2015.6.30-10Q


 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
 
FORM 10-Q
 
[X]
 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2015.
 
 
 
[   ]
 
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______ to ______
 
 
 
 
 
Commission file number 001-15373
 
ENTERPRISE FINANCIAL SERVICES CORP

 
Incorporated in the State of Delaware
I.R.S. Employer Identification # 43-1706259
Address: 150 North Meramec
Clayton, MO 63105
Telephone: (314) 725-5500
___________________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X]  No [   ] 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files ). Yes [X]  No [   ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer [ ]
Accelerated filer [X]
  Non-accelerated filer
[ ]
Smaller reporting company [ ]
 
 
(Do not check if a smaller reporting company)
 

 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes [   ]  No [X]
 
As of July 27, 2015, the Registrant had 19,958,260 shares of outstanding common stock, $0.01 par value.
 
This document is also available through our website at http://www.enterprisebank.com.

 






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





PART 1 - ITEM 1 - FINANCIAL STATEMENTS
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except share and per share data)
June 30, 2015
 
December 31, 2014
Assets
 
 
 
Cash and due from banks
$
49,498

 
$
42,903

Federal funds sold
45

 
35

Interest-bearing deposits (including $980 and $980 pledged as collateral)
50,253

 
57,758

                  Total cash and cash equivalents
99,796

 
100,696

Interest-bearing deposits greater than 90 days
1,000

 
5,300

Securities available for sale
404,928

 
400,146

Securities held to maturity
44,973

 
45,985

Loans held for sale
5,446

 
4,033

Portfolio loans
2,542,555

 
2,433,916

   Less: Allowance for loan losses
31,765

 
30,185

Portfolio loans, net
2,510,790

 
2,403,731

Purchase credit impaired loans, net of the allowance for loan losses ($11,594 and $15,410, respectively)
76,050

 
83,693

                  Total loans, net
2,586,840

 
2,487,424

Other real estate not covered under FDIC loss share
1,933

 
1,896

Other real estate covered under FDIC loss share
7,909

 
5,944

Other investments, at cost
15,232

 
17,037

Fixed assets, net
14,726

 
14,753

Accrued interest receivable
7,920

 
7,956

State tax credits held for sale, including $9,965 and $11,689 carried at fair value, respectively
42,062

 
38,309

FDIC loss share receivable
10,332

 
15,866

Goodwill
30,334

 
30,334

Intangible assets, net
3,595

 
4,164

Other assets
94,052

 
97,160

Total assets
$
3,371,078

 
$
3,277,003

 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
Demand deposits
$
658,258

 
$
642,930

Interest-bearing transaction accounts
507,889

 
508,941

Money market accounts
925,987

 
755,569

Savings
88,494

 
78,718

Certificates of deposit:
 
 
 
$100 and over
398,333

 
377,544

Other
112,597

 
127,808

Total deposits
2,691,558

 
2,491,510

Subordinated debentures
56,807

 
56,807

Federal Home Loan Bank advances
73,000

 
144,000

Other borrowings
183,446

 
234,183

Notes payable
5,100

 
5,700

Accrued interest payable
820

 
843

Other liabilities
27,917

 
27,719

Total liabilities
3,038,648

 
2,960,762

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

 

Common stock, $0.01 par value; 30,000,000 shares authorized; 20,023,019 and 19,913,519 shares issued, respectively
200

 
199

Treasury stock, at cost; 76,000 shares
(1,743
)
 
(1,743
)
Additional paid in capital
208,541

 
207,731

Retained earnings
124,183

 
108,373

Accumulated other comprehensive income
1,249

 
1,681

Total shareholders' equity
332,430

 
316,241

Total liabilities and shareholders' equity
$
3,371,078

 
$
3,277,003

See accompanying notes to consolidated financial statements.

1



ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
 
Three months ended June 30,
 
Six months ended June 30,
(in thousands, except per share data)
2015
 
2014
 
2015
 
2014
Interest income:
 
 
 
 
 
 
 
Interest and fees on loans
$
29,875

 
$
29,743

 
$
59,483

 
$
61,187

Interest on debt securities:
 
 
 
 
 
 
 
Taxable
2,117

 
2,189

 
4,258

 
4,355

Nontaxable
285

 
299

 
582

 
598

Interest on interest-bearing deposits
38

 
36

 
85

 
102

Dividends on equity securities
37

 
42

 
95

 
91

Total interest income
32,352

 
32,309

 
64,503

 
66,333

Interest expense:
 
 
 
 
 
 
 
Interest-bearing transaction accounts
279

 
110

 
556

 
222

Money market accounts
672

 
700

 
1,314

 
1,442

Savings accounts
54

 
50

 
104

 
99

Certificates of deposit:
 
 
 
 
 
 
 
$100 and over
1,233

 
1,336

 
2,459

 
2,662

Other
361

 
419

 
726

 
843

Subordinated debentures
308

 
303

 
610

 
710

Federal Home Loan Bank advances
24

 
456

 
73

 
855

Notes payable and other borrowings
141

 
193

 
336

 
392

Total interest expense
3,072

 
3,567

 
6,178

 
7,225

Net interest income
29,280

 
28,742

 
58,325

 
59,108

Provision for portfolio loan losses
2,150

 
1,348

 
3,730

 
2,375

Provision (provision reversal) for purchase credit impaired loan losses

 
(470
)
 
(3,270
)
 
2,834

Net interest income after provision for loan losses
27,130

 
27,864

 
57,865

 
53,899

Noninterest income:
 
 
 
 
 
 
 
Wealth management revenue
1,778

 
1,715

 
3,518

 
3,437

Service charges on deposit accounts
1,998

 
1,767

 
3,854

 
3,505

Other service charges and fee income
840

 
702

 
1,593

 
1,339

Gain on sale of other real estate
9

 
717

 
29

 
1,400

Gain on state tax credits, net
74

 
207

 
748

 
704

Gain on sale of investment securities

 

 
23

 

Change in FDIC loss share receivable
(945
)
 
(2,742
)
 
(3,209
)
 
(5,152
)
Miscellaneous income
2,052

 
1,039

 
2,833

 
2,094

Total noninterest income
5,806

 
3,405

 
9,389

 
7,327

Noninterest expense:
 
 
 
 
 
 
 
Employee compensation and benefits
11,274

 
11,853

 
22,787

 
23,969

Occupancy
1,621

 
1,675

 
3,315

 
3,315

Data processing
1,127

 
1,125

 
2,157

 
2,251

FDIC and other insurance
665

 
761

 
1,391

 
1,460

Loan legal and other real estate expense
548

 
1,040

 
826

 
2,174

Professional fees
854

 
592

 
1,826

 
1,859

FDIC clawback
50

 
143

 
462

 
32

Other
3,319

 
3,256

 
6,644

 
6,487

Total noninterest expense
19,458

 
20,445

 
39,408

 
41,547

 
 
 
 
 
 
 
 
Income before income tax expense
13,478

 
10,824

 
27,846

 
19,679

Income tax expense
4,762

 
3,664

 
9,784

 
6,671

Net income
$
8,716

 
$
7,160

 
$
18,062

 
$
13,008

 
 
 
 
 
 
 
 
Earnings per common share
 
 
 
 
 
 
 
Basic
$
0.44

 
$
0.36

 
$
0.91

 
$
0.66

Diluted
0.43

 
0.36

 
0.90

 
0.66

See accompanying notes to consolidated financial statements.

2




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

 
Three months ended June 30,
 
Six months ended June 30,
(in thousands)
2015
 
2014
 
2015
 
2014
Net income
$
8,716

 
$
7,160

 
$
18,062

 
$
13,008

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gains (losses) on investment securities arising during the period, net of income tax expense for three months of $(1,322) and $1,988, and for six months of $(277) and $3,079, respectively
(2,130
)
 
3,202

 
(418
)
 
4,959

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

 

 
(14
)
 

Total other comprehensive income (loss)
(2,130
)
 
3,202

 
(432
)
 
4,959

Total comprehensive income
$
6,586

 
$
10,362

 
$
17,630

 
$
17,967


See accompanying notes to consolidated financial statements.


3



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

 
$
199

 
$
(1,743
)
 
$
207,731

 
$
108,373

 
$
1,681

 
$
316,241

Net income
 

 

 

 

 
18,062

 

 
18,062

Other comprehensive loss
 

 

 

 

 


 
(432
)
 
(432
)
Cash dividends paid on common shares, $0.1125 per share
 

 

 

 

 
(2,252
)
 

 
(2,252
)
Issuance under equity compensation plans, 109,500 shares, net
 

 
1

 

 
(1,081
)
 

 

 
(1,080
)
Share-based compensation
 

 

 

 
1,738

 

 

 
1,738

Excess tax benefit related to equity compensation plans
 

 

 

 
153

 

 

 
153

Balance June 30, 2015
 
$

 
$
200

 
$
(1,743
)
 
$
208,541

 
$
124,183

 
$
1,249

 
$
332,430

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

 
$
194

 
$
(1,743
)
 
$
200,258

 
$
85,376

 
$
(4,380
)
 
$
279,705

Net income
 

 

 

 

 
13,008

 

 
13,008

Other comprehensive income
 

 

 

 

 

 
4,959

 
4,959

Cash dividends paid on common shares, $0.105 per share
 

 

 

 

 
(2,086
)
 

 
(2,086
)
Issuance under equity compensation plans, 153,007 shares, net
 

 
1

 

 
(650
)
 

 

 
(649
)
Trust preferred securities conversion 287,852 shares
 

 
3

 

 
4,999

 

 

 
5,002

Share-based compensation
 

 

 

 
1,524

 

 

 
1,524

Excess tax benefit related to equity compensation plans
 

 

 

 
101

 

 

 
101

Balance June 30, 2014
 
$

 
$
198

 
$
(1,743
)
 
$
206,232

 
$
96,298

 
$
579

 
$
301,564


See accompanying notes to consolidated financial statements.

4



ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
Six months ended June 30,
(in thousands)
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
18,062

 
$
13,008

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation
1,009

 
1,077

Provision for loan losses
460

 
5,209

Deferred income taxes
2,803

 
3,257

Net amortization of debt securities
1,661

 
1,910

Amortization of intangible assets
569

 
651

Gain on sale of investment securities
(23
)
 

Mortgage loans originated for sale
(69,434
)
 
(31,543
)
Proceeds from mortgage loans sold
68,252

 
28,184

Gain on sale of other real estate
(29
)
 
(1,400
)
Gain on state tax credits, net
(748
)
 
(704
)
Excess tax benefit of share-based compensation
(153
)
 
(101
)
Share-based compensation
1,738

 
1,524

Valuation adjustment on other real estate
82

 
590

Net accretion of loan discount and indemnification asset
(3,382
)
 
(5,818
)
Changes in:
 
 
 
Accrued interest receivable
36

 
294

Accrued interest payable
(23
)
 
(95
)
Other assets
(2,601
)
 
(8,250
)
Other liabilities
196

 
(2,754
)
Net cash provided by operating activities
18,475

 
5,039

Cash flows from investing activities:
 
 
 
Net increase in loans
(99,282
)
 
(87,491
)
Net cash proceeds received from FDIC loss share receivable
1,574

 
4,212

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

 

Proceeds from the paydown or maturity of securities, available for sale
25,813

 
22,519

Proceeds from the paydown or maturity of securities, held to maturity
1,078

 

Proceeds from the redemption of other investments
25,746

 
8,409

Proceeds from the sale of state tax credits held for sale
4,489

 
3,639

Proceeds from the sale of other real estate
3,723

 
8,754

Payments for the purchase/origination of:
 
 
 
Available for sale debt and equity securities
(74,069
)
 
(29,853
)
Other investments
(19,641
)
 
(11,914
)
State tax credits held for sale
(3,425
)
 

Fixed assets
(983
)
 
(828
)
Net cash used by investing activities
(93,908
)
 
(82,553
)
Cash flows from financing activities:
 
 
 
Net increase in noninterest-bearing deposit accounts
15,328

 
21,614

Net increase (decrease) in interest-bearing deposit accounts
184,721

 
(91,118
)
Proceeds from Federal Home Loan Bank advances
531,900

 
278,600

Repayments of Federal Home Loan Bank advances
(602,900
)
 
(175,000
)
Repayments of notes payable
(600
)
 
(4,200
)
Net decrease in other borrowings
(50,737
)
 
(37,888
)
Cash dividends paid on common stock
(2,252
)
 
(2,086
)
Excess tax benefit of share-based compensation
153

 
101

Issuance of common stock, net
(1,080
)
 
(649
)
Net cash provided (used) by financing activities
74,533

 
(10,626
)
Net decrease in cash and cash equivalents
(900
)
 
(88,140
)
Cash and cash equivalents, beginning of period
100,696

 
210,569

Cash and cash equivalents, end of period
$
99,796

 
$
122,429

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
6,201

 
$
7,320

Income taxes
6,517

 
8,498

Noncash transactions:
 
 
 
Transfer to other real estate owned in settlement of loans
$
5,998

 
$
6,158

Sales of other real estate financed

 
1,107

Issuance of common stock from Trust Preferred Securities conversion

 
5,002


See accompanying notes to consolidated financial statements.

5



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

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Business and Consolidation

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

Operating results for the three and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2015. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014.

