UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
For the fiscal year ended December 31, 2006
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
For the transition period from to
Commission file number 001-15373
ENTERPRISE FINANCIAL SERVICES CORP
Incorporated in the State of Delaware
I.R.S. Employer Identification # 43-1706259
Address: 150 North Meramec
Clayton, MO 63105
Telephone: (314) 725-5500
___________________
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]
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, and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See
definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer: [ ]
Non-accelerated filer: [ ]
Accelerated filer: [X]
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act
Yes [ ] No [X]
The aggregate market value of the common stock held by non-affiliates of the Registrant was approximately $297,931,197,
based on the closing price of the common stock of $29.75 on February 21, 2007, as reported by the NASDAQ National
Market.
As of February 21, 2007, the Registrant had outstanding 11,769,854 of outstanding common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required for Part III of this report is incorporated by reference to the Registrant’s Proxy Statement for the
2007 Annual Meeting of Shareholders.
ENTERPRISE FINANCIAL SERVICES CORP
2006 ANNUAL REPORT ON FORM 10-K
Page
Part I
Item 1: Business.......................................................................................................................................... 1
Item 1A: Risk Factors ................................................................................................................................... 6
Item 1B: Unresolved SEC Comments .......................................................................................................
Item 2: Properties......................................................................................................................................
Item 3: Legal Proceedings ........................................................................................................................
Item 4: Submission of Matters to Vote of Security Holders.....................................................................
8
8
8
8
Part II
Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities....................................................................................................................
9
Item 6: Selected Financial Data ................................................................................................................ 11
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations....... 12
Item 7A: Quantitative and Qualitative Disclosures About Market Risk...................................................... 36
Item 8: Financial Statements and Supplementary Data ............................................................................. 36
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ....... 36
Item 9A: Controls and Procedures............................................................................................................... 36
Item 9B: Other Information ......................................................................................................................... 36
Part III
Item 10: Directors, Executive Officers and Corporate Governance ........................................................... 37
Item 11: Executive Compensation. ............................................................................................................. 37
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters .................................................................................................................................. 37
Item 13: Certain Relationships and Related Transactions, and Director Independence ............................. 37
Item 14: Principal Accountant Fees and Services....................................................................................... 37
Part IV
Item 15: Exhibits, Financial Statement Schedules ..................................................................................... 37
Management’s Report on Internal Control over Financial Reporting ................................... 38
Report of Independent Registered Public Accounting Firm................................................... 39
Consolidated Financial Statements ......................................................................................... 41
Signatures .................................................................................................................................................... 74
Exhibit Index ............................................................................................................................................... 75
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Readers should note that in addition to the historical information contained herein, some of the information in this
report contains forward-looking statements within the meaning of the federal securities laws. Forward-looking
statements typically are identified with use of terms such as “may,” “will,” “expect,” “anticipate,” “estimate,”
“potential,” “could”: and similar words, although some forward-looking statements are expressed differently. You
should be aware that the Company’s actual results could differ materially from those contained in the forward-
looking statements due to a number of factors, including: burdens imposed by federal and state regulation, changes
in accounting regulation or standards of banks; credit risk; exposure to general and local economic conditions;
risks associated with rapid increase or decrease in prevailing interest rates; consolidation within the banking
industry; competition from banks and other financial institutions; our ability to attract and retain relationship
officers and other key personnel and technological developments; all of which could cause the Company’s actual
results to differ from those set forth in the forward-looking statements.
Other factors that could cause results to differ from expected results include the acquisition of Millennium, the
integration of our recent acquisition of NorthStar and our recent acquisition of Clayco, all of which could result in
costs and expenses that are greater, or benefits that are less, than we currently anticipate, or the assumption of
unanticipated liabilities.
Readers are cautioned not to place undue reliance on our forward-looking statements, which reflect management’s
analysis only as of the date of the statements. The Company does not intend to publicly revise or update forward-
looking statements to reflect events or circumstances that arise after the date of this report. Readers should
carefully review all disclosures we file from time to time with the Securities and Exchange Commission which are
available on our website at www.enterprisebank.com.
PART I
ITEM 1: BUSINESS
General
Enterprise Financial Services Corp (“EFSC” or “the Company”), a Delaware corporation, is a financial holding
company headquartered in St. Louis, Missouri. At December 31, 2006, our wholly owned subsidiary, Enterprise
Bank & Trust (“Enterprise” or “the Bank”), a Missouri chartered trust company with banking powers, was the
largest publicly held bank, in asset size, headquartered in St. Louis, Missouri, with $1.5 billion in assets. Enterprise
is a regional bank primarily serving the St. Louis and Kansas City metropolitan areas.
The Company’s stated mission is “to guide our clients to a lifetime of financial success.” We have established an
accompanying corporate vision “to build an exceptional company that clients value, shareholders prize and where
our associates flourish.” These tenets are fundamental to the Company’s business strategies and operations.
Enterprise is highly focused on serving the needs of private businesses, their owner families and other
professionals. This is achieved through two primary lines of business: commercial banking and wealth
management. We offer full product lines in each line of business.
The commercial banking line of business offers a broad range of business and personal banking services. Lending
services include commercial, commercial real estate, financial and industrial development, real estate construction
and development, residential real estate, and consumer loans. A wide variety of deposit products and a complete
suite of treasury management services complement our lending capabilities.
The wealth management line of business provides fee-based corporate and personal financial consulting, advisory
and trust services to our target markets. Corporate consulting services are focused in the areas of retirement plans,
management compensation and management succession planning. Personal financial consulting includes estate
planning, investment management and retirement planning. In 2005, we acquired controlling interest in Millennium
Brokerage Group, LLC (“Millennium”), a life insurance advisory and brokerage operation serving life agents,
banks, CPA firms, property and casualty groups and financial advisors. Millennium’s capabilities, market reach
and industry presence have significantly enhanced our wealth management business line and opened new wholesale
marketing opportunities for the Company while expanding our fee income sources.
Our executive offices are located at 150 North Meramec, Clayton, MO 63105 and our telephone number is (314)
725-5500.
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Available Information
The Company’s Internet website is www.enterprisebank.com. Various reports provided to the Securities and
Exchange Commission (“SEC”), including our annual reports, quarterly reports, current reports and proxy
statements are available free of charge on our website. These reports are made available as soon as reasonably
practicable after they are filed with or furnished to the SEC.
2006 Acquisitions
On July 5, 2006, the Company completed the acquisition of NorthStar Bancshares, Inc. and its wholly owned
subsidiary, NorthStar Bank N.A. (“NorthStar”), a $187.5 million banking company in Kansas City, MO, for $36.0
million in EFSC stock and cash. NorthStar Bancshares, Inc. was merged into Enterprise Financial Services Corp
on the acquisition date. In October 2006, we successfully integrated NorthStar’s systems and accounts into
Enterprise Bank & Trust’s and converted four of five NorthStar branches to Enterprise branches. One NorthStar
branch was closed.
As a result of the NorthStar acquisition, at December 31, 2006 the Bank’s assets in the Kansas City market grew to
approximately $400.0 million, operating from six branches.
On November 22, 2006, the Company entered into a definitive agreement to acquire Kansas City-based Clayco
Banc Corporation (“Clayco”) for $37.0 million in EFSC stock and cash. Clayco is the parent company of the
$201.9 million Great American Bank (“Great American”) with branches in DeSoto, KS and Claycomo, MO. The
transaction closed on February 28, 2007. We do not expect to integrate Great American into Enterprise Bank &
Trust until early 2008.
With the acquisition of Clayco, assets in the Kansas City market will total approximately $600.0 million – roughly
a threefold increase since year-end 2005.
See Note 2 – Acquisitions and Note 4 - Subsequent Events in this filing for more information.
Business Strategy
Our general business strategy is to generate superior shareholder returns by concentrating on private businesses,
their owner families and other success-minded individuals and providing comprehensive financial services through
banking and wealth management lines of business.
Key success factors in pursuing this strategy include a focused and relationship-oriented distribution and sales
approach, emphasis on growing wealth management revenues, aggressive credit and interest rate risk management,
advanced technology and tightly managed expense growth.
Building long-term client relationships – The Bank’s historical growth strategy has been client relationship driven.
The Bank continuously seeks to add clients who fit our target market of business owners and associated families.
Those relationships are maintained, cultivated and expanded over time. This strategy enables the Bank to attract
clients with significant and growing borrowing needs, in tandem with the Bank’s increasing capacity to fund client
loan requests. The Bank’s officers are typically highly experienced and trained to establish and develop long-term
relationships. As a result of its long-term relationship orientation, the Bank is able to fund loan growth primarily
with core deposits from its business and professional clients. This is supplemented by borrowing from the Federal
Home Loan Bank, and by issuing brokered certificates of deposits, priced at or below the Bank’s alternative cost of
funds.
Growing Trust business – Enterprise Trust, a division of the Bank, has grown to $1.6 billion in assets under
administration in eight years by offering fiduciary and financial advisory services. We employ a full complement
of attorneys, certified financial planners, estate planning professionals, as well as other investment professionals
who offer a broad range of services for business owners and high net worth individuals. Employing an intensive,
personalized methodology, Enterprise Trust representatives assist clients in defining lifetime goals and designing
plans to achieve them. Consistent with the Company’s long-term relationship strategy, Trust representatives
maintain close contact with clients ensuring follow up, discipline, and appropriate adjustments as circumstances
change. The results have been excellent, as measured by client satisfaction, rapid growth, and contributions to
Company earnings.
Wholesale distribution opportunities – Historically, we have distributed products and services directly to clients
through local offices of the Bank. However, the application of newer technologies to the delivery of bank and trust
products, coupled with the increasing trend toward consolidation of financial services, has created an opportunity
for the Company to pursue a wholesale distribution strategy to complement our direct operations. In a wholesale
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arrangement, Enterprise distributes products and services indirectly to clients through an intermediary, such as
another bank, financial services firm or financial advisor.
Our acquisition of Millennium is one example of how we are executing our wholesale strategy. Millennium
provides life insurance products and related consulting services to other independent life insurance agents, CPA
firms, banks, property & casualty insurance agents and financial advisors.
As another component of this wholesale strategy, the Company has applied to the Office of Thrift Supervision for a
federal savings bank charter with trust-only authority. This charter, if approved, will allow the Company to offer
its trust advisory and fiduciary services, through both direct and wholesale distribution, on a nationwide basis.
The Bank also offers selected deposit products through several existing wholesale distribution arrangements.
Capitalizing on technology – We view our technological capabilities to be a competitive advantage. Our systems
provide Internet banking, expanded treasury management products, checks and document imaging, as well as a 24-
hour voice response system. Other services currently offered by the Bank include controlled disbursements,
repurchase agreements and sweep investment accounts. Our treasury management suite of products blends
advanced technology and personal service, often creating a competitive advantage over larger, nationwide banks.
Technology is also utilized extensively in internal systems, operational support functions to improve customer
service, and management reporting and analysis.
Maintaining asset quality – Senior Management and the head of Credit administration monitor our asset quality
through regular reviews of loans. In addition, the loan portfolio is subject to ongoing monitoring by a loan review
function that reports directly to the audit committee of our board of directors.
The Bank’s investment policy is designed to enhance its net income and return on equity through: prudent
management of risk; ensuring liquidity to meet cash-flow requirements; managing interest rate risk; ensuring
availability of collateral for public deposits, advances and repurchase agreements; and to seek asset diversification.
Through our Asset/Liability Management Committee (“ALCO”), Bank liquidity is managed by structuring the
maturity dates of investments to maintain an appropriate relationship between assets and liabilities while
maximizing interest rate spreads. Accordingly, the ALCO monitors the sensitivity of assets and liabilities with
respect to changes in interest rates and maturities and directs the overall acquisition and allocation of funds. ALCO
also utilizes derivative financial instruments to assist in the management of interest rate sensitivity by modifying
the re-pricing, maturity and option characteristics of certain assets and liabilities.
Expense management – The Company is focused on leveraging its current expense base and measures the
“efficiency ratio” as a benchmark for improvement. The efficiency ratio is equal to noninterest expense divided by
total revenue (net interest income plus noninterest income). Continued improvement is targeted to maintain strong
earnings per share growth and generate higher returns on equity.
Market Areas and Approach to Geographic Expansion
The Bank has four banking facilities in St. Louis metropolitan area. The St. Louis region enjoys a stable, diverse
economic base and is ranked the 18th largest MSA in the United States. It is an attractive market for us with nearly
60,000 privately held businesses and over 80,000 households with investible assets of $1.0 million or more. As
noted previously, we are the largest publicly-held, locally headquartered bank in this market.
In 2006 the Company substantially strengthened its market position in Kansas City. Kansas City is also a rich
private company market with over 48,000 businesses and over 54,000 households with investible assets of $1.0
million or more. As mentioned previously, the Company almost doubled its size in Kansas City in 2006. The
planned acquisition of Clayco Banc Corporation will increase the Company’s assets in the Kansas City market to
roughly $600.0 million on a pro-forma basis, making Enterprise one of the fastest growing banks in the Kansas City
market.
The Company, as part of its expansion effort, plans to continue its strategy of operating relatively fewer offices
with a larger asset base per office, emphasizing commercial banking and wealth management and employing
experienced staff who are compensated on the basis of performance and customer service.
By virtue of its Millennium subsidiary and other wholesale distribution operations, subject to applicable regulatory
restrictions, the Company provides services beyond St. Louis and Kansas City in markets across the United States.
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Competition
The Company and its subsidiaries operate in highly competitive markets. Our geographic markets are served by a
number of large multi-bank holding companies with substantial capital resources and lending capacity. Many of
the larger banks have established specialized units, which target private businesses and high net worth individuals.
Also, both the St. Louis and Kansas City markets are experiencing an increase in de novo banks, which have either
opened or are in the application stage. In addition to other financial holding companies and commercial banks, we
compete with credit unions, investment managers, brokerage firms, and other providers of financial services and
products.
Supervision and Regulation
The Company and the Bank are subject to state and federal banking laws and regulations which impose specific
requirements or restrictions on and provide for general regulatory oversight with respect to virtually all aspects of
operations. These laws and regulations are intended to protect depositors, and shareholders to some extent. To the
extent that the following summary describes statutory or regulatory provisions, it is qualified in its entirety by
reference to the particular statutory and regulatory provisions. Any change in applicable laws or regulations may
have a material effect on the business and prospects of the Company. The numerous regulations and policies
promulgated by the regulatory authorities create a difficult and ever-changing atmosphere in which to operate. The
Company and the Bank commit substantial resources in order to comply with these statutes, regulations and
policies. The Company is unable to predict the nature or the extent of the effect on its business and earnings that
fiscal or monetary policies, economic control, or new federal or state legislation may have in the future.
Millennium and the investment management industry in general are subject to extensive regulation in the United
States at both the federal and state level, as well as by self-regulatory organizations such as the National
Association of Securities Dealers, Inc. ("NASD"). The Securities and Exchange Commission is the federal agency
that is primarily responsible for the regulation of investment advisers. Millennium is licensed to sell insurance,
including variable insurance policies, in various states and is subject to regulation by the NASD. This regulation
includes supervisory and organizational procedures intended to assure compliance with securities laws, including
qualification and licensing of supervisory and sales personnel and rules designed to promote high standards of
commercial integrity and fair and equitable principles of trade.
The Holding Company
The Company is a financial holding company registered under the Bank Holding Company Act of 1956, as
amended (“BHCA”). As a financial holding company, the Company is subject to regulation and examination by
the Federal Reserve Board, and is required to file periodic reports of its operations and such additional information
as the Federal Reserve may require. In order to remain a financial holding company, the Company must continue
to be considered well managed and well capitalized by the Federal Reserve and have at least a “satisfactory” rating
under the Community Reinvestment Act. See “Capital Resources” in the Management Discussion and Analysis for
more information on our capital adequacy and “Enterprise Bank – Community Reinvestment Act” below for more
information on Community Reinvestment.
Acquisitions: With certain limited exceptions, the BHCA requires every financial holding company or bank holding
company to obtain the prior approval of the Federal Reserve before (i) acquiring substantially all the assets of any
bank, (ii) acquiring direct or indirect ownership or control of any voting shares of any bank if, after such
acquisition, it would own or control more than 5% of the voting shares of such bank (unless it already owns or
controls the majority of such shares), or (iii) merging or consolidating with another bank holding company. Federal
legislation permits bank holding companies to acquire control of banks throughout the United States.
Permissible Activities: The Gramm-Leach-Bliley Act of 1999 (“GLBA”) eliminates many of the restrictions placed
on the activities of certain qualified financial or bank holding companies. A financial holding company such as
EFSC can expand into wide variety of financial services, including securities activities, insurance and merchant
banking without the prior approval of the Federal Reserve.
Privacy Regulation: GLBA also imposes restrictions on the Company and the Bank regarding the sharing of
customer non-public personal information with non-affiliated third parties unless the customer has had an
opportunity to opt out of the disclosure. GLBA also imposes periodic disclosure requirements concerning the
Company and the Bank policies and practices regarding data sharing with affiliated and non-affiliated parties.
Source of Strength; Cross-Guarantee. In accordance with Federal Reserve policy, we are expected to act as a
source of financial strength to the Bank and to commit resources to support the Bank. The Federal Reserve takes
the position that in implementing this policy, it may require us to provide financial support when we otherwise
would not consider ourselves able to do so.
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Sarbanes-Oxley Act. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (“SOX”).
The stated goals of SOX are to increase corporate responsibility, to provide for enhanced penalties for accounting
and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and
reliability of corporate disclosures made pursuant to the securities laws. The changes are intended to allow
shareholders to monitor the performance of companies and directors more easily and efficiently.
SOX generally applies to all companies, both U.S. and non-U.S., that file or are required to file periodic reports
with the SEC under the Securities Exchange Act of 1934 and includes specific additional disclosure requirements
and new corporate governance rules. The Act addresses, among other matters, (i) certification of financial
statements by the chief executive officer and the chief financial officer, (ii) management assessment of internal
controls with the issuer’s auditor attesting to and reporting on such assessment, (iii) the forfeiture of certain bonuses
in the event of a restatement of financial results. In addition, public companies whose securities are listed on a
national securities exchange must satisfy the following additional requirements: (i) the company’s audit committee
must appoint and oversee the company’s auditors, (ii) each member of the company’s audit committee must be
independent, (iii) the company’s audit committee must establish procedures for receiving complaints regarding
accounting, internal accounting controls and audit-related matters, (iv) the company’s audit committee must have
the authority to engage independent advisors and (v) the company must provide appropriate funding to its audit
committee, as determined by the audit committee.
Enterprise Bank & Trust
The Bank is a Missouri trust company with banking powers. It is not a member of the Federal Reserve System.
The Missouri Division of Finance and the Federal Deposit Insurance Corporation (“FDIC”) are primary regulators
for the Bank. These regulatory authorities regulate or monitor all areas of the Bank’s operations, including security
devices and procedures, adequacy of capitalization and loss reserves, loans, investments, borrowings, deposits,
mergers, issuance of securities, payment of dividends, interest rates payable on deposits, interest rates or fees
chargeable on loans, establishment of branches, corporate reorganizations, maintenance of books and records, and
adequacy of staff training to carry on safe lending and deposit gathering practices. The Bank must maintain certain
capital ratios and is subject to limitations on aggregate investments in real estate, bank premises, and furniture and
fixtures.
Transactions with Affiliates and Insiders: The Bank is subject to the provisions of Regulation W promulgated by
the Federal Reserve, which encompasses Sections 23A and 23B of the Federal Reserve Act. Regulation W places
limits and conditions on the amount of loans or extensions of credit to, investments in, or certain other transactions
with, affiliates and on the amount of advances to third parties collateralized by the securities or obligations of
affiliates. Regulation W also prohibits, among other things, an institution from engaging in certain transactions
with certain affiliates unless the transactions are on terms substantially the same, or at least as favorable to such
institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated
companies.
Community Reinvestment Act: The Community Reinvestment Act (“CRA”) requires that, in connection with
examinations of financial institutions within its jurisdiction, the FDIC shall evaluate the record of the financial
institutions in meeting the credit needs of their local communities, including low and moderate income
neighborhoods, consistent with the safe and sound operation of those institutions. These factors are also considered
in evaluating mergers, acquisitions, and applications to open a branch or facility. The Company has a satisfactory
rating under CRA.
USA Patriot Act: On October 26, 2001, President Bush signed into law the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA PATRIOT
Act"). Among its other provisions, the USA PATRIOT Act requires each financial institution to: (i) establish an
anti-money laundering program; (ii) establish due diligence policies, procedures and controls with respect to its
private banking accounts and correspondent banking accounts involving foreign individuals and certain foreign
banks; and (iii) implement certain due diligence policies, procedures and controls with regard to correspondent
accounts in the United States for, or on behalf of, a foreign bank that does not have a physical presence in any
country. In addition, the USA PATRIOT Act contains a provision encouraging cooperation among financial
institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and
organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities.
Check 21: The Check Clearing for the 21st Century Act (“Check 21”) was signed into law on October 28, 2003,
and became effective on October 28, 2004. Check 21 is designed to foster innovation in the payments system and to
enhance its efficiency by reducing some of the legal impediments to check clearing. The law facilitates check
clearing by creating a new negotiable instrument called a substitute check, which permits banks to clear original
checks, to process check information electronically, and to deliver substitute checks to banks that want to continue
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receiving paper checks. A substitute check is the legal equivalent of the original check and includes all the
information contained on the original check. The law does not require banks to accept checks in electronic form nor
does it require banks to use the new authority granted by Check 21 to create substitute checks.
Limitations on Loans and Transaction: The Federal Reserve Act generally imposes certain limitations on
extensions of credit and other transactions by and between banks that are members of the Federal Reserve and other
affiliates (which includes any holding company of which a bank is a subsidiary and any other non-bank subsidiary
of such holding company). Banks that are not members of the Federal Reserve are also subject to these limitations.
Further, federal law prohibits a bank holding company and its subsidiaries from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of property or the furnishing of services.
Other Regulations: Interest and certain other charges collected or contracted for by the Bank are subject to state
usury laws and certain federal laws concerning interest rates. The Bank’s loan operations are also subject to certain
federal laws applicable to credit transactions, such as the federal Truth-In-Lending Act governing disclosures of
credit terms to consumer borrowers; the Home Mortgage Disclosure Act of 1975 requiring financial institutions to
provide information to enable the public and public officials to determine whether a financial institution is fulfilling
its obligation to help meet the housing needs of the community it serves; the Equal Credit Opportunity Act
prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; the Fair Credit
Reporting Act of 1978 governing these and provision of information to credit reporting agencies; the Fair Debt
Collection Act governing the manner in which consumer debts may be collected by collection agencies; the
Soldiers’ and Sailors Civil Relief Act of 1940, governing the repayment terms of, and property rights underlying
obligations of persons in military service; and the rules and regulations of the various federal agencies charged with
the responsibility of implementing such federal laws. The deposit operations of the Bank are also subject to the
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and
prescribes procedures for complying with administrative subpoenas of financial records, and the Electronic Funds
Transfer Act and Regulation E issued by the Federal Reserve Board to implement that act, which governs automatic
deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of
automated teller machines and other electronic banking services.
Deposit Insurance: The deposits of the Bank are currently insured by the FDIC to a maximum of $100,000 per
depositor, subject to certain aggregation rules. The FDIC establishes rates for the payment of premiums by
federally insured banks for deposit insurance. An insurance fund is maintained for commercial banks, with
insurance premiums from the industry used to offset losses from insurance payouts when banks and thrifts fail. The
FDIC has adopted a risk-based deposit insurance premium system for all insured depository institutions, including
the Bank, which requires premiums from a depository institution based upon its capital levels and risk profile, as
determined by its primary federal regulator on a semiannual basis.
ITEM 1A: RISK FACTORS
At any given time, the Company is subject to any number of risk factors that may affect the market price of the
Company’s stock. Some of the specific risks include the following:
The Bank’s allowance for loan losses may be inadequate, which could impair our earnings. The Bank’s allowance
for loan losses may not be adequate to cover actual loan losses and if the Bank is required to increase its reserve,
current earnings will be reduced. Our experience shows that some borrowers either will not pay on time or will not
pay at all, which will require the Bank to charge-off the defaulted loan or loans. We provide for losses by reserving
what we believe to be an adequate amount to absorb any probable inherent losses. A charge-off reduces the Bank’s
allowance for loan losses. If the Bank’s reserves were insufficient, it would be required to increase reserves by
recording a larger provision for loan losses, which would reduce earnings for that period.
Changes in economic conditions could cause an increase in delinquencies and non-performing assets, including
loan charge-offs, which in turn may negatively affect the Company’s income and growth. Demand for loans may
decrease during economic downturns as a result of, among other things, an increase in unemployment, a decrease in
real estate values or increases in interest rates. These factors could depress our earnings and consequently our
financial condition because:
customers may not want or need the Company’s products and services;
•
• borrowers may not be able to repay their loans;
•
•
the value of the collateral securing the Bank’s loans to borrowers may decline; and
the quality of the Bank’s loan portfolio may decline.
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Any of these scenarios could cause an increase in delinquencies and non-performing assets or require us to charge-
off a percentage of loans and/or increase the provisions for loan losses, which would reduce our earnings.
A prolonged flat or inverted yield curve may reduce our net income and cash flows. The interest rate yield curve is
normally upward sloping where absolute interest rates are higher as the maturity of the financial instrument
lengthens. During 2006, the curve became inverted where rates were lower on longer-term maturities. If this
condition persists throughout 2007, we will likely experience continued compression of our interest rate spread and
related net interest rate margin, which would have a negative impact on our profitability.
Because the Bank competes primarily on the basis of the interest rates it offers depositors and the terms of loans it
offers borrowers, the Bank’s margins could decrease if it were required to increase deposit rates or lower interest
rates on loans in response to competitive pressure. The Bank faces intense competition both in making loans and
attracting deposits. It competes primarily on the basis of its depository rates, the terms of the loans it originates and
the quality of its financial and depository services. This competition has made it more difficult for the Bank to
make new loans and at times has forced us to offer higher deposit rates in our market areas. We expect competition
to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of
consolidation in the financial services industry. Technological advances, for example, have lowered barriers to
market entry, enabled banks to expand their geographic reach by providing services over the Internet and enabled
non-depository institutions to offer products and services that traditionally have been provided by banks. Recent
changes in federal banking law permit affiliation among banks, securities firms and insurance companies, which
also will change the competitive environment in which we conduct business. Some of the institutions with which
we compete are significantly larger than us and, therefore, have significantly greater resources.
A real estate downturn in our geographic markets could hurt our business because a majority of our loans are
secured by real estate. If real estate prices decline the value of real estate collateral securing our loans could be
reduced. Our ability to recover on defaulted loans by foreclosing and selling real estate collateral would be
diminished and we would likely suffer losses on defaulted loans. As of December 31, 2006, approximately 60% of
the book value of our loan portfolio consisted of loans collateralized by various types of real estate. Substantially
all of our real property collateral is located in Missouri and Kansas. Any such downturn could have a material
adverse effect on our business, financial condition and results of operations.
Recent supervisory guidance on commercial real estate concentrations could restrict our activities and impose
financial requirements or limitations on the conduct of business. The office of the Comptroller of the Currency,
The Board of Governors of the Federal Reserve System and the FDIC recently finalized joint supervisory guidance
on sound risk management practices for concentrations in commercial real estate lending. The guidance is intended
to help ensure that institutions pursuing a significant commercial real estate lending strategy remain healthy and
profitable while continuing to serve the credit needs of the community.
Our commercial real estate portfolio as of December 31, 2006 meets the definition of a commercial real estate
concentration as set forth in the guidelines. If our risk management practices are found to be deficient, it could
result in increased reserves and capital costs.
