1
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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,
1999
[ ] 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
-----------------
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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
----- -----
Indicate the number of shares outstanding of each of the registrant's classes
of common stock as of July 31 1999:
Common Stock, $.01 par value----2,380,212 shares outstanding
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ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
At June 30, 1999 and December 31, 1998 1
Consolidated Statements of Income
Six Months Ended June 30, 1999 and 1998 2
Consolidated Statements of Comprehensive Income
Three Months and Six Months Ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk 22
PART II - OTHER INFORMATION
Item 4. Submissions of Matters to a Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
3
PART I - Item 1
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited) (Audited)
At June 30, At December 31,
Assets 1999 1998
------ -------------- ---------------
Cash and due from banks $ 22,903,169 $ 29,701,018
Federal funds sold 24,700,000 14,250,000
Interest-bearing deposits 12,119 5,035
Investments in debt and equity securities:
Held for trade at fair value 707,546 --
Available for sale, at estimated fair value 14,914,137 45,592,327
Held to maturity, at amortized cost
(estimated fair value of $598,061 at June 30,
1999, and $704,723 at December 31, 1998) 587,787 698,609
-------------- --------------
Total investments in debt and equity securities 16,209,470 46,290,936
-------------- --------------
Loans held for sale 2,811,288 6,272,124
Loans, less unearned loan fees 338,633,956 273,817,522
Less allowance for loan losses 3,440,000 3,200,000
-------------- --------------
Loans, net 335,193,956 270,617,522
-------------- --------------
Other real estate owned 806,072 806,072
Office equipment and leasehold improvements 3,069,486 3,063,123
Accrued interest receivable 2,026,796 1,648,775
Investment in Enterprise Fund, L.P. 427,296 424,484
Prepaid expenses and other assets 2,291,081 2,224,829
-------------- --------------
Total assets $410,450,733 $375,303,918
============== ==============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Demand $ 68,910,586 $ 61,114,961
Interest-bearing transaction accounts 25,785,461 24,234,717
Money market accounts 179,956,465 149,177,922
Savings 1,830,800 1,471,647
Certificates of deposit:
$100,000 and over 38,119,048 43,326,061
Other 54,731,913 59,854,862
-------------- --------------
Total deposits 369,334,273 339,180,170
Notes payable 2,250,000 --
Federal Home Loan Bank advances 6,940,649 6,000,000
Accrued interest payable 668,660 608,056
Accounts payable and accrued expenses 467,492 275,563
-------------- --------------
Total liabilities 379,661,074 346,063,789
-------------- --------------
Shareholders' equity:
Common stock, $.01 par value; authorized
3,500,000 shares; issued and outstanding
2,380,212 shares at June 30, 1999 and
2,371,837 shares at December 31, 1998 23,802 23,719
Surplus 19,326,591 19,264,000
Retained earnings 11,471,064 9,941,792
Accumulated other comprehensive income (loss) (31,798) 10,618
-------------- --------------
Total shareholders' equity 30,789,659 29,240,129
-------------- --------------
Total liabilities and shareholders' equity $410,450,733 $375,303,918
============== ==============
- ----------------
See accompanying notes to consolidated financial statements.
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ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Income (unaudited)
Three months ended Six months ended
June 30, 1999 June 30, 1999
1999 1998 1999 1998
-------------- -------------- -------------- ---------------
Interest income:
Interest and fees on loans $ 7,003,242 $ 5,611,836 $ 13,338,479 $ 10,991,800
Interest on debt securities:
Taxable 242,692 137,510 562,581 292,144
Nontaxable 3,923 5,396 12,554 12,549
Interest on federal funds sold 185,478 298,579 463,398 523,485
Interest on interest earning deposits -- 1,668 137 3,474
-------------- -------------- -------------- ---------------
Total interest income 7,435,335 6,054,989 14,377,149 11,823,452
-------------- -------------- -------------- ---------------
Interest expense:
Interest-bearing transaction accounts 119,981 125,611 231,913 249,509
Money market accounts 1,778,399 1,175,908 3,483,239 2,263,565
Savings 10,934 9,277 20,404 17,892
Certificates of deposit:
$100,000 and over 490,121 511,658 999,941 995,666
Other 729,506 970,948 1,511,958 1,911,651
Federal Home Loan advances 83,685 -- 158,712 --
Notes payable 3,494 -- 3,494 --
-------------- -------------- -------------- ---------------
Total interest expense 3,216,120 2,793,402 6,409,661 5,438,283
-------------- -------------- -------------- ---------------
Net interest income 4,219,215 3,261,587 7,967,488 6,385,169
Provision for loan losses 157,545 102,671 237,545 520,929
Net interest income after
provision for loan losses 4,061,670 3,158,916 7,729,943 5,864,240
-------------- -------------- -------------- ---------------
Noninterest income:
Service charges on deposit accounts 150,878 61,638 268,370 111,952
Financial advisory income 42,272 -- 55,434 --
Other service charges and fee income 66,664 69,641 145,572 148,411
Gain on sale of mortgage loans 171,102 333,446 506,527 602,747
Gain (Loss) on investment in
Enterprise Fund, L.P. (3,645) 1,241 2,811 (1,075)
-------------- -------------- -------------- ---------------
Total noninterest income 427,271 465,966 978,714 862,035
-------------- -------------- -------------- ---------------
Noninterest expense:
Salaries 1,588,867 1,215,506 3,147,422 2,277,187
Payroll taxes and employee benefits 324,772 276,686 651,130 492,120
Occupancy 241,420 225,049 469,830 425,082
Furniture and equipment 97,452 92,159 197,976 176,873
FDIC insurance 9,625 -- 9,625 14,965
Data processing 119,580 68,444 229,509 135,316
Other 830,709 616,588 1,582,192 1,059,537
-------------- -------------- -------------- ---------------
Total noninterest expense 3,212,425 2,494,432 6,287,684 4,581,080
-------------- -------------- -------------- ---------------
Income before income tax expense 1,276,516 1,130,450 2,420,973 2,145,195
Income tax expense 463,752 426,800 870,427 819,300
-------------- -------------- -------------- ---------------
Income before cumulative effect of
a change in accounting principle $ 812,764 $ 703,650 $ 1,550,546 $ 1,325,895
============== ============== ============== ===============
Cumulative effect on prior years of a change in
asset classification 121,491 -- 121,491 --
-------------- -------------- -------------- ---------------
Net income $ 934,255 $ 703,650 $ 1,672,037 $ 1,325,895
============== ============== ============== ===============
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ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Income (unaudited) continued
Three months ended Six months ended
June 30, 1999 June 30, 1999
1999 1998 1999 1998
------------ ------------ ------------ ------------
Per share amounts
Basic earnings per share:
Income before cumulative effect of
change in accounting principle $ 0.34 $ 0.30 $ 0.65 $ 0.57
Cumulative effect on prior years of a
change in asset classification $ 0.05 $ 0.00 $ 0.05 $ 0.00
------------ ------------ ------------ ------------
Net Income $ 0.39 $ 0.30 $ 0.70 $ 0.57
============ ============ ============ ============
Basic weighted average common shares
common stock equivalents outstanding 2,379,485 2,365,112 2,376,809 2,334,939
Diluted earnings per share:
Income before cumulative effect of a
change in accounting principle $ 0.31 $ 0.28 $ 0.61 $ 0.53
Cumulative effect on prior years of a
change in asset classification $ 0.05 $ 0.00 $ 0.05 $ 0.00
------------ ------------ ------------ ------------
Net Income $ 0.36 $ 0.28 $ 0.66 $ 0.53
============ ============ ============ ============
Diluted weighted average common
shares and common stock
equivalents outstanding 2,567,401 2,511,307 2,549,993 2,492,880
- -------------------
See accompanying notes to consolidated financial statements.
