2015.3.31-10Q


 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
 
FORM 10-Q
 
[X]
 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2015.
 
 
 
[   ]
 
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______ to ______
 
 
 
 
 
Commission file number 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
___________________
 
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 whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files ). Yes [X]  No [   ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer [ ]
Accelerated filer [X]
  Non-accelerated filer [ ]
Smaller reporting company [ ]
 
 
(Do not check if 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]
 
As of April 27, 2015, the Registrant had 19,935,455 shares of outstanding common stock, $0.01 par value.
 
This document is also available through our website at http://www.enterprisebank.com.

 






ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
 
Page
PART I - FINANCIAL INFORMATION
 
 
 
 
Item 1.  Financial Statements
 
 
 
Condensed Consolidated Balance Sheets (Unaudited)
 
 
Condensed Consolidated Statements of Operations (Unaudited)
 
 
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 
 
Condensed Consolidated Statements of Shareholders' Equity (Unaudited)
 
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4. Controls and Procedures
 
 
PART II - OTHER INFORMATION
 
 
 
 
Item 1.  Legal Proceedings
 
 
 
Item 1A.  Risk Factors
 
 
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 6. Exhibits
 
 
Signatures
 
 
 
 





PART 1 - ITEM 1 - FINANCIAL STATEMENTS
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except share and per share data)
March 31, 2015
 
December 31, 2014
Assets
 
 
 
Cash and due from banks
$
56,420

 
$
42,903

Federal funds sold
48

 
35

Interest-bearing deposits (including $980 and $980 pledged as collateral)
42,865

 
57,758

                  Total cash and cash equivalents
99,333

 
100,696

Interest-bearing deposits greater than 90 days
1,000

 
5,300

Securities available for sale
410,061

 
400,146

Securities held to maturity
45,563

 
45,985

Loans held for sale
7,843

 
4,033

Portfolio loans
2,435,559

 
2,433,916

   Less: Allowance for loan losses
30,288

 
30,185

Portfolio loans, net
2,405,271

 
2,403,731

Purchase credit impaired loans, net of the allowance for loan losses ($11,625 and $15,410, respectively)
83,163

 
83,693

                  Total loans, net
2,488,434

 
2,487,424

Other real estate not covered under FDIC loss share
2,024

 
1,896

Other real estate covered under FDIC loss share
3,560

 
5,944

Other investments, at cost
11,719

 
17,037

Fixed assets, net
14,911

 
14,753

Accrued interest receivable
8,061

 
7,956

State tax credits held for sale, including $10,286 and $11,689 carried at fair value, respectively
42,411

 
38,309

FDIC loss share receivable
11,644

 
15,866

Goodwill
30,334

 
30,334

Intangible assets, net
3,880

 
4,164

Other assets
94,517

 
97,160

Total assets
$
3,275,295

 
$
3,277,003

 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
Demand deposits
$
680,997

 
$
642,930

Interest-bearing transaction accounts
494,228

 
508,941

Money market accounts
848,139

 
755,569

Savings
85,769

 
78,718

Certificates of deposit:
 
 
 
$100 and over
441,775

 
377,544

Other
123,723

 
127,808

Total deposits
2,674,631

 
2,491,510

Subordinated debentures
56,807

 
56,807

Federal Home Loan Bank advances
6,000

 
144,000

Other borrowings
181,164

 
234,183

Notes payable
5,700

 
5,700

Accrued interest payable
845

 
843

Other liabilities
24,039

 
27,719

Total liabilities
2,949,186

 
2,960,762

 
 
 
 
Shareholders' equity:
 
 
 
Preferred stock, $0.01 par value;
5,000,000 shares authorized; 0 shares issued and outstanding

 

Common stock, $0.01 par value; 30,000,000 shares authorized; 20,011,455 and 19,913,519 shares issued, respectively
200

 
199

Treasury stock, at cost; 76,000 shares
(1,743
)
 
(1,743
)
Additional paid in capital
207,605

 
207,731

Retained earnings
116,668

 
108,373

Accumulated other comprehensive income
3,379

 
1,681

Total shareholders' equity
326,109

 
316,241

Total liabilities and shareholders' equity
$
3,275,295

 
$
3,277,003

See accompanying notes to consolidated financial statements.

1



ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
 
Three months ended March 31,
(in thousands, except per share data)
2015
 
2014
Interest income:
 
 
 
Interest and fees on loans
$
29,608

 
$
31,444

Interest on debt securities:
 
 
 
Taxable
2,141

 
2,166

Nontaxable
297

 
299

Interest on interest-bearing deposits
47

 
66

Dividends on equity securities
58

 
49

Total interest income
32,151

 
34,024

Interest expense:
 
 
 
Interest-bearing transaction accounts
277

 
112

Money market accounts
642

 
742

Savings accounts
50

 
49

Certificates of deposit:
 
 
 
$100 and over
1,226

 
1,326

Other
365

 
424

Subordinated debentures
302

 
407

Federal Home Loan Bank advances
49

 
399

Notes payable and other borrowings
195

 
199

Total interest expense
3,106

 
3,658

Net interest income
29,045

 
30,366

Provision for portfolio loan losses
1,580

 
1,027

Provision (provision reversal) for purchase credit impaired loan losses
(3,270
)
 
3,304

Net interest income after provision for loan losses
30,735

 
26,035

Noninterest income:
 
 
 
Wealth management revenue
1,740

 
1,722

Service charges on deposit accounts
1,856

 
1,738

Other service charges and fee income
753

 
637

Gain on sale of other real estate
20

 
683

Gain on state tax credits, net
674

 
497

Gain on sale of investment securities
23

 

Change in FDIC loss share receivable
(2,264
)
 
(2,410
)
Miscellaneous income
781

 
1,055

Total noninterest income
3,583

 
3,922

Noninterest expense:
 
 
 
Employee compensation and benefits
11,513

 
12,116

Occupancy
1,694

 
1,640

Data processing
1,030

 
1,126

FDIC and other insurance
726

 
699

Loan legal and other real estate expense
278

 
1,134

Professional fees
972

 
1,267

FDIC clawback
412

 
(111
)
Other
3,325

 
3,231

Total noninterest expense
19,950

 
21,102

 
 
 
 
Income before income tax expense
14,368

 
8,855

Income tax expense
5,022

 
3,007

Net income
$
9,346

 
$
5,848

 
 
 
 
Earnings per common share
 
 
 
Basic
$
0.47

 
$
0.30

Diluted
0.46

 
0.30

See accompanying notes to consolidated financial statements.

2




ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited)

 
Three months ended March 31,
(in thousands)
2015
 
2014
Net income
$
9,346

 
$
5,848

Other comprehensive income, net of tax:
 
 
 
Unrealized gains on investment securities arising during the period, net of income tax expense of $1,045, and $1,091, respectively
1,712

 
1,757

Less: Reclassification adjustment for realized gains on sale of securities available for sale included in net income, net of income tax expense of $9, and $0, respectively
(14
)
 

Total other comprehensive income (loss)
1,698

 
1,757

Total comprehensive income
$
11,044

 
$
7,605


See accompanying notes to consolidated financial statements.


3



ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)
(in thousands, except per share data)
 
Preferred Stock
 
Common Stock
 
Treasury Stock
 
Additional paid in capital
 
Retained earnings
 
Accumulated
other
comprehensive income (loss)
 
Total
shareholders' equity
Balance January 1, 2015
 
$

 
$
199

 
$
(1,743
)
 
$
207,731

 
$
108,373

 
$
1,681

 
$
316,241

Net income
 

 

 

 

 
9,346

 

 
9,346

Other comprehensive income
 

 

 

 

 

 
1,698

 
1,698

Cash dividends paid on common shares, $0.0525 per share
 

 

 

 

 
(1,051
)
 

 
(1,051
)
Issuance under equity compensation plans, 97,936 shares, net
 

 
1

 

 
(1,047
)
 

 

 
(1,046
)
Share-based compensation
 

 

 

 
768

 

 

 
768

Excess tax benefit related to equity compensation plans
 

 

 

 
153

 

 

 
153

Balance March 31, 2015
 
$

 
$
200

 
$
(1,743
)
 
$
207,605

 
$
116,668

 
$
3,379

 
$
326,109

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands, except per share data)
 
Preferred Stock
 
Common Stock
 
Treasury Stock
 
Additional paid in capital
 
Retained earnings
 
Accumulated
other
comprehensive income (loss)
 
Total
shareholders' equity
Balance January 1, 2014
 
$

 
$
194

 
$
(1,743
)
 
$
200,258

 
$
85,376

 
$
(4,380
)
 
$
279,705

Net income
 

 

 

 

 
5,848

 

 
5,848

Other comprehensive income
 

 

 

 

 

 
1,757

 
1,757

Cash dividends paid on common shares, $0.0525 per share
 

 

 

 

 
(1,043
)
 

 
(1,043
)
Issuance under equity compensation plans, 94,047 shares, net
 

 
1

 

 
(630
)
 

 

 
(629
)
Trust preferred securities conversion 287,852 shares
 

 
3

 

 
4,999

 

 

 
5,002

Share-based compensation
 

 

 

 
735

 

 

 
735

Excess tax benefit related to equity compensation plans
 

 

 

 
74

 

 

 
74

Balance March 31, 2014
 
$

 
$
198

 
$
(1,743
)
 
$
205,436

 
$
90,181

 
$
(2,623
)
 
$
291,449


See accompanying notes to consolidated financial statements.

4



ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
Three months ended March 31,
(in thousands)
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
9,346

 
$
5,848

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation
489

 
533

Provision for loan losses
(1,690
)
 
4,331

Deferred income taxes
(152
)
 
1,032

Net amortization of debt securities
851

 
951

Amortization of intangible assets
284

 
383

Gain on sale of investment securities
(23
)
 

Mortgage loans originated for sale
(31,603
)
 
(10,050
)
Proceeds from mortgage loans sold
27,767

 
10,008

Gain on sale of other real estate
(20
)
 
(683
)
Gain on state tax credits, net
(674
)
 
(497
)
Excess tax benefit of share-based compensation
(153
)
 
(74
)
Share-based compensation
768

 
735

Valuation adjustment on other real estate
41

 
344

Net accretion of loan discount and indemnification asset
(1,390
)
 
(4,096
)
Changes in:
 
 
 
Accrued interest receivable
(104
)
 
(173
)
Accrued interest payable
2

 
(83
)
Other assets
(1,666
)
 
(6,621
)
Other liabilities
(3,681
)
 
(9,285
)
Net cash used by operating activities
(1,608
)
 
(7,397
)
Cash flows from investing activities:
 
 
 
Net decrease (increase) in loans
3,443

 
(23,344
)
Net cash proceeds received from FDIC loss share receivable
1,395

 
2,255

Proceeds from the sale of securities, available for sale
41,069

 

Proceeds from the paydown or maturity of securities, available for sale
10,715

 
10,278

Proceeds from the paydown or maturity of securities, held to maturity
515

 

Proceeds from the redemption of other investments
19,593

 
1,118

Proceeds from the sale of state tax credits held for sale
4,066

 
3,294

Proceeds from the sale of other real estate
2,896

 
3,014

Payments for the purchase/origination of:
 
 
 
Available for sale debt and equity securities
(59,869
)
 
(29,853
)
Other investments
(9,975
)
 
(3,457
)
State tax credits held for sale
(3,112
)
 

Fixed assets
(648
)
 
(381
)
Net cash provided (used) by investing activities
10,088

 
(37,076
)
Cash flows from financing activities:
 
 
 
Net increase (decrease) in noninterest-bearing deposit accounts
38,066

 
(40,971
)
Net increase (decrease) in interest-bearing deposit accounts
145,054

 
(41,863
)
Proceeds from Federal Home Loan Bank advances
302,000

 
80,000

Repayments of Federal Home Loan Bank advances
(440,000
)
 

Proceeds from notes payable

 
(3,900
)
Net decrease in other borrowings
(53,019
)
 
(20,113
)
Cash dividends paid on common stock
(1,051
)
 
(1,043
)
Excess tax benefit of share-based compensation
153

 
74

Proceeds from the issuance of equity instruments, net
(1,046
)
 
(629
)
Net cash used by financing activities
(9,843
)
 
(28,445
)
Net decrease in cash and cash equivalents
(1,363
)
 
(72,918
)
Cash and cash equivalents, beginning of period
100,696

 
210,569

Cash and cash equivalents, end of period
$
99,333

 
$
137,651

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
3,105

 
$
3,741

Income taxes
3,500

 
8,549

Noncash transactions:
 
 
 
Transfer to other real estate owned in settlement of loans
$
890

 
$
4,721

Sales of other real estate financed

 
495

Issuance of common stock from Trust Preferred Securities conversion

 
5,002


See accompanying notes to consolidated financial statements.

