-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IUh7mBq9eR9QBbdKSaUKmocDTPjfyBIRrVudGQmXe7+HCH6lbWatZG8aYuzWGdwj csIH8QLM2Ng2DuT1sw4Thg== 0000950131-03-001652.txt : 20030326 0000950131-03-001652.hdr.sgml : 20030325 20030326150106 ACCESSION NUMBER: 0000950131-03-001652 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030326 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENTERPRISE FINANCIAL SERVICES CORP CENTRAL INDEX KEY: 0001025835 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 431706259 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-15373 FILM NUMBER: 03618084 BUSINESS ADDRESS: STREET 1: 150 NORTH MERAMEC STREET 2: 150 NORTH MERAMEC CITY: CLAYTON STATE: MO ZIP: 63105 BUSINESS PHONE: 3147255500 MAIL ADDRESS: STREET 1: 150 NORTH MERAMEC STREET 2: 150 NORTH MERAMEC CITY: CLAYTON STATE: MO ZIP: 63105 FORMER COMPANY: FORMER CONFORMED NAME: ENTERBANK HOLDINGS INC DATE OF NAME CHANGE: 19961024 10-K 1 d10k.txt FORM 10-K ================================================================================ 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, 2002 [ ] 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 (Exact Name of Registrant as Specified in its Charter) DELAWARE 43-1706259 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 150 North Meramec, Clayton, MO 63105 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 314-725-5500 ---------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 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 Form 10-K [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes( ) No (X). State the aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 10, 2003: Common Stock, par value $.01, $92,105,615 Indicate the number of shares outstanding of each of the Registrant's classes of common stock as of March 10, 2003: Common Stock, par value $.01, 9,532,616 shares outstanding ================================================================================ ENTERPRISE FINANCIAL SERVICES CORP 2002 ANNUAL REPORT ON FORM 10-K Page ---- Business................................................................... 1 Properties................................................................. 5 Legal Proceedings.......................................................... 5 Submission of Matters to Vote of Security Holders.......................... 6 Market for Common Stock and Related Stockholder Matters.................... 6 Selected Financial Data.................................................... 7 Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................... 8 Quantitative and Qualitative Disclosures About Market Risk................. 27 Financial Statements and Supplementary Data................................ 34 Directors and Executive Officers of the Registrant......................... 34 Executive Compensation..................................................... 34 Security Ownership of Certain Beneficial Owners and Management............................................................ 34 Certain Relationships and Related Party Transactions....................... 35 Disclosure Control and Procedures.......................................... 35 Exhibits, Financial Statement Schedules and Reports on Form 8-K............................................................... 35 Independent Auditors' Report............................................... 36 Consolidated Financial Statements.......................................... 37 Signatures................................................................. 71 Exhibit Index.............................................................. 75 SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Readers should note that in addition to the historical information contained herein, some of the information in this report contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements typically are identified with use of terms such as "may," "will," "expect," "anticipate," "estimate" and similar words, although some forward-looking statements are expressed differently. You should be aware that Enterprise Financial Services Corp's actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including burdens imposed by federal and state regulation of banks, credit risk, exposure to local economic conditions, risks associated with rapid increase or decrease in prevailing interest rates and competition from banks and other financial institutions, all of which could cause Enterprise Financial Services Corp's, actual results to differ from those set forth in the forward-looking statements. PART I ITEM 1: BUSINESS GENERAL Enterprise Financial Services Corp, formerly known as Enterbank Holdings Inc. (the "Company" or "Enterprise Financial") was incorporated under the laws of the State of Delaware on December 30, 1994, for the purpose of providing a holding company structure for the ownership of Enterprise Bank, (the "Bank") which commenced operations in 1988. The Company acquired the Bank in May 1995 through a tax-free exchange with the Bank's shareholders. In June of 2000, Enterprise Financial and Commercial Guaranty Bancshares, Inc. ("CGB"), the parent company for First Commercial Bank, N.A. (the "Kansas Bank"), merged under a tax-free reorganization. The holding company ownership structure gives the Bank a source of capital and financial strength and allows the organization some flexibility in expanding the products and services offered to clients. In 2000, the Company elected to change its status from a bank holding company to a financial holding company. From 1988 through 1996, the Bank provided commercial banking services to its customers from a single location in the City of Clayton, St. Louis County, Missouri. During 1997, the Bank opened two additional facilities located in St. Charles County, Missouri and the city of Sunset Hills, located in St. Louis County, Missouri. During 1998, the Bank opened an operations facility in St. Louis County, Missouri. Enterprise Trust ("Trust"), formerly referred to as Enterprise Financial Advisors ("EFA"), a division of the Bank, was organized in late 1998 to provide fee-based trust services, personal financial planning, estate planning, and corporate planning services to the Company's target market on a full time basis. As part of the organization of Trust, the Company entered into solicitation and referral agreements with Moneta Group, Inc. ("Moneta"), a large financial planning company based in St. Louis, Missouri. These agreements call for Moneta to provide assistance in staffing, training, marketing and regulatory compliance for Trust for which Moneta receives compensation. Moneta refers customers, when appropriate, to the Bank and receives a share of the revenue generated in the form of options to purchase the Company's common stock. The agreements with Moneta allow Trust to offer a full range of products and services with the depth and expertise of a large financial planning firm. The Kansas Bank began operations on February 20, 1996 as a new Kansas banking corporation in Overland Park, Kansas located in Johnson County. The Kansas Bank acquired First National Bank of Humboldt in December of 1997, adding three additional locations in Humboldt, Chanute and Iola, all located in Southeast Kansas. In June of 2000, Enterprise Financial completed a merger transaction under which the Kansas Bank became a subsidiary of the Company. On January 1, 2001, the Kansas Bank changed its legal name to Enterprise Banking, N.A. and on September 30, 2001 Enterprise Banking, N.A. merged into Enterprise Bank with Enterprise Bank as the surviving entity. On December 30, 2002, the Company signed an Asset Purchase Agreement to sell its Humboldt, Chanute and Iola, Kansas branches ("Southeast Kansas branches") to Emprise Financial Corporation based in Wichita, Kansas. Assets of $36.4 million and deposits of $50.1 million associated with these branches are shown as "held for sale" on the Company's balance sheet at December 31, 2002. The sale is subject to the satisfaction of customary conditions, including regulatory approvals, and is expected to close in April of 2003. The Southeast Kansas branches had a minimal effect on net income (loss) for the years ended December 31, 2002, 2001, and 2000. 1 As used herein, unless the context indicates otherwise, Enterprise Financial Services Corp and all of its subsidiaries are referred collectively as the "Organization" or the "Company". Enterprise Bank and all of its subsidiaries are referred to as the "Bank". The Company's executive offices are located at 150 North Meramec, Clayton, Missouri 63105. The Company's telephone number is (314) 725-5500. STRATEGY The Company's strategy is to provide a complete range of financial services designed to appeal to closely-held businesses, their owners and to professionals in the St. Louis and Kansas City metropolitan areas. The Bank serves the greater St. Louis and Kansas City Metropolitan area. The Company's goal is to grow its operations within its defined market niche by being well-managed, well-capitalized, and disciplined in its approach to managing and expanding its operations as growth opportunities arise. The Company believes its goals can be achieved while providing attractive returns to shareholders. Net income, earnings per share growth, and return on shareholders' equity are the financial performance indicators the Company considers most critical in measuring success. Through the Bank, the Company delivers a full range of commercial banking services to the closely-held business market. Financial planning and trust fiduciary services are offered through Trust. The Company plans to continue to expand the range of services it provides within its market niche while expanding the base of customers. THE BANK Enterprise Bank is a Missouri state chartered trust company. The Bank offers a broad range of commercial and personal banking services to customers. Loans include commercial, commercial real estate, financial and industrial development, real estate construction and development, residential real estate, and a smaller amount of consumer loans. Other services include treasury management and safe-deposit boxes. The Bank's primary source of funds has historically been customer deposits. The Bank offers a variety of accounts for depositors designed to attract both short-term and long-term deposits. These accounts include certificates of deposit, savings accounts, money market accounts, commercial sweep accounts, checking and negotiable order of withdrawal accounts, and individual retirement accounts. Interest-bearing accounts earn interest at rates established by management based on competitive market factors and management's desire to increase or decrease certain types of deposits. The Bank experiences significant competition in attracting depositors and borrowers. Competition in lending activities comes principally from other commercial banks, savings associations, insurance companies, governmental agencies, credit unions, brokerage firms, and pension funds. The primary factors in competing for loans are interest rate and overall lending services. Competition for deposits comes from other commercial banks, savings associations, money market and mutual funds, credit unions, insurance companies, and brokerage firms. The primary factors in competing for deposits are overall deposit services, interest rates paid on deposits, account liquidity, convenience of office location and overall financial condition. The Bank believes that its size provides flexibility, which enables the Bank to offer an array of banking products and services. The Bank's financial condition also contributes to a favorable competitive position in the markets it serves. Management believes the Bank is able to compete effectively in its market because: 1) the Bank's relationship officers and management maintain close working relationships with their commercial clients, 2) the Bank's management structure enables it to react to customer requests for loan and deposit services more quickly than many competitors, 3) the Bank's management and officers have significant experience in the communities serviced by the Bank, and 4) the Bank is highly focused on the closely-held business and professional market. Additionally, industry consolidation has resulted in fewer independent banks and fewer banks serving the Bank's target market niche. Management believes the Bank is one of only a few whose business model is specifically designed for closely-held businesses, their owners and the professional market. The Bank's historical growth strategy has been both client and asset driven. The Bank continuously seeks to add clients that fit its target market. This strategy enables the Bank to attract clients whose borrowing needs have grown along with the Bank's increasing capacity to fund client loan requests. Additionally, the Bank increased its loan portfolio based on lending opportunities developed by relationship officers. The Bank funds loan growth by 2 attracting deposits from business and professional clients, by borrowing from the Federal Home Loan Bank, and by issuing brokered certificates of deposits which are priced at or below the Bank's all-in alternative cost of funds. The Bank can expand its customer relationships and control operating costs by: 1) operating a small number of offices with a high per office asset base, 2) emphasizing commercial loans which tend to be larger than retail loans, 3) employing an experienced staff, all of whom are rewarded on the basis of performance and customer service, 4) improving data processing and operational systems to increase productivity and to control risk, 5) leasing facilities where possible so that capital can be deployed more effectively to support growth in earning assets, and 6) outsourcing services where possible. The Bank has a strong orientation toward commercial banking, with a specific focus on closely-held businesses, their owners, and professionals located in the target service areas. The Bank stresses personal service, timely responsiveness to the needs of clients, and flexibility in structuring loan and deposit relationships which meet client needs. Management of the Bank makes it a practice to maintain close working relationships and personal contact with each of the commercial clients. Each of the banking units has its own operating Board of Directors. Each Board of Directors is comprised primarily of business owners and professionals who fit the target client profile. Each Board of Directors takes an active role in the business development activities of its respective banking unit. Input and understanding of the needs of the Bank's current and target clients has been critical in the Bank's past success and will be important in the Bank's plans for future growth. The Bank has historically had low relationship officer turnover, and the policy is to keep officers assigned to accounts for long periods of time. This practice improves each officer's understanding of clients' businesses, resulting in knowledgeable credit assessments and superior client service. Relationship officers are supported by credit analysts and other support personnel who are familiar with each assigned customer, creating a team approach to serving customers' needs. A significant portion of the Bank's new business results from referrals from existing customers. ENTERPRISE TRUST In 1998, the Bank entered the trust and financial planning business on a full time basis when the Bank was granted trust powers. At that time, the Bank modified its agreements with Moneta. The new agreements call for Moneta to help the Bank with many of the issues related to startup including, but not limited to, staffing, training, marketing, and regulatory compliance. In return, Moneta receives a portion of the gross margin earned by the Trust division of the Bank in the form of cash. Moneta still refers banking business to the Bank and receives compensation in the form of options to purchase the Company's common stock for banking business referrals. Enterprise Trust provides fee-based personal and corporate financial consulting and trust services to the Company's target market. Personal financial consulting includes estate planning, investment management, and retirement planning. Corporate consulting services are focused in the areas of retirement plans, management compensation and management succession issues. Some investment management services are provided through Argent Capital Management LLC ("Argent"), a money management company that invests principally in large capitalization companies. The Company owns approximately 4.8% of Argent's outstanding shares. In addition, the Company acquired approximately 11% of Retirement Plan Services, LLC ("RPS") in October of 2000 and in December of 2000 elected to move its 401(k) plan from the Principal Group to RPS. RPS provides retirement plan administration to primarily small and medium size businesses. During 2001, the Company increased its ownership percentage to approximately 20% and actively refers business to RPS. MARKET AREAS AND APPROACH TO EXPANSION In the St. Louis metropolitan area, the Bank has facilities in Clayton, St. Charles County, and the city of Sunset Hills. In Kansas, the Bank has facilities in Johnson County and Southeast Kansas along with an office in the Country Club Plaza on the Missouri side of Kansas City. The Company chose to locate in all of these markets, except Southeast Kansas, based on high expectations for growth, high concentration of closely-held businesses and the high number of professionals in those markets. As mentioned above, the Company believes that local management and the involvement of a Board of Directors comprised of local business persons and professionals are 3 key ingredients for success. Management believes that credit decisions, pricing matters, business development strategies, and other decisions should be made locally by managers who have an equity stake in the Company (see "Management") while complying with the Bank's policies and procedures. The Company, as part of its expansion effort, plans to continue its strategy of operating a small number of offices with a high per office asset base, emphasizing commercial loans and employing experienced staff who are rewarded on the basis of performance and customer service. ENTERPRISE MERCHANT BANC The Company organized Enterprise Merchant Banc, Inc. ("Merchant Banc") (formerly Enterprise Capital Resources, Inc.) in 1995 as a wholly owned subsidiary to provide merchant banking services to closely-held business and their owners. Its operations included a minority investment in Enterprise Merchant Banc, LLC ("EMB LLC"), which focused on providing equity capital and equity-linked debt investments to growing companies in need of additional capital to finance internal and acquisition-related growth. EMB LLC managed and held a 1% economic ownership interest as the general partner in two investment funds, Enterprise Fund, LP ("Fund I") and Enterprise Capital Partners, LP ("Fund II") with total committed capital of approximately $35 million, substantially all of which has been invested. The portfolio companies held by each Fund are primarily manufacturers, versus service providers, and have no relationship to the internet or technology industries. EMB LLC focused on "second stage" and mezzanine financing for established companies rather than "seed money" for start up organizations. In mid-1999, the Company restructured its ownership and control positions of its various merchant banking operations. As a result of this restructuring, the Company maintained a minority interest in EMB LLC. The minority interest in the LLC included a 4.9% voting and common stock ownership interest with a 24.9% economic interest in the earnings or losses. The Company also had a 4.5% economic and voting interest in Fund I and had equity and debt investments in two portfolio companies of Fund I and Fund II. After experiencing significant losses on merchant banking investments in 2001, the Company considered that the merchant banking investments were no longer a viable part of its long term business strategy. The investments are now viewed as "workouts", regardless of their individual performance, and the Company is pursuing maximum recovery efforts as available. INVESTMENTS The Company's investment policy is designed to enhance its net income and return on equity through prudent management of risk; ensure liquidity to meet cash-flow requirements; help manage interest rate risk; ensure collateral is available for public deposits, advances and repurchase agreements; and to seek asset diversification. The Company, through its Asset/Liability Management Committee ("ALCO"), monitors investment activity and manages its liquidity by structuring the maturity dates of its investments to meet anticipated customer funding needs. However, the primary goal of the Company's investment policy is to maintain an appropriate relationship between assets and liabilities while maximizing interest rate spreads. Accordingly, the ALCO monitors the sensitivity of its assets and liabilities with respect to changes in interest rates and maturities and directs the overall acquisition and allocation of funds. ALCO also utilizes derivative financial instruments to assist in the management of interest rate sensitivity by modifying the repricing, maturity and option characteristics of certain assets and liabilities. EMPLOYEES Effective July 1, 2002, Kevin C. Eichner, the Vice Chairman of the Board of Directors since inception of the Company, was named President and Chief Executive Officer. Fred H. Eller, former President and Chief Executive Officer, resigned September 30, 2002 after a three month transition period with Mr. Eichner. Mr. Eichner still serves on the Board of Directors as Vice Chairman and as a member of the Executive Committee. Effective October 1, 2002, Peter F. Benoist was named Chairman and Chief Executive Officer of the Bank. Mr. Benoist was also named Executive Vice President of the Holding Company. He was subsequently appointed to its Board of Directors and Executive Committee. 4 At December 31, 2002 and 2001 the Company had approximately 232 and 253, respectively, 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 very strong. ITEM 2: PROPERTIES All of the Company's St. Louis banking facilities are leased under agreements that expire in 2004, 2008, 2011 and 2016, for Clayton, St. Louis County, the City of Sunset Hills, and St. Charles County, respectively. The Company has the option to renew the Clayton facility lease for one additional five-year period with future rentals to be agreed upon. The Company has the option to renew the St. Louis County facility lease for three additional five-year periods with future rentals to be agreed upon. The Company has the option to renew the Sunset Hills facility lease for two additional five-year periods with future rentals to be agreed upon. The Company has no future rental options for the St. Charles County facility; however, during the term of the lease, the monthly rentals are adjusted periodically based on then-current market conditions and inflation. The Company's Kansas City Country Club Plaza banking facility is leased under an agreement that expires in 2011. The Company has the option to renew the Plaza facility lease for one 5 year term. The banking facilities in Overland Park, Humboldt, Chanute, and Iola, Kansas are owned by the Company. As noted above, the Company plans to sell its Humboldt, Chanute, and Iola, Kansas branches in 2003. The following is a list of the Company's current facilities:
Facility Address Description - -------------------------------- ----------------------------- --------------------- Enterprise Bank, Clayton 150 North Meramec Commercial and Retail Clayton, Missouri 63105 Banking Enterprise Bank, St. Peters 300 St. Peters Centre Blvd. Commercial and Retail St. Peters, Missouri 63376 Banking Enterprise Bank, Sunset Hills 3890 South Lindbergh Blvd. Commercial and Retail Sunset Hills, Missouri 63127 Banking Enterprise Bank, Overland Park 12695 Metcalf Avenue Commercial and Retail Overland Park, Kansas 66213 Banking Enterprise Bank, Humboldt 725 Bridge Street Commercial and Retail Humboldt, Kansas 66748 Banking Enterprise Bank, Chanute 17 S. Lincoln Commercial and Retail Chanute, Kansas 66720 Banking Enterprise Bank, Iola 208 West Street Commercial and Retail Iola, Kansas 66749 Banking Enterprise Bank, Plaza 444 W 47th Street Suite 110 Commercial and Retail Kansas City, Missouri 64112 Banking Enterprise Bank, St. Louis 1281 North Warson Road Operations Center St. Louis, Missouri 63132
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. 5 ITEM 4: SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders in the quarter ended December 31, 2002. ITEM 5: MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS As of March 10, 2003, the Company had approximately 1,100 common stock shareholders of record and a market price of $13.10 per share. The common stock is not traded on an exchange but is traded on the Over-The-Counter Bulletin Board. The Company believes the high and low sale prices for the common stock and dividends declared were as follows in the quarters indicated: Dividends Market Price Declared -------------------- ------------- 2001 High Low First Quarter $ 16.00 $ 13.00 $ .0150 Second Quarter 14.00 11.00 .0150 Third Quarter 13.50 11.25 .0150 Fourth Quarter 12.40 10.50 .0150 2002 High Low First Quarter $ 12.10 $ 9.50 $ .0175 Second Quarter 10.75 9.00 .0175 Third Quarter 11.50 9.00 .0175 Fourth Quarter 13.05 10.25 .0175 There may have been other transactions at prices not known to the Company. DIVIDENDS The holders of shares of common stock of the Company are entitled to receive dividends when, as, and if declared by the Company's Board of Directors out of funds legally available for the purpose of paying dividends. The amount of dividends, if any, that may be declared by the Company will be dependent on many factors, including future earnings, bank regulatory capital requirements and business conditions as they affect the Bank. As a result, no assurance can be given that dividends will be paid in the future with respect to the common stock. COMMON STOCK The authorized capital stock of the Company consists of 20,000,000 shares of common stock, par value $.01 per share (the "Common Stock"). Holders of Common Stock are entitled to one vote per share on all matters on which the holders of Common Stock are entitled to vote. In all elections of directors, holders of Common Stock have the right to cast votes equaling the number of shares of Common Stock held by such stockholder multiplied by the number of directors to be elected. All of such votes may be cast for a single director or may be distributed among the number of directors to be elected, or any two or more directors, as such stockholder may deem fit. Holders of Common Stock have no preemptive, conversion, redemption, or sinking fund rights. In the event of a liquidation, dissolution or winding-up of the Company, holders of Common Stock are entitled to share equally and ratably in the assets of the Company, if any, remaining after the payment of all liabilities of the Company. 6 ITEM 6: SELECTED FINANCIAL DATA The following selected financial data should be read in connection with and are qualified by reference to the consolidated financial statements, related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this report. This selected financial data presented below is derived from the Company's audited consolidated financial statements as of and for the years ended: December 31, 2002, 2001, 2000, 1999, and 1998. (in thousands, except per share amounts)
Year Ended December 31, --------------------------------------------------------------- 2002 2001 2000 1999 1998 ---------- ---------- ---------- ---------- ---------- STATEMENT OF INCOME DATA: Interest income $ 45,171 $ 52,612 $ 56,030 $ 41,076 $ 33,505 Interest expense 14,307 23,810 27,596 18,160 15,705 Net interest income 30,864 28,802 28,434 22,916 17,800 Provision for loan losses 2,251 3,230 1,043 2,496 1,361 Noninterest income (loss) 6,306 (1,288) 3,280 3,595 2,758 Noninterest expense 28,304 25,577 22,262 18,095 14,526 Income (loss) before income tax expense 6,615 (1,293) 8,409 5,920 4,671 Income tax expense 1,614 1,242 3,208 2,335 1,725 Income (loss) before cumulative effect of a change in accounting principle 5,001 (2,535) 5,201 3,585 2,946 Cumulative effect on prior years of a change in asset classification - - - 121 - Net income (loss) 5,001 (2,535) 5,201 3,706 2,946 PER SHARE DATA: Net income (loss) per share-basic $ 0.53 $ (0.28) $ 0.58 $ 0.41 $ 0.34 Net income (loss) per share-diluted 0.52 (0.28) 0.54 0.39 0.32 Cash dividends per share 0.070 0.060 0.050 0.040 0.033 Book value per share 6.19 5.60 5.90 5.26 4.96 BALANCE SHEET DATA: BALANCE SHEET TOTALS-END OF PERIOD: Assets $ 876,787 $ 795,250 $ 710,938 $ 615,143 $ 488,066 Loans 679,799 602,747 516,810 445,448 322,394 Allowance for loan losses 8,600 7,296 7,097 6,758 4,430 Assets held for sale 36,401 40,575 41,222 36,695 33,886 Deposits 716,314 655,553 576,268 488,555 380,674 Guaranteed preferred beneficial interests in subordinated debentures 15,000 11,000 11,000 11,000 - Borrowings 31,823 15,399 11,191 12,417 9,205 Liabilities held for sale 50,053 58,800 56,169 53,774 52,529 Shareholders' equity 58,810 51,897 53,484 47,044 44,306 AVERAGE BALANCE SHEET AMOUNTS: Assets $ 820,326 $ 743,163 $ 662,157 $ 527,255 $ 425,701 Loans 693,551 613,539 517,381 429,408 328,761 Earning assets 778,790 701,242 627,882 492,288 393,128 Interest-bearing liabilities 629,247 583,003 529,187 411,706 328,195 Shareholders' equity 55,361 56,623 50,132 46,261 41,148 SELECTED RATIOS: Return on average equity 9.03% N/A% 10.37% 7.88% 7.16% Return on average assets 0.61 N/A 0.79 0.70 0.69 Efficiency ratio (noninterest expense as a percentage of total revenues) 76.15 92.96 70.40 68.25 70.66 Noninterest expense to average assets 3.45 3.44 3.36 3.43 3.41 Average equity to average assets 6.75 7.62 7.57 8.77 9.67 Leverage ratio 7.93 8.18 9.41 10.62 9.76 Net yield on average earning assets 5.83 7.52 8.95 8.37 8.56 Cost of interest-bearing liabilities 2.27 4.08 5.21 4.41 4.79 Net interest rate margin 4.00 4.13 4.55 4.68 4.56 Net interest rate spread 3.56 3.44 3.74 3.96 3.77 Nonperforming loans to total loans 0.57 0.62 0.39 0.57 0.21 Nonperforming assets to total assets 0.46 0.49 0.29 0.48 0.30 Net charge offs to average loans 0.14 0.49 0.14 0.04 0.03 Allowance for loan losses to total loans 1.27 1.21 1.37 1.52 1.37 Dividend payout ratio 13.21 N/A 8.62 9.66 9.74
7 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The following discussion and analysis is intended to review the significant factors of the financial condition and results of operations of the Company for the three-year period ended December 31, 2002. Reference should be made to the accompanying consolidated financial statements and the selected financial data presented elsewhere and herein for an understanding of the following review. The Company has prepared all of the consolidated financial information in this report in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). In preparing the consolidated financial statements in accordance with U.S. GAAP, the Company makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurances that actual results will not differ from those estimates. CRITICAL ACCOUNTING POLICIES We have identified the following accounting policies that we believe are the most critical to the understanding of our 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. 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 be a reasonable likelihood. The impact and any associated risks related to our critical accounting policies on our business operations is 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 detail discussion on the application of these and other accounting policies see Note 3 to our consolidated financial statements. LOANS AND ALLOWANCE FOR LOAN LOSSES We maintain an allowance for loan losses at a level considered adequate to provide for probable losses in our loan portfolio. The determination of our allowance for loan losses requires management to make significant judgments and estimates based upon a periodic analysis of our loans held for portfolio and held for sale considering, among other factors, current economic conditions, loan portfolio composition, past loan loss experience ratios, independent appraisals, the fair value of underlying loan collateral, our customers' ability to pay and selected key financial ratios. If actual events prove the estimates and assumptions we used in determining our allowance for loan losses were incorrect, we may need to make additional provisions for loan losses. DERIVATIVE FINANCIAL INSTRUMENTS We utilize derivative financial instruments to assist in our management of interest rate sensitivity by modifying the repricing, maturity and option characteristics of certain assets and liabilities. The judgments and assumptions that are most critical to the application of this critical accounting policy are those affecting the estimation of fair value and hedge effectiveness. Fair value is based on quoted market prices. Factors that affect hedge effectiveness include the initial selection of the derivative that will be used as a hedge and how well changes in its cash flow or fair value has correlated and is expected to correlate with change in the cash flow or fair value of the underlying hedged asset or liability. Past correlation is easy to demonstrate, but expected correlation depends upon projections and trends that may not always hold true with acceptable limits. 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. The consequence of greater inefficiency and discontinuation of hedge accounting results in increased volatility to reported earnings. For cash flow hedges, this would result in more or all of the change in the fair value of the affected derivative would be reported in income. For fair value hedges, this would result in less or none of the change in the fair value of the derivative would be offset by changes in the fair value of the underlying hedged asset or liability. 8 DEFERRED TAX ASSETS We recognize deferred tax assets and liabilities for the estimated future tax effects of temporary differences, net operating loss carryforward and tax credits. We recognize deferred tax assets subject to management's judgment based upon available evidence that realization is more likely than not. Our deferred tax assets are reduced if necessary, by a deferred tax asset valuation allowance. In the event that we determine we would not be able to realize all or part of our net deferred tax assets in the future, we would need to adjust the recorded value of our deferred tax assets, which would result in a direct charge to our provision for income taxes in the period that such determination is made. Likewise, we would reverse the valuation allowance when realization of the deferred tax asset is expected. GOODWILL AND OTHER INTANGIBLE ASSETS At December 31, 2002 we had $2.1 million of goodwill. Under Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, amortization of goodwill ceased as of January 1, 2002, and instead this asset must be periodically tested for impairment. Our goodwill arose from the acquisition of CGB. We test our goodwill for impairment utilizing the methodology and guidelines established in SFAS No. 142. This methodology involves assumptions regarding the valuation of the business segments that contain the acquired entities. We believe that the assumptions we utilize are reasonable. However, we may incur impairment charges related to our goodwill in the future due to changes in business prospects or other matters that could affect our valuation assumptions. RESULTS OF OPERATIONS OVERVIEW Net income was $5.0 million for the year ended December 31, 2002, an increase of $7.5 million, as compared to a net loss of $2.5 million for the same period in 2001. Diluted earnings (loss) per share for the years ended December 31, 2002 and 2001 were $0.52 and $(0.28), respectively. The net loss for 2001 was attributed primarily to $5.7 million in losses related to Merchant Banc investments. There was also a decrease in the net interest rate margin, an increase in the provision for loan losses, and an increase in noninterest expense that contributed adversely to the 2001 results. The decrease in the net interest rate margin was precipitated by a dramatic decline in the interest rate environment since December 2000. NET INTEREST INCOME The largest component of the Company's net income is net interest income. Net interest income (presented on a tax equivalent basis) was $31.1 million, which yielded a net interest rate margin of 4.00% for the year ended December 31, 2002, compared to net interest income of $28.9 million and net interest rate margin of 4.13% for the same period in 2001. The $2.2 million, or 8%, increase in tax equivalized net interest income was driven primarily by an increase in average interest-earning assets and a decrease in the interest rates on average interest-bearing liabilities. This was offset by a decrease in the interest rates of average interest-earning assets and an increase in average interest-bearing liabilities. Average interest-earning assets increased by 11%, or $78 million, to $779 million for the year ended December 31, 2002. The increase in earning assets, primarily loans, is attributable to the continued calling efforts of the Company's relationship officers. Average loans increased $80 million, or 13%, to $694 million in 2002 as compared to $614 million in 2001. The yield on average interest-earning assets decreased to 5.83% for the year ended December 31, 2002 from 7.52% for the same period in 2001. The decrease in asset yield was primarily due to a 225 basis point decrease in the prime rate since June of 2001 and a general decrease in market interest rates. The cash flow hedges on loans increased interest income on loans by $967,551 during 2002. Average interest-bearing liabilities increased $46 million, or 8%, to $629 million for the year ended December 31, 2002. The increase in demand deposits, interest-bearing transaction accounts, and money market accounts is attributed to continued calling efforts of the Company's relationship officers. Average certificate of deposit accounts decreased to $189 million for the year ended December 31, 2002 from $206 million in the previous year. This decrease is partially due to a $16 million decrease in average wholesale certificate of deposit accounts, most of which were replaced with Federal Home Loan Bank borrowings. The remaining decrease in average certificate of 9 deposit accounts is a result of their relative unattractiveness to customers versus money market and other more liquid products in the current rate environment. The cost of interest-bearing liabilities decreased to 2.27% in 2002 compared to 4.08% for the same period in 2001. This decrease is primarily attributed to a change in the mix of liabilities and declines in the market interest rates for all sources of funding. Interest-bearing liabilities decreased to 76.71% of total assets during 2002 from 78.45% during 2001. Demand deposits increased $31 million or 31% to $131 million, which was 16% of total assets in 2002. This increase is the result of an increase in the number of customers, and an increase in the required balances for deposit accounts to offset the decrease in the earnings credit rate for activity-based service charges. During 2001, demand deposits were $100 million or 13% of total assets. The net cash flows related to fair value hedges on certificates of deposit decreased interest expense by $197,553 during 2002. Net interest income (presented on a tax equivalent basis) was $28.9 million, which yielded a net interest rate margin of 4.13% for the year ended December 31, 2001, compared to net interest income of $28.6 million and net interest rate margin of 4.55% for the same period in 2000. The $355,000, or 1%, increase in tax equivalized net interest income was driven primarily by an increase in average interest-earning assets and a decrease in the interest rates on average interest-bearing liabilities. This was offset by a decrease in the interest rates of average interest-earning assets and an increase in average interest-bearing liabilities. Average interest-earning assets increased by 12%, or $73 million, to $701 million for the year ended December 31, 2001. The increase in earning assets, primarily loans, is attributable to the continued calling efforts of the Company's relationship officers. Average loans increased $96 million, or 19%, to $614 million in 2001 as compared to $517 million in 2000. The yield on average interest-earning assets decreased to 7.52% for the year ended December 31, 2001 from 8.95% for the same period in 2000. The decrease in asset yield was primarily due to a 475 basis point decrease in the prime rate since December of 2000 and a general decrease in market interest rates. Average interest-bearing liabilities increased $54 million, or 10% to $583 million for the year ended December 31, 2001. The increase in demand deposits, interest-bearing transaction accounts, and money market accounts is attributed to continued calling efforts of the Company's relationship officers. The cost of interest-bearing liabilities decreased to 4.08% in 2001 as compared to 5.21% for the same period in 2000. This decrease is primarily attributed to the aforementioned decreases in the prime rate and declines in the market interest rates for all sources of funding. The table on page 11 sets forth, on a tax-equivalent basis, certain information relating to the Company's average balance sheet and reflects the average yield earned on interest-earning assets, the average cost of interest-bearing liabilities and the resulting net interest income for each of the three years ended December 31, 2002, 2001, and 2000. 10
December 31, ------------------------------------------------------------------------------- 2002 2001 ---------------------------------------------------- ----------------------- Percent Interest Average Percent Average of Total Income/ Yield/ Average of Total Balance Assets Expense Rate Balance Assets ---------- ---------- ---------- ---------- ---------- ---------- (Dollars in Thousands) ASSETS Interest-earning assets: Loans (1)(2) $ 693,551 84.55% $ 43,279 6.24% $ 613,539 82.55% Taxable investments in debt and equity securities 43,954 5.36 1,554 3.54 39,057 5.26 Non-taxable investments in debt and equity securities(2) 18 0.00 1 5.56 294 0.04 Federal funds sold 39,928 4.87 574 1.44 47,778 6.43 Interest-bearing deposits 1,339 0.16 29 2.13 574 0.08 ---------- ---------- ---------- ---------- ---------- Total interest-earning assets 778,790 94.94 45,437 5.83 701,242 94.36 Non-interest-earning assets: Cash and due from banks 27,496 3.35 24,624 3.31 Fixed assets, net 9,492 1.16 9,475 1.27 Assets related to Merchant Banc investments 3,895 0.52 Prepaid expenses and other assets 12,678 1.55 11,213 1.51 Allowance for loan losses (8,130) (1.00) (7,286) (0.98) ---------- ---------- ---------- ---------- Total assets $ 820,326 100.00% $ 743,163 100.00% ========== ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Interest-bearing transaction accounts $ 62,104 7.57% $ 269 0.43% $ 53,846 7.25% Money market accounts 332,700 40.56 5,001 1.50 289,264 38.92 Savings 8,571 1.05 84 0.98 7,706 1.04 Certificates of deposit 189,030 23.04 6,833 3.61 206,334 27.76 Guaranteed preferred beneficial interests in subordinated debentures 13,049 1.59 1,117 8.56 11,000 1.48 Notes payable and other borrowed funds 23,793 2.90 1,004 4.22 14,853 2.00 ---------- ---------- ---------- ---------- ---------- Total interest-bearing liabilities 629,247 76.71 14,308 2.27 583,003 78.45 Noninterest-bearing liabilities: Demand deposits 130,931 15.96 100,103 13.47 Other liabilities 4,787 0.58 3,434 0.46 ---------- ---------- ---------- ---------- Total liabilities 764,965 93.25 686,540 92.38 Shareholders' equity 55,361 6.75 56,623 7.62 ---------- ---------- ---------- ---------- Total liabilities & shareholders' equity $ 820,326 100.00% $ 743,163 100.00% ========== ========== ========== ========== Net interest income $ 31,129 ========== Net interest spread 3.56% Net interest rate margin(3) 4.00% ========== December 31, ---------------------------------------------------------------------------- 2001 2000 ----------------------- ------------------------------------------------ Interest Average Percent Interest Average Income/ Yield/ Average of Total Income/ Yield/ Expense Rate Balance Assets Expense Rate --------- ---------- --------- ---------- --------- ------- ASSETS Interest-earning assets: Loans (1)(2) $ 48,803 7.95% $ 517,381 78.14% $ 49,231 9.52% Taxable investments in debt and equity securities 2,249 5.76 55,005 8.31 3,473 6.31 Non-taxable investments in debt and equity securities(2) 26 8.96 700 0.11 54 7.75 Federal funds sold 1,634 3.42 54,773 8.27 3,410 6.23 Interest-bearing deposits 27 4.76 23 0.00 1 5.12 --------- --------- ---------- --------- Total interest-earning assets 52,739 7.52 627,882 94.83 56,169 8.95 Non-interest-earning assets: Cash and due from banks 19,878 3.00 Fixed assets, net 8,309 1.25 Assets related to Merchant Banc investments 2,046 0.31 Prepaid expenses and other assets 10,745 1.62 Allowance for loan losses (6,703) (1.01) --------- ---------- Total assets $ 662,157 100.00% ========= ========== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Interest-bearing transaction accounts $ 555 1.03% $ 48,781 7.37% $ 823 1.69% Money market accounts 9,590 3.32 257,200 38.84 13,366 5.20 Savings 157 2.04 7,178 1.08 185 2.58 Certificates of deposit 11,703 5.67 194,593 29.39 11,624 5.97 Guaranteed preferred beneficial interests in subordinated debentures 1,042 9.48 11,000 1.66 1,053 9.58 Notes payable and other borrowed funds 764 5.14 10,435 1.58 545 5.22 --------- --------- ---------- --------- Total interest-bearing liabilities 23,811 4.08 529,187 79.92 27,596 5.21 Noninterest-bearing liabilities: Demand deposits 79,364 11.99 Other liabilities 3,474 0.52 --------- ---------- Total liabilities 612,025 92.43 Shareholders' equity 50,132 7.57 --------- ---------- Total liabilities & shareholders' equity $ 662,157 100.00% ========= ========== Net interest income $ 28,928 $ 28,573 ========= ========= Net interest spread 3.44% 3.74% Net interest rate margin(3) 4.13% 4.55% ========== =======
(1) Average balances include non-accrual loans. The income on such loans is included in interest but is recognized only upon receipt. Loan fees included in interest income are approximately $1,415,000, $1,310,000 and $1,062,000 for 2002, 2001 and 2000, respectively. (2) Non-taxable income is presented on a fully tax-equivalent basis assuming a tax rate of 34%. (3) Net interest income divided by average total interest earning assets. 11 During 2002, an increase in the average volume of earning assets resulted in an increase in interest income of $6,580,000. Interest income decreased $13,882,000 due to a decrease in rates on earning assets. Increases in average volume of interest-bearing demand deposits, savings and money market accounts, guaranteed preferred beneficial interests in subordinated debentures, borrowed funds and notes payable resulted in an increase in interest expense of $1,033,000. Changes in interest rates on the average volume of interest-bearing liabilities resulted in a decrease in interest expense of $10,536,000. The net effect of the volume and rate changes associated with all categories of interest-earning assets during 2002 as compared to 2001 decreased interest income by $7,302,000, while the net effect of the volume and rate changes associated with all categories of interest-bearing liabilities decreased interest expense by $9,503,000. During 2001, an increase in the average volume of earning assets resulted in an increase in interest income of $7,039,000. Interest income decreased $10,469,000 due to a decrease in rates on earning assets. Increases in average volume of interest-bearing demand deposits, savings and money market accounts, time deposits and notes payable resulted in an increase in interest expense of $2,510,000. Changes in interest rates on the average volume of interest-bearing liabilities resulted in a decrease in interest expense of $6,295,000. The net effect of the volume and rate changes associated with all categories of interest-earning assets during 2001 as compared to 2000 decreased interest income by $3,430,000, while the net effect of the volume and rate changes associated with all categories of interest-bearing liabilities decreased interest expense by $3,785,000. The following table sets forth, on a tax-equivalent basis for the periods indicated, a summary of the changes in interest income and interest expense resulting from changes in yield/rates and volume:
