Edgar Filing: ENTERPRISE FINANCIAL SERVICES CORP

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-K

[X]		Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
		For the fiscal year ended December 31, 2008

[ ]		Transition Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
		For the transition period from to

		Commission file number 001-15373

ENTERPRISE FINANCIAL SERVICES CORP

Incorporated in the State of Delaware
I.R.S. Employer Identification # 43-1706259
Address: 150 North Meramec
Clayton, MO 63105
Telephone: (314) 725-5500
___________________

Securities registered pursuant to Section 12(b) of the Act:

(Title of class)	(Name of each exchange on which registered)
Common Stock, par value $.01 per share	NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer: [ ]	Accelerated filer: [X]	Non-accelerated filer: [ ]	Smaller Reporting Company: [ ]
		(Other than a smaller reporting company)

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. Yes [ ] No [X]

The aggregate market value of the common stock held by non-affiliates of the Registrant was approximately $104,441,705 based on the closing price of the common stock of $9.06 on March 2, 2009, as reported by the NASDAQ Global Select Market.

As of March 2, 2009, the Registrant had 12,831,457 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Certain information required for Part III of this report is incorporated by reference to the Registrant’s Proxy Statement for the
2009 Annual Meeting of Shareholders, which will be filed within 120 days of December 31, 2008.

ENTERPRISE FINANCIAL SERVICES CORP
2008 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS
		Page
Part I
Item 1:	Business	1

Item 1A:	Risk Factors	7

Item 1B:	Unresolved SEC Comments	13

Item 2:	Properties	13

Item 3:	Legal Proceedings	13

Item 4:	Submission of Matters to Vote of Security Holders	13

Part II

Item 5:	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
	Equity Securities	14

Item 6:	Selected Financial Data	17

Item 7:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 7A:	Quantitative and Qualitative Disclosures About Market Risk	46

Item 8:	Financial Statements and Supplementary Data	47

Item 9:	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	89

Item 9A:	Controls and Procedures	89

Item 9B:	Other Information	89

Part III

Item 10:	Directors, Executive Officers and Corporate Governance	89

Item 11:	Executive Compensation	89

Item 12:	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	89

Item 13:	Certain Relationships and Related Transactions, and Director Independence	89

Item 14:	Principal Accountant Fees and Services	89

Part IV

Item 15:	Exhibits, Financial Statement Schedules	90

Signatures		93

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Readers should note that in addition to the historical information contained herein, some of the information in this report contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements typically are identified with use of terms such as “may,” “will,” “expect,” “anticipate,” “estimate,” “potential,” “could” and similar words, although some forward-looking statements are expressed differently. You should be aware that the Company’s actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including: burdens imposed by federal and state regulation, changes in accounting regulation or standards of banks; credit risk; exposure to general and local economic conditions; risks associated with rapid increase or decrease in prevailing interest rates; consolidation within the banking industry; competition from banks and other financial institutions; our ability to attract and retain relationship officers and other key personnel; and technological developments; and other risks discussed in more detail in Item 1A: “Risk Factors”, all of which could cause the Company’s actual results to differ from those set forth in the forward-looking statements.

Our acquisitions could cause results to differ from expected results due to costs and expenses that are greater, or benefits that are less, than we currently anticipate, or the assumption of unanticipated liabilities.

Readers are cautioned not to place undue reliance on our forward-looking statements, which reflect management’s analysis only as of the date of the statements. The Company does not intend to publicly revise or update forward-looking statements to reflect events or circumstances that arise after the date of this report. Readers should carefully review all disclosures we file from time to time with the Securities and Exchange Commission which are available on our website at www.enterprisebank.com.

PART I

ITEM 1: BUSINESS

General
Enterprise Financial Services Corp (“we” or “the Company” or “EFSC”), a Delaware corporation, is a financial holding company headquartered in St. Louis, Missouri. The Company provides a full range of banking and wealth management services to individuals and business customers located in the St. Louis and Kansas City metropolitan markets through its banking subsidiary, Enterprise Bank & Trust (“Enterprise” or “the Bank”). Enterprise also operates a loan production office in Phoenix, Arizona. The Company celebrated 20 years in business in 2008. Our Trust division will celebrate 10 years in business in 2009.

In addition, the Company owns Millennium Brokerage Group, LLC (“Millennium”). Millennium is headquartered in Nashville, Tennessee and operates life insurance advisory and brokerage operations from 13 offices serving life agents, banks, CPA firms, property and casualty groups, and financial advisors in 49 states.

On July 31, 2008, we sold our remaining interests in Great American Bank (“Great American”). See Item 8, Note 2 – Acquisitions and Divestitures for more information.

Our stated mission is “to guide our clients to a lifetime of financial success.” We have established an accompanying corporate vision “to build an exceptional company that clients value, shareholders prize and where our associates flourish.” These tenets are fundamental to our business strategies and operations.

We are highly focused on serving the needs of private businesses, their owner families and other professionals. This is achieved through full product offerings in two primary segments: commercial banking and wealth management.

Through Enterprise, our commercial banking line of business offers a broad range of business and personal banking services. Lending services include commercial, commercial real estate, financial and industrial development, real estate construction and development, residential real estate, and consumer loans. A wide variety of deposit products and a complete suite of treasury management and international trade services complement our lending capabilities.

The wealth management line of business includes the Company’s trust operations and Millennium. Enterprise Trust, a division of Enterprise (“Enterprise Trust” or “Trust”) provides financial planning, advisory, investment management and trust services to our target markets. Business financial services are focused in the areas of retirement plans, management compensation and management succession planning. Personal advisory services include estate planning, financial planning, business succession planning and retirement planning services.

Investment management and fiduciary services are provided to individuals, businesses, institutions and nonprofit organizations. Additional information on our operating segments can be found on Pages 19 and 84.

Our executive offices are located at 150 North Meramec, Clayton, Missouri 63105 and our telephone number is (314) 725-5500.

Available Information
The Company’s website is www.enterprisebank.com. Various reports provided to the Securities and Exchange Commission (“SEC”), including our annual reports, quarterly reports, current reports and proxy statements are available free of charge on our website. These reports are made available as soon as reasonably practicable after they are filed with or furnished to the SEC. Our filings with the SEC are also available on the SEC’s website at http://www.sec.gov.

Business Strategy
Our general business strategy is to generate superior shareholder returns by providing comprehensive financial services through banking and wealth management lines of business primarily to private businesses, their owner families and other success-minded individuals.

Key success factors in pursuing this strategy include a focused and relationship-oriented distribution and sales approach, emphasis on growing wealth management revenues, aggressive credit and interest rate risk management, advanced technology and tightly managed expense growth.

Building long-term client relationships – Our historical growth strategy has been largely client relationship driven. We continuously seek to add clients who fit our target market of business owners and associated families. Those relationships are maintained, cultivated and expanded over time. This strategy enables us to attract clients with significant and growing borrowing needs, and maintain those relationships as they grow in tandem with our increasing capacity to fund client loan needs. Our banking officers are typically highly experienced. As a result of our long-term relationship orientation, we are able to fund loan growth primarily with core deposits from our business and professional clients. This is supplemented by borrowing from the Federal Home Loan Bank of Des Moines (the “FHLB”), and by issuing brokered certificates of deposits, priced at or below alternative cost of funds.

Growing Wealth Management business – Enterprise Trust offers both fiduciary and financial advisory services. We employ a full complement of attorneys, certified financial planners, estate planning professionals, as well as other investment professionals who offer a broad range of services for business owners and high net worth individuals. Employing an intensive, personalized methodology, Enterprise Trust representatives assist clients in defining lifetime goals and designing plans to achieve them. Consistent with the Company’s long-term relationship strategy, Trust representatives maintain close contact with clients ensuring follow up, discipline, and appropriate adjustments as circumstances change.

Millennium provides additional financial advisory capabilities, insurance product access and market reach that supplement our trust services. This subsidiary has also expanded our fee income sources.

Capitalizing on technology – We view our technological capabilities to be a competitive advantage. Our systems provide Internet banking, expanded treasury management products, check and document imaging, as well as a 24-hour voice response system. Other services currently offered by Enterprise include controlled disbursements, repurchase agreements and sweep investment accounts. Our treasury management suite of products blends advanced technology and personal service, often creating a competitive advantage over larger, nationwide banks. Technology is also utilized extensively in internal systems, operational support functions to improve customer service, and management reporting and analysis.

Maintaining asset quality – Senior management and the head of Credit administration monitor our asset quality through regular reviews of loans. In addition, the loan portfolios for each bank are subject to ongoing monitoring by a loan review function that reports directly to the audit committee of our board of directors.

Expense management – The Company is focused on leveraging its current expense base and measures the “efficiency ratio” as a benchmark for improvement. The efficiency ratio is equal to noninterest expense divided by total revenue (net interest income plus noninterest income). Continued improvement is targeted to increase earnings per share and generate higher returns on equity.

Market Areas and Approach to Geographic Expansion
Enterprise operates in the St. Louis, Kansas City and Phoenix metropolitan areas. Through Millennium, subject to applicable regulatory restrictions, the Company also provides services in markets across the United States.

The Company, as part of its expansion effort, plans to continue its strategy of operating relatively fewer offices with a larger asset base per office, emphasizing commercial banking and wealth management and employing experienced staff who are compensated on the basis of performance and customer service.

The Company has four Enterprise banking facilities in the St. Louis metropolitan area. The St. Louis region enjoys a stable, diverse economic base and is ranked the 19^th largest metropolitan statistical area in the United States. It is an attractive market for us with nearly 70,000 privately held businesses and over 61,000 households with investible assets of $1.0 million or more. We are the largest publicly-held, locally headquartered bank in this market.

Acquisitions in 2006 and 2007 increased the Company’s assets in the Kansas City market to more than $700.0 million, making us one of the fastest growing banks in the Kansas City market. At December 31, 2008, the Company had seven banking facilities in the Kansas City Market. Kansas City is also an attractive private company market with over 50,000 privately held businesses and over 42,000 households with investible assets of $1.0 million or more. To more efficiently deploy our resources, during 2007, the Company established a plan to streamline our Kansas City branch network. On February 28, 2008, we sold the Enterprise branch in Liberty, Missouri and on July 31, 2008, we sold the Kansas state bank charter of Great American along with the DeSoto, Kansas branch. See Item 8, Note 2 – Acquisitions and Divestitures for more information.

In 2007, the Company announced its intent to expand to Arizona, and subsequently applied for a new Arizona bank charter in 2008. Banking regulators have curtailed new charter approvals as a result of conditions in the Arizona real estate market. However, the Enterprise loan production office located in Phoenix continues to grow and build a client base. Despite the market downturn in residential real estate, we believe the Phoenix market offers substantial long-term growth opportunities for Enterprise. The demographic and geographic factors that propelled Phoenix into one of the fastest growing and most dynamic markets in the country still exist, and we believe these factors should drive continued growth in that market long after the current real estate slump is over. Today, Phoenix has more than 86,000 privately held businesses and 81,000 households with investible assets over $1.0 million each.

Competition
The Company and its subsidiaries operate in highly competitive markets. Our geographic markets are served by a number of large multi-bank holding companies with substantial capital resources and lending capacity. Many of the larger banks have established specialized units, which target private businesses and high net worth individuals. Also, the St. Louis, Kansas City and Phoenix markets have experienced an increase in de novo banks. In addition to other financial holding companies and commercial banks, we compete with credit unions, investment managers, brokerage firms, and other providers of financial services and products.

Supervision and Regulation

General
We are subject to state and federal banking laws and regulations which govern virtually all aspects of operations. These laws and regulations are intended to protect depositors, and to a lesser extent, shareholders. The numerous regulations and policies promulgated by the regulatory authorities create a difficult and ever-changing atmosphere in which to operate. The Company commits substantial resources in order to comply with these statutes, regulations and policies.

Financial Holding Company
The Company is a financial holding company registered under the Bank Holding Company Act of 1956, as amended (“BHCA”). As a financial holding company, the Company is subject to regulation and examination by the Federal Reserve Board, and is required to file periodic reports of its operations and such additional information as the Federal Reserve may require. In order to remain a financial holding company, the Company must continue to be considered well managed and well capitalized by the Federal Reserve and have at least a “satisfactory” rating under the Community Reinvestment Act. See “Liquidity and Capital Resources” in the Management Discussion and Analysis for more information on our capital adequacy and “Bank Subsidiary – Community Reinvestment Act” below for more information on Community Reinvestment.

Acquisitions: With certain limited exceptions, the BHCA requires every financial holding company or bank holding company to obtain the prior approval of the Federal Reserve before (i) acquiring substantially all the assets of any bank, (ii) acquiring direct or indirect ownership or control of any voting shares of any bank if, after such acquisition, it would own or control more than 5% of the voting shares of such bank (unless it already owns or controls the majority of such shares), or (iii) merging or consolidating with another bank holding company. Federal legislation permits bank holding companies to acquire control of banks throughout the United States.

Emergency Economic Stabilization Act of 2008: In response to recent unprecedented market turmoil, the Emergency Economic Stabilization Act (“EESA”) was enacted on October 3, 2008. EESA authorizes the Secretary of the Treasury (the “Secretary”) to purchase up to $700 billion in troubled assets from financial institutions under the Troubled Asset Relief Program (“TARP”.) Troubled assets include residential or commercial mortgages and related instruments originated prior to March 14, 2008 and any other financial instrument that the Secretary determines, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, the purchase of which is necessary to promote financial stability. If the Secretary exercises his authority under TARP, EESA directs the Secretary to establish a program to guarantee troubled assets originated or issued prior to March 14, 2008. The Secretary is authorized to purchase up to $250.0 billion in troubled assets immediately and up to $350.0 billion upon certification by the President that such authority is needed. The Secretary’s authority will be increased to $700.0 billion if the President submits a written report to Congress detailing the Secretary’s plans to use such authority unless Congress passes a joint resolution disapproving such amount within 15 days after receipt of the report. The Secretary’s authority under TARP expires on December 31, 2009 unless the Secretary certifies to Congress that extension is necessary provided that his authority may not be extended beyond October 3, 2010.

Institutions selling assets under TARP will be required to issue warrants for common or preferred stock or senior debt to the Secretary. If the Secretary purchases troubled assets directly from an institution without a bidding process and acquires a meaningful equity or debt position in the institution as a result or acquires more than $300.0 million in troubled assets from an institution regardless of method, the institution will be required to meet certain standards for executive compensation and corporate governance. See Item 11 – Executive Compensation.

EESA increases the maximum deposit insurance amount up to $250,000 until December 31, 2009 and removes the statutory limits on the FDIC’s ability to borrow from the Treasury during this period. The FDIC may not take the temporary increase in deposit insurance coverage into account when setting assessments. EESA allows financial institutions to treat any loss on the preferred stock of the Federal National Mortgage Association or Federal Home Loan Mortgage Corporation as an ordinary loss for tax purposes.

Pursuant to his authority under EESA, the Secretary created the TARP Capital Purchase Program under which the Treasury Department will invest up to $250 billion in senior preferred stock of U.S. banks and savings associations or their holding companies.

The Company applied to receive an investment by the Treasury under the Capital Purchase Program and our application was approved in November 2008. On December 19, 2008, the Company entered into a Letter Agreement and Securities Purchase Agreement (collectively, the “Purchase Agreement”) with the United States Department of the Treasury (“Treasury”) under the TARP Capital Purchase Program, pursuant to which the Company sold (i) 35,000 shares of EFSC Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) and (ii) a warrant (the “Warrant”) to purchase 324,074 shares of EFSC common stock, par value $0.01 per share (the “Common Stock”), for an aggregate investment by the Treasury of $35.0 million.

The Series A Preferred Stock will qualify as Tier 1 capital and will pay cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter. The Series A Preferred Stock may be redeemed by EFSC after three years. Prior to the end of three years, the Series A Preferred Stock may be redeemed by EFSC only with proceeds from a qualifying sale of common stock of EFSC (a “Qualified Equity Offering”), although amendments to EESA enacted in February 2009 eliminate this restriction on the means of redeeming the Senior Preferred Stock.

Pursuant to the terms of the Purchase Agreement, our ability to declare or pay dividends or distributions on, or purchase, redeem or otherwise acquire for consideration, shares of Junior Stock (as defined below) and Parity Stock (as defined below) will be subject to restrictions, including a restriction against increasing dividends from the last quarterly cash dividend per share ($0.0525) declared on the Common Stock prior to December 19, 2008. The redemption, purchase or other acquisition of trust preferred securities of EFSC or our affiliates will also be restricted. These restrictions will terminate on the earlier of (a) the third anniversary of the date of issuance of the Series A Preferred Stock and (b) the date on which the Series A Preferred Stock has been redeemed in whole or Treasury has transferred all of the Series A Preferred Stock to third parties. The restrictions described in this paragraph are set forth in the Purchase Agreement.

In addition, the ability of EFSC to declare or pay dividends or distributions on, or repurchase, redeem or otherwise acquire for consideration, shares of its Junior Stock and Parity Stock will be subject to restrictions in the event that EFSC fails to declare and pay full dividends (or declare and set aside a sum sufficient for payment thereof) on its Series A Preferred Stock.

“Junior Stock” means the Common Stock and any other class or series of EFSC stock, the terms of which expressly provide that it ranks junior to the Series A Preferred Stock as to dividend rights and/or rights on liquidation, dissolution or winding up of EFSC. “Parity Stock” means any class or series of EFSC stock, the terms of which do not expressly provide that such class or series will rank senior or junior to the Series A Preferred Stock as to dividend rights and/or rights on liquidation, dissolution or winding up of EFSC (in each case without regard to whether dividends accrue cumulatively or non-cumulatively.)

The Warrant has a 10-year term and is immediately exercisable upon its issuance, with an exercise price, subject to anti-dilution adjustments, equal to $16.20 per share of the Common Stock. Treasury has agreed not to exercise voting power with respect to any shares of Common Stock issued upon exercise of the Warrant.

The Series A Preferred Stock and the Warrant were issued in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. Upon the request of Treasury at any time, EFSC has agreed to promptly enter into a deposit arrangement whereby the Series A Preferred Stock may be deposited and depositary shares (“Depositary Shares”), representing fractional shares of Series A Preferred Stock, may be issued. EFSC agreed to register the Series A Preferred Stock, the Warrant, the shares of Common Stock underlying the Warrant (the “Warrant Shares”) and Depositary Shares, if any, as soon as practicable after the date of the issuance of the Series A Preferred Stock and the Warrant. These shares were registered with the SEC on Form S-3 on January 16, 2009. Neither the Series A Preferred Stock nor the Warrant will be subject to any contractual restrictions on transfer, except that Treasury may only transfer or exercise an aggregate of one-half of the Warrant Shares prior to the earlier of the redemption of 100% of the shares of Series A Preferred Stock and December 31, 2009.

The Purchase Agreement also subjects EFSC to certain of the executive compensation limitations included in the EESA. As a result, as a condition to the closing of the transaction, each of Messrs. Peter F. Benoist, Frank H. Sanfilippo, Stephen P. Marsh and John G. Barry and Ms. Linda M. Hanson, EFSC’s Executive Officers (as defined in the Purchase Agreement) (the “Senior Executive Officers”), (i) executed a waiver (the “Waiver”) voluntarily waiving any claim against the Treasury or EFSC for any changes to such Senior Executive Officer’s compensation or benefits that are required to comply with the regulation issued by the Treasury under the TARP Capital Purchase Program as published in the Federal Register on October 20, 2008 and acknowledging that the regulation may require modification of the compensation, bonus, incentive and other benefit plans, arrangements and policies and agreements (including so-called “golden parachute” agreements) (collectively, “Benefit Plans”) as they relate to the period the Treasury holds any equity or debt securities of EFSC acquired through the TARP Capital Purchase Program; and (ii) entered into a letter agreement (the “Letter Agreement”) with EFSC amending the Benefit Plans with respect to such Senior Executive Officer as may be necessary, during the period that the Treasury owns any debt or equity securities of EFSC acquired pursuant to the Purchase Agreement or the Warrant, as necessary to comply with Section 111(b) of the EESA.

The American Recovery and Reinvestment Act of 2009 significantly amended Section 111(b) of the EESA and imposed more severe restrictions on the executive compensation while loosening the requirements to redeem the Series A Preferred Stock including a complete prohibition on any severance or other compensation upon termination of employment, significant caps on bonuses, retention payments and executive compensation and a “clawback” requirement requiring the return of any bonus or incentive compensation based on earnings or other financial data that later turn out to be misstated. See Item 11 – Executive Compensation. These executive compensation restrictions may affect our ability to attract and retain key executives.