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ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (unaudited)
Three months ended June 30, Six months ended June 30,
1999 1998 1999 1998
---------- ---------- ------------ ------------
Net income $934,255 $703,650 $1,672,037 $1,325,895
Other comprehensive income (loss), before tax:
Unrealized losses on securities:
Unrealized holding losses arising
during period (34,859) (1,548) (64,267) (1,906)
---------- ---------- ------------ ------------
Other comprehensive income (loss), before tax (34,859) (1,548) (64,267) (1,906)
Income tax benefit related to items of
other comprehensive income 11,852 526 21,851 648
---------- ---------- ------------ ------------
Other comprehensive income (loss), net of taxes (23,007) (1,022) (42,416) (1,258)
---------- ---------- ------------ ------------
Comprehensive income $911,248 $702,628 $1,629,621 $1,324,637
========== ========== ============ ============
- ----------------
See accompanying notes to consolidated financial statements.
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7
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30,
1999 1998
-------------- --------------
Cash flows from operating activities:
Net income $ 1,672,037 $ 1,325,895
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in accounting principle, net of tax (121,491) --
Depreciation and amortization 302,994 204,912
Provision for loan losses 237,545 520,929
Net accretion of debt securities (203,321) (42,009)
(Gain) loss on investment in Enterprise Fund, L.P. (2,812) 1,075
Mortgage loans originated (34,724,575) (32,611,078)
Proceeds from mortgage loans sold 38,691,938 30,807,300
Gain on sale on mortgage loans (506,527) (602,747)
(Increase) decrease in accrued interest receivable (378,021) (123,305)
(Increase) decrease in prepaid expenses and other assets (576,252) (25,702)
Increase in accounts payable and accrued expenses 198,328 (48,375)
-------------- --------------
Net cash provided by (used in) operating activities 4,589,843 (593,105)
-------------- --------------
Cash flows from investing activities:
Purchases of interest-bearing deposits (7,084) --
Purchases of available-for-sale debt securities (13,432,055) (10,132,006)
Purchases of available-for-sale equity securities (250,700) (320,000)
Proceeds from maturities of available-for-sale debt securities 44,500,000 12,000,000
Proceeds from maturities and principal paydowns on
held-to-maturity debt securities 103,000 460,786
Proceeds from the maturity of interest-bearing deposits -- 21,504
Net increase in loans (64,813,979) (22,925,526)
Purchases of office equipment and leasehold improvements (301,535) (508,196)
Write-down of office equipment and leasehold improvements -- 2,522
Proceeds from sale of other real estate owned -- 73,455
Investment in Enterprise Fund, L.P. -- (201,000)
-------------- --------------
Net cash provided by (used in) investing activities (34,202,353) (21,528,461)
-------------- --------------
Cash flows from financing activities:
Net increase (decrease) in demand and savings accounts 40,484,065 16,703,657
Net increase (decrease) in certificates of deposit (10,329,962) 7,842,384
Increase (decrease) in notes payable 2,250,000 --
Proceeds from short term borrowings 940,649 --
Cash dividends paid (142,765) (116,756)
Proceeds from the exercise of common stock options 62,674 338,600
-------------- --------------
Net cash provided by financing activities 33,264,661 24,767,885
-------------- --------------
Net increase in cash and due from banks 3,652,151 2,646,319
Cash and due from banks, beginning of year 43,951,018 46,722,054
-------------- --------------
Cash and due from banks, end of year $ 47,603,169 $ 49,368,373
============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 6,349,057 $ 5,396,968
Income taxes 840,000 1,191,066
Transfer of held to maturity security to trading $ 510,000 $ --
_____________
See accompanying notes to consolidated financial statements.
5
8
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
(1) BASIS OF PRESENTATION
The accompanying consolidated financial statements of Enterbank Holdings,
Inc. and subsidiaries (the "Company") are unaudited and should be read in
conjunction with the consolidated financial statements and notes thereto
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998. 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 six month period ended June 30, 1999 are
not necessarily indicative of the results that may be expected for any other
interim period or for the year ending December 31, 1999.
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, 1998 have been reclassified to conform to the 1999 presentation.
Such reclassifications had no effect on previously reported consolidated net
income or shareholders' equity.
(2) ORGANIZATION
On April 28, 1999, the Company's Shareholders approved an amendment to the
Company's Certificate of Incorporation to increase the number of authorized
shares of common stock from 3,000,000 to 3,500,000.
(3) OPTION PLAN
On April 28, 1999, the Company's Shareholders approved a qualified incentive
stock option plan ("Plan IV"). Plan IV sets aside up to 200,000 shares of the
Company's Common Stock for options to be granted to certain key employees of
the Company. The purchase price for options granted under Plan IV will be
determined based upon the market value of the Common Stock at the time such
options are granted. At June 30, 1999 Plan IV had no options outstanding.
(4) ENTERPRISE MERCHANT BANC
The Company is currently restructuring the ownership of the merchant banking
operations in which it is involved. In July of 1999, a preliminary closing
took place for a merchant banking fund ("Fund II") that is not a Small
Business Investment Company ("SBIC") regulated by the Small Business
Administration ("SBA"). Due to the current Federal Reserve regulations, the
Company cannot have control of an investment company that is not an SBIC.
Therefore, the Company restructured its ownership and control positions of
the various merchant banking operations. The result of this restructuring is
that the Company maintains ownership of the wholly owned subsidiary,
Enterprise Merchant Banc, Inc., which in turn has a minority interest in
Enterprise Merchant Banc, LLC. The minority interest in Enterprise Merchant
Banc, LLC is based on a 4.9% voting and common stock ownership and a 24.9%
economic ownership. This structure provides the Company the ability to
maintain a similar level of return in the form of income that would have been
realized under the previous structure, yet satisfies the regulations
concerning ownership and control. This structure also allows Enterprise
Merchant Banc, LLC to be involved in a broader array of activities and
opportunities than were previously allowed.
6
9
Future reporting, with respect to merchant banking, will be referred to as
"merchant banking activities" which includes the activities from the
investment in the various merchant banking funds, the investment in
Enterprise Merchant Banc, LLC, as well as the income earned from Enterprise
Merchant Banc, Inc. (the wholly owned subsidiary) of the Company. Such
activities will include the returns earned on the Fund's investments, the
carried interest, and the pro-rata share of the distribution of Enterprise
Merchant Banc, LLC income as well as fees earned at Enterprise Merchant Banc,
Inc.
(5) COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This
statement requires presentation of the components of comprehensive earnings,
including the changes in equity from non-owner sources such as unrealized
gains or losses on securities. The Company's comprehensive earnings
adjustments for the six-month period ending June 30, 1999 and 1998 were as
follows:
Six Months Ended June 30, 1999
------------------------------------------------------------
Tax
Before-Tax (Expense) Net-of-Tax
Amount or Benefit Amount
------------ ------------ -----------
Unrealized gains (losses) on securities:
Unrealized holding losses arising
during period $ (64,267) $ 21,851 $ (42,416)
------------ ------------ -----------
Other comprehensive income (loss) $ (64,267) $ 21,851 $ (42,416)
============ ============ ===========
Six Months Ended June 30, 1998
------------------------------------------------------------
Tax
Before-Tax (Expense) Net-of-Tax
Amount or Benefit Amount
------------ ------------ -----------
Unrealized gains (losses) on securities:
Unrealized holding losses arising
during period $ (1,906) $ 648 $ (1,258)
------------ ------------ -----------
Other comprehensive income (loss) $ (1,906) $ 648 $ (1,258)
============ ============ ===========
7
10
The Company did not sell any investments in debt and equity securities during
the six months ended June 30, 1999 and 1998.