2002 Compared to 2001 2001 Compared to 2000 Increase (Decrease) Due to Increase (Decrease) Due to -------------------------------------- -------------------------------------- Volume/(1)/ Rate/(2)/ Net Volume/(1)/ Rate/(2)/ Net ----------- ------------ ---------- ----------- ---------- ---------- (Dollars in Thousands) Interest earned on: Loans $ 6,554 $ (12,078) $ (5,524) $ 8,381 $ (8,809) $ (428) Taxable investments in debt and equity securities 255 (950) (695) (941) (283) (1,224) Nontaxable investments in debt and equity securities/(3)/ (18) (7) (25) (35) 7 (28) Federal funds sold (234) (826) (1,060) (392) (1,384) (1,776) Interest- bearing deposits 23 (21) 2 26 (0) 26 ----------- ------------ ---------- ----------- ---------- ---------- Total interest-earning assets $ 6,580 $ (13,882) $ (7,302) $ 7,039 $ (10,469) $ (3,430) =========== ============ ========== =========== ========== ========== Interest paid on: Interest-bearing demand deposits $ 75 $ (361) $ (286) $ 79 $ (347) $ (268) Money market accounts 1,277 (5,866) (4,589) 1,511 (5,287) (3,776) Savings 16 (89) (73) 13 (41) (28) Certificates of deposit (913) (3,957) (4,870) 680 (601) 79 Guaranteed preferred beneficial interests in subordinated debentures 182 (107) 75 - (11) (11) Notes payable and other borrowed funds 396 (156) 240 227 (8) 219 ----------- ------------ ---------- ----------- ---------- ---------- Total $ 1,033 $ (10,536) $ (9,503) $ 2,510 $ (6,295) $ (3,785) ----------- ------------ ---------- ----------- ---------- ---------- Net interest income (loss) $ 5,547 $ (3,346) $ 2,201 $ 4,529 $ (4,174) $ 355 =========== ============ ========== =========== ========== ==========
/(1)/ Change in volume multiplied by yield/rate of prior period. /(2)/ Change in yield/rate multiplied by volume of prior period. /(3)/ Nontaxable investments in debt securities are presented on a fully tax-equivalent basis assuming a tax rate of 34%. NOTE: The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each. 12 In 2003, the Company plans to continue to manage the net interest rate margin aggressively, including the use of derivative financial instruments and more disciplined pricing on loans and deposits. These actions should reduce the level of interest rate risk under various rate scenarios and result in less volatility of the interest rate margin. LIQUIDITY Liquidity is provided by the Company's earning assets, including short-term investments in federal funds sold, maturities in loan and investment portfolios, and amortization of term loans, along with deposit inflows, and proceeds from borrowings. At December 31, 2002 the loan to deposit ratio was 95%, as compared to 92% at December 31, 2001. Federal funds sold, interest bearing deposits and investment securities were $100 million at December 31, 2002 as compared to $98 million at December 31, 2001. During 2002, the Company experienced loan growth of $77 million and deposit growth of $61 million. This decrease in the Company's liquidity position resulted in the utilization of maturing investment securities and federal funds sold balances to fund loan growth. The Company also increased its Federal Home Loan Bank advances to $29 million at December 31, 2002 from $14 million at December 31, 2001. Finally, the Company increased its guaranteed preferred beneficial interests in subordinated debentures to $15 million at December 31, 2002 from $11 million at December 31, 2001. The Company closely monitors its current liquidity position and believes there are sufficient backup sources of liquidity. As of December 31, 2002, the Company had over $96 million available from the Federal Home Loan Bank of Des Moines under a blanket loan pledge and $49 million from the Federal Reserve Bank under a pledged loan agreement. The Company also has access to over $50 million in overnight federal funds purchased from various banking institutions and a $5 million line of credit at the holding company level if needed. Finally, since the Bank plans to remain a "well-capitalized" institution, it has the ability to sell certificates of deposit through various national or regional brokerage firms, if needed. Upon the sale of the Company's Southeast Kansas branches in April, 2003, approximately $14 million of liquidity will need to be replaced through the various other sources noted above since the branches were a net provider of cash. 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. OFF-BALANCE SHEET ACTIVITIES In the normal course of business, the Company is party to activities that contain credit, market and operational risk that are not reflected in whole or part in the Company's consolidated financial statements. Such activities include traditional off-balance sheet credit-related financial instruments, commitments under operating leases and long-term debt. The Company provides customers with off-balance sheet credit support though loan commitments and standby letters of credit. Summarized credit-related financial instruments, including both commitments to extend credit and letters of credit at December 31, 2002 are as follows: Unused loan commitments $ 183,070,617 Standby letters of credit $ 17,755,979 $37,247,524 of the commitments expire in over a year while the rest expire in 2003. Since many of the unused commitments are expected to expire or be only partially used, the total amount of commitments in the preceding table does not necessarily represent future cash requirements. 13 CONTRACTUAL CASH OBLIGATIONS In addition to owned banking facilities, the Company has entered into long-term leasing arrangements to support its ongoing activities. The required payments under such commitments and long-term debt, including certificates of deposit at December 31, 2002 are as follows: (Dollars in thousands)
Over 1 Year Less Than Less Than Total 1 Year 5 Years Over 5 Years --------- --------- ----------- ------------ Operating leases $ 10,537 $ 1,338 $ 5,073 $ 4,126 Certificates of deposit 156,648 88,797 67,851 - Guaranteed preferred beneficial interest in subordinated debentures 15,000 - - 15,000 Federal Home Loan Bank advances 29,464 14,850 9,850 4,764
INTEREST RATE SENSITIVITY The asset/liability management process, which involves management of the components of the balance sheet to allow assets and liabilities to reprice at approximately the same time, is an ever-changing process essential to minimizing the effect of interest rate fluctuations on net interest income. In January 2002, the Bank executed two interest rate swaps in order to limit exposure from falling interest rates. The first swap had a $40 million notional amount, a term of two years and obligated the Bank to pay an adjustable rate equivalent to the prime rate and receive a fixed rate of 6.255%. The second swap was also a "receive fixed" interest rate of 6.97% and pay an adjustable rate equivalent to the prime rate, but had a notional amount of $20 million and a term of three years. Both swaps pay interest on a quarterly basis and the net cash flow paid or received is included in interest income on loans. The swaps qualify as "cash flow hedges" under SFAS No. 133, so changes in the fair value of the swaps are recognized as part of other comprehensive income. On December 31, 2002, the Bank had $2.4 million in cash collateral from the counterparty on the interest rate swap agreements which is included on the balance sheet as notes payable and other borrowings. The cash collateral is interest bearing at an interest rate that floats with the three month London InterBank Offered Rate ("LIBOR"). In May 2002, the Bank executed an interest rate swap to limit the risk of a change in the fair value of the $20 million in fixed interest rate brokered CDs obtained simultaneously. The swap had a $20 million notional amount, a term of two years and obligated the Bank to pay an adjustable rate equivalent to the three-month LIBOR plus 19 basis points and receive a fixed rate of 3.55%. The terms allow for semiannual payments for both sides of the swap. The swap qualifies for the "shortcut method" under SFAS No. 133. As a result, changes in the fair value of the swap directly offset changes in the fair value of the hedged item (i.e., brokered CDs). The impact of the swap on the Company's statement of operations is that it converts the fixed interest rate on the brokered CDs to a variable interest rate. The notional amounts of derivative financial instruments do no represent amounts exchanged by the parties and, therefore, are not a measure of the Banks' credit exposure through its use of these instruments. The credit exposure represents the accounting loss the Bank would incur in the event the counterparties failed completely to perform according to the terms of the derivative financial instruments and the collateral held to support the credit exposure was of no value. On December 31, 2002 the Bank had credit exposure of $197,745. The maturity dates, notional amounts, interest rates paid and received and fair value of our interest rate swap agreements as of December 31, 2002 were as follows:
Maturity Notional Interest Rate Interest Rate Fair Date Amount Paid Received Value -------------- ----------------- ---------------- ---------------- ----------- 1/29/2005 $ 20,000,000 4.25% 6.97% $ 1,016,508 1/29/2004 40,000,000 4.25 6.26 1,002,063 5/10/2004 20,000,000 1.58 3.55 537,927
14 The following table reflects the Company's GAP analysis (rate sensitive assets minus rate sensitive liabilities) as of December 31, 2002:
Over Over After 3 Months 1 Year 5 Years 3 Months Through 12 Through or No Stated or Less Months 5 Years Maturity Total ------------ ------------ ------------ ------------ ------------ (Dollars in Thousands) Assets: Investments in debt and equity securities $ 10,422 $ 23,173 $ 29,271 $ 3,765 $ 66,631 Interest-bearing deposits 66 - - - 66 Loans /(1)//(5)/ 414,910 57,131 187,021 20,737 679,799 Loans held for sale 6,991 - - - 6,991 Federal funds sold 33,367 - - - 33,367 ------------ ------------ ------------ ------------ ------------ Total interest-sensitive assets $ 465,756 $ 80,304 $ 216,292 $ 24,502 $ 786,854 ------------ ------------ ------------ ------------ ------------ Liabilities: Interest-bearing transaction accounts /(2)/ $ 59,058 $ - $ - $ - $ 59,058 Money market and savings accounts /(3)/ 345,011 - - - 345,011 Certificates of deposit /(4)//(5)/ 37,365 71,432 47,851 - 156,648 Guaranteed preferred beneficial interests in subordinated debentures - - - 15,000 15,000 Other borrowings 2,359 14,850 9,850 4,764 31,823 ------------ ------------ ------------ ------------ ------------ Total interest-sensitive liabilities $ 443,793 $ 86,282 $ 57,701 $ 19,764 $ 607,540 ============ ============ ============ ============ ============ Interest-sensitivity GAP GAP by period $ 21,963 $ (5,978) $ 158,591 $ 4,738 $ 179,314 ============ ============ ============ ============ ============ Cumulative GAP $ 21,963 $ 15,985 $ 174,576 $ 179,314 $ 179,314 ============ ============ ============ ============ ============ Ratio of interest-sensitive assets to interest-sensitive liabilities: Periodic 1.05 0.93 3.75 1.24 1.30 Cumulative GAP 1.05 1.03 1.30 1.30 1.30 ============ ============ ============ ============ ============
/(1)/ 3 months or less loans exclude Southeast Kansas Loans held for sale of $35,294. /(2)/ 3 months or less interest-bearing transaction accounts exclude Southeast Kansas interest bearing transaction accounts held for sale of $12,284. /(3)/ 3 months or less savings and money market accounts exclude Southeast Kansas accounts held for sale of $9,832. /(4)/ 3 months or less certificates of deposit exclude Southeast Kansas certificate of deposits held for sale of $22,317. /(5)/ Adjusted for the impact of the swap agreements. The Company made certain assumptions in preparing the table above. These assumptions included: loans will repay at historic repayment rates; interest-bearing demand accounts and savings accounts are interest sensitive due to immediate repricing of remaining balance for each period presented; 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. As indicated in the preceding table, the Company was asset sensitive on a cumulative basis for all periods except the 3 to 12 month period at December 31, 2002 based on contractual maturities. In this regard, a decrease in the general level of interest rates would generally have a negative effect on the Company's net interest income as the repricing of the larger volume of interest sensitive assets would create a larger reduction in interest income as compared to the reduction in interest expense created by the repricing of the smaller volume of interest sensitive liabilities. Likewise, an increase in the general level of interest rates would have a positive effect on net interest income. 15 As a policy, the Company focuses more attention to the cumulative GAP ratios than any specific periods ratios since the cumulative GAP takes into account the repricing nature of the assets and liabilities for a specific period plus all previous periods which would have been affected by interest rate movements. The Company also applies positive and negative interest rate "shocks" to a static balance sheet using its asset/liability management software. This analysis helps measure interest rate sensitivity against certain policy limits. NONINTEREST INCOME The following table depicts the annual changes in various noninterest income categories:
December 31, December 31, ---------------------------------------- ---------------------------------------- 2002 versus 2001 2001 versus 2000 ---------------------------------------- ---------------------------------------- 2002 2001 Change 2001 2000 Change ----------- ----------- ----------- ----------- ----------- ----------- Trust and financial advisory income $ 2,353,927 $ 1,426,078 $ 927,849 $ 1,426,078 $ 851,829 $ 574,249 Gains on sale of mortgage loans 1,707,166 1,238,441 468,725 1,238,441 503,702 734,739 Recovery/income (loss) from Merchant Banc investments 88,889 (5,716,138) 5,805,027 (5,716,138) 270,181 (5,986,319) Gain on sale of securities - 74,658 (74,658) 74,658 - 74,658 Service charges on deposit accounts 1,771,417 1,298,611 472,806 1,298,611 1,196,326 102,285 Other service charges and fee income 384,592 390,790 (6,198) 390,790 457,563 (66,773) ----------- ----------- ----------- ----------- ----------- ----------- Total noninterest income (loss) $ 6,305,991 $(1,287,560) $ 7,593,551 $(1,287,560) $ 3,279,601 $(4,567,161) =========== =========== =========== =========== =========== ===========
Total noninterest income (loss) was $6,305,991 in 2002, representing a $7,593,551 increase from 2001. Total noninterest (loss) income was $(1,287,560) in 2001, representing a $4,567,161 decrease from 2000. The key to these differences is in understanding the trends associated with each income category. The $927,849 increase in trust and financial advisory fees to $2,353,927 during 2002 and the $574,249 increase in fees to $1,426,078 during 2001 was the result of increased transaction based fees and assets under management at Enterprise Trust. The increase in the gains on sale of mortgage loans was due to changes in the interest rate environment during 2002, 2001, and 2000. The $468,725 increase in the gains on the sale of mortgage loans during 2002 to $1,707,166, and the $734,739 increase during 2001 to $1,238,441 as compared to $503,702 during 2000 were due to a dramatic decrease in interest rates during 2002 and 2001. This decrease in interest rates spurred residential mortgage loan refinancing and an increase in mortgage loans sold. Approximately 65% of the mortgage gains during 2002 and 2001 were the result of refinanced loans, while refinancing of mortgage loans account for less than 25% of the mortgage gains in 2000. The Company generally sells its mortgage loans and the related servicing rights to various third party investors shortly after the loans close. Recovery/income (loss) from Merchant Banc investments was $88,889, $(5,716,138) and $270,181 during 2002, 2001 and 2000, respectively. Given the nature of merchant banking investments, the income or loss can be volatile. The increase during 2002 was a result of a $88,889 reimbursement from a participant guarantor for a line of credit guaranteed by the Company for a Merchant Banc investment, which the Company had previously written off in full. The significant increase in losses during 2001 was due to several factors. First, the Company recognized $3,800,000 of losses related to its investment in, and guarantees to, a Midwest manufacturing company that supplies certain products primarily to the automotive industry. Second, the Company wrote off its minority investment in, and a related receivable from, Fund I at December 31, 2001 totaling approximately $800,000. Third, the Company wrote off its minority investment in, and a receivable from, EMB LLC of approximately $1,000,000 at year-end. These writeoffs were due to a lack of underlying cashflow from the various investments to support the asset value. Finally, the Company has historically recorded its share of the income or loss recorded by EMB LLC and Fund I in accordance with the equity method of accounting. In 2001, both investments had operating losses for which the Company recorded approximately $117,000 in losses. 16 Gains on the sale of investment securities were $0 for 2002, $74,658 for 2001, and $0 for 2000. The Company sold several investment securities during 2001 for liquidity purposes. Service charges on deposit accounts increased $472,806 to $1,771,417 during 2002 from $1,298,611 during 2001. Service charges on deposit accounts increased $102,285 to $1,298,611 during 2001 from $1,196,326 during 2000. The increases during 2002 and 2001 were the result of a decrease in the earnings credit rate on business accounts during the declining interest rate environment and an increase in deposit balances and accounts outstanding. NONINTEREST EXPENSE The following table depicts changes in noninterest expense in the above mentioned operations:
December 31, December 31, ---------------------------------------- ---------------------------------------- 2002 verses 2001 2001 verses 2000 ---------------------------------------- ---------------------------------------- 2002 2001 Change 2001 2000 Change ------------ ------------ ------------ ------------ ------------ ------------ Employee compensation and benefits $ 16,864,830 $ 15,802,893 $ 1,061,937 $ 15,802,893 $ 13,212,572 $ 2,590,321 Occupancy 1,900,812 1,677,965 222,847 1,677,965 1,557,082 120,883 Furniture, equipment and data processing 2,013,531 2,173,548 (160,017) 2,173,548 1,807,080 366,468 Amortization of goodwill - 190,567 (190,567) 190,567 190,567 - Correspondent bank charges 353,197 364,379 (11,182) 364,379 159,327 205,052 Professional, legal and consulting 1,182,659 869,603 313,056 869,603 791,583 78,020 Losses and settlement 1,371,361 26,551 1,344,810 26,551 2,747 23,804 Postage, courier and armored car 692,903 617,934 74,969 617,934 467,938 149,996 Meals, entertainment and travel 618,749 781,911 (163,162) 781,911 849,342 (67,431) Stationary and office supplies 414,624 471,864 (57,240) 471,864 389,673 82,191 Communications 339,492 366,334 (26,842) 366,334 303,504 62,830 Marketing and public relations 202,707 259,789 (57,082) 259,789 345,320 (85,531) FDIC and other insurance 424,299 233,465 190,834 233,465 310,771 (77,306) Other 1,924,757 1,740,080 184,677 1,740,080 1,874,108 (134,028) ------------ ------------ ------------ ------------ ------------ ------------ Total noninterest expense $ 28,303,921 $ 25,576,883 $ 2,727,038 $ 25,576,883 $ 22,261,614 $ 3,315,269 ============ ============ ============ ============ ============ ============
Total noninterest expense was $28,303,921 in 2002 representing a $2,727,038, or 11%, increase from 2001. This variance was due to increased employee compensation, occupancy costs, professional fees, insurance expenses and losses and settlement offset by declines in various discretionary expense categories, reductions in equipment and data processing costs, and the elimination of goodwill amortization due to implementation of a new goodwill accounting standard in 2002. Employee compensation and benefits increased $1,061,937 in 2002 as compared to 2001. Approximately $378,000 of this increase was related to higher commission payouts in the Financial Advisory area of Trust and the Mortgage department of the Bank. Another $404,000 of this increase was due to increased payouts under the Company's incentive bonus program and 401K match benefit as the Company exceeded budgeted performance for the year. The remaining variance in this category was attributable to annual merit increases for personnel and higher compensation associated with new middle and senior management hired during 2002. Offsetting some of these costs was an overall reduction in staffing levels required as there were 20 fewer full-time equivalent employees at the end of 2002 versus 2001. Occupancy expense increased $222,847 in 2002 as compared to 2001. About half of this increase was due to remodeling and construction in the prior year. The Clayton location acquired additional space for the corporate and Trust offices and remodeled the existing space, both in late 2001. In addition, the Company opened a new banking facility in the Country Club Plaza in Kansas City, Missouri during the fourth quarter of 2001. Most of the remaining increase in occupancy expenses was due to scheduled rent increases on various Company facilities. Professional, legal and consulting expenses increased $313,056 during 2002 due to work on various special matters including Merchant Banc recovery efforts, financial reporting and accounting issues, legal review on new laws and certain contracts, and implementation of certain tax strategies, among other items. 17 The Bank recognized $25,000 in fraud losses during the first quarter of 2002, net of recoveries. In accordance with SFAS No. 5, Accounting for Contingencies, the Company recognized $1,300,000 in expense related to settlement of a dispute with another financial institution pursuant to an agreement signed in February of 2003. The precise cost of this settlement is subject to certain contingencies over an eighteen month period, but in no case will exceed $1,300,000. The FDIC and other insurance expenses increased $190,834 in 2002 as a result of expected increases in premiums on the renewal of various insurance policies, along with increases in certain insurance coverages. Declines in certain discretionary expense categories like 1) meals, entertainment and travel, 2) stationary and office supplies, and 3) marketing and public relations were due to a concerted effort by management. The $160,017 decrease in furniture, equipment and data processing along with the $26,842 decrease in communications expense was the result of 1) savings from information technology and communications upgrades in 2001, and 2) a $120,000 write-off of the existing phone system in the prior year. The ratio of noninterest expense to average assets for 2002 was 3.45%, or 3.29% adjusting for the one time $1,300,000 expense related to the settlement, verses 3.36% and higher levels in prior years. Management is focused on lowering this ratio in future years through improved employee productivity and better expense controls. Total noninterest expense was $25,576,883 in 2001 representing a $3,315,269, or 15%, increase from 2000. The increase in noninterest expense was primarily due to 1) the hiring of additional business development officers, staff and senior management; 2) increased commission-based activity in Enterprise Trust and mortgage; 3) costs related to information technology and communication upgrades; and 4) normal increases associated with continued growth. Additional business development officers were hired at all of the business units except for Southeast Kansas and additional capacity was added in the Company's operations center to handle growth in volumes. The business development officers contributed to the strong loan and deposit growth experienced in 2001 and 2000. Throughout this two-year period, the Company also added senior management to strengthen the skills and depth of the existing management team. Management personnel added during the last two years include the following: President of Enterprise Bank Unit President in Overland Park Senior Lender for the Company Chief Financial Officer for the Company President of Enterprise Trust- Fiduciary side Most of these additions along with the business development officers and staff were added during 2000, so the full year impact of these positions accounted for most of the $2.6 million increase in salary and employee benefit expenses. Also contributing to the increase in salaries expense are annual merit increases and promotional increases which approximate $500,000. The financial advisory division of Enterprise Trust provides a commission-based compensation program to its producers. With the significant increases in financial planning fees, commissions related to this activity increased approximately $275,000. The Company expanded its computer and data processing infrastructure for the additional Kansas locations and communication between the regions, which increased expenses. In February 2001, the Company completed a computer system conversion to bring the Kansas banks on the same core processing system utilized by the Company. The computer conversion, including fees to software vendors and training, increased noninterest expenses by approximately $100,000 during 2001. The Company also upgraded its telephone and voicemail systems during 2001. The upgrade allows direct connections between the Company's multiple locations and expanded capacity for future growth. This upgrade required the Company to write off the old phone systems which increased expenses by $120,000 during 2001. During 2000, the Company expensed approximately $496,386 in legal, accounting, travel and other costs related to the merger completed in June 2000. Other noninterest expense increased $495,930, or 10%, after adjusting for the merger related expenses during 2000. This increase in other noninterest expenses is related to growth of the Company and is in line with previous increases. 18 INCOME TAXES Income tax expense was $1,613,737, $1,241,944, and $3,208,450, for 2002, 2001, and 2000, respectively. The effective tax rates were 24%, N/A, and 38% for 2002, 2001, and 2000, respectively. In 2001, a valuation allowance was established in the amount of $1,041,080 related to capital losses on certain merchant banking investments. As of December 31, 2001, the Company had determined it is more likely than not that certain of the deferred tax assets related to the capital losses will not be realized. This adjustment resulted in income tax expense for 2001 in spite of a pre-tax loss. Due to the availability of certain tax planning strategies in the fourth quarter of 2002, the Company reversed $800,000 of the valuation allowance recorded in 2001. FOURTH QUARTER RESULTS The Company earned $1,347,000 in net income for the fourth quarter ended December 31, 2002 versus a net loss of $5,876,000 in the same period in 2001. This increase was due to several factors. First, net interest income in the fourth quarter of 2002 increased $1,033,000 from the fourth quarter of 2001. This increase in net interest income was the result of a $1,545,000 decrease in interest expense offset slightly by a $512,000 decrease in interest income. The Company's assets and liabilities repriced at a lower rates as a result of the drastic reductions in the prime and other market rates during 2002 and 2001. Second, the provision for loan losses was $491,000 in the fourth quarter of 2002 versus $2,460,000 in 2001. The decrease of $1,969,000 is due primarily to fewer loan losses as compared to 2001. Third, noninterest income (loss) was $1,860,000 in 2002 versus $(4,443,000) in 2001, an increase of $6,303,000. The loss in noninterest income was caused by non-recurring losses on Merchant Banc investments of $5,675,000. Fourth, noninterest expense was $8,580,000 in 2002 versus $6,834,000 in 2001. This increase of $1,746,000 is due primarily to the recognition of $1,300,000 in expense related to a settlement and a $471,000 increase in salaries, payroll taxes, and benefits offset by a $196,000 decrease in furniture equipment, data processing expenses and goodwill amortization. Excluding the $1,300,000 settlement expense, other noninterest expense increased $446,000 or 7% during 2002 as compared to 2001. Finally, income tax benefit was $921,000 in 2001 versus $585,000 in 2002. The income tax benefit was the result of the capital losses on Merchant Banc investments discussed above. As of December 31, 2001, the Company had determined it is more likely than not that certain of the deferred tax assets related to the capital losses will not be realized and established a valuation allowance. This adjustment resulted in income tax expense for 2001 in spite of a pre-tax loss. During 2002, in conjunction with the pending sale of the Southeast Kansas branches, the Company quantified the amount of gain of the appropriate character which could be utilized to offset losses recorded in 2001 on the Merchant Banc investments. Accordingly, in 2002, the Company reversed $800,000 of the valuation allowance. The Company had $5,876,000 in net loss for the fourth quarter ended December 31, 2001 versus net income of $1,495,000 in the same period in 2000. This decline was due to several factors. First, net interest income in the fourth quarter of 2001 declined $706,000 from the fourth quarter of 2000. While earning assets were higher in 2001, the net interest rate margin earned on those assets was significantly less. The drastic reductions in the prime rate during 2001 caused the loan portfolio to reprice faster than the core deposits funding those loans. Second, the provision for loan losses was $2,460,000 in the fourth quarter of 2001 versus $280,000 in 2000. The increase of $2,180,000 is due to a $2,270,000 charge-off on a loan relationship at December 31, 2001 and increased risk in the loan portfolio evidenced by higher levels of non-performing assets and a weaker economic environment. Third, noninterest (loss) income was $(4,443,000) in 2001 versus $1,029,000 in 2000, a decrease of $5,472,000. The decrease in non-interest income was caused by non-recurring losses on Merchant Banc investments of $5,675,000 versus income from those same investments of $162,000 in 2000, a $5,837,000 decline. Offsetting this decline were increases in gains on the sale of mortgage loans of $226,000 and trust and financial advisory income of $186,000. 19 Finally, noninterest expense was $6,834,000 in 2001 versus $5,990,000 in 2000. This increase of $844,000 is due primarily to a $375,000 increase in salaries, a $153,000 increase in furniture and equipment expense and a $200,000 increase in legal and professional expenses. FINANCIAL CONDITION Total assets at December 31, 2002 were $877 million, an increase of $82 million, or 10%, over total assets of $795 million at December 31, 2001. Loans were $680 million, an increase of $77 million, or 13%, over total loans of $603 million at December 31, 2001. The increase in loans is attributed, in part, to the success of the Company's relationship officers efforts. Federal funds sold, interest-bearing deposits and investment securities were $100 million, an increase of $2 million, or 2%, from a comparable balance of $98 million at December 31, 2001. Total deposits at December 31, 2002 were $716 million, an increase of $60 million, or 9%, over total deposits of $656 million at December 31, 2001. Most of the deposit growth occurred in demand, money market deposits and certificates of deposit $100,000 and over. Demand deposits grew $36 million, or 30%, during 2002. This increase is the result of an increase in the number of customers, and an increase in the required balances for deposit accounts to offset the decrease in the earnings credit rate for activity based service charges. Money market deposits grew $37 million, or 12%, during 2002. Growth in transaction and money market deposit accounts is attributed primarily to direct calling efforts of relationship officers. Certificates of deposits decreased $13 million, or 8%, during 2002 as customers chose alternative deposit types upon renewal. In addition, the Bank obtained two $10 million brokered certificates of deposit and let approximately $30 million of wholesale network CD's mature without renewing them. Total shareholders' equity at December 31, 2002 was $59 million, an increase of $7 million compared to shareholders' equity of $52 million at December 31, 2001. The increase in equity is primarily due to net income of $5.0 million for the year ended December 31, 2002, the exercise of incentive stock options, and changes in accumulated other comprehensive income offset by dividends paid to shareholders. Total assets at December 31, 2001 were $795 million, an increase of $84 million, or 12%, over total assets of $711 million at December 31, 2000. Loans were $603 million, an increase of $85 million, or 16%, over total loans of $517 million at December 31, 2000. The increase in loans is attributed, in part, to the success of the Company's relationship officers efforts. Federal funds sold, interest-bearing deposits and investment securities were $98 million, a decrease of $14 million, or 13%, from a comparable balance of $112 million at December 31, 2000. The decrease resulted primarily from the shift in earning assets from short-term investments to loans during 2001. Total deposits at December 31, 2001 were $656 million, an increase of $80 million, or 14%, over total deposits of $576 million at December 31, 2000. Most of the deposit growth occurred in demand, interest bearing transaction, and money market deposits. Demand deposits grew $19 million, or 19%, during 2001. Interest bearing transaction deposits grew $11 million, or 22%, during 2001. Money market deposits grew $37 million, or 14%, during 2001. Growth in transaction and money market deposit accounts is attributed primarily to direct calling efforts of relationship officers and $18 million in deposit accounts referred by Moneta. Certificates of deposits increased $12 million, or 8%, during 2001. Total shareholders' equity at December 31, 2001 was $52 million, a decrease of $1 million compared to shareholders' equity of $53 million at December 31, 2000. The decrease in equity was primarily due to a net loss of $2.5 million for the year ended December 31, 2001 and dividends paid to shareholders, offset by the exercise of incentive stock options, and changes in accumulated other comprehensive income. 20 LOAN PORTFOLIO Loans, as a group, are the largest asset and the primary source of interest income for the Company. Diversification among different categories of loans reduces the risks associated with any single type of loan. The following table sets forth the composition of the Company's loan portfolio by type of loans at the dates indicated:
December 31, --------------------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------------- ------------------- ------------------- ------------------- ------------------ Percent Percent Percent Percent Percent of of of of of Total Total Total Total Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans --------- ------- --------- ------- --------- ------- --------- ------- --------- ------- (Dollars in Thousands) Commercial and industrial $ 167,842 24.69% $ 160,218 26.58% $ 153,357 29.68% $ 137,815 30.94% $ 116,467 36.12% Real estate: Commercial 187,044 27.51 167,378 27.77 134,133 25.95 103,471 23.23 46,351 14.38 Construction 139,319 20.49 123,788 20.54 128,779 24.92 119,251 26.77 78,112 24.23 Residential 189,613 27.89 162,100 26.89 114,212 22.10 95,916 21.53 90,762 28.15 Consumer and other 31,275 4.60 28,569 4.74 26,312 5.09 24,438 5.49 23,235 7.21 Less: portfolio loans held for sale (35,294) (5.18) (39,307) (6.52) (39,983) (7.74) (35,443) (7.96) (32,533) (10.09) --------- ------- --------- ------- --------- ------- --------- ------- --------- ------- Total loans $ 679,799 100.00% $ 602,746 100.00% $ 516,810 100.00% $ 445,448 100.00% $ 322,394 100.00% ========= ======= ========= ======= ========= ======= ========= ======= ========= =======
In the St. Louis and Kansas City metropolitan markets, the Bank grants commercial, residential and consumer loans primarily to small to medium sized businesses and their owners. The Southeast Kansas loans are excluded from the portfolio as loans held for sale. Overall, 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 secured by real estate. As of December 31, 2002, $516 million in loans, or 72% of the loan portfolio, involved real estate as part or all of the collateral package, as compared to $453 million, or 71%, and $377 million, or 68%, in 2001 and 2000, respectively. As of December 31, 2002, $215 million, or 42%, of the real estate secured loans for 2002, were personal and business loans and loans on owner-occupied properties as compared to $199 million, or 44%, and $164 million, or 43%, for 2002 and 2001, respectively. When evaluating the appropriateness of the allowance for loan losses, these loans are evaluated based on commercial considerations such as the financial condition, cash flow and income of the borrower as well as the value of all collateral securing the loans, including the market value of any real estate securing the loan. 21 The following table sets forth the interest rate sensitivity of the loan portfolio at December 31, 2002:
Loans Maturing or Repricing ------------------------------------------------------------------- After One In One Through After Year or Less Five Years Five Years Total ---------------- -------------- ----------- -------------- (Dollars in Thousands) FIXED RATE LOANS /(1)/ Commercial and industrial $ 19,265 $ 23,821 $ 1,688 $ 44,774 Real estate: Commercial 16,196 51,720 5,683 73,599 Construction 12,147 12,273 1,706 26,126 Residential 11,597 34,516 7,162 53,275 Consumer and other 5,392 4,691 4,498 14,581 ---------------- -------------- ----------- -------------- Total $ 64,597 $ 127,021 $ 20,737 $ 212,355 ================ ============== =========== ============== Less: portfolio loans held for sale (23,427) - - (23,427) ---------------- -------------- ----------- -------------- Net Loans 41,170 127,021 20,737 188,928 ================ ============== =========== =============== VARIABLE RATE LOANS/(1)//(2)/ Commercial and industrial $ 123,068 $ - $ - $ 123,068 Real estate: Commercial 113,445 - - 113,445 Construction 113,193 - - 113,193 Residential 136,338 - - 136,338 Consumer and other 16,694 - - 16,694 ---------------- -------------- ----------- -------------- Total $ 502,738 $ - $ - $ 502,738 ================ ============= ========== ============== Less: portfolio loans held for sale (11,867) - - (11,867) ---------------- -------------- ----------- -------------- Net Loans 490,871 - - 490,871 ================ ============== =========== ============== TOTAL LOANS/(1)/ Commercial and industrial $ 142,333 $ 23,821 $ 1,688 $ 167,842 Real estate: Commercial 129,641 51,720 5,683 187,044 Construction 125,340 12,273 1,706 139,319 Residential 147,935 34,516 7,162 189,613 Consumer and other 22,086 4,691 4,498 31,275 ---------------- -------------- ----------- -------------- Total $ 567,335 $ 127,021 $ 20,737 $ 715,093 ================ ============== =========== ============== Less: portfolio loans held for sale (35,294) - - (35,294) ---------------- -------------- ----------- -------------- Net Loans 532,041 127,021 20,737 679,799 ================ ============== =========== ==============
/(1)/ Loan balances are shown net of unearned loan fees and loans held for sale. /(2)/ This table excludes the impact of swap agreements. ASSET QUALITY The provision for loan losses was $2,250,578, $3,230,000, and $1,042,534 in 2002, 2001, and 2000, respectively. The provision for loan losses can vary each year depending on net charge-offs, loan volumes, and the necessary level of the allowance for loan losses as determined by management. The Company has charged off a total of $5,595,000 in loans from January 1, 1998 through December 31, 2002. Total recoveries for the same period were $644,000, resulting in a five-year net charge-off experience of $4,951,000, or 0.19% per year of average loans for the same period. 22 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:
December 31, ------------------------------------------------------------------ 2002 2001 2000 1999 1998 ---------- ---------- ---------- ---------- ---------- (Dollars in Thousands) Allowance at beginning of period $ 7,296 $ 7,097 $ 6,758 $ 4,430 $ 3,170 ---------- ---------- ---------- ---------- ---------- Loans charged off: Commercial and industrial 700 2,538 682 109 48 Real estate: Commercial 25 279 48 2 39 Construction - - - - - Residential 417 165 32 - - Consumer and other 104 170 26 135 76 ---------- ---------- ---------- ---------- ---------- Total loans charged off 1,246 3,152 788 246 163 ---------- ---------- ---------- ---------- ---------- Recoveries of loans previously charged off: Commercial and industrial 55 38 63 33 36 Real estate: Commercial 8 25 - 21 10 Construction - - - - - Residential 192 52 13 - - Consumer and other 44 6 8 24 16 ---------- ---------- ---------- ---------- ---------- Total recoveries of loans previously charged off 299 121 84 78 62 ---------- ---------- ---------- ---------- ---------- Net loans charged off 947 3,031 704 168 101 ---------- ---------- ---------- ---------- ---------- Provision charged to operations 2,251 3,230 1,043 2,496 1,361 ---------- ---------- ---------- ---------- ---------- Allowance at end of period $ 8,600 $ 7,296 $ 7,097 $ 6,758 $ 4,430 ========== ========== ========== ========== ========== Average loans $ 693,551 $ 613,539 $ 517,381 $ 429,408 $ 328,761 Total loans 679,799 602,747 516,810 445,448 322,394 Nonperforming loans 3,888 3,749 2,005 2,559 666 Net charge offs to average loans 0.14% 0.49% 0.14% 0.04% 0.03% Allowance for loan losses to loans 1.27 1.21 1.37 1.52 1.37 Allowance for loan losses to nonperforming loans 221% 195% 354% 265% 665%
The Company's credit management policies and procedures focus on identifying, measuring, and controlling credit exposure. These procedures employ a lender-initiated system of rating credits, which is ratified in the loan approval process and subsequently tested in internal loan reviews and regulatory bank examinations. The system requires rating all loans at the time they are made. Adversely rated credits, including loans requiring close monitoring, which would not normally be considered criticized credits by regulators, are included on a monthly loan watch list. Other loans are added whenever any adverse circumstance is detected which might affect the borrower's ability to meet the terms of the loan. This could be initiated by the delinquency of a scheduled loan payment, a deterioration in the borrower's financial condition identified in a review of periodic financial statements, a decrease in the value of the collateral securing the loan, or a change in the economic environment in which the borrower operates. Loans on the watch list require detailed loan status reports prepared by the responsible officer every three months, which are then discussed in formal meetings with the Senior Lending Officer and the Executive Loan Committee. Downgrades of loan risk ratings may be initiated by the responsible loan officer, internal loan review, or credit analyst department at any time. However, upgrades of risk ratings may only be made with the concurrence of the Executive Loan Committee generally at the time of the formal quarterly watch list review meetings. Each month, management prepares a detailed list of loans on the watch list and summaries of the entire loan portfolio categorized by risk rating. These are coupled with an analysis of changes in the risk profiles of the 23 portfolios, changes in past due and non-performing loans and changes in watch list and classified loans over time. In this manner, the overall increases or decreases in the levels of risk in the portfolios are monitored continually. Factors are applied to the loan portfolios for each category of loan risk to determine acceptable levels of allowance for loan losses. These factors are derived primarily from the actual loss experience. The calculated allowance for loan losses required for the portfolios are then compared to the actual allowance balances to determine the provision necessary to maintain the allowance for loan losses at an appropriate level. In addition, management exercises judgment in its analysis of determining the overall level of the allowance for loan losses. In its analysis, management considers the change in the portfolio, including growth and composition, and the economic conditions of the region in which the Company operates. Based on this quantitative and qualitative analysis, the allowance for loan losses is adjusted. Such adjustments are reflected in the consolidated statements of operations. The Company does not engage in foreign lending. Additionally, the Company does not have any concentrations of loans exceeding 10% of total loans which are not otherwise disclosed in the loan portfolio composition table. The Company does not have a material amount of interest-bearing assets which would have been included in non-accrual, past due or restructured loans if such assets were loans. Management believes the allowance for loan losses is adequate to absorb probable losses in the loan portfolio. While management uses available information to recognize loan losses, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses. Such agencies may require the Company to increase the allowance for loan losses based on their judgments and interpretations about information available to them at the time of their examinations. As of December 31, 2002, 2001, and 2000, the Company had 17, 19, and 12 impaired loans in the aggregate amounts of $3,887,945, $3,748,970, and $1,798,364, respectively, all of which are considered potential problem loans. The Company had foreclosed property in the amount of $125,000, $138,000, and $76,680 as of December 31, 2002, 2001, and 2000, respectively, which are considered nonperforming assets. Nonperforming assets increased from $3,887,000 at December 31, 2001 to $4,013,000 at December 31, 2002. The $126,000 increase in nonperforming assets was due primarily to a $500,000 restructured loan offset by a $294,000 decrease in nonaccrual loans. Non-performing assets increased from $2,082,000 at December 31, 2000 to $3,887,000 at December 31, 2001. The $1,805,000 increase in nonperforming assets was primarily due to a $1,243,000 restructured loan and a $708,000 increase in nonaccrual loans. The following table sets forth information concerning the Company's nonperforming assets including assets held for sale as of the dates indicated:
As of December 31, ----------------------------------------------------------------- 2002 2001 2000 1999 1998 ---------- ---------- ---------- ---------- ---------- (Dollars in Thousands) Nonaccrual loans $ 2,212 $ 2,506 $ 1,798 $ 2,485 $ 581 Loans past due 90 days or more and still accruing interest - - 207 74 85 Restructured loans 1,676 1,243 - - - ---------- ---------- ---------- ---------- ---------- Total nonperforming loans 3,888 3,749 2,005 2,559 666 Foreclosed real estate 125 138 77 396 806 ---------- ---------- ---------- ---------- ---------- Total nonperforming assets $ 4,013 $ 3,887 $ 2,082 $ 2,955 $ 1,472 ========== ========== ========== ========== ========== Total assets $ 876,787 $ 795,250 $ 710,938 $ 615,143 $ 488,066 Total loans, net of unearned loan fees 679,799 602,747 516,810 445,448 322,394 Total loans plus foreclosed property 679,924 602,885 516,887 445,844 323,200 Nonperforming loans to total loans 0.57% 0.62% 0.39% 0.57% 0.21% Nonperforming assets to total loans plus foreclosed property 0.59 0.64 0.40 0.66 0.46 Nonperforming assets to total assets 0.46 0.49 0.29 0.48 0.30
24 The Company's policy is to discontinue the accrual of interest on loans when principal or interest is due and has remained unpaid for 90 days or more, unless the Company is in the process of collecting the principal and interest due, and is fairly certain to collect all interest. The following table sets forth the allocation of the allowance for loan losses by loan category as an indication of the estimated risk of loss for each loan type. The unallocated portion of the allowance is intended to cover loss exposure related to potential problem loans for which no specific allowance has been estimated and for other losses in the loan portfolio deemed probable.
