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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934--For the quarterly period ended June 30, 2001
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number: ___________
------------
Enterbank Holdings, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware 43-1706259
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
150 North Meramec, Clayton, MO 63105
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 314-725-5500
------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of August 1, 2001:
Common Stock, $.01 par value---- 9,246,996 shares outstanding
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ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets
At June 30, 2001 and December 31, 2000 ............................ 1
Consolidated Statements of Income
Three Months and Six Months Ended June 30, 2001 and 2000 .......... 2
Consolidated Statements of Comprehensive Income
Three Months and Six Months Ended June 30, 2001 and 2000 .......... 4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2001 and 2000 ........................... 5
Notes to Consolidated Financial Statements ........................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................... 10
Item 3. Quantitative and Qualitative Disclosures Regarding
Market Risk .................................................. 24
PART II - OTHER INFORMATION
Item 4. Submissions of Matters to a Vote of Security Holders ......... II-1
Item 6. Exhibits and Reports on Form 8-K ............................ II-2
Signatures ........................................................... II-3
PART I - Item 1
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (unaudited)
At June 30, At December 31,
Assets 2001 2000
------ ------------- ---------------
Cash and due from banks $ 30,406,764 $ 25,964,052
Federal funds sold 36,710,151 58,302,921
Interest-bearing deposits 55,379 9,397
Investments in debt and equity securities:
Available for sale, at estimated fair value 26,879,748 50,569,333
Held to maturity, at amortized cost (estimated fair vale of
$320,830 at June 30, 2001 and $519,442 at December 31, 2000) 320,134 521,280
Federal Reserve Bank stock and
Federal Home Loan Bank stock, at cost 2,262,550 2,262,550
------------- ---------------
Total investments in debt and equity securities 29,462,432 53,353,163
------------- ---------------
Loans held for sale 7,347,154 945,095
Loans, less unearned loan fees 616,098,416 556,792,591
Less allowance for loan losses 7,117,731 7,096,544
------------- ---------------
Loans, net 608,980,685 549,696,047
------------- ---------------
Other real estate owned 309,000 76,680
Fixed assets, net 9,498,759 8,792,020
Accrued interest receivable 3,434,584 4,258,710
Investment in Enterprise Merchant Banc LLC 2,297,712 2,326,422
Investment in Enterprise Fund, L.P. 577,467 576,664
Goodwill 2,182,821 2,278,104
Prepaid expenses and other assets 5,636,077 4,359,063
------------- ---------------
Total assets $ 736,898,985 $ 710,938,338
============= ===============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Demand $ 103,438,388 $ 105,649,983
Interest-bearing transaction accounts 47,243,888 61,314,029
Money market accounts 279,904,472 271,060,782
Savings 7,484,758 7,326,217
Certificates of deposit:
$100,000 and over 94,716,359 84,535,714
Other 115,293,793 102,550,712
------------- ---------------
Total deposits 648,081,658 632,437,437
Guaranteed preferred beneficial interests in
EBH-subordinated debentures 11,000,000 11,000,000
Federal Home Loan Bank advances 17,924,479 9,965,899
Federal funds purchased -- 1,225,000
Accrued interest payable 1,609,878 1,687,288
Accounts payable and accrued expenses 1,596,485 1,138,931
------------- ---------------
Total liabilities 680,212,500 657,454,555
------------- ---------------
Shareholders' equity:
Common stock, $.01 par value; authorized 20,000,000 shares;
issued and outstanding 9,233,196 shares at June 30, 2001, 92,332 90,725
and 9,072,521 shares at December 31, 2000
Surplus 36,992,005 35,840,371
Retained earnings 19,438,644 17,418,811
Accumulated other comprehensive income 163,504 133,876
------------- ---------------
Total shareholders' equity 56,686,485 53,483,783
------------- ---------------
Total liabilities and shareholders' equity $ 736,898,985 $ 710,938,338
- ------------------------------------------------------------------ ============= ===============
See accompanying notes to unaudited consolidated financial statements
1
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Income (unaudited)
Three months ended Six months ended
June 30, June 30,
--------------------------- ---------------------------
2001 2000 2001 2000
--------------------------- ---------------------------
Interest income:
Interest and fees on loans $ 12,656,331 $ 12,087,774 $ 25,563,707 $ 23,153,173
Interest on debt securities:
Taxable 498,110 877,914 1,326,078 1,608,280
Nontaxable 4,708 8,841 10,465 18,434
Interest on federal funds sold 289,963 639,853 790,935 1,370,788
Interest on interest-bearing deposits 6,613 222 8,417 374
------------ ------------ ------------ ------------
Total interest income 13,455,725 13,614,604 27,699,602 26,151,049
------------ ------------ ------------ ------------
Interest expense:
Interest-bearing transaction accounts 139,028 210,274 317,968 412,601
Money market accounts 2,577,273 3,130,159 5,684,595 5,854,846
Savings 45,494 45,558 91,432 89,538
Certificates of deposit:
$100,000 and over 1,353,268 981,884 2,741,001 1,945,648
Other 1,701,913 1,796,264 3,323,608 3,554,942
Other borrowed funds 202,048 145,400 348,711 280,994
Guaranteed preferred beneficial interests in
EBH-subordinated debentures 261,372 260,192 513,950 526,065
------------ ------------ ------------ ------------
Total interest expense 6,280,396 6,569,731 13,021,265 12,664,634
------------ ------------ ------------ ------------
Net interest income 7,175,329 7,044,873 14,678,337 13,486,415
Provision for loan losses 330,000 328,006 595,000 548,442
------------ ------------ ------------ ------------
Net interest income after
provision for loan losses 6,845,329 6,716,867 14,083,337 12,937,973
------------ ------------ ------------ ------------
Noninterest income:
Service charges on deposit accounts 313,814 290,711 613,375 594,938
Trust and financial advisory income 316,755 209,059 569,101 306,367
Gain on sale of trading security - - - 500
Other service charges and fee income 80,688 175,814 196,457 266,183
Gains on sale of mortgage loans 332,786 114,024 512,809 194,791
Gains on sale of securities 52,559 - 82,246 -
Income (loss) from investment in Enterprise
Merchant Banc LLC 16,009 (6,277) (23,709) 23,835
Income (loss) from investment in Enterprise
Fund, L.P. (286) 9,761 803 27,776
------------ ------------ ------------ ------------
Total noninterest income 1,112,325 793,092 1,951,082 1,414,390
------------ ------------ ------------ ------------
Noninterest expense:
Salaries 3,248,456 2,598,296 6,477,351 5,029,890
Payroll taxes and employee benefits 719,926 554,924 1,351,730 1,106,029
Occupancy 401,019 388,620 798,006 759,148
Furniture and equipment 165,556 197,311 461,770 384,298
Data processing 321,414 187,409 538,903 354,311
Amortization of goodwill 47,641 47,641 95,283 95,282
Other 1,183,000 1,460,488 2,565,383 2,903,882
------------ ------------ ------------ ------------
Total noninterest expense 6,087,012 5,434,689 12,288,426 10,632,840
------------ ------------ ------------ ------------
Income before income tax expense 1,870,642 2,075,270 3,745,993 3,719,523
Income tax expense 735,405 800,704 1,450,704 1,435,764
------------ ------------ ------------ ------------
Net income $ 1,135,237 $ 1,274,566 $ 2,295,289 $ 2,283,759
- -----------------------------------------------============ ============ ============ ============
See accompanying notes to unaudited consolidated financial statements
2
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Income (unaudited) continued
Three months ended Six months ended
June 30, June 30,
-------------------------- --------------------------
2001 2000 2001 2000
-------------------------- --------------------------
Per share amounts
Basic earnings per share $ 0.12 $ 0.14 $ 0.25 $ 0.26
Basic weighted average common shares
outstanding 9,178,233 8,963,903 9,147,928 8,954,625
