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Certain information required for Part III of this report is incorporated by reference to the Registrant’s Proxy Statement for the
proxy statements are available free of charge on our website. These reports are made available as soon as reasonably practicable after they are filed with or furnished to the SEC. Our filings with the SEC are also available on the SEC’s website at http://www.sec.gov. Investment management and fiduciary services are provided to individuals, businesses, institutions and nonprofit organizations. clients. The Company, as part of its expansion effort, plans to continue its strategy of operating relatively fewer offices with a larger asset base per office, emphasizing commercial banking and wealth management and employing experienced staff who are compensated on the basis of performance and customer service. $16.20 per share. The Series A Preferred Stock Enterprise is subject to periodic examination by the FDIC and Missouri Division of Finance. subsequent three years. Deferred income Finally, to the extent that we issue capital stock in connection with transactions, such transactions and related stock issuances may have a dilutive effect on earnings per share of our common stock and share ownership of our stockholders. skilled people in our top management ranks. See “Supervision and Regulation”, “Liquidity and Capital Resources” and Item 8, Note Participation Restatement for more information. attached tables. Unless otherwise noted, this discussion excludes discontinued operations.20082009ANNUALREPORT ONFORM10-KTABLE OFCONTENTSPage Part I PagePart IItem 1: Business 1 Item 1A: Risk Factors 76 Item 1B: Unresolved SEC Comments 1312 Item 2: Properties 1312 Item 3: Legal Proceedings 1312 Item 4: Submission of Matters to Vote of Security Holders 1312 Part II Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 13 Equity Securities14 Item 6: Selected Financial Data 1716 Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations 1817 Item 7A: Quantitative and Qualitative Disclosures About Market Risk 4647 Item 8: Financial Statements and Supplementary Data 4748 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 8993 Item 9A: Controls and Procedures 8994 Item 9B: Other Information 96 Part III Item 9B: Other Information 89Part IIIItem 10: Directors, Executive Officers and Corporate Governance 8996 Item 11: Executive Compensation 8996 Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 8996 Item 13: Certain Relationships and Related Transactions, and Director Independence 8996 Item 14: Principal Accountant Fees and Services 8996 Part IV Item 15: Exhibits, Financial Statement Schedules 9097 Signatures 93101
Readers should note that in addition to the historical information contained herein, some of the information in this report contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements typically are identified with use of terms such as “may,” “will,” “expect,” “anticipate,” “estimate,” “potential,” “could” and similar words, although some forward-looking statements are expressed differently. Youshould be aware that the Company’sactual results could differ materially from those contained in the forward-looking statements due to a number of factors, including: burdens imposed by federal and state regulation, changes in accounting regulationregulations or standards of banks; credit risk; exposure to general and local economic conditions; risks associated with rapid increase or decrease in prevailing interest rates; consolidation within the banking industry; competition from banks and other financial institutions; our ability to attract and retain relationship officers and other key personnel; andor technological developments; and other risks discussed in more detail in Item 1A: “Risk Factors”, all of which could cause the Company’s actual results to differ from those set forth in the forward-looking statements.
Enterprise Financial Services Corp (“we” or “the Company” or “EFSC”), a Delaware corporation, is a financial holding company headquartered in St. Louis, Missouri. The Company provides a full range of banking and wealth management services to individuals and business customers located in the St. Louis, and Kansas City and Phoenix metropolitan markets through its banking subsidiary, Enterprise Bank & Trust (“Enterprise” or “the Bank”). Our executive offices are located at 150 North Meramec, Clayton, Missouri 63105 and our telephone number is (314) 725-5500.also operatesentered into a loan production officeloss sharing agreement with the Federal Deposit Insurance Corporation (“FDIC”) and acquired certain assets and assumed certain liabilities of Valley Capital Bank, a full service community bank that was headquartered in Phoenix,Mesa, Arizona. Under the terms of the agreement, we acquired tangible assets with an estimated fair value of approximately $42.4 million and assumed liabilities with an estimated fair value of approximately $43.4 million. Under the loss sharing agreement, Enterprise will share in the losses on assets covered under the agreement (”Covered Assets”). The Company celebratedFDIC has agreed to reimburse Enterprise for 80 percent of the losses on Covered Assets up to $11,000,000 and 95 percent of the losses on Covered Assets exceeding $11,000,000. Reimbursement for losses on single family one-to-four residential mortgage loans are made quarterly until December 31, 2019 and reimbursement for losses on non-single family one-to-four residential mortgage loans are made quarterly until December 31, 2014. The reimbursable losses from the FDIC are based on the book value of the acquired loans and foreclosed assets as determined by the FDIC as of the date of the acquisition, December 11, 2009.years in business in 2008. Our Trust division will celebrate 10 years in business in 2009.In addition, the Company owns2010, we sold our life insurance subsidiary, Millennium Brokerage Group, LLC (“Millennium”)., for $4.0 million in cash. Enterprise acquired 60% of Millennium in October 2005 and acquired the remaining 40% in December 2007. As a result of the sale, Millennium is headquarteredreported as a discontinued operation for all periods presented herein.Nashville, Tennesseea private placement offering. We intend to use the net proceeds of the offering for general corporate purposes, which may include, without limitation, providing capital to support the growth of our subsidiaries and operates life insurance advisoryother strategic business opportunities in our market areas, including FDIC-assisted transactions. We may also seek the approval of our regulators to utilize the proceeds of this offering and brokerage operations from 13 offices serving life agents, banks, CPA firms, propertyother cash available to us to repurchase all or a portion of the securities that we issued to the United States Department of the Treasury (the “U.S. Treasury”).casualty groups,sold to the Treasury for an aggregate purchase price of $35.0 million in cash (i) 35,000 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $.01 per share, having a liquidation preference of $1,000 per share (the “Series A Preferred Stock”), and financial advisors in 49 states.On July 31, 2008, we sold(ii) a ten-year warrant to purchase up to 324,074 shares of common stock, par value $.01 per share, of EFSC, at an initial exercise price of $16.20 per share, subject to certain anti-dilution and other adjustments (the “Warrant”).
Our website is www.enterprisebank.com. Various reports provided to the SEC including our remaining interests in Great American Bank (“Great American”). See Item 8, Note 2 – Acquisitionsannual reports, quarterly reports, current reports and Divestitures for more information.
Our stated mission is “to guide our clients to a lifetime of financial success.” We have established an accompanying corporate vision “to build an exceptional company that clients value, shareholders prize and where our associates flourish.” These tenets are fundamental to our business strategies and operations.We are highly focused on serving the needsprofessionals. This is achieved through full product offerings in two primary segments: commercial banking and wealth management.Through Enterprise, oursuccess-minded individuals.Millennium.Missouri state tax credit brokerage activities. Enterprise Trust, a division of Enterprise (“Enterprise Trust” or “Trust”) provides financial planning, advisory, investment management and trust services to our target markets. Business financial services are focused in the areas of retirement plans, management compensation and management succession planning. Personal advisory services include estate planning, financial planning, business succession planning and retirement planning services.1Additional information on our operating segments can be found on Pages 19State tax credit brokerage activities consist of the acquisition of Missouri state tax credit assets and 84.Our executive offices are located at 150 North Meramec, Clayton, Missouri 63105 and our telephone number is (314) 725-5500.Available InformationThe Company’s website is www.enterprisebank.com. Various reports providedsale of these tax credits to the Securities and Exchange Commission (“SEC”), including our annual reports, quarterly reports, current reports and proxy statements are available free of charge on our website. These reports are made available as soon as reasonably practicable after they are filed with or furnished to the SEC. Our filings with the SEC are also available on the SEC’s website at http://www.sec.gov.Business StrategyOur general business strategy is to generate superior shareholder returns by providing comprehensive financial services through banking and wealth management lines of business primarily to private businesses, their owner families and other success-minded individuals.thisour strategy include a focused and relationship-oriented distribution and sales approach, emphasis on growing wealth management revenues, aggressive credit and interest rate risk management, advanced technology and tightly managed expense growth.grow in tandem with our increasing capacity to fund client loan needs.grow. Our banking officers are typically highly experienced. As a result of our long-term relationship orientation, we are able to fund loan growth primarily with core deposits from our business and professional clients. This is supplemented by borrowing from the Federal Home Loan Bank of Des Moines (the “FHLB”), the Federal Reserve, and by issuing brokered certificates of deposits, priced at or below alternative cost of funds.Millennium provides additional financial advisory capabilities, insurance product access and market reach that supplement our trust services. This subsidiary has also expanded our fee income sources.Creditcredit administration monitor our asset quality through regular reviews of loans. In addition, the Bank’s loan portfolios for each bank areportfolio is subject to ongoing monitoring by a loan review function that reports directly to the audit committee of our board of directors.2
Enterprise operates in the St. Louis, Kansas City and Phoenix metropolitan areas. Through Millennium, subject to applicable regulatory restrictions, the Company also provides services in markets across the United States.
The Company has four Enterprise banking facilities in the St. Louis metropolitan area. The St. Louis region enjoys a stable, diverse economic base and is ranked the 19th largest metropolitan statistical area in the United States. It is an attractive market for us with nearly 70,000 privately held businesses and over 61,00050,000 households with investible assets of $1.0 million or more. We are the largest publicly-held, locally headquartered bank in this market.Acquisitions in 2006 and 2007 increased the Company’s assets in the market to more than $700.0 million, making us one of the fastest growing banks in the Kansas City market.
At December 31, 2008,2009, the Company had seven banking facilities in the Kansas City Market. Kansas City is also an attractive private company market with over 50,000 privately held businesses and over 42,00035,000 households with investible assets of $1.0 million or more. To more efficiently deploy our resources, during 2007, the Company established a plan to streamline our Kansas City branch network. Onon February 28, 2008, we sold the Enterprise branch in Liberty, Missouri and on July 31, 2008, we sold the Kansas state bank charter of Great American along with the DeSoto, Kansas branch. See Item 8, Note 23 – Acquisitions and Divestitures for more information.In 2007, the Company announced its intent to expand to
On December 11, 2009, Enterprise acquired certain assets and assumed certain liabilities of Valley Capital Bank in Mesa, Arizona and subsequently applied forin an FDIC-assisted transaction. The single location opened on December 14, 2009 as an Enterprise branch. After receiving regulatory approval, Enterprise opened a new Arizona bank charter in 2008. Banking regulators have curtailed new charter approvals as a result of conditionsbranch in the Arizona real estate market. However, the Enterprise loan production office located inwestern suburbs of Phoenix continues to growon February 16, 2010. See Note 3 – Acquisitions and build a client base. Divestitures for more information.81,00072,000 households with investible assets over $1.0 million each.