As of December 31, ----------------------------------------------------------------------------- 2002 2001 2000 ----------------------- ----------------------- ----------------------- Percent Percent Percent of of of Category Category Category Total Total Total Allowance Loans Allowance Loans Allowance Loans ---------- ---------- ---------- ---------- ---------- ---------- (Dollars in Thousands) Commercial and industrial $ 2,846 24.69% $ 2,366 26.58% $ 3,046 29.68% Real estate: Commercial 1,903 27.51 1,915 27.77 1,589 25.95 Construction 1,062 20.49 932 20.54 833 24.92 Residential 2,369 27.89 1,625 26.89 1,026 22.10 Consumer and other 244 4.60 198 4.74 312 5.09 Loans held for sale - (5.18) - (6.52) - (7.74) Not allocated 176 - 260 - 291 - ---------- ---------- ---------- ---------- ---------- ---------- Total $ 8,600 100.00% $ 7,296 100.00% $ 7,097 100.00% ========== ========== ========== ========== ========== ========== As of December 31, -------------------------------------------------- 1999 1998 ----------------------- ----------------------- Percent Percent of of Category Category Total Total Allowance Loans Allowance Loans ---------- ---------- ---------- ---------- (Dollars in Thousands) Commercial and industrial $ 2,801 30.94% $ 1,625 36.12% Real estate: Commercial 1,437 23.23 577 14.38 Construction 972 26.77 688 24.23 Residential 959 21.53 896 28.15 Consumer and other 364 5.49 235 7.21 Loans held for sale - (7.96) - (10.09) Not allocated 225 - 409 - ---------- ---------- ---------- ---------- Total $ 6,758 100.00% $ 4,430 100.00% ========== ========== ========== ==========
The above allocation by loan category does not mean that actual loan charge offs will be incurred in the categories indicated. The risk factors considered in determining the above allocation are the same as those used when determining the overall level of the allowance. INVESTMENT PORTFOLIO The table below sets forth the carrying value of investment securities held by the Company at the dates indicated:
December 31, -------------------------------------------------------------------------------- 2002 2001 2000 ------------------------ ------------------------ ------------------------ Percent Percent Percent of Total of Total of Total Amount Securities Amount Securities Amount Securities ---------- ---------- ---------- ---------- ---------- ---------- (Dollars in Thousands) U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 38,826 58.27% $ 33,161 71.98% $ 42,674 79.98% Municipal bonds - - 177 0.38 660 1.24 Mortgage-backed securities 25,812 38.74 11,091 24.08 7,474 14.01 Other securities 32 0.05 32 0.07 282 0.53 Capital stock of the Federal Reserve Bank and the Federal Home Loan Bank 1,961 2.94 1,607 3.49 2,263 4.24 ---------- ---------- ---------- ---------- ---------- ---------- $ 66,631 100.00% $ 46,068 100.00% $ 53,353 100.00% ========== ========== ========== ========== ========== ==========
As of December 31, 2002, debt securities with an amortized cost of $12,600 were classified as held to maturity securities and debt and equity securities with an amortized cost of $66,148,708 were classified as available for sale securities. The market valuation account for the available for sale securities was $469,848 to increase the recorded balance of such securities at December 31, 2002 to fair value on that date. The Company had no securities classified as trading at December 31, 2002. 25 As of December 31, 2001, debt securities with an amortized cost of $116,214 were classified as held to maturity securities and debt and equity securities with an amortized cost of $45,668,070 were classified as available for sale securities. The market valuation account for the available for sale securities was $284,072 to increase the recorded balance of such securities at December 31, 2001 to fair value on that date. The Company had no securities classified as trading at December 31, 2001. As of December 31, 2000, debt securities with an amortized cost of $521,280 were classified as held to maturity securities, and debt and equity securities with an amortized cost of $52,629,041 were classified as available for sale securities. The market valuation account for the available for sale securities was $202,842 to increase the recorded balance of such securities at December 31, 2000 to fair value on that date. The Company had no securities classified as trading at December 31, 2000. The following table summarizes maturity and yield information on the investment portfolio at December 31, 2002:
Carrying Value Yield (1) ------------------- ------------------ (Dollars in Thousands) U.S. Treasury securities and obligations of U.S. government corporations and agencies: 0 to 1 year $ 28,117 3.27% 1 to 5 years 10,709 2.85 5 to 10 years - - No stated maturity - - --------------- Total $ 38,826 3.15% =============== ============ Mortgage backed securities: 0 to 1 year $ 5,478 3.68% 1 to 5 years 18,562 3.61 5 to 10 years 1,772 5.12 No stated maturity - - --------------- Total 25,812 3.73% =============== ============ Other securities, including capital stock of the Federal Reserve Bank and the Federal Home Loan Bank 0 to 1 year $ - -% 1 to 5 years - - 5 to 10 years 32 8.75 No stated maturity 1,961 3.10 --------------- Total $ 1,993 3.19% =============== ============ Total 0 to 1 year $ 33,595 3.34% 1 to 5 years 29,271 3.33 5 to 10 years 1,804 5.18 10 years or more - - No stated maturity 1,961 3.10 --------------- Total $ 66,631 3.38% =============== ============
(1) Weighted average tax-equivalent yield 26 DEPOSITS The following table shows, for the periods indicated, the average annual amount and the average rate paid by type of deposit:
December 31, ------------------------------------------------------------------------------------------ 2002 2001 2000 ---------------------------- ---------------------------- --------------------------- (Dollars in Thousands) Average Interest Average Interest Average Interest Balance Expense Rate Balance Expense Rate Balance Expense Rate --------- -------- ---- --------- -------- ---- -------- -------- ---- Noninterest-bearing demand deposits $ 130,931 $ - -% $ 100,103 $ - -% $ 79,364 $ - -% Interest-bearing transaction accounts 62,104 269 0.43 53,846 555 1.03 48,781 823 1.69 Money market accounts 332,700 5,001 1.50 289,264 9,590 3.32 257,200 13,366 5.20 Savings accounts 8,571 84 0.98 7,706 157 2.04 7,178 185 2.58 Certificates of deposit 189,030 6,833 3.61 206,334 11,703 5.67 194,593 11,624 5.97 --------- -------- --------- -------- -------- -------- $ 723,336 $ 12,187 1.68% $ 657,253 $ 22,005 3.35% $587,116 $ 25,998 4.43% ========= ======== ==== ========= ======== ==== ======== ======== ====
Since inception, the Company has experienced rapid loan and deposit growth primarily due to aggressive direct calling efforts of relationship officers. Management has pursued closely-held businesses whose management desires a close working relationship with a locally-managed, full-service bank. Due to the relationships developed with these customers, management views large deposits from this source as a stable deposit base. Additionally, the Company belongs to a national network of time depositors (primarily credit unions) who place time deposits with the Company, typically in increments of $99,000. The Company used this source of deposits for over five years and considers it to be a stable source of deposits that allows the Company to acquire funds at a cost below its alternative cost of funds. There were $5 million at December 31, 2002, $30 million at December 31, 2001 and $45 million at December 31, 2000 in deposits from the national network. In May 2002, the Company obtained two $10 million brokered certificates of deposit that mature in two years. In the future the Bank expects to continue to use certificate of deposit sold to retail customers of regional and national brokerage firms (i.e. brokered certificate of deposit program) as they generally have had lower overall costs versus the national network. The following table sets forth the amount and maturity of certificates of deposit that had balances of more than $100,000 at December 31, 2002:
Remaining Maturity Amount ----------------------------------------- ---------- (Dollars in Thousands) Three months or less $ 26,461 Over three through six months 7,778 Over six through twelve months 25,308 Over twelve months 45,483 ---------- $ 105,030 ==========
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISK The Company's exposure to market risk is reviewed on a regular basis by its Asset/Liability Committee. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the interest rate risk while at the same time maximizing income. Management realizes that certain interest rate risks are inherent in our business and that the goal is to identify and minimize those risks. Tools used by management include the standard repricing or "GAP" report subject to different rate shock scenarios. At December 31, 2002, the rate shock scenario models indicated that annual net interest income would change by less than 9% should rates rise 100 basis points and 13% should rates fall 100 basis points from their current level over a one year period. The Bank has no market risk sensitive instruments held for trading purposes. 27 The following tables present the scheduled repricing of market risk sensitive instruments at December 31, 2002:
Beyond 5 Years or No Stated Year 1 Year 2 Year 3 Year 4 Year 5 Maturity Total ---------- ---------- ---------- ---------- ---------- ---------- ---------- (Dollars in thousands) Assets: Investment in debt and equity securities $ 33,595 $ 12,746 $ 10,192 $ 6,333 $ - $ 3,765 $ 66,631 Interest-bearing deposits 66 - - - - - 66 Federal funds sold 33,367 - - - - - 33,367 Loans /(1)//(4)/ 472,041 85,522 78,965 12,819 9,715 20,737 679,799 Loans held for sale 6,991 - - - - - 6,991 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total $ 546,060 $ 98,268 $ 89,157 $ 19,152 $ 9,715 $ 24,502 $ 786,854 ========== ========== ========== ========== ========== ========== ========== Liabilities: Savings, now, money market deposits/(2)/ $ 404,069 $ - $ - $ - $ - $ - $ 404,069 Certificates of deposit /(3)//(4)/ 108,797 34,964 9,989 2,668 230 - 156,648 Guaranteed preferred beneficial interests in subordinated debentures - - - - - 15,000 15,000 Other borrowed funds 17,209 3,400 3,675 1,525 1,250 4,764 31,823 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total $ 530,075 $ 38,364 $ 13,664 $ 4,193 $ 1,480 $ 19,764 $ 607,540 ========== ========== ========== ========== ========== ========== ==========
Average Interest Estimated Total Rate Fair Value ----------- ----------- ----------- Assets: Investment in debt and equity securities $ 66,631 3.54% 66,631 Interest-bearing deposits 66 2.13 66 Federal funds sold 33,367 1.44 33,367 Loans 679,799 6.24 692,582 Loans held for sale 6,991 6,991 ----------- ----------- Total $ 786,854 $ 799,637 =========== =========== Liabilities: Savings, now, money market deposits $ 404,069 1.32% $ 404,069 Certificates of deposit 156,648 3.61 160,921 Guaranteed preferred beneficial interests in subordinated debentures 15,000 8.56 15,119 Other borrowed funds 31,823 4.22 32,258 ----------- ----------- Total $ 607,540 $ 612,367 =========== ===========
/(1)/ Year 1 loans exclude loans held for sale of $35,294. /(2)/ Year 1 savings, now, money market deposits exclude deposits held for sale of $22,116. /(3)/ Year 1 CD's exclude CD's held for sale of $22,317. /(4)/ Adjusted for impact of swap agreements. 28 CAPITAL ADEQUACY 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 generally 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 surplus 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 guaranteed beneficial interest on subordinated debentures. The following table summarizes the Company's risk-based capital and leverage ratios at the dates indicated: December 31, ------------ 2002 2001 2000 -------- -------- -------- Tier 1 capital to risk weighted assets 9.75% 9.29% 10.60% Total capital to risk weighted assets 10.95 10.41 11.79 Leverage ratio (Tier 1 capital to average assets) 7.93 8.18 9.41 Tangible capital to tangible assets 8.97 8.56 9.75 At December 31, 2002, the Company's Tier 1 capital was $70 million compared to $61 million and $62 million at December 31, 2001 and 2000, respectively. At December 31, 2002, the Company's total capital was $78 million compared to $68 million and $69 million at December 31, 2001 and 2000, respectively. EFFECT OF NEW ACCOUNTING STANDARDS On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. At the date of adoption, the company had unamortized goodwill of $2,087,537, which was subject to the transition provisions of SFAS No. 142. The goodwill intangible asset is reflected in the Enterprise Banking segment. Under SFAS No. 142, goodwill will no longer be amortized, but instead will be tested annually for impairment following existing methods of measuring and recording impairment losses. The Company completed the transitional goodwill impairment test required under SFAS No. 142, to determine the potential impact, if any, on the consolidated financial statements. The results of the transitional goodwill impairment testing did not identify any goodwill impairment losses. Following is a reconciliation of reported net income to net income adjusted to reflect the adoption of SFAS No. 142, as if it had been implemented on January 1, 2000: 2002 2001 2000 ----------- ------------ ----------- Net income: Reported net income $ 5,001,480 $ (2,534,691) $ 5,201,446 Add back - goodwill amortization - 190,567 190,567 ----------- ------------ ----------- Adjusted net income $ 5,001,480 $ (2,344,124) $ 5,392,013 =========== ============ =========== Basic earnings per share: Reported net income $ 0.53 $ (0.28) $ 0.58 Add back - goodwill amortization - 0.03 0.02 ----------- ------------ ----------- Adjusted net income $ 0.53 $ (0.25) $ 0.60 =========== ============ =========== Diluted earnings per share: Reported net income $ 0.52 $ (0.28) $ 0.54 Add back - goodwill amortization - 0.03 0.02 ----------- ------------ ----------- Adjusted net income $ 0.52 $ (0.25) $ 0.56 =========== ============ =========== 29 In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, it retains many of the fundamental provisions of that statement. SFAS No. 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transaction, for the disposal of a segment of a business. However, it retains the requirement in Opinion No. 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and interim financial periods within those fiscal years. The adoption of SFAS No 144 was considered in the accounting and disclosure of the Company's sale of the Southeast Kansas branches. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 amends existing guidance on reporting gains and losses on the extinguishment of debt to prohibit the classification of the gain or loss as extraordinary, as the use of such extinguishments have become part of the risk management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to require sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. The provisions of the Statement related to the related to Statement No. 13 were effective for transactions occurring after May 14, 2002, with early application encouraged. The adoption of SFAS No. 145 is not expected to have material effect on the Company's consolidated financial statements. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFAS No. 146 is not expected to have a material effect on the Company's consolidated financial statements. In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial Institutions. This Statement brings all business combinations involving financial institutions, except mutuals, into the scope of SFAS No. 141, Business Combinations. SFAS No. 147 requires that all acquisitions of financial institutions that meet the definition of a business, including acquisitions of part of a financial institution that meet the definition of a business, must be accounted for in accordance with SFAS No. 141 and the related intangibles accounted for in accordance with SFAS No. 142. SFAS No. 147 removes such acquisitions from the scope of SFAS No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, which was adopted in February 1983 to address financial institutions acquisitions during a period when many of such acquisitions involved "troubled" institutions. SFAS No. 147 also amends SFAS No. 144 to include in its scope long-term customer-relationship intangible assets of financial institutions. SFAS No. 147 is generally effective immediately and provides guidance with respect to amortization and impairment of intangibles recognized in connection with acquisitions previously within the scope of SFAS No. 72. The adoption of the Statement did not have a material effect on the Company's consolidated financial statements. In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on the Company's consolidated financial statements. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 31, 2002. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim 30 financial statements. Certain of the disclosures modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to these consolidated financial statements. EFFECT OF INFLATION Persistent high rates of inflation can have a significant effect on the reported financial condition and results of operations of all industries. However, the asset and liability structure of commercial banks is substantially different from that of an industrial company in that virtually all assets and liabilities of commercial banks are monetary in nature. Accordingly, changes in interest rates may have a significant impact on a commercial bank's performance. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. Inflation does have an impact on the growth of total assets in the banking industry, often resulting in a need to increase equity capital at higher than normal rates to maintain an appropriate equity-to-assets ratio. SUPERVISION AND REGULATION The Company and the Bank are subject to state and federal banking laws and regulations which impose specific requirements or restrictions on and provide for general regulatory oversight with respect to virtually all aspects of operations. These laws and regulations are generally intended to protect depositors, not shareholders. To the extent that the following summary describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable laws or regulations may have a material effect on the business and prospects of the Company. The numerous regulations and policies promulgated by the regulatory authorities create a difficult and ever-changing atmosphere in which to operate. The Company and the Bank commit substantial resources in order to comply with these statutes, regulations and policies. The Company is unable to predict the nature or the extent of the effect on its business and earnings that fiscal or monetary policies, economic control, or new federal or state legislation may have in the future. FEDERAL FINANCIAL HOLDING AND BANK HOLDING COMPANY REGULATION The Company is a bank holding company under the definition of the Bank Holding Company Act of 1956 ("BHCA") and has elected to become a financial holding company ("FHC"), as provided for under the Gramm-Leach-Bliley Act ("GLBA") which amended the BHCA. As both a bank holding company and an FHC, the Company is subject to periodic examination by the Federal Reserve and is required to file periodic reports of its operations and such additional information as the Federal Reserve may require. In order to become an FHC, the Company must have been considered well managed and well capitalized by the Federal Reserve and have at least a "satisfactory" rating under the Community Reinvestment Act. Going forward, the Company continues to be considered well managed and well capitalized and it has at least a "satisfactory" rating under the Community Reinvestment Act. It must maintain these qualifications in order to remain an FHC. FHC Activities. GLBA establishes a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other financial service providers through the creation of FHC's. GLBA permits an FHC and its affiliates, with certain restrictions, to engage in activities that are considered "financial in nature" or incidental or complementary to such activities. This is a much broader spectrum of permissible activities than those in which a bank holding company may engage. Other than as provided by GLBA, the Company's and the Bank's activities are limited to banking, managing or controlling banks, furnishing services to or performing services for its subsidiaries, or engaging in any other activity that the Federal Reserve determines to be closely related to banking. In general, the expanded powers under GLBA are reserved to FHC's and banks, where all depository institutions affiliated with them are well capitalized and well managed based on applicable banking regulations and meet specified Community Reinvestment Act ratings. GLBA authorizes the Federal Reserve and the United States Treasury, in cooperation with one another, to determine what activities, in addition to those discussed previously, are permissible as financial in nature. Maintenance of activities which are financial in nature will require FHC's and banks to continue to satisfy applicable well capitalized and well managed requirements. Bank holding companies which do not qualify for FHC status are limited to non-banking activities deemed closely related to banking prior to adoption of GLBA. In addition to the creation of FHC's, GLBA establishes a scheme of "functional regulation" of financial services businesses which is intended to reflect the primacy of regulation over activities and entities by regulators routinely responsible for such activities and entities and with the appropriate expertise in the area of regulation. This applies 31 both in allocating responsibility for supervising different companies within an FHC and in supervising different activities within the same company. Investments, Control and Activities. 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. In addition, and subject to certain exceptions, the BHCA and the Change in Bank Control Act, together with regulations thereunder, require Federal Reserve approval (or, depending on the circumstances, no notice of disapproval) prior to any person or company acquiring "control" of a bank holding company (such as the Company). Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Under Federal Reserve regulations applicable to the Company, control will be refutably presumed to exist if a person acquires at least 10% of the outstanding shares of any class of voting securities registered under the Securities and Exchange Act of 1934. The regulations provide a procedure for challenge of the rebuttable control presumption. Under the BHCA, the Company is generally prohibited from engaging in, or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in nonbanking activities, unless the Federal Reserve, by order or regulation, has found those activities to be "financial in nature" or incidental or complementary to such activities, which includes those activities so closely related to banking or managing or controlling banks as to be a related activity. Activities which are expressly considered financial in nature include, among other things, securities and insurance underwriting and agency, investment management and merchant banking. Some of the activities that the Federal Reserve has determined by regulation to be proper incidents to the business of banking include investment in and management of Small Business Investment Companies, making or servicing loans and certain types of leases, engaging in certain insurance and brokerage activities, performing data processing services, acting in certain circumstances as a fiduciary or investment or financial advisor, owning savings associations, and making investments in limited projects designed primarily to promote community welfare. Privacy Regulations. GLBA also imposes restrictions on the Company and the Bank regarding the sharing of customer non-public personal information with non-affiliated third parties unless the customer has had an opportunity to opt out of the disclosure. GLBA also imposes periodic disclosure requirements concerning the Company and the Bank policies and practices regarding data sharing with affiliated and non-affiliated parties. USA Patriot Act: The terrorist attacks in September, 2001 impacted the financial services industry and led to federal legislation that addresses certain related issues involving financial institutions. 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. Source of Strength; Cross-Guarantee. In accordance with Federal Reserve policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances in which the Company might not otherwise do so. Under the BHCA, the Federal Reserve may require a bank holding company (or an FHC) to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve's determination that such activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of any bank or nonbank subsidiary if the agency determines that divestiture may aid the depository institution's financial condition. 32 BANK REGULATION General. As of December 31, 2002, the Company is the holding company for Enterprise Bank, a Missouri trust company. The Bank is not a member of the Federal Reserve system. The Missouri Division of Finance and the FDIC are primary regulators for the Bank. These regulatory authorities regulate or monitor all areas of the Bank's operations, including security devices and procedures, adequacy of capitalization and loss reserves, loans, investments, borrowings, deposits, mergers, issuance of securities, payment of dividends, interest rates payable on deposits, interest rates or fees chargeable on loans, establishment of branches, corporate reorganizations, maintenance of books and records, and adequacy of staff training to carry on safe lending and deposit gathering practices. The Bank must maintain certain capital ratios and is subject to limitations on aggregate investments in real estate, bank premises, and furniture and fixtures. Transactions With Affiliates and Insiders. The Bank is subject to the provisions of Section 23A of the Federal Reserve Act, which place 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. The Bank is also subject to the provisions of Section 23B of the Federal Reserve Act that, among other things, prohibit 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. The Bank is subject to certain restrictions on extensions of credit to executive officers, directors, certain principal shareholders, and their related interests. Such extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. Sections 23A and 23B have been combined into Regulation W promulgated by the Federal Reserve which is presently expected to become effective on April 1, 2003. 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. Other Regulations. Interest and certain other charges collected or contracted for by the Bank are subject to state usury laws and certain federal laws concerning interest rates. The Bank's loan operations are also subject to certain federal laws applicable to credit transactions, such as the federal Truth-In-Lending Act governing disclosures of credit terms to consumer borrowers; the Home Mortgage Disclosure Act of 1975 requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; the Equal Credit Opportunity Act prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; the Fair Credit Reporting Act of 1978 governing these and provision of information to credit reporting agencies; the Fair Debt Collection Act governing the manner in which consumer debts may be collected by collection agencies; the Soldiers' and Sailors Civil Relief Act of 1940, governing the repayment terms of, and property rights underlying obligations of persons in military service; and the rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws. The deposit operations of the Bank are also subject to the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records, and the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve Board to implement that act, which governs automatic deposits to and withdrawals from deposit accounts and customers' rights and liabilities arising from the use of automated teller machines and other electronic banking services. Deposit Insurance. The deposits of the Bank are currently insured by the FDIC to a maximum of $100,000 per depositor, subject to certain aggregation rules. The FDIC establishes rates for the payment of premiums by federally insured banks for deposit insurance. An insurance fund is maintained for commercial banks, with insurance premiums from the industry used to offset losses from insurance payouts when banks and thrifts fail. The FDIC has adopted a risk-based deposit insurance premium system for all insured depository institutions, including the Bank, which requires premiums from a depository institution based upon its capital levels and risk profile, as determined by its primary federal regulator on a semiannual basis. 33 RECENT LEGISLATION On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"). The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws. The proposed changes are intended to allow shareholders to monitor the performance of companies and directors more easily and efficiently. The Sarbanes-Oxley Act generally applies to all companies, both U.S. and non-U.S., that file or are required to file periodic reports with the SEC under the Securities Exchange Act of 1934. Further, the Sarbanes-Oxley Act includes very specified additional disclosure requirements and new corporate governance rules, requires the SEC, securities exchanges and the NASDAQ Stock Market to adopt extensive additional disclosure, corporate governance and other related rules and mandates further studies of certain issues by the SEC and the Comptroller General. Given the extensive SEC role in implementing rules relating to many of the Sarbanes-Oxley Act's new requirements, the final scope of these requirements remains to be determined. This Sarbanes-Oxley Act addresses, among other matters: audit committees; certification of financial statements by the chief executive officer and the chief financial officer; the forfeiture of bonuses and profits made by directors and senior officers in the twelve month period covered by restated financial statements; a prohibition on insider trading during pension plan black out periods; disclosure of off-balance sheet transactions; a prohibition on personal loans to directors and officers (excluding Federally insured financial institutions); expedited filing requirements for stock transaction reports by officers and directors; the formation of a public accounting oversight board; auditor independence; and various increased criminal penalties for violations of securities laws. Management has taken various measures to comply with the requirements of the Sarbanes-Oxley Act. However, given the extensive role of the SEC in implementing rules relating to many of the Act's new requirements, the final scope of these requirements remains to be determined. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Included on pages 37 through 42, below. PART III MANAGEMENT ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated herein by reference to pages [3] through [8] of the Company's Proxy Statement for its annual meeting to be held on Wednesday, April 23, 2003. ITEM 11: EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to pages [9] through [10] of the Company's Proxy Statement for its annual meeting to be held on Wednesday, April 23, 2003. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference to pages [14] through [16] of the Company's Proxy Statement for its annual meeting to be held on Wednesday, April 23, 2003. 34 ITEM 13: CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS The Company and the Bank have, and expect to continue to have, banking and other transactions in the ordinary course of business with directors and executive officers of the Company and their affiliates, including members of their families or corporations, partnerships or other organizations in which such directors or executive officers have a controlling interest, on substantially the same terms (including price, or interest rates and collateral) as those prevailing at the time for comparable transactions with unrelated parties. Such transactions are not expected to involve more than the normal risk of collectibility nor present other unfavorable features to the Company and the Bank. The Bank is subject to limits on the aggregate amount it can lend to the Bank's and the Company's directors and officers as a group. This limit is currently equal to the entity's unimpaired capital plus reserve for loan losses. Loans to individual directors and officers must also comply with the Bank's lending policies and statutory lending limits, and directors with a personal interest in any loan application are excluded from the consideration of such loan application. ITEM 14: DISCLOSURE CONTROL AND PROCEDURES As of December 31, 2002, under the supervision and with the participation of the Company's Chief Executive (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. Based on that evaluation, the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of December 31, 2002. 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. ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed or incorporated by reference as part of this Report: ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES 1. Financial Statements: Page Number -------------------------------------------------------- ----------- Independent auditors' report 36 Consolidated Balance Sheets at December 31, 2002 and 2001 37 Consolidated Statements of Operations for the years ended December 31, 2002, 2001, and 2000 38 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2002, 2001, and 2000 39 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001, and 2000 40 Consolidated Statements of Comprehensive Income for the years ended December 31, 2002, 2001 and 2000 42 Notes to Consolidated Financial Statements 43 2. Financial Statement Schedules None other than those included in the Notes to Consolidated Financial Statements. 3. Exhibits See Exhibit Index (b) Reports on Form 8-K During the three months ended December 31, 2002, the Registrant filed one current report on Form 8-K dated December 30, 2002 in which the Registrant announced it had entered into a definitive agreement to sell its bank locations in Iola, Chanute, and Humboldt, Kansas to Emprise Financial Corporation subject to the terms and conditions contained in the agreement. 35 INDEPENDENT AUDITORS' REPORT 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, 2002 and 2001, and the related consolidated statements of operations, shareholders' equity, cash flows, and comprehensive income for each of the years in the three-year period ended December 31, 2002. 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 auditing standards generally accepted in the United States of America. 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 Enterprise Financial Services Corp and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 3 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." KPMG LLP St. Louis, Missouri February 21, 2003 36 ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2002 and 2001
2002 2001 ------------- ------------- Assets Cash and due from banks $ 39,052,123 $ 32,178,155 Federal funds sold 33,367,011 48,624,680 Interest-bearing deposits 66,349 3,433,351 Investments in debt and equity securities: Available for sale, at estimated fair value 66,618,556 45,952,142 Held to maturity, at amortized cost (estimated fair value of $12,780 in 2002 and $116,633 in 2001) 12,600 116,214 ------------- ------------- Total investments in debt and equity securities 66,631,156 46,068,356 ------------- ------------- Loans held for sale 6,991,421 8,936,042 Loans, less unearned loan fees 679,799,399 602,746,799 Less allowance for loan losses 8,600,001 7,295,916 ------------- ------------- Loans, net 671,199,398 595,450,883 ------------- ------------- Other real estate owned 125,000 138,000 Fixed assets, net 7,685,682 8,730,853 Accrued interest receivable 3,458,596 3,140,912 Goodwill 2,087,537 2,087,537 Assets held for sale 36,401,416 40,575,263 Prepaid expenses and other assets 9,720,812 5,885,531 ------------- ------------- Total assets $ 876,786,501 $ 795,249,563 ============= ============= Liabilities and Shareholders' Equity Deposits: Demand $ 155,596,970 $ 119,760,758 Interest-bearing transaction accounts 59,058,224 58,282,392 Money market accounts 341,589,829 304,747,322 Savings 3,420,987 2,713,572 Certificates of deposit: $100,000 and over 105,030,371 64,355,074 Other 51,617,893 105,693,791 ------------- ------------- Total deposits 716,314,274 655,552,909 Guaranteed preferred beneficial interests in subordinated debentures 15,000,000 11,000,000 Federal Home Loan Bank advances 29,464,044 14,032,385 Notes payable and other borrowings 2,358,753 1,366,667 Accrued interest payable 1,264,600 1,208,549 Liabilities held for sale 50,053,023 58,800,256 Accounts payable and accrued expenses 3,521,857 1,392,194 ------------- ------------- Total liabilities 817,976,551 743,352,960 ------------- ------------- Shareholders' equity: Common stock, $.01 par value; 20,000,000 shares authorized; 9,497,794 issued and outstanding at December 31, 2002, and 9,270,667 issued and outstanding at December 31, 2001 94,978 92,707 Surplus 38,401,814 37,288,725 Retained earnings 18,673,619 14,330,784 Accumulated other comprehensive income 1,639,539 184,387 ------------- ------------- Total shareholders' equity 58,809,950 51,896,603 ------------- ------------- Total liabilities and shareholders' equity $ 876,786,501 $ 795,249,563 ============= =============
See accompanying notes to consolidated financial statements. 37 ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES Consolidated Statements of Operations Years Ended December 31, 2002, 2001, and 2000
2002 2001 2000 ------------ ------------ ------------ Interest income: Interest and fees on loans $ 43,013,955 $ 48,684,303 $ 49,110,601 Interest on debt and equity securities: Taxable 1,495,968 2,129,348 3,328,199 Nontaxable 917 17,378 35,801 Interest on federal funds sold 574,094 1,634,289 3,410,002 Interest on interest-bearing deposits 28,406 27,332 1,183 Dividends on equity securities 58,137 119,461 144,566 ------------ ------------ ------------ Total interest income 45,171,477 52,612,111 56,030,352 ------------ ------------ ------------ Interest expense: Interest-bearing transaction accounts 269,189 554,671 823,133 Money market accounts 5,000,759 9,589,652 13,365,785 Savings 84,093 156,665 185,127 Certificates of deposit: $100,000 and over 3,144,962 5,106,034 4,689,220 Other 3,687,543 6,597,185 6,934,653 Guaranteed preferred beneficial interests in subordinated debentures 1,116,808 1,042,439 1,053,334 Notes payable and other borrowed funds 1,004,398 763,769 544,657 ------------ ------------ ------------ Total interest expense 14,307,752 23,810,415 27,595,909 ------------ ------------ ------------ Net interest income 30,863,725 28,801,696 28,434,443 Provision for loan losses 2,250,578 3,230,000 1,042,534 ------------ ------------ ------------ Net interest income after provision for loan losses 28,613,147 25,571,696 27,391,909 ------------ ------------ ------------ Noninterest income: Service charges on deposit accounts 1,771,417 1,298,611 1,196,326 Trust and financial advisory income 2,353,927 1,426,078 851,829 Other service charges and fee income 384,592 390,790 457,563 Gain on sale of mortgage loans 1,707,166 1,238,441 503,702 Gain on sale of securities - 74,658 - Recovery/income (loss) from Merchant Banc investments 88,889 (5,716,138) 270,181 ------------ ------------ ------------ Total noninterest income (loss) 6,305,991 (1,287,560) 3,279,601 ------------ ------------ ------------ Noninterest expense: Salaries 14,307,993 13,438,811 11,045,439 Payroll taxes and employee benefits 2,556,837 2,364,082 2,167,133 Occupancy 1,900,812 1,677,965 1,557,082 Furniture and equipment 1,001,671 1,081,314 722,703 Data processing 1,011,860 1,092,234 1,084,377 Amortization of goodwill - 190,567 190,567 Losses and settlement 1,371,361 26,551 2,747 Other 6,153,387 5,705,359 5,491,566 ------------ ------------ ------------ Total noninterest expense 28,303,921 25,576,883 22,261,614 ------------ ------------ ------------ Income (loss) before income tax expense 6,615,217 (1,292,747) 8,409,896 Income tax expense 1,613,737 1,241,944 3,208,450 ------------ ------------ ------------ Net income (loss) $ 5,001,480 $ (2,534,691) $ 5,201,446 ============ ============ ============ Per share amounts: Basic earnings (loss) per share $ 0.53 $ (0.28) $ 0.58 Basic weighted average common shares outstanding 9,399,374 9,203,224 8,990,605 Diluted earnings (loss) per share $ 0.52 $ (0.28) $ 0.54 Diluted weighted average common shares outstanding 9,611,108 9,203,224 9,684,752
See accompanying notes to consolidated financial statements. 38 ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity Years ended December 31, 2002, 2001 and 2000
Accumulated Common Stock other ----------------------------- Retained comprehensive Treasury Shares Amount Surplus earnings income (loss) stock ----------- ---------------- ------------ ------------ ------------- ---------- Balance December 31, 1999 8,970,359 89,703 35,133,786 12,622,630 (412,523) (390,000) Net income - - - 5,201,446 - - Dividends declared ($.05 per share) - - - (405,265) - - Stock options exercised 134,621 1,346 802,779 - - - Issuance of common stock 970 10 10,324 - - - Option surplus - - 283,148 - - - Retirement of treasury stock (33,429) (334) (389,666) - - 390,000 Other comprehensive income - - - - 546,399 - ----------- ---------------- ------------ ------------ ------------- ---------- Balance December 31, 2000 9,072,521 90,725 35,840,371 17,418,811 133,876 - Net loss - - - (2,534,691) - - Dividends declared ($.06 per share) - - - (553,336) - - Stock options exercised 198,146 1,982 1,257,061 - - - Option surplus - - 191,293 - - - Other comprehensive income - - - - 50,511 ----------- ---------------- ------------ ------------ ------------- ---------- Balance December 31, 2001 9,270,667 92,707 37,288,725 14,330,784 184,387 - Net income - - - 5,001,480 - - Dividends declared ($.07 per share) - - - (658,645) - - Stock options exercised 227,127 2,271 903,313 - - - Option surplus - - 209,776 - - - Other comprehensive income - - - - 1,455,152 ----------- ---------------- ------------ ------------ ------------- ---------- Balance December 31, 2002 9,497,794 $ 94,978 $ 38,401,814 $ 18,673,619 $ 1,639,539 $ - =========== ================ ============ ============ ============= ========== Total share- holders' equity ------------ Balance December 31, 1999 47,043,596 Net income 5,201,446 Dividends declared ($.05 per share) (405,265) Stock options exercised 804,125 Issuance of common stock 10,334 Option surplus 283,148 Retirement of treasury stock - Other comprehensive income 546,399 ------------ Balance December 31, 2000 53,483,783 Net loss (2,534,691) Dividends declared ($.06 per share) (553,336) Stock options exercised 1,259,043 Option surplus 191,293 Other comprehensive income 50,511 ------------ Balance December 31, 2001 51,896,603 Net income 5,001,480 Dividends declared ($.07 per share) (658,645) Stock options exercised 905,584 Option surplus 209,776 Other comprehensive income 1,455,152 ------------ Balance December 31, 2002 $ 58,809,950 ============
See accompanying notes to consolidated financial statements. 39 ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 2002, 2001, and 2000
2002 2001 2000 -------------- ------------- ------------- Cash flows from operating activities: Net income (loss) $ 5,001,480 $ (2,534,691) $ 5,201,446 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 1,717,891 1,720,967 1,399,929 Provision for loan losses 2,250,578 3,230,000 1,042,534 Gain on sale of other real estate owned - (12,630) (214,930) Net amortization (accretion) of debt and equity securities 706,771 195,293 (93,459) Gain on sale of available for sale investment securities - (74,658) - Recovery/income (loss) from Merchant Banc investments 88,889 5,716,138 (270,181) Proceeds from mortgage loans sold 96,871,525 87,574,753 37,535,129 Gain on sale of mortgage loans (1,707,166) (1,238,441) (503,702) Proceeds from sale of trading security - - 910,500 Mortgage loans originated (93,219,738) (94,327,259) (36,538,187) Write off of fixed assets - 104,174 - Losses and settlement 1,300,000 - - Noncash compensation expense attributed to stock option grants 209,776 191,293 283,148 (Increase) decrease in accrued interest receivable (317,684) 1,117,798 (703,095) Increase (decrease) in accrued interest payable 56,051 (478,739) 395,133 Deferred income tax benefit (325,816) (1,739,479) (173,148) Other, net (1,208,354) (864,697) (238,132) -------------- ------------- ------------- Net cash provided by (used in) operating activities 11,424,203 (1,420,178) 8,032,985 -------------- ------------- ------------- Cash flows from investing activities: Purchases of available for sale debt securities (65,686,572) (67,809,110) (35,037,422) Purchases of held to maturity securities - (101,195) - Proceeds from sale of available for sale debt securities - 3,036,792 - Proceeds from redemption of equity securities 1,600 655,250 - Proceeds from maturities and principal paydowns on available for sale debt and equity securities 44,501,177 70,941,026 27,221,293 Proceeds from maturities and principal paydowns on held to maturity debt securities 100,000 500,000 150,000 Proceeds from sale of other real estate 2,298,266 313,630 653,002 Net increase in loans (80,498,510) (89,361,410) (72,065,460) Recoveries of loans previously charged off 299,417 121,249 84,230 Net decrease (increase) in assets held for sale 4,173,847 676,321 (4,539,861) Net (decrease) increase in liabilities held for sale (8,747,233) 2,631,045 2,394,839 Increase in note receivable from Enterprise Merchant Banc LLC - (1,362,779) - Proceeds from sale of fixed assets 21,382 30,600 - Purchases of fixed assets (532,329) (2,868,183) (2,018,658) Additional Merchant Banc investments - (221,785) (1,514,686) -------------- ------------- ------------- Net cash used in investing activities (104,068,955) (82,818,549) (84,672,723) -------------- ------------- -------------
40 ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES Consolidated Statements of Cash Flows (continued) Years ended December 31, 2002, 2001, and 2000
2002 2001 2000 -------------- ------------- ------------- Cash flows from financing activities: Net increase in non-interest bearing deposit accounts 35,836,212 19,086,926 31,167,901 Net increase in interest bearing deposit accounts 24,387,153 60,197,757 56,385,159 Proceeds from guaranteed preferred beneficial interests in subordinated debentures 4,000,000 - - Maturities and paydowns of Federal Home Loan Bank advances (3,243,341) (6,083,514) (1,150,931) Decrease in federal funds purchased - (1,225,000) (75,000) Proceeds from borrowings of Federal Home Loan Bank advances 18,675,000 10,150,000 - Proceeds from borrowings of notes payable 1,750,000 1,500,000 - Repayments of notes payable (3,116,667) (133,333) - Increase in other borrowings 2,358,753 - - Cash dividends paid (658,645) (553,336) (405,265) Proceeds from the issuance of common stock - - 10,334 Proceeds from the exercise of common stock options 905,584 1,259,043 804,125 -------------- ------------- ------------- Net cash provided by financing activities 80,894,049 84,198,543 86,736,323 -------------- ------------- ------------- Net (decrease) increase in cash and cash equivalents (11,750,703) (40,184) 10,096,585 Cash and cash equivalents, beginning of year 84,236,186 84,276,370 74,179,785 -------------- ------------- ------------- Cash and cash equivalents, end of year $ 72,485,483 $ 84,236,186 $ 84,276,370 ============== ============= ============= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 14,251,701 $ 24,289,154 $ 19,205,805 Income taxes 2,062,744 3,776,300 3,218,300 ============== ============= ============= Noncash transactions: Transfers to other real estate owned in settlement of loans $ 2,235,000 $ 90,000 $ 76,680 Loans made to facilitate sale of other real estate owned 1,980,000 28,680 - Retirement of treasury stock - - 390,000 Reduction of deferred tax asset valuation reserve 800,000 - - ============== ============= =============
See accompanying notes to consolidated financial statements. 41 ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES Consolidated Statements of Comprehensive Income Years ended December 31, 2002, 2001 and 2000
2002 2001 2000 ------------ ------------- ------------ Net income (loss) $ 5,001,480 $ (2,534,691) $ 5,201,446 Other comprehensive income, before tax: Unrealized gain on investment securities arising during year, net of tax 122,612 97,157 546,399 Less reclassification adjustment for realized gain on sales of investment securities included in net income (loss), net of tax - (46,646) - Unrealized gain on cash flow type derivative instruments arising during the period, net of tax 1,332,540 - - ------------ ------------- ------------ Total other comprehensive income, net of tax 1,455,152 50,511 546,399 ------------ ------------- ------------ Total comprehensive income (loss) $ 6,456,632 $ (2,484,180) $ 5,747,845 ============ ============= ============