Basis of Financial Statement Presentation

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


6



NOTE 2 - EARNINGS PER SHARE

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

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

 
Three months ended June 30,
 
Six months ended June 30,
(in thousands, except per share data)
2015
 
2014
 
2015
 
2014
Net income as reported
$
8,716

 
$
7,160

 
$
18,062

 
$
13,008

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

 

 

 
66

Net income available to common shareholders and assumed conversions
$
8,716

 
$
7,160

 
$
18,062

 
$
13,074

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
19,978

 
19,824

 
19,958

 
19,673

Incremental shares from assumed conversions of convertible trust preferred securities

 

 

 
115

Additional dilutive common stock equivalents
190

 
139

 
211

 
168

Weighted average diluted common shares outstanding
$
20,168

 
$
19,963

 
$
20,169

 
$
19,956

 
 
 
 
 
 
 
 
Basic earnings per common share:
$
0.44

 
$
0.36

 
$
0.91

 
$
0.66

Diluted earnings per common share:
$
0.43

 
$
0.36

 
$
0.90

 
$
0.66


For the three and six months ended June 30, 2015 and 2014, the amount of common stock equivalents excluded from the earnings per share calculations because their effect was anti-dilutive was 0.2 million, and 0.3 million common stock equivalents, respectively.


7




NOTE 3 - INVESTMENTS

The following table presents the amortized cost, gross unrealized gains and losses and fair value of securities available for sale and held to maturity:
 
 
June 30, 2015
(in thousands)
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair Value
Available for sale securities:
 
 
 
 
 
 
 
    Obligations of U.S. Government-sponsored enterprises
$
99,330

 
$
769

 
$

 
$
100,099

    Obligations of states and political subdivisions
32,274

 
1,093

 
(439
)
 
32,928

    Agency mortgage-backed securities
270,785

 
3,157

 
(2,041
)
 
271,901

          Total securities available for sale
$
402,389

 
$
5,019

 
$
(2,480
)
 
$
404,928

Held to maturity securities:
 
 
 
 
 
 
 
    Obligations of states and political subdivisions
$
14,866

 
$

 
$
(460
)
 
$
14,406

    Agency mortgage-backed securities
30,107

 

 
(378
)
 
29,729

          Total securities held to maturity
$
44,973

 
$

 
$
(838
)
 
$
44,135


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

 
$
624

 
$
(153
)
 
$
91,826

    Obligations of states and political subdivisions
33,997

 
1,300

 
(416
)
 
34,881

    Agency mortgage-backed securities
271,430

 
3,577

 
(1,568
)
 
273,439

          Total securities available for sale
$
396,782

 
$
5,501

 
$
(2,137
)
 
$
400,146

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

 
$

 
$
(325
)
 
$
14,575

   Agency mortgage-backed securities
31,085

 
150

 
(15
)
 
31,220

          Total securities held to maturity
$
45,985

 
$
150

 
$
(340
)
 
$
45,795


At June 30, 2015, and December 31, 2014, there were no holdings of securities of any one issuer in an amount greater than 10% of shareholders’ equity, other than the U.S. Government agencies and sponsored enterprises. The agency mortgage-backed securities are all issued by U.S. Government-sponsored enterprises. Available for sale securities having a fair value of $256.1 million and $315.8 million at June 30, 2015, and December 31, 2014, respectively, were pledged as collateral to secure deposits of public institutions and for other purposes as required by law or contract provisions.








 

8



The amortized cost and estimated fair value of debt securities at June 30, 2015, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The weighted average life of the mortgage-backed securities is approximately 5 years.
 
 
Available for sale
 
Held to maturity
(in thousands)
Amortized Cost
 
Estimated Fair Value
 
Amortized Cost
 
Estimated Fair Value
Due in one year or less
$
3,944

 
$
3,985

 
$

 
$

Due after one year through five years
114,914

 
116,179

 
1,177

 
1,166

Due after five years through ten years
9,846

 
10,243

 
10,172

 
9,896

Due after ten years
2,900

 
2,620

 
3,517

 
3,344

Mortgage-backed securities
270,785

 
271,901

 
30,107

 
29,729

 
$
402,389

 
$
404,928

 
$
44,973

 
$
44,135



The following table represents a summary of investment securities that had an unrealized loss:
 
 
June 30, 2015
Less than 12 months
 
12 months or more
 
Total
(in thousands)
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Obligations of U.S. Government-sponsored enterprises
$

 
$

 
$

 
$

 
$

 
$

Obligations of states and political subdivisions
18,204

 
574

 
4,234

 
325

 
22,438

 
899

Agency mortgage-backed securities
113,349

 
1,683

 
21,274

 
736

 
134,623

 
2,419

 
$
131,553

 
$
2,257

 
$
25,508

 
$
1,061

 
$
157,061

 
$
3,318

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

 
$
10

 
$
24,852

 
$
143

 
$
30,251

 
$
153

Obligations of states and political subdivisions
16,827

 
343

 
5,349

 
398

 
22,176

 
741

Agency mortgage-backed securities
26,367

 
56

 
97,054

 
1,527

 
123,421

 
1,583

 
$
48,593

 
$
409

 
$
127,255

 
$
2,068

 
$
175,848

 
$
2,477



The unrealized losses at both June 30, 2015, and December 31, 2014, were primarily attributable to changes in market interest rates since the securities were purchased. Management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. This analysis requires management to consider various factors, which include among other considerations (1) the present value of the cash flows expected to be collected compared to the amortized cost of the security, (2) duration and magnitude of the decline in value, (3) the financial condition of the issuer or issuers, (4) structure of the security, and (5) the intent to sell the security or whether it is more likely than not the Company would be required to sell the security before its anticipated recovery in market value. At June 30, 2015, management performed its quarterly analysis of all securities with an unrealized loss and concluded no individual securities were other-than-temporarily impaired.


9



 The gross gains and gross losses realized from sales of available for sale investment securities were as follows:
 
 
Three months ended June 30,
 
Six months ended June 30,
(in thousands)
2015
 
2014
 
2015
 
2014
Gross gains realized
$

 
$

 
$
63

 
$

Gross losses realized

 

 
(40
)
 

Proceeds from sales

 

 
41,069

 



NOTE 4 - PORTFOLIO LOANS

Below is a summary of Portfolio loans by category at June 30, 2015 and December 31, 2014:
 
(in thousands)
June 30, 2015
 
December 31, 2014
Commercial and industrial
$
1,335,008

 
$
1,270,259

Real estate loans:
 
 
 
    Commercial - investor owned
418,111

 
413,026

    Commercial - owner occupied
371,030

 
357,503

    Construction and land development
150,740

 
144,773

    Residential
185,587

 
185,252

Total real estate loans
1,125,468

 
1,100,554

Consumer and other
81,051

 
62,208

Portfolio loans
2,541,527

 
2,433,021

Unearned loan costs, net
1,028

 
895

    Portfolio loans, including unearned loan costs
$
2,542,555

 
$
2,433,916



A summary of the year-to-date activity in the allowance for loan losses and the recorded investment in Portfolio loans by class and category based on impairment method through June 30, 2015, and at December 31, 2014, is as follows:

(in thousands)
Commercial and industrial
 
CRE - investor owned
 
CRE -
owner occupied
 
Construction and land development
 
Residential real estate
 
Consumer and other
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at
December 31, 2014
$
17,004

 
$
4,598

 
$
3,625

 
$
1,720

 
$
2,830

 
$
408

 
$
30,185

Provision charged to expense
823

 
(12
)
 
(175
)
 
914

 
74

 
(44
)
 
1,580

Losses charged off
(1,484
)
 

 

 

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

 
29

 
127

 
60

 
26

 
80

 
1,091

Balance at
March 31, 2015
$
17,112

 
$
4,615

 
$
3,577

 
$
2,694

 
$
1,857

 
$
433

 
$
30,288

Provision charged to expense
2,927

 
(519
)
 
(347
)
 
(91
)
 
100

 
80

 
2,150

Losses charged off
(1,578
)
 
(664
)
 

 
(350
)
 

 
(4
)
 
(2,596
)
Recoveries
420

 
13

 
1,287

 
115

 
87

 
1

 
1,923

Balance at
June 30, 2015
$
18,881

 
$
3,445

 
$
4,517

 
$
2,368

 
$
2,044

 
$
510

 
$
31,765



10



(in thousands)
Commercial and industrial
 
CRE - investor owned
 
CRE -
owner occupied
 
Construction and land development
 
Residential real estate
 
Consumer and other
 
Total
Balance June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses - Ending balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
1,933

 
$

 
$
287

 
$
958

 
$

 
$

 
$
3,178

Collectively evaluated for impairment
16,948

 
3,445

 
4,230

 
1,410

 
2,044

 
510

 
28,587

Total
$
18,881

 
$
3,445

 
$
4,517

 
$
2,368

 
$
2,044

 
$
510

 
$
31,765

Loans - Ending balance:
 
 
 
 
 
 
 

 
 
 
 
 
 
Individually evaluated for impairment
$
5,998

 
$
2,261

 
$
3,395

 
$
5,968

 
$
2,507

 
$

 
$
20,129

Collectively evaluated for impairment
1,329,010

 
415,850

 
367,635

 
144,772

 
183,080

 
82,079

 
2,522,426

Total
$
1,335,008

 
$
418,111

 
$
371,030

 
$
150,740

 
$
185,587

 
$
82,079

 
$
2,542,555

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

 
$

 
$
286

 
$
352

 
$
1,052

 
$

 
$
2,394

Collectively evaluated for impairment
16,300

 
4,598

 
3,339

 
1,368

 
1,778

 
408

 
27,791

Total
$
17,004

 
$
4,598

 
$
3,625

 
$
1,720

 
$
2,830

 
$
408

 
$
30,185

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

 
$
5,036

 
$
3,384

 
$
6,866

 
$
3,082

 
$

 
$
24,366

Collectively evaluated for impairment
1,264,261

 
407,990

 
354,119

 
137,907

 
182,170

 
63,103

 
2,409,550

Total
$
1,270,259

 
$
413,026

 
$
357,503

 
$
144,773

 
$
185,252

 
$
63,103

 
$
2,433,916


A summary of Portfolio loans individually evaluated for impairment by category at June 30, 2015 and December 31, 2014, is as follows:

 
June 30, 2015
(in thousands)
Unpaid
Contractual
Principal Balance
 
Recorded
Investment
With No Allowance
 
Recorded
Investment
With
Allowance
 
Total
Recorded Investment
 
Related Allowance
 
Average
Recorded Investment
Commercial and industrial
$
7,746

 
$
452

 
$
5,638

 
$
6,090

 
$
1,933

 
$
6,728

Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
    Commercial - investor owned
2,350

 
1,705

 

 
1,705

 

 
863

    Commercial - owner occupied
1,433

 
615

 
747

 
1,362

 
287

 
1,213

    Construction and land development
7,223

 
3,039

 
3,499

 
6,538

 
958

 
6,449

    Residential
3,558

 
2,576

 

 
2,576

 

 
2,773

Consumer and other

 

 

 

 

 

Total
$
22,310

 
$
8,387

 
$
9,884

 
$
18,271

 
$
3,178

 
$
18,026



11



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

 
$
2,609

 
$
3,464

 
$
6,073

 
$
704

 
$
4,136

Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
    Commercial - investor owned
5,036

 

 
5,187

 
5,187

 

 
4,375

    Commercial - owner occupied
1,376

 
770

 
519

 
1,289

 
286

 
1,281

    Construction and land development
7,961

 
419

 
6,929

 
7,348

 
352

 
7,280

    Residential
3,082

 
2,943

 
150

 
3,093

 
1,052

 
954

Consumer and other

 

 

 

 

 
581

Total
$
25,497

 
$
6,741

 
$
16,249

 
$
22,990

 
$
2,394

 
$
18,607


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

 
Three months ended June 30,
 
Six months ended June 30,
(in thousands)
2015
 
2014
 
2015
 
2014
Total interest income that would have been recognized under original terms
$
229

 
$
362

 
$
544

 
$
682

Total cash received and recognized as interest income on non-accrual loans
98

 
19

 
125

 
28

Total interest income recognized on impaired loans
14

 
10

 
27

 
16

 
 
 
 
 
 
 
 

There were no loans over 90 days past due and still accruing interest at June 30, 2015 or December 31, 2014. At June 30, 2015, there were $1.6 million unadvanced commitments on impaired loans. Other liabilities include approximately $0.2 million for estimated losses attributable to the unadvanced commitments.