The foregoing description of the TARP, the Capital Purchase Program and securities covered thereby is qualified in its entirety by reference to the Letter Agreement – Standard Terms executed and delivered by the Company to the Secretary and the Warrant to Purchase Common Stock, both of which were executed and delivered by the Company and delivered to the Secretary at the closing of the Company’s issuance of Series A Preferred Stock to the Treasury.

Bank Subsidiary
At December 31, 2008, we had one wholly owned bank subsidiary. Enterprise is a Missouri trust company with banking powers and is subject to supervision and regulation by the Missouri Division of Finance. In addition, as a Federal Reserve non-member bank, it is subject to supervision and regulation by the FDIC. Enterprise is a member of the FHLB of Des Moines.

Enterprise is subject to extensive federal and state regulatory oversight. The various regulatory authorities regulate or monitor all areas of the banking operations, including security devices and procedures, adequacy of capitalization and loss reserves, loans, investments, borrowings, deposits, mergers, issuance of securities, payment of dividends, interest rates payable on deposits, interest rates or fees chargeable on loans, establishment of branches, corporate reorganizations, maintenance of books and records, and adequacy of staff training to carry on safe lending and deposit gathering practices. Enterprise must maintain certain capital ratios and is subject to limitations on aggregate investments in real estate, bank premises, and furniture and fixtures.

Transactions with Affiliates and Insiders: Enterprise is subject to the provisions of Regulation W promulgated by the Federal Reserve, which encompasses Sections 23A and 23B of the Federal Reserve Act. Regulation W places limits and conditions on the amount of loans or extensions of credit to, investments in, or certain other transactions with, affiliates and on the amount of advances to third parties collateralized by the securities or obligations of affiliates. Regulation W also prohibits, among other things, an institution from engaging in certain transactions with certain affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.

Community Reinvestment Act: The Community Reinvestment Act (“CRA”) requires that, in connection with examinations of financial institutions within its jurisdiction, the FDIC shall evaluate the record of the financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those institutions. These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. The Company has a satisfactory rating under CRA.

USA Patriot Act: On October 26, 2001, President Bush signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA PATRIOT Act"). Among its other provisions, the USA PATRIOT Act requires each financial institution to: (i) establish an anti-money laundering program; (ii) establish due diligence policies, procedures and controls with respect to its private banking accounts and correspondent banking accounts involving foreign individuals and certain foreign banks; and (iii) implement certain due diligence policies, procedures and controls with regard to correspondent accounts in the United States for, or on behalf of, a foreign bank that does not have a physical presence in any country. In addition, the USA PATRIOT Act contains a provision encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities.

Limitations on Loans and Transactions: The Federal Reserve Act generally imposes certain limitations on extensions of credit and other transactions by and between banks that are members of the Federal Reserve and other affiliates (which includes any holding company of which a bank is a subsidiary and any other non-bank subsidiary of such holding company). Banks that are not members of the Federal Reserve are also subject to these limitations. Further, federal law prohibits a bank holding company and its subsidiaries from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or the furnishing of services.

Temporary Liquidity Guarantee Program: Pursuant to the Emergency Economic Stabilization Act of 2008, the maximum deposit insurance amount has been increased from $100,000 to $250,000 until December 31, 2009. On October 13, 2008, the FDIC established a Temporary Liquidity Guarantee Program (“TLGP”) under which the FDIC will fully guarantee all non-interest-bearing transaction accounts and all senior unsecured debt of insured depository institutions or their qualified holding companies issued between October 14, 2008 and June 30, 2009. Senior unsecured debt would include federal funds purchased and certificates of deposit outstanding to the credit of the bank. All eligible institutions participated in the program without cost for the first 30 days of the program. After December 5, 2008, institutions will be assessed at the rate of 10 basis points for transaction account balances in excess of $250,000 and at the rate of 75 basis points of the amount of debt issued. Institutions were required to opt out of the Temporary Liquidity Guarantee Program by December 5, 2008 if they did not wish to participate. The Company and Enterprise opted into the TLGP.

Deposit Insurance Fund: The FDIC establishes rates for the payment of premiums by federally insured banks for deposit insurance. The Deposit Insurance Fund (“DIF”) is maintained for commercial banks, with insurance premiums from the industry used to offset losses from insurance payouts when banks and thrifts fail. The FDIC is authorized to set the reserve ratio for the DIF annually at between 1.15% and 1.50% of estimated insured deposits.

To fund this program, pursuant to the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”), the FDIC adopted a new risk-based deposit insurance premium system that provides for quarterly assessments. Beginning in 2007, institutions were grouped into one of four categories based on their FDIC ratings and capital ratios. Each institution is assessed for deposit insurance at an annual rate of between 5 and 43 basis points with the assessment rate to be determined according to a formula based on a weighted average of the institution’s individual FDIC component ratings plus either five financial ratios or the average ratings of its long-term debt.

To restore its reserve ratio, the FDIC has proposed to raise the base annual assessment rate for all institutions by 7 basis points for the first quarter of 2009. Assessment rates for first quarter of 2009 would range from 12 to 50 basis points. For the second quarter of 2009, the proposed initial base assessment rates would range between 10 and 45 basis points. An institution’s assessment rate can be adjusted up or down as a result of additional proposed risk adjustments based on the following: long-term debt ratings, weighted average FDIC component ratings, various financial ratios, the institution’s reliance on brokered deposits and/or other secured liabilities and the amount of unsecured debt.

During 2008, Enterprise had a weighted average assessment rate of 5.9 basis points. Total payments to the FDIC were $1.2 million in 2008. Based on an analysis of the proposed rates, underlying adjustments and our planned deposit base, we expect our FDIC insurance premiums to increase by approximately $1.0 million in 2009.

On February 27, 2009, the FDIC imposed a one-time special assessment of 20 basis points, which will be collected in the third quarter of 2009. We are awaiting the final ruling of the assessment calculation, but our initial expectation is that the one-time assessment could increase our 2009 FDIC insurance premiums by as much as an additional $3.5 million. It is possible this amount may be reduced pending the final FDIC ruling.

Millennium
Millennium and the investment management industry in general are subject to extensive regulation in the United States at both the federal and state level, as well as by self-regulatory organizations such as the National Association of Securities Dealers, Inc. ("NASD"). The SEC is the federal agency that is primarily responsible for the regulation of investment advisers. Millennium is licensed to sell insurance, including variable insurance policies, in various states and is subject to regulation by the NASD. This regulation includes supervisory and organizational procedures intended to assure compliance with securities laws, including qualification and licensing of supervisory and sales personnel and rules designed to promote high standards of commercial integrity and fair and equitable principles of trade.

Employees
At December 31, 2008 we had approximately 348 full-time equivalent employees. None of the Company’s employees are covered by a collective bargaining agreement. Management believes that its relationship with its employees is good.

ITEM 1A: RISK FACTORS

An investment in our common shares is subject to risks inherent to our business. Described below are certain risks and uncertainties that management has identified as material. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report. The risks and uncertainties described below are not the only ones we face. Although we have significant risk management policies, procedures and verification processes in place, additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair our business operations.

If any of the following risks actually occur, our financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our common shares could decline, perhaps significantly, and you could lose all or part of your investment.

Risks Related To Our Business

The financial markets in the United States and elsewhere have been experiencing extreme and unprecedented volatility and disruption. We are exposed to significant financial and capital markets risk, including changes in interest rates, credit spreads and equity prices, which may have a material adverse effect on our results of operations, financial condition and liquidity.
Our earnings and cash flows are largely dependent upon our net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions, the competitive environment within our markets, consumer preferences for specific loan and deposit products and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, influence not only the amount of interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but such changes also affect our ability to originate loans and obtain deposits as well as the fair value of our financial assets and liabilities. If the interest we pay on deposits and other borrowings increases at a faster rate than the interest we receive on loans and other investments, our net interest income, and therefore earnings, will be adversely affected. Earnings could also be adversely affected if the interest we receive on loans and other investments falls more quickly than the interest we pay on deposits and other borrowings. Management uses simulation analysis to produce an estimate of interest rate exposure based on assumptions and judgments related to balance sheet growth, customer behavior, new products, new business volume, pricing and anticipated hedging activities. Simulation analysis involves a high degree of subjectivity and requires estimates of future risks and trends. Accordingly, there can be no assurance that actual results will not differ from those derived in simulation analysis due to the timing, magnitude and frequency of interest rate changes, changes in balance sheet composition, and the possible effects of unanticipated or unknown events.

Since July 2007, credit markets have experienced difficult conditions, extraordinary volatility and rapidly widening credit spreads and, therefore, have provided significantly reduced availability of liquidity for many borrowers. Uncertainties in these markets present significant challenges, particularly for the financial services industry. Disruptions in the financial markets caused widening credit spreads resulting in markdowns and/or losses by financial institutions from trading, hedging and other market activities. We obtain most of our funding from core deposit relationships with our clients and invest those funds in loans to our clients or government-backed agency securities. Our investment portfolio contains no mortgage-backed securities invested in subprime or alt-A mortgages.

Our activities in the national credit markets are limited to funding vehicles such as brokered certificates of deposit and subordinated debentures. We have seen the cost of brokered deposits decline slower than other money market rates due to demand by financial institutions, and the cost and availability of subordinated debentures has been severely and negatively impacted by this adverse environment. It is difficult to predict how long these economic conditions will exist, and which of our markets, products or other businesses will ultimately be affected. In addition, further reductions in market liquidity may make it difficult to value certain of our securities if trading becomes less frequent. As such, valuations may include assumptions or estimates that may be more susceptible to significant period to period changes which could have a material adverse effect on our consolidated results of operations or financial condition.

One important exposure to equity risk relates to the potential for lower earnings associated with our Wealth Management business, where fee income is earned based upon the fair value of the assets under management. During 2008, the significant declines in equity markets have negatively impacted assets under management. As a result, fee income earned from those assets has also decreased.

If significant, further declines in equity prices, changes in U.S. interest rates and changes in credit spreads individually or in combination, could continue to have a material adverse effect on our consolidated results of operations, financial condition and liquidity both directly and indirectly by creating competition and other pressures such as employee retention issues.

Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities or on terms which are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations and the continued deterioration in credit markets.

The Company depends on payments from Enterprise, including dividends and payments under service agreements and tax sharing agreements, for substantially all of the Company’s revenue. Federal and state regulations limit the amount of dividends and the amount of payments that Enterprise may make to the Company under service and tax sharing agreements. See “Supervision and Regulation”. In the event Enterprise becomes unable to pay dividends to the Company or make payments under the service agreements or tax sharing agreements the Company may not be able to service our debt, pay our other obligations or pay dividends on the Series A Preferred Stock or our common stock. Accordingly, our inability to receive dividends or other payments from the Bank could also have a material adverse effect on our business, financial condition and results of operations and the value of investments in the Series A Preferred Stock or our common stock.

At December 31, 2008, the Company had $0 outstanding on its $16.0 million line of credit. While the line of credit does not expire until April 2009, we do not have any current availability under the line due to our noncompliance with a certain covenant regarding classified loans as a percentage of bank equity and loan loss reserves. We may be unable to arrange for a holding company line of credit in 2009 given the uncertainties around bank industry performance. However, we believe our current level of cash at the holding company will be sufficient to meet all projected cash needs in 2009.

We believe the level of liquid assets at Enterprise is sufficient to meet current and anticipated funding needs. In addition to amounts currently borrowed, at December 31, 2008, Enterprise could borrow an additional $164.3 million available from the FHLB of Des Moines under blanket loan pledges and an additional $310.5 million available from the Federal Reserve Bank under pledged loan agreements. Enterprise also has access to over $70.0 million in overnight federal funds lines from various correspondent banks. See “Liquidity and Capital Resources” for more information.

We are subject to credit and collateral risk.
There are inherent risks associated with our lending activities. These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions in the markets where we operate. Increases in interest rates and/or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans. The real estate downturn in our geographic markets has hurt our business because a majority of our loans are secured by real estate. If real estate prices continue to decline, the value of real estate collateral securing our loans will be reduced. Our ability to recover on defaulted loans by foreclosing and selling real estate collateral will be further diminished and we would likely suffer losses on defaulted loans. Substantially all of our real property collateral is located in Missouri and Kansas. Over the past nine months, real estate values, particularly residential real estate values, have deteriorated in our markets. As a result, our 2008 charge-offs were significantly higher than historical levels. During 2008, we incurred $12.7 million of net-charge-offs, or 0.70% of average loans compared to $2.0 million, or 0.14%, of average loans for 2007.

Various factors may cause our allowance for loan losses to increase.
We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, that represents management’s estimate of probable losses within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance reflects management’s continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political and regulatory conditions; and unexpected losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for loan losses inherently involves a degree of subjectivity and requires that we make significant estimates of current credit risks and future trends, all of which may undergo material changes. The loan loss allowance increased in 2008 due to changes in economic conditions affecting borrowers, new information regarding existing loans, and identification of additional problem loans. We continue to monitor our loan loss allowance and may need to increase it if factors continue to deteriorate. In addition, bank regulatory agencies and our independent auditors periodically review our allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments that can differ somewhat from those of our own management. In addition, if charge-offs in future periods exceed the allowance for loan losses (i.e., if the loan allowance is inadequate), we will need additional loan loss provisions to increase the allowance for loan losses. Additional provisions to increase the allowance for loan losses, should they become necessary, would result in a decrease in net income and capital, and may have a material adverse effect on our financial condition and results of operations. Due to strong loan growth, an increase in non-performing loans and adverse risk rating changes primarily in the residential builder portfolio, the provision for loan losses was $22.5 million for 2008 compared to $4.6 million for 2007.

If our businesses do not perform well, we may be required to recognize an impairment of our goodwill or intangible assets or to establish a valuation allowance against the deferred income tax asset, which could have a material adverse effect on our results of operations and financial condition.
Goodwill represents the excess of the amounts we paid to acquire subsidiaries and other businesses over the fair value of their net assets at the date of acquisition. We test goodwill at least annually for impairment. Impairment testing is performed based upon estimates of the fair value of the “reporting unit” to which the goodwill relates. The reporting unit is the operating segment or a business one level below that operating segment if discrete financial information is prepared and regularly reviewed by management at that level. The fair value of the reporting unit is impacted by the performance of the business and could be adversely impacted by any efforts made by the Company to limit risk. If it is determined that the goodwill or other long-term intangible asset has been impaired, the Company must write down the asset by the amount of the impairment, with a corresponding charge to net income. Such writedowns could have a material adverse effect on our results of operations and financial position. During 2008, we took an impairment charge of $9.2 million, pre-tax, with respect to our Millennium reporting unit. At December 31, 2008, the goodwill balance included in the consolidated balance sheet for the Millennium reporting unit was $3.1 million. It is possible that additional impairment at Millennium may occur in 2009.

The Company’s 2008 analysis of goodwill at the Banking reporting unit indicated that no impairment existed at December 31, 2008. If current market conditions persist during 2009, in particular, if the EFSC common share price falls and consistently remains below book value per share, the Company may need to test for goodwill impairment at an interim date. Subsequent reviews of goodwill could result in additional impairment of goodwill during 2009.

Deferred income tax represents the tax effect of the differences between the book and tax basis of assets and liabilities. Deferred tax assets are assessed periodically by management to determine if they are realizable. If based on available information, it is more likely than not that the deferred income tax asset will not be realized, then a valuation allowance must be established with a corresponding charge to net income. As of December 31, 2008, the Company did not carry a valuation allowance against its deferred tax asset balance of $15.7 million. Future facts and circumstances may require a valuation allowance. Charges to establish a valuation allowance could have a material adverse effect on our results of operations and financial position.

We may be adversely affected by the soundness of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including Federal Home Loan banks, commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when the collateral we hold cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to us. Any such losses could have a material adverse affect on our financial condition and results of operations.

Our profitability depends significantly on economic conditions in the geographic regions in which we operate.
The regional economic conditions in areas where we conduct our business have an impact on the demand for our products and services as well as the ability of our customers to repay loans, the value of the collateral securing loans and the stability of our deposit funding sources. A significant decline in general economic conditions caused by inflation, recession, an act of terrorism, outbreak of hostilities or other international or domestic occurrences, unemployment, changes in securities markets or other factors, such as severe declines in the value of homes and other real estate, could also impact these regional economies and, in turn, have a material adverse effect on our financial condition and results of operations.

We operate in a highly competitive industry and market areas.
We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and may have more financial resources. Such competitors primarily include national and super-regional banks as well as smaller community banks within the markets in which we operate. However, we also face competition from many other types of financial institutions, including, without limitation, credit unions, mortgage banking companies, mutual funds, insurance companies, investment management firms, and other local, regional and national financial services firms. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks.

Our ability to compete successfully depends on a number of factors, including, among other things:

our ability to develop and execute strategic plans and initiatives;
our ability to develop, maintain and build upon long-term client relationships based on quality service, high ethical standards and safe, sound assets;
our ability to expand our market position;
the scope, relevance and pricing of products and services offered to meet client needs and demands;
the rate at which we introduce new products and services relative to our competitors; and
industry and general economic trends.

Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could have a material adverse effect on our financial condition and results of operations.

We are subject to extensive government regulation and supervision.
Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not shareholders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies; changes in the interpretation or implementation of statutes, regulations or policies; and/or continuing to become subject to heightened regulatory practices, requirements or expectations, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products that we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to appropriately comply with laws, regulations or policies (including internal policies and procedures designed to prevent such violations) could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations.

Our controls and procedures may fail or be circumvented.
Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.

Recent and possible acquisitions may disrupt our business and dilute shareholder value.
Acquiring other banks or businesses involves various risks commonly associated with acquisitions, including, among other things:

potential exposure to unknown or contingent liabilities of the target company;
exposure to potential asset quality issues of the target company;
difficulty and expense of integrating the operations and personnel of the target company;
potential disruption to our business;
potential diversion of our management’s time and attention;
the possible loss of key employees and customers of the target company;
difficulty in estimating the value (including goodwill) of the target company; and
potential changes in banking or tax laws or regulations that may affect the target company.

We periodically evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving cash, debt or equity securities may occur at any time. Acquisitions typically involve the payment of a premium over book and market values, and, therefore, some dilution of our tangible book value and net income per common share may occur in connection with any future transaction. Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from an acquisition could have a material adverse effect on our financial condition and results of operations.

We may not be able to attract and retain skilled people.
Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people in most activities in which we are engaged can be intense and we may not be able to hire or retain the people we want and/or need. Although we maintain employment agreements with certain key employees, and have incentive compensation plans aimed, in part, at long-term employee retention, the unexpected loss of services of one or more of our key personnel could still occur, and such events may have a material adverse impact on our business because of the loss of the employee’s skills, knowledge of our market, years of industry experience and the difficulty of promptly finding qualified replacement personnel.

The restrictions on executive compensation imposed by EESA and ARRA on all participants in TARP severely limit the amount and types of compensation we can pay our executive officers and key employees, including a complete prohibition on any severance or other compensation upon termination of employment, significant caps on bonuses, retention payments and executive compensation and a “clawback” requirement requiring the return of any bonus or incentive compensation based on earnings or other financial data that later turn out to be misstated. These restrictions may affect our ability to attract and retain key employees.

Our information systems may experience an interruption or breach in security.
We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. While we have policies and procedures designed to prevent or limit the effect of the possible failure, interruption or security breach of our information systems, there can be no assurance that any such failure, interruption or security breach will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failure, interruption or security breach of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

Risks Associated With Our Shares

Our share price can be volatile.
Share price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. Our share price can fluctuate significantly in response to a variety of factors including, among other things:

actual or anticipated variations in quarterly results of operations;
recommendations by securities analysts;
operating and stock price performance of other companies that investors deem comparable to our business;
news reports relating to trends, concerns and other issues in the financial services industry;
perceptions of us and/or our competitors in the marketplace;
significant acquisitions or business combinations or capital commitments entered into by us or our competitors; or
failure to integrate acquisitions or realize anticipated benefits from acquisitions.

General market fluctuations, market disruption, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause our share price to decrease regardless of operating results.

An investment in our common shares is not an insured deposit.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire our common shares, you may lose some or all of your investment.

Our certificate of incorporation authorizes the issuance of preferred stock by our board of directors.
Our Certificate of Incorporation authorizes the issuance of up to 5,000,000 shares of preferred stock with designations, powers, preferences, rights, qualifications and limitations determined from time to time by our Board of Directors. Accordingly, our Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting, or other rights, which could adversely affect the voting power or other rights of the holders of the common stock. In the event of issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. Although we have no present intention to issue any additional shares of its authorized preferred stock, there can be no assurance that the Company will not do so in the future.

ITEM 1B: UNRESOLVED SEC COMMENTS

Not applicable.

