EFSC 10-K 12/31/2008
Section 1: 10-K (ANNUAL REPORT)
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, 2008
[ ] 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:
(Title of class)
Common Stock, par value $.01 per share
(Name of each exchange on which registered)
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
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: [ ]
Accelerated filer: [X]
Non-accelerated filer: [ ]
Smaller Reporting Company: [ ]
(Other than a smaller reporting company)
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 $104,441,705 based on the closing price
of the common stock of $9.06 on March 2, 2009, as reported by the NASDAQ Global Select Market.
As of March 2, 2009, the Registrant had 12,831,457 shares of common stock outstanding.
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
2009 Annual Meeting of Shareholders, which will be filed within 120 days of December 31, 2008.
ENTERPRISE FINANCIAL SERVICES CORP
2008 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Part I
Item 1:
Business
Item 1A: Risk Factors
Item 1B: Unresolved SEC Comments
Item 2:
Properties
Item 3:
Legal Proceedings
Item 4:
Submission of Matters to Vote of Security Holders
Part II
Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Item 6:
Selected Financial Data
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
Item 8:
Financial Statements and Supplementary Data
Item 9:
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A: Controls and Procedures
Item 9B: Other Information
Part III
Page
1
7
13
13
13
13
14
17
18
46
47
89
89
89
Item 10: Directors, Executive Officers and Corporate Governance
Item 11: Executive Compensation
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13: Certain Relationships and Related Transactions, and Director Independence
Item 14: Principal Accountant Fees and Services
Part IV
Item 15: Exhibits, Financial Statement Schedules
Signatures
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89
89
89
89
90
93
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; and other risks discussed in more detail in
Item 1A: “Risk Factors”, all of which could cause the Company’s actual results to differ from those set forth in the forward-looking statements.
Our acquisitions could cause results to differ from expected results due to 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 (“we” or “the Company” or “EFSC”), a Delaware corporation, is a financial holding company headquartered in St.
Louis, Missouri. The Company provides a full range of banking and wealth management services to individuals and business customers located in
the St. Louis and Kansas City metropolitan markets through its banking subsidiary, Enterprise Bank & Trust (“Enterprise” or “the Bank”).
Enterprise also operates a loan production office in Phoenix, Arizona. The Company celebrated 20 years in business in 2008. Our Trust division will
celebrate 10 years in business in 2009.
In addition, the Company owns Millennium Brokerage Group, LLC (“Millennium”). 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.
On July 31, 2008, we sold our remaining interests in Great American Bank (“Great American”). See Item 8, Note 2 – Acquisitions and Divestitures for
more information.
Our stated mission is “to guide our clients to a lifetime of financial success.” We have established an accompanying corporate vision “to build an
exceptional company that clients value, shareholders prize and where our associates flourish.” These tenets are fundamental to our business
strategies and operations.
We are highly focused on serving the needs of private businesses, their owner families and other professionals. This is achieved through full
product offerings in two primary segments: commercial banking and wealth management.
Through Enterprise, our 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 and international trade services complement
our lending capabilities.
The wealth management line of business includes the Company’s trust operations and Millennium. Enterprise Trust, a division of Enterprise
(“Enterprise Trust” or “Trust”) provides financial planning, advisory, investment management and trust services to our target markets. Business
financial services are focused in the areas of retirement plans, management compensation and management succession planning. Personal advisory
services include estate planning, financial planning, business succession planning and retirement planning services.
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Investment management and fiduciary services are provided to individuals, businesses, institutions and nonprofit organizations. Additional
information on our operating segments can be found on Pages 19 and 84.
Our executive offices are located at 150 North Meramec, Clayton, Missouri 63105 and our telephone number is (314) 725-5500.
Available Information
The Company’s 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. Our filings with the SEC are also available on the SEC’s website
at http://www.sec.gov.
Business Strategy
Our general business strategy is to generate superior shareholder returns by providing comprehensive financial services through banking and
wealth management lines of business primarily to private businesses, their owner families and other success-minded individuals.
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 – Our historical growth strategy has been largely client relationship driven. We continuously seek 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 us to attract clients with significant and growing borrowing needs, and maintain those relationships as they grow in tandem
with our increasing capacity to fund client loan needs. Our banking officers are typically highly experienced. As a result of our long-term
relationship orientation, we are able to fund loan growth primarily with core deposits from our business and professional clients. This is
supplemented by borrowing from the Federal Home Loan Bank of Des Moines (the “FHLB”), and by issuing brokered certificates of deposits,
priced at or below alternative cost of funds.
Growing Wealth Management business – Enterprise Trust offers both 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.
Millennium provides additional financial advisory capabilities, insurance product access and market reach that supplement our trust services. This
subsidiary has also expanded our fee income sources.
Capitalizing on technology – We view our technological capabilities to be a competitive advantage. Our systems provide Internet banking,
expanded treasury management products, check and document imaging, as well as a 24-hour voice response system. Other services currently
offered by Enterprise 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 portfolios for each bank are subject to ongoing monitoring by a loan review function that reports directly to the audit
committee of our board of directors.
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 increase earnings per share and generate higher returns on equity.
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Market Areas and Approach to Geographic Expansion
Enterprise operates in the St. Louis, Kansas City and Phoenix metropolitan areas. Through Millennium, subject to applicable regulatory restrictions,
the Company also provides services in markets across the United States.
The Company, 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.
The Company has four Enterprise banking facilities in the St. Louis metropolitan area. The St. Louis region enjoys a stable, diverse economic base
and is ranked the 19th largest metropolitan statistical area in the United States. It is an attractive market for us with nearly 70,000 privately held
businesses and over 61,000 households with investible assets of $1.0 million or more. We are the largest publicly-held, locally headquartered bank
in this market.
Acquisitions in 2006 and 2007 increased the Company’s assets in the Kansas City market to more than $700.0 million, making us one of the fastest
growing banks in the Kansas City market. At December 31, 2008, the Company had seven banking facilities in the Kansas City Market. Kansas City
is also an attractive private company market with over 50,000 privately held businesses and over 42,000 households with investible assets of $1.0
million or more. To more efficiently deploy our resources, during 2007, the Company established a plan to streamline our Kansas City branch
network. On February 28, 2008, we sold the Enterprise branch in Liberty, Missouri and on July 31, 2008, we sold the Kansas state bank charter of
Great American along with the DeSoto, Kansas branch. See Item 8, Note 2 – Acquisitions and Divestitures for more information.
In 2007, the Company announced its intent to expand to Arizona, and subsequently applied for a new Arizona bank charter in 2008. Banking
regulators have curtailed new charter approvals as a result of conditions in the Arizona real estate market. However, the Enterprise loan production
office located in Phoenix continues to grow and build a client base. Despite the market downturn in residential real estate, we believe the Phoenix
market offers substantial long-term growth opportunities for Enterprise. The demographic and geographic factors that propelled Phoenix into one of
the fastest growing and most dynamic markets in the country still exist, and we believe these factors should drive continued growth in that market
long after the current real estate slump is over. Today, Phoenix has more than 86,000 privately held businesses and 81,000 households with
investible assets over $1.0 million each.
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, the St. Louis, Kansas City and Phoenix markets have experienced an increase in de
novo banks. 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
General
We are subject to state and federal banking laws and regulations which govern virtually all aspects of operations. These laws and regulations are
intended to protect depositors, and to a lesser extent, shareholders. The numerous regulations and policies promulgated by the regulatory
authorities create a difficult and ever-changing atmosphere in which to operate. The Company commits substantial resources in order to comply
with these statutes, regulations and policies.
Financial 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 “Liquidity and Capital Resources” in the Management Discussion and Analysis for more information on our capital
adequacy and “Bank Subsidiary – Community Reinvestment Act” below for more information on Community Reinvestment.
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.
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Emergency Economic Stabilization Act of 2008: In response to recent unprecedented market turmoil, the Emergency Economic Stabilization Act
(“EESA”) was enacted on October 3, 2008. EESA authorizes the Secretary of the Treasury (the “Secretary”) to purchase up to $700 billion in
troubled assets from financial institutions under the Troubled Asset Relief Program (“TARP”.) Troubled assets include residential or commercial
mortgages and related instruments originated prior to March 14, 2008 and any other financial instrument that the Secretary determines, after
consultation with the Chairman of the Board of Governors of the Federal Reserve System, the purchase of which is necessary to promote financial
stability. If the Secretary exercises his authority under TARP, EESA directs the Secretary to establish a program to guarantee troubled assets
originated or issued prior to March 14, 2008. The Secretary is authorized to purchase up to $250.0 billion in troubled assets immediately and up to
$350.0 billion upon certification by the President that such authority is needed. The Secretary’s authority will be increased to $700.0 billion if the
President submits a written report to Congress detailing the Secretary’s plans to use such authority unless Congress passes a joint resolution
disapproving such amount within 15 days after receipt of the report. The Secretary’s authority under TARP expires on December 31, 2009 unless the
Secretary certifies to Congress that extension is necessary provided that his authority may not be extended beyond October 3, 2010.
Institutions selling assets under TARP will be required to issue warrants for common or preferred stock or senior debt to the Secretary. If the
Secretary purchases troubled assets directly from an institution without a bidding process and acquires a meaningful equity or debt position in the
institution as a result or acquires more than $300.0 million in troubled assets from an institution regardless of method, the institution will be required
to meet certain standards for executive compensation and corporate governance. See Item 11 – Executive Compensation.
EESA increases the maximum deposit insurance amount up to $250,000 until December 31, 2009 and removes the statutory limits on the FDIC’s
ability to borrow from the Treasury during this period. The FDIC may not take the temporary increase in deposit insurance coverage into account
when setting assessments. EESA allows financial institutions to treat any loss on the preferred stock of the Federal National Mortgage Association
or Federal Home Loan Mortgage Corporation as an ordinary loss for tax purposes.
Pursuant to his authority under EESA, the Secretary created the TARP Capital Purchase Program under which the Treasury Department will invest
up to $250 billion in senior preferred stock of U.S. banks and savings associations or their holding companies.
The Company applied to receive an investment by the Treasury under the Capital Purchase Program and our application was approved in November
2008. On December 19, 2008, the Company entered into a Letter Agreement and Securities Purchase Agreement (collectively, the “Purchase
Agreement”) with the United States Department of the Treasury (“Treasury”) under the TARP Capital Purchase Program, pursuant to which the
Company sold (i) 35,000 shares of EFSC Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) and (ii) a warrant
(the “Warrant”) to purchase 324,074 shares of EFSC common stock, par value $0.01 per share (the “Common Stock”), for an aggregate investment
by the Treasury of $35.0 million.
The Series A Preferred Stock will qualify as Tier 1 capital and will pay cumulative dividends at a rate of 5% per annum for the first five years, and 9%
per annum thereafter. The Series A Preferred Stock may be redeemed by EFSC after three years. Prior to the end of three years, the Series A
Preferred Stock may be redeemed by EFSC only with proceeds from a qualifying sale of common stock of EFSC (a “Qualified Equity Offering”),
although amendments to EESA enacted in February 2009 eliminate this restriction on the means of redeeming the Senior Preferred Stock.
Pursuant to the terms of the Purchase Agreement, our ability to declare or pay dividends or distributions on, or purchase, redeem or otherwise
acquire for consideration, shares of Junior Stock (as defined below) and Parity Stock (as defined below) will be subject to restrictions, including a
restriction against increasing dividends from the last quarterly cash dividend per share ($0.0525) declared on the Common Stock prior to December
19, 2008. The redemption, purchase or other acquisition of trust preferred securities of EFSC or our affiliates will also be restricted. These
restrictions will terminate on the earlier of (a) the third anniversary of the date of issuance of the Series A Preferred Stock and (b) the date on which
the Series A Preferred Stock has been redeemed in whole or Treasury has transferred all of the Series A Preferred Stock to third parties. The
restrictions described in this paragraph are set forth in the Purchase Agreement.
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In addition, the ability of EFSC to declare or pay dividends or distributions on, or repurchase, redeem or otherwise acquire for consideration, shares
of its Junior Stock and Parity Stock will be subject to restrictions in the event that EFSC fails to declare and pay full dividends (or declare and set
aside a sum sufficient for payment thereof) on its Series A Preferred Stock.
“Junior Stock” means the Common Stock and any other class or series of EFSC stock, the terms of which expressly provide that it ranks junior to the
Series A Preferred Stock as to dividend rights and/or rights on liquidation, dissolution or winding up of EFSC. “Parity Stock” means any class or
series of EFSC stock, the terms of which do not expressly provide that such class or series will rank senior or junior to the Series A Preferred Stock
as to dividend rights and/or rights on liquidation, dissolution or winding up of EFSC (in each case without regard to whether dividends accrue
cumulatively or non-cumulatively.)
The Warrant has a 10-year term and is immediately exercisable upon its issuance, with an exercise price, subject to anti-dilution adjustments, equal
to $16.20 per share of the Common Stock. Treasury has agreed not to exercise voting power with respect to any shares of Common Stock issued
upon exercise of the Warrant.
The Series A Preferred Stock and the Warrant were issued in a private placement exempt from registration pursuant to Section 4(2) of the Securities
Act of 1933, as amended. Upon the request of Treasury at any time, EFSC has agreed to promptly enter into a deposit arrangement whereby the
Series A Preferred Stock may be deposited and depositary shares (“Depositary Shares”), representing fractional shares of Series A Preferred Stock,
may be issued. EFSC agreed to register the Series A Preferred Stock, the Warrant, the shares of Common Stock underlying the Warrant (the
“Warrant Shares”) and Depositary Shares, if any, as soon as practicable after the date of the issuance of the Series A Preferred Stock and the
Warrant. These shares were registered with the SEC on Form S-3 on January 16, 2009. Neither the Series A Preferred Stock nor the Warrant will be
subject to any contractual restrictions on transfer, except that Treasury may only transfer or exercise an aggregate of one-half of the Warrant Shares
prior to the earlier of the redemption of 100% of the shares of Series A Preferred Stock and December 31, 2009.
The Purchase Agreement also subjects EFSC to certain of the executive compensation limitations included in the EESA. As a result, as a condition
to the closing of the transaction, each of Messrs. Peter F. Benoist, Frank H. Sanfilippo, Stephen P. Marsh and John G. Barry and Ms. Linda M.
Hanson, EFSC’s Executive Officers (as defined in the Purchase Agreement) (the “Senior Executive Officers”), (i) executed a waiver (the “Waiver”)
voluntarily waiving any claim against the Treasury or EFSC for any changes to such Senior Executive Officer’s compensation or benefits that are
required to comply with the regulation issued by the Treasury under the TARP Capital Purchase Program as published in the Federal Register on
October 20, 2008 and acknowledging that the regulation may require modification of the compensation, bonus, incentive and other benefit plans,
arrangements and policies and agreements (including so-called “golden parachute” agreements) (collectively, “Benefit Plans”) as they relate to the
period the Treasury holds any equity or debt securities of EFSC acquired through the TARP Capital Purchase Program; and (ii) entered into a letter
agreement (the “Letter Agreement”) with EFSC amending the Benefit Plans with respect to such Senior Executive Officer as may be necessary,
during the period that the Treasury owns any debt or equity securities of EFSC acquired pursuant to the Purchase Agreement or the Warrant, as
necessary to comply with Section 111(b) of the EESA.
The American Recovery and Reinvestment Act of 2009 significantly amended Section 111(b) of the EESA and imposed more severe restrictions on
the executive compensation while loosening the requirements to redeem the Series A Preferred Stock including a complete prohibition on any
severance or other compensation upon termination of employment, significant caps on bonuses, retention payments and executive compensation
and a “clawback” requirement requiring the return of any bonus or incentive compensation based on earnings or other financial data that later turn
out to be misstated. See Item 11 – Executive Compensation. These executive compensation restrictions may affect our ability to attract and retain
key executives.
The foregoing description of the TARP, the Capital Purchase Program and securities covered thereby is qualified in its entirety by reference to the
Letter Agreement – Standard Terms executed and delivered by the Company to the Secretary and the Warrant to Purchase Common Stock, both of
which were executed and delivered by the Company and delivered to the Secretary at the closing of the Company’s issuance of Series A Preferred
Stock to the Treasury.
Bank Subsidiary
At December 31, 2008, we had one wholly owned bank subsidiary. Enterprise is a Missouri trust company with banking powers and is subject to
supervision and regulation by the Missouri Division of Finance. In addition, as a Federal Reserve non-member bank, it is subject to supervision and
regulation by the FDIC. Enterprise is a member of the FHLB of Des Moines.
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Enterprise is subject to extensive federal and state regulatory oversight. The various regulatory authorities regulate or monitor all areas of the
banking 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. Enterprise 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: Enterprise 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.
Limitations on Loans and Transactions: 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.
Temporary Liquidity Guarantee Program: Pursuant to the Emergency Economic Stabilization Act of 2008, the maximum deposit insurance amount
has been increased from $100,000 to $250,000 until December 31, 2009. On October 13, 2008, the FDIC established a Temporary Liquidity Guarantee
Program (“TLGP”) under which the FDIC will fully guarantee all non-interest-bearing transaction accounts and all senior unsecured debt of insured
depository institutions or their qualified holding companies issued between October 14, 2008 and June 30, 2009. Senior unsecured debt would
include federal funds purchased and certificates of deposit outstanding to the credit of the bank. All eligible institutions participated in the program
without cost for the first 30 days of the program. After December 5, 2008, institutions will be assessed at the rate of 10 basis points for transaction
account balances in excess of $250,000 and at the rate of 75 basis points of the amount of debt issued. Institutions were required to opt out of the
Temporary Liquidity Guarantee Program by December 5, 2008 if they did not wish to participate. The Company and Enterprise opted into the TLGP.
Deposit Insurance Fund: The FDIC establishes rates for the payment of premiums by federally insured banks for deposit insurance. The Deposit
Insurance Fund (“DIF”) 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 is authorized to set the reserve ratio for the DIF annually at between 1.15% and 1.50% of estimated
insured deposits.
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To fund this program, pursuant to the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”), the FDIC adopted a new risk-based
deposit insurance premium system that provides for quarterly assessments. Beginning in 2007, institutions were grouped into one of four categories
based on their FDIC ratings and capital ratios. Each institution is assessed for deposit insurance at an annual rate of between 5 and 43 basis points
with the assessment rate to be determined according to a formula based on a weighted average of the institution’s individual FDIC component
ratings plus either five financial ratios or the average ratings of its long-term debt.
To restore its reserve ratio, the FDIC has proposed to raise the base annual assessment rate for all institutions by 7 basis points for the first quarter
of 2009. Assessment rates for first quarter of 2009 would range from 12 to 50 basis points. For the second quarter of 2009, the proposed initial base
assessment rates would range between 10 and 45 basis points. An institution’s assessment rate can be adjusted up or down as a result of additional
proposed risk adjustments based on the following: long-term debt ratings, weighted average FDIC component ratings, various financial ratios, the
institution’s reliance on brokered deposits and/or other secured liabilities and the amount of unsecured debt.
During 2008, Enterprise had a weighted average assessment rate of 5.9 basis points. Total payments to the FDIC were $1.2 million in 2008. Based on
an analysis of the proposed rates, underlying adjustments and our planned deposit base, we expect our FDIC insurance premiums to increase by
approximately $1.0 million in 2009.
On February 27, 2009, the FDIC imposed a one-time special assessment of 20 basis points, which will be collected in the third quarter of 2009. We
are awaiting the final ruling of the assessment calculation, but our initial expectation is that the one-time assessment could increase our 2009 FDIC
insurance premiums by as much as an additional $3.5 million. It is possible this amount may be reduced pending the final FDIC ruling.
Millennium
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 SEC is the federal
agency that is primarily responsible for the regulation of investment advisers. Millennium is licensed to sell insurance, including variable insurance
policies, in various states and is subject to regulation by the NASD. This regulation includes supervisory and organizational procedures intended
to assure compliance with securities laws, including qualification and licensing of supervisory and sales personnel and rules designed to promote
high standards of commercial integrity and fair and equitable principles of trade.
Employees
At December 31, 2008 we had approximately 348 full-time equivalent employees. None of the Company’s employees are covered by a collective
bargaining agreement. Management believes that its relationship with its employees is good.
ITEM 1A: RISK FACTORS
An investment in our common shares is subject to risks inherent to our business. Described below are certain risks and uncertainties that
management has identified as material. Before making an investment decision, you should carefully consider the risks and uncertainties described
below together with all of the other information included or incorporated by reference in this report. The risks and uncertainties described below are
not the only ones we face. Although we have significant risk management policies, procedures and verification processes in place, additional risks
and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair our business
operations.
If any of the following risks actually occur, our financial condition and results of operations could be materially and adversely affected. If this were
to happen, the value of our common shares could decline, perhaps significantly, and you could lose all or part of your investment.
7
Risks Related To Our Business
The financial markets in the United States and elsewhere have been experiencing extreme and unprecedented volatility and disruption. We are
exposed to significant financial and capital markets risk, including changes in interest rates, credit spreads and equity prices, which may have a
material adverse effect on our results of operations, financial condition and liquidity.
Our earnings and cash flows are largely dependent upon our net interest income. Net interest income is the difference between interest income
earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and
borrowed funds. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions, the
competitive environment within our markets, consumer preferences for specific loan and deposit products and policies of various governmental and
regulatory agencies and, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, influence not
only the amount of interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but such changes
also affect our ability to originate loans and obtain deposits as well as the fair value of our financial assets and liabilities. If the interest we pay on
deposits and other borrowings increases at a faster rate than the interest we receive on loans and other investments, our net interest income, and
therefore earnings, will be adversely affected. Earnings could also be adversely affected if the interest we receive on loans and other investments
falls more quickly than the interest we pay on deposits and other borrowings. Management uses simulation analysis to produce an estimate of
interest rate exposure based on assumptions and judgments related to balance sheet growth, customer behavior, new products, new business
volume, pricing and anticipated hedging activities. Simulation analysis involves a high degree of subjectivity and requires estimates of future risks
and trends. Accordingly, there can be no assurance that actual results will not differ from those derived in simulation analysis due to the timing,
magnitude and frequency of interest rate changes, changes in balance sheet composition, and the possible effects of unanticipated or unknown
events.
Since July 2007, credit markets have experienced difficult conditions, extraordinary volatility and rapidly widening credit spreads and, therefore,
have provided significantly reduced availability of liquidity for many borrowers. Uncertainties in these markets present significant challenges,
particularly for the financial services industry. Disruptions in the financial markets caused widening credit spreads resulting in markdowns and/or
losses by financial institutions from trading, hedging and other market activities. We obtain most of our funding from core deposit relationships
with our clients and invest those funds in loans to our clients or government-backed agency securities. Our investment portfolio contains no
mortgage-backed securities invested in subprime or alt-A mortgages.
Our activities in the national credit markets are limited to funding vehicles such as brokered certificates of deposit and subordinated debentures.
We have seen the cost of brokered deposits decline slower than other money market rates due to demand by financial institutions, and the cost and
availability of subordinated debentures has been severely and negatively impacted by this adverse environment. It is difficult to predict how long
these economic conditions will exist, and which of our markets, products or other businesses will ultimately be affected. In addition, further
reductions in market liquidity may make it difficult to value certain of our securities if trading becomes less frequent. As such, valuations may
include assumptions or estimates that may be more susceptible to significant period to period changes which could have a material adverse effect
on our consolidated results of operations or financial condition.
One important exposure to equity risk relates to the potential for lower earnings associated with our Wealth Management business, where fee
income is earned based upon the fair value of the assets under management. During 2008, the significant declines in equity markets have negatively
impacted assets under management. As a result, fee income earned from those assets has also decreased.
If significant, further declines in equity prices, changes in U.S. interest rates and changes in credit spreads individually or in combination, could
continue to have a material adverse effect on our consolidated results of operations, financial condition and liquidity both directly and indirectly by
creating competition and other pressures such as employee retention issues.
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a
substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities or on terms which are
acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general. Factors that could
detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the markets
in which our loans are concentrated or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not
specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services
industry in light of the recent turmoil faced by banking organizations and the continued deterioration in credit markets.
8
The Company depends on payments from Enterprise, including dividends and payments under service agreements and tax sharing agreements, for
substantially all of the Company’s revenue. Federal and state regulations limit the amount of dividends and the amount of payments that Enterprise
may make to the Company under service and tax sharing agreements. See “Supervision and Regulation”. In the event Enterprise becomes unable to
pay dividends to the Company or make payments under the service agreements or tax sharing agreements the Company may not be able to service
our debt, pay our other obligations or pay dividends on the Series A Preferred Stock or our common stock. Accordingly, our inability to receive
dividends or other payments from the Bank could also have a material adverse effect on our business, financial condition and results of operations
and the value of investments in the Series A Preferred Stock or our common stock.
At December 31, 2008, the Company had $0 outstanding on its $16.0 million line of credit. While the line of credit does not expire until April 2009, we
do not have any current availability under the line due to our noncompliance with a certain covenant regarding classified loans as a percentage of
bank equity and loan loss reserves. We may be unable to arrange for a holding company line of credit in 2009 given the uncertainties around bank
industry performance. However, we believe our current level of cash at the holding company will be sufficient to meet all projected cash needs in
2009.
We believe the level of liquid assets at Enterprise is sufficient to meet current and anticipated funding needs. In addition to amounts currently
borrowed, at December 31, 2008, Enterprise could borrow an additional $164.3 million available from the FHLB of Des Moines under blanket loan
pledges and an additional $310.5 million available from the Federal Reserve Bank under pledged loan agreements. Enterprise also has access to over
$70.0 million in overnight federal funds lines from various correspondent banks. See “Liquidity and Capital Resources” for more information.
We are subject to credit and collateral risk.
There are inherent risks associated with our lending activities. These risks include, among other things, the impact of changes in interest rates and
changes in the economic conditions in the markets where we operate. Increases in interest rates and/or weakening economic conditions could
adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans. The real estate downturn in
our geographic markets has hurt our business because a majority of our loans are secured by real estate. If real estate prices continue to decline, the
value of real estate collateral securing our loans will be reduced. Our ability to recover on defaulted loans by foreclosing and selling real estate
collateral will be further diminished and we would likely suffer losses on defaulted loans. Substantially all of our real property collateral is located in
Missouri and Kansas. Over the past nine months, real estate values, particularly residential real estate values, have deteriorated in our markets. As a
result, our 2008 charge-offs were significantly higher than historical levels. During 2008, we incurred $12.7 million of net-charge-offs, or 0.70% of
average loans compared to $2.0 million, or 0.14%, of average loans for 2007.
Various factors may cause our allowance for loan losses to increase.
We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, that represents
management’s estimate of probable losses within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to
reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance reflects management’s continuing evaluation of
industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political and regulatory
conditions; and unexpected losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for loan losses
inherently involves a degree of subjectivity and requires that we make significant estimates of current credit risks and future trends, all of which
may undergo material changes. The loan loss allowance increased in 2008 due to changes in economic conditions affecting borrowers, new
information regarding existing loans, and identification of additional problem loans. We continue to monitor our loan loss allowance and may need
to increase it if factors continue to deteriorate. In addition, bank regulatory agencies and our independent auditors periodically review our
allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on
judgments that can differ somewhat from those of our own management. In addition, if charge-offs in future periods exceed the allowance for loan
losses (i.e., if the loan allowance is inadequate), we will need additional loan loss provisions to increase the allowance for loan losses. Additional
provisions to increase the allowance for loan losses, should they become necessary, would result in a decrease in net income and capital, and may
have a material adverse effect on our financial condition and results of operations. Due to strong loan growth, an increase in non-performing loans
and adverse risk rating changes primarily in the residential builder portfolio, the provision for loan losses was $22.5 million for 2008 compared to $4.6
million for 2007.
9
If our businesses do not perform well, we may be required to recognize an impairment of our goodwill or intangible assets or to establish a
valuation allowance against the deferred income tax asset, which could have a material adverse effect on our results of operations and financial
condition.
Goodwill represents the excess of the amounts we paid to acquire subsidiaries and other businesses over the fair value of their net assets at the
date of acquisition. We test goodwill at least annually for impairment. Impairment testing is performed based upon estimates of the fair value of the
“reporting unit” to which the goodwill relates. The reporting unit is the operating segment or a business one level below that operating segment if
discrete financial information is prepared and regularly reviewed by management at that level. The fair value of the reporting unit is impacted by the
performance of the business and could be adversely impacted by any efforts made by the Company to limit risk. If it is determined that the goodwill
or other long-term intangible asset has been impaired, the Company must write down the asset by the amount of the impairment, with a
corresponding charge to net income. Such writedowns could have a material adverse effect on our results of operations and financial position.
During 2008, we took an impairment charge of $9.2 million, pre-tax, with respect to our Millennium reporting unit. At December 31, 2008, the goodwill
balance included in the consolidated balance sheet for the Millennium reporting unit was $3.1 million. It is possible that additional impairment at
Millennium may occur in 2009.
The Company’s 2008 analysis of goodwill at the Banking reporting unit indicated that no impairment existed at December 31, 2008. If current market
conditions persist during 2009, in particular, if the EFSC common share price falls and consistently remains below book value per share, the
Company may need to test for goodwill impairment at an interim date. Subsequent reviews of goodwill could result in additional impairment of
goodwill during 2009.
Deferred income tax represents the tax effect of the differences between the book and tax basis of assets and liabilities. Deferred tax assets are
assessed periodically by management to determine if they are realizable. If based on available information, it is more likely than not that the deferred
income tax asset will not be realized, then a valuation allowance must be established with a corresponding charge to net income. As of December 31,
2008, the Company did not carry a valuation allowance against its deferred tax asset balance of $15.7 million. Future facts and circumstances may
require a valuation allowance. Charges to establish a valuation allowance could have a material adverse effect on our results of operations and
financial position.
We may be adversely affected by the soundness of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many
different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including Federal
Home Loan banks, commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose us
to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when the collateral we hold cannot
be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to us. Any such losses
could have a material adverse affect on our financial condition and results of operations.
Our profitability depends significantly on economic conditions in the geographic regions in which we operate.
The regional economic conditions in areas where we conduct our business have an impact on the demand for our products and services as well as
the ability of our customers to repay loans, the value of the collateral securing loans and the stability of our deposit funding sources. A significant
decline in general economic conditions caused by inflation, recession, an act of terrorism, outbreak of hostilities or other international or domestic
occurrences, unemployment, changes in securities markets or other factors, such as severe declines in the value of homes and other real estate,
could also impact these regional economies and, in turn, have a material adverse effect on our financial condition and results of operations.
We operate in a highly competitive industry and market areas.
We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and may have more
financial resources. Such competitors primarily include national and super-regional banks as well as smaller community banks within the markets in
which we operate. However, we also face competition from many other types of financial institutions, including, without limitation, credit unions,
mortgage banking companies, mutual funds, insurance companies, investment management firms, and other local, regional and national financial
services firms. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes
and continued consolidation. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services
traditionally provided by banks.
10
Our ability to compete successfully depends on a number of factors, including, among other things:
l our ability to develop and execute strategic plans and initiatives;
l our ability to develop, maintain and build upon long-term client relationships based on quality service, high ethical standards and safe,
sound assets;
l our ability to expand our market position;
l
l
l
the scope, relevance and pricing of products and services offered to meet client needs and demands;
the rate at which we introduce new products and services relative to our competitors; and
industry and general economic trends.
Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and
profitability, which, in turn, could have a material adverse effect on our financial condition and results of operations.
We are subject to extensive government regulation and supervision.
Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not
shareholders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other
things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to
statutes, regulations or regulatory policies; changes in the interpretation or implementation of statutes, regulations or policies; and/or continuing to
become subject to heightened regulatory practices, requirements or expectations, could affect us in substantial and unpredictable ways. Such
changes could subject us to additional costs, limit the types of financial services and products that we may offer and/or increase the ability of non-
banks to offer competing financial services and products, among other things. Failure to appropriately comply with laws, regulations or policies
(including internal policies and procedures designed to prevent such violations) could result in sanctions by regulatory agencies, civil money
penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations.
Our controls and procedures may fail or be circumvented.
Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and
procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only
reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or
failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and
financial condition.
Recent and possible acquisitions may disrupt our business and dilute shareholder value.
Acquiring other banks or businesses involves various risks commonly associated with acquisitions, including, among other things:
l potential exposure to unknown or contingent liabilities of the target company;
l exposure to potential asset quality issues of the target company;
l difficulty and expense of integrating the operations and personnel of the target company;
l potential disruption to our business;
l potential diversion of our management’s time and attention;
l
the possible loss of key employees and customers of the target company;
l difficulty in estimating the value (including goodwill) of the target company; and
l potential changes in banking or tax laws or regulations that may affect the target company.
We periodically evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other
financial institutions and financial services companies. As a result, merger or acquisition discussions and, in some cases, negotiations may take
place and future mergers or acquisitions involving cash, debt or equity securities may occur at any time. Acquisitions typically involve the payment
of a premium over book and market values, and, therefore, some dilution of our tangible book value and net income per common share may occur in
connection with any future transaction. Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or
product presence, and/or other projected benefits from an acquisition could have a material adverse effect on our financial condition and results of
operations.
11
We may not be able to attract and retain skilled people.
Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people in most activities in which we are
engaged can be intense and we may not be able to hire or retain the people we want and/or need. Although we maintain employment agreements
with certain key employees, and have incentive compensation plans aimed, in part, at long-term employee retention, the unexpected loss of services
of one or more of our key personnel could still occur, and such events may have a material adverse impact on our business because of the loss of
the employee’s skills, knowledge of our market, years of industry experience and the difficulty of promptly finding qualified replacement personnel.
The restrictions on executive compensation imposed by EESA and ARRA on all participants in TARP severely limit the amount and types of
compensation we can pay our executive officers and key employees, including a complete prohibition on any severance or other compensation
upon termination of employment, significant caps on bonuses, retention payments and executive compensation and a “clawback” requirement
requiring the return of any bonus or incentive compensation based on earnings or other financial data that later turn out to be misstated. These
restrictions may affect our ability to attract and retain key employees.
Our information systems may experience an interruption or breach in security.
We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of these
systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. While we
have policies and procedures designed to prevent or limit the effect of the possible failure, interruption or security breach of our information
systems, there can be no assurance that any such failure, interruption or security breach will not occur or, if they do occur, that they will be
adequately addressed. The occurrence of any failure, interruption or security breach of our information systems could damage our reputation, result
in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of
which could have a material adverse effect on our financial condition and results of operations.
Risks Associated With Our Shares
Our share price can be volatile.
Share price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. Our share price
can fluctuate significantly in response to a variety of factors including, among other things:
l actual or anticipated variations in quarterly results of operations;
l
recommendations by securities analysts;
l operating and stock price performance of other companies that investors deem comparable to our business;
l news reports relating to trends, concerns and other issues in the financial services industry;
l perceptions of us and/or our competitors in the marketplace;
l
l
significant acquisitions or business combinations or capital commitments entered into by us or our competitors; or
failure to integrate acquisitions or realize anticipated benefits from acquisitions.
General market fluctuations, market disruption, industry factors and general economic and political conditions and events, such as economic
slowdowns or recessions, interest rate changes or credit loss trends, could also cause our share price to decrease regardless of operating results.
An investment in our common shares is not an insured deposit.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other
public or private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere
in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire our common
shares, you may lose some or all of your investment.
Our certificate of incorporation authorizes the issuance of preferred stock by our board of directors.
Our Certificate of Incorporation authorizes the issuance of up to 5,000,000 shares of preferred stock with designations, powers, preferences, rights,
qualifications and limitations determined from time to time by our Board of Directors. Accordingly, our Board of Directors is empowered, without
stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting, or other rights, which could adversely affect the
voting power or other rights of the holders of the common stock. In the event of issuance, the preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. Although we have no present intention to
issue any additional shares of its authorized preferred stock, there can be no assurance that the Company will not do so in the future.
Not applicable.
12
ITEM 1B: UNRESOLVED SEC COMMENTS
ITEM 2: PROPERTIES
Banking facilities
Our executive offices are located at 150 North Meramec, Clayton, Missouri, 63105. As of December 31, 2008, we had four banking locations and a
support center in the St. Louis metropolitan area and seven banking locations in the Kansas City metropolitan area. We own four of the facilities
and lease the remainder. In March 2006, the Company purchased its operations center located in St. Louis County, Missouri. Most of the leases
expire between 2009 and 2017 and include one or more renewal options of 5 years. One lease expires in 2026. All the leases are classified as
operating leases. We believe all our properties are in good condition.
Wealth management facilities
In February 2008, we purchased approximately 11,000 square feet of commercial condominium space in Clayton Missouri located approximately two
blocks from our executive offices. We relocated the St. Louis-based Trust Advisory operations to this location in the fourth quarter of 2008.
Enterprise Trust also has offices in Kansas City. Expenses related to the space used by Enterprise Trust are allocated to the Wealth Management
segment.