See accompanying notes to consolidated financial statements. 42 NOTE 1--ORGANIZATION Enterprise Financial Services Corp (the "Company") is a financial holding company with five wholly-owned subsidiaries: Enterprise Bank, Enterprise Merchant Banc, Inc., Commercial Guaranty Bancshares, Inc., EBH Capital Trust I, and EFSC Capital Trust I. The Company provides a full range of banking services to individual and corporate customers located within St. Louis, Missouri, the surrounding communities, the Kansas Metropolitan and Southeast Kansas markets through its subsidiary, Enterprise Bank (the "Bank"). The Company is subject to competition from other financial and nonfinancial institutions providing financial services in the markets served by the Company's subsidiaries. Additionally, the Company and its subsidiaries are subject to the regulations of certain federal and state agencies and undergo periodic examinations by those regulatory agencies. Enterprise Trust ("Trust") is a division of the Bank which provides fee-based trust, personal financial planning, estate planning, and corporate planning services to the Company's target market. Enterprise Merchant Banc, Inc. ("Merchant Banc") (formerly Enterprise Capital Resources, Inc.) was formed as a wholly owned subsidiary to provide merchant banking services to closely-held businesses and their owners. Its current operations included a minority investment in Enterprise Merchant Banc, LLC ("EMB LLC"), which focused on providing equity capital and equity-linked dept investments to growing companies in need of additional capital to finance internal and acquisition-related growth. After experiencing significant losses on merchant banking investments in 2001, the Company no longer views the merchant banking investments as a viable part of its long term business strategy. Its investments have been viewed as "workouts", regardless of their individual performance, and the Company is pursuing maximum recovery efforts as necessary. Commercial Guaranty Bancshares, Inc. ("CGB") was the bank holding company for First Commercial Bank, N.A. ("FCB"). On January 1, 2001, First Commercial Bank, N.A., changed its name to Enterprise Banking, N.A. At the close of business on September 30, 2001 Enterprise Banking N.A. merged with and into the Bank, with the Bank being the surviving charter. The Company plans to dissolve CGB in 2003. EBH Capital Trust I ("EBH Trust") is a Delaware business trust created for the single purpose of offering trust preferred securities and purchasing the junior subordinated debentures of the Company. EFSC Capital Trust I ("EFSC Trust") is a Delaware business trust created for the single purpose of participating in a trust preferred securities pool and purchasing the junior subordinated debentures of the Company. 43 NOTE 2--PENDING SALE OF SOUTHEAST KANSAS BRANCHES On December 30, 2002, the Company signed an Asset Purchase Agreement to sell its Humboldt, Chanute and Iola, Kansas branches ("Southeast Kansas branches") to Emprise Financial Corporation based in Wichita, Kansas. Assets of $36.4 million and deposits of $50.1 million associated with these branches are shown as "held for sale" on the Company's balance sheet at December 31, 2002. The Company will receive a 2.5% premium on loans and a 4.75% premium on deposits. All other items will be transferred at book value. The sale is subject to the satisfaction of customary conditions, including regulatory approvals, and is expected to close in April of 2003. The Southeast Kansas branches had a minimal effect on net income (loss) for the years ended December 31, 2002, 2001 and 2000. The Southeast Kansas branches are included in the Enterprise Banking segment. As of December 31, 2002 2001 ------------ ------------ Assets held for sale: Loans, less unearned loan fees $ 35,294,138 $ 39,306,684 Fixed assets, net 1,107,278 1,268,579 ------------ ------------ Total assets held for sale 36,401,416 40,575,263 ============ ============ Liabilities held for sale: Demand deposits 5,619,146 6,887,290 Interest bearing transaction accounts 12,284,145 13,292,294 Money market accounts 4,726,423 4,608,004 Savings 5,106,036 5,048,345 Certificates of deposit: $100,000 and over 1,650,261 3,995,881 Other 20,667,012 24,968,442 ------------ ------------ Total liabilities held for sale $ 50,053,023 $ 58,800,256 ============ ============ NOTE 3--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: BASIS OF FINANCIAL STATEMENT PRESENTATION The consolidated financial statements of the Company and its subsidiaries have been prepared in conformity with accounting principles generally accepted in the United States of America and conform to predominant practices within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions which significantly affect the reported amounts in the consolidated financial statements. Estimates which are particularly susceptible to change in a short period of time include the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of amounts due from borrowers on loans. Actual amounts could differ from those estimates. CONSOLIDATION The consolidated financial statements include the accounts of the Company and its banking subsidiary, Enterprise Bank (100% owned). All significant intercompany accounts and transactions have been eliminated. INVESTMENTS IN DEBT AND EQUITY SECURITIES The Company currently classifies investments in debt and equity securities as follows: Trading - includes securities which the Company has bought and held principally for the purpose of selling them in the near term. 44 Held to maturity - includes debt securities which the Company has the positive intent and ability to hold until maturity. Available for sale - includes debt and marketable equity securities not classified as held to maturity or trading (i.e., investments which the Company has no present plans to sell but may be sold in the future under different circumstances). Debt securities classified as held to maturity are carried at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized holding gains and losses for held to maturity securities are excluded from earnings and shareholders' equity. Debt and equity securities classified as available for sale are carried at estimated fair value. Unrealized holding gains and losses for available for sale securities are excluded from earnings and reported as a net amount in a separate component of shareholders' equity until realized. All previous fair value adjustments included in the separate component of shareholders' equity are reversed upon sale. Debt and equity securities classified as trading are carried at estimated fair value. The realized and unrealized gains and losses on trading securities are included in noninterest income. A decline in the market value of any available for sale or held to maturity 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. For securities in the held to maturity and available for sale categories, premiums and discounts are amortized or accreted over the lives of the respective securities as an adjustment to yield using the interest method. Dividend and interest income is recognized when earned. Realized gains and losses for securities classified as trading, available for sale and held to maturity are included in earnings and are derived using the specific identification method for determining the cost of securities sold. LOANS HELD FOR SALE The Company provides long-term financing of one-to four-family residential real estate by originating fixed and variable rate loans. Long-term, fixed and variable rate loans are sold into the secondary market without recourse. Upon receipt of an application for a real estate loan, the Company determines whether the loan will be sold into the secondary market or retained in the Company's loan portfolio. The interest rates on the loans sold are locked with the buyer and the Company bears no interest rate risk related to these loans. Mortgage loans that are sold in the secondary market are sold principally under programs with the Government National Mortgage Association (GNMA) or the Federal National Mortgage Association (FNMA). Mortgage loans held for sale are carried at the lower of cost or fair value, which is determined on a specific identification method. The Company does not retain servicing on any loans sold, nor did the Company have any capitalized mortgage servicing rights at December 31, 2002 and 2001. INTEREST AND FEES ON LOANS Interest income on loans is accrued and credited 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 greater than $10,000 per loan are deferred and recognized over the lives of the related loans as a yield adjustment using a method which approximates the interest method. LOANS AND ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is increased by provisions charged to expense and is available to absorb charge offs, net of recoveries. Management utilizes a systematic, documented approach in determining the appropriate level of the allowance for loan losses. Management's approach, which provides for general and specific allowances, is based on current economic conditions, past losses, collection experience, risk characteristics of the portfolio, assessments of collateral values by obtaining independent appraisals for significant properties, and such other factors which, in management's judgment, deserve current recognition in estimating loan losses. 45 Management believes the allowance for loan losses is adequate to absorb probable losses in the loan portfolio. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions and other factors. In addition, various regulatory agencies, as an integral part of the examination process, periodically review the Bank's loan portfolio. Such agencies may require the Bank to add to the allowance for loan losses based on their judgments and interpretations of information available to them at the time of their examinations. ACCOUNTING FOR IMPAIRED LOANS A loan is considered impaired when it is probable the Bank will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the loan agreement. Generally, the Bank's non-accrual and restructured loans qualify as "impaired loans." When measuring impairment, the expected future cash flows of an impaired loan are discounted at the loan's effective interest rate. Alternatively, impairment is measured by reference to an observable market price, if one exists, or the fair value of the collateral for a collateral-dependent loan. Regardless of the measurement method used, historically, the Bank measures impairment based on the fair value of the collateral when foreclosure is probable. Additionally, impairment of a restructured loan is measured by discounting the total expected future cash flow at the loan's effective rate of interest as stated in the original loan agreement. The Bank recognizes interest income on nonaccrual loans only when received and on impaired loans continuing to accrue interest as earned. OTHER REAL ESTATE OWNED Other real estate owned represents property acquired through foreclosure or deeded to the Bank in lieu of foreclosure on loans on which the borrowers have defaulted as to the payment of principal and interest. Other real estate owned is recorded on an individual asset basis at the lower of cost or fair value less estimated costs to sell. Subsequent reductions in fair value are expensed or recorded in a valuation reserve account through a provision against income. Subsequent increases in the fair value are recorded through a reversal of the valuation reserve. Gains and losses resulting from the sale of other real estate owned are credited or charged to current period earnings. Costs of maintaining and operating other real estate owned are expensed as incurred, and expenditures to complete or improve other real estate owned properties are capitalized if the expenditures are expected to be recovered upon ultimate sale of the property. FIXED ASSETS Buildings, leasehold improvements, and furniture, fixtures, and equipment are stated at cost less accumulated depreciation and amortization is computed using the straight-line method over their respective estimated useful lives. Furniture, fixtures and equipment is depreciated over three to ten years and buildings and leasehold improvements over ten to forty years based upon lease obligation periods. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill represents the excess of costs over fair value of assets of businesses acquired. The Company adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, as of January 1, 2002. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No.142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and review for impairment in accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. In connection with SFAS No. 142's transitional goodwill impairment evaluation, the Statement required the Company to perform an assessment of whether there was an indication that goodwill is impaired as of the date of adoption. To accomplish this, the Company was required to identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets to those reporting units as of January 1, 2002. The Company was required to determine the fair value of the reporting unit and compare it to the carrying amount of the reporting unit within six months of January 1, 2002. To 46 the extent the carrying amount of a reporting unit exceeded the fair value of the reporting unit, the Company would be required to perform the second step of the transitional impairment test, as this is an indication that the reporting unit goodwill may be impaired. The second step was not required because the fair value exceeded the carrying amount for the reporting units. Prior to the adoption of SFAS No. 142, goodwill was amortized on a straight-line basis over the expected periods to be benefited, generally 20 years, and assessed for recoverability by determining whether the amortization of the goodwill balance over its remaining life could be recovered through undiscounted future operating cash flows of the acquired operation. All other intangible assets were amortized on a straight-line basis. The amount of goodwill and other intangible asset impairment, if any, was measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. IMPAIRMENT OF LONG-LIVED ASSETS SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of. SFAS No. 144 also changes the criteria for classifying an asset as held for sale; and broadens the scope of businesses to be disposed of that qualify for reporting as discontinued operations and changes the timing of recognizing losses on such operations. The Company adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 was considered in the accounting and disclosure of the Company's sale of the Southeast Kansas branches. In accordance with SFAS No. 144, long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale are presented separately in the appropriate asset and liability sections of the balance sheet. Goodwill and intangible assets not subject to amortization are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. Prior to the adoption of SFAS No. 144, the Company accounted for long-lived assets in accordance with SFAS No. 121, Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. 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. CASH FLOW INFORMATION For purposes of reporting cash flows, the Company considers cash and due from banks, federal funds sold and interest-bearing deposits to be cash and cash equivalents. RECLASSIFICATION Certain reclassifications have been made to the 2001 and 2000 amounts to conform to the present year presentation. 47 STOCK OPTIONS The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25, issued in March 2000, to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an Amendment of FASB Statement No. 123. See Note 16--COMPENSATION PLANS for the Company's net income (loss) and earnings (loss) per share had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method contained in SFAS 123. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company began utilizing derivative instruments to assist in the management of interest rate sensitivity and to modify the repricing, maturity and option characteristics of certain assets and liabilities in the first quarter of 2002. The Company uses such derivative instruments solely to reduce its interest rate exposure. The following is a summary of the Company's accounting policies for derivative instruments and hedging activities under Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. Interest Rate Swap Agreements - Cash Flow Hedges. Interest rate swap agreements designated as cash flow hedges are accounted for at fair value. The effective portion of the change in the cash flow hedge's gain or loss is initially reported as a component of other comprehensive income net of taxes and subsequently reclassified into noninterest income when the underlying transaction affects earnings. The ineffective portion of the change in the cash flow hedge's gain or loss is recorded in earnings on each quarterly measurement date. The swap agreements are accounted for on an accrual basis with the net interest differential being recognized as an adjustment to interest income or interest expense of the related asset or liability. Interest Rate Swap Agreements - Fair Value Hedges. Interest rate swap agreements designated as fair value hedges are accounted for at fair value. Changes in the fair value of the swap agreements are recognized currently in noninterest income. The change in the fair value on the underlying hedged item attributable to the hedged risk adjusts the carrying amount of the underlying hedged item and is also recognized currently in noninterest income. All changes in fair value are measured on a quarterly basis. The swap agreement is accounted for on an accrual basis with the net interest differential being recognized as an adjustment to interest income or interest expense of the related asset or liability. NEW ACCOUNTING STANDARDS On January 1, 2002, the Company adopted SFAS No. 142. At the date of adoption, the company had unamortized goodwill of $2,087,537, which was subject to the transition provisions of SFAS No. 142. The goodwill intangible asset is reflected in the Enterprise Banking segment. Under SFAS No. 142, goodwill will no longer be amortized, but instead will be tested annually for impairment following existing methods of measuring and recording impairment losses. The Company completed the transitional goodwill impairment test required under SFAS No. 142, to determine the potential impact, if any, on the consolidated financial statements. The results of the transitional goodwill impairment testing did not identify any goodwill impairment losses. 48 Following is a reconciliation of reported net income to net income adjusted to reflect the adoption of SFAS No. 142, as if it had been implemented on January 1, 2000:
2002 2001 2000 ------------ ------------- ------------- Net income: Reported net income $ 5,001,480 $ (2,534,691) $ 5,201,446 Add back - goodwill amortization - 190,567 190,567 ------------ ------------- ------------- Adjusted net income $ 5,001,480 $ (2,344,124) $ 5,392,013 ============ ============= ============= Basic earnings per share: Reported net income $ 0.53 $ (0.28) $ 0.58 Add back - goodwill amortization - 0.03 0.02 ------------ ------------- ------------- Adjusted net income $ 0.53 $ (0.25) $ 0.60 ============ ============= ============= Diluted earnings per share: Reported net income $ 0.52 $ (0.28) $ 0.54 Add back - goodwill amortization - 0.03 0.02 ------------ ------------- ------------- Adjusted net income $ 0.52 $ (0.25) $ 0.56 ============ ============= =============
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, it retains many of the fundamental provisions of that statement. SFAS No. 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transaction, for the disposal of a segment of a business. However, it retains the requirement in Opinion No. 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and interim financial periods within those fiscal years. The adoption of SFAS No. 144 was considered in the accounting and disclosure of the Company's sale of the Southeast Kansas branches. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 amends existing guidance on reporting gains and losses on the extinguishment of debt to prohibit the classification of the gain or loss as extraordinary, as the use of such extinguishments have become part of the risk management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to require sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. The provisions of the Statement related to the related to Statement No. 13 were effective for transactions occurring after May 14, 2002, with early application encouraged. The adoption of SFAS No. 145 is not expected to have material effect on the Company's consolidated financial statements. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFAS No. 146 is not expected to have a material effect on the Company's consolidated financial statements. In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial Institutions. This Statement brings all business combinations involving financial institutions, except mutuals, into the scope of SFAS No. 141, Business Combinations. SFAS No. 147 requires that all acquisitions of financial institutions that meet the definition of a business, including acquisitions of part of a financial institution that meet the definition of a business, must be accounted for in accordance with SFAS No. 141 and the related intangibles accounted for in accordance with SFAS No. 142. SFAS No. 147 removes such acquisitions from the scope of SFAS No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, which was adopted in February 1983 to address financial institutions acquisitions during a period when many of such acquisitions involved "troubled" institutions. SFAS No. 147 also amends SFAS No. 144 to include in its scope long-term customer-relationship intangible assets of financial institutions. SFAS No. 147 is generally effective immediately and provides guidance 49 with respect to amortization and impairment of intangibles recognized in connection with acquisitions previously within the scope of SFAS No. 72. The adoption of the Statement did not have a material effect on the Company's consolidated financial statements. In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on the Company's consolidated financial statements. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 15, 2002. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosures modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to these consolidated financial statements. NOTE 4--EARNINGS PER SHARE Basic earnings (losses) per share data is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (losses) per share gives effect to the increase in the average shares outstanding which would have resulted from the exercise of dilutive stock options and warrants. The components of basic earnings (losses) per share for the years ended December 31, 2002, 2001, and 2000 are as follows:
2002 2001 2000 ------------ ------------- ------------- BASIC Net income (loss) attributable to common shareholders' equity $ 5,001,480 $ (2,534,691) $ 5,201,446 ============ ============= ============= Weighted average common shares outstanding 9,399,374 9,203,224 8,990,605 ============ ============= ============= Basic earnings (losses) per share $ 0.53 $ (0.28) $ 0.58 ============ ============= =============
The components of diluted earnings (losses) per share for the years ended December 31, 2001, 2000, and 1999 are as follows:
2002 2001 2000 ------------ ------------- ------------- DILUTED Net income (loss) attributable to common shareholders' equity $ 5,001,480 $ (2,534,691) $ 5,201,446 ============ ============= ============= Weighted average common shares outstanding 9,399,374 9,203,224 8,990,605 Effect of dilutive stock options 211,734 - 694,147 ------------ ------------- ------------- Diluted weighted average common shares outstanding 9,611,108 9,203,224 9,684,752 ============ ============= ============= Diluted earnings (losses) per share $ 0.52 $ (0.28) $ 0.54 ============ ============= =============
Since the company incurred a net loss for the year ended December 31, 2001, diluted earnings (losses) per share was computed in the same manner as basic earnings (losses) per share. 50 For the year ended December 31, 2002, 722,589 options at an average strike price of $12.51 were outstanding but were not included in the calculation for diluted earnings per share because the exercise price was higher than the average market price of the Company's common shares. None of the 1,480,014 options outstanding with an average strike price of $9.29 for the year ended December 31, 2001 were included in the calculation of diluted earnings per share due to the net loss. All options outstanding during the year ended December 31, 2000, were included in the calculation for diluted earnings per share. NOTE 5--REGULATORY RESTRICTIONS The Bank is subject to regulations by regulatory authorities, which require the maintenance of minimum capital standards, which may affect the amount of dividends the Bank can pay. At December 31, 2002 and 2001, approximately $1,851,000 and $2,214,000, respectively, of cash and due from banks represented required reserves on deposits maintained by the Bank in accordance with Federal Reserve Bank requirements. NOTE 6--INVESTMENTS IN DEBT AND EQUITY SECURITIES A summary of the amortized cost and estimated fair value of debt and equity securities classified as available for sale at December 31, 2002 and 2001 is as follows:
2002 ---------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value --------------- --------------- --------------- ---------------- U. S. Treasury securities and obligations of U.S. Government corporations and agencies $ 38,444,447 $ 381,829 $ - $ 38,826,276 Mortgage-backed securities 25,711,142 110,892 22,873 25,799,161 Other securities 32,419 - - 32,419 Federal Reserve Bank stock and Federal Home Loan Bank stock 1,960,700 - - 1,960,700 --------------- --------------- --------------- ---------------- $ 66,148,708 $ 492,721 $ 22,873 $ 66,618,556 =============== =============== =============== ================
2001 ---------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value --------------- --------------- --------------- ---------------- U. S. Treasury securities and obligations of U.S. Government corporations and agencies $ 32,855,635 $ 308,458 $ 3,354 $ 33,160,739 Mortgage-backed securities 11,099,034 31,143 55,049 11,075,128 Municipal bonds 73,682 2,874 - 76,556 Other securities 32,419 - - 32,419 Federal Reserve Bank stock and Federal Home Loan Bank stock 1,607,300 - - 1,607,300 --------------- --------------- --------------- ---------------- $ 45,668,070 $ 342,475 $ 58,403 $ 45,952,142 =============== =============== =============== ================
51 The amortized cost and estimated fair value of debt and equity securities classified as available for sale at December 31, 2002, 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. Amortized Estimated Cost Fair Value --------------- ---------------- Due in one year or less $ 27,898,040 $ 28,117,179 Due after one year through five years 10,546,407 10,709,097 Due after five years through ten years 32,419 32,419 Mortgage-backed securities 25,711,142 25,799,161 Securities with no stated maturity 1,960,700 1,960,700 --------------- ---------------- $ 66,148,708 $ 66,618,556 =============== ================ A summary of the amortized cost and estimated fair value of debt and equity securities classified as held to maturity at December 31, 2002 and 2001 is as follows:
2002 ---------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value --------------- --------------- --------------- ---------------- Mortgage-backed securities $ 12,600 $ 180 $ - $ 12,780 =============== =============== =============== ================
2001 ---------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value --------------- --------------- --------------- ---------------- Mortgage-backed securities $ 15,980 $ 286 $ - $ 16,266 Municipal bonds 100,234 133 - 100,367 --------------- --------------- --------------- ---------------- $ 116,214 $ 419 $ - $ 116,633 =============== =============== =============== ================
The amortized cost and estimated fair value of debt and equity securities classified as held to maturity at December 31, 2002, 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. Amortized Estimated Cost Fair Value --------------- --------------- Due after one year through five years $ 12,600 $ 12,780 =============== =============== During 2001, the Company sold investment securities with proceeds of $3,036,792 and gross gains of $82,421 and gross losses of $7,763. The Company was required to sell its equity stock in the Federal Reserve Bank of Kansas City when membership in the Kansas City Federal Reserve was eliminated with the bank merger during September 2001. The stock was sold at book value which equated to cost at $385,950. The Company also redeemed a portion of its stock in the Federal Home Loan Bank of Topeka. The Bank's membership in the Topeka Federal Home Loan Bank was eliminated with the bank merger. The Bank redeemed 16 and 2,693 shares at $1,600 and $269,300 during 2002 and 2001, respectively, which was equal to cost and book value. There were no sales of investments in debt or equity securities for the years ended December 31, 2002 or December 31, 2000. Debt and equity securities having a carrying value of $14,278,620 and $15,094,553 at December 31, 2002 and 2001, respectively, were pledged as collateral to secure public deposits and for other purposes as required by law or contract provisions. As a member of the Federal Home Loan Bank system administered by the Federal Housing Finance Board, the Bank is required to maintain an investment in the capital stock of its respective Federal Home Loan Bank (FHLB) in an amount equal to the greater of 1% of the aggregate outstanding balance of loans secured by dwelling units at the beginning of each year or 0.3% of its total assets. The FHLB stock is recorded at cost which represents redemption value. The Bank is a member of the Federal Home Loan Bank of Des Moines. 52 NOTE 7--LOANS A summary of loans by category at December 31, 2002 and 2001 is as follows: 2002 2001 ---------------- --------------- Commercial and industrial $ 167,841,653 $ 160,218,233 Loans secured by real estate 515,976,972 453,266,196 Other 31,302,167 28,593,641 --------------- -------------- 715,120,792 642,078,070 Less loans held for sale related to the Southeast Kansas branches (35,294,138) (39,306,684) Less unearned loan fees, net (27,255) (24,587) ---------------- --------------- $ 679,799,399 $ 602,746,799 ================ =============== The breakdown of loans secured by real estate at December 31, 2002 and 2001 is as follows: 2002 2001 ---------------- --------------- Business and personal loans $ 136,093,539 $ 111,082,174 Income-producing properties 158,596,417 111,899,684 Owner-occupied properties 79,263,469 87,865,291 Real estate development properties 142,023,547 142,419,047 ---------------- --------------- $ 515,976,972 $ 453,266,196 ================ =============== The Bank grants commercial, residential, and consumer loans throughout its service areas, which consists primarily of the immediate area in which the Bank is located. The Company has a diversified loan portfolio, with no particular concentration of credit in any one economic sector; however, a substantial portion of the portfolio is concentrated in and secured by real estate. The ability of the Company's borrowers to honor their contractual obligations is dependent upon the local economy and its effect on the real estate market. Following is a summary of activity for the year ended December 31, 2002 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. Balance, January 1, 2002 $ 19,457,562 New loans 8,524,106 Payments and other reductions (11,593,867) --------------- Balance, December 31, 2002 $ 16,387,801 =============== At December 31, 2001, the Bank had two loans to Enterprise Merchant Banc, LLC with total committed amounts of $1,600,000 and outstanding balances of $1,570,000. The first loan was in the amount of $1,000,000 and was collateralized with secured guarantees. This loan was fully drawn at December 31, 2001 and paid off in full during the year ended December 31, 2002. The second loan in the amount of $600,000 was secured by a commercial building in Kansas City, Kansas. The outstanding balance on this loan was $570,000 and $600,000 at December 31, 2001 and 2002, respectively. The Company's investment in Enterprise Merchant Banc, LLC was accounted for under the equity method prior to the writeoff of the investment during the year ended December 31, 2001. 53 A summary of activity in the allowance for loan losses for the years ended December 31, 2002, 2001, and 2000 is as follows:
2002 2001 2000 ------------------ ---------------- --------------- Balance at beginning of year $ 7,295,916 $ 7,096,544 $ 6,758,222 Provisions charged to operations 2,250,578 3,230,000 1,042,534 Loans charged off (1,245,910) (3,151,877) (788,442) Recoveries of loans previously charged off 299,417 121,249 84,230 ------------------ ---------------- --------------- Balance at end of year $ 8,600,001 $ 7,295,916 $ 7,096,544 ================== ================ ===============
A summary of impaired loans at December 31, 2002, 2001, and 2000 is as follows:
2002 2001 2000 -------------- ------------- -------------- Nonaccrual loans $ 2,212,479 $ 2,506,188 $ 1,798,364 Impaired loans continuing to accrue interest 1,675,466 1,242,782 - -------------- ------------- -------------- Total impaired loans $ 3,887,945 $ 3,748,970 $ 1,798,364 ============== ============= ============== Allowance for losses on specific impaired loans $ 690,493 $ 601,294 $ 859,046 Impaired loans with no related allowance for loan losses - - - Average balance of impaired loans during the year $ 4,185,486 $ 2,208,486 $ 1,859,873 ============== ============= ==============
The Bank had no loans over 90 days past due still accruing interest at December 2002 and 2001. If interest on nonaccrual loans had been accrued, such income would have been $327,334, $141,282, and $287,696 for the years ended December 31, 2002, 2001, and 2000, respectively. The amount recognized as interest income on nonaccrual loans was $135,077, $33,677, and $14,979 for the years ended December 31, 2002, 2001, and 2000, respectively. The amount recognized as interest income on impaired loans continuing to accrue interest was $127,048, $69,282, and $208,133 for the years ended December 31, 2002, 2001, and 2000, respectively. NOTE 8--DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company began utilizing derivative instruments to assist in the management of interest rate sensitivity and to modify the repricing, maturity and option characteristics of certain assets and liabilities in the first quarter of 2002. The Company uses such derivative instruments solely to reduce its interest rate exposure. The following is a summary of the Company's accounting policies for derivative instruments and hedging activities under Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. Interest Rate Swap Agreements - Cash Flow Hedges. Interest rate swap agreements designated as cash flow hedges are accounted for at fair value. The effective portion of the change in the cash flow hedge's gain or loss is initially reported as a component of other comprehensive income net of taxes and subsequently reclassified into noninterest income when the underlying transaction affects earnings. The ineffective portion of the change in the cash flow hedge's gain or loss is recorded in earnings on each quarterly measurement date. The swap agreements are accounted for on an accrual basis with the net interest differential being recognized as an adjustment to interest income or interest expense of the related asset or liability. For the year ended December 31, 2002, a net interest differential of $967,551 was included in interest income on loans. In January 2002, the Bank executed two interest rate swaps in order to limit exposure from falling interest rates. The first swap had a $40 million notional amount, a term of two years and obligated the Bank to pay an adjustable rate equivalent to the prime rate and receive a fixed rate of 6.255%. The second swap was also a "receive fixed" interest rate of 6.97% and paid an adjustable rate equivalent to the prime rate, but had a notional amount of $20 million and a term of three years. Both swaps pay interest on a quarterly basis and the net cash flow paid or received is included in interest income on loans. The swaps qualify as "cash flow hedges" under SFAS No. 133, so 54 changes in the fair value of the swaps are recognized as part of other comprehensive income. On December 31, 2002, the Bank had $2.4 million in cash collateral from the counterparty on the interest rate swap agreements which is included on the balance sheet as notes payable and other borrowings. The cash collateral is interest bearing at an interest rate that floats with the three month London Inter Bank Offered Rate ("LIBOR"). The notional amounts of derivative financial instruments do no represent amounts exchanged by the parties and, therefore, are not a measure of the Banks' credit exposure through its use of these instruments. The credit exposure represents the accounting loss the Bank would incur in the event the counterparties failed completely to perform according to the terms of the derivative financial instruments and the collateral held to support the credit exposure was of no value. On December 31, 2002 the Bank had credit exposure of $197,745. Interest Rate Swap Agreements - Fair Value Hedges. Interest rate swap agreements designated as fair value hedges are accounted for at fair value. Changes in the fair value of the swap agreements are recognized currently in noninterest income. The change in the fair value on the underlying hedged item attributable to the hedged risk adjusts the carrying amount of the underlying hedged item and is also recognized currently in noninterest income. All changes in fair value are measured on a quarterly basis. In May 2002, the Bank executed an interest rate swap to limit the risk of a change in the fair value of the $20 million in fixed interest rate brokered CDs obtained simultaneously. The swap had a $20 million notional amount, a term of two years and obligated the Bank to pay an adjustable rate equivalent to the three-month LIBOR plus 19 basis points and receive a fixed rate of 3.55%. The terms allow for semiannual payments for both sides of the swap. The swap qualifies for the "shortcut method" under SFAS No. 133. As a result, changes in the fair value of the swap directly offset changes in the fair value of the hedged item (i.e., broker CDs). The impact of the swap on the Company's statement of operations is that it converts the fixed interest rate on the brokered CDs to a variable interest rate. 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. For the year ended December 31, 2002, a net interest differential of $197,553 decreased interest expense on certificates of deposit. The maturity dates, notional amounts, interest rates paid and received and fair value of our interest rate swap agreements as of December 31, 2002 were as follows:
Maturity Notional Interest Rate Interest Rate Fair Hedge Date Amount Paid Received Value ---------- --------- ------------ ------------- ------------- ----------- Cash flow 1/29/2005 $ 20,000,000 4.25% 6.97% $ 1,016,508 Cash flow 1/29/2004 40,000,000 4.25 6.26 1,002,063 Fair Value 5/10/2004 20,000,000 1.58 3.55 537,927
NOTE 9--FIXED ASSETS A summary of fixed assets at December 31, 2002 and 2001 is as follows: 2002 2001 ------------ ------------ Land $ 842,953 $ 842,953 Buildings and leasehold improvements 7,268,246 7,241,633 Furniture, fixtures and equipment 7,069,154 8,754,467 ------------ ------------ 15,180,353 16,839,053 Less accumulated depreciation and amortization 6,387,393 6,839,621 ------------ ------------ 8,792,960 9,999,432 Less fixed assets held for sale, net 1,107,278 1,268,579 ------------ ------------ $ 7,685,682 $ 8,730,853 ============ ============ Depreciation and amortization of building, leasehold improvements, and furniture, fixtures and equipment included in noninterest expense amounted to $1,717,891, $1,530,400, and $1,209,362 in 2002, 2001, and 2000, respectively. The Company wrote off $104,174 in telephone system assets during 2001. The Company replaced its telephone and communication systems to incorporate the Kansas locations and to allow for future growth. 55 All of the Company's Missouri banking facilities are leased under agreements that expire in various years through 2016. The Company's aggregate rent expense totaled $1,311,148, $1,152,679, and $1,030,883 in 2002, 2001, and 2000, respectively, and sublease rental income totaled $7,250, $47,853, and $76,231 in 2002, 2001, and 2000, respectively. The future aggregate minimum rental commitments required under the leases are as follows: Year Amount ---------- ----------- 2003 $ 1,338,020 2004 1,256,155 2005 1,260,306 2006 1,259,390 2007 1,297,222 Thereafter 4,126,302 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. NOTE 10--MATURITY OF CERTIFICATES OF DEPOSIT Following is a summary of certificates of deposit maturities at December 31, 2002:
$100,000 Maturity Period and Over Other Total ------------------------------------------ -------------- --------------- ---------------- Less than 1 year $ 59,547,614 $ 29,249,969 $ 88,797,583 Greater than 1 year and less than 2 years 38,061,849 16,902,407 54,964,256 Greater than 2 years and less than 3 years 5,801,637 4,186,883 9,988,520 Greater than 3 years and less than 4 years 1,413,065 1,255,168 2,668,233 Greater than 4 years and less than 5 years 206,206 23,466 229,672 -------------- --------------- ---------------- $ 105,030,371 $ 51,617,893 $ 156,648,264 ============== =============== ================
NOTE 11--GUARANTEED PREFERRED BENEFICIAL INTERESTS IN SUBORDINATED DEBENTURES On October 25, 1999, EBH Capital Trust I ("EBH Trust"), a Delaware business trust subsidiary of Enterprise Financial Services Corp issued 1,375,000 shares of 9.40% Cumulative Trust Preferred Securities ("Preferred Securities") at $8 per share in an underwritten public offering. The Preferred Securities mature on December 15, 2029. The maturity date may be shortened to a date not earlier than December 15, 2004, if certain conditions are met. The debentures are the sole asset of EBH Trust. In connection with the issuance of the Preferred Securities, the Company made certain guarantees and commitments that, in the aggregate, constitute a full and unconditional guarantee by the Company of the obligations of EBH Trust under the Preferred Securities. The Company's proceeds from the issuance of the subordinated debentures to EBH Trust, net of underwriting fees and offering expenses, were $10.28 million. The Preferred Securities are classified as debt for reporting purposes and capital for regulatory reporting purposes. On June 28, 2002, EFSC Capital Trust I ("EFSC Trust"), a newly-formed Delaware business trust and subsidiary of the Company issued 4,000 floating rate Trust Preferred Securities ("Preferred Securities II") at $1,000 per share to a Trust Preferred Securities Pool. The floating rate is equal to the three month LIBOR rate plus 3.65%, and reprices quarterly. Preferred Securities II are fully, irrevocably and unconditionally guaranteed on a subordinated basis by the Company. The proceeds of the Preferred Securities II were invested in junior subordinated debentures of the Company. The net proceeds to the Company from the sale of the junior subordinated debentures, after deducting underwriting commissions and estimated offering expenses, were approximately $3.92 million. Distributions on the Preferred Securities II are payable quarterly on March 30, June 30, September 30 and December 30 of each year that the Preferred Securities II are outstanding. The Preferred Securities II mature on June 30, 2032. The maturity date may be shortened to a date not earlier than June 30 2007, if certain conditions are met. The Preferred Securities II are classified as debt for reporting purposes and capital for regulatory reporting purposes. 56 A portion of the proceeds from the offering were used to repay the $2.3 million of outstanding indebtedness with the remaining available for cash operating expenses at the holding company level. The Company currently has $5 million available under its revolving credit facility and uses it for general corporate purposes, including investments from time to time in the Bank in the form of additional capital. NOTE 12--FEDERAL HOME LOAN BANK ADVANCES As a member of the Federal Home Loan Bank, the subsidiary bank has access to Federal Home Loan Bank advances. The Federal Home Loan Bank advances at December 31, 2002 are collateralized by 1-4 family residential real estate loans, business loans and certain commercial real estate loans with a carrying value of $199 million and all stock held in the Federal Home Loan Bank of Des Moines. The following table summarizes the type, maturity and rate of the Company's Federal Home Loan Bank advances at December 31, 2002 and 2001:
2002 2001 ----------------------- ----------------------- Outstanding Weighted Outstanding Weighted Type of Advance Maturity Balance Rate Balance Rate -------------------------------------------------- ---------------- ------------ -------- ------------ -------- Long term non-amortized advance less than 1 year $ 14,850,000 3.46% $ 3,164,296 4.44% Long term non-amortized advance 1 - 2 years 3,400,000 4.73% 1,750,000 5.39% Long term non-amortized & mortgage matched advance 2 - 3 years 3,675,000 4.47% 4,100,000 4.87% Long term non-amortized advance 3 - 4 years 1,525,000 4.51% 3,185,000 4.75% Long term non-amortized & mortgage matched advance 4 - 5 years 1,250,000 4.74% 550,000 5.43% Long term non-amortized advance 5 - 10 years 2,800,000 5.30% 450,000 5.34% Mortgage matched advance 10-15 years 1,964,044 5.78% 833,089 5.92% ------------ ------------ Total Federal Home Loan Advances $ 29,464,044 4.17% $ 14,032,385 4.91% ============ ============
The majority of these advances are used to match certain fixed rate loans to lock in an interest rate spread. All of the Federal Home Loan Bank advances have fixed interest rates, and $1,956,000 of these borrowings are callable at the option of the Federal Home Loan Bank of Des Moines under certain conditions. The Company's banking subsidiary, which has an investment in the capital stock of the Federal Home Loan Bank, maintains a line of credit with the Federal Home Loan Bank and had availability of approximately $96 million at December 31, 2002. NOTE 13--NOTES PAYABLE At December 31, 2002 the Company had a $7,500,000 unsecured bank line of credit that matures on March 1, 2003 with no outstanding balance. The line was an interest only note, accruing interest at a variable rate of prime minus 0.50%. For the year ended December 31, 2002, the average balance and maximum month-end balance of the note payable were $513,319 and $2,366,667, respectively. In January 2003, the company negotiated a $5,000,000 unsecured line of credit with another lender and cancelled the original $7,500,000 line of credit. The new line of credit has debt covenants and accrues interest based on the Prime rate or LIBOR at the Company's discretion and is payable quarterly. The Company had a line with the Federal Reserve Bank of St. Louis during 2001 and 2002 for liquidity purposes and did not draw on the line. As of December 31, 2002 and 2001, $49,037,459 and $8,350,179 was available under this line. 57 NOTE 14--INCOME TAXES The components of income tax expense (benefit) for the years ended December 31, 2002, 2001, and 2000 are as follows:
2002 2001 2000 ------------------ ------------------ ------------------ Current: Federal $ 1,832,879 $ 2,586,002 $ 2,949,725 State and local 106,674 395,421 431,873 Deferred (325,816) (1,739,479) (173,148) ------------------ ------------------ ------------------ $ 1,613,737 $ 1,241,944 $ 3,208,450 ================== ================== ==================
A reconciliation of expected income tax expense (benefit), computed by applying the statutory federal income tax rate of 34% in 2002, 2001, and 2000, to income before income taxes and the amounts reflected in the consolidated statements of operations is as follows:
2002 2001 2000 ------------------ ------------------ ------------------ Income tax (benefit) expense at statutory rate $ 2,249,174 $ (439,534) $ 2,859,365 Increase (reduction) in income taxes resulting from: Reversal of valuation allowance (800,000) - - Establishment of valuation allowance on merchant banking investments - 1,041,080 - Tax-exempt income (165,798) (80,380) (82,032) State and local income tax expense 70,405 260,978 285,036 Goodwill amortization - 64,793 64,793 Non-deductible expenses 113,494 125,425 97,611 Other, net 146,462 269,582 (16,323) ------------------ ------------------ ------------------ Total tax expense $ 1,613,737 $ 1,241,944 $ 3,208,450 ================== ================== ==================
A net deferred income tax asset of $3,475,485 and $3,899,293 is included in prepaid expenses and other assets in the consolidated balance sheets at December 31, 2002 and 2001, respectively. The tax effect of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2002 and 2001 is as follows:
2002 2001 ----------------- ---------------- Deferred tax assets: Allowance for loan losses $ 2,870,398 $ 3,962,027 Deferred compensation 361,418 229,457 Merchant banking investments 1,041,080 1,041,080 Other 512,775 - ----------------- ---------------- Gross deferred tax assets 4,785,671 5,232,564 Valuation allowance (241,080) (1,041,080) ----------------- ---------------- Deferred tax assets net of valuation allowance 4,544,591 4,191,484 ----------------- ---------------- Deferred tax liabilities: Office equipment and leasehold improvements 219,797 163,916 Unrealized gains on securities available for sale 162,849 99,685 Unrealized gain on cash flow type derivative instruments 686,400 - Other - 28,590 ----------------- ---------------- Total deferred tax liabilities 1,069,106 292,191 ----------------- ---------------- Net deferred tax asset $ 3,475,485 $ 3,899,293 ================= ================
58 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 had established a valuation allowance as of December 31, 2001. Management has determined it is more likely than not that certain of the deferred tax assets related to the writedown recorded on assets related to Merchant Banc investments will not be realized. During 2002, in conjunction with the pending sale of the Southeast Kansas branches discussed in Note 2, the Company quantified the amount of gain of the appropriate character which could be utilized to offset losses recorded in 2001 on the Merchant Banc investments. Accordingly, in 2002, the Company reversed $800,000 of the valuation allowance. NOTE 15--REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possible additional, discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 2002 and 2001, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 2002, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. The Company's and Bank's actual capital amounts and ratios are also presented in the table.
