2011-3.31 10Q/A


 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
 
FORM 10-Q/A
(Amendment No. 1)
 
[X]
 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2011.
 
 
 
[   ]
 
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 [ ]  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 o
Accelerated filer R
  Non-accelerated filer o
Smaller reporting company o
 
 
(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 May 6, 2011, the Registrant had 14,945,038 shares of outstanding common stock.
 
This document is also available through our website at http://www.enterprisebank.com.

 





EXPLANATORY NOTE

In January 2012, while converting to a new system designed to address the complex accounting requirements of acquired loans under Accounting Standards Codification ("ASC") Topic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality”, the Company discovered an error in its process used to record income on these loans. ASC 310-30 is utilized to account for the loans acquired by the Company under loss sharing agreements with the Federal Deposit Insurance Corporation (the “FDIC”). Under ASC 310-30, these acquired loans are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance. The difference between the undiscounted cash flows expected at acquisition and the investment in the loans, or the "accretable yield", is recognized as interest income on a level-yield method over the life of the loans. In accounting for income from the acquired loans, the Company recorded both the accretable yield and contractually required interest payments. The Company should not have recognized the contractually required interest payments. As a result, both interest income and the carrying value of the acquired loans were overstated. This affected income reported on the loans acquired in FDIC assisted transactions since December 2009.

The Company is filing this Amendment to our Quarterly Report on Form 10-Q/A (the “Amended Filing” or “Form 10-Q/A”) to restate our unaudited consolidated financial statements and related disclosures for the quarter ended March 31, 2011 (the "Restatement".) The Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 (the "Original Filing") was filed with the Securities and Exchange Commission (“SEC”) on May 9, 2011.

The previously issued unaudited condensed financial statements for the quarter ended March 31, 2011 in the Original Filing should no longer be relied upon.

Internal Control Considerations
In conjunction with this finding, management identified control deficiencies in its internal controls over financial reporting associated with the reversal of contractual interest on acquired loans that constitute a material weakness, as discussed in Part I, Item 4 of this Form 10-Q/A. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected. For a discussion of management’s consideration of our disclosure controls and procedures and material weaknesses identified, see Part I, Item 4 included in this Amended filing.

Adjustments
In addition to the adjustments relating to the acquired loan contractual interest described above, the Company has corrected other errors that had been previously identified but not corrected because they were not material, individually or in the aggregate, to the consolidated financial results. These items included changes in accrual estimates and financial statement reclassifications. Adjustments, identified subsequent to the date of the Original Filing date, have also been made to the preliminary fair values of assets acquired and liabilities assumed for the Company's FDIC-assisted transactions.

Additional information on the effect of the adjustments in our financial statements are contained in Item 8, Note 12 - Restatement of Consolidated Financial Results.





For convenience of the reader, this Amended Filing sets forth the Original Filing in its entirety. The sections of the Original Filing which were not amended are unchanged and continue in full force and effect as originally filed. This Amended Filing speaks as of the date of the Original Filing on the Form 10-Q, and has not been updated to reflect events occurring subsequent to the Original Filing date other than those associated with the correction of the error and other adjustments specifically noted. The Items in this Form 10-Q/A which are amended and restated as a result of the foregoing are:
Part I, Item 1. - Restated Financial Statements;
Part I, Item 2. - Management’s Discussion and Analysis of Financial Condition and Results of Operations;
Part I, Item 4. - Controls and Procedures; and
Part II - Item 6. Exhibits
In accordance with applicable SEC rules, this Amended Filing includes certifications from our Chief Executive Officer and Chief Financial Officer dated as of the date of this Amended Filing.






ENTERPRISE FINANCIAL SERVICES CORP
FORM 10-Q/A - 1ST QUARTER 2011
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 Shareholder’s 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)
As Restated(1)
March 31, 2011
 
As Restated(1) December 31, 2010
Assets
 
 
 
Cash and due from banks
$
18,542

 
$
23,413

Federal funds sold
1,464

 
3,153

Interest-bearing deposits (including $1,520 pledged as collateral)
185,805

 
267,102

                  Total cash and cash equivalents
205,811

 
293,668

Interest-bearing deposits greater than 90 days
1,751

 
1,751

Securities available for sale
481,989

 
361,546

Mortgage loans held for sale
3,142

 
5,640

Portfolio loans not covered under FDIC loss share
1,761,034

 
1,766,351

Portfolio loans covered under FDIC loss share at fair value
182,277

 
121,570

   Less: Allowance for loan losses
42,822

 
42,759

                  Portfolio loans, net
1,900,489

 
1,845,162

Other real estate not covered under FDIC loss share
28,443

 
25,373

Other real estate covered under FDIC loss share
22,862

 
10,835

Other investments, at cost
14,430

 
12,278

Fixed assets, net
20,035

 
20,499

Accrued interest receivable
7,839

 
7,464

State tax credits, held for sale, including $30,494 and $31,576
carried at fair value, respectively
59,928

 
61,148

FDIC loss share receivable
103,285

 
87,792

Goodwill
3,622

 
2,064

Intangibles, net
1,921

 
1,223

Other assets
60,098

 
63,756

Total assets
$
2,915,645

 
$
2,800,199

Liabilities and Shareholders' Equity
 
 
 
Demand deposits
$
448,012

 
$
366,086

Interest-bearing transaction accounts
198,152

 
204,687

Money market accounts
942,009

 
855,522

Savings
10,789

 
10,181

Certificates of deposit:
 
 
 
$100 and over
593,791

 
543,898

Other
237,677

 
317,347

Total deposits
2,430,430

 
2,297,721

Subordinated debentures
85,081

 
85,081

Federal Home Loan Bank advances
107,300

 
107,300

Other borrowings
97,898

 
119,333

Accrued interest payable
1,545

 
1,488

Other liabilities
8,890

 
9,475

Total liabilities
2,731,144

 
2,620,398

 
 
 
 
Shareholders' equity:
 
 
 
Preferred stock, $0.01 par value;
5,000,000 shares authorized; 35,000 shares issued and outstanding
32,707

 
32,519

Common stock, $0.01 par value; 30,000,000 shares authorized; 15,016,977 and 14,965,401 shares issued, respectively
150

 
150

Treasury stock, at cost; 76,000 shares
(1,743
)
 
(1,743
)
Additional paid in capital
134,664

 
133,673

Retained earnings
18,478

 
15,775

Accumulated other comprehensive income (loss)
245

 
(573
)
Total shareholders' equity
184,501

 
179,801

Total liabilities and shareholders' equity
$
2,915,645

 
$
2,800,199

(1) See Note 12 - Restatement of Consolidated Financial Statements for more information.
The accompanying notes are an integral part of the consolidated financial statements.

1



ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
 
Three months ended March 31,
(In thousands, except per share data)
As Restated(1) 
2011
 
As Restated(1) 2010
Interest income:
 
 
 
Interest and fees on loans
$
27,631

 
$
24,973

Interest on debt securities:
 
 
 
Taxable
2,570

 
1,850

Nontaxable
110

 
10

Interest on federal funds sold
1

 
8

Interest on interest-bearing deposits
148

 
80

Dividends on equity securities
73

 
83

Total interest income
30,533

 
27,004

Interest expense:
 
 
 
Interest-bearing transaction accounts
189

 
219

Money market accounts
2,082

 
1,393

Savings
9

 
8

Certificates of deposit:
 
 
 
$100 and over
2,357

 
2,850

Other
1,053

 
1,785

Subordinated debentures
1,121

 
1,230

Federal Home Loan Bank advances
900

 
1,108

Notes payable and other borrowings
114

 
59

Total interest expense
7,825

 
8,652

Net interest income
22,708

 
18,352

Provision for loan losses
3,600

 
13,800

Net interest income after provision for loan losses
19,108

 
4,552

Noninterest income:
 
 
 
Wealth Management revenue
1,683

 
1,538

Service charges on deposit accounts
1,137

 
1,174

Other service charges and fee income
310

 
278

Gain (loss) on sale of other real estate
423

 
(12
)
Gain on state tax credits, net
155

 
518

Gain on sale of investment securities
174

 
557

Miscellaneous income
1,081

 
244

Total noninterest income
4,963

 
4,297

Noninterest expense:
 
 
 
Employee compensation and benefits
8,688

 
6,598

Occupancy
1,139

 
1,173

Furniture and equipment
354

 
370

Data processing
626

 
578

FDIC and other insurance
1,222

 
1,047

Loan legal and other real estate expense
2,436

 
1,272

Other
3,500

 
2,858

Total noninterest expense
17,965

 
13,896

 
 
 
 
Income (loss) before income tax expense (benefit)
6,106

 
(5,047
)
Income tax expense (benefit)
1,994

 
(1,856
)
Net income (loss)
$
4,112

 
$
(3,191
)
 
 
 
 
Net income (loss) available to common shareholders
$
3,486

 
$
(3,803
)
 
 
 
 
Earnings (loss) per common share
 
 
 
Basic
$
0.23

 
$
(0.26
)
Diluted
0.23

 
(0.26
)
(1) See Note 12 - Restatement of Consolidated Financial Statements for more information.
The accompanying notes are an integral part of the consolidated financial statements.

2



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, 2011 (Restated)(1)
 
$
32,519

 
$
150

 
$
(1,743
)
 
$
133,673

 
$
15,775

 
$
(573
)
 
$
179,801

Net income (Restated)(1)
 

 

 

 

 
4,112

 

 
4,112

Change in fair value of available for sale securities, net of tax
 

 

 

 

 

 
958

 
958

Reclassification adjustment for realized gain on sale of securities included in net income, net of tax
 

 

 

 

 

 
(112
)
 
(112
)
Reclassification of cash flow hedge, net of tax
 

 

 

 

 

 
(28
)
 
(28
)
Total comprehensive income
 
 

 
 
 
 
 
 
 
 
 
 
 
4,930

Cash dividends paid on common shares, $0.0525 per share
 

 

 

 

 
(783
)
 

 
(783
)
Cash dividends paid on preferred stock
 

 

 

 

 
(438
)
 

 
(438
)
Preferred stock accretion of discount
 
188

 

 

 

 
(188
)
 

 

Issuance under equity compensation plans, net, 51,576 shares
 

 

 

 
611

 

 

 
611

Share-based compensation
 

 

 

 
374

 

 

 
374

Excess tax benefit related to equity compensation plans
 

 

 

 
6

 

 

 
6

Balance March 31, 2011 (Restated)(1)
 
$
32,707

 
$
150

 
$
(1,743
)
 
$
134,664

 
$
18,478

 
$
245

 
$
184,501


(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, 2010
 
$
31,802

 
$
130

 
$
(1,743
)
 
$
117,000

 
$
15,790

 
$
933

 
$
163,912

Net loss (Restated)(1)
 

 

 

 

 
(3,191
)
 

 
(3,191
)
Change in fair value of available for sale securities, net of tax
 

 

 

 

 

 
577

 
577

Reclassification adjustment for realized gain on sale of securities included in net income, net of tax
 

 

 

 

 

 
(356
)
 
(356
)
Reclassification of cash flow hedge, net of tax
 

 

 

 

 

 
(40
)
 
(40
)
Total comprehensive loss
 
 

 
 
 
 
 
 
 
 
 
 
 
(3,010
)
Cash dividends paid on common shares, $0.0525 per share
 

 

 

 

 
(781
)
 

 
(781
)
Cash dividends paid on preferred stock
 

 

 

 

 
(437
)
 

 
(437
)
Preferred stock accretion of discount
 
174

 

 

 

 
(174
)
 

 

Issuance under equity compensation plans, net, 37,845 shares
 

 

 

 
258

 

 

 
258

Issuance under private stock offering 1,931,610 shares
 

 
19

 

 
14,883

 

 

 
14,902

Share-based compensation
 

 

 

 
473

 

 

 
473

Excess tax expense related to equity compensation plans
 

 

 

 
(260
)
 

 

 
(260
)
Balance March 31, 2010 (Restated)(1)
 
$
31,976

 
$
149

 
$
(1,743
)
 
$
132,354

 
$
11,207

 
$
1,114

 
$
175,057


(1) See Note 12 - Restatement of Consolidated Financial Statements for more information.
The accompanying notes are an integral part of the consolidated financial statements.

3



ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
Three months ended March 31,
(in thousands)
As Restated(1) 2011
 
As Restated(1) 2010
Cash flows from operating activities:
 
 
 
Net income (loss)
$
4,112

 
$
(3,191
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
 
 
 
Depreciation
694

 
747

Provision for loan losses
3,600

 
13,800

Deferred income taxes
2,732

 
(5,616
)
Net amortization of debt securities
1,251

 
804

Amortization of intangible assets
135

 
112

Gain on sale of investment securities
(174
)
 
(557
)
Mortgage loans originated for sale
(14,897
)
 
(11,306
)
Proceeds from mortgage loans sold
17,360

 
13,989

(Gain) loss on sale of other real estate
(423
)
 
12

Gain on state tax credits, net
(155
)
 
(518
)
Excess tax (benefit) expense of share-based compensation
(6
)
 
260

Share-based compensation
374

 
649

Valuation adjustment on other real estate
442

 
574

Net accretion of loan discount and indemnification asset
(1,565
)
 
(110
)
Changes in:
 
 
 
Accrued interest receivable
(12
)
 
522

Accrued interest payable
18

 
148

Prepaid FDIC insurance
852

 
760

Other assets
(1,553
)
 
2,902

Other liabilities
(1,037
)
 
840

Net cash provided by operating activities
11,748

 
14,821

 
 
 
 
Cash flows from investing activities:
 
 
 
Cash received from sale of Millennium Brokerage Group

 
4,000

Cash received from acquisition of Legacy Bank
8,926

 

Net decrease in loans
4,098

 
19,484

Net cash proceeds received from FDIC loss share receivable
11,785

 

Proceeds from the sale of debt and equity securities, available for sale
5,299

 
80,645

Proceeds from the maturity of debt and equity securities, available for sale
31,021

 
20,280

Proceeds from the sale of other investments

 
59

Proceeds from the redemption of other investments
78

 
1,359

Proceeds from the sale of state tax credits held for sale
1,527

 
2,661

Proceeds from the sale of other real estate
4,382

 
3,541

Payments for the purchase/origination of:
 
 
 
Available for sale debt and equity securities
(147,040
)
 
(85,535
)
Other investments
(261
)
 
(1,388
)
Bank owned life insurance

 
(20,000
)
State tax credits held for sale

 
(2,387
)
Fixed assets
(212
)
 
(98
)
Net cash (used in) provided by investing activities
(80,397
)
 
22,621

 
 
 
 
Cash flows from financing activities:
 
 
 
Net increase in noninterest-bearing deposit accounts
52,074

 
11,177

Net increase in interest-bearing deposit accounts
(32,987
)
 
(48,539
)
Repayments of Federal Home Loan Bank advances
(16,256
)
 

Net (decrease) increase in other borrowings
(21,435
)
 
21,099

Cash dividends paid on common stock
(783
)
 
(781
)
Excess tax benefit (expense) benefit of share-based compensation
6

 
(260
)
Cash dividends paid on preferred stock
(438
)
 
(437
)
Issuance of common stock

 
14,902

Proceeds from the issuance of equity instruments
611

 

Net cash used in financing activities
(19,208
)
 
(2,839
)
Net (decrease) increase in cash and cash equivalents
(87,857
)
 
34,603

Cash and cash equivalents, beginning of period
293,668

 
106,966

Cash and cash equivalents, end of period
$
205,811

 
$
141,569

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid (received) during the period for:
 
 
 
Interest
$
7,767

 
$
8,801

Income taxes
696

 
(57
)
Noncash transactions:
 
 
 
Transfer to other real estate owned in settlement of loans
$
11,229

 
$
5,701

Sales of other real estate financed
442

 
5,685

(1) See Note 12 - Restatement of Consolidated Financial Statements for more information.
The accompanying notes are an integral part of the consolidated financial statements.