Six Months Ended June 30, 1999
--------------------------------------------
Accumulated
Unrealized Other
Gains (Losses) on Comprehensive
On Securities Income (Loss)
----------------- -------------
Beginning balance $ 10,618 $ 10,618
Current-period change (42,416) (42,416)
----------- -----------
Ending balance $ (31,798) $ (31,798)
=========== ===========
Six Months Ended June 30, 1998
--------------------------------------------
Accumulated
Unrealized Other
Gains (Losses) on Comprehensive
On Securities Income (Loss)
----------------- -------------
Beginning balance $ (1,473) $ (1,473)
Current-period change (1,258) (1,258)
----------- -----------
Ending balance $ (2,731) $ (2,731)
=========== ===========
(6) SEGMENT DISCLOSURE
Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about
Segments of an Enterprise and Related Information requires operating segment
reporting in financial statements for periods beginning after December 15,
1997. An operating segment is defined under SFAS 131 as a component of an
enterprise that engages in business activities that generate revenue and
expense for which operating results are reviewed by the chief operating
decision maker in the determination of resource allocation and performance.
Management of the Company reviews the financial performance of its operation
segments on an after-tax basis. The Company's four major operating segments
in 1998 and 1999 include Enterbank Holdings, Inc., Enterprise Bank,
Enterprise Financial Advisors and Enterprise Merchant Banc. Enterbank
Holdings incurs general corporate expenses not allocated to the operating
segments and operates as a holding company for each of the other three
operating segment entities. Enterprise Bank provides a full range of
commercial banking services. These services include but are not limited to
loans, deposit accounts, safe deposit boxes, lock boxes and cash management
services. Enterprise Financial Advisors, a division of Enterprise Bank,
offers financial planning and trust services. Enterprise Merchant Banc
offers merchant banking and venture capital services.
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11
The following are the financial results for each of the Company's operating
segments for the three-month periods ended June 30, 1999 and 1998:
Three Months Ended June 30, 1999
---------------------------------------------------------------------------------------
Enterprise Enterprise
Enterbank Enterprise Financial Merchant
Holdings, Inc. Bank Advisors Banc Eliminations Consolidated
-------------- -------------- ----------- ----------- ------------ --------------
Interest income $ -- $ 7,435,335 $ -- $ 10 $ (10) $ 7,435,335
Interest expense 3,494 3,212,636 -- -- (10) 3,216,120
Net interest margin (3,494) 4,222,699 -- 10 -- 4,219,215
Provision for loan losses -- 157,545 -- -- -- 157,545
Noninterest income -- 322,754 63,292 41,225 -- 427,271
Direct expenses -- -- 22,861 -- -- 22,861
Contribution margin -- 322,754 40,431 41,225 -- 404,410
Noninterest expenses 154,481 2,671,623 222,626 163,695 -- 3,212,425
------------ -------------- ----------- ----------- ------------ --------------
Income (loss) before
income tax expense (benefit) (157,975) 1,716,285 (182,195) (122,460) -- 1,276,516
Income tax expense (benefit) (79,800) 656,113 (65,424) (47,137) -- 463,752
------------ -------------- ----------- ----------- ------------ --------------
Income before cumulative
effect of a change in
accounting principle (78,175) 1,060,172 (116,771) (75,323) -- 812,764
Cumulative effect on prior
years of a change in
asset classification 121,491 -- -- -- -- 121,491
------------ -------------- ----------- ----------- ------------ --------------
Net income $ 43,316 $ 1,060,172 $(116,771) $ (75,323) $ -- $ 934,255
============ ============== =========== =========== ============ ==============
Total assets $1,418,261 $408,590,329 $ 31,048 $ 707,954 $ (296,859) $410,450,783
------------ -------------- ----------- ----------- ------------ --------------
Three Months Ended June 30, 1998
---------------------------------------------------------------------------------------
Enterprise Enterprise
Enterbank Enterprise Financial Merchant
Holdings, Inc. Bank Advisors Banc Eliminations Consolidated
-------------- -------------- ----------- ----------- ------------ --------------
Interest income $ -- $ 6,054,989 $ -- $ 2 $ (2) $ 6,054,989
Interest expense -- 2,793,404 -- -- (2) 2,793,402
Net interest margin -- 3,216,586 -- -- -- 3,261,587
Provision for loan losses -- 102,671 -- -- -- 102,671
Noninterest income -- 412,790 -- 53,176 -- 456,966
Direct expenses -- -- -- -- -- --
Contribution margin -- 412,790 -- 53,176 -- 465,966
Noninterest expenses 258,837 2,087,811 -- 147,784 -- 2,494,432
------------ -------------- ----------- ----------- ------------ --------------
Income before income tax
expense (benefit) (258,837) 1,483,893 -- (94,606) -- 1,130,450
Income tax expense (99,000) 561,300 -- (35,500) -- 426,800
------------ -------------- ----------- ----------- ------------ --------------
Net income $ (159,837) $ 922,593 $ -- $ (59,106) $ -- $ 703,650
============ ============== =========== =========== ============ ==============
Total assets $2,134,709 $316,341,562 $ -- $ 233,086 $(1,301,002) $317,408,355
------------ -------------- ----------- ----------- ------------ --------------
As shown on the table, Enterprise Bank ("the Bank") is the primary source of
income and assets for the Company. The Bank contributed $92 million more in
assets at June 30, 1999 compared to assets at June 30, 1998. Most of the
asset growth experienced by the Company is attributable to the Bank. The
Bank also provides much of the income to the Company. The other operating
segments are experiencing net losses primarily because they are in early
stages of growth. Enterprise Financial Advisors began operations during the
second half of 1998. Enterprise Merchant Banc has increased activity during
1998 and 1999 by opening an office in Overland Park, Kansas, and
9
12
raised capital for a second equity fund. Enterbank Holdings has some assets
in the form of small investments. Enterbank Holdings also has noninterest
expenses related to consolidated items of the Company.