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions --------------------- --------------------- ---------------------- Amount Ratio Amount Ratio Amount Ratio ------------ ------ ------------ ------ ------------ ------- As of December 31, 2002: Total Capital (to risk weighted assets) Enterprise Financial Services Corp $ 78,207,875 10.95% $ 57,136,811 8.00% $ - -% Enterprise Bank 75,204,737 10.58 56,885,394 8.00 71,106,743 10.00 Tier 1 Capital (to risk weighted assets) Enterprise Financial Services Corp $ 69,607,874 9.75% $ 28,568,406 4.00% $ - -% Enterprise Bank 66,604,736 9.37 28,442,697 4.00 42,664,046 6.00 Tier 1 Capital (to average assets) Enterprise Financial Services Corp $ 69,607,874 7.93% $ 26,346,052 3.00% $ - -% Enterprise Bank 66,604,736 7.60 26,283,571 3.00 43,805,951 5.00 As of December 31, 2001: Total Capital (to risk weighted assets) Enterprise Financial Services Corp $ 67,920,595 10.41% $ 52,203,818 8.00% $ - -% Enterprise Bank 67,605,690 10.40 52,024,902 8.00 65,031,128 10.00 Tier 1 Capital (to risk weighted assets) Enterprise Financial Services Corp $ 60,624,679 9.29% $ 26,101,909 4.00% $ - -% Enterprise Bank 60,309,774 9.27 26,012,451 4.00 39,018,677 6.00 Tier 1 Capital (to average assets) Enterprise Financial Services Corp $ 60,624,679 8.18% $ 22,232,250 3.00% $ - -% Enterprise Bank 60,309,774 8.21 22,040,917 3.00 36,734,862 5.00
59 NOTE 16--COMPENSATION PLANS STOCK OPTIONS PLANS At December 31, 2002, the Company had five qualified incentive, two nonqualified and one omnibus stock plan for the benefit of employees and directors. Plan I was adopted on April 20, 1988 with 432,000 options. As of December 31, 2002, Plan I had no options outstanding and no options available for future grant. Plan II was adopted on April 25, 1990 with 225,000 options and a five year vesting term. Plan II had 13,200 options outstanding and no options available for grant. Plan III was adopted on June 19, 1996 with 600,000 options and a five year vesting term. Plan III has 415,300 options outstanding and no options available for future grants. Plan IV was adopted on April 28, 1999 with 600,000 options and a five year vesting term. Plan IV has 556,200 options outstanding and 41,300 available for future grants. Plan V is an omnibus plan which allows the Board to use its discretion for vesting terms. Plan V also has Stock Appreciation Rights ("SAR") available for grant. Plan V was adopted by the Company's Board of Directors on October 26, 2002 and is subject to stockholder approval at the 2003 Annual Meeting of shareholders with 750,000 shares. At December 31, 2002 the Company had 132,905 nonqualified options outstanding which were granted to members of management pursuant to their employment agreements. The Company inherited two stock option plans with the CGB merger completed in June of 2000. The stock option plans provide qualified and nonqualified options to certain officers and directors for up to 273,220 common shares of the Company. These options were fully vested upon grant. The options are exercisable for ten years and five years for the qualified and nonqualified options, respectively. As of December 31, 2002 the CGB qualified plan had 29,252 options outstanding and no options available for future grant. The CGB nonqualified plan had 39,536 options outstanding and no options available for grant. In 1998, the Company adopted by board approval a nonqualified stock option plan ("the Nonqualified Plan"), which sets aside up to 105,000 shares of Company common stock to grant options with a five year vesting term to certain key employees of the Company or any of its subsidiaries. There are limitations as to the number of options which may be granted to any individual and additional restrictions for options which may be granted to any individual who is also a ten percent shareholder. The purchase price for any options granted under the Nonqualified Plan will be determined based upon the market value of the common stock at the time such options are granted. At December 31, 2002, the Nonqualified Plan had 98,250 options outstanding and 6,750 options available for future grants. Following is a summary of the various stock option plan transactions:
Number Price Weighted Avg. of Shares per Share Price per Share Total --------- --------------- --------------- ------------- December 31, 1999 1,139,684 $ 1.67 - 15.17 $ 6.35 $ 7,234,512 Granted 214,097 15.00 - 18.00 15.34 3,284,122 Exercised 134,621 2.33 - 11.67 5.97 804,125 Forfeited 17,249 5.33 - 18.00 12.54 216,248 --------- --------------- --------------- ------------- December 31, 2000 1,201,911 $ 2.33 - 18.00 $ 7.90 $ 9,498,261 Granted 284,850 11.75 - 15.50 12.04 3,429,238 Exercised 198,146 2.33 - 11.67 6.35 1,259,043 Forfeited 33,571 5.33 - 18.00 9.70 325,680 --------- --------------- --------------- ------------- December 31, 2001 1,255,044 $ 2.33 - 18.00 $ 9.04 $ 11,342,776 Granted 373,905 9.25 - 11.50 9.93 3,714,079 Exercised 227,127 2.33 - 11.75 3.99 905,584 Forfeited 117,179 5.33 - 18.00 11.90 1,433,821 --------- --------------- --------------- ------------- December 31, 2002 1,284,643 $ 5.33 - 18.00 $ 9.90 $ 12,717,450 ========= =============== =============== =============
The exercise price range of outstanding options at December 31, 2002 was $5.33 to $18.00 and the weighted average contractual life was 7.06 years. The exercise price range of outstanding options at December 31, 2001 was $2.33 to $18.00 and the weighted average contractual life was 6.33 years. 60 Following is a summary of the options outstanding at December 31, 2002: Number of Number of Exercisable Option Price Options Total Options Total -------------- --------- ------------- ----------- ----------- $ 5.33 324,700 $ 1,730,651 324,700 $ 1,730,651 5.58 6,000 33,480 6,000 33,480 7.78 7,286 56,685 7,286 56,685 8.33 3,000 24,990 2,400 19,992 9.25 250 2,312 - - 9.30 82,905 771,017 - - 9.72 30,537 296,820 30,537 296,820 9.92 3,900 38,688 3,120 30,950 10.00 261,750 2,617,500 55,200 552,000 10.25 79,000 809,750 - - 10.30 12,500 128,750 - - 10.33 10,500 108,465 3,900 40,287 10.67 1,500 16,005 1,200 12,804 11.50 6,500 74,750 - - 11.67 30,965 361,362 30,965 361,362 11.75 224,400 2,636,700 42,880 503,840 12.50 2,250 28,125 1,350 16,875 14.00 18,100 253,400 5,060 70,840 15.00 152,600 2,289,000 61,040 915,600 15.50 10,500 162,750 3,100 48,050 16.00 1,000 16,000 200 3,200 17.50 1,500 26,250 600 10,500 18.00 13,000 234,000 5,200 93,600 --------- ------------- ----------- ----------- 1,284,643 $ 12,717,450 584,738 $ 4,797,536 ========= ============= =========== =========== The Company applies APB Opinion 25 and related interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method contained in SFAS No. 123, the Company's net income (loss) and earnings (loss) per share would have been reduced to the pro forma amounts indicated below:
2002 2001 2000 -------------- --------------- ---------------- Net income, as reported $ 5,001,480 $ (2,534,691) $ 5,201,446 Deduct total stock-based employee compensation expense determined under fair-value-based method for all rewards, net of tax (809,289) (510,980) (439,585) -------------- --------------- ---------------- Pro forma net income $ 4,192,191 $ (3,045,671) $ 4,761,861 ============== =============== ================ Earnings (losses) per share: Basic: As reported $ 0.53 $ (0.28) $ (0.58) Pro forma 0.45 (0.33) (0.53) Diluted: As reported $ 0.52 $ (0.28) $ (0.54) Pro forma 0.44 (0.33) (0.49)
The fair value of each option granted in 2002 was estimated on the date of grant using the Black-Scholes option-pricing model with following assumptions; a risk-free interest rate of 5.20%, 5.44%, 4.85%, 4.22%, and 3.69% for January, April, July, August, and September, respectively; a dividend yield of 0.60%; vesting period for 5 years; expected lives of 10 years; and volatility of 60.02%, 65.80%, 68.88%, 66.93%, and 65.50% for January, April, July August, and September, respectively. Additional grants were made in July and October with the following 61 assumptions; a risk-free interest rate of 4.85% and 3.72% for July and October, respectively; a dividend yield of 0.60%; vesting period for 3 years; expected lives of 10 years; and volatility of 68.88% and 65.35% for July and October, respectively. The weighted average fair value of the options granted in 2002 was $7.41. The fair value of each option granted in 2001 was estimated on the date of grant using the Black-Scholes option-pricing model with following assumptions; a risk-free interest rate of 4.92%, 4.98%, 5.37%, and 4.55% for January, April, July, and October, respectively; a dividend yield of 0.60%; vesting period for 5 years; expected lives of 10 years; and volatility of 37.50%, 46.07%, 56.00%, and 58.34% for January, April, July and October, respectively. The weighted average fair value of the options granted in 2002 was $7.89. The fair value of each option granted in 2000 was estimated on the date of grant using the Black-Scholes option- pricing model with the following assumptions; a risk-free interest rate of 6.50% and 6.06% for April and September, respectively; a dividend yield of 0.67%; vesting period for 5 years; expected lives of 10 years; and volatility of 13.38% and 30.13% for April and September, respectively. The weighted average fair value of the options granted in 2001 was $6.75. On April 1, 1999, the Company adopted a Stock Appreciation Rights ("SAR") Plan. This Plan replaced the previous form of cash compensation for directors of the Company and its subsidiaries and awards vest based upon attendance and unit performance. Under the plan, the Company has the option to pay vested SARs either in the form of cash or Company common stock. At December 31, 2001, there were 104,500 SARs outstanding. On January 1, 2002, directors were given the option to forfeit their SARs for cash compensation for previous services and future meeting attendance or keep the SARs and the future value without cash compensation for service. Approximately 35,300 SARs were forfeited for an estimated payout of $57,000 for meeting attendance. At December 31, 2002, there were 69,200 SARs outstanding. The Company recognized $49,163 in expense to record the market value of the SARs on December 31, 2002. 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. Moneta receives options for banking business referrals and a portion of the gross margin earned by Trust in the form of cash. The Company recognizes the fair value of the options over the vesting period as expense. The Company recognized $209,776, $191,293 and $283,148 in Moneta option related expenses during 2002, 2001 and 2000, respectively. The fair value of each option grant to Moneta was estimated on the date of grant using the Black-Scholes option pricing model. The Company granted 11,769 options on January 1, 2002 at $11.50 price per share, a fair value of $7.34, assuming a risk free interest rate of 5.20%, a dividend yield of 0.60%, vesting period for 5 years, expected life of 8 years and volatility of 59.47%. The Company granted 11,081 options on January 1, 2001 at $10.33 price per share, a fair value of $7.77 per share, assuming a risk free interest rate of 5.20%, a dividend yield of 0.67%, vesting period for 5 years, expected life of 8 years and volatility of 39.79%. The Company granted 5,648 options on January 1, 2000 at $18.25 price per share a fair value of $6.30 per share, assuming a risk free interest rate of 6.19%, a dividend yield of 0.67%, vesting period for 5 years, expected lives of 8 years and volatility of 11.80%. The Company granted 60,000 options on August 18, 1999 at $15.00 price per share, a fair value of $6.56, assuming a risk free interest rate of 6.10%, a dividend yield of 0.67% vesting period for 5 years, expected lives of 8 years and volatility of 27.95%. The Company granted 99,180 options on January 1, 1999 at $10.33 price per share, a fair value of $4.09 per share, assuming a risk free interest rate of 4.75%, a dividend yield of 0.67% vesting period for 5 years, expected lives of 8 years and volatility of 27.23%. The weighted average fair value of the options granted to Moneta was $5.37. There were no exercises of Moneta options since grant date. There were 1,182 Moneta options forfeited in 2002. Effective January 1, 1993, the Company adopted a 401(k) thrift plan which covers substantially all full-time employees over the age of 21. The amount charged to expense for the Company's contributions to the plan was $433,798, $255,807, and $290,423 for 2002, 2001, and 2000, respectively. NOTE 17--LITIGATION AND OTHER CLAIMS Except as noted below, various legal claims have arisen during the normal course of business which, in the opinion of management, after discussion with legal counsel, will not result in any material liability. In accordance with SFAS No. 5, Accounting for Contingencies, the Company recognized $1,300,000 in expense related to settlement of a dispute with another financial institution pursuant to an agreement signed in February of 2003. 62 NOTE 18--DISCLOSURES ABOUT FINANCIAL INSTRUMENTS The Bank issues financial instruments with off balance sheet risk in the normal course of the business of meeting the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments may involve, to varying degrees, elements of credit and interest-rate risk in excess of the amounts recognized in the consolidated balance sheets. The Company's extent of involvement and maximum potential exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for financial instruments included on its consolidated balance sheets. At December 31, 2002, 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, 2002 and 2001 is as follows: 2002 2001 --------------- -------------- Commitments to extend credit $ 183,070,617 $ 242,784,209 Standby letters of credit 17,755,979 13,402,288 =============== ============== Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Of the total commitments to extend credit at December 31, 2002, approximately $6,070,659 represents fixed rate loan commitments. Of the total commitments to extend credit at December 31, 2001, approximately $13,182,144 represents fixed rate loan commitments. Since certain of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, premises and equipment, and real estate. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These standby letters of credit are primarily issued to support contractual obligations of the Bank's customers. The credit risk involved in issuing letters of credit is essentially the same as the risk involved in extending loans to customers. The approximate remaining term of standby letters of credit range from 1 month to 10 years at December 31, 2002. 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. 63 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, 2002 and 2001:
2002 2001 -------------------------------- -------------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value --------------- -------------- --------------- -------------- Balance sheet assets: Cash and due from banks $ 39,052,123 $ 39,052,123 $ 32,178,155 $ 32,178,155 Federal funds sold 33,367,011 33,367,011 48,624,680 48,624,680 Interest-bearing deposits 66,349 66,349 3,433,351 3,433,351 Investments in debt and equity securities 66,631,156 66,631,336 46,068,356 46,068,775 Loans held for sale 6,991,421 6,991,421 8,936,042 8,936,042 Derivative financial instruments 2,556,498 2,556,498 - - Loans, net 671,199,398 683,981,753 595,450,883 602,492,575 Accrued interest receivable 3,458,596 3,458,596 3,140,912 3,140,912 Assets held for sale 36,401,416 37,283,769 40,575,263 41,557,930 Balance sheet liabilities: Deposits $ 716,314,274 $ 720,586,761 $ 655,552,909 $ 658,742,159 Guaranteed preferred beneficial interests in subordinated debentures 15,000,000 15,118,851 11,000,000 11,126,098 Other borrowed funds 31,822,797 32,257,666 15,399,052 15,573,233 Accrued interest payable 1,264,600 1,264,600 1,208,549 1,208,549 Liabilities held for sale 50,053,023 47,675,504 58,800,256 56,007,244
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 AND OTHER SHORT-TERM INSTRUMENTS For cash and due from banks, federal funds sold (purchased), interest-bearing deposits, and accrued interest receivable (payable), the carrying amount is a reasonable estimate of fair value, as such instruments reprice in a short time period. INVESTMENTS IN DEBT AND EQUITY SECURITIES Fair values are based on quoted market prices or dealer quotes. LOANS, NET The fair value of adjustable-rate loans approximates cost. The fair value of fixed-rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. DERIVATIVE FINANCIAL INSTRUMENTS The fair value of derivative financial instruments is based on quoted market prices where available. If quoted market prices were not available, the fair value was based upon quoted market prices of comparable instruments. 64 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. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN SUBORDINATED DEBENTURES Fair value of fixed interest rate guaranteed preferred beneficial interests in subordinated debentures is based on market prices as of December 31, 2002 and 2001. Fair value of floating interest rate guaranteed preferred beneficial interests in the subordinated debentures is assumed to equal book value at December 31, 2002. OTHER BORROWED FUNDS Other borrowed funds include Federal Home Loan Bank advances and notes payable. The fair value of Federal Home Loan Bank 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 notes payable is assumed to be its carrying amount since it has an adjustable interest rate. COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT The fair value of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the likelihood of the counterparties drawing on such financial instruments, and the present creditworthiness of such counterparties. The Company believes such commitments have been made on terms which are competitive in the markets in which it operates; however, no premium or discount is offered thereon and accordingly, the Company has not assigned a value to such instruments for purposes of this disclosure. ASSETS AND LIABILITIES HELD FOR SALE The fair value of assets and liabilities held for sale is based on the contractual premium in the signed definitive agreement dated December 30, 2002. LIMITATIONS Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment, and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on-balance and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in many of the estimates. NOTE 19--SEGMENT REPORTING Management segregates the Company into three distinct businesses for evaluation purposes. The three segments are; Enterprise Banking, Enterprise Trust and Corporate. The segments are evaluated separately on their individual performance, as well as, their contribution to the Company as a whole. 65 The Corporate, Intercompany, and Reclassifications segment includes the holding company, merchant banking investments, and trust preferred securities activities. The Company incurs general corporate expenses and owns Enterprise Bank and Enterprise Merchant Banc, Inc. Enterprise Merchant Banc, Inc. offered merchant banking services through its investment in Enterprise Merchant Banc LLC. The majority of the Company's assets and income result from Enterprise Banking. Enterprise Banking consists of three banking branches and an operations center in the St. Louis County area, two banking branches in the Kansas City region and three banking branches in the Southeast Kansas region. The products and services offered by the banking branches include a broad range of commercial and personal banking services, including certificates of deposit, individual retirement and other time deposit accounts, checking and other demand deposit accounts, interest checking accounts, savings accounts and money market accounts. Loans include commercial, financial and agricultural, real estate construction and development, commercial and residential real estate, consumer and installment loans. Other financial services include mortgage banking, debit and credit cards, automatic teller machines, internet account access, safe deposit boxes, and treasury management services. Enterprise Trust, which is a division of Enterprise Bank, provides fee-based personal and corporate financial consulting and trust services. Personal financial consulting includes estate planning, investment management, and retirement planning. Corporate consulting services are focused in the areas of retirement plans, management compensation and management succession issues. 66 Following are the financial results for the Company's operating segments.
Years ended December 31, 2002 ----------------------------------------------------------------------- Corporate, Enterprise Enterprise Intercompany, and Banking Trust Reclassifications Total --------------- -------------- ----------------- ---------------- Net interest income $ 32,026,044 $ - $ (1,162,319) $ 30,863,725 Provision for loan losses 2,250,578 - - 2,250,578 Other income 3,871,752 2,353,927 80,312 6,305,991 Other expense 21,434,933 3,090,242 3,778,746 28,303,921 --------------- -------------- ----------------- ---------------- Income (loss) before income tax expense 12,212,285 (736,315) (4,860,753) 6,615,217 Income tax expense (benefit) 4,453,445 (272,437) (2,567,271) 1,613,737 --------------- -------------- ----------------- ---------------- Net income (loss) $ 7,758,840 $ (463,878) $ (2,293,482) $ 5,001,480 =============== ============== ================= ================ Loans, less unearned loan fees $ 679,799,399 $ - $ - $ 679,799,399 Assets held for sale 36,401,416 - - 36,401,416 Goodwill 2,087,537 - - 2,087,537 Deposits 717,135,113 - (820,839) 716,314,274 Borrowings 31,822,797 - 15,000,000 46,822,797 Liabilities held for sale 50,053,023 - - 50,053,023 Total assets $ 873,035,220 $ - $ 3,751,281 $ 876,786,501 =============== ============== ============= ================
2001 ----------------------------------------------------------------------- Corporate, Enterprise Enterprise Intercompany, and Banking Trust Reclassifications Total --------------- -------------- ----------------- ---------------- Net interest income $ 29,883,119 $ - $ (1,081,423) $ 28,801,696 Provision for loan losses 3,230,000 - - 3,230,000 Other income 3,002,500 1,426,078 (5,716,138) (1,287,560) Other expense 21,466,812 2,622,872 1,487,199 25,576,883 --------------- -------------- ----------------- ---------------- Income (loss) before income tax expense 8,188,807 (1,196,794) (8,284,760) (1,292,747) Income tax expense (benefit) 3,106,493 (484,702) (1,379,847) 1,241,944 --------------- -------------- ----------------- ---------------- Net income (loss) $ 5,082,314 $ (712,092) $ (6,904,913) $ (2,534,691) =============== ============== ================= ================ Loans, less unearned loan fees $ 602,746,799 $ - $ - $ 602,746,799 Assets held for sale 40,575,263 - - 40,575,263 Goodwill 2,087,537 - - 2,087,537 Deposits 655,775,912 - (223,003) 655,552,909 Borrowings 14,032,385 - 12,366,667 26,399,052 Liabilities held for sale 58,800,256 - - 58,800,256 Total assets $ 793,013,142 $ - $ 2,236,421 $ 795,249,563 =============== ============== ================= ================
2000 ----------------------------------------------------------------------- Corporate, Enterprise Enterprise Intercompany, and Banking Trust Reclassifications Total --------------- -------------- ----------------- ---------------- Net interest income $ 29,478,075 $ - $ (1,043,632) $ 28,434,443 Provision for loan losses 1,042,534 - - 1,042,534 Other income 2,070,655 851,829 357,117 3,279,601 Other expense 18,108,886 1,772,477 2,380,251 22,261,614 --------------- -------------- ----------------- ---------------- Income (loss) before income tax expense 12,397,310 (920,648) (3,066,766) 8,409,896 Income tax expense (benefit) 4,622,965 (350,590) (1,063,925) 3,208,450 --------------- -------------- ----------------- ---------------- Net income (loss) 7,774,345 (570,058) (2,002,841) 5,201,446 =============== ============== ================= ================ Loans, less unearned loan fees $ 516,809,586 $ - $ - $ 516,809,586 Assets held for sale 41,221,943 - - 41,221,943 Goodwill 2,278,104 - - 2,278,104 Deposits 577,971,473 - (1,703,247) 576,268,226 Borrowings 11,190,899 - 11,000,000 22,190,899 Liabilities held for sale 56,169,211 - - 56,169,211 Total assets $ 706,479,592 $ - $ 4,458,746 $ 710,938,338 =============== ============== ================= ================
67 NOTE 20--QUARTERLY CONDENSED FINANCIAL INFORMATION (Unaudited) The following table presents the unaudited quarterly financial information for the years ended December 31, 2002 and 2001.
2002 ------------------------------------------------------ 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter ------------ ----------- ----------- ----------- (dollars in thousands, except per share data) Interest income $ 11,221 $ 11,529 $ 11,392 $ 11,029 Interest expense 3,248 3,555 3,642 3,862 ------------ ----------- ----------- ----------- Net interest income 7,973 7,974 7,750 7,167 Provision for loan losses 491 640 530 590 ------------ ----------- ----------- ----------- Net interest income after provision for loan losses 7,482 7,334 7,220 6,577 Noninterest income 1,860 1,508 1,446 1,492 Noninterest expense 8,580 6,724 6,367 6,633 ------------ ----------- ----------- ----------- Income before income tax expense 762 2,118 2,299 1,436 Income tax (benefit) expense (585) 784 850 565 Net income $ 1,347 $ 1,334 $ 1,449 $ 871 ============ ========== =========== =========== Earnings per common share Basic $ 0.15 $ 0.14 $ 0.15 $ 0.09 Diluted $ 0.14 $ 0.14 $ 0.15 $ 0.09
2001 ------------------------------------------------------ 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter ------------ ----------- ----------- ----------- (dollars in thousands, except per share data) Interest income $ 11,733 $ 13,180 $ 13,455 $ 14,244 Interest expense 4,793 5,996 6,280 6,741 ------------ ----------- ----------- ----------- Net interest income 6,940 7,184 7,175 7,503 Provision for loan losses 2,460 175 330 265 ------------ ----------- ----------- ----------- Net interest income after provision for loan losses 4,480 7,009 6,845 7,238 Noninterest income (4,443) 1,205 1,112 838 Noninterest expense 6,834 6,455 6,087 6,201 ------------ ----------- ----------- ----------- Income before income tax expense (6,797) 1,759 1,870 1,875 Income tax (benefit) expense (921) 713 735 715 ------------ ----------- ----------- ----------- Net (loss) income $ (5,876) $ 1,046 $ 1,135 $ 1,160 ============ =========== =========== =========== (Loss) earnings per common share Basic $ (0.64) $ 0.11 $ 0.12 $ 0.13 Diluted $ (0.64) $ 0.11 $ 0.12 $ 0.12
68 NOTE 21--PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS Condensed Balance Sheets
December 31, -------------------------------------------- 2002 2001 ---------------- ---------------- Assets Cash $ 814,197 $ 157,791 Investment in Enterprise Bank 70,331,813 62,581,698 Other assets 4,586,242 2,956,841 ---------------- ---------------- Total assets $ 75,732,252 $ 65,696,330 =============== =============== Liabilities and Shareholders' Equity Guaranteed preferred beneficial interests in subordinated debentures $ 15,000,000 $ 11,000,000 Notes payable - 1,366,667 Accounts payable and other liabilities 1,922,302 1,433,060 Shareholders' equity 58,809,950 51,896,603 ---------------- ---------------- Total liabilities and shareholders' equity $ 75,732,252 $ 65,696,330 =============== ===============
Condensed Statements of Operations
Year ended December 31, -------------------------------------------------------------- 2002 2001 2000 ------------------ ------------------ ------------------ Income: Dividends from subsidiaries $ 1,060,000 $ 679,047 $ 1,935,000 Realized gain on trading security - - 500 Recoveries/income (loss) from Merchant Banc investments 88,889 (2,939,443) 29,954 Other (loss) income (8,577) - 9,229 ------------------ ------------------ ------------------ Total income 1,140,312 (2,260,396) 1,974,683 ------------------ ------------------ ------------------ Expenses: Interest expense-guaranteed preferred beneficial interest in subordinated debentures 1,116,808 1,042,439 1,053,334 Interest expense-notes payable 45,510 40,260 - Other expenses 3,773,548 1,472,435 1,748,947 ------------------ ------------------ ------------------ Total expenses 4,935,866 2,555,134 2,802,281 ------------------ ------------------ ------------------ Loss before tax benefit and equity in undistributed earnings of subsidiaries (3,795,554) (4,815,530) (827,598) Income tax benefit 2,566,996 1,232,792 995,872 ------------------ ------------------ ------------------ (Loss) income before equity in undistributed earnings of subsidiaries (1,228,558) (3,582,738) 168,274 ------------------ ------------------ ------------------ Equity in undistributed earnings of subsidiaries 6,230,038 1,048,047 5,033,172 ------------------ ------------------ ------------------ Net income (loss) $ 5,001,480 $ (2,534,691) $ 5,201,446 ================== ================== ==================
69 Condensed Statements of Cash Flow
Year ended December 31, -------------------------------------------------------------- 2002 2001 2000 ------------------ ------------------ ------------------ Cash flows from operating activities: Net income (loss) $ 5,001,480 $ (2,534,691) $ 5,201,446 Adjustments to reconcile net income (loss) to net cash used in operating activities: Proceeds from sale of trading security - - 910,500 Recoveries/income (loss) from Merchant Banc investments 88,889 2,939,443 (30,454) Losses and settlement 1,300,000 - - Noncash compensation expense attributed to stock option grants 209,777 191,293 283,148 Net income of subsidiaries (7,290,038) (1,727,094) (6,968,172) Dividends from subsidiaries 1,060,000 679,047 1,935,000 Other, net (1,293,974) (728,916) (962,825) ------------------ ------------------ ------------------ Net cash (used in) provided by operating activities (2,223,866) (1,180,918) 368,643 Cash flows from investing activities: Capital contributions to subsidiaries - (860,000) (3,175,000) Increase in note receivable from Enterprise Merchant Banc, LLC - (1,362,779) - ------------------ ------------------ ------------------ Net cash used in investing activities - (2,222,779) (3,175,000) Cash flows from financing activities: Proceeds from borrowings of notes payable 1,750,000 1,500,000 - Repayments of notes payable (3,116,667) (133,333) - Proceeds from issuance of subordinated debentures 4,000,000 - - Cash dividends paid (658,645) (553,336) (405,265) Proceeds from the issuance of common stock - - 10,334 Proceeds from the exercise of common stock options 905,584 1,259,043 804,125 ------------------ ------------------ ------------------ Net cash provided by financing activities 2,880,272 2,072,374 409,194 ------------------ ------------------ ------------------ Net increase (decrease) in cash and cash equivalents 656,406 (1,331,323) (2,397,163) Cash and cash equivalents, beginning of year 157,791 1,489,114 3,886,277 ------------------ ------------------ ------------------ Cash and cash equivalents, end of year $ 814,197 $ 157,791 $ 1,489,114 ================== ================== ================== Supplemental disclosures of cash flow information: Retirement of treasury stock $ - $ - $ 390,000 Reduction of deferred tax asset valuation reserve 800,000 - - ================== ================== ==================
70 SIGNATURES Pursuant to the requirements of Section 13 or 15d of the Securities Act of 1934, the undersigned Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Clayton, State of Missouri, on the 25th of March, 2003. ENTERPRISE FINANCIAL SERVICES CORP /s/ Kevin C. Eichner /s/ Frank H. Sanfilippo - ------------------------------------ ------------------------------------ Kevin C. Eichner Frank H. Sanfilippo Chief Executive Officer 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 25th day of March, 2003. SIGNATURES TITLE ---------- ----- /s/ Paul J. McKee, Jr. - ------------------------------------ Paul J. McKee, Jr. Chairman of the Board of Directors /s/ Kevin C. Eichner - ------------------------------------ Kevin C. Eichner Chief Executive Officer and Director /s/ Peter F. Benoist - ------------------------------------ Peter F. Benoist Executive Vice President and Director /s/ Paul R. Cahn - ------------------------------------ Paul R. Cahn Director /s/ William H. Downey - ------------------------------------ William Downey Director /s/ Robert E. Guest, Jr. - ------------------------------------ Robert E. Guest, Jr. Director /s/ Ronald E. Henges - ------------------------------------ Ronald E. Henges Director /s/ Richard S. Masinton - ------------------------------------ Richard S. Masinton Director /s/ Jerry McElhatton - ------------------------------------ Jerry McElhatton Director /s/ William B. Moskoff - ------------------------------------ William B. Moskoff Director /s/ Birch M. Mullins - ------------------------------------ Birch M. Mullins Director /s/ James J. Murphy - ------------------------------------ James Murphy Director /s/ Ted A. Murray - ------------------------------------ Ted A. Murray Director 71 /s/ Stephen A. Oliver - ------------------------------------ Stephen A. Oliver Director /s/ Robert E. Saur - ------------------------------------ Robert E. Saur Director /s/ Jack L. Sutherland - ------------------------------------ Jack L. Sutherland Director /s/ Paul L. Vogel - ------------------------------------ Paul L. Vogel Director /s/ Henry D. Warshaw - ------------------------------------ Henry D. Warshaw Director /s/ Ted C. Wetterau - ------------------------------------ Ted C. Wetterau Director /s/ James L. Wilhite - ------------------------------------ James L. Wilhite Director /s/ James A. Williams - ------------------------------------ James A. Williams Director 72 CERTIFICATION I, Kevin C. Eichner, 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-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures 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) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 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 in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 25, 2003 /s/ Kevin C. Eichner - ------------------------------------ Kevin C. Eichner, Chief Executive Officer 73 I, Frank H. Sanfilippo, 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-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures 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) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 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 in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 25, 2003 /s/ Frank H. Sanfilippo - ------------------------------------ Frank H. Sanfilippo, Chief Financial Officer 74 EXHIBIT INDEX Exhibit No. Exhibit - ------- ------------------------------------------------------------------- 3.1 Certificate of Incorporation of the Registrant, as amended (incorporated herein by reference to Exhibit 3.1 of the Registrant's Registration Statement on Form S-1 dated December 19, 1996 (File No. 333-14737)). 3.2 Amendment to the Certificates of Incorporation of the Registrant (incorporated herein by reference to Exhibit 4.2 to the Registrant's Registration Statement on Form S-8 dated July 1, 1999 (File No. 333-82087)). 3.3 Amendment to the Certificate of Incorporation of the Registrant (incorporated herein by reference to Exhibit 3.1 of the Registrant's Quarterly Report on Form 10-Q for the period ending September 30, 1999). 3.4 Amendment to the Certificate of Incorporation of the Registrant (incorporated herein by reference to Exhibit 99.2 to the Registrant's Current Report on Form 8-K filed on April 30, 2002). 3.5 Bylaws of the Registrant, as amended (incorporated herein by reference to Exhibit 3.4 of the Registrant's Annual Report on Form 10-K for the period ending December 31, 1999). 4.1 Enterprise Bank Second Incentive Stock Option Plan (incorporated herein by reference to Exhibit 44.4 of the Registrant's Registration Statement on Form S-8 dated December 29, 1997 (File No. 333-43365)). 4.2 Enterprise Financial Services Corp Third Incentive Stock Option Plan (incorporated herein by reference to Exhibit 4.5 of the Registrant's Registration Statement on Form S-8 dated December 29, 1997 (File No. 333-43365)). 4.3 Enterprise Financial Services Corp, Fourth Incentive Stock Option Plan (incorporated herein by reference to the Registrant's 1998 Proxy Statement on Form 14-A). 4.4 Enterprise Financial Services Corp (formerly Commercial Guaranty Bancshares, Inc.) Employee Incentive Stock Option Plan (incorporated herein by reference to the Registrant's Form S-8 dated July 25, 2000 (File No. 333-42204)). 4.5 Enterprise Financial Services Corp (formerly Commercial Guaranty Bancshares, Inc.) Non-Employee Organizer and Director Incentive Stock Option Plan (incorporated herein by reference to the Registrant's Form S-8 dated July 25, 2000 (File No. 333-42204)). 4.6 Enterprise Financial Services Corp Stock Appreciation Rights (SAR) Plan and Agreement (incorporated herein by reference to Exhibit 4.5 of the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1999). 4.7.1 Subordinated Indenture dated October 24, 1999 between the Registrant and Wilmington Trust Company relating to 9.40% Junior Subordinated Debentures due December 15, 2029, (incorporated herein by reference to Exhibit 4.6 to Registrant's Registration Statement on Form S-3 (File No. 333-87881)). 4.7.2 Form of 9.40% Junior subordinated Debenture ((included as an Exhibit to Exhibit 4.8.1), incorporated herein by reference to Exhibit 4.6 to Registrant's Registration Statement on Form S-3 (File No. 333-87881)). 75 4.7.3 Amended and Redated Trust Agreement of EBH Capital Trust I dated October 19, 1999, (incorporated herein by reference to Exhibit 4.4 to Registrant's Registration Statement on Form S-3 (File No. 333-87881)). 4.7.4 Preferred Securities Guarantee Agreement between Registrant and Wilmington Trust Company dated October 25, 1999, (incorporated herein by reference to Exhibit 4.8 to Registrant's Registration Statement on Form S-3 (File No. 333-87881)). 4.8.1 Indenture dated June 27, 2002 between Registrant and Wells Fargo, National Association, relating to Floating Rate Junior Subordinated Deferrable Interest Debentures due June 30, 2032, (incorporated by reference to exhibit 4.9.1 to Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2002). 4.8.2 Form of Floating Rate Junior Subordinated Deferrable Interest Debenture due June 30, 2032, (incorporated by reference to exhibit 4.9.2 to Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2002). 4.8.3 Amended and Restated Trust Agreement of EFSC Capital Trust I dated June 27, 2002, (incorporated by reference to exhibit 4.9.3 to Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2002). 4.8.4 Trust Preferred Securities Guarantee Agreement between Registrant and Wells Fargo, National Association, dated June 27, 2002, (incorporated by reference to exhibit 4.9.4 to Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2002.) 4.9 Enterprise Financial Services Corp 2002 Stock Incentive Plan (incorporated herein by reference to Appendix B of the Company's Definitive Proxy Statement dated April 4, 2003). 4.10 Enterprise Financial Services Corp, Incentive Stock Purchase Plan (incorporated herein by reference to the Registrant's Registration Statement on Form S-8 dated October 30, 2002 (File No. 333-100928)). 10.1 Revised Customer Referral Agreement by and among Enterprise Financial Services Corp, Enterprise Bank and Moneta Group Investment Advisors, Inc. (incorporated herein by reference to Exhibit 10.3 of the Registrant's Annual Report on Form 10-K for the period ended December 31, 1998). 10.2 Amendment #1 to the Revised Customer referral Agreement by and among Enterbank Holdings, Inc., Enterprise Bank and Moneta Group Investment Advisors, Inc. (incorporated herein by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2001). 10.3 Amendment #2 to the Revised Customer Referral Agreement by and among Enterbank Holdings, Inc., Enterprise Bank and Moneta Group Investment Advisors, Inc. (incorporated herein by reference to Exhibit 10.2 of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2001). 10.4 Enterprise Financial Services Corp Deferred Compensation Plan I (incorporated herein by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 2000). 10.5 Consulting contract dated October 3, 2001 between Enterprise Financial Services Corp and Paul J. McKee, Jr. (incorporated herein by reference to Exhibit 10.12 of the Registrant's Annual Report on Form 10-K for the period ending December 31, 2001). 76 10.6 Separation Agreement dated September 30, 2002 between Enterprise Financial Services Corp and Fred H. Eller. (incorporated herein by reference to Exhibit 10.15 of the Registrants Quarterly Report on form 10-Q for the period ended September 30, 2002). 10.7/(1)/ Key Executive Employment Agreement dated July 1, 2002 between Enterprise Financial Services Corp and Kevin C. Eichner. 10.8/(1)/ Form of Key Executive Employment Agreement dated October 15, 2002 between Enterprise Financial Services Corp and James C. Wagner and Jack L. Sutherland. 10.9/(1)/ Key Executive Employment Agreement dated October 15, 2002 between Enterprise Financial Services Corp and Paul L. Vogel. 10.10/(1)/ Key Executive Employment Agreement dated October 1, 2002 between Enterprise Financial Services Corp and Peter F. Benoist. 10.11/(1)/ $5,000,000 Unsecured Credit Agreement dated January 9, 2004 between Enterprise Financial Services Corp and Wells Fargo Bank, National Association. 11.1/(1)/ Statement regarding computation of per share earnings. 21.1/(1)/ Subsidiaries of the Registrant. 23.1/(1)/ Consent of KPMG LLP. 99.1/(1)/ Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section Section 906 of the Sarbanes-Oxley Act of 2002 99.2/(1)/ Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section Section 906 of the Sarbanes-Oxley Act of 2002 /(1)/ Filed herewith 77 EX-10.7 3 dex107.txt KEY EXECUTIVE EMPLOYMENT AGREEMENT BETWEEN ENTERPRISE AND KEVIN C. EICHNER EXHIBIT 10.7 ENTERPRISE FINANCIAL SERVICES CORP. EXECUTIVE EMPLOYMENT AGREEMENT THIS AGREEMENT, is made by and between KEVIN C. EICHNER (the "Executive") and ENTERPRISE FINANCIAL SERVICES CORP, a Delaware corporation (the "Company"), effective as of July 1, 2002 (the "Effective Date"). WITNESSETH: WHEREAS, Executive desires to be employed by the Company, and the Company desires to employ Executive, on the terms, covenants and conditions hereinafter set forth in this Agreement. NOW, THEREFORE, for the reasons set forth above, and in consideration of the mutual promises and agreements herein set forth, the Company and Executive agree as follows: 1. Employment. Subject to the terms and conditions set forth in this Agreement, the Company hereby employs Executive for the Contract Term as hereafter defined. During the Contract Term, Executive shall serve as the President and Chief Executive Officer of the Company and shall have such duties and responsibilities as are customarily assigned to individuals serving in such position and such other duties as the Board of Directors (the "Board") may from time to time specify consistent with such corporate office and position. Executive shall comply with all polices and procedures of the Company generally applicable to executive employees of the Company and to the extent consistent with the provisions of this Agreement. The duties and responsibilities Executive is to perform hereunder shall be conducted primarily from the St. Louis, Missouri metropolitan area where the principal offices of the Company are located. Executive may be required from time to time to perform his duties hereunder on an occasional basis at such other places as the Board shall designate or as the interests or business opportunities of the Company may require; provided, however, that without Executive's consent, the Executive shall not be required to relocate his residence from the St. Louis, Missouri metropolitan area. Executive hereby accepts such employment and agrees to serve the Company in such capacities for the term of this Agreement. 2. Term of Employment. Except as otherwise provided herein, the term of this Agreement shall be for three years commencing on the Effective Date and ending on June 30, 2005 (the "Contract Term"). The Contract Term may be extended by mutual written agreement of Executive and the Company upon such terms, provisions and conditions which are mutually acceptable to Executive and the Company. Notwithstanding any expiration of this Agreement at the end of the Contract Term, to the extent that Executive remains an employee of the Company thereafter, unless the parties otherwise agree in writing, (i) the obligations of the Company under sections 4, 6 and 11 of this Agreement shall remain applicable and (ii) the obligations of Executive under sections 7, 8 and 9 of this Agreement shall remain applicable. The term during which Executive is an employee of the Company, including any period of employment following the Contract Term, is referred to as the "Employment Term." 3. Devotion to Duties. Executive agrees that during the Employment Term he will devote all of his skill, knowledge, commercial efforts and working time to the conscientious and faithful performance of his duties and responsibilities to the Company (except for (i) permitted vacation time and absence for sickness or similar disability and (ii) to the extent that it does not interfere with the performance of Executive's duties hereunder: (A) such reasonable time as may be devoted to the fulfillment of Executive's civic and charitable activities and (B) such reasonable time as may be necessary from time to time for personal financial matters). Executive will use his best good faith efforts to promote the success of the Company's business and will cooperate fully with the Board in the advancement of the best interests of the Company. Executive will agree to serve as a director of the Company, or as a director or officer of any of its Subsidiaries or Affiliates, without additional compensation. 4. Compensation of Executive. 4.a Base Salary. During the Employment Term, the Company shall pay to the Executive as compensation for the services to be performed by the Executive a base salary of $300,000 per year (the "Base Salary"). The Base Salary shall be payable in installments in accordance with the Company's normal payroll practice and shall be subject to such withholdings and other ordinary employee withholdings as may be required by law. The Base Salary may be adjusted from time to time in the sole discretion of the Board, but shall not be reduced without the consent of Executive. 4.b Targeted Bonus. In addition to the compensation set forth elsewhere in this Section 4, for each year or portion thereof during the Employment Term and any extensions thereof, the Executive shall qualify for a targeted annualized bonus ("Targeted Bonus") based upon meeting established targeted goals such that with his Base Salary and Targeted Bonus Executive will have the opportunity to earn at least $600,000 per year. No later than the Company's January Board meeting, the Company and Executive shall 78 agree upon certain targeted financial and operating goals ("Targets") for that calendar year which may include Company specific goals such as consolidated return on equity, asset quality and performance of the Company's wealth management services. The established Targets shall be consistent with the financial plan for the Company as adopted by the Company's Board. Within 75 days after the end of each calendar year, the Board (or a committee of the Board to which the Board has delegated such authority) shall make a good faith determination as to the extent to which the Targets have been met by the Company for the preceding calendar year. If the Targets have been met, then Executive shall receive a Targeted Bonus for such preceding year up to a maximum of $300,000 for calendar 2003 and in subsequent years such amounts as the Board may determine, subject to the aforementioned condition that the sum of annual base compensation plus Targeted Bonus for the year is at least $600,000. In the event that the established Targets are exceeded, then Executive shall be entitled to receive additional bonus amounts above the Targeted Bonus pursuant to the previously determined formula applicable to that year. If the Board (or such committee of the Board) determines that the Targets have not been fully met, but minimum thresholds as may be established by the Board (or such committee) have been met, the Board (or such committee) shall make a good faith determination as to the extent that the Targets have been met and determine the amount of such Targeted Bonus to be awarded to the Executive based proportionately upon the extent to which the Targets are determined to have been met. Executive shall also be eligible to receive such other bonuses or incentive payments as may be approved by the Board of Directors. Without limiting the foregoing, Executive shall be entitled to receive a draw against such annual Targeted Bonus at the rate of $15,000 per month (subject to such withholdings as may be required by law) and the Company agrees that for all periods ending on or prior to December 31, 2002, no part of such draw shall be refundable regardless of the extent to which the Targets have been achieved by the Company. After December 31, 2002, the Board may from time to time eliminate, reduce or increase the draw against the annual Targeted Bonus based upon the Board's determination in its sole discretion as to the progress or lack of progress in achieving the Targets for the applicable fiscal year of the Company. 4.c Benefits. Executive shall be entitled to participate, during the Employment Term, in all regular employee benefit and deferred compensation plans established by each of Enterprise Bank (to the extent such participation is not restricted by the Internal Revenue Code of 1986 (the "Code")) and the Company, including, without limitation, any savings and profit sharing plan, incentive stock plan, dental and medical plans, life insurance and disability insurance, such participation to be as provided in said employee benefit plans in accordance with the terms and conditions thereof as in effect from time to time and subject to any applicable waiting period. Executive shall also be entitled to four weeks of paid vacation during each year of the Employment Term, provided that any vacation not used in any year shall be forfeited and not carried over to any subsequent year. In addition to the foregoing benefits, the Company agrees (i) to provide during the Employment Term aggregate term insurance on Executive's life equal to $1,000,000 payable to a beneficiary designated by Executive, provided that Executive qualifies for such coverage at normal published premium rates, and (ii) to provide (or reimburse Executive with respect to) supplemental disability income insurance such that the total combined disability income coverage available to employee from the Company and under policies maintained by Executive on which the Company reimburses Executive for the premiums is equal to $25,000 per month until Executive's 65th birthday. Executive agrees that the cost of the foregoing supplemental insurance benefits shall constitute taxable benefits and be subject to such withholding taxes as may be required by law. 4.d Office and Secretary. Executive will have a private office, secretarial assistance, administrative support, and such other facilities and services as the Company deems necessary or appropriate for the performance of the Executive's duties under this Agreement. 4.e Reimbursement of Expenses. The Company will provide for the payment or reimbursement of all reasonable and necessary expenses incurred by the Executive in connection with the performance of his duties under this Agreement in accordance with the Company's expense reimbursement policy, as such may change from time to time. Without limiting the foregoing, the Company further agrees during the Employment Term (i) to reimburse Executive for monthly automobile expense by means of a $500 per month automobile allowance; (ii) to reimburse Executive for dues and assessments in respect of club memberships maintained by Executive up to a maximum of $7,500 per year; and (iii) that all air travel required of Executive shall be at no less than "Business Class" or its equivalent, if available. In addition, the Executive shall be entitled to receive reimbursement for up to $5,000 in legal expenses incurred in connection with the negotiation and execution of this Agreement. 4.f Stock Options and Long-Term Incentives. Effective as of the Effective Date, Executive was granted ten-year non-qualified options to acquire 82,905 shares of the common stock of the Company at a per-share exercise price of $9.30 pursuant to the terms of the Company's 2002 Stock Incentive Plan. Such options shall vest and become exercisable at the rate of 27,635 shares on June 30 of each of 2003, 2004 and 2005, provided that Executive remains continuously employed by the Company through such dates. Executive shall also be eligible for additional option grants annually as determined by the Board, under the 79 terms of the Company's 2002 Stock Incentive Plan as adopted and/or amended by the Company from time to time. In the event that the Company adopts a long-term incentive compensation program, either to supplement or replace option awards, Executive shall be entitled to participate therein on a similar basis. 5. Termination of Employment. 5.a Termination for Cause. "Termination for Cause", as hereinafter defined, may be effected by the Company at any time during the term of this Agreement by written notification to Executive, specifying in detail the basis for the Termination for Cause. Upon Termination for Cause, Executive shall immediately be paid all accrued salary, bonus compensation to the extent earned, vested deferred compensation, if any, (other than pension plan or profit sharing plan benefits which will be paid in accordance with the terms of the applicable plan), any benefits under any plans of the Company in which the Executive is a participant to the full extent of the Executive's rights under such plans, accrued vacation pay for the year in which termination occurs, and any appropriate business expenses incurred by Executive reimbursable by the Company in connection with his duties hereunder, all to the date of termination, but Executive shall not be paid any other compensation or reimbursement of any kind, including without limitation, severance compensation. "Termination for Cause" shall mean termination by the Company of Executive's employment by the Company by reason of (a) an order of any federal or state regulatory authority having jurisdiction over the Company, (b) the willful failure of Executive substantially to perform his duties hereunder (other than any such failure due to Executive's physical or mental illness); (c) a willful breach by Executive of any material provision of this Agreement or of any other written agreement with the Company or any of its Affiliates; (d) Executive's commission of a crime that constitutes a felony or other crime of moral turpitude or criminal fraud; or (e) chemical or alcohol dependency which materially and adversely affects Executive's performance of his duties under this Agreement; (f) any act of disloyalty or breach of responsibilities to the Company by the Executive which is intended by the Executive to cause material harm to the Company; (e) misappropriation (or attempted misappropriation) of any of the Company's funds or property. If subsequent to Executive's termination of employment hereunder for other than Cause it is determined in good faith by the Company that Executive's employment could have been terminated for Cause hereunder, Executive's employment shall be deemed to have been terminated for Cause retroactively to the date the events giving rise to Cause occurred. 