4



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:

Basis of Financial Statement Presentation
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”).

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. They do not include all information and footnotes required by U.S. GAAP for annual financial statements. 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.

On January 7, 2011, the Bank entered into a purchase and assumption agreement with the Federal Deposit Insurance Corporation (“FDIC”) and acquired certain assets and assumed certain liabilities of Legacy Bank, a full service community bank that was headquartered in Scottsdale, Arizona.  For more information on this transaction, see Note 3 - Acquisitions and Divestitures in this report.

Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2011. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K/A for the year ended December 31, 2010.
 
NOTE 2 - EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per common share data is calculated by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) 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 securities related to the issuance of trust preferred securities. The following table presents a summary of per common share data and amounts for the periods indicated.
 
Three months ended March 31,
(in thousands, except per share data)

2011
 
 
2010
Net income (loss) as reported
$
4,112

 
$
(3,191
)
Preferred stock dividend
(438
)
 
(437
)
Accretion of preferred stock discount
(188
)
 
(175
)
Net income (loss) available to common shareholders
$
3,486

 
$
(3,803
)
 
 
 
 
Weighted average common shares outstanding
14,920

 
14,418

Additional dilutive common stock equivalents
16

 

Diluted common shares outstanding
14,936

 
14,418

 
 
 
 
Basic earnings (loss) per common share:
$
0.23

 
$
(0.26
)
Diluted earnings (loss) per common share:
$
0.23

 
$
(0.26
)
For the three months ended March 31, 2011 and 2010, there were 2.0 million and 2.3 million, respectively, of weighted

5



average common stock equivalents excluded from the per share calculations because their effect was anti-dilutive. In addition, at March 31, 2011 and 2010, the Company had outstanding warrants to purchase 324,074 shares of common stock associated with the U.S. Treasury Capital Purchase Program which were excluded from the per common share calculation because their effect was also anti-dilutive.
 
NOTE 3-ACQUISITIONS AND DIVESTITURES
 
Acquisition of Legacy Bank

On January 7, 2011, the Bank entered into a purchase and assumption agreement with the FDIC and acquired certain assets and assumed certain liabilities of Legacy Bank (“Legacy”), a full service community bank that was headquartered in Scottsdale, Arizona. The acquisition consisted of tangible assets with estimated fair values of approximately $128.0 million and tangible liabilities with estimated fair values of approximately $130.4 million. The Bank acquired the assets at a discount of 7.6% and approximately $43.5 million of the deposits were assumed at a premium of 1%. The Bank also acquired approximately $55.6 million of discretionary and $13.6 million of non-discretionary trust assets.

As part of the acquisition, the Company provided the FDIC with a Value Appreciation Instrument (“VAI”) whereby 372,500 units were awarded to the FDIC at an exercise price of $10.63 per unit. The units were exercisable at any time from January 14, 2011 until January 6, 2012. The FDIC exercised the units on January 20, 2011 at a settlement price of $11.8444. A cash payment of $452,364 was made to the FDIC on January 21, 2011.

In connection with the acquisition, the Bank also entered into a loss share agreement whereby the FDIC will reimburse the Bank for 80% of all losses incurred on certain loans and other real estate covered under the agreement (“Covered Assets”). The loss share agreement is subject to the servicing procedures as specified in the agreement with the FDIC.

The reimbursable losses from the FDIC are based on the book value of the Covered Assets as determined by the FDIC as of the date of the acquisition. A majority of these loans were valued based on the liquidation value of the underlying collateral because the future cash flows are primarily based on the liquidation of underlying collateral. The expected reimbursements under the loss share agreement were recorded as a FDIC loss share receivable at their estimated fair value.

The loans and other real estate acquired are recorded at estimated fair value. As such, there was no allowance for credit losses established related to the acquired loans at January 7, 2011 and no carryover of the related allowance from Legacy. The loans are accounted for in accordance with guidance for certain loans acquired in a transfer, when the loans have evidence of credit deterioration and it is probable at the date of acquisition that the acquirer will not collect all contractually required principal and interest payments. The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges and an adjustment in accretable yield, which will have a positive impact on interest income.


6



The table below summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. The table includes adjustments subsequent to the date of the Original Filing on Form 10-Q. These fair value estimates are considered preliminary, and are subject to change for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available.

 
(in thousands)
Preliminary January 7, 2011 Amount
Refinements
Refined January 7, 2011 Amount
Cash and cash equivalents
$
8,926

$

$
8,926

Securities available for sale
9,569


9,569

Other investments
1,969


1,969

Portfolio loans
73,214


73,214

Other real estate
8,612


8,612

FDIC loss share receivable
24,963

257

25,220

Goodwill
1,815

(257
)
1,558

Core deposit intangible
833


833

Other assets
466


466

Total deposits
(113,620
)

(113,620
)
Federal Home Loan Bank Advances
(16,256
)

(16,256
)
Other liabilities
(491
)

(491
)

Management concluded that it is impracticable to present pro forma financial results due to the lack of documentation and objective information about significant estimates and management’s intent in prior periods.



7



NOTE 4 - INVESTMENTS
 
The following table presents the amortized cost, gross unrealized gains and losses and fair value of securities available-for-sale:
 
 
March 31, 2011
(in thousands)
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
UnrealizedLosses
 
Fair Value
Available for sale securities:
 
 
 
 
 
 
 
    Obligations of U.S. Government sponsored enterprises
$
40,645

 
$
14

 
$
(422
)
 
$
40,237

    Obligations of states and political subdivisions
26,303

 
160

 
(695
)
 
25,768

    Residential mortgage-backed securities
414,619

 
2,706

 
(1,341
)
 
415,984

 
$
481,567

 
$
2,880

 
$
(2,458
)
 
$
481,989

 
 
 
 
 
 
 
 
 
December 31, 2010
(in thousands)
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
UnrealizedLosses
 
Fair Value
Available for sale securities:
 
 
 
 
 
 
 
    Obligations of U.S. Government agencies
$
444

 
$
9

 
$

 
$
453

    Obligations of U.S. Government sponsored enterprises
32,880

 
9

 
(770
)
 
32,119

    Obligations of states and political subdivisions
18,486

 
45

 
(855
)
 
17,676

    Residential mortgage-backed securities
310,636

 
2,656

 
(1,994
)
 
311,298

 
$
362,446

 
$
2,719

 
$
(3,619
)
 
$
361,546


At March 31, 2011 and December 31, 2010, 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 carrying value of $243.9 million and $249.6 million at March 31, 2011 and December 31, 2010, 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 March 31, 2011, 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 3.5 years.
 
(in thousands)
Amortized Cost
 
Estimated Fair Value
Due in one year or less
$
8,624

 
$
8,636

Due after one year through five years
33,669

 
33,302

Due after five years through ten years
20,348

 
20,063

Due after ten years
4,307

 
4,004

Mortgage-backed securities
414,619

 
415,984

 
$
481,567

 
$
481,989



8



The following table represents a summary of available-for-sale investment securities that had an unrealized loss:
 
 
March 31, 2011
 
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
$
30,689

 
$
422

 
$

 
$

 
$
30,689

 
$
422

Obligations of the state and political subdivisions
12,820

 
267

 
2,972

 
428

 
15,792

 
695

Residential mortgage-backed securities
163,010

 
1,341

 

 

 
163,010

 
1,341

 
$
206,519

 
$
2,030

 
$
2,972

 
$
428

 
$
209,491

 
$
2,458

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2010
 
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
$
27,100

 
$
770

 
$

 
$

 
$
27,100

 
$
770

Obligations of the state and political subdivisions
11,329

 
420

 
2,965

 
435

 
14,294

 
855

Residential mortgage-backed securities
133,893

 
1,994

 

 

 
133,893

 
1,994

 
$
172,322

 
$
3,184

 
$
2,965

 
$
435

 
$
175,287

 
$
3,619


The unrealized losses at both March 31, 2011 and December 31, 2010, were 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 March 31, 2011, 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 March 31,
(in thousands)
2011
 
2010
Gross gains realized
$
174

 
$
557

Gross losses realized

 

Proceeds from sales
5,299

 
80,645


NOTE 5 - GOODWILL AND INTANGIBLE ASSETS
 
Goodwill is tested for impairment annually and more frequently if events or changes in circumstances indicate that the asset might be impaired.

Below is a summary of the goodwill in the Banking segment.
 
(in thousands)
Goodwill
Balance at January 1, 2011
$
2,064

    Goodwill from purchase of Legacy Bank
1,558

Balance at March 31, 2011
$
3,622



9



The table below summarizes the changes to core deposit intangible asset balances in the Banking segment.
 
(in thousands)
Core Deposit Intangible
Balance at January 1, 2011
$
1,223

    Intangibles from purchase of Legacy Bank
833

    Amortization expense
(135
)
Balance at March 31, 2011
$
1,921


The following table reflects the expected amortization schedule for the core deposit intangibles.
 
Year
Core Deposit Intangible
2011
$
374

2012
432

2013
355

2014
278

2015
201

After 2015
281

 
$
1,921




10




NOTE 6 - PORTFOLIO LOANS
 
Below is a summary of loans by category at March 31, 2011 and December 31, 2010:
 
 
March 31, 2011
(in thousands)
Portfolio
Loans not
Covered
under FDIC loss share
 
Portfolio
Loans
Covered
under FDIC loss share
 
Total
Real Estate Loans:
 
 
 
 
 
    Construction and land development
$
176,249

 
$
42,140

 
$
218,389

    Commercial real estate - Investor Owned
455,684

 
43,329

 
499,013

    Commercial real estate - Owner Occupied
325,080

 
42,213

 
367,293

    Residential real estate
174,405

 
35,661

 
210,066

Total real estate loans
$
1,131,418

 
$
163,343

 
$
1,294,761

    Commercial and industrial
612,970

 
17,683

 
630,653

    Consumer & other
16,469

 
1,251

 
17,720

    Portfolio Loans
$
1,760,857

 
$
182,277

 
$
1,943,134

Unearned loan costs, net
177

 

 
177

    Portfolio loans, including unearned loan costs
$
1,761,034

 
$
182,277

 
$
1,943,311

 
 
 
 
 
 
 
December 31, 2010
(in thousands)
Portfolio
Loans not
Covered
under FDIC loss share
 
Portfolio
Loans
Covered
under FDIC loss share
 
Total
Real Estate Loans:
 
 
 
 
 
    Construction and land development
$
190,285

 
$
32,374

 
$
222,659

    Commercial real estate - Investor Owned
444,724

 
39,850

 
484,574

    Commercial real estate - Owner Occupied
331,544

 
29,803

 
361,347

    Residential real estate
189,484

 
9,589

 
199,073

Total real estate loans
$
1,156,037

 
$
111,616

 
$
1,267,653

    Commercial and industrial
593,938

 
9,477

 
603,415

    Consumer & other
16,308

 
477

 
16,785

    Portfolio Loans
$
1,766,283

 
$
121,570

 
$
1,887,853

Unearned loan costs, net
68

 

 
68

    Portfolio loans, including unearned loan costs
$
1,766,351

 
$
121,570

 
$
1,887,921


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. 

11



A summary of activity in the allowance for loan losses and the recorded investment in loans by portfolio class and category based on impairment method for the quarter ended March 31, 2011 and at December 31, 2010 is as follows:
 
(in thousands)
Commercial & Industrial
 
Commercial
Real Estate
Owner Occupied
 
Commercial
Real Estate
Investor Owned
 
Construction Real Estate
 
Residential Real Estate
 
Consumer & Other
 
Unallocated
 
Portfolio
loans covered
under FDIC loss share
 
Total
Allowance for Loan Losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2010
$
12,727

 
$
5,060

 
$
5,629

 
$
8,407

 
$
5,485

 
$
93

 
$
5,358

 
$

 
$
42,759

Provision charged to expense
(62
)
 
691

 
1,524

 
2,964

 
(361
)
 
9

 
(1,165
)
 

 
3,600

Losses charged off
400

 
378

 
360

 
2,716

 
111

 

 

 

 
3,965

Recoveries
125

 

 
15

 
178

 
89

 
21

 

 

 
428

Balance at March 31, 2011
$
12,390

 
$
5,373

 
$
6,808

 
$
8,833

 
$
5,102

 
$
123

 
$
4,193

 
$

 
$
42,822

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance March 31, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for Loan Losses - Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
3,417

 
$
348

 
$
1,899

 
$
3,672

 
$
2,045

 
$

 
$

 
$

 
$
11,381

Collectively evaluated for impairment
8,973

 
5,025

 
4,909

 
5,161

 
3,057

 
123

 
4,193

 

 
31,441

Loans acquired with deteriorated credit quality

 

 

 

 

 

 

 

 

Total
$
12,390

 
$
5,373

 
$
6,808

 
$
8,833

 
$
5,102

 
$
123

 
$
4,193

 
$

 
$
42,822

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans - Ending Balance:
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
6,559

 
$
1,219

 
$
9,393

 
$
16,808

 
$
9,508

 
$

 
$

 
$

 
$
43,487

Collectively evaluated for impairment
606,411

 
323,861

 
446,291

 
159,441

 
164,897

 
16,646

 

 
6,883

 
1,724,430

Loans acquired with deteriorated credit quality

 

 

 

 

 

 

 
175,394

 
175,394

Total
$
612,970

 
$
325,080

 
$
455,684

 
$
176,249

 
$
174,405

 
$
16,646

 
$

 
$
182,277

 
$
1,943,311



12




(in thousands)
Commercial & Industrial
 
Commercial
Real Estate
Owner Occupied
 
Commercial
Real Estate
Investor Owned
 
Construction Real Estate
 
Residential Real Estate
 
Consumer & Other
 
Unallocated
 
Portfolio
loans covered
under FDIC loss share
 
Total
Balance at December 31, 2010
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for Loan Losses - Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
4,434

 
$
219

 
$
1,457

 
$
650

 
$
2,368

 
$

 
$

 
$

 
$
9,128

Collectively evaluated for impairment
8,293

 
4,841

 
4,172

 
7,757

 
3,117

 
93

 
5,358

 

 
33,631

Loans acquired with deteriorated credit quality

 

 

 

 

 

 

 

 

Total
$
12,727

 
$
5,060

 
$
5,629

 
$
8,407

 
$
5,485

 
$
93

 
$
5,358

 
$

 
$
42,759

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans - Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
11,276

 
$
2,024

 
$
10,935

 
$
9,934

 
$
12,188

 
$

 
$

 
$

 
$
46,357

Collectively evaluated for impairment
582,662

 
329,520

 
433,789

 
180,351

 
177,296

 
16,376

 

 
350

 
1,720,344

Loans acquired with deteriorated credit quality

 

 

 

 

 

 

 
121,220

 
121,220

Total
$
593,938

 
$
331,544

 
$
444,724

 
$
190,285

 
$
189,484

 
$
16,376

 
$

 
$
121,570

 
$
1,887,921












13




A summary of loans individually evaluated for impairment by category at March 31, 2011 and December 31, 2010 is as follows:
 
March 31, 2011
(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
$
6,604

 
$
402

 
$
6,157

 
$
6,559

 
$
3,417

 
$
9,209

Real Estate:
 
 
 
 
 
 
 
 
 
 
 
    Commercial - Owner Occupied
1,390

 

 
1,219

 
1,219

 
348

 
1,913

    Commercial - Investor Owned
15,096

 
376

 
9,017

 
9,393

 
1,899

 
10,369

    Construction
21,603

 
2,294

 
14,514

 
16,808

 
3,672

 
15,607

    Residential
9,695

 
2,486

 
7,022

 
9,508

 
2,045

 
9,508

Consumer & Other

 

 

 

 

 

Total
$
54,388

 
$
5,558

 
$
37,929

 
$
43,487

 
$
11,381

 
$
46,606


 
December 31, 2010
(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
$
11,591

 
$
412

 
$
10,864

 
$
11,276

 
$
4,434

 
$
5,848

Real Estate:
 
 
 
 
 
 
 
 
 
 
 
    Commercial - Owner Occupied
2,668

 
1,044

 
980

 
2,024

 
219

 
3,890

    Commercial - Investor Owned
15,024

 
1,960

 
8,975

 
10,935

 
1,457

 
15,122

    Construction
13,391

 
5,388

 
4,546

 
9,934

 
650

 
16,898

    Residential
12,390

 
2,650

 
9,538

 
12,188

 
2,368

 
5,721

Consumer & Other

 

 

 

 

 
92

Total
$
55,064

 
$
11,454

 
$
34,903

 
$
46,357

 
$
9,128

 
$
47,571



There were no loans over 90 days past due and still accruing interest at March 31, 2011. If interest on impaired loans would have been accrued based upon the original contractual terms, such income would have been $703,000 for the quarter ended March 31, 2011. The cash amount collected and recognized as interest income on impaired loans was $130,000, for the quarter ended March 31, 2011. The amount recognized as interest income on impaired loans continuing to accrue interest was $150,000 for the quarter ended March 31, 2011. At March 31, 2011 there were $1.3 million of unadvanced commitments on impaired loans. Other Liabilities include approximately $268,000 for estimated losses attributable to the unadvanced commitments on impaired loans.