ITEM 2: PROPERTIES

Banking facilities
Our executive offices are located at 150 North Meramec, Clayton, Missouri, 63105. As of December 31, 2008, we had four banking locations and a support center in the St. Louis metropolitan area and seven banking locations in the Kansas City metropolitan area. We own four of the facilities and lease the remainder. In March 2006, the Company purchased its operations center located in St. Louis County, Missouri. Most of the leases expire between 2009 and 2017 and include one or more renewal options of 5 years. One lease expires in 2026. All the leases are classified as operating leases. We believe all our properties are in good condition.

Wealth management facilities
In February 2008, we purchased approximately 11,000 square feet of commercial condominium space in Clayton Missouri located approximately two blocks from our executive offices. We relocated the St. Louis-based Trust Advisory operations to this location in the fourth quarter of 2008. Enterprise Trust also has offices in Kansas City. Expenses related to the space used by Enterprise Trust are allocated to the Wealth Management segment.

As of December 31, 2008, Millennium had 13 locations in 9 states throughout the United States. The executive offices are located in Nashville, Tennessee. None of the locations are owned by Millennium. The leases are classified as operating leases and expire in various years through 2011.

ITEM 3: LEGAL PROCEEDINGS

The Company and its subsidiaries are, from time to time, parties to various legal proceedings arising out of their businesses. Management believes that there are no such proceedings pending or threatened against the Company or its subsidiaries which, if determined adversely, would have a material adverse effect on the business, financial condition, results of operations or cash flows of the Company or any of its subsidiaries.

ITEM 4: SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

A Special Meeting of Shareholders was held on December 12, 2008. Proxies were solicited pursuant to Regulation 14A of the Securities Exchange Act of 1934. The shareholders were asked to approve an amendment to the Company’s Certificate of Incorporation to authorize the issuance of up to 5,000,000 shares of preferred stock. At the meeting, shareholders approved the amendment by a vote of 7,758,555 “for” the amendment, 1,264,544 “against” the amendment and 54,340 abstaining. Following the filing of the amendment to the Certificate of Incorporation, the Company’s Directors designated 35,000 shares of preferred stock for sale to the Treasury under the TARP program.

PART II

ITEM 5: MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASE OF EQUITY SECURITIES

Common Stock Market Prices
The Company’s common stock trades on the NASDAQ Global Select Market under the symbol “EFSC”. Below are the dividends declared by quarter along with what the Company believes are the high and low closing sales prices for the common stock. There may have been other transactions at prices not known to the Company. As of March 2, 2009, the Company had 719 common stock shareholders of record and a market price of $9.06 per share. The number of holders of record does not represent the actual number of beneficial owners of our common stock because securities dealers and others frequently hold shares in “street name” for the benefit of individual owners who have the right to vote shares.

	2008								2007
	4th Qtr		3rd Qtr		2nd Qtr		1st Qtr		4th Qtr		3rd Qtr		2nd Qtr		1st Qtr
Closing Price	$	15.24	$	22.56	$	18.85	$	25.00	$	23.81	$	24.34	$	24.86	$	28.00
High		22.49		23.04		25.25		25.00		25.70		26.81		28.15		31.36
Low		11.49		15.95		18.60		18.19		19.97		20.02		24.25		27.73
Cash dividends paid
on common shares		0.0525		0.0525		0.0525		0.0525		0.0525		0.0525		0.0525		0.0525

Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2008, regarding securities issued and to be issued under our equity compensation plans that were in effect during the year ended December 31, 2008:

			Number of securities
			remaining available for
	Number of securities to	Weighted-average	future issuance under
	be issued upon exercise	exercise price of	equity compensation plans
	of outstanding options,	outstanding options,	(excluding shares
	warrants and rights	warrants and rights	reflected in column (a)
Plan Category	(a)	(b)	(c)
Equity compensation
plans approved by the
Company's shareholders	827,471	$17.03	965,869
Equity compensation
plans not approved by
the Company's
shareholders	--	--	--
Total	827,471 (1)	$17.03	965,869 (2)

(1) Includes the following:

29,090 shares of common stock to be issued upon exercise of outstanding stock options under the 1996 Stock Incentive Plan (Plan III);
190,035 shares of common stock to be issued upon exercise of outstanding stock options under the 1999 Stock Incentive Plan (Plan IV);
198,670 shares of common stock to be issued upon exercise of outstanding stock options under the 2002 Stock Incentive Plan (Plan V);
407,176 shares of common stock used as the base for grants of stock settled stock appreciation rights under the 2002 Stock Incentive Plan (Plan V);
2,500 shares of common stock to be issued upon exercise of outstanding stock options under the 1998 Nonqualified Plan.

(2) Includes the following:

28,800 shares of common stock available for issuance under the 1999 Stock Incentive Plan (Plan IV);
856,723 shares of common stock available for issuance under the 2002 Stock Incentive Plan (Plan V);
80,346 shares of common stock available for issuance under the Non-management Director Stock Plan.

Dividends
The holders of shares of common stock of the Company are entitled to receive dividends when declared by the Company’s Board of Directors out of funds legally available for the purpose of paying dividends. Holders of our Series A Preferred Stock originally issued to the United States Treasury on December 19, 2008, are entitled to cumulative dividends of 5% per annum. Dividends payable on the Series A Preferred Stock are currently $1.8 million per annum. Dividends on the Series A Preferred Stock are prior to and in preference to any dividends payable on our common stock. Pursuant to the terms of the Purchase Agreement under the TARP Capital Purchase Program, prior to December 19, 2011 our ability to declare or pay dividends is subject to restrictions, including a restriction against increasing the dividend rate from the last quarterly cash dividend per share ($0.0525) declared on the Common Stock prior to December 19, 2008. The amount of dividends, if any, that may be declared by the Company also depends on many other factors, including future earnings, bank regulatory capital requirements and business conditions as they affect the Company and its subsidiaries. As a result, no assurance can be given that dividends will be paid in the future with respect to the Company’s common stock. In addition, the Company currently plans to retain most of its earnings to strengthen our balance sheet given the weak economic environment.

Repurchases of Common Stock
On August 27, 2007, the Company’s Board of Directors authorized a one year stock repurchase program of up to 625,000 shares, or approximately 5.00%, of the Company’s outstanding common stock in the open market or in privately negotiated transactions. No purchases were made in 2008 and the program expired in August 2008 without reauthorization. In addition, participants in TARP are not allowed to repurchase shares of common stock. All repurchased shares are being held as Treasury stock. See Item 8, Note 1 – Significant Accounting Policies for more information.

Performance Graph
The following Stock Performance Graph and related information should not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission nor shall such performance be incorporated by reference into any future filings under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.

The following graph compares the cumulative total shareholder return on the Company’s common stock from December 31, 2003 through December 31, 2008. The graph compares the Company’s common stock with the NASDAQ Composite and the SNL $1B-$5B Bank Index. The graph assumes an investment of $100.00 in the Company’s common stock and each index on December 31, 2003 and reinvestment of all quarterly dividends. The investment is measured as of each subsequent fiscal year end. There is no assurance that the Company’s common stock performance will continue in the future with the same or similar results as shown in the graph.

	*Period Ending*
*Index*	12/31/03	12/31/04	12/31/05	12/31/06	12/31/07	12/31/08
Enterprise Financial Services Corp	100.00	133.02	164.16	237.34	174.94	113.30
NASDAQ Composite	100.00	108.59	110.08	120.56	132.39	78.72
SNL Bank $1B-$5B	100.00	123.42	121.31	140.38	102.26	84.81

ITEM 6: SELECTED FINANCIAL DATA

The following consolidated selected financial data is derived from the Company’s audited financial statements as of and for the five years ended December 31, 2008. This information should be read in connection with our audited consolidated financial statements, related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this report.

	Year ended December 31,
(in thousands, except per share data)	2008			2007			2006			2005			2004
EARNINGS SUMMARY:
Interest income	$	117,981		$	122,517		$	94,418		$	68,108		$	48,893
Interest expense		51,258			61,465			43,141			23,541			12,169
Net interest income		66,723			61,052			51,277			44,567			36,724
Provision for loan losses		22,475			4,615			2,127			1,490			2,212
Noninterest income		25,273			19,673			16,916			8,967			7,122
Noninterest expense		63,505			49,516			41,394			34,324			29,331
Minority interest in net income of consolidated
consolidated subsidiary		-			-			(875	)		(113	)		-
Income before income taxes		6,016			26,594			23,797			17,607			12,303
Income taxes		1,586			9,016			8,325			6,312			4,088
NET INCOME	$	4,430		$	17,578		$	15,472		$	11,295		$	8,215

PER SHARE DATA:
Basic earnings per common share	$	0.35		$	1.44		$	1.41		$	1.12		$	0.85
Diluted earnings per common share		0.34			1.40			1.36			1.05			0.82
Cash dividends paid on common shares		0.21			0.21			0.18			0.14			0.10
Book value per common share		14.31			13.96			11.52			8.85			7.44
Tangible book value per common share		10.24			8.86			8.43			7.27			7.23

BALANCE SHEET DATA:
Year end balances:
Loans	$	1,977,175		$	1,641,432		$	1,311,723		$	1,002,379		$	898,505
Allowance for loan losses		31,309			21,593			16,988			12,990			11,665
Goodwill		48,512			57,177			29,983			12,042			1,938
Intangibles, net		3,504			6,053			5,789			4,548			135
Assets		2,270,174		1,999,118				1,535,587			1,286,968			1,059,950
Deposits		1,792,784		1,585,012				1,315,508			1,116,244			939,628
Subordinated debentures		85,081			56,807			35,054			30,930			20,620
Borrowings		166,117		169,581				40,752			36,931			20,164
Shareholders' equity		217,788		173,149				132,994			92,605			72,726
Average balances:
Loans		1,828,434		1,495,807				1,159,110			964,259			847,270
Earning assets		1,952,942		1,619,425				1,300,378			1,100,559			967,854
Assets		2,127,671		1,753,254				1,385,726			1,148,691			1,008,022
Interest-bearing liabilities		1,711,048		1,365,471				1,055,520			859,912			748,434
Shareholders' equity		183,819		161,359				113,000			81,511			68,854

SELECTED RATIOS:
Return on average common equity		2.43	%		10.89	%		13.69	%		13.86	%		11.93	%
Return on average assets		0.21			1.00			1.12			0.98			0.81
Efficiency ratio		69.03			61.34			60.70			64.12			66.90
Average common equity to average assets		8.58			9.20			8.15			7.10			6.83
Yield on average interest-earning assets		6.09			7.63			7.33			6.25			5.10
Cost of interest-bearing liabilities		3.00			4.50			4.09			2.74			1.63
Net interest rate spread		3.09			3.13			3.24			3.51			3.47
Net interest rate margin		3.47			3.83			4.01			4.11			3.84
Nonperforming loans to total loans		1.50			0.77			0.49			0.14			0.20
Nonperforming assets to total assets		1.92			0.78			0.52			0.11			0.18
Net chargeoffs to average loans		0.70			0.14			0.10			0.02			0.13
Allowance for loan losses to total loans		1.58			1.32			1.30			1.30			1.30
Dividend payout ratio - basic		60.09			15.01			12.78			12.58			11.76

ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

INTRODUCTION
The objective of this section is to provide an overview of the results of operations and financial condition of the Company for the three years ended December 31, 2008. It should be read in conjunction with the Consolidated Financial Statements, Notes and other financial data presented elsewhere in this report, particularly the information regarding the Company’s business operations described in Item 1.

EXECUTIVE SUMMARY
This overview of management’s discussion and analysis highlights selected information in this document and may not contain all of the information that is important to you. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources and critical accounting estimates, you should carefully read this entire document.

Over the past eighteen months, banks and financial institutions of all sizes have been impacted by adverse conditions in the housing and credit markets, and recent bank failures have heightened awareness and concern regarding the safety and soundness of all banks. The Company, including its wholly owned bank subsidiary, Enterprise, are “well-capitalized” under the regulatory guidelines. Since September 2008, we have raised $62.5 million in regulatory capital, raising our risk-based capital ratio to 12.81% - well in excess of the regulatory guidelines. On September 30, 2008, Enterprise completed a $2.5 million private placement of subordinated capital notes. On December 12, 2008, we completed a private placement of $25.0 million in Convertible Trust Preferred Securities that qualify as Tier II regulatory capital until they would convert to EFSC common stock. And finally, on December 19, 2008, we received $35.0 million from the US Treasury under the Capital Purchase Program.

See “Supervision and Regulation”, “Liquidity and Capital Resources” and Item 8, Note 11 – Subordinated Debentures for more information.

We are concentrating our resources on growing our core banking and wealth management businesses and aggressively managing asset quality through this credit cycle. The additional capital will strengthen our balance sheet and allows us to take advantage of opportunities that may emerge as a result of the current unsettled nature of the financial industry. In addition, please note:

We have not participated in the origination of subprime or Alt-A loans.
We have not invested in securities that are secured by subprime loans.
We have no common or preferred Federal National Mortgage Association (Fannie Mae) or Federal Home Loan Mortgage Corporation (Freddie Mac) stock.

Operating Results
Net income for 2008 was $4.4 million, or $0.34 per fully diluted share, compared to $17.6 million, or $1.40 per fully diluted share in 2007. Included in 2008 results are:

$9.2 million in pre-tax, non-cash goodwill and intangible impairment charges related to Millennium;
$3.4 million in pre-tax gains on the sale of non-strategic branches in the Kansas City market; and
$1.0 million pre-tax charge related to a payout under an employee retention agreement.

Excluding these non-recurring items, operating earnings for the year were $9.1 million, or $0.70, per share. We are presenting operating earnings and loss figures, which are not financial measures as defined under U.S. GAAP, because we believe adjusting our results to exclude non-recurring items provides shareholders with a more comparable basis for evaluating our period-to-period operating results and financial performance. Below is a reconciliation of U.S. GAAP net (loss) income to operating (loss) earnings for the fourth quarter and year of 2008.

	4th Quarter 2008						Total year 2008
(All amounts net of tax, in thousands, except per share data)	Net loss			Diluted EPS			Net income			Diluted EPS
U.S. GAAP net (loss) income	$	(3,952	)	$	(0.32	)	$	4,430		$	0.34
Impairment charges related to Millennium		2,112			0.16			5,888			0.46
Gain on sales of Kansas City nonstrategic branches/charter		-			-			(1,880	)		(0.15	)
Employee retention agreement		560			0.04			640			0.05
Operating (loss) earnings	$	(1,280	)	$	(0.12	)	$	9,078		$	0.70

Our diluted earnings per share are $0.01 less than previously reported in the press release issued on January 29, 2009 on Form 8-K due to the inclusion of preferred stock dividends that were not declared as of the press release date and not included in the earnings per share calculation at that time.

Below are highlights of our Banking and Wealth Management segments. For more information on our segments, see Item 8, Note 20 – Segment Reporting.

Banking
Our core banking business continues to perform relatively well in light of the unprecedented turmoil in the financial markets and the continued deterioration of the housing market. Below is a summary of 2008:

Loan growth – At December 31, 2008, portfolio loans were $1.977 billion, an increase of $336.0 million, or 20%, from December 31, 2007. The strong net growth in loans is attributable in part to a more favorable competitive environment, with fewer competitors positioned today to capture new business, resulting in both increased volumes and more favorable pricing. More than 60% of the net loan growth was related to commercial and industrial businesses. Our loan portfolio mix at December 31, 2008, from both industry and collateral perspectives, did not change significantly from December 31, 2007. Loans collateralized by commercial real estate totaled $829.0 million at year end 2008. Approximately $318.0 million, or 38%, of that total, represented real estate that was “owner-occupied” by commercial and industrial businesses.

Enterprise continues to operate a loan production office in central Phoenix. Through December 2008, the loan production office has generated approximately $22.0 million of commercial and industrial and commercial real estate loans. In 2008, we applied for a de novo Arizona state bank charter. Unfortunately, conditions have led the Arizona regulatory authorities to stop approvals for de novo charters and as a result the most likely option to obtain a charter to operate a bank in Arizona is, through negotiated acquisition or an FDIC-assisted transaction. We continue to believe in the long-term value in the Phoenix market and remain confident in our decision to establish a bank in that region.

The Bank has continued its lending activities since the Treasury’s investment on December 19, 2008. From the close of business December 18, 2008 through February 28, 2009, the Bank funded $55.0 million in new loans and advanced another $80.4 million on existing loans. Total portfolio loans, net of payoffs and paydowns, grew $29.1 million or roughly 8% annualized between December 18, 2008 and February 28, 2009. We continue to see loan opportunities in all our markets. During 2009, we expect our loan growth percentage to be in the high single digits.
Deposit growth – Deposit growth in 2008 was challenging. Across the financial industry, growing concern over the safety of bank deposits caused some large balance clients to reduce their exposure by spreading funds among numerous financial institutions. Our focus for 2009 is to reduce our reliance on brokered deposits, grow our core deposits and increase our percentage of non-interest bearing deposits. We have adjusted our incentive programs to focus our associates on deposit gathering efforts and will be aggressively managing deposit rates to achieve this objective.

During the fourth quarter of 2008, we increased core deposits $113.0 million, or 8%. While less than our historical fourth quarter deposit surge, this increase is significant in that it occurred despite a massive investor flight to the Treasury markets driven by the instability and volatility of the financial markets during that period. In 2008, total deposits grew $208.0 million, or 13%, to $1.793 billion. Brokered deposits represented $336.0 million of this total, an increase of $222.0 million over December 31, 2007. Approximately $37.0 million of deposits were sold as part of the Great American sale. Excluding the impact of the Great American sale and brokered deposits, core deposits increased $23.0 million, or 2%, in 2008. For the year ended December 31, 2008, brokered deposits represented 19% of total deposits on average compared to 7% for the year ended December 31, 2007. Non-interest bearing demand deposits represented 14% of total deposits at December 31, 2008, compared to 18% of total deposits one year ago.

In July 2008, Enterprise became a participating depository institution in the Certificate of Deposit Accounts Registry Service, or CDARS, a private network of institutions, which allows us to provide our customers with access to additional levels of FDIC insurance. As of December 31, 2008, Enterprise had $60.0 million of reciprocal CDARS deposits outstanding.

We elected to “opt-in” to the expanded FDIC deposit insurance program and the government sponsored debt issuance guaranty program, which represents additional sources of liquidity.

See “Supervision and Regulation” and “Liquidity and Capital Resources” for more information.

Asset quality – We are entering the third year of slow residential housing activity in St. Louis and Kansas City with no significant improvement expected in 2009. During the latter half of 2008, we performed an in-depth review to specifically target our higher risk real estate loans where repayment is dependent on the sale of the underlying properties. Examples would be residential construction, commercial construction, land acquisition and development, improved lots, and raw-land. The review:

determined our geographic distribution of construction projects (those within our primary lending areas compared to those that are out-of-market) along with distribution by counties;
determined if we were exposed to concentration risk within residential subdivisions through an excessive number of builders, or excessive number of speculative homes, or lots;
assessed the establishment and use of interest reserves by determining if sufficient amounts were structured into the loans at origination and determined if adequate amounts exist to carry the project to completion;
assessed the adequacy of financial information and analysis at loan origination or modification; and
evaluated disbursing procedures to ensure that loan advances are appropriate to the various stages of the construction project, which minimizes the risk of the bank becoming fully funded on a loan when the project has not reached completion.

As a result of the review, we aggressively downgraded risk ratings primarily in the Kansas City region on residential construction loans, which resulted in higher provision expense and loan loss reserves for the year. Although loans to residential builders represent only 12% of our loan portfolio, they represent almost 40% of our nonperforming loans at December 31, 2008.

We are closely monitoring our portfolio to determine if the recession is impacting other sectors. We have not seen significant deterioration in the commercial and industrial sector of our portfolio but anticipate continued economic weakness will adversely impact these borrowers in 2009. Commercial construction projects have slowed, but not as severely as in the residential sector. Builders are still working on backlogs, but some projects are being cancelled and it appears 2010 may be slow.

Non-performing loans were $29.7 million, or 1.50%, of portfolio loans at December 31, 2008. The allowance for loan losses was $31.3 million, or 1.58%, of portfolio loans vs. $21.6 million, or 1.32%, at the end of 2007. In 2008, we incurred $12.7 million of net charge-offs, or 0.70%, of average loans compared to $2.0 million of net charge-offs, or 0.14%, of average loans in 2007. See “Allowance for Loan Losses” for more information.

Net Interest Rate Margin – Our fully tax-equivalent net interest rate margin was 3.47% for 2008 versus 3.83% for 2007. The margin has been compressed as a result of sharply declining short-term rates, an increased volume of wholesale funding to support loan growth and higher average levels of nonperforming loans.