The recorded investment in impaired Portfolio loans by category at June 30, 2015 and December 31, 2014, is as follows:
 
 
June 30, 2015
(in thousands)
Non-accrual
 
Restructured
 
Loans over 90 days past due and still accruing interest
 
Total
Commercial and industrial
$
6,090

 
$

 
$

 
$
6,090

Real estate loans:
 
 
 
 
 
 
 
    Commercial - investor owned
1,705

 

 

 
1,705

    Commercial - owner occupied
615

 
747

 

 
1,362

    Construction and land development
6,538

 

 

 
6,538

    Residential
2,576

 

 

 
2,576

Consumer and other

 

 

 

       Total
$
17,524

 
$
747

 
$

 
$
18,271



12



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

 
$

 
$

 
$
6,073

Real estate loans:
 
 
 
 
 
 
 
    Commercial - investor owned
4,597

 
590

 

 
5,187

    Commercial - owner occupied
519

 
770

 

 
1,289

    Construction and land development
7,348

 

 

 
7,348

    Residential
3,093

 

 

 
3,093

Consumer and other

 

 

 

       Total
$
21,630

 
$
1,360

 
$

 
$
22,990



The recorded investment by category for the Portfolio loans that have been restructured during the three and six months ended June 30, 2015 and 2014, is as follows:

 
Three months ended June 30, 2015
 
Three months ended June 30, 2014
(in thousands, except for number of loans)
Number of Loans
 
Pre-Modification Outstanding
Recorded Balance
 
Post-Modification Outstanding
Recorded Balance
 
Number of Loans
 
Pre-Modification Outstanding
Recorded Balance
 
Post-Modification Outstanding
Recorded Balance
Commercial and industrial

 
$

 
$

 

 
$

 
$

Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
     Commercial - investor owned

 

 

 
1

 
603

 
603

     Commercial - owner occupied

 

 

 

 

 

     Construction and land development

 

 

 

 

 

     Residential

 

 

 
1

 
125

 
125

Consumer and other

 

 

 

 

 

  Total

 
$

 
$

 
2

 
$
728

 
$
728


 
Six months ended June 30, 2015
 
Six months ended June 30, 2014
(in thousands, except for number of loans)
Number of Loans
 
Pre-Modification Outstanding
Recorded Balance
 
Post-Modification Outstanding
Recorded Balance
 
Number of Loans
 
Pre-Modification Outstanding
Recorded Balance
 
Post-Modification Outstanding
Recorded Balance
Commercial and industrial

 
$

 
$

 

 
$

 
$

Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
     Commercial - investor owned

 

 

 
1

 
603

 
603

     Commercial - owner occupied

 

 

 
2

 
1,292

 
1,042

     Construction and land development

 

 

 

 

 

     Residential

 

 

 
1

 
125

 
125

Consumer and other

 

 

 

 

 

  Total

 
$

 
$

 
4

 
$
2,020

 
$
1,770


The restructured Portfolio loans primarily resulted from interest rate concessions and changing the terms of the loans. As of June 30, 2015, the Company allocated $0.3 million of specific reserves to the loans that have been restructured.

13




There were no Portfolio loans that were restructured and subsequently defaulted during the six months ended June 30, 2015 or 2014.

The aging of the recorded investment in past due Portfolio loans by portfolio class and category at June 30, 2015 and December 31, 2014 is shown below.

 
June 30, 2015
(in thousands)
30-89 Days
 Past Due
 
90 or More
Days
Past Due
 
Total
Past Due
 
Current
 
Total
    Commercial and industrial
$
1,643

 
$
2,864

 
$
4,507

 
$
1,330,501

 
$
1,335,008

    Real estate loans:
 
 
 
 
 
 
 
 
 
       Commercial - investor owned
1,685

 

 
1,685

 
416,426

 
418,111

       Commercial - owner occupied

 
594

 
594

 
370,436

 
371,030

       Construction and land development

 
3,226

 
3,226

 
147,514

 
150,740

       Residential
133

 
2,506

 
2,639

 
182,948

 
185,587

    Consumer and other
4

 

 
4

 
82,075

 
82,079

          Total
$
3,465

 
$
9,190

 
$
12,655

 
$
2,529,900

 
$
2,542,555


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

 
$
232

 
$
3,291

 
$
1,266,968

 
$
1,270,259

    Real estate loans:
 
 
 
 
 
 
 
 
 
       Commercial - investor owned
261

 
4,450

 
4,711

 
408,315

 
413,026

       Commercial - owner occupied
766

 
496

 
1,262

 
356,241

 
357,503

       Construction and land development
702

 
2,524

 
3,226

 
141,547

 
144,773

       Residential
168

 

 
168

 
185,084

 
185,252

    Consumer and other
8

 

 
8

 
63,095

 
63,103

          Total
$
4,964

 
$
7,702

 
$
12,666

 
$
2,421,250

 
$
2,433,916



The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, and current economic factors among other factors. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:
Grades 1, 2, and 3 Includes loans to borrowers with a continuous record of strong earnings, sound balance sheet condition and capitalization, ample liquidity with solid cash flow, and whose management team has experience and depth within their industry.
Grade 4 Includes loans to borrowers with positive trends in profitability, satisfactory capitalization and balance sheet condition, and sufficient liquidity and cash flow.
Grade 5 Includes loans to borrowers that may display fluctuating trends in sales, profitability, capitalization, liquidity, and cash flow.
Grade 6 Includes loans to borrowers where an adverse change or perceived weakness has occurred, but may be correctable in the near future. Alternatively, this rating category may also include circumstances where the borrower is starting to reverse a negative trend or condition, or has recently been upgraded from a 7, 8, or 9 rating.

14



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

The recorded investment by risk category of the Portfolio loans by portfolio class and category at June 30, 2015, which is based upon the most recent analysis performed, and December 31, 2014 is as follows:

 
June 30, 2015
(in thousands)
Pass (1-6)
 
Watch (7)
 
Substandard (8)
 
Doubtful (9)
 
Total
    Commercial and industrial
$
1,223,114

 
$
81,660

 
$
30,234

 
$

 
$
1,335,008

    Real estate loans:
 
 
 
 
 
 
 
 
 
       Commercial - investor owned
383,373

 
23,703

 
11,035

 

 
418,111

       Commercial - owner occupied
349,481

 
17,062

 
4,487

 

 
371,030

       Construction and land development
130,879

 
12,300

 
6,859

 
702

 
150,740

       Residential
168,995

 
10,610

 
5,982

 

 
185,587

    Consumer and other
81,545

 
44

 
490

 

 
82,079

          Total
$
2,337,387

 
$
145,379

 
$
59,087

 
$
702

 
$
2,542,555


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

 
$
62,315

 
$
40,193

 
$

 
$
1,270,259

    Real estate loans:
 
 
 
 
 
 
 
 
 
       Commercial - investor owned
372,818

 
24,088

 
16,120

 

 
413,026

       Commercial - owner occupied
334,347

 
18,025

 
5,131

 

 
357,503

       Construction and land development
123,260

 
12,993

 
8,520

 

 
144,773

       Residential
168,543

 
11,012

 
5,697

 

 
185,252

    Consumer and other
62,711

 
51

 
341

 

 
63,103

          Total
$
2,229,430

 
$
128,484

 
$
76,002

 
$

 
$
2,433,916



15




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

Below is a summary of PCI loans by category at June 30, 2015 and December 31, 2014:
 
 
June 30, 2015
 
December 31, 2014
(in thousands)
Weighted-
Average
Risk Rating
Recorded
Investment
PCI Loans
 
Weighted-
Average
Risk Rating
Recorded
Investment
PCI Loans
Commercial and industrial
6.51
$
4,325

 
6.57
$
4,012

Real estate loans:
 
 
 
 
 
    Commercial - investor owned
7.00
32,615

 
7.07
39,066

    Commercial - owner occupied
6.37
21,381

 
6.35
22,695

    Construction and land development
6.29
7,412

 
6.16
7,740

    Residential
5.54
21,629

 
5.54
25,121

Total real estate loans
 
83,037

 
 
94,622

Consumer and other
5.15
282

 
5.39
469

    Purchase credit impaired loans
 
$
87,644

 
 
$
99,103


The aging of the recorded investment in past due PCI loans by portfolio class and category at June 30, 2015 and December 31, 2014 is shown below:

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

 
$
36

 
$
36

 
$
4,289

 
$
4,325

    Real estate loans:
 
 
 
 
 
 
 
 
 
       Commercial - investor owned
2,184

 
3,356

 
5,540

 
27,075

 
32,615

       Commercial - owner occupied
647

 
551

 
1,198

 
20,183

 
21,381

       Construction and land development
455

 

 
455

 
6,957

 
7,412

       Residential
170

 
988

 
1,158

 
20,471

 
21,629

    Consumer and other
9

 

 
9

 
273

 
282

          Total
$
3,465

 
$
4,931

 
$
8,396

 
$
79,248

 
$
87,644


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

 
$
16

 
$
16

 
$
3,996

 
$
4,012

    Real estate loans:
 
 
 
 
 
 
 
 
 
       Commercial - investor owned
878

 
6,484

 
7,362

 
31,704

 
39,066

       Commercial - owner occupied

 
2,759

 
2,759

 
19,936

 
22,695

       Construction and land development
774

 

 
774

 
6,966

 
7,740

       Residential
2,020

 
1,451

 
3,471

 
21,650

 
25,121

    Consumer and other

 
12

 
12

 
457

 
469

          Total
$
3,672

 
$
10,722

 
$
14,394

 
$
84,709

 
$
99,103



16



The following table is a rollforward of PCI loans, net of the allowance for loan losses, for the six months ended June 30, 2015 and 2014.

(in thousands)
Contractual Cashflows
 
Non-accretable Difference
 
Accretable Yield
 
Carrying Amount
Balance December 31, 2014
$
178,145

 
$
65,719

 
$
28,733

 
$
83,693

Principal reductions and interest payments
(13,214
)
 

 

 
(13,214
)
Accretion of loan discount

 

 
(5,989
)
 
5,989

Changes in contractual and expected cash flows due to remeasurement
(12,100
)
 
(26,187
)
 
5,304

 
8,783

Reductions due to disposals
(13,831
)
 
(2,794
)
 
(1,836
)
 
(9,201
)
Balance June 30, 2015
$
139,000

 
$
36,738

 
$
26,212

 
$
76,050

 
 
 
 
 
 
 
 
Balance December 31, 2013
$
266,068

 
$
87,438

 
$
53,530

 
$
125,100

Principal reductions and interest payments
(18,089
)
 

 

 
(18,089
)
Accretion of loan discount

 

 
(8,601
)
 
8,601

Changes in contractual and expected cash flows due to remeasurement
(3,871
)
 
5

 
(5,693
)
 
1,817

Reductions due to disposals
(25,552
)
 
(5,440
)
 
(3,648
)
 
(16,464
)
Balance June 30, 2014
$
218,556

 
$
82,003

 
$
35,588

 
$
100,965


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

A summary of activity in the FDIC loss share receivable for the six months ended June 30, 2015 is as follows:

(in thousands)
 
Balance December 31, 2014
$
15,866

Adjustments not reflected in income:
 
Cash received from the FDIC for covered assets
(1,574
)
FDIC reimbursable losses, net
(751
)
Adjustments reflected in income:
 
Amortization, net
215

Loan impairment
(2,589
)
Reductions for payments on covered assets in excess of expected cash flows
(835
)
Balance June 30, 2015
$
10,332



Outstanding customer balances on PCI loans were $117.7 million and $135.3 million as of June 30, 2015, and December 31, 2014, respectively.



17



NOTE 6 - COMMITMENTS AND CONTINGENCIES

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

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

The Company uses the same credit policies in making commitments and conditional obligations as it does for financial instruments included on its consolidated balance sheets. At June 30, 2015, there were $1.6 million of unadvanced commitments on impaired loans.

The contractual amounts of off-balance-sheet financial instruments as of June 30, 2015, and December 31, 2014, are as follows:
 
(in thousands)
June 30,
2015
 
December 31,
2014
Commitments to extend credit
$
1,027,745

 
$
947,424

Standby letters of credit
52,657

 
50,108


Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments usually have fixed expiration dates or other termination clauses, may have significant usage restrictions, and may require payment of a fee. Of the total commitments to extend credit at June 30, 2015, and December 31, 2014, approximately $87.9 million and $65.9 million, respectively, represent fixed rate loan commitments. Since certain of the commitments may expire without being drawn upon or may be revoked, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, premises and equipment, and real estate. Other liabilities include approximately $0.2 million for estimated losses attributable to the unadvanced commitments at June 30, 2015 and December 31, 2014.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These standby letters of credit are issued to support contractual obligations of the Company’s customers. The credit risk involved in issuing letters of credit is essentially the same as the risk involved in extending loans to customers. The approximate remaining term of standby letters of credit range from 1 month to 2.8 years at June 30, 2015.

Contingencies

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


18



NOTE 7 - DERIVATIVE FINANCIAL INSTRUMENTS

Client-Related Derivative Instruments. The Company enters into interest rate swaps to allow customers to hedge changes in fair value of certain loans. The table below summarizes the notional amounts and fair values of the client-related derivative instruments:
 
 
Asset Derivatives
(Other Assets)
 
Liability Derivatives
(Other Liabilities)
 
Notional Amount
 
Fair Value
 
Fair Value
(in thousands)
June 30,
2015
 
December 31,
2014
 
June 30,
2015
 
December 31,
2014
 
June 30,
2015
 
December 31,
2014
Non-designated hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
$
148,878

 
$
141,263

 
$
1,166

 
$
907

 
$
1,166

 
$
907


Changes in the fair value of client-related derivative instruments are recognized currently in operations. For the three and six months ended June 30, 2015 and 2014, the gains and losses offset each other due to the Company's hedging of the client swaps with other bank counterparties.