Recent and possible future acquisitions could involve risks and challenges that could adversely affect our ability to
achieve our profitability goals for acquired businesses or realize anticipated benefits of those acquisitions. We
have experienced strong growth in the past several years and our strategy of future growth, while not dependent on,
might include the acquisition of banking branches, other financial institutions and other wealth management
companies. However, we cannot assure investors that we will be able to identify suitable future acquisition
opportunities or finance and complete any particular acquisition, combination or other transaction on acceptable
terms and prices. There can be no assurance that we will be able to develop and integrate acquired businesses
without adversely affecting our financial performance. In addition, all acquisitions involve a number of risks and
challenges that could adversely affect our ability to achieve anticipated benefits of acquisitions.
Business Continuity Plans may not adequately anticipate all risks. We are subject to events that could impact or
disrupt our business, although our goal is to ensure continuous service delivery to our customers. We have
undertaken an enterprise-wide Business Continuity Plan in order to respond to and guard against this risk.
However, no plan can fully eliminate such risk and there can be no assurance that our Plan will be successful.
Future Government Regulation Could Hinder Future Performance. The Company is a registered financial holding
company under the Bank Holding Company Act of 1956. Accordingly, both the Company and the Bank are
subject to extensive government regulation, legislation and control. These laws limit the manner in which the
Company operates. Management cannot predict whether, or the extent to which, the government and governmental
organizations may change any of these laws or controls. Changes in authoritative accounting guidance by the
7
Financial Accounting Standards Board or other regulatory agencies could affect the Company in ways that are not
currently determinable. Management cannot predict how any of these changes would adversely affect the
Company’s business.
Federal and state law limits the Company’s ability to declare and pay dividends. In addition, the Board of
Governors of the Federal Reserve System may impose restrictions on the Company’s ability to declare and pay
dividends on its common stock.
Employees
At December 31, 2006 we had approximately 329 full-time equivalent employees. None of the Company’s
employees is covered by a collective bargaining agreement. Management believes that its relationship with its
employees is good.
ITEM 1B: UNRESOLVED SEC COMMENTS
Not applicable.
ITEM 2: PROPERTIES
Banking facilities
Our executive offices are located at 150 North Meramec, Clayton, Missouri, 63105. As of December 31, 2006, we
had four banking locations in the St. Louis metropolitan area and six banking locations in the Kansas City
metropolitan area. The Bank owns two of the banking facilities and leases the remainder. In March 2006, the
Company purchased its operations center located in St. Louis County, Missouri. The terms of the leases expire
between 2009 and 2017 and most of the leases include one or more renewal options of 5 years. All the leases are
classified as operating leases. We believe all our properties are in good condition.
Wealth management facilities
Enterprise Trust, a division of the Bank has offices in St. Louis and Kansas City. Expenses related to the space
used by Enterprise Trust are allocated to the Wealth Management segment.
As of December 31, 2006, Millennium had 13 locations in 11 states throughout the United States. The executive
offices are located in Nashville, TN. None of the locations is owned by Millennium. The leases are classified as
operating leases and expire in various years through 2011.
ITEM 3: LEGAL PROCEEDINGS
The Company and its subsidiaries are, from time to time, parties to various legal proceedings arising out of their
businesses. Management believes that there are no such proceedings pending or threatened against the Company or
its subsidiaries which, if determined adversely, would have a material adverse effect on the business, financial
condition, results of operations or cash flows of the Company or any of its subsidiaries.
ITEM 4: SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the quarter ended December 31, 2006.
8
PART II
ITEM 5: MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASE OF EQUITY SECURITIES
Effective February 8, 2005, the Company’s common stock began trading on the NASDAQ National Market under
the symbol “EFSC”. Prior to that date, the common stock was not traded on an exchange but was traded on the
Over-The-Counter Bulletin Board. Below are the dividends declared by quarter along with what the Company
believes are the high and low closing sales prices for the common stock. There may have been other transactions at
prices not known to the Company. As of February 21, 2007, the Company had 835 common stock shareholders of
record and a market price of $29.75 per share. The number of holders of record does not represent the actual
number of beneficial owners of our common stock because securities dealers and others frequently hold shares in
“street name” for the benefit of individual owners who have the right to vote shares.
4th Qtr
3rd Qtr
2nd Qtr
1st Qtr
4th Qtr
3rd Qtr
2nd Qtr
1st Qtr
2006
2005
High
Low
Dividends declared
$
33.87
29.54
0.045
$
31.29
25.46
0.045
$
28.49
24.88
0.045
$
27.40
22.73
0.045
$
23.17
19.58
0.035
$
25.87
20.77
0.035
$
24.71
18.80
0.035
$
20.75
18.17
0.035
Dividends
The holders of shares of common stock of the Company are entitled to receive dividends when declared by the
Company’s Board of Directors out of funds legally available for the purpose of paying dividends. The amount of
dividends, if any, that may be declared by the Company will be dependent on many factors, including future
earnings, bank regulatory capital requirements and business conditions as they affect the Bank. As a result, no
assurance can be given that dividends will be paid in the future with respect to the Company’s common stock. In
addition, the Company currently plans to retain most of its earnings for growth.
Common Stock
The authorized capital stock of the Company consists of 20,000,000 shares of common stock, par value $0.01 per
share. The Company has asked the shareholders to increase the number of authorized common shares to
30,000,0000. The shareholders will vote on this matter at the 2007 Annual Meeting. Please see the Company’s
Proxy Statement for its 2007 annual meeting to be held on Wednesday, April 18, 2007 for more information.
Holders of the common stock are entitled to one vote per share on all matters on which the holders of common
stock are entitled to vote. In all elections of directors, holders of common stock have the right to cast votes equaling
the number of shares of common stock held by such stockholder multiplied by the number of directors to be
elected. All of such votes may be cast for a single director or may be distributed among the number of directors to
be elected, or any two or more directors, as such stockholder elects. Holders of common stock have no preemptive,
conversion, redemption, or sinking fund rights. In the event of a liquidation, dissolution or winding-up of the
Company, holders of common stock are entitled to share equally and ratably in the assets of the Company, if any,
remaining after the payment of all liabilities of the Company.
The Company has authorized the repurchase of up to 500,000 shares of its common stock. In the quarter ended
December 31, 2006, the Company repurchased no shares of its common stock.
See Note 17 – Compensation Plans in this filing for information about securities authorized for issuance under
equity compensation plans.
9
The following Stock Performance Graph and related information should not be deemed “soliciting material” or to
be “filed” with the Securities and Exchange Commission nor shall such performance be incorporated by reference
into any future filings under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended,
except to the extent that the Company specifically incorporates it by reference into such filing.
The following graph compares the Company’s cumulative total shareholder return on its common stock from
December 31, 2001 through December 31, 2006. The graph compares the Company’s common stock with the
NASDAQ Composite and the SNL $1B-$5B Bank Index. The graph assumes an investment of $100.00 in the
Company’s common stock and each index on December 31, 2001 and reinvestment of all quarterly dividends. The
investment is measured as of each subsequent fiscal year end. There is no assurance that the Company’s common
stock performance will continue in the future with the same or similar results as shown in the graph.
STOCK PERFORMANCE GRAPH
Total Return Analysis
Enterprise Financial Services
NASDAQ Composite
SNL $1B-$5B Bank Index
300
250
200
150
100
e
u
l
a
V
x
e
d
n
I
50
12/31/01
12/31/02
12/31/03
12/31/04
12/31/05
12/31/06
Index
Enterprise Financial Services
NASDAQ Composite
SNL $1B-$5B Bank Index
Period Ending
12/31/01
100.00
100.00
100.00
12/31/02
109.41
68.76
115.44
12/31/03
123.27
103.67
156.98
12/31/04
163.97
113.16
193.74
12/31/05
202.36
115.57
190.43
12/31/06
292.56
127.58
220.36
10
ITEM 6: SELECTED FINANCIAL DATA
The following consolidated selected financial data is derived from the Company’s audited financial statements as of
and for the five years ended December 31, 2006. This information should be read in connection with our audited
consolidated financial statements, related notes and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” appearing elsewhere in this report.
(in thousands, except per share data)
EARNINGS SUMMARY:
Interest income
Interest expense
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Minority interest in net income of consolidated subsidiary
Income before income taxes
Income taxes
NET INCOME
PER SHARE DATA:
Net income per share-basic
Net income per share-diluted
Cash dividends per share
Book value per share
BALANCE SHEET DATA:
Year end balances:
Loans
Allowance for loan losses
Goodwill
Intangibles, net
Assets held for sale
Assets
Deposits
Subordinated debentures
Borrowings
Liabilities held for sale
Shareholders' equity
Average balances:
Loans
Earning assets
Assets
Interest-bearing liabilities
Shareholders' equity
SELECTED RATIOS:
Return on average equity
Return on average assets
Efficiency ratio
Average equity to average assets
Yield on average interest-earning assets
Cost of interest-bearing liabilities
Net interest rate spread
Net interest rate margin
Nonperforming loans to total loans
Nonperforming assets to total assets
Net chargeoffs to average loans
Allowance for loan losses to total loans
Dividend payout ratio - basic
2006
Year ended December 31,
2004
2005
2003
2002
$
$
$
$
$
94,418
43,141
51,277
2,127
16,916
41,394
(875)
23,797
8,325
15,472
$
$
68,108
23,541
44,567
1,490
8,967
34,324
(113)
17,607
6,312
11,295
48,893
12,169
36,724
2,212
7,122
29,331
-
12,303
4,088
8,215
43,245
10,544
32,701
3,627
10,091
28,215
-
10,950
4,025
6,925
$
$
$
45,207
14,343
30,864
2,251
5,366
27,364
-
6,615
1,614
5,001
$
1.41
1.36
0.18
11.52
$
1.12
1.05
0.14
8.85
$
0.85
0.82
0.10
7.44
$
0.72
0.70
0.08
6.80
$
0.53
0.52
0.07
6.19
$
1,311,723
16,988
29,983
5,789
-
1,535,587
1,315,508
35,054
40,752
-
132,994
1,159,110
1,300,378
1,385,726
1,055,520
113,000
$
1,002,379
12,990
12,042
4,548
-
1,286,968
1,116,244
30,930
36,931
-
92,605
964,259
1,100,559
1,148,691
859,912
81,511
$
898,505
11,665
1,938
135
-
1,059,950
939,628
20,620
20,164
-
72,726
847,270
967,854
1,008,022
748,434
68,854
$
783,878
10,590
1,938
315
-
907,726
796,400
15,464
24,147
-
65,388
738,572
825,973
868,303
647,087
63,175
$
679,799
8,600
1,938
475
36,401
877,251
716,314
15,464
31,823
50,053
58,810
693,551
779,194
820,730
629,651
55,361
%
13.86
0.98
64.12
7.10
6.25
2.74
3.51
4.11
0.14
0.11
0.02
1.30
12.58
%
11.93
0.81
66.90
6.83
5.10
1.63
3.47
3.84
0.20
0.18
0.13
1.30
11.76
%
10.96
0.80
65.94
7.28
5.29
1.63
3.66
4.01
0.20
0.17
0.22
1.35
11.11
%
9.03
0.61
75.53
6.75
5.84
2.28
3.56
4.00
0.57
0.46
0.14
1.27
13.21
%
13.69
1.12
60.70
8.15
7.33
4.09
3.24
4.01
0.49
0.52
0.10
1.30
12.78
11
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The objective of this section is to provide an overview of the financial condition and results of operations of the
Company for the three years ended December 31, 2006. It should be read in conjunction with the Consolidated
Financial Statements, Notes and other financial data presented elsewhere in this report, particularly the information
regarding the Company’s business operations described in Item 1.
CRITICAL ACCOUNTING POLICIES
The following accounting policies are considered most critical to the understanding of the Company’s financial
condition and results of operations. These critical accounting policies require management’s most difficult,
subjective and complex judgments about matters that are inherently uncertain. Because these estimates and
judgments are based on current circumstances, they may change over time or prove to be inaccurate based on actual
experiences. In the event that different assumptions or conditions were to prevail, and depending upon the severity
of such changes, the possibility of a materially different financial condition and/or results of operations could
reasonably be expected. The impact and any associated risks related to our critical accounting policies on our
business operations are discussed throughout “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” where such policies affect our reported and expected financial results. For a detailed
discussion on the application of these and other accounting policies, see Note 1 – Significant Accounting Policies in
this filing.
The Company has prepared all of the consolidated financial information in this report in accordance with U.S.
generally accepted accounting principles (“U.S. GAAP”). The Company makes estimates and assumptions that
affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the
consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period.
There can be no assurances that actual results will not differ from those estimates.
Allowance for Loan Losses
The Company maintains an allowance for loan losses (“the allowance”), which is intended to be management’s best
estimate of probable inherent losses in the outstanding loan portfolio. The allowance is based on management’s
continuing review and evaluation of the loan portfolio. The review and evaluation combines several factors
including: consideration of past loan loss experience; trends in past due and nonperforming loans; risk
characteristics of the various classifications of loans; existing economic conditions; the fair value of underlying
collateral; and other qualitative and quantitative factors which could affect probable credit losses.
Because current economic conditions can change and future events are inherently difficult to predict, the
anticipated amount of estimated loan losses, and therefore the adequacy of the allowance, could change
significantly. As an integral part of their examination process, various regulatory agencies also review the
allowance for loan losses. These agencies may require that certain loan balances be charged off when their credit
evaluations differ from those of management, based on their judgments about information available to them at the
time of their examination. The Company believes the allowance for loan losses is adequate and properly recorded
in the consolidated financial statements.
Derivative Financial Instruments
The Company uses derivative financial instruments to assist in managing interest rate sensitivity. The derivative
financial instruments used are interest rate swaps. Derivative financial instruments are required to be measured at
fair value and recognized as either assets or liabilities in the consolidated financial statements. Fair value represents
the payment the Company would receive or pay if the item were sold or bought in a current transaction. Fair values
are generally based on market quotes. The accounting for changes in fair value (gains or losses) of a derivative
depends on whether the derivative is designated and qualifies for “hedge accounting.” In accordance with
Statement of Financial Accounting Standards No. 133 (“SFAS No. 133”) Accounting for Derivative Instruments
and Hedging Activities, the Corporation assigns derivatives to one of these categories at the purchase date:
• Cash Flow Hedges – Derivatives designated as cash flow hedges are accounted for at fair value. The effective
portion of the change in fair value is recorded net of taxes as a component of other comprehensive income
(“OCI”) in shareholders’ equity. Amounts recorded in OCI are subsequently reclassified into interest expense
when the underlying transaction affects earnings. The ineffective portion of the change in fair value is recorded
in noninterest income. The swap agreements are accounted for on an accrual basis with the net interest
differential being recognized as an adjustment to interest income or interest expense of the related asset or
liability.
12
• Fair Value Hedges – Derivatives designated as fair value hedges, the fair value of the derivative instrument
and related hedged item are recognized through the related interest income or expense, as applicable, except for
the ineffective portion, which is recorded in noninterest income. All changes in fair value are measured on a
quarterly basis. The swap agreement is accounted for on an accrual basis with the net interest differential being
recognized as an adjustment to interest income or interest expense of the related asset or liability.
• Non-Designated Hedges – Certain economic hedges are not designated as cash flow or as fair value hedges for
accounting purposes. These non-designated derivatives were entered into to provide interest rate protection on
net interest income but do not meet hedge accounting treatment. Changes in the fair value of these instruments
are recorded in interest income at the end of each reporting period.
The judgments and assumptions most critical to the application of this accounting policy are those affecting the
estimation of fair value and hedge effectiveness. Changes in assumptions and conditions could result in greater
than expected inefficiencies that, if large enough, could reduce or eliminate the economic benefits anticipated when
the hedges were established and/or invalidate continuation of hedge accounting. Greater inefficiency and
discontinuation of hedge accounting can result in increased volatility in reported earnings. For cash flow hedges,
this would result in more or all of the change in the fair value of the affected derivative being reported in income.
For fair value hedges, this would result in less or none of the change in the fair value of the derivative being offset
by changes in the fair value of the underlying hedged asset or liability.
Deferred Tax Assets
The Company accounts for income taxes under the asset/liability method. Deferred tax assets and liabilities are
recognized for future tax effects of temporary differences, net operating loss carry forwards and tax credits.
Deferred tax assets are reduced if necessary, by a deferred tax asset valuation allowance. A valuation allowance is
established when in the judgment of management, it is more likely than not that such deferred tax assets will not
become realizable. In this case, the Company would adjust the recorded value of our deferred tax assets, which
would result in a direct charge to income tax expense in the period that the determination is made. Likewise, the
Company would reverse the valuation allowance when realization of the deferred tax asset is expected.
Goodwill and Other Intangible Assets
The Company accounts for goodwill and intangible assets according to Statement of Financial Accounting
Standards (“SFAS”) No. 142 “Goodwill and other Intangible Assets.” The Company tests goodwill and intangible
assets for impairment on an annual basis. Such tests involve the use of estimates and assumptions. Management
believes that the assumptions utilized are reasonable. However, the Company may incur impairment charges
related to goodwill in the future due to changes in business prospects or other matters that could affect our
assumptions. Intangible assets other than goodwill, such as core deposit intangibles, that are determined to have
finite lives are amortized over their estimated remaining useful lives.
The 2006 impairment evaluation of the goodwill and intangible balances did not identify any potential impairment;
therefore, no goodwill or intangible impairment was recorded in 2006. See Note 9 – Goodwill and Intangible
Assets in this filing for more information.
EXECUTIVE SUMMARY
This overview of management’s discussion and analysis highlights selected information in this document and may
not contain all of the information that is important to you. For a more complete understanding of trends, events,
commitments, uncertainties, liquidity, capital resources and critical accounting estimates, you should carefully read
this entire document.
Net income increased 37% to $15.5 million, or $1.36 per fully diluted share compared to $11.3 million or $1.05 per
fully diluted share in 2005. Our four-year annual compound growth rate in earnings per share exceeded 27%.
Banking – During 2006, our banking line of business posted strong loan and deposit growth. We believe this is
especially impressive in light of the intense banking competition in St. Louis and Kansas City. As some of the
newer banks struggled to gain momentum and the larger banks sought to retain market share, we saw a good deal of
aggressive loan and deposit pricing. Throughout 2006, we remained disciplined in our pricing practices in order to
maintain our interest rate margin above 4.0%. We are confident in our ability to compete successfully in this
increasingly competitive environment.
While organic growth remains our primary objective, during 2006, we announced two acquisitions:
• NorthStar Bancshares, Inc. – On July 5, 2006 the Company completed its acquisition of NorthStar
Bancshares, Inc. and it’s wholly owned subsidiary, NorthStar Bank, N.A. On October 6, 2006, NorthStar
Bank was merged into the Bank. The NorthStar purchase expanded our footprint in Kansas City, which
13
was essential for us to become a larger “participant” in that market. Subsequent to announcing the
acquisition, two senior bankers in the Kansas City market agreed to join our team. The NorthStar
acquisition contributed $154 million in loans and $146 million in deposits.
• Clayco Banc Corporation – On November 22, 2006 the Company executed an agreement to acquire Clayco
Banc Corporation and its wholly owned banking subsidiary, Great American Bank for approximately $37.0
million in cash and stock. Clayco is headquartered in DeSoto, Kansas and operates two banking offices,
one in DeSoto, Kansas and one in Claycomo, Missouri. The transaction closed on February 28, 2007.
The staffs and branches of these organizations are expected to provide a stronger platform for our banking and
wealth management businesses in Kansas City. Please refer to Note 2 – Acquisitions and Note 4 – Subsequent
Events in this filing for more information related to the acquisitions.
Below is a summary of 2006 banking highlights:
• Loans – Total portfolio loans grew by $309 million, or 31% and ended the year at $1.3 billion. During
2006, organic loan growth (from original units of the Bank) grew $155 million – 50% higher than 2005
loan growth of $104 million.
• Deposits – Total deposits grew $199 million, or 18% and the bank was able to maintain an attractive
deposit mix, with 18% of the total held in interest free demand deposits. Core deposit growth in 2006 was
in line with our expectations and reflected management’s decision to de-emphasize higher rate certificates
of deposit. Instead, we pursued lower cost transaction and relationship-based accounts primarily through
our Treasury management products and services
• Asset quality – Asset quality was solid. In 2006, we incurred $1.2 million of net charge-offs, or 0.10% of
average loans. Non-performing loans were $6.5 million or 0.49% of portfolio loans. Nine of twelve non-
performing relationships related to the NorthStar acquisition. The allowance for loan losses was $17.0
million, or 1.30%, of portfolio loans vs. $13.0 million (also 1.30%) at the end of 2005.
• Net Interest Rate Margin – During 2006, average interest-earning assets increased $200 million, or 18%.
The fully tax-equivalent net interest rate margin was 4.01% for 2006 versus 4.11% for 2005. The decline
in the net interest rate margin was primarily due to the increasing cost of deposits that more than offset
higher earning asset yields. In addition, a portion of the decline was due to the slightly dilutive impact of
NorthStar’s net interest rate margin.
Wealth Management – In 2006, the Wealth Management line of business delivered strong growth in revenues and
earnings.
• Revenue – Wealth Management revenue increased by $7.3 million, or 112%, due to $6.2 million of
incremental revenue from Millennium. Factoring out Millennium, the Trust business increased income by
$1.0 million or 14% for the year. Assets under administration were $1.635 billion at December 31, 2006,
an 18% increase over December 31, 2005. The growth in Wealth Management revenue improved our ratio
of fee income to revenue from 17% in 2005 to 25% in 2006, consistent with our strategy of steadily
diversifying our revenue sources.
• Earnings – Pre-tax earnings of our Trust business were $1.3 million, an increase of 38% over 2005.
Millennium, in its first full year with Enterprise, accounted for $0.08 of 2006 fully diluted earnings per
share including the cost of acquisition-related debt issued at the Company. Millennium generated $3.5
million of pre-tax earnings before intangible amortization and debt costs.
RESULTS OF OPERATIONS ANALYSIS
Net Interest Income
Comparison of 2006 vs. 2005
Net interest income is the primary source of the Company’s revenue. Net interest income is the difference between
interest income on earning assets, such as loans and securities, and the interest expense on interest-bearing deposits
and other borrowings, used to fund interest earning and other assets. The amount of net interest income is affected
by changes in interest rates and by the amount and composition of interest-earning assets and interest-bearing
liabilities, such as the mix of fixed vs. variable rate loans. When and how often loans and deposits mature and re-
price also impacts net interest income.
Net interest spread and net interest rate margin are utilized to measure and explain changes in net interest income.
Interest rate spread is the difference between the yield on interest-earning assets and the rate paid for interest-
14
bearing liabilities that fund those assets. The net interest rate margin is expressed as the percentage of net interest
income to average interest-earning assets. The net interest rate margin exceeds the interest rate spread because
noninterest-bearing sources of funds (net free funds), principally demand deposits and shareholders’ equity, also
support earning assets.
The Company’s balance sheet and resulting net interest income is essentially neutral to changes in interest rates.
The shift in our loan portfolio over the past year toward a more balanced split between fixed and floating rate loans,
along with higher levels of variable rate liabilities, has naturally increased our protection against significant interest
rate changes, which management deems prudent given the current economic environment.
Net interest income (on a tax equivalent basis) was $52.2 million for 2006, compared to $45.2 million for 2005, an
increase of $7.0 million, or 15%. Total interest income increased $26.6 million while total interest expense
increased $19.6 million.
Average interest-earning assets were $1.3 billion, an increase of $200 million, or 18% over $1.1 billion, for the
same period in 2005. Average loans increased 20%, or $195 million to $1.159 billion from $964 million. For
2006, interest income on loans increased $14.1 million from growth and $11.1 million due to the impact of the rate
environment, for a net increase of $25.2 million versus 2005 (see “Rate/Volume” below.)
Average interest-bearing liabilities increased $196 million, or 23% to $1.056 billion compared to $860 million for
2005. The growth in interest-bearing liabilities resulted from a $172 million increase in interest-bearing deposits, a
$10.0 million increase in subordinated debentures, and a $14 million increase in borrowed funds including Federal
Home Loan Bank (“FHLB”) advances. We intentionally did not pursue higher rate certificates of deposit in our
markets given the current interest rate environment, but continue to pursue lower cost transaction and relationship-
based accounts primarily through our treasury management products and services. This resulted in lower deposit
growth than in the prior year. The combined bank deposit mix remains favorable with demand deposit accounts,
that are non interest-bearing, representing 18% of average total deposits in a competitive deposit rate environment.
For 2006, interest expense on interest-bearing liabilities increased $6.9 million due to this growth while the impact
of rising rates increased interest expense on interest-bearing liabilities by $12.7 million versus 2005.
Net interest rate margin (on a tax equivalent basis) for 2006 was 4.01%, compared to 4.11% in 2005. Competitor
pricing and the interest rate environment drove up the cost of interest-bearing liabilities from 2.74% in 2005 to
4.09% in 2006. The net interest rate margin increases were primarily in money market and consumer certificates of
deposit rates. A portion of the decline in the margin was due to the slightly dilutive impact of NorthStar’s net
interest rate margin.
Comparison of 2005 vs. 2004
Net interest income (on a tax equivalent basis) was $45.2 million for 2005, an increase of $8.0 million or 22% from
2004. Throughout 2005, slightly less than two-thirds of the loan portfolio floated with the prime rate. Throughout
2005, we were asset-sensitive, which means our assets generally re-priced faster than our liabilities. The fed funds
rate increases during late 2004 and 2005 by the Federal Open Markets Committee (“FOMC”) had a positive
influence on our net interest income and margin.
Average interest-earning assets were $1.1 billion in 2005, an increase of $133 million or 14% from 2004. Loans
accounted for the majority of the growth, increasing by $117 million or almost 14% to $964 million on average in
2005. For 2005, interest income on loans increased $7.0 million from growth and $10.7 million due to the impact
of the rate environment, for a net increase of $17.7 million versus 2004.
Average interest-bearing liabilities were $860 million in 2005, an increase of $112 million or 15% from 2004. The
growth in interest-bearing liabilities resulted from an $85 million increase in interest-bearing deposits, a $4 million
increase in subordinated debentures, and a $23 million increase in borrowed funds including FHLB advances. The
growth in earning assets was also supported by a $16 million or 9% increase in average noninterest-bearing
deposits. For 2005, interest expense on interest-bearing liabilities increased $2.4 million due to this growth and the
impact of rising rates increased interest expense on interest-bearing liabilities by $8.9 million versus 2004.
The net interest rate margin for 2005 was 4.11%, compared to 3.84% in 2004. The yield on interest-earning assets
increased 1.15% from 5.10% to 6.25%. The cost of interest-bearing liabilities increased from 1.63% in 2004 to
2.74%. The increase in cost of funds was primarily due to increases in money market and certificate of deposit
rates given competitor pricing and the increasing interest rate environment.
15
Average Balance Sheet
The following table presents, for the periods indicated, certain information related to our average interest-earning
assets and interest-bearing liabilities, as well as, the corresponding interest rates earned and paid, all on a tax
equivalent basis.
The loans and deposits associated with NorthStar are included in the following table for six months of 2006.