The following are the financial results for each of the Company's operating
segments for the six-month periods ended June 30, 1999 and 1998:
Six Months Ended June 30, 1999
---------------------------------------------------------------------------------------
Enterprise Enterprise
Enterbank Enterprise Financial Merchant
Holdings, Inc. Bank Advisors Banc Eliminations Consolidated
-------------- -------------- ----------- ----------- ------------ --------------
Interest income $ -- $ 14,377,149 $ -- $ 10 $ (10) $ 14,377,149
Interest expense 3,494 6,406,177 -- -- (10) 6,409,661
Net interest margin (3,494) 7,970,972 -- 10 -- 7,967,488
Provision for loan losses -- 237,545 -- -- -- 237,545
Noninterest income 726 794,807 89,865 93,316 -- 978,714
Direct expenses -- -- 34,868 -- -- 34,868
Contribution margin 726 794,807 54,997 93,316 -- 943,846
Noninterest expenses 335,037 5,175,902 441,765 334,980 -- 6,287,684
Income (loss) before
income tax expense (benefit) (337,805) 3,352,332 (386,768) (241,654) -- 2,420,973
Income tax expense (benefit) (127,539) 1,236,804 (143,608) (95,230) -- 870,427
------------ -------------- ----------- ----------- ------------ --------------
Income before cumulative
effect of a change in
accounting principle (210,266) 2,115,528 (243,160) (146,424) -- 1,550,546
Cumulative effect on prior
years of a change in
assetclassification 121,491 -- -- -- -- 121,491
------------ -------------- ----------- ----------- ------------ --------------
Net income (loss) $ (88,775) $ 2,115,528 $(243,160) $(146,424) $ -- $ 1,672,037
============ ============== =========== =========== ============ ==============
Total assets $1,418,261 $408,590,329 $ 31,048 $ 707,954 $ (296,859) $410,450,733
------------ -------------- ----------- ----------- ------------ --------------
Six Months Ended June 30, 1998
---------------------------------------------------------------------------------------
Enterprise Enterprise
Enterbank Enterprise Financial Merchant
Holdings, Inc. Bank Advisors Banc Eliminations Consolidated
-------------- -------------- ----------- ----------- ------------ --------------
Interest income $ -- $ 11,823,452 $ -- $ 2 $ (2) $ 11,823,452
Interest expense -- 5,438,283 -- -- (2) 5,438,283
Net interest margin -- 6,835,167 -- -- -- 6,385,169
Provision for loan losses -- 520,929 -- -- -- 520,929
Noninterest income 2,820 743,830 -- 115,385 -- 862,035
Direct expenses -- -- -- -- -- --
Contribution margin 2,820 743,830 -- 115,385 -- 862,035
Noninterest expenses 475,780 3,860,263 -- 245,037 -- 4,581,080
------------ -------------- ----------- ----------- ------------ --------------
Income before income
tax expense (benefit) (472,960) 2,747,805 -- (129,650) -- 2,145,195
Income tax expense (benefit) (177,500) 1,044,300 -- (47,500) -- 819,300
------------ -------------- ----------- ----------- ------------ --------------
Net income $ (295,460) $ 1,703,505 $ -- $ (82,150) $ -- $ 1,325,895
============ ============== =========== =========== ============ ==============
Total assets $2,134,709 $316,341,562 $ -- $ 233,086 $(1,301,002) $317,408,355
------------ -------------- ----------- ----------- ------------ --------------
As shown on the table, Enterprise Bank ("the Bank") is the primary source of
income and assets for the Company. The Bank contributed $92 million more in
assets at June 30, 1999 compared to assets at June 30, 1998. Most of the
asset growth experienced by the Company is attributable to the Bank. The Bank
also provides much of the income to the Company. The Bank experienced a 24%
increase in net income during the six-month period ended June 30, 1999
compared to the same period in 1998. The Company experienced a 26% increase
in net income for the same period. The other operating segments are
experiencing net losses primarily because they are in early stages of growth.
Enterprise Financial Advisors began operations during the second half of 1998.
Enterprise Merchant Banc has increased activity during 1998 and 1999 by
opening an office in Overland Park, Kansas, and raised capital
10
13
for a second equity fund. Enterbank Holdings has some assets in the form of
small investments. Enterbank Holdings also has noninterest expenses related to
consolidated items of the Company.
(7) CHANGE IN ACCOUNTING PRINCIPLES
Effective May 1, 1999, the Company adopted SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities". This statement establishes
standards for derivative instruments embedded in other contracts, and for
hedging activities. It requires an entity to recognize all derivatives as
either assets or liabilities in the balance sheet and measure those
instruments at fair value.
In connection with the adoption of SFAS 133, the Company elected to reclassify
an equity investment from held-to-maturity to trading. The Company recorded a
$197,546 gain on marking the asset to market which is treated as a cumulative
effect of change in accounting principle.
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,
burdens imposed by federal and state regulation of banks, credit risk,
exposure to local economic conditions, risks associated with rapid increase or
decrease in prevailing interest rates and competition from banks and other
financial institutions, as well as those discussed in the Company's 1998
Annual Report on Form 10-K.
INTRODUCTION
The 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, 1999 compared to
the three and six month periods ended June 30, 1998 and the year ended
December 31, 1998. 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, 1998.
FINANCIAL CONDITION
Total assets at June 30, 1999 were $410 million, an increase of $35 million,
or 9%, over total assets of $375 million at December 31, 1998. Loans and
leases, net of unearned loan fees, were $339 million, an increase of $65
million, or 24%, over total loans and leases of $274 million at December 31,
1998. Federal funds sold and investment securities were $41 million, a
decrease of $20 million, or 33%, from total federal funds sold and investment
securities of $61 million at December 31, 1998. The decrease resulted from
the shift in earnings assets from short-term investments into loans during the
first six months of 1999.
Total deposits at June 30, 1999 were $369 million, an increase of $30 million
over total deposits of $339 million at December 31, 1998.
11
14
Total shareholders' equity at June 30, 1999 was $30.8 million, an increase of
$1.6 million over total shareholders' equity of $29.2 million at December 31,
1998. The increase in equity is due to an increase in net income of $1.7
million for the six months ended June 30, 1999, and the exercise of incentive
stock options by employees, less dividends paid to shareholders.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Net income was $934,255 for the three month period ended June 30, 1999, an
increase of 33% over net income of $703,650 for the same period in fiscal
1998. Basic earnings per share for the three month periods ended June 30,
1999 and 1998 were $0.39 and $0.30, respectively. Diluted earnings per share
for the three month periods ended June 30, 1999 and 1998 were $0.36 and $0.28,
respectively.
NET INTEREST INCOME
Net interest income (presented on a tax equivalent basis) was $4.2 million, or
4.74% of average earnings assets, for the three months ended June 30, 1999,
compared to $3.3 million, or 4.76% of average earning assets, for the same
period in 1998. The $958,000, or 29%, increase in net interest income for the
three months ended June 30, 1999 resulted primarily from an $83 million
increase in average earnings assets to $359 million, from $276 million during
the same period in 1998. This increase in earning asset balances was offset
by a 0.50% decrease in the earning asset yield. The increase in earning assets
is attributable to the continued calling efforts of the Company's relationship
officers and sustained economic growth in the local market served by the
Company. The yield on average earning assets decreased to 8.32% for the three
month period ended June 30, 1999 compared to 8.82% for the three month period
ended June 30, 1998. The decrease in asset yield was primarily due to three
0.25% drops, for a total of a 0.75% decrease, in the Prime rate during the
third and fourth quarters of the fiscal year 1998 and a general decrease in
the average yield on loans. The increase in net interest margin was offset by
a $73 million increase in average interest-bearing liabilities to $298 million
for the three months ended June 30, 1999 from $225 million during the same
period in 1998. The yield on interest-bearing liabilities decreased to 4.33%
for the three months ended June 30, 1999 compared to 4.97% for the same period
in 1998. This decrease is attributed to the above-mentioned declines in the
Prime rate and a change in the mix of interest-bearing liabilities from higher
yielding certificates of deposits to lower yielding transaction and money
market accounts.