Diluted earnings per share $ 0.12 $ 0.13 $ 0.24 $ 0.24
Diluted weighted average common
shares outstanding 9,611,136 9,674,051 9,630,369 9,675,854
- ----------------------------------------------
See accompanying notes to unaudited consolidated financial statements
3
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (unaudited)
Three months ended June 30, Six months ended June 30,
----------------------------- ----------------------------
2001 2000 2001 2000
----------------------------- ----------- -----------
Net income $ 1,135,237 $ 1,274,566 $ 2,295,289 $ 2,283,759
Other comprehensive income (loss), before tax:
Realized and unrealized gain (loss)
arising during the period, net of tax 19,062 29,650 83,910 (4,404)
Less: reclassification adjustment for
realized gains included in net 34,689 - 54,282 -
income, net of tax
----------- ----------- ----------- -----------
Total other comprehensive income (loss),
net of tax (15,627) 29,650 29,628 (4,404)
----------- ----------- ----------- -----------
Total comprehensive income $ 1,119,610 $ 1,304,216 $ 2,324,917 $ 2,279,355
=========== =========== =========== ===========
- ----------------------------------------------
See accompanying notes to unaudited consolidated financial statements
4
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30,
2001 2000
------------- -------------
Cash flows from operating activities:
Net income $ 2,295,289 $ 2,283,759
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 768,449 637,533
Provision for loan losses 595,000 548,442
Proceeds from sale of trading security - 910,500
Gain on sale of trading security - (500)
Net accretion of debt and equity securities (55,336) (94,265)
Gain on sale of available for sale investment securities (82,246) -
Gain on investment in Enterprise Fund, L.P. (803) (27,776)
Loss (gain) on investment in Enterprise Merchant Banc, L.L.C. 23,709 (23,835)
Mortgage loans originated (46,341,528) (19,894,466)
Proceeds from mortgage loans sold 40,452,278 16,572,902
Gain on sale on mortgage loans (512,809) (194,791)
Noncash compensation expense attributed to stock option grants 99,205 80,074
Decrease (increase) in accrued interest receivable 824,126 (181,430)
(Decrease) increase in accrued interest payable (77,410) 130,294
Other, net (802,362) (833,163)
------------- -------------
Net cash used in operating activities (2,814,438) (86,722)
------------- -------------
Cash flows from investing activities:
Increase in interest-bearing deposits (45,982) (22,921)
Purchases of available for sale debt securities (10,143,108) (18,629,830)
Purchases of available for sale equity securities - (332,200)
Purchase of held to maturity debt securities (101,195) -
Proceeds from sale of available for sale debt and equity securities 2,517,209 -
Proceeds from maturities and principal paydowns on available-for-sale debt
and equity securities 31,505,215 5,089,331
Proceeds from maturities and principal paydowns on held to maturity debt
securities 300,000 150,000
Proceeds from sale of other real estate - 30,000
Net increase in loans (60,156,694) (37,797,521)
Recoveries of loans previously charged off 44,736 12,580
Proceeds from sale of fixed assets 15,300 -
Purchases of fixed assets (1,392,482) (733,604)
Investment in Enterprise Merchant Banc LLC (35,000) (1,566,438)
------------- -------------
Net cash used in investing activities (37,492,001) (53,800,603)
------------- -------------
Cash flows from financing activities:
Net (decrease) increase in non-interest bearing deposit accounts (2,211,595) 4,889,410
Net increase in interest bearing deposit accounts 17,855,816 40,700,774
Decrease in federal funds purchased (1,225,000) (1,300,000)
Paydowns of Federal Home Loan Bank advances (41,420) (1,100,153)
Proceeds from borrowings of Federal Home Loan Bank advances 8,000,000 -
Cash dividends paid (275,456) (179,075)
Proceeds from the exercise of common stock options 1,054,036 156,461
------------- -------------
Net cash provided by financing activities 23,156,381 43,167,417
------------- -------------
Net decrease in cash and cash equivalents (17,150,058) (10,719,908)
Cash and cash equivalents, beginning of year 84,266,973 74,179,316
------------- -------------
Cash and cash equivalents, end of year $ 67,116,915 $ 63,459,408
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 13,098,675 $ 12,534,340
Income taxes 3,389,300 2,724,952
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Noncash transactions:
Loans made to facilitate sale of other real estate owned 28,680
Retirement of treasury stock - 390,000
============= =============
- ------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements.
5
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not
include all information and footnotes required by accounting principles
generally accepted in the United States of America for complete
consolidated financial statements. The accompanying consolidated financial
statements of Enterbank Holdings, Inc. and subsidiaries (the "Company" or
"Enterbank") are unaudited and should be read in conjunction with the
consolidated financial statements and notes thereto contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000.
In the opinion of management, all adjustments consisting of normal
recurring accruals considered necessary for a fair presentation of the
results of operations for the interim periods presented herein have been
included. Operating results for the three and six month periods ended June
30, 2001 are not necessarily indicative of the results that may be expected
for any other interim period or for the year ending December 31, 2001. The
consolidated financial statements include the accounts of Enterbank
Holdings, Inc. and its subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
Certain amounts in the consolidated financial statements for the year ended
December 31, 2000 have been reclassified to conform to the 2001
presentation. Such reclassifications had no effect on previously reported
consolidated net income or shareholders' equity.
(2) Segment Disclosure
To help the Company more effectively manage the geographic areas in which
it operates, management has taken a regional management approach. The
different geographic regions in which we operate are evaluated separately
on their individual performance, as well as their contribution to the
Company as a whole. The corporate, other and intercompany reclassifications
includes the holding company, merchant banking activities, trust preferred
securities activities and intercompany eliminations and reclassifications.
The Company incurs general corporate expenses and owns Enterprise Bank in
Missouri, Enterprise Banking, N.A. in Kansas, and Enterprise Merchant Banc,
Inc. Enterprise Merchant Banc, Inc. offers merchant banking and venture
capital services through its investment in Enterprise Merchant Banc, LLC.
The majority of the activity for the Kansas Region occurs in Enterprise
Banking, N.A., while the majority of the activity for the St. Louis Region
occurs in Enterprise Bank. The Banks provide similar products and services
in two defined geographic areas. The products and services offered include
a broad range of commercial and personal banking services, including
certificates of deposit, individual retirement and other time deposit
accounts, checking and other demand deposit accounts, interest checking
accounts, savings accounts, and money market accounts. Loans include
commercial, individual, agricultural, real estate construction and
development, commercial and residential real estate, consumer, and
installment loans. Other financial services include mortgage banking, debit
and credit cards, automatic teller machines, internet account access, safe
deposit boxes, trust and financial advisory services, and cash management
services. The revenues generated by each business segment consist primarily
of interest income generated from the loan and investment security
portfolios, and service charges and fees generated from the deposit
products and services. The products and services are offered to customers
primarily within their respective geographic areas, with the exception of
loan participations executed between the subsidiary banks. The St. Louis
Region includes Enterprise Trust, which provides trust and financial
advisory services.