2006
Interest
Income/
Expense
Average
Yield/
Rate
Average
Balance
2005
Interest
Income/
Expense
Average
Yield/
Rate
2004
Interest
Income/
Expense
Average
Yield/
Rate
Average
Balance
Average
Balance
For the years ended December 31,
(in thousands)
Assets
Interest-earning assets:
Taxable loans (1)
Tax-exempt loans (2)
Total loans
Taxable investments in debt and equity securities
Non-taxable investments in debt and equity
securities (2)
Short-term investments
Total securities and short-term investments
Total interest-earning assets
Non-interest-earning assets:
Cash and due from banks
Other assets
Allowance for loan losses
Total assets
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing transaction accounts
Money market accounts
Savings
Certificates of deposit
Total interest-bearing deposits
Subordinated debentures
Borrowed funds
Total interest-bearing liabilities
Noninterest-bearing liabilities:
Demand deposits
Other liabilities
Total liabilities
Shareholders' equity
Total liabilities & shareholders' equity
Net interest income
Net interest spread
Net interest rate margin (3)
1,140
28,317
141,268
1,300,378
42,282
58,649
(15,583)
1,385,726
$
$
102,327
496,590
4,164
357,706
960,787
32,704
62,029
1,055,520
207,328
9,878
1,272,726
113,000
1,385,726
$
$
1,130,482
28,628
1,159,110
111,811
$
86,893
2,412
89,305
4,530
$
944,009
20,250
964,259
99,284
$
62,318
1,766
64,084
3,340
7.69%
8.43
7.70
4.05
4.82
5.00
4.25
7.33
55
1,416
6,001
95,306
6.60%
8.72
6.65
3.36
4.03
3.61
3.43
6.25
$
830,267
17,003
847,270
81,949
$
45,082
1,325
46,407
2,374
1,639
36,996
120,584
967,854
62
522
2,958
49,365
5.43%
7.79
5.48
2.90
3.78
1.41
2.45
5.10
61
1,280
4,681
68,765
$
1,035
10,761
31
8,647
20,474
1,348
1,719
23,541
1.18%
2.46
0.70
3.33
2.59
5.88
3.60
2.74
30,031
21,392
(11,255)
1,008,022
$
$
71,568
403,363
4,254
225,529
704,714
19,022
24,698
748,434
184,116
6,618
939,168
68,854
1,008,022
$
$
320
4,614
14
5,050
9,998
1,405
766
12,169
0.45%
1.14
0.33
2.24
1.42
7.39
3.10
1.63
1,514
35,502
136,300
1,100,559
35,603
25,275
(12,746)
1,148,691
$
$
87,560
437,346
4,435
259,852
789,193
22,936
47,783
859,912
200,054
7,214
1,067,180
81,511
1,148,691
$
$
2,332
19,213
57
16,230
37,832
2,343
2,966
43,141
2.28%
3.87
1.37
4.54
3.94
7.16
4.78
4.09
$
52,165
$
45,224
$
37,196
3.24%
4.01
3.51%
4.11
3.47%
3.84
(1) Average balances include non-accrual loans. The income on such loans is included in interest but is recognized only upon receipt.
Loan fees, prior to deferral adjustment, included in interest income are approximately $2,229,000, $1,468,000 and $1,437,000 for the years ended December 31, 2006, 2005, and 2004, respectively.
(2) Non-taxable income is presented on a fully tax-equivalent basis using the combined statutory federal and state income tax rate in effect for each year.
The tax-equivalent adjustments reflected in the above table is approximately $888,000, $658,000, and 472,000 for the years ended December 31, 2006, 2005, and 2004, respectively.
(3) Net interest income divided by average total interest-earning assets.
16
Rate/Volume
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.
The loans and deposits associated with NorthStar are included in the following table for six months of 2006.
(in thousands)
Interest earned on:
Loans
Nontaxable loans (3)
Taxable investments in debt
and equity securities
Nontaxable investments in debt
and equity securities (3)
Short-term investments
Total interest-earning assets
Interest paid on:
Interest-bearing transaction accounts
Money market accounts
Savings
Certificates of deposit
Subordinated debentures
Borrowed funds
Total interest-bearing liabilities
Net interest income
2006 compared to 2005
Increase (decrease) due to
Rate (2)
Volume (1)
Net
2005 compared to 2004
Increase (decrease) due to
Rate (2)
Volume (1)
Net
$
13,414
708
$
11,161
(62)
$
24,575
646
$
6,694
271
$
10,542
170
$
17,236
441
454
736
1,190
548
418
966
(17)
(293)
14,266
$
11
429
12,275
$
(6)
136
26,541
$
(5)
(22)
7,486
$
4
780
11,914
$
(1)
758
19,400
$
$
$
$
$
$
$
200
1,618
(2)
3,858
657
593
6,924
7,342
1,097
6,834
28
3,725
338
654
12,676
(401)
1,297
8,452
26
7,583
995
1,247
19,600
6,941
86
420
1
858
259
813
2,437
5,049
629
5,727
16
2,739
(316)
140
8,935
2,979
715
6,147
17
3,597
(57)
953
11,372
8,028
$
$
$
$
$
$
(1) Change in volume multiplied by yield/rate of prior period.
(2) Change in yield/rate multiplied by volume of prior period.
(3) Nontaxable income is presented on a fully tax-equivalent basis using the combined statutory federal and
state income tax rate in effect for each year.
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.
Provision for loan losses. The provision for loan losses was $2.1 million for 2006 compared to $1.5 million for
2005. The increase was due to stronger loan growth and higher non-performing loan levels.
The provision for loan losses was $1.5 million for 2005 compared to $2.2 million for 2004. The decrease in the
provision for loan losses was due to lower non-performing loan levels, continued strengthening local economies
and continued low delinquency rates.
See the sections below captioned “Loans” And “Allowance for Loan Losses” for more information on our loan
portfolio and asset quality.
17
Noninterest Income
The following table presents a comparative summary of the major components of noninterest income.
Years ended December 31,
(in thousands)
Wealth Management income
Service charges on deposit accounts
Other service charges and fee income
Gain on sale of mortgage loans
Gain on sale of other real estate
(Loss) gain on sale of securities
Miscellaneous income
Total noninterest income
2006
$ 13,809
2,228
617
230
2
-
30
$
16,916
2005
$ 6,525
2,065
464
281
91
(494)
35
$
8,967
2004
$
4,264
2,032
396
262
-
126
42
7,122
$
Change 2006
over 2005
$
7,284
163
153
(51)
(89)
494
(5)
$
7,949
Change 2005
over 2004
2,261
$
33
68
19
91
(620)
(7)
$
1,845
Comparison 2006 vs. 2005
Total Wealth Management income increased 112% during 2006. This includes an incremental increase of $6.2
million of commission income earned by Millennium. Excluding Millennium, Trust revenue increased $1.0
million, or 14% for the year. Our ratio of fee income to total revenue at December 31, 2006 was 25% compared to
17% in 2005. This increase is consistent with our strategy of steadily diversifying our revenue sources. Assets
under administration increased to $1.635 billion in 2006, an 18% increase over 2005.
Increases in Service charges on deposit accounts were primarily due to NorthStar activity along with increased
account activity. These increases were somewhat offset by a rising earnings credit rate on commercial accounts.
Higher fee volumes on debit cards, merchant processing and health savings accounts along with NorthStar deposit
fee income contributed to the increase in Other service charges and fee income.
During the second half of 2005, we elected to reposition a portion of our investment portfolio by selling and
reinvesting approximately $29.0 million of investments. We realized losses of $494,000 on these sales. Increases
in market rates for the two through four-year maturity ranges and the company’s overall interest rate sensitivity
presented an opportunity to strengthen the expected total return on portfolio investments for 2006 and 2007.
The Company sold a foreclosed real estate property during the third quarter of 2005 for a gain of $91,000.
Comparison 2005 vs. 2004
Total Wealth Management revenue increased 53% during 2005. The increase includes $780,000 of commission
income earned by Millennium in 2005 after the October acquisition. Excluding Millennium, Trust revenue
increased $1.5 million, or 35% for the year. The increase was the result of a 25% growth rate in net Trust client
relationships as well as having a full year of revenue generated from the Wealth Products Group (“WPG”) unit.
Favorable market conditions and client mix also factored in this growth. Assets under administration increased
almost $225.0 million in 2005, but were offset by $250.0 million of assets managed in a special common trust fund
account which were distributed to clients as called for by contract in the fourth quarter of 2005.
Service charges on deposit accounts were basically unchanged year over year due to a rising earnings credit rate on
commercial accounts, which was offset by increased account activity.
18
Noninterest Expense
The following table presents a comparative summary of the major components of noninterest expenses.
(in thousands)
Noninterest expense:
Employee compensation and benefits
Occupancy
Furniture and equipment
Data processing
Communications
Director related expense
Meals and entertainment
Marketing and public relations
FDIC and other insurance
Amortization of intangibles
Postage, courier, armored car
Professional, legal, consulting
Other taxes
Other
Total noninterest expense
Years ended December 31,
2006
2005
2004
Change 2006
over 2005
Change 2005
over 2004
$
$
$
$
$
25,247
2,966
1,028
1,431
546
508
1,744
985
574
1,128
845
1,102
437
2,853
41,394
22,130
2,327
821
1,018
295
542
1,181
736
519
346
719
1,237
279
2,174
34,324
18,553
2,090
720
797
245
167
800
661
417
180
659
831
271
2,940
29,331
3,117
639
207
413
251
(34)
563
249
55
782
126
(135)
158
679
7,070
3,577
237
101
221
50
375
381
75
102
166
60
406
8
(766)
4,993
$
$
$
$
$
The Company’s efficiency ratio improved from 64% to 61% in 2006. Noninterest expenses increased 21% or $7.1
million in 2006. Approximately $3.0 million of this increase is related to the addition of Millennium, which was
acquired in October 2005. Noninterest expense also includes $2.5 million of NorthStar expenses incurred since the
July 2006 acquisition. Excluding these amounts, noninterest expenses increased only $1.6 million or 5%.
Comparison of 2006 vs. 2005
Employee compensation and benefits. Our compensation programs reflect our philosophy that carefully selected
associates who are properly trained, directed and motivated will dramatically impact our performance and represent
a sustaining competitive advantage. We compensate our associates in ways to attract and retain top performers,
and to provide base salary, incentives and rewards that incent the behaviors consistent with a high-performing
company. Over the last four years, we have implemented a disciplined process for managing the performance of
our associates against defined business goals and results. The process includes frequent and candid performance
feedback, measures individual contributions, differentiates individual performance and reinforces contribution with
highly differentiated rewards. Two major components of our compensation program are the variable-pay incentive
bonus pool and the Long-Term Incentive Plan (“LTIP”).
Effective January 1, 2005, the Board of Directors adopted a new LTIP. Under the terms of the plan, the Company
awards restricted share units (“RSU’s”) to selected personnel based on the Company’s three year rolling average
increase in earnings per share in comparison to a peer group of approximately 150 financial institutions. RSU’s are
expensed annually as they vest.
Millennium employee compensation and benefits increased $1.3 million over 2005 amounts due to a full year of
expenses versus only two months in 2005. Employee compensation and benefits includes $1.3 million for
NorthStar in 2006. Excluding Millennium and NorthStar, employee compensation and benefits increased 3% or
$543,000. The increase is due to increased salary and related benefits, including LTIP expenses, of existing
associates along with expenses related to new senior level banking associates and new associates in various areas of
our organization including marketing, wealth management and other support areas. These increases were offset by
declines in wealth management commissions and the deferral of direct loan origination costs.
All other expense categories. All other expense categories include $1.2 million for NorthStar in 2006. All other
expense categories include $1.7 million of incremental expenses related to Millennium. Excluding Millennium
and NorthStar, all other noninterest expenses increased $1.1 million, or 9% over 2005.
The addition of Millennium and NorthStar contributed $169,000 and $236,000, respectively, to the increase in
occupancy expense. Occupancy expense also includes scheduled rent increases on various Company facilities and
related leasehold improvements completed at the Operations Center. In December 2006, the Bank’s Kansas City
19
Plaza location moved. This resulted in $200,000 of leasehold improvement write-offs, which were recorded in
Occupancy expense.
Furniture and equipment increases were due to the new St. Charles bank location, Millennium, NorthStar and the
expansion of the Operations Center.
Data processing expenses increased due to upgrades to the Company’s AS400, licensing fee increases for our core
banking system as a result of our increased asset size and increased maintenance fees for various Company systems.
In addition, several new systems designed to improve efficiency in various support areas, such as Finance and
Human Resources, were purchased and implemented in 2006. Expenses incurred to convert NorthStar technology
to our platform have been capitalized and will be amortized according to the Company’s depreciation policies.
Communication expenses increased $100,000 due to Millennium and $71,000 due to NorthStar.
Meals and entertainment increases of $136,000 were related to Millennium. An additional $71,000 was related to
NorthStar. The remaining increase was due to increased travel between St. Louis and Kansas City along with
additional client meetings, including Enterprise University classes, which were held offsite.
Amortization of intangibles related to Millennium was $912,000 in 2006 compared to $152,000 in 2005. In 2006,
NorthStar intangible amortization was $216,000. In 2005, the Company also recognized non-compete expenses
related to the former CEO, who resigned in 2002. See Note 9 – Goodwill and Intangible Assets in this filing for
more information related to the intangible amortization.
Other noninterest expense includes increases in charitable contributions and loan-related expenses along with
increases in general operating expenses such as supplies, publications, and employee education.
Comparison of 2005 vs. 2004
Our efficiency ratio, which expresses noninterest expense, as a percentage of tax-equivalent net interest income and
other income, was 64% for 2005, improved from 67% in 2004. The improved efficiency ratio was due to revenue
growth and cost management across all lines of business. Noninterest expense for 2005 includes three months of
Millennium operations subsequent to the acquisition.
Noninterest expenses grew 17% or $5 million in 2005 over 2004. Excluding expenses incurred for Millennium of
$504,000 and $152,000 of amortization expenses related to the acquisition, noninterest expenses increased $4.3
million, or 15%.
Employee compensation and benefits. 2005 expenses under the Company’s incentive bonus programs, including
the 401(k) match program, which is tied to performance targets, increased $1.3 million over 2004 from $2.9 million
to $4.2 million. Driving this increase were the Company’s EPS growth in 2005, asset quality statistics, and growth
in deposits and wealth management revenue and referrals. Compensation expense related to the RSU’s was
$483,000 in 2005.
Growth in wealth management revenues increased commissions by $594,000. Salaries and benefits of new
associates, annual merit increases, along with increases in medical and disability insurance costs contributed
$784,000 to the increase. Recruiting fees increased $115,000 over 2004. Actual expenses related to the 2004
acceleration of vesting on stock options were $15,000. The remaining increase was attributable to Millennium.
All other expense categories. Excluding the increase in employee compensation and benefits and Millennium, all
other noninterest expenses increased $1 million, or 9% over 2004.
Occupancy expense increases were due to scheduled rent increases on various Company facilities along with a full
year of rent for additional space leased at the Company’s Operation Center and related leasehold improvements
completed at the Operations Center. The new St. Charles City banking location and the addition of Millennium
also contributed to the increase.
Data processing expenses increased due to upgrades to our AS400 computer system, licensing fee increases for our
core banking system as a result of our increased asset size and increased maintenance fees for various Company
systems. Furniture and equipment increases were due to the new St. Charles bank location, Millennium and the
expansion of the Operations Center.
20
The increase in professional, legal and consulting includes acquisition related activities, as well as, expenses for the
further development of our business continuity plan, development of bank products, human resource consulting,
investment management consulting and various legal issues.
Meals and entertainment increases were due to the addition of Millennium, various client related events and more
employee travel between the St. Louis and Kansas City banking locations.
In 2005, director compensation was restructured to more competitive levels including restricted stock units granted
to the directors. Mark to market adjustments for outstanding Stock Appreciation Rights paid to the directors also
increased over 2004.
In 2005 and 2004, the Company recognized non-compete expenses related to the former CEO, who resigned in
2002.
During 2005, our directors and officers liability insurance coverage was renewed which resulted in increased
coverage amounts and insurance premiums. The growth in Bank deposits also increased FDIC insurance expenses.
In 2004, we expensed unamortized debt issuance costs related to the refinancing of $11.0 million of Trust Preferred
Securities (“TRUPS”).
Minority Interest in Net Income of Consolidated Subsidiary
On October 21, 2005, the Company acquired a 60% controlling interest in Millennium. The Company records the
40% non-controlling interest in Millennium, related to Millennium’s results of operations, in minority interest on
the consolidated statements of income. Contractually, the Company is entitled to a priority return of 23.1% pre-tax
on its current $15.0 million investment in Millennium. During 2006, the Company adjusted minority interest by
$861,000 to recognize its priority return in line with its contractual rights.
Income Taxes
In 2006, the Company recorded income tax expense of $8.3 million on pre-tax income of $23.8 million, an
effective tax rate of 35.0%. During 2006, $230,000 of tax reserves were reversed through Income tax expenses
related to certain state tax positions taken in 2002. The expiration of the statute of limitations for the 2002 tax year
warranted this release.
The 2005 effective tax rate for the Company was 35.8% compared to 33.2% in 2004. During 2004 the Company
recognized a $241,000 reversal of the remaining deferred tax valuation allowance related to Merchant Banking
losses in 2001. In addition during 2004, the Company recognized state income tax refunds of $163,000 related to
amendments of prior state income tax returns. Exclusive of these non-recurring items, the effective tax rate in 2004
would have been approximately 36.5%.
FINANCIAL CONDITION
Comparison for the years ended December 31, 2006 and 2005
Total assets at December 31, 2006 were $1.5 billion, an increase of $249 million, or 19%, over total assets of $1.3
billion at December 31, 2005. The increase in total assets was driven by a $309 million, or 31%, increase in loans
with $154 million of the loan increase due to the NorthStar acquisition.
Investment securities were $111 million at December 31, 2006 compared to $136 million at December 31, 2005.
At December 31, 2005, investment securities included $40 million of short-term discount agency securities, which
matured in January 2006 and were not replaced.
Goodwill and intangible assets were $36 million at December 31, 2006, compared to $17 million at December 31,
2005, an increase of $19 million. The increase in goodwill and intangible assets was primarily related to the
purchase of NorthStar. See Note 9 – Goodwill and Intangible Assets in this filing for more information.
At December 31, 2006, deposits were $1.3 billion, an increase of $199 million, or 18%, from $1.1 billion at
December 31, 2005. NorthStar added $146 million, including $61.0 million of Brokered CD’s. Total Brokered
CD’s at December 31, 2006 were $104 million. During 2006, we did not pursue client-based higher rate certificate
of deposits in our markets given the current interest rate environment, and instead pursued lower cost transaction
and relationship-based accounts primarily through our treasury management products and services. This resulted in
lower deposit growth than in prior years. The combined bank deposit mix remains favorable with demand deposits
accounts representing 18% of total deposits in a competitive deposit rate environment.
21
We plan to continue utilizing FHLB advances and brokered certificates of deposit to fund shortfalls due to loan
demand. At December 31, 2006, FHLB advances were $27.0 million compared to $28.6 million at December 31,
2005. There were no short-term FHLB advances outstanding at December 31, 2006 or 2005.
Junior subordinated debentures increased by $4.1 million due to a pooled trust offering that closed on July 29, 2006
through a statutory trust established by the Company. In conjunction with the issuance of the trust preferred
offering, the Company issued $4.0 million in junior subordinated debentures to the trust. The issuance of the
additional junior subordinated debentures was to partially fund the acquisition of NorthStar. The Company also
borrowed $4.0 million against its line of credit with U.S. Bank to help fund the acquisition of NorthStar.
Federal funds (“Fed funds”) sold were $7.1 million at December 31, 2006 compared to $65 million at December
31, 2005. Strong loan fundings near year-end reduced our overall liquidity levels at December 31, 2006.
Fourth Quarter 2006 Discussion
The Company earned $4.4 million in net income for the fourth quarter ended December 31, 2006, a $1.6 million
increase over net income of $2.8 million for the same period in 2005.
The tax-equivalent net interest rate margin was 3.98% for the fourth quarter of 2006 as compared to 4.06% for the
same period in 2005. Net interest income in the fourth quarter of 2006 increased $2.2 million from the fourth
quarter of 2005. This increase in net interest income was the result of a $7.4 million increase in interest income
offset by a $5.2 million increase in interest expense. The yield on average interest-earning assets increased to
7.57% during the fourth quarter of 2006 as compared to 6.66% during the same period in 2005. The cost of
interest-bearing liabilities increased to 4.42% for the fourth quarter of 2006 from 3.27% for the same period in
2005. This increase is attributed mainly to an increase in money market interest rates and certificates of deposit due
to the rate environment.
The provision for loan losses was $350,000 in the fourth quarter of 2006 versus $70,000 in 2005. The increase was
due to stronger loan growth and higher non-performing loan levels.
Noninterest income was $4.7 million during the fourth quarter of 2005, a $2.1 million increase over noninterest
income of $2.6 million for the same period in 2005. Millennium earned $1.9 million of commission income during
fourth quarter 2006 compared to $780,000 during the fourth quarter of 2005. In the fourth quarter of 2005,
$408,000 of net realized losses from the sale of securities were recognized. The remaining increase is due to
increased revenues from the Trust division of the Bank and higher fee volumes associated with debit cards,
merchant processing, health savings accounts and other products.
Noninterest expenses were $11.8 million during the fourth quarter of 2006 versus $9.9 million during the same
period in 2005, a $1.9 million increase. Approximately $530,000 of the increase was related to the addition of
Millennium in late October 2005. Millennium increases included one additional month of expenses (three months
during 2006 versus only two months in 2005) along with increases in salaries, performance-based variable
compensation and various operating expenses. An additional $1.2 million of the increase was related to NorthStar
(including $215,000 of intangible amortization.) The remaining increase was primarily due to additional
compensation expense tied to our incentive bonus programs, which is tied to performance targets such as EPS
growth, deposit and loan growth, asset quality statistics, and increases in wealth management revenue and referrals.
Income tax expense was $2.1 million during the fourth quarter of 2006 versus $1.6 million in the same period in
2005. The effective tax rate was 32.2% for the fourth quarter of 2006 compared to 36.0% for the fourth quarter of
2005. During the fourth quarter of 2006, we released $230,000 of state tax reserves where the statute of limitations
had expired.
22
Loans
Total loans, less unearned loan fees, increased $309 million, or 30.1% during 2006. This includes $154 million in
loans from the acquisition of NorthStar. The Company’s lending strategy emphasizes commercial, residential real
estate, real estate construction and commercial real estate loans to small and medium sized businesses and their
owners in the St. Louis and Kansas City metropolitan markets. Consumer lending is minimal. A common
underwriting policy is employed throughout the Company. Lending to these small and medium sized businesses
are riskier from a credit perspective than lending to larger companies, but the risk tends to be offset with higher
loan pricing and ancillary income from cash management activities.
The Company has a targeted hiring program designed to attract and retain experienced commercial middle market
bankers in both the St. Louis and Kansas City markets. As a result of this strategy the Company has continued to
target larger and more sophisticated commercial and industrial and commercial real estate clients. It is expected
that the Company’s average relationship size will continue to increase, resulting in greater efficiencies, as the same
level of cost can originate and service larger average relationships and their related higher revenues.
The following table sets forth the composition of the Company’s loan portfolio by type of loans (based on call
report classifications) at the dates indicated:
(in thousands)
Commercial and industrial
Real estate:
Commercial
Construction
Residential
Consumer and other
Less: Portfolio loans held for sale
Total Loans
2006
352,914
$
2005
265,488
$
2004
253,594
$
2003
209,928
$
2002
167,842
$
December 31,
576,172
196,851
150,244
35,542
-
1,311,723
$
410,382
138,318
151,575
36,616
-
1,002,379
$
328,986
127,180
149,293
39,452
-
898,505
$
257,202
130,074
150,371
36,303
-
783,878
$
187,044
139,319
189,613
31,275
(35,294)
679,799
$
Commercial and industrial
Real estate:
Commercial
Construction
Residential
Consumer and other
Less: Portfolio loans held for sale
Total Loans
2006
26.9%
43.9%
15.0%
11.5%
2.7%
-
100.0%
December 31,
2005
26.5%
2004
28.2%
40.9%
13.8%
15.1%
3.7%
-
100.0%
36.6%
14.2%
16.6%
4.4%
-
100.0%
2003
26.8%
2002
24.7%
32.8%
16.6%
19.2%
4.6%
-
100.0%
27.5%
20.5%
27.9%
4.6%
-5.2%
100.0%
Commercial and industrial loans are made based on the borrower’s character, experience, general credit strength,
and ability to generate cash flows for repayment from income sources, even though such loans may also be secured
by real estate or other assets. The credit risk related to commercial loans is largely influenced by general economic
conditions and the resulting impact on a borrower’s operations. Commercial and industrial loans are primarily
made to borrowers operating within the manufacturing industry. This industry sector represents approximately
$114 million, or approximately 9% of the Bank’s loan portfolio at December 31, 2006. The largest component
within this industry sector are loans to aerospace product and parts manufacturers.
Real estate loans are also based on the borrower’s character, but more emphasis is placed on the estimated collateral
values. Real estate commercial loans are mainly for owner-occupied business and industrial properties, multifamily
properties, and other commercial properties on which income from the property is the primary source of repayment.
Credit risk on these loan types is managed in a similar manner to commercial loans and real estate construction
loans by employing sound underwriting guidelines. As of December 31, 2006, approximately $285 million of real
estate loans, or 22% of the Bank’s loan portfolio are secured by commercial and multi-family properties that are
located within the Bank’s two primary metropolitan markets. These loans are underwritten based on the cash flow
23
coverage of the property, typically meet the Bank’s loan to value guidelines, and generally require either the limited
or full guaranty of principal sponsors of the credit.
Real estate construction loans, relating to residential and commercial properties, represent financing secured by real
estate under construction for eventual sale. At December 31, 2006, the largest component of this category consists
of loans to residential builders. These loans represent $107 million, or 8%, of the Bank’s total loans. The majority
of these loans are granted to builders within the Bank’s primary markets. The loans are secured by single family
residences, of which, approximately $20 million, are constructed for display or inventory and are not pre-sold. The
Bank requires third party disbursement on the majority of its builder portfolio and the Bank reviews projects
regularly for progress status.
Real estate residential loans include residential mortgages (which consist of loans that, due to size, do not qualify
for conventional home mortgages, that the Company sells into the secondary market and second mortgages) and
home equity lines. Residential mortgage loans are usually limited to a maximum of 80% of collateral value.
Consumer and other loans represent loans to individuals on both a secured and unsecured nature. Credit risk is
controlled by thoroughly reviewing the creditworthiness of the borrowers on a case-by-case basis.
Portfolio loans held for sale relate to loans originated by the Southeast Kansas branches that were sold on April 4,
2003.
Factors that are critical to managing overall credit quality are sound loan underwriting and administration,
systematic monitoring of existing loans and commitments, effective loan review on an ongoing basis, early
identification of potential problems, an adequate allowance for loan losses, and sound non-accrual and charge-off
policies.
Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to
numerous borrowers engaged in similar activities that would cause them to be similarly impacted by economic or
other conditions. At December 31, 2006, no significant concentrations exceeding 10% of total loans existed in the
Company's loan portfolio, except as described above.
24
Loans at December 31, 2006 mature or reprice as follows:
(in thousands)
Fixed Rate Loans (1)
Commercial and industrial
Real estate:
Commercial
Construction
Residential
Consumer and other
Total
Variable Rate Loans (1) (2)
Commercial and industrial
Real estate:
Commercial
Construction
Residential
Consumer and other
Total
Loans (1) (2)
Commercial and industrial
Real estate:
Commercial
Construction
Residential
Consumer and other
Total
In One
Year or Less
Loans Maturing or Repricing
After One
Through
Five Years
After
Five Years
Total
$
37,372
$
90,831
$
4,546
$
132,749
76,441
47,190
16,124
4,744
181,871
$
269,822
22,917
29,865
6,391
419,826
$
35,734
7,324
-
3,240
50,844
$
381,997
77,431
45,989
14,375
652,541
$
$
220,165
$
-
$
-
$
220,165
194,175
119,420
104,255
21,167
659,182
$
-
-
-
-
-
-
-
-
-
-
194,175
119,420
104,255
21,167
659,182
$
$
$
$
257,537
$
90,831
$
4,546
$
352,914
270,616
166,610
120,379
25,911
841,053
$
269,822
22,917
29,865
6,391
419,826
$
35,734
7,324
-
3,240
50,844
$
576,172
196,851
150,244
35,542
1,311,723
$
(1) Loan balances are shown net of unearned loan fees.