NOTE 8 - FAIR VALUE MEASUREMENTS

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

The following table summarizes financial instruments measured at fair value on a recurring basis as of June 30, 2015 and December 31, 2014, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
 
 
June 30, 2015
(in thousands)
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
 
Significant
Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total Fair
Value
Assets
 
 
 
 
 
 
 
Securities available for sale
 
 
 
 
 
 
 
Obligations of U.S. Government-sponsored enterprises
$

 
$
100,099

 
$

 
$
100,099

Obligations of states and political subdivisions

 
29,858

 
3,070

 
32,928

Residential mortgage-backed securities

 
271,901

 

 
271,901

Total securities available for sale
$

 
$
401,858

 
$
3,070

 
$
404,928

State tax credits held for sale

 

 
9,965

 
9,965

Derivative financial instruments

 
1,166

 

 
1,166

Total assets
$

 
$
403,024

 
$
13,035

 
$
416,059

 
 
 
 
 
 
 
 
Liabilities
 

 
 
 
 

 
 
Derivative financial instruments
$

 
$
1,166

 
$

 
$
1,166

Total liabilities
$

 
$
1,166

 
$

 
$
1,166

 
 
 
 
 
 
 
 


19



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

 
$
91,826

 
$

 
$
91,826

Obligations of states and political subdivisions

 
31,822

 
3,059

 
34,881

Residential mortgage-backed securities

 
273,439

 

 
273,439

Total securities available for sale
$

 
$
397,087

 
$
3,059

 
$
400,146

State tax credits held for sale

 

 
11,689

 
11,689

Derivative financial instruments

 
909

 

 
909

Total assets
$

 
$
397,996

 
$
14,748

 
$
412,744

 
 
 
 
 
 
 
 
Liabilities
 

 
 
 
 

 
 
Derivative financial instruments
$

 
$
907

 
$

 
$
907

Total liabilities
$

 
$
907

 
$

 
$
907

 
 
 
 
 
 
 
 

Securities available for sale. Securities classified as available for sale are reported at fair value utilizing Level 2 and Level 3 inputs. Fair values for Level 2 securities are based upon dealer quotes, market spreads, the U.S. Treasury yield curve, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions at the security level. At June 30, 2015, Level 3 securities available for sale consist primarily of three Auction Rate Securities that are valued based on the securities' estimated cash flows, yields of comparable securities, and live trading levels.
Portfolio Loans. Certain fixed rate portfolio loans are accounted for as trading instruments and reported at fair value. Fair value on these loans is determined using a third party valuation model with observable Level 2 market data inputs.
State tax credits held for sale. At June 30, 2015, of the $42.1 million of state tax credits held for sale on the condensed consolidated balance sheet, approximately $10.0 million were carried at fair value. The remaining $32.1 million of state tax credits were accounted for at cost.
The Company is not aware of an active market that exists for the 10-year streams of state tax credit financial instruments. However, the Company’s principal market for these tax credits consists of Missouri state residents who buy these credits and local and regional accounting firms who broker them. As such, the Company employed a discounted cash flow analysis (income approach) to determine the fair value.
The fair value measurement is calculated using an internal valuation model with market data including discounted cash flows based upon the terms and conditions of the tax credits. If the underlying project remains in compliance with the various federal and state rules governing the tax credit program, each project will generate about 10 years of tax credits. The inputs to the discounted cash flow calculation include: the amount of tax credits generated each year, the anticipated sale price of the tax credit, the timing of the sale and a discount rate. The discount rate is estimated using the LIBOR swap curve at a point equal to the remaining life in years of credits plus a 205 basis point spread. With the exception of the discount rate, the other inputs to the fair value calculation are observable and readily available. The discount rate is considered a Level 3 input because it is an “unobservable input” and is based on the Company’s assumptions. An increase in the discount rate utilized would generally result in a lower estimated fair value of the tax credits. Alternatively, a decrease in the discount rate utilized would generally result in a higher estimated fair value of the tax credits. Given the significance of this input to the fair value calculation, the state tax credit assets are reported as Level 3 assets.

20



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 June 30, 2015 and 2014.
Purchases, sales, issuances and settlements. There were no Level 3 purchases during the quarter ended June 30, 2015 or 2014.
Transfers in and/or out of Level 3. There were no Level 3 transfers during the quarter ended June 30, 2015 and 2014.
 
Securities available for sale, at fair value
Three months ended June 30,
 
Six months ended June 30,
(in thousands)
2015
 
2014
 
2015
 
2014
Beginning balance
$
3,071

 
$
3,046

 
$
3,059

 
$
3,040

   Total gains:
 
 
 
 
 
 
 
Included in other comprehensive income
(1
)
 
5

 
11

 
11

   Purchases, sales, issuances and settlements:
 
 
 
 
 
 
 
Purchases

 

 

 

Transfer in and/or out of Level 3

 

 

 

Ending balance
$
3,070

 
$
3,051

 
$
3,070

 
$
3,051

 
 
 
 
 
 
 
 
Change in unrealized gains relating to
assets still held at the reporting date
$
(1
)
 
$
5

 
$
11

 
$
11



 
State tax credits held for sale
Three months ended June 30,
 
Six months ended June 30,
(in thousands)
2015
 
2014
 
2015
 
2014
Beginning balance
$
10,286

 
$
14,900

 
$
11,689

 
$
16,491

   Total gains:
 
 
 
 
 
 
 
Included in earnings
66

 
142

 
194

 
260

   Purchases, sales, issuances and settlements:
 
 
 
 
 
 
 
Sales
(387
)
 
(57
)
 
(1,918
)
 
(1,766
)
Ending balance
$
9,965

 
$
14,985

 
$
9,965

 
$
14,985

 
 
 
 
 
 
 
 
Change in unrealized gains relating to
assets still held at the reporting date
$
(36
)
 
$
130

 
$
(310
)
 
$
(204
)







21



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 June 30, 2015.
 
 
(1)
 
(1)
 
(1)
 
(1)
 
 
 
 
(in thousands)
Total Fair Value
 
Quoted Prices in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total losses for the three
months ended
June 30, 2015
 
Total losses
gains for the six months ended
June 30, 2015
Impaired loans
$
12,608

 
$

 
$

 
$
12,608

 
$
(2,596
)
 
$
(5,164
)
Other real estate
1,270

 

 

 
1,270

 
(41
)
 
(82
)
Total
$
13,878

 
$

 
$

 
$
13,878

 
$
(2,637
)
 
$
(5,246
)

(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 June 30, 2015 and December 31, 2014.

 
June 30, 2015
 
December 31, 2014
(in thousands)
Carrying Amount
 
Estimated fair value
 
Carrying Amount
 
Estimated fair value
Balance sheet assets
 
 
 
 
 
 
 
Cash and due from banks
$
49,498

 
$
49,498

 
$
42,903

 
$
42,903

Federal funds sold
45

 
45

 
35

 
35

Interest-bearing deposits
51,253

 
51,253

 
63,058

 
63,058

Securities available for sale
404,928

 
404,928

 
400,146

 
400,146

Securities held to maturity
44,973

 
44,135

 
45,985

 
45,795

Other investments, at cost
15,232

 
15,232

 
17,037

 
17,037

Loans held for sale
5,446

 
5,446

 
4,033

 
4,033

Derivative financial instruments
1,166

 
1,166

 
909

 
909

Portfolio loans, net
2,586,840

 
2,581,224

 
2,487,424

 
2,482,700

State tax credits, held for sale
42,062

 
46,549

 
38,309

 
42,970

Accrued interest receivable
7,920

 
7,920

 
7,956

 
7,956

 
 
 
 
 
 
 
 
Balance sheet liabilities
 
 
 
 
 
 
 
Deposits
2,691,558

 
2,693,784

 
2,491,510

 
2,494,624

Subordinated debentures
56,807

 
34,529

 
56,807

 
34,124

Federal Home Loan Bank advances
73,000

 
72,998

 
144,000

 
144,000

Other borrowings
188,546

 
188,533

 
239,883

 
239,950

Derivative financial instruments
1,166

 
1,166

 
907

 
907

Accrued interest payable
820

 
820

 
843

 
843



22



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

The following table presents the level in the fair value hierarchy for the estimated fair values of only the Company’s financial instruments that are not already presented on the condensed consolidated balance sheets at fair value at June 30, 2015, and December 31, 2014.
 
 
Estimated Fair Value Measurement at Reporting Date Using
 
Balance at
June 30, 2015
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Financial Assets:
 
 
 
 
 
 
 
Securities held to maturity
$

 
$
44,135

 
$

 
$
44,135

Portfolio loans, net

 

 
2,581,224

 
2,581,224

State tax credits, held for sale

 

 
36,584

 
36,584

Financial Liabilities:
 
 
 
 
 
 
 
Deposits
2,180,628

 

 
513,156

 
2,693,784

Subordinated debentures

 
34,529

 

 
34,529

Federal Home Loan Bank advances

 
72,998

 

 
72,998

Other borrowings

 
188,533

 

 
188,533

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

 
$
45,795

 
$

 
$
45,795

Portfolio loans, net

 

 
2,482,700

 
2,482,700

State tax credits, held for sale

 

 
31,281

 
31,281

Financial Liabilities:
 
 
 
 
 
 
 
Deposits
1,986,158

 

 
508,466

 
2,494,624

Subordinated debentures

 
34,124

 

 
34,124

Federal Home Loan Bank advances

 
144,000

 

 
144,000

Other borrowings

 
239,950

 

 
239,950



NOTE 9 - NEW AUTHORITATIVE ACCOUNTING GUIDANCE

FASB ASU 2014-09, "Revenue from Contracts with Customers" In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”. The objective of ASU 2014-09 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle of ASU 2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the new guidance, an entity will (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract’s performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. The new guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2016 for public companies. Early adoption is not permitted. Entities have the option of using either a full retrospective or modified approach to adopt ASU 2014-09. In April 2015, the FASB tentatively decided to extend the adoption date to annual periods beginning after December 15, 2017, and interim periods within those years. The FASB announced they intend to expose this tentative decision for a 30-day comment period under a

23



proposed ASU during the second quarter of 2015. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on its financial statements nor decided upon the method of adoption.

FASB ASU 2014-11, "Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures" In June 2014, the FASB issued ASU No. 2014-11, "Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures." The objective of ASU 2014-11 is to amend the accounting for certain secured financing transactions, and requires enhanced disclosures with respect to transactions recognized as sales in which exposure to the derecognized asset is retained through a separate agreement with the counterparty. In addition, the guidance requires enhanced disclosures with respect to the types and quality of financial assets pledged in secured financing transactions. The guidance became effective in the first quarter of 2015, except for the disclosures regarding the types and quality of financial assets pledged, which became effective in the second quarter of 2015. The adoption of the guidance did not have a material impact on the Company's consolidated balance sheets or statements of operations.


FASB ASU 2015-03, "Interest-Imputation of Interest (Subtopic 835-30): FASB Accounting Standards Codification-Simplifying the Presentation of Debt Issuance Costs" In April 2015, the FASB issued ASU No. 2015-03, "Interest-Imputation of Interest (Subtopic 835-30): FASB Accounting Standards Codification-Simplifying the Presentation of Debt Issuance Costs." ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The objective is to reduce cost and complexity in accounting standards while maintaining the usefulness of information being provided to users of financial statements. The guidance becomes effective in the first quarter of 2016 and requires the Company to apply the new guidance on a retrospective basis upon adoption, but early adoption is permitted for financial statements that have not been previously issued. The Company is currently evaluating the effect of this guidance on its consolidated balance sheets and statements of operations.

24



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

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

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

Introduction

The following discussion describes the significant changes to the financial condition of the Company that have occurred during the first six months of 2015 compared to the financial condition as of December 31, 2014. In addition, this discussion summarizes the significant factors affecting the results of operations, liquidity and cash flows of the Company for the three and six months ended June 30, 2015, compared to the same periods in 2014. This discussion should be read in conjunction with the accompanying condensed consolidated financial statements included in this report and our Annual Report on Form 10-K for the year ended December 31, 2014.

 

25



Executive Summary

Below are highlights of our financial performance for the quarter and year to date period ended June 30, 2015, as compared to the linked quarter ended March 31, 2015, and prior year quarter and year to date period ended June 30, 2014.

(in thousands, except per share data)
For the Quarter ended and At
 
For the Six Months ended
June 30, 2015
 
March 31, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
EARNINGS
 
 
 
 
 
 
 
 
 
Total interest income
$
32,352

 
$
32,151

 
$
32,309

 
$
64,503

 
$
66,333

Total interest expense
3,072

 
3,106

 
3,567

 
6,178

 
7,225

Net interest income
29,280

 
29,045

 
28,742

 
58,325

 
59,108

Provision for portfolio loans
2,150

 
1,580

 
1,348

 
3,730

 
2,375

Provision (provision reversal) for purchase credit impaired loans

 
(3,270
)
 
(470
)
 
(3,270
)
 
2,834

Net interest income after provision for loan losses
27,130

 
30,735

 
27,864

 
57,865

 
53,899

 
 
 
 
 
 
 
 
 
 
Core noninterest income
6,741

 
5,839

 
5,983

 
12,580

 
12,184

Other
(935
)
 
(2,256
)
 
(2,578
)
 
(3,191
)
 
(4,857
)
Total noninterest income
5,806

 
3,583

 
3,405

 
9,389

 
7,327

 
 
 
 
 
 
 
 
 
 
Total noninterest expenses
19,458

 
19,950

 
20,445

 
39,408

 
41,547

Income before income tax expense
13,478

 
14,368

 
10,824

 
27,846

 
19,679

Income tax expense
4,762

 
5,022

 
3,664

 
9,784

 
6,671

Net income
$
8,716

 
$
9,346

 
$
7,160

 
$
18,062

 
$
13,008

 
 
 
 
 
 
 
 
 
 
Basic earnings per share
$
0.44

 
$
0.47

 
$
0.36

 
$
0.91

 
$
0.66

Diluted earnings per share
0.43

 
0.46

 
0.36

 
0.90

 
0.66

 
 
 
 
 
 
 
 
 
 
Return on average assets
1.06
%
 
1.16
%
 
0.92
%
 
1.11
%
 
0.84
%
Return on average common equity
10.56
%
 
11.78
%
 
9.65
%
 
11.16
%
 
8.97
%
Return on average tangible common equity
11.77
%
 
13.19
%
 
10.95
%
 
12.47
%
 
10.21
%
Net interest margin (fully tax equivalent)
3.85
%
 
3.92
%
 
4.04
%
 
3.88
%
 
4.21
%
Efficiency ratio
55.46
%
 
61.14
%
 
63.60
%
 
58.20
%
 
62.54
%
 
 
 
 
 
 
 
 
 
 
ASSET QUALITY (1)
 
 
 
 
 
 
 
 
 
Net charge-offs
$
672

 
$
1,478

 
$
831

 
$
2,150

 
$
1,242

Nonperforming loans
17,498

 
15,143

 
19,287

 
 
 
 
Classified assets
61,722

 
63,001

 
85,445

 
 
 
 
Nonperforming loans to total loans
0.69
%
 
0.62
%
 
0.86
%
 
 
 
 
Nonperforming assets to total assets
0.58
%
 
0.52
%
 
0.85
%
 
 
 
 
Allowance for loan losses to total loans
1.25
%
 
1.24
%
 
1.26
%
 
 
 
 
Net charge-offs to average loans (annualized)
0.11
%
 
0.25
%
 
0.15
%
 
0.19
%
 
0.11
%
 
 
 
 
 
 
 
 
 
 
(1) Excludes PCI loans and other assets covered under FDIC loss share agreements, except for their inclusion in total assets.