6
The following are the financial results and balance sheet information for the
Company's operating segments as of and for the six month periods ended June 30,
2001 and 2000 (unaudited):
Corporate, other
St. Louis Kansas and intercompany
Balance sheet information: Region Region reclassifications Total
------------- ------------- ----------------- -------------
June 30, 2001
- -----------------------
Investment securities $ 14,563,701 $ 14,898,731 $ - $ 29,462,432
Loans, less unearned loan fees 493,640,397 122,458,019 - 616,098,416
Total assets 570,805,573 160,645,939 5,447,473 736,898,985
Deposits 509,834,546 139,135,644 (888,532) 648,081,658
Shareholders' equity 46,697,574 14,508,752 (4,519,841) 56,686,485
============= ============= ================= =============
June 30, 2000
- -------------------
Investment securities $ 39,519,394 $ 19,056,595 $ - $ 58,575,989
Loans, less unearned loan fees 415,626,184 102,988,453 - 518,614,637
Total assets 522,038,950 132,459,636 5,565,392 660,063,978
Deposits 473,961,148 115,408,806 (1,451,143) 587,918,811
Shareholders' equity 39,727,390 13,290,699 (3,717,752) 49,300,337
============= ============= ================= =============
7
Corporate, other,
St. Louis Kansas and intercompany
Income statement information: Region Region reclassifications Total
------------ ----------- ----------------- ------------
Three months ended June 30, 2001
- ---------------------------------------
Interest income $ 10,671,521 $ 2,784,204 $ - $ 13,455,725
Interest expense 4,669,629 1,349,396 261,371 6,280,396
------------ ----------- ----------------- ------------
Net interest income 6,001,892 1,434,808 (261,371) 7,175,329
Provision for loan losses 305,000 25,000 - 330,000
Noninterest income 903,702 232,900 (24,277) 1,112,325
Noninterest expense 4,438,653 1,401,632 246,727 6,087,012
------------ ----------- ----------------- ------------
Income (loss) before income tax expense 2,161,941 241,076 (532,375) 1,870,642
Income tax expense (benefit) 864,047 91,575 (220,217) 735,405
------------ ----------- ----------------- ------------
Net income (loss) $ 1,297,894 $ 149,501 $ (312,158) $ 1,135,237
============ =========== ================= ============
Three months ended June 30, 2000
- ---------------------------------------
Interest income $ 10,943,567 $ 2,671,037 $ - $ 13,614,604
Interest expense 5,119,838 1,191,560 258,333 6,569,731
------------ ----------- ----------------- ------------
Net interest income 5,823,729 1,479,477 (258,333) 7,044,873
Provision for loan losses 253,006 75,000 - 328,006
Noninterest income 518,318 208,286 66,488 793,092
Noninterest expense 3,709,713 1,037,688 687,288 5,434,689
------------ ----------- ----------------- ------------
Income (loss) before income tax expense 2,379,328 575,075 (879,133) 2,075,270
Income tax expense (benefit) 890,523 196,223 (286,042) 800,704
------------ ----------- ----------------- ------------
Net income (loss) $ 1,488,805 $ 378,852 $ (593,091) $ 1,274,566
============ =========== ================= ============
Six months ended June 30, 2001
- ---------------------------------------
Interest income $ 22,090,058 $ 5,609,544 $ - $ 27,699,602
Interest expense 9,805,431 2,703,160 512,674 13,021,265
------------ ----------- ----------------- ------------
Net interest income 12,284,627 2,906,384 (512,674) 14,678,337
Provision for loan losses 500,000 95,000 - 595,000
Noninterest income 1,554,555 419,433 (22,906) 1,951,082
Noninterest expense 8,905,160 2,727,017 656,249 12,288,426
------------ ----------- ----------------- ------------
Income (loss) before income tax expense 4,434,022 503,800 (1,191,829) 3,745,993
Income tax expense (benefit) 1,732,549 189,533 (471,378) 1,450,704
------------ ----------- ----------------- ------------
Net income (loss) $ 2,701,473 $ 314,267 $ (720,451) $ 2,295,289
============ =========== ================= ============
Six months ended June 30, 2000
- ---------------------------------------
Interest income $ 21,010,302 $ 5,140,747 $ - $ 26,151,049
Interest expense 9,850,061 2,293,558 521,015 12,664,634
------------ ----------- ----------------- ------------
Net interest income 11,160,241 2,847,189 (521,015) 13,486,415
Provision for loan losses 398,442 150,000 - 548,442
Noninterest income 900,916 390,267 123,207 1,414,390
Noninterest expense 7,336,093 2,029,512 1,267,235 10,632,840
------------ ----------- ----------------- ------------
Income (loss) before income tax expense 4,326,622 1,057,944 (1,665,043) 3,719,523
Income tax expense (benefit) 1,612,895 359,457 (536,588) 1,435,764
------------ ----------- ----------------- ------------
Net income (loss) $ 2,713,727 $ 698,487 $ (1,128,455) $ 2,283,759
============ =========== ================= ============
8
The St. Louis Region provided approximately 80% of the loans, deposits, and
assets for the Company as of June 30, 2001 and 2000. During the same periods,
the Kansas Region provided approximately 20% of the loans, deposits and assets
for the Company. In the St. Louis Region, loans increased $78 million, or 19%,
while loans in the Kansas Region increased $19 million, or 19%, for the three
months ended June 30, 2001 compared to the three months ended June 30, 2000.
Assets and deposits increased 9% and 8% in the St. Louis Region, respectively,
and 21% in the Kansas Region for the three months ended June 30, 2001 compared
to the three months ended June 30, 2000. The increase in loans and deposits is
attributable to the continued calling efforts of the Company's relationship
officers and sustained economic growth in the local markets served by the
Company. Investment securities in the St. Louis Region decreased $25 million, or
63%, while investment securities decreased $4 million, or 22%, in the Kansas
Region for the three months ended June 30, 2001 compared to the three months
ended June 30, 2000. The decrease in investment securities in both regions was
the result of liquidity needs for loan growth as the Company used the funds from
matured investment securities to fund new loans.
St. Louis Region interest income decreased $272,046, or 2%, while interest
expense decreased $450,209, or 9%, for the three month period ended June 30,
2001 compared to the same period ended June 30, 2000. St. Louis Region net
interest income increased $178,163, or 3%, during the three months ended June
30, 2001 as compared to the same period in 2000. The decrease in interest income
and interest expense is a result of a dramatic decline in the interest rate
environment since December 2000. The Kansas Region experienced a $113,167, or
4%, increase in interest income and a $157,836, or 13%, increase in interest
expense during the three month period ended June 30, 2001 compared to the same
period in 2000. The increase in interest income and interest expense is a result
of an increase in average balances outstanding in interest-earning assets and
interest-bearing liabilities offset by a dramatic decline in the interest rate
environment since December 20000. The increase in interest expense resulted in a
$44,669 decrease in the net interest income in the Kansas Region, during the
three months ended June 30, 2001 as compared to the same period in 2000.
Noninterest income increased $385,384, or 74%, in the St. Louis Region as a
result of increased activity in the trust and financial advisory services and
gain on the sale of mortgage loans during the three months ended June 30, 2001
as compared to the same period in 2000. The Company made significant investments
in personnel and technology in the Kansas Region which resulted in a $363,944,
or 35%, increase in noninterest expense during the three months ended June 30,
2001 as compared to the same period in 2000. The $728,940, or 20%, increase in
noninterest expense in the St. Louis Region was the result of the addition of
resources and infrastructure for continued growth during the three months ended
June 30, 2001 as compared to the same period in 2000. Noninterest expense was
$246,727 for Corporate, other, and intercompany reclassification segment for the
three months ended June 30, 2001, a $440,561, or 64%, decrease as compared to
the same period in 2000, due to the fact that, during the three months ended
June 30, 2000, the Corporate, other, and intercompany reclassification segment
expensed approximately $450,000 in legal, accounting, travel, and other costs
related to the merger completed in June 2000.
Interest income increased $1,079,756, or 5%, while interest expense decreased
$44,630, or 0.5% resulting in an increase in net interest income of $1,124,386
or 10%, for the St. Louis Region for the six months ended June 30, 2001 as
compared to the same period in 2000. The increase in interest income is a result
of an increase in average balances outstanding in interest-earning assets offset
by a dramatic decline in the interest rate environment. The decrease in interest
expense is a result of a dramatic decline in the interest rate environment since
December 2000. During the same period, the Kansas Region experienced an increase
of $468,797, or 9%, and $409,602, or 18%, in interest income and expense,
respectively. The increase in interest income and interest expense is a result
of an increase in average balances outstanding in interest-earning assets and
interest-bearing liabilities offset by a dramatic decline in the interest rate
environment since December 2000. These increases resulted in an increase of
$59,195, or 2%, in net interest income for the Kansas Region. Noninterest income
increased $653,639, or 73%, in the St. Louis Region as a result of increased
activity in the trust and financial advisory services and gains on the sale of
mortgage loans during the six months ended June 30, 2001 as compared to the same
period in 2000. The Company made significant investments in personnel and
9
technology in the Kansas Region which resulted in a $697,505, or 34%, increase
in noninterest expense during the six months ended June 30, 2001 as compared to
the same period in 2000. The $1,569,067, or 21%, increase in noninterest
expense in the St. Louis Region was the result of the addition of resources and
infrastructure for continued growth during the six months ended June 30, 2001 as
compared to the same period in 2000. Noninterest expense was $656,249 and
$1,267,235 at the Corporate, other, and intercompany reclassification segment
for the six months ended June 30, 2001 and 2000, respectively. The $610,986, or
48%, decrease in noninterest expense is a result of approximately $450,000 in
legal, accounting, travel, and other expenses related to the merger completed in
June 2000 and a concerted effort by management to decrease corporate expenses.
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Readers should note that in addition to the historical information contained
herein, this Form 10-Q contains forward looking statements which are inherently
subject to risks and uncertainties that could cause actual results to differ
materially from those contemplated by such statements. Factors that could cause
or contribute to such differences include, but are not limited to: the effect
that changes in interest rates and cost of funds have on earnings and assets,
the level of loan defaults and delinquencies, the ability to successfully grow
and realize profits from commercial banking operations and strategic non-banking
lines of business, concentrations of loans in two geographic areas, the ability
to retain key personnel, the degree and nature of competition, and changes in
government regulation of business, as well as those factors discussed in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000.