12
15
The following table sets forth, on a tax-equivalent basis, certain
information relating to the Company's average balance sheet and reflects the
average yield earned on interest-earning assets, the average cost of
interest-bearing liabilities and the resulting net interest income for the
three month periods ended June 30, 1999 and 1998:
Three Months Ended June 30,
----------------------------------------------------------------------------------------------
1999 1998
---------------------------------------------- ----------------------------------------------
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 <F1> $324,047 84.70% $7,025 8.70% $242,352 81.96% $5,623 9.31%
Taxable investments
in debt securities 18,856 4.93 241 5.13 10,038 3.39 138 5.51
Non-taxable
investments in
debt securities <F2> 562 0.15 9 6.42 486 0.16 8 6.61
Federal funds sold 16,020 4.19 185 4.63 23,056 7.80 299 5.20
Interest earning
deposits 10 -- 0 1.71 119 0.04 2 6.74
---------- -------- -------- ---------- -------- --------
Total interest-
earning assets 359,495 93.97 7,460 8.32 276,051 93.35 6,070 8.82
Non-interest-
earning assets:
Cash and due
from banks 17,671 4.62 15,606 5.28
Office equipment
and leasehold
improvements 3,051 0.80 2,454 0.83
Prepaid expenses
and other assets 5,670 1.48 4,571 1.55
Allowance for
possible loan losses (3,314) (0.87) (2,986) (1.01)
---------- -------- ---------- --------
Total assets $382,573 100.00% $295,696 100.00%
========== ======== ========== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
- --------------------
Interest-bearing
liabilities:
Interest-bearing
transaction
accounts $ 27,088 7.08% $ 120 1.78% $ 20,274 6.86% $ 126 2.49%
Money market 166,735 43.58 1,778 4.28 101,989 34.49 1,176 4.62
Savings 1,778 0.46 11 2.47 1,509 0.51 9 2.39
Certificates of
deposit 94,587 24.72 1,220 5.17 101,726 34.49 1,483 5.85
Notes payable 883 0.23 3 1.76 -- -- -- --
Federal Home
Loan Bank advances 6,840 1.79 84 4.91 -- -- -- --
---------- -------- -------- ---------- -------- --------
Total interest-
bearing liabilities 297,911 77.87 3,216 4.33 225,496 76.26 2,794 4.97
Noninterest-bearing
liabilities:
Demand deposits 53,465 13.98 41,834 14.15
Other liabilities 672 0.18 1,048 0.35
---------- -------- ---------- --------
Total liabilities 352,048 92.02 268,378 90.76
Shareholders' equity 30,524 7.98 27,319 9.24
---------- -------- ---------- --------
Total liabilities
and shareholders'
equity $382,572 100.00% $295,696 100.00%
========== ======== ========== ========
Net interest income $4,244 $3,276
======== ========
Net interest margin 4.74% 4.76%
<FN>
- -------------
<F1> 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 $250,000 and $148,000, for
1999 and 1998, respectively.
<F2> Non-taxable investment income is presented on a fully tax-equivalent
basis assuming a tax rate of 34%.
13
16
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Net income was $1,672,037 for the six month period ended June 30, 1999, an
increase of 26% over net income of $1,325,895 for the same period in fiscal
1998. Basic earnings per share for the six month periods ended June 30, 1999
and 1998 were $0.70 and $0.57, respectively. Diluted earnings per share for
the six month periods ended June 30, 1999 and 1998 were $0.66 and $0.53,
respectively.
NET INTEREST INCOME
Net interest income (presented on a tax equivalent basis) was $8.0 million,
or 4.59% of average earnings assets, for the six months ended June 30, 1999,
compared to $6.4 million, or 4.80% of average earning assets, for the same
period in 1998. The $1.6 million, or 25% increase, in net interest income
for the six months ended June 30, 1999 resulted primarily from an $82 million
increase in average earnings assets to $352 million, from $270 million during
the same period in 1998. This increase in earning asset balances was offset
by a 0.61% decrease in the earning asset yield. The increase in earning
assets is attributable to the continued calling efforts of the Company's
relationship officers and sustained economic growth in the local market
served by the Company. The yield on average earning assets decreased to
8.26% for the six month period ended June 30, 1999 compared to 8.87% for the
six month period ended June 30, 1998. The decrease in asset yield was
primarily due to three 0.25% drops, for a total of a 0.75% decrease, in the
Prime rate during the third and fourth quarters of fiscal 1998 and a general
decrease in average yield on loans. The increase in net interest margin was
offset by a $74 million increase in average interest-bearing liabilities to
$294 million for the six months ended June 30, 1999 from $220 million during
the same period in 1998. $7.0 million of the $74 million increase in
interest-bearing liabilities represents an increase in notes payable and
Federal Home Loan Bank advances as of June 30, 1999 as compared to June 30,
1998. The yield on interest-bearing liabilities decreased to 4.40% for the
six months ended June 30, 1999 compared to 4.99% for the same period in 1998.
This decrease is attributed to the above-mentioned declines in the Prime rate
and a concerted effort by management to decrease the interest paid on
deposits.
14
17
The following table sets forth, on a tax-equivalent basis, certain
information relating to the Company's average balance sheet and reflects the
average yield earned on interest-earning assets, the average cost of
interest-bearing liabilities and the resulting net interest income for the
six month periods ended June 30, 1999 and 1998:
Six Months Ended June 30,
----------------------------------------------------------------------------------------------
1999 1998
---------------------------------------------- ----------------------------------------------
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 <F1> $309,734 82.03% $13,385 8.71% $238,841 82.76% $11,018 9.30%
Taxable investments
in debt securities 21,638 5.73 562 5.24 10,398 3.60 292 5.66
Non-taxable
investments in
debt securities <F2> 596 0.16 19 6.42 572 0.20 19 6.70
Federal funds sold 20,079 5.32 463 4.65 19,725 6.83 523 5.35
Interest earning
deposits 13 0.00 0 3.27 123 0.04 3 4.90
---------- -------- --------- ---------- -------- --------
Total interest-
earning assets 352,060 93.24 14,429 8.26 269,658 93.43 11,855 8.87
Non-interest-
earning assets:
Cash and due
from banks 20,347 5.39 14,992 5.19
Office equipment
and leasehold
improvements 3,051 0.81 2,396 0.83
Prepaid expenses
and other assets 5,411 1.43 4,421 1.53
Allowance for
possible loan
losses (3,276) (0.87) (2,861) (0.99)
---------- -------- ---------- --------
Total assets $377,593 100.00% $288,606 100.00%
========== ======== ========== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
- --------------------
Interest-bearing
liabilities:
Interest-bearing
transaction
accounts $ 26,036 6.90% $ 232 1.79% $ 20,080 6.96% $ 250 2.51%
Money market 162,783 43.11 3,483 4.31 98,000 33.96 2,264 4.66
Savings 1,667 0.44 20 2.47 1,461 0.51 18 2.48
Certificates of
deposit 96,281 25.50 2,512 5.26 100,106 34.69 2,908 5.86
Notes payable 441 0.12 3 3.52 -- -- -- --
Federal Home Loan
Bank advances 6,585 1.74 159 4.87 -- -- -- --
---------- -------- --------- ---------- -------- --------
Total interest-
bearing liabilities 293,793 76.07 6,410 4.40 219,647 76.12 5,440 4.99
Noninterest-bearing
liabilities:
Demand deposits 52,780 13.98 41,025 14.21
Other liabilities 921 0.24 1,029 0.36
---------- -------- ---------- --------
Total liabilities 347,494 92.03 261,701 90.68
Shareholders' equity 30,100 7.97 26,905 9.32
---------- -------- ---------- --------
Total liabilities
and shareholders'
equity $377,594 100.00% $288,606 100.00%
========== ======== ========== ========
Net interest income $ 8,020 $ 6,415
========= =========
Net interest margin 4.59% 4.80%
<FN>
- -------------
<F1> 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 $250,000 and $148,000,
for 1999 and 1998, respectively.