The Company and its subsidiaries operate in highly competitive markets. Our geographic markets are served by a number of large multi-bank holding companies with substantial capital resources and lending capacity. Many of the larger banks have established specialized units, which target private businesses and high net worth individuals. Also, the St. Louis, Kansas City and Phoenix markets have experienced an increase in de novonumerous small community banks. In addition to other financial holding companies and commercial banks, we compete with credit unions, thrifts, investment managers, brokerage firms, and other providers of financial services and products.GeneralWe are subject to state and federal banking laws and regulations which govern virtually all aspects of operations. These laws and regulations are intended to protect depositors, and to a lesser extent, shareholders. The numerous regulations and policies promulgated by the regulatory authorities create a difficult and ever-changing atmosphere in which to operate. The Company commits substantial resources in order to comply with these statutes, regulations and policies.
The Company is a financial holding company registered under the Bank Holding Company Act of 1956, as amended (“BHCA”). As a financial holding company, the Company is subject to regulation and examination by the Federal Reserve Board, and is required to file periodic reports of its operations and such additional information as the Federal Reserve may require. In order to remain a financial holding company, the Company must continue to be considered well managed and well capitalized by the Federal Reserve and have at least a “satisfactory” rating under the Community Reinvestment Act. See “Liquidity and Capital Resources” in the Management Discussion and Analysis for more information on our capital adequacy and “Bank Subsidiary – Community Reinvestment Act” below for more information on Community Reinvestment.anybank,any bank, (ii) acquiring direct or indirect ownership or control of any voting shares of any bank if, after such acquisition, it would own or control more than 5% of the voting shares of such bank (unless it already owns or controls the majority of such shares), or (iii) merging or consolidating with another bank holding company. The BHCA also prohibits a financial holding company generally from engaging directly or indirectly in activities other than those involving banking, activities closely related to banking that are permitted for a bank holding company, securities, insurance or merchant banking. Federal legislation permits bank holding companies to acquire control of banks throughout the United States.3Emergency Economic Stabilization Act of 2008:In response to recent unprecedented market turmoil, the Emergency Economic Stabilization Act (“EESA”) was enacted on October 3, 2008. EESA authorizes the SecretaryUnited States Department of the Treasury (the “Secretary”) to purchase up to $700 billion in troubled assets from financial institutions underCapital Purchase Program: On December 19, 2008, the Troubled Asset Relief Program (“TARP”.) Troubled assets include residential or commercial mortgages and related instruments originated prior to March 14, 2008 and any other financial instrument that the Secretary determines, after consultation with the ChairmanCompany received an investment of the Board of Governors of the Federal Reserve System, the purchase of which is necessary to promote financial stability. If the Secretary exercises his authority under TARP, EESA directs the Secretary to establish a program to guarantee troubled assets originated or issued prior to March 14, 2008. The Secretary is authorized to purchase up to $250.0 billion in troubled assets immediately and up to $350.0 billion upon certification by the President that such authority is needed. The Secretary’s authority will be increased to $700.0 billion if the President submits a written report to Congress detailing the Secretary’s plans to use such authority unless Congress passes a joint resolution disapproving such amount within 15 days after receipt of the report. The Secretary’s authority under TARP expires on December 31, 2009 unless the Secretary certifies to Congress that extension is necessary provided that his authority may not be extended beyond October 3, 2010.Institutions selling assets under TARP will be required to issue warrants for common or preferred stock or senior debt to the Secretary. If the Secretary purchases troubled assets directly from an institution without a bidding process and acquires a meaningful equity or debt position in the institution as a result or acquires more than $300.0approximately $35.0 million in troubled assets from an institution regardless of method, the institution will be required to meet certain standards for executive compensation and corporate governance. See Item 11 – Executive Compensation.EESA increases the maximum deposit insurance amount up to $250,000 until December 31, 2009 and removes the statutory limits on the FDIC’s ability to borrow from the Treasury during this period. The FDIC may not take the temporary increase in deposit insurance coverage into account when setting assessments. EESA allows financial institutions to treat any loss on the preferred stock of the Federal National Mortgage Association or Federal Home Loan Mortgage Corporation as an ordinary loss for tax purposes.Pursuant to his authority under EESA, the Secretary created the TARP Capital Purchase Program under which the Treasury Department will invest up to $250 billion in senior preferred stock of U.S. banks and savings associations or their holding companies.The Company applied to receive an investment by the Treasury under the Capital Purchase Program and our application was approved in November 2008. On December 19, 2008,. In exchange for the investment, the Company entered into a Letter Agreement and Securities Purchase Agreement (collectively,issued to the “Purchase Agreement”) with the United States Department of theU.S. Treasury (“Treasury”) under the TARP Capital Purchase Program, pursuant to which the Company sold (i) 35,000 shares of EFSC Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) and (ii) a warrant (the “Warrant”) to purchase 324,074 shares of EFSC common stock, par value $0.01 per share (the “Common Stock”), for an aggregate investment by the Treasury at a price of $35.0 million.will qualifyqualifies as Tier 1 capital and will paypays cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter. The Series A Preferred Stock may be redeemed by EFSC after three years. Prior to the end of three years, the Series A Preferred Stock may be redeemed by EFSC only with proceeds from a qualifying sale of common stock of EFSC (a “Qualified Equity Offering”), although amendments to EESA enacted in February 2009 eliminate this restriction on the means of redeeming the Senior Preferred Stock.Purchase Agreement,purchase agreement with the U.S. Treasury, our ability to declare or pay dividends or distributions on, or purchase, redeem or otherwise acquire for consideration, shares of Junior Stock (as defined below)junior stock and Parity Stock (as defined below) will beparity stock is subject to restrictions, including a restriction against increasing dividends from the last quarterly cash dividend per share ($0.0525) declared on the Common Stockcommon stock prior to December 19, 2008. The redemption, purchase or other acquisition of trust preferred securities of EFSC or our affiliates willis also be restricted. These restrictions will terminate on the earlier of (a) the third anniversary of the date of issuance of the Series A Preferred Stock and (b) the date on which the Series A Preferred Stock has been redeemed in whole or U.S. Treasury has transferred all of the Series A Preferred Stock to third parties. The restrictions described in this paragraph are set forth in the Purchase Agreement.4Junior Stock and Parity Stock will beother classes of stock is subject to restrictions in the event that EFSC fails to declare and pay full dividends (or declare and set aside a sum sufficient for payment thereof) on its Series A Preferred Stock.“Junior Stock” meansCommon Stockamount and any other class or seriestype of EFSC stock, the terms of which expresslycompensation that we can pay our employees and are required to provide that it ranks juniormonthly reports to the Series A Preferred Stock as to dividend rights and/or rights on liquidation, dissolution or winding up of EFSC. “Parity Stock” means any class or series of EFSC stock,U.S. Treasury regarding our lending activity during the terms of which do not expressly providetime that such class or series will rank senior or junior to the Series A Preferred Stock as to dividend rights and/or rights on liquidation, dissolution or winding up of EFSC (in each case without regard to whether dividends accrue cumulatively or non-cumulatively.)The Warrant has a 10-year term and is immediately exercisable upon its issuance, with an exercise price, subject to anti-dilution adjustments, equal to $16.20 per share of the Common Stock.U.S. Treasury has agreed not to exercise voting power with respect to anyowns shares of Common Stock issued upon exercise of the Warrant.The Series A Preferred Stock and the Warrant were issued in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. Upon the request of Treasury at any time, EFSC has agreed to promptly enter into a deposit arrangement whereby the Series A Preferred Stock may be deposited and depositary shares (“Depositary Shares”), representing fractional shares of Series A Preferred Stock, may be issued. EFSC agreed to register the Series A Preferred Stock, the Warrant, the shares of Common Stock underlying the Warrant (the “Warrant Shares”) and Depositary Shares, if any, as soon as practicable after the date of the issuance of the Series A Preferred Stock and the Warrant. These shares were registered with the SEC on Form S-3 on January 16, 2009. Neither the Series A Preferred Stock nor the Warrant will be subject to any contractual restrictions on transfer, except that Treasury may only transfer or exercise an aggregate of one-half of the Warrant Shares priorStock.earlier of the redemption of 100% of the shares of Series A Preferred Stock and December 31, 2009.The Purchase Agreement also subjects EFSC to certain of the executive compensation limitations included in the EESA. As a result, as a condition to the closing of the transaction, each of Messrs. Peter F. Benoist, Frank H. Sanfilippo, Stephen P. Marsh and John G. Barry and Ms. Linda M. Hanson, EFSC’s Executive Officers (as defined in the Purchase Agreement) (the “Senior Executive Officers”), (i) executed a waiver (the “Waiver”) voluntarily waiving any claim against the Treasury or EFSC for any changes to such Senior Executive Officer’s compensation or benefits that are required to comply with the regulation issuedrestrictions imposed by the Treasury under the TARP Capital Purchase Program as published in the Federal RegisterCPP on October 20, 2008 and acknowledging that the regulation may require modification of the compensation, bonus, incentive and other benefit plans, arrangements and policies and agreements (including so-called “golden parachute” agreements) (collectively, “Benefit Plans”) as they relate to the period the Treasury holds any equity or debt securities of EFSC acquired through the TARP Capital Purchase Program; and (ii) entered into a letter agreement (the “Letter Agreement”) with EFSC amending the Benefit Plans with respect to such Senior Executive Officer as may be necessary, during the period that the Treasury owns any debt or equity securities of EFSC acquired pursuant to the Purchase Agreement or the Warrant, as necessary to comply with Section 111(b) of the EESA.The American Recovery and Reinvestment Act of 2009 significantly amended Section 111(b) of the EESA and imposed more severe restrictions on the executive compensation while loosening the requirements to redeem the Series A Preferred Stock including a complete prohibition on any severance or other compensation upon termination of employment, significant caps on bonuses, retention payments and executive compensation and a “clawback” requirement requiring the return of any bonus or incentive compensation based on earnings or other financial data that later turn out to be misstated. See Item 11 – Executive Compensation. These executive compensation restrictions may affect our ability to attractpay dividends to holders of our common stock, under Federal Reserve Board policies, bank holding companies may pay cash dividends on common stock only out of income available over the past year and retain key executives.The foregoing descriptiononly if prospective earnings retention is consistent with the organization’s expected future needs and financial condition and if the organization is not in danger of not meeting its minimum regulatory capital requirements. Federal Reserve Board policy also provides that bank holding companies should not maintain a level of cash dividends that undermines the TARP, the Capital Purchase Program and securities covered thereby is qualified inbank holding company’s ability to serve as a source of strength to its entirety by reference to the Letter Agreement – Standard Terms executed and delivered by the Company to the Secretary and the Warrant to Purchase Common Stock, both of which were executed and delivered by the Company and delivered to the Secretary at the closing of the Company’s issuance of Series A Preferred Stock to the Treasury.banking subsidiaries.