14



The recorded investment in impaired loans by category at March 31, 2011 and December 31, 2010 is as follows:
 
 
March 31, 2011
(in thousands)
Non-accrual
 
Restructured
 
Loans over 90 days past due and still accruing interest
 
Total
Commercial & Industrial
$
6,559

 
$

 
$

 
$
6,559

Real Estate:
 
 
 
 
 
 
 
    Commercial - Owner Occupied
1,219

 

 

 
1,219

    Commercial - Investor Owned
4,609

 
4,784

 

 
9,393

    Construction
16,211

 
597

 

 
16,808

    Residential
5,184

 
4,324

 

 
9,508

Consumer & Other

 

 

 

       Total
$
33,782

 
$
9,705

 
$

 
$
43,487


 
December 31, 2010
(in thousands)
Non-accrual
 
Restructured
 
Loans over 90 days past due and still accruing interest
 
Total
Commercial & Industrial
$
11,276

 
$

 
$

 
$
11,276

Real Estate:
 
 
 
 
 
 
 
    Commercial - Owner Occupied
2,024

 

 

 
2,024

    Commercial - Investor Owned
10,516

 
419

 

 
10,935

    Construction
9,352

 
582

 

 
9,934

    Residential
5,309

 
6,879

 

 
12,188

Consumer & Other

 

 

 

       Total
$
38,477

 
$
7,880

 
$

 
$
46,357



15



The aging of the recorded investment in past due loans by portfolio class and category at March 31, 2011 and December 31, 2010 is shown below.
 
March 31, 2011
(in thousands)
30-89 Days
 Past Due
 
90 or More
Days
Past Due
 
Total
Past Due
 
Current
 
Total
Portfolio loans not covered under FDIC loss share
 
 
 
 
 
 
 
 
 
    Commercial & Industrial
$
530

 
$
4,630

 
$
5,160

 
$
607,810

 
$
612,970

    Real Estate:
 
 
 
 
 
 
 
 
 
       Commercial - Owner Occupied

 
1,219

 
1,219

 
323,861

 
325,080

       Commercial - Investor Owned
2,901

 
2,815

 
5,716

 
449,968

 
455,684

       Construction
216

 
7,210

 
7,426

 
168,823

 
176,249

       Residential
422

 
4,645

 
5,067

 
169,338

 
174,405

    Consumer & Other

 

 

 
16,646

 
16,646

          Total
$
4,069

 
$
20,519

 
$
24,588

 
$
1,736,446

 
$
1,761,034

 
 
 
 
 
 
 
 
 
 
Portfolio loans covered under FDIC loss share
 
 
 
 
 
 
 
 
 
    Commercial & Industrial
$
295

 
$
1,937

 
$
2,232

 
$
15,451

 
$
17,683

    Real Estate:
 
 
 
 
 
 
 
 
 
       Commercial - Owner Occupied

 
5,954

 
5,954

 
36,259

 
42,213

       Commercial - Investor Owned
3,869

 
2,978

 
6,847

 
36,482

 
43,329

       Construction
2,089

 
13,953

 
16,042

 
26,098

 
42,140

       Residential
2,066

 
1,107

 
3,173

 
32,488

 
35,661

    Consumer & Other
254

 
192

 
446

 
805

 
1,251

          Total
$
8,573

 
$
26,121

 
$
34,694

 
$
147,583

 
$
182,277

 
 
 
 
 
 
 
 
 
 
Portfolio loans, total
 
 
 
 
 
 
 
 
 
    Commercial & Industrial
$
825

 
$
6,567

 
$
7,392

 
$
623,261

 
$
630,653

    Real Estate:
 
 
 
 
 
 
 
 
 
       Commercial - Owner Occupied

 
7,173

 
7,173

 
360,120

 
367,293

       Commercial - Investor Owned
6,770

 
5,793

 
12,563

 
486,450

 
499,013

       Construction
2,305

 
21,163

 
23,468

 
194,921

 
218,389

       Residential
2,488

 
5,752

 
8,240

 
201,826

 
210,066

    Consumer & Other
254

 
192

 
446

 
17,451

 
17,897

          Total
$
12,642

 
$
46,640

 
$
59,282

 
$
1,884,029

 
$
1,943,311




16



 
December 31, 2010
(in thousands)
30-89 Days
 Past Due
 
90 or More
Days
Past Due
 
Total
Past Due
 
Current
 
Total
Portfolio loans not covered under FDIC loss share
 
 
 
 
 
 
 
 
 
    Commercial & Industrial
$
5,938

 
$
3,557

 
$
9,495

 
$
584,443

 
$
593,938

    Real Estate:
 
 
 
 
 
 
 
 
 
       Commercial - Owner Occupied
914

 
1,583

 
2,497

 
329,047

 
331,544

       Commercial - Investor Owned
2,692

 
4,348

 
7,040

 
437,684

 
444,724

       Construction
802

 
6,876

 
7,678

 
182,607

 
190,285

       Residential
2,496

 
2,518

 
5,014

 
184,470

 
189,484

    Consumer & Other
3

 

 
3

 
16,373

 
16,376

          Total
$
12,845

 
$
18,882

 
$
31,727

 
$
1,734,624

 
$
1,766,351

 
 
 
 
 
 
 
 
 
 
Portfolio loans covered under FDIC loss share
 
 
 
 
 
 
 
 
 
    Commercial & Industrial
$
777

 
$
258

 
$
1,035

 
$
8,442

 
$
9,477

    Real Estate:
 
 
 
 
 
 
 
 
 
       Commercial - Owner Occupied
56

 
5,550

 
5,606

 
24,197

 
29,803

       Commercial - Investor Owned
3,471

 
1,888

 
5,359

 
34,491

 
39,850

       Construction

 
25,844

 
25,844

 
6,530

 
32,374

       Residential
679

 
735

 
1,414

 
8,175

 
9,589

    Consumer & Other
190

 

 
190

 
287

 
477

          Total
$
5,173

 
$
34,275

 
$
39,448

 
$
82,122

 
$
121,570

 
 
 
 
 
 
 
 
 
 
Portfolio loans, total
 
 
 
 
 
 
 
 
 
    Commercial & Industrial
$
6,715

 
$
3,815

 
$
10,530

 
$
592,885

 
$
603,415

    Real Estate:
 
 
 
 
 
 
 
 
 
       Commercial - Owner Occupied
970

 
7,133

 
8,103

 
353,244

 
361,347

       Commercial - Investor Owned
6,163

 
6,236

 
12,399

 
472,175

 
484,574

       Construction
802

 
32,720

 
33,522

 
189,137

 
222,659

       Residential
3,175

 
3,253

 
6,428

 
192,645

 
199,073

    Consumer & Other
193

 

 
193

 
16,660

 
16,853

          Total
$
18,018

 
$
53,157

 
$
71,175

 
$
1,816,746

 
$
1,887,921



The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, and current economic factors among other factors. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:
Grades 1, 2, and 3 - These grades include 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 – This grade includes loans to borrowers with positive trends in profitability, satisfactory capitalization and balance sheet condition, and sufficient liquidity and cash flow.
Grade 5 – This grade includes loans to borrowers that may display fluctuating trends in sales, profitability, capitalization, liquidity, and cash flow.



17



Grade 6 – This grade 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 company is starting to reverse a negative trend or condition, or have recently been upgraded from a 7, 8, or 9 rating.
Grade 7 – Watch credits are companies that have experienced financial setback of a nature that are not determined to be severe or influence ‘ongoing concern’ expectations. Borrowers within this category are expected to turnaround within a 12-month period of time. Although possible, no loss is anticipated, due to strong collateral and/or guarantor support.
Grade 8Substandard credits will include those companies that are characterized by significant losses and sustained downward trends in balance sheet condition, liquidity, and cash flow. Repayment reliance may have shifted to secondary sources. Collateral exposure may exist and additional reserves may be warranted.
Grade 9Doubtful credits include borrowers that may show deteriorating trends that are unlikely to be corrected. Collateral values may appear insufficient for full recovery, therefore requiring a partial charge-off, or debt renegotiation with the borrower. Borrower may have declared bankruptcy or bankruptcy is likely in the near term. All doubtful rated credits will be on non-accrual.
Acquired loans are also subject to the Company’s internal and external credit review and are risk rated using the same criteria as loans originated by the Company. However, risk ratings are not always a clear indicator of the Company's losses on acquired loans as a majority of the losses are recoverable from the FDIC under the loss-sharing agreements.


18



The recorded investment by risk category of the loans by portfolio class and category at March 31, 2011, which is based upon the most recent analysis performed, and December 31, 2010 is as follows:
 
 
March 31, 2011
(in thousands)
Commercial & Industrial
 
Commercial
Real Estate
Owner Occupied
 
Commercial
Real Estate
Investor Owned
 
Construction Real Estate
 
Residential Real Estate
 
Consumer & Other
 
Total
Portfolio loans not covered under FDIC loss share
 
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding (1-3)
$
88,565

 
$
18,785

 
$
6,796

 
$
1,136

 
$
1,497

 
$
2,999

 
$
119,778

Above Average (4)
62,995

 
65,596

 
37,076

 
9,046

 
16,931

 
1,633

 
193,277

Average (5)
277,224

 
144,911

 
266,961

 
74,833

 
115,961

 
11,447

 
891,337

Below Average (6)
107,294

 
48,114

 
76,538

 
27,407

 
11,382

 
111

 
270,846

Watch (7)
42,674

 
32,751

 
52,333

 
29,486

 
7,477

 
7

 
164,728

Substandard (8)
31,546

 
14,923

 
15,755

 
34,033

 
20,865

 
449

 
117,571

Doubtful (9)
2,672

 

 
225

 
308

 
292

 

 
3,497

Total
$
612,970

 
$
325,080

 
$
455,684

 
$
176,249

 
$
174,405

 
$
16,646

 
$
1,761,034

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Portfolio loans covered under FDIC loss share
 
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding (1-3)
$

 
$

 
$

 
$

 
$

 
$
77

 
$
77

Above Average (4)
1,294

 
2,582

 

 
78

 
5,413

 
56

 
9,423

Average (5)
8,408

 
15,074

 
16,207

 
15,598

 
21,110

 
838

 
77,235

Below Average (6)
5,493

 
7,306

 
7,492

 
1,513

 
1,605

 
39

 
23,448

Watch (7)
36

 
3,003

 
7,569

 
322

 
1,346

 

 
12,276

Substandard (8)
2,452

 
14,248

 
9,649

 
16,565

 
5,678

 
241

 
48,833

Doubtful (9)

 

 
2,412

 
8,064

 
509

 

 
10,985

Total
$
17,683

 
$
42,213

 
$
43,329

 
$
42,140

 
$
35,661

 
$
1,251

 
$
182,277

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Portfolio loans, total
 
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding (1-3)
$
88,565

 
$
18,785

 
$
6,796

 
$
1,136

 
$
1,497

 
$
3,076

 
$
119,855

Above Average (4)
64,289

 
68,178

 
37,076

 
9,124

 
22,344

 
1,689

 
202,700

Average (5)
285,632

 
159,985

 
283,168

 
90,431

 
137,071

 
12,285

 
968,572

Below Average (6)
112,787

 
55,420

 
84,030

 
28,920

 
12,987

 
150

 
294,294

Watch (7)
42,710

 
35,754

 
59,902

 
29,808

 
8,823

 
7

 
177,004

Substandard (8)
33,998

 
29,171

 
25,404

 
50,598

 
26,543

 
690

 
166,404

Doubtful (9)
2,672

 

 
2,637

 
8,372

 
801

 

 
14,482

Total
$
630,653

 
$
367,293

 
$
499,013

 
$
218,389

 
$
210,066

 
$
17,897

 
$
1,943,311



19



 
December 31, 2010
(in thousands)
Commercial & Industrial
 
Commercial
Real Estate
Owner Occupied
 
Commercial
Real Estate
Investor Owned
 
Construction Real Estate
 
Residential Real Estate
 
Consumer & Other
 
Total
Portfolio loans not covered under FDIC loss share
 
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding (1-3)
$
92,940

 
$
19,139

 
$
6,846

 
$
1,142

 
$
1,522

 
$
5,930

 
$
127,519

Above Average (4)
48,745

 
68,443

 
31,826

 
8,549

 
17,400

 
2,264

 
177,227

Average (5)
252,938

 
149,773

 
259,937

 
80,400

 
127,587

 
7,722

 
878,357

Below Average (6)
135,174

 
46,080

 
91,385

 
27,931

 
10,900

 
117

 
311,587

Watch (7)
26,549

 
33,374

 
38,680

 
32,519

 
8,272

 
9

 
139,403

Substandard (8)
34,512

 
14,634

 
15,812

 
39,744

 
23,759

 
334

 
128,795

Doubtful (9)
3,080

 
101

 
238

 

 
44

 

 
3,463

Total
$
593,938

 
$
331,544

 
$
444,724

 
$
190,285

 
$
189,484

 
$
16,376

 
$
1,766,351

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Portfolio loans covered under FDIC loss share
 
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding (1-3)
$

 
$

 
$

 
$

 
$

 
$
77

 
$
77

Above Average (4)

 

 

 

 
105

 

 
105

Average (5)
3,902

 
8,287

 
13,951

 
1,253

 
4,047

 
357

 
31,797

Below Average (6)
4,719

 
7,486

 
7,485

 
1,483

 
2,584

 
43

 
23,800

Watch (7)
62

 
3,219

 
6,943

 
337

 
1,351

 

 
11,912

Substandard (8)
794

 
10,811

 
9,209

 
22,160

 
1,142

 

 
44,116

Doubtful (9)

 

 
2,262

 
7,141

 
360

 

 
9,763

Total
$
9,477

 
$
29,803

 
$
39,850

 
$
32,374

 
$
9,589

 
$
477

 
$
121,570

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Portfolio loans, total
 
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding (1-3)
$
92,940

 
$
19,139

 
$
6,846

 
$
1,142

 
$
1,522

 
$
6,007

 
$
127,596

Above Average (4)
48,745

 
68,443

 
31,826

 
8,549

 
17,505

 
2,264

 
177,332

Average (5)
256,840

 
158,060

 
273,888

 
81,653

 
131,634

 
8,079

 
910,154

Below Average (6)
139,893

 
53,566

 
98,870

 
29,414

 
13,484

 
160

 
335,387

Watch (7)
26,611

 
36,593

 
45,623

 
32,856

 
9,623

 
9

 
151,315

Substandard (8)
35,306

 
25,445

 
25,021

 
61,904

 
24,901

 
334

 
172,911

Doubtful (9)
3,080

 
101

 
2,500

 
7,141

 
404

 

 
13,226

Total
$
603,415

 
$
361,347

 
$
484,574

 
$
222,659

 
$
199,073

 
$
16,853

 
$
1,887,921



Portfolio loans covered under FDIC loss share
Purchased loans acquired in a business combination, including loans purchased in our FDIC-assisted transactions, are recorded at estimated fair value on their purchase date without a carryover of the related allowance for loan losses. Purchased credit-impaired loans are loans that have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. Evidence of credit quality deterioration as of the purchase date may include factors such as past due and non-accrual status. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges or a reclassification of the difference from non-accretable to accretable with a positive impact on interest income. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.
 

