Attached files

file filename
EX-32.2 - CHIEF FINANCIAL OFFICER CERTIFICATION PURSUANT TO 18 U.S.C SECT 1350 - ENTERPRISE FINANCIAL SERVICES CORPa2014930-ex322.htm
EX-31.2 - CHIEF FINANCIAL OFFICER CERTIFICATION REQUIRED BY RULE 13(A)-14(A) - ENTERPRISE FINANCIAL SERVICES CORPa2014930-ex312.htm
EX-10.2 - LEUCK AGREEMENT - ENTERPRISE FINANCIAL SERVICES CORPa2014930-ex102.htm
EX-31.1 - CHIEF EXECUTIVE OFFICER CERTIFICATION REQUIRED BY RULE 13(A)-14(A) - ENTERPRISE FINANCIAL SERVICES CORPa2014930-ex311.htm
EX-32.1 - CHIEF EXECUTIVE OFFICER CERTIFICATION PURSUANT TO 18 U.S.C SECT 1350 - ENTERPRISE FINANCIAL SERVICES CORPa2014930-ex321.htm
EX-10.1 - SANFILIPPO AGREEMENT - ENTERPRISE FINANCIAL SERVICES CORPa2014930-ex101.htm
EXCEL - IDEA: XBRL DOCUMENT - ENTERPRISE FINANCIAL SERVICES CORPFinancial_Report.xls
EX-12.1 - COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS - ENTERPRISE FINANCIAL SERVICES CORPa2014930-ex121.htm


 

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 September 30, 2014.
 
 
 
[   ]
 
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 October 29, 2014, the Registrant had 19,785,022 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 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)
September 30, 2014
 
December 31, 2013
Assets
 
 
 
Cash and due from banks
$
54,113

 
$
19,573

Federal funds sold
36

 
76

Interest-bearing deposits (including $980 and $990 pledged as collateral)
69,663

 
190,920

                  Total cash and cash equivalents
123,812

 
210,569

Interest-bearing deposits greater than 90 days
5,300

 
5,300

Securities available for sale
456,584

 
434,587

Loans held for sale
4,899

 
1,834

Portfolio loans
2,294,905

 
2,137,313

   Less: Allowance for loan losses
28,800

 
27,289

Portfolio loans, net
2,266,105

 
2,110,024

Purchase credit impaired loans, net of the allowance for loan losses ($15,544 and $15,438, respectively)
98,318

 
125,100

                  Total loans, net
2,364,423

 
2,235,124

Other real estate not covered under FDIC loss share
2,261

 
7,576

Other real estate covered under FDIC loss share
8,826

 
15,676

Other investments, at cost
15,291

 
12,605

Fixed assets, net
18,054

 
18,180

Accrued interest receivable
7,526

 
7,303

State tax credits, held for sale, including $15,131 and $16,491 carried at fair value, respectively
45,631

 
48,457

FDIC loss share receivable
22,039

 
34,319

Goodwill
30,334

 
30,334

Intangible assets, net
4,453

 
5,418

Other assets
100,157

 
102,915

Total assets
$
3,209,590

 
$
3,170,197

 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
Demand deposits
$
695,804

 
$
653,686

Interest-bearing transaction accounts
438,205

 
219,802

Money market accounts
736,840

 
948,884

Savings
80,521

 
79,666

Certificates of deposit:
 
 
 
$100 and over
426,593

 
475,544

Other
131,801

 
157,371

Total deposits
2,509,764

 
2,534,953

Subordinated debentures
56,807

 
62,581

Federal Home Loan Bank advances
120,000

 
50,000

Other borrowings
181,122

 
203,831

Notes payable
6,000

 
10,500

Accrued interest payable
854

 
957

Other liabilities
26,289

 
27,670

Total liabilities
2,900,836

 
2,890,492

 
 
 
 
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; 19,861,022 and 19,399,709 shares issued, respectively
199

 
194

Treasury stock, at cost; 76,000 shares
(1,743
)
 
(1,743
)
Additional paid in capital
207,079

 
200,258

Retained earnings
103,452

 
85,376

Accumulated other comprehensive loss
(233
)
 
(4,380
)
Total shareholders' equity
308,754

 
279,705

Total liabilities and shareholders' equity
$
3,209,590

 
$
3,170,197

See accompanying notes to condensed consolidated financial statements.

1



ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
 
Three months ended September 30,
 
Nine months ended September 30,
(In thousands, except per share data)
2014
 
2013
 
2014
 
2013
Interest income:
 
 
 
 
 
 
 
Interest and fees on loans
$
28,395

 
$
34,396

 
$
89,582

 
$
109,330

Interest on debt securities:
 
 
 
 
 
 
 
Taxable
2,190

 
2,043

 
6,545

 
6,210

Nontaxable
298

 
301

 
896

 
907

Interest on interest-bearing deposits
43

 
37

 
145

 
130

Dividends on equity securities
110

 
106

 
201

 
277

Total interest income
31,036

 
36,883

 
97,369

 
116,854

Interest expense:
 
 
 
 
 
 
 
Interest-bearing transaction accounts
163

 
99

 
385

 
360

Money market accounts
653

 
714

 
2,095

 
2,348

Savings
52

 
56

 
151

 
171

Certificates of deposit:
 
 
 
 
 
 
 
$100 and over
1,335

 
1,326

 
3,997

 
4,207

Other
406

 
439

 
1,249

 
1,385

Subordinated debentures
306

 
679

 
1,016

 
2,580

Federal Home Loan Bank advances
490

 
757

 
1,345

 
2,221

Notes payable and other borrowings
187

 
239

 
579

 
801

Total interest expense
3,592

 
4,309

 
10,817

 
14,073

Net interest income
27,444

 
32,574

 
86,552

 
102,781

Provision for portfolio loan losses
66

 
(652
)
 
2,441

 
(3,094
)
Provision for purchase credit impaired loan losses
(1,877
)
 
2,811

 
957

 
2,789

Net interest income after provision for loan losses
29,255

 
30,415

 
83,154

 
103,086

Noninterest income:
 
 
 
 
 
 
 
Wealth Management revenue
1,754

 
1,698

 
5,191

 
5,419

Service charges on deposit accounts
1,812

 
1,768

 
5,317

 
5,025

Other service charges and fee income
849

 
722

 
2,188

 
2,030

Gain on sale of other real estate
114

 
472

 
1,514

 
1,562

Gain on state tax credits, net
156

 
308

 
860

 
1,214

Gain on sale of investment securities

 
611

 

 
1,295

Change in FDIC loss share receivable
(2,374
)
 
(2,849
)
 
(7,526
)
 
(13,647
)
Miscellaneous income
2,141

 
986

 
4,235

 
2,055

Total noninterest income
4,452

 
3,716

 
11,779

 
4,953

Noninterest expense:
 
 
 
 
 
 
 
Employee compensation and benefits
11,913

 
10,777

 
35,882

 
33,006

Occupancy
1,683

 
1,689

 
4,998

 
5,298

Data processing
1,045

 
1,143

 
3,296

 
3,000

FDIC and other insurance
710

 
900

 
2,170

 
2,592

Loan legal and other real estate expense
811

 
1,247

 
2,985

 
3,355

Professional fees
710

 
1,041

 
2,569

 
3,394

FDIC clawback
1,028

 
62

 
1,060

 
815

Other
3,221

 
4,149

 
9,708

 
10,979

Total noninterest expense
21,121

 
21,008

 
62,668

 
62,439

 
 
 
 
 
 
 
 
Income before income tax expense
12,586

 
13,123

 
32,265

 
45,600

Income tax expense
4,388

 
4,713

 
11,059

 
16,117

Net income
$
8,198

 
$
8,410

 
$
21,206

 
$
29,483

 
 
 
 
 
 
 
 
Earnings per common share
 
 
 
 
 
 
 
Basic
$
0.41

 
$
0.45

 
$
1.07

 
$
1.61

Diluted
0.41

 
0.44

 
1.07

 
1.55

See accompanying notes to condensed consolidated financial statements.

2




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

 
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)
2014
 
2013
 
2014
 
2013
Net income
$
8,198

 
$
8,410

 
$
21,206

 
$
29,483

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gain/(loss) on investment securities available for sale arising during the period, net of income tax expense/(benefit) for three months of $(505), and $598, and for nine months of $2,574 and ($5,716), respectively.
(812
)
 
939

 
4,147

 
(8,981
)
Less reclassification adjustment for realized gains
on sale of securities available for sale included in net income, net of income tax expense for three months of $0, and $238, and for the nine months of $0, and $505, respectively.

 
(373
)
 

 
(790
)
Total other comprehensive income (loss)
(812
)
 
566

 
4,147

 
(9,771
)
Total comprehensive income
$
7,386

 
$
8,976

 
$
25,353

 
$
19,712


See accompanying notes to condensed 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, 2014
 
$

 
$
194

 
$
(1,743
)
 
$
200,258

 
$
85,376

 
$
(4,380
)
 
$
279,705

Net income
 

 

 

 

 
21,206

 

 
21,206

Other comprehensive income
 

 

 

 

 

 
4,147

 
4,147

Cash dividends paid on common shares, $0.105 per share
 

 

 

 

 
(3,130
)
 

 
(3,130
)
Issuance under equity compensation plans, 173,461 shares
 

 
2

 

 
(484
)
 

 

 
(482
)
Trust preferred securities conversion 287,852 shares
 

 
3

 

 
4,999

 

 

 
5,002

Share-based compensation
 

 

 

 
2,205

 

 

 
2,205

Excess tax benefit related to equity compensation plans
 

 

 

 
101

 

 

 
101

Balance September 30, 2014
 
$

 
$
199

 
$
(1,743
)
 
$
207,079

 
$
103,452

 
$
(233
)
 
$
308,754


(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, 2013
 
$

 
$
181

 
$
(1,743
)
 
$
173,299

 
$
56,218

 
$
7,790

 
$
235,745

Net income
 

 

 

 

 
29,483

 

 
29,483

Other comprehensive loss
 

 

 

 

 

 
(9,771
)
 
(9,771
)
Cash dividends paid on common shares, $0.1575 per share
 

 

 

 

 
(2,924
)
 

 
(2,924
)
Repurchase of common stock warrants
 

 

 

 
(1,006
)
 

 

 
(1,006
)
Issuance under equity compensation plans, 87,743 shares
 

 
1

 

 
2,550

 

 

 
2,551

Trust preferred securities conversion, 1,176,470 shares
 

 
12

 

 
20,431

 

 

 
20,443

Share-based compensation
 

 

 

 
3,136

 

 

 
3,136

Excess tax benefit related to equity compensation plans
 

 

 

 
83

 

 

 
83

Balance September 30, 2013
 
$

 
$
194

 
$
(1,743
)
 
$
198,493

 
$
82,777

 
$
(1,981
)
 
$
277,740


See accompanying notes to condensed consolidated financial statements.

4



ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
Nine months ended September 30,
(in thousands)
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
21,206

 
$
29,483

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation
1,681

 
1,936

Provision for loan losses
3,398

 
(305
)
Deferred income taxes
6,458

 
180

Net amortization of debt securities
2,885

 
4,579

Amortization of intangible assets
965

 
1,540

Gain on sale of investment securities

 
(1,295
)
Mortgage loans originated for sale
(52,475
)
 
(64,463
)
Proceeds from mortgage loans sold
49,811

 
70,884

Gain on sale of other real estate
(1,514
)
 
(1,562
)
Gain on state tax credits, net
(860
)
 
(1,214
)
Excess tax benefit of share-based compensation
(101
)
 

Share-based compensation
2,205

 
3,136

Valuation adjustment on other real estate
618

 
962

Net accretion of loan discount and indemnification asset
731

 
(13,853
)
Changes in:
 
 
 
Accrued interest receivable
(223
)
 
600

Accrued interest payable
(103
)
 
(397
)
Prepaid FDIC insurance

 
2,607

Other assets
(2,984
)
 
(21,322
)
Other liabilities
(1,381
)
 
516

Net cash provided by operating activities
30,317

 
12,012

Cash flows from investing activities:
 
 
 
Net (increase) decrease in loans
(133,782
)
 
36,955

Net cash proceeds received from FDIC loss share receivable
6,487

 
9,654

Proceeds from the sale of debt and equity securities, available for sale

 
159,604

Proceeds from the maturity of debt and equity securities, available for sale
35,503

 
69,017

Proceeds from the redemption of other investments
18,637

 
26,695

Proceeds from the sale of state tax credits held for sale
4,099

 
8,126

Proceeds from the sale of other real estate
14,435

 
15,303

Payments for the purchase/origination of:
 
 
 
Available for sale debt and equity securities
(53,664
)
 
(60,732
)
Other investments
(21,324
)
 
(28,143
)
Bank owned life insurance

 
(20,000
)
State tax credits held for sale

 
(1,365
)
Fixed assets
(1,556
)
 
(1,122
)
Net cash (used in) provided by investing activities
(131,165
)
 
213,992

Cash flows from financing activities:
 
 
 
Net increase/(decrease) in noninterest-bearing deposit accounts
42,118

 
(67,242
)
Net decrease in interest-bearing deposit accounts
(67,307
)
 
(143,691
)
Proceeds from Federal Home Loan Bank advances
799,600

 
743,000

Repayments of Federal Home Loan Bank advances
(729,600
)
 
(703,000
)
Repayments of notes payable
(4,500
)
 
(900
)
Repayments of subordinated debentures

 
(2,000
)
Net decrease in other borrowings
(22,709
)
 
(66,005
)
Cash dividends paid on common stock
(3,130
)
 
(2,924
)
Excess tax benefit of share-based compensation
101

 
83

Payments for the repurchase of common stock warrants

 
(1,006
)
Employee stock issuances, net
(482
)
 
2,551

Net cash provided by (used in) financing activities
14,091

 
(241,134
)
Net decrease in cash and cash equivalents
(86,757
)
 
(15,130
)
Cash and cash equivalents, beginning of period
210,569

 
116,370

Cash and cash equivalents, end of period
$
123,812

 
$
101,240

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
10,920

 
$
14,470

Income taxes
8,998

 
24,348

Noncash transactions:
 
 
 
Transfer to other real estate owned in settlement of loans
7,468

 
21,116

Sales of other real estate financed
5,102

 
5,564

Issuance of common stock from Trust Preferred Securities conversion
5,002

 
20,443

See accompanying notes to condensed 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 and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2014. 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, 2013.