At December 31, 2008, we had one wholly owned2009, Enterprise was our only bank subsidiary. Enterprise is a Missouri trust company with banking powers and is subject to supervision and regulation by the Missouri Division of Finance. In addition, as a Federal Reserve non-member bank, it is subject to supervision and regulation by the FDIC. Enterprise is a member of the FHLB of Des Moines.5On October 26, 2001, President Bush signed into law theThe Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA PATRIOT Act"). Among its other provisions, the USA PATRIOT Act requires each financial institution to: (i) establish an anti-money laundering program; (ii) establish due diligence policies, procedures and controls with respect to its private banking accounts and correspondent banking accounts involving foreign individuals and certain foreign banks; and (iii) implement certain due diligence policies, procedures and controls with regard to correspondent accounts in the United States for, or on behalf of, a foreign bank that does not have a physical presence in any country. In addition, the USA PATRIOT Act contains a provision encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities.Temporary Liquidity Guarantee Program:Pursuant to the Emergency Economic Stabilization Act of 2008, the maximum deposit insurance amount has been increased from $100,000 to $250,000 until December 31, 2009. On October 13, 2008, the FDIC established a Temporary Liquidity Guarantee Program (“TLGP”) under which the FDIC will fully guarantee all non-interest-bearing transaction accounts and all senior unsecured debt of insured depository institutions or their qualified holding companies issued between October 14, 2008 and June 30, 2009. Senior unsecured debt would include federal funds purchased and certificates of deposit outstanding to the credit of the bank. All eligible institutions participated in the program without cost for the first 30 days of the program. After December 5, 2008, institutions will be assessed at the rate of 10 basis points for transaction account balances in excess of $250,000 and at the rate of 75 basis points of the amount of debt issued. Institutions were required to opt out of the Temporary Liquidity Guarantee Program by December 5, 2008 if they did not wish to participate. The Company and Enterprise opted into the TLGP.6 (the “Reform Act”), the FDIC adopted a new risk-based deposit insurance premium system that provides for quarterly assessments. Beginning in 2007, institutions were grouped into one of four categories based on their FDIC ratings and capital ratios. Each institution is assessed for deposit insurance at an annual rate of between 5 and 43 basis points with the assessment rate to be determined according to a formula based on a weighted average of the institution’s individual FDIC component ratings plus either five financial ratios or the average ratings of its long-term debt.has proposed to raiseraised the base annual assessment rate for all institutions by 7in 2009. As a result of this increase, institutions pay an assessment of between 12 and 77.5 basis points fordepending on the first quarterinstitution’s risk classification. Under the new assessment structure, Enterprise’s average annual assessment during 2009 was 15.43 basis points (excluding the special assessment described below). An institution’s risk classification is assigned based on its capital levels and the level of 2009. Assessmentsupervisory concern the institution poses to the regulators. Institutions assigned to higher-risk classifications pay assessments at higher rates for first quarter of 2009 would range from 12 to 50 basis points. For the second quarter of 2009, the proposed initial base assessment rates would range between 10 and 45 basis points. Anthan institutions that pose a lower risk. Each institution’s assessment rate can beis further adjusted up or down as a result of additional proposed risk adjustments based on the following: long-term debt ratings, weighted average FDIC component ratings, various financial ratios, the institution’s reliance on brokered deposits and/or other secured liabilities and the amount of unsecured debt.During 2008, Enterprise had a weighted average assessment rate of 5.9 basis points. Total payments to the FDIC were $1.2 million in 2008. Based on an analysis of the proposed rates, underlying adjustments and our planned deposit base, we expect our FDIC insurance premiums to increase by approximately $1.0 million in 2009.of 20 basis points,equal to $995,000 which will be collectedwas paid in the third quarter of 2009. We are awaitingIn addition, on November 12, 2009, the FDIC adopted a final rulingrule imposing a 13-quarter prepayment of FDIC premiums. As a result, Enterprise prepaid $11.5 million in December 2009. The prepayment will be expensed over the assessment calculation, but our initial expectation is that the one-time assessment could increase our 2009 FDIC insurance premiums by as much as an additional $3.5 million. It is possible this amount may be reduced pending the final FDIC ruling.MillenniumMillennium and the investment management industry in general are subject to extensive regulation in the United States at both the federal and state level, as well as by self-regulatory organizations such as the National Association of Securities Dealers, Inc. ("NASD"). The SEC is the federal agency that is primarily responsible for the regulation of investment advisers. Millennium is licensed to sell insurance, including variable insurance policies, in various states and is subject to regulation by the NASD. This regulation includes supervisory and organizational procedures intended to assure compliance with securities laws, including qualification and licensing of supervisory and sales personnel and rules designed to promote high standards of commercial integrity and fair and equitable principles of trade.
At December 31, 20082009, we had approximately 348308 full-time equivalent employees. None of the Company’s employees are covered by a collective bargaining agreement. Management believes that its relationship with its employees is good. Described below are certain risks and uncertainties that management has identified as material. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report. The risks and uncertainties described below are not the only ones we face. Although we have significant risk management policies, procedures and verification processes in place, additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also materially and adversely impair our business operations.If any of the following risks actually occur, our financial condition and results of operations could be materially and adversely affected. If this were to happen, the The value of our common shares could decline perhaps significantly,due to any of these risks, and you could lose all or part of your investment.7The financial markets in the United States and elsewhere have been experiencing extreme and unprecedented volatility and disruption. We are exposed to significant financial and capital markets risk, including changes in interest rates, credit spreads and equity prices, which may have a material adverse effect on our results of operations, financial condition and liquidity.Our earnings and cash flows are largely dependent upon our net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions, the competitive environment within our markets, consumer preferences for specific loan and deposit products and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, influence not only the amount of interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but such changes also affect our ability to originate loans and obtain deposits as well as the fair value of our financial assets and liabilities. If the interest we pay on deposits and other borrowings increases at a faster rate than the interest we receive on loans and other investments, our net interest income, and therefore earnings, will be adversely affected. Earnings could also be adversely affected if the interest we receive on loans and other investments falls more quickly than the interest we pay on deposits and other borrowings. Management uses simulation analysis to produce an estimate of interest rate exposure based on assumptions and judgments related to balance sheet growth, customer behavior, new products, new business volume, pricing and anticipated hedging activities. Simulation analysis involves a high degree of subjectivity and requires estimates of future risks and trends. Accordingly, there can be no assurance that actual results will not differ from those derived in simulation analysis due to the timing, magnitude and frequency of interest rate changes, changes in balance sheet composition, and the possible effects of unanticipated or unknown events.Since July 2007, credit markets have experienced difficult conditions, extraordinary volatility and rapidly widening credit spreads and, therefore, have provided significantly reduced availability of liquidity for many borrowers. Uncertainties in these markets present significant challenges, particularly for the financial services industry. Disruptions in the financial markets caused widening credit spreads resulting in markdowns and/or losses by financial institutions from trading, hedging and other market activities. We obtain most of our funding from core deposit relationships with our clients and invest those funds in loans to our clients or government-backed agency securities. Our investment portfolio contains no mortgage-backed securities invested in subprime or alt-A mortgages.Our activities in the national credit markets are limited to funding vehicles such as brokered certificates of deposit and subordinated debentures. We have seen the cost of brokered deposits decline slower than other money market rates due to demand by financial institutions, and the cost and availability of subordinated debentures has been severely and negatively impacted by this adverse environment. It is difficult to predict how long these economic conditions will exist, and which of our markets, products or other businesses will ultimately be affected. In addition, further reductions in market liquidity may make it difficult to value certain of our securities if trading becomes less frequent. As such, valuations may include assumptions or estimates that may be more susceptible to significant period to period changes which could have a material adverse effect on our consolidated results of operations or financial condition.One important exposure to equity risk relates to the potential for lower earnings associated with our Wealth Management business, where fee income is earned based upon the fair value of the assets under management. During 2008, the significant declines in equity markets have negatively impacted assets under management. As a result, fee income earned from those assets has also decreased.If significant, further declines in equity prices, changes in U.S. interest rates and changes in credit spreads individually or in combination, could continue to have a material adverse effect on our consolidated results of operations, financial condition and liquidity both directly and indirectly by creating competition and other pressures such as employee retention issues.Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities or on terms which are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations and the continued deterioration in credit markets.8The Company depends on payments from Enterprise, including dividends and payments under service agreements and tax sharing agreements, for substantially all of the Company’s revenue. Federal and state regulations limit the amount of dividends and the amount of payments that Enterprise may make to the Company under service and tax sharing agreements. See “Supervision and Regulation”. In the event Enterprise becomes unable to pay dividends to the Company or make payments under the service agreements or tax sharing agreements the Company may not be able to service our debt, pay our other obligations or pay dividends on the Series A Preferred Stock or our common stock. Accordingly, our inability to receive dividends or other payments from the Bank could also have a material adverse effect on our business, financial condition and results of operations and the value of investments in the Series A Preferred Stock or our common stock.At December 31, 2008, the Company had $0 outstanding on its $16.0 million line of credit. While the line of credit does not expire until April 2009, we do not have any current availability under the line due to our noncompliance with a certain covenant regarding classified loans as a percentage of bank equity and loan loss reserves. We may be unable to arrange for a holding company line of credit in 2009 given the uncertainties around bank industry performance. However, we believe our current level of cash at the holding company will be sufficient to meet all projected cash needs in 2009.We believe the level of liquid assets at Enterprise is sufficient to meet current and anticipated funding needs. In addition to amounts currently borrowed, at December 31, 2008, Enterprise could borrow an additional $164.3 million available from the FHLB of Des Moines under blanket loan pledges and an additional $310.5 million available from the Federal Reserve Bank under pledged loan agreements. Enterprise also has access to over $70.0 million in overnight federal funds lines from various correspondent banks. See “Liquidity and Capital Resources” for more information.We are subject to credit and collateral risk.There are inherent risks associated with our lending activities. These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions in the markets where we operate. Increases in interest rates and/or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans. The real estate downturn in our geographic markets has hurt our business because a majority of our loans are secured by real estate. If real estate prices continue to decline, the value of real estate collateral securing our loans will be reduced. Our ability to recover on defaulted loans by foreclosing and selling real estate collateral will be further diminished and we would likely suffer losses on defaulted loans. Substantially all of our real property collateral is located in Missouri and Kansas. Over the past nine months, real estate values, particularly residential real estate values, have deteriorated in our markets. As a result, our 2008 charge-offs were significantly higher than historical levels. During 2008, we incurred $12.7 million of net-charge-offs, or 0.70% of average loans compared to $2.0 million, or 0.14%, of average loans for 2007.