(2) Not adjusted for impact of interest rate swap agreements.
As indicated in the above maturity table, half of the lending business is done on a variable rate basis based on prime
or the London Interbank Offered Rate (“LIBOR”.) In addition, most loan originations have one to three year
maturities. While the loan relationship has a much longer life, the shorter maturities allow the Company to revisit
the underwriting and pricing on each relationship periodically.
Fixed rate loans comprise approximately 50% of the loan portfolio at December 31, 2006 versus 36% at the end of
2005. This trend is consistent with the flat to inverted yield curve environment, as borrowers are choosing fixed rate
loans with one to three year terms that have lower interest rates than variable rate alternatives. Management
monitors this mix as part of its interest rate risk management. See “Interest Rate Risk” section.
Allowance for Loan Losses
The loan portfolio is the primary asset subject to credit risk. Credit risk is controlled and monitored through the use
of lending standards, a thorough review of potential borrowers, and ongoing review of loan payment performance.
Active asset quality administration, including early problem loan identification and timely resolution of problems,
further ensures appropriate management of credit risk and minimization of loan losses. Credit risk management for
each loan type is discussed briefly in the section entitled “Loans.”
The allowance for loan losses represents management’s estimate of an amount adequate to provide for probable
credit losses in the loan portfolio at the balance sheet date. Management’s evaluation of the adequacy of the
allowance for loan losses is based on management’s ongoing review and grading of the loan portfolio,
consideration of past loss experience, trends in past due and nonperforming loans, risk characteristics of the various
classifications of loans, existing economic conditions, the fair value of underlying collateral, and other factors that
25
could affect probable credit losses. Assessing these numerous factors involves significant judgment. Management
considers the allowance for loan losses a critical accounting policy (see section “Critical Accounting Policies”).
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 charged to expense.
(in thousands)
2006
2005
2004
2003
2002
At December 31,
Allowance at beginning of period
Acquired allowance for loan losses
Loans charged off:
Commercial and industrial
Real estate:
Commercial
Construction
Residential
Consumer and other
Total loans charged off
Recoveries of loans previously charged off:
Commercial and industrial
Real estate:
Commercial
Construction
Residential
Consumer and other
Total recoveries of loans
Net loans charged off
Provision for loan losses
$
12,990
3,069
$
11,665
-
$
10,590
-
$
8,600
-
$
7,296
-
1,067
25
-
504
2
1,598
362
1
-
31
6
400
1,198
2,127
171
424
-
-
49
644
209
74
-
177
19
479
165
1,490
425
577
-
100
194
1,296
92
-
-
42
25
159
1,137
2,212
1,492
-
-
335
77
1,904
107
66
-
38
56
267
1,637
3,627
700
25
-
417
104
1,246
55
8
-
192
44
299
947
2,251
Allowance at end of period
$
16,988
$
12,990
$
11,665
$
10,590
$
8,600
Average loans
Total loans
Nonperforming loans
$
1,159,110
1,311,723
7,975
$
964,259
1,002,379
1,421
$
847,270
898,505
1,827
$
738,572
783,878
1,548
$
693,551
679,799
3,888
Net charge-offs to average loans
Allowance for loan losses to loans
0.10 %
1.30
0.02 %
1.30
0.13 %
1.30
0.22 %
1.35
0.14 %
1.27
At the acquisition date, the NorthStar allowance for loan losses was $3.1 million or 1.85% of total loans. This
percentage, along with existence of the Reserved Credit Escrow (described in Note 2 – Acquisitions in this filing),
demonstrates the higher level of credit risk inherent in that loan portfolio.
Loans charged off are subject to continuous review, and specific efforts are taken to achieve maximum recovery of
principal, accrued interest, and related expenses.
The Company’s credit management policies and procedures focus on identifying, measuring, and controlling credit
exposure. These procedures employ a lender-initiated system of rating credits, which is ratified in the loan
approval process and subsequently tested in internal loan reviews and regulatory bank examinations. The system
requires rating all loans at the time they are made, at each renewal date and as conditions warrant.
Adversely rated credits, including loans requiring close monitoring, which would normally not be considered
criticized credits by regulators, are included on a monthly loan watch list. Other loans are added whenever any
adverse circumstances are detected which might affect the borrower’s ability to meet the terms of the loan. This
could be initiated by any of the following:
1) delinquency of a scheduled loan payment,
2) deterioration in the borrower’s financial condition identified in a review of periodic financial statements,
3) decrease in the value of collateral securing the loan, or
26
4) change in the economic environment in which the borrower operates.
Loans on the watch list require detailed loan status reports, including recommended corrective actions, prepared by
the responsible loan officer every three months. These reports are then discussed in formal meetings with the
Senior Credit Administration Officer, Chief Credit Officer and Chief Executive Officer of the Bank.
Downgrades of loan risk ratings may be initiated by the responsible loan officer, internal loan review, or the credit
analyst department at any time. Upgrades of certain risk ratings may only be made with the concurrence of the
Senior Credit Administration Officer, Chief Credit Officer and Loan Review Officer.
In determining the allowance and the related provision for loan losses, three principal elements are considered:
1) specific allocations based upon probable losses identified during a quarterly review of the loan portfolio,
2) allocations based principally on the Company’s risk rating formulas, and
3) an unallocated allowance based on subjective factors.
The first element reflects management’s estimate of probable losses based upon a systematic review of specific
loans considered to be impaired. These estimates are based upon collateral exposure, if they are collateral
dependent for collection. Otherwise, discounted cash flows are estimated and used to assign loss.
The second element reflects the application of our loan rating system. This rating system is similar to those
employed by state and federal banking regulators. Loans are rated and assigned a loss allocation factor for each
category that is consistent with our historical losses, adjusted for environmental factors. The higher the rating
assigned to a loan, the greater the allocation percentage that is applied.
The unallocated allowance is based on management’s evaluation of conditions that are not directly reflected in the
determination of the formula and specific allowances. The evaluation of the inherent loss with respect to these
conditions is subject to a higher degree of uncertainty because they may not be identified with specific problem
credits or portfolio segments. The conditions evaluated in connection with the unallocated allowance include the
following:
credit quality trends (including trends in nonperforming loans expected to result from existing conditions);
collateral values;
loan volumes and concentrations;
competitive factors resulting in shifts in underwriting criteria;
specific industry conditions within portfolio segments;
recent loss experience in particular segments of the portfolio;
(cid:131) general economic and business conditions affecting our key lending areas;
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131) bank regulatory examination results; and
(cid:131)
findings of our internal loan review department.
Executive management reviews these conditions quarterly in discussion with our entire lending staff. To the extent
that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the
evaluation date, management’s estimate of the effect of such conditions may be reflected as a specific allowance,
applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a specifically
identifiable problem credit or portfolio segment as of the evaluation date, management’s evaluation of the probable
loss related to such condition is reflected in the unallocated allowance.
Based on this quantitative and qualitative analysis, provisions are made to the allowance for loan losses. Such
provisions are reflected in our consolidated statements of income.
The allocation of the allowance for loan losses by loan category is a result of the analysis above. The allocation
methodology applied by the Company, designed to assess the adequacy of the allowance for loan losses, focuses on
changes in the size and character of the loan portfolio, changes in levels of impaired and other nonperforming
loans, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing
economic conditions, and historical losses on each portfolio category. Because each of the criteria used is subject
to change, the allocation of the allowance for loan losses is made for analytical purposes and is not necessarily
indicative of the trend of future loan losses in any particular loan category. The total allowance is available to
absorb losses from any segment of the portfolio. Management continues to target and maintain the allowance for
loan losses equal to the allocation methodology plus an unallocated portion, as determined by economic conditions
and other qualitative and quantitative factors affecting the Company’s borrowers, as described above.
27
The following table is a summary of the allocation of the allowance for loan losses for the five years ended
December 31, 2006:
2006
2005
Percent by
Category to
Total Loans
26.9
%
43.9
15.0
11.5
2.7
-
100.0
%
Percent by
Category to
Total Loans
26.5
%
40.9
13.8
15.1
3.7
-
100.0
%
Allowance
$
3,172
4,245
1,048
1,774
313
-
2,439
12,990
$
Allowance
$
3,485
5,710
2,927
2,056
513
-
2,296
16,988
$
December 31,
2004
2003
2002
Percent by
Category to
Total Loans
%
28.2
36.6
14.2
16.6
4.4
-
100.0
%
Percent by
Category to
Total Loans
26.8
%
32.8
16.6
19.2
4.6
-
100.0
%
Allowance
$
2,948
3,715
1,099
2,093
245
-
490
10,590
$
Allowance
$
2,948
3,671
1,037
1,903
283
-
1,823
11,665
$
Percent by
Category to
Total Loans
24.7
%
27.5
20.5
27.9
4.6
(5.2)
100.0
%
Allowance
$
2,846
1,903
1,062
2,369
244
-
176
8,600
$
(in thousands)
Commercial and industrial
Real estate:
Commercial
Construction
Residential
Consumer and other
Loans held for sale
Not allocated
Total allowance
Prior to 2004, the methods of calculating the allowance requirements had not changed significantly over time. The
reallocations among different categories of loans that appear between periods were the result of the redistribution of
the individual loans that comprise the aggregate portfolio due to the factors listed above. However, the perception
of risk with respect to particular loans within the portfolio will change over time as a result of the characteristics
and performance of those loans, overall economic and market trends, and the actual and expected trends in
nonperforming loans. Consequently, while there are no specific allocations of the allowance resulting from
economic or market conditions or actual or expected trends in nonperforming loans, these factors are considered in
the initial assignment of risk ratings to loans, subsequent changes to those risk ratings and to a lesser extent in the
size of the unallocated allowance amount.
Beginning in 2004, as a part of an overall effort to further improve its risk assessment; the Company refined its
methodology with special attention to the unallocated allowance. The unallocated allowance is based on factors
that cannot necessarily be associated with a specific loan or loan category. In its 2004 assessment, management
focused on the following factors and conditions:
(cid:131) There is a level of imprecision necessarily inherent in the estimates of expected loan losses, and the
unallocated reserve gives reasonable assurance that this level of imprecision in our formula methodologies
is adequately provided for.
(cid:131) With respect to the real estate sector, management considered the continued weakness in the commercial
office market with vacancy rates continuing to remain high and rents continuing to remain soft.
(cid:131) Pressures to maintain and grow the loan portfolio in a slower economic environment with increasing
competition from de novo institutions and larger competitors have to some degree affected credit granting
criteria adversely. The Company monitors the disposition of all credits, which have been approved through
its Executive Loan Committee in order to better understand competitive shifts in underwriting criteria.
(cid:131) While the Bank’s target client has not changed, the Bank is focusing more of its calling efforts on larger
middle market commercial and industrial companies. This move “up market” results in larger average
loans per client, and generally more complex credit structures.
While the Company has no significant specific industry concentration risk, analysis at the time showed that over
60% of the loan portfolio was dependent on real estate collateral. The Company has policies, guidelines, and
individual risk ratings in place to control this exposure at the transaction level. However, the percentage of the
portfolio secured by commercial real estate increased from 28% at December 31, 2002 to 37% at December 31,
2004. Given the trend of rising rates inherent in the current economic cycle and the likely adverse impacts on
borrowers’ debt service coverage ratios, management believed it was prudent to increase the unallocated allowance
component.
Additionally, the Company continues to be committed to a strategy of acquiring relationships with larger
commercial and industrial companies. The percentage of the portfolio represented by these clients increased from
25% at December 31, 2002 to 28% at December 31, 2004. Management believed it was prudent to increase the
percentage of the unallocated allowance to cover the risks inherent in the higher average loan size of these
relationships.
Finally, management believed that the level of competition for credit relationships had increased substantially over
the prior year in both of our primary markets. During 2004, the entry of National City Bank into the St. Louis
market along with six new banking charters are examples of the increased level of competition. To the extent that
substantially increased levels of competition for credit may inherently result in an increased level of credit risk,
management believed it was prudent to increase the Company’s unallocated allowance component.
28
As a result of the above analysis, management increased the unallocated allowance by $1.3 million from 2003 to
2004. The factors noted for 2004 were still applicable at December 31, 2005 and 2006. Additionally, the
residential real estate markets in both St. Louis and Kansas City are experiencing a slow down in new home sales,
thus affecting both builder profitability and the level of unsold inventory on the market. The potential risks of
softening residential real estate markets have been offset in part by a strengthening commercial and industrial real
estate market in both St. Louis and Kansas City, and the relatively static levels of interest rates in the second half of
2006. The unallocated reserve amount as a percentage of the total reserve has ranged from 14% to 19% in the last
three years, consistent with the various factors noted above.
Nonperforming assets include non-accrual loans, loans with payments past due 90 days or more and still accruing
interest, restructured loans and foreclosed real estate. The following table presents the categories of nonperforming
assets and certain ratios as of the dates indicated:
(in thousands)
Non-accrual loans
Loans past due 90 days or more
and still accruing interest
Restructured loans
Total nonperforming loans
Foreclosed property
Total nonperforming assets
2006
$
6,363
2005
$
1,421
2004
$
1,827
2003
2002
$
1,548
$
2,212
At December 31,
112
-
6,475
1,500
7,975
-
-
1,421
-
1,421
$
-
-
1,827
123
1,950
$
$
-
-
1,548
-
1,548
$
$
907,726
783,878
783,878
-
1,676
3,888
125
4,013
$
$
875,987
679,799
679,924
Total assets
Total loans
Total loans plus foreclosed property
$
1,535,587
1,311,723
1,313,223
$
1,286,968
1,002,379
1,002,379
$
1,059,950
898,505
898,628
Nonperforming loans to loans
Nonperforming assets to loans plus
foreclosed property
Nonperforming assets to total assets
0.49 %
0.14 %
0.20 %
0.20 %
0.57 %
0.61
0.52
0.14
0.11
0.22
0.18
0.20
0.17
0.59
0.46
Allowance for loan losses to nonperforming loans
264.00 %
914.00 %
639.00 %
684.00 %
221.00 %
Nonperforming loans are defined as loans on non-accrual status, loans 90 days or more past due but still accruing,
and restructured loans. Loans are placed on non-accrual status when contractually past due 90 days or more as to
interest or principal payments. Additionally, whenever management becomes aware of facts or circumstances that
may adversely impact the collectibility of principal or interest on loans, it is management’s practice to place such
loans on non-accrual status immediately, rather than delaying such action until the loans become 90 days past due.
Previously accrued and uncollected interest on such loans is reversed and income is recorded only to the extent that
interest payments are subsequently received in cash and a determination has been made that the principal balance of
the loan is collectible. If collectibility of the principal is in doubt, payments received are applied to loan principal.
Loans past due 90 days or more but still accruing interest are also included in nonperforming loans. Loans past due
90 days or more but still accruing are classified as such where the underlying loans are both well secured (the
collateral value is sufficient to cover principal and accrued interest) and are in the process of collection. Also
included in nonperforming loans are “restructured” loans. Restructured loans involve the granting of some
concession to the borrower involving the modification of terms of the loan, such as changes in payment schedule or
interest rate.
Nonperforming loans were $6.5 million at December 31, 2006, an increase of $5.1 million over 2005. Two loans in
the Kansas City market secured by real estate represent $3.6 million of this increase. Six of the remaining ten
relationships on non-accrual at December 31, 2006 and approximately 50% of the nonperforming loan balances
relate to smaller relationships acquired in the NorthStar transaction.
At December 31, 2005, the nonperforming loans consisted of five accounts with two credits accounting for 68% of
the total. At December 31, 2004 and 2003, approximately 36% and 37%, respectively, of the nonperforming loans
related to a printing company and the remainder consisted of five and eight different borrowers, respectively. At
December 31, 2002, $1.2 million of the restructured loans related to an auto dealership that had financial
difficulties.
29
Foreclosed real estate valued at $1.5 million represents several single family residences and lots in Kansas City that
were former NorthStar loan relationships. All properties are presently being marketed for resale either by
residential real estate firms or through our network of residential builders.
The Company’s non-accrual loans and restructured loans meet the definition of “impaired loans” under U.S.
GAAP. As of December 31, 2006, 2005 and 2004, the Company had twelve, five, and eight impaired loan
relationships, respectively, all of which are considered potential problem loans as well.
Management believes that the allowance for loan losses is adequate.
Investment Securities
At December 31, 2006, the investment securities portfolio was $111.2 million, or 7% of total assets. Our debt
securities portfolio is primarily comprised of U.S. government agency obligations, mortgage-backed pools,
collateralized mortgage obligations and municipal bonds. Our equity investments primarily consist of stock in the
FHLB of Des Moines. The size of the investment portfolio is generally 5-10% of total assets and will vary within
that range based on liquidity. Typically, management classifies securities as available for sale to maximize
management flexibility, although securities may be purchased with the intention of holding to maturity. Securities
available-for-sale are carried at fair value, with related unrealized net gains or losses, net of deferred income taxes,
recorded as an adjustment to equity capital.
The table below sets forth the carrying value of investment securities held by the Company at the dates indicated:
(in thousands)
Obligations of U.S. government agencies
Mortgage-backed securities
Municipal bonds
Equity securities
2006
Amount
$
95,452
9,617
1,111
5,030
111,210
$
December 31,
2005
2004
Percent
Of Total
Securities
85.8%
8.6%
1.0%
4.6%
100.0%
Amount
$
117,326
12,953
1,231
4,049
135,559
$
Percent
Of Total
Securities
86.5%
9.6%
0.9%
3.0%
100.0%
Amount
$
98,944
18,514
1,616
2,564
121,638
$
Percent
Of Total
Securities
81.4%
15.2%
1.3%
2.1%
100.0%
At December 31, 2005, Obligations of U.S. government agencies included $40.0 million of short-term discount
agency notes that matured in January 2006. These investments were used as an alternative to overnight funds to
obtain higher yield given the excess liquidity.
The Company had no securities classified as trading at December 31, 2006, 2005 or 2004.
The following table summarizes expected maturity and yield information on the investment portfolio at December
31, 2006:
(in thousands)
Obligations of U.S. government agencies
Mortgage-backed securities
Municipal bonds
Equity securities
Total
Within 1 year
Yield
3.15%
2.93%
2.97%
0.00%
3.15%
Amount
35,540
$
518
365
-
36,423
$
1 to 5 years
5 to 10 years
Amount
59,912
$
8,449
281
-
68,642
$
Yield
4.66%
3.79%
4.37%
0.00%
4.55%
Amount
-
$
650
465
-
1,115
$
Yield
0.00%
3.76%
5.55%
0.00%
4.51%
No Stated Maturity
Amount
-
$
-
-
5,030
5,030
Yield
0.00%
0.00%
0.00%
5.54%
5.54%
$
Total
Amount
95,452
$
9,617
1,111
5,030
111,210
$
Yield
4.10%
3.74%
4.40%
5.54%
4.14%
Yields on tax exempt securities are computed on a taxable equivalent basis using a tax rate of 36%. Expected
maturities will differ from contractual maturities, as borrowers may have the right to call on repay obligations with
or without prepayment penalties.
30
Deposits
The following table shows, for the periods indicated, the average annual amount and the average rate paid by type
of deposit:
(in thousands)
Interest-bearing transaction accounts
Money market accounts
Savings accounts
Certificates of deposit
Noninterest-bearing demand deposits
2006
For the year ended December 31,
2005
Weighted
average rate
2.28%
3.87%
1.37%
4.54%
3.94%
--
3.24%
Average
balance
$
87,560
437,346
4,435
259,852
789,193
200,054
989,247
$
Weighted
average rate
1.18%
2.46%
0.70%
3.33%
2.59%
--
2.07%
$
Average
balance
71,568
403,363
4,254
225,529
704,714
184,116
888,830
$
2004
Weighted
average rate
0.45%
1.14%
0.33%
2.24%
1.42%
--
1.12%
$
Average
balance
102,327
496,590
4,164
357,706
960,787
207,328
1,168,115
$
We continued to experience loan and deposit growth due to aggressive direct calling efforts of relationship officers.
Management has pursued closely-held businesses whose management desires a close working relationship with a
locally-managed, full-service bank. Due to the relationships developed with these customers, management views
large deposits from this source as a stable deposit base. The Company also uses certificates of deposit sold to retail
customers of regional and national brokerage firms (i.e. brokered certificates of deposit) to help fund its growth. At
December 31, 2006 and 2005, the Company had $104 million and $64 million in brokered certificates of deposit,
respectively.
Maturities of certificates of deposit of $100,000 or more are as follows:
(in thousands)
Three months or less
Over three through six months
Over six through twelve months
Over twelve months
Total
Total
$
97,002
50,382
75,388
74,144
296,916
$
Liquidity and Capital Resources
The objective of liquidity management is to ensure the Company has the ability to generate sufficient cash or cash
equivalents in a timely and cost-effective manner to meet its commitments as they become due. Funds are available
from a number of sources, such as from the core deposit base and from loans and securities repayments and
maturities. Additionally, liquidity is provided from sales of the securities portfolio, lines of credit with major
banks, the Federal Reserve and the FHLB, the ability to acquire large and brokered deposits and the ability to sell
loan participations to other banks.
The Company’s liquidity management framework includes measurement of several key elements, such as the loan
to deposit ratio, wholesale deposits as a percentage of total deposits, and various dependency ratios used by
banking regulators. The Company’s liquidity framework also incorporates contingency planning to assess the
nature and volatility of funding sources and to determine alternatives to these sources.
Strong capital ratios, credit quality and core earnings are essential to retaining cost-effective access to the wholesale
funding markets. Deterioration in any of these factors could have an impact on the Company’s ability to access
these funding sources and, as a result, these factors are monitored on an ongoing basis as part of the liquidity
management process.
While core deposits and loan and investment repayments are principal sources of liquidity, funding diversification
is another key element of liquidity management. Diversity is achieved by strategically varying depositor types,
terms, funding markets, and instruments.
31
We manage the parent Company’s liquidity to provide the funds necessary to pay dividends to shareholders, service
debt, invest in the Bank as necessary, and satisfy other operating requirements. The parent Company’s primary
funding sources to meet its liquidity requirements are dividends from subsidiaries, borrowings against its $11
million line of credit with a major bank, and proceeds from the issuance of equity (i.e. stock option exercises).
The Bank is subject to regulations and, among other things, may be limited in its ability to pay dividends or transfer
funds to the parent Company. Accordingly, consolidated cash flows as presented in the consolidated statements of
cash flows may not represent cash immediately available for the payment of cash dividends to the Company’s
shareholders or for other cash needs.
Another source of funding for the parent company includes the issuance of subordinated debentures. In October of
2005, the Company issued $10.0 million of subordinated debentures as part of a TRUPS at a fixed rate of 6.14% for
five years. Following the five-year period, the TRUPS will pay a variable rate of three-month LIBOR plus 1.44%
that reprices quarterly. In July of 2006, the Company issued $4.0 million of subordinated debentures as part of a
TRUPS at a floating rate equal to three-month LIBOR + 1.60%. The TRUPS are classified as subordinated
debentures, but qualify as regulatory capital. The related interest expense is tax-deductible and is recorded as
interest expense in the Company’s consolidated financial statements. See Note 11 – Subordinated Debentures in
this filing for more information.
Investment securities are an important tool to the Company’s liquidity objective. As of December 31, 2006, the
entire investment portfolio was available for sale. Of the $111 million investment portfolio available for sale, $32
million was pledged as collateral for public deposits, treasury, tax and loan notes, and other requirements. The
remaining securities could be pledged or sold to enhance liquidity, if necessary.
The Bank has a variety of funding sources (in addition to key liquidity sources, such as core deposits, loan
repayments, loan participations sold, and investment portfolio sales) available to increase financial flexibility. At
December 31, 2006, the Bank had $130 million available from the FHLB of Des Moines under a blanket loan
pledge, subject to the Bank not being in default on its credit agreement, and $165 million available from the Federal
Reserve under a pledged loan agreement. The Bank also has access to over $70 million in overnight federal funds
lines purchased from various banking institutions. Finally, because the Bank continues to be a “well-capitalized”
institution, it has the ability to sell certificates of deposit through various national or regional brokerage firms, if
needed.
Over the normal course of business, the Company enters into certain forms of off-balance sheet transactions,
including unfunded loan commitments and letters of credit. These transactions are managed through the
Company’s various risk management processes. Management considers both on-balance sheet and off-balance
sheet transactions in its evaluation of the Company’s liquidity. The Company has $480 million in unused loan
commitments as of December 31, 2006. While this commitment level would be very difficult to fund given the
Company’s current liquidity resources, we know that the nature of these commitments is such that the likelihood of
funding demand is very low.
For the year ended December 31, 2006 and 2005, net cash provided by operating activities was materially
consistent. Net cash used in investing activities was $123 million in 2006 versus $132 million in 2005. The
decrease of $9 million was primarily due to a reduction in investment security activity. Net cash provided by
financing activities was $37 million in 2006 versus $206 million in 2005. The change in cash provided by
financing activities is due to less deposit growth in 2006 and paydowns of long-term Federal Home Loan Bank
advances.
Risk-based capital 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 consists of (a) common shareholders’ equity (excluding the unrealized
market value adjustments on the available-for-sale securities and cash flow hedges), (b) qualifying perpetual
preferred stock and related additional paid in capital subject to certain limitations specified by the FDIC, and (c)
minority interests in the equity accounts of consolidated subsidiaries less (d) goodwill, (e) mortgage servicing rights
within certain limits, and (f) any other intangible assets and investments in subsidiaries that the FDIC determines
should be deducted from Tier 1 capital. The FDIC also requires a minimum leverage ratio of 3.0%, defined as the
ratio of Tier 1 capital to average total assets for banking organizations deemed the strongest and most highly rated
by banking regulators. A higher minimum leverage ratio is required of less highly rated banking organizations.
Total capital, a measure of capital adequacy, includes Tier 1 capital, allowance for loan losses, and subordinated
debentures.
32
The following table summarizes the Company’s risk-based capital and leverage ratios at the dates indicated:
(in thousands)
Tier I capital to risk weighted assets
Total capital to risk weighted assets
Leverage ratio (Tier I capital to average assets)
Tangible capital to tangible assets
Tier I capital
Total risk-based capital
At December 31,
2006
2005
2004
9.60%
10.83%
8.87%
6.48%
131,869
148,856
$
$
10.31%
11.55%
8.75%
5.98%
107,538
120,528
9.94%
11.19%
8.44%
6.68%
92,096
103,673
$
$
$
$
Risk Management
Market risk arises from exposure to changes in interest rates and other relevant market rate or price risk. The
Company faces market risk in the form of interest rate risk through transactions other than trading activities.
Market risk from these activities, in the form of interest rate risk, is measured and managed through a number of
methods. The Company uses financial modeling techniques to measure interest rate risk. These techniques
measure the sensitivity of future earnings due to changing interest rate environments. Guidelines established by the
Company’s Asset/Liability Management Committee and approved by the Company’s Board of Directors are used
to monitor exposure of earnings at risk. General interest rate movements are used to develop sensitivity as the
Company feels it has no primary exposure to a specific point on the yield curve. These limits are based on the
Company’s exposure to a 100 basis points and 200 basis points immediate and sustained parallel rate move, either
upward or downward.
Interest Rate Risk
In order to measure earnings sensitivity to changing rates, the Company uses a static gap analysis and earnings
simulation model.