Introduction
This discussion summarizes the significant factors affecting the consolidated
financial condition, results of operations, liquidity and cash flows of the
Company for the three and six month periods ended June 30, 2001 compared to the
three and six month periods ended June 30, 2000 and the year ended December 31,
2000. This discussion should be read in conjunction with the consolidated
financial statements and notes thereto contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 2000.
Financial Condition
Total assets at June 30, 2001 were $737 million, an increase of $26 million, or
4%, over total assets of $711 million at December 31, 2000. Loans and leases,
net of unearned loan fees, were $616 million, an increase of $59 million, or
11%, over total loans and leases of $557 million at December 31, 2000. The
increase in loans is in part attributed to the Company's investment in
additional business development officers and the success of these officers'
efforts. Federal funds sold and investment securities were $66 million, a
decrease of $46 million, or 41%, from total federal funds sold and investment
securities of $112 million at December 31, 2000. The decrease resulted primarily
from the shift in earning assets from short-term investments to loans during the
first six months of 2001.
Total deposits at June 30, 2001 were $648 million, an increase of $16 million,
or 3%, over total deposits of $632 million at December 31, 2000.
10
Total shareholders' equity at June 30, 2001 was $57 million, an increase of $4
million, or 6%, over total shareholders' equity of $53 million at December 31,
2000. The increase in equity is due to net income of $2.3 million for the six
months ended June 30, 2001, and the exercise of incentive stock options by
employees, less dividends paid to shareholders.
Results of Operations
Net income was $1,135,237 for the three month period ended June 30, 2001, a
decrease of 11% compared to net income of $1,274,566 for the same period in
2000. Net income was $2,295,289 for the six month period ended June 30, 2001, an
increase of 0.5% over net income of $2,283,759 for the same period in 2000. The
decrease in net income for the three months ended June 30, 2001 is attributable
to a decrease in the net interest income as a result of a dramatic decline in
the interest rate environment since December 2000 and an increase in noninterest
expense offset by an increase in noninterest income. Basic earnings per share
for the three month periods ended June 30, 2001 and 2000 was $0.12 and $0.14,
respectively. Diluted earnings per share for the three month periods ended June
30, 2001 and 2000 were $0.12 and $0.13, respectively. Basic earnings per share
for the six month periods ended June 30, 2001 and 2000 were $0.25 and $0.26,
respectively. Diluted earnings per share for the six month periods ended June
30, 2001 and 2000 were $0.24 and $0.24, respectively.
Net Interest Income
Net interest income (on a tax equivalent basis) was $7.2 million, or 4.30%, of
average interest-earning assets, for the three months ended June 30, 2001,
compared to $7.1 million, or 4.64%, of average earning assets, for the same
period in 2000. The $113,000 increase in net interest income for the three
months ended June 30, 2001 as compared to the same period in 2000 was the result
of an increase in average interest-earning assets and a decrease in the interest
rates on average interest-bearing liabilities offset by a decrease in interest
rates of average interest-earning assets and an increase in average
interest-bearing liabilities. Average interest-earning assets for the three
months ended June 30, 2001 were $672 million, a $59 million, or 9%, increase
over $613 million, during the same period in 2000. The increase in average
interest-earning assets is attributable to the continued calling efforts of the
Company's relationship officers and sustained economic growth in the local
markets served by the Company. The yield on average interest-earning assets
decreased to 8.05% for the three month period ended June 30, 2001 compared to
8.92% for the three month period ended June 30, 2000. The decrease in asset
yield was primarily due to a 275 basis point decrease in the prime rate since
December 2000 and a general decrease in the average yield on fixed rate loans
and investment securities. Average interest-bearing liabilities increased to
$560 million for the three months ended June 30, 2001 from $517 million for the
same period in 2000. The increase in interest-bearing transaction accounts,
money market accounts and certificates of deposit is attributed to continued
calling efforts of the Company's relationship officers. The cost of
interest-bearing liabilities decreased to 4.50% for the three months ended June
30, 2001 compared to 5.11% for the same period in 2000. This decrease is
attributed mainly to declines in market interest rates for all sources of
funding.
We expect continued pressure on our interest rate spreads and net interest rate
margin for the third quarter as declines in the prime rate late in the second
quarter are absorbed, assuming the prime rate stabilizes at its current level,
continued repricing of our funding sources over the next six months should
offset some of this negative impact on asset yields. In addition, loan volume
growth should continue and, with existing volumes, should result in greater net
interest income for the second half of the year.
11
The following table sets forth, on a tax-equivalent basis, certain information
relating to the Company's average balance sheet and reflects the average yield
earned on interest-earning assets, the average cost of interest-bearing
liabilities and the resulting interest spread and net interest rate margin for
the three month periods ended June 30, 2001 and 2000:
Three Months Ended June 30,
----------------------------------------------------------------------------
2001 2000
------------------------------------- -------------------------------------
Percent Interest Average Percent Interest Average
Average of Total Income/ Yield/ Average of Total Income/ Yield/
Balance Assets Expense Rate Balance Assets Expense Rate
-------- -------- -------- ------- -------- -------- -------- -------
Assets (Dollars in Thousands)
Interest-earning assets:
Loans (1) (2) $610,342 85.91% $12,675 8.33% $513,600 79.51% $12,123 9.49%
Taxable investments in debt securities 32,934 4.64 498 6.07 57,409 8.89 878 6.15
Non-taxable investments in debt securities (2) 350 0.05 7 8.18 679 0.11 13 7.93
Federal funds sold 27,252 3.84 290 4.27 41,676 6.45 640 6.17
Interest-bearing deposits 717 0.10 7 3.70 22 - - 4.03
-------- ----- ------- -------- ----- -------
Total interest-earning assets 671,595 94.54 $13,477 8.05% 613,386 94.96 $13,654 8.95%
Non interest-earning assets:
Cash and due from banks 22,934 3.22 19,195 2.97
Fixed assets, net 9,319 1.31 8,168 1.26
Investment in Enterprise
Merchant Banc, LLC 2,306 0.32 845 0.13
Prepaid expenses and other assets 11,565 1.63 11,460 1.78
Allowance for loan losses (7,339) (1.02) (7,105) (1.10)
-------- ----- -------- ------
Total assets $710,380 100.00% $645,949 100.00%
======== ====== ======== ======
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 51,009 7.18% $ 139 1.09% $ 49,304 7.63% $ 211 1.72%
Money market accounts 272,379 38.34 2,577 3.80 246,831 38.21 3,130 5.10
Savings 7,409 1.04 46 2.46 7,097 1.10 46 2.58
Certificates of deposit 202,522 28.51 3,055 6.05 191,654 29.67 2,778 5.83
Borrowed funds 15,767 2.22 202 5.14 11,145 1.73 145 5.25
Guaranteed preferred beneficial interest
in EBH-subordinated debentures 11,000 1.55 261 9.53 11,000 1.70 260 9.51
-------- ----- ------- -------- ------ -------
Total interest-bearing liabilities 560,086 78.84 6,280 4.50 517,031 80.04 6,570 5.11
Noninterest-bearing liabilities:
Demand deposits 91,500 12.88 77,595 12.01
Other liabilities 2,701 0.38 2,102 0.33
-------- ----- -------- -----
Total liabilities 654,287 92.10 596,728 92.38
Shareholders' equity 56,093 7.90 49,221 7.62
-------- ----- -------- ------
Total liabilities and shareholders' equity $710,380 100.00% $645,949 100.00%
======== ====== ======== ======
Net interest income $ 7,197 $ 7,084
======= =======
Net interest spread 3.55 3.81
Net interest rate margin 4.30%(3) 4.64%(3)
==== ====
(1) Average balances include non-accrual loans. The income on such loans is
included in interest income but is recognized only upon receipt. Loan fees
included in interest income are approximately $342,000 and $312,000 for the
three months ended June 30, 2001 and 2000, respectively.
(2) Non-taxable investment income is presented on a fully tax-equivalent basis
assuming a tax rate of 34%.
(3) Net interest income divided by average total interest-earning assets.