5.b Termination Other Than for Cause. Notwithstanding any other provisions of this Agreement, the Company may effect a "Termination Other Than For Cause", as hereinafter defined, at any time upon giving written notice to Executive of such termination. Upon any Termination Other Than for Cause, subject to the effectiveness of Executive's execution of a release and waiver of all claims with respect to Executive's employment against the Company its Affiliates and their respective officers and directors in a form reasonably satisfactory to the Company other than rights under this Section 5.2 and subject to Executive's compliance with the terms and conditions contained in this Agreement, Executive shall within 30 days after such termination be paid all accrued salary, bonus compensation to the extent earned, vested deferred compensation (other than pension plan or profit sharing plan benefits which will be paid in accordance with the applicable plan), accrued vacation pay for the year in which termination occurs, any benefits under any plans of the Company in which Executive is a participant to the full extent of Executive's rights under such plans, and any appropriate business expenses incurred by Executive in connection with his duties hereunder, all to the date of termination, and all severance compensation provided in subsection 6.2. In addition, subject to the conditions set forth above, upon such termination of employment, all stock options granted to Executive shall become fully vested and exercisable and all restricted common stock granted to Executive shall fully vest and become transferable. "Termination Other Than for Cause" shall mean any termination by the Company of Executive's employment with the Company other than a termination pursuant to subsection 5.1, 5.3, 5.4, 5.5 or 5.6, or termination by Executive of Executive's employment with the Company by reason of (i) the Company's material breach of this Agreement, (ii) the assignment of Executive without his consent to a position, responsibilities or duties of a materially lesser status or degree of responsibility than his position, responsibilities or duties as of the Effective Date, (iii) the requirement by the Company that Executive be based anywhere other than the St. Louis, Missouri metropolitan area, without Executive's consent or (iv) the failure of Executive to be reelected to the Board by its stockholders or the failure of the Board to re-nominate him for reelection without Executive's consent. 5.c Termination by Reason of Disability. If, during the term of this Agreement, the Executive, in the reasonable judgment of the Board of Directors, (i) has failed to perform his duties under this Agreement on account of illness or physical or mental incapacity, (ii) such illness or incapacity continues for a period of more than 90 consecutive days, or 90 days during any 180 day period, and (iii) Executive is entitled to receive disability income benefit payments under the disability insurance policy maintained by the Company pursuant to Section 4.3 of this Agreement, the Company shall have the right to terminate Executive's employment hereunder by written notification to Executive and payment to Executive of all accrued salary, bonus compensation to the extent earned, vested deferred compensation, if any, (other than 80 pension plan or profit sharing plan benefits which will be paid in accordance with the applicable plans), accrued vacation pay for the year in which termination occurs, any benefits under any plans of the Company in which Executive is a participant to the full extent of Executive's rights under such plans, and any appropriate business expenses incurred by Executive in connection with his duties hereunder, all to the date of termination, but Executive shall not be paid any other compensation or reimbursement of any kind, including without limitation, severance compensation. 5.d Death. In the event of Executive's death during the term of this Agreement, Executive's employment shall be deemed to have terminated as of the last day of the month during which his death occurs and the Company shall pay to his estate or such beneficiaries as Executive may from time to time designate all accrued salary, bonus compensation to the extent earned, vested deferred compensation (other than pension plan or profit sharing plan benefits which will be paid in accordance with the applicable plan), any benefits under any plans of the Company in which Executive is a participant to the full extent of Executive's rights under such plans, accrued vacation pay for the year in which termination occurs, and any appropriate business expenses incurred by Executive in connection with his duties hereunder, all to the date of termination, but Executive's estate shall not be paid any other compensation or reimbursement of any kind, including without limitation, severance compensation. 5.e Voluntary Termination. In the event of a "Voluntary Termination," as hereinafter defined, provided that the Executive provides the Company with at least 90 days notice of such termination (which notice and any requirement for service may be waived or shortened by the Company), the Company shall within 30 days after such termination pay all accrued salary, bonus compensation to the extent earned, vested deferred compensation, if any, (other than pension plan or profit sharing plan benefits which will be paid in accordance with the applicable plans), any benefits under any plans of the Company in which Executive is a participant to the full extent of Executive's rights under such plans, accrued vacation pay for the year in which termination occurs, and any appropriate business expenses incurred by Executive in connection with his duties hereunder, all to the date of termination, but no other compensation or reimbursement of any kind, including without limitation, severance compensation. "Voluntary Termination" shall mean termination by Executive of Executive's employment other than (i) constructive termination as described in paragraphs (i) through (ii) of subsection 5.2, (ii) termination by reason of Executive's disability as described in subsection 5.3, (iii) termination by reason of Executive's death as described in subsection 5.4, and (iv) Termination Upon a Change in Control as described in subsection 5.6. 5.f Termination Upon a Change in Control. In the event of a "Termination Upon a Change in Control," as hereinafter defined, Executive shall immediately be paid all accrued salary, bonus compensation to the extent earned, vested deferred compensation, if any, (other than pension plan or profit sharing plan benefits which will be paid in accordance with the applicable plans), any benefits under any plans of the Company in which Executive is a participant to the full extent of Executive's rights under such plans, vacation pay for the year in which termination occurs, and any appropriate business expenses incurred by Executive in connection with his duties hereunder, all to the date of termination, and all severance compensation provided in subsection 6.1. "Termination Upon a Change in Control" shall mean a termination by the Company (other than a Termination for Cause) or by Executive, in either case within one year following a "Change in Control" as hereinafter defined. "Change in Control" shall mean the date on which any of the following has occurred: (a) any individual, entity or group (a "Person"), other than one or more of the Company's directors on the Effective Date of this Agreement or any Person that any such director controls, becomes the beneficial owner of 50% or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors of the Company (the "Company Outstanding Voting Securities"); (b) any Person becomes the beneficial owner of 50% or more of the combined voting power of the then outstanding voting securities of Enterprise Bank entitled to vote generally in the election of directors of Enterprise Bank ("Bank Outstanding Voting Securities"); (c) consummation of a reorganization, merger or consolidation (a "Business Combination") of the Company, unless, in each case, following such Business Combination (i) all or substantially all of the Persons who were the beneficial owners, respectively, of the Company Outstanding Voting 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 company resulting from such Business Combination, (ii) no Person (excluding any company 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 company 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 Directors of the company resulting from the Business Combination are Continuing Directors (as hereinafter 81 defined) at the time of the execution of the definitive agreement, or the action of the Board, providing for such Business Combination; (d) consummation of the sale, other than in the ordinary course of business, of more than 50% of the combined assets of the Company and its subsidiaries in a transaction or series of related transactions during the course of any twelve-month period; (e) the date on which Continuing Directors (as hereinafter defined) cease for any reason to constitute at least a majority of the Board of Directors of the Company; or (f) the failure of Executive to be reelected to the Board by its stockholders or the failure of the Board to re-nominate him for reelection without Executive's consent. As used in this Section 5.6, the definitions of the terms "beneficial owner" and "group" shall have the meanings ascribed to those terms in Rule 13(d)(3) under the Securities Exchange Act of 1934. As used in this Section 5.6, the term "Continuing Directors" shall mean, as of any date of determination, (i) any member of the Board of Directors on the Effective Date of this Agreement, (ii) any person who has been a member of the Board of Directors for the two years immediately preceding such date of determination, or (iii) any person who was nominated for election or elected to the Board of Directors with the affirmative vote of the greater of (A) a majority of the Continuing Directors who were members of the Board of Directors at the time of such nomination or election or (B) at least four Continuing Directors but excluding, for purposes of this clause (iii), any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies by or on behalf of a Person other than the Board of Directors of the Company. "Control" means the direct or indirect ownership of voting securities constituting more than fifty percent (50%) of the issued voting securities of a corporation. 5.g Resignation Upon Termination. Effective upon any termination under this Section 5 or otherwise, Executive shall automatically and without taking any further actions be deemed to have resigned from all positions then held by him with the Company and all of its Affiliates. 6. Severance Compensation 6.a Termination Upon Change in Control. In the event Executive's employment is terminated in a Termination Upon a Change in Control, Executive shall be paid the following as severance compensation: (a) For two (2) years following such termination of employment, an amount (payable on the dates specified in subsection 4.1 except as otherwise provided herein) equal to the Base Salary at the rate payable at the time of such termination plus (i) any accrued and unpaid Bonus due Executive under paragraph 4.3 of this Agreement and (ii) an amount equal to the Targeted Bonuses due (based on the Base Salary then in effect) for the year in which such termination of employment occurs (determined as though all requisite targets were fully and completely achieved). Notwithstanding any provision in this paragraph (a) to the contrary, Executive may, in Executive's sole discretion, by delivery of a notice to the Company within 30 days following a Termination Upon a Change in Control, elect to receive from the Company a lump sum severance payment by bank cashier's check equal to the present value of the flow of cash payments that would otherwise be paid to Executive pursuant to this paragraph (a). Such present value shall be determined as of the date of delivery of the notice of election by Executive and shall be based on a discount rate equal to the prime rate, as reported in the Wall Street Journal, or similar publication, on the date of delivery of the election notice. If Executive elects to receive a lump sum severance payment, the Company shall make such payment to Executive within 30 days following the date on which Executive notifies the Company of Executive's election. (b) In the event that Executive is not otherwise entitled to fully exercise all awards granted to him under any stock option plan maintained by the Company and any such plan does not otherwise provide for acceleration of exerciseability upon the occurrence of the Change in Control described herein, such awards shall become immediately exercisable upon a Change in Control. (c) All restricted stock granted to Executive will vest and become transferable. (d) Executive shall continue to accrue retirement benefits and shall continue to enjoy any benefits under any plans of the Company in which Executive is a participant to the full extent of Executive's rights under such plans, including any perquisites provided under this Agreement, through the remainder of the Employment Term; provided, however, that the benefits under any such plans of the Company in which Executive is a participant, including any such perquisites, shall cease upon Executive's obtaining other employment. If necessary to provide such benefits to Executive, the Company shall, at its election, either: (i) amend its employee benefit plans to provide the benefits described in this paragraph (c), to the extent that such is permissible under the nondiscrimination requirements and other provisions of the Internal Revenue Code of 1986 (the "Code") and the provisions of Executive Retirement Income Security Act of 1974, or (ii) provide 82 separate benefit arrangements or cash payments so that Executive receives amounts equivalent thereto, net of tax consequences. 6.b Termination Other Than for Cause. In the event Executive's employment is terminated in a Termination Other Than for Cause, Executive shall be paid as severance compensation his Base Salary, at the rate payable at the time of such termination, through the remaining period of the Contract Term or the one year period commencing on the effective date of such termination (whichever period is shorter) plus (i) any accrued and unpaid Bonus due Executive under paragraph 4.3 of this Agreement and (ii) an amount equal to the Targeted Bonuses due (based on the Base Salary then in effect) for the year in which such termination of employment as though all requisite targets were fully and completely achieved. Notwithstanding any provision in this subsection 6.2 to the contrary, the Company may, in the Company's sole discretion, by delivery of a notice to Executive within 30 days following a Termination Other Than for Cause, elect to remit to Executive a lump sum severance payment by bank cashier's check equal to the present value of the flow of cash payments that would otherwise be paid to Executive pursuant to this subsection 6.2. Such present value shall be determined as of the date of delivery of the notice of election by the Company and shall be based on a discount rate equal to the prime rate, as reported in The Wall Street Journal, on the date of delivery of the election notice. If the Company elects to remit a lump sum severance payment, the Company shall make such payment to Executive within 30 days following the date on which the Company notifies Executive of its election. In the event that Executive is not otherwise entitled to fully exercise all awards granted to him under the Company's Incentive Stock Plan, and the Incentive Stock Plan does not otherwise provide for acceleration of exerciseability upon the occurrence of a Termination Other Than for Cause described herein, such awards shall become immediately exercisable upon a Termination Other Than for Cause. 6.c Termination Upon Any Other Event. In the event of a Voluntary Termination, Termination For Cause, termination by reason of Executive's disability pursuant to subsection 5.5 or termination by reason of Executive's death pursuant to subsection 5.6, Executive or his estate shall not be paid any severance compensation. 7. Confidentiality. Executive agrees to hold in strict confidence all non-public information concerning any matters affecting or relating to the business of the Company, including without limiting the generality of the foregoing non-public information concerning its manner of operation, business or other plans, data bases, marketing programs, protocols, processes, computer programs, client lists, marketing information and analyses, operating policies or manuals or other data. Executive agrees that he will not, directly or indirectly, use any such information for the benefit of others than the Company or disclose or communicate any of such information in any manner whatsoever other than to the directors, officers, employees, agents and representatives of the Company who need to know such information, who shall be informed by Executive of the confidential nature of such information and directed by Executive to treat such information confidentially. Upon the Company's request, Executive shall return all information furnished to him related to the business of the Company without retaining any copies in electronic or other form. The above limitations on use and disclosure shall not apply to information which Executive can demonstrate: (a) was known to Executive before receipt thereof from the Company; (b) is learned by Executive from a third party entitled to disclose it; or (c) becomes known publicly other than through Executive; (c) is disclosed by Executive upon authority of the Board or any committee of the Board; (d) is disclosed pursuant to any legal requirement or (e) is disclosed pursuant to any agreement to which the Company or any of its Subsidiaries or Affiliates is a party. The parties hereto stipulate that all such information is material and confidential and gravely affects the effective and successful conduct of the business of the Company and the Company's goodwill, and that any breach of the terms of this Section 7 shall be a material breach of this Agreement. The terms of this Section 7 shall survive and remain in effect following any termination of this Agreement. 8. Use of Proprietary Information. Executive recognizes that the Company possesses a proprietary interest in all of the information described in Section 7 and has the exclusive right and privilege to use, protect by copyright, patent or trademark, manufacture or otherwise exploit the processes, ideas and concepts described therein to the exclusion of Executive, except as otherwise agreed between the Company and Executive in writing. Executive expressly agrees that any products, inventions, discoveries or improvements made by Executive, his agents or affiliates, during the term of this Agreement, based on or arising out of the information described in Section 7 shall be the property of and inure to the exclusive benefit of the Company. Executive further agrees that any and all products, inventions, discoveries or improvements developed by Executive (whether or not able to be protected by copyright, patent or trademark) in the scope of his employment, or involving the use of the Company's time, materials or other resources, shall be promptly disclosed to the Company and shall become the exclusive property of the Company. 83 9. Non-Competition Agreement. 9.a Non-Competition. Executive agrees that, during the Employment Term and for a period of one year following any termination of such employment, Executive shall not, without the prior written consent of the Company, directly or indirectly, own, manage, operate, control, be connected with as an officer, employee, partner, consultant or otherwise, or otherwise engage or participate in (except as an employee of the Company, or Affiliate of it) any corporation or other business entity engaged in the operation, ownership or management of a bank, trust company or financial services business within the Metropolitan Statistical Areas of St. Louis, Kansas City or any other city in which the Company or any of its Affiliates has an office at the time of such termination. Notwithstanding the foregoing, the ownership by Executive of less than 1% of any class of the outstanding capital stock of any corporation conducting such a competitive business which is regularly traded on a national securities exchange or in the over-the-counter market shall not be a violation of the foregoing covenant. 9.b Non-Solicitation. During the period of actual employment and, in addition, the period, if any, during which Executive shall be entitled to severance compensation pursuant to Section 6 (notwithstanding an election by Executive to receive a lump sum severance payment for such period), Executive shall not, except on behalf of or with the prior written consent of the Company, directly or indirectly, entice or induce, or attempt to entice or induce, any employee of the Company to leave such employ, or employ any such person in any business similar to or in competition with that of the Company. Executive hereby acknowledges and agrees that the provisions set forth in this subsection 9.2 constitute a reasonable restriction on his ability to compete with the Company. 9.c Saving Provision. The parties hereto agree that, in the event a court of competent jurisdiction shall determine that the geographical or durational elements of this covenant are unenforceable, such determination shall not render the entire covenant unenforceable. Rather, the excessive aspects of the covenant shall be reduced to the threshold which is enforceable, and the remaining aspects shall not be affected thereby. 9.d Equitable Relief. Executive acknowledges that the extent of damages to the Company from a breach of Sections 7, 8 and 9 of this Agreement would not be readily quantifiable or ascertainable, that monetary damages would be inadequate to make the Company whole in case of such a breach, and that there is not and would not be an adequate remedy at law for such a breach. Therefore, Executive specifically agrees that the Company is entitled to injunctive or other equitable relief (without any requirement to post any bond or other security) from a breach of Sections 7, 8 and 9 of this Agreement, and hereby waives and covenants not to assert against a prayer for such relief that there exists an adequate remedy at law, in monetary damages or otherwise. 10. Assignment. This Agreement shall not be assignable by Executive and shall not be assignable by the Company except by operation of law or to a successor entity acquiring all or substantially all the Company's business or assets. No such assignment shall affect any determination of whether such assignment involves a Change of Control for purposes of this Agreement. In the event of any assignment permitted hereby, the duties and responsibilities of Executive performed for the assignee shall not, without the written consent of Executive, be materially increased, altered or diminished in a manner inconsistent with Executive's duties and responsibilities hereunder for the Company. 11. Indemnification. The Company shall indemnify the Executive to the full extent provided for in the Bylaws of the Company, and no amendment of such Bylaws shall diminish the Company's obligation to indemnify the Executive pursuant to this Agreement. 1. Entire Agreement. This Agreement and any agreements entered into after the date hereof under any of the Company's benefit plans or compensation programs as described in Section 4 contain the complete agreement concerning the employment arrangement between the parties, including without limitation severance or termination pay, and shall, as of the Effective Date, supersede all other agreements or arrangements between the parties with regard to the subject matter hereof. 11. Binding Agreement. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors and assigns. The obligations of the Company under this Agreement shall not be terminated by reason of any liquidation, dissolution, bankruptcy, cessation of business or similar event relating to the Company. This Agreement shall not be terminated by reason of any merger, consolidation or reorganization of the Company, but shall be binding upon and inure to the benefit of the surviving or resulting entity. 12. Modification. No waiver or modification of this Agreement or of any covenant, condition, or limitation herein contained shall be valid unless authorized by the Board and reduced to in writing and duly executed by the party to be charged therewith and no evidence of any waiver or modification shall be offered or received in evidence of any proceeding, arbitration, or litigation between the parties hereto arising out of or affecting this Agreement, or the rights or obligations of the parties thereunder, unless such waiver or modification is in writing, duly executed as aforesaid. 84 13. Severability. All agreements and covenants contained herein are severable, and in the event any of them shall be held to be invalid or unenforceable by any court of competent jurisdiction, this Agreement shall be interpreted as if such invalid agreements or covenants were not contained herein. 14. Manner of Giving Notice. All notices, requests and demands to or upon the respective parties hereto shall be sent by hand, certified mail, overnight air courier service, in each case with all applicable charges paid or otherwise provided for, addressed as follows, or to such other address as may hereafter be designated in writing by the respective parties hereto: To Company: To Executive at his current Enterprise Financial Services Corp residential address on file with 150 North Meramec the Company. Clayton, Missouri 63105 Attention: Chairman of the Board and Corporate Secretary Such notices, requests and demands shall be deemed to have been given or made on the date of delivery if delivered by hand or by telecopy and on the next following date if sent by mail or by air courier service. 15. Remedies. In the event of a breach of this Agreement, the non-breaching party shall be entitled to such legal and equitable relief as may be provided by law, and shall further be entitled to recover all costs and expenses, including reasonable attorneys' fees, incurred in enforcing the non-breaching party's rights hereunder. 16. Headings. The headings have been inserted for convenience only and shall not be deemed to limit or otherwise affect any of the provisions of this Agreement. 17. Choice of Law. It is the intention of the parties hereto that this Agreement and the performance hereunder be construed in accordance with, under and pursuant to the laws of the State of Missouri without regard to the jurisdiction in which any action or special proceeding may be instituted. 18. Taxes. The company may withhold from any payments made under this Agreement all applicable taxes, including but not limited to income, employment and social insurance taxes, as shall be required by law. 19. Voluntary Agreement; No Conflicts. Executive hereby represents and warrants to the Company that he is legally free to accept and perform his employment with the Company, that he has no obligation to any other person or entity that would affect or conflict with any of Executive's obligations pursuant to such employment, and that the complete performance of the obligations pursuant to Executive's employment will not violate any order or decree of any governmental or judicial body or contract by which Executive is bound. The Company will not request or require, and Executive agrees not to use, in the course of Executive's employment with the Company, any information obtained in Executive's employment with any previous employer to the extent that such use would violate any contract by which Executive is bound or any decision, law, regulation, order or decree of any governmental or judicial body. 20. Certain Definitions. As used herein, the following definitions shall apply: "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. "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" Any natural person, firm, partnership, limited liability company, association, corporation, company, trust, business trust, governmental authority or other entity. "Subsidiary" With respect to any Person, each corporation or other Person in which the first Person owns or Controls, 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. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first stated above. ENTERPRISE FINANCIAL SERVICES CORP By: Title: Kevin C. Eichner 85 EX-10.8 4 dex108.txt FORM OF KEY EXECUTIVE EMPLOYMENT AGREEMENT BETWEEN ENTERPRISE & JAMES C. WAGNER EXHIBIT 10.8 ENTERPRISE BANKING KEY EXECUTIVE EMPLOYMENT AGREEMENT THIS AGREEMENT is made as of ___________, 2002, between ENTERPRISE FINANCIAL SERVICES CORP, a Delaware Company, its subsidiaries, affiliates, successors and assigns (the "Company"), and ____________________ (the "Executive"). A. The Company is engaged in providing of financial products and services including banking, trust services, financial consulting, merchant banking activities and related products and services to persons and corporations (the "Business"). B. The Company wishes to employ or continue to employee the Executive in connection with the conduct of the Business, and the Executive is willing to accept such employment or continued employment, on the terms and conditions set out in this Agreement. C. In such position, the Executive will have substantial customer contacts, will perform special and unique duties and services for the Company, and will acquire confidential information concerning the customers, business operations, and trade secrets of the Company (as further defined in this Agreement). The success of the Business requires maintaining strict secrecy with respect to the Confidential Information of the Company. D. The parties to this Agreement agree that substantial and irreparable loss and damage will be suffered by the Company in the event of a breach of this Agreement by the Executive. AGREEMENT NOW, THEREFORE, in consideration of the promises and mutual representations and covenants contained herein and other good and valuable consideration received by the Executive, the parties agree as follows: 1. Compensation. In full consideration for the Executive's services and subject to the due performance thereof, the Executive shall be entitled to compensation as agreed to by the parties, which may be changed from time to time by written agreement of the parties, provided that, in such event, all of the other terms and conditions of this Agreement shall remain in full force and effect. 2. Benefits. The Executive will be permitted to participate in such pension, profit sharing, bonus, life insurance, hospitalization, major medical, and other employee benefit plans of the Company that may be in effect from time to time, to the extent the Executive is eligible under the terms of those plans. 3. Duties. The Executive is engaged to perform such executive and managerial duties as may be delegated to Executive from time to time by or under the authority of the Company's Board of Directors, President or other appropriate officers. The Executive shall devote all of Executive's business time and attention to the performance of such duties which are in the area of the Business as defined above, subject to the direction and control of the Company. The Executive shall comply with all oral and written rules, regulations and policies of the Company. 4. Termination of Employment. a. Death, Disability and For Cause Terminations i. Death. The Agreement shall terminate immediately upon the Executive's death, provided that in such event the Company shall cause Executive's salary to be paid to the Executive's estate for the period through the earlier of (1) the end of the current payroll period or (2) the end of the calendar month in which the Executive's death occurs. ii. Disability. Company may, upon thirty (30) days' prior written notice, terminate this Agreement in the event the Executive, by reason of physical or mental disability, shall be unable to perform the services required of the Executive hereunder. In the event of disagreement 86 concerning the existence of any such disability, the matter shall be resolved by a disinterested licensed medical doctor chosen by written agreement of the Company and the Executive. If the Company and the Executive cannot agree on a selection of a medical doctor, each of them will select a medical doctor, and the two medical doctors will select a third medical doctor who will determine whether the Executive has a disability. The existence of such a disability shall be conclusively presumed in the event either (a) the Executive is entitled to payment of benefits under any disability insurance policy or program carried by the Company or (b) the Executive is unable to perform his or her duties for a total of 60 or more calendar days (whether or not consecutive) during any period of one hundred eighty (180) consecutive calendar days, whether as a result of one or more illnesses or ailments. In the event of any such termination, the Company shall cause the Executive's salary to be paid to the Executive for the period through the date of termination. iii. For Cause. The Company may terminate the Executive's employment for Cause. For this purpose, "cause" shall include, without limitation, (i) Executive's insubordination, meaning the willful failure to conform to or conduct himself or herself in accordance with the policies and standards of Company (unless deviation from said written policy is considered a "known normal business practice") or the refusal to perform the duties assigned pursuant to Section 3; (ii) the dishonesty of Executive; (iii) Executive's commission of a felony, fraud, embezzlement or any other act of moral turpitude; (iv) any willful violation by Executive of laws or regulations applicable to Company's business; (v) Executive's gross negligence or willful misconduct in the performance of Executive's duties under this Agreement which could adversely affect the business or reputation of Company. If the Executive's employment is terminated for Cause, the Company shall pay the Executive his full accrued Base Salary through the effective date of the termination of his employment (which shall be no earlier than the date of Executive's receipt of notice thereof) at the rate in effect at the time of such termination. iv. If the Executive's employment is terminated for the reason provided above in 4(a)i-iii, Executive shall be entitled to receive any salary or other compensation to which the Executive is entitled which accrues through the date of termination. Unless otherwise specifically agreed to by the Company in this Agreement, any bonus or other compensation or benefits applicable to the Executive shall be deemed to have accrued only in the event that the entire period to which the bonus applies has elapsed prior to the date of termination. b. All Other Employment Terminations i. Change of Control. If following a Change of Control, Executive's employment terminates and Executive is not offered a new position comparable to his position, at the same or greater base salary and located within sixty (60) minute normal commuting distance from the Executive's office immediately prior to Charge of Control, the Company shall pay Executive as provided below in 4(b)iv. ii. Resignation or Retirement. If Executive voluntarily resigns his employment or retires and Executive agrees to any extension or postponement of his resignation or retirement if requested by the Company at his normal rate of compensation for a period not to exceed three (3) months, he shall be entitled to the payment as provided below in 4(b)iv. iii. Involuntary Termination Without Cause. If the Company terminates Executive's employment other than as provided for in Section 4a(i) through 4a(iii) of this Agreement, Executive shall be entitled to the payment provision below in 4(b)iv. iv. If Executive's employment is terminated as provided for in 4(b)i-iii above, he shall be entitled to 24 months severance pay, to be paid in accordance with the Company's standard payroll procedures over a 24 month period. Executive will be paid severance pay at his/her base salary effective as of the end of the most recent quarter prior to termination plus an amount each year equal to the average of his/her bonus compensation for the two years preceding termination. c. Immediately upon the effective date of any termination, except as otherwise provided in this Section 4b and as provided below in this Agreement, all obligations of the Company, including the obligation of the Company to pay any compensation or other benefits to the Executive accruing after the date of such termination, shall cease. 87 5. Company Documents. Any and all documents in any way related to the Company and/or its customers or prospective customers shall be and remain the sole and exclusive property of the Company and are subject to immediate recall at any time by the Company. Document is used in the broadest sense and includes, but is not limited to meaning, any writing or recording, graphic or other matter, whether produced, reproduced or stored on paper, cards, tapes, discs, belts, charts, film, computer storage devices, or any other medium including, but not limited to, matter in the form of books, manuals, pamphlets, resolutions, plans, proposals, minutes of meetings, conferences and telephone or other communications, reports, studies, statements, notebooks, applications, original agreements, appointment calendars, working papers, charts, graphs, diagrams, contracts, memoranda, notes, records, correspondence, original diaries, bookkeeping entries, regulations, or any published material and also includes, but is not limited to, originals (unless otherwise stated), copies (with or without notes or changes thereon), and drafts. Upon recall of the documents or upon termination of the Executive's employment (whether such termination is initiated by the Executive or the Company and regardless of the reason for such termination, whether or not such reason constitutes good cause), the Executive shall deliver such documents to the Company within seventy-two (72) hours. The Executive shall also provide the Company within seventy-two (72) hours with a written guarantee that states that all of the Company's documents have been returned to the Company pursuant to this Section. 6. Non-disclosure of Information. Executive will not, except as authorized by Company in writing or as required by any law, rule or regulation after providing prior written notice to Company within sufficient time for Company to object to production or disclosure or quash subpoenas related to same, during or at any time after the termination of Executive's employment with Company, directly or indirectly, use for Executive's benefit or for the benefit of others, or disclose, communicate, divulge, furnish to, or convey to any other person, firm, or Company, any secret or confidential information, knowledge or data of Company or that of third parties obtained by Executive during the period of Executive's employment with Company, and such information, knowledge or data includes, without limitation, the following: . Secret or confidential matters of a technical nature such as, but not limited to, methods, know-how, formulations, compositions, processes, computer programs, and similar items or research projects involving such items, . Secret or confidential matters of a business nature such as, but not limited to, marketing policies or strategies, information about costs, price lists, purchasing and purchasing policies, profits, marketing, sales or lists of customers, customer history information, and . Secret or confidential matters pertaining to future developments such as, but not limited to, research and development or future marketing or merchandising. 7. Subsequent Employment: Executive must personally notify Company in writing regarding the details of any new employment within seventy-two (72) hours of accepting an offer of employment. Company may notify any person, firm, or company employing Executive or potentially employing Executive as to the existence and provisions of this Agreement. 8. Non-Competition: a. Executive recognizes that during the course of Executive's employment with Company, Executive has been and will be instructed by Company about and become acquainted with and shall gain knowledge of confidential information of Company, including, but not limited to confidential information about customer and prospective lists and proposals, methods of sales, the existence and contents and terms of this Agreement, methods of sales procurement, sales procurement techniques, sales procedures and equipment/supply information, supply acquisition procedures and processes and sources, customer acquisition and evaluation procedures, customer maintenance procedures and corresponding information relating to persons, firms and corporations which are or may become customers of Company by virtue of Executive's employment by the Company, Executive will have access to the Customer Lists and will be directly involved in developing such lists and maintaining customer relationships and, further, companies from which Company obtains various products for sale, resale and distribution to customers of Company specific and unique knowledge of the persons, firms, Company, and other entities that purchase or use products sold by the Company or have purchased products sold by the Company. Further, Executive agrees and acknowledges that the development and assemblage and maintenance of the customer lists, information, documents, and business of Company has taken extraordinary time, money, resources, training, and effort by Company and its employees and accordingly, Executive agrees that Executive will 88 not during Executive's period of employment with Company and for a period of two (2) years following cessation of Executive's employment at Company for any cause or reason ("restricted period"), directly or indirectly, engage in any business in competition with Company with respect to the sale of, maintenance of, billing and processing of, services and products in the markets and supplies and sale for and/or to present customers, former customers (defined as any person or Company who was a customer during the two (2) years prior to the cessation of Executive's employment) and prospects of Company. Executive agrees that during Executive's period of employment with Company and for the two (2) year restricted period following cessation of Executive's employment with Company, Executive shall not induce or attempt to induce any present, former, or prospective customer (defined as any company or person that has been or is in the loan approval process or to whom the company has made a presentation for deposit within the last two (2) years) of Company to become a customer of Executive at any person, firm, or Company, or business association with which Executive is or becomes affiliated in any capacity with respect to the business which Company is engaged in currently and/or during the period of employment. b. The Executive shall not at any time during the term of his or her employment by the Company and for a period of two (2) years following the termination thereof (whether such termination is initiated by the Executive or the Company and regardless of the reason for such termination, whether or not such reason constitutes good cause), directly or indirectly, induce or attempt to induce any employee of the Company or of any of its subsidiaries or affiliates to cease employment with the Company or its subsidiaries or affiliates, as the case may be, or to seek employment elsewhere. c. The Company and the Executive acknowledge their understanding that the laws and public policies of the various states of the United States may differ as to the validity and enforceability of the covenants contained in this Section and hereby acknowledge their understanding and intention both that the provisions of this Section shall be enforced to the fullest extent permissible and the unenforceability of or modification necessary to conform with such laws and public policies shall not render unenforceable any other provision hereof. Accordingly, to the extent that any covenant in this Section shall be adjudicated to be invalid or unenforceable, such covenant (or portion thereof) shall automatically be amended to such extent as may grant the Company the maximum protection and restriction on Executive's activities permitted by applicable law. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof and this Agreement shall be construed in all respects as if any invalid or unenforceable provision were omitted. d. The two (2) year time periods described in this Section shall begin on the date of termination of the Executive's employment with the Company. 9. Non-Disparagement: The Executive further agrees that, during the term of employment by the Company and thereafter (whether such termination is initiated by the Executive or the Company and regardless of the reason for such termination, whether or not such reason constitutes good cause), Executive will not, directly or indirectly, in any individual or representative capacity whatsoever, make any statement, oral or written, or perform any other act or omission which is or is likely to be materially detrimental to the goodwill of the Company or any of its subsidiaries or affiliates. However, Executive may provide truthful responses to inquiries regarding objectively verifiable information. 10. Remedies. The Executive recognizes that the Company has a valid, protectable right and business interest in preserving the information and relationships described in this Agreement and that each covenant and agreement of the Executive contained in such Sections is a material and essential precondition to the Company's agreement to employ the Executive under the terms set forth in this Agreement. The parties further agree that the services to be rendered by the Executive are of a special, unique, and extraordinary character and the Executive hereby acknowledges that: (i) the covenants and agreements contained herein are reasonable and necessary in order to protect the legitimate business interests of the Company; (ii) the enforcement of such covenants would not unreasonably impair the Executive's ability to earn a livelihood; and (iii) any breach or violation thereof would result in irreparable injury and harm to the Company and its affiliates and subsidiaries, for which the Company would be without adequate legal remedy as long as the company escrows the disputed termination pay as it becomes due with Southwest Bank or other mutually agreeable escrow agent. The Executive, therefore, acknowledges and agrees that, in the event of any violation or breach of this Agreement, whether threatened or actual, the Company shall be authorized and entitled to obtain, any and all injunctive relief and/or restraining orders available to it so as to prohibit, bar, and restrain any and all such breaches by the Executive. Any such equitable remedies or relief available to the Company shall be cumulative and in addition to whatever other remedies the Company may have, including without limitation recovery of damages and 89 attorneys' fees. The Executive waives any requirement that the Company post bond of any sort in connection with any action taken by the Company hereunder. 11. Prior Employment. The Executive expressly confirms that the duties to be performed in connection with employment by the Company will not violate any contractual or other restrictions applicable to the Executive, including any restrictions contained in any employment agreement between the Executive and any prior employer. The Executive will fully indemnify and hold the Company harmless from and against any and all liability, cost or expense (including attorney's fees) which the Company may suffer as a result of a breach by the Executive of this Section or of any agreement with any prior employer. 12. Definitions. a. "Subsidiary" shall mean any Company owned or controlled by the Company, directly or indirectly, through stock ownership, and shall include (but not be limited to) each Company a majority of the voting stock of which is owned by the Company or any such other majority-owned subsidiary (or a chain thereof) of the Company. b. "Affiliate" shall mean any Company or other entity controlling, controlled by or under common control with the Company, directly or indirectly, through stock ownership or otherwise. c. "Successors and assigns" shall mean any person, Company or other entity which succeeds to purchase, acquire or accept assignments of all or substantially all of the assets or outstanding stock of the Company, whether by agreement or operation of law. d. A "Change of Control" shall mean an event or act or combination thereof the direct or indirect result of which is that (a) the individuals who constitute the Board of Directors on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof, whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) shall be, for purposes of this clause considered as though such a person were a member of the Incumbent Board, or (b) the incumbent stockholders of the Company approve or ratify a reorganization, merger or consolidation and, immediately thereafter, the incumbent stockholders do not own, directly or indirectly, more than 50% of the combined voting power entitled to consolidated company's then outstanding voting securities, or a liquidation or dissolution of the Company or of the sale of all or substantially all of the assets of the Company. For purposes of this Agreement, the term "Person" shall mean and include any individual, Company, partnership, group, association or other "person," other than the Company, a subsidiary of the Company or any employee benefit plan(s) sponsored or maintained by the Company or any subsidiary thereof. 13. Non-Waiver of Rights. The failure to enforce at any time any of the provisions of this Agreement or to require at any time performance by the other party of any of the provisions hereof shall in no way be construed to be a waiver of such provisions or to affect either the validity of this Agreement, or any part hereof, or the right of either party thereafter to enforce each and every provision in accordance with the terms of this Agreement. 14. Invalidity of Provisions. The invalidity or unenforceability of any particular provisions of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provisions were omitted. 15. Assignments. a. This Agreement and the Company's rights and obligations hereunder shall be freely assignable by the Company to, and shall inure to the benefit of, and be binding upon any other corporate entity which shall succeed to all or part the Business conducted by the Company. b. As this Agreement is a contract for personal services, neither this Agreement nor any of the Executive's rights and obligations hereunder shall be assignable by the Executive. 90 16. Governing Law. This Agreement shall be interpreted in accordance with and governed by the laws of the State of Missouri. 17. Jurisdiction. The Company and the Executive hereby agree to submit any suit, action, or proceeding arising out of or relating to this Agreement to the jurisdiction of the Circuit Court St. Louis County, Missouri or the United States District Court for the Eastern District of Missouri. The Company and the Executive further agree that all claims with respect to such suit, action or proceeding may be heard and determined in any of such courts. The Company and the Executive waive, to the fullest extent permitted by law, any objection regarding the venue of such suit, action or proceeding in any court aforementioned, including proceedings for enforcement of any court order and the Company and the Executive further waive any claim that such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. The Company and the Executive hereby expressly waive all rights of any other jurisdiction which either of them may now or hereafter have by reason of their present or subsequent domiciles. 18. Notices. Any notice given by either party hereunder shall be in writing and shall be personally delivered, telexed, or wired, or mailed (certified or registered mail, postage prepaid), as follows: To the Company: Enterprise Financial Services Corp 150 North Meramec Clayton, MO 63105-3753 To the Executive: At his or her address set forth on the payroll records of the Company or to such other address as may have been furnished to the other party by written notice. 19. Counterparts. This Agreement may be executed in one or more identical counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. 20. Attorneys' Fees. In the event of violations or alleged violations of this Agreement, the prevailing party to any resulting action or claim shall be entitled to all expenses and costs incurred in protecting or enforcing its rights hereunder, including but not limited to reasonable attorney's fees and expenses. 