Following are the balance sheet information and financial results for the Company’s operating segments as of June 30, 2005 and December 31, 2004, and for the three and six months ended June 30, 2005 and 2004 (in thousands) (unaudited):
Management segregates the Company into three distinct businesses: Banking, Wealth Management and Corporate. The Banking and Wealth Management segments are evaluated separately on their individual performance, as well as, their contribution to the Company as a whole.
The majority of the Company’s assets and income result from the Banking segment. The Bank consists of four banking branches and an operations center in the St. Louis region and two banking branches in the Kansas City region. The products and services offered by the banking branches include a broad range of commercial and personal banking services, including certificates of deposit, individual retirement accounts, checking and other demand deposit accounts, interest checking accounts, savings accounts and money market accounts. Loans include commercial, financial, real estate construction and development, commercial and residential real estate, consumer and installment loans. Other financial services include mortgage banking, debit and credit cards, automatic teller machines, internet account access, safe deposit boxes, and treasury management services.
Wealth Management provides fee-based personal and corporate financial consulting and trust services. Personal financial consulting includes estate planning, investment management, and retirement planning. Corporate consulting services are focused in the areas of retirement plans, management compensation and strategic planning issues. The Wealth Management segment also provides life, annuity, disability income, and long-term care products and mutual funds.
Corporate and intercompany includes the holding company and subordinated debentures. The Company incurs general corporate expenses and owns the Bank.
NOTE 4 -DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company utilizes interest rate swap derivatives as one method to manage some of its interest rate risk from recorded financial assets and liabilities. These derivatives are utilized when they can be demonstrated to effectively hedge a designated asset or liability and such asset or liability exposes the Bank to interest rate risk.
The Bank accounts for its derivatives under Statement of Financial Accounting Standards (SFAS) No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities and SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. These Standards require recognition of all derivatives as either assets or liabilities in the balance sheet and require measurement of those instruments at fair value through adjustments to either other comprehensive income, current earnings, or both, as appropriate.
The decision to enter into an interest rate swap is made after considering the asset/liability position of the Bank, the desired asset/liability sensitivity and interest rate levels. Prior to entering into a hedge transaction, the Bank formally documents the relationship between hedging instruments and the hedged items, as well as the risk management objective for undertaking the various hedge transactions.
The following is a summary of the Company’s accounting policies for derivative instruments and its activities under SFAS No. 149 and SFAS No. 133.
Cash Flow Hedges – The Bank enters into interest rate swap agreements to convert floating-rate loan assets to fixed rates. The swap agreements provide for the Bank to pay a variable rate of interest equivalent to the prime rate and to receive a fixed rate of interest. Under the swap agreements the Bank is to pay or receive interest quarterly. Amounts to be paid or received under these swap agreements are accounted for on an accrual basis and recognized as interest income of the related loan asset. The net cash flows related to cash flow hedges decreased interest income on loans by $91,000 and $71,000 for the three and six months ended June 30, 2005, respectively. The net cash flows related to cash flow hedges increased interest income on loans by $351,000 and $672,000 for the three and six months ended June 30, 2004, respectively.
Cash flow hedges are accounted for at fair value. The effective portion of the change in the cash flow hedge’s gain or loss is reported as a component of other comprehensive income net of taxes. The ineffective portion of the change in the cash flow hedge’s gain or loss is recorded in earnings on each quarterly measurement date. At June 30, 2005 and December 31, 2004, $453,000 and $347,000, respectively, in deferred losses, net of tax, were recorded in accumulated other comprehensive income. All cash flow hedges were effective; therefore, no gain or loss was recorded in earnings for the periods presented. The maximum term over which the Bank is hedging its exposure to the variability of future cash flows is less than 1 year.
10
Fair Value Hedges - The Bank enters into interest rate swap agreements with the objective of converting the fixed interest rate on brokered CDs to a variable interest rate. The swap agreements require the Bank to pay a variable rate of interest based on a spread to the three-month London Interbank Offered Rate (LIBOR) and to receive a fixed rate of interest equal to that of the brokered CD (hedged instrument.) Under the swap agreements the Bank is to pay or receive interest semiannually. Amounts to be paid or received under these swap agreements are accounted for on an accrual basis and recognized as interest expense of the related liability. The net cash flows related to fair value hedges increased interest expense on certificates of deposit by $54,000 and $110,000 for the three and six months ended June 30, 2005, respectively. The net cash flows related to fair value hedges decreased interest expense on certificates of deposit by $140,000 and $317,000 for the three and six months ended June 30, 2004, respectively.
Fair value hedges are accounted for at fair value. The swaps qualify for the “shortcut method” under SFAS No. 133. Based on this shortcut method, no ineffectiveness is assumed. As a result, changes in the fair value of the swaps directly offset changes in the fair value of the underlying hedged item (i.e., brokered CDs). All changes in fair value are measured on a quarterly basis.
The maturity dates, notional amounts, interest rates paid and received and fair value of our interest rate swap agreements as of June 30, 2005 were as follows:
Cash Flow Hedges | | June 30, 2005 | | December 31, 2004 | |
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| |
| | | (Dollars in thousands) | |
Notional amount | | $ | 70,000 | | $ | 90,000 | |
Weighted average pay rate | | | 6.25 | % | | 5.25 | % |
Weighted average receive rate | | | 5.39 | % | | 5.74 | % |
Weighted average maturity in months | | | | | | | |
Unrealized loss related to interest rate swaps | | $ | (691 | ) | $ | (511 | ) |
Fair Value Hedges | | June 30, 2005 | | December 31, 2004 | |
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| | | (Dollars in thousands) | |
Notional amount | | $ | 30,000 | | $ | 40,000 | |
Weighted average pay rate | | | 3.37 | % | | 2.60 | % |
Weighted average receive rate | | | 2.55 | % | | 2.34 | % |
Weighted average maturity in months | | | 13 | | | 14 | |
Unrealized loss related to interest rate swaps | | $ | (418 | ) | $ | (415 | ) |
NOTE 5 - DISCLOSURES ABOUT FINANCIAL INSTRUMENTS
The Bank issues financial instruments with off balance sheet risk in the normal course of the business of meeting the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments may involve, to varying degrees, elements of credit and interest-rate risk in excess of the amounts recognized in the consolidated balance sheets.
The Bank’s extent of involvement and maximum potential exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for financial instruments included on its consolidated balance sheets. At June 30, 2005 and December 31, 2004, no amounts have been accrued for any estimated losses for these financial instruments.