Noninterest Expense Reductions – In light of the difficult operating environment, during the fourth quarter of 2008, we took a number of actions to reduce operating expenses. These actions included staff reductions in all three markets, reductions in variable compensation and limitations on filling open positions and staff additions. These actions are expected to reduce noninterest expenses in 2009 by approximately $1.8 million.
Branch/Charter Sales and Expansion – As part of our expansion effort, we plan to continue our strategy of operating relatively fewer offices with a larger asset base per office, emphasizing commercial banking and wealth management and employing experienced staff who are compensated on the basis of performance and customer service. As a result, on February 28, 2008, we sold the Enterprise branch in Liberty, Missouri for an after tax gain of $315,000, or $0.02, per fully diluted share. On June 26, 2008, we merged the Claycomo branch of Great American into Enterprise and on July 31, 2008, we sold the Great American bank charter along with the DeSoto, Kansas branch. The sale generated an after-tax gain of almost $1.6 million, or $0.13, per fully diluted share. Please refer to Item 8, Note 2 – Acquisitions and Divestitures for more information.

Wealth Management
The Wealth Management segment is comprised of Millennium, Enterprise Trust and our state tax credit brokerage activities. Wealth Management is a strategic line of business consistent with our Company mission of “guiding our clients to a lifetime of financial success.” It is a driver of fee income and is intended to help us diversify our dependency on bank spread incomes.

For 2008, Wealth Management recorded a pre-tax net loss of $6.7 million, including $9.2 million of impairment charges related to Millennium. Excluding the Millennium impairment charges, pre-tax net income was $2.5 million for 2008, compared to $4.2 million for 2007. Revenues for Trust and Millennium are net of commissions and other direct investment expenses such as custody charges and investment management expenses.

Trust revenues – Revenues from the Trust division decreased $1.2 million, or 17%, for the year. The decline in the overall equity markets along with lost advisory revenues due to personnel turnover earlier in the year were the primary drivers of the decrease. Trust assets under administration were $1.2 billion at December 31, 2008, a 28% decrease over one year ago. We expect to see demand for our fiduciary services increase in 2009 due to market disruptions resulting from the acquisition of a major St. Louis investment firm. During the fourth quarter of 2008, our Trust operations completed several initiatives designed to enhance client service including implementing a new client account reporting and aggregation system.
State tax credit brokerage activities – In 2008, we recognized approximately $4.2 million of net gains from state tax credit brokerage activities whereby we sell certain state tax credits to our clients. Net gains associated with this activity were $792,000 in 2007. Of the 2008 total, $3.1 million represented the net effects from fair value adjustments on the tax credit assets and related interest rate caps used to economically hedge the tax credits. The remaining increase reflects the full year of the brokerage activity compared to a partial year in 2007 and was consistent with the Company’s performance expectations for its first full year of operations.
Millennium revenue – Millennium revenues decreased $1.9 million, or 28% for the year. While sales margins rebounded to near expected levels in the fourth quarter of 2008, paid premiums sales were down from 2007 as a result of tighter underwriting standards, continued disruption from the growing influence of aggregators and general turmoil in the financial services industry. We expect earnings before taxes and amortization in 2009 to be flat with 2008.
Millennium impairment charges –We evaluated Millennium’s goodwill and intangible assets for impairment during the third quarter of 2008. In connection with these tests, we determined that margin pressures reducing Millennium revenues continue to negatively affect operating performance, thereby reducing the fair value of our investment in Millennium. As a result, the Company recorded a $5.9 million, pre-tax goodwill impairment charge as of September 30, 2008. In the fourth quarter of 2008, due to slower paid premium sales and resulting decreased earnings of Millennium, we identified and recorded an additional pre-tax goodwill impairment of $2.8 million and $500,000 of intangible asset impairment. The charges did not reduce our regulatory capital or cash flow. See “Noninterest Expenses” and Item 8, Note 9 – Goodwill and Intangible Assets for more information.

RESULTS OF OPERATIONS ANALYSIS

Net Interest Income
Comparison of 2008 vs. 2007
Net interest income is the primary source of the Company’s revenue. Net interest income is the difference between interest income on earning assets, such as loans and securities, and the interest expense on interest-bearing deposits and other borrowings used to fund interest earning and other assets. The amount of net interest income is affected by changes in interest rates and by the amount and composition of interest-earning assets and interest-bearing liabilities, such as the mix of fixed vs. variable rate loans. When and how often loans and deposits mature and reprice also impacts net interest income.

Net interest spread and net interest rate margin are utilized to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on interest-earning assets and the rate paid for interest-bearing liabilities that fund those assets. The net interest rate margin is expressed as the percentage of net interest income to average interest-earning assets. The net interest rate margin exceeds the interest rate spread because noninterest-bearing sources of funds (net free funds), principally demand deposits and shareholders’ equity, also support earning assets.

The Company’s balance sheet is relatively neutral to rate changes. In response to the federal funds decreases in early 2008, which in turn lowered the prime rate earned on many of our loans, we aggressively reduced deposit rates. This allowed us to partially offset the lower asset yields. Following the December 2008 federal funds decreases, management chose to maintain the Enterprise prime rate at 4%. In addition, we are including interest rate floors in many of our new and renewing variable rate loans.

Net interest income (on a tax-equivalent basis) increased $5.6 million, or 9%, from $62.1 million for 2007 to $67.7 million for 2008. Total interest income decreased $4.6 million while total interest expense decreased $10.2 million.

Average interest-earning assets were $1.953 billion in 2008, an increase of $334.0 million, or 21%, from 2007. Loans accounted for the majority of the growth, increasing by $333.0 million, or 22%, to $1.828 billion. Interest income on loans increased $16.8 million from growth and decreased by $21.3 million due to the impact of rates, for a net decrease of $4.5 million versus 2007.

Average interest-bearing liabilities increased $346.0 million, or 25%, to $1.711 billion compared to $1.365 billion for 2007. The growth in interest-bearing liabilities resulted from a $99.0 million increase in interest-bearing core deposits, a $94.0 million increase in brokered certificates of deposit, a $5.4 million increase in subordinated debentures, and a $147.0 million increase in borrowed funds including FHLB advances and federal funds purchased. In December 2008, we began utilizing the Federal Reserve discount window, due to its lower borrowing rates. For 2008, interest expense on interest-bearing liabilities increased $9.7 million due to growth while the impact of declining rates decreased interest expense on interest-bearing liabilities by $19.9 million, for a net decrease of $10.2 million versus 2007. See “Liquidity and Capital Resources” for more information.

For the year ended December 31, 2008, the tax-equivalent net interest rate margin was 3.47% compared to 3.83% for 2007. The margin has been compressed as a result of sharply declining short-term rates along with an increased volume of wholesale funding to support loan growth. Approximately 0.11% of the decline is due to higher average levels of nonperforming loans in 2008 versus the prior year. In 2009, we expect margins to remain flat as improved loan pricing is expected to be offset by more aggressive deposit pricing in our markets.

Comparison of 2007 vs. 2006
Net interest income (on a tax-equivalent basis) increased $9.9 million, or 19%, from $52.2 million for 2006 to $62.1 million for 2007. Total interest income increased $28.2 million while total interest expense increased $18.3 million.

Average interest-earning assets were $1.619 billion in 2007, an increase of $319.0 million, or 25%, from 2006. Loans accounted for the majority of the growth, increasing by $337.0 million, or 29%, to $1.496 billion. Average short-term investments declined by $17.0 million due to a decline in federal funds sold. Interest income on loans increased $26.5 million from growth and $2.1 million due to the impact of rates, for a net increase of $28.6 million versus 2006.

Average interest-bearing liabilities increased $310.0 million, or 29%, to $1.365 billion compared to $1.056 billion for 2006. The growth in interest-bearing liabilities resulted from a $223.0 million increase in interest-bearing core deposits, a $31.0 million increase in brokered certificates of deposit, a $21.0 million increase in subordinated debentures, and a $35.0 million increase in borrowed funds including FHLB advances. We continue to meet loan funding demands with FHLB advances and brokered certificates of deposit. For 2007, interest expense on interest-bearing liabilities increased $14.4 million due to growth while the impact of rising rates increased interest expense on interest-bearing liabilities by $3.9 million versus 2006.

For the year ended December 31, 2007, the tax-equivalent net interest rate margin was 3.83% compared to 4.01% for 2006. Approximately 0.05% of the decline was due to higher average levels of nonperforming loans in 2007 versus the prior year. Additionally, higher levels of subordinated debentures associated with the acquisition of Clayco negatively impacted the margin.

Average Balance Sheet
The following table presents, for the periods indicated, certain information related to our average interest-earning assets and interest-bearing liabilities, as well as, the corresponding interest rates earned and paid, all on a tax equivalent basis.

For 2006, loans and deposits associated with NorthStar Bank NA (“NorthStar”) are included for six months. The loans and deposits associated with Great American are included for ten months of 2007. Approximately $30.0 million of deposits associated with the DeSoto branch are included for seven months of 2008.

	For the years ended December 31,
	2008							2007							2006
				Interest		Average					Interest		Average					Interest Income/ Expense		Average
	Average			Income/		Yield/		Average			Income/		Yield/		Average					Yield/
(in thousands)	Balance			Expense		Rate		Balance			Expense		Rate		Balance					Rate
Assets
Interest-earning assets:
Taxable loans (1)	$	1,798,065		$	110,610	6.15	%	$	1,463,133		$	115,039	7.86	%	$	1,130,482		$	86,893	7.69	%
Tax-exempt loans (2)		30,369			2,776	9.14			32,674			2,824	8.64			28,628			2,412	8.43
Total loans		1,828,434			113,386	6.20			1,495,807			117,863	7.88			1,159,110			89,305	7.70
Taxable investments in debt and equity securities		111,902			5,268	4.71			111,332			5,093	4.57			111,811			4,530	4.05
Non-taxable investments in debt and equity
securities (2)		804			48	5.97			936			53	5.66			1,140			55	4.82
Short-term investments		11,802			295	2.50			11,350			543	4.78			28,317			1,416	5.00
Total securities and short-term investments		124,508			5,611	4.51			123,618			5,689	4.60			141,268			6,001	4.25
Total interest-earning assets		1,952,942			118,997	6.09			1,619,425			123,552	7.63			1,300,378			95,306	7.33
Noninterest-earning assets:
Cash and due from banks		40,349							44,417							42,282
Other assets		158,907							108,716							58,649
Allowance for loan losses		(24,527	)						(19,304	)						(15,583	)
Total assets	$	2,127,671						$	1,753,254						$	1,385,726

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing transaction accounts		121,371			1,554	1.28	%		120,418			3,078	2.56	%		102,327			2,332	2.28	%
Money market accounts		687,867			13,786	2.00			579,029			23,578	4.07			496,590			19,213	3.87
Savings		9,594			55	0.57			11,126			125	1.12			4,164			57	1.37
Certificates of deposit		588,561			24,525	4.17			503,926			26,083	5.18			357,706			16,230	4.54
Total interest-bearing deposits		1,407,393			39,920	2.84			1,214,499			52,864	4.35			960,787			37,832	3.94
Subordinated debentures		58,851			3,536	6.01			53,500			3,859	7.21			32,704			2,343	7.16
Borrowed funds		244,804			7,802	3.19			97,472			4,742	4.86			62,029			2,966	4.78
Total interest-bearing liabilities		1,711,048			51,258	3.00			1,365,471			61,465	4.50			1,055,520			43,141	4.09
Noninterest-bearing liabilities:
Demand deposits		221,925							215,610							207,328
Other liabilities		10,879							10,814							9,878
Total liabilities		1,943,852							1,591,895							1,272,726
Shareholders' equity		183,819							161,359							113,000
Total liabilities & shareholders' equity	$	2,127,671						$	1,753,254						$	1,385,726
Net interest income				$	67,739						$	62,087						$	52,165
Net interest spread						3.09	%						3.13	%						3.24	%
Net interest rate margin (3)						3.47							3.83							4.01

(1)		Average balances include non-accrual loans. The income on such loans is included in interest but is recognized only upon receipt. Loan fees, net of amortization of deferred loan origination fees and costs, included in interest income are approximately $1,394,000, $690,000 and $217,000 for the years ended December 31, 2008, 2007, and 2006, respectively.

(2)		Non-taxable income is presented on a fully tax-equivalent basis using the combined statutory federal and state income tax in effect for the year. The tax-equivalent adjustments reflected in the above table are approximately $1,016,000, $1,035,000 and $888,000 for the years ended December 31, 2008, 2007, and 2006, respectively.

(3)		Net interest income divided by average total interest-earning assets.

Rate/Volume
The following table sets forth, on a tax-equivalent basis for the periods indicated, a summary of the changes in interest income and interest expense resulting from changes in yield/rates and volume.

For 2006, loans and deposits associated with NorthStar are included for six months. The loans and deposits associated with Great American are included for ten months of 2007. Approximately $30.0 million of deposits associated with the DeSoto branch are included for seven months of 2008.

	2008 compared to 2007									2007 compared to 2006
	Increase (decrease) due to									Increase (decrease) due to
(in thousands)	Volume(1)			Rate(2)			Net			Volume(1)			Rate(2)			Net
Interest earned on:
Taxable loans	$	16,944		$	(21,373	)	$	(4,429	)	$	26,113		$	2,033		$	28,146
Nontaxable loans (3)		(161	)		113			(48	)		349			63			412
Taxable investments in debt
and equity securities		27			148			175			(19	)		582			563
Nontaxable investments in debt
and equity securities (3)		(7	)		2			(5	)		(11	)		9			(2	)
Short-term investments		11			(259	)		(248	)		(814	)		(59	)		(873	)
Total interest-earning assets	$	16,814		$	(21,369	)	$	(4,555	)	$	25,618		$	2,628		$	28,246

Interest paid on:
Interest-bearing transaction accounts	$	12		$	(1,536	)	$	(1,524	)	$	442		$	304		$	746
Money market accounts		2,198			(11,990	)		(9,792	)		3,317			1,048			4,365
Savings		(15	)		(55	)		(70	)		80			(12	)		68
Certificates of deposit		2,803			(4,361	)		(1,558	)		7,329			2,524			9,853
Subordinated debentures		240			(563	)		(323	)		1,500			16			1,516
Borrowed funds		4,485			(1,425	)		3,060			1,724			52			1,776
Total interest-bearing liabilities		9,723			(19,930	)		(10,207	)		14,392			3,932			18,324
Net interest income	$	7,091		$	(1,439	)	$	5,652		$	11,226		$	(1,304	)	$	9,922

(1)		Change in volume multiplied by yield/rate of prior period.

(2)		Change in yield/rate multiplied by volume of prior period.

(3)		Nontaxable income is presented on a fully tax-equivalent basis using the combined statutory federal and state income tax rate in effect for each year.

		NOTE: The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each.

Provision for loan losses. The provision for loan losses was $22.5 million for 2008 compared to $4.6 million for 2007. The increase was due to strong loan growth, an increase in non-performing loans and adverse risk rating changes primarily in the residential builder portfolio.

The provision for loan losses was $4.6 million for 2007 compared to $2.1 million for 2006. The increase was due to strong loan growth, higher non-performing loan levels and adverse risk rating changes.

See the sections below captioned “Loans” And “Allowance for Loan Losses” for more information on our loan portfolio and asset quality.

Noninterest Income
The following table presents a comparative summary of the major components of noninterest income.

	Years ended December 31,
								Change 2008			Change 2007
(in thousands)	2008		2007			2006		over 2007			over 2006
Wealth Management revenue	$	10,848	$	13,980		$	13,809	$	(3,132	)	$	171
Service charges on deposit accounts		4,376		3,228			2,228		1,148			1,000
Other service charges and fee income		1,000		852			586		148			266
Gain on sale of branches/charter		3,400		-			-		3,400			-
Gain (loss) on sale of other real estate		552		(48	)		2		600			(50	)
Gain on state tax credits, net		4,201		792			-		3,409			792
Gain on sale of securities		161		233			-		(72	)		233
Miscellaneous income		735		636			291		99			345
Total noninterest income	$	25,273	$	19,673		$	16,916	$	5,600		$	2,757

Comparison 2008 vs. 2007
Noninterest income increased 28% during 2008. Our ratio of noninterest income to total revenue at December 31, 2008 was 27%, compared to 24% in 2007.

Wealth Management revenue decreased $3.1 million, or 22%, from 2007. This decrease is a result of lower revenue and margins from the Trust division and Millennium. Revenues from the Trust division decreased $1.2 million, or 17%, due to declining market value of assets under management and client attrition related to advisor turnover experienced earlier this year. Assets under administration were $1.2 billion at December 31, 2008, a 28% decrease from one year ago.

Millennium revenues were $4.9 million, a decrease of $1.9 million, or 28%, due to lower levels of paid premium sales and slightly lower sales margins. Producer sales volumes and carrier commission payouts remain constrained due to continued consolidation of distributors in the industry, uncertainty in the financial markets and tougher underwriting for large insurance cases.

Increases in Service charges on deposit accounts were primarily due to the declining earnings crediting rate on commercial accounts, which increased service charges earned. Other service charges and fee income increases were the result of higher fee volumes on debit cards, merchant processing, and fee income from our International Banking operation.

Gain on sale of branches/charter includes a $550,000 pre-tax gain on the sale of the Liberty branch and a $2.8 million pre-tax gain on the sale of the Great American charter along with the Desoto Kansas branch.

In 2008, we sold $7.9 million of other real estate at a net gain of $552,000. In 2007, we sold $5.6 million of other real estate at a net loss of $48,000.

In the fourth quarter of 2007, we signed an agreement whereby we will purchase the rights to receive ten-year streams of state tax credits at agreed upon discount rates and then re-sell them to our clients for a profit. Gains from state tax credit brokerage activities were $4.2 million in 2008, compared to $792,000 in 2007. Of the 2008 total, $3.1 million represented the net effects from fair value adjustments on the tax credit assets and related interest rate caps used to economically hedge the tax credits. The remaining increase of $1.1 million reflects the full year of the brokerage activity compared to a partial year in 2007 and was consistent with the Company’s performance expectations for its first full year of operations.

Comparison 2007 vs. 2006
Noninterest income increased 16% during 2007. Our ratio of fee income to total revenue at December 31, 2007 was 24%, flat with 2006. Wealth Management revenue increased $171,000, or 1% from 2006. This relatively small increase compared to the 2006 increase is the result of lower revenue and margins from Millennium. Revenues from the Trust division increased $370,000, or 5%, while revenues from Millennium decreased by almost $200,000.

The decline in Millennium revenue was the result of less favorable carrier mix and higher commission payouts to direct producers.

Shift in carrier mix – Throughout 2007, more business was placed with certain carriers whose contractual payouts to Millennium were lower than other carriers, thus impacting Millennium’s revenue on this business. The decision on where to place business was based on several factors, including underwriting, product features, and carrier service levels.
Producer mix – During 2007, more production came from producers who earn higher payouts from Millennium, thus lowering Millennium’s net revenue.

Assets under administration were $1.7 billion at December 31, 2007, a 4% increase over 2006.

Increases in Service charges on deposit accounts were primarily due to incremental activity of Great American along with increased account activity. Other service charges and fee income increases were the result of higher fee volumes on debit cards, merchant processing and health savings accounts along with Great American deposit fee income.

In December 2007, we elected to sell and reinvest a portion of our investment portfolio as part of a restructuring effort to lengthen the portfolio duration and improve our overall expected return. We sold approximately $39.0 million of agency investments realizing a gain of $233,000 on these sales. In December, we reinvested approximately $19.0 million of the proceeds in collateralized mortgage obligations and reinvested the remaining $20.0 million in first quarter of 2008.

Miscellaneous income in 2007 includes $268,000 from the sale of a holding company investment in an investment management firm.

Noninterest Expense
The following table presents a comparative summary of the major components of noninterest expenses.

	Years ended December 31,
							Change 2008			Change 2007
(in thousands)	2008		2007		2006		over 2007			over 2006
Employee compensation and benefits	$	31,024	$	29,555	$	25,247	$	1,469		$	4,308
Occupancy		4,246		3,901		2,966		345			935
Furniture and equipment		1,470		1,439		1,028		31			411
Data processing		2,187		1,911		1,431		276			480
Communications		693		668		546		25			122
Director related expense		481		409		508		72			(99	)
Meals and entertainment		1,484		1,878		1,744		(394	)		134
Marketing and public relations		704		708		985		(4	)		(277	)
FDIC and other insurance		2,055		846		574		1,209			272
Amortization of intangibles		1,444		1,604		1,128		(160	)		476
Impairment charges related to Millennium Brokerage Group		9,200		-		-		9,200			-
Postage, courier, and armored car		928		953		845		(25	)		108
Professional, legal, and consulting		2,021		1,447		1,102		574			345
Loan, legal and Other Real Estate (ORE)		1,717		501		252		1,216			249
Other taxes		568		626		437		(58	)		189
Other		3,283		3,070		2,601		213			469
Total noninterest expense	$	63,505	$	49,516	$	41,394	$	13,989		$	8,122

Comparison of 2008 vs. 2007
Noninterest expenses increased $14.0 million, or 28%, in 2008. This increase is mainly due to $9.2 million of goodwill impairment charges associated with Millennium and a $1.0 million executive retention agreement associated with the acquisition of Great American. Excluding these charges, noninterest expenses increased $3.8 million, or 8%. The Company’s efficiency ratio for 2008 is 69%. Excluding the impairment charges, the retention payment and the $3.4 million branch sale gains, the efficiency ratio is 61%, unchanged from 2007.