26



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

 
For the Quarter ended and At
 
For the Six Months ended
(in thousands)
June 30, 2015
 
March 31, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
CORE PERFORMANCE MEASURES (1)
 
 
 
 
Net interest income
$
26,277

 
$
25,587

 
$
24,204

 
$
51,864

 
$
47,906

Provision for portfolio loans
2,150

 
1,580

 
1,348

 
3,730

 
2,375

Noninterest income
6,741

 
5,839

 
5,983

 
12,580

 
12,184

Noninterest expense
19,030

 
19,068

 
19,468

 
38,098

 
39,852

Income before income tax expense
11,838

 
10,778

 
9,371

 
22,616

 
17,863

Income tax expense
4,134

 
3,647

 
3,108

 
7,781

 
5,975

Net income
$
7,704

 
$
7,131

 
$
6,263

 
$
14,835

 
$
11,888

 
 
 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.38

 
$
0.35

 
$
0.31

 
$
0.74

 
$
0.60

Return on average assets
0.93
%
 
0.88
%
 
0.80
%
 
0.91
%
 
0.77
%
Return on average common equity
9.34
%
 
8.99
%
 
8.44
%
 
9.17
%
 
8.20
%
Return on average tangible common equity
10.41
%
 
10.06
%
 
9.57
%
 
10.24
%
 
9.33
%
Net interest margin (fully tax equivalent)
3.46
%
 
3.46
%
 
3.41
%
 
3.46
%
 
3.42
%
Efficiency ratio
57.64
%
 
60.67
%
 
64.49
%
 
59.12
%
 
66.32
%
 
 
 
 
 
 
 
 
 
 
(1) A non-GAAP measure. A reconciliation has been included in this MD&A section under the caption "Use of Non-GAAP Financial Measures."

During the six months ended June 30, 2015, the Company noted the following trends:

The Company reported net income of $18.1 million for the six months ended June 30, 2015, compared to $13.0 million for the same period in 2014. The increase in net income over the prior year was primarily due to an increase in reversal of provision for PCI loan loss, an increase in noninterest income, and a decrease in noninterest expenses from lower legal expense on problem loans and expense management.

On a core basis1, net income was $14.8 million, or $0.74 per share for the six months ended June 30, 2015, compared to $11.9 million, or $0.60 per share in the prior year period. The increase was primarily due to increases in earning asset balances, driving growth in core net interest income, combined with a reduction in noninterest expenses and increases in noninterest income from service charges on deposits and other fee income.

Net interest income for the first six months of 2015 decreased $0.8 million from the prior year period due to a decline in accelerations from PCI loans. On a core basis1, net interest income increased 8% when compared to the prior year period due to strong portfolio loan growth and improvements in funding costs during 2014 and 2015.

The Core net interest margin1, defined as Net interest margin (fully tax equivalent), including contractual interest on PCI loans, but excluding the incremental accretion on these loans, increased 4 basis points from the prior year period primarily due to the managed reductions in funding costs combined with an improved earning asset mix.

27




Core noninterest income1, which primarily includes the Company's wealth management revenue, service charges and other fees on deposit accounts, sales of other real estate, and state tax brokerage activity, increased 3% compared to the prior year period primarily due to an increase in Service charges on deposit accounts and other fees.

Noninterest expense declined 5% and the Company's efficiency ratio improved to 58.2% from 62.5% when compared to the prior year. Core noninterest expenses1 declined 4% when compared to the prior year, and the Core efficiency ratio1 improved to 59.12% from 66.32% when compared to the prior year period.

Other highlights:

The Company's Board approved an increase in the Company’s quarterly cash dividend to $0.07 per common share for the third quarter of 2015 from $0.06, payable on September 30, 2015 to shareholders of record as of the close of business on September 15, 2015.

The Company received a $65 million allocation of New Markets Tax Credits ("NMTC"), which is the fourth allocation of NMTC received in the past five years, for a total of $183 million.

The Company's Board also authorized the repurchase of up to 2 million common shares, representing approximately 10% of the Company’s currently outstanding shares. Shares may be bought back in open market or privately negotiated transactions over an indeterminate time period based on market and business conditions. During the second quarter of 2015, the Company did not repurchase any shares pursuant to this publicly announced program.

Balance sheet highlights:

Loans – Loans totaled $2.6 billion at June 30, 2015, including $87.6 million of purchase credit impaired ("PCI") loans. Portfolio loans excluding PCI loans increased $291.5 million, or 13%, from June 30, 2014. Commercial and industrial loans increased $199.9 million, or 18%, Consumer and other loans increased $32.5 million, or 66%, Construction loans and Residential real estate loans increased $25.3 million, or 8%, and Commercial real estate increased $33.7 million. See Item 1, Note 4 – Portfolio Loans for more information.
Deposits – Total deposits at June 30, 2015 were $2.7 billion, an increase of $226.1 million, or 9%, from June 30, 2014, partially due to enhanced deposit gathering efforts in both commercial and business banking.
Asset quality – Nonperforming loans, including troubled debt restructurings, were $17.5 million at June 30, 2015, compared to $19.3 million at June 30, 2014. Nonperforming loans represented 0.69% of portfolio loans at June 30, 2015 versus 0.86% at June 30, 2014. There were no portfolio loans that were over 90 days delinquent and still accruing at June 30, 2015 or June 30, 2014.
Provision for portfolio loan losses was an expense of $3.7 million for the six months ended June 30, 2015, compared to expense of $2.4 million for the six months ended June 30, 2014. See Item 1, Note 4 – Portfolio Loans and, Provision for Loan Losses and Allowance for Loan Losses in this section for more information.




28



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

 
Three months ended June 30,
 
2015
 
2014
(in thousands)
Average Balance
 
Interest
Income/Expense
 
Average
Yield/
Rate
 
Average Balance
 
Interest
Income/Expense
 
Average
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Taxable portfolio loans (1)
$
2,450,453

 
$
25,273

 
4.14
%
 
$
2,196,080

 
$
22,988

 
4.20
%
Tax-exempt portfolio loans (2)
38,443

 
627

 
6.54

 
33,324

 
547

 
6.58

Purchase credit impaired loans
92,168

 
4,212

 
18.33

 
123,476

 
6,416

 
20.84

Total loans
2,581,064

 
30,112

 
4.68

 
2,352,880

 
29,951

 
5.11

Taxable investments in debt and equity securities
421,912

 
2,154

 
2.05

 
425,026

 
2,231

 
2.11

Non-taxable investments in debt and equity securities (2)
41,895

 
459

 
4.39

 
43,795

 
481

 
4.41

Short-term investments
51,423

 
38

 
0.30

 
74,282

 
36

 
0.19

Total securities and short-term investments
515,230

 
2,651

 
2.06

 
543,103

 
2,748

 
2.03

Total interest-earning assets
3,096,294

 
32,763

 
4.24

 
2,895,983

 
32,699

 
4.53

Noninterest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
48,599

 
 
 
 
 
16,450

 
 
 
 
Other assets
208,897

 
 
 
 
 
261,202

 
 
 
 
Allowance for loan losses
(43,212
)
 
 
 
 
 
(47,124
)
 
 
 
 
 Total assets
$
3,310,578

 
 
 
 
 
$
3,126,511

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing transaction accounts
$
506,073

 
$
279

 
0.22
%
 
$
229,918

 
$
110

 
0.19
%
Money market accounts
879,685

 
672

 
0.31

 
900,111

 
700

 
0.31

Savings
86,860

 
54

 
0.25

 
80,817

 
50

 
0.25

Certificates of deposit
539,387

 
1,594

 
1.19

 
605,394

 
1,755

 
1.16

Total interest-bearing deposits
2,012,005

 
2,599

 
0.52

 
1,816,240

 
2,615

 
0.58

Subordinated debentures
56,807

 
308

 
2.18

 
56,807

 
303

 
2.14

Other borrowed funds
230,492

 
165

 
0.29

 
339,331

 
649

 
0.77

Total interest-bearing liabilities
2,299,304

 
3,072

 
0.54

 
2,212,378

 
3,567

 
0.65

Noninterest bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
655,635

 
 
 
 
 
594,977

 
 
 
 
Other liabilities
24,640

 
 
 
 
 
21,541

 
 
 
 
Total liabilities
2,979,579

 
 
 
 
 
2,828,896

 
 
 
 
Shareholders' equity
330,999

 
 
 
 
 
297,615

 
 
 
 
Total liabilities & shareholders' equity
$
3,310,578

 
 
 
 
 
$
3,126,511

 
 
 
 
Net interest income
 
 
$
29,691

 
 
 
 
 
$
29,132

 
 
Net interest spread
 
 
 
 
3.70
%
 
 
 
 
 
3.88
%
Net interest margin
 
 
 
 
3.85
%
 
 
 
 
 
4.03
%



29



(1)
Average balances include non-accrual loans. Loan fees, net of amortization of deferred loan origination fees and costs, included in interest income are approximately $0.5 million and $0.1 million for the three months ended June 30, 2015 and 2014 respectively.
(2)
Non-taxable income is presented on a fully tax-equivalent basis using a 38% tax rate in 2015 and 2014. The tax-equivalent adjustments were $0.4 million for the three months ended June 30, 2015 and 2014.


 
Six months ended June 30,
 
2015
 
2014
(in thousands)
Average Balance
 
Interest
Income/Expense
 
Average
Yield/
Rate
 
Average Balance
 
Interest
Income/Expense
 
Average
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Taxable portfolio loans (1)
$
2,420,949

 
$
49,498

 
4.12
%
 
$
2,152,186

 
$
45,369

 
4.25
%
Tax-exempt portfolio loans (2)
38,424

 
1,252

 
6.57

 
35,461

 
1,211

 
6.89

Purchase credit impaired loans
94,670

 
9,209

 
19.62

 
128,941

 
15,068

 
23.57

Total loans
2,554,043

 
59,959

 
4.73

 
2,316,588

 
61,648

 
5.37

Taxable investments in debt and equity securities
420,371

 
4,353

 
2.09

 
414,334

 
4,446

 
2.16

Non-taxable investments in debt and equity securities (2)
42,429

 
939

 
4.46

 
43,902

 
965

 
4.43

Short-term investments
55,345

 
85

 
0.31

 
97,555

 
102

 
0.21

Total securities and short-term investments
518,145

 
5,377

 
2.09

 
555,791

 
5,513

 
2.00

Total interest-earning assets
3,072,188

 
65,336

 
4.29

 
2,872,379

 
67,161

 
4.72

Noninterest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
48,417

 
 
 
 
 
16,161

 
 
 
 
Other assets
213,596

 
 
 
 
 
262,398

 
 
 
 
Allowance for loan losses
(44,611
)
 
 
 
 
 
(45,207
)
 
 
 
 
 Total assets
$
3,289,590

 
 
 
 
 
$
3,105,731

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing transaction accounts
$
495,457

 
$
556

 
0.23
%
 
$
222,492

 
$
222

 
0.20
%
Money market accounts
861,565

 
1,314

 
0.31

 
919,464

 
1,442

 
0.32

Savings
84,149

 
104

 
0.25

 
80,789

 
99

 
0.25

Certificates of deposit
532,974

 
3,185

 
1.21

 
613,589

 
3,505

 
1.15

Total interest-bearing deposits
1,974,145

 
5,159

 
0.53

 
1,836,334

 
5,268

 
0.58

Subordinated debentures
56,807

 
610

 
2.17

 
59,072

 
710

 
2.42

Other borrowed funds
252,137

 
409

 
0.33

 
295,101

 
1,247

 
0.85

Total interest-bearing liabilities
2,283,089

 
6,178

 
0.55

 
2,190,507

 
7,225

 
0.67

Noninterest bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
655,367

 
 
 
 
 
602,253

 
 
 
 
Other liabilities
24,723

 
 
 
 
 
20,544

 
 
 
 
Total liabilities
2,963,179

 
 
 
 
 
2,813,304

 
 
 
 
Shareholders' equity
326,411

 
 
 
 
 
292,427

 
 
 
 
Total liabilities & shareholders' equity
$
3,289,590

 
 
 
 
 
$
3,105,731

 
 
 
 
Net interest income
 
 
$
59,158

 
 
 
 
 
$
59,936

 
 
Net interest spread
 
 
 
 
3.74
%
 
 
 
 
 
4.05
%
Net interest margin
 
 
 
 
3.88
%
 
 
 
 
 
4.21
%

(1)
Average balances include non-accrual loans. Loan fees, net of amortization of deferred loan origination fees and costs, included in interest income are approximately $0.9 million and $0.3 million for the six months ended June 30, 2015 and 2014, respectively.
(2)
Non-taxable income is presented on a fully tax-equivalent basis using a 38% tax rate in 2015 and 2014. The tax-equivalent adjustments were $0.8 million for the six months ended June 30, 2015 and 2014.