20



Changes in the accretable yield for purchased loans were as follows for the quarters ended March 31, 2011 and 2010:
 
(in thousands)
March 31,
2011
 
March 31,
2010
Balance at beginning of period
$
46,460

 
$
3,708

Additions
10,875

 

Accretion
(2,934
)
 
(235
)
Balance at end of period
$
54,401

 
$
3,473


Outstanding balances on purchased loans from the FDIC were $293.0 million as of March 31, 2011 and $219.5 million at December 31, 2010, respectively. In the first quarter of 2011, the Bank received payments of $11.8 million for loss share claims under the terms of the FDIC loss share agreements.

Legacy acquisition
The following table presents information regarding the contractually required payments receivable, the cash flows expected to be collected, and the estimated fair value of the loans acquired in the Legacy acquisition, as of the closing date of the transaction:
 
(In thousands)
January 7, 2011 Purchased
 Credit-Impaired Loans
Contractually required payments (principal and interest):
$
106,286

Cash flows expected to be collected (principal and interest):
84,089

Fair value of loans acquired:
73,214


These amounts were determined based upon the estimated remaining life of the underlying loans, which includes the effects of estimated prepayments. The majority of the purchased credit-impaired loans were valued based on the liquidation value of the underlying collateral. There was no allowance for credit losses on purchased loans related to FDIC-assisted transactions at March 31, 2011.

The determination of the initial fair value of loans and other real estate acquired in the transaction and the initial fair value of the related FDIC loss share receivable involve a high degree of judgment and complexity. The carrying value of the acquired loans and other real estate and the FDIC indemnification asset reflect management's best estimate of the fair value of each of these assets as of the date of acquisition. However, the amount that the Bank realizes on these assets could differ materially from the carrying value reflected in these financial statements, based upon the timing and amount of collections on the acquired loans in future periods. To the extent the actual values realized for the acquired loans are different from the estimate, the FDIC loss share receivable will generally be affected in an offsetting manner due to the indemnification obligations of the FDIC, thus limiting the Bank's loss exposure.
 
NOTE 7 - COMMITMENTS AND CONTINGENCIES
 
The Company issues financial instruments with off balance sheet risk in the normal course of the business of meeting the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments may involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.

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



21



and conditional obligations as it does for financial instruments included on its consolidated balance sheets. At March 31, 2011 there were $1.3 million of unadvanced commitments on impaired loans. Other liabilities include approximately $268,000 for estimated losses attributable to the unadvanced commitments on impaired loans.

The contractual amounts of off-balance-sheet financial instruments as of March 31, 2011 and December 31, 2010 are as follows:
 
(in thousands)
March 31,
2011
 
December 31,
2010
Commitments to extend credit
$
435,206

 
$
429,411

Standby letters of credit
42,706

 
42,113


Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments usually have fixed expiration dates or other termination clauses and may require payment of a fee. Of the total commitments to extend credit at March 31, 2011 and December 31, 2010, approximately $59.1 million and $67.0 million, respectively, represent fixed rate loan commitments. Since certain of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, premises and equipment, and real estate.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These standby letters of credit are issued to support contractual obligations of the Company's customers. The credit risk involved in issuing letters of credit is essentially the same as the risk involved in extending loans to customers. The approximate remaining term of standby letters of credit range from 6 months to 5 years at March 31, 2011.

Contingencies
The Bank, along with other co-defendants has been named as a defendant in two lawsuits filed by persons alleging to be clients of the Bank's Trust division who invested in promissory notes issued by Distinctive Properties (UK) Limited (“Distinctive Properties”), a company involved in the purchase and development of real estate in the United Kingdom. Plaintiffs allege that the promissory notes were part of a multi-million dollar Ponzi scheme. Plaintiffs allege to hold such promissory notes in accounts with the Trust division and that, among other things, the Bank was negligent, breached its fiduciary duties and breached its contracts. Plaintiffs also allege that the Bank violated the Racketeer Influenced and Corrupt Organizations Act (“RICO”). Plaintiffs, in the aggregate, are seeking damages from defendants, including the Bank, of approximately $27.0 million as well as their costs and attorneys' fees and trebled damages under RICO. The Company is unable to estimate a reasonably possible loss for the cases described above because the proceedings are in early stages and there are significant factual issues to be determined and resolved. The Company denies Plaintiffs' allegations and intends to vigorously defend the lawsuits.

The following litigation was filed subsequent to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, which was filed with the Securities and Exchange Commission (“SEC”) on May 9, 2011. On April 10, 2012, a putative class action was filed in the United States District Court for the Eastern District of Missouri captioned William Mark Scott v. Enterprise Financial Services Corp, Peter F. Benoist, and Frank H. Sanfilippo. The complaint asserts claims for violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 on behalf of a putative class of purchasers of the Company's stock between April 20, 2010 and January 25, 2012, inclusive. The complaint alleges, among other things, that defendants allegedly made false and misleading statements and allegedly "failed to disclose that the Company was improperly recording income on loans covered under loss share agreements with the FDIC" and that, as a result, "the Company's financial statements were materially false and misleading at all relevant times." The action seeks unspecified damages and costs and expenses. The Company denies plaintiffs’ allegations and intends to vigorously defend the lawsuit.
 

22



NOTE 8 - DERIVATIVE FINANCIAL INSTRUMENTS
 
The Company is a party to various derivative financial instruments that are used in the normal course of business to meet the needs of its clients and as part of its risk management activities. These instruments include interest rate swaps and option contracts. The Company does not enter into derivative financial instruments for trading or speculative purposes.

Interest rate swap contracts involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts. The Company enters into interest rate swap contracts on behalf of its clients and also utilizes such contracts to reduce or eliminate the exposure to changes in the cash flows or fair value of hedged assets or liabilities due to changes in interest rates. Interest rate option contracts consist of caps and provide for the transfer or reduction of interest rate risk in exchange for a fee.
 
All derivative financial instruments, whether designated as hedges or not, are recorded on the consolidated balance sheet at fair value within Other assets or Other liabilities. The accounting for changes in the fair value of a derivative in the consolidated statement of operations depends on whether the contract has been designated as a hedge and qualifies for hedge accounting. At March 31, 2011, the Company did not have any derivatives designated as cash flow or fair value hedges.

Using derivative instruments means assuming counterparty credit risk. Counterparty credit risk relates to the loss the Company could incur if a counterparty were to default on a derivative contract. Notional amounts of derivative financial instruments do not represent credit risk, and are not recorded in the consolidated balance sheet. They are used merely to express the volume of this activity. The overall credit risk and exposure to individual counterparties is monitored. The Company does not anticipate nonperformance by any counterparties. The amount of counterparty credit exposure is the unrealized gains, if any, on such derivative contracts. At March 31, 2011, the Company had pledged cash of $1.5 million and accepted pledged securities of $2.2 million as collateral in connection with our interest rate swap agreements. At December 31, 2010, the Company had accepted cash of $530,000, pledged cash of $1.5 million, and accepted pledged securities of $2.2 million as collateral in connection with our interest rate swap agreements.

Risk Management Instruments. The Company enters into certain derivative contracts to economically hedge state tax credits and certain loans.

Economic hedge of state tax credits. In November 2008, the Company paid $2.1 million to enter into a series of interest rate caps in order to economically hedge changes in fair value of the State tax credits held for sale. In February 2010, the Company paid $751,000 for an additional series of interest rate caps. See Note 10-Fair Value Measurements for further discussion of the fair value of the state tax credits.

Economic hedge of prime based loans. Previously, the Company had two outstanding interest rate swap agreements whereby the Company paid a variable rate of interest equivalent to the prime rate and received a fixed rate of interest. The swaps were designed to hedge the cash flows associated with a portion of prime based loans and had been designated as cash flow hedges. However, in December 2008, due to a variable rate differential, the Company concluded the cash flow hedges would not be prospectively effective and the hedges were dedesignated. The swaps were terminated in February 2009. The unrealized gain prior to dedesignation was included in Accumulated other comprehensive income and is being amortized over the expected life of the related loans. At March 31, 2011, the amount remaining in Accumulated other comprehensive income is $75,300. For the three months ended March 31, 2011 and 2010, $44,000 and $62,000 was reclassified into Miscellaneous income, respectively. The Company expects to reclassify $118,000 of remaining derivative gains from Accumulated other comprehensive income to earnings over the next twelve months.

23



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)
March 31,
2011
 
December 31,
2010
 
March 31,
2011
 
December 31,
2010
 
March 31,
2011
 
December 31,
2010
Non-designated hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Interest rate cap contracts
$
99,300

 
$
314,300

 
$
495

 
$
528

 
$

 
$


The following table shows the location and amount of gains and losses related to derivatives used for risk management purposes that were recorded in the condensed consolidated statements of operations for the three months ended March 31, 2011 and 2010.
 
 
 
Location of Gain or (Loss) Recognized in Operations on Derivative
 
Amount of Gain or (Loss) Recognized in Operations on Derivative
(in thousands)
 
 
2011
 
2010
Non-designated hedging instruments
 
 
 
 
 
 
 
 
Interest rate cap contracts
 
Gain on state tax credits, net
 
$
(33
)
 
$
(565
)
Interest rate swap contracts
 
Miscellaneous income
 
44

 
62


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)
March 31,
2011
 
December 31,
2010
 
March 31,
2011
 
December 31,
2010
 
March 31,
2011
 
December 31,
2010
Non-designated hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
$
108,680

 
$
109,012

 
$
1,077

 
$
1,514

 
$
2,032

 
$
2,607


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 months ended March 31, 2011 and 2010.
 
 
 
Location of Gain or (Loss) Recognized in Operations on Derivative
 
Amount of Gain or (Loss) Recognized in Operations on Derivative
(in thousands)
 
2011
 
2010
Non-designated hedging instruments
 
 
 
 
 
 
 
 
Interest rate swap contracts
 
Interest and fees on loans
 
$
(150
)
 
$
(154
)

NOTE 9 - COMPENSATION PLANS
 
The Company maintains a number of share-based incentive programs, which are discussed in more detail in Note 16 of the Company's Annual Report on Form 10-K for the year ended December 31, 2010. There were no stock options,



24



stock-settled stock appreciation rights, or restricted stock units granted in the first three months of 2011. The share-based compensation expense was $545,000 and $649,000 for the three months ended March 31, 2011 and 2010, respectively.

Employee Stock Options and Stock-settled Stock Appreciation Rights (“SSAR”)
At March 31, 2011, there was $1.6 million of total unrecognized compensation costs related to SSAR's which is expected to be recognized over a weighted average period of 2.5 years. Following is a summary of the employee stock option and SSAR activity for the first three months of 2011.

(Dollars in thousands, except share data)
Shares
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual Term
 
Aggregate
Intrinsic Value
Outstanding at January 1, 2011
902,932

 
$
15.71

 
 
 
 
Granted

 

 
 
 
 
Exercised
(15,200
)
 
11.73

 
 
 
 
Forfeited
(2,438
)
 
20.27

 
 
 
 
Outstanding at March 31, 2011
885,294

 
$
15.77

 
5.3 years
 
$

Exercisable at March 31, 2011
583,389

 
$
16.11

 
 3.8 years
 
$

Vested and expected to vest at March 31, 2011
794,675

 
$
15.32

 
 5.3 years
 
$


Restricted Stock Units (“RSU”)

At March 31, 2011, there was $689,000 of total unrecognized compensation costs related to the RSU's, which is expected to be recognized over a weighted average period of 1.4 years. A summary of the Company's restricted stock unit activity for the first three months of 2011 is presented below.
 
 
Shares
 
Weighted
Average
Grant Date
Fair Value
Outstanding at January 1, 2011
36,173

 
$
22.14

Granted

 

Vested
(200
)
 
10.69

Forfeited
(286
)
 
22.36

Outstanding at March 31, 2011
35,687

 
$
22.20


Stock Plan for Non-Management Directors

Shares are issued twice a year and compensation expense is recorded as the shares are earned, therefore, there is no unrecognized compensation expense related to this plan. The Company recognized $167,000 and $143,000 of share-based compensation expense for the directors for the three months ended March 31, 2011 and 2010, respectively. Pursuant to this plan, the Company issued 13,900 and 15,491 shares in the first three months of 2011 and 2010, respectively.
 
Employee Stock Issuance

Restricted stock was granted to certain key employees as part of their compensation. The restricted stock may be in a form of a one-time award or in paid pro-rata installments. The stock is restricted for 2 years and upon issuance may



25



be fully vested or vest over five years. The Company recognized $4,600 and $33,000 of share-based compensation related to these awards and issued 4,831 and 8,694 shares, for the three months ended March 31, 2011 and 2010, respectively.

In conjunction with the Company's short-term incentive plan, the Company issued 14,329 and 13,660 restricted shares to certain key employees in the first three months ended March 31, 2011 and 2010, respectively. The compensation expense related to these shares was expensed in 2010 and 2009, respectively. For further information on the short-term incentive plan, refer to the Compensation Discussion and Analysis in the Company's Proxy Statement for the 2011 Annual Meeting of Stockholders.
 
Moneta Plan

As of December 31, 2006, the fair value of all Moneta options had been expensed. As a result, there have been no option-related expenses for Moneta in 2011 or 2010. Following is a summary of the Moneta stock option activity for the first three months of 2011.
 
(Dollars in thousands, except share data)
Shares
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual Term
 
Aggregate
Intrinsic Value
Outstanding at January 1, 2011
26,105

 
$
13.58

 
 
 
 
Granted

 

 
 
 
 
Exercised
(3,194
)
 
11.50

 
 
 
 
Forfeited
(8,792
)
 
15.50

 
 
 
 
Outstanding at March 31, 2011
14,119

 
$
12.87

 
1.7 years
 
$
17

Exercisable at March 31, 2011
14,119

 
$
12.87

 
1.7 years
 
$
17






























26



NOTE 10 - FAIR VALUE MEASUREMENTS
 
Below is a description of certain assets and liabilities measured at fair value.

The following table summarizes financial instruments measured at fair value on a recurring basis as of March 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.

 
March 31, 2011
(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
$

 
$
40,237

 
$

 
$
40,237

Obligations of states and political subdivisions

 
22,796

 
2,972

 
25,768

Residential mortgage-backed securities

 
415,984

 

 
415,984

Total securities available for sale
$

 
$
479,017

 
$
2,972

 
$
481,989

Portfolio loans

 
15,588

 

 
15,588

State tax credits held for sale

 

 
30,494

 
30,494

Derivative financial instruments

 
1,572

 

 
1,572

Total assets
$

 
$
496,177

 
$
33,466

 
$
529,643

 
 
 
 
 
 
 
 
Liabilities
 

 
 
 
 

 
 
Derivative financial instruments
$

 
$
2,032

 
$

 
$
2,032

Total liabilities
$

 
$
2,032

 
$

 
$
2,032



Securities available for sale. Securities classified as available for sale are reported at fair value utilizing Level 2 and Level 3 inputs. The Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions. Through March 31, 2011, Level 3 securities available for sale include three Auction Rate Securities and a municipal bond issued to a school district.

Portfolio Loans. Certain fixed rate portfolio loans are accounted for as trading instruments and reported at fair value. Fair value on these loans is determined using a third party valuation model with observable Level 2 market data inputs.

State tax credits held for sale. At March 31, 2011, of the $59.9 million of state tax credits held for sale on the condensed consolidated balance sheet, approximately $30.5 million were carried at fair value. The remaining $29.4 million of state tax credits were accounted for at cost.