Employee compensation and benefits. We compensate our associates in ways to attract and retain top performers and to provide base salary, incentives and rewards that incent the behaviors consistent with a high-performing company. We have implemented a disciplined process for managing the performance of our associates against defined business goals and results. The process includes frequent and candid performance feedback, measures individual contributions, differentiates individual performance and reinforces contribution with highly differentiated rewards. Two major components of our compensation program are the variable-pay incentive bonus pool and the Long-Term Incentive Plan (“LTIP”.)

Employee compensation and benefits increased $1.5 million, or 5%, over 2007. Included in the increase is $1.0 million related to the final stock payment pursuant to the expiration of an executive retention agreement associated with the acquisition of Great American. The incremental impact of the Millennium compensation due to the December 31, 2007 restructuring and an increase in compensation expense for various stock programs associated with our LTIP also contributed to the increase. Lower variable compensation expenses driven by Company financial results offset these expenses.

All other expense categories. All other expense categories include $8.7 million for the goodwill impairment charge and a $500,000 impairment charge on the customer related intangible asset associated with Millennium. Excluding these charges, all other expense categories increased $3.3 million, or 17%, over 2007.

Occupancy expense increases were due to scheduled rent increases on various Company facilities along with leasehold improvements completed at the Operations Center and our Clayton headquarters.

Furniture and equipment increases were due to expansion at the Operations Center and in the Kansas City region.

Meals and entertainment expenses decreased due to less travel and controlled customer-related entertainment expenses.

FDIC and other insurance increased $1.2 million due to higher FDIC insurance premiums (due to a higher rate structure imposed by the FDIC on all insured financial institutions.) See “Supervision and Regulation – Deposit Insurance Fund” in Part I – Item I for more information.

Professional, legal and consulting increased due to the Arizona de novo bank activities, consulting services in Wealth Management and various legal matters.

Increases in Loan, legal and ORE expenses were due to increased levels of nonperforming loans and ORE properties.

Comparison of 2007 vs. 2006
The Company’s efficiency ratio for 2007 was 61%, unchanged from 2006. Noninterest expenses increased 20%, or $8.1 million, in 2007. Approximately $2.8 million of this increase is related to the addition of Great American and $2.5 million was due to the full year impact of NorthStar. Excluding these amounts, noninterest expenses increased $2.8 million, or 7%.

Employee compensation and benefits. Employee compensation and benefits increased $4.3 million. Increases of $1.3 million were related to Great American. Excluding these expenses, employee compensation and benefits increased $3.0 million, or 12%. The increase was due to salaries and related benefits of new associates in various areas of our organization including banking units and other support areas along with the full year impact of NorthStar. Approximately $710,000 of the increase is related to compensation expense for various stock programs associated with our LTIP.

All other expense categories. All other expense categories include $1.5 million for Great American in 2007. Excluding Great American, all other expense categories increased $2.3 million, or 15%, over 2006.

Occupancy expense increases were due to scheduled rent increases on various Company facilities along with related leasehold improvements completed at the Operations Center.

Furniture and equipment increases were due to expansion at the Operations Center and in the Kansas City region, including Great American.

Data processing expenses increased due to upgrades to the Company’s main operating system, licensing fee increases for our core banking system as a result of our increased asset size and increased maintenance fees for various Company systems. Costs incurred to upgrade NorthStar technology to our platform were capitalized and are being amortized according to the Company’s depreciation policies. In 2007, no significant costs were incurred to upgrade Great American to our platform since the actual conversion to the Enterprise systems did not occur until June 2008.

FDIC and other insurance increased $201,000 due to higher FDIC insurance premiums (due to a higher rate structure imposed by the FDIC on all insured financial institutions.)

Amortization of intangibles related to NorthStar was $409,000 in 2007 compared to $215,000 in 2006. In 2007, the amortization on the Great American core deposit intangible was $283,000. See Item 8, Note 9 – Goodwill and Intangible Assets for more information.

Professional, legal and consulting increased due to new business initiatives and the addition of Great American.

Other noninterest expense includes $270,000 for Great American. On September 30, 2007, EFSC Capital Trust I redeemed all of its $4.0 million variable rate trust preferred securities and its variable rate common securities. At the time of the redemption, the Company recognized an $82,000 charge in noninterest expense for unamortized debt issuance costs related to this instrument. The remaining increase is related to amortization on our tax credit limited partnership, increases in bank charges including ATM charges and other outside services.

Minority Interest in Net Income of Consolidated Subsidiary
On October 21, 2005, the Company acquired a 60% controlling interest in Millennium. As a result, in 2006 and 2007, the Company recorded the 40% non-controlling interest in Millennium, related to Millennium’s results of operations, in minority interest on the consolidated statements of income. Contractually, the Company was entitled to a priority return of 23.1% pre-tax on its original $15.0 million investment in Millennium. The Company adjusted minority interest by $1.3 million and $861,000, in 2007 and 2006, respectively, to recognize its priority return in line with its contractual rights.

Effective December 31, 2007, the Company acquired the remaining 40% of Millennium for $1.5 million in cash. See Item 8, Note 2 – Acquisitions and Divestitures for more information.

Income Taxes
In 2008, the Company recorded income tax expense of $1.6 million on pre-tax income of $6.0 million, resulting in an effective tax rate of 26.3%. The following items were included in Income tax expense and impacted the 2008 effective tax rate:

the expiration of the statute of limitations for the 2004 tax year warranted the release of $436,000 of reserves related to certain state tax positions;
reserves associated with various tax benefits of $80,000 related to certain federal tax items were released; and
recognition of federal tax benefits of $511,000 related to low income housing tax credits from a limited partnership interest.

In 2007, the effective tax rate for the Company was 33.9% compared to 35.0% in 2006. The following items were included in Income tax expense and impacted the 2007 effective tax rate:

the expiration of the statute of limitations for the 2003 tax year warranted the release of $375,000 of reserves on certain state tax positions;
reserves related to various tax benefits of $68,000 related to certain federal tax items were released; and
recognition of federal tax benefits of $242,000 related to low income housing tax credits from a limited partnership interest.

Fourth Quarter 2008 Discussion
For the quarter ended December 31, 2008, the Company recorded a net loss of $4.0 million, or $0.32, per fully diluted share compared to a net profit of $4.9 million, or $0.39, per fully diluted share for the same period in 2007.

The tax-equivalent net interest rate margin was 3.37% for the fourth quarter of 2008 as compared to 3.80% for the same period in 2007. Net interest income in the fourth quarter of 2008 increased $1.1 million from the fourth quarter of 2007. This increase in net interest income was the result of a $3.8 million decrease in interest expense offset by a $2.7 million decrease in interest income. The yield on average interest-earning assets decreased from 7.42% during the fourth quarter of 2007 to 5.67% during the same period in 2008. The decline in the yield is primarily the result of reductions in the prime rate throughout 2008 along with higher levels of nonperforming loans in 2008. The cost of interest-bearing liabilities decreased from 4.26% for the fourth quarter of 2007 to 2.62% for the same period in 2008. These decreases are attributed mainly to lower money market rates (i.e. treasury, LIBOR and swap rates) that drive lower deposit and borrowing costs.

The provision for loan losses was $14.1 million for the fourth quarter of 2008 compared with $2.5 million in the fourth quarter of 2007. The increase in the provision was due to an increase in nonperforming loans during the quarter of $6.1 million (versus $4.2 million in the fourth quarter of 2007), and adverse risk rating changes primarily in the residential housing sector of our portfolio.

Noninterest income was $7.6 million during the fourth quarter of 2008, a $1.4 million increase over noninterest income of $6.2 million for the same period in 2007. The increase includes $1.9 million from gain on state tax credits and $638,500 of gain reclassified from accumulated other comprehensive income to earnings for measured ineffectiveness of cash flow hedges. Offsetting these increases were lower Trust and Millennium revenues.

Noninterest expenses were $17.8 million during the fourth quarter of 2008 versus $13.1 million during the same period in 2007, a $4.7 million increase. The increase was primarily due to $3.3 million of impairment charges related to Millennium and $875,000 related to the final stock payment pursuant to the expiration of an executive retention agreement associated with the acquisition of Great American Bank. Also contributing to the increase was the incremental impact of the Millennium employee compensation due to the December 31, 2007 restructuring, an increase in the Company’s compensation expense for various stock programs associated with our LTIP, higher FDIC insurance premiums and increases in ORE expenses. Lower variable compensation expenses driven by Company financial results partially offset these expenses.

Income tax benefits were $3.1 million during the fourth quarter of 2008 versus income tax expense of $2.0 million in the same period in 2007. The effective tax rate was (44.2%) for the fourth quarter of 2008 compared to 28.9% for the fourth quarter of 2007. The fourth quarter 2008 effective tax rate includes a tax benefit of $436,000 for various tax reserves that were released as a result of the statute of limitations expiring.

FINANCIAL CONDITION
Comparison for December 31, 2008 and 2007
Total assets at December 31, 2008 were $2.27 billion. Assets increased $272.0 million, or 14%, over total assets of $2.0 billion at December 31, 2007. The increase in total assets was primarily driven by a $335.7 million, or 20%, increase in loans, partially offset by a $111.0 million decrease in cash and cash equivalents.

Investments were $108.3 million at December 31, 2008 compared to $83.3 million at December 31, 2007. In December 2007, a portion of the debt securities portfolio was sold in an effort to lengthen the portfolio duration and improve our expected overall return.

Goodwill and intangible assets were $52.0 million at December 31, 2008, compared to $63.2 million at December 31, 2007, a decrease of $11.2 million. The decrease in goodwill and intangible assets was primarily related to impairment charges related to Millennium. See Item 8, Note 9 – Goodwill and Intangible Assets for more information.

At December 31, 2008, Other assets included $15.9 million of receivables related to federal income taxes along with $1.8 million of fair value adjustments related to derivative financial instruments and $2.8 million of private equity investments.

At December 31, 2008, deposits were $1.79 billion, an increase of $208.0 million, or 13%, from $1.59 billion at December 31, 2007. Total brokered CD’s at December 31, 2008 were $336.0 million compared to $114.0 million at December 31, 2007. Excluding brokered deposits and the effects of the sale of approximately $37.0 million in core deposits related to the branch sales, core deposits increased $23 million, or 2%, in 2008.

As mentioned previously, while we typically experience a seasonal increase in deposits during the fourth quarter, the effect was muted in the fourth quarter of 2008 due to the investor flight to Treasury markets. Nevertheless, our core deposits increased during the fourth quarter, and our Treasury Management pipelines remain strong.

Through November of 2008, we utilized short-term FHLB advances along with brokered certificates of deposit to fund shortfalls due to loan demand. In December 2008, following the Federal Open Market Committee meeting, we began utilizing the Federal Reserve discount window program which lowered our overnight borrowing rate to 0.50%. As a result, we replaced all short-term FHLB advances with Federal Reserve advances at a lower overall cost. At December 31, 2008, FHLB advances were $120.0 million compared to $153.0 million at December 31, 2007. Federal funds purchased from the Federal Reserve were $19.4 million at December 31, 2008.

During 2008, subordinated debentures increased by $27.5 million. See Item 8, Note 11 – Subordinated Debentures for more information.

On December 19, 2008, the Company sold 35,000 shares of preferred stock and a warrant to purchase 324,074 shares of EFSC common stock, for an aggregate investment by the Treasury of $35.0 million. See Item 8, Note 4 – Preferred Stock and Common Stock Warrants for more information.

Loans
Total loans, less unearned loan fees, increased $336.0 million, or 20% during 2008. The Company’s lending strategy emphasizes commercial, residential real estate, real estate construction and commercial real estate loans to small and medium sized businesses and their owners in the St. Louis, Kansas City and Phoenix metropolitan markets. Consumer lending is minimal.

Nearly two-thirds of our net loan growth in 2008 was from our St. Louis units and over 60% of the 2008 net growth was to commercial and industrial businesses. A common underwriting policy is employed throughout the Company. Lending to these small and medium sized businesses are riskier from a credit perspective than lending to larger companies, but the risk is appropriately considered with higher loan pricing and ancillary income from cash management activities. The Company does not originate or invest in subprime single-family home loans.

The following table sets forth the composition of the Company’s loan portfolio by type of loans (based on call report classifications) at the dates indicated:

	December 31,
(in thousands)	2008			2007			2006			2005			2004
Commercial and industrial	$	556,210		$	476,184		$	352,914		$	265,488		$	253,594
Real estate:
Commercial		829,476			690,868			576,172			410,382			328,986
Construction		337,550			266,111			196,851			138,318			127,180
Residential		228,772			170,510			150,244			151,575			149,293
Consumer and other		25,167			37,759			35,542			36,616			39,452
Total Loans	$	1,977,175		$	1,641,432		$	1,311,723		$	1,002,379		$	898,505

	December 31,
	2008			2007			2006			2005			2004
Commercial and industrial		28.1	%		29.0	%		26.9	%		26.5	%		28.2	%
Real estate:
Commercial		42.0	%		42.1	%		43.9	%		40.9	%		36.6	%
Construction		17.1	%		16.2	%		15.0	%		13.8	%		14.2	%
Residential		11.6	%		10.4	%		11.5	%		15.1	%		16.6	%
Consumer and other		1.2	%		2.3	%		2.7	%		3.7	%		4.4	%
Total Loans		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

Commercial and industrial loans are made based on the borrower’s character, experience, general credit strength, and ability to generate cash flows for repayment from income sources, even though such loans may also be secured by real estate or other assets. The credit risk related to commercial loans is largely influenced by general economic conditions and the resulting impact on a borrower’s operations. Commercial and industrial loans are primarily made to borrowers operating within the manufacturing industry.

Real estate loans are also based on the borrower’s character, but more emphasis is placed on the estimated collateral values. Approximately 38% of commercial real estate loans were owner-occupied by commercial and industrial businesses where the primary source of repayment is dependent on sources other than the underlying collateral. Multifamily properties and other commercial properties on which income from the property is the primary source of repayment makes for the balance of this category. The majority of this category of loans is secured by commercial and multi-family properties located within our two primary metropolitan markets. These loans are underwritten based on the cash flow coverage of the property, typically meet the Company’s loan to value guidelines, and generally require either the limited or full guaranty of principal sponsors of the credit. Real estate construction loans, relating to residential and commercial properties, represent financing secured by real estate under construction for eventual sale. Real estate residential loans include residential mortgages, which are loans that, due to size, do not qualify for conventional home mortgages that the Company sells into the secondary market, second mortgages and home equity lines. Residential mortgage loans are usually limited to a maximum of 80% of collateral value.

Consumer and other loans represent loans to individuals on both a secured and unsecured nature. Credit risk is mitigated by thoroughly reviewing the creditworthiness of the borrowers prior to origination.

In addition to segmenting the Company’s loan portfolio by collateral or call report code, following is a breakout by industry codes at December 31, 2008:

	% of portfolio
Industry	2008		2007
Real Estate:
Developers of retail, industrial warehouse and office buildings	16	%	19	%
Commercial and residential subcontractors	3	%	3	%
Real estate property managers	6	%	4	%
Raw land for resale	2	%	2	%
Other	2	%	2	%
Total real estate	29	%	30	%

Services:
Financial and insurance companies	7	%	6	%
Professional service firms	4	%	5	%
Health care related services	5	%	4	%
Others	9	%	9	%
Total services	25	%	24	%

Construction:
Residential	9	%	10	%
Commercial	9	%	10	%
Multi-family housing	2	%	2	%
Total construction	20	%	22	%

Manufacturing	10	%	10	%
Wholesale	5	%	5	%
Retail Trade	5	%	3	%
Transportation/Warehousing	3	%	3	%
Other	3	%	3	%
	100	%	100	%

Note: (%) in the following paragraphs represent percentages of total portfolio.

Repayment of loans related to developers of retail, industrial warehouse, and commercial office buildings come from the cash flow of the properties.

In total, the residential real estate represents 12% of the Company’s loan portfolio. When calculating this exposure, we include residential construction, the residential land speculators included in raw land and the residential subcontractors included in real estate. The majority of these loans are granted to builders within our primary markets. The Company requires third party disbursement on the majority of its builder portfolio and reviews projects regularly for progress status. Land Acquisition and Development (“LAD”) loans are included in residential (3%) and commercial (5%).

Manufacturing industries are diverse, with the largest component being Aerospace Product and Parts Manufacturing (1%). The Wholesale industries are also diverse with the largest being Petroleum and Petroleum Product wholesalers (1%). Air Transportation companies (not rental or leasing) and Truck Transportation (2%) represent the largest portion of the Transportation/Warehousing category.

Factors that are critical to managing overall credit quality are sound loan underwriting and administration, systematic monitoring of existing loans and commitments, early identification of potential problems, an adequate allowance for loan losses, and sound non-accrual and charge-off policies.

Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to numerous borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At December 31, 2008, no significant concentrations exceeding 10% of total loans existed in the Company's loan portfolio, except as described above.

Loans at December 31, 2008 mature or reprice as follows:

	Loans Maturing or Repricing
			After One
	In One		Through		After
(in thousands)	Year or Less		Five Years		Five Years		Total
Fixed Rate Loans ⁽¹⁾

Commercial and industrial	$	51,085	$	126,321	$	6,348	$	183,754
Real estate:
Commercial		111,008		382,099		38,646		531,753
Construction		46,183		60,700		17,257		124,140
Residential		35,441		66,096		7,604		109,141
Consumer and other		8,433		2,605		1,717		12,755
Total	$	252,150	$	637,821	$	71,572	$	961,543

Variable Rate Loans ^{(1) (2)}

Commercial and industrial	$	372,456	$	-	$	-	$	372,456
Real estate:
Commercial		297,723		-		-		297,723
Construction		213,409		-		-		213,409
Residential		119,632		-		-		119,632
Consumer and other		12,412		-		-		12,412
Total	$	1,015,632	$	-	$	-	$	1,015,632

Loans ^{(1) (2)}

Commercial and industrial	$	423,541	$	126,321	$	6,348	$	556,210
Real estate:
Commercial		408,731		382,099		38,646		829,476
Construction		259,592		60,700		17,257		337,549
Residential		155,073		66,096		7,604		228,773
Consumer and other		20,845		2,605		1,717		25,167
Total	$	1,267,782	$	637,821	$	71,572	$	1,977,175

(1)		Loan balances are shown net of unearned loan fees.

(2)		Not adjusted for impact of interest rate swap agreements.

Fixed rate loans comprise approximately 50% of the loan portfolio at both December 31, 2008 and 2007. Variable rate loans are based on the prime rate or the London Interbank Offered Rate (“LIBOR”.) Most loan originations have one to three year maturities. While the loan relationship has a much longer life, the shorter maturities allow the Company to revisit the underwriting and pricing on each relationship periodically. Management monitors this mix as part of its interest rate risk management. See “Interest Rate Risk” section.

Allowance for Loan Losses
The loan portfolio is the primary asset subject to credit risk. Credit risk is controlled and monitored through the use of lending standards, a thorough review of potential borrowers, and ongoing review of loan payment performance. Active asset quality administration, including early problem loan identification and timely resolution of problems, further ensures appropriate management of credit risk. Credit risk management for each loan type is discussed briefly in the section entitled “Loans.”

The allowance for loan losses represents management’s estimate of an amount adequate to provide for probable credit losses in the loan portfolio at the balance sheet date. Various quantitative and qualitative factors are analyzed and provisions are made to the allowance for loan losses. Such provisions are reflected in our consolidated statements of income. The evaluation of the adequacy of the allowance for loan losses is based on management’s ongoing review and grading of the loan portfolio, consideration of past loss experience, trends in past due and nonperforming loans, risk characteristics of the various classifications of loans, existing economic conditions, the fair value of underlying collateral, and other factors that could affect probable credit losses. Assessing these numerous factors involves significant judgment and could be significantly impacted by the current economic conditions. Management considers the allowance for loan losses a critical accounting policy. See “Critical Accounting Policies” for more information.

In determining the allowance and the related provision for loan losses, three principal elements are considered:

1) specific allocations based upon probable losses identified during a quarterly review of the loan portfolio,

2) allocations based principally on the Company’s risk rating formulas, and

3) an unallocated allowance based on subjective factors.