5



ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies used by Enterprise Financial Services Corp (the "Company" or "Enterprise") in the preparation of the condensed consolidated financial statements are summarized below:

Business and Consolidation

Enterprise is a financial holding company that provides a full range of banking and wealth management services to individuals and corporate customers located in the St. Louis, Kansas City and Phoenix metropolitan markets through its banking subsidiary, Enterprise Bank & Trust (the "Bank").

Operating results for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2015. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014.

Basis of Financial Statement Presentation

The condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with the accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The condensed consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All intercompany accounts and transactions have been eliminated. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

NOTE 2 - EARNINGS PER SHARE

Basic earnings per common share data is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Common shares outstanding include common stock and restricted stock awards where recipients have satisfied the vesting terms. Diluted earnings per common share gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and the if-converted method for convertible trust preferred securities.

6




The following table presents a summary of per common share data and amounts for the periods indicated.

 
Three months ended March 31,
(in thousands, except per share data)
2015
 
2014
Net income as reported
$
9,346

 
$
5,848

Impact of assumed conversions
 
 
 
Interest on 9% convertible trust preferred securities, net of income tax

 
66

Net income available to common shareholders and assumed conversions
$
9,346

 
$
5,914

 
 
 
 
Weighted average common shares outstanding
19,934

 
19,521

Incremental shares from assumed conversions of convertible trust preferred securities

 
230

Additional dilutive common stock equivalents
223

 
198

Weighted average diluted common shares outstanding
$
20,157

 
$
19,949

 
 
 
 
Basic earnings per common share:
$
0.47

 
$
0.30

Diluted earnings per common share:
$
0.46

 
$
0.30


The calculation of diluted earnings per common share for the three months ended March 31, 2015, and 2014, excludes the impact of 0.3 million common stock equivalents, because their effect was anti-dilutive.



7



NOTE 3 - INVESTMENTS

The following table presents the amortized cost, gross unrealized gains and losses and fair value of securities available for sale and held to maturity:
 
 
March 31, 2015
(in thousands)
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair Value
Available for sale securities:
 
 
 
 
 
 
 
    Obligations of U.S. Government-sponsored enterprises
$
99,643

 
$
1,256

 
$

 
$
100,899

    Obligations of states and political subdivisions
33,965

 
1,441

 
(359
)
 
35,047

    Agency mortgage-backed securities
270,455

 
4,470

 
(810
)
 
274,115

          Total securities available for sale
$
404,063

 
$
7,167

 
$
(1,169
)
 
$
410,061

Held to maturity securities:
 
 
 
 
 
 
 
    Obligations of states and political subdivisions
$
14,883

 
$
2

 
$
(109
)
 
$
14,776

    Agency mortgage-backed securities
30,680

 
355

 

 
31,035

          Total securities held to maturity
$
45,563

 
$
357

 
$
(109
)
 
$
45,811

 
 
 
 
 
 
 
 
 
December 31, 2014
(in thousands)
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair Value
Available for sale securities:
 
 
 
 
 
 
 
    Obligations of U.S. Government-sponsored enterprises
$
91,355

 
$
624

 
$
(153
)
 
$
91,826

    Obligations of states and political subdivisions
33,997

 
1,300

 
(416
)
 
34,881

    Agency mortgage-backed securities
271,430

 
3,577

 
(1,568
)
 
273,439

Total securities available for sale
$
396,782

 
$
5,501

 
$
(2,137
)
 
$
400,146

Held to maturity securities:
 
 
 
 
 
 
 
   Obligations of states and political subdivisions
$
14,900

 
$

 
$
(325
)
 
$
14,575

   Agency mortgage-backed securities
31,085

 
150

 
(15
)
 
31,220

          Total securities held to maturity
$
45,985

 
$
150

 
$
(340
)
 
$
45,795


At March 31, 2015, and December 31, 2014, there were no holdings of securities of any one issuer in an amount greater than 10% of shareholders’ equity, other than the U.S. Government agencies and sponsored enterprises. The agency mortgage-backed securities are all issued by U.S. Government-sponsored enterprises. Available for sale securities having a fair value of $251.4 million and $315.8 million at March 31, 2015, and December 31, 2014, respectively, were pledged as collateral to secure deposits of public institutions and for other purposes as required by law or contract provisions.
 
The amortized cost and estimated fair value of debt securities at March 31, 2015, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The weighted average life of the mortgage-backed securities is approximately 4 years.
 

8



 
Available for sale
 
Held to maturity
(in thousands)
Amortized Cost
 
Estimated Fair Value
 
Amortized Cost
 
Estimated Fair Value
Due in one year or less
$
4,331

 
$
4,382

 
$

 
$

Due after one year through five years
100,610

 
102,383

 
662

 
664

Due after five years through ten years
25,767

 
26,561

 
12,963

 
12,875

Due after ten years
2,900

 
2,620

 
1,258

 
1,237

Mortgage-backed securities
270,455

 
274,115

 
30,680

 
31,035

 
$
404,063

 
$
410,061

 
$
45,563

 
$
45,811


The following table represents a summary of investment securities that had an unrealized loss:
 
 
March 31, 2015
Less than 12 months
 
12 months or more
 
Total
(in thousands)
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Obligations of U.S. Government-sponsored enterprises
$

 
$

 
$

 
$

 
$

 
$

Obligations of states and political subdivisions
14,982

 
127

 
4,321

 
341

 
19,303

 
468

Agency mortgage-backed securities
28,750

 
179

 
21,868

 
631

 
50,618

 
810

 
$
43,732

 
$
306

 
$
26,189

 
$
972

 
$
69,921

 
$
1,278

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
Less than 12 months
 
12 months or more
 
Total
(in thousands)
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Obligations of U.S. Government-sponsored enterprises
$
5,399

 
$
10

 
$
24,852

 
$
143

 
$
30,251

 
$
153

Obligations of states and political subdivisions
16,827

 
343

 
5,349

 
398

 
22,176

 
741

Agency mortgage-backed securities
26,367

 
56

 
97,054

 
1,527

 
123,421

 
1,583

 
$
48,593

 
$
409

 
$
127,255

 
$
2,068

 
$
175,848

 
$
2,477


The unrealized losses at both March 31, 2015, and December 31, 2014, were primarily attributable to changes in market interest rates since the securities were purchased. Management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. This analysis requires management to consider various factors, which include among other considerations (1) the present value of the cash flows expected to be collected compared to the amortized cost of the security, (2) duration and magnitude of the decline in value, (3) the financial condition of the issuer or issuers, (4) structure of the security, and (5) the intent to sell the security or whether it is more likely than not that the Company would be required to sell the security before its anticipated recovery in market value. At March 31, 2015, management performed its quarterly analysis of all securities with an unrealized loss and concluded no individual securities were other-than-temporarily impaired.









9



 The gross gains and gross losses realized from sales of available for sale investment securities were as follows:
 
 
Three months ended March 31,
(in thousands)
2015
 
2014
Gross gains realized
$
63

 
$

Gross losses realized
(40
)
 

Proceeds from sales
41,069

 


10



NOTE 4 - PORTFOLIO LOANS

Below is a summary of Portfolio loans by category at March 31, 2015 and December 31, 2014:
 
(in thousands)
March 31, 2015
 
December 31, 2014
Real estate loans:
 
 
 
    Construction and land development
$
138,924

 
$
144,773

    Commercial - Investor Owned
413,170

 
413,026

    Commercial - Owner Occupied
368,313

 
357,503

    Residential real estate
180,253

 
185,252

Total real estate loans
1,100,660

 
1,100,554

    Commercial and industrial
1,265,104

 
1,270,259

    Consumer and other
68,830

 
62,208

Portfolio loans
2,434,594

 
2,433,021

Unearned loan costs, net
965

 
895

    Portfolio loans, including unearned loan costs
$
2,435,559

 
$
2,433,916



A summary of the year-to-date activity in the allowance for loan losses and the recorded investment in Portfolio loans by class and category based on impairment method through March 31, 2015, and at December 31, 2014, is as follows:

(in thousands)
Commercial & Industrial
 
Commercial
Real Estate
Owner Occupied
 
Commercial
Real Estate
Investor Owned
 
Construction and Land Development
 
Residential Real Estate
 
Consumer & Other
 
Total
Allowance for Loan Losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at
December 31, 2014
$
17,004

 
$
3,625

 
$
4,598

 
$
1,720

 
$
2,830

 
$
408

 
$
30,185

Provision charged to expense
823

 
(175
)
 
(12
)
 
914

 
74

 
(44
)
 
1,580

Losses charged off
(1,484
)
 

 

 

 
(1,073
)
 
(11
)
 
(2,568
)
Recoveries
769

 
127

 
29

 
60

 
26

 
80

 
1,091

Balance at
March 31, 2015
$
17,112

 
$
3,577

 
$
4,615

 
$
2,694

 
$
1,857

 
$
433

 
$
30,288



11



(in thousands)
Commercial & Industrial
 
Commercial
Real Estate
Owner Occupied
 
Commercial
Real Estate
Investor Owned
 
Construction and Land Development
 
Residential Real Estate
 
Consumer & Other
 
Total
Balance March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for Loan Losses - Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
1,196

 
$
297

 
$

 
$
1,370

 
$

 
$

 
$
2,863

Collectively evaluated for impairment
15,916

 
3,280

 
4,615

 
1,324

 
1,857

 
433

 
27,425

Total
$
17,112

 
$
3,577

 
$
4,615

 
$
2,694

 
$
1,857

 
$
433

 
$
30,288

Loans - Ending Balance:
 
 
 
 
 
 
 

 
 
 
 
 
 
Individually evaluated for impairment
$
4,250

 
$
3,380

 
$
581

 
$
6,366

 
$
2,655

 
$

 
$
17,232

Collectively evaluated for impairment
1,260,854

 
364,933

 
412,589

 
132,558

 
177,598

 
69,795

 
2,418,327

Total
$
1,265,104

 
$
368,313

 
$
413,170

 
$
138,924

 
$
180,253

 
$
69,795

 
$
2,435,559

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for Loan Losses - Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
704

 
$
286

 
$

 
$
352

 
$
1,052

 
$

 
$
2,394

Collectively evaluated for impairment
16,300

 
3,339

 
4,598

 
1,368

 
1,778

 
408

 
27,791

Total
$
17,004

 
$
3,625

 
$
4,598

 
$
1,720

 
$
2,830

 
$
408

 
$
30,185

Loans - Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
5,998

 
$
3,384

 
$
5,036

 
$
6,866

 
$
3,082

 
$

 
$
24,366

Collectively evaluated for impairment
1,264,261

 
354,119

 
407,990

 
137,907

 
182,170

 
63,103

 
2,409,550

Total
$
1,270,259

 
$
357,503

 
$
413,026

 
$
144,773

 
$
185,252

 
$
63,103

 
$
2,433,916


12



A summary of Portfolio loans individually evaluated for impairment by category at March 31, 2015 and December 31, 2014, is as follows:

 
March 31, 2015
(in thousands)
Unpaid
Contractual
Principal Balance
 
Recorded
Investment
With No Allowance
 
Recorded
Investment
With
Allowance
 
Total
Recorded Investment
 
Related Allowance
 
Average
Recorded Investment
Commercial and industrial
$
5,141

 
$
3,223

 
$
1,068

 
$
4,291

 
$
1,196

 
$
8,956

Real estate:
 
 
 
 
 
 
 
 
 
 
 
    Commercial - Owner occupied
1,383

 
759

 
560

 
1,319

 
297

 
649

    Commercial - Investor owned
581

 

 
581

 
581

 

 
632

    Construction and land development
7,271

 
3,881

 
2,973

 
6,854

 
1,370

 
6,682

    Residential
3,707

 

 
2,696

 
2,696

 

 
2,940

Consumer and other

 

 

 

 

 
759

Total
$
18,083

 
$
7,863

 
$
7,878

 
$
15,741

 
$
2,863

 
$
20,618


 
December 31, 2014
(in thousands)
Unpaid
Contractual
Principal Balance
 
Recorded
Investment
With No Allowance
 
Recorded
Investment
With
Allowance
 
Total
Recorded Investment
 
Related Allowance
 
Average
Recorded Investment
Commercial and industrial
$
8,042

 
$
2,609

 
$
3,464

 
$
6,073

 
$
704

 
$
4,136

Real estate:
 
 
 
 
 
 
 
 
 
 
 
    Commercial - Owner occupied
1,376

 
770

 
519

 
1,289

 
286

 
1,281

    Commercial - Investor owned
5,036

 

 
5,187

 
5,187

 

 
4,375

    Construction and land development
7,961

 
419

 
6,929

 
7,348

 
352

 
7,280

    Residential
3,082

 
2,943

 
150

 
3,093

 
1,052

 
954

Consumer and other

 

 

 

 

 
581

Total
$
25,497

 
$
6,741

 
$
16,249

 
$
22,990

 
$
2,394

 
$
18,607


The following table presents details for past due and impaired loans:

 
For the three months ended
(in thousands)
March 31, 2015
 
March 31, 2014
Total interest income that would have been recognized under original terms
$
315

 
$
320

Total cash received and recognized as interest income on non-accrual loans
27

 
9

Total interest income recognized on impaired loans
13

 
6


There were no loans over 90 days past due and still accruing interest at March 31, 2015 or December 31, 2014. At March 31, 2015, there were no unadvanced commitments on impaired loans. Other liabilities include approximately $0.2 million for estimated losses attributable to the unadvanced commitments.