As of December 31, 2008, Millennium had 13 locations in 9 states throughout the United States. The executive offices are located in Nashville,
Tennessee. None of the locations are owned by Millennium. The leases are classified as operating leases and expire in various years through 2011.
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
A Special Meeting of Shareholders was held on December 12, 2008. Proxies were solicited pursuant to Regulation 14A of the Securities Exchange
Act of 1934. The shareholders were asked to approve an amendment to the Company’s Certificate of Incorporation to authorize the issuance of up
to 5,000,000 shares of preferred stock. At the meeting, shareholders approved the amendment by a vote of 7,758,555 “for” the amendment, 1,264,544
“against” the amendment and 54,340 abstaining. Following the filing of the amendment to the Certificate of Incorporation, the Company’s Directors
designated 35,000 shares of preferred stock for sale to the Treasury under the TARP program.
13
PART II
ITEM 5: MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASE OF EQUITY SECURITIES
Common Stock Market Prices
The Company’s common stock trades on the NASDAQ Global Select Market under the symbol “EFSC”. Below are the dividends declared by
quarter along with what the Company believes are the high and low closing sales prices for the common stock. There may have been other
transactions at prices not known to the Company. As of March 2, 2009, the Company had 719 common stock shareholders of record and a market
price of $9.06 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.
Closing Price
High
Low
Cash dividends paid
on common shares
4th Qtr 3rd Qtr
$ 22.56
2008
2nd Qtr 1st Qtr
$ 18.85
$ 25.00
4th Qtr 3rd Qtr
$ 24.34
2007
2nd Qtr 1st Qtr
$ 24.86
$ 28.00
23.04
15.95
25.25
18.60
25.00
18.19
26.81
20.02
28.15
24.25
31.36
27.73
$ 23.81
25.70
19.97
$ 15.24
22.49
11.49
0.0525
0.0525
0.0525
0.0525
0.0525
0.0525
0.0525
0.0525
14
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2008, regarding securities issued and to be issued under our equity compensation
plans that were in effect during the year ended December 31, 2008:
Number of securities to Weighted-average
exercise price of
be issued upon exercise
outstanding options,
of outstanding options,
warrants and rights
warrants and rights
(b)
(a)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding shares
reflected in column (a)
(c)
827,471
$17.03
965,869
--
827,471 (1)
--
$17.03
--
965,869 (2)
Plan Category
Equity compensation
plans approved by the
Company's shareholders
Equity compensation
plans not approved by
the Company's
shareholders
Total
(1) Includes the following:
l 29,090 shares of common stock to be issued upon exercise of outstanding stock options under the 1996 Stock Incentive Plan (Plan III);
l 190,035 shares of common stock to be issued upon exercise of outstanding stock options under the 1999 Stock Incentive Plan (Plan IV);
l 198,670 shares of common stock to be issued upon exercise of outstanding stock options under the 2002 Stock Incentive Plan (Plan V);
l 407,176 shares of common stock used as the base for grants of stock settled stock appreciation rights under the 2002 Stock Incentive Plan
(Plan V);
l 2,500 shares of common stock to be issued upon exercise of outstanding stock options under the 1998 Nonqualified Plan.
(2) Includes the following:
l 28,800 shares of common stock available for issuance under the 1999 Stock Incentive Plan (Plan IV);
l 856,723 shares of common stock available for issuance under the 2002 Stock Incentive Plan (Plan V);
l 80,346 shares of common stock available for issuance under the Non-management Director Stock Plan.
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. Holders of our Series A Preferred Stock originally issued to the United States
Treasury on December 19, 2008, are entitled to cumulative dividends of 5% per annum. Dividends payable on the Series A Preferred Stock are
currently $1.8 million per annum. Dividends on the Series A Preferred Stock are prior to and in preference to any dividends payable on our common
stock. Pursuant to the terms of the Purchase Agreement under the TARP Capital Purchase Program, prior to December 19, 2011 our ability to declare
or pay dividends is subject to restrictions, including a restriction against increasing the dividend rate from the last quarterly cash dividend per share
($0.0525) declared on the Common Stock prior to December 19, 2008. The amount of dividends, if any, that may be declared by the Company also
depends on many other factors, including future earnings, bank regulatory capital requirements and business conditions as they affect the
Company and its subsidiaries. As a result, no assurance can be given that dividends will be paid in the future with respect to the Company’s
common stock. In addition, the Company currently plans to retain most of its earnings to strengthen our balance sheet given the weak economic
environment.
15
Repurchases of Common Stock
On August 27, 2007, the Company’s Board of Directors authorized a one year stock repurchase program of up to 625,000 shares, or approximately
5.00%, of the Company’s outstanding common stock in the open market or in privately negotiated transactions. No purchases were made in 2008
and the program expired in August 2008 without reauthorization. In addition, participants in TARP are not allowed to repurchase shares of common
stock. All repurchased shares are being held as Treasury stock. See Item 8, Note 1 – Significant Accounting Policies for more information.
Performance Graph
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 cumulative total shareholder return on the Company’s common stock from December 31, 2003 through December
31, 2008. 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, 2003 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.
Index
Enterprise Financial Services Corp
NASDAQ Composite
SNL Bank $1B-$5B
Period Ending
12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08
113.30
78.72
84.81
174.94
132.39
102.26
164.16
110.08
121.31
237.34
120.56
140.38
133.02
108.59
123.42
100.00
100.00
100.00
16
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, 2008. 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
consolidated subsidiary
Income before income taxes
Income taxes
NET INCOME
PER SHARE DATA:
Basic earnings per common share
Year ended December 31,
2008
2007
2006
2005
2004
$ 117,981
$ 122,517
$
94,418
$
68,108
$
48,893
51,258
66,723
22,475
25,273
63,505
-
6,016
1,586
4,430
0.35
$
$
61,465
61,052
4,615
19,673
49,516
-
26,594
9,016
17,578
1.44
$
$
43,141
51,277
2,127
16,916
41,394
(875)
23,797
8,325
15,472
1.41
$
$
23,541
44,567
1,490
8,967
34,324
(113)
17,607
6,312
11,295
1.12
$
$
12,169
36,724
2,212
7,122
29,331
-
12,303
4,088
8,215
0.85
$
$
Diluted earnings per common share
Cash dividends paid on common shares
Book value per common share
Tangible book value per common share
0.34
0.21
14.31
10.24
1.40
0.21
13.96
8.86
1.36
0.18
11.52
8.43
1.05
0.14
8.85
7.27
0.82
0.10
7.44
7.23
BALANCE SHEET DATA:
Year end balances:
Loans
Allowance for loan losses
Goodwill
Intangibles, net
Assets
Deposits
Subordinated debentures
Borrowings
Shareholders' equity
Average balances:
Loans
Earning assets
Assets
Interest-bearing liabilities
Shareholders' equity
SELECTED RATIOS:
Return on average common equity
Return on average assets
Efficiency ratio
Average common 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
$
1,977,175
$
1,641,432
$
1,311,723
$
1,002,379
$
898,505
31,309
48,512
3,504
2,270,174
1,792,784
85,081
166,117
217,788
1,828,434
1,952,942
2,127,671
1,711,048
183,819
21,593
57,177
6,053
1,999,118
1,585,012
56,807
169,581
173,149
1,495,807
1,619,425
1,753,254
1,365,471
161,359
2.43 %
10.89 %
0.21
69.03
8.58
6.09
3.00
3.09
3.47
1.50
1.92
0.70
1.58
1.00
61.34
9.20
7.63
4.50
3.13
3.83
0.77
0.78
0.14
1.32
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
13.69 %
1.12
60.70
8.15
7.33
4.09
3.24
4.01
0.49
0.52
0.10
1.30
12,990
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
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
13.86 %
11.93 %
0.98
64.12
7.10
6.25
2.74
3.51
4.11
0.14
0.11
0.02
1.30
0.81
66.90
6.83
5.10
1.63
3.47
3.84
0.20
0.18
0.13
1.30
11.76
60.09
15.01
12.78
12.58
17
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 results of operations and financial condition of the Company for the three years ended
December 31, 2008. 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.
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.
Over the past eighteen months, banks and financial institutions of all sizes have been impacted by adverse conditions in the housing and credit
markets, and recent bank failures have heightened awareness and concern regarding the safety and soundness of all banks. The Company,
including its wholly owned bank subsidiary, Enterprise, are “well-capitalized” under the regulatory guidelines. Since September 2008, we have raised
$62.5 million in regulatory capital, raising our risk-based capital ratio to 12.81% - well in excess of the regulatory guidelines. On September 30, 2008,
Enterprise completed a $2.5 million private placement of subordinated capital notes. On December 12, 2008, we completed a private placement of
$25.0 million in Convertible Trust Preferred Securities that qualify as Tier II regulatory capital until they would convert to EFSC common stock. And
finally, on December 19, 2008, we received $35.0 million from the US Treasury under the Capital Purchase Program.
See “Supervision and Regulation”, “Liquidity and Capital Resources” and Item 8, Note 11 – Subordinated Debentures for more information.
We are concentrating our resources on growing our core banking and wealth management businesses and aggressively managing asset quality
through this credit cycle. The additional capital will strengthen our balance sheet and allows us to take advantage of opportunities that may emerge
as a result of the current unsettled nature of the financial industry. In addition, please note:
l We have not participated in the origination of subprime or Alt-A loans.
l We have not invested in securities that are secured by subprime loans.
l We have no common or preferred Federal National Mortgage Association (Fannie Mae) or Federal Home Loan Mortgage Corporation
(Freddie Mac) stock.
Operating Results
Net income for 2008 was $4.4 million, or $0.34 per fully diluted share, compared to $17.6 million, or $1.40 per fully diluted share in 2007. Included in
2008 results are:
l $9.2 million in pre-tax, non-cash goodwill and intangible impairment charges related to Millennium;
l $3.4 million in pre-tax gains on the sale of non-strategic branches in the Kansas City market; and
l $1.0 million pre-tax charge related to a payout under an employee retention agreement.
Excluding these non-recurring items, operating earnings for the year were $9.1 million, or $0.70, per share. We are presenting operating earnings and
loss figures, which are not financial measures as defined under U.S. GAAP, because we believe adjusting our results to exclude non-recurring items
provides shareholders with a more comparable basis for evaluating our period-to-period operating results and financial performance. Below is a
reconciliation of U.S. GAAP net (loss) income to operating (loss) earnings for the fourth quarter and year of 2008.
(All amounts net of tax, in thousands, except per share data)
U.S. GAAP net (loss) income
Impairment charges related to Millennium
Gain on sales of Kansas City nonstrategic branches/charter
Employee retention agreement
Operating (loss) earnings
4th Quarter 2008
Net loss
$ (3,952)
Diluted EPS
$ (0.32)
2,112
-
560
(1,280)
$
$
0.16
-
0.04
(0.12)
Total year 2008
Net income Diluted EPS
$ 0.34
$ 4,430
0.46
5,888
(0.15)
(1,880)
640
9,078
$
$
0.05
0.70
Our diluted earnings per share are $0.01 less than previously reported in the press release issued on January 29, 2009 on Form 8-K due to the
inclusion of preferred stock dividends that were not declared as of the press release date and not included in the earnings per share calculation at
that time.
18
Below are highlights of our Banking and Wealth Management segments. For more information on our segments, see Item 8, Note 20 – Segment
Reporting.
Banking
Our core banking business continues to perform relatively well in light of the unprecedented turmoil in the financial markets and the continued
deterioration of the housing market. Below is a summary of 2008:
l Loan growth – At December 31, 2008, portfolio loans were $1.977 billion, an increase of $336.0 million, or 20%, from December 31, 2007. The
strong net growth in loans is attributable in part to a more favorable competitive environment, with fewer competitors positioned today to
capture new business, resulting in both increased volumes and more favorable pricing. More than 60% of the net loan growth was related to
commercial and industrial businesses. Our loan portfolio mix at December 31, 2008, from both industry and collateral perspectives, did not
change significantly from December 31, 2007. Loans collateralized by commercial real estate totaled $829.0 million at year end 2008.
Approximately $318.0 million, or 38%, of that total, represented real estate that was “owner-occupied” by commercial and industrial
businesses.
Enterprise continues to operate a loan production office in central Phoenix. Through December 2008, the loan production office has
generated approximately $22.0 million of commercial and industrial and commercial real estate loans. In 2008, we applied for a de novo
Arizona state bank charter. Unfortunately, conditions have led the Arizona regulatory authorities to stop approvals for de novo charters and
as a result the most likely option to obtain a charter to operate a bank in Arizona is, through negotiated acquisition or an FDIC-assisted
transaction. We continue to believe in the long-term value in the Phoenix market and remain confident in our decision to establish a bank in
that region.
The Bank has continued its lending activities since the Treasury’s investment on December 19, 2008. From the close of business December
18, 2008 through February 28, 2009, the Bank funded $55.0 million in new loans and advanced another $80.4 million on existing loans. Total
portfolio loans, net of payoffs and paydowns, grew $29.1 million or roughly 8% annualized between December 18, 2008 and February 28,
2009. We continue to see loan opportunities in all our markets. During 2009, we expect our loan growth percentage to be in the high single
digits.
l Deposit growth – Deposit growth in 2008 was challenging. Across the financial industry, growing concern over the safety of bank deposits
caused some large balance clients to reduce their exposure by spreading funds among numerous financial institutions. Our focus for 2009 is
to reduce our reliance on brokered deposits, grow our core deposits and increase our percentage of non-interest bearing deposits. We have
adjusted our incentive programs to focus our associates on deposit gathering efforts and will be aggressively managing deposit rates to
achieve this objective.
During the fourth quarter of 2008, we increased core deposits $113.0 million, or 8%. While less than our historical fourth quarter deposit
surge, this increase is significant in that it occurred despite a massive investor flight to the Treasury markets driven by the instability and
volatility of the financial markets during that period. In 2008, total deposits grew $208.0 million, or 13%, to $1.793 billion. Brokered deposits
represented $336.0 million of this total, an increase of $222.0 million over December 31, 2007. Approximately $37.0 million of deposits were
sold as part of the Great American sale. Excluding the impact of the Great American sale and brokered deposits, core deposits increased
$23.0 million, or 2%, in 2008. For the year ended December 31, 2008, brokered deposits represented 19% of total deposits on average
compared to 7% for the year ended December 31, 2007. Non-interest bearing demand deposits represented 14% of total deposits at
December 31, 2008, compared to 18% of total deposits one year ago.
In July 2008, Enterprise became a participating depository institution in the Certificate of Deposit Accounts Registry Service, or CDARS, a
private network of institutions, which allows us to provide our customers with access to additional levels of FDIC insurance. As of
December 31, 2008, Enterprise had $60.0 million of reciprocal CDARS deposits outstanding.
We elected to “opt-in” to the expanded FDIC deposit insurance program and the government sponsored debt issuance guaranty program,
which represents additional sources of liquidity.
19
See “Supervision and Regulation” and “Liquidity and Capital Resources” for more information.
l Asset quality – We are entering the third year of slow residential housing activity in St. Louis and Kansas City with no significant
improvement expected in 2009. During the latter half of 2008, we performed an in-depth review to specifically target our higher risk real estate
loans where repayment is dependent on the sale of the underlying properties. Examples would be residential construction, commercial
construction, land acquisition and development, improved lots, and raw-land. The review:
l determined our geographic distribution of construction projects (those within our primary lending areas compared to those that are out-
of-market) along with distribution by counties;
l determined if we were exposed to concentration risk within residential subdivisions through an excessive number of builders, or
excessive number of speculative homes, or lots;
l assessed the establishment and use of interest reserves by determining if sufficient amounts were structured into the loans at
origination and determined if adequate amounts exist to carry the project to completion;
l assessed the adequacy of financial information and analysis at loan origination or modification; and
l evaluated disbursing procedures to ensure that loan advances are appropriate to the various stages of the construction project, which
minimizes the risk of the bank becoming fully funded on a loan when the project has not reached completion.
As a result of the review, we aggressively downgraded risk ratings primarily in the Kansas City region on residential construction loans,
which resulted in higher provision expense and loan loss reserves for the year. Although loans to residential builders represent only 12% of
our loan portfolio, they represent almost 40% of our nonperforming loans at December 31, 2008.
We are closely monitoring our portfolio to determine if the recession is impacting other sectors. We have not seen significant deterioration
in the commercial and industrial sector of our portfolio but anticipate continued economic weakness will adversely impact these borrowers in
2009. Commercial construction projects have slowed, but not as severely as in the residential sector. Builders are still working on backlogs,
but some projects are being cancelled and it appears 2010 may be slow.
Non-performing loans were $29.7 million, or 1.50%, of portfolio loans at December 31, 2008. The allowance for loan losses was $31.3 million,
or 1.58%, of portfolio loans vs. $21.6 million, or 1.32%, at the end of 2007. In 2008, we incurred $12.7 million of net charge-offs, or 0.70%, of
average loans compared to $2.0 million of net charge-offs, or 0.14%, of average loans in 2007. See “Allowance for Loan Losses” for more
information.
l Net Interest Rate Margin – Our fully tax-equivalent net interest rate margin was 3.47% for 2008 versus 3.83% for 2007. The margin has been
compressed as a result of sharply declining short-term rates, an increased volume of wholesale funding to support loan growth and higher
average levels of nonperforming loans.
l Noninterest Expense Reductions – In light of the difficult operating environment, during the fourth quarter of 2008, we took a number of
actions to reduce operating expenses. These actions included staff reductions in all three markets, reductions in variable compensation and
limitations on filling open positions and staff additions. These actions are expected to reduce noninterest expenses in 2009 by approximately
$1.8 million.
l Branch/Charter Sales and Expansion – As part of our expansion effort, we plan to continue our 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. As a result, on February 28, 2008, we sold the Enterprise branch in
Liberty, Missouri for an after tax gain of $315,000, or $0.02, per fully diluted share. On June 26, 2008, we merged the Claycomo branch of
Great American into Enterprise and on July 31, 2008, we sold the Great American bank charter along with the DeSoto, Kansas branch. The
sale generated an after-tax gain of almost $1.6 million, or $0.13, per fully diluted share. Please refer to Item 8, Note 2 – Acquisitions and
Divestitures for more information.
Wealth Management
The Wealth Management segment is comprised of Millennium, Enterprise Trust and our state tax credit brokerage activities. Wealth Management is
a strategic line of business consistent with our Company mission of “guiding our clients to a lifetime of financial success.” It is a driver of fee
income and is intended to help us diversify our dependency on bank spread incomes.
20
For 2008, Wealth Management recorded a pre-tax net loss of $6.7 million, including $9.2 million of impairment charges related to Millennium.
Excluding the Millennium impairment charges, pre-tax net income was $2.5 million for 2008, compared to $4.2 million for 2007. Revenues for Trust and
Millennium are net of commissions and other direct investment expenses such as custody charges and investment management expenses.
l Trust revenues – Revenues from the Trust division decreased $1.2 million, or 17%, for the year. The decline in the overall equity markets
along with lost advisory revenues due to personnel turnover earlier in the year were the primary drivers of the decrease. Trust assets under
administration were $1.2 billion at December 31, 2008, a 28% decrease over one year ago. We expect to see demand for our fiduciary services
increase in 2009 due to market disruptions resulting from the acquisition of a major St. Louis investment firm. During the fourth quarter of
2008, our Trust operations completed several initiatives designed to enhance client service including implementing a new client account
reporting and aggregation system.
l State tax credit brokerage activities – In 2008, we recognized approximately $4.2 million of net gains from state tax credit brokerage
activities whereby we sell certain state tax credits to our clients. Net gains associated with this activity were $792,000 in 2007. Of the 2008
total, $3.1 million represented the net effects from fair value adjustments on the tax credit assets and related interest rate caps used to
economically hedge the tax credits. The remaining increase reflects the full year of the brokerage activity compared to a partial year in 2007
and was consistent with the Company’s performance expectations for its first full year of operations.
l Millennium revenue – Millennium revenues decreased $1.9 million, or 28% for the year. While sales margins rebounded to near expected
levels in the fourth quarter of 2008, paid premiums sales were down from 2007 as a result of tighter underwriting standards, continued
disruption from the growing influence of aggregators and general turmoil in the financial services industry. We expect earnings before taxes
and amortization in 2009 to be flat with 2008.
l Millennium impairment charges –We evaluated Millennium’s goodwill and intangible assets for impairment during the third quarter of
2008. In connection with these tests, we determined that margin pressures reducing Millennium revenues continue to negatively affect
operating performance, thereby reducing the fair value of our investment in Millennium. As a result, the Company recorded a $5.9 million,
pre-tax goodwill impairment charge as of September 30, 2008. In the fourth quarter of 2008, due to slower paid premium sales and resulting
decreased earnings of Millennium, we identified and recorded an additional pre-tax goodwill impairment of $2.8 million and $500,000 of
intangible asset impairment. The charges did not reduce our regulatory capital or cash flow. See “Noninterest Expenses” and Item 8, Note 9
– Goodwill and Intangible Assets for more information.
RESULTS OF OPERATIONS ANALYSIS
Net Interest Income
Comparison of 2008 vs. 2007
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 reprice
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-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 is relatively neutral to rate changes. In response to the federal funds decreases in early 2008, which in turn lowered
the prime rate earned on many of our loans, we aggressively reduced deposit rates. This allowed us to partially offset the lower asset yields.
Following the December 2008 federal funds decreases, management chose to maintain the Enterprise prime rate at 4%. In addition, we are including
interest rate floors in many of our new and renewing variable rate loans.
Net interest income (on a tax-equivalent basis) increased $5.6 million, or 9%, from $62.1 million for 2007 to $67.7 million for 2008. Total interest
income decreased $4.6 million while total interest expense decreased $10.2 million.
21
Average interest-earning assets were $1.953 billion in 2008, an increase of $334.0 million, or 21%, from 2007. Loans accounted for the majority of the
growth, increasing by $333.0 million, or 22%, to $1.828 billion. Interest income on loans increased $16.8 million from growth and decreased by $21.3
million due to the impact of rates, for a net decrease of $4.5 million versus 2007.
Average interest-bearing liabilities increased $346.0 million, or 25%, to $1.711 billion compared to $1.365 billion for 2007. The growth in interest-
bearing liabilities resulted from a $99.0 million increase in interest-bearing core deposits, a $94.0 million increase in brokered certificates of deposit, a
$5.4 million increase in subordinated debentures, and a $147.0 million increase in borrowed funds including FHLB advances and federal funds
purchased. In December 2008, we began utilizing the Federal Reserve discount window, due to its lower borrowing rates. For 2008, interest expense
on interest-bearing liabilities increased $9.7 million due to growth while the impact of declining rates decreased interest expense on interest-bearing
liabilities by $19.9 million, for a net decrease of $10.2 million versus 2007. See “Liquidity and Capital Resources” for more information.
For the year ended December 31, 2008, the tax-equivalent net interest rate margin was 3.47% compared to 3.83% for 2007. The margin has been
compressed as a result of sharply declining short-term rates along with an increased volume of wholesale funding to support loan growth.
Approximately 0.11% of the decline is due to higher average levels of nonperforming loans in 2008 versus the prior year. In 2009, we expect margins
to remain flat as improved loan pricing is expected to be offset by more aggressive deposit pricing in our markets.
Comparison of 2007 vs. 2006
Net interest income (on a tax-equivalent basis) increased $9.9 million, or 19%, from $52.2 million for 2006 to $62.1 million for 2007. Total interest
income increased $28.2 million while total interest expense increased $18.3 million.
Average interest-earning assets were $1.619 billion in 2007, an increase of $319.0 million, or 25%, from 2006. Loans accounted for the majority of the
growth, increasing by $337.0 million, or 29%, to $1.496 billion. Average short-term investments declined by $17.0 million due to a decline in federal
funds sold. Interest income on loans increased $26.5 million from growth and $2.1 million due to the impact of rates, for a net increase of $28.6 million
versus 2006.
Average interest-bearing liabilities increased $310.0 million, or 29%, to $1.365 billion compared to $1.056 billion for 2006. The growth in interest-
bearing liabilities resulted from a $223.0 million increase in interest-bearing core deposits, a $31.0 million increase in brokered certificates of deposit,
a $21.0 million increase in subordinated debentures, and a $35.0 million increase in borrowed funds including FHLB advances. We continue to meet
loan funding demands with FHLB advances and brokered certificates of deposit. For 2007, interest expense on interest-bearing liabilities increased
$14.4 million due to growth while the impact of rising rates increased interest expense on interest-bearing liabilities by $3.9 million versus 2006.
For the year ended December 31, 2007, the tax-equivalent net interest rate margin was 3.83% compared to 4.01% for 2006. Approximately 0.05% of
the decline was due to higher average levels of nonperforming loans in 2007 versus the prior year. Additionally, higher levels of subordinated
debentures associated with the acquisition of Clayco negatively impacted the margin.
22
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.
For 2006, loans and deposits associated with NorthStar Bank NA (“NorthStar”) are included for six months. The loans and deposits associated with
Great American are included for ten months of 2007. Approximately $30.0 million of deposits associated with the DeSoto branch are included for
seven months of 2008.
(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
Noninterest-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
For the years ended December 31,
2008
2007
2006
Interest
Average
Interest
Average
Interest
Average
Average
Income/
Yield/
Average
Income/
Yield/
Average
Income/
Yield/
Balance
Expense Rate Balance
Expense Rate Balance
Expense
Rate
$ 1,798,065
$ 110,610
6.15% $ 1,463,133
$ 115,039 7.86% $ 1,130,482
$ 86,893 7.69%
30,369
2,776 9.14
32,674
2,824
1,828,434
113,386
111,902
5,268
804
11,802
48
295
124,508
5,611
1,952,942
118,997
6.20
4.71
5.97
2.50
4.51
6.09
1,495,807
117,863
111,332
5,093
936
11,350
53
543
123,618
5,689
1,619,425
123,552
8.64
7.88
4.57
5.66
4.78
4.60
7.63
28,628
2,412
1,159,110
89,305
111,811
4,530
1,140
28,317
141,268
55
1,416
6,001
1,300,378
95,306
8.43
7.70
4.05
4.82
5.00
4.25
7.33
40,349
158,907
(24,527)
44,417
108,716
(19,304)
42,282
58,649
(15,583)
$ 2,127,671
$ 1,753,254
$ 1,385,726
1,554
1.28%
3,078
2.56%
102,327
2,332
2.28%
121,371
687,867
9,594
588,561
1,407,393
58,851
244,804
13,786
55
24,525
39,920
3,536
7,802
2.00
0.57
4.17
2.84
6.01
3.19
3.00
1,711,048
51,258
221,925
10,879
1,943,852
183,819
120,418
579,029
11,126
503,926
1,214,499
53,500
97,472
23,578
125
26,083
52,864
3,859
4,742
1,365,471
61,465
215,610
10,814
1,591,895
161,359
4.07
1.12
5.18
4.35
7.21
4.86
4.50
496,590
19,213
4,164
57
357,706
16,230
960,787
37,832
32,704
62,029
2,343
2,966
1,055,520
43,141
3.87
1.37
4.54
3.94
7.16
4.78
4.09
207,328
9,878
1,272,726
113,000
Total liabilities & shareholders' equity
$ 2,127,671
$ 1,753,254
$ 1,385,726
Net interest income
Net interest spread
Net interest rate margin (3)
$
67,739
$
62,087
$ 52,165
3.09%
3.47
3.13%
3.83
3.24%
4.01
(1)
(2)
Average balances include non-accrual loans. The income on such loans is included in interest but is recognized only upon receipt.
Loan fees, net of amortization of deferred loan origination fees and costs, included in interest income are approximately $1,394,000, $690,000 and $217,000 for the years ended December
31, 2008, 2007, and 2006, respectively.
Non-taxable income is presented on a fully tax-equivalent basis using the combined statutory federal and state income tax in effect for the year.
The tax-equivalent adjustments reflected in the above table are approximately $1,016,000, $1,035,000 and $888,000 for the years ended December 31, 2008, 2007, and 2006, respectively.
(3)
Net interest income divided by average total interest-earning assets.
23
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.
For 2006, loans and deposits associated with NorthStar are included for six months. The loans and deposits associated with Great American are
included for ten months of 2007. Approximately $30.0 million of deposits associated with the DeSoto branch are included for seven months of 2008.
(in thousands)
Interest earned on:
Taxable 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
2008 compared to 2007
Increase (decrease) due to
2007 compared to 2006
Increase (decrease) due to
Volume(1) Rate(2)
Net
Volume(1) Rate(2)
Net
$ 16,944
$ (21,373)
$ (4,429)
$ 26,113
$ 2,033
$ 28,146
(161)
27
(7)
11
113
148
2
(259)
(48)
349
63
175
(19)
582
(5)
(248)
(11)
(814)
9
(59)
412
563
(2)
(873)
$
16,814
$
(21,369)
$
(4,555)
$
25,618
$
2,628
$
28,246
$
12
$
(1,536)
$
(1,524)
$
442
$
304
$
746
2,198
(15)
2,803
240
4,485
9,723
(11,990)
(55)
(4,361)
(563)
(1,425)
(9,792)
(70)
(1,558)
(323)
3,060
3,317
80
7,329
1,500
1,724
1,048
(12)
2,524
16
52
4,365
68
9,853
1,516
1,776
(19,930)
(10,207)
14,392
3,932
18,324
$
7,091
$
(1,439)
$
5,652
$
11,226
$
(1,304)
$
9,922
(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 $22.5 million for 2008 compared to $4.6 million for 2007. The increase was due to strong
loan growth, an increase in non-performing loans and adverse risk rating changes primarily in the residential builder portfolio.
The provision for loan losses was $4.6 million for 2007 compared to $2.1 million for 2006. The increase was due to strong loan growth, higher non-
performing loan levels and adverse risk rating changes.
See the sections below captioned “Loans” And “Allowance for Loan Losses” for more information on our loan portfolio and asset quality.
Noninterest Income
The following table presents a comparative summary of the major components of noninterest income.
(in thousands)
Wealth Management revenue
Service charges on deposit accounts
Other service charges and fee income
Gain on sale of branches/charter
Years ended December 31,
2008
2007
2006
over 2007
over 2006
Change 2008
Change 2007
$ 10,848
$ 13,980
$ 13,809
$
(3,132)
$
4,376
1,000
3,400
3,228
852
-
2,228
586
-
1,148
148
3,400
171
1,000
266
-
Gain (loss) on sale of other real estate
Gain on state tax credits, net
Gain on sale of securities
Miscellaneous income
Total noninterest income
552
4,201
161
735
(48)
792
233
636
2
-
-
291
600
3,409
(72)
99
(50)
792
233
345
$
25,273
$
19,673
$
16,916
$
5,600
$
2,757
24
Comparison 2008 vs. 2007
Noninterest income increased 28% during 2008. Our ratio of noninterest income to total revenue at December 31, 2008 was 27%, compared to 24% in
2007.
Wealth Management revenue decreased $3.1 million, or 22%, from 2007. This decrease is a result of lower revenue and margins from the Trust
division and Millennium. Revenues from the Trust division decreased $1.2 million, or 17%, due to declining market value of assets under
management and client attrition related to advisor turnover experienced earlier this year. Assets under administration were $1.2 billion at December
31, 2008, a 28% decrease from one year ago.
Millennium revenues were $4.9 million, a decrease of $1.9 million, or 28%, due to lower levels of paid premium sales and slightly lower sales margins.
Producer sales volumes and carrier commission payouts remain constrained due to continued consolidation of distributors in the industry,
uncertainty in the financial markets and tougher underwriting for large insurance cases.
Increases in Service charges on deposit accounts were primarily due to the declining earnings crediting rate on commercial accounts, which
increased service charges earned. Other service charges and fee income increases were the result of higher fee volumes on debit cards, merchant
processing, and fee income from our International Banking operation.
Gain on sale of branches/charter includes a $550,000 pre-tax gain on the sale of the Liberty branch and a $2.8 million pre-tax gain on the sale of the
Great American charter along with the Desoto Kansas branch.
In 2008, we sold $7.9 million of other real estate at a net gain of $552,000. In 2007, we sold $5.6 million of other real estate at a net loss of $48,000.
In the fourth quarter of 2007, we signed an agreement whereby we will purchase the rights to receive ten-year streams of state tax credits at agreed
upon discount rates and then re-sell them to our clients for a profit. Gains from state tax credit brokerage activities were $4.2 million in 2008,
compared to $792,000 in 2007. Of the 2008 total, $3.1 million represented the net effects from fair value adjustments on the tax credit assets and
related interest rate caps used to economically hedge the tax credits. The remaining increase of $1.1 million reflects the full year of the brokerage
activity compared to a partial year in 2007 and was consistent with the Company’s performance expectations for its first full year of operations.
Comparison 2007 vs. 2006
Noninterest income increased 16% during 2007. Our ratio of fee income to total revenue at December 31, 2007 was 24%, flat with 2006. Wealth
Management revenue increased $171,000, or 1% from 2006. This relatively small increase compared to the 2006 increase is the result of lower
revenue and margins from Millennium. Revenues from the Trust division increased $370,000, or 5%, while revenues from Millennium decreased by
almost $200,000.
The decline in Millennium revenue was the result of less favorable carrier mix and higher commission payouts to direct producers.
l Shift in carrier mix – Throughout 2007, more business was placed with certain carriers whose contractual payouts to Millennium were lower than
other carriers, thus impacting Millennium’s revenue on this business. The decision on where to place business was based on several factors,
including underwriting, product features, and carrier service levels.
l Producer mix – During 2007, more production came from producers who earn higher payouts from Millennium, thus lowering Millennium’s net
revenue.
Assets under administration were $1.7 billion at December 31, 2007, a 4% increase over 2006.
Increases in Service charges on deposit accounts were primarily due to incremental activity of Great American along with increased account
activity. Other service charges and fee income increases were the result of higher fee volumes on debit cards, merchant processing and health
savings accounts along with Great American deposit fee income.
25
In December 2007, we elected to sell and reinvest a portion of our investment portfolio as part of a restructuring effort to lengthen the portfolio
duration and improve our overall expected return. We sold approximately $39.0 million of agency investments realizing a gain of $233,000 on these
sales. In December, we reinvested approximately $19.0 million of the proceeds in collateralized mortgage obligations and reinvested the remaining
$20.0 million in first quarter of 2008.
Miscellaneous income in 2007 includes $268,000 from the sale of a holding company investment in an investment management firm.
Noninterest Expense
The following table presents a comparative summary of the major components of noninterest expenses.
(in thousands)
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
Impairment charges related to Millennium Brokerage Group
Postage, courier, and armored car
Professional, legal, and consulting
Loan, legal and Other Real Estate (ORE)
Other taxes
Other
Total noninterest expense
Years ended December 31,
Change
Change
2008
2007
2008
2007
2006
over 2007 over 2006
$ 31,024
$ 29,555
$ 25,247
$ 1,469
$ 4,308
4,246
1,470
2,187
693
481
1,484
704
2,055
1,444
9,200
928
2,021
1,717
568
3,283
3,901
1,439
1,911
668
409
2,966
1,028
1,431
546
508
1,878
1,744
708
846
985
574
1,604
1,128
-
953
-
845
1,447
1,102
501
626
252
437
3,070
2,601
345
31
276
25
72
(394)
(4)
1,209
(160)
9,200
(25)
574
1,216
(58)
213
935
411
480
122
(99)
134
(277)
272
476
-
108
345
249
189
469
$
63,505
$
49,516
$
41,394
$
13,989
$
8,122
Comparison of 2008 vs. 2007
Noninterest expenses increased $14.0 million, or 28%, in 2008. This increase is mainly due to $9.2 million of goodwill impairment charges associated
with Millennium and a $1.0 million executive retention agreement associated with the acquisition of Great American. Excluding these charges,
noninterest expenses increased $3.8 million, or 8%. The Company’s efficiency ratio for 2008 is 69%. Excluding the impairment charges, the retention
payment and the $3.4 million branch sale gains, the efficiency ratio is 61%, unchanged from 2007.
Employee compensation and benefits. 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. 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”.)
Employee compensation and benefits increased $1.5 million, or 5%, over 2007. Included in the increase is $1.0 million related to the final stock
payment pursuant to the expiration of an executive retention agreement associated with the acquisition of Great American. The incremental impact
of the Millennium compensation due to the December 31, 2007 restructuring and an increase in compensation expense for various stock programs
associated with our LTIP also contributed to the increase. Lower variable compensation expenses driven by Company financial results offset these
expenses.
All other expense categories. All other expense categories include $8.7 million for the goodwill impairment charge and a $500,000 impairment charge
on the customer related intangible asset associated with Millennium. Excluding these charges, all other expense categories increased $3.3 million, or
17%, over 2007.
Occupancy expense increases were due to scheduled rent increases on various Company facilities along with leasehold improvements completed at
the Operations Center and our Clayton headquarters.