The fair value of the state tax credits carried at fair value decreased by $164,000 in the first three months of 2011 compared to a $308,000 increase in the first three months of 2010. These fair value changes are included in Gain on State tax credits, net in the condensed consolidated statements of operations.

The Company is not aware of an active market that exists for the 10-year streams of state tax credit financial instruments. However, the Company's principal market for these tax credits consists of state residents who buy these credits 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.



27



The fair value measurement is calculated using an internal valuation model with observable market data including discounted cash flows based upon the terms and conditions of the tax credits. Assuming that the underlying project remains in compliance with the various federal and state rules governing the tax credit program, each project will generate about 10 years of tax credits. The inputs to the fair value calculation include: the amount of tax credits generated each year, the anticipated sale price of the tax credit, the timing of the sale and a discount rate. The discount rate is defined as the LIBOR swap curve at a point equal to the remaining life in years of credits plus a 205 basis point spread. With the exception of the discount rate, the other inputs to the fair value calculation are observable and readily available. The discount rate is considered a Level 3 input because it is an “unobservable input” and is based on the Company's assumptions. Given the significance of this input to the fair value calculation, the state tax credit assets are reported as Level 3 assets.

Derivatives. Derivatives are reported at fair value utilizing Level 2 inputs. The Company obtains counterparty quotations to value its interest rate swaps and caps. In addition, the Company validates the counterparty quotations with third party valuation sources. Derivatives with negative fair values are included in Other liabilities in the consolidated balance sheets. Derivatives with positive fair value are included in Other assets in the consolidated balance sheets.

Level 3 financial instruments
The following table presents the changes in Level 3 financial instruments measured at fair value on a recurring basis as of March 31, 2011.

Purchases, sales, issuances and settlements, net. There were no purchases of Level 3 financial instruments during the quarter ended March 31, 2011. Sales of Level 3 instruments during the quarter ended March 31, 2011 consisted of $1.2 million in state tax credits held for sale.

Transfers in and/or out of Level 3. The transfer out of Level 3 is related to two newly issued mortgage-backed securities purchased in the fourth quarter of 2010 which were originally priced using Level 3 assumptions. In the first quarter of 2011, a third party pricing service became available.

 
Three months ended March 31,
 
2011
 
2010
 
2011
 
2010
(in thousands)
Securities available for sale, at fair value
 
Securities available for sale, at fair value
 
State tax
 credits held for sale
 
State tax
 credits held for sale
Beginning balance
$
7,520

 
$
2,830

 
$
31,576

 
$
32,485

   Total gains or (losses) (realized and unrealized):
 
 
 
 
 
 
 
Included in earnings

 

 
142

 
652

Included in other comprehensive income
7

 
4

 

 

   Purchases, sales, issuances and settlements:
 
 
 
 
 
 
 
Purchases

 
100

 

 

Sales

 

 
(1,224
)
 
(1,377
)
Transfer in and/or out of Level 3
(4,555
)
 

 

 

Ending balance
$
2,972

 
$
2,934

 
$
30,494

 
$
31,760

 
 
 
 
 
 
 
 
Change in unrealized gains relating to
assets still held at the reporting date
$
7

 
$
4

 
$
(164
)
 
$
308







28



From time to time, the Company measures certain assets at fair value on a nonrecurring basis. These include assets that are measured at the lower of cost or fair value that were recognized at fair value below cost at the end of the period. The following table presents financial instruments and non-financial assets measured at fair value on a non-recurring basis as of March 31, 2011.
 
 
(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)
gains for the three
months ended
March 31, 2011
Impaired loans
$
768

 
$

 
$

 
$
768

 
$
(3,966
)
Other real estate
3,898

 

 

 
3,898

 
(442
)
Total
$
4,666

 
$

 
$

 
$
4,666

 
$
(4,408
)

(1) The amounts represent only balances measured at fair value during the period and still held as of the reporting date.
 
Impaired loans are reported at the fair value of the underlying collateral. Fair values for impaired loans are obtained from current appraisals by qualified licensed appraisers or independent valuation specialists. Other real estate owned is adjusted to fair value upon foreclosure of the underlying loan. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value less costs to sell. Fair value of other real estate is based upon the current appraised values of the properties as determined by qualified licensed appraisers and the Company's judgment of other relevant market conditions. Certain state tax credits are reported at cost.

Following is a summary of the carrying amounts and fair values of the Company's financial instruments on the consolidated balance sheets at March 31, 2011 and December 31, 2010.
 
 
March 31, 2011
 
December 31, 2010
(in thousands)
Carrying Amount
 
Estimated fair value
 
Carrying Amount
 
Estimated fair value
Balance sheet assets
 
 
 
 
 
 
 
Cash and due from banks
$
18,542

 
$
18,542

 
$
23,413

 
$
23,413

Federal funds sold
1,464

 
1,464

 
3,153

 
3,153

Interest-bearing deposits
187,556

 
187,556

 
268,853

 
268,853

Securities available for sale
481,989

 
481,989

 
361,546

 
361,546

Other investments, at cost
14,430

 
14,430

 
12,278

 
12,278

Loans held for sale
3,142

 
3,142

 
5,640

 
5,640

Derivative financial instruments
1,572

 
1,572

 
2,042

 
2,042

Portfolio loans, net (Restated)
1,900,489

 
1,907,962

 
1,845,162

 
1,850,197

State tax credits, held for sale
59,928

 
59,928

 
61,148

 
61,148

Accrued interest receivable
7,839

 
7,839

 
7,464

 
7,464

 
 
 
 
 
 
 
 
Balance sheet liabilities
 
 
 
 
 
 
 
Deposits
2,430,430

 
2,433,738

 
2,297,721

 
2,301,387

Subordinated debentures
85,081

 
45,189

 
85,081

 
44,866

Federal Home Loan Bank advances
107,300

 
108,828

 
107,300

 
118,602

Other borrowings
97,898

 
97,905

 
119,333

 
119,366

Derivative financial instruments
2,032

 
2,032

 
2,607

 
2,607

Accrued interest payable
1,545

 
1,545

 
1,488

 
1,488





29



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 19 - Fair Value Measurements in the
Company's Annual Report on Form 10-K/A for the year ended December 31, 2010.
 
NOTE 11 - 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 Wealth Management 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 consulting on management compensation, strategic planning and management succession issues. State tax credits are part of a fee initiative designed to augment the Company's wealth management segment and banking lines of business.

The Corporate segment's principal activities include the direct ownership of the Company's banking subsidiary and the issuance of debt and equity. Its principal source of liquidity is dividends from its subsidiaries and stock option exercises.

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

























30



Following are the financial results for the Company’s operating segments.
 
(in thousands)
Banking
 
Wealth Management
 
Corporate and Intercompany
 
Total
 
 
Balance Sheet Information
March 31, 2011
Portfolio loans
$
1,943,311

 
$

 
$

 
$
1,943,311

Goodwill
3,622

 

 

 
3,622

Intangibles, net
1,921

 

 

 
1,921

Deposits
2,444,549

 

 
(14,119
)
 
2,430,430

Borrowings
152,051

 
55,647

 
82,581

 
290,279

Total assets
2,844,832

 
60,522

 
10,291

 
2,915,645

 
 
 
 
 
 
 
 
 
December 31, 2010
 
Banking
 
Wealth Management
 
Corporate and Intercompany
 
Total
Portfolio loans
$
1,887,921

 
$

 
$

 
$
1,887,921

Goodwill
2,064

 

 

 
2,064

Intangibles, net
1,223

 

 

 
1,223

Deposits
2,313,117

 

 
(15,396
)
 
2,297,721

Borrowings
172,431

 
56,702

 
82,581

 
311,714

Total assets
2,724,289

 
61,770

 
14,140

 
2,800,199

 
 
 
 
 
 
 
 
 
 
Income Statement Information
Three months ended March 31, 2011
Net interest income (expense)
$
24,056

 
$
(322
)
 
$
(1,026
)
 
$
22,708

Provision for loan losses
3,600

 

 

 
3,600

Noninterest income
3,077

 
1,838

 
48

 
4,963

Noninterest expense
14,980

 
1,846

 
1,139

 
17,965

Income (loss) before income tax expense (benefit)
8,553

 
(330
)
 
(2,117
)
 
6,106

Income tax expense (benefit)
2,812

 
(110
)
 
(708
)
 
1,994

Net income (loss)
$
5,741

 
$
(220
)
 
$
(1,409
)
 
$
4,112

 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2010
Net interest income (expense)
$
19,782

 
$
(298
)
 
$
(1,132
)
 
$
18,352

Provision for loan losses
13,800

 

 

 
13,800

Noninterest income
2,207

 
2,057

 
33

 
4,297

Noninterest expense
10,869

 
1,911

 
1,116

 
13,896

Loss before income tax benefit
(2,680
)
 
(152
)
 
(2,215
)
 
(5,047
)
Income tax benefit
(984
)
 
(56
)
 
(816
)
 
(1,856
)
Net loss
$
(1,696
)
 
$
(96
)
 
$
(1,399
)
 
$
(3,191
)

31




NOTE 12 - RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

Background of the Restatement
In January 2012, while converting to a new system designed to address the complex accounting requirements of acquired loans under Accounting Standards Codification ("ASC") Topic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality”, the Company discovered an error in its process used to record income on these loans. ASC 310-30 is utilized to account for the loans acquired by the Company under loss sharing agreements with the Federal Deposit Insurance Corporation (the “FDIC”). Under ASC 310-30, these acquired loans are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance. The difference between the undiscounted cash flows expected at acquisition and the investment in the loans, or the "accretable yield", is recognized as interest income on a level-yield method over the life of the loans. In accounting for income from the acquired loans, the Company recorded both the accretable yield and contractually required interest payments. The Company should not have recognized the contractually required interest payments. As a result, both interest income and the carrying value of the acquired loans were overstated. This affected income reported on the loans acquired in FDIC assisted transactions since December 2009.

Adjustments
In addition to the adjustments relating to the acquired loan contractual interest described above, the Company has corrected other errors that had been previously identified but not corrected because they were not material, individually or in the aggregate, to the consolidated financial results. These items included changes in accrual estimates and financial statement reclassifications. Adjustments, identified subsequent to the date of the Original Filing date, have also been made to the preliminary fair values of assets acquired and liabilities assumed for the Company's FDIC-assisted transactions.






























32



The following tables present the impact of the restatement on the Company's previously issued unaudited interim Consolidated Statement of Operations and Consolidated Statement of Cash Flows for the quarters ended March 31, 2011 and 2010 and its unaudited interim Consolidated Balance Sheet as of March 31, 2011.


At or for the three months ended March 31, 2011
(in thousands, except per share data)
As Previously Reported

Restatement Adjustments

Other Adjustments

As Restated
Consolidated Statement of Operations







Interest income:







Interest and fees on loans
$
31,661


$
(4,030
)

$


$
27,631

Total interest income
34,563


(4,030
)



30,533

Total interest expenses
7,825






7,825

Net interest income
26,738


(4,030
)



22,708

Provision for loan losses
3,600






3,600

Net interest income after provision for loan losses
23,138


(4,030
)



19,108

Total Noninterest income
4,963






4,963

Noninterest expense:








Other
3,000




500


3,500

Total noninterest expense
17,465




500


17,965

Income before income tax
10,636


(4,030
)

(500
)

6,106

   Income tax expense
3,557


(1,316
)

(247
)

1,994

Net income
7,079


(2,714
)

(253
)

4,112

Net income available to common shareholders
6,453


(2,714
)

(253
)

3,486

Net income available to common shareholders and assumed conversions
6,824


(3,085
)

(253
)

3,486

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.43


$
(0.18
)

$
(0.02
)

$
0.23

Diluted earnings per share
0.42


(0.18
)

(0.01
)

0.23









Consolidated Balance Sheet







Portfolio loans covered under FDIC loss share at fair value
$
191,447


$
(9,170
)

$


$
182,277

Portfolio loans, net
1,909,659


(9,170
)



1,900,489

FDIC loss share receivable
103,529




(244
)

103,285

Goodwill
3,879




(257
)

3,622

Total assets
2,925,316


(9,170
)

(501
)

2,915,645

Other liabilities
12,047


(2,824
)

(333
)

8,890

Total liabilities
2,734,301


(2,824
)

(333
)

2,731,144

Retained earnings
24,992


(6,346
)

(168
)

18,478

Total shareholders' equity
191,015


(6,346
)

(168
)

184,501

Total liabilities and shareholders' equity
2,925,316


(9,170
)

(501
)

2,915,645









Consolidated Statement of Cash Flows







Net income
$
7,079


$
(2,714
)

$
(253
)

$
4,112

Net accretion of loan discount and indemnification asset
(5,595
)

4,030




(1,565
)
Other liabilities
26


(1,316
)

253


(1,037
)











33



 
At or for the three months ended March 31, 2010
(in thousands, except per share data)
As Previously Reported
 
Restatement Adjustments
 
Other Adjustments
 
As Restated
Consolidated Statement of Operations
 
 
 
 
 
 
 
Interest income:
 
 
 
 
 
 
 
Interest and fees on loans
$
25,244

 
$
(271
)
 
$

 
$
24,973

Total interest income
$
27,275

 
$
(271
)
 

 
$
27,004

Total interest expenses
8,652

 

 

 
8,652

Net interest income
18,623

 
(271
)
 

 
18,352

Provision for loan losses
13,800

 

 

 
13,800

Net interest income after provision for loan losses
4,823

 
(271
)
 

 
4,552

Noninterest income:
 
 
 
 
 
 
 
Wealth Management revenue
1,297

 

 
241

 
1,538

Miscellaneous income
244

 

 

 
244

Total noninterest income
4,056

 

 
241

 
4,297

Noninterest expense:
 
 
 
 
 
 
 
Other
2,617

 

 
241

 
2,858

Total noninterest expense
13,655

 

 
241

 
13,896

Loss before income tax
(4,776
)
 
(271
)
 

 
(5,047
)
Loss tax expense benefit
(1,762
)
 
(94
)
 

 
(1,856
)
Net loss
(3,014
)
 
(177
)
 

 
(3,191
)
Net loss available to common shareholders
(3,626
)
 
(177
)
 

 
(3,803
)
Net income available to common shareholders and assumed conversions
(3,626
)
 
(177
)
 

 
(3,803
)
 
 
 
 
 
 
 
 
Basic loss per share
$
(0.25
)
 
$
(0.01
)
 
$

 
$
(0.26
)
Diluted loss per share
(0.25
)
 
(0.01
)
 

 
(0.26
)
 
 
 
 
 
 
 
 
Consolidated Statement of Cash Flows
 
 
 
 
 
 
 
Net income (loss)
$
(3,014
)
 
$
(177
)
 
$

 
$
(3,191
)
Net accretion of loan discount and indemnification asset
(381
)
 
271

 

 
(110
)
Other assets
2,996

 
(94
)
 

 
2,902




34



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

As discussed in the Explanatory Note and Note 12 - Restatement of Consolidated Financial Statements of this Amended Filing, the Company has restated its previously issued unaudited condensed consolidated financial statements for the three months ended March 31, 2011 and 2010. Management's Discussion and Analysis of Financial Condition and Results of Operations have been revised for the effects of the restatement.
 
Some of the information in this report contains “forward-looking statements” within the meaning of and are 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 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 in Part II, 1A of this Form 10-Q, all of which could cause the Company's actual results to differ from those set forth in the forward-looking statements.

Readers are cautioned not to place undue reliance on our forward-looking statements, which reflect management's analysis and expectations only as of the date of such statements. Forward-looking statements speak only as of the date they are made, and the Company does not intend, and undertakes no obligation, to publicly revise or update forward-looking statements after the date of this report, whether as a result of new information, future events or otherwise, except as required by federal securities law. You should understand that it is not possible to predict or identify all risk factors. Readers should carefully review all disclosures we file from time to time with the Securities and Exchange Commission which are available on our website at www.enterprisebank.com.
 