<F2> Non-taxable investment income is presented on a fully tax-equivalent
basis assuming a tax rate of 34%.
15
18
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses was $158,000 and $238,000 for the
three month and six month periods ended June 30, 1999, respectively, compared
to $103,000 and $521,000 for the same periods in 1998. Continued quality of
the loan portfolio allowed the Company to decrease the provision for loan
losses during the first six months of 1999 as compared to the same period in
1998. This quality is demonstrated by a decrease in non-performing loans.
Non-performing loans decreased from $8,000 as of June 30, 1998 to $0 at June
30, 1999. The decrease in provision for possible loan losses also reflects a
decrease in net loans charged off to net recoveries of $2,000 from net loans
charged off of $31,000 for six months ended June 30, 1999 and 1998,
respectively.
The following table summarizes changes in the allowance for loan losses
arising from loans charged off and recoveries on loans previously charged
off, by loan category, and additions to the allowance that have been charged
to expense:
Six Months Ended June 30,
----------------------------------
1999 1998
---------- ------------
(Dollars in Thousands)
Allowance at beginning of year $ 3,200 $ 2,510
---------- ------------
Loans charged off:
Commercial and industrial --
Real estate: -- 30
Commercial -- 19
Construction -- --
Residential -- --
Consumer and other -- --
---------- ------------
Total loans charged off -- 49
---------- ------------
Recoveries of loans previously charged off:
Commercial and industrial -- 18
Real estate:
Commercial -- --
Construction -- --
Residential -- --
Consumer and other 2 --
---------- ------------
Total recoveries of loans previously charged off 2 18
---------- ------------
Net loans (recovered) charged off (2) 31
---------- ------------
Provisions charged to operations 238 521
---------- ------------
Allowance at end of period $ 3,440 $ 3,000
========== ============
Average loans $309,734 $238,841
Total loans $338,634 $248,357
Nonperforming loans $ -- $ 8
Net charge-offs to average loans 0.00% 0.03%
Allowance for possible loan losses to loans 1.02% 1.21%
Allowance for possible loan losses to
non-performing loans N/A N/M
16
19
The Company's credit management policy 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 four months, which
are then discussed in formal meetings with the loan review and loan
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 watch list review
meetings.
Each month, loan administration provides management with 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 possible loan losses. These factors are derived primarily from
the actual loss experience and from published national surveys of norms in
the industry. The calculated allowances required for the portfolios are then
compared to the actual allowance balances to determine the provisions
necessary to maintain the allowances at appropriate levels. In addition,
management exercises judgment in its analysis of determining the overall
level of the allowance for possible 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 possible
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. 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
losses in the loan portfolio. While management uses available information to
recognize loan losses, future additions to the allowance may be necessary
based on changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process, periodically
review the allowance for loan losses. Such agencies may require the Company
to increase the allowance for loan losses based on their judgments and
interpretations about information available to them at the time of their
examinations.
While the Company has benefited from very low historical net charge-offs
during an extended period of rapid loan growth, management remains cognizant
that historical loan loss and 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,
concentration of credit and other factors, all of which impact the credit
risk associated with the Company's loan portfolio.
17
20
The following table sets forth information concerning the Company's
non-performing assets as of the dates indicated:
June 30, December 31,
1999 1998
---------- ------------
(Dollars in Thousands)
Non-accrual loans $ -- $ 2
Loans past due 90 days or more
and still accruing interest -- --
Restructured loans -- --
---------- ----------
Total nonperforming loans -- 2
Foreclosed property 806 806
---------- ----------
Total non-performing assets $ 806 $ 808
========== ==========
Total assets $410,451 $375,304
Total loans $338,634 $273,818
Total loans plus foreclosed property $339,440 $274,624
Nonperforming loans to loans 0.00% 0.00%
Nonperforming assets to loans plus
foreclosed property 0.24% 0.29%
Nonperforming assets to total assets 0.20% 0.22%
NONINTEREST INCOME
Noninterest income was $427,000 and $979,000 for the three month and six
month periods ended June 30, 1999 respectively, compared to $466,000 and
$862,000 for the same periods in 1998. The increase is primarily attributed
to increased service charges on deposit accounts and financial advisory fees.
Service charges on deposit accounts were $151,000 and $268,000 for the three
month and six month periods ended June 30, 1999, respectively, compared to
$62,000 and $112,000 for the same periods in 1998. The increase in service
charges is due to a concerted effort by the Company's management to alter
service charges and other fees to stay competitive in the marketplace.
Financial advisory fees were $42,000 and $55,000 for the three month and six
month periods ended June 30, 1999, respectively as compared to $0 for the
same periods in 1999. The Company began offering financial advisory services
in October 1997. The above mentioned increases were offset by a $162,000 and
$96,000 decrease in the gain on the sale of mortgage loans for the three
month and six month periods ended June 30, 1999 compared to the same periods
ended June 30, 1998. This decrease is due to an increase in interest rates
during the last half of the year in 1998. Over half of the gain on sale of
mortgage loans for the three and six month periods ended June 30, 1999 were
due to refinancing of mortgages. This business has dramatically decreased
with the rise in interest rates.
NONINTEREST EXPENSE
Noninterest expense was $3.2 million and $6.3 million for the three month and
six month periods ended June 30, 1999 respectively, compared to $2.5 million
and $4.6 million for the same periods in 1998. The increase is primarily due
to increases in salaries and benefits expense, occupancy and equipment
expense and other operating expenses. Increases in salaries and benefits and
occupancy and equipment expenses are primarily due to: 1) the personnel,
occupancy and equipment expenses for the new trust and financial planning
operations initiated in 1998 and the ongoing costs associated with Enterprise
Merchant Banc; 2) salaries and benefits related to continued growth in the
18
21
banking facilities opened in 1996 and mortgage loan product started in 1997;
and 3) normal increases associated with growth. Expenses related to other
operations were $1,304,346 and $2,544,334 for the three month and six month
periods ended June 30, 1999, respectively, an increase of $119,025, or 10%,
and $352,082 or 16% over the three month and six month periods ended June 30,
1998. This increase is attributed to normal operating expenses associated
with growth.
The following is a breakdown of noninterest expenses by the above units:
Three months ended June 30, Six months ended June 30,
1999 versus 1998 1999 versus 1998
------------------------------------- ---------------------------------------
$ Change 1999 1998 $ Change 1999 1998
---------- ------------ ------------ ------------ ------------ ------------
Enterprise Merchant Banc $ 22,515 $ 167,272 $ 144,757 $ 88,361 $ 332,440 $ 244,079
St. Peters and Sunset Hills
banking units 341,591 1,306,423 964,832 722,732 2,503,351 1,780,619
Mortgage operations 11,802 211,324 199,522 99,499 463,629 364,130
Enterprise Financial Advisors 223,060 223,060 -- 443,930 443,930 --
Other operations 119,025 1,304,346 1,185,321 352,082 2,544,334 2,192,252
---------- ------------ ------------ ------------ ------------ ------------
Total noninterest expense 717,993 $3,212,425 $2,494,432 $1,706,604 $6,287,684 $4,581,080
========== ============ ============ ============ ============ ============
YEAR 2000
OVERVIEW
The Year 2000 ("Y2K") issue refers to the ability of a date-sensitive
computer program to recognize a two-digit date field designated "00" as the
year 2000. Mistaking "00" for 1900 could result in a system failure or
miscalculations causing a disruption to operations and normal business
activities. This is a significant issue for many companies, including banks,
and the implications of the Y2K issue cannot be predicted with any high
degree of certainty.