We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, that represents management’s estimate of probable losses within the existing portfolio of loans. The allowance, in the judgment of management, is necessarysufficient to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance reflects management’s continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political and regulatory conditions; and unexpected losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for loan losses inherently involves a degree of subjectivity and requires that we make significant estimates of current credit risks and future trends, all of which may undergo material changes. TheCompany’s loan loss allowance increased induring the 2008 fiscal year and through 2009 due to changes in economic conditions affecting borrowers, new information regarding existing loans, and identification of additional problem loans. We continue to monitor the adequacy of our loan loss allowance and may need to increase it if factorseconomic conditions continue to deteriorate. In addition, bank regulatory agencies and our independent auditors periodically review our allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments that can differ somewhat from those of our own management. In addition, if charge-offs in future periods exceed the allowance for loan losses (i.e., if the loan allowance is inadequate), we will need additional loan loss provisions to increase the allowance for loan losses. Additional provisions to increase the allowance for loan losses, should they become necessary, would result in a decrease in net income or an increase in net loss and a reduction in capital, and may have a material adverse effect on our financial condition and results of operations.
Substantially all of our loans are to businesses and individuals in the St. Louis, Kansas City, and Phoenix metropolitan areas. The regional economic conditions in areas where we conduct our business have an impact on the demand for our products and services as well as the ability of our customers to repay loans, the value of the collateral securing loans and the stability of our deposit funding sources.
A significant portion of our portfolio is secured by real estate and thus we have a high degree of risk from a downturn in our real estate markets. If real estate values continue to decline further in our markets, the value of real estate collateral securing our loans could be significantly reduced. Our ability to recover on defaulted loans where the primary reliance for repayment is on the real estate collateral by foreclosing and selling that real estate would then be diminished and we would be more likely to suffer losses on defaulted loans.strong loan growth, an increasethis process, it takes approximately one year for us to foreclose on real estate collateral located in non-performingthe State of Kansas. Our ability to recover on defaulted loans in our Kansas market may be delayed and we would be more likely to suffer losses on defaulted loans in this market.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial material adverse risk rating changes primarilyeffect on our liquidity. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the residential builderlevel of our business activity due to a market downtown, our failure to remain well capitalized, or adverse regulatory action against us. Our ability to acquire deposits or borrow could also be impaired by factors that are not specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole as the recent turmoil faced by banking organizations in the domestic and worldwide credit markets deteriorates.provisionholding company will be sufficient to meet all projected cash needs in 2010. See “Liquidity and Capital Resources” for more information.
A substantial portion of our income is derived from the differential or “spread” between the interest earned on loans, investment securities and other interest-earning assets, and the interest paid on deposits, borrowings and other interest-bearing liabilities. Because of the differences in the maturities and repricing characteristics of our interest-earning assets and interest-bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Significant fluctuations in market interest rates could materially and adversely affect not only our net interest spread, but also our asset quality and loan losses was $22.5 million for 2008 compared to $4.6 million for 2007.origination volume.9 to recognize an impairment of our goodwill or intangible assets or to establish a valuation allowance against the deferred income tax asset, which could have a material adverse effect on our results of operations and financial condition.Goodwill represents the excess of the amounts we paid to acquire subsidiaries and other businesses over the fair value of their net assets at the date of acquisition. We test goodwill at least annually for impairment. Impairment testing is performed based upon estimates of the fair value of the “reporting unit” to which the goodwill relates. The reporting unit is the operating segment or a business one level below that operating segment if discrete financial information is prepared and regularly reviewed by management at that level. The fair value of the reporting unit is impacted by the performance of the business and could be adversely impacted by any efforts made by the Company to limit risk. If it is determined that the goodwill or other long-term intangible asset has been impaired, the Company must write down the asset by the amount of the impairment, with a corresponding charge to net income. Such writedowns could have a material adverse effect on our results of operations and financial position. During 2008, we took an impairment charge of $9.2 million, pre-tax, with respect to our Millennium reporting unit. At December 31, 2008, the goodwill balance included in the consolidated balance sheet for the Millennium reporting unit was $3.1 million. It is possible that additional impairment at Millennium may occur in 2009.The Company’s 2008 analysis of goodwill at the Banking reporting unit indicated that no impairment existed at December 31, 2008. If current market conditions persist during 2009, in particular, if the EFSC common share price falls and consistently remains below book value per share, the Company may need to test for goodwill impairment at an interim date. Subsequent reviews of goodwill could result in additional impairment of goodwill during 2009.tax representstaxes represent the tax effect of the differences between the book and tax basis of assets and liabilities. Deferred tax assets are assessed periodically by management to determine if they are realizable. If based on available information, it is more likely than not that the deferred income tax asset will not be realized, then a valuation allowance must be established with a corresponding charge to net income. As of December 31, 2008,2009, the Company did not carry a valuation allowance against its deferred tax asset balance of $15.7$18.3 million. Future facts and circumstances may require a valuation allowance. Charges to establish a valuation allowance could have a material adverse effect on our results of operations and financial position.
Under federal and state laws and regulations pertaining to the safety and soundness of insured depository institutions, the Missouri Division of Finance and the Federal Reserve, and separately the FDIC as insurer of the Bank’s deposits, have authority to compel or restrict certain actions if the Bank’s capital should fall below adequate capital standards as a result of future operating losses, or if its bank regulators determine that it has insufficient capital. Among other matters, the corrective actions include but are not limited to requiring affirmative action to correct any conditions resulting from any violation or practice; directing an increase in capital and the maintenance of specific minimum capital ratios; restricting the Bank’s operations; limiting the rate of interest it may pay on brokered deposits; restricting the amount of distributions and dividends and payment of interest on its trust preferred securities; requiring the Bank to enter into informal or formal enforcement orders, including memoranda of understanding, written agreements and consent or cease and desist orders to take corrective action and enjoin unsafe and unsound practices; removing officers and directors and assessing civil monetary penalties; and taking possession and closing and liquidating the Bank. See “Supervision and Regulation”.
Our operations are subject to extensive regulations by federal, state and local governmental authorities. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not stockholders. We are now also subject to supervisions, regulation and investigation by the U.S. Treasury and the Office of the Special Inspector General for the Troubled Asset Relief Program (“TARP”) by virtue of our participation in the Capital Purchase Program. Changes to statutes, regulations or regulatory policies; changes in the interpretation or implementation of statutes, regulations or policies could subject us to additional costs, limit the types of financial services and products that we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things.
In 2009, the FDIC charged a “special assessment” equal to five basis point special assessment on each insured depository institution’s assets minus Tier 1 capital. Our special assessment amounted to $995,000 and was paid on September 30, 2009. The FDIC also raised our annual assessment rate by 9.11 basis points to an average of 15.43 basis points. It is possible that the FDIC may impose additional special assessments in the future or further increase our annual assessment, which could adversely affect our earnings.
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industriesinstitutions and counterparties, and routinely execute transactions with various counterparties in the financial services industry, including Federal Home Loanfederal home loan banks, commercial banks, brokers and dealers, investment banks and other institutional clients. Many of these transactions exposeRecent defaults by financial services institutions, and even rumors or questions about one or more financial services institutions or the financial services industry in general, have led to market wide liquidity problems and could lead to losses or defaults by us to credit risk in the event of a defaultor by a counterparty or client. In addition, our credit risk may be exacerbated when the collateral we hold cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to us.other institutions. Any such losses could materially and adversely affect our results of operations.a material adverseengaged in and may continue to engage in further expansion through acquisitions, including FDIC-assisted transactions, which could negatively affect on our business and earnings.
Our earnings, financial condition, and resultsprospects after a merger or acquisition depend in part on our ability to successfully integrate the operations of operations.Our profitability depends significantly on economic conditionsthe acquired company. We may be unable to integrate operations successfully or to achieve expected cost savings. Any cost savings which are realized may be offset by losses in revenues or other charges to earnings.geographic regions in which we operate.The regional economic conditions in areas where we conduct our business have an impact on the demand for our productspayment of a premium over book value, and, services as well as the abilitytherefore, some dilution of our customerstangible book value per common share may occur in connection with any future transaction. Furthermore, failure to repay loans,realize the value of the collateral securing loans and the stability of our deposit funding sources. A significant declineexpected revenue increases, cost savings, increases in general economic conditions caused by inflation, recession, an act of terrorism, outbreak of hostilities geographic or product presence, and/or other international or domestic occurrences, unemployment, changes in securities markets or other factors, such as severe declines in the value of homes and other real estate,projected benefits from an acquisition could also impact these regional economies and, in turn, have a material adverse effect on our financial condition and results of operations.