Furniture and equipment increases were due to expansion at the Operations Center and in the Kansas City region.
26
Data processing expenses increased due to upgrades to the Company’s main operating 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.
Meals and entertainment expenses decreased due to less travel and controlled customer-related entertainment expenses.
FDIC and other insurance increased $1.2 million due to higher FDIC insurance premiums (due to a higher rate structure imposed by the FDIC on all
insured financial institutions.) See “Supervision and Regulation – Deposit Insurance Fund” in Part I – Item I for more information.
Professional, legal and consulting increased due to the Arizona de novo bank activities, consulting services in Wealth Management and various
legal matters.
Increases in Loan, legal and ORE expenses were due to increased levels of nonperforming loans and ORE properties.
Comparison of 2007 vs. 2006
The Company’s efficiency ratio for 2007 was 61%, unchanged from 2006. Noninterest expenses increased 20%, or $8.1 million, in 2007.
Approximately $2.8 million of this increase is related to the addition of Great American and $2.5 million was due to the full year impact of NorthStar.
Excluding these amounts, noninterest expenses increased $2.8 million, or 7%.
Employee compensation and benefits. Employee compensation and benefits increased $4.3 million. Increases of $1.3 million were related to Great
American. Excluding these expenses, employee compensation and benefits increased $3.0 million, or 12%. The increase was due to salaries and
related benefits of new associates in various areas of our organization including banking units and other support areas along with the full year
impact of NorthStar. Approximately $710,000 of the increase is related to compensation expense for various stock programs associated with our
LTIP.
All other expense categories. All other expense categories include $1.5 million for Great American in 2007. Excluding Great American, all other
expense categories increased $2.3 million, or 15%, over 2006.
Occupancy expense increases were due to scheduled rent increases on various Company facilities along with related leasehold improvements
completed at the Operations Center.
Furniture and equipment increases were due to expansion at the Operations Center and in the Kansas City region, including Great American.
Data processing expenses increased due to upgrades to the Company’s main operating 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. Costs incurred to upgrade NorthStar
technology to our platform were capitalized and are being amortized according to the Company’s depreciation policies. In 2007, no significant costs
were incurred to upgrade Great American to our platform since the actual conversion to the Enterprise systems did not occur until June 2008.
FDIC and other insurance increased $201,000 due to higher FDIC insurance premiums (due to a higher rate structure imposed by the FDIC on all
insured financial institutions.)
Amortization of intangibles related to NorthStar was $409,000 in 2007 compared to $215,000 in 2006. In 2007, the amortization on the Great American
core deposit intangible was $283,000. See Item 8, Note 9 – Goodwill and Intangible Assets for more information.
Professional, legal and consulting increased due to new business initiatives and the addition of Great American.
Other noninterest expense includes $270,000 for Great American. On September 30, 2007, EFSC Capital Trust I redeemed all of its $4.0 million variable
rate trust preferred securities and its variable rate common securities. At the time of the redemption, the Company recognized an $82,000 charge in
noninterest expense for unamortized debt issuance costs related to this instrument. The remaining increase is related to amortization on our tax
credit limited partnership, increases in bank charges including ATM charges and other outside services.
27
Minority Interest in Net Income of Consolidated Subsidiary
On October 21, 2005, the Company acquired a 60% controlling interest in Millennium. As a result, in 2006 and 2007, the Company recorded 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 was entitled to a priority return of 23.1% pre-tax on its original $15.0 million investment in Millennium. The Company
adjusted minority interest by $1.3 million and $861,000, in 2007 and 2006, respectively, to recognize its priority return in line with its contractual
rights.
Effective December 31, 2007, the Company acquired the remaining 40% of Millennium for $1.5 million in cash. See Item 8, Note 2 – Acquisitions and
Divestitures for more information.
Income Taxes
In 2008, the Company recorded income tax expense of $1.6 million on pre-tax income of $6.0 million, resulting in an effective tax rate of 26.3%. The
following items were included in Income tax expense and impacted the 2008 effective tax rate:
l
l
l
the expiration of the statute of limitations for the 2004 tax year warranted the release of $436,000 of reserves related to certain state tax
positions;
reserves associated with various tax benefits of $80,000 related to certain federal tax items were released; and
recognition of federal tax benefits of $511,000 related to low income housing tax credits from a limited partnership interest.
In 2007, the effective tax rate for the Company was 33.9% compared to 35.0% in 2006. The following items were included in Income tax expense and
impacted the 2007 effective tax rate:
l
l
l
the expiration of the statute of limitations for the 2003 tax year warranted the release of $375,000 of reserves on certain state tax positions;
reserves related to various tax benefits of $68,000 related to certain federal tax items were released; and
recognition of federal tax benefits of $242,000 related to low income housing tax credits from a limited partnership interest.
Fourth Quarter 2008 Discussion
For the quarter ended December 31, 2008, the Company recorded a net loss of $4.0 million, or $0.32, per fully diluted share compared to a net profit of
$4.9 million, or $0.39, per fully diluted share for the same period in 2007.
The tax-equivalent net interest rate margin was 3.37% for the fourth quarter of 2008 as compared to 3.80% for the same period in 2007. Net interest
income in the fourth quarter of 2008 increased $1.1 million from the fourth quarter of 2007. This increase in net interest income was the result of a
$3.8 million decrease in interest expense offset by a $2.7 million decrease in interest income. The yield on average interest-earning assets decreased
from 7.42% during the fourth quarter of 2007 to 5.67% during the same period in 2008. The decline in the yield is primarily the result of reductions in
the prime rate throughout 2008 along with higher levels of nonperforming loans in 2008. The cost of interest-bearing liabilities decreased from 4.26%
for the fourth quarter of 2007 to 2.62% for the same period in 2008. These decreases are attributed mainly to lower money market rates (i.e. treasury,
LIBOR and swap rates) that drive lower deposit and borrowing costs.
The provision for loan losses was $14.1 million for the fourth quarter of 2008 compared with $2.5 million in the fourth quarter of 2007. The increase in
the provision was due to an increase in nonperforming loans during the quarter of $6.1 million (versus $4.2 million in the fourth quarter of 2007), and
adverse risk rating changes primarily in the residential housing sector of our portfolio.
Noninterest income was $7.6 million during the fourth quarter of 2008, a $1.4 million increase over noninterest income of $6.2 million for the same
period in 2007. The increase includes $1.9 million from gain on state tax credits and $638,500 of gain reclassified from accumulated other
comprehensive income to earnings for measured ineffectiveness of cash flow hedges. Offsetting these increases were lower Trust and Millennium
revenues.
Noninterest expenses were $17.8 million during the fourth quarter of 2008 versus $13.1 million during the same period in 2007, a $4.7 million increase.
The increase was primarily due to $3.3 million of impairment charges related to Millennium and $875,000 related to the final stock payment pursuant
to the expiration of an executive retention agreement associated with the acquisition of Great American Bank. Also contributing to the increase was
the incremental impact of the Millennium employee compensation due to the December 31, 2007 restructuring, an increase in the Company’s
compensation expense for various stock programs associated with our LTIP, higher FDIC insurance premiums and increases in ORE expenses.
Lower variable compensation expenses driven by Company financial results partially offset these expenses.
28
Income tax benefits were $3.1 million during the fourth quarter of 2008 versus income tax expense of $2.0 million in the same period in 2007. The
effective tax rate was (44.2%) for the fourth quarter of 2008 compared to 28.9% for the fourth quarter of 2007. The fourth quarter 2008 effective tax
rate includes a tax benefit of $436,000 for various tax reserves that were released as a result of the statute of limitations expiring.
FINANCIAL CONDITION
Comparison for December 31, 2008 and 2007
Total assets at December 31, 2008 were $2.27 billion. Assets increased $272.0 million, or 14%, over total assets of $2.0 billion at December 31, 2007.
The increase in total assets was primarily driven by a $335.7 million, or 20%, increase in loans, partially offset by a $111.0 million decrease in cash
and cash equivalents.
Investments were $108.3 million at December 31, 2008 compared to $83.3 million at December 31, 2007. In December 2007, a portion of the debt
securities portfolio was sold in an effort to lengthen the portfolio duration and improve our expected overall return.
Goodwill and intangible assets were $52.0 million at December 31, 2008, compared to $63.2 million at December 31, 2007, a decrease of $11.2 million.
The decrease in goodwill and intangible assets was primarily related to impairment charges related to Millennium. See Item 8, Note 9 – Goodwill and
Intangible Assets for more information.
At December 31, 2008, Other assets included $15.9 million of receivables related to federal income taxes along with $1.8 million of fair value
adjustments related to derivative financial instruments and $2.8 million of private equity investments.
At December 31, 2008, deposits were $1.79 billion, an increase of $208.0 million, or 13%, from $1.59 billion at December 31, 2007. Total brokered CD’s
at December 31, 2008 were $336.0 million compared to $114.0 million at December 31, 2007. Excluding brokered deposits and the effects of the sale of
approximately $37.0 million in core deposits related to the branch sales, core deposits increased $23 million, or 2%, in 2008.
As mentioned previously, while we typically experience a seasonal increase in deposits during the fourth quarter, the effect was muted in the fourth
quarter of 2008 due to the investor flight to Treasury markets. Nevertheless, our core deposits increased during the fourth quarter, and our Treasury
Management pipelines remain strong.
Through November of 2008, we utilized short-term FHLB advances along with brokered certificates of deposit to fund shortfalls due to loan
demand. In December 2008, following the Federal Open Market Committee meeting, we began utilizing the Federal Reserve discount window
program which lowered our overnight borrowing rate to 0.50%. As a result, we replaced all short-term FHLB advances with Federal Reserve
advances at a lower overall cost. At December 31, 2008, FHLB advances were $120.0 million compared to $153.0 million at December 31, 2007. Federal
funds purchased from the Federal Reserve were $19.4 million at December 31, 2008.
During 2008, subordinated debentures increased by $27.5 million. See Item 8, Note 11 – Subordinated Debentures for more information.
At December 31, 2008, the Company had $0 outstanding on its $16.0 million line of credit. While the line of credit does not expire until April 2009, we
do not have any current availability under the line due to our noncompliance with a certain covenant regarding classified loans as a percentage of
bank equity and loan loss reserves. We may be unable to arrange for a holding company line of credit in 2009 given the uncertainties around bank
industry performance. However, we believe our current level of cash at the holding company will be sufficient to meet all projected cash needs in
2009. See “Liquidity and Capital Resources” for more information.
On December 19, 2008, the Company sold 35,000 shares of preferred stock and a warrant to purchase 324,074 shares of EFSC common stock, for an
aggregate investment by the Treasury of $35.0 million. See Item 8, Note 4 – Preferred Stock and Common Stock Warrants for more information.
Loans
Total loans, less unearned loan fees, increased $336.0 million, or 20% during 2008. 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, Kansas City and Phoenix metropolitan markets. Consumer lending is minimal.
29
Nearly two-thirds of our net loan growth in 2008 was from our St. Louis units and over 60% of the 2008 net growth was to commercial and industrial
businesses. 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 is appropriately considered with higher loan pricing and ancillary income
from cash management activities. The Company does not originate or invest in subprime single-family home loans.
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
Total Loans
December 31,
2008
2007
2006
2005
2004
$ 556,210
$ 476,184
$ 352,914
$ 265,488
$ 253,594
829,476
337,550
228,772
25,167
690,868
266,111
170,510
37,759
576,172
196,851
150,244
35,542
410,382
138,318
151,575
36,616
328,986
127,180
149,293
39,452
$
1,977,175
$
1,641,432
$
1,311,723
$
1,002,379
$
898,505
2008
2007
2006
2005
2004
December 31,
Commercial and industrial
28.1%
29.0%
26.9%
26.5%
28.2%
Real estate:
Commercial
Construction
Residential
Consumer and other
Total Loans
42.0%
17.1%
11.6%
1.2%
42.1%
16.2%
10.4%
2.3%
43.9%
15.0%
11.5%
2.7%
40.9%
13.8%
15.1%
3.7%
36.6%
14.2%
16.6%
4.4%
100.0%
100.0%
100.0%
100.0%
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.
Real estate loans are also based on the borrower’s character, but more emphasis is placed on the estimated collateral values. Approximately 38% of
commercial real estate loans were owner-occupied by commercial and industrial businesses where the primary source of repayment is dependent on
sources other than the underlying collateral. Multifamily properties and other commercial properties on which income from the property is the
primary source of repayment makes for the balance of this category. The majority of this category of loans is secured by commercial and multi-
family properties located within our two primary metropolitan markets. These loans are underwritten based on the cash flow coverage of the
property, typically meet the Company’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. Real estate residential loans include residential mortgages, which are loans that, due to size, do not qualify for
conventional home mortgages that the Company sells into the secondary market, 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 mitigated by thoroughly reviewing
the creditworthiness of the borrowers prior to origination.
30
In addition to segmenting the Company’s loan portfolio by collateral or call report code, following is a breakout by industry codes at December 31,
2008:
Industry
Real Estate:
Developers of retail, industrial warehouse and office buildings
Commercial and residential subcontractors
Real estate property managers
Raw land for resale
Other
Total real estate
Services:
Financial and insurance companies
Professional service firms
Health care related services
Others
Total services
Construction:
Residential
Commercial
Multi-family housing
Total construction
Manufacturing
Wholesale
% of portfolio
2008 2007
16 % 19 %
3 %
4 %
2 %
2 %
3 %
6 %
2 %
2 %
29 %
30 %
7 %
4 %
5 %
9 %
6 %
5 %
4 %
9 %
25 %
24 %
9 %
9 %
2 %
20 %
10 %
5 %
10 %
10 %
2 %
22 %
10 %
5 %
Retail Trade
Transportation/Warehousing
Other
5 %
3 %
3 %
3 %
3 %
3 %
100 %
100 %
Note: (%) in the following paragraphs represent percentages of total portfolio.
Repayment of loans related to developers of retail, industrial warehouse, and commercial office buildings come from the cash flow of the properties.
In total, the residential real estate represents 12% of the Company’s loan portfolio. When calculating this exposure, we include residential
construction, the residential land speculators included in raw land and the residential subcontractors included in real estate. The majority of these
loans are granted to builders within our primary markets. The Company requires third party disbursement on the majority of its builder portfolio and
reviews projects regularly for progress status. Land Acquisition and Development (“LAD”) loans are included in residential (3%) and commercial
(5%).
Manufacturing industries are diverse, with the largest component being Aerospace Product and Parts Manufacturing (1%). The Wholesale
industries are also diverse with the largest being Petroleum and Petroleum Product wholesalers (1%). Air Transportation companies (not rental or
leasing) and Truck Transportation (2%) represent the largest portion of the Transportation/Warehousing category.
Factors that are critical to managing overall credit quality are sound loan underwriting and administration, systematic monitoring of existing loans
and commitments, 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, 2008, no significant
concentrations exceeding 10% of total loans existed in the Company's loan portfolio, except as described above.
31
Loans at December 31, 2008 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)
Loans Maturing or Repricing
In One
After One
Through
After
Year or Less Five Years Five Years
Total
$
51,085
$ 126,321
$ 6,348
$ 183,754
111,008
382,099
46,183
35,441
8,433
60,700
66,096
2,605
38,646
17,257
7,604
1,717
531,753
124,140
109,141
12,755
$
252,150
$
637,821
$
71,572
$
961,543
$
372,456
$
297,723
213,409
119,632
12,412
$
1,015,632
$
-
-
-
-
-
-
$
$
-
-
-
-
-
-
$
372,456
297,723
213,409
119,632
12,412
$
1,015,632
Commercial and industrial
Real estate:
Commercial
Construction
Residential
Consumer and other
Total
(1)
Loan balances are shown net of unearned loan fees.
(2)
Not adjusted for impact of interest rate swap agreements.
$
423,541
$
126,321
$
6,348
$
556,210
408,731
259,592
155,073
20,845
382,099
60,700
66,096
2,605
38,646
17,257
7,604
1,717
829,476
337,549
228,773
25,167
$
1,267,782
$
637,821
$
71,572
$
1,977,175
Fixed rate loans comprise approximately 50% of the loan portfolio at both December 31, 2008 and 2007. Variable rate loans are based on the prime
rate or the London Interbank Offered Rate (“LIBOR”.) 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. 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. 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. Various quantitative and qualitative factors are analyzed and provisions are made to the allowance for loan losses. Such
provisions are reflected in our consolidated statements of income. The 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
could affect probable credit losses. Assessing these numerous factors involves significant judgment and could be significantly impacted by the
current economic conditions. Management considers the allowance for loan losses a critical accounting policy. See “Critical Accounting Policies”
for more information.
32
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:
l general economic and business conditions affecting our key lending areas;
l credit quality trends (including trends in nonperforming loans expected to result from existing conditions);
l collateral values;
l
loan volumes and concentrations;
l competitive factors resulting in shifts in underwriting criteria;
l
l
specific industry conditions within portfolio segments;
recent loss experience in particular segments of the portfolio;
l bank regulatory examination results; and
l
findings of our loan monitoring process.
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.
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.
Management believes that the allowance for loan losses is adequate at December 31, 2008.
33
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)
Allowance at beginning of year
(Disposed) 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 loan chargeoffs
Provision for loan losses
2008
2007
2006
2005
2004
At December 31,
$
21,593
(50 )
3,783
1,384
5,516
2,367
31
13,081
64
-
241
56
11
372
12,709
22,475
$
16,988
$
12,990
$
11,665
$ 10,590
2,010
3,069
238
43
705
1,418
125
2,529
347
15
25
17
105
509
2,020
4,615
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
Allowance at end of year
Average loans
Total portfolio loans
Nonperforming loans
Net chargeoffs to average loans
Allowance for loan losses to loans
$
$
$
$
31,309
1,828,434
1,977,175
29,662
21,593
$
16,988
1,495,807
$
1,159,110
$
$
12,990
$
11,665
964,259
$
847,270
1,641,432
1,311,723
1,002,379
12,720
7,975
1,421
0.70 %
1.58
0.14 %
1.32
0.10 %
1.30
0.02 %
1.30
898,505
1,827
0.13
1.30
The following table is a summary of the allocation of the allowance for loan losses for the five years ended December 31, 2008:
2008
2007
December 31,
2006
2005
2004
Percent by
Category to
Percent by
Category to
Percent by
Category to
Percent by
Category to
Percent by
Category to
(in thousands)
Allowance Total Loans Allowance Total Loans Allowance Total Loans Allowance Total Loans Allowance Total Loans
Commercial and industrial
$ 5,938
28.1 % $ 4,106
29.0 % $ 3,485
26.9 % $ 3,172
26.5 % $ 2,948
28.2 %
Real estate:
Commercial
Construction
Residential
Consumer and other
Not allocated
Total allowance
10,764
6,482
2,749
188
5,188
42.0
17.1
11.6
1.2
42.1
16.2
10.4
2.3
7,004
5,241
2,624
437
2,180
43.9
15.0
11.5
2.7
5,710
2,927
2,056
513
2,296
40.9
13.8
15.1
3.7
4,245
1,048
1,774
313
2,439
36.6
14.2
16.6
4.4
3,671
1,037
1,903
283
1,823
$ 31,309
100.0 % $ 21,593
100.0 % $ 16,988
100.0 % $ 12,990
100.0 % $ 11,665
100.0 %
Nonperforming loans are defined as loans on non-accrual status, loans 90 days or more past due but still accruing, and restructured loans.
Nonperforming assets include nonperforming loans plus foreclosed real estate.
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.
34
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 a concession to a borrower experiencing financial difficulty involving the modification of terms of the loan, such as changes in payment
schedule or interest rate.
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
At December 31,
2008
2007
2006
2005
2004
$
29,662
$
12,720
$
6,363
$
1,421
$
1,827
-
-
29,662
13,868
-
-
12,720
2,963
$
43,530
$
15,683
$
112
-
6,475
1,500
7,975
-
-
1,421
-
$
1,421
$
-
-
1,827
123
1,950
Total assets
$
2,270,174
$
1,999,118
$
1,535,587
$
1,286,968
$
1,059,950
Total loans
Total loans plus foreclosed property
1,977,175
1,991,043
1,641,432
1,644,395
1,311,723
1,313,223
1,002,379
1,002,379
898,505
898,628
Nonperforming loans to loans
Nonperforming assets to loans plus foreclosed property
Nonperforming assets to total assets
1.50 %
2.19
1.92
0.77 %
0.95
0.78
0.49 %
0.14 %
0.20 %
0.61
0.52
0.14
0.11
0.22
0.18
Allowance for loan losses to nonperforming loans
106.00 %
170.00 %
264.00 %
914.00 %
639.00 %
Nonperforming loans were $29.7 million at December 31, 2008, an increase of $16.9 million over 2007. Nonperforming loans at December 31, 2008 by
industry segment were as follows (in millions):
Residential Construction/Land Acquisition and Development
Commercial and Industrial
Other
Commercial Real Estate $ 16.1
11.8
1.7
0.1
Total
$
29.7
At December 31, 2008, of the total nonperforming loans, $17.0 million, or 60%, relates to five relationships: $4.8 million secured by a partially
completed retail center; $3.5 million secured by commercial ground; $4.7 million secured by a medical office building; $2.8 million secured by a single
family residence; and $1.9 million secured by a residential development. The remaining nonperforming loans consist of 20 relationships. Eighty-one
percent of the total nonperforming loans are located in the Kansas City market.
At December 31, 2007, of the total nonperforming loans, $7.3 million, or 57%, related to eight residential homebuilders in St. Louis and Kansas City.
The two largest related to a residential builder in Kansas City totaling $2.2 million and a single-family rehab builder in Kansas City totaling $1.6
million. The remaining nonperforming loans consisted of 11 relationships, nearly all of which were related to the soft residential housing markets in
St. Louis and Kansas City.
Two credits in the Kansas City market secured by real estate represented $3.7 million of the total nonperforming loans at December 31, 2006. Six of
the remaining ten relationships on non-accrual at December 31, 2006 and approximately 50% of the nonperforming loan balances related 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, approximately 36% of the nonperforming loans related to a printing company and the
remainder consisted of five different borrowers.
The Company’s nonperforming loans meet the definition of “impaired loans” under U.S. GAAP. As of December 31, 2008, the Company had a loan
for $3.6 million, which also came within the definition of impaired loans based upon our expectation that the borrower will be unable or unwilling to
pay 100% of future contractual obligations under the contract. As of December 31, 2008, 2007 and 2006, the Company had 26, 19 and 12 impaired
loan relationships, respectively.
35
Other real estate at December 31, 2008 was $13.9 million, an increase of $10.9 million over 2007. The foreclosed real estate includes: $6.1 million of
single family residences located in St. Louis and Kansas City; $6.2 million of residential lots in St. Louis and Kansas City; and $1.6 million in
commercial real estate. Approximately 55% of the foreclosed real estate is located in St. Louis.
The severity of the economic downtown resulting from the constraints in the financial markets caused us to expand our risk monitoring processes in
the fourth quarter of 2008 and into the current year. Increased scrutiny of residential builders, commercial developers and commercial and industrial
credit was undertaken. Steps taken include reviewing all non-watch list credits related to the residential builder and commercial real estate developer
segments to assess current cash flow information along with updated and current collateral valuations. For all commercial and industrial credits in
excess of $1.0 million of exposure, we are also evaluating current financial information, updated financial projections and cash flow forecasts for
fiscal 2009. Continued declines in the valuations of completed and unsold residential lot inventories due to the slowness of the residential housing
markets are noted. Additionally, commercial retail and commercial office development show continuing evidence of weakness. As of February 28,
2009, our nonperforming assets were $56.9 million, a 30% increase from December 31, 2008.
Potential problem loans, which are not included in nonperforming loans, amounted to approximately $15.8 million, or 0.80% of total loans
outstanding at December 31, 2008, compared to $23.9 million, or 1.45% of total loans outstanding at December 31, 2007. Potential problem loans
represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to
have doubts about the borrower’s ability to comply with present repayment terms. At February 28, 2009, the potential problem loans had increased
to approximately $39.3 million, or 1.98% of total loans outstanding.
Investments
At December 31, 2008, the investment portfolio was $108.3 million, or 5%, of total assets. Our debt securities portfolio is primarily comprised of U.S.
government agency obligations, mortgage-backed pools, and collateralized mortgage obligations (“CMO’s”). Our other investments primarily
consist of the common stock investment of our trust preferred securities and other private equity investments. 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:
December 31,
(in thousands)
Obligations of U.S. government agencies
Mortgage-backed securities
Municipal bonds
FHLB capital stock
Other investments
Amount
$
-
2008
2007
% Amount % Amount
2006
34.5% $ 95,452
41,087
0.0% $ 28,720
88.4%
0.7%
6.9%
4.0%
9,106
3,471
949
95,659
772
7,517
4,367
49.3%
1.1%
10.9%
4.2%
100.0% $
%
85.8%
8.6%
1.0%
2.7%
1.8%
9,617
1,111
3,007
2,023
$
108,315
100.0% $
83,333
111,210
100.0%
During 2008, the US government agency debt either matured or was called and we reinvested the proceeds in agency mortgage-backed securities
(including CMO’s) given their more favorable option adjusted spreads. The underlying collateral on these mortgage-backed securities is diversified
among state and does not include “subprime” mortgages.
At December 31, 2008, of the $7.5 million in FHLB capital stock, $2.1 million is required for FHLB membership and $5.4 million is required to support
our outstanding advances. Historically, it has been the FHLB practice to automatically repurchase activity-based stock that became excess because
of a member's reduction in advances. The FHLB has the discretion, but is not required, to repurchase any shares that a member is not required to
hold. In December 2008, the FHLB suspended the automatic repurchase of this excess stock.
The Company had no securities classified as trading at December 31, 2008, 2007 or 2006.
36
The following table summarizes expected maturity and yield information on the investment portfolio at December 31, 2008:
(in thousands)
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Amount
Mortgage-backed securities
$ 4,364
3.70% $ 79,758
4.95% $ 11,350
5.45% $ 187
5.21%
-
0.00% $ 95,659
Yield
4.95%
Within 1 year
1 to 5 years
5 to 10 years
Over 10 years
No Stated Maturity
Total
Municipal bonds
FHLB capital stock
Other investments
Total
400
4.45%
372
6.48%
-
-
$
4,764
0.00%
0.00%
3.76% $
-
-
80,130
0.00%
0.00%
4.95% $
-
-
-
11,350
0.00%
0.00%
0.00%
5.45% $
-
-
-
187
-
7,517
0.00%
0.00%
0.00%
5.21% $ 11,884
4,367
0.00%
4.44%
3.13%
772
5.42%
7,517
4.44%
4,367
3.13%
3.96% $
108,315
4.84%
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.
Deposits
The following table shows, for the periods indicated, the average annual amount and the average rate paid by type of deposit:
For the year ended December 31,
2008
2007
2006
(in thousands)
Interest-bearing transaction accounts
Money market accounts
Savings accounts
Certificates of deposit
Average
balance
$ 121,371
687,867
9,594
588,561
1,407,393
Weighted
average rate
1.28%
Average
balance
Weighted
average rate
2.56%
$ 120,418
$ 102,327
Average
balance
Weighted
average rate
2.28%
2.00%
0.57%
4.17%
2.84%
579,029
11,126
503,926
1,214,499
4.07%
1.12%
5.18%
4.35%
496,590
4,164
357,706
960,787
3.87%
1.37%
4.54%
3.94%
Noninterest-bearing demand deposits
221,925
--
215,610
--
207,328
--
$
1,629,318
2.45%
$
1,430,109
3.70%
$
1,168,115
3.24%
While we continued aggressive direct calling efforts of relationship officers in conjunction with our treasury management products and services,
our core deposit growth in 2008 was lower than in prior years. Market concern over the safety of banks in general certainly had some impact on our
lower deposit growth rate. Management has pursued closely-held businesses who desire 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.
We also use certificates of deposit sold to retail customers of regional and national brokerage firms (i.e. brokered certificates of deposit) to help
fund our growth. At December 31, 2008 and 2007, the Company had $336.0 million and $114.0 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
37
Total
$ 134,351
101,333
137,362
147,151
$
520,197
Liquidity and Capital Resources
Since September 2008, we have raised $62.5 million in regulatory capital, raising our risk-based capital ratio to 12.81% - well in excess of the
regulatory guidelines. On September 30, 2008, Enterprise completed a $2.5 million private placement of subordinated capital notes. In October 2008,
given the difficult economic environment and the Company’s expectation to continue its growth, the Board approved the addition of $60.0 million in
regulatory capital. The Company was approved by the U.S. Treasury for a $62.0 million Capital Purchase Program investment. At the same time, the
Company had the opportunity to privately place a Convertible Trust Preferred Security offering. As a result, the Company decided to take
advantage of both the private and public capital sources.
On December 12, 2008, we completed a private placement of $25.0 million in Convertible Trust Preferred Securities that qualify as Tier II regulatory
capital until they would convert to EFSC common stock. And on December 19, 2008, we received $35.0 million from the U.S. Treasury under the
Capital Purchase Program.
As of December 31, 2008, $20.0 million of the capital funds were used to pay off the Company’s line of credit and term loan. We also injected $18.0
million into Enterprise to support continued loan growth and bolster its capital ratio. Subject to other demands for cash, we expect to use the
remaining capital funds to support continuing loan growth and strengthening our capital position as appropriate. Some portion of this additional
capital may also be deployed to take advantage of acquisition opportunities that may emerge from the current unsettled nature of the financial
industry.
Liquidity
The objective of liquidity management is to ensure we have the ability to generate sufficient cash or cash equivalents in a timely and cost-effective
manner to meet its commitments as they become due. Typical demands on liquidity are deposit run-off from demand deposits, maturing time
deposits, which are not renewed, and fundings under credit commitments to customers. 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, fed fund lines with correspondent 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. These alternatives are an important part of our liquidity plan and provide flexibility and efficient
execution of the asset-liability management strategy.
Our Asset-Liability Management Committee oversees our liquidity position, the parameters of which are approved by the Board of Directors. Our
liquidity position is monitored monthly by producing a liquidity report, which measures the amount of liquid versus non-liquid assets and liabilities.
Our 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. While core deposits
and loan and investment repayments are principal sources of liquidity, funding diversification is another key element of liquidity management and is
achieved by strategically varying depositor types, terms, funding markets, and instruments.
For the year ended December 31, 2008, net cash provided by operating activities was $4.9 million less than for 2007. Net cash used in investing
activities was $437.0 million for 2008 versus $151.0 million in 2007. The increase of $286.0 million was primarily due an increase in loan volume. Net
cash provided by financing activities was $306.0 million in 2008 versus $230.0 million in 2007. The change in cash provided by financing activities is
due to increases in brokered deposits in 2008, additional federal funds purchased, FHLB advances, additional subordinated debentures and TARP
funds.
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. Enterprise 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.
38
Parent Company liquidity
The parent company’s liquidity is managed to provide the funds necessary to pay dividends to shareholders, service debt, invest in subsidiaries as
necessary, and satisfy other operating requirements. The parent company’s primary funding sources to meet its liquidity requirements are
dividends from Enterprise and proceeds from the issuance of equity (i.e. stock option exercises). While our $16.0 million line of credit does not
expire until April 2009, we do not have any current availability under the line due to our noncompliance with a certain covenant regarding classified
loans as a percentage of bank equity and loan loss reserves. We may be unable to arrange for a holding company line of credit in 2009 given the
uncertainties around bank industry performance. However, we believe our current level of cash at the holding company will be sufficient to meet all
projected cash needs in 2009. See Item 8, Note 13 – Other borrowings and notes payable for more information regarding the line of credit.
Another source of funding for the parent company includes the issuance of subordinated debentures. As of December 31, 2008, the Company had
$82.6 million of outstanding subordinated debentures as part of nine Trust Preferred Securities Pools. These securities are classified as debt but are
included in regulatory capital and the related interest expense is tax-deductible, which makes them a very attractive source of funding. See Item 8,
Note 11 – Subordinated Debentures for more information.
Enterprise liquidity
Enterprise has a variety of funding sources available to increase financial flexibility. In addition to amounts currently borrowed, at December 31,
2008, Enterprise could borrow an additional $164.3 million available from the FHLB of Des Moines under blanket loan pledges and an additional
$310.5 million available from the Federal Reserve Bank under pledged loan agreements. Enterprise has unsecured federal funds lines with five
correspondent banks totaling $70.0 million.
Investment securities are another important tool to the Company’s liquidity objective. As of December 31, 2008, the entire investment portfolio was
available for sale. Of the $96.4 million investment portfolio available for sale, $72.8 million was pledged as collateral for public deposits, treasury, tax
and loan notes, and other requirements. The remaining debt securities could be pledged or sold to enhance liquidity, if necessary.
In July 2008, Enterprise joined the Certificate of Deposit Account Registry Service, or CDARS, which allows us to provide our customers with
access to additional levels of FDIC insurance coverage. The CDARS program is designed to provide full FDIC insurance on deposit amounts larger
than the stated minimum by exchanging or reciprocating larger depository relationships with other member banks. Our depositors’ funds are broken
into smaller amounts and placed with other banks that are members of the network. Each member bank issues CDs in amounts that are eligible for
FDIC insurance. CDARS are considered brokered deposits according to banking regulations; however, the Company considers the reciprocal
deposits placed through the CDARS program as core funding since the original funds came from clients and does not report the balances as
brokered sources in its internal or external financial reports. Enterprise must remain “well-capitalized” in order to utilize the CDARS program. As of
December 31, 2008, the Bank had $59.0 million of reciprocal CDARS deposits outstanding. We expect CDARS deposits to increase during 2009.
In addition to the reciprocal deposits available through CDARS, we also have access to the “one-way buy” program, which allows us to bid on the
excess deposits of other CDARS member banks. The Company will report any outstanding “one-way buy” funds as brokered funds in its internal
and external financial reports. At December 31, 2008, we had no outstanding “one-way buy” deposits.
As long as Enterprise remains “well-capitalized”, we have the ability to sell certificates of deposit through various national or regional brokerage
firms, if needed. At December 31, 2008, we had $336.0 million of brokered certificates of deposit outstanding.
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 $555.0 million in unused loan
commitments as of December 31, 2008. 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 them is very low.
At December 31, 2008 and 2007, approximately $10,018,000 and $6,400,000, respectively, of cash and due from banks represented required reserves
on deposits maintained by the Company in accordance with Federal Reserve Bank requirements.
39
Capital Resources
As a financial holding company, the Company is subject to “risk based” capital adequacy guidelines established by the Federal Reserve. 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.
The Company met the definition of “well-capitalized” (the highest category) at December 31, 2008, 2007 and 2006. The following table summarizes
the Company’s risk-based capital and leverage ratios at the dates indicated:
(Dollars in thousands)
Tier I capital to risk weighted assets
Total capital to risk weighted assets
Leverage ratio (Tier I capital to average assets)
Tangible common equity to tangible assets
Tier I capital
Total risk-based capital
At December 31
2008
2007
2006
8.89%
12.81%
8.58%
5.90%
$ 190,253
273,978
$
9.32%
10.54%
8.85%
5.68%
$ 164,957
186,549
$
9.60%
10.83%
8.87%
6.48%
$ 131,869
$
148,856
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 Bank’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
Our interest rate sensitivity management seeks to avoid fluctuating interest margins to enhance consistent growth of net interest income through
periods of changing interest rates. Interest rate sensitivity varies with different types of interest-earning assets and interest-bearing liabilities. We
attempt to maintain interest-earning assets, comprised primarily of both loans and investments, and interest-bearing liabilities, comprised primarily
of deposits, maturing or repricing in similar time horizons in order to minimize or eliminate any impact from market interest rate changes. 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.
40
The following table represents the estimated interest rate sensitivity and periodic and cumulative gap positions calculated as of December 31, 2008.
Significant assumptions used for this table include: 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
Securities available for sale
Other investments
Interest-bearing deposits
Federal funds sold
Year 1
Year 2
Year 3
Year 4
Year 5
Beyond
5 years
or no stated
maturity
Total
$
19,198
$ 15,160
$ 15,751
$ 17,618
$ 27,405
$ 1,299
$
96,431
-
14,384
2,637
-
-
-
-
-
-
-
-
-
-
-
-
11,884
-
-
11,884
14,384
2,637
Loans (1)
Loans held for sale
Total interest-earning assets
Interest-Bearing Liabilities
1,206,660
252,585
198,435
96,009
151,914
71,572
1,977,175
2,632
-
-
-
-
-
2,632
$
1,245,511
$
267,745
$
214,186
$
113,627
$
179,319
$
84,755
$
2,105,143
Savings, NOW and Money market deposits
$
837,356
$
-
$
-
$
-
$
-
$
Certificates of deposit
Subordinated debentures
Other borrowings
Total interest-bearing liabilities
Interest-sensitivity GAP
GAP by period
Cumulative GAP
Ratio of interest-earning assets to
interest-bearing liabilities
Periodic
Cumulative GAP as of December 31, 2008
Cumulative GAP as of December 31, 2007(2)
(1)
(2)
Adjusted for the impact of the interest rate swaps.