13



The recorded investment in impaired Portfolio loans by category at March 31, 2015 and December 31, 2014, is as follows:
 
 
March 31, 2015
(in thousands)
Non-accrual
 
Restructured
 
Loans over 90 days past due and still accruing interest
 
Total
Commercial and industrial
$
4,291

 
$

 
$

 
$
4,291

Real estate:
 
 
 
 
 
 
 
    Commercial - Investor owned

 
581

 

 
581

    Commercial - Owner occupied
560

 
759

 

 
1,319

    Construction and land development
6,854

 

 

 
6,854

    Residential
2,696

 

 

 
2,696

Consumer and other

 

 

 

       Total
$
14,401

 
$
1,340

 
$

 
$
15,741


 
December 31, 2014
(in thousands)
Non-accrual
 
Restructured
 
Loans over 90 days past due and still accruing interest
 
Total
Commercial and industrial
$
6,073

 
$

 
$

 
$
6,073

Real estate:
 
 
 
 
 
 
 
    Commercial - Investor owned
4,597

 
590

 

 
5,187

    Commercial - Owner occupied
519

 
770

 

 
1,289

    Construction and land development
7,348

 

 

 
7,348

    Residential
3,093

 

 

 
3,093

Consumer and other

 

 

 

       Total
$
21,630

 
$
1,360

 
$

 
$
22,990



The recorded investment by category for the Portfolio loans that have been restructured during the three months ended March 31, 2015 and 2014, is as follows:

 
Three months ended March 31, 2015
 
Three months ended March 31, 2014
(in thousands, except for number of loans)
Number of Loans
 
Pre-Modification Outstanding
Recorded Balance
 
Post-Modification Outstanding
Recorded Balance
 
Number of Loans
 
Pre-Modification Outstanding
Recorded Balance
 
Post-Modification Outstanding
Recorded Balance
Commercial and industrial

 
$

 
$

 

 
$

 
$

Real estate:
 
 
 
 
 
 
 
 
 
 
 
     Commercial - Owner occupied

 

 

 
2

 
1,292

 
1,042

     Commercial - Investor owned

 

 

 

 

 

     Construction and land development

 

 

 

 

 

     Residential

 

 

 

 

 

Consumer and other

 

 

 

 

 

  Total

 
$

 
$

 
2

 
$
1,292

 
$
1,042


14




The restructured Portfolio loans primarily resulted from interest rate concessions and changing the terms of the loans. As of March 31, 2015, the Company allocated $0.3 million of specific reserves to the loans that have been restructured.

There were no Portfolio loans that were restructured and subsequently defaulted during the three months ended March 31, 2015 or 2014.

The aging of the recorded investment in past due Portfolio loans by portfolio class and category at March 31, 2015 and December 31, 2014 is shown below.

 
March 31, 2015
(in thousands)
30-89 Days
 Past Due
 
90 or More
Days
Past Due
 
Total
Past Due
 
Current
 
Total
    Commercial and industrial
$
2,931

 
$
932

 
$
3,863

 
$
1,261,241

 
$
1,265,104

    Real estate:
 
 
 
 
 
 
 
 
 
       Commercial - Owner occupied
267

 
267

 
534

 
367,779

 
368,313

       Commercial - Investor owned

 

 

 
413,170

 
413,170

       Construction and land development

 
3,226

 
3,226

 
135,698

 
138,924

       Residential
974

 
1,977

 
2,951

 
177,302

 
180,253

    Consumer and other
18

 

 
18

 
69,777

 
69,795

          Total
$
4,190

 
$
6,402

 
$
10,592

 
$
2,424,967

 
$
2,435,559


 
December 31, 2014
(in thousands)
30-89 Days
 Past Due
 
90 or More
Days
Past Due
 
Total
Past Due
 
Current
 
Total
    Commercial and industrial
$
3,059

 
$
232

 
$
3,291

 
$
1,266,968

 
$
1,270,259

    Real estate:
 
 
 
 
 
 
 
 
 
       Commercial - Owner occupied
766

 
496

 
1,262

 
356,241

 
357,503

       Commercial - Investor owned
261

 
4,450

 
4,711

 
408,315

 
413,026

       Construction and land development
702

 
2,524

 
3,226

 
141,547

 
144,773

       Residential
168

 

 
168

 
185,084

 
185,252

    Consumer and other
8

 

 
8

 
63,095

 
63,103

          Total
$
4,964

 
$
7,702

 
$
12,666

 
$
2,421,250

 
$
2,433,916



The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, and current economic factors among other factors. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:
Grades 1, 2, and 3 Includes loans to borrowers with a continuous record of strong earnings, sound balance sheet condition and capitalization, ample liquidity with solid cash flow, and whose management team has experience and depth within their industry.
Grade 4 Includes loans to borrowers with positive trends in profitability, satisfactory capitalization and balance sheet condition, and sufficient liquidity and cash flow.
Grade 5 Includes loans to borrowers that may display fluctuating trends in sales, profitability, capitalization, liquidity, and cash flow.
Grade 6 Includes loans to borrowers where an adverse change or perceived weakness has occurred, but may be correctable in the near future. Alternatively, this rating category may also include circumstances where the

15



borrower is starting to reverse a negative trend or condition, or has recently been upgraded from a 7, 8, or 9 rating.
Grade 7 – Watch credits are borrowers that have experienced financial setback of a nature that is not determined to be severe or influence ‘ongoing concern’ expectations. Although possible, no loss is anticipated, due to strong collateral and/or guarantor support.
Grade 8Substandard credits will include those borrowers characterized by significant losses and sustained downward trends in balance sheet condition, liquidity, and cash flow. Repayment reliance may have shifted to secondary sources. Collateral exposure may exist and additional reserves may be warranted.
Grade 9Doubtful credits include borrowers that may show deteriorating trends that are unlikely to be corrected. Collateral values may appear insufficient for full recovery, therefore requiring a partial charge-off, or debt renegotiation with the borrower. The borrower may have declared bankruptcy or bankruptcy is likely in the near term. All doubtful rated credits will be on non-accrual.

The recorded investment by risk category of the Portfolio loans by portfolio class and category at March 31, 2015, which is based upon the most recent analysis performed, and December 31, 2014 is as follows:

 
March 31, 2015
(in thousands)
Pass (1-6)
 
Watch (7)
 
Substandard (8)
 
Doubtful (9)
 
Total
    Commercial and industrial
$
1,149,860

 
$
84,786

 
$
29,799

 
$
659

 
$
1,265,104

    Real estate:
 
 
 
 
 
 
 
 
 
       Commercial - Owner occupied
346,073

 
17,730

 
4,510

 

 
368,313

       Commercial - Investor owned
378,017

 
23,581

 
11,572

 

 
413,170

       Construction and land development
117,768

 
13,178

 
7,276

 
702

 
138,924

       Residential
162,387

 
11,681

 
6,185

 

 
180,253

    Consumer and other
69,473

 
48

 
274

 

 
69,795

          Total
$
2,223,578

 
$
151,004

 
$
59,616

 
$
1,361

 
$
2,435,559


 
December 31, 2014
(in thousands)
Pass (1-6)
 
Watch (7)
 
Substandard (8)
 
Doubtful (9)
 
Total
    Commercial and industrial
$
1,167,751

 
$
62,315

 
$
40,193

 
$

 
$
1,270,259

    Real estate:
 
 
 
 
 
 
 
 
 
       Commercial - Owner occupied
334,347

 
18,025

 
5,131

 

 
357,503

       Commercial - Investor owned
372,818

 
24,088

 
16,120

 

 
413,026

       Construction and land development
123,260

 
12,993

 
8,520

 

 
144,773

       Residential
168,543

 
11,012

 
5,697

 

 
185,252

    Consumer and other
62,711

 
51

 
341

 

 
63,103

          Total
$
2,229,430

 
$
128,484

 
$
76,002

 
$

 
$
2,433,916



16




NOTE 5 - PURCHASE CREDIT IMPAIRED ("PCI") LOANS

Below is a summary of PCI loans by category at March 31, 2015 and December 31, 2014:
 
 
March 31, 2015
 
December 31, 2014
(in thousands)
Weighted-
Average
Risk Rating
Recorded
Investment
PCI Loans
 
Weighted-
Average
Risk Rating
Recorded
Investment
PCI Loans
Real estate loans:
 
 
 
 
 
    Construction and land development
6.26
$
7,574

 
6.16
$
7,740

    Commercial - Investor Owned
7.12
37,524

 
7.07
39,066

    Commercial - Owner Occupied
6.39
20,935

 
6.35
22,695

    Residential real estate
5.52
24,314

 
5.54
25,121

Total real estate loans
 
90,347

 
 
94,622

    Commercial and industrial
6.67
4,125

 
6.57
4,012

    Consumer and other
5.29
316

 
5.39
469

    Purchase credit impaired loans
 
$
94,788

 
 
$
99,103


The aging of the recorded investment in past due PCI loans by portfolio class and category at March 31, 2015 and December 31, 2014 is shown below:

 
March 31, 2015
(in thousands)
30-89 Days
 Past Due
 
90 or More
Days
Past Due
 
Total
Past Due
 
Current
 
Total
    Commercial and industrial
$

 
$
6

 
$
6

 
$
4,119

 
$
4,125

    Real estate:
 
 
 
 
 
 
 
 
 
       Commercial - Owner occupied

 
3,115

 
3,115

 
17,820

 
20,935

       Commercial - Investor owned

 
7,953

 
7,953

 
29,571

 
37,524

       Construction and land development
396

 

 
396

 
7,178

 
7,574

       Residential
448

 
2,847

 
3,295

 
21,019

 
24,314

    Consumer and other
10

 

 
10

 
306

 
316

          Total
$
854

 
$
13,921

 
$
14,775

 
$
80,013

 
$
94,788


 
December 31, 2014
(in thousands)
30-89 Days
 Past Due
 
90 or More
Days
Past Due
 
Total
Past Due
 
Current
 
Total
    Commercial and industrial
$

 
$
16

 
$
16

 
$
3,996

 
$
4,012

    Real estate:
 
 
 
 
 
 
 
 
 
       Commercial - Owner occupied

 
2,759

 
2,759

 
19,936

 
22,695

       Commercial - Investor owned
878

 
6,484

 
7,362

 
31,704

 
39,066

       Construction and land development
774

 

 
774

 
6,966

 
7,740

       Residential
2,020

 
1,451

 
3,471

 
21,650

 
25,121

    Consumer and other

 
12

 
12

 
457

 
469

          Total
$
3,672

 
$
10,722

 
$
14,394

 
$
84,709

 
$
99,103



17



The following table is a rollforward of PCI loans, net of the allowance for loan losses, for the three months ended March 31, 2015 and 2014.

(in thousands)
Contractual Cashflows
 
Non-accretable Difference
 
Accretable Yield
 
Carrying Amount
Balance January 1, 2015
$
178,145

 
$
65,719

 
$
28,733

 
$
83,693

Principal reductions and interest payments
(6,148
)
 

 

 
(6,148
)
Accretion of loan discount

 

 
(3,088
)
 
3,088

Changes in contractual and expected cash flows due to remeasurement
(12,159
)
 
(26,187
)
 
8,517

 
5,511

Reductions due to disposals
(5,623
)
 
(1,709
)
 
(933
)
 
(2,981
)
Balance March 31, 2015
$
154,215

 
$
37,823

 
$
33,229

 
$
83,163

 
 
 
 
 
 
 
 
Balance January 1, 2014
$
266,068

 
$
87,438

 
$
53,530

 
$
125,100

Principal reductions and interest payments
(9,849
)
 

 

 
(9,849
)
Accretion of loan discount

 

 
(4,560
)
 
4,560

Changes in contractual and expected cash flows due to remeasurement
4,888

 
10,503

 
(5,076
)
 
(539
)
Reductions due to disposals
(14,297
)
 
(3,142
)
 
(2,042
)
 
(9,113
)
Balance March 31, 2014
$
246,810

 
$
94,799

 
$
41,852

 
$
110,159




The accretable yield is accreted into interest income over the estimated life of the acquired loans using the effective
yield method.

