Attached files

file filename
EX-12.1 - COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS - ENTERPRISE FINANCIAL SERVICES CORPa2015930-ex121.htm
EX-32.1 - CHIEF EXECUTIVE OFFICER CERTIFICATION PURSUANT TO 18 U.S.C SECT 1350 - ENTERPRISE FINANCIAL SERVICES CORPa2015930-ex321.htm
EX-31.2 - CHIEF FINANCIAL OFFICER CERTIFICATION REQUIRED BY RULE 13(A)-14(A) - ENTERPRISE FINANCIAL SERVICES CORPa2015930-ex312.htm
EX-31.1 - CHIEF EXECUTIVE OFFICER CERTIFICATION REQUIRED BY RULE 13(A)-14(A) - ENTERPRISE FINANCIAL SERVICES CORPa2015930-ex311.htm
EX-10.1.1 - BENOIST AGREEMENT AMENDMENT - ENTERPRISE FINANCIAL SERVICES CORPa2015930-ex1011.htm
EX-10.1.2 - TURNER AGREEMENT AMENDMENT - ENTERPRISE FINANCIAL SERVICES CORPa2015930-ex1012.htm
EX-32.2 - CHIEF FINANCIAL OFFICER CERTIFICATION PURSUANT TO 18 U.S.C SECT 1350 - ENTERPRISE FINANCIAL SERVICES CORPa2015930-ex322.htm


 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
 
FORM 10-Q
 
[X]
 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 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 [ ] (Do not check if a smaller reporting company)
Smaller reporting company [ ]

 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes [   ]  No [X]
 
As of October 26, 2015, the Registrant had 20,023,376 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)
September 30, 2015
 
December 31, 2014
Assets
 
 
 
Cash and due from banks
$
46,775

 
$
42,903

Federal funds sold
45

 
35

Interest-bearing deposits (including $1,580 and $980 pledged as collateral)
80,070

 
57,758

                  Total cash and cash equivalents
126,890

 
100,696

Interest-bearing deposits greater than 90 days
1,000

 
5,300

Securities available for sale
470,496

 
400,146

Securities held to maturity
44,175

 
45,985

Loans held for sale
4,275

 
4,033

Portfolio loans
2,602,156

 
2,433,916

   Less: Allowance for loan losses
32,251

 
30,185

Portfolio loans, net
2,569,905

 
2,403,731

Purchase credit impaired loans, net of the allowance for loan losses ($11,339 and $15,410, respectively)
72,397

 
83,693

                  Total loans, net
2,642,302

 
2,487,424

Other real estate not covered under FDIC loss share
1,575

 
1,896

Other real estate covered under FDIC loss share
6,795

 
5,944

Other investments, at cost
15,906

 
17,037

Fixed assets, net
14,395

 
14,753

Accrued interest receivable
8,660

 
7,956

State tax credits held for sale, including $10,089 and $11,689 carried at fair value, respectively
48,207

 
38,309

FDIC loss share receivable
8,619

 
15,866

Goodwill
30,334

 
30,334

Intangible assets, net
3,323

 
4,164

Other assets
89,589

 
97,160

Total assets
$
3,516,541

 
$
3,277,003

 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
Demand deposits
$
691,758

 
$
642,930

Interest-bearing transaction accounts
529,052

 
508,941

Money market accounts
1,045,699

 
755,569

Savings
90,858

 
78,718

Certificates of deposit:
 
 
 
$100 and over
353,488

 
377,544

Other
103,108

 
127,808

Total deposits
2,813,963

 
2,491,510

Subordinated debentures
56,807

 
56,807

Federal Home Loan Bank advances
75,000

 
144,000

Other borrowings
189,884

 
234,183

Notes payable
4,800

 
5,700

Accrued interest payable
780

 
843

Other liabilities
31,744

 
27,719

Total liabilities
3,172,978

 
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; 20,035,165 and 19,913,519 shares issued, respectively
200

 
199

Treasury stock, at cost; 76,000 shares
(1,743
)
 
(1,743
)
Additional paid in capital
209,643

 
207,731

Retained earnings
132,490

 
108,373

Accumulated other comprehensive income
2,973

 
1,681

Total shareholders' equity
343,563

 
316,241

Total liabilities and shareholders' equity
$
3,516,541

 
$
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 September 30,
 
Nine months ended September 30,
(in thousands, except per share data)
2015
 
2014
 
2015
 
2014
Interest income:
 
 
 
 
 
 
 
Interest and fees on loans
$
30,626

 
$
28,395

 
$
90,109

 
$
89,582

Interest on debt securities:
 
 
 
 
 
 
 
Taxable
2,176

 
2,190

 
6,434

 
6,545

Nontaxable
298

 
298

 
880

 
896

Interest on interest-bearing deposits
68

 
43

 
153

 
145

Dividends on equity securities
12

 
110

 
107

 
201

Total interest income
33,180

 
31,036

 
97,683

 
97,369

Interest expense:
 
 
 
 
 
 
 
Interest-bearing transaction accounts
293

 
163

 
849

 
385

Money market accounts
822

 
653

 
2,136

 
2,095

Savings accounts
58

 
52

 
162

 
151

Certificates of deposit:
 