Introduction

The following discussion describes the significant changes to the financial condition of the Company that have occurred during the first three months of 2011 compared to the financial condition as of December 31, 2010. In addition, this discussion summarizes the significant factors affecting the condensed consolidated results of operations, liquidity and cash flows of the Company for the three months ended March 31, 2011, compared to the same period in 2010. This discussion should be read in conjunction with the accompanying consolidated financial statements included in this report and our Annual Report on Form 10-K/A for the year ended December 31, 2010.
 
Executive Summary

The Company reported net income of $4.1 million for the three months ended March 31, 2011, compared to a net loss of $3.2 million for the same period in 2010. After deducting dividends on preferred stock, the Company reported net income per share of $0.23, compared to a net loss of $0.26 per share for the prior year period.

On January 7, 2011, the Bank entered into a purchase and assumption agreement with the FDIC and acquired certain assets and assumed certain liabilities of Legacy Bank, a full service community bank that was headquartered in Scottsdale, Arizona. The acquisition consisted of assets with an estimated fair value of approximately $128.0 million and liabilities with an estimated fair value of approximately $130.4 million. In connection with the acquisition, the Bank also entered into a loss share agreement whereby the FDIC will reimburse the Bank for 80% of all losses incurred on certain loans and other real estate covered under the agreement. The Bank acquired the assets at a discount of 7.6% and approximately $43.5 million of the deposits were assumed at a premium of 1%. The two branches of Legacy

35



opened as branches of the Bank. The Bank also acquired approximately $55.6 million of discretionary and $13.6 million of non-discretionary trust assets. See Note 3 - Acquisitions and Divestitures and Note 6 - Portfolio Loans for more information.
    
Our pre-tax, pre-provision income for the first quarter of 2011 was $9.6 million, compared to pre-tax, pre-provision income of $8.8 million, an increase of 9% from the first quarter of 2010. Pre-tax, pre-provision income, which is a non-GAAP (Accounting Principles Generally Accepted in the United States of America) financial measure, is presented because the Company believes adjusting its results to exclude loan loss provision expense, sales and fair value writedowns of other real estate, and sales of securities provides shareholders with a more comparable basis for evaluating period-to-period operating results. A schedule reconciling GAAP pre-tax income (loss) to pre-tax, pre-provision income is provided in the table below.
 
 
For the Quarter Ended
 
 
 
 
 
 
 
 
 
 
 
Mar 31,
 
Dec 31,
 
Sep 30,
 
Jun 30,
 
Mar 31,
(In thousands)
2011
 
2010
 
2010
 
2010
 
2010
Pre-tax income (loss)
$
6,106

 
6,687

 
4,384

 
372

 
(5,047
)
Sales and fair value writedowns of other real estate
19

 
2,683

 
1,606

 
678

 
586

Sale of securities
(174
)
 
(781
)
 
(124
)
 
(525
)
 
(557
)
Income (loss) before income tax
5,951

 
8,589

 
5,866

 
525

 
(5,018
)
Provision for loan losses
3,600

 
3,325

 
7,650

 
8,960

 
13,800

Pre-tax, pre-provision income
$
9,551

 
$
11,914

 
$
13,516

 
$
9,485

 
$
8,782


Below are highlights of our Banking and Wealth Management segments. For more information on our segments, see Note 11 –Segment Reporting.
 
Banking Segment

Loans - Portfolio loans totaled $1.9 billion at March 31, 2011, including $182.3 million of loans covered under FDIC loss share agreements. Since December 31, 2010, portfolio loans covered under FDIC loss share agreements increased $60.7 million, or 50%, as a result of the Legacy acquisition. Excluding the loans covered under loss share, total portfolio loans were essentially flat in the first quarter of 2011, although Commercial & Industrial loans increased $19.0 million, or 3%, during the quarter and represent almost one-third of the Company's loan portfolio at March 31, 2011. The net increase in Commercial & Industrial loans was a result of strong new business activity rather than higher credit line utilization rates. The increase in Commercial & Industrial loans was offset by a decrease of $29.1 million in Construction and Residential Real Estate loans as the Company continued to reduce its exposure to these sectors. See Note 6 - Portfolio Loans for more information.

Deposits - Core deposits, which exclude brokered certificates of deposit and include reciprocal CDARS deposits, increased $132.7 million, or 6%, in the first quarter of 2011 compared to the fourth quarter of 2010. First quarter deposit growth included an $81.9 million increase in demand deposits, an $80.6 million increase in money market accounts and other interest-bearing deposit accounts, and a $55.9 million increase in non-CDARS certificates of deposit. Reciprocal CDARS certificates of deposits decreased by $85.7 million in the first quarter of 2011 to $74.8 million compared to $160.5 million at December 31, 2010 and $147.9 million at March 31, 2010. Approximately $36.6 million of the money market increase was the result of a new CDARS money market sweep product, of which approximately $32.0 million, or 88%, were transfers from CDARS certificates of deposit. The Legacy acquisition added $49.3 million of total deposits consisting of $15.6 million of demand deposits, $19.5 million of money market accounts and other interest-bearing deposit accounts, and $14.2 million of certificates of deposit.

At March 31, 2011, total deposits were $2.4 billion, an increase of $526.4 million, or 28%, from March 31, 2010. Total deposits increased $132.7 million, or 6%, from December 31, 2010. Our deposit mix continues to improve. Noninterest-bearing demand deposits were $448.0 million at March 31, 2011, an increase of 49% from March 31, 2010 and a 22% increase from December 31, 2010. Noninterest bearing demand deposits represented 18% of

36



total deposits at March 31, 2011 compared to 16% of total deposits at December 31, 2010 and March 31, 2010.

Strong deposit growth was attributed to the company's marketing and sales activities, as well as, the continuing cash accumulation trend among our commercial clients. The Company completed a successful deposit promotion in Arizona, generating more than $22.9 million in money market balances in the first quarter of 2011. In addition, approximately $12.0 million of the money market growth and $33.0 million of the certificate of deposit growth in the first quarter of 2011 was related to the Company's Enterprise Advisory Services initiative, a proprietary deposit platform marketed to registered investment advisory firms.

Asset quality - Nonperforming loans were $43.5 million at March 31, 2011, a decrease of $12.3 million from the prior year period, and a decrease of $2.9 million from year end 2010. Nonperforming loans represented 2.24% of total loans at March 31, 2011 versus 2.46% of total loans at December 31, 2010 and 3.10% at March 31, 2010. Excluding non-accrual loans and portfolio loans covered under FDIC loss share agreements, portfolio loans that were 30-89 days delinquent at March 31, 2011 remained at very low levels, representing 0.12% of the portfolio compared to 0.13% at December 31, 2010.

Provision for loan losses was $3.6 million in the first quarter of 2011 compared to $3.3 million in the fourth quarter of 2010 and $13.8 million in the first quarter of 2010. The large provision for loan losses in the first quarter of 2010 was due to higher levels of loan risk rating downgrades. See Note 6 - Portfolio Loans above and Provision for Loan Losses and Nonperforming Assets in this section for more information.

Interest rate margin - The net interest rate margin was 3.58% for the first quarter of 2011, compared to 4.09% for the fourth quarter of 2010 and 3.42% in the first quarter of 2010. The net interest rate margin for the fourth quarter of 2010 was significantly impacted by the yield on the loans covered under FDIC loss share. See Net Interest Income in this section for more information.

Wealth Management Segment
Fee income from the Wealth Management segment, including results from state tax credit brokerage activity, totaled $1.8 million in the first quarter of 2011 versus $2.1 million in the same quarter of 2010. The decrease was due to lower sales in the first quarter of 2011. See Noninterest Income in this section for more information.

Net Interest Income
 
Three months ended March 31, 2011 and 2010
Net interest income (on a tax-equivalent basis) was $23.0 million for the three months ended March 31, 2011 compared to $18.6 million for the same period of 2010, an increase of $4.4 million, or 24%. Total interest income increased $3.6 million and total interest expense decreased $827,000.

Average interest-earning assets increased $404.0 million, or 18%, to $2.6 billion for the quarter ended March 31, 2011 from $2.2 billion for the quarter ended March 31, 2010. Average loans increased $134.4 million, or 7%, to $2.0 billion at March 31, 2011 from $1.8 billion at March 31, 2010. Average investment securities increased $136.4 million, or 48%, to $423.1 million from the first quarter of 2010 as increased core deposits were deployed to offset weak loan demand. Average short-term investments, including cash balances at the Federal Reserve, increased $133.2 million to $231.2 million from $98.0 million in the same period of 2010. Interest income on earning assets increased $4.2 million due to higher volume and decreased $595,000 due to higher rates, for a net increase of $3.6 million versus the first quarter of 2010.

For the quarter ended March 31, 2011, average interest-bearing liabilities increased $404.8 million, or 22%, to $2.3 billion compared to $1.9 billion for the quarter ended March 31, 2010. The increase in average interest-bearing liabilities resulted from a $350.4 million increase in average interesting bearing core deposits, primarily consisting of $248.5 million increase in average money market accounts and a $101.0 million increase in average certificates of deposit, and a $44.8 million increase in borrowings. For the first quarter of 2011, interest expense on interest-bearing liabilities decreased $2.2 million due to declining rates partially offset by an increase of $1.4 million due to the impact of higher volumes, for a net decrease of $827,000 versus the first quarter of 2010.

37




The tax-equivalent net interest rate margin was 3.58% for the first quarter of 2011, compared to 4.09% for the fourth quarter of 2010 and 3.42% in the first quarter of 2010. The net interest rate margin for the fourth quarter of 2010 was significantly impacted by the yield on the loans covered under FDIC loss share. Loans covered under FDIC loss share yielded 18.74% in the fourth quarter of 2010 primarily due to cash flows on paid off covered loans that exceeded expectations. In the first quarter of 2011, the loans covered under FDIC loss share yielded 8.53%. Absent the FDIC loss share loans, the net interest rate margin was 3.33% for the first quarter of 2011 compared to 3.47% for the fourth quarter of 2010. The reduction in the net interest rate margin, excluding the effect of loans covered under FDIC loss share, was primarily due to the Company's increasingly strong liquidity position.

The Company expects low to mid-single digit growth in portfolio loans not covered under FDIC loss share. The growth is expected to be primarily in the Commercial & Industrial loan category. Pipelines for new loan activity have been strengthening over the past several months.


38



Average Balance Sheet

The following table presents, for the periods indicated, certain information related to our average interest-earning assets and interest-bearing liabilities, as well as, the corresponding interest rates earned and paid, all on a tax equivalent basis.
 
Three months ended March 31,
 
2011
 
2010
(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)
$
1,736,608

 
$
23,321

 
5.45
%
 
$
1,779,735

 
$
24,296

 
5.54
%
Tax-exempt loans (2)
35,153

 
681

 
7.86

 
28,817

 
632

 
8.89

Covered loans (3)
184,098

 
3,874

 
8.53

 
12,876

 
273

 
8.60

Total loans
1,955,859

 
27,876

 
5.78

 
1,821,428

 
25,201

 
5.61

Taxable investments in debt and equity securities
407,943

 
2,642

 
2.63

 
285,527

 
1,933

 
2.75

Non-taxable investments in debt and equity securities (2)
15,174

 
172

 
4.60

 
1,173

 
16

 
5.53

Short-term investments
231,208

 
149

 
0.26

 
98,039

 
88

 
0.36

Total securities and short-term investments
654,325

 
2,963

 
1.84

 
384,739

 
2,037

 
2.15

Total interest-earning assets
2,610,184

 
30,839

 
4.79

 
2,206,167

 
27,238

 
5.01

Noninterest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
11,220

 
 
 
 
 
11,283

 
 
 
 
Other assets
311,584

 
 
 
 
 
163,914

 
 
 
 
Allowance for loan losses
(43,558
)
 
 
 
 
 
(44,711
)
 
 
 
 
 Total assets
$
2,889,430

 
 
 
 
 
$
2,336,653

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing transaction accounts
$
194,340

 
$
189

 
0.39
%
 
$
185,244

 
$
219

 
0.48
%
Money market accounts
896,185

 
2,082

 
0.94

 
647,676

 
1,393

 
0.87

Savings
10,751

 
9

 
0.34

 
9,373

 
8

 
0.35

Certificates of deposit
880,966

 
3,410

 
1.57

 
779,940

 
4,635

 
2.41

Total interest-bearing deposits
1,982,242

 
5,690

 
1.16

 
1,622,233

 
6,255

 
1.56

Subordinated debentures
85,081

 
1,121

 
5.34

 
85,081

 
1,230

 
5.86

Borrowed funds
217,858

 
1,014

 
1.89

 
173,028

 
1,167

 
2.74

Total interest-bearing liabilities
2,285,181

 
7,825

 
1.39

 
1,880,342

 
8,652

 
1.87

Noninterest bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
408,766

 
 
 
 
 
273,702

 
 
 
 
Other liabilities
12,239

 
 
 
 
 
7,520

 
 
 
 
Total liabilities
2,706,186

 
 
 
 
 
2,161,564

 
 
 
 
Shareholders' equity
183,244

 
 
 
 
 
175,089

 
 
 
 
Total liabilities & shareholders' equity
$
2,889,430

 
 
 
 
 
$
2,336,653

 
 
 
 
Net interest income
 
 
$
23,014

 
 
 
 
 
$
18,586

 
 
Net interest spread
 
 
 
 
3.40
%
 
 
 
 
 
3.14
%
Net interest rate margin (4)
 
 
 
 
3.58

 
 
 
 
 
3.42


(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 $146,000 and $624,000 for the quarters ended March 31, 2011 and 2010, respectively.
(2)
Non-taxable income is presented on a fully tax-equivalent basis using a 36% tax rate. The tax-equivalent adjustments were $306,000 and $234,000 for the quarters ended March 31, 2011 and 2010, respectively.
(3)
Covered loans are loans covered under FDIC loss share agreements and are recorded at fair value.
(4)
Net interest income divided by average total interest-earning assets.



39



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.
  
 

2011 compared to 2010
 
Three months ended March 31,
 
Increase (decrease) due to
(in thousands)
Volume(1)
 
Rate(2)
 
Net
Interest earned on:
 
 
 
 
 
Taxable loans
$
(583
)
 
$
(392
)
 
$
(975
)
Tax-exempt loans (3)
129

 
(80
)
 
49

Covered loans
3,603

 
(2
)
 
3,601

Taxable investments in debt and equity securities
796

 
(87
)
 
709

Non-taxable investments in debt and equity securities (3)
159

 
(3
)
 
156

Short-term investments
92

 
(31
)
 
61

Total interest-earning assets
$
4,196

 
$
(595
)
 
$
3,601

 
 
 
 
 
 
Interest paid on:
 
 
 
 
 
Interest-bearing transaction accounts
$
11

 
$
(41
)
 
$
(30
)
Money market accounts
570

 
119

 
689

Savings
1

 

 
1

Certificates of deposit
543

 
(1,768
)
 
(1,225
)
Subordinated debentures

 
(109
)
 
(109
)
Borrowed funds
260

 
(413
)
 
(153
)
Total interest-bearing liabilities
1,385

 
(2,212
)
 
(827
)
Net interest income
$
2,811

 
$
1,617

 
$
4,428


(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 a 36% tax rate.
NOTE: The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each.

Provision and Allowance for Loan Losses

The provision for loan losses in the first quarter of 2011 was $3.6 million compared to $3.3 million in the fourth quarter of 2010 and $13.8 million in the first quarter of 2010. The large provision for loan losses in the first quarter of 2010 was due to higher levels of loan risk rating downgrades. The allowance for loan losses as a percentage of total loans was 2.20% at March 31, 2011 compared to 2.26% at December 31, 2010 and 2.45% at March 31, 2010. The allowance for loan losses represented 98% of nonperforming loans at March 31, 2011 compared to 79% at March 31, 2010 and 92% at December 31, 2010. Management believes that the allowance for loan losses is adequate to absorb inherent losses in the loan portfolio.