12
Net Interest Income
Net interest income, presented on a tax equivalent basis, was $14.7 million, or
4.49% of average interest-earning assets, for the six months ended June 30,
2001, compared to $13.5 million, or 4.52% of average interest-earning assets,
for the same period in 2000. The $1,220,000 increase in net interest income for
the six months ended June 30, 2001 as compared to the same period in 2000 was
the result of an increase in average interest-earning assets and a decrease in
the interest rates on average interest-bearing liabilities offset by a decrease
in the interest rates of average interest earning assets and an increase in
average interest-bearing liabilities. Average interest-earning assets for the
six months ended June 30, 2001 were $661 million, a $61 million, or 10%,
increase over $600 million during the same period in 2000. The increase in
interest-earning assets is attributable to the continued calling efforts of the
Company's relationship officers and sustained economic growth in the local
markets served by the Company. The yield on average interest-earning assets
decreased to 8.46% for the six month period ended June 30, 2001 compared to
8.76% for the same period ended June 30, 2000. The decrease in asset yield was
primarily due to a 275 basis point decrease in the prime rate since December
2000 and a general decrease in the average yield on loans and investment
securities. Average interest-bearing liabilities increased $45 million or 9% to
$552 million, for the six months ended June 30, 2001 from $508 million for the
same period in 2000. The increase in interest-bearing transaction accounts,
money market accounts and certificates of deposit is attributed to continued
calling efforts of the Company's relationship officers. The cost of
interest-bearing liabilities decreased to 4.76% for the six months ended June
30, 2001 compared to 5.02% for the same period in 2000. This decrease is
attributed mainly to declines in market interest rates for all sources of
funding.
13
The following table sets forth, on a tax-equivalent basis, certain information
relating to the Company's average balance sheet and reflects the average yield
earned on interest-earning assets, the average cost of interest-bearing
liabilities and the resulting net interest spread and rate margin for the six
month periods ended June 30, 2001 and 2000:
Six Months Ended June 30,
----------------------------------------------------------------------------
2001 2000
------------------------------------- -------------------------------------
Percent Interest Average Percent Interest Average
Average of Total Income/ Yield/ Average of Total Income/ Yield/
Balance Assets Expense Rate Balance Assets Expense Rate
-------- -------- -------- ------- -------- -------- -------- -------
Assets (Dollars in Thousands)
Interest-earning assets:
Loans (1) (2) $589,384 84.30% $25,602 8.76% $500,108 $ 79.05% $23,160 9.31%
Taxable investments in debt securities 38,699 5.53 1,326 6.91 52,697 8.33 1,608 6.14
Nonb-taxable investments in debt securities (2) 409 0.06 16 7.82 735 0.12 28 7.64
Federal funds sold 32,218 4.61 791 4.95 46,935 7.42 1,371 5.87
Interest-earning deposits 461 0.07 8 3.68 18 - - 4.13
-------- ------ ------- -------- ------- -------
Total interest-earning assets 661,171 94.57 27,743 8.46% 600,493 94.92 $26,167 8.76%
Noninterest-earning assets:
Cash and due from banks 22,524 3.22 19,216 3.04
Minority interest in EMB LLC 2,285 0.33 - -
Office equipment and leasehold improvements 9,107 1.30 8,163 1.29
Prepaid expenses and other assets 11,301 1.61 11,609 1.84
Allowance for possible loan losses (7,282) (1.03) (6,871) (1.09)
-------- ------ -------- -------
Total assets $699,106 100.00% $632,610 100.00%
======== ====== ======== =======
Liabilities and Shareholders' Equity
- ------------------------------------
Interest-bearing liabilities
Interest-bearing accounts $ 52,392 7.49% $ 318 1.22% $ 48,245 7.63% $ 412 $1.72%
Money market accounts 269,885 38.60 5,684 4.25 237,789 37.59 5,855 4.95
Savings 7,316 1.05 91 2.52 6,960 1.10 90 2.59
Certificates of deposit 197,182 28.20 6,065 6.20 192,981 30.51 5,501 5.73
Borrowed funds 13,771 1.97 349 5.11 10,858 1.72 281 5.20
Guaranteed preferred beneficial interests
in EBH-subordinated debentures 11,000 1.57 514 9.42 11,000 1.73 526 9.62
-------- ------ ------- -------- ------- -------
Total interest-bearing liabilities 551,546 78.88 13,021 4.76 507,833 80.28 $12,665 5.02
Noninterest-bearing liabilities
Demand deposits 89,353 12.79 74,354 11.75
Other liabilities 2,784 0.40 1,691 0.27
-------- ------ -------- -------
Total liabilities 643,683 92.07 583,878 92.30
Shareholders' equity 55,423 7.93 48,732 7.70
-------- ------ -------- -------
Total liabilities and shareholders' equity $699,106 100.00% $633,610 100.00%
======== ====== ======== =======
Net interest income $14,722 $13,502
======= =======
Net interest spread 3.70 3.74
Net interest rate margin 4.49%(3) 4.52%(3)
==== ====
(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 $690,000 and
$604,000 for 2001 and 2000, respectively.
(2) Non-taxable investment income is presented on a fully tax-equivalent basis
assuming a tax rate of 34%.
(3) Net interest income divided by average total interest-earning assets.
During the three months ended June 30, 2001, an increase in the average volume
of interest-earning assets resulted in an increase in interest income of
$7,005,000. Interest income decreased $7,182,000 due to a decrease in rates on
average interest-earning assets. Increases in the average volume of
interest-bearing demand deposits, savings and money market accounts, time
deposits and borrowed funds resulted in an increase in interest expense of
$1,993,000. Changes in interest rates on the average volume of interest-bearing
liabilities resulted in a decrease in interest expense of $2,283,000. The net
effect of the volume and rate changes associated with all categories of
interest-earning assets during the three months
14
effect of the volume and rate changes associated with all categories of
interest-earning assets during the three months ended June 30, 2001 as compared
to the same period in 2000 was a decrease in interest income of $177,000, while
the net effect of the volume and rate changes associated with all categories of
interest-bearing liabilities was a decrease in interest expense of $290,000.
During the six months ended June 30, 2001 as compared to the same period in
2000, an increase in the average volume of interest-earning assets resulted in
an increase in interest income of $4,824,000, partially offset by a decrease of
$3,248,000 due to a decrease in interest rates on interest-earning assets.
Increases in the average volume of interest-bearing demand deposits, savings and
money market accounts, borrowed funds, and guaranteed preferred beneficial
interests in EBH-subordinated debentures resulted in an increase in interest
expense of $1,838,000. Changes in interest rates on the average volume of
interest-bearing liabilities resulted in a decrease in interest expense of
$1,482,000. The net effect of the volume and rate changes associated with all
categories of interest-earning assets during the six months ended June 30, 2001
as compared to the same period in 2000, increased interest income by $1,576,000,
while the net effect of the volume and rate changes associated with all
categories of interest-bearing liabilities was an increase in interest expense
of $356,000.
The following table sets forth, on a tax-equivalent basis for the periods
indicated, a summary of the changes in interest income and interest expense
resulting from changes in yield/rates and volume:
2001 Compared to 2000
----------------------------------------------------------------
3 months ended June 30 6 months ended June 30
Increase (Decrease) Due to Increase (Decrease) Due to
----------------------------- -------------- --------------
Volume(1) Rate(2) Net Volume(1) Rate(2) Net
--------- -------- ------ --------- -------- -------
(Dollars in Thousands)
Interest earned on:
Loans (3) $ 7,561 $ (7,009) $ 552 $ 5,968 $ (3,526) $ 2,442
Taxable investments in debt
and equity securities (369) (11) (380) (743) 461 (282)
Nontaxable investments in debt
and equity securities(3) (9) 3 (6) (14) 2 (12)
Federal funds sold (185) (165) (350) (387) (193) (580)
Interest-earning deposits 7 - 7 - 8 8
--------- -------- ------ --------- -------- -------
Total interest-earning assets $ 7,005 $ (7,182) $ (177) $ 4,824 $ (3,248) $ 1,576
--------- -------- ------ --------- -------- -------
Interest paid on:
Interest-bearing transaction accounts $ 47 $ (119) $ (72) $ 89 $ (183) $ (94)
Money market accounts 1,694 (2,247) (553) 1,542 (1,713) (171)
Savings 8 (8) - 7 (6) 1
Certificates of deposit 166 111 277 118 446 564
Borrowed funds 78 (21) 57 82 (14) 68
Guaranteed preferred beneficial
interests in EBH-subordinated
debentures - 1 1 - (12) (12)
--------- -------- ------ --------- -------- -------
Total interest-bearing liabilities 1,993 (2,283) (290) 1,838 (1,482) 356
--------- -------- ------ --------- -------- -------
Net interest income (loss) $ 5,012 $ (4,899) $ 113 $ 2,986 $ (1,766) $ 1,220
========= ======== ====== ========= ======== =======
(1) Change in volume multiplied by yield/rate of prior period.