 
 
 
 
 
 
$100 and over
1,195

 
1,335

 
3,654

 
3,997

Other
348

 
406

 
1,074

 
1,249

Subordinated debentures
314

 
306

 
924

 
1,016

Federal Home Loan Bank advances
9

 
490

 
82

 
1,345

Notes payable and other borrowings
135

 
187

 
471

 
579

Total interest expense
3,174

 
3,592

 
9,352

 
10,817

Net interest income
30,006

 
27,444

 
88,331

 
86,552

Provision for portfolio loan losses
599

 
66

 
4,329

 
2,441

Provision (provision reversal) for purchase credit impaired loan losses
(227
)
 
(1,877
)
 
(3,497
)
 
957

Net interest income after provision for loan losses
29,634

 
29,255

 
87,499

 
83,154

Noninterest income:
 
 
 
 
 
 
 
Wealth management revenue
1,773

 
1,754

 
5,291

 
5,191

Service charges on deposit accounts
2,044

 
1,812

 
5,898

 
5,317

Other service charges and fee income
871

 
849

 
2,464

 
2,188

Gain on sale of other real estate
32

 
114

 
61

 
1,514

Gain on state tax credits, net
321

 
156

 
1,069

 
860

Gain on sale of investment securities

 

 
23

 

Change in FDIC loss share receivable
(1,241
)
 
(2,374
)
 
(4,450
)
 
(7,526
)
Miscellaneous income
929

 
2,141

 
3,762

 
4,235

Total noninterest income
4,729

 
4,452

 
14,118

 
11,779

Noninterest expense:
 
 
 
 
 
 
 
Employee compensation and benefits
11,475

 
11,913

 
34,262

 
35,882

Occupancy
1,605

 
1,683

 
4,920

 
4,998

Data processing
1,138

 
1,045

 
3,295

 
3,296

FDIC and other insurance
654

 
710

 
2,045

 
2,170

Loan legal and other real estate expense
530

 
811

 
1,356

 
2,985

Professional fees
800

 
710

 
2,626

 
2,569

FDIC clawback
298

 
1,028

 
760

 
1,060

Other
3,432

 
3,221

 
10,076

 
9,708

Total noninterest expense
19,932

 
21,121

 
59,340

 
62,668

 
 
 
 
 
 
 
 
Income before income tax expense
14,431

 
12,586

 
42,277

 
32,265

Income tax expense
4,722

 
4,388

 
14,506

 
11,059

Net income
$
9,709

 
$
8,198

 
$
27,771

 
$
21,206

 
 
 
 
 
 
 
 
Earnings per common share
 
 
 
 
 
 
 
Basic
$
0.49

 
$
0.41

 
$
1.39

 
$
1.07

Diluted
0.48

 
0.41

 
1.37

 
1.07

See accompanying notes to consolidated financial statements.

2




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

 
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)
2015
 
2014
 
2015
 
2014
Net income
$
9,709

 
$
8,198

 
$
27,771

 
$
21,206

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gains (losses) on investment securities arising during the period, net of income tax expense/benefit for three months of $1,070 and $(505), and for nine months of $793 and $2,574, respectively
1,724

 
(812
)
 
1,306

 
4,147

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 nine months of $9 and $0, respectively

 

 
(14
)
 

Total other comprehensive income (loss)
1,724

 
(812
)
 
1,292

 
4,147

Total comprehensive income
$
11,433

 
$
7,386

 
$
29,063

 
$
25,353


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
 

 

 

 

 
27,771

 

 
27,771

Other comprehensive loss
 

 

 

 

 

 
1,292

 
1,292

Cash dividends paid on common shares, $0.183 per share
 

 

 

 

 
(3,654
)
 

 
(3,654
)
Issuance under equity compensation plans, 121,646 shares, net
 

 
1

 

 
(832
)
 

 

 
(831
)
Share-based compensation
 

 

 

 
2,588

 

 

 
2,588

Excess tax benefit related to equity compensation plans
 

 

 

 
156

 

 

 
156

Balance September 30, 2015
 
$

 
$
200

 
$
(1,743
)
 
$
209,643

 
$
132,490

 
$
2,973

 
$
343,563

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

 
$
194

 
$
(1,743
)
 
$
200,258

 
$
85,376

 
$
(4,380
)
 
$
279,705

Net income
 

 

 

 

 
21,206

 

 
21,206

Other comprehensive income
 

 

 

 

 

 
4,147

 
4,147

Cash dividends paid on common shares, $0.105 per share
 

 

 

 

 
(3,130
)
 

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

 
2

 

 
(484
)
 

 

 
(482
)
Trust preferred securities conversion 287,852 shares
 

 
3

 

 
4,999

 

 

 
5,002

Share-based compensation
 

 

 

 
2,205

 

 

 
2,205

Excess tax benefit related to equity compensation plans
 

 

 

 
101

 

 

 
101

Balance September 30, 2014
 
$

 
$
199

 
$
(1,743
)
 
$
207,079

 
$
103,452

 
$
(233
)
 
$
308,754


See accompanying notes to consolidated financial statements.