11
The contractual amount (in thousands) of off-balance-sheet financial instruments as of June 30, 2005 and December 31, 2004 is as follows:
| | June 30, 2005 | | December 31, 2004 | |
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Commitments to extend credit | | $ | 307,574 | | $ | 296,561 | |
Standby letters of credit | | | 26,494 | | | 20,263 | |
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Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since certain of these commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, premises and equipment, and real estate.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These standby letters of credit are primarily issued to support contractual obligations of the Bank’s customers. The credit risk involved in issuing letters of credit is essentially the same as the risk involved in extending loans to customers. The approximate remaining terms of standby letters of credit range from 1 month to 5 years at June 30, 2005.
Item 2 - Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion describes significant changes in the financial condition of the Company that have occurred during the first six months of 2005 compared to December 31, 2004. In addition, this discussion summarizes the significant factors affecting the consolidated results of operations, liquidity and cash flows of the Company for the three and six months ended June 30, 2005 compared to the three and six months ended June 30, 2004. This discussion should be read in conjunction with our consolidated financial statements and notes thereto included in this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2004.
Results of Operations
Net income for the three and six months ended June 30, 2005 was $3.1 million and $5.6 million, an increase of 55% and 60%, respectively, compared to $2.0 million and $3.5 million for the same periods in 2004. Fully diluted earnings per share for the three and six months ended June 30, 2005 were $0.29 and $0.53, an increase of 45% and 51% respectively, compared to $0.20 and $0.35 for the same periods in 2004.
Financial Condition
Total assets increased $81 million, or 7.5%, from $1.06 billion at December 31, 2004 to $1.14 billion at June 30, 2005.
For the six months ended June 30, 2005, loans, net of unearned loan fees, increased $60 million to $959 million, or 13% annualized since December 31, 2004. This is an increase of $92 million from June 30, 2004. At December 31, 2004, our loan pipeline was robust, and as a result loan volume in first quarter 2005 was a strong 33% annualized. Principal payments, primarily on variable commercial & industrial and commercial real estate loans, late in the second quarter drove down the outstanding loan balance on June 30, 2005. As a result, from a point in time perspective, loans declined $14 million from March 31, 2005. However, average loans were $967 million for the second quarter of 2005, an increase of almost 4% over first quarter 2005 average loans of $935 million and an increase of 13% over second quarter 2004 average loans of $853 million.
12
The growth in loans was funded by increases in deposits and advances from the Federal Home Loan Bank (“FHLB”). Total deposits at June 30, 2005 were $996 million, an increase of $56 million, or 12% annualized, over total deposits of $940 million at December 31, 2004. Following a decline in first quarter due to normal seasonal cash demands of our clients, deposits grew $59 million in second quarter. Money market accounts increased $13 million and time deposits, excluding brokered CDs, increased $29 million during the first half of 2005. During first quarter 2005, we executed $30 million of brokered certificates of deposits, a net increase of $10 million from year-end. The growth in time deposits was primarily due to competitive time deposit promotions at selected branches, including our new location in St. Charles, Missouri.
During the second quarter as core deposits grew, we relied less on overnight FHLB advances; however, to take advantage of attractive rates, we entered into $22 million of long-term FHLB advances at an average rate of 4.50% with an average term of 8 years. Some fixed rate loans with similar maturities will be funded with these fixed rate advances. At June 30, 2005, FHLB advances were $31 million, a $20 million increase over December 31, 2004. There were no short-term FHLB advances outstanding at June 30, 2005.
At June 30, 2005, federal funds sold were $43 million compared to $6 million of federal funds purchased at December 31, 2004.
Total shareholders’ equity was $80 million at June 30, 2005 compared to $73 million at December 31, 2004. The $7 million increase in equity is due to net income of $5.6 million for the six months ended June 30, 2005 and the exercise of incentive stock options by employees offset by dividends paid to shareholders and changes in accumulated other comprehensive income.
Net Interest Income
Net interest income, the most significant component of our earnings, is the difference between interest income earned on loans, investment securities and other interest-earning assets less interest expense on deposit accounts and other interest-bearing liabilities. The level of net interest income is determined by the mix and volume of interest-earning assets, interest-bearing deposits and borrowed funds, and by changes in interest rates. Business volumes are influenced by overall economic factors including inflation, market interest rates, business spending, consumer confidence and competitive conditions within the marketplace. Net interest rate margin represents net interest income on a tax equivalent basis as a percentage of average interest-earning assets during the period. Net interest rate margin is affected by the spread between average yields earned on interest-earning assets and the average rates paid on interest-bearing deposits and borrowings. The level of non-interest bearing funds, primarily consisting of demand deposits and stockholders’ equity, also affects the net interest rate margin.
Net interest income (on a tax-equivalent basis) was $11.1 million for the three months ended June 30, 2005, compared to $9.0 million for the same period of 2004, an increase of 23%. Average interest-earning assets for the three months ended June 30, 2005 were $1.067 billion, an increase of $110 million, or 11% over $958 million, for the same period in 2004. For the three months ended June 30, 2005, average interest-bearing liabilities were $829 million, an increase of $90 million, or 12% over $739 million for the same period in 2004.
Net interest rate margin (on a tax-equivalent basis) was 4.19% for the second quarter of 2005, up from 3.80% in the second quarter of 2004. The increase in net interest rate margin reflects a 118 basis point increase in yields on average interest-earning assets and an increasing benefit from non-interest bearing deposits and equity, offset by a 102 basis point increase in the cost of average interest-bearing liabilities. The increase in average interest-earning asset yields was the result of prime rate increases in the latter half of 2004 and first half of 2005. Approximately two-thirds of the Company’s loan portfolio floats with the prime rate. The increase in cost of funds was primarily due to increases in money market and certificate of deposit rates.
13
Net interest income (on a tax-equivalent basis) was $21.8 million for the six months ended June 30, 2005, compared to $17.5 million for the same period of 2004, an increase of 25%. Average interest-earning assets for the six months ended June 30, 2005 were $1.051 billion, an increase of $131 million, or 14% over $920 million, for the same period in 2004. Average interest-bearing liabilities increased $104 million, or 15% to $816 million for the six months ended June 30, 2005 compared to $712 million for the six months ended June 30, 2004.
Net interest rate margin (on a tax-equivalent basis) was 4.18% for the first half of 2005, up from 3.84% in the first half of 2004. The increase in net interest rate margin reflects a 97 basis point increase in yields on average interest-earning assets and an increasing benefit from non-interest bearing deposits and equity, offset by an 80 basis point increase in the costs of average interest-bearing liabilities. Increases in yields and cost of funds are the same as those described above.
The following tables set forth, on a tax-equivalent basis, certain information relating to the Company’s average balance sheet and reflects the average yield earned on interest-earning assets, the average cost of interest-bearing liabilities and the resulting net interest spread and net interest rate margin for the three and six months ended June 30, 2005 and 2004.