30



Rate/Volume
The following table sets forth, on a tax-equivalent basis for the periods indicated, a summary of the changes in interest income and interest expense resulting from changes in yield/rates and volume.
  
 
2015 compared to 2014
 
Three months ended June 30,
 
Six months ended June 30,
 
Increase (decrease) due to
 
Increase (decrease) due to
(in thousands)
Volume(1)
 
Rate(2)
 
Net
 
Volume(1)
 
Rate(2)
 
Net
Interest earned on:
 
 
 
 
 
 
 
 
 
 
 
Taxable portfolio loans
$
2,628

 
$
(343
)
 
$
2,285

 
$
5,528

 
$
(1,399
)
 
$
4,129

Tax-exempt portfolio loans (3)
83

 
(3
)
 
80

 
98

 
(57
)
 
41

Purchase credit impaired loans
(1,494
)
 
(710
)
 
(2,204
)
 
(3,593
)
 
(2,266
)
 
(5,859
)
Taxable investments in debt and equity securities
(16
)
 
(61
)
 
(77
)
 
64

 
(157
)
 
(93
)
Non-taxable investments in debt and equity securities (3)
(21
)
 
(1
)
 
(22
)
 
(33
)
 
7

 
(26
)
Short-term investments
(13
)
 
15

 
2

 
(54
)
 
37

 
(17
)
Total interest-earning assets
$
1,167

 
$
(1,103
)
 
$
64

 
$
2,010

 
$
(3,835
)
 
$
(1,825
)
 
 
 
 
 
 
 
 
 
 
 
 
Interest paid on:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing transaction accounts
$
150

 
$
19

 
$
169

 
$
303

 
$
31

 
$
334

Money market accounts
(16
)
 
(12
)
 
(28
)
 
(89
)
 
(39
)
 
(128
)
Savings
4

 

 
4

 
4

 
1

 
5

Certificates of deposit
(194
)
 
33

 
(161
)
 
(476
)
 
156

 
(320
)
Subordinated debentures

 
5

 
5

 
(26
)
 
(74
)
 
(100
)
Borrowed funds
(164
)
 
(320
)
 
(484
)
 
(161
)
 
(677
)
 
(838
)
Total interest-bearing liabilities
(220
)
 
(275
)
 
(495
)
 
(445
)
 
(602
)
 
(1,047
)
Net interest income
$
1,387

 
$
(828
)
 
$
559

 
$
2,455

 
$
(3,233
)
 
$
(778
)

(1)
Change in volume multiplied by yield/rate of prior period.
(2)
Change in yield/rate multiplied by volume of prior period.
(3)
Nontaxable income is presented on a fully-tax equivalent basis using the combined statutory federal and state income tax rate in effect for each year.

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

Net interest income (on a tax equivalent basis) was $29.7 million for the three months ended June 30, 2015, compared to $29.1 million for the same period of 2014, an increase of $0.6 million, or 2%. Total interest income increased $0.1 million and total interest expense decreased $0.5 million. The tax-equivalent net interest rate margin was 3.85% for the second quarter of 2015, compared to 3.92% for the first quarter of 2015, and 4.03% in the second quarter of 2014.

Net interest income (on a tax equivalent basis) was $59.2 million for the six months ended June 30, 2015, compared to $59.9 million for the same period of 2014, a decrease of $0.8 million, or 1%. Total interest income decreased $1.8 million and total interest expense decreased $1.0 million. The tax-equivalent net interest rate margin was 3.88% for the six months ended June 30, 2015, compared to 4.21% for the six months ended June 30, 2014.

Interest rates remain at historically low levels and continue to negatively impact loan yields leading to lower net interest margins. As seen in the table above, during the six months ended June 30, 2015, changes in interest rates have led to a $1.4 million, and $2.3 million reduction in interest income in our portfolio and PCI loans, respectively.

31



Additionally, the run-off of higher yielding PCI loans continue to negatively impact net interest margin leading to a $3.6 million decrease in interest income due to volume. To partially mitigate lower yields on loans, the Company managed deposit costs lower and decreased other borrowing costs including the prepayment of $50.0 million of FHLB borrowings in December 2014.

Core net interest margin1 was 3.46% for the quarter ended June 30, 2015, compared to 3.41% for the same prior year period.  Core net interest margin1 increased 5 basis points from the prior year quarter primarily due to the managed reductions in funding costs combined with an improved earning asset mix. These factors mitigated continued pressure in portfolio loan yields and reductions in PCI loan balances as those balances continue to run-off. Pressure on loan yields and continued reductions in PCI loan balances could lead to a modest decline in core net interest margin in the second half of 2015.


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

 
For the Quarter ended
(in thousands)
June 30, 2015
 
March 31, 2015
 
December 31, 2014
 
September 30, 2014
 
June 30, 2014
Contractual interest income
$
1,209

 
$
1,539

 
$
1,840

 
$
1,701

 
$
1,878

Accelerated cash flows and other incremental accretion
3,003

 
3,458

 
5,149

 
2,579

 
4,538

Estimated funding cost
(329
)
 
(317
)
 
(326
)
 
(314
)
 
(349
)
Total net interest income
3,883

 
4,680

 
6,663

 
3,966

 
6,067

(Provision) benefit for loan losses

 
3,270

 
(126
)
 
1,877

 
470

Gain (loss) on sale of other real estate
10

 
(15
)
 
195

 
(45
)
 
164

Change in FDIC loss share receivable
(945
)
 
(2,264
)
 
(1,781
)
 
(2,374
)
 
(2,742
)
Change in FDIC clawback liability
(50
)
 
(412
)
 
(141
)
 
(1,028
)
 
(143
)
Other expenses
(378
)
 
(471
)
 
(541
)
 
(731
)
 
(832
)
PCI assets income before income tax expense
$
2,520

 
$
4,788

 
$
4,269

 
$
1,665

 
$
2,984


At June 30, 2015, the remaining accretable yield on the portfolio was estimated to be $26 million and the non-accretable difference was approximately $37 million. Absent cash flow accelerations or pool impairment, the Company currently estimates average PCI loan balances to be approximately $80 million, and income before tax expense on PCI assets will be approximately $9 million to $12 million in 2015.


32



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

 
Three months ended June 30,
(in thousands)
2015
 
2014
 
Increase (decrease)
 Wealth management revenue
$
1,778

 
$
1,715

 
$
63

 
4
 %
 Service charges on deposit accounts
1,998

 
1,767

 
231

 
13
 %
 Other service charges and fee income
840

 
702

 
138

 
20
 %
 Sale of other real estate
(1
)
 
553

 
(554
)
 
(100
)%
 State tax credit activity, net
74

 
207

 
(133
)
 
(64
)%
 Miscellaneous income
2,052

 
1,039

 
1,013

 
97
 %
Core noninterest income (1)
6,741

 
5,983

 
758

 
13
 %
Gain (loss) on sale of other real estate covered under FDIC loss share agreements
10

 
164

 
(154
)
 
(94
)%
Change in FDIC loss share receivable
(945
)
 
(2,742
)
 
1,797

 
(66
)%
Total noninterest income
$
5,806

 
$
3,405

 
$
2,401

 
71
 %
 
 
 
 
 
 
 
 
(1) A non-GAAP measure. A reconciliation has been included in this MD&A section under the caption "Use of Non-GAAP Financial Measures."

 
Six months ended June 30,
(in thousands)
2015
 
2014
 
Increase (decrease)
 Wealth management revenue
$
3,518

 
$
3,437

 
$
81

 
2
 %
 Service charges on deposit accounts
3,854

 
3,505

 
349

 
10
 %
 Other service charges and fee income
1,593

 
1,339

 
254

 
19
 %
 Sale of other real estate
34

 
1,105

 
(1,071
)
 
(97
)%
 State tax credit activity, net
748

 
704

 
44

 
6
 %
 Miscellaneous income
2,833

 
2,094

 
739

 
35
 %
Core noninterest income (1)
12,580

 
12,184

 
396

 
3
 %
Gain (loss) on sale of other real estate covered under FDIC loss share agreements
(5
)
 
295

 
(300
)
 
(102
)%
Gain on sale of investment securities
23

 

 
23

 

Change in FDIC loss share receivable
(3,209
)
 
(5,152
)
 
2,742

 
(53
)%
Total noninterest income
$
9,389

 
$
7,327

 
$
2,062

 
28
 %
 
 
 
 
 
 
 
 
(1) A non-GAAP measure. A reconciliation has been included in this MD&A section under the caption "Use of Non-GAAP Financial Measures."

Noninterest income increased $2.1 million, or 28% in the first six months of 2015 compared to the first six months of 2014. Core noninterest income1 grew 3% in the first six months of 2015 due to an allocation fee from a tax credit project, increases in fees earned from recoveries, gain on sales of mortgages, and swap fee income. Wealth management revenues increased by 2% in the first six months of 2015 when compared to the prior year period due to an increase in Trust assets under administration.


33



Noninterest Expense
The following table presents a comparative summary of the major components of noninterest expense for the periods indicated.

 
Three months ended June 30,
(in thousands)
2015
 
2014
 
Increase (decrease)
Core expenses (1):
 
 
 
 
 
 
 
 Employee compensation and benefits - core
$
11,030

 
$
11,465

 
$
(435
)
 
(4
)%
 Occupancy - core
1,598

 
1,648

 
(50
)
 
(3
)%
 Data processing - core
1,097

 
1,057

 
40

 
4
 %
 FDIC and other insurance
665

 
761

 
(96
)
 
(13
)%
 Professional fees - core
837

 
582

 
255

 
44
 %
 Loan, legal and other real estate expense - core
490

 
709

 
(219
)
 
(31
)%
 Other - core
3,313

 
3,246

 
67

 
2
 %
Core noninterest expense (1)
19,030

 
19,468

 
(438
)
 
(2
)%
FDIC clawback
50

 
143

 
(93
)
 
(65
)%
Other loss share expenses
378

 
834

 
(456
)
 
(55
)%
Total noninterest expense
$
19,458

 
$
20,445

 
$
(987
)
 
(5
)%
 
 
 
 
 
 
 
 
(1) A non-GAAP measure. A reconciliation has been included in this MD&A section under the caption "Use of Non-GAAP Financial Measures."

 
Six months ended June 30,
(in thousands)
2015
 
2014
 
Increase (decrease)
Core expenses (1):
 
 
 
 
 
 
 
 Employee compensation and benefits - core
$
22,280

 
$
22,987

 
$
(707
)
 
(3
)%
 Occupancy - core
3,265

 
3,262

 
3

 
 %
 Data processing - core
2,097

 
2,120

 
(23
)
 
(1
)%
 FDIC and other insurance
1,391

 
1,460

 
(69
)
 
(5
)%
 Professional fees - core
1,809

 
1,848

 
(39
)
 
(2
)%
 Loan, legal and other real estate expense - core
621

 
1,706

 
(1,085
)
 
(64
)%
 Other - core
6,635

 
6,469

 
166

 
3
 %
Core noninterest expense (1)
38,098

 
39,852

 
(1,754
)
 
(4
)%
FDIC clawback
462

 
32

 
430

 
1,344
 %
Other loss share expenses
848

 
1,663

 
(815
)
 
(49
)%
Total noninterest expense
$
39,408

 
$
41,547

 
$
(2,139
)
 
(5
)%
 
 
 
 
 
 
 
 
(1) A non-GAAP measure. A reconciliation has been included in this MD&A section under the caption "Use of Non-GAAP Financial Measures."

Noninterest expenses were $39.4 million for the six months ended June 30, 2015, compared to $41.5 million for the six months ended June 30, 2014. Core noninterest expenses1, which exclude certain items and expenses directly related to PCI loans and assets covered under loss share agreements decreased to $38.1 million for the six months ended June 30, 2015, from $39.9 million for the prior year period.

The Company's Core efficiency ratio1 was 59.1% for the six months ended June 30, 2015, compared to 66.3% for the prior year, and reflects lower legal expenses on problem loans, overall expense management and revenue growth trends. Core efficiency ratio is a non-GAAP measure. The attached tables contain a reconciliation of Core efficiency ratio.

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

34



Income Taxes

The Company's income tax expense for the three and six months ended June 30, 2015, which includes both federal and state taxes, was $4.8 million and $9.8 million, respectively, compared to $3.7 million and $6.7 million for the same periods of 2014. The combined federal and state effective income tax rates were 35.3% and 33.9% for the quarters ended June 30, 2015, and 2014, respectively. The increase in the effective tax rate was primarily due to higher net income in 2015 lessening the impact of permanent nontaxable items.