4



ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
Nine months ended September 30,
(in thousands)
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
27,771

 
$
21,206

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation
1,510

 
1,681

Provision for loan losses
832

 
3,398

Deferred income taxes
1,937

 
6,458

Net amortization of debt securities
2,473

 
2,885

Amortization of intangible assets
842

 
965

Gain on sale of investment securities
(23
)
 

Mortgage loans originated for sale
(95,744
)
 
(52,475
)
Proceeds from mortgage loans sold
95,814

 
49,811

Gain on sale of other real estate
(61
)
 
(1,514
)
Gain on state tax credits, net
(1,069
)
 
(860
)
Excess tax benefit of share-based compensation
(156
)
 
(101
)
Share-based compensation
2,588

 
2,205

Valuation adjustment on other real estate
82

 
618

Net accretion of loan discount and indemnification asset
(4,894
)
 
731

Changes in:
 
 
 
Accrued interest receivable
(703
)
 
(223
)
Accrued interest payable
(63
)
 
(103
)
Other assets
4,851

 
(2,984
)
Other liabilities
4,024

 
(1,381
)
Net cash provided by operating activities
40,011

 
30,317

Cash flows from investing activities:
 
 
 
Net increase in loans
(152,970
)
 
(133,782
)
Net cash proceeds received from FDIC loss share receivable
1,725

 
6,487

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

 

Proceeds from the paydown or maturity of securities, available for sale
40,230

 
35,503

Proceeds from the paydown or maturity of securities, held to maturity
1,848

 

Proceeds from the redemption of other investments
29,362

 
18,637

Proceeds from the sale of state tax credits held for sale
5,353

 
4,099

Proceeds from the sale of other real estate
5,662

 
14,435

Payments for the purchase/origination of:
 
 
 
Securities, available for sale
(150,934
)
 
(53,664
)
Other investments
(23,931
)
 
(21,324
)
State tax credits held for sale
(14,004
)
 

Fixed assets
(1,152
)
 
(1,556
)
Net cash used in investing activities
(217,742
)
 
(131,165
)
Cash flows from financing activities:
 
 
 
Net increase in noninterest-bearing deposit accounts
48,828

 
42,118

Net increase (decrease) in interest-bearing deposit accounts
273,625

 
(67,307
)
Proceeds from Federal Home Loan Bank advances
635,900

 
799,600

Repayments of Federal Home Loan Bank advances
(704,900
)
 
(729,600
)
Repayments of notes payable
(900
)
 
(4,500
)
Net decrease in other borrowings
(44,299
)
 
(22,709
)
Cash dividends paid on common stock
(3,654
)
 
(3,130
)
Excess tax benefit of share-based compensation
156

 
101

Issuance of common stock, net
(831
)
 
(482
)
Net cash provided by financing activities
203,925

 
14,091

Net increase (decrease) in cash and cash equivalents
26,194

 
(86,757
)
Cash and cash equivalents, beginning of period
100,696

 
210,569

Cash and cash equivalents, end of period
$
126,890

 
$
123,812

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
9,415

 
$
10,920

Income taxes
8,763

 
8,998

Noncash transactions:
 
 
 
Transfer to other real estate owned in settlement of loans
$
6,604

 
$
7,468

Sales of other real estate financed

 
5,102

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 nine months ended September 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 September 30,
 
Nine months ended September 30,
(in thousands, except per share data)
2015
 
2014
 
2015
 
2014
Net income as reported
$
9,709

 
$
8,198

 
$
27,771

 
$
21,206

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

 

 

 
66

Net income available to common shareholders and assumed conversions
$
9,709

 
$
8,198

 
$
27,771

 
$
21,272

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
19,995

 
19,838

 
19,970

 
19,729

Incremental shares from assumed conversions of convertible trust preferred securities

 

 

 
76

Additional dilutive common stock equivalents
266

 
142

 
266

 
165

Weighted average diluted common shares outstanding
$
20,261

 
$
19,980

 
$
20,236

 
$
19,970

 
 
 
 
 
 
 
 
Basic earnings per common share:
$
0.49

 
$
0.41

 
$
1.39

 
$
1.07

Diluted earnings per common share:
$
0.48

 
$
0.41

 
$
1.37

 
$
1.07


For the three and nine months ended September 30, 2015 and 2014, the amount of common stock equivalents excluded from the earnings per share calculations because their effect was anti-dilutive was 0.1 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:
 
 
September 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
$
99,015

 
$
1,298

 
$

 
$
100,313

    Obligations of states and political subdivisions
40,740

 
1,219

 
(380
)
 
41,579

    Agency mortgage-backed securities
325,417

 
3,983

 
(796
)
 
328,604

          Total securities available for sale
$
465,172

 
$
6,500

 
$
(1,176
)
 
$
470,496

Held to maturity securities:
 
 
 
 
 
 
 
    Obligations of states and political subdivisions
$
14,848

 
$
7

 
$
(212
)
 
$
14,643

    Agency mortgage-backed securities
29,327

 
131

 

 
29,458

          Total securities held to maturity
$
44,175

 
$
138

 
$
(212
)
 