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Three months ended June 30, | |
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| | 2005 | | 2004 | |
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(Dollars in thousands) | | Average Balance | | Percent of Total Assets | | Interest Income/ Expense | | Average Yield/ Rate | | Average Balance | | Percent of Total Assets | | Interest Income/ Expense | | Average Yield/ Rate | |
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Assets | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | |
Taxable loans (1) | | $ | 949,338 | | | 85.3 | % | $ | 15,178 | | | 6.41 | % | $ | 836,222 | | | 84.0 | % | $ | 10,848 | | | 5.22 | % |
Tax-exempt loans(2) | | | 17,402 | | | 1.6 | | | 385 | | | 8.87 | | | 16,643 | | | 1.7 | | | 329 | | | 7.95 | |
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| | | | |
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| |
Total loans | | | 966,740 | | | 86.9 | | | 15,563 | | | 6.46 | | | 852,865 | | | 85.7 | | | 11,177 | | | 5.27 | |
Taxable investments in debt and equity securities | | | 88,960 | | | 8.0 | | | 721 | | | 3.25 | | | 81,800 | | | 8.2 | | | 593 | | | 2.92 | |
Non-taxable investments in debt and equity securities(2) | | | 1,530 | | | 0.1 | | | 15 | | | 3.93 | | | 1,644 | | | 0.2 | | | 16 | | | 3.91 | |
Short-term investments | | | 10,136 | | | 0.9 | | | 77 | | | 3.05 | | | 21,209 | | | 2.1 | | | 39 | | | 0.74 | |
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| | | | |
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| | | | |
Total securities and short-term investments | | | 100,626 | | | 9.0 | | | 813 | | | 3.24 | | | 104,653 | | | 10.5 | | | 648 | | | 2.49 | |
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| | | | |
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Total interest-earning assets | | | 1,067,366 | | | 95.9 | | | 16,376 | | | 6.15 | | | 957,518 | | | 96.2 | | | 11,825 | | | 4.97 | |
Non-interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and due from banks | | | 36,504 | | | 3.3 | | | | | | | | | 26,998 | | | 2.7 | | | | | | | |
Other assets | | | 21,965 | | | 2.0 | | | | | | | | | 21,600 | | | 2.2 | | | | | | | |
Allowance for loan losses | | | (12,760 | ) | | (1.2 | ) | | | | | | | | (10,977 | ) | | (1.1 | ) | | | | | | |
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Total assets | | $ | 1,113,075 | | | 100.0 | % | | | | | | | $ | 995,139 | | | 100.0 | % | | | | | | |
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Liabilities and Shareholders’ Equity | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing transaction accounts | | $ | 85,204 | | | 7.7 | % | $ | 220 | | | 1.04 | % | $ | 66,868 | | | 6.7 | % | $ | 58 | | | 0.35 | % |
Money market accounts | | | 413,531 | | | 37.2 | | | 2,311 | | | 2.24 | | | 380,917 | | | 38.3 | | | 904 | | | 0.95 | |
Savings | | | 4,658 | | | 0.4 | | | 9 | | | 0.77 | | | 4,192 | | | 0.4 | | | 3 | | | 0.29 | |
Certificates of deposit | | | 239,464 | | | 21.5 | | | 1,852 | | | 3.10 | | | 229,705 | | | 23.1 | | | 1,230 | | | 2.15 | |
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Total interest-bearing deposits | | | 742,857 | | | 66.8 | | | 4,392 | | | 2.37 | | | 681,682 | | | 68.5 | | | 2,195 | | | 1.30 | |
Subordinated debentures | | | 20,620 | | | 1.9 | | | 288 | | | 5.60 | | | 18,353 | | | 1.8 | | | 345 | | | 7.56 | |
Borrowed funds | | | 65,077 | | | 5.9 | | | 550 | | | 3.39 | | | 39,006 | | | 3.9 | | | 238 | | | 2.45 | |
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Total interest-bearing liabilities | | | 828,554 | | | 74.6 | | | 5,230 | | | 2.53 | | | 739,041 | | | 74.2 | | | 2,778 | | | 1.51 | |
Noninterest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | |
Demand deposits | | | 199,609 | | | 17.9 | | | | | | | | | 181,751 | | | 18.3 | | | | | | | |
Other liabilities | | | 6,211 | | | 0.4 | | | | | | | | | 6,164 | | | 0.6 | | | | | | | |
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Total liabilities | | | 1,034,374 | | | 92.9 | | | | | | | | | 926,956 | | | 93.1 | | | | | | | |
Shareholders’ equity | | | 78,701 | | | 7.1 | | | | | | | | | 68,183 | | | 6.9 | | | | | | | |
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Total liabilities & shareholders’ equity | | $ | 1,113,075 | | | 100.0 | % | | | | | | | $ | 995,139 | | | 100.0 | % | | | | | | |
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Net interest income | | | | | | | | $ | 11,146 | | | | | | | | | | | $ | 9,047 | | | | |
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Net interest spread | | | | | | | | | | | | 3.62 | % | | | | | | | | | | | 3.46 | % |
Net interest rate margin(3) | | | | | | | | | | | | 4.19 | % | | | | | | | | | | | 3.80 | % |
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(1) | Average balances include non-accrual loans. The income on such loans is included in interest but is recognized only upon receipt. Loan fees included in interest income are approximately $504,000 and $427,000 for the quarters ended June 30, 2005 and 2004, respectively. |
| Non-taxable income is presented on a fully tax-equivalent basis assuming a tax rate of 36% for 2005 and 36% for 2004. The approximate tax-equivalent adjustments were $144,000 and $124,000 for the quarters ended June, 2005 and 2004, respectively. |
(3) | Net interest income divided by average total interest-earning assets. |