A summary of activity in the FDIC loss share receivable for the three months ended March 31, 2015 is as follows:

(in thousands)
March 31,
2015
Balance at beginning of period
$
15,866

Adjustments not reflected in income:
 
Cash received from the FDIC for covered assets
(1,395
)
FDIC reimbursable losses, net
(563
)
Adjustments reflected in income:
 
Amortization, net
900

Loan impairment
(2,589
)
Reductions for payments on covered assets in excess of expected cash flows
(575
)
Balance at end of period
$
11,644



Outstanding customer balances on PCI loans were $127.7 million and $135.3 million as of March 31, 2015, and December 31, 2014, respectively.







18



NOTE 6 - COMMITMENTS AND CONTINGENCIES

The Company issues financial instruments with off balance sheet risk in the normal course of the business of meeting the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments may involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.

The Company’s extent of involvement and maximum potential exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments.

The Company uses the same credit policies in making commitments and conditional obligations as it does for financial instruments included on its consolidated balance sheets. At March 31, 2015, there were no unadvanced commitments on impaired loans.

The contractual amounts of off-balance-sheet financial instruments as of March 31, 2015, and December 31, 2014, are as follows:
 
(in thousands)
March 31,
2015
 
December 31,
2014
Commitments to extend credit
$
995,715

 
$
947,424

Standby letters of credit
52,981

 
50,108


Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments usually have fixed expiration dates or other termination clauses, may have significant usage restrictions, and may require payment of a fee. Of the total commitments to extend credit at March 31, 2015, and December 31, 2014, approximately $73.0 million and $65.9 million, respectively, represent fixed rate loan commitments. Since certain of the commitments may expire without being drawn upon or may be revoked, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, premises and equipment, and real estate. Other liabilities include approximately $0.2 million for estimated losses attributable to the unadvanced commitments at March 31, 2015 and December 31, 2014.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These standby letters of credit are issued to support contractual obligations of the Company’s customers. The credit risk involved in issuing letters of credit is essentially the same as the risk involved in extending loans to customers. The approximate remaining term of standby letters of credit range from 1 month to 2.9 years at March 31, 2015.

Contingencies

The Company and its subsidiaries are, from time to time, parties to various legal proceedings arising out of their businesses. Management believes 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, consolidated financial condition, results of operations or cashflows of the Company or any of its subsidiaries.

NOTE 7 - DERIVATIVE FINANCIAL INSTRUMENTS

Client-Related Derivative Instruments. The Company enters into interest rate swaps to allow customers to hedge changes in fair value of certain loans. The table below summarizes the notional amounts and fair values of the client-related derivative instruments:

19



 
 
Asset Derivatives
(Other Assets)
 
Liability Derivatives
(Other Liabilities)
 
Notional Amount
 
Fair Value
 
Fair Value
(in thousands)
March 31,
2015
 
December 31,
2014
 
March 31,
2015
 
December 31,
2014
 
March 31,
2015
 
December 31,
2014
Non-designated hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
$
136,924

 
$
141,263

 
$
1,176

 
$
907

 
$
1,176

 
$
907


Changes in the fair value of client-related derivative instruments are recognized currently in operations. For the three months ended March 31, 2015 and 2014, the gains and losses offset each other due to the Company's hedging of the client swaps.


20




NOTE 8 - FAIR VALUE MEASUREMENTS

Below is a description of certain assets and liabilities measured at fair value.

The following table summarizes financial instruments measured at fair value on a recurring basis as of March 31, 2015, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
 
 
March 31, 2015
(in thousands)
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
 
Significant
Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total Fair
Value
Assets
 
 
 
 
 
 
 
Securities available for sale
 
 
 
 
 
 
 
Obligations of U.S. Government-sponsored enterprises
$

 
$
100,899

 
$

 
$
100,899

Obligations of states and political subdivisions

 
31,976

 
3,071

 
35,047

Residential mortgage-backed securities

 
274,115

 

 
274,115

Total securities available for sale
$

 
$
406,990

 
$
3,071

 
$
410,061

State tax credits held for sale

 

 
10,286

 
10,286

Derivative financial instruments

 
1,176

 

 
1,176

Total assets
$

 
$
408,166

 
$
13,357

 
$
421,523

 
 
 
 
 
 
 
 
Liabilities
 

 
 
 
 

 
 
Derivative financial instruments
$

 
$
1,176

 
$

 
$
1,176

Total liabilities
$

 
$
1,176

 
$

 
$
1,176

 
 
 
 
 
 
 
 
 
December 31, 2014
(in thousands)
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
 
Significant
Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total Fair
Value
Assets
 
 
 
 
 
 
 
Securities available for sale
 
 
 
 
 
 
 
Obligations of U.S. Government-sponsored enterprises
$

 
$
91,826

 
$

 
$
91,826

Obligations of states and political subdivisions

 
31,822

 
3,059

 
34,881

Residential mortgage-backed securities

 
273,439

 

 
273,439

Total securities available for sale
$

 
$
397,087

 
$
3,059

 
$
400,146

State tax credits held for sale

 

 
11,689

 
11,689

Derivative financial instruments

 
909

 

 
909

Total assets
$

 
$
397,996

 
$
14,748

 
$
412,744

 
 
 
 
 
 
 
 
Liabilities
 

 
 
 
 

 
 
Derivative financial instruments
$

 
$
907

 
$

 
$
907

Total liabilities
$

 
$
907

 
$

 
$
907


Securities available for sale. Securities classified as available for sale are reported at fair value utilizing Level 2 and Level 3 inputs. Fair values for Level 2 securities are based upon dealer quotes, market spreads, the U.S. Treasury yield curve, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions at the security level. At March 31, 2015, Level 3 securities available for sale

21



consist primarily of three Auction Rate Securities that are valued based on the securities' estimated cash flows, yields of comparable securities, and live trading levels.
Portfolio Loans. Certain fixed rate portfolio loans are accounted for as trading instruments and reported at fair value. Fair value on these loans is determined using a third party valuation model with observable Level 2 market data inputs.
State tax credits held for sale. At March 31, 2015, of the $42.4 million of state tax credits held for sale on the condensed consolidated balance sheet, approximately $10.3 million were carried at fair value. The remaining $32.1 million of state tax credits were accounted for at cost.
The Company is not aware of an active market that exists for the 10-year streams of state tax credit financial instruments. However, the Company’s principal market for these tax credits consists of Missouri state residents who buy these credits and local and regional accounting firms who broker them. As such, the Company employed a discounted cash flow analysis (income approach) to determine the fair value.
The fair value measurement is calculated using an internal valuation model with market data including discounted cash flows based upon the terms and conditions of the tax credits. If the underlying project remains in compliance with the various federal and state rules governing the tax credit program, each project will generate about 10 years of tax credits. The inputs to the discounted cash flow 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 estimated using the LIBOR swap curve at a point equal to the remaining life in years of credits plus a 205 basis point spread. With the exception of the discount rate, the other inputs to the fair value calculation are observable and readily available. The discount rate is considered a Level 3 input because it is an “unobservable input” and is based on the Company’s assumptions. An increase in the discount rate utilized would generally result in a lower estimated fair value of the tax credits. Alternatively, a decrease in the discount rate utilized would generally result in a higher estimated fair value of the tax credits. Given the significance of this input to the fair value calculation, the state tax credit assets are reported as Level 3 assets.
Derivatives. Derivatives are reported at fair value utilizing Level 2 inputs. The Company obtains counterparty quotations to value its interest rate swaps and caps. In addition, the Company validates the counterparty quotations with third party valuation sources. Derivatives with negative fair values are included in Other liabilities in the consolidated balance sheets. Derivatives with positive fair value are included in Other assets in the consolidated balance sheets.
Level 3 financial instruments

The following table presents the changes in Level 3 financial instruments measured at fair value on a recurring basis as of March 31, 2015 and 2014.
Purchases, sales, issuances and settlements. There were no Level 3 purchases during the quarter ended March 31, 2015 or 2014.
Transfers in and/or out of Level 3. There were no transfers in an/or out of Level 3 for the quarter ended March 31, 2015 and 2014.

22



 
Securities available for sale, at fair value
Three months ended March 31,
(in thousands)
2015
 
2014
Beginning balance
$
3,059

 
$
3,040

   Total gains:
 
 
 
Included in other comprehensive income
12

 
6

   Purchases, sales, issuances and settlements:
 
 
 
Purchases

 

Transfer in and/or out of Level 3

 

Ending balance
$
3,071

 
$
3,046

 
 
 
 
Change in unrealized gains relating to
assets still held at the reporting date
$
12

 
$
6



 
State tax credits held for sale
Three months ended March 31,
(in thousands)
2015
 
2014
Beginning balance
$
11,689

 
$
16,491

   Total gains:
 
 
 
Included in earnings
128

 
118

   Purchases, sales, issuances and settlements:
 
 
 
Sales
(1,531
)
 
(1,709
)
Ending balance
$
10,286

 
$
14,900

 
 
 
 
Change in unrealized gains relating to
assets still held at the reporting date
$
(274
)
 
$
(334
)


From time to time, the Company measures certain assets at fair value on a nonrecurring basis. These include assets that are measured at the lower of cost or fair value that were recognized at fair value below cost at the end of the period.
The following table presents financial instruments and non-financial assets measured at fair value on a non-recurring basis as of March 31, 2015.
 
 
(1)
 
(1)
 
(1)
 
(1)
 
 
(in thousands)
Total Fair Value
 
Quoted Prices in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total losses for the three
months ended
March 31, 2015
Impaired loans
$
8,419

 
$

 
$

 
$
8,419

 
$
(2,568
)
Other real estate
463

 

 

 
463

 
(41
)
Total
$
8,882

 
$

 
$

 
$
8,882

 
$
(2,609
)

(1) The amounts represent only balances measured at fair value during the period and still held as of the reporting date.
 
Impaired loans are reported at the fair value of the underlying collateral. Fair values for impaired loans are obtained from current appraisals by qualified licensed appraisers or independent valuation specialists. Other real estate owned is adjusted to fair value upon foreclosure of the underlying loan. Subsequently, foreclosed assets are carried at the

23



lower of carrying value or fair value less costs to sell. Fair value of other real estate is based upon the current appraised values of the properties as determined by qualified licensed appraisers and the Company’s judgment of other relevant market conditions. Certain state tax credits are reported at cost.

Following is a summary of the carrying amounts and fair values of the Company’s financial instruments on the consolidated balance sheets at March 31, 2015 and December 31, 2014.

 
March 31, 2015
 
December 31, 2014
(in thousands)
Carrying Amount
 
Estimated fair value
 
Carrying Amount
 
Estimated fair value
Balance sheet assets
 
 
 
 
 
 
 
Cash and due from banks
$
56,420

 
$
56,420

 
$
42,903

 
$
42,903

Federal funds sold
48

 
48

 
35

 
35

Interest-bearing deposits
43,865

 
43,865

 
63,058

 
63,058

Securities available for sale
410,061

 
410,061

 
400,146

 
400,146

Securities held to maturity
45,563

 
45,811

 
45,985

 
45,795

Other investments, at cost
11,719

 
11,719

 
17,037

 
17,037

Loans held for sale
7,843

 
7,843

 
4,033

 
4,033

Derivative financial instruments
1,176

 
1,176

 
909

 
909

Portfolio loans, net
2,488,434

 
2,483,751

 
2,487,424

 
2,482,700

State tax credits, held for sale
42,411

 
46,851

 
38,309

 
42,970

Accrued interest receivable
8,061

 
8,061

 
7,956

 
7,956

 
 
 
 
 
 
 
 
Balance sheet liabilities
 
 
 
 
 
 
 
Deposits
2,674,631

 
2,677,798

 
2,491,510

 
2,494,624

Subordinated debentures
56,807

 
34,557

 
56,807

 
34,124

Federal Home Loan Bank advances
6,000

 
6,000

 
144,000

 
144,000

Other borrowings
186,864

 
186,937

 
239,883

 
239,950

Derivative financial instruments
1,176

 
1,176

 
907

 
907

Accrued interest payable
845

 
845

 
843

 
843


For information regarding the methods and assumptions used to estimate the fair value of each class of financial instruments for which it is practical to estimate such value, refer to Note 20-Fair Value Measurements in the Company's Annual Report on Form 10-K for the year ended December 31, 2014.

24




The following table presents the level in the fair value hierarchy for the estimated fair values of only the Company’s financial instruments that are not already presented on the condensed consolidated balance sheets at fair value at March 31, 2015, and December 31, 2014.
 