$
44,101


 
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 September 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 $260.0 million and $315.8 million at September 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 September 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 4 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
$
3,091

 
$
3,115

 
$

 
$

Due after one year through five years
115,027

 
116,882

 
2,662

 
2,648

Due after five years through ten years
16,987

 
17,524

 
10,319

 
10,158

Due after ten years
4,650

 
4,371

 
1,867

 
1,837

Mortgage-backed securities
325,417

 
328,604

 
29,327

 
29,458

 
$
465,172

 
$
470,496

 
$
44,175

 
$
44,101



The following table represents a summary of investment securities that had an unrealized loss:
 
 
September 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
15,757

 
249

 
3,563

 
343

 
19,320

 
592

Agency mortgage-backed securities
58,913

 
273

 
21,138

 
523

 
80,051

 
796

 
$
74,670

 
$
522

 
$
24,701

 
$
866

 
$
99,371

 
$
1,388

 
 
 
 
 
 
 
 
 
 
 
 
 
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 September 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 September 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 September 30,
 
Nine months ended September 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 September 30, 2015 and December 31, 2014:
 
(in thousands)
September 30, 2015
 
December 31, 2014
Commercial and industrial
$
1,371,095

 
$
1,270,259

Real estate loans:
 
 
 
    Commercial - investor owned
424,090

 
413,026

    Commercial - owner occupied
354,178

 
357,503

    Construction and land development
152,979

 
144,773

    Residential
188,985

 
185,252

Total real estate loans
1,120,232

 
1,100,554

Consumer and other
109,853

 
62,208

Portfolio loans
2,601,180

 
2,433,021

Unearned loan fees, net
976

 
895

    Portfolio loans, including unearned loan costs
$
2,602,156

 
$
2,433,916




10



A summary of the year-to-date activity in the allowance for loan losses and the recorded investment in Portfolio loans by class and category based on impairment method through September 30, 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

Provision charged to expense
1,501

 
788

 
(1,340
)
 
(660
)
 
40

 
270

 
599

Losses charged off
(572
)
 

 

 

 
(240
)
 
(9
)
 
(821
)
Recoveries
389

 
16

 
68

 
125

 
108

 
2

 
708

Balance at
September 30, 2015
$
20,199

 
$
4,249

 
$
3,245

 
$
1,833

 
$
1,952

 
$
773

 
$
32,251



11



(in thousands)
Commercial and industrial
 
CRE - investor owned
 
CRE -
owner occupied
 
Construction and land development
 
Residential real estate
 
Consumer and other
 
Total
Balance September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses - Ending balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
1,802

 
$

 
$

 
$
403

 
$

 
$

 
$
2,205

Collectively evaluated for impairment
18,397

 
4,249

 
3,245

 
1,430

 
1,952

 
773

 
30,046

Total
$
20,199

 
$
4,249

 
$
3,245

 
$
1,833

 
$
1,952

 
$
773

 
$
32,251

Loans - Ending balance:
 
 
 
 
 
 
 

 
 
 
 
 
 
Individually evaluated for impairment
$
2,975

 
$
2,954

 
$
2,248

 
$
2,823

 
$
714

 
$

 
$
11,714

Collectively evaluated for impairment
1,368,120

 
421,136

 
351,930

 
150,156

 
188,271

 
110,829

 
2,590,442

Total
$
1,371,095

 
$
424,090

 
$
354,178

 
$
152,979

 
$
188,985

 
$
110,829

 
$
2,602,156

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 September 30, 2015 and December 31, 2014, is as follows:

 
September 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
$
3,702

 
$
658

 
$
2,433

 
$
3,091

 
$
1,802

 
$
5,696

Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
    Commercial - investor owned
3,047

 
2,437

 

 
2,437

 

 
1,294

    Commercial - owner occupied
321

 
240

 

 
240

 

 
967

    Construction and land development
3,728

 
2,862

 
542

 
3,404

 
403

 
5,934

    Residential
714

 
735

 

 
735

 

 
2,450

Consumer and other

 

 

 

 

 

Total
$
11,512

 
$
6,932

 
$
2,975

 
$
9,907

 
$
2,205

 
$
16,341



12



 
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 September 30,
 
Nine months ended September 30,
(in thousands)
2015
 
2014
 
2015
 
2014
Total interest income that would have been recognized under original terms
$
369

 
$
246

 
$
913

 
$
927

Total cash received and recognized as interest income on non-accrual loans
81

 
51

 
206

 
83

Total interest income recognized on impaired loans
4

 
11

 
31

 
27

 
 
 
 
 
 
 
 

There were no loans over 90 days past due and still accruing interest at September 30, 2015 or December 31, 2014. At September 30, 2015, there were $0.3 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 September 30, 2015 and December 31, 2014, is as follows:
 
 
September 30, 2015
(in thousands)
Non-accrual
 
Restructured
 
Loans over 90 days past due and still accruing interest
 
Total
Commercial and industrial
$
3,091

 
$

 
$

 
$
3,091

Real estate loans:
 
 
 
 
 
 
 
    Commercial - investor owned
2,437

 

 

 
2,437

    Commercial - owner occupied
240

 

 

 
240

    Construction and land development
3,404

 