Basis of Financial Statement Presentation

The condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with 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 September 30,
 
Nine months ended September 30,
(in thousands, except per share data)
2014
 
2013
 
2014
 
2013
Net income as reported
$
8,198

 
$
8,410

 
$
21,206

 
$
29,483

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

 
217

 
66

 
926

Net income available to common shareholders and assumed conversions
$
8,198

 
$
8,627

 
$
21,272

 
$
30,409

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
19,838

 
18,779

 
19,729

 
18,288

Incremental shares from assumed conversions of convertible trust preferred securities

 
851

 
76

 
1,241

Additional dilutive common stock equivalents
142

 
200

 
165

 
153

Weighted average diluted common shares outstanding
19,980

 
19,830

 
19,970

 
19,682

 
 
 
 
 
 
 
 
Basic earnings per common share:
$
0.41

 
$
0.45

 
$
1.07

 
$
1.61

Diluted earnings per common share:
$
0.41

 
$
0.44

 
$
1.07

 
$
1.55


For the three months ended September 30, 2014 and 2013, the amount of common stock equivalents excluded from the earnings per share calculations because their effect was anti-dilutive was 289,286, and 474,267 common stock equivalents, respectively. For the nine months ended September 30, 2014 and 2013, the amount of common stock equivalents excluded from the earnings per share calculations because their effect was anti-dilutive was 289,407, and 488,318 common stock equivalents (including 9,497 common stock warrants), respectively.

7



NOTE 3 - INVESTMENTS

The following table presents the amortized cost, gross unrealized gains and losses and fair value of securities available-for-sale:
 
 
September 30, 2014
(in thousands)
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair Value
Available for sale securities:
 
 
 
 
 
 
 
    Obligations of U.S. Government-sponsored enterprises
$
91,823

 
$
638

 
$
(189
)
 
$
92,272

    Obligations of states and political subdivisions
49,064

 
1,576

 
(699
)
 
49,941

    Agency mortgage-backed securities
315,951

 
3,099

 
(4,679
)
 
314,371

 
$
456,838

 
$
5,313

 
$
(5,567
)
 
$
456,584

 
 
 
 
 
 
 
 
 
December 31, 2013
(in thousands)
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair Value
Available for sale securities:
 
 
 
 
 
 
 
    Obligations of U.S. Government-sponsored enterprises
$
93,218

 
$
700

 
$
(388
)
 
$
93,530

    Obligations of states and political subdivisions
49,721

 
983

 
(1,761
)
 
48,943

    Agency mortgage-backed securities
298,623

 
2,675

 
(9,184
)
 
292,114

 
$
441,562

 
$
4,358

 
$
(11,333
)
 
$
434,587


At September 30, 2014, and December 31, 2013, 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 residential mortgage-backed securities are all issued by U.S. government sponsored enterprises. Available for sale securities having a fair value of $255.9 million and $270.1 million at September 30, 2014, and December 31, 2013, 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 classified as available for sale at September 30, 2014, 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 5 years.

(in thousands)
Amortized Cost
 
Estimated Fair Value
Due in one year or less
$
3,181

 
$
3,227

Due after one year through five years
109,044

 
110,116

Due after five years through ten years
21,833

 
22,352

Due after ten years
6,829

 
6,518

Mortgage-backed securities
315,951

 
314,371

 
$
456,838

 
$
456,584



8



The following table represents a summary of available-for-sale investment securities that had an unrealized loss:

 
September 30, 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
$
5,454

 
$
7

 
$
24,813

 
$
182

 
$
30,267

 
$
189

Obligations of states and political subdivisions
$
1,092

 
$
18

 
$
14,143

 
$
681

 
$
15,235

 
$
699

Agency mortgage-backed securities
29,404

 
139

 
136,333

 
4,540

 
165,737

 
4,679

 
$
35,950

 
$
164

 
$
175,289

 
$
5,403

 
$
211,239

 
$
5,567

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
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
$
30,221

 
$
388

 
$

 
$

 
$
30,221

 
$
388

Obligations of states and political subdivisions
17,141

 
952

 
7,168

 
809

 
24,309

 
1,761

Agency mortgage-backed securities
159,999

 
7,338

 
21,437

 
1,846

 
181,436

 
9,184

 
$
207,361

 
$
8,678

 
$
28,605

 
$
2,655

 
$
235,966

 
$
11,333


The unrealized losses at both September 30, 2014, and December 31, 2013, 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 (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 September 30, 2014, management performed its quarterly analysis of all securities with an unrealized loss and concluded no individual securities were other-than-temporarily impaired.

The gross gains and gross losses realized from sales of available-for-sale investment securities were as follows:
 
 
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)
2014
 
2013
 
2014
 
2013
Gross gains realized
$

 
$
611

 
$

 
$
1,477

Gross losses realized

 

 

 
(182
)
Proceeds from sales

 
36,710

 

 
159,604



9



NOTE 4 - PORTFOLIO LOANS


Below is a summary of Portfolio loans by category at September 30, 2014, and December 31, 2013:

(in thousands)
September 30, 2014
 
December 31, 2013
Real Estate Loans:
 
 
 
    Construction and land development
$
123,888

 
$
117,032

    Commercial real estate - Investor owned
391,791

 
437,688

    Commercial real estate - Owner occupied
366,724

 
341,631

    Residential real estate
187,594

 
158,527

Total real estate loans
$
1,069,997

 
$
1,054,878

    Commercial and industrial
1,172,015

 
1,041,576

    Consumer and other
51,816

 
39,838

    Portfolio loans
$
2,293,828

 
$
2,136,292

Unearned loan costs, net
1,077

 
1,021

    Portfolio loans, including unearned loan costs
$
2,294,905

 
$
2,137,313


The Company grants commercial, real estate, 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 concentrated in and 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.
 

10




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 September 30, 2014, and at December 31, 2013, 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, 2013
$
12,246

 
$
4,096

 
$
6,600

 
$
2,136

 
$
2,019

 
$
192

 
$
27,289

Provision charged to expense
899

 
589

 
(9
)
 
(532
)
 
16

 
64

 
1,027

Losses charged off
(474
)
 
(336
)
 
(250
)
 
(305
)
 

 
(4
)
 
(1,369
)
Recoveries
187

 
8

 
34

 
688

 
41

 

 
958

Balance at
March 31, 2014
$
12,858

 
$
4,357

 
$
6,375

 
$
1,987

 
$
2,076

 
$
252

 
$
27,905

Provision charged to expense
3,068

 
(262
)
 
(2,064
)
 
132

 
412

 
62

 
1,348

Losses charged off
(1,005
)
 
(88
)
 

 

 

 

 
(1,093
)
Recoveries
154

 
14

 
19

 
36

 
39

 

 
262

Balance at
June 30, 2014
$
15,075

 
$
4,021

 
$
4,330

 
$
2,155

 
$
2,527

 
$
314

 
$
28,422

Provision charged to expense
169

 
(245
)
 
(101
)
 
321

 
(110
)
 
32

 
66

Losses charged off
(215
)
 
(50
)
 

 
(600
)
 

 

 
(865
)
Recoveries
880

 
8

 
23

 
35

 
230

 
1

 
1,177

Balance at
September 30, 2014
$
15,909

 
$
3,734

 
$
4,252

 
$
1,911

 
$
2,647

 
$
347

 
$
28,800


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 September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for Loan Losses - Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
404

 
$
293

 
$

 
$
364

 
$
17

 
$

 
$
1,078

Collectively evaluated for impairment
15,505

 
3,441

 
4,252

 
1,547

 
2,630

 
347

 
27,722

Total
$
15,909

 
$
3,734

 
$
4,252

 
$
1,911

 
$
2,647

 
$
347

 
$
28,800

Loans - Ending Balance:
 
 
 
 
 
 
 

 
 
 
 
 
 
Individually evaluated for impairment
$
3,198

 
$
4,820

 
$
5,164

 
$
6,455

 
$
386

 
$

 
$
20,023

Collectively evaluated for impairment
1,168,817

 
361,904

 
386,627

 
117,433

 
187,208

 
52,893

 
2,274,882

Total
$
1,172,015

 
$
366,724

 
$
391,791

 
$
123,888

 
$
187,594

 
$
52,893

 
$
2,294,905

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for Loan Losses - Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
736

 
$
107

 
$

 
$
703

 
$
4

 
$

 
$
1,550

Collectively evaluated for impairment
11,510

 
3,989

 
6,600

 
1,433

 
2,015

 
192

 
25,739

Total
$
12,246

 
$
4,096

 
$
6,600

 
$
2,136

 
$
2,019

 
$
192

 
$
27,289

Loans - Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
3,380

 
$
606

 
$
6,811

 
$
9,484

 
$
559

 
$

 
$
20,840

Collectively evaluated for impairment
1,038,196

 
341,025

 
430,877

 
107,548

 
157,968

 
40,859

 
2,116,473

Total
$
1,041,576

 
$
341,631

 
$
437,688

 
$
117,032

 
$
158,527

 
$
40,859

 
$
2,137,313


12



A summary of Portfolio loans individually evaluated for impairment by category at September 30, 2014, and December 31, 2013, is as follows:

 
September 30, 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 & Industrial
$
4,512

 
$
3,198

 
$

 
$
3,198

 
$
404

 
$
4,037

Real Estate:
 
 
 
 
 
 
 
 
 
 
 
    Commercial - Owner Occupied
4,876

 
773

 
1,891

 
2,664

 
293

 
1,388

    Commercial - Investor Owned
5,164

 

 
5,164

 
5,164

 

 
4,138

    Construction and Land Development
7,550

 
430

 
6,026

 
6,456

 
364

 
7,565

    Residential
386

 
200

 
185

 
385

 
17

 
495

Consumer & Other

 

 

 

 

 
519

Total
$
22,488

 
$
4,601

 
$
13,266

 
$
17,867

 
$
1,078

 
$
18,142


 
December 31, 2013
(in thousands)
Unpaid
Contractual
Principal Balance
 
Recorded
Investment
With No Allowance
 
Recorded
Investment
With
Allowance
 
Total
Recorded Investment
 
Related Allowance
 
Average
Recorded Investment
Commercial & Industrial
$
4,377

 
$

 
$
3,384

 
$
3,384

 
$
736

 
$
6,574

Real Estate:
 
 
 
 
 
 
 
 
 
 
 
    Commercial - Owner Occupied
606

 
201

 
421

 
622

 
107

 
1,868

    Commercial - Investor Owned
8,033

 
7,190

 

 
7,190

 

 
11,348

    Construction and Land Development
10,668

 
7,383

 
2,419

 
9,802

 
703

 
5,770

    Residential
559

 
348

 
221

 
569

 
4

 
1,930

Consumer & Other

 

 

 

 

 

Total
$
24,243

 
$
15,122

 
$
6,445

 
$
21,567

 
$
1,550

 
$
27,490



The following table presents details for past due and impaired loans:
 
September 30, 2014
 
September 30, 2013
(in thousands)
Three months ended
 
Nine months ended
 
Three months ended
 
Nine months ended
Total interest income that would have been recognized under original terms
$
246

 
$
927

 
$
410

 
$
1,454

Total cash received and recognized as interest income on non-accrual loans
51

 
83

 
4

 
28

Total interest income recognized on impaired loans
11

 
27

 
4

 
33


There was one loan for $0.3 million over 90 days past due and still accruing interest at September 30, 2014. At September 30, 2014, there were no unadvanced commitments on impaired loans.