For comparative purposes
520,432
32,064
127,210
140,719
44,246
10,310
20,800
-
300
1,775
14,433
7,000
442
28,274
-
10,807
-
453
-
$
837,356
708,067
85,081
166,117
$
1,517,062
$
171,829
$
44,546
$
23,208
$
28,716
$
11,260
$
1,796,621
$
$
(271,551)
(271,551)
$
$
95,916
(175,635)
$
$
169,640
(5,995)
$
$
90,419
84,424
$
$
150,603
235,027
$
$
73,495
308,522
$
$
308,522
308,522
0.82
0.82
0.94
1.56
0.90
4.81
1.00
4.90
1.05
6.24
1.13
7.53
1.17
0.98
1.06
1.09
1.13
1.18
1.17
1.17
1.18
At December 31, 2008, the Company was asset sensitive on a cumulative basis for all periods except years 1 and 2 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, 2008 demonstrate that the Company’s balance sheet is relatively neutral to rate changes. The
simulations projected that net interest income of Enterprise would decrease by approximately 1.5% if rates rose by a 100 basis point parallel rate
shock and projected that the net interest income would decrease by approximately 0.8% 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, 2008, the Company had $97.4 million in
notional amount of outstanding interest rate swaps to help manage interest rate risk. Derivative financial instruments are also discussed in Item 8,
Note 7 – Derivative Financial Instruments.
41
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, excluding any contractual interest, at December 31, 2008 were as follows:
Over 1 Year
Less Than
Less than
Over
(in thousands)
Operating leases
Certificates of deposit
Subordinated debentures
Federal Home Loan Bank advances
Commitments to extend credit
Standby letters of credit
Total
1 Year
5 Years
$ 12,249
$ 2,378
$ 5,646
5 Years
$ 4,225
708,067
85,081
119,957
555,361
33,875
520,432
-
81,050
357,262
33,875
187,182
-
28,100
161,353
-
453
85,081
10,807
36,746
-
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.
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 Item 8, Note 1 – Significant Accounting Policies.
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. Such estimates include the valuation of loans, goodwill, intangible assets, and other long-lived assets, along with assumptions
used in the calculation of income taxes, among others. These estimates and assumptions are based on management’s best estimates and judgment.
Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current
economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when
facts and circumstances dictate. Decreasing real estate values, illiquid credit markets, volatile equity markets, and declines in consumer spending
have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined
with precision, actual results could differ significantly from these estimates. Changes in estimates resulting from continuing changes in the
economic environment will be reflected in the financial statement in future periods. There can be no assurances that actual results will not differ
from those estimates.
42
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.
Acquisitions and Divestitures
The Company has accounted for business combinations in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141,
Business Combinations (“SFAS 141”), Under SFAS 141, the assets and liabilities of the acquired entities are recorded at their estimated fair values
at the date of acquisition. Goodwill represents the excess of the purchase price over the fair value of net assets, including the amount assigned to
identifiable intangible assets. The purchase price allocation process requires an analysis of the fair values of the assets acquired and the liabilities
assumed. When a business combination agreement provides for an adjustment to the cost of the combination contingent on future events, the
Company includes that adjustment in the cost of the combination when the contingent consideration is determinable beyond a reasonable doubt
and can be reliably estimated and should not otherwise be expensed according to the provisions of SFAS 141. The results of operations of the
acquired business are included in the Company’s consolidated financial statements from the respective date of acquisition. As a general rule,
goodwill established in connection with a stock purchase is nondeductible for tax purposes.
The company accounts for divestitures under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”.)
SFAS 144 requires an entity to measure an asset (disposal group) classified as held for sale at the lower of its carrying value at the date the assets is
initially classified as held for sale or its fair value less costs to sell. It also requires an entity to report in discontinued operations the results of
operations of a component that either has been disposed of or held to sale if:
l
the operations and cash flows of the disposal group will be eliminated from the ongoing operations as a result of the disposal transaction;
and
l
the Company will not have any significant continuing involvement in the operations of the entity after the disposal transaction.
Any incremental direct costs incurred to transact the sale are allocated against the gain or loss on the sale. These costs would include items like
legal fees, title transfer fees, broker fees, etc. Pursuant to SFAS 142, any goodwill associated with the portion of the reporting unit that constitutes a
business to be disposed of is included in the carrying amount of the business in determining the gain or loss on the sale. Also, any intangible
assets or write down to fair value associated with the entity to be disposed of is also included in the carrying amount of the business in determining
the gain or loss on the sale. The gain or loss on the sale is classified in the consolidated statements of income as noninterest income.
In December 2007, SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”) was issued. This statement replaces SFAS 141, and
establishes several new principles and requirements for accounting for business combinations. The new accounting standard is effective for all
business combinations consummated on or after December 15, 2008.
Goodwill and Other Intangible Assets
The Company accounts for goodwill and intangible assets according to SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”.)
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 Company tests goodwill for impairment on an annual basis and intangible assets whenever events or changes in
circumstances indicate that the Company may not be able to recover the respective asset’s carrying amount. 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 or intangible assets in the future due to changes in business prospects or other matters that could affect our assumptions.
SFAS 142 requires that goodwill be tested for impairment at the reporting unit level. Reporting units are defined as the same level as, or one level
below, an operating segment, as defined in SFAS 131, Disclosures about Segments of an Enterprise and Related Information. An operating
segment is a component of a business for which separate financial information is available that management regularly evaluates in deciding how to
allocate resources and assess performance. The Company’s reporting units are Millennium, Trust and the Banking operations of Enterprise. At
December 31, 2008 and 2007, the Trust reporting unit had no goodwill.
43
Historically, our goodwill impairment tests have been completed as of December 31 each year. Following the annual impairment test for 2006, the
Company changed the goodwill impairment test date for the Millennium reporting unit to September 30 of each fiscal year. This change in the
testing date was designed to provide sufficient time for independent experts to complete the Millennium reporting unit testing prior to year end
reporting. The goodwill impairment test date for the Banking reporting unit did not change.
Under SFAS 142, businesses must identify potential impairments by comparing the fair value of a reporting unit to its carrying amount, including
goodwill. Goodwill impairment does not occur as long as the fair value of the unit is greater than its carrying value. The second step of the
impairment test is only required if a goodwill impairment is identified in step one. The second step of the test compares the implied fair market value
of goodwill to its carrying amount. If the carrying amount of goodwill exceeds its implied fair market value, an impairment loss is recognized. That
loss is equal to the carrying amount of goodwill that is in excess of its implied fair market value.
SFAS 144 also requires long-lived assets, such as purchased intangibles subject to amortization, to be 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.
There are three general approaches commonly used in business valuation: income approach, asset-based approach, and market approach. Within
each of these approaches, there are various techniques for determining the value of a business using the definition of value appropriate for the
appraisal assignment. Professional judgment is required to determine which valuation methods are the most appropriate. The valuation may utilize
one or more of the approaches. Generally, the income approaches determine value by calculating the net present value of the benefit stream
generated by the business (discounted cash flow); the asset-based approaches determine value by adding the sum of the parts of the business (net
asset value); and the market approaches determine value by comparing the subject company to other companies in the same industry, of the same
size, and/or within the same region.
Millennium reporting unit
An independent third party performed the valuation of the Millennium reporting unit. Step one of the impairment valuation utilized a combination of
the income approach and the market approach. The income and market approaches were weighted at 33% and 67%, respectively. The weights reflect
the relative importance of the methods used and serve as a means of simulating the thinking of hypothetical investors. Significant assumptions and
estimates used to determine the step one impairment value included expected cash flows and annual growth rates, anticipated future earnings,
operating margins and other indicators of value derived from market transactions of similar companies.
Step two of the impairment valuation contemplated a hypothetical acquisition of the assets and liabilities of Millennium. The intangible assets
identified were trade name and customer lists. Significant assumptions and estimates used to determine the step two allocation include an expected
discount rate, existing customer list and projected revenue from those customers.
In accordance with SFAS 142 and SFAS 144, we evaluated Millennium’s goodwill and intangible assets for impairment as of September 30, 2008. In
connection with these tests, we determined that margin pressures reducing Millennium revenues continued to negatively affect operating
performance, thereby reducing the fair value of our investment in Millennium. As a result, the Company recorded a $5.9 million, pre-tax goodwill
impairment charge as of September 30, 2008. In the fourth quarter of 2008, due to continued pressures in the sales margin and resulting decreased
earnings of Millennium, we identified and recorded an additional pre-tax goodwill impairment of $2.8 million and $500,000 of intangible asset
impairment. Millennium’s goodwill and intangible assets were $3.1 million and $1.4 million, respectively, at December 31, 2008. It is possible that
additional impairment charges could occur in 2009.
Banking reporting unit
An independent third party performed the valuation of the Banking reporting unit. Step one of the impairment valuation utilized a combination of
the income approach and the market approach. The income and market approaches were weighted at 67% and 33%, respectively. The weights reflect
the relative importance of the methods used and serve as a means of simulating the thinking of hypothetical investors. Significant assumptions and
estimates used to determine the step one impairment value included expected cash flows and annual growth rates, anticipated future earnings,
operating margins and other indicators of value derived from market transactions of similar companies.
44
The 2008 annual impairment evaluation of the goodwill and intangible balances did not identify any impairment for the Banking reporting unit. At
December 31, 2008, the Company’s common shareholders’ equity was $186.7 million. At March 2, 2009, the Company’s market capitalization was
$116.0 million. A goodwill impairment test may be performed on the Banking reporting unit as of March 31, 2009. If current market conditions persist,
it is possible that goodwill impairment could occur in the Banking reporting unit in 2009.
There was no goodwill or intangible impairment recorded in 2007 or 2006 for either the Millennium or Banking reporting units.
State Tax Credits Held for Sale
On January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (“SFAS 157”), and SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (“SFAS 159”.) SFAS 157 defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. SFAS 159 permits the Company to choose to measure eligible items at fair value at specified
election dates. Unrealized gains and losses on items for which the fair value measurement option (“FVO”) has been elected are reported in earnings
at each subsequent reporting date. The fair value option (i) may be applied instrument by instrument, with certain exceptions, thus the Company
may record identical financial assets and liabilities at fair value or by another measurement basis permitted under generally accepted accounting
principles, (ii) is irrevocable (unless a new election date occurs) and (iii) is applied only to entire instruments and not to portions of instruments.
In 2007, the Company executed an agreement to purchase the rights to receive 10-year streams of state tax credits at agreed upon discount rates. At
December 31, 2007, the Company had purchased $23.0 million of state tax credits. Upon adoption of SFAS 157 and SFAS 159, the Company elected
to account for the state tax credit assets at fair value. As a result, the state tax credits were re-measured to fair value. The effect of the re-
measurement was reported as a cumulative-effect adjustment, which reduced opening retained earnings on January 1, 2008, by $365,000.
The Company is not aware of an active financial market for the 10-year streams of state tax credit financial instruments. However, the Company’s
principal market for these tax credits consists of state residents who buy them to reduce their state tax exposure. The state tax credits purchased by
the Company are held until they are “usable” and then are sold to our clients for a profit.
The Company utilizes a discounted cash flow analysis (income approach) to determine the fair value of the state tax credits. The fair value
measurement is calculated using an internal valuation model. The inputs to the fair value calculation include: the amount of tax credits generated
each year, the anticipated sale price of the tax credit, the timing of the sale and a discount rate. The discount rate is defined as the LIBOR swap
curve at a point equal to the remaining life in years of credits plus a risk premium spread. With the exception of the discount rate, the inputs to the
fair value calculation are observable and readily available. The discount rate is an “unobservable input” and is based on the Company’s
assumptions. As a result, fair value measurement for these instruments falls within Level 3 of the fair value hierarchy of SFAS 157.
At December 31, 2008, the discount rates utilized in our state tax credits fair value calculation ranged from 3.80% to 4.61%. Resulting changes in the
fair value of the state tax credits held for sale of $4.6 million were reported in Gain on state tax credits, net in the consolidated statement of income
for the year ended December 31, 2008. A rate simulation with a 100 basis point parallel rate shock to the discount rate was run for December 31, 2008.
The resulting simulation indicates that if the LIBOR swap curve were to increase by 100 basis points, the fair value of the state tax credits would be
lower by approximately $1.5 million. We would expect a portion of this decline would be offset by a change in the value of derivative financial
instruments hedging the state tax credits.
These Level 3 fair value measurements are based primarily upon our own estimates and are calculated based on the current economic and regulatory
environment, interest rate risks and other factors. Therefore, the results cannot be determined with precision, cannot be substantiated by
comparison to quoted prices in active markets, and may not be realized in a current sale or immediate settlement of the asset or liability.
Additionally, there are inherent uncertainties in any fair value measurement technique, and changes in the underlying assumptions used, including
the discount rate and estimate of future cash flows, could significantly affect the fair value measurement amounts.
45
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 and caps. 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. As of December 31, 2008, the Company used derivative financial instruments in a cash flow hedge program for prime based
loans. In addition, as of December 31, 2008, the Company used nondesignated derivative financial instruments to economically hedge changes in
the fair value of state tax credits held for sale and changes in the fair value of certain loans accounted for as trading instruments.
l Cash Flow Hedges – Derivatives designated as cash flow hedges are recorded 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 income or expense (depending on whether the hedged item is an asset or liability) when the
underlying transaction affects earnings. The ineffective portion of the change in fair value is recorded in noninterest income. Upon
dedesignation of a derivative financial instrument from a cash flow hedge relationship, any remaining amounts in OCI are recorded in
noninterest income over the expected remaining life of the underlying forecasted hedge transaction. The net interest differential between the
hedged item and the hedging derivative financial instrument are recorded as an adjustment to interest income or interest expense of the
related asset or liability.
l Fair Value Hedges – For derivatives designated as fair value hedges, the change in fair value of the derivative instrument and related
hedged item are recorded in the related interest income or expense, as applicable, except for the ineffective portion, which is recorded in
noninterest income in the consolidated statements of income. 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.
l Non-Designated Hedges – Certain derivative financial instruments are not designated as cash flow or as fair value hedges for accounting
purposes. These non-designated derivatives are entered into to provide interest rate protection on net interest income or noninterest income
but do not meet hedge accounting treatment. Changes in the fair value of these instruments are recorded in interest income or noninterest
income in the consolidated statements of income depending on the underlying hedged item.
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 related derivative financial instruments being reported in income. In December 2008, the Company
discontinued hedge accounting on two prime based loan hedge relationships as a result of the significant decrease in the prime rate. As a result of
the dedesignation, the changes in the fair value of the related derivative financial instruments are being reported in income without a corresponding
and offsetting change in the fair value for the loans previously hedged.
Deferred Tax Assets and Liabilities
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, we 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, we would reverse the valuation allowance when realization of the deferred
tax asset is expected.
Effects of New Accounting Pronouncements
See Item 8, Note 1 – Summary of Significant Accounting Policies for information on recent accounting pronouncements and their impact, if any, on
our consolidated financial statements.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Please refer to “Risk Factors” included in Item 1A and “Risk Management” included in Management’s Discussion and Analysis under Item 7.
46
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Enterprise Financial Services Corp and subsidiaries
Management’s Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2008 and 2007
Consolidated Statements of Income for the years
ended December 31, 2008, 2007, and 2006
Consolidated Statements of Shareholders’ Equity and Comprehensive Income
for the years ended December 31, 2008, 2007, and 2006
Consolidated Statements of Cash Flows for the years
ended December 31, 2008, 2007, and 2006
Notes to Consolidated Financial Statements
47
Page Number
48
49
51
52
53
54
55
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, 2008, 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, 2008, the Company’s internal control over financial
reporting was effective based on these criteria.
48
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Enterprise Financial Services Corp:
We have audited Enterprise Financial Services Corp’s (the Company) internal control over financial reporting as of December 31, 2008, 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, included in the accompanying Management’s Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that
a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audit also included 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, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, 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, 2008 and 2007, and the related consolidated statements of operations, shareholders’ equity and
comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2008, and our report dated March 13, 2009
expressed an unqualified opinion on those consolidated financial statements.
St. Louis, Missouri
March 13, 2009
49
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, 2008 and 2007, 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, 2008. 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, 2008 and 2007, and the results of its operations and its cash flows for each of the years in the three-year period ended December
31, 2008, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 157, Fair Value Measurements, and Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment to FASB Statement No. 115, on January 1, 2008.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s
internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 13, 2009 expressed an unqualified
opinion on the effectiveness of the Company’s internal control over financial reporting.
St. Louis, Missouri
March 13, 2009
50
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Balance Sheets
Years ended December 31, 2008 and 2007
December 31,
(In thousands, except share and per share data)
Assets
Cash and due from banks
Federal funds sold
Interest-bearing deposits
Total cash and cash equivalents
Securities available for sale, at fair value
Other investments
Loans held for sale
Portfolio loans
Less: Allowance for loan losses
Portfolio loans, net
Other real estate
Fixed assets, net
Accrued interest receivable
State tax credits, held for sale,
at fair value as of December 31, 2008
Goodwill
Intangibles, net
Other assets
Total assets
Liabilities and Shareholders' Equity
Deposits:
Demand deposits
Interest-bearing transaction accounts
Money market accounts
Savings
Certificates of deposit:
$100k and over
Other
Total deposits
Subordinated debentures
Federal Home Loan Bank advances
Other borrowings
Notes payable
Accrued interest payable
Other liabilities
Total liabilities
Shareholders' equity:
Preferred stock, $0.01 par value;
5,000,000 shares authorized; 35,000 and
0 shares issued, respectively
Common stock, $0.01 par value;
30,000,000 shares authorized; 12,876,981 and
12,482,357 shares issued, respectively
Treasury stock, at cost; 76,000 shares
Additional paid in capital
Retained earnings
Accumulated other comprehensive income
Total shareholders' equity
Total liabilities and shareholders' equity
2008
2007
$
25,626
2,637
14,384
42,647
96,431
11,884
2,632
1,977,175
31,309
1,945,866
13,868
25,158
7,557
$
76,265
75,665
1,719
153,649
70,756
12,577
3,420
1,641,432
21,593
1,619,839
2,963
22,223
8,334
39,142
48,512
3,504
32,973
$ 2,270,174
23,149
57,177
6,053
18,978
$ 1,999,118
$
247,361
126,644
702,886
7,826
$
278,313
131,141
672,577
10,343
520,197
187,870
1,792,784
85,081
119,957
46,160
-
2,473
5,931
2,052,386
347,318
145,320
1,585,012
56,807
152,901
10,680
6,000
3,710
10,859
1,825,969
31,116
-
129
(1,743 )
115,111
71,927
1,248
217,788
125
(1,743 )
104,127
70,523
117
173,149
$ 2,270,174
$ 1,999,118
See accompanying notes to consolidated financial statements.
51
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 2008, 2007 and 2006
(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 advances
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 revenue
Service charges on deposit accounts
Other service charges and fee income
Gain on sale of branches/charter
Gain (loss) on sale of other real estate
Gain on state tax credits, net
Gain on sale of investment securities
Miscellaneous income
Total noninterest income
Noninterest expense:
Employee compensation and benefits
Occupancy
Furniture and equipment
Data processing
Meals and entertainment
Amortization of intangibles
Impairment charges related to Millennium Brokerage Group
Other
Total noninterest expense
Years ended December 31,
2007
2008
2006
$
112,387
$
116,847
$
88,437
4,722
31
211
83
547
117,981
4,571
34
481
62
522
122,517
1,554
13,786
55
18,127
6,398
3,536
6,649
1,153
51,258
66,723
22,475
44,248
10,848
4,376
1,000
3,400
552
4,201
161
735
25,273
31,024
4,246
1,470
2,187
1,484
1,444
9,200
12,450
63,505
3,078
23,578
125
18,329
7,754
3,859
4,277
465
61,465
61,052
4,615
56,437
13,980
3,228
852
-
(48 )
792
233
636
19,673
29,555
3,901
1,439
1,911
1,878
1,604
-
9,228
49,516
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
586
-
2
-
-
291
16,916
25,247
2,966
1,028
1,431
1,744
1,128
-
7,850
41,394
Minority interest in net income of consolidated subsidiary
Income before income tax expense
Income tax expense
Net income
Earnings per common share:
Basic
Diluted
See accompanying notes to consolidated financial statements.
52
-
6,016
1,586
4,430
$
-
(875 )
26,594
9,016
17,578
23,797
8,325
15,472
$
$
$
$
0.35
0.34
$
$
1.44
1.40
1.41
$
$ 1.36
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity and Comprehensive Income
Years ended December 31, 2006, 2007, and 2008
Preferred Common Treasury Additional paid Retained comprehensive shareholders'
Accumulated
other
Total
Stock
in capital
earnings
(in thousands, except per share data)
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
Cash dividends paid on common shares, $0.18 per share
Issuance under equity compensation plans, net, 166,543 shares
Acquisition of NorthStar Bancshares, Inc., 914,144 shares
Share-based compensation
Excess tax benefit related to equity compensation plans
Balance December 31, 2006
Cumulative effect of adoption of FIN 48
Balance January 1, 2007
Net income
Change in fair value of investment securities, net of tax
Reclassification adjustment for realized gain
on sale of securities included in net income, net of tax
Total comprehensive income
Cash dividends paid on common shares, $0.21 per share
Issuance under equity compensation plans, net, 194,737 shares
Purchase of Treasury Stock, 76,000 shares
Acquisition of Clayco Banc Corporation, 698,733 shares
Additional contingent shares issued in connection with
acquisition of NorthStar Bancshares, Inc., 49,348 shares
Share-based compensation
Excess tax benefit related to equity compensation plans
Balance December 31, 2007
Cumulative effect of adoption of SFAS No. 159 (see Note 9)
Balance January 1, 2008
Net income
Change in fair value of available for sale securities, net of tax
Reclassification adjustment for realized gain
$
$
$
$
$
- $
-
-
-
-
-
-
-
-
- $
-
- $
-
-
-
-
-
-
-
-
-
-
-
- $
- $
-
-
income (loss)
(1,137 )
-
282
263
41,950 $
15,472
-
-
105 $
-
-
-
-
1
9
-
-
115 $
-
115 $
-
-
-
-
2
-
7
$
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(1,743 )
-
51,687 $
-
-
-
-
1,274
23,473
1,067
525
78,026 $
-
78,026 $
-
-
(1,977 )
-
-
-
-
55,445 $
138
55,583 $
17,578
-
-
-
-
1,486
-
21,193
(2,638 )
-
-
-
1
-
-
125 $
-
125 $
-
-
-
-
-
(1,743 ) $
-
(1,743 ) $
-
-
1,281
1,760
381
104,127 $
-
104,127 $
-
-
-
-
-
70,523 $
(365 )
70,158 $
4,430
-
$
$
$
$
$
equity
92,605
15,472
282
263
16,017
(1,977 )
1,275
23,482
1,067
525
132,994
138
133,132
17,578
858
(149 )
18,287
(2,638 )
1,488
(1,743 )
21,200
1,282
1,760
381
173,149
(365 )
172,784
4,430
816
-
-
-
-
-
(592 )
-
(592 )
-
858
(149 )
-
-
-
-
-
-
-
117
-
117
-
816
on sale of securities included in net income, net of tax
Change in fair value of cash flow hedges, net of tax
Total comprehensive income
Cash dividends paid on common shares, $0.21 per share
Issuance of preferred stock and associated warrants, 35,000 shares
Issuance under equity compensation plans, net, 361,665 shares
Additional share-based compensation in connection with
acquisition of Clayco Banc Corporation, 32,959 shares
Share-based compensation
Excess tax benefit related to equity compensation plans
Balance December 31, 2008
See accompanying notes to consolidated financial statements.
-
-
-
31,116
-
-
-
-
-
4
-
-
-
-
-
-
-
3,884
3,555
-
-
(2,661 )
-
-
(103 )
418
-
-
-
(103 )
418
5,561
(2,661 )
35,000
3,559
-
-
-
-
-
-
$ 31,116 $ 129 $ (1,743 ) $
-
-
-
1,000
2,085
460
-
-
-
115,111 $ 71,927 $ 1,248
-
-
-
1,000
2,085
460
$ 217,788
53
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2008, 2007 & 2006
(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
Deferred income taxes
Net amortization (accretion) of debt and equity securities
Amortization of intangible assets
Gain on sale of investment securities
Mortgage loans originated
Proceeds from mortgage loans sold
(Gain) loss on sale of other real estate
Gain on state tax credits, net
Additional share-based compensation from acquisition of Clayco
Excess tax benefits of share-based compensation
Share-based compensation
Gain on sale of branches/charter
Impairment charges related to Millennium Brokerage Group
Changes in:
Accrued interest receivable and income tax receivable
Accrued interest payable and other liabilities
Other, net
Net cash provided by operating activities
Cash flows from investing activities:
Cash paid in sale of branch/charter, net of cash and cash equivalents received
Cash paid for acquisitions, net of cash and cash equivalents received
Net increase in loans
Proceeds from the sale/maturity/redemption/recoveries of:
Debt and equity securities, available for sale
State tax credits held for sale
Years ended December 31,
2007
2008
2006
$
4,430
$
17,578
$
15,472
2,690
22,475
(6,246 )
545
1,444
(161 )
(46,416 )
47,300
(552 )
(4,201 )
1,000
(460 )
2,255
(3,400 )
9,200
(3,054 )
(2,203 )
(4,356 )
20,290
(20,736 )
-
(370,963 )
62,721
4,422
2,465
4,615
747
(195 )
1,604
(233 )
(81,221 )
80,551
48
(792 )
-
(381 )
1,944
-
-
720
(1,013 )
(1,220 )
25,217
1,901
2,127
(1,244 )
39
1,128
-
(57,184 )
57,822
(2 )
-
-
(525 )
1,153
-
-
(1,601 )
327
(1,651 )
17,762
-
(9,375 )
(168,032 )
115,834
4,578
-
(4,078 )
(145,218 )
73,626
-
Other real estate
Loans previously charged off
Payments for the purchase/origination of:
Available for sale debt and equity securities
Limited partnership interests
State tax credits held for sale
Fixed assets
Net cash used in investing activities
Cash flows from financing activities:
Net (decrease) increase in noninterest-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
Net proceeds from federal funds purchased
Net increase (decrease) in other borrowings
Proceeds from notes payable
Repayments on notes payable
Cash dividends paid on common stock
Excess tax benefits of share-based compensation
Issuance of preferred stock and warrants
Repurchase 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 year
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest
Income taxes
Noncash transactions:
Common stock issued for acquisitions
Transfer to other real estate owned in settlement of loans
See accompanying notes to consolidated financial statements.
8,593
372
(93,372 )
(5,034 )
(15,271 )
(7,467 )
(436,735 )
(28,868 )
273,312
28,274
-
2,442,872
(2,475,815 )
19,400
16,080
15,000
(21,000 )
(2,661 )
460
35,000
-
3,389
305,443
(111,002 )
153,649
42,647
$
5,260
509
(67,726 )
(1,171 )
(27,726 )
(3,379 )
(151,228 )
28,313
90,092
18,557
(4,124 )
1,242,875
(1,146,572 )
-
923
6,750
(4,751 )
(2,638 )
381
-
(1,743 )
1,304
229,367
103,356
50,293
153,649
167
400
(40,676 )
-
-
(7,591 )
(123,370 )
(11,785 )
53,261
4,124
-
723,534
(725,121 )
-
(6,015 )
10,000
(10,745 )
(1,977 )
525
-
-
1,189
36,990
(68,618 )
118,911
50,293
$
$
52,495
11,579
$
61,223
7,854
42,377
7,896
$
$
$
-
18,432
$
22,482
5,979
$ 23,482
-
54
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 individuals and corporate customers located in the St. Louis and Kansas City metropolitan markets through its banking
subsidiary, Enterprise Bank & Trust (“Enterprise”.) Enterprise also operates a loan production office in Phoenix, Arizona. In addition, the Company
owns 100% 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 fourteen offices serving
life agents, banks, CPA firms, property and casualty groups, and financial advisors in 49 states. On July 31, 2008, the Company sold its remaining
interest in Great American Bank (“Great American”.)
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 its banking subsidiary 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.
Use of Estimates
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. Such estimates include the valuation of loans, goodwill, intangible assets, and other long-lived assets, along with assumptions
used in the calculation of income taxes, among others. These estimates and assumptions are based on management’s best estimates and judgment.
Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current
economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when
facts and circumstances dictate. Decreasing real estate value, illiquid credit markets, volatile equity markets, and declines in consumer spending
have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined
with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the
economic environment will be reflected in the financial statement in future periods. Actual amounts could differ from those estimates.
Consolidation
The consolidated financial statements include the accounts of the Company, Enterprise, Great American (through the date of disposition) and
Millennium. Acquired businesses are included in the consolidated financial statements from the date of acquisition. All material intercompany
accounts and transactions have been eliminated. Any minority ownership interests are reported in our Consolidated Balance Sheets as a liability.
Any minority ownership interest of earnings or loss, net of tax, is classified as “Minority interest in net income of consolidated subsidiary” in our
Consolidated Statements of Income.
Investments
The Company has currently classified investments in debt securities as available for sale.
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 fair 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 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.
55
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 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, 2008 and 2007, approximately $10,018,000 and $6,400,000, respectively, of cash and due from banks represented required reserves
on deposits maintained by the Company 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 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, 2008 and 2007. 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 provision 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. The level of the allowance reflects
management’s continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present
economic, political and regulatory conditions; and unexpected losses inherent in the current loan portfolio. The determination of the appropriate
level of the allowance for loan losses inherently involves a degree of subjectivity and requires that we make significant estimates of current credit
risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding
existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the
allowance for 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 additions 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 management believes it is probable that collection of all amounts due, both principal and interest, according to
the contractual terms of the loan agreement will not occur. Non-accrual loans, loans past due greater than 90 days and still accruing, and
restructured loans qualify as “impaired loans.” Loans are also considered “impaired” when it becomes probable that the Company will be unable to
collect all amounts due according to the loan’s contractual terms. Restructured loans involve the granting of a concession to a borrower
experiencing financial difficulty involving the modification of terms of the loan, such as changes in payment schedule or interest rate.
56
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. Loans and leases,
which are deemed uncollectible, are charged off and deducted from the allowance for loan losses, while recoveries of amounts previously charged
off are credited to the allowance for loan losses.
Other Real Estate
Other real estate represents property acquired through foreclosure or deeded to the Company in lieu of foreclosure on loans on which the
borrowers have defaulted as to the payment of principal and interest. Other real estate is recorded on an individual asset basis at the lower of cost
or fair value less estimated costs to sell. The fair value of other real estate is based upon estimates of future cash flows, market value of similar
assets, if available or independent appraisals. These estimates involve significant uncertainties and judgments and cannot be determined with
certainty. As a result, fair value estimates may not be realizable in a current sale or settlement of the other real estate. Subsequent reductions in fair
value are expensed.
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, equipment, and capitalized software 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.
State Tax Credits Held for Sale
The Company purchases the rights to receive 10-year streams of state tax credits at agreed upon discount rates and sells such tax credits to Wealth
Management customers. Upon adoption of Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS
157”), and SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”) on January 1, 2008, the Company
elected to prospectively account for $23 million of state tax credit assets at fair value. As a result, the Company recorded an adjustment to retained
earnings as of January 1, 2008 of $365,000. All state tax credits purchased in 2008 were accounted for at fair value.
The Company utilizes a discounted cash flow analysis (income approach) to determine the fair value of the state tax credits. The fair value
measurement is calculated using an internal valuation model. The inputs to the fair value calculation include: the amount of tax credits generated
each year, the anticipated sale price of the tax credit, the timing of the sale and a discount rate. The discount rate is defined as the LIBOR swap
curve at a point equal to the remaining life in years of credits plus a risk premium spread. With the exception of the discount rate, the inputs to the
fair value calculation are observable and readily available. The discount rate is an “unobservable input” and is based on the Company’s
assumptions. As a result, fair value measurement for these instruments fall within Level 3 of the fair value hierarchy of SFAS 157.
Goodwill and Other Intangible Assets
The Company accounts for goodwill and intangible assets according to SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). The
Company tests goodwill for impairment on an annual basis. Such tests involve the use of estimates and assumptions. Intangibles, consisting of
customer lists are amortized using the straight-line method over the estimated useful life of 5 years and trade names are amortized using the straight-
line method over the estimated useful lives of approximately 20 years. Core deposit intangibles are amortized using an accelerated method over an
estimated useful life of approximately 10 years.
Historically, our goodwill impairment tests have been completed as of December 31 each year. Following the annual impairment test for 2006, the
Company changed the goodwill and intangible asset impairment test date for the Millennium reporting unit to September 30 of each fiscal year. This
change in the testing date was designed to provide sufficient time for independent experts to complete the Millennium reporting unit testing prior to
year end reporting. The goodwill and other intangible impairment test date for the Banking segment did not change.
57
Under SFAS 142, businesses must identify potential goodwill impairments by comparing the fair value of a reporting unit to its carrying amount,
including goodwill. Goodwill impairment is not indicated as long as the fair value of the reporting unit is greater than its carrying value. The second
step of the impairment test is only required if a goodwill impairment is identified in step one. The second step of the test compares the implied fair
value of goodwill to its carrying amount. If the carrying amount of goodwill exceeds its implied fair value, an impairment loss is recognized. That
loss is equal to the carrying amount of goodwill that is in excess of its implied fair market value.
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 according to SFAS No. 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets” (“SFAS 144”). 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 Financial Instruments and Hedging Activities
The Company uses derivative financial instruments to assist in the management of interest rate sensitivity and to modify the repricing, maturity and
option characteristics of certain assets and liabilities. Derivative 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. 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 SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities (“SFAS 133”), the Company assigns derivatives to one of these categories at the purchase date: fair value hedge, cash flow
hedge or non-designated derivatives. SFAS 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 balance sheets.
Generally, the only derivative instruments used by the Company have been interest rate swaps. In 2008, the Company executed several interest rate
cap contracts.
The following is a summary of the Company’s accounting policies for derivative instruments and hedging activities.
l Cash Flow Hedges – Derivatives designated as cash flow hedges are recorded 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 income or expense (depending on whether the hedged item is an asset or liability) when the underlying
transaction affects earnings. The ineffective portion of the change in fair value is recorded in noninterest income. Upon dedesignation of a
derivative financial instrument from a cash flow hedge relationship, any remaining amounts in OCI are recorded in noninterest income over the
expected remaining life of the underlying forecasted hedge transaction. The net interest differential between the hedged item and the hedging
derivative financial instrument are recorded as an adjustment to interest income or interest expense of the related asset or liability.
l Fair Value Hedges – For derivatives designated as fair value hedges, the change in fair value of the derivative instrument and related hedged
item are recorded in the related interest income or expense, as applicable, except for the ineffective portion, which is recorded in noninterest
income in the consolidated statements of income. 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.
l Non-Designated Hedges – Certain derivative financial instruments are not designated as cash flow or as fair value hedges for accounting
purposes. These non-designated derivatives are intended to provide interest rate protection on net interest income or noninterest income but do
not meet hedge accounting treatment. Changes in the fair value of these instruments are recorded in interest income or noninterest income in the
consolidated statements of income depending on the underlying hedged item.
58
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.
Treasury Stock
On August 27, 2007, the Company’s Board of Directors authorized a one-year stock repurchase program of up to 625,000 shares, or approximately
5.00%, of the Company’s outstanding common stock in the open market or in privately negotiated transactions. No purchases were made in 2008
and the program expired in August 2008 without reauthorization. In addition, participants in TARP are not allowed to repurchase shares of common
stock. At December 31, 2008, the Company has 76,000 shares of Treasury stock. All repurchased shares are being held as Treasury stock for general
corporate purposes. Treasury shares are accounted for under the cost method and are included as a component of shareholders’ equity.
Stock-Based Compensation
Effective January 1, 2006, the Company adopted SFAS No. 123(R), Share-based Payment (“SFAS 123(R)”.) This statement 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 required the Company to recognize
compensation expense on a prospective basis for all outstanding unvested awards.
Acquisitions and Divestitures
In accordance with SFAS No. 141, Business Combinations (“SFAS 141”), the Company has accounted for business combinations using the
purchase method of accounting. Accordingly, the assets and liabilities of the acquired entities have been recorded at their estimated fair values at
the date of acquisition. Goodwill represents the excess of the purchase price over the fair value of net assets, including the amount assigned to
identifiable intangible assets.
The purchase price allocation process requires an estimation of the fair values of the assets acquired and the liabilities assumed. When a business
combination agreement provides for an adjustment to the cost of the combination contingent on future events, the Company has included that
adjustment in the cost of the combination when the contingent consideration is determinable beyond a reasonable doubt and can be reliably
estimated and should not otherwise be expensed according to the provisions of SFAS 141. The results of operations of the acquired business are
included in the Company’s consolidated financial statements from the respective date of acquisition. As a general rule, goodwill established in
connection with a stock purchase is nondeductible for tax purposes.