The first element reflects management’s estimate of probable losses based upon a systematic review of specific loans considered to be impaired. These estimates are based upon collateral exposure, if they are collateral dependent for collection. Otherwise, discounted cash flows are estimated and used to assign loss.

The second element reflects the application of our loan rating system. This rating system is similar to those employed by state and federal banking regulators. Loans are rated and assigned a loss allocation factor for each category that is consistent with our historical losses, adjusted for environmental factors. The higher the rating assigned to a loan, the greater the allocation percentage that is applied.

The unallocated allowance is based on management’s evaluation of conditions that are not directly reflected in the determination of the formula and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they may not be identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the unallocated allowance include the following:

general economic and business conditions affecting our key lending areas;
credit quality trends (including trends in nonperforming loans expected to result from existing conditions);
collateral values;
loan volumes and concentrations;
competitive factors resulting in shifts in underwriting criteria;
specific industry conditions within portfolio segments;
recent loss experience in particular segments of the portfolio;
bank regulatory examination results; and
findings of our loan monitoring process.

Executive management reviews these conditions quarterly in discussion with our entire lending staff. To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s estimate of the effect of such conditions may be reflected as a specific allowance, applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s evaluation of the probable loss related to such condition is reflected in the unallocated allowance.

The allocation of the allowance for loan losses by loan category is a result of the analysis above. The allocation methodology applied by the Company, designed to assess the adequacy of the allowance for loan losses, focuses on changes in the size and character of the loan portfolio, changes in levels of impaired and other nonperforming loans, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing economic conditions, and historical losses on each portfolio category. Because each of the criteria used is subject to change, the allocation of the allowance for loan losses is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular loan category. The total allowance is available to absorb losses from any segment of the portfolio. Management continues to target and maintain the allowance for loan losses equal to the allocation methodology plus an unallocated portion, as determined by economic conditions and other qualitative and quantitative factors affecting the Company’s borrowers, as described above.

Management believes that the allowance for loan losses is adequate at December 31, 2008.

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.

	At December 31,
(in thousands)	2008				2007			2006			2005			2004
Allowance at beginning of year	$	21,593			$	16,988		$	12,990		$	11,665		$	10,590
(Disposed) acquired allowance for loan losses		(50	)			2,010			3,069			-			-
Loans charged off:
Commercial and industrial		3,783				238			1,067			171			425
Real estate:
Commercial		1,384				43			25			424			577
Construction		5,516				705			-			-			-
Residential		2,367				1,418			504			-			100
Consumer and other		31				125			2			49			194
Total loans charged off		13,081				2,529			1,598			644			1,296
Recoveries of loans previously charged off:
Commercial and industrial		64				347			362			209			92
Real estate:
Commercial		-				15			1			74			-
Construction		241				25			-			-			-
Residential		56				17			31			177			42
Consumer and other		11				105			6			19			25
Total recoveries of loans		372				509			400			479			159
Net loan chargeoffs		12,709				2,020			1,198			165			1,137
Provision for loan losses		22,475				4,615			2,127			1,490			2,212

Allowance at end of year	$	31,309			$	21,593		$	16,988		$	12,990		$	11,665

Average loans	$	1,828,434			$	1,495,807		$	1,159,110		$	964,259		$	847,270
Total portfolio loans		1,977,175				1,641,432			1,311,723			1,002,379			898,505
Nonperforming loans		29,662				12,720			7,975			1,421			1,827

Net chargeoffs to average loans		0.70		%		0.14	%		0.10	%		0.02	%		0.13
Allowance for loan losses to loans		1.58				1.32			1.30			1.30			1.30

The following table is a summary of the allocation of the allowance for loan losses for the five years ended December 31, 2008:

	December 31,
	2008				2007				2006				2005				2004
			Percent by				Percent by				Percent by				Percent by				Percent by
			Category to				Category to				Category to				Category to				Category to
(in thousands)	Allowance		Total Loans		Allowance		Total Loans		Allowance		Total Loans		Allowance		Total Loans		Allowance		Total Loans
Commercial and industrial	$	5,938	28.1	%	$	4,106	29.0	%	$	3,485	26.9	%	$	3,172	26.5	%	$	2,948	28.2	%
Real estate:
Commercial		10,764	42.0			7,004	42.1			5,710	43.9			4,245	40.9			3,671	36.6
Construction		6,482	17.1			5,241	16.2			2,927	15.0			1,048	13.8			1,037	14.2
Residential		2,749	11.6			2,624	10.4			2,056	11.5			1,774	15.1			1,903	16.6
Consumer and other		188	1.2			437	2.3			513	2.7			313	3.7			283	4.4
Not allocated		5,188				2,180				2,296				2,439				1,823
Total allowance	$	31,309	100.0	%	$	21,593	100.0	%	$	16,988	100.0	%	$	12,990	100.0	%	$	11,665	100.0	%

Nonperforming loans are defined as loans on non-accrual status, loans 90 days or more past due but still accruing, and restructured loans. Nonperforming assets include nonperforming loans plus foreclosed real estate.

Loans are placed on non-accrual status when contractually past due 90 days or more as to interest or principal payments. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collectibility of principal or interest on loans, it is management’s practice to place such loans on non-accrual status immediately, rather than delaying such action until the loans become 90 days past due. Previously accrued and uncollected interest on such loans is reversed and income is recorded only to the extent that interest payments are subsequently received in cash and a determination has been made that the principal balance of the loan is collectible. If collectibility of the principal is in doubt, payments received are applied to loan principal.

Loans past due 90 days or more but still accruing interest are also included in nonperforming loans. Loans past due 90 days or more but still accruing are classified as such where the underlying loans are both well secured (the collateral value is sufficient to cover principal and accrued interest) and are in the process of collection. Also included in nonperforming loans are “restructured” loans. Restructured loans involve the granting of a concession to a borrower experiencing financial difficulty involving the modification of terms of the loan, such as changes in payment schedule or interest rate.

The following table presents the categories of nonperforming assets and certain ratios as of the dates indicated:

	At December 31,
(in thousands)	2008			2007			2006			2005			2004
Non-accrual loans	$	29,662		$	12,720		$	6,363		$	1,421		$	1,827
Loans past due 90 days or more and still accruing interest		-			-			112			-			-
Restructured loans		-			-			-			-			-
Total nonperforming loans		29,662			12,720			6,475			1,421			1,827
Foreclosed property		13,868			2,963			1,500			-			123
Total nonperforming assets	$	43,530		$	15,683		$	7,975		$	1,421		$	1,950

Total assets	$	2,270,174		$	1,999,118		$	1,535,587		$	1,286,968		$	1,059,950
Total loans		1,977,175			1,641,432			1,311,723			1,002,379			898,505
Total loans plus foreclosed property		1,991,043			1,644,395			1,313,223			1,002,379			898,628

Nonperforming loans to loans		1.50	%		0.77	%		0.49	%		0.14	%		0.20	%
Nonperforming assets to loans plus foreclosed property		2.19			0.95			0.61			0.14			0.22
Nonperforming assets to total assets		1.92			0.78			0.52			0.11			0.18

Allowance for loan losses to nonperforming loans		106.00	%		170.00	%		264.00	%		914.00	%		639.00	%

Nonperforming loans were $29.7 million at December 31, 2008, an increase of $16.9 million over 2007. Nonperforming loans at December 31, 2008 by industry segment were as follows (in millions):

Commercial Real Estate	$	16.1
Residential Construction/Land Acquisition and Development		11.8
Commercial and Industrial		1.7
Other		0.1
Total	$	29.7

At December 31, 2008, of the total nonperforming loans, $17.0 million, or 60%, relates to five relationships: $4.8 million secured by a partially completed retail center; $3.5 million secured by commercial ground; $4.7 million secured by a medical office building; $2.8 million secured by a single family residence; and $1.9 million secured by a residential development. The remaining nonperforming loans consist of 20 relationships. Eighty-one percent of the total nonperforming loans are located in the Kansas City market.

At December 31, 2007, of the total nonperforming loans, $7.3 million, or 57%, related to eight residential homebuilders in St. Louis and Kansas City. The two largest related to a residential builder in Kansas City totaling $2.2 million and a single-family rehab builder in Kansas City totaling $1.6 million. The remaining nonperforming loans consisted of 11 relationships, nearly all of which were related to the soft residential housing markets in St. Louis and Kansas City.

Two credits in the Kansas City market secured by real estate represented $3.7 million of the total nonperforming loans at December 31, 2006. Six of the remaining ten relationships on non-accrual at December 31, 2006 and approximately 50% of the nonperforming loan balances related to smaller relationships acquired in the NorthStar transaction. At December 31, 2005, the nonperforming loans consisted of five accounts with two credits accounting for 68% of the total. At December 31, 2004, approximately 36% of the nonperforming loans related to a printing company and the remainder consisted of five different borrowers.

The Company’s nonperforming loans meet the definition of “impaired loans” under U.S. GAAP. As of December 31, 2008, the Company had a loan for $3.6 million, which also came within the definition of impaired loans based upon our expectation that the borrower will be unable or unwilling to pay 100% of future contractual obligations under the contract. As of December 31, 2008, 2007 and 2006, the Company had 26, 19 and 12 impaired loan relationships, respectively.

Other real estate at December 31, 2008 was $13.9 million, an increase of $10.9 million over 2007. The foreclosed real estate includes: $6.1 million of single family residences located in St. Louis and Kansas City; $6.2 million of residential lots in St. Louis and Kansas City; and $1.6 million in commercial real estate. Approximately 55% of the foreclosed real estate is located in St. Louis.

The severity of the economic downtown resulting from the constraints in the financial markets caused us to expand our risk monitoring processes in the fourth quarter of 2008 and into the current year. Increased scrutiny of residential builders, commercial developers and commercial and industrial credit was undertaken. Steps taken include reviewing all non-watch list credits related to the residential builder and commercial real estate developer segments to assess current cash flow information along with updated and current collateral valuations. For all commercial and industrial credits in excess of $1.0 million of exposure, we are also evaluating current financial information, updated financial projections and cash flow forecasts for fiscal 2009. Continued declines in the valuations of completed and unsold residential lot inventories due to the slowness of the residential housing markets are noted. Additionally, commercial retail and commercial office development show continuing evidence of weakness. As of February 28, 2009, our nonperforming assets were $56.9 million, a 30% increase from December 31, 2008.

Potential problem loans, which are not included in nonperforming loans, amounted to approximately $15.8 million, or 0.80% of total loans outstanding at December 31, 2008, compared to $23.9 million, or 1.45% of total loans outstanding at December 31, 2007. Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have doubts about the borrower’s ability to comply with present repayment terms. At February 28, 2009, the potential problem loans had increased to approximately $39.3 million, or 1.98% of total loans outstanding.

Investments
At December 31, 2008, the investment portfolio was $108.3 million, or 5%, of total assets. Our debt securities portfolio is primarily comprised of U.S. government agency obligations, mortgage-backed pools, and collateralized mortgage obligations (“CMO’s”). Our other investments primarily consist of the common stock investment of our trust preferred securities and other private equity investments. The size of the investment portfolio is generally 5-10% of total assets and will vary within that range based on liquidity. Typically, management classifies securities as available for sale to maximize management flexibility, although securities may be purchased with the intention of holding to maturity. Securities available-for-sale are carried at fair value, with related unrealized net gains or losses, net of deferred income taxes, recorded as an adjustment to equity capital.

The table below sets forth the carrying value of investment securities held by the Company at the dates indicated:

	December 31,
	2008				2007				2006
(in thousands)	Amount		%		Amount		%		Amount		%
Obligations of U.S. government agencies	$	-	0.0	%	$	28,720	34.5	%	$	95,452	85.8	%
Mortgage-backed securities		95,659	88.4	%		41,087	49.3	%		9,617	8.6	%
Municipal bonds		772	0.7	%		949	1.1	%		1,111	1.0	%
FHLB capital stock		7,517	6.9	%		9,106	10.9	%		3,007	2.7	%
Other investments		4,367	4.0	%		3,471	4.2	%		2,023	1.8	%
	$	108,315	100.0	%	$	83,333	100.0	%	$	111,210	100.0	%

During 2008, the US government agency debt either matured or was called and we reinvested the proceeds in agency mortgage-backed securities (including CMO’s) given their more favorable option adjusted spreads. The underlying collateral on these mortgage-backed securities is diversified among state and does not include “subprime” mortgages.

At December 31, 2008, of the $7.5 million in FHLB capital stock, $2.1 million is required for FHLB membership and $5.4 million is required to support our outstanding advances. Historically, it has been the FHLB practice to automatically repurchase activity-based stock that became excess because of a member's reduction in advances. The FHLB has the discretion, but is not required, to repurchase any shares that a member is not required to hold. In December 2008, the FHLB suspended the automatic repurchase of this excess stock.

The Company had no securities classified as trading at December 31, 2008, 2007 or 2006.

The following table summarizes expected maturity and yield information on the investment portfolio at December 31, 2008:

	Within 1 year				1 to 5 years				5 to 10 years				Over 10 years				No Stated Maturity				Total
(in thousands)	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
Mortgage-backed securities	$	4,364	3.70	%	$	79,758	4.95	%	$	11,350	5.45	%	$	187	5.21	%		-	0.00	%	$	95,659	4.95	%
Municipal bonds		400	4.45	%		372	6.48	%		-	0.00	%		-	0.00	%		-	0.00	%		772	5.42	%
FHLB capital stock		-	0.00	%		-	0.00	%		-	0.00	%		-	0.00	%		7,517	4.44	%		7,517	4.44	%
Other investments		-	0.00	%		-	0.00	%		-	0.00	%		-	0.00	%		4,367	3.13	%		4,367	3.13	%
Total	$	4,764	3.76	%	$	80,130	4.95	%	$	11,350	5.45	%	$	187	5.21	%	$	11,884	3.96	%	$	108,315	4.84	%

Yields on tax exempt securities are computed on a taxable equivalent basis using a tax rate of 36%. Expected maturities will differ from contractual maturities, as borrowers may have the right to call on repay obligations with or without prepayment penalties.

Deposits
The following table shows, for the periods indicated, the average annual amount and the average rate paid by type of deposit:

	For the year ended December 31,
	2008				2007				2006
	Average		Weighted		Average		Weighted		Average		Weighted
(in thousands)	balance		average rate		balance		average rate		balance		average rate
Interest-bearing transaction accounts	$	121,371	1.28	%	$	120,418	2.56	%	$	102,327	2.28	%
Money market accounts		687,867	2.00	%		579,029	4.07	%		496,590	3.87	%
Savings accounts		9,594	0.57	%		11,126	1.12	%		4,164	1.37	%
Certificates of deposit		588,561	4.17	%		503,926	5.18	%		357,706	4.54	%
		1,407,393	2.84	%		1,214,499	4.35	%		960,787	3.94	%
Noninterest-bearing demand deposits		221,925	--			215,610	--			207,328	--
	$	1,629,318	2.45	%	$	1,430,109	3.70	%	$	1,168,115	3.24	%

While we continued aggressive direct calling efforts of relationship officers in conjunction with our treasury management products and services, our core deposit growth in 2008 was lower than in prior years. Market concern over the safety of banks in general certainly had some impact on our lower deposit growth rate. Management has pursued closely-held businesses who desire a close working relationship with a locally-managed, full-service bank. Due to the relationships developed with these customers, management views large deposits from this source as a stable deposit base. We also use certificates of deposit sold to retail customers of regional and national brokerage firms (i.e. brokered certificates of deposit) to help fund our growth. At December 31, 2008 and 2007, the Company had $336.0 million and $114.0 million in brokered certificates of deposit, respectively.

Maturities of certificates of deposit of $100,000 or more are as follows:

(in thousands)	Total
Three months or less	$	134,351
Over three through six months		101,333
Over six through twelve months		137,362
Over twelve months		147,151
Total	$	520,197

Liquidity and Capital Resources
Since September 2008, we have raised $62.5 million in regulatory capital, raising our risk-based capital ratio to 12.81% - well in excess of the regulatory guidelines. On September 30, 2008, Enterprise completed a $2.5 million private placement of subordinated capital notes. In October 2008, given the difficult economic environment and the Company’s expectation to continue its growth, the Board approved the addition of $60.0 million in regulatory capital. The Company was approved by the U.S. Treasury for a $62.0 million Capital Purchase Program investment. At the same time, the Company had the opportunity to privately place a Convertible Trust Preferred Security offering. As a result, the Company decided to take advantage of both the private and public capital sources.

On December 12, 2008, we completed a private placement of $25.0 million in Convertible Trust Preferred Securities that qualify as Tier II regulatory capital until they would convert to EFSC common stock. And on December 19, 2008, we received $35.0 million from the U.S. Treasury under the Capital Purchase Program.

As of December 31, 2008, $20.0 million of the capital funds were used to pay off the Company’s line of credit and term loan. We also injected $18.0 million into Enterprise to support continued loan growth and bolster its capital ratio. Subject to other demands for cash, we expect to use the remaining capital funds to support continuing loan growth and strengthening our capital position as appropriate. Some portion of this additional capital may also be deployed to take advantage of acquisition opportunities that may emerge from the current unsettled nature of the financial industry.

Liquidity
The objective of liquidity management is to ensure we have the ability to generate sufficient cash or cash equivalents in a timely and cost-effective manner to meet its commitments as they become due. Typical demands on liquidity are deposit run-off from demand deposits, maturing time deposits, which are not renewed, and fundings under credit commitments to customers. Funds are available from a number of sources, such as from the core deposit base and from loans and securities repayments and maturities. Additionally, liquidity is provided from sales of the securities portfolio, fed fund lines with correspondent banks, the Federal Reserve and the FHLB, the ability to acquire large and brokered deposits and the ability to sell loan participations to other banks. These alternatives are an important part of our liquidity plan and provide flexibility and efficient execution of the asset-liability management strategy.

Our Asset-Liability Management Committee oversees our liquidity position, the parameters of which are approved by the Board of Directors. Our liquidity position is monitored monthly by producing a liquidity report, which measures the amount of liquid versus non-liquid assets and liabilities. Our liquidity management framework includes measurement of several key elements, such as the loan to deposit ratio, wholesale deposits as a percentage of total deposits, and various dependency ratios used by banking regulators. The Company’s liquidity framework also incorporates contingency planning to assess the nature and volatility of funding sources and to determine alternatives to these sources. While core deposits and loan and investment repayments are principal sources of liquidity, funding diversification is another key element of liquidity management and is achieved by strategically varying depositor types, terms, funding markets, and instruments.

For the year ended December 31, 2008, net cash provided by operating activities was $4.9 million less than for 2007. Net cash used in investing activities was $437.0 million for 2008 versus $151.0 million in 2007. The increase of $286.0 million was primarily due an increase in loan volume. Net cash provided by financing activities was $306.0 million in 2008 versus $230.0 million in 2007. The change in cash provided by financing activities is due to increases in brokered deposits in 2008, additional federal funds purchased, FHLB advances, additional subordinated debentures and TARP funds.

Strong capital ratios, credit quality and core earnings are essential to retaining cost-effective access to the wholesale funding markets. Deterioration in any of these factors could have an impact on the Company’s ability to access these funding sources and, as a result, these factors are monitored on an ongoing basis as part of the liquidity management process. Enterprise is subject to regulations and, among other things, may be limited in its ability to pay dividends or transfer funds to the parent Company. Accordingly, consolidated cash flows as presented in the consolidated statements of cash flows may not represent cash immediately available for the payment of cash dividends to the Company’s shareholders or for other cash needs.

Parent Company liquidity
The parent company’s liquidity is managed to provide the funds necessary to pay dividends to shareholders, service debt, invest in subsidiaries as necessary, and satisfy other operating requirements. The parent company’s primary funding sources to meet its liquidity requirements are dividends from Enterprise and proceeds from the issuance of equity (i.e. stock option exercises). While our $16.0 million line of credit does not expire until April 2009, we do not have any current availability under the line due to our noncompliance with a certain covenant regarding classified loans as a percentage of bank equity and loan loss reserves. We may be unable to arrange for a holding company line of credit in 2009 given the uncertainties around bank industry performance. However, we believe our current level of cash at the holding company will be sufficient to meet all projected cash needs in 2009. See Item 8, Note 13 – Other borrowings and notes payable for more information regarding the line of credit.

Another source of funding for the parent company includes the issuance of subordinated debentures. As of December 31, 2008, the Company had $82.6 million of outstanding subordinated debentures as part of nine Trust Preferred Securities Pools. These securities are classified as debt but are included in regulatory capital and the related interest expense is tax-deductible, which makes them a very attractive source of funding. See Item 8, Note 11 – Subordinated Debentures for more information.