(2) Change in yield/rate multiplied by volume of prior period.
(3) Nontaxable investment income is presented on a fully tax-equivalent basis
assuming a tax rate of 34%.
NOTE: The change in interest due to both rate and volume has been allocated to
rate and volume changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
15
Provision for Loan Losses
The provision for loan losses was $330,000 and $595,000 for the three month and
six month periods ended June 30, 2001, respectively, compared to $328,000 and
$548,000 for the same periods in 2000. The Company had net chargeoffs of
$574,000 for the six months ended June 30, 2001 compared to net charge offs of
$61,000 during the same period ended June 30, 2000. During May 2001, the Kansas
Region restructured a $1.5 million commercial loan on nonaccrual which resulted
in a charge off of $270,000. This one restructured loan was approximately 44% of
the charge offs during the six months ended June 30, 2001. The Kansas Region had
specifically reserved for this loan relationship. Two other commercial loans
were charged off for an additional amount of $287,000. These three commercial
loans charged off represent 97% of the net chargeoffs during the six months
ended June 30, 2001. Loan growth remained strong during the first six months of
2001. The Company increased its allowance for loan losses for the six months
ended June 30, 2001 by charging $595,000 to the provision for loan losses. The
increase in provision for loan losses during the first six months of 2001 as
compared to the same period in 2000 was due to an increase in loans outstanding
and an increase of $591,000 in nonperforming loans. A commercial loan in the St.
Louis Region with a principal balance of $597,000 was added to nonaccrual during
June 2001 which accounted for 87% of the increase in nonperforming loans. The
loan was subsequently paid off during July 2001.
The following table summarizes changes in the allowance for loan losses arising
from loans charged off and recoveries on loans previously charged off, by loan
category, and additions to the allowance that have been charged to the
provision:
Six Months Ended June 30,
-------------------------
2001 2000
-------- ---------
(Dollars in Thousands)
Allowance at beginning of year $ 7,097 $ 6,758
Loans charged off:
Commercial and industrial 162 64
Real estate:
Commercial 270 -
Construction - -
Residential 165 -
Consumer and other 22 10
--------- ---------
Total loans charged off 619 74
--------- ---------
Recoveries of loans previously charged off:
Commercial and industrial 11 4
Real estate:
Commercial 25 3
Construction - -
Residential 6 1
Consumer and other 3 5
--------- ---------
Total recoveries of loans previously charged off 45 13
--------- ---------
Net loans charged off 574 61
--------- ---------
Provision charged to operations 595 548
--------- ---------
Allowance at end of period $ 7,118 $ 7,245
========= =========
Average loans $ 589,384 $ 500,108
Ending total loans, less unearned loan fees $ 616,098 $ 518,615
Ending nonperforming loans $ 2,692 $ 2,101
Net charge offs to average loans (annualized) 0.20% 0.02%
Allowance for loan losses to total loans 1.16% 1.40%
16
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, external
audits, and regulatory bank examinations. The system requires rating all loans
at the time they are made.
Adversely rated credits, including loans requiring close monitoring, which would
not normally be considered criticized credits by regulators, are included on a
monthly loan watch list. Loans may be added to the watch list for reasons which
are temporary and correctable, such as the absence of current financial
statements of the borrower or a deficiency in loan documentation. Other loans
are added whenever any adverse circumstance is detected which might affect the
borrower's ability to meet the terms of the loan. This could be initiated by the
delinquency of a scheduled loan payment, a deterioration in the borrower's
financial condition identified in a review of periodic financial statements, a
decrease in the value of the collateral securing the loan, or a change in the
economic environment in which the borrower operates. Loans on the watch list
require detailed loan status reports prepared by the responsible officer every
six months, which are then discussed in formal meetings with the loan review and
credit administration staffs. Downgrades of loan risk ratings may be initiated
by the responsible loan officer at any time. However, upgrades of risk ratings
may only be made with the concurrence of the loan review and credit
administration staffs generally at the time of the formal quarterly watch list
review meetings.
Each month, management prepares a detailed list of loans on the watch list and
summaries of the entire loan portfolio categorized by risk rating. These are
coupled with an analysis of changes in the risk profiles of the portfolios,
changes in past due and non-performing loans and changes in watch list and
classified loans over time. In this manner, the overall increases or decreases
in the levels of risk in the portfolios are monitored continually. Factors are
applied to the loan portfolios for each category of loan risk to determine
acceptable levels of allowance for loan losses. These factors are derived
primarily from the actual loss experience and from published national surveys of
norms in the industry. The calculated allowance for loan losses required for the
portfolios are then compared to the actual allowance balances to determine the
provision necessary to maintain the allowance for loan losses at an appropriate
level. In addition, management exercises judgment in its analysis of determining
the overall level of the allowance for loan losses. In its analysis, management
considers the change in the portfolio, including growth and composition, and the
economic conditions of the region in which the Company operates. Based on this
quantitative and qualitative analysis, the allowance for loan losses is
adjusted. Such adjustments are reflected in the consolidated statements of
income.
The Company does not engage in foreign lending. Additionally, the Company does
not have any concentrations of loans exceeding 10% of total loans which are not
otherwise disclosed in the loan portfolio composition table provided in the most
recent form 10-K. The Company does not have a material amount of
interest-bearing assets which would have been included in non-accrual, past due
or restructured loans if such assets were loans.
Management believes the allowance for loan losses is adequate to absorb probable
losses in the loan portfolio. While management uses available information to
recognize loan losses, future additions to the allowance for loan losses may be
necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the allowance for loan losses. Such agencies may require the
Company to increase the allowance for loan losses based on their judgments and
interpretations about information available to them at the time of their
examinations.
While the Company has benefited from very low historical net charge-offs during
an extended period of rapid loan growth, management remains cognizant that
historical loan loss and non-performing asset experience may not be indicative
of future results. Were the experience to deteriorate, and additional provisions
for loan losses were required, future operational results would be negatively
impacted. Both management and the Board of Directors continually monitor changes
in asset quality, market conditions, concentrations of credit, and other
factors, all of which impact the credit risk associated with the Company's loan
portfolio.
17
The following table sets forth information concerning the Company's
non-performing assets as of the dates indicated:
June 30, December 31,
2001 2000
--------- ------------
(Dollars in Thousands)
Non-accrual loans $ 1,109 $ 1,798
Loans past due 90 days or more
and still accruing interest 321 207
Restructured loans 1,262 -
--------- ------------
Total nonperforming loans 2,692 2,005
Foreclosed property 309 77
--------- ------------
Total non-performing assets $ 3,001 $ 2,082
========= ============
Total assets $ 736,899 $ 710,938
Total loans, less unearned loan fees $ 616,098 $ 556,793
Total loans plus foreclosed property $ 616,407 $ 556,870
Nonperforming loans to loans 0.44% 0.36%
Nonperforming assets to loans plus
foreclosed property 0.49% 0.37%
Nonperforming assets to total assets 0.41% 0.29%
Noninterest Income
Noninterest income was $1,112,325 and $1,951,082 for the three month and six
month periods ended June 30, 2001, respectively, compared to $793,092 and
$1,414,390 for the same periods in 2000. The increases are primarily attributed
to increases in trust and financial advisory income and increases in the gain on
the sale of mortgage loans. Trust and financial advisory income was $316,755 and
$569,101 for the three month and six month periods ended June 30, 2001,
respectively, as compared to $209,059 and $306,367 for the same periods in 2000.
The increases in fees were the result of increased transaction-based fees and
assets under management in Enterprise Trust. Management expects fee growth to
continue throughout 2001. The gains on the sale of mortgage loans were $332,786
and $512,809 for the three month and six month periods ended June 30, 2001,
respectively, as compared to $114,024 and $194,791 for the same periods in
2000. The increases in these gains were due to a dramatic decrease in interest
rates during the first six months of 2001, which spurred residential mortgage
loan refinancing and an increase in loan sales. Approximately 65% of the
mortgage gains were the result of refinanced loans. The Company generally sells
its mortgage loans and the related servicing rights to various third party
investors. The gains on sale of investment securities were $52,559 and $82,246
for the three month and six month periods ended June 30, 2001 as compared to no
gains during the same periods in 2000. The Company sold three investment
securities during the first six months of 2001 for liquidity purposes. These
increases were slightly offset by decreases in income from the Company's
investment in Enterprise Merchant Banc, LLC and the gain on investment in
Enterprise Fund, L.P. during the six month period ended June 30, 2001 as
compared to the same period in 2000. Both of these decreases were a result of
decreased fee income in these businesses during 2001 as compared to 2000.