The static gap analysis starts with contractual repricing information for assets, liabilities, and off-balance sheet
instruments. These items are then combined with repricing estimations for administered rate (interest-bearing
demand deposits, savings, and money market accounts) and non-rate related products (demand deposit accounts,
other assets, and other liabilities) to create a baseline repricing balance sheet. In addition, mortgage-backed
securities are adjusted based on industry estimates of prepayment speeds.
33
The following table represents the estimated interest rate sensitivity and periodic and cumulative gap positions
calculated as of December 31, 2006. Significant assumptions used for this table included: loans will repay at
historic repayment rates; interest-bearing demand accounts and savings accounts are interest sensitive due to
immediate repricing, and fixed maturity deposits will not be withdrawn prior to maturity. A significant variance in
actual results from one or more of these assumptions could materially affect the results reflected in the table.
(in thousands)
Interest-Earning Assets
Year 1
Year 2
Year 3
Year 4
Year 5
Beyond
5 years
or no stated
maturity
Total
Investments in debt and equity securities
$
36,261
$
35,618
$
27,680
$
3,580
$
1,927
$
6,144
$
111,210
Interest-bearing deposits
Federal funds sold
Loans (1)
Loans held for sale
1,669
7,066
867,820
2,602
-
-
-
-
149,855
103,611
-
-
-
-
87,806
-
-
-
56,573
-
-
-
46,058
-
1,669
7,066
1,311,723
2,602
Total interest-earning assets
$
915,418
$
185,473
$
131,291
$
91,386
$
58,500
$
52,202
$
1,434,270
Interest-Bearing Liabilities
Savings, NOW and Money market deposits
$
668,672
$
-
$
-
$
-
$
-
$
-
$
668,672
Certificates of deposit (1)
Subordinated debentures
Other borrowings
315,851
24,744
11,007
47,046
-
650
24,297
-
5,050
21,675
-
5,800
2,718
10,310
300
400
-
17,945
411,987
35,054
40,752
Total interest-bearing liabilities
$
1,020,274
$
47,696
$
29,347
$
27,475
$
13,328
$
18,345
$
1,156,465
Interest-sensitivity GAP
GAP by period
Cumulative GAP
Ratio of interest-earning assets to
interest-bearing liabilities
Periodic
Cumulative GAP
$
(104,856)
$
137,777
$
101,944
$
63,911
$
45,172
$
33,857
$
277,805
$
(104,856)
$
32,921
$
134,865
$
198,776
$
243,948
$
277,805
$
277,805
0.90
0.90
3.89
1.03
4.47
1.12
3.33
1.18
4.39
1.21
2.85
1.24
1.24
1.24
(1) Adjusted for the impact of the interest rate swaps.
At December 31, 2006, the Company was asset sensitive on a cumulative basis for all periods except 1 year based
on contractual maturities. Asset sensitive means that assets will reprice faster than liabilities.
Along with the static gap analysis, determining the sensitivity of short-term future earnings to a hypothetical plus or
minus 100 and 200 basis point parallel rate shock can be accomplished through the use of simulation modeling. In
addition to the assumptions used to create the static gap, simulation of earnings includes the modeling of the
balance sheet as an ongoing entity. Future business assumptions involving administered rate products, prepayments
for future rate-sensitive balances, and the reinvestment of maturing assets and liabilities are included. These items
are then modeled to project net interest income based on a hypothetical change in interest rates. The resulting net
interest income for the next 12-month period is compared to the net interest income amount calculated using flat
rates. This difference represents the Company’s earnings sensitivity to a plus or minus 100 basis points parallel rate
shock.
The resulting simulations for December 31, 2006, projected that net interest income would increase by
approximately 0.4% if rates rose by a 100 basis point parallel rate shock, and projected that the net interest income
would decrease by approximately 2.6% if rates fell by a 100 basis point parallel rate shock.
The Company uses interest rate derivative financial instruments as an asset/liability management tool to hedge
mismatches in interest rate exposure indicated by the net interest income simulation described above. They are
used to modify the Company’s exposures to interest rate fluctuations and provide more stable spreads between loan
yields and the rate on their funding sources. At December 31, 2006, the Company had $17 million in notional
amount of outstanding interest rate swaps to reduce interest rate risk. Derivative financial instruments are also
discussed in Note 7 – Derivatives in this filing.
34
Contractual Obligations, Off-Balance Sheet Risk, and Contingent Liabilities
Through the normal course of operations, the Company has entered into certain contractual obligations and other
commitments. Such obligations relate to funding of operations through deposits or debt issuances, as well as leases
for premises and equipment. As a financial services provider, the Company routinely enters into commitments to
extend credit. While contractual obligations represent future cash requirements of the Company, a significant
portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to
the same credit policies and approval process accorded to loans made by the Company.
The required contractual obligations and other commitments at December 31, 2006 were as follows:
(in thousands)
Operating leases
Certificates of deposit
Subordinated debentures
Federal Home Loan Bank advances
Commitments to extend credit
Standby letters of credit
Private equity bank fund
Total
$
10,822
411,987
35,054
26,995
480,071
39,587
250
Less Than
1 Year
$
1,924
315,851
-
1,250
379,407
39,587
-
Over 1 Year
Less than
5 Years
Over
5 Years
$
6,935
96,136
-
7,800
61,292
-
250
$
1,963
-
35,054
17,945
39,372
-
-
The Company also enters into derivative contracts under which the Company either receives cash from or pays cash
to counterparties depending on changes in interest rates. Derivative contracts are carried at fair value on the
consolidated balance sheet with the fair value representing the net present value of expected future cash receipts or
payments based on market interest rates as of the balance sheet date. The fair value of these contracts changes daily
as market interest rates change. Derivative liabilities are not included as contractual cash obligations as their fair
value does not represent the amounts that may ultimately be paid under these contracts.
Effects of New Accounting Standards
In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an Interpretation of FAS No. 109, Accounting for Income Taxes. The interpretation
defines the threshold for recognizing the financial impact of uncertain tax positions in accordance with FAS 109.
A company is required to recognize, in its financial statements, the best estimate of the impact of a tax position only
if that position is “more-likely-than-not” of being sustained on audit based solely on the technical merits of the
position on the reporting date. In evaluating whether the “more-likely-than-not” recognition threshold has been met,
the Interpretation requires the assumption that the tax position will be evaluated during an audit by taxing
authorities. The term “more-likely-than-not” is defined as a likelihood of more than 50 percent. Individual tax
positions that fail to meet the recognition threshold will generally result in either (a) a reduction in the deferred tax
asset or an increase in a deferred tax liability or (b) an increase in a liability for income taxes payable or the
reduction of an income tax refund receivable. The impact may also include both (a) and (b). This Interpretation also
provides guidance on disclosure, accrual of interest and penalties, accounting in interim periods, and transition.
The Interpretation is effective for reporting periods beginning after December 15, 2006. The Company does not
expect FASB Interpretation No. 48 to have a material impact on the Company's financial position or results of
operations.
In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108
(“SAB No. 108”) to clarify consideration of the effects of prior year errors when quantifying misstatements in
current year financial statements for the purpose of quantifying materiality. SAB No. 108 requires issuers to
quantify misstatements using both the “rollover” and “iron curtain” approaches and requires an adjustment to the
current year financial statements in the event that after the application of either approach and consideration of all
relevant quantitative and qualitative factors, a misstatement is determined to be material. SAB No. 108 is effective
for fiscal years beginning after November 15, 2006. We are in the process of determining the effect, if any, that
SAB 108 will have on our consolidated financial statements. The Company’s analysis under SAB No. 108 of prior
year and current year misstatements did not result in any adjustment to prior year or current year financial
statements.
In September 2006, the FASB issued FAS No. 157, Fair Value Measurements. FAS No. 157 defines fair value,
establishes a framework for measuring fair value in generally accepted accounting standards, and expands
disclosures about fair value measurements. FAS No. 157 is effective for financial statements issued for fiscal years
35
beginning after November 15, 2007, and interim periods within those fiscal years. We do not expect that the
adoption of FAS No. 157 will have a material impact on our financial condition or results of operations.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Please refer to “Risk Factors” included in Item 1A and “Market Risk” included in Management’s Discussion and
Analysis under Item 7.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Please refer to Item 15 below.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
ITEM 9A: CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of December 31, 2006, under the supervision and with the participation of the Company’s Chief Executive
Officer (“CEO”) and the Chief Financial Officer (“CFO”), management has evaluated the effectiveness of the
design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15.
Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were
effective as of December 31, 2006, to ensure that information required to be disclosed in the Company’s periodic
SEC filings is processed, recorded, summarized and reported when required. There were no significant changes in
the Company’s internal controls or in the other factors that could significantly affect those controls subsequent to
the date of the evaluation.
Management’s Report on Internal Control over Financial Reporting
Management’s Report on Internal Controls over financial reporting and the audit report of KPMG, the Company’s
independent registered accounting firm, on management’s assessment of internal control over financial reporting
are included in Item 15 of the report and are incorporated in this Item 9A by reference.
The Company is not aware of any information required to be disclosed in a report on Form 8-K during the fourth
quarter covered by their Form 10-K, but not reported, whether or not otherwise required by this Form 10-K.
ITEM 9B: OTHER INFORMATION
36
PART III
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated herein by reference to the Company’s Proxy Statement for its
annual meeting to be held on Wednesday, April 18, 2007.
ITEM 11: EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the Company’s Proxy Statement for its
annual meeting to be held on Wednesday, April 18, 2007.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference to the Company’s Proxy Statement for its
annual meeting to be held on Wednesday, April 18, 2007.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
The information required by this item is incorporated herein by reference to the Company’s Proxy Statement for its
annual meeting to be held on Wednesday, April 18, 2007.
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to the Company’s Proxy Statement for its annual
meeting to be held on Wednesday, April 18, 2007.
PART IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed or incorporated by reference as part of this Report:
Enterprise Financial Services Corp and subsidiaries
1. Financial Statements:
Page Number
Management’s Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
at December 31, 2006 and 2005
Consolidated Statements of Income for the years
ended December 31, 2006, 2005, and 2004
Consolidated Statements of Shareholders’ Equity and Comprehensive Income
for the years ended December 31, 2006, 2005, and 2004
Consolidated Statements of Cash Flows for the
years ended December 31, 2006, 2005, and 2004
Notes to Consolidated Financial Statements
38
39
41
42
43
44
45
2. Financial Statement Schedules
None other than those included in the Notes to Consolidated Financial Statements.
3. Exhibits
See Exhibit Index
37
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over
financial reporting. The Company’s internal control over financial reporting is a process designed under the
supervision of the CEO and CFO to provide reasonable assurance regarding reliability of financial reporting and
preparation of the Company’s financial statements for external reporting purposes in accordance with U.S. GAAP.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting
as of December 31, 2006, based on the criteria set forth by the Committee of Sponsoring Organization of the
Treadway Commission (COSO) in “Internal Control-Integrated Framework.” Based on the assessment,
management determined that, as of December 31, 2006, the Company’s internal control over financial reporting
was effective based on these criteria.
Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2006 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in
their report included in this Form 10-K.
38
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Enterprise Financial Services Corp:
We have audited management's assessment, included in the accompanying Management’s Report on Internal
Control over Financial Reporting that Enterprise Financial Services Corp (the Company) maintained effective
internal control over financial reporting as of December 31, 2006, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company's management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the
Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, evaluating management's
assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective internal control over financial
reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal
Control—Integrated Framework issued by COSO. Also, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in
Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of the Company as of December 31, 2006 and 2005, and the related
consolidated statements of income, shareholders’ equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 2006, and our report dated March 12, 2007 expressed an
unqualified opinion on those consolidated financial statements.
St. Louis, Missouri
March 12, 2007
39
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Enterprise Financial Services Corp:
We have audited the accompanying consolidated balance sheets of Enterprise Financial Services Corp and
subsidiaries (the Company) as of December 31, 2006 and 2005, and the related consolidated statements of income,
shareholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended
December 31, 2006. These consolidated financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of the Company as of December 31, 2006 and 2005, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2006, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the effectiveness of the Company’s internal control over financial reporting as of December 31,
2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission, and our report dated March 12, 2007 expressed an
unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial
reporting.
St. Louis, Missouri
March 12, 2007
40
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31, 2006 and 2005
(In thousands)
Assets
Cash and due from banks
Federal funds sold
Interest-bearing deposits
Total cash and cash equivalents
Investments in debt and equity securities
available for sale, at estimated fair value
Loans held for sale
Portfolio loans
Less: Allowance for loan losses
Portfolio loans, net
Other real estate
Fixed assets, net
Accrued interest receivable
Goodwill
Intangibles, net
Prepaid expenses and other assets
Total assets
Liabilities and Shareholders' Equity
Deposits:
Demand
Interest-bearing transaction accounts
Money market accounts
Savings
Certificates of deposit:
$100 and over
Other
Total deposits
Subordinated debentures
Federal Home Loan Bank advances
Other borrowings
Notes payable
Accrued interest payable
Accounts payable and accrued expenses
Total liabilities
Minority interest in equity of consolidated subsidiary
Shareholders' equity:
Common stock, $.01 par value; authorized
20,000,000 shares; issued and outstanding
11,539,539 shares at December 31, 2006 and
10,458,852 at December 31, 2005.
Additional paid in capital
Unearned compensation
Retained earnings
Accumulated other comprehensive loss
Total shareholders' equity
December 31,
2006
2005
$ 41,558
7,066
1,669
50,293
$
54,118
64,709
84
118,911
111,210
2,602
1,311,723
16,988
1,294,735
1,500
17,050
7,995
29,983
5,789
14,430
1,535,587
$
135,559
2,761
1,002,379
12,990
989,389
-
10,276
5,598
12,042
4,548
7,884
1,286,968
$
$ 234,849
111,725
553,251
3,696
$
229,325
108,712
479,507
3,679
296,916
115,071
1,315,508
35,054
26,995
9,757
4,000
3,468
7,811
1,402,593
-
115
78,026
-
55,445
( 592)
132,994
229,839
65,182
1,116,244
30,930
28,584
6,847
1,500
2,704
7,221
1,194,030
333
105
53,218
( 1,531)
41,950
( 1,137)
92,605
Total liabilities and shareholders' equity
$
1,535,587
$
1,286,968
See accompanying notes to consolidated financial statements
41
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 2006, 2005 and 2004
(In thousands, except per share data)
Interest income:
Interest and fees on loans
Interest on debt and equity securities:
Taxable
Nontaxable
Interest on federal funds sold
Interest on interest-bearing deposits
Dividends on equity securities
Total interest income
Interest expense:
Interest-bearing transaction accounts
Money market accounts
Savings
Certificates of deposit:
$100 and over
Other
Subordinated debentures
Federal Home Loan Bank borrowings
Notes payable and other borrowings
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income:
Wealth Management income
Service charges on deposit accounts
Other service charges and fee income
Gain on sale of mortgage loans
Gain on sale of other real estate
(Loss) gain on sale of securities
Miscellaneous income
Total noninterest income
Noninterest expense:
Employee compensation and benefits
Occupancy
Furniture and equipment
Data processing
Other
Total noninterest expense
Years ended December 31,
2005
2006
2004
$ 88,437
$ 63,448
$ 45,956
4,246
35
1,340
76
284
94,418
2,332
19,213
57
12,386
3,844
2,343
2,523
443
43,141
51,277
2,127
49,150
13,809
2,228
617
230
2
-
30
16,916
25,247
2,966
1,028
1,431
10,722
41,394
3,192
39
1,267
13
149
68,108
1,035
10,761
31
6,925
1,722
1,348
1,581
138
23,541
44,567
1,490
43,077
6,525
2,065
464
281
91
(494)
35
8,967
22,130
2,327
821
1,018
8,028
34,324
2,274
41
520
2
100
48,893
320
4,614
14
3,993
1,057
1,405
725
41
12,169
36,724
2,212
34,512
4,264
2,032
396
262
-
126
42
7,122
18,553
2,090
720
797
7,171
29,331
Minority interest in net income of consolidated subsidiary
(875)
(113)
-
Income before income tax expense
Income tax expense
Net income
23,797
8,325
$ 15,472
17,607
6,312
$ 11,295
12,303
4,088
$ 8,215
Per share amounts:
Basic earnings per share
Basic weighted average common shares outstanding
$ 1.41
10,964
$ 1.12
10,103
$ 0.85
9,696
Diluted earnings per share
Diluted weighted average common shares outstanding
$ 1.36
11,387
$ 1.05
10,747
$ 0.82
10,055
See accompanying notes to consolidated financial statements.
42
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity and Comprehensive Income
Years ended December 31, 2004, 2005, and 2006
(in thousands, except shares)
Balance December 31, 2003
Net income
Change in fair value of investment securities, net of tax
Reclassification adjustment for gains realized in
net income, net of tax
Change in fair value of cash flow hedges, net of tax
Total comprehensive income
Dividends declared ($0.10 per share)
Common stock issued under stock option plans
Income tax benefit from stock options exercised
Noncash compensation attributed to stock option grants
Balance December 31, 2004
Net income
Change in fair value of investment securities, net of tax
Reclassification adjustment for losses realized in
net income, net of tax
Change in fair value of cash flow hedges, net of tax
Total comprehensive income
Dividends declared ($0.14 per share)
Common stock issued under stock option plans,
net of restricted share unit cancellations
Income tax benefit from stock options exercised and
vesting of restricted share units
Acquisition of Millennium Brokerage Group, LLC
Noncash compensation attributed to stock option grants
Amortization of unearned compensation
Balance December 31, 2005
Net income
Change in fair value of investment securities, net of tax
Change in fair value of cash flow hedges, net of tax
Total comprehensive income
Dividends declared ($0.18 per share)
Common stock issued under stock option plans,
net of restricted share unit cancellations
Income tax benefit from stock options exercised and
vesting of restricted share units
Acquisition of NorthStar Bancshares, Inc.
Issuance of common stock shares
Noncash compensation attributed to stock option grants
Noncash compensation attributed to restricted share units
Balance December 31, 2006
See accompanying notes to consolidated financial statements.
Common Stock
Shares
9,618,482
-
-
Amount
96
$
-
-
Additional Paid
in Capital
Retained
earnings
$
39,841
-
-
$
24,832
8,214
-
-
-
-
-
-
159,875
-
-
9,778,357
-
-
-
2
-
-
98
-
-
$
-
-
-
431,334
-
249,161
-
-
10,458,852
-
-
-
-
163,162
-
914,144
3,381
-
-
11,539,539
-
-
-
5
-
2
-
-
105
-
-
-
$
-
1
-
9
-
-
-
115
$
$
-
-
-
1,240
11
234
41,326
-
-
-
-
-
$
-
-
(971)
-
-
-
32,075
11,295
-
-
-
(1,420)
3,634
-
831
5,247
49
600
51,687
-
-
-
$
-
-
-
-
41,950
15,472
-
-
$
-
(1,977)
1,188
525
23,473
86
38
1,029
78,026
-
-
-
-
-
-
55,445
$
$
Accumulated
other
comprehensive
income (loss)
618
$
-
(418)
(83)
(890)
-
-
-
-
(773)
-
(648)
$
201
83
-
-
-
-
-
-
(1,137)
-
282
263
$
-
-
-
-
-
-
-
(592)
$
Total
shareholders'
equity
$
65,387
8,214
(418)
(83)
(890)
6,823
(971)
1,242
11
234
72,726
11,295
(648)
$
201
83
10,931
(1,420)
3,639
$
831
5,249
49
600
92,605
15,472
282
263
16,017
(1,977)
1,189
525
23,482
86
38
1,029
132,994
$
43
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2006, 2005 & 2004
(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation
Provision for loan losses
Net amortization of debt and equity securities
Amortization of intangible assets
Loss (gain) on sale of available for sale investment securities
Mortgage loans originated
Proceeds from mortgage loans sold
Gain on sale of mortgage loans
Decrease in settlement accrual of disputed note
Gain on sale of other real estate
Excess tax benefits of share-based compensation
Stock based compensation
Changes in:
Accrued interest receivable
Accrued interest payable and other liabilities
Other, net
Net cash provided by operating activities
Cash flows from investing activities:
Cash paid for acquisition, net of cash and cash equivalents received
Net increase in loans
Purchases of available for sale debt and equity securities
Proceeds from sales of available for sale debt securities
Proceeds from redemption of equity securities
Proceeds from maturities and principal paydowns on available
for sale debt and equity securities
Proceeds from sales of other real estate
Recoveries of loans previously charged off
Purchases of fixed assets
Net cash used in investing activities
Cash flows from financing activities:
Net (decrease) increase in non-interest bearing deposit accounts
Net increase in interest bearing deposit accounts
Proceeds from issuance of subordinated debentures
Paydown of subordinated debentures
Proceeds from Federal Home Loan Bank advances
Repayments of Federal Home Loan Bank advances
Decrease in other borrowings
Proceeds from notes payable
Paydowns on notes payable
Cash dividends paid on common stock
Excess tax benefits of share-based compensation
Proceeds from the issuance of common stock
Proceeds from the exercise of common stock options
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of period
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
Income taxes
Noncash transactions:
Years ended December 31,
2006
2005
2004
$
15,472
$
11,295
$
8,215
1,901
2,127
39
1,128
-
(57,184)
57,822
(230)
-
(2)
(525)
786
(1,601)
327
(2,663)
17,397
(4,078)
(145,218)
(40,676)
-
6,904
66,722
167
399
(7,591)
(123,371)
1,272
1,490
342
287
494
(65,891)
65,787
(281)
-
(91)
831
649
(1,360)
1,699
(360)
16,163
(8,882)
(104,518)
(165,944)
39,040
4,672
106,786
229
479
(3,505)
(131,643)
996
2,212
1,817
180
(126)
(60,263)
60,998
(262)
(575)
-
11
234
(959)
589
2,015
15,082
-
(116,046)
(351,696)
62,766
2,534
246,244
-
159
(1,723)
(157,762)
(11,785)
53,261
4,124
-
723,534
(725,121)
(6,015)
10,000
(10,745)
(1,977)
525
86
1,470
37,357
(68,618)
118,911
50,293
$
32,042
144,574
10,310
-
301,200
(282,915)
(2,768)
1,500
(250)
(1,420)
-
-
3,638
205,911
90,431
28,480
118,911
$
32,331
110,897
16,496
(11,340)
55,000
(59,201)
(31)
350
(100)
(971)
-
-
1,241
144,672
1,992
26,488
28,480
$
$
42,377
7,896
$
22,502
6,456
$
11,655
3,280
Transfer to other real estate owned in settlement of loans
Common stock issued for acquisition of business
$
-
23,482
-
$
5,249
$
273
-
See accompanying notes to consolidated financial statements.
44
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The more significant accounting policies used by the Company in the preparation of the consolidated financial
statements are summarized below:
Business
Enterprise Financial Services Corp (the “Company” or “EFSC”) is a financial holding company that provides a full
range of banking and wealth management services to individual and corporate customers located in the St. Louis
and Kansas City metropolitan markets through its subsidiary, Enterprise Bank & Trust (the “Bank”). In addition, as
of October 21, 2005, the Company owns 60% of Millennium Brokerage Group, LLC (“Millennium”) through its
wholly-owned subsidiary, Millennium Holding Company, Inc. Millennium is headquartered in Nashville,
Tennessee and operates life insurance advisory and brokerage operations from 13 offices serving life agents, banks,
CPA firms, property and casualty groups, and financial advisors in 49 states. Millennium is included in the Wealth
Management segment along with Enterprise Trust, a division of the Bank, which provides fee-based trust, personal
financial planning, estate planning, and corporate planning services to the Company’s target market.
The Company is subject to competition from other financial and nonfinancial institutions providing financial
services in the markets served by the Company’s subsidiary. Additionally, the Company and the Bank are subject
to the regulations of certain federal and state agencies and undergo periodic examinations by those regulatory
agencies. Millennium and the investment management industry in general are subject to extensive regulation in the
United States at both the federal and state level, as well as by self-regulatory organizations such as the National
Association of Securities Dealers, Inc. The Securities and Exchange Commission is the federal agency that is
primarily responsible for the regulation of investment advisers.
Basis of Financial Statement Presentation
The consolidated financial statements of the Company and its subsidiaries have been prepared in conformity with
U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) and conform to predominant practices within the
banking industry. In preparing the consolidated financial statements, management is required to make estimates
and assumptions, which significantly affect the reported amounts in the consolidated financial statements.
Estimates that are particularly susceptible to significant change in a short period of time include the determination
of the allowance for loan losses, derivative financial instruments, deferred tax assets and goodwill. Actual amounts
could differ from those estimates.
Consolidation
The consolidated financial statements include the accounts of the Company, Bank (100% owned) and Millennium
(60% owned). Acquired businesses are included in the consolidated financial statements from the date of
acquisition. All material intercompany accounts and transactions have been eliminated. Minority ownership
interests are reported in our Consolidated Balance Sheets as a liability. The minority ownership interest of our
earnings or loss, net of tax, is classified as “Minority interest in net income of consolidated subsidiary” in our
Consolidated Statements of Income. For more information, please refer to “Minority Interest in Net Income of
Consolidated Subsidiary” discussed in Item 2 – Management’s Discussion and Analysis of Financial Condition and
Results of Operations included in this filing.
Investments in Debt and Equity Securities
The Company currently classifies investments in debt and equity securities as follows:
• Available for sale - includes debt and marketable equity securities not classified as held to maturity or trading
(i.e., investments which the Company has no present plans to sell but may be sold in the future under different
circumstances).
Debt and equity securities classified as available for sale are carried at estimated fair value. Unrealized holding
gains and losses for available for sale securities are excluded from earnings and reported as a net amount in a
separate component of shareholders’ equity until realized. All previous fair value adjustments included in the
separate component of shareholders’ equity are reversed upon sale.
A decline in the market value of any available for sale security below cost that is deemed other-than-temporary
results in a charge to earnings and the establishment of a new cost basis for the security. To determine whether an
impairment is other-than-temporary, the Company considers whether it has the ability and intent to hold the
investment until a market price recovery and considers whether evidence indicating cost of the investment is
recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for
the impairment, the severity and duration of the impairment, changes in value subsequent to year-end, and
forecasted performance of the investee.
45
For available for sale securities, premiums and discounts are amortized or accreted over the lives of the respective
securities as an adjustment to yield using the interest method. Dividend and interest income is recognized when
earned. Realized gains and losses for securities classified as available for sale are included in earnings and are
derived using the specific identification method for determining the cost of securities sold.
Cash and Cash Equivalents
At December 31, 2006 and 2005, approximately $8,200,000 and $12,600,000, respectively, of cash and due from
banks represented required reserves on deposits maintained by the Bank in accordance with Federal Reserve Bank
requirements.
Loans Held for Sale
The Company provides long-term financing of one-to-four-family residential real estate by originating fixed and
variable rate loans. Long-term, fixed and variable rate loans are sold into the secondary market without recourse.
Upon receipt of an application for a real estate loan, the Company determines whether the loan will be sold into the
secondary market or retained in the Company’s loan portfolio. The interest rates on the loans sold are locked with
the buyer and the Company bears no interest rate risk related to these loans. Mortgage loans that are sold in the
secondary market are sold principally under programs with the Government National Mortgage Association
(“GNMA”) or the Federal National Mortgage Association (“FNMA”). Mortgage loans held for sale are carried at
the lower of cost or fair value, which is determined on a specific identification method. The Company does not
retain servicing on any loans sold, nor did the Company have any capitalized mortgage servicing rights at
December 31, 2006 and 2005. Gains on the sale of loans held for sale are reported net of direct origination fees and
costs in the Company’s consolidated statements of income.
Interest and Fees on Loans
Interest income on loans is accrued to income based on the principal amount outstanding. The recognition of
interest income is discontinued when a loan becomes 90 days past due or a significant deterioration in the
borrower’s credit has occurred which, in management’s opinion, negatively impacts the collectibility of the loan.