Summary Balance Sheet

(in thousands)
June 30, 2015
 
December 31, 2014
 
Increase (decrease)
Total cash and cash equivalents
$
99,796

 
$
100,696

 
(900
)
(0.9
)%
Securities available for sale
404,928

 
400,146

 
4,782

1.2
 %
Securities held to maturity
44,973

 
45,985

 
(1,012
)
(2.2
)%
Portfolio loans
2,542,555

 
2,433,916

 
108,639

4.5
 %
Purchase credit impaired loans
87,644

 
99,103

 
(11,459
)
(11.6
)%
Total assets
3,371,078

 
3,277,003

 
94,075

2.9
 %
Deposits
2,691,558

 
2,491,510

 
200,048

8.0
 %
Total liabilities
3,038,648

 
2,960,762

 
77,886

2.6
 %
Total shareholders' equity
332,430

 
316,241

 
16,189

5.1
 %

Assets

Loans by Type

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

(in thousands)
June 30, 2015
 
December 31, 2014
 
Increase (decrease)
Commercial and industrial
$
1,335,008

 
$
1,270,259

 
$
64,749

5.1
 %
Commercial real estate - investor owned
418,111

 
413,026

 
5,085

1.2
 %
Commercial real estate - owner occupied
371,030

 
357,503

 
13,527

3.8
 %
Construction and land development
150,740

 
144,773

 
5,967

4.1
 %
Residential real estate
185,587

 
185,252

 
335

0.2
 %
Consumer and other
82,079

 
63,103

 
18,976

30.1
 %
   Portfolio loans
2,542,555

 
2,433,916

 
108,639

4.5
 %
Purchase credit impaired loans
87,644

 
99,103

 
(11,459
)
(11.6
)%
   Total loans
$
2,630,199

 
$
2,533,019

 
$
97,180

3.8
 %

Portfolio loans grew by $109 million to $2.5 billion at June 30, 2015 when compared to December 31, 2014. PCI loans totaled $87.6 million at June 30, 2015, a decrease of $11.5 million, or 11.6%, from December 31, 2014, primarily as a result of principal paydowns and accelerated loan payoffs.


35



The following table illustrates loan growth from selected specialized market segments:

(in thousands)
June 30, 2015
 
December 31, 2014
 
Change
 
% Change
Enterprise value lending
251,018

 
202,468

 
48,550

 
24.0
%
Life insurance premium financing
239,182

 
220,909

 
18,273

 
8.3
%

These specialized market segments are primarily C&I loans and have contributed significantly to the Company's loan growth in the first six months of 2015. These loans are sourced through relationships developed with private equity funds and estate planning, and are not bound geographically by our traditional three markets.


36



Provision and Allowance for Loan Losses
The following table summarizes changes in the allowance for loan losses arising from loans charged off and recoveries on loans previously charged off, by loan category, and additions to the allowance charged to expense.
 
Three months ended June 30,
 
Six months ended June 30,
(in thousands)
2015
 
2014
 
2015
 
2014
Allowance at beginning of period, for portfolio loans
$
30,288

 
$
27,905

 
$
30,185

 
$
27,289

Loans charged off:
 
 
 
 
 
 
 
Commercial and industrial
(1,578
)
 
(1,005
)
 
(3,062
)
 
(1,479
)
Real estate:
 
 
 
 
 
 
 
Commercial
(664
)
 
(88
)
 
(664
)
 
(674
)
Construction and land development
(350
)
 

 
(350
)
 
(305
)
Residential

 

 
(1,073
)
 

Consumer and other
(4
)
 

 
(15
)
 
(4
)
Total loans charged off
(2,596
)
 
(1,093
)
 
(5,164
)
 
(2,462
)
Recoveries of loans previously charged off:
 
 
 
 
 
 
 
Commercial and industrial
420

 
154

 
1,189

 
341

Real estate:
 
 
 
 
 
 
 
Commercial
1,300

 
33

 
1,456

 
75

Construction and land development
115

 
36

 
175

 
724

Residential
87

 
39

 
113

 
80

Consumer and other
1

 

 
81

 

Total recoveries of loans
1,923

 
262

 
3,014

 
1,220

Net loan chargeoffs
(673
)
 
(831
)
 
(2,150
)
 
(1,242
)
Provision for loan losses
2,150

 
1,348

 
3,730

 
2,375

Allowance at end of period, for portfolio loans
$
31,765

 
$
28,422

 
$
31,765

 
$
28,422

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

 
$
18,513

 
$
15,410

 
$
15,438

   Loans charged off
(5
)
 
(9
)
 
(2
)
 
(164
)
   Recoveries of loans

 

 

 

Other
(26
)
 
(495
)
 
(544
)
 
(569
)
Net loan chargeoffs
(31
)
 
(504
)
 
(546
)
 
(733
)
Provision (provision reversal) for loan losses

 
(470
)
 
(3,270
)
 
2,834

Allowance at end of period, for purchase credit impaired loans
$
11,594

 
$
17,539

 
$
11,594

 
$
17,539

 
 
 
 
 
 
 
 
Total allowance at end of period
$
43,359

 
$
45,961

 
$
43,359

 
$
45,961

 
 
 
 
 
 
 
 
Excludes purchase credit impaired loans
 
 
 
 
 
 
 
Average loans
$
2,482,291

 
$
2,225,669

 
$
2,255,180

 
$
2,184,786

Total portfolio loans
2,542,555

 
2,251,102

 
2,542,555

 
2,251,102

Net chargeoffs to average loans (annualized)
0.11
%
 
0.15
%
 
0.19
%
 
0.11
%
Allowance for loan losses to total loans
1.25

 
1.26

 
1.25

 
1.26


The provision for loan losses on portfolio loans for the six months ended June 30, 2015 was $3.7 million compared to $2.4 million for the comparable 2014 period. The provision for loan losses for the six month period ended June 30, 2015 was primarily to provide for strong loan growth and to provide for changes in charge-off trends.


37



For PCI loans, the Company remeasures contractual and expected cash flows periodically. When the remeasurement process results in a decrease in expected cash flows, typically due to an increase in expected credit losses, impairment is recorded through provision for loan losses. Similarly, when expected credit losses decrease in the remeasurement process, prior recorded impairment is reversed before the yield is increased prospectively. There was $3.3 million of provision reversal for loan losses on PCI loans for the six months ended June 30, 2015, compared to provision of $2.8 million for the comparable 2014 period.

The allowance for loan losses on portfolio loans was 1.25% of total loans at June 30, 2015 compared to 1.26% at June 30, 2014. Management believes the allowance for loan losses is adequate to absorb inherent losses in the loan portfolio and coverage trends reflect steady improvements in credit quality measures and classified loan levels. The reduction in the ratio of allowance for loan losses to total loans over the prior year period is due to continued strong credit performance, as well as continued improvement in our loss migration results.


Nonperforming assets

The following table presents the categories of nonperforming assets and other ratios as of the dates indicated.
 
(in thousands)
June 30, 2015
 
December 31, 2014
 
June 30, 2014
Non-accrual loans
$
16,751

 
$
20,892

 
$
17,787

Restructured loans
747

 
1,352

 
1,499

Total nonperforming loans
17,498

 
22,244

 
19,286

Foreclosed property (1)
1,933

 
1,896

 
7,613

Total nonperforming assets (1)
$
19,431

 
$
24,140

 
$
26,899

 
 
 
 
 
 
Excludes assets covered under FDIC loss share (1)
 
 
 
 
 
Total assets
$
3,371,078

 
$
3,277,003

 
$
3,175,441

Total portfolio loans
2,542,555

 
2,433,916

 
2,251,102

Total loans plus foreclosed property
2,544,488

 
2,435,812

 
2,258,715

Nonperforming loans to total loans
0.69
%
 
0.91
%
 
0.86
%
Nonperforming assets to total loans plus foreclosed property
0.76

 
0.99

 
1.19

Nonperforming assets to total assets
0.58

 
0.74

 
0.85

 
 
 
 
 
 
Allowance for portfolio loans to nonperforming loans
182
%
 
136
%
 
147
%
 
(1)
Excludes purchase credit impaired loans and assets covered under FDIC shared-loss agreements, except for their inclusion in total assets.


38



Nonperforming loans 
Nonperforming loans exclude PCI loans that are accounted for on a pool basis, as the pools are considered to be performing. See Item 1, Note 5 – Purchase Credit Impaired Loans for more information on these loans.
 
Nonperforming loans based on loan type were as follows:
 
(in thousands)
June 30, 2015
 
December 31, 2014
 
June 30, 2014
Commercial and industrial
5,998

 
5,998

 
4,059

Commercial real estate
3,026

 
6,298

 
7,261

Construction and land development
$
5,968

 
$
6,866

 
$
7,422

Residential real estate
2,506

 
3,082

 
545

Consumer and other

 

 

Total
$
17,498

 
$
22,244

 
$
19,287


The following table summarizes the changes in nonperforming loans:
 
 
Six months ended June 30,
(in thousands)
2015
 
2014
Nonperforming loans beginning of period
$
22,244

 
$
20,840

Additions to nonaccrual loans
16,100

 
10,283

Additions to restructured loans

 
1,522

Chargeoffs
(5,297
)
 
(2,462
)
Other principal reductions
(14,523
)
 
(6,029
)
Moved to other real estate
(450
)
 
(4,722
)
Moved to performing
(576
)
 
(145
)
Loans past due 90 days or more and still accruing interest

 

Nonperforming loans end of period
$
17,498

 
$
19,287



Other real estate
Other real estate at June 30, 2015, was $9.8 million, compared to $20.4 million at June 30, 2014. Approximately 80% of total Other real estate, or $7.9 million, is covered by FDIC shared-loss agreements.

The following table summarizes the changes in Other real estate:

 
Six months ended June 30,
(in thousands)
2015
 
2014
Other real estate beginning of period
$
7,840

 
$
23,252

Additions and expenses capitalized to prepare property for sale
5,998

 
6,158

Writedowns in value
(295
)
 
(1,410
)
Sales
(3,701
)
 
(7,566
)
Other real estate end of period
$
9,842

 
$
20,434


The writedowns in fair value were recorded in Loan legal and other real estate expense based on current market activity shown in the appraisals. In addition, for the three months ended June 30, 2015, the Company realized a negligible net gain on the sale of other real estate and recorded these gains as part of Noninterest income.

39



Liabilities

Liabilities totaled $3.0 billion at June 30, 2015, consistent with balances at December 31, 2014. Liabilities remained relatively stable due to a $200 million increase in total deposits, offset by a decrease of $71 million in short-term Federal Home Loan Bank advances and a decrease of $51 million in other borrowings.

Deposits
(in thousands)
June 30, 2015
 
December 31, 2014
 
Increase (decrease)
Demand deposits
$
658,258

 
$
642,930

 
15,328

 
2.38
 %
Interest-bearing transaction accounts
507,889

 
508,941

 
(1,052
)
 
(0.21
)%
Money market accounts
925,987

 
755,569

 
170,418

 
22.55
 %
Savings
88,494

 
78,718

 
9,776

 
12.42
 %
Certificates of deposit:
 
 
 
 
 
 
 
$100 and over
398,333

 
377,544

 
20,789

 
5.51
 %
Other
112,597

 
127,808

 
(15,211
)
 
(11.90
)%
Total deposits
$
2,691,558

 
$
2,491,510

 
200,048

 
8.03
 %
 
 
 
 
 
 
 
 
Non-time deposits / total deposits
81
%
 
80
%
 
 
 
 
Demand deposits / total deposits
24
%
 
26
%
 
 
 
 

Total deposits at June 30, 2015 were $2.7 billion, an increase of $200 million, or 8.0%, from December 31, 2014. The increase in deposits within our money market accounts reflects initiatives to enhance overall deposit levels as well as to improve our funding mix. The composition of our noninterest bearing deposits remained relatively stable at 24% of total deposits at June 30, 2015 compared to December 31, 2014. Growth in balances and the change in composition modestly improved deposit costs during the second quarter when compared to the linked first quarter at 0.39%, as compared to 0.40%, and improved from the 0.43% for the prior year period.

Shareholders' Equity
Shareholders' equity totaled $332 million at June 30, 2015, an increase of $16.2 million from December 31, 2014. Significant activity during the six months ended June 30, 2015:

Net income of $18.1 million,
Other comprehensive losses of $0.4 million from the change in unrealized gains on investment securities,
Dividends paid on common stock of $2.3 million.


Liquidity and Capital Resources

Liquidity

The objective of liquidity management is to ensure we have the ability to generate sufficient cash or cash equivalents in a timely and cost-effective manner to meet our commitments as they become due. Typical demands on liquidity are run-off from demand deposits, maturing time deposits which are not renewed, and fundings under credit commitments to customers. Funds are available from a number of sources, such as from the core deposit base and from loans and securities repayments and maturities.

Additionally, liquidity is provided from sales of the securities portfolio, fed fund lines with correspondent banks, the Federal Reserve and the FHLB, the ability to acquire large and brokered deposits, and the ability to sell loan participations to other banks. These alternatives are an important part of our liquidity plan and provide flexibility and efficient execution of the asset-liability management strategy.

40




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

Parent Company liquidity
The parent company's liquidity is managed to provide the funds necessary to pay dividends to shareholders, service debt, invest in subsidiaries as necessary, and satisfy other operating requirements. The parent company's primary funding sources to meet its liquidity requirements are dividends and payments from the Bank and proceeds from the issuance of equity (i.e. stock option exercises, stock offerings). Another source of funding for the parent company includes the issuance of subordinated debentures and other debt instruments. Management believes our current level of cash at the holding company of $10.8 million will be sufficient to meet all projected cash needs for the remainder of 2015.