14
| | Six months ended June 30, | |
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| | 2005 | | 2004 | |
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(Dollars in thousands) | | Average Balance | | Percent of Total Assets | | Interest Income/ Expense | | Average Yield/ Rate | | Average Balance | | Percent of Total Assets | | Interest Income/ Expense | | Average Yield/ Rate | |
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Assets | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | |
Taxable loans (1) | | $ | 933,247 | | | 85.3 | % | $ | 28,823 | | | 6.23 | % | $ | 811,297 | | | 84.7 | % | $ | 21,089 | | | 5.23 | % |
Tax-exempt loans(2) | | | 17,528 | | | 1.6 | | | 762 | | | 8.77 | | | 16,900 | | | 1.8 | | | 665 | | | 7.91 | |
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Total loans | | | 950,775 | | | 86.9 | | | 29,585 | | | 6.27 | | | 828,197 | | | 86.5 | | | 21,754 | | | 5.28 | |
Taxable investments in debt and equity securities | | | 92,526 | | | 8.5 | | | 1,467 | | | 3.20 | | | 68,216 | | | 7.1 | | | 1,023 | | | 3.02 | |
Non-taxable investments in debt and equity securities(2) | | | 1,558 | | | 0.1 | | | 31 | | | 4.01 | | | 1,649 | | | 0.2 | | | 32 | | | 3.90 | |
Short-term investments | | | 6,178 | | | 0.6 | | | 88 | | | 2.87 | | | 21,462 | | | 2.2 | | | 87 | | | 0.82 | |
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Total securities and short-term investments | | | 100,262 | | | 9.2 | | | 1,586 | | | 3.19 | | | 91,327 | | | 9.5 | | | 1,142 | | | 2.51 | |
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Total interest-earning assets | | | 1,051,037 | | | 96.1 | | | 31,171 | | | 5.98 | | | 919,524 | | | 96.0 | | | 22,896 | | | 5.01 | |
Non-interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and due from banks | | | 34,893 | | | 3.2 | | | | | | | | | 27,543 | | | 2.9 | | | | | | | |
Other assets | | | 21,026 | | | 1.8 | | | | | | | | | 21,626 | | | 2.2 | | | | | | | |
Allowance for loan losses | | | (12,454 | ) | | (1.1 | ) | | | | | | | | (10,900 | ) | | (1.1 | ) | | | | | | |
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Total assets | | $ | 1,094,502 | | | 100.0 | % | | | | | | | $ | 957,793 | | | 100.0 | % | | | | | | |
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Liabilities and Shareholders’ Equity | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing transaction accounts | | $ | 85,138 | | | 7.8 | % | $ | 370 | | | 0.88 | % | $ | 61,236 | | | 6.4 | % | $ | 97 | | | 0.32 | % |
Money market accounts | | | 414,225 | | | 37.8 | | | 4,090 | | | 1.99 | | | 376,972 | | | 39.4 | | | 1,763 | | | 0.94 | |
Savings | | | 4,429 | | | 0.4 | | | 14 | | | 0.64 | | | 4,214 | | | 0.4 | | | 6 | | | 0.29 | |
Certificates of deposit | | | 232,118 | | | 21.2 | | | 3,381 | | | 2.94 | | | 221,266 | | | 23.1 | | | 2,356 | | | 2.14 | |
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Total interest-bearing deposits | | | 735,910 | | | 67.2 | | | 7,855 | | | 2.15 | | | 663,688 | | | 69.3 | | | 4,222 | | | 1.28 | |
Subordinated debentures | | | 20,620 | | | 1.9 | | | 548 | | | 5.36 | | | 16,909 | | | 1.8 | | | 662 | | | 7.87 | |
Borrowed funds | | | 59,664 | | | 5.5 | | | 958 | | | 3.24 | | | 31,628 | | | 3.3 | | | 448 | | | 2.85 | |
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Total interest-bearing liabilities | | | 816,194 | | | 74.6 | | | 9,361 | | | 2.31 | | | 712,225 | | | 74.4 | | | 5,332 | | | 1.51 | |
Noninterest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | |
Demand deposits | | | 195,340 | | | 17.8 | | | | | | | | | 172,427 | | | 18.0 | | | | | | | |
Other liabilities | | | 6,089 | | | 0.6 | | | | | | | | | 6,008 | | | 0.6 | | | | | | | |
| |
|
| |
|
| | | | | | | |
|
| |
|
| | | | | | | |
Total liabilities | | | 1,017,623 | | | 92.9 | | | | | | | | | 890,660 | | | 93.0 | | | | | | | |
Shareholders’ equity | | | 76,879 | | | 7.0 | | | | | | | | | 67,133 | | | 7.0 | | | | | | | |
| |
|
| |
|
| | | | | | | |
|
| |
|
| | | | | | | |
Total liabilities & shareholders’ equity | | $ | 1,094,502 | | | 100.0 | % | | | | | | | $ | 957,793 | | | 100.0 | % | | | | | | |
| |
|
| |
|
| | | | | | | |
|
| |
|
| | | | | | | |
Net interest income | | | | | | | | $ | 21,810 | | | | | | | | | | | $ | 17,564 | | | | |
| | | | | | | |
|
| | | | | | | | | | |
|
| | | | |
Net interest spread | | | | | | | | | | | | 3.67 | % | | | | | | | | | | | 3.50 | % |
Net interest rate margin(3) | | | | | | | | | | | | 4.18 | % | | | | | | | | | | | 3.84 | % |
| | | | | | | | | | |
|
| | | | | | | | | | |
|
| |
|
(1) | Average balances include non-accrual loans. The income on such loans is included in interest but is recognized only upon receipt. Loan fees included in interest income are approximately $920,000 and $735,000 for the six months ended June 30, 2005 and 2004, respectively. |
(2) | Non-taxable income is presented on a fully tax-equivalent basis assuming a tax rate of 36% for 2005 and 36% for 2004. The approximate tax-equivalent adjustments were $286,000 and $251,000 for the six months ended June, 2005 and 2004, respectively. |
(3) | Net interest income divided by average total interest-earning assets. |
The following table sets forth, on a tax equivalent basis, a summary of the changes in interest income and interest expense resulting from changes in yield/rates and volume for the three and six months ended June 30, 2005 and 2004.