18
Noninterest Expense
Noninterest expense was $6.1 million and $12.3 million for the three month and
six month periods ended June 30, 2001, respectively, compared to $5.4 million
and $10.6 million for the same periods in 2000. The increases in noninterest
expenses were primarily due to: 1) the investment in several new business
development officers in the St. Louis Region and additional management in the
Kansas Region; 2) increased commission-based activity and backroom processing
growth in financial advisory services; and 3) normal increases associated with
continued growth. The Company recently implemented an Internet banking product
and check imaging system to enhance customer service. Both programs increased
noninterest expense during 2001. In addition, the Company expanded its computer
and data processing infrastructure for the additional Kansas locations and
communication between the regions, which also increased expenses. Other
noninterest expense was $1,183,000 and $2,565,383 for the three month and six
month periods ended June 30, 2001, respectively, a decrease of $277,488, or 19%,
and $338,499 or 12%, compared to the three month and six month periods ended
June 30, 2000. These decreases are attributed to a concerted effort by the
Company's management to reduce expenses and the elimination of corporate merger
related expenses. During the three months ended June 30, 2000 the Company
expensed approximately $450,000 in legal, accounting, travel and other costs
related to the merger completed in June 2000.
Liquidity and Interest Rate Sensitivity
Liquidity is provided by the Company's earning assets, including short-term
investments in federal funds sold, maturities in loan and investment portfolios,
and amortization of term loans, along with deposit inflows, proceeds from
borrowings and retained earnings. The Company utilizes key liquidity indicators
including, but not limited to the loan to deposit ratio, federal funds sold,
short-term investment balances and Federal Home Loan Bank advances. At June 30,
2001 the loan to deposit ratio was 95%, as compared to 88% at December 31, 2000.
Federal funds sold and investment securities were $66 million at June 30, 2001
as compared to $112 million at December 31, 2000. During the six months ended
June 30, 2001, the Company experienced loan growth of $59 million and deposit
growth of $16 million. This decreased the Company's liquidity position resulted
in the utilization of maturing investment securities and federal funds sold
balances for loans. The Company increased its Federal Home Loan Bank advances to
$18 million at June 30, 2001 from $10 million at December 31, 2000. Based upon
historical trends, the second half of 2001 should be better for deposit growth,
which should help the Company's current liquidity position.
The Company closely monitors its current liquidity position and believes there
are sufficient backup sources of liquidity. As of June 30, the Company has over
$64 million available from the Federal Home Loan Bank of Des Moines under a
blanket pledge and $12 million from the Federal Reserve under a pledged loan
agreement. The Company also has access to over $36 million in overnight federal
funds purchased from various banking institutions. Finally, the Company has a $5
million unsecured line of credit from Jefferson Bank and Trust. There were no
amounts outstanding under the line of credit at June 30, 2001.
The asset/liability management process, which involves management of the
components of the balance sheet to allow assets and liabilities to reprice at
approximately the same time, is an ever-changing process essential to minimizing
the effect of interest rate fluctuations on net interest income. For further
discussion, see Item 3 on page 24.
Capital Adequacy
Enterbank Holdings, Inc, Enterprise Bank and Enterprise Banking, N.A. are
subject to various regulatory capital requirements administered by the federal
and state banking agencies. Failure to meet minimum requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Company's
consolidated financial statements. Under capital adequacy guidelines and the
regulatory frame work for prompt corrective action, Enterbank Holdings, Inc,
Enterprise Bank, and Enterprise Banking,
19
N.A. must meet specific capital guidelines that involve quantitative measures of
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. 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 Enterbank Holdings, Inc, Enterprise Bank and Enterprise Banking, N.A. to
maintain minimum amounts and ratios of total and Tier I capital (as defined in
the regulations) to risk-weighted assets, and of Tier I capital to average
assets. Management believes, as of June 30, 2001, that Enterbank Holdings, Inc,
Enterprise Bank and Enterprise Banking, N.A. were each well capitalized.
As of June 30, 2001, the most recent notification from the Company's primary
regulator categorized Enterbank Holdings, Inc, Enterprise Bank and Enterprise
Banking, N.A. as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, Enterbank Holdings,
Inc, Enterprise Bank, and Enterprise Banking, N.A. must maintain minimum total
risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the
following table.
20
At June 30, 2001 and December 31, 2000, Enterbank Holdings, Inc, Enterprise
Bank, and Enterprise Banking, N.A. required and actual capital ratios were as
follows:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- --------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ----- ------------ ----- ----------- -----
At June 30, 2001:
- ----------------
Total Capital (to Risk Weighted Assets)
Enterbank Holdings, Inc. $ 72,457,891 11.52% $ 50,326,370 8.00% $ 62,907,963 10.00%
Enterprise Bank 51,861,907 10.39 39,938,439 8.00 49,923,049 10.00
Enterprise Banking, N.A. 13,809,917 10.93 10,104,497 8.00 12,630,621 10.00
Tier I Capital (to Risk Weighted Assets)
Enterbank Holdings, Inc. $ 65,340,160 10.39% $ 25,163,185 4.00% $ 37,744,778 6.00%
Enterprise Bank 46,632,744 9.34 19,969,219 4.00 29,953,829 6.00
Enterprise Banking, N.A 12,227,265 9.68 5,052,248 4.00 7,578,372 6.00
Tier I Capital (to Average Assets)
Enterbank Holdings, Inc. $ 65,340,160 9.23% $ 21,245,922 3.00% $ 35,409,869 5.00%
Enterprise Bank 46,632,744 8.39 16,677,452 3.00 27,795,754 5.00
Enterprise Banking, N.A. 12,227,265 8.29 4,423,062 3.00 7,371,771 5.00
At December 31, 2000:
- --------------------
Total Capital (to Risk Weighted Assets)
Enterbank Holdings, Inc. $ 69,043,524 11.79% $ 46,859,325 8.00% $ 58,574,157 10.00%
Enterprise Bank 47,996,270 10.27 37,397,138 8.00 46,746,422 10.00
Enterprise Banking, N.A. 13,209,043 11.68 9,049,719 8.00 11,312,149 10.00
Tier I Capital (to Risk Weighted Assets)
Enterbank Holdings, Inc. $ 62,071,803 10.60% $ 23,429,663 4.00% $ 35,144,494 6.00%
Enterprise Bank 43,131,270 9.23 18,698,569 4.00 28,047,853 6.00
Enterprise Banking, N.A. 11,817,715 10.45 4,524,860 4.00 6,787,289 6.00
Tier I Capital (to Average Assets)
Enterbank Holdings, Inc. $ 62,071,803 9.41% $ 19,796,366 3.00% $ 32,993,943 5.00%
Enterprise Bank 43,131,270 8.21 15,754,367 3.00 26,257,279 5.00
Enterprise Banking, N.A. 11,817,715 9.05 3,919,173 3.00 6,531,955 5.00
21
Effect of Inflation
Changes in interest rates may have a significant impact on a commercial bank's
performance because virtually all assets and liabilities of commercial banks are
monetary in nature. Interest rates do not necessarily move in the same direction
or in the same magnitude as the prices of goods and services. Inflation does
have an impact on the growth of total assets in the banking industry, often
resulting in a need to increase equity capital at higher than normal rates to
maintain an appropriate equity to asset ratio.
Effect of Implementing Recently Issued Accounting Standards
In September 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,
which replaces SFAS No. 125. This Statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. The standards are based on the consistent application of
the financial components approach, whereupon after a transfer, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, and derecognizes financial liabilities when extinguished. This
Statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. This Statement
was effective for recognition and reclassification of collateral and for
disclosures relating to securitization transactions and collateral for fiscal
years ending after December 15, 2000. A transfer of financial assets in which
the transferor surrenders control is accounted for as a sale to the extent that
consideration other than beneficial interests in the transferred assets is
received in exchange. This Statement requires that liabilities and derivatives
transferred be initially measured at fair value, if practicable. Servicing
assets and other retained interests in the transferred assets are to be measured
by allocating the previous carrying amount between the assets and retained
interests sold, if any, based on their relative fair values on the date of the
transfer. This Statement requires that servicing assets and liabilities be
subsequently measured by amortization in proportion to and over the period of
estimated net servicing income or loss, and assessment for asset impairment or
increased obligation based on their fair values. This Statement requires that a
liability be derecognized if the debtor pays the creditor and is relieved of its
obligation for the liability, or the debtor is legally released from being the
primary obligor under the liability either judicially or by the creditor. The
implementation of this Statement did not have a material effect on the Company's
consolidated financial statements.