During the first quarter of 2011, the Company recorded net charge-offs of $3.5 million, or 0.73%, of average portfolio loans on an annualized basis, compared to $7.6 million, or 1.57%, for the fourth quarter of 2010 and $12.7 million, or 2.83%, for the first quarter of 2010. Approximately 72% of the charge-offs in the first quarter of 2011 were related to Construction Land Acquisition and Development loans, 21% were related to Commercial Real Estate loans and the remaining 7% were related to Commercial & Industrial loans.


40



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 March 31,
(in thousands)
2011
 
2010
Allowance at beginning of period
$
42,759

 
$
42,995

Loans charged off:
 
 
 
Commercial and industrial
400

 
530

Real estate:
 
 
 
Commercial
738

 
7,285

Construction
2,716

 
4,701

Residential
111

 
355

Consumer and other

 
92

Total loans charged off
3,965

 
12,963

Recoveries of loans previously charged off:
 
 
 
Commercial and industrial
125

 
42

Real estate:
 
 
 
Commercial
15

 
167

Construction
178

 
2

Residential
89

 
36

Consumer and other
21

 

Total recoveries of loans
428

 
247

Net loan chargeoffs
3,537

 
12,716

Provision for loan losses
3,600

 
13,800

 
 
 
 
Allowance at end of period
$
42,822

 
$
44,079

 
 
 
 
Excludes loans covered under FDIC loss share agreements
 
 
 
Average loans
$
1,771,761

 
$
1,808,552

Total portfolio loans
1,761,034

 
1,786,097

Net chargeoffs to average loans
0.81
%
 
2.85
%
Allowance for loan losses to loans
2.43

 
2.47

 
 
 
 
Includes loans covered under FDIC loss share agreements
 
 
 

Average loans
$
1,955,859

 
$
1,821,428

Total portfolio loans
1,943,311

 
1,798,954

Net chargeoffs to average loans
0.73
%
 
2.83
%
Allowance for loan losses to loans
2.20

 
2.45




41



Nonperforming assets
 
The following table presents the categories of nonperforming assets and other ratios as of the dates indicated.
 
 
March 31,
 
March 31,
(in thousands)
2011
 
2010
Non-accrual loans
$
33,782

 
$
53,190

Loans past due 90 days or more and still accruing interest

 
885

Restructured loans
9,705

 
1,710

Total nonperforming loans
43,487

 
55,785

Foreclosed property (1)
28,443

 
18,669

Other bank owned assets
600

 
936

Total nonperforming assets (1)
$
72,530

 
$
75,390

 
 
 
 
Excludes assets covered under FDIC loss share agreements
 
 
 
Total assets
$
2,915,645

 
$
2,361,228

Total portfolio loans
1,761,034

 
1,786,097

Total loans plus foreclosed property
1,790,077

 
1,805,702

Nonperforming loans to total loans
2.47
%
 
3.12
%
Nonperforming assets to total loans plus foreclosed property
4.05

 
4.18

Nonperforming assets to total assets (1)
2.49

 
3.19

 
 
 
 
Includes assets covered under FDIC loss share agreements
 
 
 
Total assets
$
2,915,645

 
$
2,361,228

Total portfolio loans
1,943,311

 
1,798,954

Total loans plus foreclosed property
1,995,216

 
1,820,838

Nonperforming loans to total loans
2.24
%
 
3.10
%
Nonperforming assets to total loans plus foreclosed property
4.78

 
4.27

Nonperforming assets to total assets
3.27

 
3.29

 
 
 
 
Allowance for loan losses to nonperforming loans
98
%
 
79
%
 
(1)
Excludes assets covered under FDIC loss share agreements, except for their inclusion in total assets

As 2011 progresses, the Company expects slight improvement in its ratio of nonperforming assets to total assets, excluding assets covered under FDIC loss share agreements.

Nonperforming loans
 Nonperforming loans exclude credit-impaired loans that were acquired in the December 2009, July 2010, and January 2011 FDIC-assisted transactions. These purchased credit-impaired loans are accounted for on a pool basis, and the pools are considered to be performing. See Note 6 - Portfolio Loans for more information on these loans.

At March 31, 2011, nonperforming loans, including troubled debt restructurings of $9.7 million, were $43.5 million, or 2.24%, of total loans. This compares to $46.4 million, or 2.46% of total loans, at December 31, 2010 and $55.8 million, or 3.10% of total loans, at March 31, 2010. The nonperforming loans are comprised of approximately 43 relationships with the largest being a $5.8 million loan secured by commercial land in Kansas City. Five relationships comprise 53% of the nonperforming loans. Approximately 60% of the nonperforming loans were located in the Kansas City market and 40% were located in the St. Louis market. At March 31, 2011, there were no performing restructured loans that have been excluded from the nonperforming loan amounts.


42



Nonperforming loans based on Call Report codes were as follows:
 
(in thousands)
March 31, 2011
 
December 31, 2010
Construction, Real Estate/Land Acquisition and Development
$
16,808

 
$
9,934

Commercial Real Estate
10,612

 
12,959

Residential Real Estate
9,508

 
12,188

Commercial & Industrial
6,559

 
11,276

Consumer & Other

 

Total
$
43,487

 
$
46,357


The following table summarizes the changes in nonperforming loans by quarter.
 
 
2011
 
2010
(in thousands)
1st Qtr
 
4th Qtr
 
3rd Qtr
 
2nd Qtr
 
1st Qtr
Nonperforming loans beginning of period
$
46,357

 
$
51,955

 
$
46,550

 
$
55,785

 
$
38,540

Additions to nonaccrual loans
18,187

 
15,877

 
19,373

 
15,440

 
39,663

Additions to restructured loans
297

 
3,430

 
2,286

 
454

 
611

Chargeoffs
(3,966
)
 
(7,860
)
 
(7,023
)
 
(8,314
)
 
(12,963
)
Other principal reductions
(6,445
)
 
(7,288
)
 
(1,881
)
 
(4,580
)
 
(2,739
)
Moved to Other real estate
(7,014
)
 
(8,743
)
 
(7,122
)
 
(11,350
)
 
(5,564
)
Moved to Other bank owned assets

 

 

 

 
(955
)
Moved to performing
(3,929
)
 
(1,014
)
 
(228
)
 

 
(1,693
)
Loans past due 90 days or more and still accruing interest

 

 

 
(885
)
 
885

Nonperforming loans end of period
$
43,487

 
$
46,357

 
$
51,955

 
$
46,550

 
$
55,785


Of the $18.5 million in new nonperforming loans, five construction real estate loans representing three relationships comprised over $15.7 million, or 85% of the total. Of these, two relationships totaling $6.0 million were transferred to Other real estate during the quarter.

Other real estate
Other real estate was $51.3 million at March 31, 2011 compared to $36.2 million at December 31, 2010, and $20.9 million at March 31, 2010. Approximately $22.9 million, or 45% of the Other real estate, is covered by an FDIC loss share agreement. The following table summarizes the changes in Other real estate for the past five quarters.

 
2011
 
2010
(in thousands)
1st Qtr
 
4th Qtr
 
3rd Qtr
 
2nd Qtr
 
1st Qtr
Other real estate beginning of period
$
36,208

 
$
34,685

 
$
25,884

 
$
20,947

 
$
25,084

Additions and expenses capitalized to prepare property for sale
7,014

 
8,743

 
7,122

 
11,350

 
5,564

Additions from FDIC assisted transactions
12,826

 
4,871

 
5,469

 

 
113

Writedowns in fair value
(703
)
 
(2,406
)
 
(1,750
)
 
(1,364
)
 
(574
)
Sales
(4,040
)
 
(9,685
)
 
(2,040
)
 
(5,049
)
 
(9,240
)
Other real estate end of period
$
51,305

 
$
36,208

 
$
34,685

 
$
25,884

 
$
20,947



43



At March 31, 2011, Other real estate was comprised of 21% residential lots, 21% completed homes, and 58% commercial real estate. Of the total Other real estate, 21%, or 27 properties, are located in the Kansas City region, 34%, or 19 properties, are located in the St. Louis region and 45%, or 48 properties, are located in the Arizona region related to the FDIC acquisitions.

The writedowns in fair value were recorded in Loan legal and other real estate expense based on current market activity shown in the appraisals. In addition, the Company realized a net gain of $423,000 on the sale of other real estate and recorded these gains as part of Noninterest income.

Noninterest Income

Noninterest income increased $666,000, or 15%, from the first quarter of 2010 compared to the first quarter of 2011. The increase is mainly due to increases in miscellaneous income related to the accretion on the indemnification asset on our Covered Assets.

Wealth Management revenue - For the three months ended March 31, 2011, Wealth Management revenue from the Trust division increased $145,000, or 9%, compared to the same period in 2010. Assets under administration were $1.6 billion at March 31, 2011, a 21% increase from March 31, 2010 due to market value increases and additional accounts from new and existing clients.

Sale of other real estate - For the quarter ended March 31, 2011, the Company sold $4.0 million of Other real estate for a gain of $423,000.

State tax credit brokerage activities - For the quarter ended March 31, 2011, the Company recorded a gain of $155,000 compared to a gain of $518,000 in the first quarter of 2010. Gains of $352,000 related to the sale of state tax credits to clients were partially offset by a negative fair value adjustment of $164,000 and a negative fair value adjustment of $33,000 on the interest rate caps used to economically hedge the tax credits. Tax credit sales in the first quarter of 2011 were lower than expected due to timing of customer purchases. See Note 7 - Derivatives Instruments and Hedging Activities above for more information on the interest rate caps. For more information on the fair value treatment of the state tax credits, see Note 10 - Fair Value Measurements.

Sale of investment securities - During the first three months of 2011, the Company purchased approximately $147.0 million in securities primarily in U.S. Government sponsored enterprises and Residential mortgage-backed securities. The Company sold approximately $5.3 million of securities realizing a gain of $174,000 on these sales.

Miscellaneous income - The increase from the first quarter of 2010 to the first quarter of 2011, is primarily due to an increase of $586,000 in accretion related to the indemnification assets on the Company's Covered Assets.

Noninterest Expense

Noninterest expenses were $18.0 million in the first quarter of 2011, an increase of $4.1 million, or 29%, from the first quarter of 2010. The increase over the prior year period was comprised of $2.1 million in salaries and benefits primarily due to variable compensation accruals and staff additions to support our Arizona acquisition activity and $1.2 million in higher loan legal and other real estate expenses. The Company also incurred additional data processing costs related to new web-based customer relationship software and increases in FDIC insurance premiums due to the higher levels of deposits.

The Company's efficiency ratio in the first quarter of 2011 was 65% compared to 61% in the first quarter of 2010, as compensation and loan legal and other real estate expenses increased relative to increases in revenues.






44



Income Taxes

For the three months ended March 31, 2011, the Company's income tax expense, which includes both federal and state taxes, was $2.0 million compared to a $1.9 million benefit for the same period in 2010. The combined federal and state effective income tax rates were 32.7% and (36.8)% for the three months ended March 31, 2011 and 2010, respectively.

The Company recognizes deferred tax assets only to the extent that they are expected to be used to reduce amounts that have been paid or will be paid to tax authorities.  Management believes, based on all positive and negative evidence, that the deferred tax asset at March 31, 2011 is more likely-than-not-to be realized, and accordingly, no valuation allowance has been recorded. 

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 and the FHLB, the ability to acquire large and brokered deposits and the ability to sell loan participations to other banks. These alternatives are an important part of our liquidity plan and provide flexibility and efficient execution of the asset-liability management strategy.

Our Asset-Liability Management Committee oversees our liquidity position, the parameters of which are approved by the Board of Directors. Our liquidity position is monitored monthly by producing a liquidity report, which measures the amount of liquid versus non-liquid assets and liabilities. Our liquidity management framework includes measurement of several key elements, such as the loan to deposit ratio, 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). 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 $14.1 million will be sufficient to meet all projected cash needs in 2011.

As of March 31, 2011, the Company had $82.6 million of outstanding subordinated debentures as part of nine Trust Preferred Securities Pools. These securities are classified as debt but are included in regulatory capital and the related interest expense is tax-deductible, which makes them a very attractive source of funding.

Bank liquidity
During the first quarter of 2011, we maintained a strong liquidity position by targeting core funding while reducing certain volatile deposit sources. Noninterest-bearing demand deposits grew $81.9 million, and money markets increased $86.5 million offset by decreases of $29.8 million in time deposits, including CDARS balances, and $6.5 million in interest bearing checking accounts.

The Bank has a variety of funding sources available to increase financial flexibility. In addition to amounts currently borrowed, at March 31, 2011, the Bank could borrow an additional $109.7 million from the FHLB of Des Moines under blanket loan pledges and has an additional $330.4 million from the Federal Reserve Bank under a pledged loan

45



agreement. The Bank has unsecured federal funds lines with three correspondent banks totaling $35.0 million.

Of the $482.0 million of the securities available for sale at March 31, 2011, $243.9 million was pledged as collateral for deposits of public institutions, treasury, tax and loan notes, and other requirements. The remaining $238.1 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. 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 March 31, 2011, the Bank had $74.8 million of reciprocal CDARS certificates of deposits outstanding. During the first quarter of 2011, the Bank began offering reciprocal money market accounts and had $36.6 million outstanding at March 31, 2011. In addition to the reciprocal deposits available through CDARS, we also have access to the “one-way buy” program, which allows us to bid on the excess deposits of other CDARS member banks. The Company will report any outstanding “one-way buy” funds as brokered funds in its internal and external financial reports. At March 31, 2011, we had no outstanding “one-way buy” deposits.

Finally, because the Bank is “well-capitalized”, it has the ability to sell certificates of deposit through various national or regional brokerage firms, if needed. At March 31, 2011, brokered certificate of deposit balances were $156.7 million, flat with December 31, 2010. At March 31, 2010, the Bank had $132.0 million of brokered certificates of deposit outstanding. Brokered certificates of deposit represented 6.4% of total deposits at March 31, 2011, 6.8% of total deposits at December 31, 2010 and 6.9% of total deposits at March 31, 2010.

Over 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 $435.2 million in unused loan commitments as of March 31, 2011. While this commitment level would be difficult to fund given the Company's current liquidity resources, the nature of these commitments is such that the likelihood of funding them is low.

Capital Resources
In January 2010, the Company issued $15.0 million in stock through a private offering and separately registered these shares with the SEC in March 2010. The proceeds of the offering were injected into the Bank to improve its capital position.

From time to time we may choose to issue equity or debt securities to raise capital. A variety of factors, including financial market conditions, may influence the timing of any such issuance. To allow us to timely respond to opportunities to raise capital, the Company filed a shelf registration statement on Form S-3 which became effective on July 1, 2009. Under Rule 415 of the Securities Act of 1933, the Company has until July 1, 2012 to issue securities pursuant to this registration statement.

Proceeds from any additional offerings would be used for capital expenditures, repayment or refinancing of indebtedness or other securities from time to time, working capital, to make acquisitions, for general corporate purposes, or for the redemption of all or part of the preferred stock held by the U.S. Treasury as a result the Company's participation in the Capital Purchase Program.

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


46



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%). Management believes, as of March 31, 2011 and December 31, 2010, that 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 March 31, 2011 and December 31, 2010.

The following table summarizes the Company's risk-based capital and leverage ratios at the dates indicated:
 
 
 
 
 
(Dollars in thousands)
March 31, 2011
 
December 31, 2010
Tier 1 capital to risk weighted assets
11.75
%
 
11.73
%
Total capital to risk weighted assets
14.04
%
 
14.11
%
Tier 1 common equity to risk weighted assets
7.14
%
 
7.16
%
Leverage ratio (Tier 1 capital to average assets)
8.33
%
 
8.99
%
Tangible common equity to tangible assets
5.03
%
 
5.15
%
Tier 1 capital
$
240,292

 
$
237,099

Total risk-based capital
$
287,157

 
$
285,226



47



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. The tables below contain reconciliations of these ratios to U.S. GAAP.
 