Enterprise liquidity
Enterprise has a variety of funding sources available to increase financial flexibility. In addition to amounts currently borrowed, at December 31, 2008, Enterprise could borrow an additional $164.3 million available from the FHLB of Des Moines under blanket loan pledges and an additional $310.5 million available from the Federal Reserve Bank under pledged loan agreements. Enterprise has unsecured federal funds lines with five correspondent banks totaling $70.0 million.

Investment securities are another important tool to the Company’s liquidity objective. As of December 31, 2008, the entire investment portfolio was available for sale. Of the $96.4 million investment portfolio available for sale, $72.8 million was pledged as collateral for public deposits, treasury, tax and loan notes, and other requirements. The remaining debt securities could be pledged or sold to enhance liquidity, if necessary.

In July 2008, Enterprise joined the Certificate of Deposit Account Registry Service, or CDARS, which allows us to provide our customers with access to additional levels of FDIC insurance coverage. The CDARS program is designed to provide full FDIC insurance on deposit amounts larger than the stated minimum by exchanging or reciprocating larger depository relationships with other member banks. Our depositors’ funds are broken into smaller amounts and placed with other banks that are members of the network. Each member bank issues CDs in amounts that are eligible for FDIC insurance. CDARS are considered brokered deposits according to banking regulations; however, the Company considers the reciprocal deposits placed through the CDARS program as core funding since the original funds came from clients and does not report the balances as brokered sources in its internal or external financial reports. Enterprise must remain “well-capitalized” in order to utilize the CDARS program. As of December 31, 2008, the Bank had $59.0 million of reciprocal CDARS deposits outstanding. We expect CDARS deposits to increase during 2009.

In addition to the reciprocal deposits available through CDARS, we also have access to the “one-way buy” program, which allows us to bid on the excess deposits of other CDARS member banks. The Company will report any outstanding “one-way buy” funds as brokered funds in its internal and external financial reports. At December 31, 2008, we had no outstanding “one-way buy” deposits.

As long as Enterprise remains “well-capitalized”, we have the ability to sell certificates of deposit through various national or regional brokerage firms, if needed. At December 31, 2008, we had $336.0 million of brokered certificates of deposit outstanding.

Over the normal course of business, the Company enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through the Company’s various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of the Company’s liquidity. The Company has $555.0 million in unused loan commitments as of December 31, 2008. While this commitment level would be very difficult to fund given the Company’s current liquidity resources, we know that the nature of these commitments is such that the likelihood of funding them is very low.

At December 31, 2008 and 2007, approximately $10,018,000 and $6,400,000, respectively, of cash and due from banks represented required reserves on deposits maintained by the Company in accordance with Federal Reserve Bank requirements.

Capital Resources
As a financial holding company, the Company is subject to “risk based” capital adequacy guidelines established by the Federal Reserve. Risk-based capital guidelines were designed to relate regulatory capital requirements to the risk profile of the specific institution and to provide for uniform requirements among the various regulators. Currently, the risk-based capital guidelines require the Company to meet a minimum total capital ratio of 8.0% of which at least 4.0% must consist of Tier 1 capital. Tier 1 capital consists of (a) common shareholders’ equity (excluding the unrealized market value adjustments on the available-for-sale securities and cash flow hedges), (b) qualifying perpetual preferred stock and related additional paid in capital subject to certain limitations specified by the FDIC, and (c) minority interests in the equity accounts of consolidated subsidiaries less (d) goodwill, (e) mortgage servicing rights within certain limits, and (f) any other intangible assets and investments in subsidiaries that the FDIC determines should be deducted from Tier 1 capital. The FDIC also requires a minimum leverage ratio of 3.0%, defined as the ratio of Tier 1 capital to average total assets for banking organizations deemed the strongest and most highly rated by banking regulators. A higher minimum leverage ratio is required of less highly rated banking organizations. Total capital, a measure of capital adequacy, includes Tier 1 capital, allowance for loan losses, and subordinated debentures.

The Company met the definition of “well-capitalized” (the highest category) at December 31, 2008, 2007 and 2006. The following table summarizes the Company’s risk-based capital and leverage ratios at the dates indicated:

	At December 31
(Dollars in thousands)	2008			2007			2006
Tier I capital to risk weighted assets		8.89	%		9.32	%		9.60	%
Total capital to risk weighted assets		12.81	%		10.54	%		10.83	%
Leverage ratio (Tier I capital to average assets)		8.58	%		8.85	%		8.87	%
Tangible common equity to tangible assets		5.90	%		5.68	%		6.48	%
Tier I capital	$	190,253		$	164,957		$	131,869
Total risk-based capital	$	273,978		$	186,549		$	148,856

Risk Management
Market risk arises from exposure to changes in interest rates and other relevant market rate or price risk. The Company faces market risk in the form of interest rate risk through transactions other than trading activities. Market risk from these activities, in the form of interest rate risk, is measured and managed through a number of methods. The Company uses financial modeling techniques to measure interest rate risk. These techniques measure the sensitivity of future earnings due to changing interest rate environments. Guidelines established by the Bank’s Asset/Liability Management Committee and approved by the Company’s Board of Directors are used to monitor exposure of earnings at risk. General interest rate movements are used to develop sensitivity as the Company feels it has no primary exposure to a specific point on the yield curve. These limits are based on the Company’s exposure to a 100 basis points and 200 basis points immediate and sustained parallel rate move, either upward or downward.

Interest Rate Risk
Our interest rate sensitivity management seeks to avoid fluctuating interest margins to enhance consistent growth of net interest income through periods of changing interest rates. Interest rate sensitivity varies with different types of interest-earning assets and interest-bearing liabilities. We attempt to maintain interest-earning assets, comprised primarily of both loans and investments, and interest-bearing liabilities, comprised primarily of deposits, maturing or repricing in similar time horizons in order to minimize or eliminate any impact from market interest rate changes. In order to measure earnings sensitivity to changing rates, the Company uses a static gap analysis and earnings simulation model.

The static gap analysis starts with contractual repricing information for assets, liabilities, and off-balance sheet instruments. These items are then combined with repricing estimations for administered rate (interest-bearing demand deposits, savings, and money market accounts) and non-rate related products (demand deposit accounts, other assets, and other liabilities) to create a baseline repricing balance sheet. In addition, mortgage-backed securities are adjusted based on industry estimates of prepayment speeds.

The following table represents the estimated interest rate sensitivity and periodic and cumulative gap positions calculated as of December 31, 2008. Significant assumptions used for this table include: loans will repay at historic repayment rates; interest-bearing demand accounts and savings accounts are interest sensitive due to immediate repricing, and fixed maturity deposits will not be withdrawn prior to maturity. A significant variance in actual results from one or more of these assumptions could materially affect the results reflected in the table.

														Beyond
														5 years
														or no stated
(in thousands)	Year 1			Year 2			Year 3			Year 4		Year 5		maturity		Total
Interest-Earning Assets
Securities available for sale	$	19,198		$	15,160		$	15,751		$	17,618	$	27,405	$	1,299	$	96,431
Other investments		-			-			-			-		-		11,884		11,884
Interest-bearing deposits		14,384			-			-			-		-		-		14,384
Federal funds sold		2,637			-			-			-		-		-		2,637
Loans (1)		1,206,660			252,585			198,435			96,009		151,914		71,572		1,977,175
Loans held for sale		2,632			-			-			-		-		-		2,632
Total interest-earning assets	$	1,245,511		$	267,745		$	214,186		$	113,627	$	179,319	$	84,755	$	2,105,143

Interest-Bearing Liabilities
Savings, NOW and Money market deposits	$	837,356		$	-		$	-		$	-	$	-	$	-	$	837,356
Certificates of deposit		520,432			140,719			44,246			1,775		442		453		708,067
Subordinated debentures		32,064			10,310			-			14,433		28,274		-		85,081
Other borrowings		127,210			20,800			300			7,000		-		10,807		166,117
Total interest-bearing liabilities	$	1,517,062		$	171,829		$	44,546		$	23,208	$	28,716	$	11,260	$	1,796,621

Interest-sensitivity GAP
GAP by period	$	(271,551	)	$	95,916		$	169,640		$	90,419	$	150,603	$	73,495	$	308,522
Cumulative GAP	$	(271,551	)	$	(175,635	)	$	(5,995	)	$	84,424	$	235,027	$	308,522	$	308,522
Ratio of interest-earning assets to
interest-bearing liabilities
Periodic		0.82			1.56			4.81			4.90		6.24		7.53		1.17
Cumulative GAP as of December 31, 2008		0.82			0.90			1.00			1.05		1.13		1.17		1.17

Cumulative GAP as of December 31, 2007(2)		0.94			0.98			1.06			1.09		1.13		1.18		1.18

(1)		Adjusted for the impact of the interest rate swaps.

(2)		For comparative purposes

At December 31, 2008, the Company was asset sensitive on a cumulative basis for all periods except years 1 and 2 based on contractual maturities. Asset sensitive means that assets will reprice faster than liabilities.

Along with the static gap analysis, determining the sensitivity of short-term future earnings to a hypothetical plus or minus 100 and 200 basis point parallel rate shock can be accomplished through the use of simulation modeling. In addition to the assumptions used to create the static gap, simulation of earnings includes the modeling of the balance sheet as an ongoing entity. Future business assumptions involving administered rate products, prepayments for future rate-sensitive balances, and the reinvestment of maturing assets and liabilities are included. These items are then modeled to project net interest income based on a hypothetical change in interest rates. The resulting net interest income for the next 12-month period is compared to the net interest income amount calculated using flat rates. This difference represents the Company’s earnings sensitivity to a plus or minus 100 basis points parallel rate shock.

The resulting simulations for December 31, 2008 demonstrate that the Company’s balance sheet is relatively neutral to rate changes. The simulations projected that net interest income of Enterprise would decrease by approximately 1.5% if rates rose by a 100 basis point parallel rate shock and projected that the net interest income would decrease by approximately 0.8% if rates fell by a 100 basis point parallel rate shock.

The Company uses interest rate derivative financial instruments as an asset/liability management tool to hedge mismatches in interest rate exposure indicated by the net interest income simulation described above. They are used to modify the Company’s exposures to interest rate fluctuations and provide more stable spreads between loan yields and the rate on their funding sources. At December 31, 2008, the Company had $97.4 million in notional amount of outstanding interest rate swaps to help manage interest rate risk. Derivative financial instruments are also discussed in Item 8, Note 7 – Derivative Financial Instruments.

Contractual Obligations, Off-Balance Sheet Risk, and Contingent Liabilities
Through the normal course of operations, the Company has entered into certain contractual obligations and other commitments. Such obligations relate to funding of operations through deposits or debt issuances, as well as leases for premises and equipment. As a financial services provider, the Company routinely enters into commitments to extend credit. While contractual obligations represent future cash requirements of the Company, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans made by the Company.

The required contractual obligations and other commitments, excluding any contractual interest, at December 31, 2008 were as follows:

					Over 1 Year
			Less Than		Less than		Over
(in thousands)	Total		1 Year		5 Years		5 Years
Operating leases	$	12,249	$	2,378	$	5,646	$	4,225
Certificates of deposit		708,067		520,432		187,182		453
Subordinated debentures		85,081		-		-		85,081
Federal Home Loan Bank advances		119,957		81,050		28,100		10,807
Commitments to extend credit		555,361		357,262		161,353		36,746
Standby letters of credit		33,875		33,875		-		-

The Company also enters into derivative contracts under which the Company either receives cash from or pays cash to counterparties depending on changes in interest rates. Derivative contracts are carried at fair value on the consolidated balance sheet with the fair value representing the net present value of expected future cash receipts or payments based on market interest rates as of the balance sheet date. The fair value of these contracts changes daily as market interest rates change. Derivative liabilities are not included as contractual cash obligations as their fair value does not represent the amounts that may ultimately be paid under these contracts.

CRITICAL ACCOUNTING POLICIES
The following accounting policies are considered most critical to the understanding of the Company’s financial condition and results of operations. These critical accounting policies require management’s most difficult, subjective and complex judgments about matters that are inherently uncertain. Because these estimates and judgments are based on current circumstances, they may change over time or prove to be inaccurate based on actual experiences. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of a materially different financial condition and/or results of operations could reasonably be expected. The impact and any associated risks related to our critical accounting policies on our business operations are discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Item 8, Note 1 – Significant Accounting Policies.

The Company has prepared all of the consolidated financial information in this report in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The Company makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Such estimates include the valuation of loans, goodwill, intangible assets, and other long-lived assets, along with assumptions used in the calculation of income taxes, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. Decreasing real estate values, illiquid credit markets, volatile equity markets, and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statement in future periods. There can be no assurances that actual results will not differ from those estimates.

Allowance for Loan Losses
The Company maintains an allowance for loan losses (“the allowance”), which is intended to be management’s best estimate of probable inherent losses in the outstanding loan portfolio. The allowance is based on management’s continuing review and evaluation of the loan portfolio. The review and evaluation combines several factors including: consideration of past loan loss experience; trends in past due and nonperforming loans; risk characteristics of the various classifications of loans; existing economic conditions; the fair value of underlying collateral; and other qualitative and quantitative factors which could affect probable credit losses. Because current economic conditions can change and future events are inherently difficult to predict, the anticipated amount of estimated loan losses, and therefore the adequacy of the allowance, could change significantly. As an integral part of their examination process, various regulatory agencies also review the allowance for loan losses. These agencies may require that certain loan balances be charged off when their credit evaluations differ from those of management, based on their judgments about information available to them at the time of their examination. The Company believes the allowance for loan losses is adequate and properly recorded in the consolidated financial statements.

Acquisitions and Divestitures
The Company has accounted for business combinations in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations (“SFAS 141”), Under SFAS 141, the assets and liabilities of the acquired entities are recorded at their estimated fair values at the date of acquisition. Goodwill represents the excess of the purchase price over the fair value of net assets, including the amount assigned to identifiable intangible assets. The purchase price allocation process requires an analysis of the fair values of the assets acquired and the liabilities assumed. When a business combination agreement provides for an adjustment to the cost of the combination contingent on future events, the Company includes that adjustment in the cost of the combination when the contingent consideration is determinable beyond a reasonable doubt and can be reliably estimated and should not otherwise be expensed according to the provisions of SFAS 141. The results of operations of the acquired business are included in the Company’s consolidated financial statements from the respective date of acquisition. As a general rule, goodwill established in connection with a stock purchase is nondeductible for tax purposes.

The company accounts for divestitures under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”.) SFAS 144 requires an entity to measure an asset (disposal group) classified as held for sale at the lower of its carrying value at the date the assets is initially classified as held for sale or its fair value less costs to sell. It also requires an entity to report in discontinued operations the results of operations of a component that either has been disposed of or held to sale if:

the operations and cash flows of the disposal group will be eliminated from the ongoing operations as a result of the disposal transaction; and
the Company will not have any significant continuing involvement in the operations of the entity after the disposal transaction.

Any incremental direct costs incurred to transact the sale are allocated against the gain or loss on the sale. These costs would include items like legal fees, title transfer fees, broker fees, etc. Pursuant to SFAS 142, any goodwill associated with the portion of the reporting unit that constitutes a business to be disposed of is included in the carrying amount of the business in determining the gain or loss on the sale. Also, any intangible assets or write down to fair value associated with the entity to be disposed of is also included in the carrying amount of the business in determining the gain or loss on the sale. The gain or loss on the sale is classified in the consolidated statements of income as noninterest income.

In December 2007, SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”) was issued. This statement replaces SFAS 141, and establishes several new principles and requirements for accounting for business combinations. The new accounting standard is effective for all business combinations consummated on or after December 15, 2008.

Goodwill and Other Intangible Assets
The Company accounts for goodwill and intangible assets according to SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”.) Intangible assets other than goodwill, such as core deposit intangibles, that are determined to have finite lives are amortized over their estimated remaining useful lives. The Company tests goodwill for impairment on an annual basis and intangible assets whenever events or changes in circumstances indicate that the Company may not be able to recover the respective asset’s carrying amount. Such tests involve the use of estimates and assumptions. Management believes that the assumptions utilized are reasonable. However, the Company may incur impairment charges related to goodwill or intangible assets in the future due to changes in business prospects or other matters that could affect our assumptions.

SFAS 142 requires that goodwill be tested for impairment at the reporting unit level. Reporting units are defined as the same level as, or one level below, an operating segment, as defined in SFAS 131, Disclosures about Segments of an Enterprise and Related Information. An operating segment is a component of a business for which separate financial information is available that management regularly evaluates in deciding how to allocate resources and assess performance. The Company’s reporting units are Millennium, Trust and the Banking operations of Enterprise. At December 31, 2008 and 2007, the Trust reporting unit had no goodwill.

Historically, our goodwill impairment tests have been completed as of December 31 each year. Following the annual impairment test for 2006, the Company changed the goodwill impairment test date for the Millennium reporting unit to September 30 of each fiscal year. This change in the testing date was designed to provide sufficient time for independent experts to complete the Millennium reporting unit testing prior to year end reporting. The goodwill impairment test date for the Banking reporting unit did not change.

Under SFAS 142, businesses must identify potential impairments by comparing the fair value of a reporting unit to its carrying amount, including goodwill. Goodwill impairment does not occur as long as the fair value of the unit is greater than its carrying value. The second step of the impairment test is only required if a goodwill impairment is identified in step one. The second step of the test compares the implied fair market value of goodwill to its carrying amount. If the carrying amount of goodwill exceeds its implied fair market value, an impairment loss is recognized. That loss is equal to the carrying amount of goodwill that is in excess of its implied fair market value.

SFAS 144 also requires long-lived assets, such as purchased intangibles subject to amortization, to be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

There are three general approaches commonly used in business valuation: income approach, asset-based approach, and market approach. Within each of these approaches, there are various techniques for determining the value of a business using the definition of value appropriate for the appraisal assignment. Professional judgment is required to determine which valuation methods are the most appropriate. The valuation may utilize one or more of the approaches. Generally, the income approaches determine value by calculating the net present value of the benefit stream generated by the business (discounted cash flow); the asset-based approaches determine value by adding the sum of the parts of the business (net asset value); and the market approaches determine value by comparing the subject company to other companies in the same industry, of the same size, and/or within the same region.

Millennium reporting unit
An independent third party performed the valuation of the Millennium reporting unit. Step one of the impairment valuation utilized a combination of the income approach and the market approach. The income and market approaches were weighted at 33% and 67%, respectively. The weights reflect the relative importance of the methods used and serve as a means of simulating the thinking of hypothetical investors. Significant assumptions and estimates used to determine the step one impairment value included expected cash flows and annual growth rates, anticipated future earnings, operating margins and other indicators of value derived from market transactions of similar companies.

Step two of the impairment valuation contemplated a hypothetical acquisition of the assets and liabilities of Millennium. The intangible assets identified were trade name and customer lists. Significant assumptions and estimates used to determine the step two allocation include an expected discount rate, existing customer list and projected revenue from those customers.

In accordance with SFAS 142 and SFAS 144, we evaluated Millennium’s goodwill and intangible assets for impairment as of September 30, 2008. In connection with these tests, we determined that margin pressures reducing Millennium revenues continued to negatively affect operating performance, thereby reducing the fair value of our investment in Millennium. As a result, the Company recorded a $5.9 million, pre-tax goodwill impairment charge as of September 30, 2008. In the fourth quarter of 2008, due to continued pressures in the sales margin and resulting decreased earnings of Millennium, we identified and recorded an additional pre-tax goodwill impairment of $2.8 million and $500,000 of intangible asset impairment. Millennium’s goodwill and intangible assets were $3.1 million and $1.4 million, respectively, at December 31, 2008. It is possible that additional impairment charges could occur in 2009.

Banking reporting unit
An independent third party performed the valuation of the Banking reporting unit. Step one of the impairment valuation utilized a combination of the income approach and the market approach. The income and market approaches were weighted at 67% and 33%, respectively. The weights reflect the relative importance of the methods used and serve as a means of simulating the thinking of hypothetical investors. Significant assumptions and estimates used to determine the step one impairment value included expected cash flows and annual growth rates, anticipated future earnings, operating margins and other indicators of value derived from market transactions of similar companies.

The 2008 annual impairment evaluation of the goodwill and intangible balances did not identify any impairment for the Banking reporting unit. At December 31, 2008, the Company’s common shareholders’ equity was $186.7 million. At March 2, 2009, the Company’s market capitalization was $116.0 million. A goodwill impairment test may be performed on the Banking reporting unit as of March 31, 2009. If current market conditions persist, it is possible that goodwill impairment could occur in the Banking reporting unit in 2009.

There was no goodwill or intangible impairment recorded in 2007 or 2006 for either the Millennium or Banking reporting units.