 

 
3,404

    Residential
735

 

 

 
735

Consumer and other

 

 

 

       Total
$
9,907

 
$

 
$

 
$
9,907



13



 
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 nine months ended September 30, 2015 and 2014, is as follows:
 
Three months ended September 30, 2015
 
Three months ended September 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

 
$

 
$

 
2

 
$
658

 
$
658

Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
     Commercial - investor owned

 

 

 

 

 

     Commercial - owner occupied

 

 

 
1

 
357

 
357

     Construction and land development

 

 

 
1

 
2,827

 
2,827

     Residential

 

 

 

 

 

Consumer and other

 

 

 

 

 

  Total

 
$

 
$

 
4

 
$
3,842

 
$
3,842


 
Nine months ended September 30, 2015
 
Nine months ended September 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

 
$

 
$

 
2

 
$
658

 
$
658

Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
     Commercial - investor owned

 

 

 
1

 
603

 
603

     Commercial - owner occupied

 

 

 
3

 
1,649

 
1,399

     Construction and land development

 

 

 
1

 
2,827

 
2,827

     Residential

 

 

 
1

 
125

 
125

Consumer and other

 

 

 

 

 

  Total

 
$

 
$

 
8

 
$
5,862

 
$
5,612


The restructured Portfolio loans primarily resulted from interest rate concessions and changing the terms of the loans. As of September 30, 2015, the Company had no specific reserves allocated to the loans that have been restructured.


14



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

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

 
September 30, 2015
(in thousands)
30-89 Days
 Past Due
 
90 or More
Days
Past Due
 
Total
Past Due
 
Current
 
Total
    Commercial and industrial
$
5,472

 
$
1,043

 
$
6,515

 
$
1,364,580

 
$
1,371,095

    Real estate loans:
 
 
 
 
 
 
 
 
 
       Commercial - investor owned
577

 
2,382

 
2,959

 
421,131

 
424,090

       Commercial - owner occupied

 
85

 
85

 
354,093

 
354,178

       Construction and land development
148

 
2,283

 
2,431

 
150,548

 
152,979

       Residential
13

 
714

 
727

 
188,258

 
188,985

    Consumer and other

 

 

 
110,829

 
110,829

          Total
$
6,210

 
$
6,507

 
$
12,717

 
$
2,589,439

 
$
2,602,156


 
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.
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.

15



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 September 30, 2015, which is based upon the most recent analysis performed, and December 31, 2014 is as follows:

 
September 30, 2015
(in thousands)
Pass (1-6)
 
Watch (7)
 
Substandard (8)
 
Doubtful (9)
 
Total
    Commercial and industrial
$
1,267,697

 
$
67,560

 
$
35,838

 
$

 
$
1,371,095

    Real estate loans:
 
 
 
 
 
 
 
 
 
       Commercial - investor owned
390,403

 
22,034

 
11,653

 

 
424,090

       Commercial - owner occupied
328,753

 
20,813

 
4,612

 

 
354,178

       Construction and land development
136,374

 
12,139

 
4,466

 

 
152,979

       Residential
174,883

 
10,576

 
3,526

 

 
188,985

    Consumer and other
110,336

 

 
493

 

 
110,829

          Total
$
2,408,446

 
$
133,122

 
$
60,588

 
$

 
$
2,602,156


 
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



16



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

Below is a summary of PCI loans by category at September 30, 2015 and December 31, 2014:
 
 
September 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
6.72
$
3,467

 
6.57
$
4,012

Real estate loans:
 
 
 
 
 
    Commercial - investor owned
7.11
32,534

 
7.07
39,066

    Commercial - owner occupied
6.35
20,008

 
6.35
22,695

    Construction and land development
6.31
7,068

 
6.16
7,740

    Residential
5.44
20,404

 
5.54
25,121

Total real estate loans
 
80,014

 
 
94,622

Consumer and other
6.13
255

 
5.39
469

    Purchase credit impaired loans
 
$
83,736

 
 
$
99,103


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

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

 
$

 
$

 
$
3,467

 
$
3,467

    Real estate loans:
 
 
 
 
 
 
 
 
 
       Commercial - investor owned
4,358

 
3,441

 
7,799

 
24,735

 
32,534

       Commercial - owner occupied

 
543

 
543

 
19,465

 
20,008

       Construction and land development

 
1,975

 
1,975

 
5,093

 
7,068

       Residential
89

 
53

 
142

 
20,262

 
20,404

    Consumer and other

 

 

 
255

 
255

          Total
$
4,447

 
$
6,012

 
$
10,459

 
$
73,277

 
$
83,736


 
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



17



The following table is a rollforward of PCI loans, net of the allowance for loan losses, for the nine months ended September 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
(19,315
)
 

 

 
(19,315
)
Accretion of loan discount

 

 
(8,604
)
 
8,604

Changes in contractual and expected cash flows due to remeasurement
(5,731
)
 
(26,797
)
 
9,233

 
11,833

Reductions due to disposals
(19,734
)
 
(4,183
)
 
(3,133
)
 
(12,418
)
Balance September 30, 2015
$
133,365

 
$
34,739

 
$
26,229

 
$
72,397

 
 