| | 2005 Compared to 2004 | |
| |
| |
| | 3 month Increase (decrease) due to | | 6 month Increase (decrease ) due to | |
| |
| |
| |
| | Volume(1) | | Rate(2) | | Net | | Volume(1) | | Rate(2) | | Net | |
| |
| |
| |
| |
| |
| |
| |
| | (Dollars in thousands) | | (Dollars in thousands) | |
Interest earned on: | | | | | | | | | | | | | | | | | | | |
Loans | | $ | 1,607 | | $ | 2,723 | | $ | 4,330 | | $ | 3,402 | | $ | 4,332 | | $ | 7,734 | |
Nontaxable loans (3) | | | 16 | | | 40 | | | 56 | | | 25 | | | 72 | | | 97 | |
Taxable investments in debt and equity securities | | | 55 | | | 73 | | | 128 | | | 380 | | | 64 | | | 444 | |
Nontaxable investments in debt and equity securities (3) | | | (1 | ) | | — | | | (1 | ) | | (2 | ) | | 1 | | | (1 | ) |
Short-term investments | | | (29 | ) | | 67 | | | 38 | | | (96 | ) | | 97 | | | 1 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total interest-earning assets | | $ | 1,648 | | $ | 2,903 | | $ | 4,551 | | $ | 3,709 | | $ | 4,566 | | $ | 8,275 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Interest paid on: | | | | | | | | | | | | | | | | | | | |
Interest-bearing transaction accounts | | $ | 20 | | $ | 142 | | $ | 162 | | $ | 50 | | $ | 223 | | $ | 273 | |
Money market accounts | | | 84 | | | 1,323 | | | 1,407 | | | 189 | | | 2,138 | | | 2,327 | |
Savings | | | — | | | 6 | | | 6 | | | — | | | 8 | | | 8 | |
Certificates of deposit | | | 54 | | | 568 | | | 622 | | | 119 | | | 906 | | | 1,025 | |
Subordinated debentures | | | 40 | | | (97 | ) | | (57 | ) | | 125 | | | (239 | ) | | (114 | ) |
Borrowed funds | | | 199 | | | 113 | | | 312 | | | 442 | | | 68 | | | 510 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total interest-bearing liabilities | | | 397 | | | 2,055 | | | 2,452 | | | 925 | | | 3,104 | | | 4,029 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Net interest income | | $ | 1,251 | | $ | 848 | | $ | 2,099 | | $ | 2,784 | | $ | 1,462 | | $ | 4,246 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
(1) | Change in volume multiplied by yield/rate of prior period. |
(2) | Change in yield/rate multiplied by volume of prior period. |
(3) | Non taxable income is presented on a fully tax-equivalent basis assuming a tax rate of 36% in 2005 and 2004. |
NOTE: The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each.
16
Provision for Loan Losses
The provision for loan losses is affected by changes in the loan portfolio, management’s assessment of the collectability of the loan portfolio, loss experience and economic and market factors. A description of the process used to determine the loan loss provision is below. The provision for loan losses was $226,000 for the second quarter 2005 compared to $740,000 for the same period in 2004 due to lower nonperforming loan levels and slower loan growth in the quarter. The allowance for loan losses as a percentage of total loans was 1.33% at June 30, 2005 compared to 1.30% at December 31, 2004 and 1.32% at June 30, 2004.
Asset quality remains strong. Nonperforming loans were $2.1 million or 22 basis points of total loans at June 30, 2005 versus 28 basis points and 20 basis points at June 30, 2004 and December 31, 2004, respectively. At June 30, 2005, three relationships comprised $1.5 million, or 69% of the non-performing loans. The remaining non-performing loans represented four different relationships. At June 30, 2004, three relationships comprised $1.8 million, or 76% of the non-performing loans. One of the relationships was foreclosed and sold in first quarter 2005. The Company recovered $73,000 on the property. In March 2005, the Company also recovered $92,000 on a loan previously charged off.
The following table summarizes changes in the allowance for loan losses for the three and six months ended June 30, 2005 and 2004.
| | Three months ended June 30, | | Six months ended June 30, | |
| |
| |
| |
| | 2005 | | 2004 | | 2005 | | 2004 | |
| |
| |
| |
| |
| |
| | (Dollars in thousands) | | (Dollars in Thousands) | |
Allowance at beginning of period | | $ | 12,639 | | $ | 10,686 | | $ | 11,665 | | $ | 10,590 | |
Loans charged off: | | | | | | | | | | | | | |
Commercial and industrial | | | 65 | | | — | | | 68 | | | — | |
Real estate: | | | | | | | | | | | | | |
Commercial | | | 100 | | | — | | | 100 | | | 427 | |
Construction | | | — | | | — | | | — | | | — | |
Residential | | | — | | | — | | | — | | | 100 | |
Consumer and other | | | 14 | | | — | | | 14 | | | 7 | |
| |
|
| |
|
| |
|
| |
|
| |
Total loans charged off | | | 179 | | | — | | | 182 | | | 534 | |
| |
|
| |
|
| |
|
| |
|
| |
Recoveries of loans previously charged off: | | | | | | | | | | | | | |
Commercial and industrial | | | 57 | | | — | | | 77 | | | 9 | |
Real estate: | | | | | | | | | | | | | |
Commercial | | | — | | | — | | | 73 | | | — | |
Construction | | | — | | | — | | | — | | | — | |
Residential | | | 19 | | | 16 | | | 114 | | | 32 | |
Consumer and other | | | 7 | | | 6 | | | 10 | | | 14 | |
| |
|
| |
|
| |
|
| |
|
| |
Total recoveries of loans previously charged off: | | | 83 | | | 22 | | | 274 | | | 55 | |
| |
|
| |
|
| |
|
| |
|
| |
Net loans charged off (recovered) | | | 96 | | | (22 | ) | | (92 | ) | | 479 | |
| |
|
| |
|
| |
|
| |
|
| |
Provision for loan losses | | | 226 | | | 740 | | | 1,012 | | | 1,337 | |
| |
|
| |
|
| |
|
| |
|
| |
Allowance at end of period | | $ | 12,769 | | $ | 11,448 | | $ | 12,769 | | $ | 11,448 | |
| |
|
| |
|
| |
|
| |
|
| |
Average loans | | $ | 966,740 | | $ | 852,865 | | $ | 950,775 | | $ | 828,197 | |
Total loans | | | 958,878 | | | 866,814 | | | 958,878 | | | 866,814 | |
Non-performing loans | | | 2,136 | | | 2,401 | | | 2,136 | | | 2,401 | |
Net charge-offs (recoveries) to average loans (annualized) | | | 0.04 | % | | (0.01 | )% | | (0.02 | )% | | 0.12 | % |
Allowance for loan losses to loans | | | 1.33 | | | 1.32 | | | 1.33 | | | 1.32 | |
Allowance for loan losses to non-performing loans | | | 598 | | | 477 | | | 598 | | | 477 | |
17
The Company’s credit management policies and procedures focus on identifying, measuring, and controlling credit exposure. These procedures employ a lender-initiated system of rating credits, which is ratified in the loan approval process and subsequently tested in internal loan reviews and regulatory bank examinations. The system requires rating all loans at the time they are made, and at each renewal date.
Adversely rated credits, including loans requiring close monitoring, which would normally not be considered criticized credits by regulators, are included on a monthly loan watch list. Other loans are added whenever any adverse circumstances are detected which might affect the borrower’s ability to meet the terms of the loan. This could be initiated by any of the following:
| 1) | delinquency of a scheduled loan payment; |
| 2) | deterioration in the borrower’s financial condition identified in a review of periodic financial statements; |
| 3) | decrease in the value of collateral securing the loan; or |
| 4) | change in the economic environment in which the borrower operates. |
Loans on the watch list require detailed loan status reports, including recommended corrective actions, prepared by the responsible loan officer every three months. These reports are then discussed in formal meetings with the Chief Credit Officer and Chief Executive Officer of the Bank.