13



The recorded investment in impaired Portfolio loans by category at September 30, 2014, and December 31, 2013, is as follows:
 
 
September 30, 2014
(in thousands)
Non-accrual
 
Restructured
 
Loans over 90 days past due and still accruing interest
 
Total
Commercial & Industrial
$
3,221

 
$

 
$
340

 
$
3,561

Real Estate:
 
 
 
 
 
 
 
    Commercial - Investor Owned
4,755

 
587

 

 
5,342

    Commercial - Owner Occupied
2,192

 
777

 

 
2,969

    Construction and Land Development
6,849

 

 

 
6,849

    Residential
401

 

 

 
401

Consumer & Other

 

 

 

       Total
$
17,418

 
$
1,364

 
$
340

 
$
19,122


 
December 31, 2013
(in thousands)
Non-accrual
 
Restructured
 
Loans over 90 days past due and still accruing interest
 
Total
Commercial & Industrial
$
3,384

 
$

 
$

 
$
3,384

Real Estate:
 
 
 
 
 
 
 
    Commercial - Investor Owned
6,511

 
678

 

 
7,189

    Commercial - Owner Occupied
622

 

 

 
622

    Construction and Land Development
9,802

 

 

 
9,802

    Residential
569

 

 

 
569

Consumer & Other

 

 

 

       Total
$
20,888

 
$
678

 
$

 
$
21,566


The recorded investment by category for the Portfolio loans that have been restructured during the three and nine months ended September 30, 2014 and 2013, is as follows:

 
Three months ended September 30, 2014
 
Three months ended September 30, 2013
(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 & Industrial
2

 
$
658

 
$
658

 

 
$

 
$

Real Estate:
 
 
 
 
 
 
 
 
 
 
 
     Commercial - Owner Occupied
1

 
357

 
357

 

 

 

     Commercial - Investor Owned

 

 

 

 

 

    Construction and Land Development
1

 
2,827

 
2,827

 

 

 

     Residential

 

 

 

 

 

Consumer & Other

 

 

 

 

 

  Total
4

 
$
3,842

 
$
3,842

 

 
$

 
$



14



 
Nine months ended September 30, 2014
 
Nine months ended September 30, 2013
(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 & Industrial
2

 
$
658

 
$
658

 
1

 
$
5

 
$
5

Real Estate:
 
 
 
 
 
 
 
 
 
 
 
     Commercial - Owner Occupied
3

 
1,649

 
1,399

 

 

 

     Commercial - Investor Owned
1

 
603

 
603

 

 

 

    Construction and Land Development
1

 
2,827

 
2,827

 

 

 

     Residential
1

 
125

 
125

 

 

 

Consumer & Other

 

 

 

 

 

  Total
8

 
$
5,862

 
$
5,612

 
1

 
$
5

 
$
5


The restructured Portfolio loans resulted from interest rate concessions and changing the terms of the loans. As of September 30, 2014, the Company allocated $0.3 million of specific reserves to the loans that have been restructured.

There were no Portfolio loans that have been restructured and subsequently defaulted in the nine months ended September 30, 2014 and 2013.

The aging of the recorded investment in past due Portfolio loans by portfolio class and category at September 30, 2014, and December 31, 2013, is shown below.

 
September 30, 2014
(in thousands)
30-89 Days
 Past Due
 
90 or More
Days
Past Due
 
Total
Past Due
 
Current
 
Total
    Commercial & Industrial
$
785

 
$
706

 
$
1,491

 
$
1,170,524

 
$
1,172,015

    Real Estate:
 
 
 
 
 
 
 
 
 
       Commercial - Owner Occupied
712

 
1,156

 
1,868

 
364,856

 
366,724

       Commercial - Investor Owned
451

 
4,577

 
5,028

 
386,763

 
391,791

       Construction and Land Development

 
2,528

 
2,528

 
121,360

 
123,888

       Residential

 
385

 
385

 
187,209

 
187,594

    Consumer & Other
15

 

 
15

 
52,878

 
52,893

          Total
$
1,963

 
$
9,352

 
$
11,315

 
$
2,283,590

 
$
2,294,905


 
December 31, 2013
(in thousands)
30-89 Days
 Past Due
 
90 or More
Days
Past Due
 
Total
Past Due
 
Current
 
Total
    Commercial & Industrial
$
229

 
$

 
$
229

 
$
1,041,347

 
$
1,041,576

    Real Estate:
 
 
 
 
 
 
 
 
 
       Commercial - Owner Occupied

 
428

 
428

 
341,203

 
341,631

       Commercial - Investor Owned

 
6,132

 
6,132

 
431,556

 
437,688

       Construction and Land Development
464

 
7,344

 
7,808

 
109,224

 
117,032

       Residential
237

 
213

 
450

 
158,077

 
158,527

    Consumer & Other

 

 

 
40,859

 
40,859

          Total
$
930

 
$
14,117

 
$
15,047

 
$
2,122,266

 
$
2,137,313




15



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, payment experience, credit documentation, and current economic factors, among other factors. 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 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 8- Substandard 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 9- Doubtful 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 September 30, 2014, which is based upon the most recent analysis performed, and December 31, 2013 is as follows:

 
September 30, 2014
(in thousands)
Pass (1-6)
 
Watch (7)
 
Substandard (8)
 
Doubtful (9)
 
Total
    Commercial & Industrial
$
1,066,001

 
$
66,098

 
$
39,545

 
$
371

 
$
1,172,015

    Real Estate:
 
 
 
 
 
 
 
 
 
       Commercial - Owner Occupied
337,763

 
20,241

 
8,720

 

 
366,724

       Commercial - Investor Owned
353,824

 
24,295

 
13,672

 

 
391,791

       Construction and Land Development
99,832

 
13,547

 
10,509

 

 
123,888

       Residential
165,300

 
13,730

 
8,564

 

 
187,594

    Consumer & Other
52,425

 
54

 
414

 

 
52,893

          Total
$
2,075,145

 
$
137,965

 
$
81,424

 
$
371

 
$
2,294,905



16



 
December 31, 2013
(in thousands)
Pass (1-6)
 
Watch (7)
 
Substandard (8)
 
Doubtful (9)
 
Total
    Commercial & Industrial
$
977,199

 
$
40,265

 
$
23,934

 
$
178

 
$
1,041,576

    Real Estate:
 
 
 
 
 
 
 
 
 
       Commercial - Owner Occupied
306,321

 
26,500

 
8,810

 

 
341,631

       Commercial - Investor Owned
368,433

 
42,227

 
27,028

 

 
437,688

       Construction and Land Development
87,812

 
17,175

 
11,582

 
463

 
117,032

       Residential
143,613

 
8,240

 
6,674

 

 
158,527

    Consumer & Other
40,852

 
3

 
4

 

 
40,859

          Total
$
1,924,230

 
$
134,410

 
$
78,032

 
$
641

 
$
2,137,313



NOTE 5 - PURCHASE CREDIT IMPAIRED ("PCI") LOANS (FORMERLY REFERRED TO AS PORTFOLIO LOANS COVERED UNDER FDIC LOSS SHARE OR COVERED LOANS)

Below is a summary of PCI loans by category at September 30, 2014, and December 31, 2013:
 
 
September 30, 2014
 
December 31, 2013
(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
6.33

$7,842

 
6.84

$14,325

    Commercial real estate - Investor owned
7.17
39,275

 
6.81
48,146

    Commercial real estate - Owner occupied
6.50
29,922

 
6.75
32,525

    Residential real estate
5.94
30,289

 
5.92
34,498

Total real estate loans
 

$107,328

 
 

$129,494

    Commercial and industrial
7.04
6,103

 
6.87
9,271

    Consumer and other
4.30
431

 
6.47
1,773

    Portfolio loans
 

$113,862

 
 

$140,538



17



The aging of the recorded investment in past due PCI loans by portfolio class and category at September 30, 2014, and December 31, 2013, is shown below.

 
September 30, 2014
(in thousands)
30-89 Days
 Past Due
 
90 or More
Days
Past Due
 
Total
Past Due
 
Current
 
Total
    Commercial & Industrial
$
338

 
$
702

 
$
1,040

 
$
5,063

 
$
6,103

    Real Estate:
 
 
 
 
 
 
 
 
 
       Commercial - Owner Occupied
94

 
3,466

 
3,560

 
26,362

 
29,922

       Commercial - Investor Owned

 
4,270

 
4,270

 
35,005

 
39,275

       Construction and Land Development

 
94

 
94

 
7,748

 
7,842

       Residential
299

 
3,831

 
4,130

 
26,158

 
30,288

    Consumer & Other

 
13

 
13

 
419

 
432

          Total
$
731

 
$
12,376

 
$
13,107

 
$
100,755

 
$
113,862


 
December 31, 2013
(in thousands)
30-89 Days
 Past Due
 
90 or More
Days
Past Due
 
Total
Past Due
 
Current
 
Total
    Commercial & Industrial
$
397

 
$
573

 
$
970

 
$
8,301

 
$
9,271

    Real Estate:
 
 
 
 
 
 
 
 
 
       Commercial - Owner Occupied
255

 
6,595

 
6,850

 
25,675

 
32,525

       Commercial - Investor Owned
5,143

 
3,167

 
8,310

 
39,836

 
48,146

       Construction and Land Development
32

 
4,198

 
4,230

 
10,095

 
14,325

       Residential
639

 
5,276

 
5,915

 
28,583

 
34,498

    Consumer & Other

 

 

 
1,773

 
1,773

          Total
$
6,466

 
$
19,809

 
$
26,275

 
$
114,263

 
$
140,538






18



The following table is a rollforward of PCI loans, net of the allowance for loan losses, for the nine months ended September 30, 2014 and 2013.

(In thousands)
Contractual Cashflows
 
Less:
Non-accretable Difference
 
Less: Accretable Yield
 
Carrying Amount
Balance January 1, 2014
$
266,068

 
$
87,438

 
$
53,530

 
$
125,100

Principal reductions and interest payments
(25,261
)
 

 

 
(25,261
)
Accretion of loan discount

 

 
(12,323
)
 
12,323

Changes in contractual and expected cash flows due to remeasurement
(2,616
)
 
(7,378
)
 
(500
)
 
5,262

Reductions due to disposals
(30,334
)
 
(7,379
)
 
(3,849
)
 
(19,106
)
Balance September 30, 2014
$
207,857

 
$
72,681

 
$
36,858

 
$
98,318

 
 
 
 
 
 
 
 
Balance January 1, 2013
$
386,966

 
$
118,627

 
$
78,768

 
$
189,571

Principal reductions and interest payments
(37,421
)
 

 

 
(37,421
)
Accretion of loan discount

 

 
(19,987
)
 
19,987

Changes in contractual and expected cash flows due to remeasurement
9,216

 
(10,858
)
 
14,233

 
5,841

Reductions due to disposals
(68,953
)
 
(23,867
)
 
(12,288
)
 
(32,798
)
Balance September 30, 2013
$
289,808

 
$
83,902

 
$
60,726

 
$
145,180


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 nine months ended September 30, 2014 is as follows:

(In thousands)
September 30,
2014
Balance at beginning of period
$
34,319

Adjustments not reflected in income:
 
Cash received from the FDIC for covered assets
(6,487
)
FDIC reimbursable losses, net
1,734

Adjustments reflected in income:
 
Amortization, net
(5,375
)
Loan impairment
741

Reductions for payments on covered assets in excess of expected cash flows
(2,893
)
Balance at end of period
$
22,039


Due to continued favorable projections in the expected cash flows, the Company continues to anticipate it will be required to pay the FDIC at the end of two of its loss share agreements. Accordingly, a liability of $2.6 million has been recorded at September 30, 2014. The liability will continue to be adjusted as part of the remeasurement process through the end of the loss share agreements.


19



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 under commitments to extend credit and standby letters of credit in the event of nonperformance by the other party to the financial instrument 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 September 30, 2014, there were no unadvanced commitments on impaired loans compared to $0.1 million at December 31, 2013. Other liabilities include approximately $0.2 million at both September 30, 2014 and December 31, 2013 for estimated losses attributable to the unadvanced commitments.
 
The contractual amounts of off-balance-sheet financial instruments as of September 30, 2014, and December 31, 2013, are as follows:
 
(in thousands)
September 30,
2014
 
December 31,
2013
Commitments to extend credit
$
879,258

 
$
804,420

Standby letters of credit
45,791

 
44,376


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 September 30, 2014, and December 31, 2013, approximately $66.4 million and $50.3 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. The type of collateral held varies, but may include accounts receivable, inventory, premises and equipment, and real estate.

Standby letters of credit are conditional commitments issued by the 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 standby letters of credit is essentially the same as the risk involved in extending loans to customers. The remaining terms of standby letters of credit range from 1 month to 3.4 years at September 30, 2014.
 
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 cash flows of the Company or any of its subsidiaries.




20



NOTE 7 - DERIVATIVE FINANCIAL INSTRUMENTS

Risk Management Instruments. The Company enters into certain derivative contracts to economically hedge state tax credits and certain loans. The table below summarizes the notional amounts and fair values of the derivative instruments used to manage risk.
 
 
 
 
Asset Derivatives
(Other Assets)
 
Liability Derivatives
(Other Liabilities)
Notional Amount
 
Fair Value
 
Fair Value
(in thousands)
September 30,
2014
 
December 31,
2013
 
September 30,
2014
 
December 31,
2013
 
September 30,
2014
 
December 31,
2013
Non-designated hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Interest rate cap contracts
$
23,800

 
$
23,800

 
$
2

 
$
10

 
$

 
$


The following table shows the location and amount of gains and losses related to derivatives used for risk management purposes recorded in the condensed consolidated statements of operations for the three and nine months ended September 30, 2014 and 2013.
 