As of June 30, 2015, the Company had $56.8 million of outstanding subordinated debentures as part of eight Trust Preferred Securities Pools. These securities are classified as debt but are included in regulatory capital and the related interest expense is tax-deductible, which makes them an attractive source of funding.

Bank liquidity
The Bank has a variety of funding sources available to increase financial flexibility. In addition to amounts currently borrowed, at June 30, 2015, the Bank could borrow an additional $271.7 million from the FHLB of Des Moines under blanket loan pledges and has an additional $707.6 million available from the Federal Reserve Bank under a pledged loan agreement. The Bank has unsecured federal funds lines with four correspondent banks totaling $45.0 million. On December 30, 2013, the Company prepaid $30.0 million of debt with the Federal Home Loan Bank with a weighted average interest rate of 4.09% and a maturity of 3 years and incurred a prepayment penalty of $2.6 million. On December 23, 2014, the Company prepaid an additional $50.0 million of debt with the Federal Home Loan Bank with a weighted average interest rate of 3.17%, a maturity of 3 years and incurred a prepayment penalty of $2.9 million. These transactions have reduced our cost of interest bearing liabilities and continue to help mitigate net interest margin compression.

Investment securities are another important tool to the Bank's liquidity objectives. Of the $404.9 million of the securities available for sale at June 30, 2015, $256.1 million was pledged as collateral for deposits of public institutions, treasury, loan notes, and other requirements. The remaining $148.8 million could be pledged or sold to enhance liquidity, if necessary.

In the normal course of business, the Bank enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through the Bank's various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of the Company's liquidity. The Bank has $1,080.4 million in unused commitments as of June 30, 2015. While this commitment level would exhaust the majority the Company's current liquidity resources, the nature of these commitments is such that the likelihood of funding them in the aggregate at any one time is low.

Capital Resources

The Company and the Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its

41



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.
 
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total, Tier 1, and Common equity tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. To be categorized as “well capitalized”, banks must maintain minimum total risk-based (10%), Tier 1 risk-based (8%), Common equity tier 1 risk-based (6.5%), and Tier 1 leverage ratios (5%). As of June 30, 2015, and December 31, 2014, the Company and the Bank met all capital adequacy requirements to which they are subject.
 
The Bank continues to exceed regulatory standards and met the definition of “well-capitalized” (the highest category) at June 30, 2015. Beginning with reporting for the first quarter of 2015, the Company adopted the Regulatory Capital Framework (Basel III). The Company has implemented the necessary processes and procedures to comply with Basel III.

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

(in thousands)
June 30, 2015
 
December 31, 2014
Total capital to risk-weighted assets
12.68
%
 
13.40
%
Tier 1 capital to risk-weighted assets
11.43
%
 
12.14
%
Common equity tier 1 capital to risk-weighted assets1
9.66
%
 
10.15
%
Leverage ratio (Tier 1 capital to average assets)
10.83
%
 
10.48
%
Tangible common equity to tangible assets2
8.94
%
 
8.69
%
Tier 1 capital
$
355,118

 
$
335,220

Total risk-based capital
394,000

 
369,867

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

The decline in regulatory ratios at June 30, 2015 represents the impact of an increase in risk weighted assets under the Basel III guidelines. The Company believes the tangible common equity ratio and the common equity tier 1 capital ratio are important measures of capital strength even though they are considered to be non-GAAP measures. The tables further within MD&A reconcile these ratios to U.S. GAAP.
 
Use of Non-GAAP Financial Measures:

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

42



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

Core Performance Measures

 
Three months ended June 30,
 
Six months ended June 30,
(in thousands)
2015
 
2014
 
2015
 
2014
CORE PERFORMANCE MEASURES
 
 
 
 
 
 
 
Net interest income
$
29,280

 
$
28,742

 
$
58,325

 
$
59,108

Less: Incremental accretion income
3,003

 
4,538

 
6,461

 
11,202

Core net interest income
26,277

 
24,204

 
51,864

 
47,906

 
 
 
 
 
 
 
 
Total noninterest income
5,806

 
3,405

 
9,389

 
7,327

Less: Change in FDIC loss share receivable
(945
)
 
(2,742
)
 
(3,209
)
 
(5,152
)
Less: Gain (loss) on sale of other real estate covered under FDIC loss share
10

 
164

 
(5
)
 
295

Less: Gain on sale of investment securities

 

 
23

 

Core noninterest income
6,741

 
5,983

 
12,580

 
12,184

 
 
 
 
 
 
 
 
Total core revenue
33,018

 
30,187

 
64,444

 
60,090

 
 
 
 
 
 
 
 
Provision for portfolio loans
2,150

 
1,348

 
3,730

 
2,375

 
 
 
 
 
 
 
 
Total noninterest expense
19,458

 
20,445

 
39,408

 
41,547

Less: FDIC clawback
50

 
143

 
462

 
32

Less: Other loss share expenses
378

 
834

 
848

 
1,663

Core noninterest expense
19,030

 
19,468

 
38,098

 
39,852

 
 
 
 
 
 
 
 
Core income before income tax expense
11,838

 
9,371

 
22,616

 
17,863

 
 
 
 
 
 
 
 
Total income tax expense
4,762

 
3,664

 
9,784

 
6,671

Less: Income tax expense of PCI assets
628

 
556

 
2,003

 
696

Core income tax expense
4,134

 
3,108

 
7,781

 
5,975

Core net income
$
7,704

 
$
6,263

 
$
14,835

 
$
11,888

 
 
 
 
 
 
 
 
Core earnings per share
$
0.38

 
$
0.31

 
$
0.74

 
$
0.60

Core efficiency ratio
57.64
%
 
64.49
%
 
59.12
%
 
66.32
%
Core return on average assets
0.93
%
 
0.80
%
 
0.91
%
 
0.77
%
Core return on average common equity
9.34
%
 
8.44
%
 
9.17
%
 
8.20
%
 
 
 
 
 
 
 
 


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




43



Net Interest Margin to Core Net Interest Margin

 
Three months ended June 30,
 
Six months ended June 30,
(in thousands)
2015
 
2014
 
2015
 
2014
Net interest income (fully tax equivalent)
$
29,691

 
$
29,133

 
$
59,158

 
$
59,936

Less: Incremental accretion income
3,003

 
4,538

 
6,461

 
11,202

Core net interest income (fully tax equivalent)
$
26,688

 
$
24,595

 
$
52,697

 
$
48,734

 
 
 
 
 
 
 
 
Average earning assets
$
3,096,294

 
$
2,895,982

 
$
3,072,188

 
$
2,872,380

Reported net interest margin (fully tax equivalent)
3.85
%
 
4.04
%
 
3.88
%
 
4.21
%
Core net interest margin (fully tax equivalent)
3.46
%
 
3.41
%
 
3.46
%
 
3.42
%



Tangible common equity ratio

(in thousands)
June 30, 2015
 
December 31, 2014
Total shareholders' equity
$
332,430

 
$
316,241

Less: Goodwill
30,334

 
30,334

Less: Intangible assets
3,595

 
4,164

Tangible common equity
$
298,501

 
$
281,743

 
 
 
 
Total assets
$
3,371,078

 
$
3,277,003

Less: Goodwill
30,334

 
30,334

Less: Intangible assets
3,595

 
4,164

Tangible assets
$
3,337,149

 
$
3,242,505

 
 
 
 
Tangible common equity to tangible assets
8.94
%
 
8.69
%






















44




Common equity tier 1 ratio

(in thousands)
June 30, 2015
 
December 31, 2014
Total shareholders' equity
$
332,430

 
$
316,241

Less: Goodwill
30,334

 
30,334

Less: Intangible assets, net of deferred tax liabilities1
887

 
4,164

Less: Unrealized gains
1,249

 
1,681

Plus: Qualifying trust preferred securities
55,100

 
55,100

Plus: Other
58

 
58

Total tier 1 capital
355,118

 
335,220

Less: Qualifying trust preferred securities
55,100

 
55,100

Less: Other1
23

 

Common equity tier 1 capital
$
299,995

 
$
280,120

 
 
 
 
Total risk-weighted assets determined in accordance with prescribed regulatory requirements
$
3,106,041

 
$
2,760,729

 
 
 
 
Common equity tier 1 capital to risk-weighted assets
9.66
%
 
10.15
%
 
 
 
 
1 Beginning with quarter ended March 31, 2015, the implementation of revised regulatory capital guidelines under Basel III has resulted in differences in these items when compared to prior periods.



Critical Accounting Policies

The impact and any associated risks related to the Company's critical accounting policies on business operations are described throughout "Management's Discussion and Analysis of Financial Condition and Results of Operations," where such policies affect our reported and expected financial results. For a detailed description on the application of these and other accounting policies, see the Company's Annual Report on Form 10-K for the year ended December 31, 2014.

45



ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

The Company determines the sensitivity of its short-term future earnings to a hypothetical plus or minus 100 to 300 basis point parallel rate shock through the use of simulation modeling. The simulation of earnings includes the modeling of the balance sheet as an ongoing entity. Future business assumptions involving administered rate products, prepayments for future rate-sensitive balances, and the reinvestment of maturing assets and liabilities are included. These items are then modeled to project net interest income based on a hypothetical change in interest rates. The resulting net interest income for the next 12-month period is compared to the net interest income amount calculated using flat rates. This difference represents the Company's earnings sensitivity to a plus or minus 100 basis points parallel rate shock.

The following table summarizes the expected impact of interest rate shocks on net interest income (due to the current level of interest rates, the 200 and 300 basis point downward shock scenarios are not shown):

Rate Shock
 
Annual % change
in net interest income
+ 300 bp
 
5.6%
+ 200 bp
 
3.6%
+ 100 bp
 
1.5%
 - 100 bp
 
-1.3%

Interest rate simulations for June 30, 2015, demonstrate that a rising rate environment will have a positive impact on net interest income.

The Company occasionally uses interest rate derivative financial instruments as an asset/liability management tool to hedge mismatches in interest rate exposure indicated by the net interest income simulation described above. At June 30, 2015, the Company had $23.8 million in notional amount of outstanding interest rate caps, to help manage interest rate risk.

 





46



ITEM 4: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of the Company’s Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15, as of June 30, 2015. Disclosure controls and procedures include without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Based on that evaluation, the CEO and CFO concluded the Company’s disclosure controls and procedures were effective as of June 30, 2015 to provide reasonable assurance of the achievement of the objectives described above.

Changes to Internal Controls

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

PART II - OTHER INFORMATION


ITEM 1: LEGAL PROCEEDINGS

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


ITEM 1A: RISK FACTORS

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


47



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

Issuer Purchases of Equity Securities

The following table provides information on repurchases by the Company of its common stock in each month of the quarter ended June 30, 2015.

Period
 
Total number of shares purchased (a)
 
Weighted-average price paid per share
 
Total number of shares purchased as part of publicly announces plans or programs
 
Maximum number of shares that may yet be purchased under the plans or programs (b)
April 1, 2015 through April 30, 2015
 

 
$

 

 

May 1, 2015 through May 31, 2015
 
1,663

 
20.84

 

 
2,000,000

June 1, 2015 through June 30, 2015
 

 

 

 
2,000,000

Total
 
1,663

 
 
 

 
 

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

(b) In May 2015, the Company’s board of directors authorized the repurchase of up to 2 million shares of the Company’s common stock. The repurchases may be made in open market or privately negotiated transactions and the repurchase program will remain in effect until fully utilized or until modified, superseded or terminated. The timing and exact amount of common stock repurchases will depend on a number of factors including, among others, market and general economic conditions, economic capital and regulatory capital considerations, alternative uses of capital, the potential impact on our credit ratings, and contractual and regulatory limitations.



48



ITEM 6: EXHIBITS

Exhibit
No.
 
Description
 
 
Registrant hereby agrees to furnish to the Commission, upon request, the instruments defining the rights of holders of each issue of long-term debt of Registrant and its consolidated subsidiaries.
 
 
 
3.1
 
Amended and Restated Bylaws of Registrant as adopted June 9, 2015 (incorporated herein by reference to Exhibit 3.1 of Registrant's Current Report Form 8-K filed on June 12, 2015)
 
 
 
*12.1
 
Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends.
 
 
 
*31.1
 
Chief Executive Officer's Certification required by Rule 13(a)-14(a).
 
 
 
*31.2
 
Chief Financial Officer's Certification required by Rule 13(a)-14(a).
 
 
 
**32.1
 
Chief Executive Officer Certification pursuant to 18 U.S.C. § 1350, as adopted pursuant to section § 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
**32.2
 
Chief Financial Officer Certification pursuant to 18 U.S.C. § 1350, as adopted pursuant to section § 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101
 
Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2015, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheet at June 30, 2015 and December 31, 2014; (ii) Consolidated Statement of Income for the three and six months ended June 30, 2015 and 2014; (iii) Consolidated Statement of Comprehensive Income for the three and six months ended June 30, 2015 and 2014; (iv) Consolidated Statement of Changes in Equity for the six months ended June 30, 2015 and 2014; (v) Consolidated Statement of Cash Flows for the six months ended June 30, 2015 and 2014; and (vi) Notes to Financial Statements.

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

49



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Clayton, State of Missouri on the day of July 31, 2015.
 
 
ENTERPRISE FINANCIAL SERVICES CORP
 
 
 
By:
/s/ Peter F. Benoist
 
 
 
Peter F. Benoist
 
 
 
Chief Executive Officer
 
 
 
 
By: 
/s/ Keene S. Turner
 
 
 
Keene S. Turner
 
 
 
Chief Financial Officer
 



50