Downgrades of loan risk ratings may be initiated by the responsible loan officer, internal loan review, or the credit analyst department at any time. Upgrades of risk ratings may only be made with the concurrence of the Chief Credit Officer and Loan Review.
In determining the allowance and the related provision for loan losses, three principal elements are considered:
| • | specific allocations based upon probable losses identified during a monthly review of the loan portfolio; |
| • | allocations based principally on the Company’s risk rating formulas; and |
| • | an unallocated allowance based on subjective factors. |
The first element reflects management’s estimate of probable losses based upon a systematic review of specific loans considered to be impaired. These estimates are based upon collateral exposure, if they are collateral dependent for collection. Otherwise, discounted cash flows are estimated and used to assign loss.
The second element reflects the application of the Company’s loan rating system. This rating system is similar to those employed by state and federal banking regulators. Loans are rated and assigned a loss allocation factor for each category that is consistent with our historical losses, adjusted for environmental factors. The higher the rating assigned to a loan, the greater the allocation percentage that is applied.
The unallocated allowance is based on management’s evaluation of conditions that are not directly reflected in the determination of the formula and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they may not be identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the unallocated allowance include the following:
| • | general economic and business conditions affecting our key lending areas; |
| • | credit quality trends (including trends in nonperforming loans expected to result from existing conditions); |
| • | collateral values; |
| • | loan volumes and concentrations; |
| • | competitive factors resulting in shifts in underwriting criteria; |
| • | specific industry conditions within portfolio segments; |
| • | recent loss experience in particular segments of the portfolio; |
| • | bank regulatory examination results; and |
| • | findings of our internal loan review department. |
Executive management reviews these conditions quarterly in discussion with the entire lending staff. To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s estimate of the effect of such conditions may be reflected as a specific allowance, applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s evaluation of the probable loss related to such condition is reflected in the unallocated allowance.
18
Based on this quantitative and qualitative analysis, provisions are made to the allowance for loan losses. Such provisions are reflected in the Company’s consolidated statements of income.
The Bank had no loans 90 days past due still accruing interest at June 30, 2005 or December 31, 2004. The following table sets forth information concerning the Company’s non-performing assets as of the dates indicated:
| | June 30, 2005 | | December 31, 2004 | |
| |
| |
| |
| | (Dollars in thousands) | |
Non-accrual loans | | $ | 2,136 | | $ | 1,827 | |
| |
|
| |
|
| |
Total non-performing loans | | | 2,136 | | | 1,827 | |
Foreclosed real estate | | | 123 | | | 123 | |
| |
|
| |
|
| |
Total non-performing assets | | $ | 2,259 | | $ | 1,950 | |
| |
|
| |
|
| |
Total assets | | $ | 1,140,522 | | $ | 1,059,950 | |
Total loans | | | 958,878 | | | 898,505 | |
Total loans plus foreclosed property | | | 959,001 | | | 898,628 | |
Non-performing loans to loans | | | 0.22 | % | | 0.20 | % |
Non-performing assets to loans plus foreclosed property | | | 0.24 | | | 0.22 | |
Non-performing assets to total assets | | | 0.20 | | | 0.18 | |
The increase in nonperforming loans during the first six months of 2005 consists of a $539,000 credit that is secured by a first mortgage on a commercial property and a $300,000 credit to a manufacturer. The increase was partially offset by a motel property that was foreclosed and sold during the first quarter of 2005. Five other borrowers represent the remainder.
Noninterest Income
Noninterest income primarily consists of fees and service charges on deposit accounts, Wealth Management fee income and to a lesser extent, gains on sales of mortgage loans. Noninterest income was $2.2 million for the three months ended June 30, 2005, compared to $1.8 million for the same period in 2004. Driving this improvement was a 42% increase in Wealth Management income from $1.0 million for second quarter of 2004 to $1.5 million for the same quarter of 2005. This increase was the result of both increased assets under administration and a more favorable mix of managed versus custodial assets. Assets under administration in Enterprise Trust were $1.5 billion at June 30, 2005 versus $1.2 billion at June 30, 2004. Service charges on deposit accounts of $537,000 were basically unchanged in the second quarter of 2005 compared to the same quarter in 2004. This is due to a rising earnings crediting rate on commercial accounts which is offset by increased account activity.
For the six months ended June 30, 2005, noninterest income was $4.1 million compared to $3.3 million for the same period in 2004. Wealth management income increased $807,000, or 42%, to $2.7 million for the six month period ended June 30, 2005, compared to $1.9 million for the same period in 2004 as a result of the reasons stated above. In addition, Wealth Products Group, which was introduced in March 2004, contributed $305,000 of the Wealth Management increase. Service charges increased slightly from $997,000 to $1.02 million for the six month period ended June 30, 2005.
Noninterest Expense
Total noninterest expense was $8.2 million for the three months ended June 30, 2005, an increase of $1.0 million over the same period in 2004. Additional employee compensation and benefits comprised $817,000 of the increase. Other expenses increased $126,000.
19
The increase in employee compensation and benefits was related to several factors. Accrued expenses under the Company’s incentive bonus programs, which are tied to performance targets, increased $388,000. Growth in the Wealth Management business increased commissions by $154,000. Effective January 1, 2005, the Board of Directors awarded restricted share units (“RSUs”) to selected personnel during the first quarter of 2005. RSUs will be expensed annually as they vest over five years. Compensation expense related to the RSUs was $95,000 in the second quarter 2005. Recruiting fees of $ 71,000 were incurred during the second quarter. The remaining increase was attributable to annual merit increases for personnel, increases in medical and disability insurance costs and increases in temporary help.
The increase in other expenses was the result of additional legal and professional and director expenses offset by decreases in marketing and public relations. Legal and professional expenses, including expenses related to Sarbanes-Oxley 404 compliance, increased $150,000 for the second quarter of 2005 compared to the same period in 2004. Director expenses increased $99,000 for the second quarter of 2005 compared to the second quarter of 2004. $42,000 of this increase was related to director stock appreciation rights, which are marked to market on a quarterly basis based upon the Company’s stock price. The remaining increase in director expenses was due to increases in compensation to more competitive levels. Offsetting these increases was a $109,000 decrease in marketing and public relations expenses due to the timing of a media campaign in 2004.
Total noninterest expense was $15.9 million for the six months ended June 30, 2005, representing a $1.8 million increase over the same period in 2004. Employee compensation and benefits and other expenses compose the increase. Fluctuations in these expense categories for the six month period are similar to those discussed above for the second quarter period.