The Company's State of Readiness:
The Company has developed a Y2K compliance program with five primary phases.
These are: 1) Awareness, 2) Assessment, 3) Renovations, 4) Validation and 5)
Implementation. As of June 30, 1999 all five phases were complete and all
systems have been reviewed for Y2K compliance. The scope of the Assessment
phase included all areas of technology for the Company and its subsidiaries
including, but not limited to, the phone system, voice mail system, computer
network, banking mainframe and related software. The Company completed the
Implementation Phase on June 30, 1999. The Company completed its contingency
plan related to Y2K on June 30, 1999. Contingency plan training is currently
underway and will be completed by October 31, 1999. The Company feels its
primary Y2K exposure is in its core banking software, which is leased from a
third party bank software vendor providing the same software to hundreds of
other banks. This vendor is working closely with the Company to address any
Y2K issues that may be discovered and has indicated to the Company that there
should be no material Y2K problems.
The Cost of Y2K Compliance:
The total cost to the Company to assess, correct and verify Y2K issues is
estimated at $103,000, consisting of $45,000 in salaries and benefit costs
allocated to Y2K projects and $58,000 in software and hardware expenses
required for upgrading and testing of the Company's systems. This cost
estimate does not include the cost associated with regulatory reporting,
legal review of regulatory requirements, auditing requirements or other costs
incurred related only to the disclosure requirements and not actual software
or hardware issues. Such costs are difficult to determine as these
requirements change frequently. If these non-systems related costs become
significant and quantifiable, they will be disclosed at that time.
19
22
What Risks Exist for the Company:
The most likely risk the Company faces with respect to Y2K issues is in the
core banking software. This system identifies and calculates payments due
the Company's subsidiary bank for loans made to customers and amounts due to
the bank's customers for deposits. The loss of these records or inability to
accurately perform these calculations could cause the bank to incur
additional expenses such as loan losses, underpayments of amounts due on
loans, overpayments of amounts due to depositors or increased personnel
expenses required to track this information manually. Such expenses are not
currently quantifiable, but may be material to the operations and financial
performance of the Company and its subsidiaries.
Contingency Plans:
Management believes the Company will be Y2K compliant by December 31, 1999.
The Company is currently testing its contingency plans. However, as a
precautionary measure, the Company will create electronic and paper based
reports of every account as a back up. The back up reports will include the
necessary information to calculate balance and payment information. If
necessary, the electronic version of this information can be used by other
common software applications such as Lotus 1-2-3 or Microsoft Excel to
perform many of the calculations performed by the bank's core software
system. The back up reports can also be used to manually calculate customer
information indefinitely if needed. Training for bank personnel on the
contingency plan is currently underway and should be completed by October 31,
1999.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity is provided by the Company's earning assets, including short-term
investments in federal funds sold, maturities in the loan portfolio,
maturities in the investment portfolio, amortization of term loans, deposit
inflows, proceeds from borrowings, and retained earnings.
Since inception, the Company has experienced rapid loan and deposit growth
primarily due to the aggressive direct calling efforts of the Company's
relationship officers and sustained economic growth in the local market
served by the Company. Management has pursued privately held businesses who
desire a close working relationship with a locally managed, full service
bank. Due to the relationship developed with these customers, management
views deposits from this source as a stable deposit base. Additionally, the
Company belongs to a national network of time depositors (primarily credit
unions) who place time deposits with the Company, typically in increments of
$99,000. The Company has used this source of deposits for over four years and
considers it to be a stable source of deposits enabling the Company to
acquire funds at a cost below its alternative cost of funds. There were $24
million and $31 million of deposits from the national network with the
Company at June 30, 1999 and December 31, 1998, respectively.
The following table sets forth the amount and maturity of certificates of
deposit that had balances of more than $100,000 at June 30, 1999:
Remaining Maturity Amount
------------------ ---------
(Dollars in Thousands)
Three months or less $12,953
Over three through six months 9,731
Over six through twelve months 13,284
Over twelve months 2,151
---------
$38,119
=========
20
23
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.
CAPITAL ADEQUACY
In March 1999, the Company obtained a $2,500,000 unsecured line of credit
from Jefferson Bank and Trust. The line of credit matures on March 31, 2000
and is an interest only note accruing interest at a variable rate of Prime
minus 0.50%. The outstanding principal balance on the loan as of June 30,
1999 was $2,250,000.
Risk-based capital guidelines for financial institutions were adopted by
regulatory authorities effective January 1, 1991. These guidelines were
designed to relate regulatory capital requirements to the risk profile of the
specific institution and to provide for uniform requirements among the
various regulators. Currently, the risk-based capital guidelines require the
Company to meet a minimum total capital ratio of 8.0% of which at least 4.0%
must consist of Tier 1 capital. Tier 1 capital generally consists of (a)
common shareholders' equity (excluding the unrealized market value
adjustments on the available-for-sale securities), (b) qualifying perpetual
preferred stock and related surplus subject to certain limitations specified
by the FDIC, (c) minority interests in the equity accounts of consolidated
subsidiaries less (d) goodwill, (e) mortgage servicing rights within certain
limits, and (f) any other intangible assets and investments in subsidiaries
that the FDIC determines should be deducted from Tier 1 capital. The FDIC
also requires a minimum leverage ratio of 3.0%, defined as the ratio of Tier
1 capital less purchased mortgage servicing rights to total assets, for
banking organizations deemed the strongest and most highly rated by banking
regulators. A higher minimum leverage ratio is required of less highly rated
banking organizations. Total capital, a measure of capital adequacy,
includes Tier 1 capital, allowance for possible loan losses, and debt
considered equity for regulatory capital purposes.
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The following table summarizes the Company's risk-based capital and leverage
ratios at the dates indicated:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ------ ----------- ----- ----------- ------
At June 30, 1999:
Total Capital
(to Risk Weighted Assets)
Enterbank Holdings, Inc. $34,385,929 9.74% $28,244,974 8.00% $35,306,217 10.00%
Enterprise Bank $34,756,310 9.90% $28,100,089 8.00% $35,125,111 10.00%
Tier I Capital
(to Risk Weighted Assets)
Enterbank Holdings, Inc. $30,945,929 8.77% $14,122,487 4.00% $21,183,730 6.00%
Enterprise Bank $31,316,310 8.92% $14,050,044 4.00% $21,075,067 6.00%
Tier I Capital
(to Average Assets)
Enterbank Holdings, Inc. $30,945,929 8.20% $11,327,929 3.00% $18,879,882 5.00%
Enterprise Bank $31,316,310 8.32% $11,929,498 3.00% $18,820,830 5.00%
At December 31, 1998:
Total Capital
(to Risk Weighted Assets)
Enterbank Holdings, Inc. $32,400,862 10.97% $23,618,397 8.00% $29,522,997 10.00%
Enterprise Bank $30,809,159 10.48% $25,489,876 8.00% $29,400,967 10.00%
Tier I Capital
(to Risk Weighted Assets)
Enterbank Holdings, Inc. $29,200,862 9.89% $11,809,199 4.00% $17,713,798 6.00%
Enterprise Bank $27,609,159 9.39% $11,760,387 4.00% $17,640,580 6.00%
Tier I Capital
(to Average Assets)
Enterbank Holdings, Inc. $29,200,862 9.16% $12,744,938 3.00% $15,931,172 5.00%
Enterprise Bank $27,609,159 8.69% $12,701,612 3.00% $15,877,015 5.00%
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-assets ratio.