 
 
 
 
 
 
Balance December 31, 2013
$
266,068

 
$
87,438

 
$
53,530

 
$
125,100

Principal reductions and interest payments
(25,261
)
 

 

 
(25,261
)
Accretion of loan discount

 

 
(12,323
)
 
12,323

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

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

 
$
72,681

 
$
36,858

 
$
98,318


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

A summary of activity in the FDIC loss share receivable for the nine months ended September 30, 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
(1,725
)
FDIC reimbursable losses, net
(1,072
)
Adjustments reflected in income:
 
Amortization, net
(484
)
Loan impairment
(2,611
)
Reductions for payments on covered assets in excess of expected cash flows
(1,355
)
Balance September 30, 2015
$
8,619



Outstanding customer balances on PCI loans were $110.6 million and $135.3 million as of September 30, 2015, and December 31, 2014, respectively.



18



NOTE 6 - COMMITMENTS AND CONTINGENCIES

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

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

The Company uses the same credit policies in making commitments and conditional obligations as it does for financial instruments included on its consolidated balance sheets. At September 30, 2015, there were $0.3 million of unadvanced commitments on impaired loans.

The contractual amounts of off-balance-sheet financial instruments as of September 30, 2015, and December 31, 2014, are as follows:
 
(in thousands)
September 30,
2015
 
December 31,
2014
Commitments to extend credit
$
1,099,224

 
$
947,424

Standby letters of credit
51,701

 
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 September 30, 2015, and December 31, 2014, approximately $101.4 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 September 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 2.4 years at September 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.


19



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)
September 30,
2015
 
December 31,
2014
 
September 30,
2015
 
December 31,
2014
 
September 30,
2015
 
December 31,
2014
Non-designated hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
$
146,884

 
$
141,263

 
$
1,749

 
$
907

 
$
1,749

 
$
907


Changes in the fair value of client-related derivative instruments are recognized currently in operations. For the three and nine months ended September 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 September 30, 2015 and December 31, 2014, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
 
 
September 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
$

 
$
100,313

 
$

 
$
100,313

Obligations of states and political subdivisions

 
38,502

 
3,077

 
41,579

Residential mortgage-backed securities

 
328,604

 

 
328,604

Total securities available for sale
$

 
$
467,419

 
$
3,077

 
$
470,496

State tax credits held for sale

 

 
10,089

 
10,089

Derivative financial instruments

 
1,749

 

 
1,749

Total assets
$

 
$
469,168

 
$
13,166

 
$
482,334

 
 
 
 
 
 
 
 
Liabilities
 

 
 
 
 

 
 
Derivative financial instruments
$

 
$
1,749

 
$

 
$
1,749

Total liabilities
$

 
$
1,749

 
$

 
$
1,749

 
 
 
 
 
 
 
 


20



 
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 September 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.
State tax credits held for sale. At September 30, 2015, of the $48.2 million of state tax credits held for sale on the condensed consolidated balance sheet, approximately $10.1 million were carried at fair value. The remaining $38.1 million of state tax credits were accounted for at cost.
The Company is not aware of an active market that exists for the 10-year streams of state tax credit financial instruments. However, the Company’s principal market for these tax credits consists of Missouri state residents who buy these credits and local and regional accounting firms who broker them. As such, the Company employed a discounted cash flow analysis (income approach) to determine the fair value.
The fair value measurement is calculated using an internal valuation model with market data including discounted cash flows based upon the terms and conditions of the tax credits. If the underlying project remains in compliance with the various federal and state rules governing the tax credit program, each project will generate about 10 years of tax credits. The inputs to the discounted cash flow calculation include: the amount of tax credits generated each year, the anticipated sale price of the tax credit, the timing of the sale and a discount rate. The discount rate is estimated using the LIBOR swap curve at a point equal to the remaining life in years of credits plus a 205 basis point spread. With the exception of the discount rate, the other inputs to the fair value calculation are observable and readily available. The discount rate is considered a Level 3 input because it is an “unobservable input” and is based on the Company’s assumptions. An increase in the discount rate utilized would generally result in a lower estimated fair value of the tax credits. Alternatively, a decrease in the discount rate utilized would generally result in a higher estimated fair value of the tax credits. Given the significance of this input to the fair value calculation, the state tax credit assets are reported as Level 3 assets.
Derivatives. Derivatives are reported at fair value utilizing Level 2 inputs. The Company obtains counterparty quotations to value its interest rate swaps and caps. In addition, the Company validates the counterparty quotations with third party valuation sources. Derivatives with negative fair values are included in Other

21



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 September 30, 2015 and 2014.
Purchases, sales, issuances and settlements. There were no Level 3 purchases during the quarter ended September 30, 2015 or 2014.
Transfers in and/or out of Level 3. There were no Level 3 transfers during the quarter ended September 30, 2015 and 2014.
 