 
Location of Gain or (Loss) Recognized in Operations on Derivative
Amount of Gain or (Loss) Recognized in Operations on Derivative
 
Amount of Gain or (Loss) Recognized in Operations on Derivative
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)
2014
 
2013
 
2014
 
2013
Non-designated hedging instruments
 
 
 
 
 
 
 
 
Interest rate cap contracts
Gain on state tax credits, net
$

 
$
(9
)
 
$
(8
)
 
$
1


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

 
 
Asset Derivatives
(Other Assets)
 
Liability Derivatives
(Other Liabilities)
 
Notional Amount
 
Fair Value
 
Fair Value
(in thousands)
September 30,
2014
 
December 31,
2013
 
September 30,
2014
 
December 31,
2013
 
September 30,
2014
 
December 31,
2013
Non-designated hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
$
175,906

 
$
185,213

 
$
949

 
$
990

 
$
949

 
$
990



21



Changes in the fair value of client-related derivative instruments are recognized currently in operations. The following table shows the location and amount of gains and losses recorded in the condensed consolidated statements of operations for the three and nine months ended September 30, 2014 and 2013. For the three and nine months ended September 30, 2014 and 2013 the Company entered into derivative contracts with third parties to fully offset the client-related derivative instruments. Accordingly, there was no fair value adjustment recorded.
 
 
Location of Gain or (Loss) Recognized in Operations on Derivative
Amount of Gain or (Loss) Recognized in Operations on Derivative
 
Amount of Gain or (Loss) Recognized in Operations on Derivative
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)
2014
 
2013
 
2014
 
2013
Non-designated hedging instruments
 
 
 
 
 
 
 
 
Interest rate swap contracts
Interest and fees on loans
$

 
$
(32
)
 
$

 
$
(205
)

At September 30, 2014 and December 31, 2013, the Company had $0.9 million and $1.0 million, respectively, of counterparty credit exposure on derivatives. At both September 30, 2014, and December 31, 2013, the Company had pledged cash of $1.0 million, as collateral in connection with our interest rate swap agreements.


22



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 September 30, 2014, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.
 
 
September 30, 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
$

 
$
92,272

 
$

 
$
92,272

Obligations of states and political subdivisions

 
46,887

 
3,054

 
49,941

Agency mortgage-backed securities

 
314,371

 

 
314,371

Total securities available for sale
$

 
$
453,530

 
$
3,054

 
$
456,584

State tax credits held for sale

 

 
15,131

 
15,131

Derivative financial instruments

 
951

 

 
951

Total assets
$

 
$
454,481

 
$
18,185

 
$
472,666

 
 
 
 
 
 
 
 
Liabilities
 

 
 
 
 

 
 
Derivative financial instruments
$

 
$
949

 
$

 
$
949

Total liabilities
$

 
$
949

 
$

 
$
949


Securities available for sale. Securities classified as available for sale are reported at fair value utilizing Level 2 and Level 3 inputs. The Company obtains fair value measurements from an independent pricing service. 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 September 30, 2014, Level 3 securities available for sale 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 September 30, 2014, of the $45.6 million of state tax credits held for sale on the condensed consolidated balance sheet, approximately $15.1 million were carried at fair value. The remaining $30.5 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 from local and regional accounting firms who broker them. As such, the Company employed a discounted cash flow analysis (income approach) to determine the fair value.
The fair value measurement is calculated using an internal valuation model with observable market data including discounted cash flows based upon the terms and conditions of the tax credits. 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

23



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.

24



Level 3 financial instruments

The following table presents the changes in Level 3 financial instruments measured at fair value on a recurring basis for the periods ended September 30, 2014 and 2013, respectively.
Purchases, sales, issuances and settlements, net. There were no Level 3 purchases during the nine months or quarters ended September 30, 2014 or 2013.
Transfers in and/or out of Level 3. There were no Level 3 transfers during the nine months or quarters ended September 30, 2014 or 2013.
 
Securities available for sale, at fair value
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)
2014
 
2013
 
2014
 
2013
Beginning balance
$
3,051

 
$
3,039

 
$
3,040

 
$
3,049

   Total (losses) gains:
 
 
 
 
 
 
 
Included in other comprehensive income
3

 
3

 
14

 
(7
)
   Purchases, sales, issuances and settlements:
 
 
 
 
 
 
 
Purchases

 

 

 

Transfer in and/or out of Level 3

 

 

 

Ending balance
$
3,054

 
$
3,042

 
$
3,054

 
$
3,042

 
 
 
 
 
 
 
 
Change in unrealized (losses) gains relating to
assets still held at the reporting date
$
3

 
$
3

 
$
14

 
$
(7
)


 
State tax credits held for sale
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)
2014
 
2013
 
2014
 
2013
Beginning balance
$
14,985

 
$
19,822

 
$
16,491

 
$
23,020

   Total gains:
 
 
 
 
 
 
 
Included in earnings
146

 
317

 
407

 
422

   Purchases, sales, issuances and settlements:
 
 
 
 
 
 
 
Sales

 

 
(1,767
)
 
(3,303
)
Ending balance
$
15,131

 
$
20,139

 
$
15,131

 
$
20,139

 
 
 
 
 
 
 
 
Change in unrealized gains relating to
assets still held at the reporting date
$
146

 
$
317

 
$
(58
)
 
$
(456
)



25



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 September 30, 2014:
 
 
(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
September 30, 2014
 
Total losses for the
nine months ended
September 30, 2014
Impaired loans
$
3,163

 
$

 
$

 
$
3,163

 
$
(865
)
 
$
(3,328
)
Other real estate
5,374

 

 

 
5,374

 
(28
)
 
(618
)
Total
$
8,537

 
$

 
$

 
$
8,537

 
$
(893
)
 
$
(3,946
)

(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 or by determining the net present value of future cash flows. Fair values for collateral dependent impaired loans are obtained from current appraisals by qualified licensed appraisers or independent valuation specialists. Fair values of impaired loans that are not collateral dependent are determined by using a discounted cash flow model to determine the net present value of future cash flows. Other real estate owned is adjusted to fair value upon foreclosure of the loan collateral. Subsequently, foreclosed assets are carried at the 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.

Following is a summary of the carrying amounts and fair values of the Company’s financial instruments on the consolidated balance sheets at September 30, 2014, and December 31, 2013.
 
 
September 30, 2014
 
December 31, 2013
(in thousands)
Carrying Amount
 
Estimated fair value
 
Carrying Amount
 
Estimated fair value
Balance sheet assets
 
 
 
 
 
 
 
Cash and due from banks
$
54,113

 
$
54,113

 
$
19,573

 
$
19,573

Federal funds sold
36

 
36

 
76

 
76

Interest-bearing deposits
74,963

 
74,963

 
196,220

 
196,220

Securities available for sale
456,584

 
456,584

 
434,587

 
434,587

Other investments, at cost
15,291

 
15,291

 
12,605

 
12,605

Loans held for sale
4,899

 
4,899

 
1,834

 
1,834

Derivative financial instruments
951

 
951

 
1,000

 
1,000

Portfolio loans, net
2,364,423

 
2,360,077

 
2,235,124

 
2,232,134

State tax credits, held for sale
45,631

 
51,037

 
48,457

 
52,159

Accrued interest receivable
7,526

 
7,526

 
7,303

 
7,303

 
 
 
 
 
 
 
 
Balance sheet liabilities
 
 
 
 
 
 
 
Deposits
2,509,764

 
2,513,418

 
2,534,953

 
2,540,822

Subordinated debentures
56,807

 
33,997

 
62,581

 
39,358

Federal Home Loan Bank advances
120,000

 
123,153

 
50,000

 
54,137

Other borrowings
187,122

 
187,123

 
214,331

 
214,377

Derivative financial instruments
949

 
949

 
990

 
990

Accrued interest payable
854

 
854

 
957

 
957



26



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, 2013.

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 September 30, 2014, and December 31, 2013:
 
 
Estimated Fair Value Measurement at Reporting Date Using
 
Balance at
September 30, 2014
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Financial Assets:
 
 
 
 
 
 
 
Portfolio loans, net
$

 
$

 
$
2,360,077

 
$
2,360,077

State tax credits, held for sale
$

 
$

 
$
35,906

 
$
35,906

Financial Liabilities:
 
 
 
 
 
 
 
Deposits
1,951,370

 

 
562,048

 
2,513,418

Subordinated debentures

 
33,997

 

 
33,997

Federal Home Loan Bank advances

 
123,153

 

 
123,153

Other borrowings

 
187,123

 

 
187,123

 
 
Estimated Fair Value Measurement at Reporting Date Using
 
Balance at
December 31, 2013
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Financial Assets:
 
 
 
 
 
 
 
Portfolio loans, net
$

 
$

 
$
2,232,134

 
$
2,232,134

State tax credits, held for sale
$

 
$

 
$
35,668

 
$
35,668

Financial Liabilities:
 
 
 
 
 
 
 
Deposits
1,902,038

 

 
638,784

 
2,540,822

Subordinated debentures

 
39,358

 

 
39,358

Federal Home Loan Bank advances

 
54,137

 

 
54,137

Other borrowings

 
214,377

 

 
214,377


 
NOTE 9 - SEGMENT REPORTING

The Company has two primary operating segments, Banking and Wealth Management, which are delineated by the products and services that each segment offers. The segments are evaluated separately on their individual performance, as well as their contribution to the Company as a whole.

The Banking operating segment consists of a full-service commercial bank, with locations in St. Louis, Kansas City, and Phoenix. The majority of the Company’s assets and income result from the Banking segment. All banking locations have the same product and service offerings, have similar types and classes of customers and utilize similar service delivery methods. Pricing guidelines and operating policies for products and services are the same across all regions.
The Banking operating segment also includes activities surrounding PCI loans and other assets acquired under FDIC loss share agreements. 

The Wealth Management operating segment includes the Trust division of the Bank and the state tax credit brokerage activities. The Trust division provides estate planning, investment management, and retirement planning as well as strategic planning and management succession issues. State tax credits are part of a fee initiative designed to augment the Company’s Wealth Management segment and Banking lines of business.
 

27



The Company's Corporate and Intercompany activities represent the elimination of items between segments as well as Corporate related items that management feels are not allocable to either of the two respective segments.

The financial information for each business segment reflects that information which is specifically identifiable or which is allocated based on an internal allocation method. There were no material intersegment revenues among the two segments. Management periodically makes changes to methods of assigning costs and income to its business segments to better reflect operating results. When appropriate, these changes are reflected in prior year information presented below.

Following are the financial results for the Company’s operating segments.

(in thousands)
Banking
 
Wealth Management
 
Corporate and Intercompany
 
Total
 
Three months ended September 30,
Income Statement Information
2014
Net interest income (expense)
$
27,804

 
$
(16
)
 
$
(344
)
 
$
27,444

Provision for loan losses
(1,811
)
 

 

 
(1,811
)
Noninterest income
2,424

 
1,909

 
119

 
4,452

Noninterest expense
18,353

 
1,946

 
822

 
21,121

Income (loss) before income tax expense (benefit)
13,686

 
(53
)
 
(1,047
)
 
12,586

 
 
 
 
 
 
 
 
 
2013
Net interest income (expense)
$
33,476

 
$
(166
)
 
$
(736
)
 
$
32,574

Provision for loan losses
2,159

 

 

 
2,159

Noninterest income
1,684

 
2,006

 
26

 
3,716

Noninterest expense
17,855

 
1,809

 
1,344

 
21,008

Income (loss) before income tax expense (benefit)
15,146

 
31

 
(2,054
)
 
13,123

 
 
 
 
 
 
 
 
 
Nine months ended September 30,
Income Statement Information
2014
Net interest income (expense)
$
87,733

 
$
(58
)
 
$
(1,123
)
 
$
86,552

Provision for loan losses
3,398

 

 

 
3,398

Noninterest income
5,448

 
6,200

 
131

 
11,779

Noninterest expense
53,817

 
5,589

 
3,262

 
62,668

Income (loss) before income tax expense (benefit)
35,966

 
553

 
(4,254
)
 
32,265

 
 
 
 
 
 
 
 
 
2013
Net interest income (expense)
$
105,738

 
$
(292
)
 
$
(2,665
)
 
$
102,781

Provision for loan losses
(305
)
 

 

 
(305
)
Noninterest income
(1,758
)
 
6,611

 
100

 
4,953

Noninterest expense
53,006

 
5,644

 
3,789

 
62,439

Income (loss) before income tax expense (benefit)
51,279

 
675

 
(6,354
)
 
45,600

 
 
 
 
 
 
 
 
Balance Sheet Information
September 30, 2014
 
December 31, 2013
Total assets:
 
 
 
Banking
$
3,093,055
 
 
$
3,051,256
 
Wealth Management
98,269
 
 
101,026
 
Corporate and Intercompany
18,266
 
 
17,915
 
Total
3,209,590
 
 
3,170,197
 

28



NOTE 10 - NEW AUTHORITATIVE ACCOUNTING GUIDANCE

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, (“ASU 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.