Income Taxes
The provision for income taxes was $1.7 million and $3.1 million for the three and six months ended June 30, 2005 compared to $0.9 million and $1.8 for the three and six months ended June 30, 2004. The effective tax rates for the three and six months ended June 30, 2005 were 35.0% and 35.7%, respectively. The effective tax rates for the three and six months ended June 30, 2004 were 30.8% and 33.4%, respectively. During the second quarter of 2004, we recognized state income tax refunds of $163,000 related to amendments of prior state income tax returns.
Liquidity
The objective of liquidity management is to ensure the Company has the ability to generate sufficient cash or cash equivalents in a timely and cost-effective manner to meet its commitments as they become due. Funds are available from a number of sources, such as from the core deposit base and from loans and securities repayments and maturities. Additionally, liquidity is provided from sales of the securities portfolio, lines of credit with major financial institutions, the Federal Reserve Bank and the Federal Home Loan Bank, the ability to acquire large and brokered deposits and the ability to sell loan participations to other banks.
The Company’s liquidity management framework includes measurement of several key elements, such as the loan to deposit ratio, wholesale deposits as a percentage of total deposits, and various dependency ratios used by banking regulators. The Company’s liquidity framework also incorporates contingency planning to assess the nature and volatility of funding sources and to determine alternatives to these sources.
Strong capital ratios, credit quality and core earnings are essential to retaining cost-effective access to the wholesale funding markets. Deterioration in any of these factors could have an impact on the Company’s ability to access these funding sources and, as a result, these factors are monitored on an ongoing basis as part of the liquidity management process.
While core deposits and loan and investment repayment are principal sources of liquidity, funding diversification is another key element of liquidity management. Diversity is achieved by strategically varying depositor types, terms, funding markets, and instruments.
20
Investment securities are an important part of the Company’s liquidity objective. As of June 30, 2005, all of the investment portfolio was available for sale. Of the $89.1 million available for sale investment portfolio, $18.8 million was pledged as collateral for public deposits, treasury, tax and loan notes, and other requirements. The remaining securities could be pledged or sold to enhance liquidity if necessary.
The Bank has a variety of funding sources (in addition to key liquidity sources, such as core deposits, loan repayments, loan participations sold, and investment portfolio sales) available to increase financial flexibility. At June 30, 2005, we had $31 million of outstanding FHLB long-term borrowings. At June 30, 2005, we had an additional $85 million available for borrowing from the Federal Home Loan Bank of Des Moines under a blanket loan pledge, absent the Bank being in default of its credit agreement, and $170 million available from the Federal Reserve Bank under a pledged loan agreement. During second quarter 2005, we reviewed our process for pledging loans as collateral to the FHLB and Federal Reserve. We identified additional loans that were available for pledging to the Federal Reserve. As a result, our amount available from the Federal Reserve has increased substantially over prior periods. We also have access to over $70.0 million in overnight federal funds purchased lines from various banking institutions. Finally, since the Bank is a “well-capitalized” institution, it has the ability to sell certificates of deposit through various national or regional brokerage firms, if needed.
Over the normal course of business, the Company enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through the Company’s various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of the Company’s liquidity. The Company has $307 million in unused loan commitments as of June 30, 2005. The Company believes that the nature of these commitments are such that the likelihood of such a funding demand is very low.
21
Capital Adequacy
The Company and Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulations to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets. The Company believes, as of June 30, 2005 and December 31, 2004, that the Company and Bank meet all capital adequacy requirements to which they are subject.
As of June 30, 2005 and December 31, 2004, the Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized” the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table.
| | Actual | | For Capital Adequacy Purposes | | To Be Well Capitalized Under Applicable Action Provisions | |
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| |
| |
| |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | |
| |
| |
| |
| |
| |
| |
| |
| | (Dollars in thousands) | |
As of June 30, 2005: | | | | | | | | | | | | | | | | | | | |
Total Capital (to Risk Weighted Assets) | | | | | | | | | | | | | | | | | | | |
Enterprise Financial Services Corp | | $ | 112,584 | | | 11.39 | % | $ | 79,049 | | | 8.00 | % | $ | — | | | — | % |
Enterprise Bank & Trust | | | 107,395 | | | 10.87 | | | 79,010 | | | 8.00 | | | 98,763 | | | 10.00 | |
Tier I Capital (to Risk Weighted Assets) | | | | | | | | | | | | | | | | | | | |
Enterprise Financial Services Corp | | | 100,228 | | | 10.14 | | | 39,524 | | | 4.00 | | | — | | | — | |
Enterprise Bank & Trust | | | 95,044 | | | 9.62 | | | 39,505 | | | 4.00 | | | 59,258 | | | 6.00 | |
Tier I Capital (to Average Assets) | | | | | | | | | | | | | | | | | | | |
Enterprise Financial Services Corp | | | 100,228 | | | 9.01 | | | 33,383 | | | 3.00 | | | — | | | — | |
Enterprise Bank & Trust | | | 95,044 | | | 8.55 | | | 33,338 | | | 3.00 | | | 55,564 | | | 5.00 | |
As of December 31, 2004: | | | | | | | | | | | | | | | | | | | |
Total Capital (to Risk Weighted Assets) | | | | | | | | | | | | | | | | | | | |
Enterprise Financial Services Corp | | $ | 103,673 | | | 11.19 | | $ | 74,086 | | | 8.00 | | $ | — | | | — | |
Enterprise Bank & Trust | | | 99,545 | | | 10.76 | | | 74,036 | | | 8.00 | | | 92,545 | | | 10.00 | |
Tier I Capital (to Risk Weighted Assets) | | | | | | | | | | | | | | | | | | | |
Enterprise Financial Services Corp | | | 92,096 | | | 9.94 | | | 37,043 | | | 4.00 | | | — | | | — | |
Enterprise Bank & Trust | | | 87,976 | | | 9.51 | | | 37,018 | | | 4.00 | | | 55,527 | | | 6.00 | |
Tier I Capital (to Average Assets) | | | | | | | | | | | | | | | | | | | |
Enterprise Financial Services Corp | | | 92,096 | | | 8.44 | | | 32,725 | | | 3.00 | | | — | | | — | |
Enterprise Bank & Trust | | | 87,976 | | | 8.08 | | | 32,659 | | | 3.00 | | | 54,432 | | | 5.00 | |
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Readers should note that in addition to the historical information contained herein, some of the information in this report contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements typically are identified with use of terms such as “may,” “will,” “expect,” “anticipate,” “estimate” and similar words, although some forward-looking statements are expressed differently. You should be aware that the Company’s actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including burdens imposed by federal and state regulation of banks, credit risk, availability of capital to fund the expansion of the Company’s business, exposure to local economic conditions, risks associated with rapid increase or
22
decrease in prevailing interest rates, critical accounting policies and competition from banks and other financial institutions, all of which could cause the Company’s actual results to differ from those set forth in the forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Market risk arises from exposure to changes in interest rates and other relevant market rate or price risk. The Company faces market risk in the form of interest rate risk through other than trading activities. Market risk from other than trading activities in the form of interest rate risk is measured and managed through a number of methods. The Company uses financial modeling techniques that measure the sensitivity of future earnings due to changing rate environments to measure interest rate risk. Policies established by the Company’s Asset/Liability Committee and approved by the Company’s Board of Directors limit exposure of earnings at risk. General interest rate movements are used to develop sensitivity as the Company feels it has no primary exposure to a specific point on the yield curve. These limits are based on the Company’s exposure to a 100 bp and 200 bp immediate and sustained parallel rate move, either upward or downward.