Securities available for sale, at fair value
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)
2015
 
2014
 
2015
 
2014
Beginning balance
$
3,070

 
$
3,051

 
$
3,059

 
$
3,040

   Total gains:
 
 
 
 
 
 
 
Included in other comprehensive income
7

 
3

 
18

 
14

   Purchases, sales, issuances and settlements:
 
 
 
 
 
 
 
Purchases

 

 

 

Transfer in and/or out of Level 3

 

 

 

Ending balance
$
3,077

 
$
3,054

 
$
3,077

 
$
3,054

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

 
$
3

 
$
18

 
$
14



 
State tax credits held for sale
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)
2015
 
2014
 
2015
 
2014
Beginning balance
$
9,965

 
$
14,985

 
$
11,689

 
$
16,491

   Total gains:
 
 
 
 
 
 
 
Included in earnings
124

 
146

 
318

 
407

   Purchases, sales, issuances and settlements:
 
 
 
 
 
 
 
Sales

 

 
(1,918
)
 
(1,767
)
Ending balance
$
10,089

 
$
15,131

 
$
10,089

 
$
15,131

 
 
 
 
 
 
 
 
Change in unrealized gains (losses) relating to
assets still held at the reporting date
$
124

 
$
146

 
$
(186
)
 
$
(58
)










22



From time to time, the Company measures certain assets at fair value on a nonrecurring basis. These include assets that are measured at the lower of cost or fair value that were recognized at fair value below cost at the end of the period.
The following table presents financial instruments and non-financial assets measured at fair value on a non-recurring basis as of September 30, 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
September 30, 2015
 
Total losses
for the nine months ended
September 30, 2015
Impaired loans
$
2,427

 
$

 
$

 
$
2,427

 
$
821

 
$
5,985

Other real estate
890

 

 

 
890

 
1

 
83

Total
$
3,317

 
$

 
$

 
$
3,317

 
$
822

 
$
6,068


(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 for collateral dependent loans. 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 September 30, 2015 and December 31, 2014.

 
September 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
$
46,775

 
$
46,775

 
$
42,903

 
$
42,903

Federal funds sold
45

 
45

 
35

 
35

Interest-bearing deposits
81,070

 
81,070

 
63,058

 
63,058

Securities available for sale
470,496

 
470,496

 
400,146

 
400,146

Securities held to maturity
44,175

 
44,101

 
45,985

 
45,795

Other investments, at cost
15,906

 
15,906

 
17,037

 
17,037

Loans held for sale
4,275

 
4,275

 
4,033

 
4,033

Derivative financial instruments
1,749

 
1,749

 
909

 
909

Portfolio loans, net
2,642,302

 
2,635,556

 
2,487,424

 
2,482,700

State tax credits, held for sale
48,207

 
53,767

 
38,309

 
42,970

Accrued interest receivable
8,660

 
8,660

 
7,956

 
7,956

 
 
 
 
 
 
 
 
Balance sheet liabilities
 
 
 
 
 
 
 
Deposits
2,813,963

 
2,816,039

 
2,491,510

 
2,494,624

Subordinated debentures
56,807

 
34,463

 
56,807

 
34,124

Federal Home Loan Bank advances
75,000

 
74,998

 
144,000

 
144,000

Other borrowings
194,684

 
194,671

 
239,883

 
239,950

Derivative financial instruments
1,749

 
1,749

 
907

 
907

Accrued interest payable
780

 
780

 
843

 
843



23



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 September 30, 2015, and December 31, 2014.
 
 
Estimated Fair Value Measurement at Reporting Date Using
 
Balance at
September 30, 2015
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Financial Assets:
 
 
 
 
 
 
 
Securities held to maturity
$

 
$
44,101

 
$

 
$
44,101

Portfolio loans, net

 

 
2,635,556

 
2,635,556

State tax credits, held for sale

 

 
43,678

 
43,678

Financial Liabilities:
 
 
 
 
 
 
 
Deposits
2,357,367

 

 
458,672

 
2,816,039

Subordinated debentures

 
34,463

 

 
34,463

Federal Home Loan Bank advances

 
74,998

 

 
74,998

Other borrowings

 
194,671

 

 
194,671

 
 
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 was originally effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2016 for public companies. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of this guidance to annual reporting periods beginning after December 15, 2017 for public companies, and permits early adoption on a limited basis. 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

24



the method of adoption. Entities have the option of using either a full retrospective or modified approach to adopt ASU 2014-09.

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.

25



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

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

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

Introduction

The following discussion describes the significant changes to the financial condition of the Company that have occurred during the first nine months of 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 nine months ended September 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.

 

26



Executive Summary

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

(in thousands, except per share data)
For the Three Months ended and At
 
For the Nine Months ended
September 30,
2015
 
June 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
EARNINGS
 
 
 
 
 
 
 
 
 
Total interest income
$
33,180

 
$
32,352

 
$
31,036

 
$
97,683

 
$
97,369

Total interest expense
3,174

 
3,072

 
3,592

 
9,352

 
10,817

Net interest income
30,006

 
29,280

 
27,444

 
88,331

 
86,552

Provision for portfolio loans
599

 
2,150

 
66

 
4,329

 
2,441

Provision (provision reversal) for purchase credit impaired loans
(227
)
 

 
(1,877
)
 
(3,497
)
 
957

Net interest income after provision for loan losses
29,634

 
27,130

 
29,255

 
87,499

 
83,154

 
 