Subsequent interest payments received on such loans are applied to principal if any doubt exists as to the
collectibility of such principal; otherwise, such receipts are recorded as interest income. Loans are returned to
accrual status when management believes full collectibility of principal and interest is expected.
Loan origination fees and direct origination costs are deferred and recognized over the lives of the related loans as a
yield adjustment using a method, which approximates the interest method.
Allowance For Loan Losses
The allowance for loan losses is increased by provisions charged to expense and is available to absorb charge offs,
net of recoveries. Management utilizes a systematic, documented approach in determining the appropriate level of
the allowance for loan losses. Management’s approach, which provides for general and specific allowances, is
based on current economic conditions, past losses, collection experience, risk characteristics of the portfolio,
assessments of collateral values by obtaining independent appraisals for significant properties, and such other
factors which, in management’s judgment, deserve current recognition in estimating loan losses.
Management believes the allowance for loan losses is adequate to absorb probable losses in the loan portfolio.
While management uses available information to recognize losses on loans, future additions to the allowance may
be necessary based on changes in economic conditions and other factors. In addition, various regulatory agencies,
as an integral part of the examination process, periodically review the Bank’s loan portfolio. Such agencies may
require the Bank to add to the allowance for loan losses based on their judgments and interpretations of information
available to them at the time of their examinations.
Accounting for Impaired Loans
A loan is considered impaired when it is probable the Bank will be unable to collect all amounts due, both principal
and interest, according to the contractual terms of the loan agreement. The Bank’s non-accrual loans, loans past
due greater than 90 days and still accruing, and restructured loans qualify as “impaired loans.” When measuring
impairment, the expected future cash flows of an impaired loan are discounted at the loan’s effective interest rate.
Alternatively, impairment is measured by reference to an observable market price, if one exists, or the fair value of
the collateral for a collateral-dependent loan. Interest income on impaired loans is recorded when cash is received
and only if principal is considered to be fully collectible.
Other Real Estate
Other real estate represents property acquired through foreclosure or deeded to the Bank in lieu of foreclosure on
loans on which the borrowers have defaulted as to the payment of principal and interest. Other real estate is
46
recorded on an individual asset basis at the lower of cost or fair value less estimated costs to sell. Subsequent
reductions in fair value are expensed or recorded in a valuation reserve account through a provision against income.
Subsequent increases in the fair value are recorded through a reversal of the valuation reserve.
Gains and losses resulting from the sale of other real estate are credited or charged to current period earnings.
Costs of maintaining and operating other real estate are expensed as incurred, and expenditures to complete or
improve other real estate properties are capitalized if the expenditures are expected to be recovered upon ultimate
sale of the property.
Fixed Assets
Buildings, leasehold improvements, and furniture, fixtures, and equipment are stated at cost less accumulated
depreciation and amortization is computed using the straight-line method over their respective estimated useful
lives. Furniture, fixtures and equipment is depreciated over three to ten years and buildings and leasehold
improvements over ten to forty years based upon lease obligation periods.
Goodwill and Other Intangible Assets
Goodwill represents the excess of costs over fair value of assets of businesses acquired. Goodwill and intangible
assets acquired in a purchase business combination and determined to have an indefinite useful life are not
amortized, but instead tested for impairment at least annually. Intangible assets with estimable useful lives are
amortized over their respective estimated useful lives to their estimated residual values, and reviewed for
impairment.
Intangibles, consisting of customer lists and agreements not to compete, are amortized using the straight-line
method over the estimated useful lives of approximately 5 years. Core deposit intangibles are amortized using an
accelerated method over an estimated useful life of approximately 10 years.
Impairment of Long-Lived Assets
Long-lived assets, such as fixed assets, and purchased intangibles subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an
asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of
an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are separately presented in
the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposed group classified as held for sale are presented separately in the
appropriate asset and liability sections of the balance sheet.
Derivative Instruments and Hedging Activities
The Company uses derivative instruments to assist in the management of interest rate sensitivity and to modify the
repricing, maturity and option characteristics of certain assets and liabilities. Generally, the only derivative
instruments used by the Company are interest rate swaps. Derivative instruments are required to be measured at
fair value and recognized as either assets or liabilities in the financial statements. Fair value represents the payment
the Company would receive or pay if the item were sold or bought in a current transaction. Fair values are generally
based on market quotes. The accounting for changes in fair value (gains or losses) of a hedged item is dependent on
whether the related derivative is designated and qualifies for “hedge accounting.” In accordance with Statement of
Financial Accounting Standards No. 133, (“FAS No. 133”) Accounting for Derivative Instruments and Hedging
Activities, the Company assigns derivatives to one of these categories at the purchase date: fair value hedge, cash
flow hedge or non-designated derivatives. FAS No. 133 requires an assessment of the expected and ongoing hedge
effectiveness of any derivative designated a fair value hedge or cash flow hedge. Derivatives are included in other
assets and other liabilities in the Consolidated Statements of Condition.
The following is a summary of the Company’s accounting policies for derivative instruments and hedging
activities.
• Cash Flow Hedges – Derivatives designated as cash flow hedges are accounted for at fair value. The effective
portion of the change in fair value is recorded net of taxes as a component of other comprehensive income
(“OCI”) in shareholders’ equity. Amounts recorded in OCI are subsequently reclassified into interest expense
when the underlying transaction affects earnings. The ineffective portion of the change in fair value is recorded
in noninterest income. The swap agreements are accounted for on an accrual basis with the net interest
differential being recognized as an adjustment to interest income or interest expense of the related asset or
liability.
47
• Fair Value Hedges – Derivatives designated as fair value hedges, the fair value of the derivative instrument
and related hedged item are recognized through the related interest income or expense, as applicable, except for
the ineffective portion, which is recorded in noninterest income. All changes in fair value are measured on a
quarterly basis. The swap agreement is accounted for on an accrual basis with the net interest differential being
recognized as an adjustment to interest income or interest expense of the related asset or liability.
• Non-Designated Hedges – Certain economic hedges are not designated as cash flow or as fair value hedges for
accounting purposes. These non-designated derivatives represent interest rate protection on net interest income
but do not meet hedge accounting treatment. Changes in the fair value of these instruments are recorded in
interest income at the end of each reporting period.
Income Taxes
The Company and its subsidiaries file consolidated federal income tax returns. Deferred tax assets and liabilities
are recognized for the estimated future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be
recovered or settled. A valuation allowance is recognized if the Company determines it is more likely than not that
all or some portion of the deferred tax asset will not be recognized. In estimating accrued taxes, the Company
assesses the relative merits and risks of the appropriate tax treatment considering statutory, judicial and regulatory
guidance in the context of the tax position. Because of the complexity of tax laws and regulations, interpretation
can be difficult and subject to legal judgment given specific facts and circumstances. It is possible that others, given
the same information, may at any point in time reach different reasonable conclusions regarding the estimated
amounts of accrued taxes.
Stock-Based Compensation
The Company maintains a number of stock-based incentive programs, which are discussed in more detail in Note
17 – Compensation Plans in this filing. Prior to 2006, the Company applied the intrinsic value-based method, as
outlined in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, (“APB
No. 25”) and related interpretations, in accounting for stock options granted under these programs. Under the
intrinsic value-based method, no compensation expense was recognized if the exercise price of the Company’s
employee stock options was equal to or greater than the market price of the underlying stock on the date of the
grant. Accordingly, prior to 2006, no compensation cost was recognized in the consolidated statements of income
on stock options granted to employees, since all options granted under the Company’s share incentive programs
had an exercise price equal to the market value of the underlying common stock on the date of the grant.
In 2005, the Company began awarding restricted stock units (“RSU’s”) as part of a new long-term incentive plan.
Beginning in 2005, compensation expense, based on grant date fair value of the RSU’s, is recognized in the
consolidated statements of income over the vesting period.
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R) (“FAS
No. 123(R)”) Share-based Payment. This statement replaces FAS No. 123, Accounting for Stock-Based
Compensation, and supersedes APB No. 25. FAS No. 123(R) requires that all stock-based compensation be
recognized as an expense in the financial statements and that such cost be measured at the grant date fair value for
all equity classified awards. The Company adopted this statement using the modified prospective method, which
requires the Company to recognize compensation expense on a prospective basis for all outstanding unvested
awards. Therefore, prior period financial statements have not been restated. Under this method, in addition to
reflecting compensation expense for share-based awards granted after the adoption date, expense is also recognized
to reflect the remaining service period of awards that had been included in pro forma disclosures in prior periods.
FAS No. 123(R) also requires that excess tax benefits related to stock option exercises be reflected as financing
cash inflows. Therefore, excess tax benefits related to stock option exercises in 2005 and 2004 are reflected in
operating activities. The total income tax benefit recognized for share-based compensation arrangements was
$525,000 in 2006.
48
The following table illustrates the effect on net income if the fair-value-based method had been applied to all
outstanding and unvested awards in each period. The impact of adopting FAS 123(R) increased the compensation
expense in 2006 by $57,000 before income taxes, and had less than a $0.01 impact on basic and diluted earnings
per share.
(In thousands, except per share data)
Net income, as reported
Add total stock-based employee compensation
expense included in reported net income, net
of tax
Deduct total stock-based employee compensation
expense determined under fair-value-based
method for all awards, net of tax
Pro forma net income
Earnings per share:
Basic:
As reported
Pro forma
Diluted:
As reported
Pro forma
Years ended December 31,
2005
2004
$
11,295
$
8,215
393
93
(400)
11,288
$
(3,391)
4,917
$
$
1.12
1.12
$
0.85
0.51
$
1.05
1.05
$
0.82
0.49
Based on the valuation and accounting uncertainties that outstanding options presented under proposed accounting
treatment at the time, and the transition issues associated with the Company’s new Long Term Incentive Plan
(“LTIP”), the Board of Directors accelerated the vesting on the Company’s outstanding stock options during the
fourth quarter of 2004. This action resulted in two financial reporting impacts. First, the remaining fair value of all
outstanding stock options was recognized in 2004 as part of the pro-forma footnote disclosures above. Secondly,
the Company recognized $146,000 of compensation expense in the fourth quarter of 2004 based on the product of
the number of outstanding unvested options times the spread between their weighted average stock price and the
Company stock price on October 1, 2004 times the estimated option forfeiture rate of 9.5%. The forfeiture rate is
based on the Company’s history over the past several years, but actual forfeiture effects in the future are measured
and recognized in expense for any differences versus the estimate.
Cash Flow Information
For purposes of reporting cash flows, the Company considers cash and due from banks, interest-bearing deposits
and any federal funds sold to be cash and cash equivalents.
Reclassification
Certain reclassifications have been made to the 2005 and 2004 amounts to conform to the current year presentation.
Such reclassifications had no effect on previously reported consolidated net income or shareholders’ equity.
New Accounting Standards
In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an Interpretation of FAS No. 109, Accounting for Income Taxes. The interpretation
defines the threshold for recognizing the financial impact of uncertain tax positions in accordance with FAS 109.
A company is required to recognize, in its financial statements, the best estimate of the impact of a tax position only
if that position is “more-likely-than-not” of being sustained on audit based solely on the technical merits of the
position on the reporting date. In evaluating whether the “more-likely-than-not” recognition threshold has been met,
the Interpretation requires the assumption that the tax position will be evaluated during an audit by taxing
authorities. The term “more-likely-than-not” is defined as a likelihood of more than 50 percent. Individual tax
positions that fail to meet the recognition threshold will generally result in either (a) a reduction in the deferred tax
asset or an increase in a deferred tax liability or (b) an increase in a liability for income taxes payable or the
reduction of an income tax refund receivable. The impact may also include both (a) and (b). This Interpretation also
provides guidance on disclosure, accrual of interest and penalties, accounting in interim periods, and transition.
The Interpretation is effective for reporting periods beginning after December 15, 2006. The Company does not
expect FASB Interpretation No. 48 to have a material impact on the Company's financial position or results of
operations.
49
In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108
(“SAB No. 108”) to clarify consideration of the effects of prior year errors when quantifying misstatements in
current year financial statements for the purpose of quantifying materiality. SAB No. 108 requires issuers to
quantify misstatements using both the “rollover” and “iron curtain” approaches and requires an adjustment to the
current year financial statements in the event that after the application of either approach and consideration of all
relevant quantitative and qualitative factors, a misstatement is determined to be material. SAB No. 108 is effective
for fiscal years beginning after November 15, 2006. We are in the process of determining the effect, if any, that
SAB 108 will have on our consolidated financial statements. The Company’s analysis under SAB No. 108 of prior
year and current year misstatements did not result in any adjustment to prior year or current year financial
statements.
In September 2006, the FASB issued FAS No. 157, Fair Value Measurements. FAS No. 157 defines fair value,
establishes a framework for measuring fair value in generally accepted accounting standards, and expands
disclosures about fair value measurements. FAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years. We do not expect that the
adoption of FAS No. 157 will have a material impact on our financial condition or results of operations.
NOTE 2—ACQUISITIONS
Acquisition of NorthStar Bancshares
On July 5, 2006, the Company completed its acquisition of 100% of the total outstanding common stock of Kansas
City-based NorthStar Bancshares, Inc and its wholly owned subsidiary NorthStar Bank NA (“NorthStar”) for
$36,000,000 in EFSC common stock (80%) and cash (20%). The acquisition served to expand the Company’s
banking franchise in the greater Kansas City area. The purchase price for the NorthStar business consisted of:
• $8,000,000 in cash;
• 1,091,500 unregistered shares of EFSC common stock valued at $28,000,000 based on the average closing
share price of EFSC common stock, as quoted on NASDAQ, for the 20 trading days ending two days prior
to the acquisition date;
the assumption by EFSC of a line of credit note of NorthStar, in the principal amount of $3,200,000, which
was paid in full by EFSC on the closing date.
•
While the stated purchase price of NorthStar Bancshares, Inc. was $36,000,000, approximately $4,500,000 of the
consideration is considered “contingent” and is held in an escrow account pending the collection of certain loans.
This effectively reduced loans and other real estate owned and increased goodwill on the balance sheet by the same
amount. In accordance with generally accepted accounting principles, approximately 177,000 shares of EFSC
stock in the escrow account have not been credited to shareholders’ equity or in average shares outstanding when
reporting fully diluted earnings per share. All shares issued by EFSC were issued in reliance upon exemptions from
registration set forth in Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 promulgated under
said Act. As a result, the shares issued for the acquisition are “restricted securities” and may not be offered or sold
in the United States absent registration or an applicable exemption from registration requirements.
The cash portion of the transaction was funded through internally generated funds and borrowing on the
Company’s line of credit. Subsequently, on July 28, 2006, the Company issued $4,000,000 of trust preferred
securities (“TRUPS”) through a newly formed affiliated statutory trust, as further discussed in Note 11 –
Subordinated Debentures in this filing. The TRUPS proceeds were used to pay off a portion of the line of credit
borrowing.
At the time of the acquisition, on a consolidated basis, NorthStar Bancshares, Inc. had assets of $187,500,000,
loans, net of unearned discount, of $167,200,000, deposits of $158,500,000 and stockholders’ equity of
$18,800,000. The assets acquired and liabilities assumed were recorded at their estimated fair value on the
acquisition date. The fair value adjustments represent current estimates and are subject to further adjustments as the
valuation data is finalized. Goodwill, which is not deductible for tax purposes, was $17,800,000. Core deposit
intangibles were approximately $2,400,000 and will be amortized over ten years utilizing an accelerated method.
Core deposit intangibles are not deductible for tax purposes. NorthStar was merged into and with Enterprise Bank
& Trust on October 6, 2006. Please refer to the Form 8-K filed by the Company on July 5, 2006 for more
information.
50
Acquisition and Integration Costs
As of the consummation date, the Company accrued certain costs associated with the acquisition. As of December
31, 2006, the accrued balance was $30,000 and is primarily related to amounts required to terminate several
information technology contracts. As the obligation to make these payments was accrued at the consummation
date, such payments will not have any impact on the consolidated statements of income. The acquisition costs are
reflected in Accounts payable and accrued expenses in the consolidated balance sheets.
Through December 31, 2006, the Bank has also incurred approximately $145,000 of integration costs associated
with the acquisition that have been expensed in the consolidated statements of income. These costs relate
principally to additional costs incurred in conjunction with the information technology conversion of NorthStar.
Reserved Credit Escrow
As part of the acquisition agreement, $4,500,000 of the purchase price was deposited into a “Reserved Credit
Escrow” account. These funds are being held until the Bank receives principal payments or proceeds from the sale
of several identified loans and other real estate. These amounts are considered “contingent consideration” under
U.S. GAAP and therefore, were not and will not be recorded in common stock or additional paid in capital until the
contingency is resolved. The Reserved Credit Escrow amount was split between Loans and Other real estate. It is
considered to be our best estimate, or fair value, of the specific assets. As a result, the Loans and Other real estate
amounts in the opening balance sheet were reduced by escrow amounts.
Acquisition of Millennium Brokerage Group
On October 21, 2005, the Company acquired 60% of Millennium, a Tennessee limited liability company.
Millennium is a national insurance brokerage firm with headquarters in Nashville, Tennessee. Millennium acts as a
wholesale distributor, broker and consultant concerning life insurance products, brokers insurance, and other
investments or financial products. The acquisition was accounted for using the purchase method of accounting, and
accordingly, the results of Millennium’s operations have been included in the consolidated financial statements
since the date of the purchase. The acquisition was completed through Millennium Holding Company, Inc, a
wholly-owned subsidiary of EFSC that was created to consummate the transaction. Millennium continues to
operate under their trade name.
The aggregate purchase price was $15,000,000 consisting of 249,161 shares of EFSC common stock valued at
$5,249,000 and $9,750,000 in cash. Goodwill of $10,293,000, which is deductible for tax purposes, was recorded
as part of the purchase price allocation. Intangible assets consisting of customer and trade name totaling
$4,700,000 were also recorded with a weighted average useful life of approximately 5 years.
The terms of the agreement call for an additional 20% purchase in 2008 and 2010, respectively, for the remaining
interests. The consideration mix between stock and cash for subsequent payouts are at the Company’s discretion
with a maximum of 70% stock. Future payouts up to a maximum of $36,000,000, inclusive of the initial
$15,000,000 payout, are conditioned upon certain pre-tax income performance targets. EFSC is contractually
entitled to a priority return on its investment of 23.1% (pre-tax) before additional distributions to the Millennium
principals.
51
NOTE 3—EARNINGS PER SHARE
Basic earnings per share data is calculated by dividing net income by the weighted average number of common
shares outstanding during the period. Diluted earnings per share reflects the potential dilution of earnings per share
which could occur under the treasury stock method if contracts to issue common stock, such as stock options, were
exercised. The following table presents a summary of per share data and amounts for the periods indicated.
(in thousands, except per share data)
Basic
Net income, as reported
Weighted average common
shares outstanding
Years ended December 31,
2005
2006
2004
$
15,472
$
11,295
$
8,215
10,964
10,103
9,696
Basic earnings per share
$
1.41
$
1.12
$
0.85
Diluted
Net income
Expense related to dilutive stock options and
appreciation rights, net of tax
$
15,472
$
11,295
$
8,215
-
15,472
$
22
11,317
$
(4)
8,211
$
Weighted average common
shares outstanding
Effect of dilutive stock options and restricted share units
Diluted weighted average
common shares outstanding
10,964
423
11,387
10,103
644
10,747
9,696
359
10,055
Diluted earnings per share
$
1.36
$
1.05
$
0.82
As of December 31, 2006, 2005 and 2004, 0, 7,800, and 194,994 options, respectively, were excluded from the
earnings per share calculation because their effect was anti-dilutive. The Company recognizes expense for stock
options granted to non-employees and Stock Appreciation Rights granted to Directors of the Company.
NOTE 4—SUBSEQUENT EVENTS
Acquisition of Clayco Banc Corporation
On February 28, 2007, the Company completed its acquisition of Kansas City-based Clayco Banc Corporation
(“Clayco”) and its wholly owned subsidiary, Great American Bank (“Great American”) for $37 million in EFSC
common stock (60%) and cash (40%.) The acquisition served to expand the Company’s banking franchise in the
greater Kansas City area. All shares issued by EFSC were issued in reliance upon an exemption from registration
set forth in Section 4(2) and Rule 506 of the Securities Act of 1933. As a result, the 731,692 EFSC shares issued
for the acquisition will be “restricted securities” and may not be offered or sold in the United States absent
registration of an applicable exemption from registration requirements. The cash portion of the transaction was
funded through internally generated funds and the issuance of a TRUPS, as further discussed below.
At the time of the acquisition, Clayco had assets of $201,900,000, loans, net of unearned discount, of
$167,000,000, deposits of $150,700,000, and stockholders’ equity of $12,800,000. The assets acquired and
liabilities assumed were recorded at their estimated fair value on the acquisition date. The fair value adjustments
represent current estimates and are subject to further adjustments as the valuation data is finalized. Preliminary
goodwill, which is not deductible for tax purposes, was approximately $26,300,000. Core deposit intangibles were
approximately $1,900,000 and will be amortized over ten years utilizing an accelerated method. Core deposit
intangibles are not deductible for tax purposes. Great American is expected to be merged with and into the Bank in
2008. Please refer to the Form 8-K’s filed by the Company on November 22, 2006 and March 1, 2007 for more
information.
52
Trust Preferred Securities - EFSC Capital Trust VI
On February 26, 2007, EFSC Statutory Capital Trust VI (“EFSC Trust VI”), a newly formed Delaware statutory
trust and subsidiary of EFSC, issued 14,000 floating rate Trust Preferred Securities at $1,000 per share to a Trust
Preferred Securities Pool. The fixed rate is equal to 6.573% until March 2012 when the rate floats at three-month
London Interbank Offered Rate (“LIBOR”) + 1.60%, and is payable quarterly beginning March 30, 2007. The
TRUPS are fully, irrevocably and unconditionally guaranteed on a subordinated basis by the Company. The
proceeds were invested in junior subordinated debentures of the Company. The net proceeds to the Company from
the sale of the junior subordinated debentures, were approximately $14,000,000. The TRUPS mature on March
30, 2037. The mandatory date may be shortened to a date not earlier than March 30, 2012 if certain conditions are
met. The TRUPS are classified as subordinated debentures and the distributions are recorded as interest expense in
the Company’s consolidated financial statements. The proceeds from the offering were used to fund the cash
portion of the acquisition of Clayco, as discussed above.
NOTE 5—INVESTMENTS IN DEBT AND EQUITY SECURITIES
The amortized cost and estimated fair value of debt and equity securities are summarized below:
(in thousands)
Available for sale securities:
Obligations of U.S. government agencies
Mortgage-backed securities
Municipal bonds
Other securities
Federal Home Loan Bank stock
(in thousands)
Available for sale securities:
Obligations of U.S. government agencies
Mortgage-backed securities
Municipal bonds
Other securities
Federal Home Loan Bank stock
2006
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Amortized
Cost
Estimated
Fair Value
$
$
$
$
$
$
$
$
2005
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Amortized
Cost
Estimated
Fair Value
$
$
$
$
59
13
5
-
-
77
14
12
2
-
-
28
(717)
(273)
(9)
-
-
(999)
(1,045)
(335)
(14)
-
-
(1,394)
95,452
9,617
1,111
2,024
3,006
111,210
117,326
12,953
1,231
1,455
2,594
135,559
96,110
9,877
1,115
2,024
3,006
112,132
118,357
13,276
1,243
1,455
2,594
136,925
$
$
$
$
The amortized cost and estimated fair value of debt and equity securities classified as available for sale at
December 31, 2006, by contractual maturity, are shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment
penalties.
(in thousands)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Mortgage-backed securities
Securities with no stated maturity
53
Amortized
Cost
$
Estimated
Fair Value
$
36,208
60,551
466
9,877
5,030
112,132
35,905
60,193
465
9,617
5,030
111,210
$
$
During 2006, the Company did not sell any investments in debt and equity securities. During 2005, proceeds from
sales of investments in debt and equity securities were $39,040,000, which resulted in gross gains of $12,000 and
gross losses of $506,000. During 2004, proceeds from sales of investments in debt and equity securities were
$62,766,000, which resulted in gross gains of $131,000 and gross losses of $4,000. Debt and equity securities
having a carrying value of $32,084,000 and $18,365,000 at December 31, 2006 and 2005, respectively, were
pledged as collateral to secure public deposits and for other purposes as required by law or contract provisions.
As a member of the Federal Home Loan Bank (“FHLB”) system administered by the Federal Housing Finance
Board, the Bank is required to maintain a minimum investment in the capital stock of its respective FHLB
consisting of membership stock and activity-based stock. At December 31, 2006, the membership stock
requirement for the Bank was 0.12% of its total assets subject to a maximum of $10 million. The activity-based
stock requirement is 4.45% of the Bank’s aggregate outstanding FHLB advances. The FHLB stock is recorded at
cost, which represents redemption value. The Bank is a member of the FHLB of Des Moines.
Provided below is a summary of securities available for-sale which were in an unrealized loss position at December
31, 2006 and 2005. The unrealized losses reported as of December 31, 2006 for obligations of U.S. government
agencies for 12 months or more includes 32 FNMA agency notes with estimated maturities or repricings of one to
two years. The unrealized loss reported for the mortgage-backed securities for 12 months or more includes 26
securities and primarily relates to Fannie Mae (“FNMA”) or Freddie Mac (“FHLMC”) pools with estimated
maturities or repricings of one to four years. Fannie Mae or Freddie Mac guarantees the contractual cash flows of
these securities. The unrealized losses reported for municipal bonds for 12 months or more includes 5 securities.
The Company has the ability and intent to hold these securities until such time as the value recovers or the
securities mature. Further, the Company believes the deterioration in value is attributable to changes in market
interest rates and not credit quality of the issuer.
Less than 12 months
12 months or more
Total
2006
(in thousands)
Obligations of U.S. government agencies
Mortgage-backed securities
Municipal bonds
(in thousands)
Obligations of U.S. government agencies
Mortgage-backed securities
Municipal bonds
Estimated
Fair Value
$
Unrealized
Losses
$
Estimated
Fair Value
$
Unrealized
Losses
$
Estimated
Fair Value
$
Unrealized
Losses
$
$
$
$
$
$
$
Less than 12 months
12 months or more
Total
2005
Estimated
Fair Value
$
Unrealized
Losses
$
Estimated
Fair Value
$
Unrealized
Losses
$
Estimated
Fair Value
Unrealized
Losses
$
$
683
273
9
965
818
283
13
1,114
90,461
8,687
449
99,597
102,285
11,434
936
114,655
717
273
9
999
1,045
335
14
1,394
8,197
-
-
8,197
64,759
2,641
184
67,584
82,264
8,687
449
91,400
37,526
8,793
752
47,071
$
$
$
$
$
$
34
-
-
34
227
52
1
280
54
NOTE 6—LOANS
A summary of loans by category at December 31, 2006 and 2005:
(in thousands)
Real Estate Loans:
Construction and land development
Farmland
1-4 Family residential
Multifamily residential
Other real estate loans
Total real estate loans
Commercial and industrial
Other
Total Loans
December 31,
2006
2005
$
$
196,851
8,577
150,244
41,412
526,183
923,267
352,914
35,561
1,311,742
$
$
$
$
138,318
7,518
151,575
24,927
377,937
700,275
265,488
36,494
1,002,257
Unearned loan (fees) costs, net
Total loans, net of unearned loan (fees) cost
(19)
1,311,723
$
122
1,002,379
$
The Bank grants commercial, residential, and consumer loans primarily in the St. Louis and Kansas City
metropolitan areas. The Company has a diversified loan portfolio, with no particular concentration of credit in any
one economic sector; however, a substantial portion of the portfolio is concentrated in and secured by real estate.