We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and may have more financial resources. Such competitors primarily include national and super-regional banks as well as smaller community banks within the markets in which we operate. However, we also face competition from many other types of financial institutions, including, without limitation, credit unions, mortgage banking companies, mutual funds, insurance companies, investment management firms, and other local, regional and national financial services firms. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks.10Our ability to compete successfully depends on a numberfactors, including, among other things:ability to develop and execute strategic plans and initiatives;our ability to develop, maintain and build upon long-term client relationships based on quality service, high ethical standards and safe, sound assets;our ability to expand our market position;the scope, relevance and pricing of products and services offered to meet client needs and demands;the rate at which we introduce new products and services relative to our competitors; andindustry and general economic trends.Failure to perform in any of these areas could significantly weaken our competitive position, whichkey employees could adversely affect our growth and profitability, which, in turn, could have a material adverse effect on our financial condition and results of operations.We are subject to extensive government regulation and supervision.business.Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not shareholders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies; changes in the interpretation or implementation of statutes, regulations or policies; and/or continuing to become subject to heightened regulatory practices, requirements or expectations, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products that we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to appropriately comply with laws, regulations or policies (including internal policies and procedures designed to prevent such violations) could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations.Our controls and procedures may fail or be circumvented.Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.Recent and possible acquisitions may disrupt our business and dilute shareholder value.Acquiring other banks or businesses involves various risks commonly associated with acquisitions, including, among other things:potential exposure to unknown or contingent liabilities of the target company;exposure to potential asset quality issues of the target company;difficulty and expense of integrating the operations and personnel of the target company;potential disruption to our business;potential diversion of our management’s time and attention;the possible loss of key employees and customers of the target company;difficulty in estimating the value (including goodwill) of the target company; andpotential changes in banking or tax laws or regulations that may affect the target company.We periodically evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving cash, debt or equity securities may occur at any time. Acquisitions typically involve the payment of a premium over book and market values, and, therefore, some dilution of our tangible book value and net income per common share may occur in connection with any future transaction. Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from an acquisition could have a material adverse effect on our financial condition and results of operations.11We may not be able to attract and retain skilled people.
Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people in most activities in which we are engaged can be intense and we may not be able to hire or retain the people we want and/or need. Although we maintain employment agreements with certain key employees, and have incentive compensation plans aimed, in part, at long-term employee retention, the unexpected loss of services of one or more of our key personnel could still occur, and such events may have a material adverse impact on our business because of the loss of the employee’s skills, knowledge of our market, years of industry experiencebusiness relationships and the difficulty of promptly finding qualified replacement personnel.The restrictions onimposed by EESA and ARRA on all participantscorporate governance for the period during which the U.S. Treasury holds the equity issued pursuant to our participation in TARPthe CPP. These standards generally apply to our Chief Executive Officer, Chief Financial Officer and the three next most highly compensated senior executive officers, although certain restrictions apply to as many as twenty-five (25) of our most highly compensated employees. The restrictions severely limit the amount and types of compensation we can pay our executive officers and key employees, including a complete prohibition on any severance or other compensation upon termination of employment, significant caps on bonuses and retention payments and executive compensation and a “clawback” requirement requiring the return of any bonus or incentive compensation based on earnings or other financial data that later turn out to be misstated. Thesepayments. Such restrictions may affectimpede our ability to attract and retain key employees.
We may need to raise additional capital in the future in order to support any additional provisions for loan losses and loan charge-offs, to maintain our capital ratios or for a number of other reasons. The condition of the financial markets may be such that we may not be able to obtain additional capital or the additional capital may only be available on terms that are not attractive to us.
Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.
We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. While we have policies and procedures designed to prevent or limit the effect of the possible failure, interruption or security breach of our information systems, there can be no assurance that any such failure, interruption or security breach will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failure, interruption or security breach of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.ShareThe trading price volatility may make it more difficult for you to resell yourof our common stock when you wanthas fluctuated significantly and at prices you find attractive. Our share price can fluctuate significantlymay do so in response tothe future. These fluctuations may result from a varietynumber of factors, including, amongmany of which are outside of our control. The stock market and, in particular, the market for financial institution stocks, has experienced significant volatility recently. In addition, the trading volume in our common stock is lower than for many other things:actual or anticipated variations in quarterly resultspublicly traded companies. As a result of operations;recommendations by securities analysts;operating andthese factors, the market price of our common stock price performance of other companies that investors deem comparable to our business;
may be volatile.news reports relating to trends, concerns and other issues in the financial services industry;perceptions of us and/or our competitors in the marketplace;significant acquisitions or business combinations or capital commitments entered into by us or our competitors; orfailure to integrate acquisitions or realize anticipated benefits from acquisitions.General market fluctuations, market disruption, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause our share price to decrease regardless of operating results.sharesstock is not an insured deposit.OurAn investment in our common stock is not a savings account, deposit or other obligation of our bank depositsubsidiary, any non-bank subsidiary or any other bank, and therefore, isare not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire our common shares, you may lose some or all of your investment.
Enterprise Financial Services Corp depends on payments from the Bank, including dividends and payments under tax sharing agreements, for substantially all of its revenue. Federal and state regulations limit the amount of dividends and the amount of payments that the Bank may make to Enterprise Financial Services Corp under tax sharing agreements. In certain circumstances, the Missouri Division of Finance, FDIC or Federal Reserve could restrict or prohibit the Bank from distributing dividends or making other payments to us. In the event that the Bank was restricted from paying dividends to Enterprise Financial Services Corp or make payments under the tax sharing agreement, Enterprise Financial Services Corp may not be able to service its debt, pay its other obligations or pay dividends on our Series A Preferred Stock or pay dividends on its common stock. If we are unable or determine not to pay dividends on our common stock, the market price of the common stock could be materially adversely affected.
The terms of our Series A Preferred Stock provide that prior to the earlier of (i) December 19, 2011 and (ii) the date on which all of the shares of the Series A Preferred Stock have been redeemed by us or transferred by the U.S. Treasury to third parties, we may not, without the consent of the U.S. Treasury, (a) increase the cash dividend on our common stock above $0.0525 per share per quarter or (b) subject to limited exceptions, redeem, repurchase or otherwise acquire shares of our common stock or preferred stock other than shares of our Series A Preferred Stock. These restrictions could have a negative effect on the value of our common stock.
The dividends declared and the accretion of discount on our outstanding Series A Preferred Stock reduce the net income available to common stockholders and our earnings per common share. Our outstanding Series A Preferred Stock will also receive preferential treatment in the event of liquidation, dissolution or winding up of the Company.
In the event that we fail to pay dividends on the Series A Preferred Stock for an aggregate of six or more quarters (whether or not consecutive), the authorized number of directors then constituting our board of directors will be increased by two. Holders of the Series A Preferred Stock, together with the holders of any outstanding parity stock with like voting rights voting as a single class, will be entitled to elect the two additional directors at the next annual meeting (or at a special meeting called for the purpose of electing the preferred stock directors prior to the next annual meeting) and at each subsequent annual meeting until all accrued and unpaid dividends for all past dividend periods have been paid in full.
Except as otherwise required by law and in connection with the rights to elect directors as described above, holders of the Series A Preferred Stock have voting rights in certain circumstances. So long as shares of the Series A Preferred Stock are outstanding, in addition to any other vote or consent of shareholders required by law or our amended and restated charter, the vote or consent of holders owning at least 66 2/3% of the shares of Series A Preferred Stock outstanding is required for (1) any authorization or issuance of shares ranking senior to the Series A Preferred Stock; (2) any amendment to the rights of the Series A Preferred Stock so as to adversely affect the rights, preferences, privileges or voting power of the Series A Preferred Stock; or (3) consummation of any merger, share exchange or similar transaction unless the shares of Series A Preferred Stock remain outstanding, or if we are not the surviving entity in such transaction, are converted into or exchanged for preference securities of the surviving entity and the shares of Series A Preferred Stock remaining outstanding or such preference securities have such rights, preferences, privileges and voting power as are not materially less favorable to the holders than the rights, preferences, privileges and voting power of the shares of Series A Preferred Stock.
We are not restricted from issuing additional common stock or preferred stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or preferred stock or any substantially similar securities. EFSC’s board of directors has broad discretion regarding the type and price of such securities.authorizes(as amended and together with all certificates of designations) or by-laws. Shares of our common stock are not redeemable and have no subscription or conversion rights.issuanceownership interest of preferredholders of our common stock by our board of directors.Our Certificate of Incorporation authorizescould be diluted to the issuance ofextent the CPP Warrant is exercised for up to 5,000,000324,074 shares of our common stock. Although the U.S. Treasury has agreed not to vote any of the shares of common stock it receives upon exercise of the CPP Warrant, a transferee of any portion of the CPP Warrant or of any shares of common stock acquired upon exercise of the CPP Warrant is not bound by this restriction. In addition, to the extent options to purchase common stock under our employee stock option plans are exercised, holders of our common stock could incur additional dilution. Further, if we sell additional equity or convertible debt securities, such sales could result in increased dilution to our stockholders.stock with designations, powers, preferences, rights, qualificationssecurities to investors.
If we are unable to make payments on any of our subordinated debentures for more than twenty (20) consecutive quarters, we would be in default under the governing agreements for such securities and limitations determinedthe amounts due under such agreements would be immediately due and payable. Additionally, if for any interest payment period we do not pay interest in respect of the subordinated debentures (which will be used to make distributions on the trust preferred securities), or if for any interest payment period we do not pay interest in respect of the subordinated debentures, or if any other event of default occurs, then we generally will be prohibited from time to time by our Board of Directors. Accordingly, our Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting,declaring or paying any dividends or other rights, which could adversely affectdistributions, or redeeming, purchasing or acquiring, any of our capital securities, including the voting power or other rightscommon stock, during the next succeeding interest payment period applicable to any of the holders ofsubordinated debentures, or next succeeding interest payment period, as the case may be.issuance,our common stock could be materially adversely affected.
Provisions of Delaware law and of our certificate of incorporation, as amended, and bylaws as well as various provisions of federal and Missouri state law applicable to bank and bank holding companies could make it more difficult for a third party to acquire control of us or have the effect of discouraging a third party from attempting to acquire control of us. We are subject to Section 203 of the DGCL, which would make it more difficult for another party to acquire us without the approval of our board of directors. Additionally, our certificate of incorporation, as amended, authorizes our board of directors to issue preferred stock and preferred stock could be utilized, under certain circumstances,issued as a defensive measure in response to a takeover proposal. In the event of a proposed merger, tender offer or other attempt to gain control of the Company, our board of directors would have the ability to readily issue available shares of preferred stock as a method of discouraging, delaying or preventing a change in control of the Company. Such issuance could occur whether or not our stockholders favorably view the merger, tender offer or other attempt to gain control of the Company. These and other provisions could make it more difficult for a third party to acquire us even if an acquisition might be in the best interest of our stockholders. Although we have no present intention to issue any additional shares of its authorized preferred stock, there can be no assurance that the Company will not do so in the future.12
Our executive offices are located at 150 North Meramec, Clayton, Missouri, 63105. As of December 31, 2008,2009, we had four banking locations and a support center in the St. Louis metropolitan area, and seven banking locations in the Kansas City metropolitan area.area, one banking location in Mesa, Arizona and a loan production officer in central Phoenix. We own four of the facilities and lease the remainder. In March 2006, the Company purchased its operations center located in St. Louis County, Missouri. Most of the leases expire between 20092010 and 2017 and include one or more renewal options of 5 years. One lease expires in 2026. All the leases are classified as operating leases. We believe all our properties are in good condition.