 
Estimated Fair Value Measurement at Reporting Date Using
 
Balance at
March 31, 2015
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Financial Assets:
 
 
 
 
 
 
 
Securities held to maturity
$

 
$
45,811

 
$

 
$
45,811

Portfolio loans, net

 

 
2,483,751

 
2,483,751

State tax credits, held for sale

 

 
36,565

 
36,565

Financial Liabilities:
 
 
 
 
 
 
 
Deposits
2,109,133

 

 
568,665

 
2,677,798

Subordinated debentures

 
34,557

 

 
34,557

Federal Home Loan Bank advances

 
6,000

 

 
6,000

Other borrowings

 
186,937

 

 
186,937

 
 
Estimated Fair Value Measurement at Reporting Date Using
 
Balance at
December 31, 2014
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Financial Assets:
 
 
 
 
 
 
 
Securities held to maturity
$

 
$
45,795

 
$

 
$
45,795

Portfolio loans, net

 

 
2,482,700

 
2,482,700

State tax credits, held for sale

 

 
31,281

 
31,281

Financial Liabilities:
 
 
 
 
 
 
 
Deposits
1,986,158

 

 
508,466

 
2,494,624

Subordinated debentures

 
34,124

 

 
34,124

Federal Home Loan Bank advances

 
144,000

 

 
144,000

Other borrowings

 
239,950

 

 
239,950



NOTE 9 - NEW AUTHORITATIVE ACCOUNTING GUIDANCE

FASB ASU 2014-09, "Revenue from Contracts with Customers" In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”. The objective of ASU 2014-09 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle of ASU 2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the new guidance, an entity will (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract’s performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. The new guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2016 for public companies. Early adoption is not permitted. Entities have the option of using either a full retrospective or modified approach to adopt ASU 2014-09. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on its financial statements nor decided upon the method of adoption.
FASB ASU 2014-11, "Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures" In June 2014, the FASB issued ASU No. 2014-11, "Transfers and Servicing (Topic

25



860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures." The objective of ASU 2014-11 is to amend the accounting for certain secured financing transactions, and requires enhanced disclosures with respect to transactions recognized as sales in which exposure to the derecognized asset is retained through a separate agreement with the counterparty. In addition, the guidance requires enhanced disclosures with respect to the types and quality of financial assets pledged in secured financing transactions. The guidance became effective in the first quarter of 2015, except for the disclosures regarding the types and quality of financial assets pledged, which will become effective in the second quarter of 2015. The adoption of the guidance did not have a material impact on the Company's consolidated balance sheets or statements of operations.

26





ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Some of the information in this report contains “forward-looking statements” within the meaning of and intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements typically are identified with use of terms such as “may,” “might,” “will, ”should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “could,” “continue” and the negative of these terms and similar words, although some forward-looking statements are expressed differently. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. You should be aware that our actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including, but not limited to: credit risk; changes in the appraised valuation of real estate securing impaired loans; outcomes of litigation and other contingencies; exposure to general and local economic conditions; risks associated with rapid increases or decreases 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; burdens imposed by federal and state regulation; changes in regulatory requirements; changes in accounting regulation or standards applicable to banks; and other risks discussed under the caption “Risk Factors” of our most recently filed Form 10-K and within this Form 10-Q, all of which could cause the Company’s actual results to differ from those set forth in the forward-looking statements.

Readers are cautioned not to place undue reliance on our forward-looking statements, which reflect management’s analysis and expectations only as of the date of such statements. Forward-looking statements speak only as of the date they are made, and the Company does not intend, and undertakes no obligation, to publicly revise or update forward-looking statements after the date of this report, whether as a result of new information, future events or otherwise, except as required by federal securities law. You should understand that it is not possible to predict or identify all risk factors. 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.

Introduction

The following discussion describes the significant changes to the financial condition of the Company that have occurred during the first three months of 2015 compared to the financial condition as of December 31, 2014. In addition, this discussion summarizes the significant factors affecting the results of operations, liquidity and cash flows of the Company for the three months ended March 31, 2015, compared to the same period in 2014. This discussion should be read in conjunction with the accompanying condensed consolidated financial statements included in this report and our Annual Report on Form 10-K for the year ended December 31, 2014.

 


27



Executive Summary

Below are highlights of our financial performance for the quarter ended March 31, 2015 as compared to the linked quarter ended December 31, 2014 and prior year quarter ended March 31, 2014.

(in thousands, except per share data)
For the Quarter ended
March 31, 2015
 
December 31, 2014
 
March 31, 2014
EARNINGS
 
 
 
 
 
Total interest income
$
32,151

 
$
34,385

 
$
34,024

Total interest expense
3,106

 
3,569

 
3,658

Net interest income
29,045

 
30,816

 
30,366

Provision for portfolio loans
1,580

 
1,968

 
1,027

Provision (provision reversal) for purchase credit impaired loans
(3,270
)
 
126

 
3,304

Net interest income after provision for loan losses
30,735

 
28,722

 
26,035

 
 
 
 
 
 
Fee income
5,043

 
5,790

 
5,277

Other noninterest income
(1,460
)
 
(938
)
 
(1,355
)
Total noninterest income
3,583

 
4,852

 
3,922

 
 
 
 
 
 
Total noninterest expenses
19,950

 
24,795

 
21,102

Income before income tax expense
14,368

 
8,779

 
8,855

Income tax expense
5,022

 
2,812

 
3,007

Net income
$
9,346

 
$
5,967

 
$
5,848

 
 
 
 
 
 
Basic earnings per share
$
0.47

 
$
0.30

 
$
0.30

Diluted earnings per share
0.46

 
0.30

 
0.30

 
 
 
 
 
 
Return on average assets
1.16
%
 
0.73
%
 
0.77
%
Return on average common equity
11.78
%
 
7.50
%
 
8.26
%
Net interest margin (fully tax equivalent)
3.92
%
 
4.13
%
 
4.39
%
Efficiency ratio
61.14
%
 
69.52
%
 
61.54
%
 
 
 
 
 
 
ASSET QUALITY (1)
 
 
 
 
 
Net charge-offs
$
1,478

 
$
582

 
$
411

Nonperforming loans
15,143

 
22,244

 
15,508

Classified assets
63,001

 
77,898

 
78,018

Nonperforming loans to total loans
0.62
%
 
0.91
%
 
0.71
%
Nonperforming assets to total assets
0.52
%
 
0.74
%
 
0.81
%
Allowance for loan losses to total loans
1.24
%
 
1.24
%
 
1.28
%
Net charge-offs to average loans (annualized)
0.25
%
 
0.10
%
 
0.08
%
 
 
 
 
 
 
(1) Excludes PCI loans and other assets covered under FDIC loss share agreements, except for their inclusion in total assets.










28



Below are highlights of the Company's Core performance measures, which we believe are important measures of financial performance, but are non-GAAP measures. Core performance measures include contractual interest on PCI loans, but exclude incremental accretion on these loans, and exclude the Change in the FDIC receivable, gain or loss of other real estate covered under FDIC loss share agreements, and certain other income and expense items the Company believes are not indicative of or useful to measure the Company's operating performance on an ongoing basis. A reconciliation of Core performance measures has been included in this MD&A section under the caption "Use of Non-GAAP Financial Measures".

 
For the Quarter ended
(in thousands)
March 31, 2015
 
December 31, 2014
 
March 31, 2014
CORE PERFORMANCE MEASURES (1)
Net interest income
$
25,587

 
$
25,667

 
$
23,702

Provision for portfolio loans
1,580

 
1,968

 
1,027

Noninterest income
5,839

 
6,438

 
6,201

Noninterest expense
19,068

 
20,170

 
20,384

Income before income tax expense
10,778

 
9,967

 
8,492

Income tax expense
3,647

 
3,264

 
2,867

Net income
$
7,131

 
$
6,703

 
$
5,625

 
 
 
 
 
 
Earnings per share
$
0.35

 
$
0.33

 
$
0.28

Return on average assets
0.88
%
 
0.82
%
 
0.74
%
Return on average common equity
8.99
%
 
8.43
%
 
7.94
%
Net interest margin (fully tax equivalent)
3.46
%
 
3.45
%
 
3.44
%
Efficiency ratio
60.67
%
 
62.83
%
 
68.17
%
 
 
 
 
 
 
(1) A non-GAAP measure. A reconciliation has been included in this MD&A section under the caption "Use of Non-GAAP Financial Measures."

During the quarter ended March 31, 2015, the Company noted the following:

The Company reported net income of $9.3 million for the first three months of 2015, compared to $6.0 million in the linked fourth quarter, and $5.9 million for the same period in 2014. The increase in net income is due to a decrease in noninterest expenses from improved expense control initiatives and reversal of provision for loan losses of PCI loans due to higher expected cash flows.

On a core basis1, net income was $7.1 million, or $0.35 per share for the first three months of 2015, compared to $6.7 million, or $0.33 per share in the linked fourth quarter and $5.6 million, or $0.28 per share in the prior year period. The increase from the prior year was primarily due to increases in earning asset balances, driving growth in core net interest income combined with a reduction in noninterest expenses.

Net interest income in the first quarter of 2015 decreased $1.8 million from the linked fourth quarter and $1.3 million from the prior year period due to lower balances of PCI loans, lower accelerated cash flows on PCI loans, and lower interest rates on newly originated loans. These items were partially offset by lower interest expense primarily related to the payoff of debt with higher interest rates in the prior year.

On a core basis1, net interest income remained stable when compared to the linked fourth quarter, and increased 8% from the prior year period due to strong portfolio loan growth and improvements in funding costs during 2014.

The Core net interest margin1, defined as Net interest margin (fully tax equivalent), including contractual interest on PCI loans, but excluding the incremental accretion on these loans, increased 2 basis points from

29



the prior year period primarily due to the managed reductions in funding costs combined with an improved earning asset mix.

Fee income, which primarily includes the Company's wealth management revenue, service charges and other fees on deposit accounts, sales of other real estate, and state tax brokerage activity, decreased 9% compared to the prior year period largely due to lower gains on sales of other real estate.

Noninterest expense declined 5% and the Company's efficiency ratio improved to 61.14% compared to the prior year period. Core noninterest expenses1 declined by 6% partially due to lower legal expenses on problem loans and overall expense management .

Balance sheet highlights

Loans – Loans totaled $2.5 billion at March 31, 2015, including $94.8 million of purchase credit impaired ("PCI") loans. Portfolio loans excluding PCI loans increased $261.6 million, or 12%, from March 31, 2014. Commercial & Industrial loans increased $204.7 million, or 19%, Consumer and other loans increased $22.3 million, or 47%, Construction loans and Residential real estate loans increased $37.1 million, or 13%, and Commercial Real Estate decreased $2.6 million. See Item 1, Note 4 – Portfolio Loans for more information.
Deposits – Total deposits at March 31, 2015 were $2.7 billion, an increase of $222.5 million, or 9%, from March 31, 2014 partially due to enhanced deposit gathering efforts in both commercial and business banking.
Asset quality – Nonperforming loans, including troubled debt restructurings, were $15.1 million at March 31, 2015, compared to $15.5 million at March 31, 2014. Nonperforming loans represented 0.62% of portfolio loans at March 31, 2015 versus 0.71% at March 31, 2014. There were no portfolio loans that were 30-89 days delinquent and still accruing at March 31, 2015 or March 31, 2014.
Provision for portfolio loan losses was an expense of $1.6 million for the three months ended March 31, 2015, compared to expense of $1.0 million for the three months ended March 31, 2014. See Item 1, Note 4 – Portfolio Loans and, Provision for Loan Losses and Allowance for Loan Losses in this section for more information.




30



RESULTS OF OPERATIONS
Net Interest Income
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.