21. Entire Agreement. This agreement contains the entire agreement of the parties in this matter. No modification, amendment or waiver of any of the provisions of this Agreement shall be effective unless in writing specifically referring hereto, and signed by both parties. IN WITNESS WHEREOF, the Executive and the Company have executed this Agreement as of the day and year above written. ENTERPRISE FINANCIAL SERVICES CORP Dated By ---------------------- ------------------------------------ Its ------------------------------ Dated ---------------------- ---------------------------------- Executive ---------------------------- Witness 91 EX-10.9 5 dex109.txt KEY EXECUTIVE EMPLOYMENT AGREEMENT BETWEEN ENTERPRISE AND PAUL L. VOGEL EXHIBIT 10.9 ENTERPRISE BANKING KEY EXECUTIVE EMPLOYMENT AGREEMENT THIS AGREEMENT is made as of October 16, 2002, between ENTERPRISE FINANCIAL SERVICES CORP, a Delaware Company, its subsidiaries, affiliates, successors and assigns (the "Company"), and PAUL VOGEL (the "Executive"). A. The Company is engaged in providing of financial products and services including banking, trust services, financial consulting, merchant banking activities and related products and services to persons and corporations (the "Business"). B. The Company wishes to employ or continue to employee the Executive in connection with the conduct of the Business, and the Executive is willing to accept such employment or continued employment, on the terms and conditions set out in this Agreement. C. In such position, the Executive will have substantial customer contacts, will perform special and unique duties and services for the Company, and will acquire confidential information concerning the customers, business operations, and trade secrets of the Company (as further defined in this Agreement). The success of the Business requires maintaining strict secrecy with respect to the Confidential Information of the Company. D. The parties to this Agreement agree that substantial and irreparable loss and damage will be suffered by the Company in the event of a breach of this Agreement by the Executive. AGREEMENT NOW, THEREFORE, in consideration of the promises and mutual representations and covenants contained herein and other good and valuable consideration received by the Executive, the parties agree as follows: 1. Compensation. In full consideration for the Executive's services and subject to the due performance thereof, the Executive shall be entitled to compensation as agreed to by the parties, which may be changed from time to time by written agreement of the parties, provided that, in such event, all of the other terms and conditions of this Agreement shall remain in full force and effect. 2. Benefits. The Executive will be permitted to participate in such pension, profit sharing, bonus, life insurance, hospitalization, major medical, and other employee benefit plans of the Company that may be in effect from time to time, to the extent the Executive is eligible under the terms of those plans. 3. Duties. The Executive is engaged to perform such executive and managerial duties as may be delegated to Executive from time to time by or under the authority of the Company's Board of Directors, President or other appropriate officers. The Executive shall devote all of Executive's business time and attention to the performance of such duties which are in the area of the Business as defined above, subject to the direction and control of the Company. The Executive shall comply with all oral and written rules, regulations and policies of the Company. 4. Termination of Employment. a. Death, Disability and For Cause Terminations i. Death. The Agreement shall terminate immediately upon the Executive's death, provided that in such event the Company shall cause Executive's salary to be paid to the Executive's estate for the period through the earlier of (1) the end of the current payroll period or (2) the end of the calendar month in which the Executive's death occurs. ii. Disability. Company may, upon thirty (30) days' prior written notice, terminate this Agreement in the event the Executive, by reason of physical or mental disability, shall be 92 unable to perform the services required of the Executive hereunder. In the event of disagreement concerning the existence of any such disability, the matter shall be resolved by a disinterested licensed medical doctor chosen by written agreement of the Company and the Executive. If the Company and the Executive cannot agree on a selection of a medical doctor, each of them will select a medical doctor, and the two medical doctors will select a third medical doctor who will determine whether the Executive has a disability. The existence of such a disability shall be conclusively presumed in the event either (a) the Executive is entitled to payment of benefits under any disability insurance policy or program carried by the Company or (b) the Executive is unable to perform his or her duties for a total of 60 or more calendar days (whether or not consecutive) during any period of one hundred eighty (180) consecutive calendar days, whether as a result of one or more illnesses or ailments. In the event of any such termination, the Company shall cause the Executive's salary to be paid to the Executive for the period through the date of termination. iii. For Cause. The Company may terminate the Executive's employment for Cause. For this purpose, "cause" shall include, without limitation, (i) Executive's insubordination, meaning the willful failure to conform to or conduct himself or herself in accordance with the policies and standards of Company (unless deviation from said written policy is considered a "known normal business practice") or the refusal to perform the duties assigned pursuant to Section 3; (ii) the dishonesty of Executive; (iii) Executive's commission of a felony, fraud, embezzlement or any other act of moral turpitude; (iv) any willful violation by Executive of laws or regulations applicable to Company's business; (v) Executive's gross negligence or willful misconduct in the performance of Executive's duties under this Agreement which could adversely affect the business or reputation of Company. If the Executive's employment is terminated for Cause, the Company shall pay the Executive his full accrued Base Salary through the effective date of the termination of his employment (which shall be no earlier than the date of Executive's receipt of notice thereof) at the rate in effect at the time of such termination. iv. If the Executive's employment is terminated for the reason provided above in 4(a)i-iii, Executive shall be entitled to receive any salary or other compensation to which the Executive is entitled which accrues through the date of termination. Unless otherwise specifically agreed to by the Company in this Agreement, any bonus or other compensation or benefits applicable to the Executive shall be deemed to have accrued only in the event that the entire period to which the bonus applies has elapsed prior to the date of termination. b. All Other Employment Terminations i. Change of Control. If following a Change of Control, Executive's employment terminates and Executive is not offered a new position comparable to his position, at the same or greater base salary and located within sixty (60) minute normal commuting distance from the Executive's office immediately prior to Charge of Control, the Company shall pay Executive as provided below in 4(b)iv. ii. Resignation or Retirement. If Executive voluntarily resigns his employment or retires and Executive agrees to any extension or postponement of his resignation or retirement if requested by the Company at his normal rate of compensation for a period not to exceed three (3) months, he shall be entitled to the payment as provided below in 4(b)iv. iv. Involuntary Termination Without Cause. If the Company terminates Executive's employment other than as provided for in Section 4a(i) through 4a(iii) of this Agreement, Executive shall be entitled to the payment provision below in 4(b)iv. iv. If Executive's employment is terminated as provided for in 4(b)i-iii above, he shall be entitled to 24 months severance pay, to be paid in accordance with the Company's standard payroll procedures over a 24 month period. Executive will be paid severance pay as determined by his total compensation which consists of: (1) his base salary in effect as of the end of the most recent quarter prior to termination, (2) the last twelve months production commissions (including all commissions less first year commissions from the sale of life insurance), (3) the average of the last two year's first year insurance commissions and (4) the last twelve months average management override/specialist override. 93 c. Immediately upon the effective date of any termination, except as otherwise provided in this Section 4b and as provided below in this Agreement, all obligations of the Company, including the obligation of the Company to pay any compensation or other benefits to the Executive accruing after the date of such termination, shall cease. 5. Company Documents. Any and all documents in any way related to the Company and/or its customers or prospective customers shall be and remain the sole and exclusive property of the Company and are subject to immediate recall at any time by the Company. Document is used in the broadest sense and includes, but is not limited to meaning, any writing or recording, graphic or other matter, whether produced, reproduced or stored on paper, cards, tapes, discs, belts, charts, film, computer storage devices, or any other medium including, but not limited to, matter in the form of books, manuals, pamphlets, resolutions, plans, proposals, minutes of meetings, conferences and telephone or other communications, reports, studies, statements, notebooks, applications, original agreements, appointment calendars, working papers, charts, graphs, diagrams, contracts, memoranda, notes, records, correspondence, original diaries, bookkeeping entries, regulations, or any published material and also includes, but is not limited to, originals (unless otherwise stated), copies (with or without notes or changes thereon), and drafts. Upon recall of the documents or upon termination of the Executive's employment (whether such termination is initiated by the Executive or the Company and regardless of the reason for such termination, whether or not such reason constitutes good cause), the Executive shall deliver such documents to the Company within seventy-two (72) hours. The Executive shall also provide the Company within seventy-two (72) hours with a written guarantee that states that all of the Company's documents have been returned to the Company pursuant to this Section. 6. Non-disclosure of Information. Executive will not, except as authorized by Company in writing or as required by any law, rule or regulation after providing prior written notice to Company within sufficient time for Company to object to production or disclosure or quash subpoenas related to same, during or at any time after the termination of Executive's employment with Company, directly or indirectly, use for Executives benefit or for the benefit of others, or disclose, communicate, divulge, furnish to, or convey to any other person, firm, or Company, any secret or confidential information, knowledge or data of Company or that of third parties obtained by Executive during the period of Executive's employment with Company, and such information, knowledge or data includes, without limitation, the following: . Secret or confidential matters of a technical nature such as, but not limited to, methods, know-how, formulations, compositions, processes, computer programs, and similar items or research projects involving such items, . Secret or confidential matters of a business nature such as, but not limited to, marketing policies or strategies, information about costs, price lists, purchasing and purchasing policies, profits, marketing, sales or lists of customers, customer history information, and . Secret or confidential matters pertaining to future developments such as, but not limited to, research and development or future marketing or merchandising. 7. Subsequent Employment: Executive must personally notify Company in writing regarding the details of any new employment within seventy-two (72) hours of accepting an offer of employment. Company may notify any person, firm, or company employing Executive or potentially employing Executive as to the existence and provisions of this Agreement. 8. Non-Competition: a. Executive recognizes that during the course of Executive's employment with Company, Executive has been and will be instructed by Company about and become acquainted with and shall gain knowledge of confidential information of Company, including, but not limited to confidential information about customer and prospective lists and proposals, methods of sales, the existence and contents and terms of this Agreement, methods of sales procurement, sales procurement techniques, sales procedures and equipment/supply information, supply acquisition procedures and processes and sources, customer acquisition and evaluation procedures, customer maintenance procedures and corresponding information relating to persons, firms and corporations which are or may become customers of Company by virtue of Executive's employment by the Company, Executive will have access to the Customer Lists and will be directly involved in developing such lists and maintaining customer relationships and, further, companies from which Company obtains various products for sale, resale and distribution to customers of Company specific and unique knowledge of the persons, firms, Company, and other entities that purchase or use 94 products sold by the Company or have purchased products sold by the Company. Further, Executive agrees and acknowledges that the development and assemblage and maintenance of the customer lists, information, documents, and business of Company has taken extraordinary time, money, resources, training, and effort by Company and its employees and accordingly, Executive agrees that Executive will not during Executive's period of employment with Company and for a period of two (2) years following cessation of Executive's employment at Company for any cause or reason ("restricted period"), directly or indirectly, engage in any business in competition with Company with respect to the sale of, maintenance of, billing and processing of, services and products in the markets and supplies and sale for and/or to present customers, former customers (defined as any person or Company who was a customer during the two (2) years prior to the cessation of Executive's employment) and prospects of Company. Executive agrees that during Executive's period of employment with Company and for the two (2) year restricted period following cessation of Executive's employment with Company, Executive shall not induce or attempt to induce any present, former, or prospective customer (defined as any company or person that has been or is in the loan approval process or to whom the company has made a presentation for deposit within the last two (2) years) of Company to become a customer of Executive at any person, firm, or Company, or business association with which Executive is or becomes affiliated in any capacity with respect to the business which Company is engaged in currently and/or during the period of employment. b. The Executive shall not at any time during the term of his or her employment by the Company and for a period of two (2) years following the termination thereof (whether such termination is initiated by the Executive or the Company and regardless of the reason for such termination, whether or not such reason constitutes good cause), directly or indirectly, induce or attempt to induce any employee of the Company or of any of its subsidiaries or affiliates to cease employment with the Company or its subsidiaries or affiliates, as the case may be, or to seek employment elsewhere. c. The Company and the Executive acknowledge their understanding that the laws and public policies of the various states of the United States may differ as to the validity and enforceability of the covenants contained in this Section and hereby acknowledge their understanding and intention both that the provisions of this Section shall be enforced to the fullest extent permissible and the unenforceability of or modification necessary to conform with such laws and public policies shall not render unenforceable any other provision hereof. Accordingly, to the extent that any covenant in this Section shall be adjudicated to be invalid or unenforceable, such covenant (or portion thereof) shall automatically be amended to such extent as may grant the Company the maximum protection and restriction on Executive's activities permitted by applicable law. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof and this Agreement shall be construed in all respects as if any invalid or unenforceable provision were omitted. d. The two (2) year time periods described in this Section shall begin on the date of termination of the Executive's employment with the Company. 9. Non-Disparagement: The Executive further agrees that, during the term of employment by the Company and thereafter (whether such termination is initiated by the Executive or the Company and regardless of the reason for such termination, whether or not such reason constitutes good cause), Executive will not, directly or indirectly, in any individual or representative capacity whatsoever, make any statement, oral or written, or perform any other act or omission which is or is likely to be materially detrimental to the goodwill of the Company or any of its subsidiaries or affiliates. However, Executive may provide truthful responses to inquiries regarding objectively verifiable information. 10. Remedies. The Executive recognizes that the Company has a valid, protectable right and business interest in preserving the information and relationships described in this Agreement and that each covenant and agreement of the Executive contained in such Sections is a material and essential precondition to the Company's agreement to employ the Executive under the terms set forth in this Agreement. The parties further agree that the services to be rendered by the Executive are of a special, unique, and extraordinary character and the Executive hereby acknowledges that: (i) the covenants and agreements contained herein are reasonable and necessary in order to protect the legitimate business interests of the Company; (ii) the enforcement of such covenants would not unreasonably impair the Executive's ability to earn a livelihood; and (iii) any breach or violation thereof would result in irreparable injury and harm to the Company and its affiliates and subsidiaries, for which the Company would be without adequate legal remedy as long as the company escrows the disputed termination pay as it becomes due with Southwest Bank or other mutually agreeable escrow agent. 95 The Executive, therefore, acknowledges and agrees that, in the event of any violation or breach of this Agreement, whether threatened or actual, the Company shall be authorized and entitled to obtain, any and all injunctive relief and/or restraining orders available to it so as to prohibit, bar, and restrain any and all such breaches by the Executive. Any such equitable remedies or relief available to the Company shall be cumulative and in addition to whatever other remedies the Company may have, including without limitation recovery of damages and attorneys' fees. The Executive waives any requirement that the Company post bond of any sort in connection with any action taken by the Company hereunder. 11. Prior Employment. The Executive expressly confirms that the duties to be performed in connection with employment by the Company will not violate any contractual or other restrictions applicable to the Executive, including any restrictions contained in any employment agreement between the Executive and any prior employer. The Executive will fully indemnify and hold the Company harmless from and against any and all liability, cost or expense (including attorney's fees) which the Company may suffer as a result of a breach by the Executive of this Section or of any agreement with any prior employer. 12. Definitions. a. "Subsidiary" shall mean any Company owned or controlled by the Company, directly or indirectly, through stock ownership, and shall include (but not be limited to) each Company a majority of the voting stock of which is owned by the Company or any such other majority-owned subsidiary (or a chain thereof) of the Company. b. "Affiliate" shall mean any Company or other entity controlling, controlled by or under common control with the Company, directly or indirectly, through stock ownership or otherwise. c. "Successors and assigns" shall mean any person, Company or other entity which succeeds to purchase, acquire or accept assignments of all or substantially all of the assets or outstanding stock of the Company, whether by agreement or operation of law. d. A "Change of Control" shall mean an event or act or combination thereof the direct or indirect result of which is that (a) the individuals who constitute the Board of Directors on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof, whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) shall be, for purposes of this clause considered as though such a person were a member of the Incumbent Board, or (b) the incumbent stockholders of the Company approve or ratify a reorganization, merger or consolidation and, immediately thereafter, the incumbent stockholders do not own, directly or indirectly, more than 50% of the combined voting power entitled to consolidated company's then outstanding voting securities, or a liquidation or dissolution of the Company or of the sale of all or substantially all of the assets of the Company. For purposes of this Agreement, the term "Person" shall mean and include any individual, Company, partnership, group, association or other "person," other than the Company, a subsidiary of the Company or any employee benefit plan(s) sponsored or maintained by the Company or any subsidiary thereof. 13. Non-Waiver of Rights. The failure to enforce at any time any of the provisions of this Agreement or to require at any time performance by the other party of any of the provisions hereof shall in no way be construed to be a waiver of such provisions or to affect either the validity of this Agreement, or any part hereof, or the right of either party thereafter to enforce each and every provision in accordance with the terms of this Agreement. 14. Invalidity of Provisions. The invalidity or unenforceability of any particular provisions of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provisions were omitted. 15. Assignments. a. This Agreement and the Company's rights and obligations hereunder shall be freely assignable by the Company to, and shall inure to the benefit of, and be binding upon any other corporate entity which shall succeed to all or part the Business conducted by the Company. 96 b. As this Agreement is a contract for personal services, neither this Agreement nor any of the Executive's rights and obligations hereunder shall be assignable by the Executive. 16. Governing Law. This Agreement shall be interpreted in accordance with and governed by the laws of the State of Missouri. 17. Jurisdiction. The Company and the Executive hereby agree to submit any suit, action, or proceeding arising out of or relating to this Agreement to the jurisdiction of the Circuit Court St. Louis County, Missouri or the United States District Court for the Eastern District of Missouri. The Company and the Executive further agree that all claims with respect to such suit, action or proceeding may be heard and determined in any of such courts. The Company and the Executive waive, to the fullest extent permitted by law, any objection regarding the venue of such suit, action or proceeding in any court aforementioned, including proceedings for enforcement of any court order and the Company and the Executive further waive any claim that such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. The Company and the Executive hereby expressly waive all rights of any other jurisdiction which either of them may now or hereafter have by reason of their present or subsequent domiciles. 18. Notices. Any notice given by either party hereunder shall be in writing and shall be personally delivered, telexed, or wired, or mailed (certified or registered mail, postage prepaid), as follows: To the Company: Enterprise Financial Services Corp 150 North Meramec Clayton, MO 63105-3753 To the Executive: At his or her address set forth on the payroll records of the Company or to such other address as may have been furnished to the other party by written notice. 19. Counterparts. This Agreement may be executed in one or more identical counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. 20. Attorneys' Fees. In the event of violations or alleged violations of this Agreement, the prevailing party to any resulting action or claim shall be entitled to all expenses and costs incurred in protecting or enforcing its rights hereunder, including but not limited to reasonable attorney's fees and expenses. 21. Entire Agreement. This agreement contains the entire agreement of the parties in this matter. No modification, amendment or waiver of any of the provisions of this Agreement shall be effective unless in writing specifically referring hereto, and signed by both parties. IN WITNESS WHEREOF, the Executive and the Company have executed this Agreement as of the day and year above written. ENTERPRISE FINANCIAL SERVICES CORP Dated By ---------------------- ------------------------------------ Its ------------------------------ Dated ---------------------- ------------------------------------------ Paul Vogel ---------------------------- Witness 97 EX-10.10 6 dex1010.txt KEY EXECUTIVE EMPLOYMENT AGREEMENT BETWEEN ENTERPRISE AND PETER F. BENOIST EXHIBIT 10.10 ENTERPRISE FINANCIAL SERVICES CORP. EXECUTIVE EMPLOYMENT AGREEMENT THIS AGREEMENT, is made by and between PETER F. BENOIST (the "Executive") and ENTERPRISE FINANCIAL SERVICES CORP, a Delaware corporation (the "Company"), effective as of October 1, 2002 (the "Effective Date"). WITNESSETH: WHEREAS, Executive desires to be employed by the Company, and the Company desires to employ Executive, on the terms, covenants and conditions hereinafter set forth in this Agreement. NOW, THEREFORE, for the reasons set forth above, and in consideration of the mutual promises and agreements herein set forth, the Company and Executive agree as follows: 1. Employment. Subject to the terms and conditions set forth in this Agreement, the Company hereby employs Executive for the Contract Term as hereafter defined. During the Contract Term, Executive shall serve as Executive Vice President of the Company, and the Chairman and Chief Executive Officer of the Company's subsidiary, Enterprise Bank, and shall have such duties and responsibilities as are customarily assigned to individuals serving in such positions and such other duties as the Board of Directors (the "Board") may from time to time specify consistent with such corporate offices and positions. Executive shall comply with all polices and procedures of the Company generally applicable to executive employees of the Company and to the extent consistent with the provisions of this Agreement. The duties and responsibilities Executive is to perform hereunder shall be conducted primarily from the St. Louis, Missouri metropolitan area where the principal offices of the Company are located. Executive may be required from time to time to perform his duties hereunder on an occasional basis at such other places as the Board shall designate or as the interests or business opportunities of the Company may require; provided, however, that without Executive's consent, the Executive shall not be required to relocate his residence from the St. Louis, Missouri metropolitan area. Executive hereby accepts such employment and agrees to serve the Company in such capacities for the term of this Agreement. 2. Term of Employment. Except as otherwise provided herein, the term of this Agreement shall be for term commencing on the Effective Date and ending on December 31, 2005 (the "Contract Term"). The Contract Term may be extended by mutual written agreement of Executive and the Company upon such terms, provisions and conditions which are mutually acceptable to Executive and the Company. Notwithstanding any expiration of this Agreement at the end of the Contract Term, to the extent that Executive remains an employee of the Company thereafter, unless the parties otherwise agree in writing, (i) the obligations of the Company under sections 4, 6 and 11 of this Agreement shall remain applicable and (ii) the obligations of Executive under sections 7, 8 and 9 of this Agreement shall remain 98 applicable. The term during which Executive is an employee of the Company, including any period of employment following the Contract Term, is referred to as the "Employment Term." 3. Devotion to Duties. Executive agrees that during the Employment Term he will devote all of his skill, knowledge, commercial efforts and working time to the conscientious and faithful performance of his duties and responsibilities to the Company (except for (i) permitted vacation time and absence for sickness or similar disability and (ii) to the extent that it does not interfere with the performance of Executive's duties hereunder: (A) such reasonable time as may be devoted to the fulfillment of Executive's civic and charitable activities and (B) such reasonable time as may be necessary from time to time for personal financial matters). Executive will use his best good faith efforts to promote the success of the Company's business and will cooperate fully with the Board in the advancement of the best interests of the Company. Executive will agree to serve as a director of the Company, or as a director or officer of any of its Subsidiaries or Affiliates, without additional compensation. 4. Compensation of Executive. 4.1 Base Salary. During the Employment Term, the Company shall pay to the Executive as compensation for the services to be performed by the Executive a base salary of $250,000 per year (the "Base Salary"). The Base Salary shall be payable in installments in accordance with the Company's normal payroll practice and shall be subject to such withholdings and other ordinary employee withholdings as may be required by law. The Base Salary may be adjusted from time to time in the sole discretion of the Board, but shall not be reduced without the consent of Executive. 4.2 Targeted Bonus. In addition to the compensation set forth elsewhere in this Section 4, for calendar year 2003 and each calendar year thereafter during the Employment Term and any extensions thereof, the Executive shall qualify for a targeted annualized bonus ("Targeted Bonus") based upon meeting established targeted goals such that with his Base Salary and Targeted Bonus Executive will have the opportunity to earn at least $500,000 per year. No later than the Company's January Board meeting, the Company and Executive shall agree upon certain targeted financial and operating goals ("Targets") for that calendar year. The established Targets shall be consistent with the financial plan for the Company as adopted by the Company's Board. Within 75 days after the end of each calendar year, the Company's Chief Executive Officer in collaboration with the Board (or a committee of the Board to which the Board has delegated such authority) shall make a good faith determination as to the extent to which the Targets have been met for the preceding calendar year. If the Targets have been met, then Executive shall receive a Targeted Bonus for such preceding year up to a maximum of $250,000 for calendar 2003 and in subsequent years such amounts as the Company's Chief Executive Officer in collaboration with the Board may determine, subject to the aforementioned condition that the sum of annual base compensation plus Targeted Bonus for the year is at least $500,000. In the event that the established Targets are exceeded, then Executive shall be entitled to receive additional bonus amounts above the Targeted Bonus pursuant to the previously determined formula applicable to that year. If the Company's Chief Executive Officer in collaboration with the Board (or such committee of the Board) determines that the Targets have not been fully met, but minimum thresholds as may be established by the Company's Chief Executive Officer in collaboration with the Board (or such committee) have been met, the Company's Chief Executive Officer in collaboration with the Board (or such committee) shall make a good faith determination as to the extent that the Targets have been met and determine the amount of such Targeted Bonus to be awarded to the Executive based proportionately upon the extent to which the Targets are determined to have been met. Executive shall also be eligible to receive such other bonuses or incentive payments as may be approved by the Board of Directors. 99 4.3 Benefits. Executive shall be entitled to participate, during the Employment Term, in all regular employee benefit and deferred compensation plans established by each of Enterprise Bank (to the extent such participation is not restricted by the Internal Revenue Code of 1986 (the "Code")) and the Company, including, without limitation, any savings and profit sharing plan, incentive stock plan, dental and medical plans, life insurance and disability insurance, such participation to be as provided in said employee benefit plans in accordance with the terms and conditions thereof as in effect from time to time and subject to any applicable waiting period. Executive shall also be entitled to four weeks of paid vacation during each year of the Employment Term, provided that any vacation not used in any year shall be forfeited and not carried over to any subsequent year. 4.4 Office and Secretary. Executive will have a private office, secretarial assistance, administrative support, and such other facilities and services as the Company deems necessary or appropriate for the performance of the Executive's duties under this Agreement. 4.5 Reimbursement of Expenses. The Company will provide for the payment or reimbursement of all reasonable and necessary expenses incurred by the Executive in connection with the performance of his duties under this Agreement in accordance with the Company's expense reimbursement policy, as such may change from time to time. Without limiting the foregoing, the Company further agrees during the Employment Term (i) to reimburse Executive for monthly automobile expense by means of a $500 per month automobile allowance; and (ii) to reimburse Executive for dues and assessments in respect of club memberships maintained by Executive up to a maximum of $7,500 per year. 4.6 Stock Options and Long-Term Incentives. Effective as of the Effective Date, Executive was granted ten-year non-qualified options to acquire _____ shares of the common stock of the Company at a per-share exercise price of $_____ pursuant to the terms of the Company's 2002 Stock Incentive Plan. Such options shall vest and become exercisable at the rate of _______ shares on October 1 of each of 2003, 2004 and 2005, provided that Executive remains continuously employed by the Company through such dates. 5. Termination of Employment. 5.1 Termination for Cause. "Termination for Cause", as hereinafter defined, may be effected by the Company at any time during the term of this Agreement by written notification to Executive, specifying in detail the basis for the Termination for Cause. Upon Termination for Cause, Executive shall immediately be paid all accrued salary, bonus compensation to the extent earned, vested deferred compensation, if any, (other than pension plan or profit sharing plan benefits which will be paid in accordance with the terms of the applicable plan), any benefits under any plans of the Company in which the Executive is a participant to the full extent of the Executive's rights under such plans, accrued vacation pay for the year in which termination occurs, and any appropriate business expenses incurred by Executive reimbursable by the Company in connection with his duties hereunder, all to the date of termination, but Executive shall not be paid any other compensation or reimbursement of any kind, including without limitation, severance compensation. "Termination for Cause" shall mean termination by the Company of Executive's employment by the Company by reason of (a) an order of any federal or state regulatory authority having jurisdiction over the Company, (b) the willful failure of Executive substantially to perform his duties hereunder (other than any such failure due to Executive's physical or mental illness); (c) a willful breach by Executive of any material provision of this Agreement or of any other written agreement with the Company or any of its Affiliates; (d) Executive's commission of a crime that constitutes a felony or other crime of moral 100 turpitude or criminal fraud; or (e) chemical or alcohol dependency which materially and adversely affects Executive's performance of his duties under this Agreement; (f) any act of disloyalty or breach of responsibilities to the Company by the Executive which is intended by the Executive to cause material harm to the Company; (e) misappropriation (or attempted misappropriation) of any of the Company's funds or property. If subsequent to Executive's termination of employment hereunder for other than Cause it is determined in good faith by the Company that Executive's employment could have been terminated for Cause hereunder, Executive's employment shall be deemed to have been terminated for Cause retroactively to the date the events giving rise to Cause occurred. 5.2 Termination Other Than for Cause. Notwithstanding any other provisions of this Agreement, the Company may effect a "Termination Other Than For Cause", as hereinafter defined, at any time upon giving written notice to Executive of such termination. Upon any Termination Other Than for Cause, subject to the effectiveness of Executive's execution of a release and waiver of all claims with respect to Executive's employment against the Company its Affiliates and their respective officers and directors in a form reasonably satisfactory to the Company other than rights under this Section 5.2 and subject to Executive's compliance with the terms and conditions contained in this Agreement, Executive shall within 30 days after such termination be paid all accrued salary, bonus compensation to the extent earned, vested deferred compensation (other than pension plan or profit sharing plan benefits which will be paid in accordance with the applicable plan), accrued vacation pay for the year in which termination occurs, any benefits under any plans of the Company in which Executive is a participant to the full extent of Executive's rights under such plans, and any appropriate business expenses incurred by Executive in connection with his duties hereunder, all to the date of termination, and all severance compensation provided in subsection 6.2. In addition, subject to the conditions set forth above, upon such termination of employment, all stock options granted to Executive shall become fully vested and exercisable and all restricted common stock granted to Executive shall fully vest and become transferable. "Termination Other Than for Cause" shall mean any termination by the Company of Executive's employment with the Company other than a termination pursuant to subsection 5.1, 5.3, 5.4, 5.5 or 5.6, or termination by Executive of Executive's employment with the Company by reason of (i) the Company's material breach of this Agreement, (ii) the assignment of Executive without his consent to a position, responsibilities or duties of a materially lesser status or degree of responsibility than his position, responsibilities or duties as of the Effective Date, (iii) the requirement by the Company that Executive be based anywhere other than the St. Louis, Missouri metropolitan area, without Executive's consent or (iv) the failure of Executive to be reelected to the Board by its stockholders or the failure of the Board to re-nominate him for reelection without Executive's consent. 5.3 Termination by Reason of Disability. If, during the term of this Agreement, the Executive, in the reasonable judgment of the Board of Directors, (i) has failed to perform his duties under this Agreement on account of illness or physical or mental incapacity, and (ii) such illness or incapacity continues for a period of more than 90 consecutive days, or 90 days during any 180 day period, the Company shall have the right to terminate Executive's employment hereunder by written notification to Executive and payment to Executive of all accrued salary, bonus compensation to the extent earned, vested deferred compensation, if any, (other than pension plan or profit sharing plan benefits which will be paid in accordance with the applicable plans), accrued vacation pay for the year in which termination occurs, any benefits under any plans of the Company in which Executive is a participant to the full extent of Executive's rights under such plans, and any appropriate business expenses incurred by Executive in connection with his duties hereunder, all to the date of termination, but Executive shall not be paid any other 101 compensation or reimbursement of any kind, including without limitation, severance compensation. 5.4 Death. In the event of Executive's death during the term of this Agreement, Executive's employment shall be deemed to have terminated as of the last day of the month during which his death occurs and the Company shall pay to his estate or such beneficiaries as Executive may from time to time designate all accrued salary, bonus compensation to the extent earned, vested deferred compensation (other than pension plan or profit sharing plan benefits which will be paid in accordance with the applicable plan), any benefits under any plans of the Company in which Executive is a participant to the full extent of Executive's rights under such plans, accrued vacation pay for the year in which termination occurs, and any appropriate business expenses incurred by Executive in connection with his duties hereunder, all to the date of termination, but Executive's estate shall not be paid any other compensation or reimbursement of any kind, including without limitation, severance compensation. 5.5 Voluntary Termination. In the event of a "Voluntary Termination," as hereinafter defined, provided that the Executive provides the Company with at least 90 days notice of such termination (which notice and any requirement for service may be waived or shortened by the Company), the Company shall within 30 days after such termination pay all accrued salary, bonus compensation to the extent earned, vested deferred compensation, if any, (other than pension plan or profit sharing plan benefits which will be paid in accordance with the applicable plans), any benefits under any plans of the Company in which Executive is a participant to the full extent of Executive's rights under such plans, accrued vacation pay for the year in which termination occurs, and any appropriate business expenses incurred by Executive in connection with his duties hereunder, all to the date of termination, but no other compensation or reimbursement of any kind, including without limitation, severance compensation. "Voluntary Termination" shall mean termination by Executive of Executive's employment other than (i) constructive termination as described in paragraphs (i) through (iv) of subsection 5.2, (ii) termination by reason of Executive's disability as described in subsection 5.3, (iii) termination by reason of Executive's death as described in subsection 5.4, and (iv) Termination Upon a Change in Control as described in subsection 5.6. 5.6 Termination Upon a Change in Control. In the event of a "Termination Upon a Change in Control," as hereinafter defined, Executive shall immediately be paid all accrued salary, bonus compensation to the extent earned, vested deferred compensation, if any, (other than pension plan or profit sharing plan benefits which will be paid in accordance with the applicable plans), any benefits under any plans of the Company in which Executive is a participant to the full extent of Executive's rights under such plans, vacation pay for the year in which termination occurs, and any appropriate business expenses incurred by Executive in connection with his duties hereunder, all to the date of termination, and all severance compensation provided in subsection 6.1. "Termination Upon a Change in Control" shall mean a termination by the Company (other than a Termination for Cause) or by Executive, in either case within one year following a "Change in Control" as hereinafter defined. "Change in Control" shall mean the date on which any of the following has occurred: (a) any individual, entity or group (a "Person"), other than one or more of the Company's directors on the Effective Date of this Agreement or any Person that any such director controls, becomes the beneficial owner of 50% or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors of the Company (the "Company Outstanding Voting Securities"); 102 (b) any Person becomes the beneficial owner of 50% or more of the combined voting power of the then outstanding voting securities of Enterprise Bank entitled to vote generally in the election of directors of Enterprise Bank ("Bank Outstanding Voting Securities"); (c) consummation of a reorganization, merger or consolidation (a "Business Combination") of the Company, unless, in each case, following such Business Combination (i) all or substantially all of the Persons who were the beneficial owners, respectively, of the Company Outstanding Voting 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 company resulting from such Business Combination, (ii) no Person (excluding any company 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 company 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 Directors of the company resulting from the Business Combination are Continuing Directors (as hereinafter defined) at the time of the execution of the definitive agreement, or the action of the Board, providing for such Business Combination; (d) consummation of the sale, other than in the ordinary course of business, of more than 50% of the combined assets of the Company and its subsidiaries in a transaction or series of related transactions during the course of any twelve-month period; (e) the date on which Continuing Directors (as hereinafter defined) cease for any reason to constitute at least a majority of the Board of Directors of the Company; or (f) the failure of Executive to be reelected to the Board by its stockholders or the failure of the Board to re-nominate him for reelection without Executive's consent. As used in this Section 5.6, the definitions of the terms "beneficial owner" and "group" shall have the meanings ascribed to those terms in Rule 13(d)(3) under the Securities Exchange Act of 1934. As used in this Section 5.6, the term "Continuing Directors" shall mean, as of any date of determination, (i) any member of the Board of Directors on the Effective Date of this Agreement, (ii) any person who has been a member of the Board of Directors for the two years immediately preceding such date of determination, or (iii) any person who was nominated for election or elected to the Board of Directors with the affirmative vote of the greater of (A) a majority of the Continuing Directors who were members of the Board of Directors at the time of such nomination or election or (B) at least four Continuing Directors but excluding, for purposes of this clause (iii), any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies by or on behalf of a Person other than the Board of Directors of the Company. "Control" means the direct or indirect ownership of voting securities constituting more than fifty percent (50%) of the issued voting securities of a corporation. 5.7 Resignation Upon Termination. Effective upon any termination under this Section 5 or otherwise, Executive shall automatically and without taking any further actions be deemed to have resigned from all positions then held by him with the Company and all of its Affiliates. 103 6. Severance Compensation 6.1 Termination Upon Change in Control. In the event Executive's employment is terminated in a Termination Upon a Change in Control, Executive shall be paid the following as severance compensation: (a) For two (2) years following such termination of employment, an amount (payable on the dates specified in subsection 4.1 except as otherwise provided herein) equal to the Base Salary at the rate payable at the time of such termination plus (i) any accrued and unpaid Bonus due Executive under paragraph 4.3 of this Agreement and (ii) an amount equal to the Targeted Bonuses due (based on the Base Salary then in effect) for the year in which such termination of employment occurs (determined as though all requisite targets were fully and completely achieved). Notwithstanding any provision in this paragraph (a) to the contrary, Executive may, in Executive's sole discretion, by delivery of a notice to the Company within 30 days following a Termination Upon a Change in Control, elect to receive from the Company a lump sum severance payment by bank cashier's check equal to the present value of the flow of cash payments that would otherwise be paid to Executive pursuant to this paragraph (a). Such present value shall be determined as of the date of delivery of the notice of election by Executive and shall be based on a discount rate equal to the prime rate, as reported in The Wall Street Journal, or similar publication, on the date of delivery of the election notice. If Executive elects to receive a lump sum severance payment, the Company shall make such payment to Executive within 30 days following the date on which Executive notifies the Company of Executive's election. (b) In the event that Executive is not otherwise entitled to fully exercise all awards granted to him under any stock option plan maintained by the Company and any such plan does not otherwise provide for acceleration of exerciseability upon the occurrence of the Change in Control described herein, such awards shall become immediately exercisable upon a Change in Control. (c) All restricted stock granted to Executive will vest and become transferable. (d) Executive shall continue to accrue retirement benefits and shall continue to enjoy any benefits under any plans of the Company in which Executive is a participant to the full extent of Executive's rights under such plans, including any perquisites provided under this Agreement, through the remainder of the Employment Term; provided, however, that the benefits under any such plans of the Company in which Executive is a participant, including any such perquisites, shall cease upon Executive's obtaining other employment. If necessary to provide such benefits to Executive, the Company shall, at its election, either: (i) amend its employee benefit plans to provide the benefits described in this paragraph (c), to the extent that such is permissible under the nondiscrimination requirements and other provisions of the Internal Revenue Code of 1986 (the "Code") and the provisions of Executive Retirement Income Security Act of 1974, or (ii) provide separate benefit arrangements or cash payments so that Executive receives amounts equivalent thereto, net of tax consequences. 6.2 Termination Other Than for Cause. In the event Executive's employment is terminated in a Termination Other Than for Cause, Executive shall be paid as severance compensation his Base Salary, at the rate payable at the time of such termination, through the remaining period of the Contract Term or the one year period commencing on the effective date 104 of such termination (whichever period is shorter) plus (i) any accrued and unpaid Bonus due Executive under paragraph 4.3 of this Agreement and (ii) an amount equal to the Targeted Bonuses due (based on the Base Salary then in effect) for the year in which such termination of employment as though all requisite targets were fully and completely achieved. Notwithstanding any provision in this subsection 6.2 to the contrary, the Company may, in the Company's sole discretion, by delivery of a notice to Executive within 30 days following a Termination Other Than for Cause, elect to remit to Executive a lump sum severance payment by bank cashier's check equal to the present value of the flow of cash payments that would otherwise be paid to Executive pursuant to this subsection 6.2. Such present value shall be determined as of the date of delivery of the notice of election by the Company and shall be based on a discount rate equal to the prime rate, as reported in The Wall Street Journal, on the date of delivery of the election notice. If the Company elects to remit a lump sum severance payment, the Company shall make such payment to Executive within 30 days following the date on which the Company notifies Executive of its election. In the event that Executive is not otherwise entitled to fully exercise all awards granted to him under the Company's Incentive Stock Plan, and the Incentive Stock Plan does not otherwise provide for acceleration of exerciseability upon the occurrence of a Termination Other Than for Cause described herein, such awards shall become immediately exercisable upon a Termination Other Than for Cause. 6.3 Termination Upon Any Other Event. In the event of a Voluntary Termination, Termination For Cause, termination by reason of Executive's disability pursuant to subsection 5.5 or termination by reason of Executive's death pursuant to subsection 5.6, Executive or his estate shall not be paid any severance compensation. 7. Confidentiality. Executive agrees to hold in strict confidence all non-public information concerning any matters affecting or relating to the business of the Company, including without limiting the generality of the foregoing non-public information concerning its manner of operation, business or other plans, data bases, marketing programs, protocols, processes, computer programs, client lists, marketing information and analyses, operating policies or manuals or other data. Executive agrees that he will not, directly or indirectly, use any such information for the benefit of others than the Company or disclose or communicate any of such information in any manner whatsoever other than to the directors, officers, employees, agents and representatives of the Company who need to know such information, who shall be informed by Executive of the confidential nature of such information and directed by Executive to treat such information confidentially. Upon the Company's request, Executive shall return all information furnished to him related to the business of the Company without retaining any copies in electronic or other form. The above limitations on use and disclosure shall not apply to information which Executive can demonstrate: (a) was known to Executive before receipt thereof from the Company; (b) is learned by Executive from a third party entitled to disclose it; or (c) becomes known publicly other than through Executive; (c) is disclosed by Executive upon authority of the Board or any committee of the Board; (d) is disclosed pursuant to any legal requirement or (e) is disclosed pursuant to any agreement to which the Company or any of its Subsidiaries or Affiliates is a party. The parties hereto stipulate that all such information is material and confidential and gravely affects the effective and successful conduct of the business of the Company and the Company's goodwill, and that any breach of the terms of this Section 7 shall be a material breach of this Agreement. The terms of this Section 7 shall survive and remain in effect following any termination of this Agreement. 