Tangible common equity ratio 

 
 
 
 
(In thousands)
March 31, 2011
 
December 31, 2010
Total shareholders' equity
$
184,501

 
$
179,801

Less: Preferred stock
(32,707
)
 
(32,519
)
Less: Goodwill
(3,622
)
 
(2,064
)
Less: Intangible assets
(1,921
)
 
(1,223
)
Tangible common equity
$
146,251

 
$
143,995

 
 
 
 
Total assets
$
2,915,645

 
$
2,800,199

Less: Goodwill
(3,622
)
 
(2,064
)
Less: Intangible assets
(1,921
)
 
(1,223
)
Tangible assets
$
2,910,102

 
$
2,796,912

 
 
 
 
Tangible common equity to tangible assets
5.03
%
 
5.15
%


Tier 1 common equity ratio

(In thousands)
March 31, 2011
 
December 31, 2010
Total shareholders' equity
$
184,501

 
$
179,801

Less: Goodwill
(3,622
)
 
(2,064
)
Less: Intangible assets
(1,921
)
 
(1,223
)
Less: Unrealized gains; Plus: Unrealized Losses
(245
)
 
573

Plus: Qualifying trust preferred securities
61,520

 
59,953

Other
59

 
59

Tier 1 capital
$
240,292


$
237,099

Less: Preferred stock
(32,707
)
 
(32,519
)
Less: Qualifying trust preferred securities
(61,520
)
 
(59,953
)
Tier 1 common equity
$
146,065

 
$
144,627

 
 
 
 
Total risk weighted assets determined in accordance with
prescribed regulatory requirements
2,045,802

 
2,021,136

 
 
 
 
Tier 1 common equity to risk weighted assets
7.14
%
 
7.16
%


48



Critical Accounting Policies

The impact and any associated risks related to the Company's critical accounting policies on business operations are discussed throughout “Management's Discussion and Analysis of Financial Condition and Results of Operations,” where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see the Company's Annual Report on Form 10-K/A for the year ended December 31, 2010.

New Accounting Standards

FASB ASU 2010-06, “Improving Disclosures about Fair Value Measurements” On January 1, 2011, the Company adopted new authoritative guidance under this ASU, which requires detailed Level 3 rollforward disclosure. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

FASB ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” On January 1, 2011, the Company adopted new authoritative guidance under this ASU which requires disclosures about activity that occurs during a reporting period. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

FASB ASU 2010-29, “Business Combinations (Topic 805)-Disclosure of Supplementary Pro Forma Information for Business Combinations” On January 1, 2011, the Company adopted new authoritative guidance under this ASU which provides clarification regarding the acquisition date that should be used for reporting the pro forma financial information disclosures required by Topic 805 when comparative financial statements are presented. ASU 2010-29 also requires entities to provide a description of the nature and amount of material, nonrecurring pro forma adjustments that are directly attributable to the business combination. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

FASB ASU 2011-01, “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20” In January 2011, the FASB issued ASU 2011-01, which temporarily delays the effective date of the disclosures about troubled debt restructurings in ASU 2010-20. The delay is intended to allow the Board time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. The Company believes this ASU will not have a material impact on the Company's consolidated financial statements.

FASB ASU 2011-02, “Receivables (Topic 310) - A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring” In April 2011, the FASB issued ASU 2011-02, which provides clarification on whether a restructuring constitutes a troubled debt restricting and also clarifies the guidance on a creditor's evaluation of whether it has granted a concession to the debtor and if the debtor is experiencing financial difficulties. The Company believes this ASU will not have a material impact on the Company's consolidated financial statements.

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.

Market risk arises from exposure to changes in interest rates and other relevant market rate or price risk. The Company faces market risk in the form of interest rate risk through transactions other than trading activities. Market risk from these activities, in the form of interest rate risk, is measured and managed through a number of methods. The Company uses financial modeling techniques to measure interest rate risk. These techniques measure the sensitivity of future earnings due to changing interest rate environments. Guidelines established by the Bank's Asset/Liability Management

49



Committee and approved by the Bank's Board of Directors are used to monitor exposure of earnings at risk. General interest rate movements are used to develop sensitivity as the Company feels it has no primary exposure to a specific point on the yield curve. These limits are based on the Company's exposure to a 100 basis points and 200 basis points immediate and sustained parallel rate move, either upward or downward. In today's low interest rate environment, the Company also monitors its exposure to immediate and sustained parallel rate increases of 300 basis points and 400 basis points.

Interest rate simulations for March 31, 2011 demonstrate that a rising rate environment will have a positive impact on net interest income.
 
The following table represents the Company's estimated interest rate sensitivity and periodic and cumulative gap positions calculated as of March 31, 2011.
 
(in thousands)
Year 1
 
Year 2
 
Year 3
 
Year 4
 
Year 5
 
Beyond
5 years
or no stated maturity
 
Total
Interest-Earning Assets
 
 
 
 
 
 
 

 
 

 
 

 
 

Securities available for sale
$
100,902

 
$
94,376

 
$
71,192

 
$
51,310

 
$
44,630

 
$
119,579

 
$
481,989

Other investments

 

 

 

 

 
14,430

 
14,430

Interest-bearing deposits
187,556

 

 

 

 

 

 
187,556

Federal funds sold
1,464

 

 

 

 

 

 
1,464

Portfolio loans (1)
1,270,876

 
267,239

 
272,472

 
40,202

 
64,158

 
28,364

 
1,943,311

Loans held for sale
3,142

 

 

 

 

 

 
3,142

Total interest-earning assets
$
1,563,940

 
$
361,615

 
$
343,664

 
$
91,512

 
$
108,788

 
$
162,373

 
$
2,631,892

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-Bearing Liabilities
 
 
 
 
 
 
 

 
 

 
 

 
 

Savings, NOW and Money market deposits
$
1,150,950

 
$

 
$

 
$

 
$

 
$

 
$
1,150,950

Certificates of deposit
532,080

 
90,807

 
106,587

 
7,363

 
94,106

 
525

 
831,468

Subordinated debentures
56,807

 

 
28,274

 

 

 

 
85,081

Other borrowings
118,198

 
7,000

 

 

 
10,000

 
70,000

 
205,198

Total interest-bearing liabilities
$
1,858,035

 
$
97,807

 
$
134,861

 
$
7,363

 
$
104,106

 
$
70,525

 
$
2,272,697

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-sensitivity GAP
 
 
 
 
 
 
 

 
 

 
 

 
 

GAP by period
$
(294,095
)
 
$
263,808

 
$
208,803

 
$
84,149

 
$
4,682

 
$
91,848

 
$
359,195

Cumulative GAP
$
(294,095
)
 
$
(30,287
)
 
$
178,516

 
$
262,665

 
$
267,347

 
$
359,195

 
$
359,195

Ratio of interest-earning assets to
interest-bearing liabilities
 
 
 
 
 
 
 

 
 

 
 

 
 

Periodic
0.84

 
3.70

 
2.55

 
12.43

 
1.04

 
2.30

 
1.16

Cumulative GAP as of March 31, 2011
0.84

 
0.98

 
1.09

 
1.13

 
1.12

 
1.16

 
1.16


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











50



ITEM 4: CONTROLS AND PROCEDURES
 
Restatement of Prior Period Financial Statements Filed
In January 2012, while converting to a new system designed to address the complex accounting requirements of acquired loans under ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality”, the Company discovered an error in its process used to record income on these loans. Both interest income and the carrying value of the acquired loans were overstated. The error affects income reported on all loans acquired in FDIC assisted transactions since December 2009. On January 20, 2012, the Audit Committee of the Board of Directors of the Company and management determined that previously issued consolidated financial statements for the quarter ended March 31, 2011 should no longer be relied upon and should be restated.

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 evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15, as of March 31, 2011, in conjunction with the filing of our original Form 10-Q in May 2011. Based on that evaluation, the CEO and CFO concluded that the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed in the Company's periodic SEC filings is processed, recorded, summarized and reported within the time periods specified in the SEC's rules and forms.

Subsequent to the evaluation made in connection with the Original Filing and in connection with the restatement and the filing of this Form 10-Q/A, management, including our CEO and CFO, re-evaluated the effectiveness of the design and operation of our disclosure controls and procedures and concluded that there was a material weakness in our internal control over financial reporting related to the Company's acquired loan portfolio as of March 31, 2011.

Specifically, the controls over the accounting entries of acquired loans were improperly designed and were not effective in capturing the accuracy of the resulting yield related to these loans. The controls that had been in place focused primarily on the calculation and accounting of the accretable and non-accretable yields under ASC 310-30. The controls were not effective in recording the accounting entry required to reverse the contractual interest calculated by the Company's loan servicing subsystem.

Based on this re-evaluation and including consideration of the material weakness described above, management has concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2011.

Changes to Internal Control Over Financial Reporting
There have not been any changes in our internal control over financial reporting during the quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 


51



PART II – OTHER INFORMATION
 

ITEM 1: LEGAL PROCEEDINGS
 
The following information supplements the discussion in Part I, Item 3 “Legal Proceedings” in the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2010:

Distinctive Notes
As discussed in further detail below, the Bank, along with other co-defendants, including a former President and Chief Executive Officer of the Bank's trust division (the “Former Trust President”), has been named as a defendant in two lawsuits filed by clients, or purported clients, of the Bank's trust division who invested in promissory notes issued by Distinctive Properties (UK) Limited (“Distinctive Properties”), a company involved in the purchase and development of real estate in the United Kingdom.

Phil Rosemann, et. al. v. Martin Sigillito, Enterprise Bank & Trust, et. al., Case No. 4:10-CV-1165-LRR (pending in the United States District Court for the Eastern District of Missouri). On March 30, 2011, Enterprise Bank was named as a defendant in an existing lawsuit brought by approximately 78 plaintiffs against 38 other defendants, including the Former Trust President and 20 “john doe” defendants. The lawsuit concerns investments the plaintiffs allegedly made in certain promissory notes issued by Distinctive Properties (the “Distinctive Notes”), which plaintiffs allege were part of a multi-million dollar Ponzi scheme. Plaintiffs allege to have IRA custodial accounts at Enterprise Bank which hold the Distinctive Notes. Plaintiffs assert, among other things, that the Bank was negligent, breached its fiduciary duties and breached its contracts by allowing the Distinctive Notes to be renewed, improperly disbursing funds and allowing interest payments to be credited to the accounts without receipt of such payments. Plaintiffs also assert that the Bank, and certain other defendants including the Former Trust President, violated the Racketeer Influenced and Corrupt Organizations Act (“RICO”) and conspired to violate RICO in connection with the sale of the Distinctive Notes to the plaintiffs. Plaintiffs are seeking in excess of $26,000,000 in damages from defendants, including the Bank, related to these claims as well as their costs and attorneys' fees and trebled damages under RICO.

BJD, LLC and Barbara Dunning v. Enterprise Bank & Trust, et. al., Case No. 11SL-CC1331(pending in the Circuit Court of the County of St. Louis, State of Missouri). On April 4, 2011, Barbara Dunning and an affiliated entity, BJD, LLC (“BJD”), filed a lawsuit against four defendants including the Bank and the Former Trust President relating to BJD's investment in the Distinctive Notes. Plaintiffs allege that the Bank, and the other defendants, including the Former Trust President, breached their fiduciary duties and were negligent in allowing BJD to invest in the Distinctive Notes because the loan program was allegedly never funded and the assets of the borrower did not exist or were overvalued. Plaintiffs are seeking $811,875 in damages, 9% interest, punitive damages, attorneys' fees and costs.

The Company is unable to estimate a reasonably possible loss for the cases described above because the proceedings are in early stages and there are significant factual issues to be determined and resolved. The Company denies Plaintiffs' allegations and intends to vigorously defend the lawsuits.

Other
As discussed in Note 7 - Commitments and Contingencies, subsequent to the Original filing, the Company was named as a defendant in a lawsuit arising from the Restatement. See Note 7 for more information concerning such subsequently filed lawsuit and the possible effects on our business.

ITEM 1A: RISK FACTORS
 
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/A and Part I - Item 1A of our Report on Form 10-K/A for the fiscal year ended December 31, 2010, for information regarding risk factors. Other than the additional risk factors mentioned below, there are no material changes from the risk factors set forth in such Annual Report on Form 10-K/A.

We face potential risks from litigation brought against the Company and the Bank. We are from time to time involved

52



in various lawsuits and legal proceedings. As discussed in “Legal Proceedings” in Part II, Item 1 of this Form 10-Q, the Bank, along with other co-defendants, including a former President and Chief Executive Officer of the Bank's trust division, has been named as a defendant in two lawsuits filed by clients, or purported clients, of the Bank's trust division who invested in promissory notes issued by Distinctive Properties (UK) Limited, a company involved in the purchase and development of real estate in the United Kingdom. In one of the lawsuits, the plaintiffs allege that the investments in the notes were part of a multi-million dollar Ponzi scheme. While we cannot with certainty determine the potential outcome of this or any other pending or threatened litigation against the Company or the Bank, litigation-related costs and any legal liability as a result of an adverse determination with respect to one or more of these legal proceedings could have a material adverse effect on our business, cash flows, financial position and results of operations and could cause us significant reputational harm, including without limitation as a result of negative publicity the Company may face even if it prevails in such legal proceedings, which could adversely affect our business prospects.

Recently enacted financial reform legislation and rules promulgated thereunder may adversely affect us. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), was signed into law by President Obama on July 21, 2010. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States, establishes the new federal Bureau of Consumer Financial Protection (the “BCFP”), and will require the BCFP and other federal agencies to implement many new rules.

Among the many requirements in the Dodd-Frank Act for new banking regulations is a requirement for new capital regulations to be adopted within 18 months. These regulations must be at least as stringent as, and may call for higher levels of capital than, current regulations. Generally, trust preferred securities will no longer be eligible as Tier 1 capital, but the Company's currently outstanding trust preferred securities will be grandfathered and its currently outstanding TARP preferred securities will continue to qualify as Tier 1 capital.
 
Certain provisions of the Dodd-Frank Act are expected to have a near term impact on us. For example, one year after the date of its enactment, the Dodd-Frank Act eliminates the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse impact on our interest expense. The Dodd-Frank Act also permanently increases the general limit on deposit insurance for banks to $250,000 and provides that non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2012.
 
The Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding vote on executive compensation and so-called "golden parachute" payments, and authorizes the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate their own candidates using a company's proxy materials. The legislation also directs the federal banking regulators to issue rules prohibiting incentive compensation that encourages inappropriate risks.
 
The BCFP will have broad powers to promulgate and enforce new consumer protection regulations under the Dodd-Frank Act that apply to all banks, including the authority to prohibit “unfair, deceptive or abusive acts and practices.”
 
The Dodd-Frank Act and the resulting regulations will likely affect the Company's business and operations in other ways which are difficult to predict at this time. However, compliance with these new laws and regulations will result in additional costs, which may adversely impact the Company's results of operations, financial condition or liquidity, any of which may impact the market price of the Company's common stock.




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
 
Purchase and Assumption Agreement dated January 7, 2011, by and between Enterprise Bank & Trust and the Federal Deposit Insurance Corporation as Receiver for Legacy Bank (incorporated herein by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q filed on May 10, 2011.)
 
 
 
*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.
   
* Filed herewith
 
** Furnished herewith. Notwithstanding any incorporation of this Quarterly Statement on Form 10-Q/A 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 April 23, 2012.
 
 
ENTERPRISE FINANCIAL SERVICES CORP
 
 
 
By:
/s/ Peter F. Benoist
 
 
 
Peter F. Benoist
 
 
 
Chief Executive Officer
 
 
 
 
By: 
/s/ Frank H. Sanfilippo
 
 
 
Frank H. Sanfilippo
 
 
 
Chief Financial Officer
 

55