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies
criteria intangible assets acquired in a purchase method business combination
must meet to be recognized and reported apart from goodwill. Statement 142 will
require that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of Statement 142. Statement 142 will also require
that intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
The Company is required to adopt the provisions of Statement 141 immediately and
Statement 142 effective January 1, 2002. Furthermore, any goodwill and any
intangible asset determined to have an indefinite useful life that are acquired
in a purchase business combination completed after June 30, 2001 will not be
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate pre-Statement 142 accounting literature. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of Statement 142.
Statement 141 will require upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in
22
order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of Statement 142 within the first interim
period. Any impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting principle in the
first interim period.
In connection with the transitional goodwill impairment evaluation, Statement
142 will require the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this the Company must identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption. The Company will then have up to six months from the date of
adoption to determine the fair value of each reporting unit and compare it to
the reporting unit's carrying amount. To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must compare the
implied fair value of the reporting unit's goodwill, determined by allocating
the reporting unit's fair value to all of it assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with Statement 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of
earnings. Finally, any unamortized negative goodwill existing at the date
Statement 142 is adopted must be written off as the cumulative effect of a
change in accounting principle.
As of the date of adoption, the Company expects to have unamortized goodwill in
the amount of $2,087,538, no unamortized identifiable intangible assets, and no
negative goodwill, all of which will be subject to the transition provisions of
Statements 141 and 142. Amortization expense related to goodwill was $190,567
and $95,283 for the year ended December 31, 2000 and the six months ended June
30, 2001, respectively. Because of the extensive effort needed to comply with
adopting Statements 141 and 142, it is not practicable to reasonably estimate
the impact of adopting these Statements on the Company's financial statements at
the date of this report, including whether any transitional impairment losses
will be required to be recognized as the cumulative effect of a change in
accounting principle.
23
Item 3: Quantitative and Qualitative Disclosures Regarding Market Risk
The Company's exposure to market risk is reviewed on a regular basis by the
Asset/Liability Committee. Interest rate risk is the potential of economic
losses due to future interest rate changes. These economic losses can be
reflected as a loss of future net interest income and/or a loss of current fair
market values. The objective is to measure the effect on net interest income and
to adjust the balance sheet to minimize the interest risk while at the same time
maximizing income. Management realizes certain risks are inherent and that the
goal is to identify and minimize those risks. Tools used by management include
the standard GAP report subject to different rate shock scenarios. At June 30,
2001, the rate shock scenario models indicated that annual net interest income
would change by less than 5% should rates rise or fall within 100 basis points
from their current level over a one year period. The Bank has no market risk
sensitive instruments held for trading purposes.
As the following table indicates, the Company is asset sensitive. In this
regard, a decrease in the general level of interest rates would have a negative
effect on the Company's net interest income as compared to the reduction in
interest expense created by the repricing of the smaller volume of interest
sensitive liabilities. Likewise, an increase in the general level of interest
rates would have a positive effect on net interest margin. Management is aware
of the consequences of being asset sensitive and will likely continue to remain
asset sensitive in the future.
24
The following tables present the scheduled maturity of market risk sensitive
instruments at June 30, 2001:
Beyond 5
Years or No
Stated
Year 1 Year 2 Year 3 Year 4 Year 5 Maturity Total
---------- ---------- ---------- ---------- ---------- ------------ ----------
ASSETS
Securities $ 12,262 $ 1,775 $ 3,092 $ 3,018 $ 1,535 $ 7,780 $ 29,462
Interest-bearing
deposits 55 -- -- -- -- -- 55
Federal funds sold 36,710 -- -- -- -- -- 36,710
Loans 455,583 43,476 73,893 20,059 11,636 11,451 616,098
Loans held for sale 7,347 -- -- -- -- -- 7,347
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total $ 511,957 $ 45,251 $ 76,985 $ 23,077 $ 13,171 $ 19,231 $ 689,672
========== ========== ========== ========== ========== ========== ==========
LIABILITIES
Savings, NOW, money
market deposits $ 334,633 -- -- -- -- -- $ 334,633
Certificates of
deposit $ 171,910 $ 29,740 $ 6,043 $ 1,672 $ 645 -- 210,010
Guaranteed preferred
beneficial interest
in EBH-subordinated
debentures -- -- -- -- -- 11,000 11,000
Borrowed funds 9,007 321 6,300 1,000 440 856 17,924
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total $ 515,550 $ 30,061 $ 12,343 $ 2,672 $ 1,085 $ 11,856 $ 573,567
========== ========== ========== ========== ========== ========== ==========
Average
Interest
Rate for
Six Months
Carrying Ended Estimated
Value June 30, Fair Value
2001
---------- ------------- ------------
ASSETS
Securities $ 29,462 6.91 % $ 35,425
Interest-earning
deposits 55 3.68 55
Federal funds sold 36,710 4.95 36,710
Loans 616,098 8.76 618,955
Loans held for sale 7,347 7,347
-------- --------
Total $689,672 $698,492
======== ========
LIABILITIES
Savings, NOW, money
market deposits $334,633 3.73 % $334,633
Certificates of deposit 210,010 6.20 212,282
Guaranteed preferred
beneficial interest
in EBH-subordinated
debentures 11,000 9.42 12,165
Borrowed funds 17,924 5.11 18,086
-------- --------
Total $573,567 $577,166
======== ========
25
PART II - Item 4:
Submissions of Matters to a Vote of Security Holders
ANNUAL MEETING OF SHAREHOLDERS: The annual meeting of shareholders of Enterbank
was held on April 25, 2001. 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. There was no
solicitation in opposition to management's recommendation to ratify the
selection of KPMG LLP as the Company's independent auditors. There were no other
matters other than those stated above, and the results of the votes are as
follows:
PROPOSAL NO. 1: ELECTION OF DIRECTORS
-------------------------------------
Director For Against Abstain
-------- --- ------- -------
Fred H. Eller 6,364,174 0 3,750
Ronald E. Henges 6,099,218 0 3,750
Kevin C. Eichner 6,364,174 0 3,750
Randall D. Humphreys 6,097,746 0 5,892
Paul R. Cahn 6,377,774 0 3,750
William B. Moskoff 6,364,174 0 3,750
Birch M. Mullins 6,364,174 0 3,750
Robert E. Saur 6,112,819 0 3,750
Paul L. Vogel 6,362,032 0 5,892
Henry D. Warshaw 6,361,284 0 3,750
James L. Wilhite 6,377,774 0 3,750
James A. Williams 6,364,174 0 3,750
Ted C. Wetterau 6,112,819 0 3,750
Robert D. Ames 6,364,174 0 3,750
Richard S. Masinton 6,364,174 0 3,750
Ted A. Murray 6,364,174 0 3,750
Jack L. Sutherland 6,364,174 0 3,750
PROPOSAL NO. 2: INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------------
Accountants For Against Abstain
----------- --- ------- -------
KPMG LLP 6,268,988 25,250 14,513
II-1
Item 6: Exhibits and Reports on Form 8-K
(a). Exhibits.
Exhibit
Number Description
-------- -----------
10.1 (1) Amendment #1 to the Revised Customer Referral Agreement by
and among Enterbank Holdings, Inc., Enterprise Bank and
Moneta Group Investment Advisors, Inc.
10.2 (1) Amendment #2 to the Revised Customer Referral Agreement by
and among Enterbank Holdings, Inc., Enterprise Bank and
Moneta Group Investment Advisors, Inc.
11.1 (1) Statement regarding computation of per share earnings
(b). During the three months ended June 30, 2001, there were no reports filed
on form 8-K.
(1) Filed herewith.
II-2
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 10th day of August 2001.
ENTERBANK HOLDINGS, INC.
By: /s/ Fred H. Eller
---------------------------------
Fred H. Eller
Chief Executive Officer
By: /s/ Frank H. Sanfilippo
---------------------------------
Frank H. Sanfilippo
Chief Financial Officer
II-3