In June 2014, the FASB issued ASU No. 2014-11, "Transfers and Servicing (Topic 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 will become 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 Company does not believe the guidance will have a material impact on its consolidated balance sheets or statements of operations.

29



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 nine months of 2014 compared to the financial condition as of December 31, 2013. In addition, this discussion summarizes the significant factors affecting the results of operations, liquidity and cash flows of the Company for the three and nine months ended September 30, 2014, compared to the same periods in 2013. 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, 2013.


30



Executive Summary

Below are highlights of our financial performance for the quarter and year-to-date period ended September 30, 2014 as compared to the linked quarter ended June 30, 2014 and prior year quarter and year to date period ended September 30, 2013.


(in thousands, except per share data)
For the Quarter Ended and At
 
For the Nine Months ended
September 30, 2014
 
June 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
EARNINGS
 
 
 
 
 
 
 
 
 
Total interest income
$
31,036

 
$
32,309

 
$
36,883

 
$
97,369

 
$
116,854

Total interest expense
3,592

 
3,567

 
4,309

 
10,817

 
14,073

Net interest income
27,444

 
28,742

 
32,574

 
86,552

 
102,781

Provision for portfolio loans
66

 
1,348

 
(652
)
 
2,441

 
(3,094
)
Provision for purchase credit impaired loans
(1,877
)
 
(470
)
 
2,811

 
957

 
2,789

Net interest income after provision for loan losses
29,255

 
27,864

 
30,415

 
83,154

 
103,086

 
 
 
 
 
 
 
 
 
 
Fee income
4,685

 
5,108

 
4,968

 
15,070

 
15,250

Other noninterest income
(233
)
 
(1,703
)
 
(1,252
)
 
(3,291
)
 
(10,297
)
Total noninterest income
4,452

 
3,405

 
3,716

 
11,779

 
4,953

 
 
 
 
 
 
 
 
 
 
Total noninterest expenses
21,121

 
20,445

 
21,008

 
62,668

 
62,439

Income before income tax expense
12,586

 
10,824

 
13,123

 
32,265

 
45,600

Income tax expense
4,388

 
3,664

 
4,713

 
11,059

 
16,117

Net income
$
8,198

 
$
7,160

 
$
8,410

 
$
21,206

 
$
29,483

 
 
 
 
 
 
 
 
 
 
Basic earnings per share
0.41

 
0.36

 
0.45

 
1.07

 
1.61

Diluted earnings per share
0.41

 
0.36

 
0.44

 
1.07

 
1.55

 
 
 
 
 
 
 
 
 
 
Return on average assets
1.02
 %
 
0.92
%
 
1.09
%
 
0.91
%
 
1.26
%
Return on average common equity
10.62
 %
 
9.65
%
 
12.70
%
 
9.54
%
 
15.70
%
Efficiency ratio
66.22
 %
 
63.60
%
 
57.89
%
 
63.73
%
 
57.89
%
Net interest margin
3.75
 %
 
4.04
%
 
4.71
%
 
4.05
%
 
4.85
%
 
 
 
 
 
 
 
 
 
 
ASSET QUALITY
 
 
 
 
 
 
 
 
 
Net charge-offs
(311
)
 
831

 
368

 
931

 
4,637

Nonperforming loans
18,212

 
19,287

 
24,168

 
 
 
 
Classified Assets
83,816

 
85,445

 
96,388

 
 
 
 
Nonperforming loans to total loans
0.79
 %
 
0.86
%
 
1.14
%
 
 
 
 
Nonperforming assets to total assets
0.64
 %
 
0.85
%
 
1.11
%
 
 
 
 
Allowance for loan losses to total loans
1.25
 %
 
1.26
%
 
1.26
%
 
 
 
 
Net charge-offs to average loans (annualized)
(0.05
)%
 
0.15
%
 
0.07
%
 
0.06
%
 
0.30
%

During the quarter ended September 30, 2014 the Company noted the following :
The Company reported net income of $8.2 million for the three months ended September 30, 2014, compared to $7.2 million in the linked second quarter, and $8.4 million for the same period in 2013. The Company reported diluted earnings per share of $0.41, $0.36 and $0.44 in the same respective periods. The increase in net income from the linked second quarter is primarily due to robust portfolio loan growth driving an 6%

31



annualized increase in core net interest income, as well as reduced provision for loan losses from continued strong credit quality and increased noninterest income from a $0.9 million closing fee recorded in the quarter. The decrease in net income from the prior year period is primarily due to a $2.5 million reduction in net revenue from purchase credit impaired ("PCI") loans due to declining balances and lower accelerated cash flows from these loans.

Net interest income decreased $1.3 million in the third quarter of 2014 from the linked second quarter and $5.1 million from the prior year period, primarily due to lower balances and lower accelerated cash flows on PCI loans, partially offset by strong portfolio loan growth in the quarter. Core net interest income increased modestly in the third quarter when compared to both the linked quarter and prior year period.

Nonperforming loans were 0.79% of portfolio loans at September 30, 2014, versus 0.86% of portfolio loans at June 30, 2014, and 1.14% at September 30, 2013. The Company's allowance for loan losses was 1.25% of loans at September 30, 2014, representing 158% of nonperforming loans, as compared to 1.26% at June 30, 2014 representing 147% of nonperforming loans, and 1.26% at September 30, 2013, representing 110% of nonperforming loans. The Company had net recoveries in the third quarter of 2014 of $0.3 million, representing an annualized rate of (0.05)% of average loans, compared to net charge-offs of $0.8 million, an annualized rate of 0.15%, in the linked second quarter. Net charge-offs were $0.4 million, an annualized rate of 0.07%, in the third quarter of 2013.

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 $0.5 million compared to the linked quarter and $0.3 million from the prior year period. The decrease from the linked quarter and prior year period was primarily due to lower gains on sales of other real estate.

Noninterest expenses were $21.1 million for the quarter ended September 30, 2014, compared to $20.4 million for the linked quarter ended June 30, 2014 and $21.0 million in the prior year period ended September 30, 2013. Noninterest expenses have increased slightly when compared to both periods. The increase is primarily due to increased FDIC clawback expense from continued lower loss rates on our PCI loans as well as severance costs from efficiency initiatives during the current quarter.

For the nine month period ended September 30, 2014 the Company noted the following :
The Company reported net income of $21.2 million for the nine months ended September 30, 2014, compared to $29.5 million for the same period in 2013. The Company reported diluted earnings per share of $1.07 and $1.55 in the same respective periods. The decrease in net income for the current year to date is due to reduced revenue from our PCI loans, lower interest yields on our portfolio loans offsetting volume gains, as well as lower investment security gains.

Net interest income decreased $16.2 million in the nine month period of 2014 from the comparable period in 2013. The decrease was due to lower balances and lower accelerated payments on PCI loans, lower prepayment fees on portfolio loans, and lower interest rates on newly originated loans. These items were offset by higher balances of portfolio loans and lower interest expense from the conversion of $25.0 million of trust preferred securities to common equity and early payoff of $30.0 million of FHLB borrowings, both of which carried relatively higher interest rates.










32



Income Before Income Tax Expense

Income before income tax expense on the Company's Core Bank and Covered assets for the three and nine months ended September 30, 2014 and 2013 were as follows:

(In thousands)
Three months ended September 30,
 
Nine months ended September 30,
2014
 
2013
 
2014
 
2013
Income before income tax expense
 
 
 
 
 
 
 
Core Bank
$
10,921

 
$
10,190

 
$
25,674

 
$
30,417

Covered assets
1,665

 
2,701

 
6,591

 
14,486

Total
$
12,586

 
$
12,891

 
$
32,265

 
$
44,903


Income before income tax expense for the Core Bank represents results without direct income and expenses related to Covered assets, as well as an internal estimate of associated asset funding costs for those covered assets. Core Bank pre-tax income increased $0.7 million, or 7%, in the quarter as the Company recorded robust portfolio loan growth increasing net interest income, as well as seeing increased fee income from the aforementioned $0.9 million loan closing fee. Income from our Covered assets declined $1.0 million, or 38%, from declining balances in our PCI loans, as well as reduced net interest income primarily from a reduction in accelerated cash flows and due to additional FDIC clawback expense in 2014. Absent significant cash flow accelerations or pool impairment, the Company currently estimates that income before tax expense on Covered assets will be approximately $6 to $8 million in 2015.

Core Bank pre-tax income declined $4.7 million, or 16%, in the nine month period ended September 30, 2014 as compared to the prior year period as the Company recorded a benefit in provision for portfolio loan losses of $3.1 million in the prior year period, and the Company's interest income was reduced from lower loan yields on originations. Income from our Covered assets declined $7.9 million, or 55%, from declining balances in our PCI loans, as well as reduced net interest income, primarily from a reduction in accelerated cash flows.


The Core net interest margin, defined as the Net interest margin (fully tax equivalent), including contractual interest on Covered loans, but excluding the incremental accretion on these loans, for the three and nine months ended September 30, 2014 and 2013 is as follows:




 
Three months ended September 30,
Nine months ended September 30,
 
2014
 
2013
2014
 
2013
Core net interest margin
3.41
%
 
3.54
%
3.42
%
 
3.55
%

The Core net interest margin has declined in both the three and nine months ended June 30, 2014. The decline was due to lower balances of PCI loans which have higher contractual interest rates, as well as originations at lower interest rates in the current year. This was partially offset by lower costs of interest bearing liabilities including lower deposit costs and lower cost of borrowings from the aforementioned FHLB prepayment and conversion of $25.0 million, 9% coupon, trust preferred securities into common stock, as well as a reduction of $18 million in certain interest earning deposits. Pressure on loan yields and continued reductions in PCI loan balances could lead to reductions in the core net interest margin throughout the remainder of 2014 and into 2015. Included in this MD&A under the caption "Use of Non-GAAP Financial Measures" is a reconciliation of net interest margin to Core net interest margin. The Average Balance Sheet and Rate/Volume sections following contain additional information regarding our net interest income.


33



2014 Significant Transactions

During 2014, we completed the following significant transaction:

On March 14, 2014 the remaining $5.0 million, 9% coupon, trust preferred securities were converted to shares of common stock. As a result of this transaction, the Company reduced its long-term debt by $5.0 million and issued 287,852 shares of common stock.

34



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 September 30,
 
2014
 
2013
(in thousands)
Average Balance
 
Interest
Income/Expense
 
Average
Yield/
Rate
 
Average Balance
 
Interest
Income/Expense
 
Average
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Taxable loans (1)
$
2,251,765

 
$
23,766

 
4.19
%
 
$
2,036,572

 
$
23,092

 
4.50
%
Tax-exempt loans (2)
34,012

 
565

 
6.59

 
46,846

 
857

 
7.26

Purchase credit impaired loans (3)
115,709

 
4,280

 
14.68

 
162,569

 
10,781

 
26.31

Total loans
2,401,486

 
28,611

 
4.73

 
2,245,987

 
34,730

 
6.13

Taxable investments in debt and equity securities
434,159

 
2,300

 
2.10

 
425,983

 
2,149

 
2.00

Non-taxable investments in debt and equity securities (2)
43,529

 
481

 
4.38

 
44,605

 
493

 
4.38

Short-term investments
63,896

 
43

 
0.27

 
72,739

 
37

 
0.20

Total securities and short-term investments
541,584

 
2,824

 
2.07

 
543,327

 
2,679

 
1.96

Total interest-earning assets
2,943,070

 
31,435

 
4.24

 
2,789,314

 
37,409

 
5.32

Noninterest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
36,167

 
 
 
 
 
16,897

 
 
 
 
Other assets
247,846

 
 
 
 
 
284,413

 
 
 
 
Allowance for loan losses
(46,723
)
 
 
 
 
 
(39,065
)
 
 
 
 
 Total assets
$
3,180,360

 
 
 
 
 
$
3,051,559

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing transaction accounts
$
327,113

 
$
163

 
0.20
%
 
$
209,398

 
$
99

 
0.19
%
Money market accounts
809,766

 
653

 
0.32

 
894,552

 
714

 
0.32

Savings
82,955

 
52

 
0.25

 
89,715

 
56

 
0.25

Certificates of deposit
580,186

 
1,741

 
1.19

 
579,586

 
1,765

 
1.21

Total interest-bearing deposits
1,800,020

 
2,609

 
0.58

 
1,773,251

 
2,634

 
0.59

Subordinated debentures
56,807

 
306

 
2.14

 
72,864

 
679

 
3.70

Borrowed funds
354,637

 
677

 
0.76

 
320,507

 
995

 
1.23

Total interest-bearing liabilities
2,211,464

 
3,592

 
0.64

 
2,166,622

 
4,308

 
0.79

Noninterest bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
637,425

 
 
 
 
 
607,257

 
 
 
 
Other liabilities
25,164

 
 
 
 
 
14,889

 
 
 
 
Total liabilities
2,874,053

 
 
 
 
 
2,788,768

 
 
 
 
Shareholders' equity
306,307

 
 
 
 
 
262,791

 
 
 
 
Total liabilities & shareholders' equity
$
3,180,360

 
 
 
 
 
$
3,051,559

 
 
 
 
Net interest income
 
 
$
27,843

 
 
 
 
 
$
33,101

 
 
Net interest spread
 
 
 
 
3.60
%
 
 
 
 
 
4.53
%
Net interest margin (4)
 
 
 
 
3.75

 
 
 
 
 
4.71


(1)
Average balances include non-accrual loans. The income on such loans is included in interest but is recognized only upon receipt. Loan fees, net of amortization of deferred loan origination fees and costs, included in interest income are approximately $162,000 and $282,000 for the three months ended September 30, 2014 and 2013, respectively.