In February 2008, we purchased approximately 11,000 square feet of commercial condominium space in Clayton Missouri located approximately two blocks from our executive offices. We relocated the St. Louis-based Trust Advisory operations to this location in the fourth quarter of 2008. Enterprise Trust also has offices in Kansas City. Expenses related to the space used by Enterprise Trust are allocated to the Wealth Management segment.As of December 31, 2008, Millennium had 13 locations in 9 states throughout the United States. The executive offices are located in Nashville, Tennessee. None of the locations are owned by Millennium. The leases are classified as operating leases and expire in various years through 2011.A Special Meeting of Shareholders was held on December 12, 2008. Proxies were solicited pursuant to Regulation 14A of the Securities Exchange Act of 1934. The shareholders were asked to approve an amendment to the Company’s Certificate of Incorporation to authorize the issuance of up to 5,000,000 shares of preferred stock. At the meeting, shareholders approved the amendment by a vote of 7,758,555 “for” the amendment, 1,264,544 “against” the amendment and 54,340 abstaining. Following the filing of the amendment to the Certificate of Incorporation, the Company’s Directors designated 35,000 shares of preferred stock for sale to the Treasury under the TARP program.13
ITEM 5: MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASE OF EQUITY SECURITIES
The Company’s common stock trades on the NASDAQ Global Select Market under the symbol “EFSC”. Below are the dividends declared by quarter along with what the Company believes are the high and low closing sales prices for the common stock. There may have been other transactions at prices not known to the Company. As of March 2, 2009,1, 2010, the Company had 719662 common stock shareholders of record and a market price of $9.06$9.01 per share. The number of holders of record does not represent the actual number of beneficial owners of our common stock because securities dealers and others frequently hold shares in “street name” for the benefit of individual owners who have the right to vote shares. 2008 2007 4th Qtr 3rd Qtr 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr 1st Qtr Closing Price $ 15.24 $ 22.56 $ 18.85 $ 25.00 $ 23.81 $ 24.34 $ 24.86 $ 28.00 High 22.49 23.04 25.25 25.00 25.70 26.81 28.15 31.36 Low 11.49 15.95 18.60 18.19 19.97 20.02 24.25 27.73 Cash dividends paid on common shares 0.0525 0.0525 0.0525 0.0525 0.0525 0.0525 0.0525 0.0525 142009 2008 4th Qtr 3rd Qtr 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr 1st Qtr Closing Price $ 7.71 $ 9.25 $ 9.09 $ 9.76 $ 15.24 $ 22.56 $ 18.85 $ 25.00 High 9.25 12.24 11.46 14.81 22.49 23.04 25.25 25.00 Low 7.25 8.96 7.88 7.52 11.49 15.95 18.60 18.19 Cash dividends paid on common shares 0.0525 0.0525 0.0525 0.0525 0.0525 0.0525 0.0525 0.0525
The following table provides information as of December 31, 2008,2009, regarding securities issued and to be issued under our equity compensation plans that were in effect during the year ended December 31, 2008:2009: Number of securities remaining available for Number of securities to Weighted-average future issuance under be issued upon exercise exercise price of equity compensation plans of outstanding options, outstanding options, (excluding shares warrants and rights warrants and rights reflected in column (a) Plan Category (a) (b) (c) Equity compensation plans approved by the Company's shareholders 827,471 $17.03 965,869 Equity compensation plans not approved by the Company's shareholders -- -- -- Total 827,471(1) $17.03 965,869(2) Number of securities remaining available for Number of securities to Weighted-average future issuance under be issued upon exercise exercise price of equity compensation plans of outstanding options, outstanding options, (excluding shares warrants and rights warrants and rights reflected in column (a)) Plan Category (a) (b) (c) Equity compensation plans approved by the Company's shareholders 803,735 $16.77 915,063 Equity compensation plans not approved by the Company's shareholders -- -- -- Total 803,735 (1) $16.77 915,063 (2)
190,035185,535 shares of common stock to be issued upon exercise of outstanding stock options under the 1999 Stock Incentive Plan (Plan IV);
198,670196,670 shares of common stock to be issued upon exercise of outstanding stock options under the 2002 Stock Incentive Plan (Plan V);
407,176389,940 shares of common stock used as the base for grants of stock settled stock appreciation rights under the 2002 Stock Incentive Plan (Plan V);
28,800 shares of common stock available for issuance under the 1999 Stock Incentive Plan (Plan IV);856,723849,723 shares of common stock available for issuance under the 2002 Stock Incentive Plan (Plan V);
80,34665,340 shares of common stock available for issuance under the Non-management Director Stock Plan.
The holders of shares of common stock of the Company are entitled to receive dividends when declared by the Company’s Board of Directors out of funds legally available for the purpose of paying dividends. Holders of our Series A Preferred Stock originally issued to the United StatesU.S. Treasury on December 19, 2008, are entitled to cumulative dividends of 5% per annum. Dividends payable on the Series A Preferred Stock are currently payable at the rate of $1.8 million per annum. Dividends on the Series A Preferred Stock are prior to and in preference to any dividends payable on our common stock. Pursuant to the terms of the Purchase Agreementpurchase agreement with the U.S. Treasury under the TARP Capital Purchase Program, prior to December 19, 2011 our ability to declare or pay dividends on junior securities is subject to restrictions, including a restriction against increasing the dividend rate on our common stock from the last quarterly cash dividend per share ($0.0525) declared on the Common Stockour common stock prior to December 19, 2008. The amount of dividends, if any, that may be declared by the Company also depends on many other factors, including future earnings, bank regulatory capital requirements and business conditions as they affect the Company and its subsidiaries. As a result, no assurance can be given that dividends will be paid in the future with respect to the Company’s common stock. In addition, the Company currently plans to retain most of its earnings to strengthen our balance sheet given the weak economic environment.15Repurchases of Common StockOn August 27, 2007, the Company’s Board of Directors authorized a one year stock repurchase program of up to 625,000 shares, or approximately 5.00%, of the Company’s outstanding common stock in the open market or in privately negotiated transactions. No purchases were made in 2008 and the program expired in August 2008 without reauthorization. In addition, participants in TARP are not allowed to repurchase shares of common stock. All repurchased shares are being held as Treasury stock. See Item 8, Note 1 – Significant Accounting Policies for more information.
The following Stock Performance Graph and related information should not be deemed “soliciting material” or to be “filed” with the Securities and Exchange CommissionSEC nor shall such performance be incorporated by reference into any future filings under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.graphgraph* compares the cumulative total shareholder return on the Company’s common stock from December 31, 20032004 through December 31, 2008.2009. The graph compares the Company’s common stock with the NASDAQ Composite and the SNL $1B-$5B Bank Index. The graph assumes an investment of $100.00 in the Company’s common stock and each index on December 31, 20032004 and reinvestment of all quarterly dividends. The investment is measured as of each subsequent fiscal year end. There is no assurance that the Company’s common stock performance will continue in the future with the same or similar results as shown in the graph.
Period Ending Index 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09 Enterprise Financial Services Corp 100.00 123.41 178.43 131.52 85.18 44.08 NASDAQ Composite 100.00 101.37 111.03 121.92 72.49 104.31 SNL Bank $1B-$5B 100.00 98.29 113.74 82.85 68.72 49.26 Period Ending Index 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 Enterprise Financial Services Corp 100.00 133.02 164.16 237.34 174.94 113.30 NASDAQ Composite 100.00 108.59 110.08 120.56 132.39 78.72 SNL Bank $1B-$5B 100.00 123.42 121.31 140.38 102.26 84.81 162008.2009. This information should be read in connection with our audited consolidated financial statements, related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this report. Year ended December 31, (in thousands, except per share data) 2008 2007 2006 2005 2004 EARNINGS SUMMARY: Interest income $ 117,981 $ 122,517 $ 94,418 $ 68,108 $ 48,893 Interest expense 51,258 61,465 43,141 23,541 12,169 Net interest income 66,723 61,052 51,277 44,567 36,724 Provision for loan losses 22,475 4,615 2,127 1,490 2,212 Noninterest income 25,273 19,673 16,916 8,967 7,122 Noninterest expense 63,505 49,516 41,394 34,324 29,331 Minority interest in net income of consolidated consolidated subsidiary - - (875 ) (113 ) - Income before income taxes 6,016 26,594 23,797 17,607 12,303 Income taxes 1,586 9,016 8,325 6,312 4,088 NET INCOME $ 4,430 $ 17,578 $ 15,472 $ 11,295 $ 8,215 PER SHARE DATA: Basic earnings per common share $ 0.35 $ 1.44 $ 1.41 $ 1.12 $ 0.85 Diluted earnings per common share 0.34 1.40 1.36 1.05 0.82 Cash dividends paid on common shares 0.21 0.21 0.18 0.14 0.10 Book value per common share 14.31 13.96 11.52 8.85 7.44 Tangible book value per common share 10.24 8.86 8.43 7.27 7.23 BALANCE SHEET DATA: Year end balances: Loans $ 1,977,175 $ 1,641,432 $ 1,311,723 $ 1,002,379 $ 898,505 Allowance for loan losses 31,309 21,593 16,988 12,990 11,665 Goodwill 48,512 57,177 29,983 12,042 1,938 Intangibles, net 3,504 6,053 5,789 4,548 135 Assets 2,270,174 1,999,118 1,535,587 1,286,968 1,059,950 Deposits 1,792,784 1,585,012 1,315,508 1,116,244 939,628 Subordinated debentures 85,081 56,807 35,054 30,930 20,620 Borrowings 166,117 169,581 40,752 36,931 20,164 Shareholders' equity 217,788 173,149 132,994 92,605 72,726 Average balances: Loans 1,828,434 1,495,807 1,159,110 964,259 847,270 Earning assets 1,952,942 1,619,425 1,300,378 1,100,559 967,854 Assets 2,127,671 1,753,254 1,385,726 1,148,691 1,008,022 Interest-bearing liabilities 1,711,048 1,365,471 1,055,520 859,912 748,434 Shareholders' equity 183,819 161,359 113,000 81,511 68,854 SELECTED RATIOS: Return on average common equity 2.43 % 10.89 % 13.69 % 13.86 % 11.93 % Return on average assets 0.21 1.00 1.12 0.98 0.81 Efficiency ratio 69.03 61.34 60.70 64.12 66.90 Average common equity to average assets 8.58 9.20 8.15 7.10 6.83 Yield on average interest-earning assets 6.09 7.63 7.33 6.25 5.10 Cost of interest-bearing liabilities 3.00 4.50 4.09 2.74 1.63 Net interest rate spread 3.09 3.13 3.24 3.51 3.47 Net interest rate margin 3.47 3.83 4.01 4.11 3.84 Nonperforming loans to total loans 1.50 0.77 0.49 0.14 0.20 Nonperforming assets to total assets 1.92 0.78 0.52 0.11 0.18 Net chargeoffs to average loans 0.70 0.14 0.10 0.02 0.13 Allowance for loan losses to total loans 1.58 1.32 1.30 1.30 1.30 Dividend payout ratio - basic 60.09 15.01 12.78 12.58 11.76 Year ended December 31, Restated Restated Restated Restated (in thousands, except per share data) 2009 2008 2007 2006 2005 EARNINGS SUMMARY: Interest income $ 118,486 $ 127,021 $ 130,249 $ 98,545 $ 71,648 Interest expense 48,845 60,338 69,242 47,308 27,087 Net interest income 69,641 66,683 61,007 51,236 44,561 Provision for loan losses 40,412 26,510 5,120 2,273 1,523 Noninterest income 19,877 20,341 12,852 9,897 8,187 Noninterest expense 98,427 48,776 44,695 37,754 33,667 (Loss) income from continuing operations (49,321 ) 11,738 24,044 21,107 17,558 Income tax (benefit) expense from continuing operations (2,650 ) 3,672 8,098 7,357 6,300 Net (loss) income from continuing operations (46,671 ) 8,066 15,946 13,750 11,258 Net (loss) income $ (47,955 ) $ 1,848 $ 17,255 $ 15,379 $ 11,275 PER SHARE DATA: Basic (loss) earnings per common share: From continuing operations $ (3.82 ) $ 0.63 $ 1.30 $ 1.25 $ 1.12 Total (3.92 ) 0.14 1.41 1.40 1.12 Diluted (loss) earnings per common share: From continuing operations (3.82 ) 0.63 1.27 1.21 1.05 Total (3.92 ) 0.14 1.37 1.35 1.05 Cash dividends paid on common shares 0.21 0.21 0.21 0.18 0.14 Book value per common share 10.25 14.33 13.91 11.50 8.83 Tangible book value per common share 10.05 10.27 8.81 8.40 7.25 BALANCE SHEET DATA: Ending balances: Loans 1,833,260 2,201,457 1,784,278 1,376,452 1,048,302 Allowance for loan losses 42,995 33,808 22,585 17,475 13,332 Goodwill 953 48,512 57,177 29,983 12,042 Intangibles, net 1,643 3,504 6,053 5,789 4,548 Assets 2,365,655 2,493,767 2,141,329 1,600,004 1,332,673 Deposits 1,941,416 1,792,784 1,585,013 1,315,508 1,116,244 Subordinated debentures 85,081 85,081 56,807 35,054 30,930 Borrowings 167,438 392,926 312,427 105,481 82,854 Shareholders' equity 163,912 214,572 172,515 132,683 92,386 Average balances: Loans 2,098,275 2,001,073 1,599,596 1,214,436 1,014,697 Earning assets 2,334,700 2,125,581 1,723,214 1,355,704 1,150,997 Assets 2,462,237 2,298,882 1,856,466 1,440,685 1,198,795 Interest-bearing liabilities 2,025,339 1,883,904 1,469,258 1,110,845 910,348 Shareholders' equity 177,374 182,175 160,783 112,633 81,191 SELECTED RATIOS: Return on average common equity (34.51 ) % 0.98 % 10.73 % 13.65 % 13.89 % Return on average assets (2.05 ) 0.08 0.93 1.07 0.94 Efficiency ratio 109.95 56.05 60.51 61.76 63.83 Average common equity to average assets 5.92 7.89 8.65 7.78 6.77 Yield on average interest-earning assets 5.15 6.04 7.63 7.34 6.28 Cost of interest-bearing liabilities 2.41 3.20 4.71 4.26 2.98 Net interest rate spread 2.74 2.84 2.92 3.08 3.31 Net interest rate margin 3.06 3.20 3.61 3.85 3.93 Nonperforming loans to total loans 2.10 1.61 0.71 0.47 0.14 Nonperforming assets to total assets 2.74 1.98 0.73 0.50 0.11 Net chargeoffs to average loans 1.42 0.76 0.13 0.10 0.02 Allowance for loan losses to total loans 2.35 1.54 1.27 1.27 1.27 Dividend payout ratio - basic (5.62 ) 144.02 15.29 12.85 12.60 17
RESULTS OF OPERATIONS
The objective of this section is to provide an overview of the results of operations and financial condition of the Company for the three years ended December 31, 2008.2009. It should be read in conjunction with the Consolidated Financial Statements, Notes and other financial data presented elsewhere in this report, particularly the information regarding the Company’s business operations described in Item 1.
This overview of management’s discussion and analysis highlights selected information in this document and may not contain all of the information that is important to you. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources and critical accounting estimates, you should carefully read this entire document.Overeighteenfourteen months, banks and financial institutions of all sizes have been impacted by adverse conditions in the housing and credit markets, and recent bank failures have heightened awareness and concern regarding the safety and soundness of all banks. The Company, including its wholly owned bank subsidiary, Enterprise, are “well-capitalized” under the regulatory guidelines. Since September 2008, we have raised $62.5added $75.0 million in new regulatory capital, raisingincluding $15.0 million from a January 2010 private offering of our risk-based capital ratio to 12.81% - well in excess of the regulatory guidelines. On September 30, 2008, Enterprise completed a $2.5 million private placement of subordinated capital notes. On December 12, 2008, we completed a private placement of $25.0 million in Convertible Trust Preferred Securities that qualify as Tier II regulatory capital until they would convert to EFSC common stock. And finally, on December 19, 2008, we received $35.0 million from the US Treasury under the Capital Purchase Program.113 – Subordinated DebenturesAcquisitions and Divestitures for more information.We are concentrating our resources on growing our core banking wealth management businesses and aggressively managing asset quality through this credit cycle. The additional capital will strengthen our balance sheet and allows us to take advantage of opportunities that may emerge as a result of the current unsettled nature of the financial industry. In addition, please note:We havedid not participateddetect an error in the originationaccounting for loan participations executed subject to its standard participation agreement. This resulted in the restatement of subprime or Alt-A loans.Weour financial results at December 31, 2007, December 31, 2008, each quarter in 2008 and the first and second quarters of 2009. Except for labeling affected prior period financial statements as “Restated,” no further changes are being made to our above described corrected financial statements and no further restatement of our financial statements is anticipated. All prior period results presented have not invested in securities that are secured by subprime loans.We have no common or preferred Federal National Mortgage Association (Fannie Mae) or Federal Homebeen restated for the error. The overall effect of these adjustments from the original period of correction to December 31, 2009 was neutral to the Company’s financial results. See “Loan Participations” below and Item 8, Note 2 – Loan Mortgage Corporation (Freddie Mac) stock.Net income for 2008For 2009, we reported a net loss of $48.0 million compared to a net loss of $1.8 million in 2008. After deducting preferred stock dividends, net loss available to common shareholders was $4.4$50.4 million, or $0.34$3.92 per fully diluted share, compared to $17.6net income available to common shareholders of $1.8 million, or $1.40$0.14 per fully diluted share in 2007.2008. Included in 20082009 results are:9.245.4 million in pre-tax, non-cash goodwill and intangible impairment chargescharge related to Millennium;our Banking reporting unit;
3.41.6 million in pre-tax gainsloss on the sale of non-strategic branchesMillennium;
The goodwill impairment charge is a non-cash accounting adjustment that does not reduce the Company’s regulatory or tangible capital position, liquidity or cash flow and does not impact the Company’s operations. The goodwill impairment charge was primarily driven by the deterioration in the Kansas City market;general economic environment and the resulting decline in the Company’s share price and market capitalization in the first quarter of 2009. See Item 8, Note 10 – Goodwill and Intangible Assets for more information.$1.0On January 20, 2010, we sold Millennium for $4.0 million in cash, resulting in a $1.6 million pre-tax chargeloss on the sale. Millennium financial results are reported as discontinued operations for all periods presented herein. See “Noninterest income” for more information.
During a review of loan participation agreements in the third quarter of 2009, the Company determined that certain of these agreements contained language inconsistent with sale accounting treatment. The agreements provided us with the unilateral ability to repurchase participated loans at their outstanding loan balance plus accrued interest at any time. In effect, the repurchase option afforded us with effective control over the participated portion of the loan, which conflicts with sale accounting treatment.