 
Three months ended March 31,
 
2015
 
2014
(in thousands)
Average Balance
 
Interest
Income/Expense
 
Average
Yield/
Rate
 
Average Balance
 
Interest
Income/Expense
 
Average
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Taxable portfolio loans (1)
$
2,391,117

 
$
24,227

 
4.11
%
 
$
2,107,805

 
$
22,381

 
4.31
%
Tax-exempt portfolio loans (2)
38,405

 
624

 
6.59

 
37,622

 
665

 
7.17

Purchase credit impaired loans
97,201

 
4,997

 
20.85

 
134,466

 
8,652

 
26.09

Total loans
2,526,723

 
29,848

 
4.79

 
2,279,893

 
31,698

 
5.64

Taxable investments in debt and equity securities
418,812

 
2,199

 
2.13

 
403,523

 
2,215

 
2.23

Non-taxable investments in debt and equity securities (2)
42,968

 
479

 
4.52

 
44,011

 
484

 
4.46

Short-term investments
59,312

 
47

 
0.32

 
121,087

 
66

 
0.22

Total securities and short-term investments
521,092

 
2,725

 
2.12

 
568,621

 
2,765

 
1.97

Total interest-earning assets
3,047,815

 
32,573

 
4.33

 
2,848,514

 
34,463

 
4.91

Noninterest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
48,232

 
 
 
 
 
15,869

 
 
 
 
Other assets
218,347

 
 
 
 
 
263,606

 
 
 
 
Allowance for loan losses
(46,025
)
 
 
 
 
 
(43,269
)
 
 
 
 
 Total assets
$
3,268,369

 
 
 
 
 
$
3,084,720

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing transaction accounts
$
484,724

 
$
277

 
0.23
%
 
$
214,984

 
$
112

 
0.21
%
Money market accounts
843,245

 
642

 
0.31

 
939,033

 
742

 
0.32

Savings
81,408

 
50

 
0.25

 
80,759

 
49

 
0.25

Certificates of deposit
526,489

 
1,591

 
1.23

 
621,874

 
1,750

 
1.14

Total interest-bearing deposits
1,935,866

 
2,560

 
0.54

 
1,856,650

 
2,653

 
0.58

Subordinated debentures
56,807

 
302

 
2.16

 
61,362

 
407

 
2.69

Other borrowed funds
274,022

 
244

 
0.36

 
250,381

 
598

 
0.97

Total interest-bearing liabilities
2,266,695

 
3,106

 
0.56

 
2,168,393

 
3,658

 
0.68

Noninterest bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
655,095

 
 
 
 
 
609,609

 
 
 
 
Other liabilities
24,807

 
 
 
 
 
19,537

 
 
 
 
Total liabilities
2,946,597

 
 
 
 
 
2,797,539

 
 
 
 
Shareholders' equity
321,772

 
 
 
 
 
287,181

 
 
 
 
Total liabilities & shareholders' equity
$
3,268,369

 
 
 
 
 
$
3,084,720

 
 
 
 
Net interest income
 
 
$
29,467

 
 
 
 
 
$
30,805

 
 
Net interest spread
 
 
 
 
3.77
%
 
 
 
 
 
4.23
%
Net interest margin
 
 
 
 
3.92
%
 
 
 
 
 
4.39
%



31



(1)
Average balances include non-accrual loans. Loan fees, net of amortization of deferred loan origination fees and costs, included in interest income are approximately $0.4 million and $0.2 million for the three months ended March 31, 2015 and 2014 respectively.
(2)
Non-taxable income is presented on a fully tax-equivalent basis using a 38% tax rate in 2015 and 2014. The tax-equivalent adjustments were $0.4 million for the three months ended March 31, 2015 and 2014 respectively.



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.
  
 
2015 compared to 2014
 
Three months ended March 31,
 
Increase (decrease) due to
(in thousands)
Volume(1)
 
Rate(2)
 
Net
Interest earned on:
 
 
 
 
 
Taxable portfolio loans
$
2,907

 
$
(1,061
)
 
$
1,846

Tax-exempt portfolio loans (3)
14

 
(55
)
 
(41
)
Purchase credit impaired loans
(2,119
)
 
(1,536
)
 
(3,655
)
Taxable investments in debt and equity securities
82

 
(98
)
 
(16
)
Non-taxable investments in debt and equity securities (3)
(12
)
 
7

 
(5
)
Short-term investments
(42
)
 
23

 
(19
)
Total interest-earning assets
$
830

 
$
(2,720
)
 
$
(1,890
)
 
 
 
 
 
 
Interest paid on:
 
 
 
 
 
Interest-bearing transaction accounts
$
153

 
$
12

 
$
165

Money market accounts
(74
)
 
(26
)
 
(100
)
Savings

 
1

 
1

Certificates of deposit
(282
)
 
123

 
(159
)
Subordinated debentures
(28
)
 
(77
)
 
(105
)
Borrowed funds
51

 
(405
)
 
(354
)
Total interest-bearing liabilities
(180
)
 
(372
)
 
(552
)
Net interest income
$
1,010

 
$
(2,348
)
 
$
(1,338
)

(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.



Net interest income (on a tax equivalent basis) was $29.5 million for the three months ended March 31, 2015 compared to $30.8 million for the same period of 2014, a decrease of $1.3 million, or 4%. Total interest income decreased $1.9 million and total interest expense decreased $0.6 million. The tax-equivalent net interest rate margin was 3.92% for the first quarter of 2015, compared to 4.13% for the fourth quarter of 2014, and 4.39% in the first quarter of 2014.

Interest rates remain at historically low levels and continue to negatively impact loan yields leading to lower net interest margins. As seen in the table above, changes in interest rates have led to a $1.1 million, and $1.5 million

32



reduction, in interest income in our portfolio and PCI loans, respectively. Additionally, the run-off of higher yielding PCI loans continue to negatively impact net interest margin leading to a $2.1 million decrease in interest income due to volume. To partially mitigate lower yields on loans, the Company has taken specific actions to lower deposit and other borrowing costs including the prepayment of $50.0 million of FHLB borrowings in December 2014.

Core net interest margin1 was 3.46% for the quarter ended March 31, 2015, compared to 3.44% for the same prior year period.  Core net interest margin1 increased 2 basis points from the prior year quarter primarily due to the managed reductions in funding costs combined with an improved earning asset mix. These factors mitigated continued pressure in portfolio loan yields and reductions in PCI loan balances as those balances continue to run-off. Pressure on loan yields and continued reductions in PCI loan balances could lead to a decline in core net interest margin in 2015.


Purchase Credit Impaired "PCI" Contribution
The following table illustrates the financial contribution of PCI loans and other assets covered under FDIC shared loss agreements for the most recent five quarters.

 
For the Quarter ended
(in thousands)
March 31, 2015
 
December 31, 2014
 
September 30, 2014
 
June 30, 2014
 
March 31, 2014
Contractual interest income
$
1,539

 
$
1,840

 
$
1,701

 
$
1,878

 
$
1,988

Accelerated cash flows and other incremental accretion
3,458

 
5,149

 
2,579

 
4,538

 
6,664

Estimated funding cost
(317
)
 
(326
)
 
(314
)
 
(349
)
 
(415
)
Total net interest income
4,680

 
6,663

 
3,966

 
6,067

 
8,237

(Provision) benefit for loan losses
3,270

 
(126
)
 
1,877

 
470

 
(3,304
)
Gain/(loss) on sale of other real estate
(15
)
 
195

 
(45
)
 
164

 
131

Change in FDIC loss share receivable
(2,264
)
 
(1,781
)
 
(2,374
)
 
(2,742
)
 
(2,410
)
Change in FDIC clawback liability
(412
)
 
(141
)
 
(1,028
)
 
(143
)
 
111

Other expenses
(471
)
 
(541
)
 
(731
)
 
(832
)
 
(823
)
PCI assets income before income tax expense
$
4,788

 
$
4,269

 
$
1,665

 
$
2,984

 
$
1,942


At March 31, 2015, the remaining accretable yield on the portfolio was estimated to be $33 million and the non-accretable difference was approximately $38 million. Absent cash flow accelerations or pool impairment, the Company currently estimates average PCI loan balances to be approximately $80 million and income before tax expense on PCI assets will be approximately $8 million to $10 million in 2015.















33




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

 
Three months ended March 31,
(in thousands)
2015
 
2014
 
Increase (decrease)
 Wealth management revenue
$
1,740

 
$
1,722

 
$
18

 
1
 %
 Service charges on deposit accounts
1,856

 
1,738

 
118

 
7
 %
 Other service charges and fee income
753

 
637

 
116

 
18
 %
 Sale of other real estate
35

 
552

 
(517
)
 
(94
)%
 State tax credit activity, net
674

 
497

 
177

 
36
 %
 Miscellaneous income
781

 
1,055

 
(274
)
 
(26
)%
Core noninterest income (1)
5,839

 
6,201

 
(362
)
 
(6
)%
Gain (loss) on sale of other real estate covered under FDIC loss share agreements
(15
)
 
131

 
(146
)
 
(111
)%
Gain on sale of investment securities
23

 

 
23

 

Change in FDIC loss share receivable
(2,264
)
 
(2,410
)
 
146

 
(6
)%
Total noninterest income
$
3,583

 
$
3,922

 
$
(339
)
 
(9
)%
 
 
 
 
 
 
 
 
(1) A non-GAAP measure. A reconciliation has been included in this MD&A section under the caption "Use of Non-GAAP Financial Measures."

Noninterest income decreased $0.3 million, or 9% in the first quarter of 2015 compared to the first quarter of 2014. Core noninterest income1 declined slightly in the first quarter of 2015 due to lower gains on sale of other real estate than in the first quarter of 2014. Wealth management revenues were flat in the first quarter of 2015. Assets under administration at March 31, 2015 of $1.5 billion grew 2% compared to March 31, 2014.

34



Noninterest Expense
The following table presents a comparative summary of the major components of noninterest expense:

 
Three months ended March 31,
(in thousands)
2015
 
2014
 
Increase (decrease)
Core expenses (1):
 
 
 
 
 
 
 
 Employee compensation and benefits - core
$
11,250

 
$
11,522

 
$
(272
)
 
(2
)%
 Occupancy - core
1,667

 
1,614

 
53

 
3
 %
 Data processing - core
1,001

 
1,064

 
(63
)
 
(6
)%
 FDIC and other insurance
726

 
699

 
27

 
4
 %
 Professional fees
972

 
1,267

 
(295
)
 
(23
)%
 Loan, legal and other real estate expense - core
131

 
997

 
(866
)
 
(87
)%
 Other - core
3,321

 
3,221

 
100

 
3
 %
Core noninterest expense (1)
19,068

 
20,384

 
(1,316
)
 
(6
)%
FDIC clawback
412

 
(111
)
 
523

 
(471
)%
Other loss share expenses
470

 
829

 
(359
)
 
(43
)%
Total noninterest expense
$
19,950

 
$
21,102

 
$
(1,152
)
 
(5
)%
 
 
 
 
 
 
 
 
(1) A non-GAAP measure. A reconciliation has been included in this MD&A section under the caption "Use of Non-GAAP Financial Measures."


Noninterest expenses were $20.0 million for the quarter ended March 31, 2015, compared to $24.8 million for the quarter ended December 31, 2014, and $21.1 million for the quarter ended March 31, 2014. Core noninterest expenses1, which exclude certain items and expenses directly related to PCI loans and assets covered under loss share agreements decreased to $19.1 million for the quarter ended March 31, 2015, from $20.2 million for the linked quarter and $20.4 million for the prior year period.

The Company's Core efficiency ratio1 was 60.7% for the quarter ended March 31, 2015, compared to 62.8% for the linked quarter, and 68.2% for the prior year period, and reflects lower legal expenses on problem loans, overall expense management and revenue growth trends. Core efficiency ratio is a non-GAAP measure. The attached tables contain a reconciliation of Core efficiency ratio.

The Company anticipates total noninterest expenses to be between $19 million and $21 million per quarter for 2015.

Income Taxes

For the quarter ended March 31, 2015, the Company's income tax expense, which includes both federal and state taxes, was $5.0 million compared to $3.0 million for the same period in 2014. The combined federal and state effective income tax rates were relatively consistent at 35.0% and 34.0% for the quarters ended March 31, 2015, and 2014, respectively.


35



Summary Balance Sheet

(in thousands)
March 31, 2015
 
December 31, 2014
 
Increase (decrease)
Total cash and cash equivalents
$
99,333

 
$
100,696

 
(1,363
)
(1.4
)%
Securities available for sale
410,061

 
400,146

 
9,915

2.5
 %
Securities held to maturity
45,563

 
45,985

 
(422
)
(0.9
)%
Portfolio loans
2,435,559

 
2,433,916

 
1,643

0.1
 %
Purchase credit impaired loans
94,788

 
99,103

 
(4,315
)
(4.4
)%
Total assets
3,275,295

 
3,277,003

 
(1,708
)
(0.1
)%
Deposits
2,674,631

 
2,491,510

 
183,121

7.3
 %
Total liabilities
2,949,186

 
2,960,762

 
(11,576
)
(0.4
)%
Total shareholders' equity
326,109

 
316,241

 
9,868

3.1
 %

Assets

Loans by Type

The Company grants commercial, residential, and consumer loans primarily in the St. Louis, Kansas City and Phoenix metropolitan areas. The Company has a diversified loan portfolio, with no particular concentration of credit in any one economic sector; however, a substantial portion of the portfolio is secured by real estate. The ability of the Company's borrowers to honor their contractual obligations is partially dependent upon the local economy and its effect on the real estate market. The following table summarized the composition of the Company's loan portfolio:

(in thousands)
March 31, 2015
 
December 31, 2014
 
Increase (decrease)
Commercial and industrial
$
1,265,104

 
$
1,270,259

 
$
(5,155
)
(0.4
)%
Commercial real estate - Investor owned
413,170

 
413,026

 
144

 %
Commercial real estate - Owner occupied
368,313

 
357,503

 
10,810

3.0
 %
Construction and land development
138,924

 
144,773

 
(5,849
)
(4.0
)%
Residential real estate
180,253

 
185,252

 
(4,999
)
(2.7
)%
Consumer and other
69,795

 
63,103

 
6,692

10.6
 %
   Portfolio loans
2,435,559

 
2,433,916

 
1,643

0.1
 %
Purchase credit impaired loans
94,788

 
99,103

 
(4,315
)
(4.4
)%
   Total loans
$
2,530,347

 
$
2,533,019

 
$
(2,672
)
(0.1
)%

Portfolio loans remained stable at $2.4 billion at March 31, 2015 when compared to the linked quarter. PCI loans totaled $94.8 million at March 31, 2015, a decrease of $4.3 million, or 4.4%, from the linked fourth quarter, primarily as a result of principal paydowns and accelerated loan payoffs.