8. Use of Proprietary Information. Executive recognizes that the Company possesses a proprietary interest in all of the information described in Section 7 and has the exclusive right and privilege to use, protect by copyright, patent or trademark, manufacture or otherwise exploit the processes, ideas and concepts described therein to the exclusion of Executive, except as otherwise agreed between the Company and Executive in writing. Executive expressly agrees that any products, 105 inventions, discoveries or improvements made by Executive, his agents or affiliates, during the term of this Agreement, based on or arising out of the information described in Section 7 shall be the property of and inure to the exclusive benefit of the Company. Executive further agrees that any and all products, inventions, discoveries or improvements developed by Executive (whether or not able to be protected by copyright, patent or trademark) in the scope of his employment, or involving the use of the Company's time, materials or other resources, shall be promptly disclosed to the Company and shall become the exclusive property of the Company. 9. Non-Competition Agreement. 9.1 Non-Competition. Executive agrees that, during the Employment Term and for a period of one year following any termination of such employment, Executive shall not, without the prior written consent of the Company, directly or indirectly, own, manage, operate, control, be connected with as an officer, employee, partner, consultant or otherwise, or otherwise engage or participate in (except as an employee of the Company, or Affiliate of it) any corporation or other business entity engaged in the operation, ownership or management of a bank, trust company or financial services business within the Metropolitan Statistical Areas of St. Louis, Kansas City or any other city in which the Company or any of its Affiliates has an office at the time of such termination. Notwithstanding the foregoing, the ownership by Executive of less than 1% of any class of the outstanding capital stock of any corporation conducting such a competitive business which is regularly traded on a national securities exchange or in the over-the-counter market shall not be a violation of the foregoing covenant. 9.2 Non-Solicitation. During the period of actual employment and, in addition, the period, if any, during which Executive shall be entitled to severance compensation pursuant to Section 6 (notwithstanding an election by Executive to receive a lump sum severance payment for such period), Executive shall not, except on behalf of or with the prior written consent of the Company, directly or indirectly, entice or induce, or attempt to entice or induce, any employee of the Company to leave such employ, or employ any such person in any business similar to or in competition with that of the Company. Executive hereby acknowledges and agrees that the provisions set forth in this subsection 9.2 constitute a reasonable restriction on his ability to compete with the Company. 9.3 Saving Provision. The parties hereto agree that, in the event a court of competent jurisdiction shall determine that the geographical or durational elements of this covenant are unenforceable, such determination shall not render the entire covenant unenforceable. Rather, the excessive aspects of the covenant shall be reduced to the threshold which is enforceable, and the remaining aspects shall not be affected thereby. 9.4 Equitable Relief. Executive acknowledges that the extent of damages to the Company from a breach of Sections 7, 8 and 9 of this Agreement would not be readily quantifiable or ascertainable, that monetary damages would be inadequate to make the Company whole in case of such a breach, and that there is not and would not be an adequate remedy at law for such a breach. Therefore, Executive specifically agrees that the Company is entitled to injunctive or other equitable relief (without any requirement to post any bond or other security) from a breach of Sections 7, 8 and 9 of this Agreement, and hereby waives and covenants not to assert against a prayer for such relief that there exists an adequate remedy at law, in monetary damages or otherwise. 10. Assignment. This Agreement shall not be assignable by Executive and shall not be assignable by the Company except by operation of law or to a successor entity acquiring all or 106 substantially all the Company's business or assets. No such assignment shall affect any determination of whether such assignment involves a Change of Control for purposes of this Agreement. In the event of any assignment permitted hereby, the duties and responsibilities of Executive performed for the assignee shall not, without the written consent of Executive, be materially increased, altered or diminished in a manner inconsistent with Executive's duties and responsibilities hereunder for the Company. 11. Indemnification. The Company shall indemnify the Executive to the full extent provided for in the Bylaws of the Company, and no amendment of such Bylaws shall diminish the Company's obligation to indemnify the Executive pursuant to this Agreement. 12. Entire Agreement. This Agreement and any agreements entered into after the date hereof under any of the Company's benefit plans or compensation programs as described in Section 4 contain the complete agreement concerning the employment arrangement between the parties, including without limitation severance or termination pay, and shall, as of the Effective Date, supersede all other agreements or arrangements between the parties with regard to the subject matter hereof. 13. Binding Agreement. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors and assigns. The obligations of the Company under this Agreement shall not be terminated by reason of any liquidation, dissolution, bankruptcy, cessation of business or similar event relating to the Company. This Agreement shall not be terminated by reason of any merger, consolidation or reorganization of the Company, but shall be binding upon and inure to the benefit of the surviving or resulting entity. 14. Modification. No waiver or modification of this Agreement or of any covenant, condition, or limitation herein contained shall be valid unless authorized by the Board and reduced to in writing and duly executed by the party to be charged therewith and no evidence of any waiver or modification shall be offered or received in evidence of any proceeding, arbitration, or litigation between the parties hereto arising out of or affecting this Agreement, or the rights or obligations of the parties thereunder, unless such waiver or modification is in writing, duly executed as aforesaid. 15. Severability. All agreements and covenants contained herein are severable, and in the event any of them shall be held to be invalid or unenforceable by any court of competent jurisdiction, this Agreement shall be interpreted as if such invalid agreements or covenants were not contained herein. 16. Manner of Giving Notice. All notices, requests and demands to or upon the respective parties hereto shall be sent by hand, certified mail, overnight air courier service, in each case with all applicable charges paid or otherwise provided for, addressed as follows, or to such other address as may hereafter be designated in writing by the respective parties hereto: To Company: To Executive: at his current Enterprise Financial Services Corp residential address on file with 150 North Meramec the Company. Clayton, Missouri 63105 Attention: President and Corporate Secretary Such notices, requests and demands shall be deemed to have been given or made on the date of delivery if delivered by hand or by telecopy and on the next following date if sent by mail or by air courier service. 107 17. Remedies. In the event of a breach of this Agreement, the non-breaching party shall be entitled to such legal and equitable relief as may be provided by law, and shall further be entitled to recover all costs and expenses, including reasonable attorneys' fees, incurred in enforcing the non-breaching party's rights hereunder. 18. Headings. The headings have been inserted for convenience only and shall not be deemed to limit or otherwise affect any of the provisions of this Agreement. 19. Choice of Law. It is the intention of the parties hereto that this Agreement and the performance hereunder be construed in accordance with, under and pursuant to the laws of the State of Missouri without regard to the jurisdiction in which any action or special proceeding may be instituted. 20. Taxes. The company may withhold from any payments made under this Agreement all applicable taxes, including but not limited to income, employment and social insurance taxes, as shall be required by law. 21. Voluntary Agreement; No Conflicts. Executive hereby represents and warrants to the Company that he is legally free to accept and perform his employment with the Company, that he has no obligation to any other person or entity that would affect or conflict with any of Executive's obligations pursuant to such employment, and that the complete performance of the obligations pursuant to Executive's employment will not violate any order or decree of any governmental or judicial body or contract by which Executive is bound. The Company will not request or require, and Executive agrees not to use, in the course of Executive's employment with the Company, any information obtained in Executive's employment with any previous employer to the extent that such use would violate any contract by which Executive is bound or any decision, law, regulation, order or decree of any governmental or judicial body. 22. Certain Definitions. As used herein, the following definitions shall apply: "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. "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" Any natural person, firm, partnership, limited liability company, association, corporation, company, trust, business trust, governmental authority or other entity. "Subsidiary" With respect to any Person, each corporation or other Person in which the first Person owns or Controls, 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. 108 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first stated above. ENTERPRISE FINANCIAL SERVICES CORP By: --------------------------------------- Title: ------------------------------------- ------------------------------------------- Peter F. Benoist 109 EX-10.11 7 dex1011.txt $5,000,000 UNSECURED CREDIT AGREEMENT EXHIBIT 10.11 CREDIT AGREEMENT THIS AGREEMENT is entered into as of January 10, 2003, by and between ENTERPRISE FINANCIAL SERVICES CORP., a Delaware corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"). RECITALS Borrower has requested that Bank extend or continue credit to Borrower as described below, and Bank has agreed to provide such credit to Borrower on the terms and conditions contained herein. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Bank and Borrower hereby agree as follows: ARTICLE I CREDIT TERMS SECTION 1.1. LINE OF CREDIT. (a) Line of Credit. Subject to the terms and conditions of this Agreement, Bank hereby agrees to make advances to Borrower from time to time up to and including January 9, 2004, not to exceed at any time the aggregate principal amount of Five Million Dollars ($5,000,000.00) ("Line of Credit"), the proceeds of which shall be used for general corporate purposes. Borrower's obligation to repay advances under the Line of Credit shall be evidenced by a promissory note substantially in the form of Exhibit A attached hereto ("Line of Credit Note"), all terms of which are incorporated herein by this reference. (b) Borrowing and Repayment. Borrower may from time to time during the term of the Line of Credit borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions contained herein or in the Line of Credit Note; provided however, that the total outstanding borrowings under the Line of Credit shall not at any time exceed the maximum principal amount available thereunder, as set forth above. SECTION 1.2. INTEREST/FEES. (a) Interest. The outstanding principal balance of each credit subject hereto shall bear interest, at the rate of interest set forth in each promissory note or other instruments or document executed in connection therewith. (b) Computation and Payment. Interest shall be computed on the basis of a 360-day year, actual days elapsed. Interest shall be payable at the times and place set forth in each promissory note or other instrument or document required hereby. (c) Commitment Fee. Borrower shall pay to Bank a non-refundable legal/documentation fee incurred in the preparation of the Loan Documents equal to $2,500.00, which fee shall be due and payable in full on the closing of the Line of Credit. In addition, Borrower shall pay to Bank a refundable fee for underwriting expenses equal to $2,500.00, which fee shall be due and payable in full upon the execution of this commitment, and shall be refunded to Borrower in the event an initial advance under the Line of Credit is funded on or before March 31, 2003. ARTICLE II REPRESENTATIONS AND WARRANTIES Borrower makes the following representations and warranties to Bank, which representations and warranties shall survive the execution of this Agreement and shall continue in full force and effect until the full and final payment, and satisfaction and discharge, of all obligations of Borrower to Bank subject to this Agreement. 110 SECTION 2.1. LEGAL STATUS. Borrower is a corporation, duly organized and existing and in good standing under the laws of the State of Delaware, and is qualified or licensed to do business (and is in good standing as a foreign corporation, if applicable) in all jurisdictions in which such qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a material adverse effect on Borrower. SECTION 2.2. AUTHORIZATION AND VALIDITY. This Agreement and each promissory note, contract, instrument and other document required hereby or at any time hereafter delivered to Bank in connection herewith (collectively, the "Loan Documents") have been duly authorized, and upon their execution and delivery in accordance with the provisions hereof will constitute legal, valid and binding agreements and obligations of Borrower or the party which executes the same, enforceable in accordance with their respective terms. SECTION 2.3. NO VIOLATION. The execution, delivery and performance by Borrower of each of the Loan Documents do not violate any provision of any law or regulation, or contravene any provision of the Articles of Incorporation or By-Laws of Borrower, or result in any breach of or default under any contract, obligation, indenture or other instrument to which Borrower is a party or by which Borrower may be bound. SECTION 2.4. LITIGATION. There are no pending, or to the best of Borrower's knowledge threatened, actions, claims, investigations, suits or proceedings by or before any governmental authority, arbitrator, court or administrative agency which could have a material adverse effect on the financial condition or operation of Borrower other than those disclosed by Borrower to Bank in writing prior to the date hereof. SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial statement of Borrower dated September 30, 2002, a true copy of which has been delivered by Borrower to Bank prior to the date hereof, (a) is complete and correct and presents fairly the financial condition of Borrower, (b) discloses all liabilities of Borrower that are required to be reflected or reserved against under generally accepted accounting principles, whether liquidated or unliquidated, fixed or contingent, and (c) has been prepared in accordance with generally accepted accounting principles consistently applied. Since the date of such financial statement there has been no material adverse change in the financial condition of Borrower, nor has Borrower mortgaged, pledged, granted a security interest in or otherwise encumbered any of its assets or properties except in favor of Bank or as otherwise permitted by Bank in writing. SECTION 2.6. INCOME TAX RETURNS. Borrower has no knowledge of any pending assessments or adjustments of its income tax payable with respect to any year. SECTION 2.7. NO SUBORDINATION. There is no agreement, indenture, contract or instrument to which Borrower is a party or by which Borrower may be bound that requires the subordination in right of payment of any of Borrower's obligations subject to this Agreement to any other obligation of Borrower. SECTION 2.8. PERMITS, FRANCHISES. Borrower possesses, and will hereafter possess, all permits, consents, approvals, franchises and licenses required and rights to all trademarks, trade names, patents, and fictitious names, if any, necessary to enable it to conduct the business in which it is now engaged in compliance with applicable law. SECTION 2.9. ERISA. Borrower is in compliance in all material respects with all applicable provisions of the Employee Retirement Income Security Act of 1974, as amended or recodified from time to time ("ERISA"); Borrower has not violated any provision of any defined employee pension benefit plan (as defined in ERISA) maintained or contributed to by Borrower (each, a "Plan"); no Reportable Event as defined in ERISA has occurred and is continuing with respect to any Plan initiated by Borrower; Borrower has met its minimum funding requirements under ERISA with respect to each Plan; and each Plan will be able to fulfill its benefit obligations as they come due in accordance with the Plan documents and under generally accepted accounting principles. SECTION 2.10. OTHER OBLIGATIONS. Borrower is not in default on any obligation for borrowed money, any purchase money obligation or any other material lease, commitment, contract, instrument or obligation. SECTION 2.11. BANK SUBSIDIARIES. As of the date of this Agreement there are 83,118 shares of issued and outstanding common voting stock in Enterprise Bank, of which Borrower owns 100% of the shares. Each bank named herein (and each bank hereafter acquired by Borrower) is referred to as a "Bank Subsidiary". 111 ARTICLE III CONDITIONS SECTION 3.1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation of Bank to extend any credit contemplated by this Agreement is subject to the fulfillment to Bank's satisfaction of all of the following conditions: (a) Approval of Bank Counsel. All legal matters incidental to the extension of credit by Bank shall be satisfactory to Bank's counsel. (b) Documentation. Bank shall have received, in form and substance satisfactory to Bank, each of the following, duly executed: (i) This Agreement and each promissory note or other instrument or document required hereby. (ii) Corporate Borrowing Resolution. (iii) Certificate of Incumbency. (iv) Such other documents as Bank may require under any other Section of this Agreement. (c) Financial Condition. There shall have been no material adverse change, as determined by Bank, in the financial condition or business of Borrower, nor any material decline, as determined by Bank, in the market value of any collateral required hereunder or a substantial or material portion of the assets of Borrower. SECTION 3.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of Bank to make each extension of credit requested by Borrower hereunder shall be subject to the fulfillment to Bank's satisfaction of each of the following conditions: (a) Compliance. The representations and warranties contained herein and in each of the other Loan Documents shall be true on and as of the date of the signing of this Agreement and on the date of each extension of credit by Bank pursuant hereto, with the same effect as though such representations and warranties had been made on and as of each such date, and on each such date, no Event of Default as defined herein, and no condition, event or act which with the giving of notice or the passage of time or both would constitute such an Event of Default, shall have occurred and be continuing or shall exist. (b) Documentation. Bank shall have received all additional documents which may be required in connection with such extension of credit. (c) Cancellation of Other Indebtedness. Borrower shall have cancelled by satisfaction any and all existing obligations owing to Jefferson Bank & Trust Company, St. Louis, Missouri. ARTICLE IV AFFIRMATIVE COVENANTS Borrower covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower shall, unless Bank otherwise consents in writing: SECTION 4.1. PUNCTUAL PAYMENTS. Punctually pay all principal, interest, fees or other liabilities due under any of the Loan Documents at the times and place and in the manner specified therein. SECTION 4.2. ACCOUNTING RECORDS. Maintain adequate books and records in accordance with generally accepted accounting principles consistently applied, and permit any representative of Bank, at any reasonable time, to inspect, audit and examine such books and records, to make copies of the same, and to inspect the properties of Borrower. SECTION 4.3. FINANCIAL STATEMENTS. Provide to Bank all of the following, in form and detail satisfactory to Bank: (a) not later than 90 days after and as of the end of each fiscal year, an audited financial statement of Borrower, prepared by a certified public accountant acceptable to Bank, to include balance sheet, income statement and statement of cash flows; 112 (b) contemporaneously with each annual and quarterly financial statement of Borrower required hereby, a compliance certificate of the president or chief financial officer of Borrower that said financial statements are accurate, that there exists no Event of Default nor any condition, act or event which with the giving of notice or the passage of time or both would constitute an Event of Default, and demonstrating compliance with the financial covenants contained in this Agreement; (c) as soon as available, and in any event within 45 days after the end of each calendar quarter, the complete Call Report prepared by each Bank Subsidiary at the end of such calendar quarter in compliance with the requirements of any federal or state regulatory agency which has authority to examine any Bank Subsidiary, all prepared in accordance with the requirements imposed by the applicable regulatory authorities and applied on a basis consistent with the accounting practices reflected in any previous Call Report(s) and similar statements delivered to Bank prior to the date of this Agreement; (d) as soon as available, and in any event no later than 45 days after the end of each June 30 and December 31, the complete Parent Company Only Financial Statements for Bank Holding Companies (FRY-9LP) required to be filed by Borrower quarterly with the Federal Reserve Bank in the applicable Federal Reserve District; (e) as soon as available, and in any event no later than 45 days after the end of each fiscal quarter, beginning with report dated December 31, 2002, the complete Consolidated Financial Statements for Bank Holding Companies (FRY-9C) required to be filed by Borrower quarterly with the Federal Reserve Bank in the applicable Federal Reserve District; (f) as soon as available, and in any event within 45 days after each fiscal year end of Borrower, the Annual Report of Domestic Holding Companies (FRY-6) required by the Federal Reserve Bank in the applicable Federal Reserve District; (g) from time to time such other information as Bank may reasonably request. SECTION 4.4. COMPLIANCE. Preserve and maintain all licenses, permits, governmental approvals, rights, privileges and franchises necessary for the conduct of its business; and comply with the provisions of all documents pursuant to which Borrower is organized and/or which govern Borrower's continued existence and with the requirements of all laws, rules, regulations and orders of any governmental authority applicable to Borrower and/or its business. SECTION 4.5. INSURANCE. Maintain and keep in force insurance of the types and in amounts customarily carried in lines of business similar to that of Borrower, including but not limited to fire, extended coverage, public liability, flood, property damage and workers' compensation, with all such insurance carried with companies and in amounts satisfactory to Bank, and deliver to Bank from time to time at Bank's request schedules setting forth all insurance then in effect. SECTION 4.6. FACILITIES. Keep all properties useful or necessary to Borrower's business in good repair and condition, and from time to time make necessary repairs, renewals and replacements thereto so that such properties shall be fully and efficiently preserved and maintained. SECTION 4.7. TAXES AND OTHER LIABILITIES. Pay and discharge when due any and all indebtedness, obligations, assessments and taxes, both real or personal, including without limitation federal and state income taxes and state and local property taxes and assessments, except such (a) as Borrower may in good faith contest or as to which a bona fide dispute may arise, and (b) for which Borrower has made provision, to Bank's satisfaction, for eventual payment thereof in the event Borrower is obligated to make such payment. SECTION 4.8. LITIGATION. Promptly give notice in writing to Bank of any litigation pending or threatened against Borrower. SECTION 4.9. BANK SUBSIDIARY FINANCIAL CONDITION. Cause each Bank Subsidiary to maintain its financial condition as follows using generally accepted accounting principles consistently applied and used consistently with prior practices (except to the extent modified by the definitions herein), with compliance determined commencing with such Bank Subsidiary's financial statements for the period ending December 31, 2002, and at the end of each calendar quarterly period thereafter: (a) ROA not less than .75% on a rolling four quarter basis, determined as of each fiscal quarter end, with "ROA" defined as the percentage arrived at by dividing net income by Average Total Assets, as reported in the most recent Call Report. (b) Allowance for loan and lease losses not less than 100% of the total amount of Non-Performing Assets, determined as of each fiscal quarter end, with "Non-Performing Assets" defined as the sum of: (i) all loans classified as past 113 due 90 days or more and still accruing interest; (ii) all loans classified as `non-accrual' and no longer accruing interest; (iii) all loans classified as `restructured loans and leases'; and (iv) all other `non-performing assets', including those classified as `other real estate owned' and `repossessed property', as reported in the then most recent Call Report. (c) Non-Performing Assets not greater than 10% of Primary Equity Capital, determined as of each fiscal quarter end, with "Non-Performing Assets" as defined above, and with "Primary Equity Capital" defined as the aggregate of allowance for loan and lease losses, as reported in the then most recent Call Report, plus Equity Capital (defined as the aggregate of perpetual preferred stock (and related surplus), common stock, surplus (excluding all surplus related to perpetual preferred stock), undivided profits and capital reserves, plus the net unrealized holding gains (or less the net realized holding losses) on available-for-sale securities, less goodwill and other disallowed intangible assets). SECTION 4.10. NOTICE TO BANK. Promptly (but in no event more than five (5) days after the occurrence of each such event or matter) give written notice to Bank in reasonable detail of: (a) the occurrence of any Event of Default, or any condition, event or act which with the giving of notice or the passage of time or both would constitute an Event of Default; (b) any change in the name or the organizational structure of Borrower; (c) the occurrence and nature of any Reportable Event or Prohibited Transaction, each as defined in ERISA, or any funding deficiency with respect to any Plan; (d) any termination or cancellation of any insurance policy which Borrower is required to maintain, or any uninsured or partially uninsured loss through liability or property damage, or through fire, theft or any other cause affecting Borrower's property in excess of an aggregate of $500,000.00; or (e) any negotiations to sell any capital stock of Borrower and/or any Bank Subsidiary, together with copies of any proposed buy/sell agreements; provided however, that this clause shall not be deemed approval by Bank of any such negotiation and shall not apply to information which under applicable law or regulation is prohibited from disclosure to Bank. ARTICLE V NEGATIVE COVENANTS Borrower further covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower will not without Bank's prior written consent: SECTION 5.1. USE OF FUNDS. Use any of the proceeds of any credit extended hereunder except for the purposes stated in Article I hereof. SECTION 5.2. OTHER INDEBTEDNESS. Create, incur, assume or permit to exist any indebtedness or liabilities resulting from borrowings, loans or advances, whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several, except (a) the liabilities of Borrower to Bank, (b) any other liabilities of Borrower existing as of, and disclosed to Bank prior to, the date hereof, and (c) liabilities incurred in connection with the issuance of trust preferred securities. SECTION 5.3. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge into or consolidate with any other entity; make any substantial change in the nature of Borrower's business as conducted as of the date hereof; acquire all or substantially all of the assets of any other entity; nor sell, lease, transfer or otherwise dispose of all or a substantial or material portion of Borrower's assets except in the ordinary course of its business. SECTION 5.4. GUARANTIES. Guarantee or become liable in any way as surety, endorser (other than as endorser of negotiable instruments for deposit or collection in the ordinary course of business), accommodation endorser or otherwise for, nor pledge or hypothecate any assets of Borrower as security for, any liabilities or obligations of any other person or entity, except any of the foregoing in favor of Bank. SECTION 5.5. PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to exist a security interest in, or lien upon stocks of Enterprise Bank now owned or hereafter acquired, except any of the foregoing in favor of Bank or which is existing as of, and disclosed to Bank in writing prior to, the date hereof. ARTICLE VI EVENTS OF DEFAULT SECTION 6.1. The occurrence of any of the following shall constitute an "Event of Default" under this Agreement: (a) Borrower shall fail to pay when due any principal, interest, fees or other amounts payable under any of the Loan Documents. 114 (b) Any financial statement or certificate furnished to Bank in connection with, or any representation or warranty made by Borrower or any other party under this Agreement or any other Loan Document shall prove to be incorrect, false or misleading in any material respect when furnished or made. (c) Any default in the performance of or compliance with any obligation, agreement or other provision contained herein or in any other Loan Document (other than those referred to in subsections (a) and (b) above), and with respect to any such default which by its nature can be cured, such default shall continue for a period of twenty (20) days from its occurrence. (d) Any default in the payment or performance of any obligation, or any defined event of default, under the terms of any contract or instrument (other than any of the Loan Documents) pursuant to which Borrower or any Bank Subsidiary has incurred any debt or other liability to any person or entity, including Bank. (e) The filing of a notice of judgment lien against Borrower or any Bank Subsidiary; or the recording of any abstract of judgment against Borrower or any Bank Subsidiary in any county in which Borrower or such Bank Subsidiary has an interest in real property; or the service of a notice of levy and/or of a writ of attachment or execution, or other like process, against the assets of Borrower or any Bank Subsidiary; or the entry of a judgment against Borrower or any Bank Subsidiary. Anything herein to the contrary notwithstanding, the provisions of this Section 6.1 (e) shall not apply to any judgement, lien, attachment, execution or other process involving $100,000.00 or less or to any such matter, regardless of amount, which is stayed pending appeal or which is the subject of an appeal bond. (f) Borrower or any Bank Subsidiary shall become insolvent, or shall suffer or consent to or apply for the appointment of a receiver, trustee, custodian or liquidator of itself or any of its property, or shall generally fail to pay its debts as they become due, or shall make a general assignment for the benefit of creditors; Borrower or any Bank Subsidiary shall file a voluntary petition in bankruptcy, or seeking reorganization, in order to effect a plan or other arrangement with creditors or any other relief under the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time ("Bankruptcy Code"), or under any state or federal law granting relief to debtors, whether now or hereafter in effect; or any involuntary petition or proceeding pursuant to the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors is filed or commenced against Borrower or any Bank Subsidiary, or Borrower or any Bank Subsidiary shall file an answer admitting the jurisdiction of the court and the material allegations of any involuntary petition; or Borrower or any Bank Subsidiary shall be adjudicated a bankrupt, or an order for relief shall be entered against Borrower or any Bank Subsidiary by any court of competent jurisdiction under the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors. (g) There shall exist or occur any event or condition which Bank in good faith believes impairs, or is substantially likely to impair, the prospect of payment or performance by Borrower of its obligations under any of the Loan Documents. (h) The dissolution or liquidation of Borrower or any Bank Subsidiary; or Borrower or any Bank Subsidiary, or any of their directors, stockholders or members, shall take action seeking to effect the dissolution or liquidation of Borrower or such Bank Subsidiary. (i) The issuance or proposed issuance against Borrower, or any affiliate of Borrower (including without limitation, any Bank Subsidiary) of any informal or formal administrative action, temporary or permanent, by any federal or state regulatory agency having jurisdiction or control over Borrower or such affiliate, such action taking the form of, but not limited to: (A) any informal or formal directive citing conditions or activities deemed to be unsafe or unsound or breaches of fiduciary duty or law or regulation; (B) a memorandum of understanding; (C) a cease and desist order; (D) the termination of insurance coverage of customer deposits by the Federal Deposit Insurance Corporation; (E) the suspension or removal of an officer or director, or the prohibition of participation by any others in the business affairs of Borrower or such affiliate; (F) any capital maintenance agreement; or (G) any other regulatory action, agreement or understanding with respect to Borrower or such affiliate. SECTION 6.2. REMEDIES. Upon the occurrence of any Event of Default: (a) all indebtedness of Borrower under each of the Loan Documents, any term thereof to the contrary notwithstanding, shall at Bank's option and without notice become immediately due and payable without presentment, demand, protest or notice of dishonor, all of which are hereby expressly waived by each Borrower; (b) the obligation, if any, of Bank to extend any further credit under any of the Loan Documents shall immediately cease and terminate; and (c) Bank shall have all rights, powers and remedies available under each of the Loan Documents, or accorded by law, including without limitation the right to resort to any or all security for any credit subject hereto and to exercise any or all of the rights of a beneficiary or secured party pursuant to applicable law. All rights, powers and remedies of Bank may be exercised at any time by Bank and from time to time after the occurrence of an 115 Event of Default, are cumulative and not exclusive, and shall be in addition to any other rights, powers or remedies provided by law or equity. ARTICLE VII MISCELLANEOUS SECTION 7.1. NO WAIVER. No delay, failure or discontinuance of Bank in exercising any right, power or remedy under any of the Loan Documents shall affect or operate as a waiver of such right, power or remedy; nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy. Any waiver, permit, consent or approval of any kind by Bank of any breach of or default under any of the Loan Documents must be in writing and shall be effective only to the extent set forth in such writing. SECTION 7.2. NOTICES. All notices, requests and demands which any party is required or may desire to give to any other party under any provision of this Agreement must be in writing delivered to each party at the following address: BORROWER: ENTERPRISE FINANCIAL SERVICES CORP. Attn: CEO or Chief Financial Officer 150 N. Meramec Clayton, MO 36105 Fax # (314) 727-3239 BANK: WELLS FARGO BANK, NATIONAL ASSOCIATION Correspondent Banking Office 120 S. Central #1420 St. Louis, MO 63105 Fax # (314) 726-1483 or to such other address as any party may designate by written notice to all other parties. Each such notice, request and demand shall be deemed given or made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or three (3) days after deposit in the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt. SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel), expended or incurred by Bank in connection with (a) Bank's continued administration of this Agreement and the Loan Documents, and the preparation of any amendments and waivers thereto, (b) the enforcement of Bank's rights and/or the collection of any amounts which become due to Bank under any of the Loan Documents, whether or not suit is brought, and (c) the prosecution or defense of any action in any way related to any of the Loan Documents, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to any Borrower or any other person or entity. SECTION 7.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties; provided however, that Borrower may not assign or transfer its interest hereunder without Bank's prior written consent. Bank reserves the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in, Bank's rights and benefits under each of the Loan Documents. In connection therewith, Bank may disclose all documents and information which Bank now has or may hereafter acquire relating to any credit subject hereto, Borrower, any Bank Subsidiary or any collateral required hereunder. SECTION 7.5. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other Loan Documents constitute the entire agreement between Borrower and Bank with respect to each credit subject hereto and supersede all prior negotiations, communications, discussions and correspondence concerning the subject matter hereof. This Agreement may be amended or modified only in writing signed by each party hereto. SECTION 7.6. NO THIRD PARTY BENEFICIARIES. This Agreement is made and entered into for the sole protection and benefit of the parties hereto and their respective permitted successors and assigns, and no other person or entity shall be a third party beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any other of the Loan Documents to which it is not a party. 116 SECTION 7.7. TIME. Time is of the essence of each and every provision of this Agreement and each other of the Loan Documents. SECTION 7.8. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or any remaining provisions of this Agreement. SECTION 7.9. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when executed and delivered shall be deemed to be an original, and all of which when taken together shall constitute one and the same Agreement. SECTION 7.10. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Missouri. SECTION 7.11. ARBITRATION. (a) Arbitration. The parties hereto agree, upon demand by any party, to submit to binding arbitration all claims, disputes and controversies between or among them (and their respective employees, officers, directors, attorneys, and other agents), whether in tort, contract or otherwise arising out of or relating to in any way (i) the loan and related Loan Documents which are the subject of this Agreement and its negotiation, execution, collateralization, administration, repayment, modification, extension, substitution, formation, inducement, enforcement, default or termination; or (ii) requests for additional credit. (b) Governing Rules. Any arbitration proceeding will (i) proceed in a location in Missouri selected by the American Arbitration Association ("AAA"); (ii) be governed by the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the documents between the parties; and (iii) be conducted by the AAA, or such other administrator as the parties shall mutually agree upon, in accordance with the AAA's commercial dispute resolution procedures, unless the claim or counterclaim is at least $1,000,000.00 exclusive of claimed interest, arbitration fees and costs in which case the arbitration shall be conducted in accordance with the AAA's optional procedures for large, complex commercial disputes (the commercial dispute resolution procedures or the optional procedures for large, complex commercial disputes to be referred to, as applicable, as the "Rules"). If there is any inconsistency between the terms hereof and the Rules, the terms and procedures set forth herein shall control. Any party who fails or refuses to submit to arbitration following a demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any dispute. Nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. Section 91 or any similar applicable state law. (c) No Waiver of Provisional Remedies, Self-Help and Foreclosure. The arbitration requirement does not limit the right of any party to (i) foreclose against real or personal property collateral; (ii) exercise self-help remedies relating to collateral or proceeds of collateral such as setoff or repossession; or (iii) obtain provisional or ancillary remedies such as replevin, injunctive relief, attachment or the appointment of a receiver, before during or after the pendency of any arbitration proceeding. This exclusion does not constitute a waiver of the right or obligation of any party to submit any dispute to arbitration or reference hereunder, including those arising from the exercise of the actions detailed in sections (i), (ii) and (iii) of this paragraph. (d) Arbitrator Qualifications and Powers. Any arbitration proceeding in which the amount in controversy is $5,000,000.00 or less will be decided by a single arbitrator selected according to the Rules, and who shall not render an award of greater than $5,000,000.00. Any dispute in which the amount in controversy exceeds $5,000,000.00 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations. The arbitrator will be a neutral attorney licensed in the State of Missouri or a neutral retired judge of the state or federal judiciary of Missouri, in either case with a minimum of ten years experience in the substantive law applicable to the subject matter of the dispute to be arbitrated. The arbitrator will determine whether or not an issue is arbitratable and will give effect to the statutes of limitation in determining any claim. In any arbitration proceeding the arbitrator will decide (by documents only or with a hearing at the arbitrator's discretion) any pre-hearing motions which are similar to motions to dismiss for failure to state a claim or motions for summary adjudication. The arbitrator shall resolve all disputes in accordance with the substantive law of Missouri and may grant any remedy or relief that a court of such state could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award. The arbitrator shall also have the power to award recovery of all costs and fees, to impose sanctions and to take such other action as the arbitrator deems necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the Missouri Rules of Civil Procedure or other applicable law. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction. The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a 117 waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief. (e) Discovery. In any arbitration proceeding discovery will be permitted in accordance with the Rules. All discovery shall be expressly limited to matters directly relevant to the dispute being arbitrated and must be completed no later than 20 days before the hearing date and within 180 days of the filing of the dispute with the AAA. Any requests for an extension of the discovery periods, or any discovery disputes, will be subject to final determination by the arbitrator upon a showing that the request for discovery is essential for the party's presentation and that no alternative means for obtaining information is available. (f) Class Proceedings and Consolidations. The resolution of any dispute arising pursuant to the terms of this Agreement shall be determined by a separate arbitration proceeding and such dispute shall not be consolidated with other disputes or included in any class proceeding. (g) Payment Of Arbitration Costs And Fees. The arbitrator shall award all costs and expenses of the arbitration proceeding. (h) Miscellaneous. To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the dispute with the AAA. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business or by applicable law or regulation. If more than one agreement for arbitration by or between the parties potentially applies to a dispute, the arbitration provision most directly related to the Loan Documents or the subject matter of the dispute shall control. This arbitration provision shall survive termination, amendment or expiration of any of the Loan Documents or any relationship between the parties. ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FOREBEAR FROM ENFORCING REPAYMENT OF A DEBT INCLUDING PROMISES TO EXTEND OR RENEW SUCH DEBT ARE NOT ENFORCEABLE. TO PROTECT YOU (BORROWER) AND US (BANK) 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. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above. WELLS FARGO BANK, ENTERPRISE FINANCIAL SERVICES CORP. NATIONAL ASSOCIATION By: By: ------------------------- -------------------------- Doug Gallun Title: Vice President ---------------------- 118 EX-11.1 8 dex111.txt STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11.1
Basic Diluted EPS number EPS number Net Adjusted Net Basic Diluted of shares of shares Income Income EPS EPS ------------------------------------------------------------------------------------------ Twelve Months ended December 31, 2000 8,990,605 9,684,752 $ 5,201,446 $ 5,201,446 $ 0.58 $ 0.54 Twelve Months ended December 31, 2001 9,203,224 9,203,224 $ (2,534,691) $ (2,534,691) $ (0.28) $ (0.28) Twelve Months ended December 31, 2002 9,399,374 9,611,108 $ 5,001,480 $ 5,001,480 $ 0.53 $ 0.52
TWELVE MONTHS ENDED DECEMBER 31, 2000
Basic Diluted -------------- ------------- Average Shares Outstanding 8,990,605 8,990,605 Options - Plan 1 18,934 Average Option Price $ 2.33 Total Exercise Cost $ 44,116 Shares Repurchased 2,650 Net Shares from Option - Plan 1 16,284 Options - Plan 2 202,861 Average Option Price $ 2.56 Total Exercise Cost $ 519,324 Shares Repurchased 31,191 Net Shares from Option - Plan 2 171,670 Options - Plan 3 553,528 Average Option Price $ 6.11 Total Exercise Cost $ 3,382,056 Shares Repurchased 203,126 Net Shares from Option - Plan 3 350,402 Options - Plan 4 53,631 Average Option Price $ 15.02 Total Exercise Cost $ 805,538 Shares Repurchased 48,381 Net Shares from Option - Plan 4 5,250 Options - EFA Non-qualified 84,754 Average Option Price $ 10.13 Total Exercise Cost $ 858,558 Shares Repurchased 51,565 Net Shares from Option - EFA Non-qualified 33,189 Options - CGB Qualified 160,652 Average Option Price $ 10.00 Total Exercise Cost $ 1,606,520 Shares Repurchased 96,488 Net Shares from Option - CGB Qualified 64,164 Options - CGB Non-Qualified 82,714 Average Option Price $ 10.62 Total Exercise Cost $ 878,423 Shares Repurchased 52,758 Net Shares from Option - CGB Non-Qualified 29,956 Stock Appreciation Rights 87,911 Average SAR Price $ 12.25 Total Exercise Cost $ 1,076,910 Shares Repurchased 64,679 Net Shares from SARS 23,232 -------------- ------------- Gross Shares 8,990,605 9,684,752 Price $ 16.65
119 TWELVE MONTHS ENDED DECEMBER 31, 2001
Basic Diluted -------------- ------------- Average Shares Outstanding 9,203,224 9,203,224 Options - Plan 2 158,830 Average Option Price $ 2.63 Total Exercise Cost $ 417,723 Shares Repurchased 32,840 Net Shares from Option - Plan 2 - Options - Plan 3 516,145 Average Option Price $ 6.68 Total Exercise Cost $ 3,447,849 Shares Repurchased 271,057 Net Shares from Option - Plan 3 - Options - Plan 4 300,045 Average Option Price $ 13.54 Total Exercise Cost $ 4,062,609 Shares Repurchased 319,388 Net Shares from Option - Plan 4 - Options - EFA Non-qualified 85,500 Average Option Price $ 10.19 Total Exercise Cost $ 871,245 Shares Repurchased 68,494 Net Shares from Option - EFA Non-qualified - Options - CGB Qualified 70,279 Average Option Price $ 10.33 Total Exercise Cost $ 725,982 Shares Repurchased 57,074 Net Shares from Option - CGB Qualified - Options - CGB Non-Qualified 72,732 Average Option Price $ 10.56 Total Exercise Cost $ 768,050 Shares Repurchased 60,381 Net Shares from Option - CGB Non-Qualified - Options - Moneta 175,879 Average Option Price $ 12.50 Total Exercise Cost $ 2,198,488 Shares Repurchased 172,837 Net Shares from Option - Moneta - Stock Appreciation Rights 100,604 Average SAR Price $ 12.55 Total Exercise Cost $ 1,262,580 Shares Repurchased 99,259 Net Shares from SARS - -------------- ------------- Gross Shares 9,203,224 9,203,224 Price $ 12.72
120 TWELVE MONTHS ENDED DECEMBER 31, 2002
Basic Diluted -------------- ------------- Average Shares Outstanding 9,399,374 9,399,374 Options - Plan 2 57,455 Average Option Price $ 3.14 Total Exercise Cost $ 180,409 Shares Repurchased 16,876 Net Shares from Option - Plan 2 40,579 Options - Plan 3 452,541 Average Option Price $ 6.90 Total Exercise Cost $ 3,122,533 Shares Repurchased 292,098 Net Shares from Option - Plan 3 160,443 Options - Plan 5 54,032 Average Option Price $ 9.52 Total Exercise Cost $ 514,385 Shares Repurchased 48,118 Net Shares from Option - Plan 5 5,914 Options - EFA Non-qualified 85,500 Average Option Price $ 10.18 Total Exercise Cost $ 870,390 Shares Repurchased 81,421 Net Shares from Option - EFA Non-qualified 4,079 Options - CGB Qualified 40,495 Average Option Price $ 10.59 Total Exercise Cost $ 428,842 Shares Repurchased 40,116 Net Shares from Option - CGB Qualified 379 Options - CGB Non-Qualified 45,552 Average Option Price $ 10.61 Total Exercise Cost $ 483,307 Shares Repurchased 45,211 Net Shares from Option - CGB Non-Qualified 341 -------------- ------------- Gross Shares 9,399,374 9,611,108 Price $ 10.69
121 EX-21.1 9 dex211.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 Company State of Organization ----------------------------------------------------------------------- Enterprise Financial Services Corp Delaware Enterprise Bank Missouri Charford, Inc. Missouri Enterprise Premium Finance Corp. Missouri Enterprise Merchant Banc, Inc. Missouri EBH Capital Trust I Delaware EFSC Capital Trust I Delaware Commercial Guaranty Bancshares, Inc. Kansas Enterprise Capital Corporation Kansas Enterprise Real Estate Mortgage Company, LLC Missouri Enterprise IHC, LLC Missouri 122 EX-23.1 10 dex231.txt CONSENT OF KPMG LLP EXHIBIT 23.1 Independent Auditors' Consent The Board of Directors Enterprise Financial Services Corp: We consent to the incorporation by reference in the registration statement (Nos. 333-42204, 333-43365, 333-82087, and 333-100928) on Form S-8 of Enterprise Financial Services Corp of our report dated February 21, 2003, with respect to the consolidated balance sheets of Enterprise Financial Services Corp as of December 31, 2002 and 2001, and the related consolidated statements of operations, shareholders' equity, cash flows, and comprehensive income for each of the years in the three-year period ended December 31, 2002, which report appears in the December 31, 2002, annual report on Form 10-K of Enterprise Financial Services Corp. Our report refers to Enterprise Financial Services Corp changing its method of accounting for goodwill and other intangible assets in 2002. St. Louis, Missouri March 25, 2003 123 EX-99.1 11 dex991.txt CHIEF EXECUTIVE OFFICER CERTIFICATION EXHIBIT 99.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the Form 10-K of Enterprise Financial Services Corp for the year ended December 31, 2002, I, Kevin C. Eichner, President and Chief Executive Officer of Enterprise Financial Services Corp, hereby certify pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that: (1) such Form 10-K for the year ended December 31, 2002, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in such Form 10-K for the quarter ended December 31, 2002, fairly presents, in all material respects, the financial condition and results of operations of Enterprise Financial Services Corp. /s/ Kevin C. Eichner - ---------------------------------------- Kevin C. Eichner, Chief Executive 124 EX-99.2 12 dex992.txt CHIEF FINANCIAL OFFICER CERTIFICATION EXHIBIT 99.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the Form 10-K of Enterprise Financial Services Corp for the year ended December 31, 2002, I, Frank H. Sanfilippo, Chief Financial Officer of Enterprise Financial Services Corp, hereby certify pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that: (1) such Form 10-K for the year ended December 31, 2002, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in such Form 10-K for the quarter ended December 31, 2002, fairly presents, in all material respects, the financial condition and results of operations of Enterprise Financial Services Corp. /s/ Frank H. Sanfilippo - ---------------------------------------- Frank H. Sanfilippo, Chief Financial Officer 125 -----END PRIVACY-ENHANCED MESSAGE-----