The ability of the Company’s borrowers to honor their contractual obligations is dependent upon the local economy
and its effect on the real estate market.
Following is a summary of activity for the year ended December 31, 2006 of loans to executive officers and
directors or to entities in which such individuals had beneficial interests as a shareholder, officer, or director. Such
loans were made in the normal course of business on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with other customers and did not involve more
than the normal risk of collectibility.
(in thousands)
Balance January 1, 2006
New loans and advances
Payments
Balance December 31, 2006
Total
$
$
16,859
3,006
(9,013)
10,852
A summary of activity in the allowance for loan losses for the years ended December 31, 2006, 2005, and 2004 is
as follows:
(in thousands)
Balance at beginning of year
Acquired allowance for loan losses
Provision for loan losses
Loans charged off
Recoveries of loan previously charged off
Balance at end of year
2006
$
2005
$
2004
$
12,990
3,069
2,127
(1,598)
400
16,988
11,665
-
1,490
(644)
479
12,990
10,590
-
2,212
(1,296)
159
11,665
$
$
$
55
A summary of impaired loans at December 31, 2006, 2005, and 2004 is as follows:
(in thousands)
Non-accrual loans
Loans past due 90 days or more
and still accruing interest
Restructured loans continuing to
accrue interest
Total impaired loans
2006
$
6,363
December 31,
2005
$
1,421
2004
$
1,827
112
-
-
-
6,475
$
-
1,421
$
-
1,827
$
Allowance for losses on impaired loans
Impaired loans with no related
allowance for loan losses
Average balance of impaired
loans during the year
$
2,040
$
290
$
441
112
2,658
-
1,981
872
1,846
The Bank had one loan over 90 days past due and still accruing interest at December 2006. This loan paid off on
January 5, 2007. There were no loans over 90 days past due and still accruing interest at December 31, 2005 and
2004. If interest on non-accrual loans had been accrued, such income would have been $218,000, $144,000, and
$103,000 for the years ended December 31, 2006, 2005, and 2004, respectively. The cash amount recognized as
interest income on non-accrual loans was $75,000, $109,000, and $64,000 for the years ended December 31, 2006,
2005, and 2004, respectively. The amount recognized as interest income on impaired loans continuing to accrue
interest was $3,000, $0, and $0 for the years ended December 31, 2006, 2005, and 2004, respectively.
NOTE 7—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Bank utilizes interest rate swap derivatives as one method to manage some of its interest rate risks from
recorded financial assets and liabilities. These derivatives are utilized when they can be demonstrated to effectively
hedge a designated asset or liability and such asset or liability exposes the Bank to interest rate risk. The decision
to enter into an interest rate swap is made after considering the asset/liability mix of the Bank, the desired
asset/liability sensitivity and by interest rate levels. Prior to entering into a hedge transaction, the Bank formally
documents the relationship between hedging instruments and hedged items, as well as the risk management
objective for undertaking the various hedge transactions.
The Bank accounts for its derivatives under SFAS No. 149, An Amendment of Statement 133 on Derivative
Instruments and Hedging Activities and SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. These Standards require recognition of all derivatives as either assets or liabilities in the balance sheet
and require measurement of those instruments at fair value through adjustments to the hedged item, other
comprehensive income, or current earnings, as appropriate.
Cash Flow Hedges
Previously, the Bank entered into interest rate swaps to convert floating-rate loan assets to fixed rates. Interest rate
swaps with notional amounts of $30,000,000 and $40,000,000 under which the Bank received a fixed rate of
5.3425% and 5.4150% matured in March and April 2006, respectively. As of December 31, 2006, the Bank had
no outstanding cash flow hedges.
The swap agreements provided for the Bank to pay a variable rate of interest equivalent to the prime rate and to
receive a fixed rate of interest. Amounts paid or received under these swap agreements were accounted for on an
accrual basis and recognized as interest income of the related asset. The net cash flows related to cash flow hedges
decreased interest income on loans by $410,000 and $539,000 in 2006 and 2005, respectively, and increased
interest income on loans by $1,163,000 in 2004.
Cash flow hedges are accounted for at fair value. The effective portion of the change in the cash flow hedge’s gain
or loss is reported as a component of other comprehensive income, net of taxes. The ineffective portion of the
change in the cash flow hedge’s gain or loss is recorded in earnings on each quarterly measurement date. At
December 31, 2006 and 2005, $0 and $263,000, respectively, in deferred losses, net of tax, related to cash flow
56
hedges were recorded in accumulated other comprehensive income. All cash flow hedges were effective; therefore,
no gain or loss was recorded in earnings in 2006, 2005 and 2004.
Fair Value Hedges
The Bank has entered into interest rate swap agreements with the objective of converting the fixed interest rate on
certain brokered CDs to a variable interest rate. The swap agreements provide for the Bank to pay a variable rate of
interest based on a spread to the one or three-month LIBOR and to receive a fixed rate of interest equal to that of
the brokered CD (hedged instrument.) Fair value hedges are accounted for at fair value. All changes in fair value
are measured on a quarterly basis.
Amounts to be paid or received are accounted for on an accrual basis and recognized as interest expense of the
related liability. The net cash flows related to fair value hedges increased interest expense on certificates of
deposit by $363,000 and $360,000 in 2006 and 2005, respectively, and decreased interest expense by $346,000 in
2004. Two swaps, each with a $10,000,000 notional amount, under which the Bank received a fixed rate of 2.30%
and 2.45% matured in February and April 2006, respectively. At December 31, 2006, the Bank had one
outstanding fair value hedge.
At inception of the CD, the Company paid broker placement fees by reducing the proceeds received from the issued
CD. The fees did not affect the inception value of the interest rate swap. Placement fees are capitalized and
amortized into interest expense over the life of the CD in a manner similar to debt issuance costs.
Non-Designated Hedges
The Bank has entered into interest rate swap agreements with the objective of converting long-term fixed rates on
certain loans to a variable interest rate. The swap agreements provide for the Bank to pay a fixed rate of interest
equal to that of the loan and to receive a variable rate of interest based on a spread to one-month LIBOR. The non-
designated hedges are accounted for at fair value. All changes in fair value are measured on a quarterly basis.
Under the swap agreements the Bank is to pay or receive interest monthly. The net cash flows related to these
hedges decreased interest income on loans by $2,100 in 2006. One swap agreement is a forward rate lock hedging
against rate increases through August 2007. As a result, the cash flows for this swap will not begin until August
2007.
The following table summarizes the Bank’s derivative instruments at December 31, 2006 and 2005.
(in thousands)
Cash Flow Hedges
Notional amount
Weighted average pay rate
Weighted average receive rate
Weighted average maturity in months
Unrealized loss related to interest rate swaps
Fair Value Hedges
Notional amount
Weighted average pay rate
Weighted average receive rate
Weighted average maturity in months
Unrealized loss related to interest rate swaps
Non-Designated Hedges
Notional amount
Weighted average pay rate
Weighted average receive rate
Weighted average maturity in months
Unrealized loss related to interest rate swaps
December 31,
2006
2005
$
$
$
-
-
-
-
$
-
10,000
5.32
2.90
2
(35)
7,324
7.96
7.95
79
(119)
$
$
%
%
%
%
%
%
$
$
70,000
7.25
5.39
3
(395)
30,000
4.42
2.55
6
(341)
-
$
-
-
-
$
-
%
%
%
%
%
%
$
$
The notional amounts of derivative financial instruments do not represent amounts exchanged by the parties, and
therefore, are not a measure of the Bank’s credit exposure through its use of these instruments. The credit exposure
represents the accounting loss the Bank would incur in the event the counterparties failed completely to perform
57
according to the terms of the derivative financial instruments and the collateral held to support the credit exposure
was of no value. Given the fair value loss associated with the derivatives at December 31, 2006, the Bank had no
credit exposure to counterparties. At December 31, 2006 and 2005, in connection with our interest rate swap
agreements we had pledged investment securities available for sale with a fair value of $2,500,000. At December
31, 2006 and 2005, we had accepted, as collateral in connection with our interest rate swap agreements, cash of
$196,000.
NOTE 8—FIXED ASSETS
A summary of fixed assets at December 31, 2006 and 2005 is as follows:
(in thousands)
Land
Buildings and leasehold improvements
Furniture, fixtures and equipment
Capitalized software
Less accumulated depreciation and amortization
Total fixed assets
December 31,
2006
2005
$
$
2,089
13,763
9,344
3
25,199
8,149
17,050
1,545
8,652
6,870
-
17,067
6,791
10,276
$
$
Depreciation and amortization of building, leasehold improvements, and furniture, fixtures and equipment included
in noninterest expense amounted to $1,901,000, $1,272,000 and $996,000 in 2006, 2005, and 2004, respectively.
The Company has facilities leased under agreements that expire in various years through 2017. The Company’s
aggregate rent expense totaled $1,724,000, $1,602,000, and $1,504,000 in 2006, 2005, and 2004, respectively.
Sublease rental income for 2006 was $39,000. There was no sublease rental income in 2005 or 2004. The future
aggregate minimum rental commitments (in thousands) required under the leases are as follows:
Year
2007
2008
2009
2010
2011
Thereafter
Total
Amount
$1,924
$1,936
$1,970
$1,980
$1,048
$1,963
$10,822
For leases which renew or are subject to periodic rental adjustments, the monthly rental payments will be adjusted
based on then current market conditions and rates of inflation.
58
NOTE 9—GOODWILL AND INTANGIBLE ASSETS
The tables below presents an analysis of the goodwill and intangible activity for the years ended December 31,
2006 and 2005. There was no change in goodwill during the year ended December 31, 2004.
(in thousands)
Balance at December 31, 2004
Goodwill from purchase of Millennium Brokerage Group
Balance at December 31, 2005
Goodwill from purchase of Millennium Brokerage Group
Goodwill from purchase of NorthStar Bancshares, Inc
Balance at December 31, 2006
Goodwill
1,938
$
10,104
12,042
189
17,752
29,983
$
(in thousands)
Balance at January 1, 2004
Amortization expense
Balance at December 31, 2004
Intangibles from purchase of Millennium Brokerage Group
Amortization expense
Balance at December 31, 2005
Intangibles from purchase of NorthStar Bancshares, Inc
Amortization expense
Balance at December 31, 2006
Non-compete
Intangible
$
315
(180)
135
-
(135)
-
-
-
$
-
Customer and
Trade Name
Intangibles
-
$
-
-
4,700
(152)
4,548
-
(912)
3,636
$
Core Deposit
Intangible
-
$
-
-
-
-
-
2,369
(216)
2,153
$
Net Intangible
315
$
(180)
135
4,700
(287)
4,548
2,369
(1,128)
5,789
$
The following table reflects the expected amortization schedule for the customer, trade name and core deposit
intangibles (in thousands) at December 31, 2006.
Year
2007
2008
2009
2010
2011
After 2011
Amount
$
1,321
1,278
1,235
1,179
237
539
5,789
$
The annual impairment evaluation of the goodwill and intangible balances has not identified any potential
impairment; accordingly no goodwill or intangible impairment was recorded in 2006.
59
NOTE 10—MATURITY OF CERTIFICATES OF DEPOSIT
Following is a summary of certificates of deposit maturities at December 31, 2006:
(in thousands)
Less than 1 year
Greater than 1 year and less than 2 years
Greater than 2 years and less than 3 years
Greater than 3 years and less than 4 years
Greater than 4 years and less than 5 years
$100,000
and Over
Other
Total
$
$
$
222,772
36,635
18,009
17,553
1,947
296,916
93,079
10,411
6,289
4,122
1,170
115,071
315,851
47,046
24,298
21,675
3,117
411,987
$
$
$
NOTE 11—SUBORDINATED DEBENTURES
The Corporation has five wholly-owned statutory business trusts. These trusts issued securities that were sold to
third parties. The sole purpose of the trusts was to invest the proceeds in junior subordinated debentures of the
Company that have terms identical to the trust securities. The amounts and terms of each respective issuance at
December 31 were as follows:
(in thousands)
EFSC Capital Trust I
EFSC Capital Trust II
EFSC Capital Trust III
EFSC Capital Trust IV
EFSC Capital Trust V
Total trust preferred securities
Amount
2006
2005
$
$
4,124
5,155
11,341
10,310
4,124
35,054
4,124
5,155
11,341
10,310
-
30,930
$
$
Maturity Date
June 2032
June 2034
December 2034
December 2035
September 2036
Call date
June 2007
June 2009
December 2009
December 2010
September 2011
Interest Rate
Floats @ 3MO LIBOR + 3.65%
Floats @ 3MO LIBOR + 2.65%
Floats @ 3MO LIBOR + 1.97%
Fixed for 5 years @ 6.14% (1)
Floats @ 3MO LIBOR + 1.60%
(1) After 5 years, floats @ 3MO LIBOR + 1.44%
The subordinated debentures, which are the sole assets of the trust, are subordinate and junior in right of payment to
all present and future senior and subordinated indebtedness and certain other financial conditions of the Company.
The Company fully and unconditionally guarantees each trust’s securities obligations. The trust preferred securities
are included in Tier 1 capital for regulatory capital purposes, subject to certain limitations.
The securities are redeemable in whole or in part on or after their respective call dates. Mandatory redemption dates
may be shortened if certain conditions are met. The accrual of interest to be paid on the subordinated debentures
held by the trusts is recorded as interest expense in the Company’s consolidated financial statements.
60
NOTE 12—FEDERAL HOME LOAN BANK ADVANCES
As a member of the FHLB, the Bank has access to FHLB advances. The FHLB advances at December 31, 2006 and
2005 are collateralized by 1-4 family residential real estate loans, business loans and certain commercial real estate
loans with a carrying value of $267,000,000 and $270,000,000, respectively, and all stock held in the FHLB of Des
Moines.
The following table summarizes the type, maturity and rate of the Company’s FHLB advances at December 31:
(in thousands)
Long term non-amortized fixed advance
Long term non-amortized fixed advance
Long term non-amortized fixed advance
Long term non-amortized fixed advance
Long term non-amortized fixed advance
Long term non-amortized fixed advance
Mortgage matched fixed advance
2006
Outstanding Weighted
Balance
Rate
2005
Outstanding Weighted
Balance
Rate
$
1,250
650
1,050
5,800
300
17,000
945
4.74%
4.91%
5.40%
4.48%
6.07%
4.53%
5.69%
$
1,525
1,250
650
1,050
5,800
17,300
1,009
4.51%
4.74%
4.91%
5.40%
4.48%
4.55%
5.69%
Term
less than 1 year
1 - 2 years
2 - 3 years
3 - 4 years
4 - 5 years
5 - 10 years
10 - 15 years
Total Federal Home Loan Bank Advances
$
26,995
4.63%
$
28,584
4.62%
The majority of these advances were used to match certain fixed rate loans to lock in an interest rate spread. All of
the FHLB advances have fixed interest rates, and $26,050,000 and $27,575,000 at December 31, 2006 and 2005,
respectively, are callable by the Company anytime, subject to prepayment penalties. The remaining borrowings are
not callable by the Company. The Bank, which has an investment in the capital stock of the FHLB, maintains a
line of credit with the FHLB and had availability of approximately $130,000,000 at December 31, 2006.
NOTE 13—OTHER BORROWINGS AND NOTES PAYABLE
A summary of other borrowings is as follows:
(in thousands)
Securities sold under repurchase agreements
Federal funds purchased
Other
Total other borrowings
December 31,
2006
2005
$
$
9,561
-
196
9,757
6,650
-
196
6,847
$
$
Average balance during the year
Maximum balance outstanding at any month-end
Weighted average interest rate during the year
Weighted average interest rate at December 31
$
7,692
9,757
3.07%
3.33%
$
6,440
7,674
2.13%
2.52%
At December 31, 2006 the Company had an $11,000,000 unsecured bank line of credit and a $4,000,000 term loan
that were renewed on December 6, 2006. Both instruments have debt covenants, accrue interest based on LIBOR
plus 1.25% and are payable quarterly. At December 31, 2006, outstanding balances on the line of credit and term
loan were $0 and $4,000,000, respectively. For the year ended December 31, 2006, the average balance and
maximum month-end balance of these instruments were $3,042,000 and $4,000,000, respectively.
The Company also has a line with the Federal Reserve Bank of St. Louis for back-up liquidity purposes but has not
drawn on the line. As of December 31, 2006 approximately $165,000,000 was available under this line. This line
is secured by a pledge of certain eligible loans.
61
NOTE 14—LITIGATION AND OTHER CLAIMS
Except as noted below, various legal claims have arisen during the normal course of business which, in the opinion
of management, after discussion with legal counsel, will not result in any material liability.
In accordance with SFAS No. 5, Accounting for Contingencies, during 2003 the Company recognized $725,000 in
expense related to a settlement of a dispute with another financial institution pursuant to an agreement signed in
February of 2003. An additional $575,000 was paid on this settlement in 2004.
NOTE 15—INCOME TAXES
The components of income tax expense for the years ended December 31 are as follows:
(in thousands)
Current:
Federal
State and local
Deferred
Years ended December 31,
2005
2004
2006
$
$
$
9,023
546
(1,244)
8,325
6,572
774
(1,034)
6,312
$
$
$
3,612
267
209
4,088
A reconciliation of expected income tax expense, computed by applying the statutory federal income tax rate of
35% in 2006 and 2005 and 34% in 2004 to income before income taxes and the amounts reflected in the
consolidated statements of income is as follows:
(in thousands)
Income tax expense at statutory rate
Increase (reduction) in income tax resulting from:
Reversal of valuation allowance
Tax-exempt income
State and local income tax expense
Non-deductible expenses
Other, net
Total income tax expense
Years ended December 31,
2005
2004
2006
$
8,327
$
6,162
$
4,183
-
(274)
355
236
(319)
8,325
-
(380)
503
189
(162)
6,312
(241)
(298)
176
159
109
4,088
$
$
$
62
A net deferred income tax asset of $8,773,000 and $6,064,000 is included in prepaid expenses and other assets in
the consolidated balance sheets at December 31, 2006 and 2005, respectively. The tax effect of temporary
differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities is as follows:
(in thousands)
Deferred tax assets:
Allowance for loan losses
Deferred compensation
Merchant banking investments
Unrealized losses on securities available for sale
Unrealized losses on cash flow derivative
instruments
Loans
Other
Total deferred tax assets
Deferred tax liabilities:
Core deposit intangibles
Office equipment and leasehold improvements
Total deferred tax liabilities
Net deferred tax asset
Years ended December 31,
2006
2005
$
6,022
992
239
371
$
4,547
802
212
491
-
1,436
581
9,641
784
84
868
8,773
132
-
216
6,400
-
336
336
6,064
$
$
A valuation allowance is provided on deferred tax assets when it is more likely than not that some portion of the
assets will not be realized. The Company did not have any valuation allowances as of December 31, 2006 or
December 31, 2005. Management believes it is more likely than not that the results of future operations will
generate sufficient taxable income to realize the deferred tax assets above.
NOTE 16—REGULATORY MATTERS
The Company and Bank are subject to various regulatory capital requirements administered by the Federal banking
agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional
discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial
statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the
Company and Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital
amounts and classification are also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to
maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital to risk-weighted
assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 2006 and 2005, that the
Company and Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 2006 and 2005, the Bank was categorized as “well capitalized” under the regulatory
framework for prompt corrective action. To be categorized as “well capitalized” the Bank must maintain minimum
total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table.
63
The Company’s and Bank’s actual capital amounts and ratios are also presented in the table.
(in thousands)
As of December 31, 2006:
Total Capital (to Risk Weighted Assets)
Enterprise Financial Services Corp
Enterprise Bank & Trust
Tier I Capital (to Risk Weighted Assets)
Enterprise Financial Services Corp
Enterprise Bank & Trust
Tier I Capital (to Average Assets)
Enterprise Financial Services Corp
Enterprise Bank & Trust
As of December 31, 2005:
Total Capital (to Risk Weighted Assets)
Enterprise Financial Services Corp
Enterprise Bank & Trust
Tier I Capital (to Risk Weighted Assets)
Enterprise Financial Services Corp
Enterprise Bank & Trust
Tier I Capital (to Average Assets)
Enterprise Financial Services Corp
Enterprise Bank & Trust
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Amount
Ratio
To Be Well
Capitalized Under
Applicable
Action Provisions
Amount
Ratio
$
148,856
142,645
10.83 %
10.41
$
109,935
109,640
8.00 %
8.00
$
-
137,049
- %
10.00
131,869
125,658
131,869
125,658
120,528
115,435
107,538
102,445
107,538
102,445
9.60
9.17
8.87
8.47
11.55
11.08
10.31
9.83
8.75
8.33
54,968
54,820
44,610
44,509
83,462
83,362
41,731
41,681
36,883
36,912
4.00
4.00
3.00
3.00
8.00
8.00
4.00
4.00
3.00
3.00
-
82,230
-
74,182
-
6.00
-
5.00
-
104,202
-
10.00
-
62,521
-
61,521
-
6.00
-
5.00
NOTE 17—COMPENSATION PLANS
The Company has adopted share-based compensation plans to reward and provide long-term incentive for directors
and key employees of the Company. These plans provide for the granting of stock, stock options, stock
appreciation rights, and restricted share units (RSU’s), as designated by the Company’s Board of Directors. The
Company uses authorized and unissued shares to satisfy share award exercises. During 2006, share-based
compensation was issued in the form of stock, stock options and RSU’s. At December 31, 2006, 892,865 shares
were available for grant under the various share-based compensation plans. An additional 96,619 shares of stock
were available for issuance under the Stock Plan for Non-Management Directors approved by the Shareholders in
April 2006. Share-based compensation has been settled with newly issued shares.
The share-based compensation expense that was charged against income was $1,252,000, $690,000 and $228,000
for the years ended December 31, 2006, 2005 and 2004, respectively. The total income tax benefit recognized in the
income statement for share-based compensation arrangements was $525,000, $831,000 and $11,000 for the years
ended December 31, 2006, 2005 and 2004, respectively.
In determining compensation cost for stock options, the Black-Scholes option-pricing model is used to estimate the
fair value of options on date of grant. The Black-Scholes model is a closed-end model that uses the assumptions in
the following table. The risk-free rate for the expected term is based on the U.S. Treasury zero-coupon spot rates in
effect at the time of grant. Expected volatility is based on historical volatility of the Company’s stock. The
Company uses historical exercise behavior and other factors to estimate the expected term of the options, which
represents the period of time that the options granted are expected to be outstanding.
Risk-free interest rate
Expected dividend rate
Expected volatility
Expected term (years)
2006
4.5%
0.3%
54.6%
9.5 years
2005
2004
4.5%
0.6%
43.7%
10 years
4.2%
0.6%
45.0%
10 years
64
Employee Stock Options
Stock options were granted to key employees with exercise prices equal to the market price of the Company’s stock
at the date of grant and have 10-year contractual terms. Stock options have a vesting schedule of between three to
five years. The weighted average grant date fair value of options granted during 2006, 2005 and 2004 was $18.34,
$11.62, and $7.80, respectively. Compensation expense related to stock options was $21,000, $15,000, and
$146,000 in 2006, 2005, and 2004, respectively. Compensation expense in 2004 was related to the acceleration of
outstanding employee stock options as described in Note 1 – Significant Accounting Policies. On a quarterly
basis, actual forfeitures are measured and recognized in expense for any differences versus the estimate. In 2006,
the difference between actual and estimated forfeitures on the accelerated options decreased compensation expense
by $36,000. In 2005, the difference between actual and estimated forfeitures on the accelerated options increased
compensation expense by $15,000. The total intrinsic value of options exercised on the date of exercise was
$1,750,000, $4,200,000, and $1,135,000 in 2006, 2005 and 2004, respectively. Cash received from the exercise of
stock options in 2006 was $1,226,000. At December 31, 2006, there was $189,500 of total unrecognized
compensation cost related to stock options, which is expected to be recognized over a weighted average period of
2.7 years. Following is a summary of the employee stock option activity for 2006.
(Dollars in thousands, except share data)
Outstanding at January 1, 2006
Granted
Exercised
Forfeited
Outstanding at December 31, 2006
Exercisable at December 31, 2006
Vested and expected to vest at December 31, 2006
Shares
901,528
7,487
(103,878)
-
805,137
790,009
805,137
Weighted
Average
Exercise
Price
$
12.03
27.86
11.80
-
12.21
11.98
12.21
$
$
$
Weighted
Average
Remaining
Contractual
Term
-
-
-
-
Aggregate
Intrinsic
Value
5.5 years
5.4 years
5.5 years
$
$
$
16,403
16,274
16,403
Restricted Share Units
In 2005, the Company began awarding nonvested stock, in the form of RSU’s, as part of a new long-term incentive
plan. RSU’s awarded to employees are subject to continued employment and vest ratably over five years. RSU’s
granted to directors in 2005 vested on December 31, 2005. RSU’s do not carry voting or dividend rights until
vesting. Sales of the units are restricted prior to vesting. Compensation expense related to employee RSU’s was
$1,029,000 and $483,000 in 2006 and 2005, respectively. In 2005, Other noninterest expense included $117,000
for the RSU’s awarded to the directors of the Company. The total fair value (at vest date) of shares vested during
2006 and 2005 was $1,506,000 and $658,000, respectively. At December 31, 2006, there was $3,418,000 of total
unrecognized compensation cost related to nonvested RSU’s, which is expected to be recognized over a weighted
average period of 3.5 years. A summary of the status of the Company's restricted share unit awards as of
December 31, 2006 and changes during the year then ended is presented below.
Outstanding at January 1, 2006
Granted
Vested
Forfeited
Outstanding at December 31, 2006
Weighted
Average
Grant Date
Fair Value
$
18.80
25.56
22.27
18.75
22.67
Shares
95,613
115,617
(46,325)
(4,430)
160,475
65
Stock Appreciation Rights
On April 1, 1999, the Company adopted a Stock Appreciation Rights (“SAR’s”) Plan. This Plan replaced the
previous form of cash compensation for directors of the Company and its subsidiaries. Awards vest based upon
attendance and unit performance. Under the plan, the Company has the option to pay vested SAR’s either in the
form of cash or Company common stock. There were no SAR’s granted in 2006, 2005 or 2004. For the year ended
December 31, 2006 and 2005, the Company recognized $60,000 and $41,000 of expense to record the fair value of
the SAR’s. The Company recognized a reduction to expense of $6,000 to record the fair value of the SAR’s for
the year ended December 31, 2004. During 2006, the Company paid cash of $19,000 for SAR’s that vested in July
and October. In January 2007, the Company paid $118,000 to settle SAR’s that vested on December 31, 2006. At
December 31, 2006, there were no other SAR’s outstanding.
Stock Plan for Non-Management Directors
In 2006, the Company adopted a Stock Plan for Non-Management Directors, which provides for issuing shares of
common stock to non-employee directors as compensation in lieu of cash. Shares granted under this plan may be
subject to resale restrictions (“restricted stock”). The plan was approved by the shareholders and allows up to
100,000 shares to be awarded. In July 2006, the Company issued 3,381 shares of restricted stock at a fair value of
$25.45 per share. For the year ended December 31, 2006, the Company recognized $125,000 of stock-based
compensation expense for the directors. At December 31, 2006, there is no unrecognized compensation cost related
to this plan.
Moneta Plan
In 1997, the Company entered into a solicitation and referral agreement with Moneta Group, Inc. (“Moneta”), a
nationally recognized firm in the financial planning industry. The Company renegotiated the original agreement in
2003. Under the agreements, Moneta received options for banking business referrals and still receives a portion of
the gross margin earned by Trust in the form of cash. As a result, there have been no options granted to Moneta
since 2003. The fair value of each Moneta option grant was estimated on the date of grant using the Black-Scholes
option pricing model. The Company recognized the fair value of the options over the vesting period as expense.