The Company accounts for divestitures under SFAS 144, which requires an entity to measure an asset (disposal group) classified as held for sale at
the lower of its carrying value at the date the asset is initially classified as held for sale or its fair value less costs to sell. It also requires an entity to
report in discontinued operations the results of operations of a component that either has been disposed of or held to sale if:
l The operations and cash flows of the disposal group will be eliminated from the ongoing operations as a result of the disposal transaction,
and
l The Company will not have any significant continuing involvement in the operations of the entity after the disposal transaction.
Any incremental direct costs incurred to transact the sale are allocated against the gain or loss on the sale. These costs would include items like
legal fees, title transfer fees, broker fees, etc. Pursuant to SFAS 142, any goodwill and intangible assets associated with the portion of the reporting
unit to be disposed of is included in the carrying amount of the business in determining the gain or loss on the sale.
59
Cash Flow Information
For purposes of reporting cash flows, the Company considers cash and due from banks, interest-bearing deposits and federal funds sold to be cash
and cash equivalents.
Reclassification
Certain reclassifications have been made to the 2007 and 2006 immaterial 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
On January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (“SFAS 157”), and SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (“SFAS 159”.) SFAS 157 defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. SFAS 159 permits the Company to choose to measure eligible items at fair value at specified
election dates. Unrealized gains and losses on items for which the fair value measurement option (“FVO”) has been elected are reported in earnings
at each subsequent reporting date. The fair value option (i) may be applied instrument by instrument, with certain exceptions, thus the Company
may record identical financial assets and liabilities at fair value or by another measurement basis permitted under generally accepted accounting
principles, (ii) is irrevocable (unless a new election date occurs) and (iii) is applied only to entire instruments and not to portions of instruments. The
effect of the re-measurement was reported as a cumulative-effect adjustment, which reduced opening retained earnings on January 1, 2008, by
$365,000. Upon adoption, the Company elected to account for $23 million of state tax credit assets at fair value. See Note 19 – Fair Value
Measurements for more information.
In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141(R), Business Combinations — a replacement of
FASB No. 141 (“SFAS 141R”.) SFAS 141R replaces SFAS 141, Business Combination (“SFAS 141”) and applies to all transaction and other events
in which one entity obtains control over one or more other businesses. SFAS 141R requires an acquirer, upon initially obtaining control of another
entity, to recognize the assets, liabilities and any non-controlling interest in the acquiree at fair value as of the acquisition date. Contingent
consideration is required to be recognized and measured at fair value on the date of acquisition rather than at a later date when the amount of that
consideration may be determinable beyond a reasonable doubt. This fair value approach replaces the cost-allocation process required under SFAS
141 whereby the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair value.
SFAS 141R requires acquirers to expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities
assumed, as was previously the case under SFAS 141. Under SFAS 141R, the requirements of SFAS 146, Accounting for Costs Associated with Exit
or Disposal Activities, would have to be met in order to accrue for a restructuring plan in purchase accounting. Pre-acquisition contingencies are to
be recognized at fair value, unless it is a non-contractual contingency that is not likely to materialize, in which case, nothing should be recognized in
purchase accounting and, instead, that contingency would be subject to the probable and estimable recognition criteria of SFAS 5, Accounting for
Contingencies. SFAS 141R is expected to have an impact on the Company’s accounting for business combinations closing on or after January 1,
2009.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51
(“SFAS 160”). SFAS 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 also clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated
financial statements. SFAS 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent
and the noncontrolling interest. Prior to SFAS 160, net income attributable to the noncontrolling interest generally was reported as an expense or
other deduction in arriving at consolidated net income. Additional disclosures are required as a result of SFAS 160 to clearly identify and
distinguish between the interests of the parent’s owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is effective for
fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact that SFAS 160 may have on its future consolidated
financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an Amendment of FASB
Statement No. 133 (“SFAS 161”.) SFAS 161 expands disclosure requirements regarding an entity’s derivative instruments and hedging activities.
Expanded qualitative disclosures that will be required under SFAS 161 include: (1) how and why an entity uses derivative instruments; (2) how
derivative instruments and related hedged items are accounted for under SFAS 133, Accounting for Derivative Instruments and Hedging Activities,
and related interpretations; and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance,
and cash flows. SFAS 161 also requires additional quantitative disclosures in financial statements. SFAS 161 will be effective for the Company on
January 1, 2009. Management does not expect that the adoption of the provisions of SFAS 161 will have a material impact on the Company’s
financial statements.
60
In October 2008, the FASB issued Financial Accounting Standards Board Staff Position (“FSP”) FAS No. 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active (“FSP FAS 157-3”.) The FSP clarifies the application of SFAS 157, Fair Value
Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial
asset when the market for that financial asset is not active. The FSP was effective immediately therefore the Company is currently subject to the
provision of the FSP. The implementation of FSP FAS 157-3 did not affect the Company’s fair value measurements as of December 31, 2008.
NOTE 2—ACQUISITIONS AND DIVESTITURES
Acquisition of Clayco Banc Corporation
On February 28, 2007, the Company acquired 100% of the total outstanding common stock of Kansas City-based Clayco Banc Corporation
(“Clayco”) and its wholly owned subsidiary Great American Bank for total consideration of $36,000,000, consisting of cash of $14,800,000 and
698,733 shares of common stock valued at $21,200,000.
At the time of acquisition, 32,959 shares valued at $1,000,000 were deposited into an escrow account as part of an executive retention agreement. At
December 31, 2008 the contingency was resolved, the shares were released to the executive, and the Company recorded additional compensation
expense of $1,000,000.
Acquisition of NorthStar Bancshares
On July 5, 2006, the Company acquired 100% of the total outstanding common stock of Kansas City-based NorthStar Bancshares, Inc and its wholly
owned subsidiary NorthStar Bank NA (“NorthStar”) for total consideration of $36,000,000, consisting of cash of $8,000,000 and 1,091,500 shares of
common stock valued at $28,000,000.
As part of the acquisition, $4,573,000 of the purchase price consisting of cash of $17,000 and 177,356 shares of common stock valued at $4,556,000
was deposited into a “Reserved Credit Escrow” account pending the collection of certain loans. The escrowed funds were considered “contingent
consideration” under U.S. GAAP and therefore, were not recorded in common stock or additional paid in capital until the contingency was resolved.
The Reserved Credit Escrow amount had scheduled release dates in January and July 2007 based on the receipt of principal payments or proceeds
from the sale of several identified loans and other real estate. In January 2007, no proceeds were released. In July 2007, $1,300,000 of the escrow was
released to the selling stockholders of NorthStar. This consisted of 49,348 shares of EFSC common stock and $6,400 in cash. The remaining balance
of the escrow was released to the Company. With the contingency resolved, the Company has recorded the additional common stock, paid in
capital and related goodwill.
Pro forma (unaudited)
The following pro forma consolidated amounts give effect to the Company’s acquisitions of NorthStar and Clayco as if they had occurred January
1, 2006. The pro forma consolidated amounts presented below are based on continuing operations. The pro forma consolidated amounts are not
necessarily indicative of the operating results that would have been achieved had the transactions been in effect and should not be construed as
being representative of future operating results.
(in thousands, except per share data)
Revenues(1)
Net income
Net income per share:
Basic
Diluted
Weighted average shares used in calculation:
Basic
Diluted
(1) Revenues include net interest income and noninterest income.
Year ended December 31,
2007
$ 81,871
17,789
2006
$ 78,001
16,376
1.44
1.40
12,383
12,706
1.35
1.30
12,175
12,598
Sale of Liberty Branch
On February 28, 2008, the Company sold its Enterprise banking branch located in Liberty, Missouri to an unaffiliated bank. Deposit liabilities of
$7,358,000 were transferred and approximately $158,000 of fixed assets were sold. Goodwill and core deposit intangibles related to Liberty of $97,000
and $269,000, respectively, were written off on the sale date. The gain on the sale was $550,000.
61
Great American Transactions
On June 26, 2008, the Company transferred the assets and deposit liabilities of the Great American Claycomo branch along with certain other assets
and liabilities of Great American to Enterprise. Approximately $168,000,000 of assets and $126,000,000 of liabilities were transferred to Enterprise.
On July 31, 2008, the Company sold the Great American bank charter and its remaining DeSoto branch to an unaffiliated bank holding company, for
cash of $6,500,000. The net assets of the Great American charter on the date of the sale were $2,500,000, comprised of assets of approximately
$33,000,000 and liabilities of approximately $30,500,000. Goodwill and core deposit intangibles related to Great American of $680,000 and $336,000,
respectively, were written off on the sale date. The gain on the sale was $2,850,000.
Acquisition of Millennium Brokerage Group
On October 13, 2005, the Company acquired 60% of Millennium, a Tennessee limited liability company, for total consideration of $15,000,000,
consisting of $9,750,000 in cash and 249,161 shares of common stock valued at $5,250,000. The original agreement provided that the Company
would purchase the remaining 40% interest in Millennium in two tranches of 20% each in 2008 and 2010, respectively. However, on December 31,
2007, the Company accelerated the acquisition timetable and purchased the remaining 40% interest. The acquisition was accelerated to
accommodate a change in the Millennium partner compensation plan and equity incentives and to recognize the effects of the decline in
Millennium’s margins on valuing the remaining ownership interests pursuant to the original buyout terms. As a result, Millennium became a wholly
owned subsidiary of the Company. The Company acquired the remaining 40% interest in Millennium for cash of $1,500,000. The additional purchase
was accounted for as a step acquisition and as such, was considered additional purchase price and recorded as goodwill. In addition, subsequent
annual payments of up to $2,000,000 each year for four years are contingent upon Millennium’s achievement of certain pre-tax earnings targets. No
incremental amounts were paid in 2008.
NOTE 3—EARNINGS PER SHARE
Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted earnings per common share gives effect to all dilutive potential common shares outstanding
during the period using the treasury stock method and convertible preferred stock using the if-converted method. 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
Preferred stock dividend (undeclared)
Amortization of preferred stock discount
Net income available to common shareholders
Weighted average common shares outstanding
Basic earnings per common share
Diluted
Net income available to common shareholders
Weighted average common shares outstanding
Effect of dilutive stock options and restricted share units
Diluted weighted average common shares outstanding
Diluted earnings per common share
62
Years ended December 31,
2007
2008
2006
$ 4,430
(58 )
(21 )
4,351
$
$ 17,578
-
-
17,578
$
$ 15,472
-
-
15,472
$
12,589
12,239
10,964
$
0.35
$
1.44
$
1.41
$
4,351
$
17,578
$
15,472
12,589
146
12,735
12,239
323
12,562
10,964
423
11,387
$
0.34
$
1.40
$
1.36
For the years ended December 31, 2008, 2007 and 2006, there were weighted average common stock equivalents of approximately 516,000, 215,000,
and 0, respectively, which were excluded from the earnings per share calculation because their effect was anti-dilutive.
NOTE 4—PREFERRED STOCK AND COMMON STOCK WARRANTS
Preferred Equity
The Company’s Articles of Incorporation, as amended, authorize the issuance of 5,000,000 shares of preferred stock at a par value of $0.01 per
share. On December 19, 2008, the Company entered into an agreement with the United States Department of the Treasury (“Treasury”) under the
Troubled Asset Recovery Program-Capital Purchase Program, pursuant to which the Company sold (i) 35,000 shares of Fixed Rate Cumulative
Perpetual Preferred Stock, Series A (“Senior Preferred Stock”) and (ii) a warrant to purchase 324,074 shares of EFSC common stock (“common stock
warrants”), par value $0.01 per share, for an aggregate investment by the Treasury of $35,000,000.
The proceeds received were allocated between the Senior Preferred Stock and the common stock warrants based upon their relative fair values,
which resulted in the recording of a discount on the senior preferred stock upon issuance that reflects the value allocated to the warrant. The
discount will be accreted using a level-yield basis over five years, consistent with managements estimate of the life of the preferred stock. The
allocated carrying value of the senior preferred stock and common stock warrants on the date of issuance (based on their relative fair values) were
$31,116,000 and $3,884,000, respectively. Cumulative dividends on the senior preferred stock are payable at 5% per annum for the first five years and
at a rate of 9% per annum thereafter on the liquidation preference of $1,000 per share.
The Company is prohibited from paying any dividend with respect to shares of common stock unless all accrued and unpaid dividends are paid in
full on the senior preferred stock for all past dividend periods. The Senior Preferred Stock is non-voting, other than class voting rights on matters
that could adversely affect the Senior Preferred Stock. The Senior Preferred Stock is callable at par after three years. Prior to the end of three years,
according to the terms of the operative agreements, the Senior Preferred Stock may be redeemed with the proceeds from one or more qualified equity
offerings of any Tier 1 perpetual preferred or common stock of EFSC of at least $8,750,000 (each a “Qualified Equity Offering”), although
amendments to the Emergency Economic Stabilization Act of 2008 enacted in February of 2009 eliminate this restriction on the means of redeeming
the Senior Preferred Stock. The Treasury may also transfer the senior preferred stock to a third party at any time.
Common Stock Warrants
The common stock warrants have a term of 10 years and are exercisable at any time, in whole or in part, at an exercise price of $16.20 per share
(subject to certain anti-dilution adjustments). The Treasury may not exercise or transfer the common stock warrants with respect to more than half
of the initial shares of common stock underlying the common stock warrants prior to the earlier of (a) the date on which the Company receives
aggregate gross proceeds of not less than $35,000,000 from one or more Qualified Equity Offerings or (b) December 31, 2009. The number of shares
of common stock to be delivered upon settlement of the common stock warrant will be reduced by 50% if the Company receives aggregate gross
proceeds of at least $35,000,000 from one or more Qualified Equity Offerings prior to December 31, 2009.
Assumptions were used in estimating the fair value of common stock warrants. The weighted average expected life of the common stock warrant
represents the period of time that common stock warrants are expected to be outstanding. The risk-free interest rate is based on the U.S. Treasury
yield curve in effect at the time of grant. The expected volatility is based on the historical volatility of the Company’s stock. The following
assumptions were used in estimating the fair value for the common stock warrants: a weighted average expected life of 10 years, a risk-free interest
rate of 3.1%, an expected volatility of 47.3%, and a dividend yield of 5%. Based on these assumptions, the estimated fair value of the common stock
warrants was $2,972,000. As previously noted, based on the warrants’ fair value relative to the senior preferred stock fair value, $3,884,000 of the
$35,000,000 of proceeds was recorded to Additional paid in capital in the December 31, 2008 consolidated balance sheet.
63
NOTE 5—INVESTMENTS
The amortized cost and estimated fair value of available for sale debt securities are summarized below:
(in thousands)
Available for sale securities:
Mortgage-backed securities
Municipal bonds
(in thousands)
Available for sale securities:
Obligations of U.S. government agencies
Mortgage-backed securities
Municipal bonds
2008
Gross
Gross
Amortized
Cost
Unrealized Unrealized
Estimated
Gains Losses Fair Value
$ 94,368
765
95,133
$
$ 1,438
7
1,445
$
$ (147 )
-
(147 )
$
$ 95,659
772
96,431
$
2007
Gross
Gross
Amortized
Cost
Unrealized Unrealized
Losses
Gains
Estimated
Fair Value
$
$
28,531
41,107
947
70,585
$
$
193
82
5
280
$
$
(4 )
(102 )
(3 )
(109 )
$
$
28,720
41,087
949
70,756
The amortized cost and estimated fair value of debt securities classified as available for sale at December 31, 2008, 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
Mortgage-backed securities
Cost
Amortized Estimated
Fair Value
$ 400
372
95,659
96,431
$ 400
365
94,368
95,133
$
$
During 2008, proceeds from the sales and calls of investments in debt securities were $14,362,000, which resulted in gross gains of $161,000. During
2007, proceeds from the sales of investments in debt securities were $38,684,000, which resulted in gross gains of $233,000. Debt securities having a
carrying value of $72,800,000 and $39,613,000 at December 31, 2008 and 2007, respectively, were pledged as collateral to secure public deposits and
for other purposes as required by law or contract provisions.
64
Provided below is a summary of securities available for-sale which were in an unrealized loss position at December 31, 2008 and 2007. The unrealized
losses reported as of December 31, 2008 for the mortgage-backed securities for 12 months or less includes 13 securities and primarily relates to
FNMA or Federal Home Loan Mortgage Corporation (“FHLMC”) pools with estimated maturities or repricings of three to four years. FNMA or
FHLMC guarantees the contractual cash flows of these 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.
(in thousands)
Mortgage-backed securities
(in thousands)
Obligations of U.S. government agencies
Mortgage-backed securities
Municipal bonds
2008
12 months or more
Total
Less than 12 months
Estimated
Unrealized
Fair Value Losses
$ 21,709
$
144
$ 628
$
Estimated
Unrealized
Fair Value Losses
Estimated
Unrealized
Fair Value Losses
3
$ 22,337
$
147
Less than 12 months
Estimated
Fair Value
-
$
4,285
-
4,285
$
Unrealized
Losses
$
$
-
13
-
13
2007
12 months or more
Estimated
Fair Value
3,991
$
6,303
273
10,567
$
Unrealized
Losses
$
$
4
89
3
96
Total
Estimated
Fair Value
3,991
$
10,588
273
14,852
$
Unrealized
Losses
$
$
4
102
3
109
Enterprise is a member of the Federal Home Loan Bank (“FHLB”) of Des Moines. As a member of the 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. The FHLB capital stock of $7,517,000 is recorded at cost, and is included in other investments in the consolidated
balance sheets, which represents redemption value. The remaining amounts in other investments include the Company’s investment in the
Company’s trust preferred securities (see Note 11) and various private equity investments.
NOTE 6—LOANS
Below is a summary of loans by category at December 31, 2008 and 2007:
(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,
2008
2007
$ 337,550
7,583
228,772
43,610
778,283
1,395,798
556,210
25,716
1,977,724
$
$
$ 266,111
6,699
163,256
46,937
644,486
1,127,489
476,184
37,725
1,641,398
$
$
Unearned loan (fees) costs, net
Total loans, net of unearned loan (fees) costs
(549 )
1,977,175
$
$
34
1,641,432
Enterprise 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.
65
Following is a summary of activity for the year ended December 31, 2008 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, 2008
New loans and advances
Payments
Balance December 31, 2008
Total
$ 3,186
3,204
(343 )
6,047
$
A summary of activity in the allowance for loan losses for the years ended December 31, 2008, 2007, and 2006 is as follows:
(in thousands)
Balance at beginning of year
(Disposed) acquired allowance for loan losses
Provision for loan losses
Loans charged off
Recoveries of loans previously charged off
Balance at end of year
2008
2007
2006
$ 21,593
(50 )
22,475
(13,081 )
372
31,309
$
$ 16,988
2,010
4,615
(2,529 )
509
21,593
$
$ 12,990
3,069
2,127
(1,598 )
400
16,988
$
A summary of impaired loans at December 31, 2008, 2007, and 2006 is as follows:
(in thousands)
Non-accrual loans
Performing loans
Loans past due 90 days or more
and still accruing interest
Restructured loans continuing to
accrue interest
Total impaired loans
Allowance for losses on impaired loans
Impaired loans with no related
allowance for loan losses
Average balance of impaired
loans during the year
2008
$ 29,662
3,660
December 31,
2007
$ 12,720
-
2006
$ 6,363
-
-
-
112
-
33,322
-
12,720
-
6,475
$
$
$
$
7,380
$
3,515
$
2,040
-
-
112
17,364
11,268
2,658
There were no loans over 90 days past due and still accruing interest at December 31, 2008 or 2007. There was one loan over 90 days past due and
still accruing interest at December 2006. This loan paid off on January 5, 2007. If interest on non-accrual loans had been accrued, such income would
have been $3,169,000, $1,153,000 and $218,000 for the years ended December 31, 2008, 2007, and 2006, respectively. The cash amount collected and
recognized as interest income on impaired loans was $121,000, $113,000 and $75,000 for the years ended December 31, 2008, 2007, and 2006,
respectively. The amount recognized as interest income on impaired loans continuing to accrue interest was $0, $0, and $3,000 for the years ended
December 31, 2008, 2007, and 2006, respectively.
66
NOTE 7—DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
Historically, Enterprise has utilized derivative financial instruments to manage certain interest rate risks. Derivative financial instruments are utilized
when they can be demonstrated to effectively hedge a designated asset or liability and such asset or liability exposes the Company to interest rate
or fair value risk. The decision to enter into an interest rate swap or cap is made after considering the asset/liability mix and the desired asset/liability
sensitivity of the Company.
The Company accounts for its derivatives under SFAS No. 133, as amended, which, requires recognition of all derivatives as either assets or
liabilities in the consolidated 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.
To qualify for hedge accounting treatment, a derivative must be highly effective in mitigating the designated changes in fair value or cash flow of
the hedged item. Prior to entering into a hedge, the Company formally documents the relationship between hedging instruments and hedged items,
as well as the related risk management objective. The documentation process includes linking derivatives that are designated as fair value or cash
flow hedges to specific assets or liabilities in the consolidated balance sheet or to specific forecasted transactions, and defining the effectiveness
and ineffectiveness testing methods to be used. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis,
whether the derivatives that are used in hedging transactions have been, and are expected to continue to be, highly effective in offsetting changes
in fair values or cash flows of hedged items.
The Company’s credit exposure related to derivative financial instruments represents the accounting loss Enterprise would incur in the event the
counterparties failed completely to perform according to the terms of the derivative financial instruments. At December 31, 2008, we had pledged, as
collateral in connection with our interest rate swap agreements, cash of $470,000. At December 31, 2007, we had not pledged securities or received
collateral in connection with our derivative agreements.
Cash Flow Hedges
At December 31, 2008, Enterprise had two outstanding interest rate swap agreements whereby Enterprise pays a variable rate of interest equivalent
to the prime rate and receives a fixed rate of interest. The interest rate swaps have notional amounts of $40,000,000 each and Enterprise receives
fixed rates of 4.81% and 4.25%, respectively. The swaps were designed to hedge the cash flows associated with a portfolio of prime based loans.
Amounts paid or received under these swap agreements are accounted for on an accrual basis and recognized in interest income on loans in the
2008 consolidated statements of income. The net cash flows related to these cash flow hedges increased interest income on loans by $76,000 in
2008. Enterprise had no cash flow hedges at December 31, 2007. Previously, Enterprise had entered into similar interest rate swaps, which matured in
2006. Those swaps decreased net interest income on loans by $410,000 in 2006.
At December 31, 2008, the Company had recorded $1,291,000 in Other assets in the consolidated balance sheet related to the fair value of the
interest rate swaps. The effective portion of the change in the derivatives’ 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 December 16, 2008, the prime
rate used to determine the variable rate payments Enterprise would be making to its counterparty was lowered to a rate less than the Enterprise
prime rate which is used to determine the variable rate receipts from the prime based borrowers. As a result of the variable rate differential, the
Company concluded that the cash flow hedges would not be prospectively effective and dedesignated the related interest rate swaps.
The Company used the Hypothetical Derivative Method to measure ineffectiveness. As a result, at December 31, 2008, the Company reclassified
$638,500 from Accumulated other comprehensive income in the consolidated statement of shareholders’ equity and comprehensive income and into
Noninterest income in the consolidated statement of income for the year then ended.
The amount of gain or loss associated with the cash flow hedge remaining in other comprehensive income of $652,500 will be reclassified into
earnings as the underlying loans are repaid. The Company expects to reclassify $248,000 of remaining hedge-related amounts from Accumulated
other comprehensive income to earnings over the next twelve months.
On February 4, 2009, the swaps were terminated. The Company received cash of $861,000, and recorded a loss of $530,000.
67
All cash flow hedges in 2006 were effective, and therefore, no gain or loss was recorded in earnings in 2006. There were no cash flow hedges
outstanding during any period in 2007.
Fair Value Hedges
At December 31, 2008 and 2007, Enterprise had no derivative financial instruments designated as fair value hedges. Previously, Enterprise had
entered into interest rate swap agreements whereby Enterprise paid a variable rate of interest based on a spread to the one or three-month LIBOR
and received a fixed rate of interest equal to that of the hedged instrument. The changes in fair value of the derivative instrument and related
hedged item were recognized through interest expense. For 2007 and 2006, all fair value hedges were effective, and therefore, the amounts recorded
to interest expense for the derivative instrument and related hedged item were entirely offset.
One swap with a notional amount of $10,000,000, under which Enterprise received a fixed rate of 2.90%, matured in February 2007. The fair value of
the swap was ($35,000) at December 31, 2006. Two swaps, each with a $10,000,000 notional amount, under which Enterprise received fixed rates of
2.30% and 2.45%, matured in February and April 2006, respectively.
Amounts paid or received were accounted for on an accrual basis and recognized as interest expense of the related hedged instrument. The net
cash flows related to fair value hedges increased interest expense on certificates of deposit by $0, $41,000, and $363,000 in 2008, 2007 and 2006,
respectively.
At inception of the CD, Enterprise 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
Interest rate swaps
At December 31, 2008 and 2007, the Company had interest rate swap agreements with notional amounts aggregating $17,476,000 and $5,397,000,
respectively. The swaps economically hedge changes in fair value of a group of fixed rate loans. The related loans are also carried at fair value.
These swap agreements provide for Enterprise to pay a fixed rate of interest equal to that of the underlying fixed rate loans and to receive a variable
rate of interest based on a spread to one-month LIBOR. The net cash flows related to these swaps decreased Interest and fees on loans in the
consolidated statements of income by $164,000, $3,900, and $2,100 in 2008, 2007, and 2006, respectively. The change in fair value of the interest rate
swaps decreased Interest and fees on loans in the consolidated statements of income by $1,167,000, $228,000, and $119,000 in 2008, 2007 and 2006,
respectively. The changes in fair value of the interest rate swaps were partially offset by increases in the fair value of the related fixed rate loans of
$1,101,000, $221,000, and $124,000 in 2008, 2007, and 2006, respectively. The fair value of the swaps was ($1,467,000), ($300,000), and ($119,000) at
December 31, 2008, 2007, and, 2006, respectively.
Interest rate caps
In 2008, Enterprise entered into interest rate cap contracts which entitle Enterprise to receive from the issuer at specified dates, the amount, if any,
by which a specified market rate exceeds the cap strike interest, applied to a notional principal amount. At December 31, 2008, the Company had
interest rate cap contracts with notional amounts totaling $188,050,000. Enterprise paid a premium of $2,082,000 at the inception of the contract. No
principal payments are exchanged. The change in fair value decreased Noninterest income in the consolidated statement of income by $1,538,000 in
2008. At December 31, 2008, the caps’ fair value was $544,000.
68
NOTE 8—FIXED ASSETS
A summary of fixed assets at December 31, 2008 and 2007 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,
2008
2007
$ 2,249
22,726
12,658
214
37,847
12,689
25,158
$
$ 2,299
18,827
11,617
84
32,827
10,604
22,223
$
Depreciation and amortization of building, leasehold improvements, and furniture, fixtures, equipment and capitalized software included in
noninterest expense amounted to $2,690,000, $2,465,000 and $1,901,000 in 2008, 2007, and 2006, respectively.
The Company has facilities leased under agreements that expire in various years through 2026. The Company’s aggregate rent expense totaled
$2,631,000, $2,356,000, and $1,724,000 in 2008, 2007 and 2006, respectively. Sublease rental income was $110,236, $37,000 and $39,000 for 2008, 2007
and 2006. The future aggregate minimum rental commitments (in thousands) required under the leases are as follows:
Year
2009
2010
2011
2012
2013
Thereafter
Total
Amount
2,378
2,388
1,392
1,318
549
4,225
$ 12,249
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.
69
NOTE 9—GOODWILL AND INTANGIBLE ASSETS
The tables below present an analysis of the goodwill and intangible assets for the years ended December 31, 2008, 2007 and 2006.
(in thousands)
Balance at December 31, 2005
Acquisition-related adjustments (1)
Goodwill from purchase of NorthStar Bancshares, Inc
Balance at December 31, 2006
Acquisition-related adjustments (1)
Goodwill from purchase of Clayco Banc Corporation
Goodwill from purchase of 40% of Millennium Brokerage Group
Balance at December 31, 2007
Acquisition-related adjustments (1)
Goodwill write-off related to sale of Liberty branch
Goodwill write-off related to sale of DeSoto branch
Goodwill impairment related to Millennium Brokerage Group
Balance at December 31, 2008
Millennium
$ 10,104
189
-
10,293
-
-
1,505
11,798
36
-
-
(8,700 )
3,134
$
Reporting Unit
Bank
$ 1,938
-
17,752
19,690
481
25,208
-
45,379
776
(97 )
(680 )
-
45,378
$
Total
$ 12,042
189
17,752
29,983
481
25,208
1,505
57,177
812
(97 )
(680 )
(8,700 )
48,512
$
(1) Includes additional purchase accounting adjustments on the Millennium, NorthStar and Clayco acquisitions necessary to reflect
additional valuation data since the respective acquisition dates. See Note 2 – Acquisitions and Divestitures for more information.
(in thousands)
Balance at December 31, 2005
Intangibles from purchase of NorthStar Bancshares, Inc
Amortization expense
Balance at December 31, 2006
Intangibles from purchase of Clayco Banc Corporation
Amortization expense
Balance at December 31, 2007
Amortization expense
Intangible write-off related to sale of Liberty branch
Intangible write-off related to sale of DeSoto branch/Great American charter
Intangible write-off related to Millennium
Balance at December 31, 2008
Customer and
Trade Name
Intangibles
Core Deposit
Intangible
$
$
4,548
-
(912 )
3,636
-
(912 )
2,724
(845 )
-
-
(500 )
1,379
$
$
$
Net Intangible
4,548
2,369
(1,128 )
5,789
1,868
(1,604 )
6,053
(1,444 )
(269 )
(336 )
(500 )
3,504
-
2,369
(216 )
2,153
1,868
(692 )
3,329
(599 )
(269 )
(336 )
-
2,125
$
The following table reflects the expected amortization schedule for the customer, trade name and core deposit intangibles (in thousands) at
December 31, 2008.
Year
2009
2010
2011
2012
2013
After 2013
Amount
$ 1,077
1,015
371
309
247
485
3,504
$
Historically, the goodwill impairment tests have been completed as of December 31 each year. Following the annual impairment test for 2006, the
Company changed the goodwill impairment test date for the Millennium reporting unit to September 30 of each fiscal year. This change in the
testing date was designed to provide sufficient time for independent experts to complete the Millennium reporting unit testing prior to year end
reporting. The goodwill impairment test date for the Banking reporting unit did not change.
70
The goodwill associated with Millennium was evaluated in accordance with SFAS 142, Goodwill and Other Intangible Assets. Due primarily to
continued pressures in the sales margin and resulting earnings of Millennium, the Company’s wholesale insurance brokerage business, this
analysis determined that the carrying value of the reporting unit was higher than the fair value of the reporting unit, which resulted in a non-cash
goodwill impairment charge of $8,700,000 in 2008. The Millennium intangible assets are related to their customer lists and tradename. The Company
also tested the Millennium intangible assets for impairment in conformity with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived
Asset, and determined that the customer related intangible was impaired by $500,000. These impairment charges did not reduce the Company’s
regulatory capital or cash flow. The carrying value of the Millennium customer lists and tradename, were $1,165,000 and $214,000, respectively, as of
December 31, 2008.
The annual goodwill impairment evaluation in 2008 did not identify any impairment at the Banking unit. However, paragraph 28 of SFAS 142 requires
that the goodwill impairment analysis be conducted when events or circumstances occur that would more likely than not reduce the fair value of a
reporting unit below its carrying amount. An example of such an event includes significant adverse changes in the business climate, such as a
significant decline in the Company’s market capitalization.
NOTE 10—MATURITY OF CERTIFICATES OF DEPOSIT
Following is a summary of certificates of deposit maturities at December 31, 2008:
(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
Over 5 years
NOTE 11—SUBORDINATED DEBENTURES
$100,000
and Over Other
Total
$
$
373,045
112,953
33,064
596
100
439
$
147,387
27,766
11,182
1,179
342
14
520,432
140,719
44,246
1,775
442
453
$ 520,197
$ 187,870
$ 708,067
The Corporation has nine wholly-owned statutory business trusts. These trusts issued preferred 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 preferred
securities. In addition to the statutory business trusts, on September 30, 2008, Enterprise completed a $2,500,000 private placement of subordinated
capital notes. The notes mature in 2018, pay a fixed rate of interest at 10%, and are callable by Enterprise in five years.
On December 12, 2008, the Company closed an offering of $25,000,000 in convertible trust preferred securities through EFSC Capital Trust VIII, a
statutory business trust sponsored by the Company. The proceeds from the offering were used to provide additional parent company liquidity and
regulatory capital. The securities have a 9% coupon, mature in 30 years and are callable by the Company after 5 years. They are convertible to
1,439,263 of the Company’s common stock. The Company may terminate the conversion rights, subject to certain limitations, after a two-year
lockout period, if the Company’s price per share exceeds $22.58 for twenty consecutive trading days.
On September 20, 2007, the Company issued EFSC Capital Trust VII. The proceeds from the offering were used to refinance EFSC Capital Trust I,
which was redeemed on September 30, 2007. EFSC Capital Trust I redeemed all of its $4,000,000 variable rate trust preferred securities and its
$124,000 of variable rate common securities. At the time of the redemption, the Company recognized an $82,000 charge in noninterest expense for
unamortized debt issuance costs related to this instrument.
On February 26, 2007 the Company issued EFSC Capital Trust VI to partially fund the Clayco acquisition. On February 28, 2007, as part of the
Clayco acquisition, the Company acquired Clayco Trust I and Clayco Trust II.
71
The amounts and terms of each respective issuance at December 31 were as follows:
(in thousands)
EFSC Clayco Trust I
EFSC Capital Trust II
EFSC Capital Trust III
Amount
2008
$
3,196 $
5,155
2007
Maturity Date
3,196 December 17, 2033
5,155
June 17, 2034
December 15, 2034
Call date
Interest Rate
December 17, 2008
June 17, 2009
December 15, 2009
Floats @ 3MO LIBOR + 2.85%
Floats @ 3MO LIBOR + 2.65%
Floats @ 3MO LIBOR + 1.97%
11,341
11,341
EFSC Clayco Trust II
EFSC Capital Trust IV
EFSC Capital Trust V
EFSC Capital Trust VI
EFSC Capital Trust VII
EFSC Capital Trust VIII
Total trust preferred securities
4,124
10,310
4,124
14,433
4,124
25,774
82,581
4,124
September 15, 2035
September 15, 2010
Floats @ 3MO LIBOR + 1.83%
10,310
December 15, 2035
December 15, 2010
Fixed for 5 years @ 6.14%(1)
4,124
September 15, 2036
September 15, 2011
Floats @ 3MO LIBOR + 1.60%
March 30, 2037
March 30, 2012
Fixed for 5 years @ 6.573%(2)
December 15, 2037
December 15, 2012
December 15, 2038
December 15, 2013 (3)
Floats @ 3MO LIBOR + 2.25%
Fixed @ 9%
14,433
4,124
-
56,807
Enterprise Subordinated Notes
2,500
-
October 1, 2018
October 1, 2013
Fixed @ 10%
Total Subordinated Debentures
$
85,081
$
56,807
(1) After October 2010, floats @ 3MO LIBOR + 1.44%
(2)
(3)
After February 2012, floats @ 3MO LIBOR + 1.60%
Convertible to EFSC common stock at a conversion price of $17.37. Forced conversion by EFSC if EFSC common stock trades at greater than or equal to $22.58 for twenty consecutive
trading days after two years.
The subordinated debentures, which are the sole assets of the trusts, 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 securities are classified as subordinated debentures in the Company’s consolidated balance sheets. Interest on the
subordinated debentures held by the trusts is recorded as interest expense in the Company’s consolidated statements of income. The Company’s
investment in these trusts are included in other investments in the consolidated balance sheets.
An entity managed and controlled by certain members of the Company’s Board of Directors purchased $5,000,000 of the convertible trust preferred
securities of EFSC Capital Trust VIII on December 12, 2008.
NOTE 12—FEDERAL HOME LOAN BANK ADVANCES
FHLB advances are collateralized by 1-4 family residential real estate loans, business loans and certain commercial real estate loans. At December
31, 2008 and 2007 the carrying value of the loans pledged to the FHLB of Des Moines was $465,000,000 and $336,000,000, respectively.
Enterprise also has a $7,517,000 investment in the capital stock of the FHLB of Des Moines and maintains a line of credit that had availability of
approximately $164,300,000 at December 31, 2008.