Provision and Allowance for Loan Losses
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.

36



 
Three months ended March 31,
(in thousands)
2015
 
2014
Allowance at beginning of period, for portfolio loans
$
30,185

 
$
27,289

Loans charged off:
 
 
 
Commercial and industrial
(1,484
)
 
(474
)
Real estate:
 
 
 
Commercial

 
(586
)
Construction and land development

 
(305
)
Residential
(1,073
)
 

Consumer and other
(11
)
 
(4
)
Total loans charged off
(2,568
)
 
(1,369
)
Recoveries of loans previously charged off:
 
 
 
Commercial and industrial
769

 
187

Real estate:
 
 
 
Commercial
156

 
42

Construction and land development
60

 
688

Residential
26

 
41

Consumer and other
80

 

Total recoveries of loans
1,091

 
958

Net loan chargeoffs
(1,477
)
 
(411
)
Provision for loan losses
1,580

 
1,027

Allowance at end of period, for portfolio loans
$
30,288

 
$
27,905

 
 
 
 
Allowance at beginning of period, for purchase credit impaired loans
$
15,410

 
$
15,438

   Loans charged off
3

 
(155
)
   Recoveries of loans

 

Other
(518
)
 
(74
)
Net loan chargeoffs
(515
)
 
(229
)
Provision (provision reversal) for loan losses
(3,270
)
 
3,304

Allowance at end of period, for purchase credit impaired loans
$
11,625

 
$
18,513

 
 
 
 
Total allowance at end of period
$
41,913

 
$
46,418

 
 
 
 
Excludes purchase credit impaired loans
 
 
 
Average loans
$
2,425,962

 
$
2,143,449

Total portfolio loans
2,435,559

 
2,173,988

Net chargeoffs to average loans (annualized)
0.25
%
 
0.08
%
Allowance for loan losses to total loans
1.24

 
1.28


The provision for loan losses on portfolio loans for the three months ended March 31, 2015 was $1.6 million compared to $1.0 million for the comparable 2014 period. The provision for loan losses for the three month period ended March 31, 2015 was primarily to provide for charge-offs incurred during the quarter.


37



For PCI loans, the Company remeasures contractual and expected cash flows periodically. When the remeasurement process results in a decrease in expected cash flows, typically due to an increase in expected credit losses, impairment is recorded through provision for loan losses. Similarly, when expected credit losses decrease in the remeasurement process, prior recorded impairment is reversed before the yield is increased prospectively. The provision for loan losses on PCI loans for the three months ended March 31, 2015 was a benefit of $3.3 million compared to provision of $3.3 million for the comparable 2014 period.

The allowance for loan losses on portfolio loans was 1.24% of total loans at March 31, 2015, and December 31, 2014, compared to 1.28% at March 31, 2014. Management believes the allowance for loan losses is adequate to absorb inherent losses in the loan portfolio and coverage trends reflect steady improvements in credit quality measures and classified loan levels. The reduction in the ratio of allowance for loan losses to total loans over the prior year period is due to continued strong credit performance, as well as continued improvement in our loss migration results.



38



Nonperforming assets

The following table presents the categories of nonperforming assets and other ratios as of the dates indicated.
 
(in thousands)
March 31, 2015
 
December 31, 2014
 
March 31, 2014
Non-accrual loans
$
13,805

 
$
20,892

 
$
14,040

Restructured loans
1,338

 
1,352

 
1,468

Total nonperforming loans
15,143

 
22,244

 
15,508

Foreclosed property (1)
2,024

 
1,896

 
10,001

Total nonperforming assets (1)
$
17,167

 
$
24,140

 
$
25,509

 
 
 
 
 
 
Excludes assets covered under FDIC loss share (1)
 
 
 
 
 
Total assets
$
3,275,295

 
$
3,277,003

 
$
3,139,951

Total portfolio loans
2,435,559

 
2,433,916

 
2,173,988

Total loans plus foreclosed property
2,437,583

 
2,435,812

 
2,183,989

Nonperforming loans to total loans
0.62
%
 
0.91
%
 
0.71
%
Nonperforming assets to total loans plus foreclosed property
0.70

 
0.99

 
1.17

Nonperforming assets to total assets
0.52

 
0.74

 
0.81

 
 
 
 
 
 
Allowance for portfolio loans to nonperforming loans
200
%
 
136
%
 
180
%
 
(1)
Excludes purchase credit impaired loans and assets covered under FDIC shared-loss agreements, except for their inclusion in total assets.

Nonperforming loans 
Nonperforming loans exclude PCI loans that are accounted for on a pool basis, as the pools are considered to be performing. See Item 1, Note 5 – Purchase Credit Impaired Loans for more information on these loans.
 
Nonperforming loans based on loan type were as follows:
 
(in thousands)
March 31, 2015
 
December 31, 2014
 
March 31, 2014
Construction and land development
$
6,366

 
$
6,866

 
$
7,729

Commercial and industrial
4,250

 
5,998

 
4,439

Residential real estate
2,655

 
3,082

 
430

Commercial real estate
1,872

 
6,298

 
2,910

Consumer and other

 

 

Total
$
15,143

 
$
22,244

 
$
15,508



39



The following table summarizes the changes in nonperforming loans for the quarter ending:
 
(in thousands)
March 31, 2015
 
December 31, 2014
 
March 31, 2014
Nonperforming loans beginning of period
$
22,244

 
$
18,212

 
$
20,840

Additions to nonaccrual loans
9,796

 
12,787

 
2,571

Additions to restructured loans

 

 
790

Chargeoffs
(2,556
)
 
(2,064
)
 
(1,369
)
Other principal reductions
(13,891
)
 
(3,437
)
 
(2,457
)
Moved to other real estate
(450
)
 
(610
)
 
(4,722
)
Moved to performing

 
(2,299
)
 
(145
)
Loans past due 90 days or more and still accruing interest

 
(345
)
 

Nonperforming loans end of period
$
15,143

 
$
22,244

 
$
15,508


Other real estate
Other real estate at March 31, 2015, was $5.6 million, compared to $24.9 million at March 31, 2014. Approximately 64% of total Other real estate, or $3.6 million, is covered by FDIC shared-loss agreements.

The following table summarizes the changes in Other real estate for the quarter ending:

(in thousands)
March 31, 2015
 
December 31, 2014
 
March 31, 2014
Other real estate beginning of period
$
7,840

 
$
11,087

 
$
23,252

Additions and expenses capitalized to prepare property for sale
890

 
2,401

 
4,722

Writedowns in value
(224
)
 
(468
)
 
(536
)
Sales
(2,922
)
 
(5,180
)
 
(2,539
)
Other real estate end of period
$
5,584

 
$
7,840

 
$
24,899



The writedowns in fair value were recorded in Loan legal and other real estate expense based on current market activity shown in the appraisals. In addition, for the three months ended March 31, 2015, the Company realized a negligible net gain on the sale of other real estate and recorded these gains as part of Noninterest income.

Liabilities

Liabilities totaled $2.9 billion at March 31, 2015, consistent with balances at December 31, 2014. Liabilities remained stable due to a $183 million increase in total deposits, offset by a decrease of $138 million in short-term Federal Home Loan Bank advances and a decrease of $53 million in other borrowings.

40




Deposits
(in thousands)
March 31, 2015
 
December 31, 2014
 
Increase (decrease)
Demand deposits
$
680,997

 
$
642,930

 
38,067

 
5.92
 %
Interest-bearing transaction accounts
494,228

 
508,941

 
(14,713
)
 
(2.89
)%
Money market accounts
848,139

 
755,569

 
92,570

 
12.25
 %
Savings
85,769

 
78,718

 
7,051

 
8.96
 %
Certificates of deposit:
 
 
 
 
 
 
 
$100 and over
441,775

 
377,544

 
64,231

 
17.01
 %
Other
123,723

 
127,808

 
(4,085
)
 
(3.20
)%
Total deposits
$
2,674,631

 
$
2,491,510

 
183,121

 
7.35
 %
 
 
 
 
 
 
 
 
Non-time deposits / total deposits
79
%
 
80
%
 
 
 
 
Demand deposits / total deposits
25
%
 
26
%
 
 
 
 

Total deposits at March 31, 2015 were $2.7 billion, an increase of $183 million, or 7.4%, from December 31, 2014. The increase in deposits within our money market accounts reflect initiatives to enhance overall deposit levels as well as to improve our funding mix. The composition of our noninterest bearing deposits remained stable at 26% of total deposits at March 31, 2015 compared to December 31, 2014. Growth in balances and the change in composition modestly improved deposit costs during the first quarter when compared to the linked fourth quarter at 0.40%, as compared to 0.41%, and improved from the 0.44% for the prior year period.

Shareholders' Equity
Shareholders' Equity totaled $326 million at March 31, 2015, an increase of $9.9 million from December 31, 2014. Significant activity during the three months ended March 31, 2015:

Net income of $9.3 million,
Other comprehensive income of $1.7 million from the change in unrealized gain/loss on investment securities,
Dividends paid on common stock of $1.1 million



Liquidity and Capital Resources

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 our commitments as they become due. Typical demands on liquidity are 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.

The Bank's Asset-Liability Management Committee oversees our liquidity position, the parameters of which are approved by the Bank's Board of Directors. Our liquidity position is monitored monthly by producing a liquidity

41



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, a liquidity ratio, and a dependency ratio. 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.

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 and payments from the Bank and proceeds from the issuance of equity (i.e. stock option exercises, stock offerings). Another source of funding for the parent company includes the issuance of subordinated debentures and other debt instruments. Management believes our current level of cash at the holding company of $12.2 million will be sufficient to meet all projected cash needs for the remainder of 2015.

As of March 31, 2015, the Company had $56.8 million of outstanding subordinated debentures as part of eight 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 an attractive source of funding.

Bank liquidity
The Bank has a variety of funding sources available to increase financial flexibility. In addition to amounts currently borrowed, at March 31, 2015, the Bank could borrow an additional $341.3 million from the FHLB of Des Moines under blanket loan pledges and has an additional $680.5 million available from the Federal Reserve Bank under a pledged loan agreement. The Bank has unsecured federal funds lines with four correspondent banks totaling $45.0 million. On December 30, 2013, the Company prepaid $30.0 million of debt with the Federal Home Loan Bank with a weighted average interest rate of 4.09% and a maturity of 3 years and incurred a prepayment penalty of $2.6 million. On December 23, 2014, the Company prepaid an additional $50.0 million of debt with the Federal Home Loan Bank with a weighted average interest rate of 3.17%, a maturity of 3 years and incurred a prepayment penalty of $2.9 million . These transactions are expected to further reduce our cost of interest bearing liabilities in future periods and will help mitigate net interest margin compression.

Investment securities are another important tool to the Bank's liquidity objectives. Of the $410.1 million of the securities available for sale at March 31, 2015, $251.4 million was pledged as collateral for deposits of public institutions, treasury, loan notes, and other requirements. The remaining $158.7 million could be pledged or sold to enhance liquidity, if necessary.

In the normal course of business, the Bank enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through the Bank'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 Bank has $1,048.7 million in unused commitments as of March 31, 2015. While this commitment level would exhaust the majority the Company's current liquidity resources, the nature of these commitments is such that the likelihood of funding them in the aggregate at any one time is low.

Capital Resources
The Company and the Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its bank affiliate must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The banking affiliate’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

42



 
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total, Tier 1, and Common equity tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. To be categorized as “well capitalized”, banks must maintain minimum total risk-based (10%), Tier 1 risk-based (8%), Common equity tier 1 risk-based (6.5%), and Tier 1 leverage ratios (5%). As of March 31, 2015, and December 31, 2014, the Company and the Bank met all capital adequacy requirements to which they are subject.
 