The Company recognized $17,000, $34,000, and $88,000 in Moneta option-related expenses during 2006, 2005 and
2004, respectively. As of December 31, 2006, the fair value of all Moneta options had been recognized, therefore,
there is no unrecognized compensation cost.
(Dollars in thousands, except share data)
Outstanding at January 1, 2006
Granted
Exercised
Forfeited
Outstanding at December 31, 2006
Exercisable at December 31, 2006
Vested and expected to vest at December 31, 2006
Shares
188,904
-
(23,081)
-
165,823
161,471
165,823
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
$
$
$
$
12.43
-
10.85
-
12.66
13.02
12.66
2.8 years
2.9 years
2.8 years
$
$
$
3,303
3,158
3,303
401(k) plans
Effective January 1, 1993, the Company adopted a 401(k) thrift plan which covers substantially all full-time
employees of the Bank over the age of 21. In addition, substantially all employees of Millennium can elect to
participate in a safe-harbor 401(k) plan. The amount charged to expense for the Company’s contributions,
including Millennium, to the plans was $323,000, $843,000, and $476,000 for 2006, 2005, and 2004, respectively.
NOTE 18—DISCLOSURES ABOUT FINANCIAL INSTRUMENTS
The Bank issues financial instruments with off balance sheet risk in the normal course of the business of meeting
the financing needs of its customers. These financial instruments include commitments to extend credit and
standby letters of credit. These instruments may involve, to varying degrees, elements of credit and interest-rate
risk in excess of the amounts recognized in the consolidated balance sheets.
The Company’s extent of involvement and maximum potential exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters
66
of credit is represented by the contractual amount of these instruments. The Bank uses the same credit policies in
making commitments and conditional obligations as it does for financial instruments included on its consolidated
balance sheets. At December 31, 2006, no amounts have been accrued for any estimated losses for these financial
instruments.
The contractual amount of off-balance-sheet financial instruments as of December 31, 2006 and 2005 is as follows:
(in thousands)
Commitments to extend credit
Standby letters of credit
Private equity bank fund
December 31,
2006
December 31,
2005
$
480,071
39,587
250
$
346,205
28,013
-
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the contract. Commitments usually have fixed expiration dates or other termination clauses and may
require payment of a fee. Of the total commitments to extend credit at December 31, 2006 and 2005,
approximately $35,900,000 and $10,500,000, respectively, represents fixed rate loan commitments. Since certain
of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer’s credit worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on
management’s credit evaluation of the borrower. Collateral held varies, but may include accounts receivable,
inventory, premises and equipment, and real estate.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a
customer to a third party. These standby letters of credit are issued to support contractual obligations of the Bank’s
customers. The credit risk involved in issuing letters of credit is essentially the same as the risk involved in
extending loans to customers. The approximate remaining term of standby letters of credit range from 1 month to 5
years at December 31, 2006.
In 2006, the Company entered into a commitment to invest in a private equity bank fund. The commitment will be
drawn down in the next 18 months.
SFAS 107, Disclosures about Fair Value of Financial Instruments, extends existing fair value disclosure for some
financial instruments by requiring disclosure of the fair value of such financial instruments, both assets and
liabilities recognized and not recognized in the consolidated balance sheets.
Following is a summary of the carrying amounts and fair values of the Company’s financial instruments on the
consolidated balance sheets at December 31, 2006 and 2005:
(in thousands)
Balance sheet assets
2006
2005
Carrying
Amount
Estimated
fair value
Carrying
Amount
Estimated
fair value
Cash and due from banks
Federal Funds Sold
Interest-bearing deposits
Investments in debt and equity securities
Loans held for sale
Derivative financial instruments
Loans, net
Accrued interest receivable
$ 41,588
7,066
1,669
111,210
2,602
(154)
1,311,723
7,995
$ 41,588
7,066
1,669
111,210
2,602
(154)
1,308,638
7,995
$ 54,118
64,709
84
135,559
2,761
(736)
989,389
5,598
$ 54,118
64,709
84
135,559
2,761
(736)
988,645
5,598
Balance sheet liabilities
Deposits
Subordinated debentures
Other borrowed funds
Accrued interest payable
1,315,508
35,054
40,752
3,468
1,315,508
35,152
40,991
3,468
1,116,244
30,930
36,931
2,704
1,116,593
31,061
37,195
2,704
67
The following methods and assumptions were used to estimate the fair value of each class of financial instruments
for which it is practical to estimate such value:
Cash, Fed Funds Sold, and Other Short-term Instruments
For cash and due from banks, federal funds purchased, interest-bearing deposits, and accrued interest receivable
(payable), the carrying amount is a reasonable estimate of fair value, as such instruments reprice in a short time
period.
Investments in Debt and Equity Securities
Fair values are based on quoted market prices or dealer quotes.
Loans, net
The fair value of adjustable-rate loans approximates cost. The fair value of fixed-rate loans is estimated by
discounting the future cash flows using the current rates at which similar loans would be made to borrowers for the
same remaining maturities.
Derivative Financial Instruments
The fair value of derivative financial instruments is based on quoted market prices by the counterparty and verified
by the Company using public pricing information.
Deposits
The fair value of demand deposits, interest-bearing transaction accounts, money market accounts and savings
deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of
deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar
remaining maturities.
Subordinated Debentures
Fair value of floating interest rate subordinated debentures is assumed to equal carrying value. Fair value of fixed
interest rate subordinated debentures is based on market prices.
Other Borrowed Funds
Other borrowed funds include FHLB advances, customer repurchase agreements, federal funds purchased, and
notes payable. The fair value of FHLB advances is based on the discounted value of contractual cash flows. The
discount rate is estimated using current rates on borrowed money with similar remaining maturities. The fair value
of federal funds purchased, customer repurchase agreements and notes payable are assumed to be equal to their
carrying amount since they have an adjustable interest rate.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments to extend credit and standby letters of credit are estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining terms of the agreements, the likelihood
of the counterparties drawing on such financial instruments, and the present creditworthiness of such
counterparties. The Company believes such commitments have been made on terms which are competitive in the
markets in which it operates; however, no premium or discount is offered thereon and accordingly, the Company
has not assigned a value to such instruments for purposes of this disclosure.
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information
about the financial instrument. These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market
exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of
significant judgment, and therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates. Fair value estimates are based on existing on-balance and off-balance-sheet
financial instruments without attempting to estimate the value of anticipated future business and the value of assets
and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been
considered in many of the estimates.
68
NOTE 19—SEGMENT REPORTING
Management segregates the Company into three distinct businesses for evaluation purposes. The three segments
are Banking, Wealth Management, and Corporate and Intercompany. The segments are evaluated separately on
their individual performance, as well as, their contribution to the Company as a whole.
The majority of the Company’s assets and income result from the Banking segment. The Bank is a full-service
commercial bank with four St. Louis locations and six locations in the Kansas City region.
The Wealth Management segment includes the Trust division of the Bank along with Millennium. The Trust
division of the Bank provides estate planning, investment management, and retirement planning as well as,
consulting on management compensation, strategic planning and management succession issues. Millennium
operates life insurance advisory and brokerage operations from thirteen offices serving life agents, banks, CPA
firms, property & casualty groups, and financial advisors in 49 states.
The Corporate and Intercompany segment includes the holding company and subordinated debentures. The
Company incurs general corporate expenses and owns Enterprise Bank & Trust and a controlling ownership of
Millennium.
The financial information for each business segment reflects that information which is specifically identifiable or
which is allocated based on an internal allocation method.
69
Following are the financial results for the Company’s operating segments.
Years ended December 31,
2006
Wealth
Management
Corporate and
Intercompany
Banking
$
$
$
Total
$
105
-
13,809
9,207
(875)
3,832
1,379
2,453
73
-
6,525
5,534
(113)
951
342
609
80
-
4,264
3,684
660
260
400
(in thousands)
Net interest income
Provision for loan losses
Noninterest income
Non interest expense
Minority interest
Income (loss) before income tax expense
Income tax expense (benefit)
Net income (loss)
53,639
2,127
3,056
28,563
-
26,005
9,119
16,886
$
$
$
$
Loans, less unearned loan fees
Goodwill
Intangibles, net
Deposits
Borrowings
Total assets
$
1,311,723
19,690
2,153
1,319,201
36,752
1,517,617
-
$
10,293
3,636
-
-
16,991
-
$
-
-
(3,693)
39,054
979
$
1,311,723
29,983
5,789
1,315,508
75,806
1,535,587
Wealth
Management
$
2005
Corporate and
Intercompany
$
Total
$
Net interest income
Provision for loan losses
Noninterest income
Non interest expense
Minority interest
Income (loss) before income tax expense
Income tax expense (benefit)
Net income (loss)
Banking
$
$
45,804
1,490
2,374
25,242
-
21,446
7,708
13,738
$
$
$
Loans, less unearned loan fees
Goodwill
Intangibles, net
Deposits
Borrowings
Total assets
$
1,002,379
1,938
-
1,117,110
35,431
1,269,212
-
$
10,104
4,548
-
-
16,253
-
$
-
-
( 866)
32,430
1,502
$
1,002,379
12,042
4,548
1,116,244
67,861
1,286,968
Wealth
Management
$
2004
Corporate and
Intercompany
$
Total
$
Net interest income
Provision for loan losses
Noninterest income
Non interest expense
Income (loss) before income tax expense
Income tax expense (benefit)
Net income (loss)
Banking
$
38,011
2,212
2,812
22,061
16,550
5,862
10,688
$
$
$
$
Loans, less unearned loan fees
Goodwill
Intangibles, net
Deposits
Borrowings
Total assets
$
898,505
1,938
135
939,784
19,914
1,058,539
$
-
-
-
-
-
414
-
$
-
-
( 156)
20,870
997
$
898,505
1,938
135
939,628
40,784
1,059,950
70
(2,467)
-
51
3,624
-
( 6,040)
( 2,173)
(3,867)
(1,310)
-
68
3,548
-
( 4,790)
( 1,738)
(3,052)
(1,366)
-
46
3,586
( 4,906)
( 2,033)
(2,873)
51,277
2,127
16,916
41,394
(875)
23,797
8,325
15,472
44,567
1,490
8,967
34,324
(113)
17,607
6,312
11,295
36,725
2,212
7,122
29,331
12,304
4,089
8,215
NOTE 20—PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
Condensed Balance Sheets
(in thousands)
Assets
Cash
Investment in Enterprise Bank & Trust
Investment in Millennium Holding Company
Other assets
Total assets
Liabilities and Shareholders' Equity
Subordinated debentures
Accounts payable and other liabilities
Shareholders' equity
Total liabilities and shareholders' equity
December 31,
2006
2005
$
$
1,824
146,985
16,385
7,497
172,691
35,054
4,643
132,994
172,691
$
$
$
$
$
$
866
103,322
15,462
6,022
125,672
30,930
2,137
92,605
125,672
Condensed Statements of Income
(in thousands)
Income:
Dividends from subsidiaries
Other
Total income
Expenses:
Interest expense-subordinated debentures
Interest expense-notes payable
Other expenses
Total expenses
Net income (loss) before taxes and equity in undistributed earnings of
subsidiaries
Income tax benefit
Net income (loss) before equity in undistributed earnings of subsidiaries
Years ended December 31,
2005
2006
2004
$ 9,669
133
9,802
$ -
107
107
$ -
88
88
2,343
207
3,623
6,173
3,629
2,173
5,802
1,348
1
3,548
4,897
(4,790)
1,738
(3,052)
1,405
2
3,586
4,993
(4,905)
2,033
(2,872)
Equity in undistributed earnings of subsidiaries
Net income
9,670
15,472
14,347
11,295
$
$
11,087
8,215
$
71
Condensed Statements of Cash Flow
(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Decrease in settlement accrual of disputed note
Stock based compensation
Net income of subsidiaries
Dividends from subsidiaries
Excess tax benefits of stock compensation
Other, net
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Cash paid for acquisition, net of cash acquired
Purchases of available for sale debt and equity securities
Capital contributions to subsidiaries
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from notes payable
Paydowns of notes payable
Proceeds from issuance of subordinated debentures
Paydown of subordinated debentures
Cash dividends paid
Excess tax benefits of stock compensation
Proceeds from the issuance of common stock
Proceeds from the exercise of common stock options
Net cash provided by financing activities
Years Ended December 31,
2005
2004
2006
$
15,472
$
11,295
$
8,215
-
784
(19,339)
9,669
(525)
10
6,071
(8,060)
(538)
-
(8,598)
10,000
(10,745)
4,124
-
(1,977)
525
86
1,472
3,485
-
649
(14,347)
-
831
(2,601)
(4,173)
(8,882)
-
-
(8,882)
1,500
(250)
10,310
-
(1,420)
-
-
3,638
13,778
(575)
234
(11,087)
-
11
(640)
(3,842)
-
-
(3,000)
(3,000)
350
(100)
16,496
(11,340)
(971)
-
-
1,241
5,676
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
958
866
1,824
$
723
143
866
$
(1,166)
1,309
143
$
Noncash transactions:
Common stock issued for acquisition of business
23,482
5,249
-
72
NOTE 21—QUARTERLY CONDENSED FINANCIAL INFORMATION (Unaudited)
The following table presents the unaudited quarterly financial information for the years ended December 31, 2006
and 2005.
Minority interest in net income of consolidated subsidiary
(48)
(434)
(in thousands, except per share data)
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Income before income tax expense
Income tax expense
Net income
Earnings per common share
Basic
Diluted
(in thousands, except per share data)
Interest income
Interest expense
Net interest income
Noninterest income
Noninterest expense
Minority interest in net income of consolidated subsidiary
Income before income tax expense
Income tax expense
Net income
Earnings per common share
Basic
Diluted
2006
4th
Quarter
$
26,966
12,927
14,039
3rd
Quarter
$
26,364
12,525
13,839
2nd
Quarter
$
21,659
9,517
12,142
1st
Quarter
$
19,429
8,172
11,257
350
13,689
4,662
11,828
240
13,599
4,325
10,952
6,475
2,084
4,391
$
6,538
2,356
4,182
$
737
800
11,405
10,457
3,952
9,320
60
6,097
2,196
3,901
$
$
3,977
9,294
(453)
4,687
1,689
2,998
$
0.38
0.37
$
0.37
0.35
$
0.37
0.36
$
0.29
0.28
2005
4th
Quarter
$
19,611
7,728
11,883
3rd
Quarter
$
17,611
6,452
11,159
2nd
Quarter
$
16,232
5,230
11,002
1st
Quarter
$
14,654
4,131
10,523
786
9,737
1,835
7,716
-
3,856
1,409
2,447
2,627
9,909
(113)
4,418
1,589
2,829
$
2,277
8,525
-
4,503
1,625
2,878
$
2,225
8,171
-
4,830
1,689
3,141
$
$
$
0.27
0.26
$
0.29
0.27
$
0.31
0.29
$
0.25
0.23
73
Provision for loan losses
70
408
226
Net interest income after provision for loan losses
11,813
10,751
10,776
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 14th of March, 2007.
SIGNATURES
ENTERPRISE FINANCIAL SERVICES CORP
/s/ Kevin C. Eichner
Kevin C. Eichner
Chief Executive Officer
/s/ Frank H. Sanfilippo
Frank H. Sanfilippo
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1934, this Report on Form 10-K has been signed by the
following persons in the capacities indicated on the 14th of March, 2007.
Signatures
/s/ Peter F. Benoist*
Peter F. Benoist
/s/ James J. Murphy Jr.*
James J. Murphy, Jr.
/s/ Kevin C. Eichner*
Kevin C. Eichner
/s/ Paul R. Cahn*
Paul R. Cahn
/s/ William H. Downey*
William H. Downey
/s/ Lewis A. Levey*
Lewis A. Levey
/s/ Robert E. Guest, Jr.*
Robert E. Guest, Jr.
/s/ Richard S. Masinton*
Richard S. Masinton
/s/ Birch M. Mullins*
Birch M. Mullins
/s/ Robert E. Saur*
Robert E. Saur
/s/ Sandra Van Trease*
Sandra Van Trease
/s/ Henry D. Warshaw*
Henry D. Warshaw
*Signed by Power of Attorney.
Title
Chairman of the Board
of Directors
Lead Director
Chief Executive Officer,
Vice Chairman and Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
74
Exhibit
No.
EXHIBIT INDEX
Exhibit
3.1
3.2
3.3
3.4
3.5
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
Certificate of Incorporation of the Registrant, (incorporated herein by reference to Exhibit 3.1 of the
Registrant’s Registration Statement on Form S-1 dated December 19, 1996 (File No. 333-14737)).
Amendment to the Certificates of Incorporation of the Registrant (incorporated herein by reference to
Exhibit 4.2 to the Registrant’s Registration Statement on Form S-8 dated July 1, 1999 (File No. 333-
82087)).
Amendment to the Certificate of Incorporation of the Registrant (incorporated herein by reference to
Exhibit 3.1 of the Registrant’s Quarterly Report on Form 10-Q for the period ending September 30,
1999).
Amendment to the Certificate of Incorporation of the Registrant (incorporated herein by reference to
Exhibit 99.2 to the Registrant’s Current Report on Form 8-K filed on April 30, 2002).
Bylaws of the Registrant, as amended, (incorporated herein by reference to Exhibit 99.1 to the
Registrant’s Current Report on Form 8-K filed on October 29, 2004).
Enterprise Bank Second Incentive Stock Option Plan (incorporated herein by reference to Exhibit 44.4
of the Registrant’s Registration Statement on Form S-8 dated December 29, 1997 (File No. 333-
43365)).
Enterprise Financial Services Corp Third Incentive Stock Option Plan (incorporated herein by reference
to Exhibit 4.5 of the Registrant’s Registration Statement on Form S-8 dated December 29, 1997 (File
No. 333-43365)).
Enterprise Financial Services Corp, Fourth Incentive Stock Option Plan (incorporated herein by
reference to the Registrant’s 1998 Proxy Statement on Form 14-A).
Enterprise Financial Services Corp (formerly Commercial Guaranty Bancshares, Inc.) Employee
Incentive Stock Option Plan (incorporated herein by reference to the Registrant’s Form S-8 dated July
25, 2000 (File No. 333-42204)).
Enterprise Financial Services Corp (formerly Commercial Guaranty Bancshares, Inc.) Non-
Employee Organizer and Director Incentive Stock Option Plan (incorporated herein by reference to
the Registrant’s Form S-8 dated July 25, 2000 (File No. 333-42204)).
Enterprise Financial Services Corp Stock Appreciation Rights (SAR) Plan and Agreement
(incorporated herein by reference to Exhibit 4.5 of the Registrant’s Quarterly Report on Form 10-Q for
the period ended March 31, 1999).
Enterprise Financial Services Corp, Stock Plan for Non-Management Directors (incorporated herein by
reference to the Registrant’s 2006 Proxy Statement on Form 14-A).
Enterprise Financial Services Corp, 2002 Stock Incentive Plan, as amended (incorporated herein by
reference to the Registrant’s 2006 Proxy Statement on Form 14-A).
Enterprise Financial Services Corp, Annual Incentive Plan (incorporated herein by reference to the
Registrant’s 2006 Proxy Statement on Form 14-A).
4.10.1
Indenture dated June 27, 2002 between Registrant and Wells Fargo, National Association, relating to
Floating Rate Junior Subordinated Deferrable Interest Debentures due June 30, 2032, (incorporated by
reference to exhibit 4.9.1 to Registrant’s Quarterly Report on Form 10-Q for the period ended June 30,
2002).
4.10.2
Form of Floating Rate Junior Subordinated Deferrable Interest Debenture due June 30, 2032,
(incorporated by reference to exhibit 4.9.2 to Registrant’s Quarterly Report on Form 10-Q for the
period ended June 30, 2002).
75
4.10.3 Amended and Restated Trust Agreement of EFSC Capital Trust I dated June 27, 2002, (incorporated by
reference to exhibit 4.9.3 to Registrant’s Quarterly Report on Form 10-Q for the period ended June 30,
2002).
4.10.4
4.11.1
4.11.2
Trust Preferred Securities Guarantee Agreement between Registrant and Wells Fargo, National
Association, dated June 27, 2002, (incorporated by reference to exhibit 4.9.4 to Registrant’s Quarterly
Report on Form 10-Q for the period ended June 30, 2002.)
Indenture dated May 11, 2004 between Registrant and Wilmington Trust Company relating to Floating
Rate Junior Deferrable Interest due June 17, 2034, (incorporated by reference to exhibit 4.1 to
Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2004).
Floating Rate Junior Subordinated Deferrable Interest Debenture due June 17, 2034, (incorporated by
reference to exhibit 4.2 to Registrant’s Quarterly Report on Form 10-Q for the period ended June 30,
2004).
4.11.3 Amended and Restated Declaration of Trust of EFSC Capital Trust II dated May 11, 2004,
(incorporated by reference to exhibit 4.3 to Registrant’s Quarterly Report on Form 10-Q for the period
ended June 30, 2004).
4.11.4 Guarantee Agreement between Registrant and Wilmington Trust Company dated May 11, 2004,
(incorporated by reference to exhibit 4.4 to Registrant’s Quarterly Report on Form 10-Q for the period
ended June 30, 2004).
4.12.1
4.12.2
Indenture dated December 13, 2004 between Registrant and Wilmington Trust Company relating to
Floating Rate Junior Deferrable Interest due December 15, 2034, (incorporated by reference to exhibit
4.9.1 to Registrant’s Report on Form 10-K for the period ended December 31, 2004).
Floating Rate Junior Subordinated Deferrable Interest Debenture due December 15, 2034, (incorporated
by reference to exhibit 4.9.2 to Registrant’s Report on Form 10-K for the period ended December 31,
2004).
4.12.3 Amended and Restated Declaration of Trust of EFSC Capital Trust III dated December 13, 2004,
(incorporated by reference to exhibit 4.9.3 to Registrant’s Report on Form 10-K for the period ended
December 31, 2004).
4.12.4 Guarantee Agreement between Registrant and Wilmington Trust Company dated December 13, 2004,
(incorporated by reference to exhibit 4.9.4 to Registrant’s Report on Form 10-K for the period ended
December 31, 2004).
4.13.1
Indenture dated October 11, 2005 between Registrant and Wilmington Trust Company relating to
Floating Rate Junior Deferrable Interest due December 15, 2035, (incorporated by reference to exhibit
4.10.1 to Registrant’s Report on Form 10-K for the period ended December 31, 2005).
4.13.2 Floating Rate Junior Subordinated Deferrable Interest Debenture due October 11, 2035, (incorporated
by reference to exhibit 4.10.2 to Registrant’s Report on Form 10-K for the period ended December 31,
2005).
4.13.3 Amended and Restated Declaration of Trust of EFSC Capital Trust IV dated October 11, 2005,
(incorporated by reference to exhibit 4.10.3 to Registrant’s Report on Form 10-K for the period ended
December 31, 2005).
4.13.4 Guarantee Agreement between Registrant and Wilmington Trust Company dated October 11, 2005,
(incorporated by reference to exhibit 4.10.4 to Registrant’s Report on Form 10-K for the period ended
December 31, 2005).
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4.14.1
Indenture dated July 28, 2006 between Registrant and Wilmington Trust Company relating to Floating
Rate Junior Deferrable Interest due September 15, 2036, (incorporated by reference to exhibit 4.1 to
Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2006).
4.14.2 Floating Rate Junior Subordinated Deferrable Interest Debenture due September 15, 2036,
(incorporated by reference to exhibit 4.2 to Registrant’s Quarterly Report on Form 10-Q for the period
ended September 30, 2006).
4.14.3 Amended and Restated Declaration of Trust of EFSC Capital Trust V dated July 28, 2006,
(incorporated by reference to exhibit 4.3 to Registrant’s Quarterly Report on Form 10-Q for the period
ended September 30, 2006).
4.14.4 Guarantee Agreement between Registrant and Wilmington Trust Company dated July 28, 2006,
(incorporated by reference to exhibit 4.4 to Registrant’s Quarterly Report on Form 10-Q for the period
ended September 30, 2006).
4.15
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Enterprise Financial Services Corp, Incentive Stock Purchase Plan (incorporated herein by reference to
the Registrant’s Registration Statement on Form S-8 dated October 30, 2002 (File No. 333-100928)).
Enterprise Financial Services Corp Deferred Compensation Plan I (incorporated herein by reference to
Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2000).
Form of Key Executive Employment Agreement dated October 15, 2002 between Enterprise Financial
Services Corp and James C. Wagner and Jack L. Sutherland filed on Exhibit to Registrant’s Report on
Form 10-K for the year ended December 31, 2002.
Key Executive Employment Agreement dated September 8, 2004 between Enterprise Financial
Services Corp and Stephen P. Marsh filed on Exhibit to Registrant’s Quarterly Report on Form 10-Q
for the period ended September 20, 2004.
Key Executive Employment Agreement dated December 1, 2004 between Enterprise Financial Services
Corp and Frank H. Sanfilippo. Filed on Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated
December 1, 2004.
Key Executive Employment Agreement dated November 14, 2005, between Enterprise Financial
Services Corp and Kevin C. Eichner Filed on Exhibit 10.1 to Registrant’s Current Report on Form 8-K
dated November 14, 2005.
Key Executive Employment Agreement dated January 5, 2006, between Enterprise Financial Services
Corp and Peter F. Benoist filed on Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated
January 5, 2006.
Purchase Agreement dated as of October 13, 2005, by and among Enterprise Financial Services Corp.,
Millennium Holding Company, Inc., Millennium Brokerage Group, LLC, Millennium Holdings, LLC
and the sellers filed on Exhibit 2.1 to Registrant’s Current Report on Form 8-K dated October 13, 2005.
Second Amendment and Restated Operating Agreement of Millennium Brokerage Group, LLC, dated
October 21, 2005, by and between Millennium Holding Company, Inc. and Millennium Holdings, LLC
filed on Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated October 13, 2005.
$15,000,000 Amended and Restated Credit Agreement, as modified by the First Modification
Agreement dated December 6, 2006 between Enterprise Financial Services Corp and U.S. Bank
National Association filed on Exhibit 10.1 and 10.2 to Registrant’s Current Report on Form 8-K dated
December 6, 2006.
10.10
Amended and Restated Agreement and Plan of Merger, dated May 24, 2006 by and among Enterprise
Financial Services Corp, NorthStar Bancshares, Inc., NorthStar Bank, N.A., and Leland Walker as
77
Seller Representative, filed on Exhibit 2.1 to Registrant’s Current Report on Form 8-K dated May 24,
2006.
10.11
Merger Agreement dated November 22, 2006 by and among Enterprise Financial Services Corp,
Clayco Banc Corporation, Great American Bank, and Jeffrey J. Kieffer, as representative of the sellers,
filed on Exhibit 2.1 to Registrant’s Current Report on Form 8-K dated November 22, 2006.
14.1
Code of Ethics for the Principal Executive Officer and Senior Financial Officers filed on Exhibit to
Registrant’s Report on Form 10-K for the year ended December 31, 2003.
21.1(1)
Subsidiaries of the Registrant.
23.1(1)
24.1(1)
31.1(1)
31.2(1)
32.1(1)
32.2(1)
Consent of KPMG LLP.
Power of Attorney
Chief Executive Officer’s Certification required by Rule 13(a)-14(a).
Chief Financial Officer’s Certification required by Rule 13(a)-14(a).
Chief Executive Officer Certification pursuant to 18 U.S.C. § 1350, as adopted pursuant to section
§ 906 of the Sarbanes-Oxley Act of 2002
Chief Financial Officer Certification pursuant to 18 U.S.C. § 1350, as adopted pursuant to section § 906
of the Sarbanes-Oxley Act of 2002
(1) Filed herewith
78