The following table summarizes the type, maturity and rate of the Company’s FHLB advances at December 31:
2008
2007
Outstanding
Weighted
Outstanding
Weighted
(in thousands)
Long term non-amortizing fixed advance
Long term non-amortizing fixed advance
Long term non-amortizing fixed advance
Long term non-amortizing fixed advance
Long term non-amortizing fixed advance
Long term non-amortizing fixed advance
Mortgage matched fixed advance
Term
less than 1 year
1 - 2 years
2 - 3 years
3 - 4 years
4 - 5 years
5 - 10 years
10 - 15 years
Balance
Rate
Balance
Rate
$
81,050
20,800
300
7,000
-
10,000
807
3.48%
4.19%
6.07%
4.52%
-
4.53%
5.69%
$
58,387
55,536
20,800
300
7,000
10,000
878
3.76%
4.05%
4.19%
6.07%
4.52%
4.53%
5.69%
Total Federal Home Loan Bank Advances
$ 119,957
3.77%
$ 152,901
4.02%
72
All of the FHLB advances have fixed interest rates. At December 31, 2008, $50,000,000 of the advances are prepayable by the Company at anytime,
subject to prepayment penalties. Of the advances with a term of less than one year, at December 31, 2008, $20,000,000, $25,000,000, and $25,000,000
is callable by the FHLB beginning on the option date in February 2009, March 2009 and December 2009, respectively, and quarterly thereafter.
NOTE 13—OTHER BORROWINGS AND NOTES PAYABLE
A summary of other borrowings is as follows:
(in thousands)
Federal funds purchased
Securities sold under repurchase agreements
Total
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
December 31,
2008
$ 19,400
26,760
$
2007
1,784
8,896
$
$
46,160
$ 10,680
35,781
55,232
$
8,068
10,782
1.81%
0.38%
3.32%
3.17%
Enterprise also has a line with the Federal Reserve Bank of St. Louis for back-up liquidity purposes. As of December 31, 2008, approximately
$310,500,000 was available under this line. This line is secured by a pledge of certain eligible loans.
Notes Payable
At December 31, 2008 the Company had a $16,000,000 unsecured bank line of credit and a $4,000,000 term loan that expire on April 30, 2009. As of
September 30, 2008, the Company became noncompliant with certain covenants regarding classified loans as a percentage of bank equity and loan
loss reserves. As a result, the Company repaid all outstanding balances on the line of credit and term loan in December 2008. The Company does
not expect to renew this arrangement at maturity. Both the line of credit and term loan accrue interest based on LIBOR plus 1.25% and are payable
quarterly. For the year ended December 31, 2008, the average balance and maximum month-end balance of these instruments was $12,849,000 and
$20,000,000, respectively.
NOTE 14—LITIGATION AND OTHER CLAIMS
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.
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,
2008
2007
2006
$
7,599
233
(6,246)
$
7,637
632
747
$
9,023
546
(1,244)
$
1,586
$ 9,016
$
8,325
73
A reconciliation of expected income tax expense, computed by applying the statutory federal income tax rate of 35% in 2008, 2007, and 2006 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:
Tax-exempt income
State and local income tax expense
Non-deductible expenses
Other, net
Total income tax expense
Years ended December 31,
2008
$
2,106
2007
$
9,308
2006
$
8,327
(401)
151
208
(478)
$ 1,586
(303)
411
258
(658)
$ 9,016
(274)
355
236
(319)
$ 8,325
A net deferred income tax asset of $13,225,000 and $7,492,000 is included in other assets in the consolidated balance sheets at December 31, 2008
and 2007, 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
Loans
Intangible assets
Other
Total deferred tax assets
Deferred tax liabilities:
Unrealized gains on securities available for sale
State tax credits, net
Core deposit intangibles
Office equipment and leasehold improvements
Total deferred tax liabilities
Net deferred tax asset
Years ended December 31,
2008
2007
$
$
11,292
824
239
21
3,244
75
15,695
467
1,056
774
173
2,470
$
13,225
$
7,693
897
239
102
-
-
8,931
24
-
1,212
203
1,439
7,492
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, 2008 or December 31, 2007. 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.
The Company, or one of its subsidiaries, files income tax returns in the U.S. federal jurisdiction and in seven states. With few exceptions, the
Company is no longer subject to U.S. federal, state or local income tax audits by tax authorities for years before 2005. The Company is not currently
under audit by any taxing jurisdiction.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense and classifies such interest and penalties in
the liability for unrecognized tax benefits. As of December 31, 2008, the Company had approximately $230,000 accrued for interest and penalties.
The Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an Interpretation of FAS No. 109, Accounting for Income Taxes on January 1, 2007. As a result of the implementation, the Company
recognized a $138,000 decrease in the liability for unrecognized tax benefits, which was accounted for as an increase to the January 1, 2007 balance
of retained earnings. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense and classifies such
interest and penalties in the liability for unrecognized tax benefits.
74
As of December 31, 2008, the gross amount of unrecognized tax benefits was $1,690,000 and the total amount of unrecognized tax benefits that
would impact the effective tax rate, if recognized, was $1,200,000. The Company believes it is reasonably possible that an additional $430,000 in
unrecognized tax benefits related to certain federal and state tax items will be recognized during 2009 as a result of the expiration of certain statues of
limitations.
The activity in the accrued liability for unrecognized tax benefits was as follows:
(in thousands)
Balance at beginning of year
Additions based on tax positions related to the
current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Settlements of lapse of exposure
2008
2007
$ 2,412
$ 2,430
245
241
(491)
(717)
484
112
-
(614)
Balance at end of year
$
1,690
$
2,412
NOTE 16—REGULATORY MATTERS
The Company and each of its bank subsidiaries 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 financial statements of the Company and its banking subsidiaries. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action, the Company and each 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.
Each 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 each 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, 2008 and 2007, that the Company and bank meet all capital adequacy requirements to which they are subject.
As of December 31, 2008 and 2007, the bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action. To
be categorized as “well capitalized” each bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the
table.
75
The actual capital amounts and ratios are also presented in the table.
(in thousands)
As of December 31, 2008:
Total Capital (to Risk Weighted Assets)
To Be Well
Capitalized Under
For Capital
Applicable
Actual
Adequacy Purposes
Action Provisions
Amount
Ratio Amount
Ratio
Amount
Ratio
Enterprise Financial Services Corp
$ 273,978
12.81 %
$ 171,136
Enterprise Bank & Trust
230,008
10.86
169,479
8.00 %
8.00
$
-
- %
211,848
10.00
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, 2007:
Total Capital (to Risk Weighted Assets)
190,253
200,968
190,253
200,968
8.89
9.49
8.40
8.95
85,568
84,739
67,961
67,392
4.00
4.00
3.00
3.00
-
-
127,109
6.00
-
-
112,319
5.00
Enterprise Financial Services Corp
$
186,549
10.54 %
$
141,534
8.00 %
$
-
- %
Enterprise Bank & Trust
Great American Bank
Tier I Capital (to Risk Weighted Assets)
Enterprise Financial Services Corp
Enterprise Bank & Trust
Great American Bank
Tier I Capital (to Average Assets)
Enterprise Financial Services Corp
Enterprise Bank & Trust
Great American Bank
NOTE 17—COMPENSATION PLANS
160,862
10.02
18,381
11.80
164,957
9.32
141,259
16,434
8.80
10.55
164,957
141,259
8.85
8.32
16,434
8.14
128,463
12,457
70,767
64,231
6,229
55,938
50,959
55,938
8.00
8.00
4.00
4.00
4.00
3.00
3.00
3.00
160,579
10.00
15,571
10.00
-
96,347
9,343
-
84,931
10,094
-
6.00
6.00
-
5.00
5.00
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 stock 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 2008,
share-based compensation was issued in the form of stock, stock options, stock-settled stock appreciation rights and RSU’s. At December 31, 2008,
there were 885,523 shares available for grant under the various share-based compensation plans. An additional 80,346 shares of stock were available
for issuance under the Stock Plan for Non-Management Directors approved by the Shareholders in April 2006.
The share-based compensation expense that was charged against income was $2,255,000, $1,906,000 and $1,252,000 for the years ended December
31, 2008, 2007 and 2006, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements
was $460,000, $381,000 and $525,000 for the years ended December 31, 2008, 2007 and 2006, 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 common 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
2008 2007 2006
3.9%
0.6%
39.4%
6 years
5.2%
0.6%
36.0%
6 years
4.5%
0.3%
54.6%
9.5 years
76
Employee Stock Options and Stock-settled Stock Appreciation Rights
Stock options were granted to key employees with exercise prices equal to the market price of the Company’s common stock at the date of grant and
have 10-year contractual terms. Stock options have a vesting schedule of between three to five years. In 2007, the Company began granting stock-
settled stock appreciation rights (“SSAR”) to key employees. The SSAR’s are subject to continued employment, have a 10-year contractual term
and vest ratably over five years. Neither stock options nor SSAR’s carry voting or dividend rights until exercised. At December 31, 2008, there was
$32,000 and $2,883,000 of total unrecognized compensation cost related to stock options and SSAR’s, respectively, which is expected to be
recognized over a weighted average period of 1.3 years and 3.6 years, respectively.
(in thousands, except grant date fair value)
Weighted average grant date fair value of options
Compensation expense
Intrinsic value of option exercises on date of exercise
Cash received from the exercise of stock options
Following is a summary of the employee stock option activity for 2008.
(Dollars in thousands, except share data)
Outstanding at December 31, 2007
Granted
Exercised
Forfeited
Outstanding at December 31, 2008
Exercisable at December 31, 2008
Vested and expected to vest at December 31, 2008
2008
2007
2006
$ 8.27
705
2,177
3,148
$ 10.69
452
1,961
1,233
$ 18.34
21
1,750
1,226
Weighted
Weighted
Average
Average
Exercise
Price
Remaining
Aggregate
Contractual
Intrinsic
Term
Value
15.42
19.79
11.84
24.58
$
Shares
891,816
305,198
(265,779)
(103,764)
827,471
$ 17.03
6.5 years
$ (1,484)
485,274
765,457
$
$
14.24
16.47
4.5 years
6.5 years
$
$
485
(941)
Restricted Stock Units
As part of a long-term incentive plan, the Company awards nonvested stock, in the form of RSU’s to employees. RSU’s are subject to continued
employment and vest ratably over five years. RSU’s do not carry voting or dividend rights until vested. Sales of the units are restricted prior to
vesting.
(in thousands)
Compensation expense
Total fair value at vesting date
Total unrecognized compensation cost for nonvested
stock units
Expected years to recognize unearned compensation
2008
2007
2006
$
1,380
$
765
1,308
$
1,384
1,029
1,421
3,038
3,441
3,418
3.0 years
3.1 years
3.5 years
A summary of the status of the Company's restricted stock unit awards as of December 31, 2008 and changes during the year then ended is
presented below.
Outstanding at December 31, 2007
Granted
Vested
Forfeited
Outstanding at December 31, 2008
77
Weighted
Average
Grant Date
Fair Value
$
23.74
21.39
22.63
23.20
Shares
168,286
95,067
(59,510)
(53,385)
150,458
$
22.89
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. The plan was approved by the shareholders and allows up to 100,000 shares to be awarded. Shares are
issued twice a year and compensation expense is recorded as the shares are earned, therefore, there is no unrecognized compensation cost related
to this plan. In 2008, the Company issued 9,544 shares of stock at a weighted average fair value of $17.83 per share. In 2007, the Company issued
6,729 shares of stock at a weighted average fair value of $27.40 per share. The Company recognized $170,000 and $146,000 of stock-based
compensation expense for the shares issued to the directors in 2008 and 2007, respectively.
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. There have been no options granted to Moneta under the agreement since 2003. The fair value of each option granted
to Moneta 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. As of December 31, 2006, the fair value of all Moneta options had been recognized. The Company recognized
$17,000 in Moneta option-related expenses during 2006.
Following is a summary of the Moneta stock option activity for 2008.
(Dollars in thousands, except share data)
Outstanding at December 31, 2007
Granted
Exercised
Forfeited
Outstanding at December 31, 2008
Exercisable at December 31, 2008
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Weighted
Average
Exercise
Shares
Price
$
137,098
-
(53,680)
(4,169)
12.62
-
10.34
15.32
79,249
$ 14.02
1.4 years
$
97
79,249
$
14.02
1.4 years
$ 97
401(k) plans
Effective January 1, 1993, the Company adopted a 401(k) thrift plan which covers substantially all full-time employees 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 to the plans was $529,000, $447,000 and $323,000 for 2008, 2007, and 2006, respectively.
NOTE 18—COMMITMENTS
The Company 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 of credit is represented by the contractual amount of these instruments.
The Company 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, 2008, 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, 2008 and 2007 is as follows:
(in thousands)
Commitments to extend credit
Standby letters of credit
78
December 31,
2008
December 31,
2007
$
555,361
33,875
$
535,227
36,464
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, 2008 and 2007, approximately $131,000,000 and $61,181,000, 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 Company 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 subsidiaries to guarantee the performance of a customer to a third party.
These standby letters of credit are issued to support contractual obligations of each 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, 2008.
NOTE 19—FAIR VALUE MEASUREMENTS
Effective January 1, 2008, the Company adopted SFAS 157, Fair Value Measurements, for financial assets and financial liabilities. In accordance
with FSP 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”), the Company will delay application of SFAS 157 for non-financial assets
and non-financial liabilities, until January 1, 2009. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements.
SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the
asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most
advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a
transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and
customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the
principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.
SFAS 157 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach.
The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and
liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount
on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset
(replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market
participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants
would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that
reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based
on the best information available in the circumstances. In that regard, SFAS 157 establishes a fair value hierarchy for valuation inputs that gives the
highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value
hierarchy is as follows:
l Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at
the measurement date.
l Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.
These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in
markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities,
prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.
l Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity's own assumptions about the
assumptions that market participants would use in pricing the assets or liabilities.
79
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon
internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that
financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Company's
creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The
Company's valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair
values. While management believes the Company's valuation methodologies are appropriate and consistent with other market participants, the use
of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value
at the reporting date. These valuation methodologies were applied to all of the Company's financial assets and financial liabilities carried at fair
value effective January 1, 2008.
l Securities available for sale. Securities classified as available for sale are reported at fair value utilizing Level 2 and Level 3 inputs. The Company
obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include
dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment
speeds, credit information and the bond's terms and conditions. Through September 30, 2008, Level 3 securities available for sale included a
Federal Home Loan Mortgage Corporation pool. This security was sold during the fourth quarter of 2008.
l Portfolio Loans. Certain fixed rate portfolio loans are accounted for as trading instruments and reported at fair value. Fair value on these loans is
determined using a third party valuation model with observable Level 2 market data inputs.
l State tax credits held for sale. Pursuant to the provisions of SFAS 159, the Company elected to record its state tax credits held for sale at fair
value. The cumulative effect adjustment necessary to carry the credits on hand at January 1, 2008 was $570,000, which was recorded, net of tax as
an adjustment to retained earnings as of January 1, 2008.
The Company is not aware of an active market that exists for the 10-year streams of state tax credit financial instruments. However, the
Company’s principal market for these tax credits consists of state residents who buy these credits from local and regional accounting firms who
broker them. As such, the Company employed a discounted cash flow analysis (income approach) to determine the fair value.
The fair value measurement is calculated using an internal valuation model with observable market data including discounted cash flows based
upon the terms and conditions of the tax credits. Assuming that the underlying project remains in compliance with the various federal and state
rules governing the tax credit program, each project will generate about 10 years of tax credits. The inputs to the fair value calculation include:
the amount of tax credits generated each year, the anticipated sale price of the tax credit, the timing of the sale and a discount rate. The discount
rate is defined as the LIBOR swap curve at a point equal to the remaining life in years of credits plus a 205 basis point spread. With the exception
of the discount rate, the other inputs to the fair value calculation are observable and readily available. The discount rate is considered a Level 3
input because it is an “unobservable input” and is based on the Company’s assumptions. Given the significance of this input to our fair value
calculation, the state tax credit assets are reported as Level 3 assets.
Economically, the Company equates the state tax credits to a fixed rate loan. After considering various risks, such as credit risk, compliance risk,
and recapture risk, management concluded the state tax credits are equivalent to a fixed rate loan priced at Prime minus 75 basis points. When
pricing a fixed rate loan, most banks utilize the Prime-based swap curve, which is based on the LIBOR swap curve plus a prime equivalent spread
of 265 to 285 basis points depending on market pricing and the maturity of the underlying loan. The Prime-based swap curve is available daily on
Bloomberg or other national pricing services. As a result, management concluded the spread of 205 basis points (prime equivalent spread of 285
basis points minus 75 basis points) to the LIBOR curve should be utilized in the fair value calculation.
At December 31, 2008, the discount rates utilized in our state tax credits fair value calculation ranged from 3.80% to 4.61%. Resulting changes in
the fair value of the state tax credits held for sale of $4,635,000 were reported in Gain on state tax credits in the consolidated statement of income
for the year ended December 31, 2008.
l Derivatives. Derivatives are reported at fair value utilizing Level 2 inputs. The Company obtains counterparty quotations to value its interest rate
swaps and caps. In addition, the Company validates the counterparty quotations with third party valuation sources. Derivatives with negative
fair values are included in Other liabilities in the consolidated balance sheets. Derivatives with positive fair value are included in Other assets in
the consolidated balance sheets.
80
The following table summarizes financial instruments measured at fair value on a recurring basis as of December 31, 2008, segregated by the level of
the valuation inputs within the fair value hierarchy utilized to measure fair value:
(in thousands)
Assets
Securities available for sale
State tax credits held for sale
Derivative financial instruments
Portfolio loans
Total assets
Liabilities
Derivative financial instruments
Total liabilities
Level 1
Inputs
Level 2
Inputs
Level 3
Inputs
Total Fair
Value
$
$
-
-
-
-
$
96,431
-
1,835
18,875
$
-
39,142
-
-
96,431
39,142
1,835
18,875
$ -
$ 117,141
$ 39,142
$ 156,283
$
$
-
-
$
$
1,467
1,467
$
$
-
-
$
$
-
-
The following table presents the changes in Level 3 financial instruments measured at fair value as of December 31, 2008.
(in thousands)
Balance at January 1, 2008
Total gains or losses (realized and unrealized):
Included in earnings
Included in other comprehensive income
Purchases, sales, issuances and settlements, net
Transfer in and/or out of Level 3
Balance at December 31, 2008
Change in unrealized gains or losses relating to assets still held
at the reporting date
Securities
available for
sale, at fair
value
State tax credits
held for sale
$
-
$
22,547
-
(37)
37
-
-
$
5,740
-
10,855
-
39,142
-
$
4,635
$
$
Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair
value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).
l Loans held for sale. These loans are reported at the lower of cost or fair value. Fair value is determined based on expected proceeds based on
sales contracts and commitments and are considered Level 2 inputs.
l
Impaired loans. Impaired loans are included as Portfolio loans on the Company’s consolidated balance sheet with amounts specifically reserved
for credit impairment in the Allowance for loan losses. The fair value of impaired loans is based on underlying collateral. These assets are
classified as Level 2.
l Other Real Estate. These assets are reported at the lower of the loan carrying amount at foreclosure or fair value less estimated costs to sell. Fair
value is based on third party appraisals of each property and the Company’s judgment of other relevant market conditions. These are considered
Level 2 inputs.
81
The following table presents the financial instruments measured at fair value on a non-recurring basis as of December 31, 2008.
(in thousands)
Loans held for sale
Impaired loans
Other real estate
Level 1
Input
Level 2
Input
Level 3
Input
Total Fair
Value
$
-
-
-
$
2,632
33,322
13,868
$
-
-
-
$
2,632
33,322
13,868
Total
$
-
$
49,822
$
-
$
49,822
Certain non-financial assets and non-financial liabilities measured at fair value on a recurring basis include reporting units measured at fair value in
the first step of a goodwill impairment test. Certain non-financial assets measured at fair value on a non-recurring basis include non-financial assets
and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, as well as intangible assets and other non-
financial long-lived assets measured at fair value for impairment assessment. As stated above, FSP 157-2 will be applicable to these fair value
measurements beginning January 1, 2009.
Effective January 1, 2008, the Company adopted the provisions of SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities - Including an amendment of FASB Statement No. 115. There were no valuation allowances related to the state tax credits held for sale
that were impacted by the adoption of SFAS 159. Below is a summary of the impact of the initial implementation of the FVO.
(in thousands)
State tax credits held for sale
Pretax cumulative effect of adoption of the fair value option
Increase in deferred tax asset
Cumulative effect of adoption of the fair value option
(charge to retained earnings)
December 31, 2007
(carrying value prior
to adoption)
Cumulative effect of
adjustment at
January 1, 2008
January 1, 2008
fair value (carrying
value after
adoption)
$
23,117
$ (570)
$
22,547
(570)
205
(365)
$
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.
82
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, 2008 and 2007:
(in thousands)
Balance sheet assets
Cash and due from banks
Federal Funds Sold
Interest-bearing deposits
Securities available for sale
Other investments
Loans held for sale
Derivative financial instruments
Loans, net of allowance for loan losses
State tax credits, held for sale
Accrued interest receivable
Balance sheet liabilities
Deposits
Subordinated debentures
Other borrowed funds
Derivative financial instruments
Accrued interest payable
2008
2007
Carrying
Amount
Estimated
fair value
Carrying
Amount
Estimated
fair value
$
25,626
$
25,626
$
76,265
$
2,637
14,384
96,431
11,884
2,632
1,835
2,637
14,384
96,431
11,884
2,632
1,835
75,665
1,719
70,756
12,577
3,420
300
76,265
75,665
1,719
70,756
12,577
3,420
300
1,945,866
1,991,183
1,619,839
1,622,977
39,142
7,557
39,142
7,557
23,149
8,334
23,149
8,334
1,792,784
1,800,958
1,585,012
1,588,539
85,081
166,117
1,467
2,473
71,393
180,864
1,467
2,473
56,807
169,580
-
3,710
57,050
182,065
-
3,710
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, Federal 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.
Securities available for sale
The Company obtains fair value measurements for available for sale debt instruments from an independent pricing service. The fair value
measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading
levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions.
Other investments
Other investments, which primarily consists of membership stock in the FHLB is reported at cost, which approximates fair value.
Loans, net of allowance for loan losses
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.
State tax credits held for sale
The fair value of state tax credits held for sale is calculated using an internal valuation model with unobservable market data including discounted
cash flows based upon the terms and conditions of the tax credits.
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.
83
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 discounting the future cash flows using rates currently offered for financial instruments of similar remaining maturities.
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 would be 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 are subjective in nature and involve uncertainties and matters of significant judgment, and therefore, cannot be determined with precision.
Such estimates include the valuation of loans, goodwill, intangible assets, and other long-lived assets, along with assumptions used in the
calculation of income taxes, among others. These estimates and assumptions are based on management’s best estimates and judgment.
Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current
economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when
facts and circumstances dictate. Decreasing real estate values, illiquid credit markets, volatile equity markets, and declines in consumer spending
have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined
with precision, actual results could differ significantly from these estimates. Changes in estimates resulting from continuing changes in the
economic environment will be reflected in the financial statement in future periods. In addition, 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. 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.
NOTE 20—SEGMENT REPORTING
The Company has two primary operating segments, Banking and Wealth Management, which are delineated by the products and services that each
segment offers. The segments are evaluated separately on their individual performance, as well as, their contribution to the Company as a whole.
The Banking operating segment consists of a full-service commercial bank, Enterprise, with locations in St. Louis and Kansas City and a loan
production office in Phoenix, Arizona. The majority of the Company’s assets and income result from the Banking segment. With the exception of the
loan production office, all banking locations have the same product and service offerings, have similar types and classes of customers and utilize
similar service delivery methods. Pricing guidelines and operating policies for products and services are the same across all regions.
The Wealth Management segment includes the Trust division of Enterprise, the state tax credit brokerage activities, and Millennium. The Trust
division provides estate planning, investment management, and retirement planning as well as consulting on management compensation, strategic
planning and management succession issues. State tax credits are part of a fee initiative designed to augment the Company’s wealth management
segment and banking lines of business. 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.
84
The Corporate segment’s principal activities include the direct ownership of the Company’s banking and non-banking subsidiaries and the
issuance of debt and equity. Its principal source of revenue is dividends from its subsidiaries and stock option exercises.
The financial information for each business segment reflects that information which is specifically identifiable or which is allocated based on an
internal allocation method. There were no material intersegment revenues among the three segments. Management periodically makes changes to
methods of assigning costs and income to its business segments to better reflect operating results. When appropriate, these changes are reflected
in prior year information presented below.
Following are the financial results for the Company’s operating segments.
(in thousands)
Net interest income (expense)
Provision for loan losses
Noninterest income
Non interest expense
Impairment charges related to Millennium Brokerage Group
Income (loss) before income tax expense
Income tax expense (benefit)
Net income (loss)
Years ended December 31,
Wealth
Banking
Management
2008
Corporate and
Intercompany
Total
$
71,628
$
(1,043)
$
(3,862)
$
66,723
22,475
10,027
38,851
-
20,329
7,296
-
15,049
11,536
9,200
(6,730)
(2,447)
-
197
3,918
-
(7,583)
(3,263)
22,475
25,273
54,305
9,200
6,016
1,586
$
13,033
$ (4,283)
$ (4,320)
$
4,430
Loans, less unearned loan fees
$1,977,175
$
-
$
Goodwill
Intangibles, net
Deposits
Borrowings
Total assets
Net interest income (expense)
Provision for loan losses
Noninterest income
Non interest expense
Income (loss) before income tax expense
Income tax expense (benefit)
Net income (loss)
45,378
2,126
1,818,514
168,617
3,134
1,378
-
-
2,204,341
48,775
-
-
-
$1,977,175
48,512
3,504
(25,730)
1,792,784
82,581
17,058
251,198
2,270,174
2007
Wealth
Corporate and
Banking
Management
Intercompany
Total
$
64,840
$
138
$
(3,926)
$
61,052
4,615
4,472
35,483
29,214
10,283
-
14,772
10,674
4,236
1,525
-
429
3,359
(6,856)
(2,792)
4,615
19,673
49,516
26,594
9,016
$
18,931
$
2,711
$
(4,064)
$
17,578
Loans, less unearned loan fees
$1,641,432
$
-
$
Goodwill
Intangibles, net
Deposits
Borrowings
Total assets
Net interest income (expense)
Provision for loan losses
Noninterest income
Non interest expense
Minority interest
Income (loss) before income tax expense
Income tax expense (benefit)
Net income (loss)
Loans, less unearned loan fees
Goodwill
Intangibles, net
Deposits
Borrowings
Total assets
85
NOTE 21—PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
Condensed Balance Sheets
(in thousands)
Assets
Cash
Investment in Enterprise Bank & Trust
Investment in Millennium Holding Company
Investment in Great American Bank
Other assets
Total assets
Liabilities and Shareholders' Equity
Subordinated debentures
Notes payable
Accounts payable and other liabilities
Shareholders' equity
Total liabilities and shareholders' equity
45,379
3,330
1,588,963
163,581
11,798
2,723
-
-
1,952,495
42,542
-
-
-
$1,641,432
57,177
6,053
(3,951)
1,585,012
62,807
4,081
226,388
1,999,118
2006
Wealth
Corporate and
Banking
Management
Intercompany
Total
$
53,639
$
105
$
(2,467)
$
51,277
2,127
3,056
28,563
-
26,005
9,119
$
16,886
$1,311,723
19,690
2,153
1,319,201
36,752
-
13,809
9,207
(875)
3,832
1,379
2,453
-
10,293
3,636
-
-
$
$
-
51
3,624
-
( 6,040)
( 2,173)
2,127
16,916
41,394
(875)
23,797
8,325
$
$
(3,867)
$
15,472
-
-
-
$1,311,723
29,983
5,789
(3,693)
1,315,508
39,054
75,806
1,517,617
16,991
979
1,535,587
December 31,
2008
2007
$
23,840
249,662
8,861
-
18,947
$
487
162,881
17,754
43,570
14,519
$ 301,310
$ 239,211
$
82,581
-
941
217,788
$
56,807
6,000
3,255
173,149
$
301,310
$
239,211
(in thousands)
Years ended December 31,
2008
2007
2006
Condensed Statements of Income
Income:
Dividends from subsidiaries
Other
Total income
Expenses:
Interest expense-subordinated debentures
Interest expense-notes payable
Other expenses
Total expenses
$
45,811
$
8,440
$
9,669
3,162
48,973
3,471
507
4,918
8,896
559
8,999
3,859
197
3,359
7,415
133
9,802
2,343
207
3,623
6,173
Net income before taxes and equity in undistributed earnings of subsidiaries
40,077
1,584
3,629
Income tax benefit
2,338
2,792
2,173
Net income before equity in undistributed earnings of subsidiaries
42,415
4,376
5,802
Equity in undistributed earnings of subsidiaries
Net income
(37,985)
4,430
$
13,202
9,670
$ 17,578
$ 15,472
86
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:
Gain on sale of charter
Share-based compensation
Net income of subsidiaries
Dividends from subsidiaries
Excess tax benefits of share-based compensation
Additional share-based compensation from acquisition of Clayco
Other, net
Net cash provided by operating activities
Cash flows from investing activities:
Cash contributions to subsidiaries
Cash received in sale of charter, net of cash and cash equivalents paid
Cash paid for acquisitions, net of cash acquired
Purchases of available for sale debt securities
Proceeds from maturities and principal paydowns on available
for sale debt securities
Purchase of limited partnership interests
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
Years Ended December 31,
2008
2007
2006
$
4,430
$
17,578
$
15,472
(2,850)
2,255
-
1,944
-
1,153
(7,826)
(21,642)
(19,339)
45,811
(460)
1,000
(28)
42,332
(73,988)
5,575
-
(1,494)
-
(5,034)
(74,941)
15,000
(21,000)
25,774
8,440
(381)
-
(2,096)
3,843
-
-
(17,085)
(784)
124
(1,171)
(18,916)
6,750
(4,751)
18,557
9,669
(525)
-
10
6,440
-
-
(8,060)
(538)
-
-
(8,598)
10,000
(10,745)
4,124
Paydown of subordinated debentures
Cash dividends paid
Excess tax benefits of share-based compensation
Issuance of preferred stock and warrants
Common stock repurchased
Proceeds from the exercise of common stock options
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Noncash transactions:
Common stock issued for acquisitions of businesses
-
(2,661)
460
35,000
-
3,389
55,962
23,353
487
23,840
$
(4,124)
(2,638)
381
-
(1,743)
1,304
13,736
(1,337)
1,824
487
-
$
22,482
$
$
$
$
-
(1,977)
525
-
-
1,189
3,116
958
866
1,824
5,249
87
NOTE 22—QUARTERLY CONDENSED FINANCIAL INFORMATION (Unaudited)
The following table presents the unaudited quarterly financial information for the years ended December 31, 2008 and 2007.
(in thousands, except per share data)
Interest income
Interest expense
Net interest income
Provision for loan losses
2008
4th
3rd
2nd
1st
Quarter
Quarter
Quarter
Quarter
$
29,163
$
29,289
$
29,283
$
30,246
11,963
17,200
12,705
16,584
12,481
16,802
14,125
2,825
3,200
14,109
16,137
2,325
Net interest income after provision for loan losses
3,075
13,759
13,602
13,812
Noninterest income
Noninterest expense
7,650
17,817
7,641
19,133
4,444
12,723
5,538
13,832
Income before income tax expense
(7,092)
2,267
5,323
5,518
Income tax expense
Net income
Earnings per common share:
Basic
Diluted
(in thousands, except per share data)
Interest income
Interest expense
Net interest income
Provision for loan losses
(3,140)
948
1,823
1,955
$
(3,952)
$
1,319
$
3,500
$
3,563
$
(0.32)
$
(0.32)
$
0.10
0.10
$
0.28
0.27
0.29
0.28
2007
4th
3rd
2nd
Quarter
$ 31,916
15,713
Quarter
$ 31,807
16,002
Quarter
$ 30,946
15,821
16,203
15,805
15,125
1st
Quarter
$ 27,848
13,929
13,919
2,450
600
715
850
Net interest income after provision for loan losses
13,753
15,205
14,410
13,069
Noninterest income
Noninterest expense
6,230
13,083
4,638
12,202
4,906
12,370
3,899
11,861
Minority interest in net income of consolidated subsidiary
-
-
157
(157)
Income before income tax expense
6,900
7,641
7,103
4,950
Income tax expense
Net income
Earnings per common share
Basic
Diluted
1,994
2,642
2,588
1,792
$
4,906
$
4,999
$
4,515
$
3,158
$
$
0.40
0.39
$
0.40
0.40
$
0.37
0.36
0.27
0.26
The sum of the quarterly EPS amounts may not equal the full year amounts due to rounding.
88
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, 2008, 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, 2008, 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 LLP, the Company’s independent registered
public accounting firm, are included in Item 8 and are incorporated in this Item 9A by reference.
ITEM 9B: OTHER INFORMATION
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 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
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
Thursday, April 30, 2009. The Company’s executive officers consist of the named executive officers disclosed in the Compensation Discussion and
Analysis Section of the Proxy Statement.
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
Thursday, April 30, 2009.
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
Thursday, April 30, 2009.
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
Thursday, April 30, 2009.
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 Thursday,
April 30, 2009.
89
PART IV
(a) 1. Financial Statements
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The consolidated financial statements of Enterprise Financial Services Corp and its subsidiaries and independent auditors' reports are included in
Part II (Item 8) of this Form 10 K.
2. Financial Statement Schedules
All financial statement schedules have been omitted, as they are either inapplicable or included in the Notes to Consolidated Financial Statements.
3. Exhibits
The following documents are included or incorporated by reference in this Annual Report on Form 10-K:
Exhibit
No.
3.1
Certificate of Incorporation of Registrant, (incorporated herein by reference to Exhibit 3.1 of Registrant’s Registration Statement on Form
S-1 filed on December 19, 1996 (File No. 333-14737)).
3.2
3.3
3.4
3.5
3.6
3.7
Amendment to the Certificates of Incorporation of Registrant (incorporated herein by reference to Exhibit 4.2 to Registrant’s Registration
Statement on Form S-8 filed on July 1, 1999 (File No. 333-82087)).
Amendment to the Certificate of Incorporation of Registrant (incorporated herein by reference to Exhibit 3.1 to Registrant’s Quarterly
Report on Form 10-Q for the period ending September 30, 1999).
Amendment to the Certificate of Incorporation of Registrant (incorporated herein by reference to Exhibit 99.2 to Registrant’s Current
Report on Form 8-K filed on April 30, 2002).
Amendment to the Certificate of Incorporation of Registrant (incorporated herein by reference to Appendix A to Registrant’s Proxy
Statement on Form 14-A filed on November 20, 2008).
Certificate of Designations of Registrant for Fixed Rate Cumulative Perpetual Preferred Stock, Series A, dated December 17, 2008
(incorporated herein by reference to Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed on December 23, 2008).
Bylaws of Registrant, as amended, (incorporated herein by reference to Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed on
October 2, 2007).
10.1
Key Executive Employment Agreement dated effective as of July 1, 2008 by and between Registrant and Stephen P. Marsh (incorporated
herein by reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed on November 25, 2008), and amended by that First
Amendment of Executive Employment Agreement dated as of December 19, 2008 (incorporated herein by reference to Exhibit 99.6 to
Registrant’s Current Report on Form 8-K filed on December 23, 2008).
Key Executive Employment Agreement dated effective as of December 1, 2004 by and between Registrant and Frank H. Sanfilippo
(incorporated herein by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on December 1, 2004), and amended by
that First Amendment of Executive Employment Agreement dated as of December 19, 2008 (incorporated herein by reference to Exhibit
99.5 to Registrant’s Current Report on Form 8-K filed on December 23, 2008).
Key Executive Employment Agreement dated effective as of September 24, 2008, by and between Registrant and Peter F. Benoist
(incorporated herein by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on September 30, 2008), and amended
by that First Amendment of Executive Employment Agreement dated as of December 19, 2008 (incorporated herein by reference to Exhibit
99.3 to Registrant’s Current Report on Form 8-K filed on December 23, 2008).
90
Key Executive Employment Agreement dated effective as of November 1, 2004, by and between Registrant and Linda M. Hanson
(incorporated herein by reference to Exhibit 10.14 to Registrant’s Report on Form 10-K for the year ended December 31, 2007), and
amended by that First Amendment of Executive Employment Agreement dated as of December 19, 2008 (incorporated herein by
reference to Exhibit 99.4 to Registrant’s Current Report on Form 8-K filed on December 23, 2008).
Key Executive Employment Agreement dated effective as of October 5, 2007, by and among Registrant, Enterprise Bank & Trust, and
John G. Barry (filed herewith), and amended by that First Amendment of Executive Employment Agreement dated as of December 19,
2008 (incorporated herein by reference to Exhibit 99.7 to Registrant’s Current Report on Form 8-K filed on December 23, 2008).