We reported a net loss from continuing operations of $46.7 million, or $3.82 per diluted share, for 2009, compared to net income of $8.1 million, or $0.63 per diluted share, for 2008. For 2009, net loss from discontinued operations was $1.3 million, or $0.10 per diluted share, compared to a payout under an employee retention agreement.Excluding these non-recurring items,net loss of $6.2 million, or $0.49 per diluted share in 2008.earningsincome from continuing operations was $31.9 million, for the year were $9.12009 compared to $35.2 million or $0.70, per share. in 2008. The reduction in 2009 operating income from continuing operations compared to 2008 is largely attributable to the fair value adjustments on state tax credits held for sale and the related interest rate caps used to hedge market risk along with increases in loan legal and other real estate expenses.operating earnings and loss figures,pre-tax, pre-provision income from continuing operations, which are notis a non-GAAP (Generally Accepted Accounting Principles) financial measures as defined under U.S. GAAP,measure, because we believe adjusting our results to exclude non-recurring itemsdiscontinued operations, loan loss provision expense, impairment charges, special FDIC assessments and unusual gains or losses provides shareholders with a more comparable basis for evaluating our period-to-period operating results and financial performance. Belowresults. A schedule reconciling pre-tax income (loss) from continuing operations to pre-tax, pre-provision income from continuing operations is a reconciliation of U.S. GAAP net (loss) income to operating (loss) earnings for the fourth quarter and year of 2008. 4th Quarter 2008 Total year 2008 (All amounts net of tax, in thousands, except per share data) Net loss Diluted EPS Net income Diluted EPS U.S. GAAP net (loss) income $ (3,952 ) $ (0.32 ) $ 4,430 $ 0.34 Impairment charges related to Millennium 2,112 0.16 5,888 0.46 Gain on sales of Kansas City nonstrategic branches/charter - - (1,880 ) (0.15 ) Employee retention agreement 560 0.04 640 0.05 Operating (loss) earnings $ (1,280 ) $ (0.12 ) $ 9,078 $ 0.70 Our diluted earnings per share are $0.01 less than previously reportedprovided in the press release issued on January 29, 2009 on Form 8-K due to the inclusion of preferred stock dividends that were not declared as of the press release date and not included in the earnings per share calculation at that time.18For the Quarter Ended Restated Restated Dec 31, Sep 30, Jun 30, Mar 31, Total Year (In thousands) 2009 2009 2009 2009 2009 Pre-tax income (loss) from continuing operations $ 8 $ 7,003 $ (1,634 ) $ (54,698 ) $ (49,321 ) Goodwill impairment charge - - - 45,377 45,377 Sales and fair value writedowns of other real estate 1,166 602 508 549 2,825 Sale of securities (3 ) - (636 ) (316 ) (955 ) Gain on extinguishment of debt (2,062 ) (5,326 ) - - (7,388 ) FDIC special assessment (included in Other noninterest expense) - (105 ) 1,100 - 995 (Loss) income before income tax (891 ) 2,174 (662 ) (9,088 ) (8,467 ) Provision for loan losses 8,400 6,480 9,073 16,459 40,412 Pre-tax, pre-provision income from continuing operations $ 7,509 $ 8,654 $ 8,411 $ 7,371 $ 31,945 For the Quarter Ended (Restated) Dec 31, Sep 30, Jun 30, Mar 31, Total Year (In thousands) 2008 2008 2008 2008 2008 Pre-tax (loss) income from continuing operations $ (6,291 ) $ 8,214 $ 4,386 $ 5,429 $ 11,738 Sales and fair value writedowns of other real estate 91 (242 ) (351 ) 9 (492 ) Sale of securities (88 ) - (73 ) - (161 ) Gain on sale of Kansas City nonstrategic branches/charter 0 (2,840 ) 19 (579 ) (3,400 ) Retention payment 875 125 - - 1,000 (Loss) income before income tax (5,413 ) 5,257 3,981 4,859 8,685 Provision for loan losses 16,296 3,007 4,378 2,829 26,510 Pre-tax, pre-provision income from continuing operations $ 10,883 $ 8,264 $ 8,359 $ 7,688 $ 35,195 2021 – Segment Reporting.Our core banking business continuesFor 2009, the Banking segment recorded a net loss of $43.2 million compared to perform relatively well in lightnet income of $10.5 million for 2008. Excluding the unprecedented turmoil innon-tax deductible goodwill impairment of $45.4 million, the financial markets and the continued deteriorationBanking segment recorded net income of the housing market.$2.2 million for 2009. Below is a summary of 2008:2009:growthdemand – At December 31, 2008,2009, portfolio loans were $1.977$1.833 billion, an increasea decrease of $336.0$368.0 million, or 20%17%, from December 31, 2007. The strong net growth in loans is attributable in part to a more favorable competitive environment, with fewer competitors positioned today to capture new business, resulting in both increased volumes and more favorable pricing. More than 60%2008. Net of the net loan growth was relatedparticipations, portfolio loans declined $144.0 million, or 7%.
Loan demand appears to commercialbe soft as business clients postpone expansion efforts and industrial businesses.pare back debt. Our loan portfolio mix at December 31, 2008,2009, from both industry anda collateral perspectives, did not changeperspective, changed significantly from December 31, 2007.2008 in two categories. Construction loans collateralized by real estate totaled $224.4 million or 12% of the portfolio, at December 31, 2009 compared to $378.1 million or 17% of the portfolio at December 31, 2008. This reduction reflects the soft real estate markets and the Company’s intentional efforts to reduce our construction loan exposure. Loans collateralized by commercial real estate totaled $829.0$820.2 million, or 45% of the portfolio at year endDecember 31, 2009 compared to $888.0 million, or 40% of the portfolio at December 31, 2008. Approximately $318.0 million, or 38%39%, of that total, represented real estate that was “owner-occupied” by commercial and industrial businesses.Enterprise continuesbusinesses compared to operate a loan production office in central Phoenix. Through December 2008, the loan production office has generated approximately $22.0 million of commercial and industrial and commercial real estate loans. In 2008, we applied for a de novo Arizona state bank charter. Unfortunately, conditions have led the Arizona regulatory authorities to stop approvals for de novo charters and as a result the most likely option to obtain a charter to operate a bank in Arizona is, through negotiated acquisition or an FDIC-assisted transaction. We continue to believe in the long-term value in the Phoenix market and remain confident in our decision to establish a bank in that region.The Bank has continued its lending activities since the Treasury’s investment on December 19, 2008. From the close of business December 18, 2008 through February 28, 2009, the Bank funded $55.0 million in new loans and advanced another $80.4 million on existing loans. Total portfolio loans, net of payoffs and paydowns, grew $29.1$333.0 million, or roughly 8% annualized between38% at December 18, 2008 and February 28, 2009. 31, 2008.
We continue to see loan opportunities in all our markets. During 2009, we expect ourmodest loan growth percentage to be in the high single digits.
2010 as business activity should improve slightly and additional capacity from new hires and focused sales teams take effect. Deposit growth in 2008 was challenging. Across the financial industry, growing concern over the safety of bank deposits caused some large balance clients to reduce their exposure by spreading funds among numerous financial institutions. Our focus for 2009 iswas to reduce our reliance on brokered deposits, grow our core deposits, and increase our percentage of non-interest bearing deposits. We have adjusted our incentive programs to focus our associates on deposit gathering efforts and will be aggressively managingmanaged deposit rates to achieve this objective.DuringTotal deposits were $1.94 billion at December 31, 2009, an increase of $149.0 million, or 8%, from December 31, 2008. Total deposits increased $88.0 million, or 5%, during the fourth quarter of 2008, we increased core2009. Noninterest-bearing demand deposits $113.0 million, or 8%. While less than our historicalrepresented 15% of total deposits at December 31, 2009 compared to 14% at December 31, 2008. Noninterest-bearing demand deposit growth was particularly strong in the fourth quarter deposit surge, this increase is significant in that it occurred despite a massive investor flight to the Treasury markets driven by the instability and volatility of the financial markets during that period. In 2008, total deposits grew $208.0 million, or 13%, to $1.793 billion. Brokered deposits represented $336.0 million of this total,2009, with an increase of $222.0$32.0 million, overor 12%.
Excluding brokered certificates of deposit, “core” deposits grew $328.0 million, or 23%, from a year ago, and $139.0 million, or 9%, during the fourth quarter of 2009. Core deposits include certificates of deposit sold to clients through the reciprocal CDARS program. As of December 31, 2007. Approximately $37.02009, Enterprise had $135.0 million of reciprocal CDARS deposits were sold as part of the Great American sale. Excluding the impact of the Great American sale and brokeredoutstanding compared to $60.0 million at December 31, 2008.
Brokered deposits core deposits increased $23.0declined $180.0 million, or 2%53%, in 2008.from December 31, 2008 to $156.0 million. For the year ended December 31, 2008,2009, brokered deposits represented 19%8% of total deposits on average compared to 7%19% for the year ended December 31, 2007. Non-interest bearing demand deposits represented 14% of total deposits at December 31, 2008, compared to 18% of total deposits one year ago.2008.In July 2008, Enterprise became a participating depository institution in the Certificate of Deposit Accounts Registry Service, or CDARS, a private network of institutions, which allows us to provide our customers with access to additional levels of FDIC insurance. As of December 31, 2008, Enterprise had $60.0 million of reciprocal CDARS deposits outstanding.We elected to “opt-in” to the expanded FDIC deposit insurance program and the government sponsored debt issuance guaranty program, which represents additional sources of liquidity.19 See “Supervision and Regulation” and “Liquidity and Capital Resources” for more information.thirdfourth year of slow residential housing activity in St. Louis and Kansas City with no significant improvement expected in 2009. During the latter half of 2008, we performed an in-depth review to specifically target our higher riskCity. In addition, commercial real estate loans where repayment is dependent on the sale of the underlying properties. Examples would be residential construction, commercial construction, land acquisition and development, improved lots, and raw-land. The review:determined our geographic distribution of construction projects (those within our primary lending areas compared to those thatmarkets, especially retail, are out-of-market) along with distribution by counties;softening.
determined if we were exposed to concentration risk within residential subdivisions through an excessive number of builders, or excessive number of speculative homes, or lots;assessed the establishment and use of interest reserves by determining if sufficient amounts were structured into the loans at origination and determined if adequate amounts exist to carry the project to completion;assessed the adequacy of financial information and analysis at loan origination or modification; andevaluated disbursing procedures to ensure that loan advances are appropriate to the various stages of the construction project, which minimizes the risk of the bank becoming fully funded on a loan when the project has not reached completion.As a result of the review, we aggressively downgraded risk ratings primarily in the Kansas City region on residential construction loans, which resulted in higher provision expense and loan loss reserves for the year. Although loans to residential builders represent only 12% of our loan portfolio, they represent almost 40% of our nonperforming loans at December 31, 2008.We are closely monitoring our portfolio to determine if the recession is impacting other sectors. We have not seen significant deterioration in the commercial and industrial sector of our portfolio but anticipate continued economic weakness will adversely impact these borrowers in 2009. Commercial construction projects have slowed, but not as severely as in the residential sector. Builders are still working on backlogs, but some projects are being cancelled and it appears 2010 may be slow.Non-performingNonperforming loans were $29.7$38.5 million, or 1.50%2.10%, of portfolio loans at December 31, 2008.2009. The allowance for loan losses was $31.3$43.0 million, or 1.58%2.35%, of portfolio loans vs. $21.6versus $33.8 million, or 1.32%,1.54% of portfolio loans, at the end of 2007.2008. In 2008,2009, we incurred $12.7$29.8 million of net charge-offs, or 0.70%,1.42% of average loans compared to $2.0$15.2 million of net charge-offs, or 0.14%,0.76% of average loans in 2007. See “Allowance for Loan Losses” for more information.2008.
Management expects 2010 nonperforming assets and chargeoff levels to remain elevated.