35



(2)
Non-taxable income is presented on a fully tax-equivalent basis using a 38% tax rate in 2014 and 39% tax rate in 2013. The tax-equivalent adjustments were $399,000 and $527,000 for the three months ended September 30, 2014 and 2013, respectively.
(3)
Purchase credit impaired loans are loans acquired as part of our acquisitions of Valley Capital, Home National, Legacy, and/or First National Bank of Olathe.
(4)
Net interest income divided by average total interest-earning assets.


 
Nine months ended September 30,
 
2014
 
2013
(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)
$
2,185,744

 
$
69,135

 
4.23
%
 
$
2,048,503

 
$
70,963

 
4.63
%
Tax-exempt portfolio loans (2)
34,973

 
1,776

 
6.79

 
47,041

 
2,574

 
7.32

Purchase credit impaired loans (3)
124,481

 
19,348

 
20.78

 
175,100

 
36,796

 
28.10

Total loans
2,345,198

 
90,259

 
5.15

 
2,270,644

 
110,333

 
6.50

Taxable investments in debt and equity securities
421,015

 
6,747

 
2.14

 
477,409

 
6,487

 
1.82

Non-taxable investments in debt and equity securities (2)
43,777

 
1,446

 
4.42

 
44,115

 
1,486

 
4.50

Short-term investments
86,212

 
146

 
0.23

 
81,836

 
130

 
0.21

Total securities and short-term investments
551,004

 
8,339

 
2.02

 
603,360

 
8,103

 
1.80

Total interest-earning assets
2,896,202

 
98,598

 
4.55

 
2,874,004

 
118,436

 
5.51

Noninterest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
22,903

 
 
 
 
 
17,575

 
 
 
 
Other assets
257,494

 
 
 
 
 
274,085

 
 
 
 
Allowance for loan losses
(45,718
)
 
 
 
 
 
(43,593
)
 
 
 
 
 Total assets
$
3,130,881

 
 
 
 
 
$
3,122,071

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing transaction accounts
$
257,749

 
$
385

 
0.20
%
 
$
238,400

 
$
360

 
0.20
%
Money market accounts
882,496

 
2,093

 
0.32

 
939,127

 
2,348

 
0.33

Savings
81,519

 
151

 
0.25

 
89,664

 
171

 
0.25

Certificates of deposit
602,332

 
5,248

 
1.16

 
561,796

 
5,593

 
1.33

Total interest-bearing deposits
1,824,096

 
7,877

 
0.58

 
1,828,987

 
8,472

 
0.62

Subordinated debentures
58,309

 
1,016

 
2.33

 
80,920

 
2,580

 
4.26

Borrowed funds
315,165

 
1,924

 
0.82

 
336,063

 
3,021

 
1.20

Total interest-bearing liabilities
2,197,570

 
10,817

 
0.66

 
2,245,970

 
14,073

 
0.84

Noninterest bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
614,105

 
 
 
 
 
610,894

 
 
 
 
Other liabilities
22,101

 
 
 
 
 
14,205

 
 
 
 
Total liabilities
2,833,776

 
 
 
 
 
2,871,069

 
 
 
 
Shareholders' equity
297,105

 
 
 
 
 
251,002

 
 
 
 
Total liabilities & shareholders' equity
$
3,130,881

 
 
 
 
 
$
3,122,071

 
 
 
 
Net interest income
 
 
$
87,781

 
 
 
 
 
$
104,363

 
 
Net interest spread
 
 
 
 
3.89
%
 
 
 
 
 
4.67
%
Net interest margin (4)
 
 
 
 
4.05
%
 
 
 
 
 
4.86
%

(1)
Average balances include non-accrual loans. The income on such loans is included in interest but is recognized only upon receipt. Loan fees, net of amortization of deferred loan origination fees and costs, included in interest income are approximately $503,000 and $1,154,000 for the nine months ended September 30, 2014 and 2013, respectively.

36



(2)
Non-taxable income is presented on a fully tax-equivalent basis using a 38% tax rate in 2014 and 39% tax rate in 2013. The tax-equivalent adjustments were $1,229,000 and $1,582,000 for the nine months ended September 30, 2014 and 2013, respectively.
(3)
Purchase credit impaired loans are loans acquired as part of our acquisitions of Valley Capital, Home National, Legacy, and/or First National Bank of Olathe.
(4)
Net interest income divided by average total interest-earning assets.

Rate/Volume
The following table sets forth, on a tax-equivalent basis for the periods indicated, a summary of the changes in interest income and interest expense resulting from changes in yield/rates and volume.
  
 
2014 compared to 2013
Three months ended September 30,
 
Nine months ended September 30,
Increase (decrease) due to
 
Increase (decrease) due to
(in thousands)
Volume(1)
 
Rate(2)
 
Net
 
Volume(1)
 
Rate(2)
 
Net
Interest earned on:
 
 
 
 
 
 
 
 
 
 
 
Taxable portfolio loans
$
2,338

 
$
(1,664
)
 
$
674

 
$
4,574

 
$
(6,402
)
 
$
(1,828
)
Tax-exempt portfolio loans (3)
(219
)
 
(73
)
 
(292
)
 
(623
)
 
(175
)
 
(798
)
Purchase credit impaired loans
(2,565
)
 
(3,936
)
 
(6,501
)
 
(9,180
)
 
(8,268
)
 
(17,448
)
Taxable investments in debt and equity securities
42

 
109

 
151

 
(821
)
 
1,081

 
260

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

 
(12
)
 
(11
)
 
(29
)
 
(40
)
Short-term investments
(5
)
 
11

 
6

 
7

 
9

 
16

Total interest-earning assets
$
(421
)
 
$
(5,553
)
 
$
(5,974
)
 
$
(6,054
)
 
$
(13,784
)
 
$
(19,838
)
 
 
 
 
 
 
 
 
 
 
 
 
Interest paid on:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing transaction accounts
$
59

 
$
5

 
$
64

 
$
29

 
$
(4
)
 
$
25

Money market accounts
(68
)
 
7

 
(61
)
 
(138
)
 
(117
)
 
(255
)
Savings
(4
)
 

 
(4
)
 
(15
)
 
(5
)
 
(20
)
Certificates of deposit
2

 
(26
)
 
(24
)
 
385

 
(730
)
 
(345
)
Subordinated debentures
(128
)
 
(245
)
 
(373
)
 
(596
)
 
(968
)
 
(1,564
)
Borrowed funds
97

 
(415
)
 
(318
)
 
(178
)
 
(919
)
 
(1,097
)
Total interest-bearing liabilities
(42
)
 
(674
)
 
(716
)
 
(513
)
 
(2,743
)
 
(3,256
)
Net interest income
$
(379
)
 
$
(4,879
)
 
$
(5,258
)
 
$
(5,541
)
 
$
(11,041
)
 
$
(16,582
)

(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 $27.8 million for the three months ended September 30, 2014 compared to $33.1 million for the same period of 2013, a decrease of $5.3 million, or 16%. Total interest income decreased $6.0 million and total interest expense decreased $0.7 million. The net interest margin was 3.75% for the third quarter of 2014, compared to 4.04% for the second quarter of 2014 and 4.71% in the third quarter of 2013. During the third quarter of 2014, there was a decrease in average interest earning assets of approximately $18 million associated with certain interest earning deposits.

Net interest income (on a tax equivalent basis) was $87.8 million for the nine months ended September 30, 2014, compared to $104.4 million for the same period of 2013, a decrease of $16.6 million, or 16%. Total interest income decreased $19.8 million and total interest expense decreased $3.3 million. The tax-equivalent net interest rate margin

37



was 4.05% for the nine months ended September 30, 2014, compared to 4.86% in the nine months ended September 30, 2013.


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 $1.7 million and $6.6 million reduction in interest income on our portfolio loans for the three and nine months ended September 30, 2014 and a $3.9 million and $8.3 million reduction in interest income on our PCI loans for the same periods. Additionally, the run-off of higher yielding PCI loans continues to negatively impact net interest margin leading to a $2.6 million and $9.2 million decrease in interest income due to volume for the quarter and nine months ended September 30, 2014. To partially mitigate lower yields on loans the Company has taken specific actions to lower deposit and other borrowing costs including the prepayment of $30.0 million of FHLB borrowings with a weighted average interest rate of 4.09%, the conversion of $25.0 million of 9% coupon, trust preferred securities to common stock, and the prepayment of $3.6 million of the Company's term loan to lower the contractual interest rate by 50 basis points. Additionally, portfolio loan growth of $158 million since December 31, 2013 has resulted in interest income volume growth of $2.1 million and $4.0 million for the three and nine months ended September 30, 2014.

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. The presentation excludes the cost of funding the related assets and the operating expenses to service the assets.

 
For the Quarter ended
(in thousands)
September 30, 2014
 
June 30, 2014
 
March 31, 2014
 
December 31, 2013
 
September 30, 2013
Accretion income
$
3,722

 
$
4,041

 
$
4,560

 
$
5,332

 
$
6,252

Accelerated cash flows
473

 
2,285

 
3,916

 
4,111

 
4,309

Other
84

 
90

 
176

 
229

 
219

Total interest income
4,279

 
6,416

 
8,652

 
9,672

 
10,780

Provision reversal/(Provision) for loan losses
1,877

 
470

 
(3,304
)
 
(2,185
)
 
(2,811
)
Gain /(loss) on sale of other real estate
(45
)
 
164

 
131

 
97

 
168

Change in FDIC loss share receivable
(2,374
)
 
(2,742
)
 
(2,410
)
 
(4,526
)
 
(2,849
)
Change in FDIC clawback liability
(1,028
)
 
(142
)
 
110

 
(136
)
 
(62
)
Other expenses and estimated funding costs
1,044

 
1,182

 
1,237

 
1,949

 
2,525

Covered assets income before income tax expense
$
1,665

 
$
2,984

 
$
1,942

 
$
973

 
$
2,701


Our current projection of average PCI loan balances are $103 million and $83 million for the years ended December 31, 2014 and 2015, respectively.


38



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

 
Three months ended September 30,
(in thousands)
2014
 
2013
 
Increase (decrease)
 Wealth Management revenue
$
1,754

 
$
1,698

 
$
56

 
3
 %
 Service charges on deposit accounts
1,812

 
1,768

 
44

 
2
 %
 Other service charges and fee income
849

 
722

 
127

 
18
 %
 Sale of other real estate
114

 
472

 
(358
)
 
(76
)%
 State tax credit activity, net
156

 
308

 
(152
)
 
(49
)%
 Sale of securities

 
611

 
(611
)
 
(100
)%
Change in FDIC loss share receivable
(2,374
)
 
(2,849
)
 
475

 
17
 %
 Miscellaneous income
2,141

 
986

 
1,155

 
117
 %
Total noninterest income
$
4,452

 
$
3,716

 
$
736

 
(20
)%


Noninterest income increased $0.7 million, in the third quarter of 2014 compared to the third quarter of 2013. The increase is primarily due to a $0.9 million non-recurring closing fee recorded during the quarter in Miscellaneous income as well as a $0.5 million increase in the change in FDIC loss share receivable from lower negative amortization and lower accelerated cash flows in the prior period offset with the impact from impairment reversals. These items were offset by $0.6 million of gains on the sale of securities in the prior period as well as a $0.4 million increase in gains on the sale of other real estate.

 
Nine months ended September 30,
(in thousands)
2014
 
2013
 
Increase (decrease)
 Wealth Management revenue
$
5,191

 
$
5,419

 
$
(228
)
 
(4
)%
 Service charges on deposit accounts
5,317

 
5,025

 
292

 
6
 %
 Other service charges and fee income
2,188

 
2,030

 
158

 
8
 %
 Sale of other real estate
1,514

 
1,562

 
(48
)
 
(3
)%
 State tax credit activity, net
860

 
1,214

 
(354
)
 
(29
)%
 Sale of securities

 
1,295

 
(1,295
)
 
(100
)%
Change in FDIC loss share receivable
(7,526
)
 
(13,647
)
 
6,121

 
45
 %
 Miscellaneous income
4,235

 
2,055

 
2,180

 
106
 %
Total noninterest income
$
11,779

 
$
4,953

 
$
6,826

 
138
 %

Noninterest income increased $6.8 million, or 138%, in the nine months ended September 30, 2014 compared to the same period of 2013. The increase is primarily due to a $6.1 million increase in the change in FDIC loss share receivable from lower negative amortization and lower accelerated cash flows in the prior period offset with the impact from impairment reversals, as well as a $2.1 million increase in Miscellaneous income from a $0.9 million non-recurring closing fee as well as higher income on a $20.0 million BOLI policy entered into late in the second quarter of 2013. These items were offset by a $1.3 million gain on the sale of securities recorded in the prior year period.