Waiver executed by each of Peter F. Benoist, Frank H. Sanfilippo, Linda M. Hanson, Stephen P. Marsh and John G. Barry (incorporated
herein by reference to Exhibit 99.2 to Registrant’s Current Report on Form 8-K filed on December 23, 2008).
Consulting Agreement dated May 1, 2008, by and between Registrant and Kevin C. Eichner (incorporated herein by reference to Exhibit
10.1 to Registrant’s Current Report on Form 8-K filed on March 3, 2008).
Enterprise Financial Services Corp Deferred Compensation Plan I (incorporated herein by reference to Exhibit 10.1 of Registrant’s
Quarterly Report on Form 10-Q for the period ended March 31, 2000).
Enterprise Financial Services Corp Amended and Restated Deferred Compensation Plan I dated effective as of December 31, 2008.
Enterprise Financial Services Corp, Third Incentive Stock Option Plan (incorporated herein by reference to Exhibit 4.5 to Registrant’s
Registration Statement on Form S-8 filed on December 29, 1997 (File No. 333-43365)).
Enterprise Financial Services Corp, Fourth Incentive Stock Option Plan (incorporated herein by reference to Registrant’s 1998 Proxy
Statement on Form 14-A).
Enterprise Financial Services Corp, Stock Plan for Non-Management Directors (incorporated herein by reference to Registrant’s Proxy
Statement on Form 14-A filed on March 7, 2006).
Enterprise Financial Services Corp, 2002 Stock Incentive Plan, as amended (incorporated herein by reference to Registrant’s Proxy
Statement on Form 14-A, filed on March 17, 2008).
Enterprise Financial Services Corp, Annual Incentive Plan (incorporated herein by reference to Registrant’s Proxy Statement on Form
14-A, filed on March 7, 2006).
Enterprise Financial Services Corp, Incentive Stock Purchase Plan (incorporated herein by reference to Exhibit 4.6 to Registrant’s
Registration Statement on Form S-8 filed on November 1, 2002 (File No. 333-100928)).
$20,000,000 Amended and Restated Credit Agreement, as modified by the Third Modification Agreement dated April 30, 2007, by and
between Registrant and U.S. Bank National Association (incorporated herein by reference to Exhibit 10.1 to Registrant’s Current Report
on Form 8-K filed on June 22, 2007).
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9(1)
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.16.1(1) $20,000,000 Amended and Restated Credit Agreement, as modified by the Fourth, Fifth and Sixth Modification Agreements dated April
30, 2008, June 30, 2008, and December 11, 2008, by and between Registrant and U.S. Bank National Association.
91
10.17
10.18
10.19
10.20
10.21
Stock Purchase Agreement dated February 5, 2008 between Registrant and First Financial Bancshares, Inc. (incorporated herein by
reference to Exhibit 2.1 to Registrant’s Current Report on Form 8-K filed on February 6, 2008).
Membership Interest Purchase Agreement (Second Installment Closing) by and among Registrant, Millennium Holding Company, Inc.,
and Millennium Brokerage Group, LLC, et al. dated December 31, 2007 (incorporated herein by reference to Exhibit 2.1 to Registrant’s
Current Report on Form 8-K filed on January 7, 2008).
Condominium Sale Contract, dated October 3, 2007, by and between Enterprise Bank & Trust and Maryland Walk LLC (incorporated
herein by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated October 9, 2007).
Indenture dated December 12, 2008, by and between Registrant and Wilmington Trust Company (incorporated herein by reference to
Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed on December 15, 2008).
Amended and Restated Declaration of Trust dated December 12, 2008, by and among Registrant, Wilmington Trust Company, and each
of the Administrators named therein (incorporated herein by reference to Exhibit 4.2 to Registrant’s Current Report on Form 8-K filed on
December 15, 2008).
10.22
Guarantee dated December 12, 2008, by and between Registrant and Wilmington Trust Company (incorporated herein by reference to
Exhibit 4.3 to Registrant’s Current Report on Form 8-K filed on December 15, 2008).
10.23(1)
First Amendment to Amended and Restated Declaration of Trust No. 2 dated January 9, 2009 by and among Registrant, Wilmington
Trust Company and each of the Administrators named therein.
10.24 Warrant to Purchase Shares of Common Stock dated December 19, 2008, by Registrant in favor of the United States Department of the
Treasury (incorporated herein by reference to Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed on December 23, 2008).
10.25
14.1
21.1(1)
23.1(1)
24.1(1)
31.1(1)
31.2(1)
32.1(1)
32.2(1)
Letter Agreement dated December 19, 2008, including Securities Purchase Agreement – Standard Terms incorporated by reference
therein, by and between Registrant and the United States Department of the Treasury (incorporated herein by reference to Exhibit 99.1 to
Registrant’s Current Report on Form 8-K filed on December 23, 2008).
Code of Ethics for the Principal Executive Officer and Senior Financial Officers (incorporated herein by reference to Exhibit 14.1 to
Registrant’s Report on Form 10-K for the year ended December 31, 2003).
Subsidiaries of Registrant.
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
Note:
In accordance with Item 601 (b) (4) (iii) of Regulation S-K, Registrant hereby agrees to furnish to the Commission, upon request, the
instruments defining the rights of holders of each issue of long-term debt of Registrant and its consolidated subsidiaries.
92
SIGNATURES
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 16th of March, 2009.
ENTERPRISE FINANCIAL SERVICES CORP
/s/ Peter F. Benoist
Peter F. Benoist
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 16th of March, 2009.
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/ Michael A. DeCola*
Michael A. DeCola
/s/ William H. Downey*
William H. Downey
/s/ Robert E. Guest, Jr.*
Robert E. Guest, Jr.
/s/ Lewis A. Levey*
Lewis A. Levey
/s/ Birch M. Mullins*
Birch M. Mullins
/s/ Brenda D. Newberry*
Brenda D. Newberry
/s/ Robert E. Saur*
Robert E. Saur
/s/ Sandra A. Van Trease*
Sandra A. Van Trease
/s/ Henry D. Warshaw*
Henry D. Warshaw
*Signed by Power of Attorney.
93
Title
President and Chief Executive Officer and Director
Chairman of the Board of Directors
Vice Chairman and Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
(Back To Top)
Section 2: EX-10.9 (AMENDED AND RESTATED DEFERRED
COMPENSATION PLAN I)
EXHIBIT 10.9
AMENDMENT AND RESTATEMENT OF THE
ENTERPRISE FINANCIAL SERVICES CORP.
DEFERRED COMPENSATION PLAN I
_______________
Article I
Establishment of Plan
1.1. Purpose. The Board of Directors of Enterprise Financial Services Corp., a Delaware corporation, established the Plan originally effective
December 20, 1999 to provide deferred compensation benefits to selected executives of the Corporation.
1.2. Amendment and Restatement. The Plan is amended and restated as set forth herein to comply with Code Section 409A and to make other
changes.
1.3. Effective Date and Term. The Corporation adopts this amended and restated Plan effective as of January 1, 2005. Deferral Accounts to
which Annual Deferrals under Section 4.1 and Corporation credits under Section 4.4 were credited with respect to Deferral Periods ending prior to
January 1, 2005, including all earnings (including earnings credited after December 31, 2004) credited to such Deferral Accounts, shall to the extent
such amounts were vested as of December 31, 2004 remain subject to the terms of the Plan document in effect on December 31, 2004 and this
Amendment and Restatement of the Plan document shall not apply to such Deferral Accounts.
1.4. Applicability of ERISA. This Plan is intended to be an unfunded, top-hat plan maintained primarily for the purpose of providing deferred
compensation to a select group of management or highly compensated employees within the meaning of ERISA.
Article II
Definitions
As used within this document, the following words and phrases have the meanings described in this Article II unless a different meaning is
required by the context. Some of the words and phrases used in the Plan are not defined in this Article II, but for convenience, are defined as they
are introduced into the text. Words in the masculine gender shall be deemed to include the feminine gender. Any headings used are included for
ease of reference only, and are not to be construed so as to alter any of the terms of the Plan.
2.1. Affiliated Company. Any corporation which is a member of the same controlled group of corporations determined by Code Section 1563(a)
[without regard to Code Section 1563(a)(4) and (e)(3)(C)] of which the Company is a member.
2.2. Annual Deferral. The amount of Basic Salary and/or Bonuses which the Participant elects to defer in each Deferral Period pursuant to
Article 4.1 of the Plan.
2.3. Basic Salary. A Participant’s base, annual salary for the applicable Plan Year.
2.4. Beneficiary. Individual(s) or entit(ies) designated by a Participant in accordance with Section 14.6.
2.5. Board. The Board of Directors of the Corporation.
2.6. Bonus. Earnings and incentive compensation awarded to a Participant at the option of the Corporation which may or may not occur during
each Plan Year.
2.7. Code. The Internal Revenue Code of 1986, as amended. References to a section of the Code shall include that section and any comparable
section or sections of any future legislation that amends, supplements or supersedes such section.
2.8. Committee. The Compensation Committee of the Board.
2.9. Corporation. Enterprise Financial Services Corp. or, where the context so admits or requires, an Affiliated Company.
2.10. Deferral Account or Accounts. The account or accounts established for a Participant pursuant to Section 5.1 of the Plan.
2.11. Deferral Election. The election made by the Participant pursuant to Section 4.1 of the Plan.
2.12. Deferral Period. The Plan Year.
2.13. Disability. The disability of a Participant within the meaning of Code Section 409A(a)(2)(C).
2.14. Effective Date. January 1, 2005.
2.15. Eligible Employee. An employee of the Corporation or an Affiliated Company who is designated by the Board as an Eligible Employee.
2.16. ERISA. The Employee Retirement Income Security Act of 1974, as amended.
2.17. Participant. Any individual who becomes eligible to participate in the Plan pursuant to Article III of the Plan.
2.18. Participant Agreement and Deferral Election Form. The written agreement to defer Basic Salary and/or Bonuses made by the Participant.
Such written agreement shall be in a form designated by the Corporation. In order to revoke a Participant Agreement and Deferral Election Form, the
Participant must notify the Committee and the Plan Administrator of such revocation in writing and such revocation shall not be effective until
January 1 of the Plan Year following the Plan Year in which such notification is provided to the Committee.
2.19. Plan. The Enterprise Financial Services Corp. Deferred Compensation Plan I, as amended and restated.
2.20. Plan Administrator. The Corporation unless the Corporation designates another individual, committee or entity to hold the position of the
Plan Administrator.
2.21. Plan Year. The 12-month period beginning each January 1 and ending on the following December 31.
2.22. Rabbi Trust. A grantor trust that conforms to the terms of the model trust set forth in Internal Revenue Service Revenue Procedure 92-64
(or any Revenue Procedure or other Internal Revenue Service publication that supersedes Revenue Procedure 92-64), the assets of which shall be
subject to the claims of the Corporation’s creditors in the event of the Corporation’s insolvency, and the creation of which does not trigger
inclusion of any amounts deferred under this plan in the income of Participants.
2.23. Retirement Date. The first day of the first month coincident with or next following the date on which a Participant reaches age 65 and has a
Separation from Service. If a Participant continues employment with Corporation beyond age 65, the Retirement Date is the first day of the first
month coincident with or next following the date on which Participant has a Separation from Service.
2.24. Separation from Service. Termination of employment with the Company and all Affiliated Companies determined in accordance with the
provisions of Treasury Regulation 1.409A-1(h).
2.25. Valuation Date. Each business day of the Plan Year.
2.26. Year of Service. Each consecutive twelve (12) month period during which a Participant is continually employed by the Corporation.
Article III
Eligibility and Participation
3.1. Participation – Eligibility and Initial Period. Participation in the Plan is open only to Eligible Employees. Any employee first becoming an
Eligible Employee (e.g., a new hire or promoted employee) shall become a Participant as of January 1 of the Deferral Period following the Deferral
Period in which the Eligible Employee submits a properly completed and executed Participation Agreement and Deferral Election Form with the Plan
Administrator, provided that the employee is still an Eligible Employee as of such date.
3.2. Participation – Subsequent Entry into Plan. An Eligible Employee who fails or elects not to participate at the time of initial eligibility as set
forth in Section 3.1 remains eligible to become a Participant in subsequent Plan Years as long as he continues his status as an Eligible Employee. In
such event, the Eligible Employee may become a Participant effective as of January 1 of the Deferral Period following the Deferral Period in which
the Eligible Employee submits a properly completed and executed Participation Agreement and Deferral Election Form.
Article IV
Contributions
4.1. Deferral Election. Prior to the first day of a Deferral Period for which a Deferral Election is applicable, an Eligible Employee shall file with the
Committee a Participation Agreement and Deferral Election Form indicating the amount of Annual Deferrals for such Deferral Period. After the
Deferral Period commences, such Deferral Election is irrevocable and shall continue for the entire Deferral Period, except that it shall terminate upon
the Participant’s Separation from Service.
4.2. Maximum Deferral Election. A Participant may elect to defer up to twenty-five percent (25%) of Basic Salary and/or up to one hundred
(100%) of Bonuses earned during a Deferral Period. A Deferral Election is automatically reduced if the Committee determines that such action is
necessary to meet Federal or State legal requirements.
4.3. Minimum Deferral Election. A Participant must elect to defer at least $2,400 during the Deferral Period from Basic Salary, Bonuses, or a
combination of Basic Salary and Bonuses. If such amount is not elected, no Annual Deferral may be made with respect to such Deferral Period.
4.4. Corporation Credits. The Corporation may, in its sole discretion, declare an amount to be credited to a Participant’s Deferral Account.
Article V
Accounts
5.1. Deferral Accounts. Solely for recordkeeping purposes, the Plan Administrator shall establish a Deferral Account for each Participant for
each Plan Year for which the Participant has made a Deferral Election. A Participant’s Deferral Account for a Deferral Period is (i) credited with the
Annual Deferrals selected by him under Section 4.1, (ii) credited with amounts credited on his behalf by the Corporation under Section 4.4, (iii)
credited (or charged, as the case may be) with the hypothetical or deemed investment earnings and losses determined pursuant to Section 5.3, and
(iv) charged with distributions made to or with respect to the Participant and or his Beneficiary or Beneficiaries.
5.2. Crediting of Deferral Accounts. Annual Deferrals attributable to a Participant’s Basic Salary under Section 4.1 are credited to a Participant’s
Deferral Account as of the date on which such contributions are withheld from his Basic Salary. Annual Deferrals attributable to Bonuses under
Section 4.1 are credited to a Participant’s Deferral Account as of the date on which the contribution would have otherwise been paid to the
Participant. Amounts under Section 4.4 are credited to the Participant’s Deferral Account as of the date declared by the Corporation. Any
distribution with respect to a Deferral Account is charged to that Account as of the date such payment is made by the Corporation or the trustee of
any Rabbi Trust established for the Plan.
5.3. Earning Credits or Losses. Amounts credited to a Deferral Account are credited with deemed net income, gain and loss, including the
deemed net unrealized gain and loss based on hypothetical investment directions made by the Participant with respect to his Deferral Account on a
form designated by the Corporation, in accordance with investment options and procedures adopted by the Corporation in its sole discretion, from
time to time. Such earnings continue to accrue during any period in which installments are paid pursuant to Article VII.
5.4. Hypothetical Nature of Accounts. The Plan constitutes a mere promise by the Corporation to make the benefit payments in the future. Any
Deferral Account established for a Participant under this Article V is hypothetical in nature and is only maintained for the Corporation’s
recordkeeping purposes so that any contributions and deemed investment earnings and losses on such amounts can be credited (or charged, as the
case may be). Neither the Plan nor any of the Deferred Accounts (or subaccounts) or shall hold any actual funds or assets except as otherwise
provided under a Rabbi Trust. The right of any individual or entity to receive one or more payments under the Plan is an unsecured claim against
the general assets of the Corporation. Any liability of the Corporation to any Participant, former Participant, or Beneficiary with respect to a right to
payment is based solely upon contractual obligations created by the Plan. The Corporation, the Board, the Committee and any individual or entity is
or are not to be deemed to be a trustee or trustees of any amounts to be paid under the Plan. Nothing contained in the Plan, and no action taken
pursuant to its provisions, creates or is to be construed to create a trust of any kind, or a fiduciary relationship, between the Corporation and a
Participant, former Participant, Beneficiary, or any other individual or entity. The Corporation may, in its sole discretion, establish a Rabbi Trust as a
vehicle in which to place funds with respect to this Plan. The Corporation does not in any way guarantee any Participant’s Deferral Account
against loss or depreciation, whether caused by poor investment performance, insolvency of a deemed investment or by any other event or
occurrence. In no event shall an employee, officer, director, or stockholder of the Corporation be liable to any individual or entity on account of any
claim arising by reason of the Plan provisions or any instrument or instruments implementing its provisions, or for the failure of any Participant,
Beneficiary or other individual or entity to be entitled to any particular tax consequences with respect to the Plan or any credit or payment
thereunder.
5.5. Statement of Deferral Accounts. The Plan Administrator shall provide to each Participant quarterly statements setting forth the value of the
Deferral Accounts maintained for such Participant.
Article VI
Vesting
6.1. Vesting. The Corporation’s credits to a Participant’s Deferral Accounts under Section 4.4 and any deemed investment earnings attributable
to such credits become one hundred percent (100%) vested and non-forfeitable when the Participant has five Years of Service with the Corporation.
Prior to the time a Participant has five Years of Service with the Corporation, the Corporation’s credits to his Deferral Accounts under Section 4.4
and any deemed earnings attributable to such contributions are zero percent (0%) vested. Notwithstanding anything in this Section 6.1 to the
contrary, a Participant becomes one hundred percent (100%) vested in the Corporation’s credits to his Deferral Accounts under Section 4.4,
including any deemed investment earnings attributable to such amounts, upon his death or Disability while he is actively employed by the
Corporation. All other amounts credited to a Participant’s Deferral Accounts are one hundred percent (100%) vested at all times.
Article VII
Benefits
7.1. Retirement Date. Unless benefits have commenced pursuant to another section in this Article VII, the amount of a Participant’s benefits
under this Plan are based on the vested amount credited to his Deferral Accounts as of the Valuation Date coinciding with his Retirement Date or, if
no Valuation Date coincides with his Retirement Date, as of the Valuation Date which first occurs after his Retirement Date. Payment of amounts
under this Section shall commence within thirty (30) days of the Participant’s Retirement Date in accordance with the payment methods elected by
the Participant on his Participation Agreement and Deferral Election Forms.
7.2. Disability. If a Participant suffers a Disability while employed with the Corporation and before he is otherwise entitled to benefits under this
Article, he receives the vested amount credited to his Deferral Accounts as of the Valuation Date coinciding with the date on which the Participant
incurs the Disability or, if no Valuation Date coincides with the date on which he incurs the Disability, as of the Valuation Date which first occurs
after the date upon which he incurs a Disability. Payment of any amount under this Section commences within thirty (30) days of when the
Participant incurs the Disability in accordance with the payment method elected by the Participant on his Participation Agreement and Deferral
Election Form.
7.3. Pre-Retirement Survivor Benefit. If a Participant dies before becoming entitled to benefits under this Article, the Beneficiary or Beneficiaries
designated under Section 14.6, is or are paid, in a single, lump sum, a pre-retirement survivor benefit equal to the vested amount credited to the
Participant’s Deferral Accounts as of the Valuation Date coinciding with the date of the Participant’s death or, if no Valuation Date coincides with
his date of death, as of the Valuation Date which first occurs after his date of death. Payment of any amount under this Section shall be made within
thirty (30) days of the Participant’s death, or if later, within thirty (30) days of when the Committee receives notification of or otherwise confirms the
Participant’s death.
7.4. Post-Retirement Survivor Benefit. If a Participant dies after benefits have commenced, but prior to receiving complete payment of benefits
under this Article, the Beneficiary or Beneficiaries designated under Section 14.6, shall receive, in a single, lump sum, the vested amount credited to
the Participant’s Deferral Accounts as of the Valuation Date coinciding with the date of the Participant’s death or, if no Valuation Date coincides
with his date of death, as of the Valuation Date which first occurs after his date of death. Payment of any amount under this Section shall be made
within thirty (30) days of the Participant’s death, or if later, within thirty (30) days of when the Committee receives notification of or otherwise
confirms the Participant’s death.
7.5. Termination. If a Participant has a Separation from Service before he becomes entitled to receive benefits by reason of any of the above
Sections, he shall receive, in a single, lump sum, the vested amount credited to his Deferral Accounts as of the Valuation Date coinciding with the
date of the Participant’s Separation from Service or, if no Valuation Date coincides with his Separation from Service, as of the Valuation Date which
first occurs after such Separation from Service. Payment of any amount under this Section shall be made within thirty (30) days of the Participant’s
Separation from Service.
7.6. Change in Control. If a Change in Control occurs before a Participant becomes entitled to receive benefits by reason of any of the above
Sections or before the Participant has received complete payment of his benefits under this Article, he shall receive a single, lump sum payment of
the total amount credited to his Deferral Accounts as of the Valuation Date immediately preceding the date on which the Change in Control occurs.
Payment of any amount under this Section shall commence within thirty (30) days of the occurrence of the Change in Control.
For purposes of this Plan, a “Change in Control” shall be deemed to have occurred on the date on which any of the following four events has
occurred:
(a) A change in ownership of the Corporation, which shall be deemed to occur when:
(i) any Person (other than the Corporation or any of its Affiliates, a trustee or other fiduciary holding securities of the Corporation under
an employee benefit plan of the Corporation or any one or more of the Corporation’s directors as of the date this Plan is approved) becomes
the beneficial owner of securities of the Corporation representing more than 50% of the combined voting power of the Corporation’s then
outstanding securities; or
(ii) any Person (other than the Corporation or any of its Affiliates, or a trustee or other fiduciary holding securities of the Corporation
under an employee benefit plan of the Corporation) becomes the beneficial owner of securities of Enterprise Bank and Trust Company
(“ETC”) representing more than 50% of the combined voting power of ETC’s then outstanding securities, provided that such event shall
constitute a Change in Control only with respect to Participants who are employed by ETC or a Subsidiary thereof and only with respect to
such Participants’ Deferral Accounts that relate to employment with ETC or a Subsidiary thereof.
(b) A change in ownership of a substantial portion of assets, which shall be deemed to occur upon:
(i) consummation of a transaction in which any Person (other than a Person described in Treasury Regulation 1.409A-3(i)(5)(vii)(B))
acquires assets from the Corporation and its Subsidiaries that have a total gross fair market value of more than 50% of the total gross fair
market value of all of the assets of the Corporation and its Subsidiaries immediately before such acquisition or acquisitions; or
(ii) consummation of a transaction in which any Person (other than a Person described in Treasury Regulation 1.409A-3(i)(5)(vii)(B))
acquires assets from ETC and ETC’s Subsidiaries that have a total gross fair market value of more than 50% of the total gross fair market
value of all of the assets of ETC and ETC’s Subsidiaries immediately before such acquisition or acquisitions, provided that such event shall
constitute a Change in Control only with respect to Participants who are employed by ETC or a Subsidiary thereof and only with respect to
such Participants’ Deferral Accounts that relate to employment with ETC or a Subsidiary thereof.
(c) The replacement of a majority of members of the Corporation’s Board during any 12-month period by directors whose appointment or
election is not endorsed by a majority of the members of the Corporation’s Board before the date of their appointment or election, provided that for
purposes of this provision, the term “Corporation” shall refer solely to Enterprise Financial Services Corp.
(d) the consummation of a reorganization, merger or consolidation (a “Business Combination”) of the Corporation in which one of the
events described in (a), (b) or (c) above also occurs; provided that, an event described in (a), (b) or (c) above shall not be deemed to have occurred
if, following such Business Combination (i) all or substantially all of the Persons who were the beneficial owners, respectively, of Corporation’s
outstanding securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than a majority of the combined
voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the Corporation resulting from such
Business Combination, (ii) no Person (excluding any Corporation resulting from such Business Combination) beneficially owns, directly or
indirectly, 50% or more of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors
of the Corporation resulting from such Business Combination except to the extent such ownership existed prior to the Business Combination, and
(iii) at least a majority of the members of the Board of the company resulting from the Business Combination are endorsed by a majority of the
members of the Corporation’s Board at the time of the execution of the definitive agreement, or the action of the Board providing for such Business
Combination.
Notwithstanding anything in this Plan to the contrary, in applying the foregoing definition of Change in Control to any particular transaction or
situation, the rules set forth in Treasury Regulation 1.409A-3(i)(5), including without limitation rules for identification of relevant corporations and
attribution of stock ownership, shall govern and shall, to the extent necessary to cause such definition to comply with Code Section 409A,
supersede any inconsistent provision herein. For purposes of the foregoing definition of Change in Control only, the following terms shall be
defined as follows:
“Affiliate” with respect to any person, means any other Person that, directly or indirectly through one or more intermediaries, Controls, is
Controlled by, or is under common Control with the first Person, including but not limited to a Subsidiary of the first Person, a Person of which the
first Person is a Subsidiary, or another Subsidiary of a Person of which the first Person is also a Subsidiary.
“Beneficial owner” shall have the meaning ascribed to such term in Rule 13(d)(3) under the Securities Exchange Act of 1934, but only to the
extent that such meaning is consistent with the concept of ownership under Treasury Regulation 1.409A-3(i)(5).
“Control” With respect to any Person, means the possession, directly or indirectly, severally or jointly, of the power to direct or cause the
direction of the management policies of such Person, whether through the ownership of voting securities, by contract or credit arrangement, as
trustee or executor, or otherwise.
“Person” means any natural person, firm, partnership, limited liability company, association, corporation, company, trust, business trust,
governmental authority or other entity, or “more than one person acting as a group” as such phrase is defined in Treasury Regulation 1.409A-3(i)(5)
(v)(B) or 1.409A-3(i)(5)(vii)(C), as applicable (a “409A Group”), provided that such term shall include a 409A Group only to the extent that such
409A Group is also a “group” within the meaning of Section 13(d) or 14(d) of the Exchange Act or any comparable successor provisions.
“Subsidiary” With respect to any Person, each corporation or other Person in which the first Person owns, directly or indirectly, capital stock or
other ownership interests representing 50% or more of the combined voting power of the outstanding voting stock or other ownership interests of
such corporation or other Person.
7.7. Payment Methods. Unless otherwise provided in this Article VII, a Participant may elect to receive payment of the vested amount credited
to a Deferral Account in a single lump sum or in five (5), or ten (10) annual installments. This election must be made on the Participant Agreement
and Deferral Election Form in advance of the corresponding Deferral Period. A different form of distribution may be elected with respect to each
Deferral Account. Any installment payments shall be paid annually on the first practicable day after the distributions are scheduled to commence.
Each installment payment shall be determined by multiplying the Deferral Account balance, as of the last Valuation Date immediately preceding the
date upon which an installment is to be paid, by a fraction, the numerator of which is one and the denominator of which is the number of remaining
installment payments. A Participant, the payment of whose Account has not commenced as of December 31, 2008, shall make the election described
in the immediately preceding sentence before January 1, 2009, with respect to Deferral Accounts relating to Plan Years commencing before January
1, 2009. Payment will commence, except as described in Section 7.8, within thirty (30) days of the occurrence of the event giving rise to the
distribution.
7.8. Six-Month Delay in Payments to Specified Employees. Notwithstanding anything in this Plan to the contrary, payment of benefits under
Sections 7.1 or 7.5 to a Participant, who is a specified employee within the meaning of Code § 409A(a)(2)(B)(i) on his Retirement Date or date of
termination of employment with the Corporation, shall commence as of the first day of the seventh month immediately following the month in which
such termination of employment occurs. In this event, such Participant’s benefits under the Plan are based upon the vested amount credited to his
Accounts as of the Valuation Date coinciding with the first day of such seventh month, or if no Valuation Date coincides with such date, as of the
Valuation Date which first occurs after the first day of such seventh month.
Article VIII
In-Service Distributions
8.1. Election of In-Service Distributions. A Participant may irrevocably elect for each Deferral Period, on the Participation Agreement and
Deferral Election Form for such Deferral Period, to receive an amount in the future as an in-service distribution from his Deferral Account relating to
such Deferral Period. Such Deferral Election shall state the percentage of the value of the Deferral Account to be paid and the date on which such
in-service distribution is to be paid provided that such date is not earlier than five (5) years from January 1st of the Plan Year following the year of
said election. For example: the earliest distribution date for the Deferral Account relating to the Plan Year ending December 31, 2009 would be
January 1, 2014. This is calculated using January 1, 2009 as the “January 1st of the Plan Year following” plus five (5).
8.2. Payment of In-Service Distributions. All in-service distributions shall be paid in a single, lump sum within thirty (30) days of the date stated
on the Participation Agreement and Deferral Election Form and shall be based on the value of the Deferral Accounts as of the Valuation Date that
coincides with the of the in-service distribution date or, if such date is not a Valuation Date, as of the Valuation Date which first occurs after such in
service disbursement date.
8.3. Termination Prior to In-Service Distribution Date. Notwithstanding a Participant’s election of an in-service distribution, in the event a
Participant’s employment terminates for any reason pursuant to Article VII of the Plan and prior to such Participant receiving any in-service
distribution, the Participant shall receive his Deferral Accounts according to the payment method designated in Article VII and no further benefits
shall be paid pursuant to the Plan.
Article IX
Hardship Withdrawals
9.1. Hardship Withdrawals. If a Participant incurs an unforeseeable emergency within the meaning of Code § 409A(a)(2)(B)(i), the Participant
may make a written request to the Committee for a hardship withdrawal from his Deferral Accounts. Withdrawals of amounts because of
unforeseeable emergencies are only permitted to the extent reasonably necessary to satisfy the emergency need but cannot exceed the vested
amount of a Participant’s Deferral Accounts at the time of withdrawal. This section shall be interpreted in a manner consistent with Code Section
409A(a)(2)(B)(ii)(II). In the event of a hardship withdrawal under this Section, the Participant’s Annual Deferrals for the remainder of the Plan Year
shall be suspended. Annual Deferrals may commence with the next following Plan Year provided the Participant completes the appropriate
Participation Agreement and Deferral Election form prior to January 1 of the corresponding Plan Year.
Article X
Establishment of Trust
10.1. Establishment of Trust. The Corporation may establish a Rabbi Trust for the Plan. If established, the Rabbi Trust shall be irrevocable and
all benefits payable under this Plan to a Participant shall be paid directly from the Rabbi Trust. To the extent that such benefits are not paid from the
Rabbi Trust, the benefits shall be paid from the general assets of the Corporation. Except as to any amounts paid or payable to a Rabbi Trust, the
Corporation shall not be obligated to set aside, earmark or escrow any funds or other assets to satisfy its obligations under this Plan, and the
Participant and/or his designated Beneficiaries shall not have any property interest in any specific assets of the Corporation other than the
unsecured right to receive payments from the Corporation, as provided in this Plan.
Article XI
Plan Administration
11.1. Plan Administration. The Plan shall be administered by the Committee, and such Committee may designate an agent to perform the
recordkeeping duties. The Committee shall construe and interpret the Plan, including disputed and doubtful terms and provisions and, in its sole
discretion, decide all questions of eligibility and determined the amount, manner and time of payment of benefits under the Plan. The determinations
and interpretations of the Committee shall be consistently and uniformly applied to all Participants and Beneficiaries, including, but not limited to,
interpretations and determinations of amounts due under this Plan, and shall be final and binding on all parties. The Plan at all times shall be
interpreted and administered as an unfunded, deferred compensation plan, and no provision of the Plan shall be interpreted so as to give any
Participant or Beneficiary any right in any asset of the Corporation which is a right greater than the right of a general unsecured creditor of the
Corporation.
Article XII
Non-alienation of Benefits
12.1. Non-alienation of Benefits. The interests of Participants and their Beneficiaries under this Plan are not subject to the claims of their
creditors and may not be voluntarily or involuntarily sold, transferred, alienated, assigned, pledged, anticipated, or encumbered, attached or
garnished. Any attempt by a Participant, his Beneficiary, or any other individual or entity to sell, transfer, alienate, assign, pledge, anticipate,
encumber, attach, garnish, charge or otherwise dispose of any right to benefits payable shall be void. The Corporation may cancel and refuse to pay
any portion of a benefit which is sold, transferred, alienated, assigned, pledged, anticipated, encumbered, attached or garnished. Notwithstanding
anything in this Section 12.1 to the contrary, a payment or payments may be made to satisfy a domestic relations order within the meaning of Code
Section 414(p)(1)(B). The withholding of taxes from Plan payments, the recovery of Plan overpayments of benefits made to a Participant or
Beneficiary, the transfer of Plan benefit rights from the Plan to another plan, or the direct deposit of Plan payments to an account in a financial
institution (if not actually a part of an arrangement constituting an assignment or alienation) shall not be construed as assignment or alienation
under this Article XII.
Article XIII
Amendment and Termination
13.1. Amendment and Termination. The Corporation reserves the right to amend, alter or discontinue this Plan at any time. Such action may be
taken in writing by any officer of the Corporation who has been duly authorized by the Corporation to perform acts of such kind. However, no such
amendment shall deprive any Participant or Beneficiary of any portion of any benefit which would have been payable had the Participant’s
employment with the Corporation terminated on the effective date of such amendment or termination. Notwithstanding the provisions of this Article
XIII to the contrary, the Corporation may amend the Plan at any time, in any manner, if the Corporation determines any such amendment is required
to otherwise conform the Plan to the provisions of any applicable law including, but not limited to, ERISA and the Code.
Article XIV
General Provisions
14.1. Good Faith Payment. Any payment made in good faith in accordance with provisions of the Plan shall be a complete discharge of any
liability for the making of such payment under the provisions of this Plan.
14.2. No Right to Employment. This Plan does not constitute a contract of employment, and participation in the Plan shall not give any
Participant the right to be retained in the employment of the Corporation.
14.3. Binding Effect. The provisions of this Plan shall be binding upon the Corporation and its successors and assigns and upon every
Participant and his/her heirs, Beneficiaries, estates and legal representatives.
14.4. Participant Change of Address. Each Participant and Beneficiary entitled to benefits shall file with the Plan Administrator, in writing, any
change of post office address. Any check representing payment and any communication addressed to a Participant or Beneficiary or a former
Participant or Beneficiary at this last address filed with the Plan Administrator, or if no such address has been filed, then at his last address as
indicated on the Corporation’s records, shall be binding on such Participant and Beneficiary for all purposes of the Plan, and neither the Plan
Administrator, the Corporation nor any other payer shall be obliged to search for or ascertain the location of any such Participant or Beneficiary. If
the Plan Administrator is in doubt as to the address of any Participant or Beneficiary entitled to benefits or as to whether benefit payments are
being received by a Participant or Beneficiary, it shall, by registered mail addressed to such Participant or Beneficiary at his last known address,
notify such Participant or Beneficiary that:
(i) All unmailed and future Plan payments shall be withheld until Participant or Beneficiary provides the Plan Administrator with evidence of
such Participant’s or Beneficiary’s continued life and proper mailing address; and
(ii) Participant’s or Beneficiary’s right to any Plan payment shall, at the option of the Committee, be canceled forever, if, at the expiration of five
(5) years from the date of such mailing, such Participant or his Beneficiary shall not have provided the Committee with evidence of his continued
life and proper mailing address.
14.5. Notices. Each Participant and Beneficiary shall furnish to the Plan Administrator any information the Plan Administrator deems necessary
for purposes of administering the Plan, and the payment provisions of the Plan are conditional upon the Participant or Beneficiary furnishing
promptly such true and complete information as the Plan Administrator may request. Each Participant and Beneficiary shall submit proof of his age
when required by the Plan Administrator. The Plan Administrator shall, if such proof of age is not submitted as required, use such information as is
deemed by it to be reliable, regardless of the lack of proof, or the misstatement of the age of individuals entitled to benefits. Any notice or
information which, according to the terms of the Plan or requirements of the Plan Administrator, must be filed with the Plan Administrator, shall be
deemed so filed if addressed and either delivered in person or mailed to and received by the Plan Administrator, in care of the Corporation currently
located at:
Enterprise Financial Services Corp.
Attn: Chief Financial Officer
150 North Meramec
Clayton, MO 63105
14.6. Designation of Beneficiary. Each Participant shall designate, by name, on Beneficiary designation forms provided by the Plan
Administrator, the Beneficiary(ies) who shall receive any benefits which might be payable after such Participant’s death. A Beneficiary designation
may be changed or revoked without such Beneficiary’s consent at any time or from time to time in the manner as provided by the Plan
Administrator, and the Plan Administrator shall have no duty to notify any individual or entity designated as a Beneficiary of any change in such
designation which might affect such individual or entity’s present or future rights. If the designated Beneficiary does not survive the Participant, all
amounts which would have been paid to such deceased Beneficiary shall be paid to any remaining Beneficiary in that class of beneficiaries, unless
the Participant has designated that such amounts go to the lineal descendants of the deceased Beneficiary. If none of the designated primary
Beneficiaries survive the Participant, and the Participant did not designate that payments would be payable to such Beneficiary’s lineal
descendants, amounts otherwise payable to such Beneficiaries shall be paid to any successor Beneficiaries designated by the Participant, or if
none, to the Participant’s spouse, or, if the Participant was not married at the time of death, the Participant’s estate.