The following table (in thousands) presents the scheduled repricing of market risk sensitive instruments at June 30, 2005:
| | Year 1 | | Year 2 | | Year 3 | | Year 4 | | Year 5 | | Beyond 5 years or no stated maturity | | Total | |
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ASSETS | | | | | | | | | | | | | | | | | | | | | | |
Investments in debt and equity securities | | $ | 1,843 | | $ | 22,513 | | $ | 54,570 | | $ | 4,749 | | $ | 51 | | $ | 5,467 | | $ | 89,193 | |
Interest-bearing deposits | | | 94 | | | — | | | — | | | — | | | — | | | — | | | 94 | |
Loans (1) | | | 741,679 | | | 62,445 | | | 70,237 | | | 31,137 | | | 42,607 | | | 10,773 | | | 958,878 | |
Loans held for sale | | | 3,996 | | | — | | | — | | | — | | | — | | | — | | | 3,996 | |
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Total | | $ | 747,612 | | $ | 84,958 | | $ | 124,807 | | $ | 35,886 | | $ | 42,658 | | $ | 16,240 | | $ | 1,052,161 | |
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LIABILITIES | | | | | | | | | | | | | | | | | | | | | | |
Savings, NOW, and Money market deposits | | $ | 536,608 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 536,608 | |
Certificates of deposit (1) | | | 154,115 | | | 78,466 | | | 22,669 | | | 3,499 | | | 1,160 | | | 31 | | | 259,940 | |
Subordinated debentures | | | 20,620 | | | — | | | — | | | — | | | — | | | — | | | 20,620 | |
Other borrowings | | | 9,580 | | | 1,125 | | | 1,250 | | | 650 | | | 1,050 | | | 24,139 | | | 37,794 | |
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Total | | $ | 720,923 | | $ | 79,591 | | $ | 23,919 | | $ | 4,149 | | $ | 2,210 | | $ | 24,170 | | $ | 854,962 | |
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Item 4 - Disclosure Control and Procedures
As of June 30, 2005, under the supervision and with the participation of the Company’s Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based on that evaluation, the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2005, to ensure that information required to be disclosed in the Company’s periodic SEC filings is processed, recorded, summarized and reported when required. There were no significant changes in the Company’s internal controls over financial reporting for the quarter ended June 30, 2005, that have materially affected, or are reasonably likely to affect, those controls.
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PART II – OTHER INFORMATION
Item 1 – Legal Proceedings
There were no material changes in legal proceedings as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
| (a) | During the quarter ended June 30, 2005, the Company issued 1,500 unregistered shares of its common stock to officers upon exercise of stock options pursuant to the 2002 Stock Incentive Plan (Plan V.) The aggregate value of unregistered shares issued was $19,650. The issuances were made in reliance upon the exemptions from registration (to the extent applicable) under Section 4(2) of the Securities Act of 1933. |
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| (b) | Not applicable. |
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| (c) | There were no repurchases of the Company’s common stock during the quarter ended June 30, 2005. |
Item 3 – Defaults Upon Senior Securities
None.
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Item 4 - Submission of Matters to a Vote of Security Holders
ANNUAL MEETING OF SHAREHOLDERS: The annual meeting of shareholders was held on April 20, 2005. Proxies were solicited pursuant to Regulation 14A of the Securities Exchange Act of 1934. There was no solicitation in opposition to management’s nominees for Directors and all nominees were elected. The appointment of KPMG LLP to serve as independent registered public accounting firm for the Company in 2005 was ratified.
The results of the voting on each proposal submitted at the meeting are as follows:
PROPOSAL NO. 1: ELECTION OF DIRECTORS
Director | | For | | Abstain |
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Paul J. McKee, Jr. | | 7,126,882 | | 86,943 |
Kevin C. Eichner | | 7,149,282 | | 64,543 |
Peter F. Benoist | | 7,194,073 | | 19,752 |
Paul R. Cahn | | 7,193,873 | | 19,952 |
William H. Downey | | 7,191,573 | | 22,252 |
Robert E. Guest, Jr. | | 7,192,973 | | 20,852 |
Richard S. Masinton | | 7,182,051 | | 31,774 |
Birch M. Mullins | | 7,194,073 | | 19,752 |
James J. Murphy | | 7,193,973 | | 19,852 |
Robert E. Saur | | 7,194,073 | | 19,752 |
Sandra Van Trease | | 7,077,859 | | 135,966 |
Henry D. Warshaw | | 7,193,973 | | 19,852 |
PROPOSAL NO. 2: INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Accountants | | For | | Against | | Abstain |
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KPMG LLP | | 7,170,376 | | 34,739 | | 8,710 |
Item 5 – Other Information
Not applicable or required.
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Item 6 - Exhibits
Exhibit Number | | Description |
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*11.1 | | Statement regarding computation of per share earnings |
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*31.1 | | Chief Executive Officer’s Certification required by Rule 13(a)-14(a). |
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*31.2 | | Chief Financial Officer’s Certification required by Rule 13(a)-14(a). |
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*32.1 | | Chief Executive Officer Certification pursuant to 18 U.S.C. § 1350, as adopted pursuant to section § 906 of the Sarbanes-Oxley Act of 2002 |
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*32.2 | | Chief Financial Officer Certification pursuant to 18 U.S.C. § 1350, as adopted pursuant to section § 906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Clayton, State of Missouri on the day of August 5, 2005.
| ENTERPRISE FINANCIAL SERVICES CORP |
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| By: | /s/ KEVIN C. EICHNER |
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| | Kevin C. Eichner |
| | Chief Executive Officer |
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| By: | /s/ FRANK H. SANFILIPPO |
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| | Frank H. Sanfilippo |
| | Chief Financial Officer |
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