State Tax Credits Held for Sale
On January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (“SFAS 157”), and SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”.) SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 159 permits the Company to choose to measure eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value measurement option (“FVO”) has been elected are reported in earnings at each subsequent reporting date. The fair value option (i) may be applied instrument by instrument, with certain exceptions, thus the Company may record identical financial assets and liabilities at fair value or by another measurement basis permitted under generally accepted accounting principles, (ii) is irrevocable (unless a new election date occurs) and (iii) is applied only to entire instruments and not to portions of instruments.

In 2007, the Company executed an agreement to purchase the rights to receive 10-year streams of state tax credits at agreed upon discount rates. At December 31, 2007, the Company had purchased $23.0 million of state tax credits. Upon adoption of SFAS 157 and SFAS 159, the Company elected to account for the state tax credit assets at fair value. As a result, the state tax credits were re-measured to fair value. The effect of the re-measurement was reported as a cumulative-effect adjustment, which reduced opening retained earnings on January 1, 2008, by $365,000.

The Company is not aware of an active financial market for the 10-year streams of state tax credit financial instruments. However, the Company’s principal market for these tax credits consists of state residents who buy them to reduce their state tax exposure. The state tax credits purchased by the Company are held until they are “usable” and then are sold to our clients for a profit.

The Company utilizes a discounted cash flow analysis (income approach) to determine the fair value of the state tax credits. The fair value measurement is calculated using an internal valuation model. The inputs to the fair value calculation include: the amount of tax credits generated each year, the anticipated sale price of the tax credit, the timing of the sale and a discount rate. The discount rate is defined as the LIBOR swap curve at a point equal to the remaining life in years of credits plus a risk premium spread. With the exception of the discount rate, the inputs to the fair value calculation are observable and readily available. The discount rate is an “unobservable input” and is based on the Company’s assumptions. As a result, fair value measurement for these instruments falls within Level 3 of the fair value hierarchy of SFAS 157.

At December 31, 2008, the discount rates utilized in our state tax credits fair value calculation ranged from 3.80% to 4.61%. Resulting changes in the fair value of the state tax credits held for sale of $4.6 million were reported in Gain on state tax credits, net in the consolidated statement of income for the year ended December 31, 2008. A rate simulation with a 100 basis point parallel rate shock to the discount rate was run for December 31, 2008. The resulting simulation indicates that if the LIBOR swap curve were to increase by 100 basis points, the fair value of the state tax credits would be lower by approximately $1.5 million. We would expect a portion of this decline would be offset by a change in the value of derivative financial instruments hedging the state tax credits.

These Level 3 fair value measurements are based primarily upon our own estimates and are calculated based on the current economic and regulatory environment, interest rate risks and other factors. Therefore, the results cannot be determined with precision, cannot be substantiated by comparison to quoted prices in active markets, and may not be realized in a current sale or immediate settlement of the asset or liability. Additionally, there are inherent uncertainties in any fair value measurement technique, and changes in the underlying assumptions used, including the discount rate and estimate of future cash flows, could significantly affect the fair value measurement amounts.

Derivative Financial Instruments
The Company uses derivative financial instruments to assist in managing interest rate sensitivity. The derivative financial instruments used are interest rate swaps and caps. Derivative financial instruments are required to be measured at fair value and recognized as either assets or liabilities in the consolidated financial statements. Fair value represents the payment the Company would receive or pay if the item were sold or bought in a current transaction. As of December 31, 2008, the Company used derivative financial instruments in a cash flow hedge program for prime based loans. In addition, as of December 31, 2008, the Company used nondesignated derivative financial instruments to economically hedge changes in the fair value of state tax credits held for sale and changes in the fair value of certain loans accounted for as trading instruments.

Cash Flow Hedges – Derivatives designated as cash flow hedges are recorded at fair value. The effective portion of the change in fair value is recorded (net of taxes) as a component of other comprehensive income (“OCI”) in shareholders’ equity. Amounts recorded in OCI are subsequently reclassified into interest income or expense (depending on whether the hedged item is an asset or liability) when the underlying transaction affects earnings. The ineffective portion of the change in fair value is recorded in noninterest income. Upon dedesignation of a derivative financial instrument from a cash flow hedge relationship, any remaining amounts in OCI are recorded in noninterest income over the expected remaining life of the underlying forecasted hedge transaction. The net interest differential between the hedged item and the hedging derivative financial instrument are recorded as an adjustment to interest income or interest expense of the related asset or liability.
Fair Value Hedges – For derivatives designated as fair value hedges, the change in fair value of the derivative instrument and related hedged item are recorded in the related interest income or expense, as applicable, except for the ineffective portion, which is recorded in noninterest income in the consolidated statements of income. The swap agreement is accounted for on an accrual basis with the net interest differential being recognized as an adjustment to interest income or interest expense of the related asset or liability.
Non-Designated Hedges – Certain derivative financial instruments are not designated as cash flow or as fair value hedges for accounting purposes. These non-designated derivatives are entered into to provide interest rate protection on net interest income or noninterest income but do not meet hedge accounting treatment. Changes in the fair value of these instruments are recorded in interest income or noninterest income in the consolidated statements of income depending on the underlying hedged item.

The judgments and assumptions most critical to the application of this accounting policy are those affecting the estimation of fair value and hedge effectiveness. Changes in assumptions and conditions could result in greater than expected inefficiencies that, if large enough, could reduce or eliminate the economic benefits anticipated when the hedges were established and/or invalidate continuation of hedge accounting. Greater inefficiency and discontinuation of hedge accounting can result in increased volatility in reported earnings. For cash flow hedges, this would result in more or all of the change in the fair value of the related derivative financial instruments being reported in income. In December 2008, the Company discontinued hedge accounting on two prime based loan hedge relationships as a result of the significant decrease in the prime rate. As a result of the dedesignation, the changes in the fair value of the related derivative financial instruments are being reported in income without a corresponding and offsetting change in the fair value for the loans previously hedged.

Deferred Tax Assets and Liabilities
The Company accounts for income taxes under the asset/liability method. Deferred tax assets and liabilities are recognized for future tax effects of temporary differences, net operating loss carry forwards and tax credits. Deferred tax assets are reduced if necessary, by a deferred tax asset valuation allowance. A valuation allowance is established when in the judgment of management, it is more likely than not that such deferred tax assets will not become realizable. In this case, we would adjust the recorded value of our deferred tax assets, which would result in a direct charge to income tax expense in the period that the determination is made. Likewise, we would reverse the valuation allowance when realization of the deferred tax asset is expected.

Effects of New Accounting Pronouncements
See Item 8, Note 1 – Summary of Significant Accounting Policies for information on recent accounting pronouncements and their impact, if any, on our consolidated financial statements.

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Please refer to “Risk Factors” included in Item 1A and “Risk Management” included in Management’s Discussion and Analysis under Item 7.

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Enterprise Financial Services Corp and subsidiaries

	Page Number
Management’s Report on Internal Control over Financial Reporting	48
Report of Independent Registered Public Accounting Firm	49
Consolidated Balance Sheets at December 31, 2008 and 2007	51
Consolidated Statements of Income for the years
ended December 31, 2008, 2007, and 2006	52
Consolidated Statements of Shareholders’ Equity and Comprehensive Income
for the years ended December 31, 2008, 2007, and 2006	53
Consolidated Statements of Cash Flows for the years
ended December 31, 2008, 2007, and 2006	54
Notes to Consolidated Financial Statements	55

Management’s Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the CEO and CFO to provide reasonable assurance regarding reliability of financial reporting and preparation of the Company’s financial statements for external reporting purposes in accordance with U.S. GAAP.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008, based on the criteria set forth by the Committee of Sponsoring Organization of the Treadway Commission (COSO) in “Internal Control-Integrated Framework.” Based on the assessment, management determined that, as of December 31, 2008, the Company’s internal control over financial reporting was effective based on these criteria.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Enterprise Financial Services Corp:

We have audited Enterprise Financial Services Corp’s (the Company) internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2008 and 2007, and the related consolidated statements of operations, shareholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2008, and our report dated March 13, 2009 expressed an unqualified opinion on those consolidated financial statements.

St. Louis, Missouri
March 13, 2009

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Enterprise Financial Services Corp:

We have audited the accompanying consolidated balance sheets of Enterprise Financial Services Corp and subsidiaries (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of income, shareholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our auditsin accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 157, Fair Value Measurements, and Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment to FASB Statement No. 115, on January 1, 2008.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 13, 2009 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

St. Louis, Missouri
March 13, 2009

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Balance Sheets
Years ended December 31, 2008 and 2007

	December 31,
(In thousands, except share and per share data)	2008			2007
Assets
Cash and due from banks	$	25,626		$	76,265
Federal funds sold		2,637			75,665
Interest-bearing deposits		14,384			1,719
Total cash and cash equivalents		42,647			153,649
Securities available for sale, at fair value		96,431			70,756
Other investments		11,884			12,577
Loans held for sale		2,632			3,420
Portfolio loans		1,977,175			1,641,432
Less: Allowance for loan losses		31,309			21,593
Portfolio loans, net		1,945,866			1,619,839
Other real estate		13,868			2,963
Fixed assets, net		25,158			22,223
Accrued interest receivable		7,557			8,334
State tax credits, held for sale,
at fair value as of December 31, 2008		39,142			23,149
Goodwill		48,512			57,177
Intangibles, net		3,504			6,053
Other assets		32,973			18,978
Total assets	$	2,270,174		$	1,999,118

Liabilities and Shareholders' Equity
Deposits:
Demand deposits	$	247,361		$	278,313
Interest-bearing transaction accounts		126,644			131,141
Money market accounts		702,886			672,577
Savings		7,826			10,343
Certificates of deposit:
$100k and over		520,197			347,318
Other		187,870			145,320
Total deposits		1,792,784			1,585,012
Subordinated debentures		85,081			56,807
Federal Home Loan Bank advances		119,957			152,901
Other borrowings		46,160			10,680
Notes payable		-			6,000
Accrued interest payable		2,473			3,710
Other liabilities		5,931			10,859
Total liabilities		2,052,386			1,825,969

Shareholders' equity:
Preferred stock, $0.01 par value;
5,000,000 shares authorized; 35,000 and
0 shares issued, respectively		31,116			-
Common stock, $0.01 par value;
30,000,000 shares authorized; 12,876,981 and
12,482,357 shares issued, respectively		129			125
Treasury stock, at cost; 76,000 shares		(1,743	)		(1,743	)
Additional paid in capital		115,111			104,127
Retained earnings		71,927			70,523
Accumulated other comprehensive income		1,248			117
Total shareholders' equity		217,788			173,149

Total liabilities and shareholders' equity	$	2,270,174		$	1,999,118

See accompanying notes to consolidated financial statements.

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 2008, 2007 and 2006

	Years ended December 31,
(In thousands, except per share data)	2008		2007			2006
Interest income:
Interest and fees on loans	$	112,387	$	116,847		$	88,437
Interest on debt and equity securities:
Taxable		4,722		4,571			4,246
Nontaxable		31		34			35
Interest on federal funds sold		211		481			1,340
Interest on interest-bearing deposits		83		62			76
Dividends on equity securities		547		522			284
Total interest income		117,981		122,517			94,418
Interest expense:
Interest-bearing transaction accounts		1,554		3,078			2,332
Money market accounts		13,786		23,578			19,213
Savings		55		125			57
Certificates of deposit:
$100 and over		18,127		18,329			12,386
Other		6,398		7,754			3,844
Subordinated debentures		3,536		3,859			2,343
Federal Home Loan Bank advances		6,649		4,277			2,523
Notes payable and other borrowings		1,153		465			443
Total interest expense		51,258		61,465			43,141
Net interest income		66,723		61,052			51,277
Provision for loan losses		22,475		4,615			2,127
Net interest income after provision for loan losses		44,248		56,437			49,150
Noninterest income:
Wealth Management revenue		10,848		13,980			13,809
Service charges on deposit accounts		4,376		3,228			2,228
Other service charges and fee income		1,000		852			586
Gain on sale of branches/charter		3,400		-			-
Gain (loss) on sale of other real estate		552		(48	)		2
Gain on state tax credits, net		4,201		792			-
Gain on sale of investment securities		161		233			-
Miscellaneous income		735		636			291
Total noninterest income		25,273		19,673			16,916
Noninterest expense:
Employee compensation and benefits		31,024		29,555			25,247
Occupancy		4,246		3,901			2,966
Furniture and equipment		1,470		1,439			1,028
Data processing		2,187		1,911			1,431
Meals and entertainment		1,484		1,878			1,744
Amortization of intangibles		1,444		1,604			1,128
Impairment charges related to Millennium Brokerage Group		9,200		-			-
Other		12,450		9,228			7,850
Total noninterest expense		63,505		49,516			41,394

Minority interest in net income of consolidated subsidiary		-		-			(875	)

Income before income tax expense		6,016		26,594			23,797
Income tax expense		1,586		9,016			8,325
Net income	$	4,430	$	17,578		$	15,472

Earnings per common share:
Basic	$	0.35	$	1.44		$	1.41
Diluted	$	0.34	$	1.40		$	1.36

See accompanying notes to consolidated financial statements.

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity and Comprehensive Income
Years ended December 31, 2006, 2007, and 2008

													Accumulated
													other			Total
	Preferred		Common		Treasury			Additional paid		Retained			comprehensive			shareholders'
(in thousands, except per share data)			Stock					in capital		earnings			income (loss)			equity
Balance December 31, 2005	$	-	$	105	$	-		$	51,687	$	41,950		$	(1,137	)	$	92,605
Net income		-		-		-			-		15,472			-			15,472
Change in fair value of investment securities, net of tax		-		-		-			-		-			282			282
Change in fair value of cash flow hedges, net of tax		-		-		-			-		-			263			263
Total comprehensive income																	16,017
Cash dividends paid on common shares, $0.18 per share		-		-		-			-		(1,977	)		-			(1,977	)
Issuance under equity compensation plans, net, 166,543 shares		-		1		-			1,274		-			-			1,275
Acquisition of NorthStar Bancshares, Inc., 914,144 shares		-		9		-			23,473		-			-			23,482
Share-based compensation		-		-		-			1,067		-			-			1,067
Excess tax benefit related to equity compensation plans		-		-		-			525		-			-			525
Balance December 31, 2006	$	-	$	115	$	-		$	78,026	$	55,445		$	(592	)	$	132,994
Cumulative effect of adoption of FIN 48		-		-		-			-		138			-			138
Balance January 1, 2007	$	-	$	115	$	-		$	78,026	$	55,583		$	(592	)	$	133,132
Net income		-		-		-			-		17,578			-			17,578
Change in fair value of investment securities, net of tax		-		-		-			-		-			858			858
Reclassification adjustment for realized gain
on sale of securities included in net income, net of tax		-		-		-			-		-			(149	)		(149	)
Total comprehensive income		-															18,287
Cash dividends paid on common shares, $0.21 per share		-		-		-			-		(2,638	)		-			(2,638	)
Issuance under equity compensation plans, net, 194,737 shares		-		2		-			1,486		-			-			1,488
Purchase of Treasury Stock, 76,000 shares		-		-		(1,743	)		-		-			-			(1,743	)
Acquisition of Clayco Banc Corporation, 698,733 shares		-		7		-			21,193		-			-			21,200
Additional contingent shares issued in connection with
acquisition of NorthStar Bancshares, Inc., 49,348 shares		-		1		-			1,281		-			-			1,282
Share-based compensation		-		-		-			1,760		-			-			1,760
Excess tax benefit related to equity compensation plans		-		-		-			381		-			-			381
Balance December 31, 2007	$	-	$	125	$	(1,743	)	$	104,127	$	70,523		$	117		$	173,149
Cumulative effect of adoption of SFAS No. 159 (see Note 9)				-		-			-		(365	)		-			(365	)
Balance January 1, 2008	$	-	$	125	$	(1,743	)	$	104,127	$	70,158		$	117		$	172,784
Net income		-		-		-			-		4,430			-			4,430
Change in fair value of available for sale securities, net of tax		-		-		-			-		-			816			816
Reclassification adjustment for realized gain
on sale of securities included in net income, net of tax		-		-		-			-		-			(103	)		(103	)
Change in fair value of cash flow hedges, net of tax		-		-					-		-			418			418
Total comprehensive income																	5,561
Cash dividends paid on common shares, $0.21 per share		-		-		-			-		(2,661	)		-			(2,661	)
Issuance of preferred stock and associated warrants, 35,000 shares		31,116		-		-			3,884		-			-			35,000
Issuance under equity compensation plans, net, 361,665 shares		-		4		-			3,555		-			-			3,559
Additional share-based compensation in connection with
acquisition of Clayco Banc Corporation, 32,959 shares		-		-		-			1,000		-			-			1,000
Share-based compensation		-		-		-			2,085		-			-			2,085
Excess tax benefit related to equity compensation plans		-		-		-			460		-			-			460
Balance December 31, 2008	$	31,116	$	129	$	(1,743	)	$	115,111	$	71,927		$	1,248		$	217,788

See accompanying notes to consolidated financial statements.

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2008, 2007 & 2006

	Years ended December 31,
(in thousands)	2008			2007			2006
Cash flows from operating activities:
Net income	$	4,430		$	17,578		$	15,472
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation		2,690			2,465			1,901
Provision for loan losses		22,475			4,615			2,127
Deferred income taxes		(6,246	)		747			(1,244	)
Net amortization (accretion) of debt and equity securities		545			(195	)		39
Amortization of intangible assets		1,444			1,604			1,128
Gain on sale of investment securities		(161	)		(233	)		-
Mortgage loans originated		(46,416	)		(81,221	)		(57,184	)
Proceeds from mortgage loans sold		47,300			80,551			57,822
(Gain) loss on sale of other real estate		(552	)		48			(2	)
Gain on state tax credits, net		(4,201	)		(792	)		-
Additional share-based compensation from acquisition of Clayco		1,000			-			-
Excess tax benefits of share-based compensation		(460	)		(381	)		(525	)
Share-based compensation		2,255			1,944			1,153
Gain on sale of branches/charter		(3,400	)		-			-
Impairment charges related to Millennium Brokerage Group		9,200			-			-
Changes in:
Accrued interest receivable and income tax receivable		(3,054	)		720			(1,601	)
Accrued interest payable and other liabilities		(2,203	)		(1,013	)		327
Other, net		(4,356	)		(1,220	)		(1,651	)
Net cash provided by operating activities		20,290			25,217			17,762

Cash flows from investing activities:
Cash paid in sale of branch/charter, net of cash and cash equivalents received		(20,736	)		-			-
Cash paid for acquisitions, net of cash and cash equivalents received		-			(9,375	)		(4,078	)
Net increase in loans		(370,963	)		(168,032	)		(145,218	)
Proceeds from the sale/maturity/redemption/recoveries of:
Debt and equity securities, available for sale		62,721			115,834			73,626
State tax credits held for sale		4,422			4,578			-
Other real estate		8,593			5,260			167
Loans previously charged off		372			509			400
Payments for the purchase/origination of:
Available for sale debt and equity securities		(93,372	)		(67,726	)		(40,676	)
Limited partnership interests		(5,034	)		(1,171	)		-
State tax credits held for sale		(15,271	)		(27,726	)		-
Fixed assets		(7,467	)		(3,379	)		(7,591	)
Net cash used in investing activities		(436,735	)		(151,228	)		(123,370	)

Cash flows from financing activities:
Net (decrease) increase in noninterest-bearing deposit accounts		(28,868	)		28,313			(11,785	)
Net increase in interest-bearing deposit accounts		273,312			90,092			53,261
Proceeds from issuance of subordinated debentures		28,274			18,557			4,124
Paydown of subordinated debentures		-			(4,124	)		-
Proceeds from Federal Home Loan Bank advances		2,442,872			1,242,875			723,534
Repayments of Federal Home Loan Bank advances		(2,475,815	)		(1,146,572	)		(725,121	)
Net proceeds from federal funds purchased		19,400			-			-
Net increase (decrease) in other borrowings		16,080			923			(6,015	)
Proceeds from notes payable		15,000			6,750			10,000
Repayments on notes payable		(21,000	)		(4,751	)		(10,745	)
Cash dividends paid on common stock		(2,661	)		(2,638	)		(1,977	)
Excess tax benefits of share-based compensation		460			381			525
Issuance of preferred stock and warrants		35,000			-			-
Repurchase of common stock		-			(1,743	)		-
Proceeds from the exercise of common stock options		3,389			1,304			1,189
Net cash provided by financing activities		305,443		229,367				36,990
Net (decrease) increase in cash and cash equivalents		(111,002	)	103,356				(68,618	)
Cash and cash equivalents, beginning of year		153,649			50,293			118,911
Cash and cash equivalents, end of year	$	42,647		$	153,649		$	50,293