No Participant shall designate more than five (5) simultaneous Beneficiaries, and if more than one (1) Beneficiary is named, Participant shall
designate the share to be received by each Beneficiary. Despite the limitation on five (5) Beneficiaries, a Participant may designate more than five (5)
Beneficiaries provided such beneficiaries are the surviving spouse and children of the Participant. If a Participant designates alternative, successor,
or contingent Beneficiaries, such Participant shall specify the shares, terms and conditions upon which amounts shall be paid to such multiple,
alternative, successor or contingent beneficiaries. Any payments made under this Plan after the death of a Participant shall be made only to the
Beneficiary or Beneficiaries designated pursuant to this Section.
14.7. Claims. Any claim for benefits must initially be submitted in writing to the Plan Administrator. If such claim is denied (in whole or in part),
the claimant shall receive notice from the Plan Administrator, in writing, setting forth the specific reasons for denial, with specific references to
applicable provisions of this Plan. Such notice shall be provided within ninety (90) days of the date the claim for benefits is received by the Plan
Administrator, unless special circumstances require an extension of time for processing the claim, in which event notification of the extension shall
be provided to the claimant prior to the expiration of the initial ninety (90) day period. The extension notification shall indicate the special
circumstances requiring the extension of time and the date by which the Plan Administrator expects to render its decision. Any such extension shall
not exceed ninety (90) days. Any disagreements about such interpretations and construction may be appealed in writing by the claimant within
sixty (60) days to the Plan Administrator. The Plan Administrator shall respond to such appeal within sixty (60) days, with a notice in writing fully
disclosing its decision and its reasons, unless special circumstances require an extension of time for reviewing the claim, in which event notification
of the extension shall be provided to the claimant prior to the expiration of the initial sixty (60) day period. Any such extension shall be provided to
the claimant prior to the commencement of the extension. Any such extension shall not exceed sixty (60) days. No member of the Board, or any
committee thereof, shall be liable to any individual or entity for any action take hereunder, except those actions undertaken with lack of good faith.
14.8. Action by Board. Any action required to be taken by the Board pursuant to the Plan provisions may be performed by a committee of the
Board, to which the Board delegates the authority to take actions of that kind.
14.9. Governing Law and Venue. To the extent not superseded by the laws of the United States, the laws of the State of Missouri shall be
controlling in all matters relating to this Plan. State and federal courts located in the State of Missouri have exclusive jurisdiction to determine all
matters relating to the Plan and venue is proper in such courts.
14.10. Severability. In the event any provision of this Plan shall be held illegal or invalid for any reason, such illegality or invalidity shall not
affect the remaining provisions of the Plan, and the Plan shall be interpreted and enforced as if such illegal and invalid provisions had never been
set forth.
14.11. Withholding Taxes. A distribution pursuant to the Plan shall be subject to appropriate withholding taxes.
14.12. Interpretation. Terms in the masculine shall include the feminine and terms in the singular shall include the plural, and vice versa, where
ever the context so admits or requires.
IN WITNESS WHEREOF, ENTERPRISE FINANCIAL SERVICES CORP. has adopted this Amendment and Restatement of the Enterprise
Financial Services Corp. Deferred Compensation Plan I as of this 17 day of December, 2008.
ENTERPRISE FINANCIAL SERVICES CORP.
By: /s/ Mark G. Murtha
Title:
ATTEST:
(Back To Top)
Section 3: EX-10.16.1 ($20,000,000 AMENDED AND RESTATED CREDIT
AGREEMENT)
EXHIBIT 10.16.1
FOURTH MODIFICATION AGREEMENT
This FOURTH MODIFICATION AGREEMENT (this “Agreement”) is made and entered into as of April 30, 2008, by and between ENTERPRISE
FINANCIAL SERVICES CORP., a Delaware corporation (the “Borrower”), and U.S. BANK NATIONAL ASSOCIATION, a national banking
association (the “Lender”).
RECITALS
A. Pursuant to that certain Amended and Restated Credit Agreement dated July 28, 2006, by and between Borrower and Lender (the “Credit
Agreement”), Lender extended the following credit facilities to Borrower: (i) a revolving loan in the principal amount of $11,000,000.00, the proceeds
of which are to be used solely to finance Borrower’s general working capital purposes (the “Revolving Loan”), and (ii) a term loan in the principal
amount of $4,000,000.00, the proceeds of which were to be used to finance Borrower’s acquisition of NorthStar Bancshares, Inc (the “Term Loan”).
B. The Revolving Loan is evidenced by an Amended and Restated Revolving Credit Note dated July 28, 2006, executed by Borrower, as maker,
and payable to Lender in a maximum principal amount equal to the Revolving Credit Commitment (the “Revolving Note”).
C. The Term Loan is evidenced by a Promissory Note dated July 28, 2006, executed by Borrower, as maker, and payable to Lender in a maximum
principal amount equal to the Term Credit Commitment (the “Term Note” and, together with the Revolving Note, the “Notes”).
D. On December 6, 2006, Borrower and Lender entered into a First Modification Agreement pursuant to which the parties agreed to add certain
financial covenants to the Credit Agreement (the “First Modification”).
E. On February 23, 2007, Borrower and Lender entered into a Second Modification Agreement pursuant to which the parties agreed to amend
certain covenants contained in the Credit Agreement (the “Second Modification”).
F. On April 30, 2007, Borrower and Lender entered into a Third Modification Agreement pursuant to which the parties agreed to (i) to increase
the Revolving Credit Commitment from $11,000,000.00 to $16,000,000.00, (ii) to extend the Revolving Credit Termination Date from April 30, 2007 to
April 30, 2008, and (iii) to amend the definition of the term Fixed Charge Coverage Ratio contained in the Credit Agreement (the “Third
Modification”).
G. This Agreement, the Credit Agreement, the Notes, the First Modification, the Second Modification, the Third Modification and any and all
other documents executed and delivered or relating in any manner to the Loan are collectively referred to herein as the “Loan Documents”.
H. The parties enter into this Agreement to extend the Revolving Credit Termination Date from April 30, 2008 to April 30, 2009.
I. Capitalized terms used in this Agreement and not otherwise defined in this Agreement have the meaning assigned to them in the Credit
Agreement.
NOW THEREFORE, Lender and Borrower, for good, sufficient and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, agree as follows:
1. Modification to the Credit Agreement. The Credit Agreement is modified by deleting the reference to “April 30, 2008” contained in the
definition of the term “Revolving Credit Termination Date” appearing in Section 1.1 and inserting a reference to “April 30, 2009” in lieu thereof.
2. Modification to the Other Loan Documents. Each of the other Loan Documents is hereby modified such that references to the Credit
Agreement shall refer to the Credit Agreement as modified by this Agreement.
3. No Other Modifications. Except as expressly set forth herein, all other terms and conditions of the Loan Documents shall remain unmodified
and in full force and effect, and Borrower hereby confirms and ratifies such terms and conditions and agrees to perform and comply with the same.
4. Accuracy of Representations and Warranties. Borrower represents and warrants to Lender that Borrower is duly authorized and has all
requisite power to execute and deliver this Agreement. Borrower further represents and warrants that each of the representations and warranties
contained in the Loan Documents is true and correct in all material respects as of the date of this Agreement (except to the extent such
representations and warranties are expressly made as of a particular date, in which event such representations and warranties were true and correct
as of such date).
5. No Impairment. Nothing in this Agreement shall be deemed to, or shall in any manner, prejudice or impair Lender’s rights under the Loan
Documents. This Agreement shall not be deemed to be nor shall it constitute any alteration, waiver, annulment or variation of the Loan Documents
or the terms and conditions of or any rights, powers or remedies under the Loan Documents, except as expressly set forth in this Agreement.
6. Waiver of Claims and Defenses. Borrower hereby waives and releases any and all claims, defenses or rights of set-off, known or unknown,
existing as of the date of this Agreement, which in any manner arise out of or relate to the Loan or any of the Loan Documents.
7. Further Acts and Assurances. Borrower agrees to comply with any and all requirements of Lender hereafter made by Lender from time to time
so long as the Loan is outstanding, and Borrower agrees to make, execute and deliver to Lender any and all further instruments, documents and
agreements required by Lender.
8. Entire Agreement. This Agreement and the other Loan Documents embody the entire agreement and understanding between the parties
hereto and supersede all prior agreements and understandings relating to the subject matter hereof.
9. Binding Agreement. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and
assigns.
10. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Missouri, except to the
extent superseded by Federal law.
11. Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one agreement,
and any party hereto may execute this Agreement by signing any such counterpart. In making proof of this Agreement, it shall not be necessary to
produce or account for more than one such counterpart.
12. NO ORAL AGREEMENTS. ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR
FROM ENFORCING REPAYMENT OF A DEBT INCLUDING PROMISES TO EXTEND OR RENEW SUCH DEBT ARE NOT ENFORCEABLE,
REGARDLESS OF THE LEGAL THEORY UPON WHICH IT IS BASED, THAT IS IN ANY WAY RELATED TO THE CREDIT AGREEMENT. TO
PROTECT YOU (BORROWER) AND US (LENDER) FROM MISUNDERSTANDING OR DISAPPOINTMENT, ANY AGREEMENTS WE REACH
COVERING SUCH MATTERS ARE CONTAINED IN THIS WRITING, WHICH IS THE COMPLETE AND EXCLUSIVE STATEMENT OF THE
AGREEMENT BETWEEN US, EXCEPT AS WE MAY LATER AGREE IN WRITING TO MODIFY IT.
[Signature Page Follows]
IN WITNESS WHEREOF, the parties hereto have caused their duly authorized officers to execute and deliver this Agreement as of the date set
forth above.
BORROWER:
ENTERPRISE FINANCIAL SERVICES CORP.,
a Delaware corporation
By: /s/ Frank H. Sanfilippo
Frank H. Sanfilippo
Chief Financial Officer
LENDER:
U.S. BANK NATIONAL ASSOCIATION,
a national banking association
By: /s/ Jaycee D. Greene
Jaycee D. Greene
Vice President
FIFTH MODIFICATION AGREEMENT
This FIFTH MODIFICATION AGREEMENT (this “Agreement”) is made and entered into as of June 30, 2008, by and between ENTERPRISE
FINANCIAL SERVICES CORP., a Delaware corporation (the “Borrower”), and U.S. BANK NATIONAL ASSOCIATION, a national banking
association (the “Lender”).
RECITALS
J. Pursuant to that certain Amended and Restated Credit Agreement dated July 28, 2006, by and between Borrower and Lender (the “Credit
Agreement”), Lender extended the following credit facilities to Borrower: (i) a revolving loan in the original principal amount of $11,000,000.00, the
proceeds of which are to be used by Borrower for general working capital purposes (the “Revolving Loan”), and (ii) a term loan in the principal
amount of $4,000,000.00, the proceeds of which were to be used to finance Borrower’s acquisition of NorthStar Bancshares, Inc (the “Term Loan”
and together with the Revolving Loan, the “Loans”).
K. The Revolving Loan is evidenced by an Amended and Restated Revolving Credit Note dated July 28, 2006, executed by Borrower, as maker,
and payable to Lender in a maximum principal amount equal to the Revolving Credit Commitment (the “Revolving Note”).
L. The Term Loan is evidenced by a Promissory Note dated July 28, 2006, executed by Borrower, as maker, and payable to Lender in a maximum
principal amount equal to the Term Credit Commitment (the “Term Note” and, together with the Revolving Note, the “Notes”).
M. On December 6, 2006, Borrower and Lender entered into a First Modification Agreement pursuant to which the parties agreed to add certain
financial covenants to the Credit Agreement (the “First Modification”).
N. On February 23, 2007, Borrower and Lender entered into a Second Modification Agreement pursuant to which the parties agreed to amend
certain covenants contained in the Credit Agreement (the “Second Modification”).
O. On April 30, 2007, Borrower and Lender entered into a Third Modification Agreement pursuant to which the parties agreed to (i) increase the
Revolving Credit Commitment from $11,000,000.00 to $16,000,000.00, (ii) extend the Revolving Credit Termination Date from April 30, 2007 to April 30,
2008, and (iii) amend the definition of the term Fixed Charge Coverage Ratio contained in the Credit Agreement (the “Third Modification”).
P. On April 30, 2008, Borrower and Lender entered into a Fourth Modification Agreement pursuant to which the parties agreed to extend the
Revolving Credit Termination Date from April 30, 2008 to April 30, 2009 and to modify a financial covenant (the “Fourth Modification”).
Q. This Agreement, the Credit Agreement, the Notes, the First Modification, the Second Modification, the Third Modification, the Fourth
Modification and any and all other documents executed and delivered or relating in any manner to the Loans are collectively referred to herein as
the “Loan Documents”.
R. The parties enter into this Agreement to provide for a temporary increase in the Revolving Credit Commitment from $16,000,000.00 to
$18,000,000.00.
S. Capitalized terms used in this Agreement and not otherwise defined in this Agreement have the meaning assigned to them in the Credit
Agreement.
NOW THEREFORE, Lender and Borrower, for good, sufficient and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, agree as follows:
1. Modifications to the Revolving Note. The Revolving Note is modified as follows:
(a) The reference to “$16,000,000.00” contained in the upper left-hand corner of the Revolving Note is deleted and replaced with a reference
to “$18,000,000.00”.
(b) The reference to “SIXTEEN MILLION AND NO/100 DOLLARS ($16,000,000.00)” appearing in the first paragraph is deleted and replaced
with a reference to “EIGHTEEN MILLION AND NO/100 DOLLARS ($18,000,000.00)”.
(c) The following is inserted after the first sentence appearing on the first page of the Note:
“On or before August 31, 2008 (the “Principal Reduction Date”), Borrower shall make a payment of principal under this Note in an amount
sufficient to reduce the then outstanding principal balance of this Note to an amount not greater than $16,000,000.00 and from and after the
Principal Reduction Date, the principal amount available to be borrowed under this Note is limited to $16,000,000.00.”
2. Modifications to the Credit Agreement. The Credit Agreement is modified as follows:
(a) The reference to “SIXTEEN MILLION AND NO/100 DOLLARS ($16,000,000.00)” contained in the recitals is deleted and replaced with a
reference to EIGHTEEN MILLION AND NO/100 DOLLARS ($18,000,000.00)”.
(b) The definition of the term “Revolving Credit Commitment” appearing in Section 1.1 is deleted and replaced with the following:
“Revolving Credit Commitment” shall mean (i) from June 30, 2008 until August 31, 2008, an amount equal to $18,000,000.00, and (ii) from and
after September 1, 2008, an amount equal to $16,000,000.00.”
3. Modification to the Other Loan Documents. Each of the other Loan Documents is hereby modified such that references to the Credit
Agreement and the Revolving Note shall refer to the Credit Agreement and the Revolving Note, respectively, as modified by this Agreement.
4. No Other Modifications. Except as expressly set forth herein, all other terms and conditions of the Loan Documents shall remain unmodified
and in full force and effect, and Borrower hereby confirms and ratifies such terms and conditions and agrees to perform and comply with the same.
5. Accuracy of Representations and Warranties. Borrower represents and warrants to Lender that Borrower is duly authorized and has all
requisite power to execute and deliver this Agreement. Borrower further represents and warrants that each of the representations and warranties
contained in the Loan Documents is true and correct in all material respects as of the date of this Agreement (except to the extent such
representations and warranties are expressly made as of a particular date, in which event such representations and warranties were true and correct
as of such date).
6. No Impairment. Nothing in this Agreement shall be deemed to, or shall in any manner, prejudice or impair Lender’s rights under the Loan
Documents. This Agreement shall not be deemed to be nor shall it constitute any alteration, waiver, annulment or variation of the Loan Documents
or the terms and conditions of or any rights, powers or remedies under the Loan Documents, except as expressly set forth in this Agreement.
7. Waiver of Claims and Defenses. Borrower hereby waives and releases any and all claims, defenses or rights of set-off, known or unknown,
existing as of the date of this Agreement, which in any manner arise out of or relate to the Loans or any of the Loan Documents.
8. Further Acts and Assurances. Borrower agrees to comply with any and all requirements of Lender hereafter made by Lender from time to time
so long as either of the Loans are outstanding, and Borrower agrees to make, execute and deliver to Lender any and all further instruments,
documents and agreements required by Lender.
9. Entire Agreement. This Agreement and the other Loan Documents embody the entire agreement and understanding between the parties
hereto and supersede all prior agreements and understandings relating to the subject matter hereof.
10. Binding Agreement. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and
assigns.
11. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Missouri, except to the
extent superseded by Federal law.
12. Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one agreement,
and any party hereto may execute this Agreement by signing any such counterpart. In making proof of this Agreement, it shall not be necessary to
produce or account for more than one such counterpart.
13. NO ORAL AGREEMENTS. ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR
FROM ENFORCING REPAYMENT OF A DEBT INCLUDING PROMISES TO EXTEND OR RENEW SUCH DEBT ARE NOT ENFORCEABLE,
REGARDLESS OF THE LEGAL THEORY UPON WHICH IT IS BASED, THAT IS IN ANY WAY RELATED TO THE CREDIT AGREEMENT. TO
PROTECT YOU (BORROWER) AND US (LENDER) FROM MISUNDERSTANDING OR DISAPPOINTMENT, ANY AGREEMENTS WE REACH
COVERING SUCH MATTERS ARE CONTAINED IN THIS WRITING, WHICH IS THE COMPLETE AND EXCLUSIVE STATEMENT OF THE
AGREEMENT BETWEEN US, EXCEPT AS WE MAY LATER AGREE IN WRITING TO MODIFY IT.
[Signature Page Follows]
IN WITNESS WHEREOF, the parties hereto have caused their duly authorized officers to execute and deliver this Agreement as of the date set
forth above.
BORROWER:
ENTERPRISE FINANCIAL SERVICES CORP.,
a Delaware corporation
By: /s/ Frank H. Sanfilippo
Frank H. Sanfilippo
Chief Financial Officer
LENDER:
U.S. BANK NATIONAL ASSOCIATION,
a national banking association
By: /s/ Jaycee D. Greene
Jaycee D. Greene
Vice President
SIXTH MODIFICATION AGREEMENT
This SIXTH MODIFICATION AGREEMENT (this “Agreement”) is made and entered into as of December 11, 2008, by and between
ENTERPRISE FINANCIAL SERVICES CORP., a Delaware corporation (the “Borrower”), and U.S. BANK NATIONAL ASSOCIATION, a national
banking association (the “Lender”).
RECITALS
T. Pursuant to that certain Amended and Restated Credit Agreement dated July 28, 2006, by and between Borrower and Lender (the “Credit
Agreement”), Lender extended the following credit facilities to Borrower: (i) a revolving loan in the original principal amount of $11,000,000.00, the
proceeds of which are to be used by Borrower for general working capital purposes (the “Revolving Loan”), and (ii) a term loan in the principal
amount of $4,000,000.00, the proceeds of which were to be used to finance Borrower’s acquisition of NorthStar Bancshares, Inc (the “Term Loan”
and together with the Revolving Loan, the “Loans”).
U. The Revolving Loan is evidenced by an Amended and Restated Revolving Credit Note dated July 28, 2006, executed by Borrower, as maker,
and payable to Lender in a maximum principal amount equal to the Revolving Credit Commitment (the “Revolving Note”).
V. The Term Loan is evidenced by a Promissory Note dated July 28, 2006, executed by Borrower, as maker, and payable to Lender in a maximum
principal amount equal to the Term Credit Commitment (the “Term Note” and, together with the Revolving Note, the “Notes”).
W. On December 6, 2006, Borrower and Lender entered into a First Modification Agreement pursuant to which the parties agreed to add certain
financial covenants to the Credit Agreement (the “First Modification”).
X. On February 23, 2007, Borrower and Lender entered into a Second Modification Agreement pursuant to which the parties agreed to amend
certain covenants contained in the Credit Agreement (the “Second Modification”).
Y. On April 30, 2007, Borrower and Lender entered into a Third Modification Agreement pursuant to which the parties agreed to (i) increase the
Revolving Credit Commitment from $11,000,000.00 to $16,000,000.00, (ii) extend the Revolving Credit Termination Date from April 30, 2007 to April 30,
2008, and (iii) amend the definition of the term Fixed Charge Coverage Ratio contained in the Credit Agreement (the “Third Modification”).
Z. On April 30, 2008, Borrower and Lender entered into a Fourth Modification Agreement pursuant to which the parties agreed to extend the
Revolving Credit Termination Date from April 30, 2008 to April 30, 2009 and to modify a financial covenant (the “Fourth Modification”).
AA. On June 30, 2008, Borrower and Lender entered into a Fifth Modification Agreement pursuant to which the parties agreed to provide for a
temporary increase in the Revolving Credit Commitment from $16,000,000.00 to $18,000,000.00 (the “Fifth Modification”).
BB. This Agreement, the Credit Agreement, the Notes, the First Modification, the Second Modification, the Third Modification, the Fourth
Modification, the Fifth Modification and any and all other documents executed and delivered or relating in any manner to the Loans are collectively
referred to herein as the “Loan Documents”.
CC. The parties enter into this Agreement to amend the restriction on indebtedness of Borrower appearing in the Credit Agreement as more
specifically described therein.
DD. Capitalized terms used in this Agreement and not otherwise defined in this Agreement have the meaning assigned to them in the Credit
Agreement.
AGREEMENT
Lender and Borrower, for good, sufficient and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, agree as
follows:
1. Modification to the Credit Agreement. The Credit Agreement is modified by deleting Section 8.1 and inserting the following in place thereof:
“8.1Restriction on Indebtedness. Create, incur, assume or have outstanding any indebtedness for borrowed money (including
capitalized leases) except (i) indebtedness under the Revolving Note or the Term Note issued under this Agreement, (ii) other
indebtedness to the Lender, (iii) fed funds transactions in the ordinary course of business, (iv) indebtedness owing to any Federal
Home Loan Bank (or any successor thereto), (v) indebtedness on account of the Subsidiary Bank maintaining deposit accounts in
the ordinary course of business, (vi) any other indebtedness outstanding on the date hereof, and shown on the Borrower’s financial
statements delivered to the Lender prior to the date hereof, together with restatements, substitutions and refinancings of such
indebtedness, (vii) trust preferred securities issued by Borrower on February 26, 2007 in the amount of $14,000,000.00 with a maturity
of March 30, 2037, (viii) trust preferred securities issued by Borrower on September 30, 2007 in the amount of $4,000,000.00 with a
maturity of December 15, 2037, and (ix) trust preferred securities to be issued by Borrower (in one or more issuances) on or about
December 11, 2008 in the amount of $25,000,000.00 with a maturity on or about December ___, 2038.”
2. Modification to the Other Loan Documents. Each of the other Loan Documents is hereby modified such that references to the Credit
Agreement and the Revolving Note shall refer to the Credit Agreement and the Revolving Note, respectively, as modified by this Agreement.
3. No Other Modifications. Except as expressly set forth herein, all other terms and conditions of the Loan Documents shall remain unmodified
and in full force and effect, and Borrower hereby confirms and ratifies such terms and conditions and agrees to perform and comply with the same.
4. Accuracy of Representations and Warranties. Borrower represents and warrants to Lender that Borrower is duly authorized and has all
requisite power to execute and deliver this Agreement. Borrower further represents and warrants that each of the representations and warranties
contained in the Loan Documents is true and correct in all material respects as of the date of this Agreement (except to the extent such
representations and warranties are expressly made as of a particular date, in which event such representations and warranties were true and correct
as of such date).
5. No Impairment. Nothing in this Agreement shall be deemed to, or shall in any manner, prejudice or impair Lender’s rights under the Loan
Documents. This Agreement shall not be deemed to be nor shall it constitute any alteration, waiver, annulment or variation of the Loan Documents
or the terms and conditions of or any rights, powers or remedies under the Loan Documents, except as expressly set forth in this Agreement.
6. Waiver of Claims and Defenses. Borrower hereby waives and releases any and all claims, defenses or rights of set-off, known or unknown,
existing as of the date of this Agreement, which in any manner arise out of or relate to the Loans or any of the Loan Documents.
7. Further Acts and Assurances. Borrower agrees to comply with any and all requirements of Lender hereafter made by Lender from time to time
so long as either of the Loans are outstanding, and Borrower agrees to make, execute and deliver to Lender any and all further instruments,
documents and agreements required by Lender.
8. Entire Agreement. This Agreement and the other Loan Documents embody the entire agreement and understanding between the parties
hereto and supersede all prior agreements and understandings relating to the subject matter hereof.
9. Binding Agreement. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and
assigns.
10. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Missouri, except to the
extent superseded by Federal law.
11. Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one agreement,
and any party hereto may execute this Agreement by signing any such counterpart. In making proof of this Agreement, it shall not be necessary to
produce or account for more than one such counterpart.
12. NO ORAL AGREEMENTS. ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR
FROM ENFORCING REPAYMENT OF A DEBT INCLUDING PROMISES TO EXTEND OR RENEW SUCH DEBT ARE NOT ENFORCEABLE,
REGARDLESS OF THE LEGAL THEORY UPON WHICH IT IS BASED, THAT IS IN ANY WAY RELATED TO THE CREDIT AGREEMENT. TO
PROTECT YOU (BORROWER) AND US (LENDER) FROM MISUNDERSTANDING OR DISAPPOINTMENT, ANY AGREEMENTS WE REACH
COVERING SUCH MATTERS ARE CONTAINED IN THIS WRITING, WHICH IS THE COMPLETE AND EXCLUSIVE STATEMENT OF THE
AGREEMENT BETWEEN US, EXCEPT AS WE MAY LATER AGREE IN WRITING TO MODIFY IT.
[Signature Page Follows]
IN WITNESS WHEREOF, the parties hereto have caused their duly authorized officers to execute and deliver this Agreement as of the date set
forth above.
BORROWER:
ENTERPRISE FINANCIAL SERVICES CORP.,
a Delaware corporation
By: /s/ Frank H. Sanfilippo
Frank H. Sanfilippo
Chief Financial Officer
LENDER:
U.S. BANK NATIONAL ASSOCIATION,
a national banking association
By: /s/ Jaycee D. Greene
Jaycee D. Greene
Vice President
(Back To Top)
Section 4: EX-10.23 (FIRST AMENDMENT TO AMENDED AND
RESTATED DECLARATION OF TRUST NO. 2)
EXHIBIT 10.23
FIRST AMENDMENT TO
AMENDED AND RESTATED DECLARATION OF TRUST NO. 2
This FIRST AMENDMENT TO AMENDED AND RESTATED DECLARATION OF TRUST NO. 2 (this “Amendment”) is entered into effective
as of January 9, 2009, by and among Wilmington Trust Company, as Delaware Trustee and Institutional Trustee, Enterprise Financial Services Corp,
as Sponsor, and Frank H. Sanfilippo, Deborah N. Barstow and Betty L. Lewis, as Administrators (collectively the “Parties”).
The Parties are party to an Amended and Restated Declaration of Trust No. 2 dated as of December 12, 2008 (the “Declaration”). Each
capitalized term that is used and not otherwise defined in this Amendment has the meaning that the Declaration assigns to that term.
The Institutional Trustee has received all opinions, certifications and consents required as a condition precedent to amending the Declaration
and the Parties have agreed to make certain amendments to the Declaration in accordance with Section 11.1 of the Declaration.
Therefore, for good and valuable consideration, the receipt and sufficiency of which are acknowledged, the Parties hereby agree as follows.
1. Section 7(b)(II) of Annex A of the Declaration shall be deleted in its entirety and replaced with the following:
Except as provided in Section 7(b)(III) below with respect to conversion of Securities after a Redemption/Distribution Notice has been
given, if any Securities are converted during an Extension Period, the Holder may elect in the Conversion Request to (x) provided that such
election would not cause Sponsor to be in violation of any shareholder approval requirement of Rule 4350(i) or any successor rule, as such
may be amended, of the NASDAQ Stock Market Rules, convert all or any part of the accrued and unpaid interest on the converted
Securities (including Additional Interest thereon, if any, to the extent permitted by applicable laws, rules or regulations) (“Convertible
Interest”) into shares of Common Stock on the Conversion Date in an amount equal to such Convertible Interest divided by the Conversion
Price or (y) receive such accrued and unpaid interest on the converted Securities up to, but excluding the Conversion Date, (including
Additional Interest thereon, if any, to the extent permitted by applicable laws, rules or regulations) on the Distribution Payment Date upon
which such Extension Period ends. In the event that the Holder does not elect either (x) or (y) in the Conversion Request, the Holder shall be
deemed to have elected (y). At any time following the submission of the Conversion Request and prior to the payment in full of such
Convertible Interest, the Holder may, by delivery of a separate Conversion Request convert any Convertible Interest into shares of Common
Stock in an amount equal to such Convertible Interest divided by the Conversion Price, such conversion to be governed by the applicable
provisions of this Annex A. If a Holder makes the election, or is deemed to have made the election, described in clause (y), the Holder shall
receive from the Sponsor a letter agreement in the form of Exhibit C attached hereto.
2. Section 7 of Annex A of the Declaration shall be amended to include a new Section 7(l) which shall read as follows:
Notwithstanding anything to the contrary contained in this Section 7, a Holder of Securities may convert Securities or Convertible
Interest pursuant to this Section 7, or receive shares of Common Stock upon such conversion, to the extent (but only to the extent) that
such conversion or receipt would not cause or result in such Holder and its Affiliates, collectively, being deemed to own, control or have the
power to vote, for purposes of the Bank Holding Company Act of 1956, as amended (the “BHC Act”), the Change in Bank Control Act of
1978, as amended (the “CIBC Act”), Section 16 of Securities Exchange Act of 1934, as amended (“1934 Act”) or Rule 13d-3 of the 1934 Act,
and any rules and regulations promulgated under any of the BHC Act, the CIBC Act or the 1934 Act, 10% or more of any class of
outstanding voting securities of the Sponsor outstanding at such time (it being understood, for the avoidance of doubt, that no security
shall be included in any such percentage calculation to the extent that it cannot by its terms be converted into or exercisable for outstanding
voting securities of the Sponsor by such Holder or its Affiliates at the time of such measurement or transfer).
3. The Parties agree that the Declaration is hereby deemed amended in such respects as may be necessary to give effect to the agreements set
forth in Section 1 of this Amendment. Except as amended pursuant to the preceding sentence, the Declaration remains in full force and effect.
4. This Amendment may be executed by delivery of a signature by facsimile or other electronic means reasonably acceptable to both parties and
such signature shall constitute an original for all purposes. This Amendment may be executed in two or more counterparts, all of which shall be
considered one and the same instrument and shall become effective when one or more counterparts have been signed by each of the Parties and
delivered to the other.
5. Each of the Parties acknowledges that it has been represented by counsel in connection with this Amendment and the transactions
contemplated by this Amendment. Accordingly, any rule of law or any legal decision that would require interpretation of any claimed ambiguities in
this Amendment against the drafting party has no application and is expressly waived.
[The remainder of this page is intentionally left blank.]
IN WITNESS WHEREOF, the Parties have caused this First Amendment to Amended and Restated Declaration of Trust No. 2 to be executed
effective as of the date first written above.
WILMINGTON TRUST COMPANY,
as Delaware Trustee
By: /s/ Christopher J. Slaybaugh
Name: Christopher J. Slaybaugh
Title:
WILMINGTON TRUST COMPANY,
as Institutional Trustee
By:
Name:
Title:
ENTERPRISE FINANCIAL SERVICES CORP, as Sponsor
By:
Name:
Title:
ADMINISTRATORS OF
EFSC CAPITAL TRUST VIII
By: /s/ Frank H. Sanfilippo
Name: Frank H. Sanfilippo
By: /s/ Deborah N. Barstow
Name: Deborah N. Barstow
By: /s/ Betty L. Lewis
Name: Betty L. Lewis
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Section 5: EX-21.1 (SUBSIDIARIES OF REGISTRANT)
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
State of Organization
Delaware
Missouri
Missouri
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Missouri
Missouri
Missouri
Tennessee
Company
Enterprise Financial Services Corp
Enterprise Bank & Trust
Charford, Inc.
EFSC Capital Trust II
EFSC Capital Trust III
EFSC Capital Trust IV
EFSC Capital Trust V
EFSC Capital Trust VI
EFSC Capital Trust VII
EFSC Capital Trust VIII
EFSC Clayco Trust I
EFSC Clayco Trust II
Enterprise Real Estate Mortgage Company, LLC
Enterprise IHC, LLC
Millennium Holding Company, Inc.
Millennium Brokerage Group, LLC
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Section 6: EX-23.1 (CONSENT OF KPMG LLP)
EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Enterprise Financial Services Corp:
We consent to the incorporation by reference in the Registration Statements No. 333-14737 on Form S-1, No. 333-156771 on Form S-3, and No. 333-
152985, No. 333-82087, No. 333-43365, No. 333-100928, each on Form S-8 of Enterprise Financial Services Corp of our reports dated March 13, 2009,
with respect to the consolidated balance sheets of Enterprise Financial Services Corp and subsidiaries as of December 31, 2008 and 2007, 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, 2008, and the effectiveness of internal control over financial reporting as of December 31, 2008, which reports appear in
the December 31, 2008 annual report on Form 10-K of Enterprise Financial Services Corp.
St. Louis, Missouri
March 16, 2009
/s/ KPMG LLP
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Section 7: EX-24.1 (POWER OF ATTORNEY)
EXHIBIT 24.1
POWER OF ATTORNEY
The undersigned members of the Board of Directors and Executive Officers of Enterprise Financial Services Corp, a Delaware corporation (the
“Company”) hereby appoint Frank H. Sanfilippo or Peter F. Benoist as their Attorney-in-Fact for the purpose of signing the Company’s Securities
Exchange Commission Form 10-K (and any and all Amendments thereto) for the year ended December 31, 2008.
Dated: January 29, 2009
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/ Michael A. DeCola
Michael A. DeCola
/s/ William H. Downey
William H. Downey
/s/ Robert E. Guest, Jr.
Robert E. Guest, Jr.
/s/ Lewis A. Levey
Lewis A. Levey
Title
President and Chief Executive Officer and Director
Chairman of the Board of Directors
Vice Chairman and Director
Director
Director
Director
Director
/s/ Birch M. Mullins
Birch M. Mullins
/s/ Brenda D. Newberry
Brenda D. Newberry
/s/ Robert E. Saur*
Robert E. Saur
/s/ Sandra A. Van Trease
Sandra A. Van Trease
/s/ Henry D. Warshaw
Henry D. Warshaw
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Director
Director
Director
Director
Director
Section 8: EX-31.1 (CHIEF EXECUTIVE OFFICER'S CERTIFICATION
REQUIRED BY RULE 13(A)-14(A))
EXHIBIT 31.1
CERTIFICATION
I, Peter F. Benoist, certify that:
1. I have reviewed this annual report on Form 10-K of Enterprise Financial Services Corp;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered
by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, 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;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and retained weaknesses in the design or operation of internal controls over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control.
Date: March 16, 2009
/s/ Peter F. Benoist
Peter F. Benoist, Chief Executive Officer
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Section 9: EX-31.2 (CHIEF FINANCIAL OFFICER'S CERTIFICATION
REQUIRED BY RULE 13(A)-14(A))
I, Frank H. Sanfilippo, certify that:
1. I have reviewed this annual report on Form 10-K of Enterprise Financial Services Corp;
EXHIBIT 31.2
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered
by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, 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;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit
committee of registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and retained weaknesses in the design or operation of internal controls over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control.
Date: March 16, 2009
/s/ Frank H. Sanfilippo
Frank H. Sanfilippo, Chief Financial Officer
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Section 10: EX-32.1 (CHIEF EXECUTIVE OFFICER CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350)
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Enterprise Financial Services Corp (the “Company”) on Form 10-K for the period ending December 31, 2008
as filed with the Securities and Exchange Commission (the “Report”), I, Peter F. Benoist, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. § 1350, as enacted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that the Report fully complies with the requirements of Section 13
(a) or 15(d) of the Securities Exchange Act of 1934; and the information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
/s/ Peter F. Benoist
Peter F. Benoist
Chief Executive Officer
March 16, 2009
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Section 11: EX-32.2 (CHIEF FINANCIAL OFFICER CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350)
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Enterprise Financial Services Corp (the “Company”) on Form 10-K for the period ending December 31, 2008
as filed with the Securities and Exchange Commission (the “Report”), I, Frank H. Sanfilippo, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. § 1350, as enacted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that the Report fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and the information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
/s/ Frank H. Sanfilippo
Frank H. Sanfilippo
Chief Financial Officer
March 16, 2009
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