39



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

 
Three months ended September 30,
(in thousands)
2014
 
2013
 
Increase (decrease)
Employee compensation and benefits
$
11,913

 
$
10,777

 
$
1,136

 
11
 %
Occupancy
1,683

 
1,689

 
(6
)
 
 %
FDIC clawback
1,028

 
62

 
966

 
1,558
 %
Data processing
1,045

 
1,143

 
(98
)
 
(9
)%
FDIC and other insurance
710

 
900

 
(190
)
 
(21
)%
Loan legal and other real estate expense
811

 
1,247

 
(436
)
 
(35
)%
Professional fees
710

 
1,041

 
(331
)
 
(32
)%
Other
3,221

 
4,149

 
(928
)
 
(22
)%
Total noninterest expense
$
21,121

 
$
21,008

 
$
113

 
1
 %


Noninterest expenses were $21.1 million in the third quarter of 2014, an increase of $0.1 million, from the same quarter of 2013. The increase over the prior year period is primarily due to increased FDIC clawback expense from continued lower loss rates on our PCI loans as well as severance costs from efficiency initiatives during the quarter. Offsetting these increases was a decrease in loan legal and other real estate expenses from improved credit quality. Further offsetting increases in noninterest expenses was reduced professional fees from lower legal expenses and other expenses primarily due to a $0.4 million, one-time non-cash expense for the inducement of the conversion of $20.0 million of trust preferred securities during the third quarter of 2013.

The Company's efficiency ratio, which measures noninterest expense as a percentage of total revenue, was 66.2% for the quarter ended September 30, 2014 compared to 57.9% for the prior year period. The Company expects noninterest expenses to be between $19 million and $21 million per quarter for the foreseeable future.
 
Nine months ended September 30,
(in thousands)
2014
 
2013
 
Increase (decrease)
Employee compensation and benefits
$
35,882

 
$
33,006

 
$
2,876

 
9
 %
Occupancy
4,998

 
5,298

 
(300
)
 
(6
)%
FDIC clawback
1,060

 
815

 
245

 
30
 %
Data processing
3,296

 
3,000

 
296

 
10
 %
FDIC and other insurance
2,170

 
2,592

 
(422
)
 
(16
)%
Loan legal and other real estate expense
2,985

 
3,355

 
(370
)
 
(11
)%
Professional fees
2,569

 
3,394

 
(825
)
 
(24
)%
Other
9,708

 
10,979

 
(1,271
)
 
(12
)%
Total noninterest expense
$
62,668

 
$
62,439

 
$
229

 
 %

Noninterest expenses have increased $0.2 million in the nine month period ended September 30, 2014 as compared to the same period of 2013. The increase is due to a $2.9 million increase in employee compensation and benefits costs due to insourcing certain risk management functions, higher employee benefit costs, and severance expenses recorded in the current period. This was offset by $0.8 million reduction in professional fees from lower legal expenses, as well as a reduction in other expenses of $0.4 million from the trust preferred securities conversion described previously.

The Company's efficiency ratio, which measures noninterest expense as a percentage of total revenue, was 63.7% for the nine months ended September 30, 2014 compared to 57.9% for the prior year period.


40




Income Taxes

For the quarter ended September 30, 2014, the Company’s income tax expense, which includes both federal and state taxes, was $4.4 million compared to $4.7 million for the same period in 2013. The combined federal and state effective income tax rate was 34.9% for the quarter ended September 30, 2014, slightly lower than September 30, 2013, due to lower state taxes.

For the nine months ended September 30, 2014, the Company’s income tax expense, which includes both federal and state taxes, was $11.1 million compared to $15.4 million for the same period in 2013. The combined federal and state effective income tax rate was 34.3% for the nine month period ended September 30, 2014, consistent with the comparable period ended September 30, 2013.





41



Summary Balance Sheet

(in thousands)
September 30, 2014
 
December 31, 2013
 
Increase (decrease)
Total cash and cash equivalents
$
123,812

 
$
210,569

 
$
(86,757
)
(41.2
)%
Securities available for sale
456,584

 
434,587

 
21,997

5.1
 %
Portfolio loans
2,294,905

 
2,137,313

 
157,592

7.4
 %
Purchase credit impaired loans
113,862

 
140,538

 
(26,676
)
(19.0
)%
Total assets
3,209,590

 
3,170,197

 
39,393

1.2
 %
Deposits
2,509,764

 
2,534,953

 
(25,189
)
(1.0
)%
Total liabilities
2,900,836

 
2,890,492

 
10,344

0.4
 %
Total shareholders' equity
308,754

 
279,705

 
29,049

10.4
 %

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 concentrated in and 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 summarizes the composition of the Company's loan portfolio:

(in thousands)
September 30, 2014
 
December 31, 2013
 
Increase (decrease)
Commercial and industrial
$
1,172,015

 
$
1,041,576

 
$
130,439

12.5
 %
Commercial real estate - Investor owned
391,791

 
437,688

 
(45,897
)
(10.5
)%
Commercial real estate - Owner occupied
366,724

 
341,631

 
25,093

7.3
 %
Construction and land development
123,888

 
117,032

 
6,856

5.9
 %
Residential real estate
187,594

 
158,527

 
29,067

18.3
 %
Consumer and other
52,893

 
40,859

 
12,034

29.5
 %
Portfolio loans
$
2,294,905

 
$
2,137,313

 
$
157,592

7.4
 %
Purchase credit impaired loans
113,862

 
140,538

 
(26,676
)
(19.0
)%
Total loans
$
2,408,767

 
$
2,277,851

 
$
130,916

5.7
 %

Portfolio loans totaled $2.3 billion at September 30, 2014, increasing $158 million, or 10% annualized, compared to December 31, 2013 as the Company experienced continued growth in its Commercial and Industrial ("C&I") loans, as well as our Owner Occupied Commercial real estate and Residential real estate loans. The Company expects to achieve approximately 10% annualized portfolio loan growth for the foreseeable future. PCI loans totaled $114 million at September 30, 2014, a decrease of $27 million, or 19% from December 31, 2013, primarily as a result of principal paydowns and accelerated loan payoffs.




42



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.
 
 
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)
2014
 
2013
 
2014
 
2013
Allowance at beginning of period, for portfolio loans
$
28,422

 
$
27,619

 
$
27,289

 
$
34,330

Loans charged off:
 
 
 
 
 
 
 
Commercial and industrial
(215
)
 
(1,817
)
 
(1,694
)
 
(2,423
)
Real estate:
 
 
 
 
 
 
 
Commercial
(50
)
 
(560
)
 
(724
)
 
(4,132
)
Construction and Land Development
(600
)
 
(85
)
 
(905
)
 
(419
)
Residential

 
(52
)
 

 
(1,038
)
Consumer and other

 

 
(4
)
 
(34
)
Total loans charged off
(865
)
 
(2,514
)
 
(3,327
)
 
(8,046
)
Recoveries of loans previously charged off:
 
 
 
 
 
 
 
Commercial and industrial
880

 
906

 
1,221

 
1,322

Real estate:
 
 
 
 
 
 
 
Commercial
31

 
374

 
106

 
756

Construction and Land Development
35

 
385

 
759

 
420

Residential
230

 
481

 
310

 
911

Consumer and other
1

 

 
1

 

Total recoveries of loans
1,177

 
2,146

 
2,397

 
3,409

Net loan chargeoffs
312

 
(368
)
 
(930
)
 
(4,637
)
Provision for loan losses
66

 
(652
)
 
2,441

 
(3,094
)
Allowance at end of period, for portfolio loans
$
28,800

 
$
26,599

 
$
28,800

 
$
26,599

 
 
 
 
 
 
 
 
Allowance at beginning of period, for purchase credit impaired loans
$
17,539

 
$
11,045

 
$
15,438

 
$
11,547

   Loans charged off
(8
)
 
(16
)
 
(171
)
 
(273
)
   Recoveries of loans

 
26

 

 
101

Other
(110
)
 
(234
)
 
(680
)
 
(532
)
Net loan chargeoffs
(118
)
 
(224
)
 
(851
)
 
(704
)
Provision for loan losses
(1,877
)
 
2,811

 
957

 
2,789

Allowance at end of period, for purchase credit impaired loans
$
15,544

 
$
13,632

 
$
15,544

 
$
13,632

 
 
 
 
 
 
 
 
Total Allowance at end of period
$
44,344

 
$
40,231

 
$
44,344

 
$
40,231

 
 
 
 
 
 
 
 
Excludes purchase credit impaired loans
 
 
 
 
 
 
 
Average loans
$
2,280,377

 
$
2,076,765

 
$
2,217,000

 
$
2,090,194

Total portfolio loans
2,294,905

 
2,110,825

 
2,294,905

 
2,110,825

Net chargeoffs to average loans
(0.05
)%
 
0.07
%
 
0.06
%
 
0.30
%
Allowance for loan losses to loans
1.25

 
1.26

 
1.25

 
1.26



43



The provision for loan losses on portfolio loans for the three months ended September 30, 2014 was $0.1 million compared to a $0.7 million benefit for the comparable 2013 period. For the nine month period ended September 30, 2014 provision for loan losses on portfolio loans was $2.4 million compared to a $3.1 million benefit in the prior year period. The provision for loan losses for the year to date period ended September 30, 2014 was primarily to provide for charge-offs incurred as well as loan growth in the portfolio including slightly elevated levels of classified loans during 2014. The benefit in loan provision for the third quarter and year to date period ended September 30, 2013 was primarily due to significant improvements in credit quality during the prior year including improvement in loan risk ratings and loss migration results, as well as lower levels of classified loans.

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 September 30, 2014 was a benefit of $1.9 million compared to provision of $2.8 million for the comparable 2013 periods. The provision for loan losses on PCI loans for the nine months ended September 30, 2014 was $1.0 million compared to $2.8 million for the comparable 2013 periods.

The allowance for loan losses on portfolio loans was 1.25% of total loans at September 30, 2014, compared to 1.26% at June 30, 2014, and September 30, 2013. Management believes the allowance for loan losses is adequate to absorb inherent losses in the loan portfolio. The slight reduction in the ratio of allowance for loan losses to total loans over the linked quarter and prior year period is due to continued strong credit performance, as well as continued improvement in our loss migration results.



44



Nonperforming assets

The following table presents the categories of nonperforming assets and other ratios as of the dates indicated.

(in thousands)
September 30, 2014
 
December 31, 2013
 
September 30, 2013
Non-accrual loans
$
16,507

 
$
20,163

 
$
24,169

Loans past due 90 days or more and still accruing interest
345

 

 

Restructured loans
1,360

 
677

 

Total nonperforming loans
18,212

 
20,840

 
24,169

Foreclosed property (1)
2,261

 
7,576

 
10,278

Total nonperforming assets (1)
$
20,473

 
$
28,416

 
$
34,447

 
 
 
 
 
 
Excludes assets covered under FDIC loss share
 
 
 
 
 
Total assets (1)
$
3,209,590

 
$
3,170,197

 
$
3,108,062

Total portfolio loans
2,294,905

 
2,137,313

 
2,110,825

Total loans plus foreclosed property
2,297,166

 
2,144,889

 
2,121,103

Nonperforming loans to total loans
0.79
%
 
0.98
%
 
1.15
%
Nonperforming assets to total loans plus foreclosed property
0.89

 
1.32

 
1.62

Nonperforming assets to total assets (1)
0.64

 
0.90

 
1.11

 
 
 
 
 
 
Allowance for loans not covered under FDIC loss share to nonperforming loans
158
%
 
131
%
 
110
%
 
(1)
Excludes 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 Note 5 – Purchase Credit Impaired ("PCI") Loans for more information on these loans.

Nonperforming loans at September 30, 2014 were $18.2 million, a decrease from $19.3 million at June 30, 2014, and $24.2 million at September 30, 2013. The nonperforming loans are comprised of 18 relationships, with the largest from a $4.6 million Commercial Real Estate loan. The top five relationships comprise 67% of the nonperforming loans. Approximately 55% of nonperforming loans were located in the St. Louis market, 30% were located in the Kansas City market, and 15% were located in the Arizona market. At September 30, 2014, there were 2 performing, restructured loans in the amount of $2.2 million excluded from the nonperforming loans.

Nonperforming loans represented 0.79% of portfolio loans at September 30, 2014, versus 0.86% at June 30, 2014 and 1.14% at September 30, 2013.