The Bank continues to exceed regulatory standards and met the definition of “well-capitalized” (the highest category) at March 31, 2015. Beginning with reporting for the first quarter of 2015, the Company adopted the Regulatory Capital Framework (Basel III). The Company has implemented the necessary processes and procedures to comply with Basel III.

The following table summarizes the Company's various capital ratios at the dates indicated:

(in thousands)
March 31, 2015
 
December 31, 2014
Total capital to risk-weighted assets
12.88
%
 
13.40
%
Tier 1 capital to risk-weighted assets
11.62
%
 
12.14
%
Common equity tier 1 capital to risk-weighted assets1
9.78
%
 
10.15
%
Leverage ratio (Tier 1 capital to average assets)
10.76
%
 
10.48
%
Tangible common equity to tangible assets2
9.01
%
 
8.69
%
Tier 1 capital
$
346,597

 
$
335,220

Total risk-based capital
383,928

 
369,867

 
 
 
 
1 Not an applicable regulatory ratio until the quarter ended March 31, 2015
2 Not a required regulatory capital ratio


The decline in regulatory ratios at March 31, 2015 represents the impact of an increase in risk weighted assets under the Basel III guidelines. The Company believes the tangible common equity and Tier 1 common equity ratios are important measures of capital strength even though they are considered to be non-GAAP measures. The tables further within MD&A reconcile these ratios to U.S. GAAP.
 
Use of Non-GAAP Financial Measures:

The Company's accounting and reporting policies conform to generally accepted accounting principles ("GAAP") in the U.S. and the prevailing practices in the banking industry. However, the Company provides other financial measures, such as Core net interest margin, tangible common equity ratio and Tier 1 common equity ratio, in this filing that are considered “non-GAAP financial measures.” Generally, a non-GAAP financial measure is a numerical measure of a company's financial performance, financial position or cash flows that exclude (or include) amounts included in (or excluded from) the most directly comparable measure calculated and presented in accordance with U.S. GAAP.
The Company believes these non-GAAP financial measures and ratios, when taken together with the corresponding U.S. GAAP measures and ratios, provide meaningful supplemental information regarding the Company's performance and capital strength. The Company's management uses, and believes investors benefit from referring to, these non-GAAP measures and ratios in assessing the Company's financial and operating results and related trends and when planning and forecasting future periods. However, these non-GAAP measures and ratios should be considered in addition to, and not as a substitute for or preferable to, ratios prepared in accordance with U.S. GAAP. The Company has provided a reconciliation of, where applicable, the most comparable GAAP financial measures and ratios to the non-GAAP financial measures and ratios, or a reconciliation of the non-GAAP calculation of the financial measure.

43



The Company believes the tangible common equity and Tier 1 common equity ratios are important financial measures of capital strength even though they are considered to be non-GAAP measures and provide useful information about the Company's capital adequacy. The tables below contain reconciliations of these ratios to the most comparable measure under U.S. GAAP.

Core Performance Measures

 
For the Quarter ended
(in thousands)
March 31, 2015
 
December 31, 2014
 
March 31, 2014
CORE PERFORMANCE MEASURES
 
 
 
 
 
Net interest income
$
29,045

 
$
30,816

 
$
30,366

Less: Incremental accretion income
3,458

 
5,149

 
6,664

Core net interest income
25,587

 
25,667

 
23,702

 
 
 
 
 
 
Total noninterest income
3,583

 
4,852

 
3,922

Less: Change in FDIC loss share receivable
(2,264
)
 
(1,781
)
 
(2,410
)
Less: Gain (loss) on sale of other real estate covered under FDIC loss share
(15
)
 
195

 
131

Less: Gain on sale of investment securities
23

 

 

Core noninterest income
5,839

 
6,438

 
6,201

 
 
 
 
 
 
Total core revenue
31,426

 
32,105

 
29,903

 
 
 
 
 
 
Provision for portfolio loans
1,580

 
1,968

 
1,027

 
 
 
 
 
 
Total noninterest expense
19,950

 
24,795

 
21,102

Less: FDIC clawback
412

 
141

 
(111
)
Less: Other loss share expenses
470

 
544

 
829

Less: FHLB prepayment penalty

 
2,936

 

Less: Facilities disposal charge

 
1,004

 

Core noninterest expense
19,068

 
20,170

 
20,384

 
 
 
 
 
 
Core income before income tax expense
10,778

 
9,967

 
8,492

 
 
 
 
 
 
Total income tax expense
5,022

 
2,812

 
3,007

Less: Income tax expense (benefit) of PCI assets
1,375

 
(452
)
 
140

Core income tax expense
3,647

 
3,264

 
2,867

Core net income
$
7,131

 
$
6,703

 
$
5,625

 
 
 
 
 
 
Core earnings per share
$
0.35

 
$
0.33

 
$
0.28

Core efficiency ratio
60.67
%
 
62.83
%
 
68.17
%
Core return on average assets
0.88
%
 
0.82
%
 
0.74
%
Core return on average common equity
8.99
%
 
8.43
%
 
7.94
%
 
 
 
 
 
 










44



The Company believes Core net interest margin is an important measure of our financial performance, even though it is a non-GAAP financial measure, because it provides supplemental information by which the evaluate the impact of excess Covered loan accretion on the Company's net interest margin and the Company's operating performance on an ongoing bases, excluding such impact. The table below reconciles Core net interest margin to the most comparable number under U.S. GAAP.

Net Interest Margin to Core Net Interest Margin

 
For the Quarter ended
(in thousands)
March 31, 2015
 
December 31, 2014
Net interest income (fully tax equivalent)
$
29,467

 
$
30,803

Less: Incremental accretion income
3,457

 
6,664

Core net interest income (fully tax equivalent)
$
26,010

 
$
24,139

 
 
 
 
Average earning assets
$
3,047,815

 
$
2,848,514

Reported net interest margin (fully tax equivalent)
3.92
%
 
4.39
%
Core net interest margin (fully tax equivalent)
3.46
%
 
3.44
%

Tangible common equity ratio

(in thousands)
March 31, 2015
 
December 31, 2014
Total shareholders' equity
$
326,109

 
$
316,241

Less: Goodwill
30,334

 
30,334

Less: Intangible assets
3,880

 
4,164

Tangible common equity
$
291,895

 
$
281,743

 
 
 
 
Total assets
$
3,275,295

 
$
3,277,003

Less: Goodwill
30,334

 
30,334

Less: Intangible assets
3,880

 
4,164

Tangible assets
$
3,241,081

 
$
3,242,505

 
 
 
 
Tangible common equity to tangible assets
9.01
%
 
8.69
%


















45



Tier 1 common equity ratio

(in thousands)
March 31, 2015
 
December 31, 2014
Total shareholders' equity
$
326,109

 
$
316,241

Less: Goodwill
30,334

 
30,334

Less: Intangible assets, net of deferred tax liabilities1
958

 
4,164

Less: Unrealized gains
3,379

 
1,681

Plus: Qualifying trust preferred securities
55,100

 
55,100

Plus: Other
59

 
58

Total tier 1 capital
346,597

 
335,220

Less: Qualifying trust preferred securities
55,100

 
55,100

Less: Other1
23

 
 
Common equity tier 1 capital
$
291,474

 
$
280,120

 
 
 
 
Total risk-weighted assets determined in accordance with prescribed regulatory requirements
$
2,981,811

 
$
2,760,729

 
 
 
 
Common equity tier 1 capital to risk-weighted assets
9.78
%
 
10.15
%
 
 
 
 
1 Beginning with quarter ended March 31, 2015, the implementation of revised regulatory capital guidelines under Basel III has resulted in differences in these items when compared to prior periods.




Critical Accounting Policies

The impact and any associated risks related to the Company's critical accounting policies on business operations are described 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 description on the application of these and other accounting policies, see the Company's Annual Report on Form 10-K for the year ended December 31, 2014.

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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The disclosures set forth in this item are qualified by the section captioned “Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995” included in Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report and other cautionary statements set forth elsewhere in this report.

Interest Rate Risk 
Our interest rate sensitivity management seeks to avoid fluctuating interest margins to provide for 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 an earnings simulation model.

The Company determines the sensitivity of its short-term future earnings to a hypothetical plus or minus 100 to 300 basis point parallel rate shock through the use of simulation modeling. The 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 following table summarizes the expected impact of interest rate shocks on net interest income (due to the current level of interest rates, the 200 and 300 basis point downward shock scenarios are not shown):

Rate Shock
 
Annual % change
in net interest income
+ 300 bp
 
6.4%
+ 200 bp
 
4.1%
+ 100 bp
 
1.7%
 - 100 bp
 
-1.1%

Interest rate simulations for March 31, 2015, demonstrate that a rising rate environment will have a positive impact on net interest income.

The Company occasionally 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. At March 31, 2015, the Company had $23.8 million in notional amount of outstanding interest rate caps, to help manage interest rate risk.

 





47




ITEM 4: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of the Company’s Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15, as of March 31, 2015. Disclosure controls and procedures include without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Based on that evaluation, the CEO and CFO concluded the Company’s disclosure controls and procedures were effective as of March 31, 2015 to provide reasonable assurance of the achievement of the objectives described above.

Changes to Internal Controls

There were no changes during the period covered by this Quarterly Report on Form 10-Q in the Company's internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, those controls.



48




PART II - OTHER INFORMATION


ITEM 1: LEGAL PROCEEDINGS

The Company and its subsidiaries are, from time to time, parties to various legal proceedings arising out of their businesses. Management believes 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, consolidated financial condition, results of operations or cash flows of the Company or any of its subsidiaries.


ITEM 1A: RISK FACTORS

For information regarding risk factors affecting the Company, please see the cautionary language regarding forward-looking statements in the introduction to Item 2 of Part I of this Report on Form 10-Q, and Part I, Item 1A of our Report on Form 10-K for the fiscal year ended December 31, 2014. There have been no material changes to the risk factors described in such Annual Report on Form 10-K.


ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

The following tables provides information on repurchases by the Company of its common stock in each month of the quarter ended March 31, 2015.

Period
 
Total number of shares purchased (a)
 
Weighted-average price paid per share
 
Total number of shares purchased as part of publicly announces plans or programs
 
Maximum number of shares that may yet be purchased under the plans or programs
January 1, 2015 through January 31, 2015
 

 
$

 

 

February 1, 2015 through February 28, 2015
 

 

 

 

March 1, 2015 through March 31, 2015
 
11,733

 
20.83

 

 

Total
 
11,733

 
 
 

 
 

(a) Represents shares of the Company’s common stock shares withheld to satisfy tax withholding obligations upon the vesting of awards of restricted stock.  These shares were purchased pursuant to the terms of the applicable plan and not pursuant to a publicly announced repurchase plan or program.



49



ITEM 6: EXHIBITS

Exhibit
No.
 
Description
 
 
Registrant hereby agrees to furnish to the Commission, upon request, the instruments defining the rights of holders of each issue of long-term debt of Registrant and its consolidated subsidiaries.
 
 
 
10.1
 
Form of Enterprise Financial Services Corp LTIP Grant Agreement (filed herewith).
 
 
 
*12.1
 
Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends.
 
 
 
*31.1
 
Chief Executive Officer's Certification required by Rule 13(a)-14(a).
 
 
 
*31.2
 
Chief Financial Officer's Certification required by Rule 13(a)-14(a).
 
 
 
**32.1
 
Chief Executive Officer Certification pursuant to 18 U.S.C. § 1350, as adopted pursuant to section § 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
**32.2
 
Chief Financial Officer Certification pursuant to 18 U.S.C. § 1350, as adopted pursuant to section § 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101
 
Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2015, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheet at March 31, 2015 and December 31, 2014; (ii) Consolidated Statement of Income for the three months ended March 31, 2015 and 2014; (iii) Consolidated Statement of Comprehensive Income for the three months ended March 31, 2015 and 2014; (iv) Consolidated Statement of Changes in Equity for the three months ended March 31, 2015 and 2014; (v) Consolidated Statement of Cash Flows for the three months ended March 31, 2015 and 2014; and (vi) Notes to Financial Statements.
 
 
 

* Filed herewith
** Furnished herewith. Notwithstanding any incorporation of this Quarterly Statement on Form 10-Q in any other filing by the Registrant, Exhibits furnished herewith and designated with two (**) shall not be deemed incorporated by reference to any other filing unless specifically otherwise set forth herein or therein.

50



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Clayton, State of Missouri on the day of April 30, 2015.
 
 
ENTERPRISE FINANCIAL SERVICES CORP
 
 
 
By:
/s/ Peter F. Benoist
 
 
 
Peter F. Benoist
 
 
 
Chief Executive Officer
 
 
 
 
By: 
/s/ Keene S. Turner
 
 
 
Keene S. Turner
 
 
 
Chief Financial Officer
 



51