ITEM 4: 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, 1999, the rate shock scenario models indicated
that annual net interest income would change by less than 5% should rates
rise or fall within 200 basis points from their current level over a one year
period. The Bank has no market risk sensitive instruments held for trading
purposes.
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The following tables present the scheduled maturity of market risk sensitive
instruments at June 30, 1999:
Beyond 5
years or no
stated
Year 1 Year 2 Year 3 Year 4 Year 5 maturity Total
---------- -------- -------- -------- -------- ----------- ----------
ASSETS
Securities $ 6,649 8,211 200 -- -- 1,149 $ 16,209
Interest-bearing
deposits 12 -- -- -- -- -- 12
Federal funds sold 24,700 -- -- -- -- -- 24,700
Loans 221,201 20,827 41,488 11,175 38,648 5,295 338,634
---------- -------- -------- -------- -------- ------- ----------
Total $252,562 29,038 41,688 11,175 38,648 6,444 $379,555
========== ======== ======== ======== ======== ======= ==========
LIABILITIES
Savings, Now,
Money Market
deposits $207,572 -- -- -- -- -- $207,572
CD's 85,354 4,362 1,073 709 1,337 16 92,851
FHLB Borrowings -- -- 3,000 -- 3,000 941 6,941
---------- -------- -------- -------- -------- ------- ----------
Total $292,926 4,362 4,073 709 4,337 957 $307,364
========== ======== ======== ======== ======== ======= ==========
Average
Interest Estimated
Total Rate Fair Value
----------- -------- ----------
ASSETS
Securities $ 16,209 5.24% $ 16,209
Interest-bearing
deposits 12 3.27 12
Federal funds sold 24,700 4.65 24,700
Loans 338,634 8.71% 336,524
---------- ----------
Total $379,555 $377,445
========== ==========
LIABILITIES
Savings, Now,
Money Market
deposits 207,572 3.95% $207,572
CD's 92,851 5.26 93,218
FHLB Borrowings 6,941 4.87% 7,214
---------- ----------
Total $307,364 $308,004
========== ==========
PART II - ITEM 4.
SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of Enterbank Holdings, Inc. ("the
Company") was held on April 28, 1999. 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 approve KPMG LLP as the Company's independent
accountants. There was no solicitation in opposition to management's
recommendation to amend Article Four of the Certificate of Incorporation of
the Company to reflect an increase in the number of authorized shares from
3,000,000 to 3,500,000. In addition, there was no solicitation in opposition
to management's recommendation to approve 200,000 options in an additional
incentive stock option plan for the benefit of the employees of the Company
and its subsidiaries. There were no other matters other than those stated
above, and the results of the votes are as follows:
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PROPOSAL NO. 1: ELECTION OF DIRECTORS
--------------------------------------
Director For Against Abstain
-------- --------- ------- -------
Fred H. Eller 1,848,860 0 0
Ronald E. Henges 1,848,860 0 0
Kevin C. Eichner 1,848,860 0 0
Randall D. Humphreys 1,843,346 0 5,514
Paul R. Cahn 1,844,050 0 4,810
William B. Moskoff 1,844,050 0 4,810
Birch M. Mullins 1,848,860 0 0
Robert E. Saur 1,844,050 0 4,810
Paul L. Vogel 1,844,050 0 4,810
Henry D. Warshaw 1,844,050 0 4,810
James L. Wilhite 1,844,050 0 4,810
Ted C. Wetterau 1,848,319 0 541
PROPOSAL NO. 2: INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------------
Accountants For Against Abstain
----------- --------- ------- -------
KPMG LLP 1,837,923 1,650 7,232
PROPOSAL NO. 3: COMMON SHARES AUTHORIZED
-----------------------------------------
For Against Abstain
--------- ------- -------
1,795,747 37,476 13,582
PROPOSAL NO. 4: QUALIFIED INCENTIVE STOCK OPTION PLAN
------------------------------------------------------
For Against Abstain
--------- ------- -------
1,788,610 37,241 20,954
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Item 6. -- Exhibits and Reports on Form 8-K
(a). The exhibits are numbered in accordance with the Exhibit Table of
Item 601 of Regulation S-K.
Exhibit
Number Description
------- -----------
3.1 Certificate of Incorporation of the Registrant, as amended
(incorporated herein by reference from Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1 dated December
19, 1996 (File No. 333-14737)).
3.2 Bylaws of the Registrant, as amended, (incorporated herein by
reference from Exhibit 3.2 to the Registrant's Registration
Statement on Form S-1 dated December 19, 1996 (File No. 333-
14737)).
3.3 Amendment to the Cerificate of Incorporation of the Registrant
(incorporated herein by reference from Exhibit 4.2 to the
Registrant's Registration Statement on Form S-8 dated July 1,
1999 (File No. 333-82087)).
3.4 Amendment to the Bylaws of the Registrant (incorporated herein
by reference from Exhibit 3 to the Registrant's Current Report
on Form 8-K dated May 15, 1998 (File No. 000-24131)).
4.1 Enterprise Bank Incentive Stock Option Plan (incorporated
herein by reference from Exhibit 4.3 to the Registrant's
Registration Statement on Form S-8 dated December 29, 1997
(File No. 333-43365)).
4.2 Enterprise Bank Second Incentive Stock Option Plan
(incorporated herein by reference from Exhibit 4.4 to the
Registrant's Registration Statement on Form S-8 dated December
29, 1997 (File No. 333-43365)).
4.3 Enterbank Holdings, Inc. Third Incentive Stock Option Plan
(incorporated herein by reference from Exhibit 4.5 to the
Registrant's Registration Statement on Form S-8 dated December
29, 1997 (File No. 333-43365)).
4.4 Enterbank Holdings, Inc. Fourth Incentive Stock Option Plan
(incorporated herein by reference from Exhibit 10.3 to the
Registrant's Registration Statement on Form S-8 dated July 1,
1999 (File No. 333-82087)).
4.5 Enterbank Holdings, Inc., Non-qualified Incentive Stock Option
Plan (incorporated herein by reference to the Registrant's
1998 Proxy Statement (File No. 000-24131)).
4.6 Enterbank Holdings, Inc. Stock Appreciation Rights (SAR) Plan
and Agreement (incorporated herein by reference from Exhibit
4.5 to the Registrant's Quarterly Report on Form 10-Q dated
May 14, 1999 (File No. 000-24131)).
10.1 Revised Customer Referral Agreement by and among Enterbank
Holdings, Inc., Enterprise Bank and Moneta Group Investment
Advisors, Inc. (incorporated herein by reference to the
Registrant's Annual Report on Form 10-K for the period ended
December 31, 1998 (File No. 000-24131)).
11.1 Statement regarding computation of per share earnings. <F1>
27.1 Financial Data Schedule. (EDGAR only) <F1>
(b). The Company filed no current reports on Form 8-K during the six
months ended June 30, 1999.
<FN>
- -----------
<F1> Filed Herewith
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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 11th day of August,1999.
ENTERBANK HOLDINGS, INC.
By: _________________________________
Fred H. Eller
Chief Executive Officer
By: _________________________________
James C. Wagner
Chief Financial Officer
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