45



Nonperforming loans based on loan type were as follows:
 
 
2014
 
2013
(in thousands)
3rd Qtr
 
2nd Qtr
 
4th Qtr
 
3rd Qtr
 
2nd Qtr
Construction and Land Development
$
6,455

 
$
7,422

 
$
9,484

 
$
6,499

 
$
4,396

Commercial Real Estate
7,055

 
7,261

 
7,417

 
11,021

 
12,439

Residential Real Estate
386

 
545

 
559

 
675

 
2,432

Commercial & Industrial
3,543

 
4,059

 
3,380

 
5,974

 
6,681

Consumer & Other
773

 

 

 

 

Total
$
18,212

 
$
19,287

 
$
20,840

 
$
24,169

 
$
25,948


The following table summarizes the changes in nonperforming loans by quarter.

 
2014
2013
(in thousands)
3rd Qtr
 
2nd Qtr
 
Year to date
 
Year to date
Nonperforming loans beginning of period
$
19,287

 
$
15,508

 
$
20,840

 
$
38,727

Additions to nonaccrual loans
1,564

 
7,712

 
11,847

 
17,748

Additions to restructured loans

 
732

 
1,522

 

Chargeoffs
(837
)
 
(1,093
)
 
(3,299
)
 
(8,046
)
Other principal reductions
(1,823
)
 
(3,572
)
 
(7,852
)
 
(12,429
)
Moved to other real estate

 

 
(4,722
)
 
(7,661
)
Moved to performing
(324
)
 

 
(469
)
 
(4,170
)
Loans past due 90 days or more and still accruing interest
345

 

 
345

 

Nonperforming loans end of period
$
18,212

 
$
19,287

 
$
18,212

 
$
24,169



Other real estate

Other real estate at September 30, 2014, was $11.1 million, compared to $20.4 million at June 30, 2014, and $28.1 million at September 30, 2013. Approximately 80% of total other real estate, or $8.8 million, is covered by FDIC loss share agreements.

The following table summarizes the changes in other real estate.
 
2014
 
2013
(in thousands)
3rd Qtr
 
2nd Qtr
 
Year to date
 
Year to date
Other real estate beginning of period
$
20,434

 
$
24,899

 
$
23,252

 
$
26,500

Additions and expenses capitalized to prepare property for sale
1,310

 
1,436

 
7,468

 
7,661

Additions from FDIC assisted transactions

 

 

 
13,455

Writedowns in value
(900
)
 
(874
)
 
(2,310
)
 
(2,798
)
Sales
(9,757
)
 
(5,027
)
 
(17,323
)
 
(16,693
)
Other real estate end of period
$
11,087

 
$
20,434

 
$
11,087

 
$
28,125


At September 30, 2014, other real estate was comprised of 23 properties, with the largest being a $2.1 million residential property in the Kansas City region.


46



Writedowns in fair value were recorded in Loan legal and other real estate expense or are charged-off existing loan balances based on current market activity shown in the appraisals. In addition, for the three and nine months ended September 30, 2014, the Company realized a net gain of $0.1 million and $1.5 million, respectively, on the sale of other real estate, as compared to $0.5 million and $1.6 million in the prior year periods. Gains on the sale of other real estate are recorded as part of Noninterest income.

Liabilities

Liabilities totaled $2.9 billion at September 30, 2014, consistent with balances at December 31, 2013. Liabilities remained stable due to a $25 million decrease in total deposits, as well as $27 million decrease in other borrowings primarily due to a decrease in securities sold under repurchase agreements, offset by an increase of $70 million in short-term Federal Home Loan Bank advances.

Deposits

(in thousands)
September 30, 2014
 
December 31, 2013
 
Increase (decrease)
Demand deposits
$
695,804

 
$
653,686

 
$
42,118

 
6.4
 %
Interest-bearing transaction accounts
438,205

 
219,802

 
218,403

 
99.4
 %
Money market accounts
736,840

 
948,884

 
(212,044
)
 
(22.3
)%
Savings
80,521

 
79,666

 
855

 
1.1
 %
Certificates of deposit:
 
 
 
 

 

$100 and over
426,593

 
475,544

 
(48,951
)
 
(10.3
)%
Other
131,801

 
157,371

 
(25,570
)
 
(16.2
)%
Total deposits
$
2,509,764

 
$
2,534,953

 
$
(25,189
)
 
(1.0
)%
 
 
 
 
 
 
 
 
Non-time deposits / total deposits
78
%
 
75
%
 
 
 
 

Total deposits at September 30, 2014 were $2.5 billion, a decrease of $25 million, or 1%, from December 31, 2013. The decrease in deposits within our money market accounts and corresponding increase in interest-bearing transaction accounts was primarily due to a product change during the year for which a reclassification between the two categories was necessary. The continued decline in our certificate of deposit balances is due to continued efforts by the Company to lower its cost of funds. The composition of our noninterest bearing deposits increased to 28% of total deposits at September 30, 2014, compared to 26% at December 31, 2013, although a portion of the increase in demand deposits represented a temporary increase from a significant customer transaction that occurred close to the end of the third quarter. During the quarter ending September 30, 2014, our cost of deposits was slightly lower compared to the linked second quarter at 0.64% as compared to 0.65%, and improved from the 0.79% for the prior year period.

Shareholders' Equity

Shareholders' Equity totaled $309 million at September 30, 2014, an increase of $29 million from December 31, 2013. Significant activity during the nine months ended September 30, 2014 included:

Net income of $21.2 million,
Other comprehensive income of $4.1 million from the change in unrealized gain/loss on available-for-sale investment securities,
The conversion of $5.0 million of trust preferred securities to common stock,
Dividends paid on common stock of $3.1 million.



47



Liquidity and Capital Resources
 
Liquidity management

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 Bank 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 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. Management believes our current level of cash at the holding company of approximately $6.2 million and bank subsidiary dividend will be sufficient to meet all projected cash needs for the remainder of 2014.

On August 20, 2014, the Company's shelf registration statement on Form S-3 registering up to $50.0 million of common stock, preferred stock, debt securities, and various other securities, including combinations of such securities was declared effective by the Securities and Exchange Commission. The Company's ability to offer securities pursuant to the registration statement depends on market conditions and the Company's continuing eligibility to use the Form S-3 under rules of the Securities and Exchange Commission.

As of September 30, 2014, the Company had $56.8 million of outstanding subordinated debentures as part of eight trust preferred securities pools. On March 14, 2014, the Company converted the remaining $5.0 million, 9% coupon, trust preferred securities to shares of common stock. As a result of this transaction the Company reduced its long-term debt by $5.0 million and issued 287,852 shares of common stock. The trust preferred securities are classified as debt but are currently included in regulatory capital and the related interest expense is tax-deductible. Regulations recently finalized by the Federal Reserve Board to implement the Basel III regulatory capital reforms allow our currently outstanding trust preferred securities to retain their Tier 1 capital status.

On January 9, 2013, the Company repurchased warrants issued by the U.S. Treasury as part of the Capital Purchase Program. The repurchase price was approximately $1.0 million.


48



Bank liquidity

The Bank has a variety of funding sources available to increase financial flexibility. In addition to amounts currently borrowed, at September 30, 2014, the Bank could borrow an additional $216 million from the FHLB of Des Moines under blanket loan pledges and has an additional $634 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.

Of the $457 million of the securities available for sale at September 30, 2014, $201 million was pledged as collateral for deposits of public institutions, treasury, loan notes, and other requirements. The remaining $256 million could be pledged or sold to enhance liquidity, if necessary.

The Bank belongs to the Certificate of Deposit Account Registry Service, or CDARS, which allows us to provide our customers with access to additional levels of FDIC insurance coverage on their deposits. The Company considers the reciprocal deposits placed through the CDARS program as core funding and does not report the balances as brokered sources in its internal or external financial reports. As of September 30, 2014, the Bank had $39.1 million of reciprocal CDARS money market sweep balances and $1.9 million of reciprocal certificates of deposits outstanding. In addition to the reciprocal deposits available through CDARS, the Company has access to the “one-way buy” program, which allows the Company to bid on the excess deposits of other CDARS member banks. The Company will report any outstanding “one-way buy” funds as brokered funds in its internal and external financial reports. At September 30, 2014, we had no outstanding “one-way buy” deposits. In addition, the Bank has the ability to sell certificates of deposit through various national or regional brokerage firms, if needed.

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 $925 million in unused commitments as of September 30, 2014. 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 Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. To be categorized as “well capitalized”, banks must maintain minimum total risk-based (10%), Tier 1 risk-based (6%) and Tier 1 leverage ratios (5%). As of September 30, 2014, and December 31, 2013, the Company and the Bank met all capital adequacy requirements to which they are subject.

The Company continues to exceed regulatory standards and met the definition of “well-capitalized” (the highest category) at September 30, 2014, and December 31, 2013. Beginning in the first quarter of 2015 the Company will adopt the Regulatory Capital Framework (Basel III). The Company has begun to implement the necessary processes and procedures to comply with Basel III. Based on the Company's current assessment of the framework and corresponding ratios, we expect to be in compliance with the various rules and remain "well-capitalized" upon implementation.


49



The following table summarizes the Company’s various capital ratios at the dates indicated:
 
(Dollars in thousands)
September 30, 2014
 
December 31, 2013
Tier 1 capital to risk weighted assets
12.35
%
 
12.52
%
Total capital to risk weighted assets
13.61
%
 
13.78
%
Tier 1 common equity to risk weighted assets
10.29
%
 
10.08
%
Leverage ratio (Tier 1 capital to average assets)
10.47
%
 
9.94
%
Tangible common equity to tangible assets
8.63
%
 
7.78
%
Tier 1 capital
$
329,354

 
$
308,490

Total risk-based capital
$
362,818

 
$
339,433



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.
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.

Tangible common equity ratio

(In thousands)
September 30, 2014
 
December 31, 2013
Total shareholders' equity
$
308,754

 
$
279,705

Goodwill
(30,334
)
 
(30,334
)
Intangible assets
(4,453
)
 
(5,418
)
Tangible common equity
$
273,967

 
$
243,953

 
 
 
 
Total assets
$
3,209,590

 
$
3,170,197

Goodwill
(30,334
)
 
(30,334
)
Intangible assets
(4,453
)
 
(5,418
)
Tangible assets
$
3,174,803

 
$
3,134,445

 
 
 
 
Tangible common equity to tangible assets
8.63
%
 
7.78
%

50




Tier 1 common equity ratio
 
(In thousands)
September 30, 2014
 
December 31, 2013
Total shareholders' equity
$
308,754

 
$
279,705

Goodwill
(30,334
)
 
(30,334
)
Intangible assets
(4,453
)
 
(5,418
)
Unrealized losses (gains)
233

 
4,380

Qualifying trust preferred securities
55,100

 
60,100

Other
56

 
57

Tier 1 capital
$
329,356

 
$
308,490

Qualifying trust preferred securities
(55,100
)
 
(60,100
)
Tier 1 common equity
$
274,256

 
$
248,390

 
 
 
 
Total risk weighted assets determined in accordance with prescribed regulatory requirements
2,666,221

 
2,463,605

 
 
 
 
Tier 1 common equity to risk weighted assets
10.29
%
 
10.08
%

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 to evaluate the impact of excess Covered loan accretion on the Company's net interest margin and the Company's operating performance on an ongoing basis, 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

(In thousands)
Three months ended September 30,
 
Nine months ended September 30,
2014
 
2013
 
2014
 
2013
Net interest income (fully tax equivalent)
$
27,843

 
$
33,101

 
$
87,781

 
$
104,363

Incremental accretion income
(2,579
)
 
(8,178
)
 
(13,782
)
 
(28,032
)
Core net interest income
$
25,264

 
$
24,923

 
$
73,999

 
$
76,331

 
 
 
 
 
 
 
 
Average earning assets
$
2,943,070

 
$
2,789,314

 
$
2,896,202

 
$
2,874,004

Reported net interest margin
3.75
%
 
4.71
%
 
4.05
%
 
4.86
%
Core net interest margin
3.41
%
 
3.54
%
 
3.42
%
 
3.55
%

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, 2013.




51



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
 
11.1%
+ 200 bp
 
7.1%
+ 100 bp
 
3.1%
 - 100 bp
 
(1.1)%

Interest rate simulations for September 30, 2014, 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 September 30, 2014, the Company had $23.8 million in notional amount of outstanding interest rate caps, to help manage interest rate risk. Derivative financial instruments are also discussed in Part I, Item 1, Note 7 - Derivative Financial Instruments.




52




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 September 30, 2014. 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 September 30, 2014 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.
 

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, 2013. There have been no material changes to the risk factors described in such Annual Report on Form 10-K.




53



ITEM 6: EXHIBITS
 
Exhibit
Number
 
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
 
Third Amendment of Executive Employment Agreement dated as of August 8, 2014 by and between Registrant and Frank H. Sanfilippo.
 
 
 
*10.2
 
Employment separation and release agreement dated effective September 29, 2014 by and between Registrant and Richard C. Leuck.
 
 
 
*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 September 30, 2014, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheet at September 30, 2014 and December 31, 2013; (ii) Consolidated Statement of Income for the three and nine months ended September 30, 2014 and 2013; (iii) Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2014 and 2013; (iv) Consolidated Statement of Changes in Equity for the nine months ended September 30, 2014 and 2013; (v) Consolidated Statement of Cash Flows for the nine months ended September 30, 2014 and 2013; 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.




54



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 October 31, 2014.
 
 
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
 

55