 
 
 
 
 
 
 
 
Total noninterest income
4,729

 
5,806

 
4,452

 
14,118

 
11,779

 
 
 
 
 
 
 
 
 
 
Total noninterest expense
19,932

 
19,458

 
21,121

 
59,340

 
62,668

Income before income tax expense
14,431

 
13,478

 
12,586

 
42,277

 
32,265

Income tax expense
4,722

 
4,762

 
4,388

 
14,506

 
11,059

Net income
$
9,709

 
$
8,716

 
$
8,198

 
$
27,771

 
$
21,206

 
 
 
 
 
 
 
 
 
 
Basic earnings per share
$
0.49

 
$
0.44

 
$
0.41

 
$
1.39

 
$
1.07

Diluted earnings per share
0.48

 
0.43

 
0.41

 
1.37

 
1.07

 
 
 
 
 
 
 
 
 
 
Return on average assets
1.13
%
 
1.06
%
 
1.02
 %
 
1.11
%
 
0.91
%
Return on average common equity
11.38
%
 
10.56
%
 
10.62
 %
 
11.24
%
 
9.54
%
Return on average tangible common equity
12.65
%
 
11.77
%
 
11.98
 %
 
12.53
%
 
10.83
%
Net interest margin (fully tax equivalent)
3.77
%
 
3.85
%
 
3.75
 %
 
3.84
%
 
4.05
%
Efficiency ratio
57.38
%
 
55.46
%
 
66.22
 %
 
57.92
%
 
63.73
%
 
 
 
 
 
 
 
 
 
 
ASSET QUALITY (1)
 
 
 
 
 
 
 
 
 
Net charge-offs (recoveries)
$
113

 
$
672

 
$
(311
)
 
$
2,263

 
$
931

Nonperforming loans
9,123

 
17,498

 
18,212

 
 
 
 
Classified assets
62,679

 
61,722

 
81,382

 
 
 
 
Nonperforming loans to total loans
0.35
%
 
0.69
%
 
0.79
 %
 
 
 
 
Nonperforming assets to total assets
0.30
%
 
0.58
%
 
0.64
 %
 
 
 
 
Allowance for loan losses to total loans
1.24
%
 
1.25
%
 
1.25
 %
 
 
 
 
Net charge-offs to average loans (annualized)
0.02
%
 
0.11
%
 
(0.05
)%
 
0.12
%
 
0.06
%
 
 
 
 
 
 
 
 
 
 
(1) Excludes PCI loans and other assets covered under FDIC loss share agreements, except for their inclusion in total assets.








27



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 Three Months ended
 
For the Nine Months ended
(in thousands)
September 30,
2015
 
June 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
CORE PERFORMANCE MEASURES (1)
 
 
 
 
Net interest income
$
27,087

 
$
26,277

 
$
24,865

 
$
78,951

 
$
72,771

Provision for portfolio loans
599

 
2,150

 
66

 
4,329

 
2,441

Noninterest income
5,939

 
6,741

 
5,926

 
18,519

 
18,110

Noninterest expense
19,347

 
19,030

 
19,347

 
57,445

 
59,199

Income before income tax expense
13,080

 
11,838

 
11,378

 
35,696

 
29,241

Income tax expense
4,204

 
4,134

 
3,926

 
11,985

 
9,901

Net income
$
8,876

 
$
7,704

 
$
7,452

 
$
23,711

 
$
19,340

 
 
 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.44

 
$
0.38

 
$
0.37

 
$
1.17

 
$
0.97

Return on average assets
1.03
%
 
0.93
%
 
0.93
%
 
0.95
%
 
0.83
%
Return on average common equity
10.41
%
 
9.34
%
 
9.65
%
 
9.59
%
 
8.70
%
Return on average tangible common equity
11.56
%
 
10.41
%
 
10.89
%
 
10.70
%
 
9.88
%
Net interest margin (fully tax equivalent)
3.41
%
 
3.46
%
 
3.41
%
 
3.44
%
 
3.42
%
Efficiency ratio
58.58
%
 
57.64
%
 
62.83
%
 
58.94
%
 
65.14
%
 
 
 
 
 
 
 
 
 
 
(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 nine months ended September 30, 2015, the Company noted the following trends:

The Company reported net income of $27.8 million, or $1.37 per share, for the nine months ended September 30, 2015, compared to $21.2 million, or $1.07 per share, 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 $23.7 million, or $1.17 per share, for the nine months ended September 30, 2015, compared to $19.3 million, or $0.97 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 nine months of 2015 increased $1.8 million, or 2%, from the prior year period due to strong portfolio loan growth during the year, offset by a decline in accelerations from PCI loans. On a core basis1, net interest income increased $6.2 million, or 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, for the first nine months of 2015, defined as Net interest margin (fully tax equivalent), including contractual interest on PCI loans, but excluding the incremental accretion on these

28



loans, increased two basis points from the prior year period primarily due to the managed reductions in funding costs combined with an improved earning asset mix.

Core noninterest income1, for the first nine months of 2015, 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 2% 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 57.9% from 63.7% when compared to the prior year. Core noninterest expense1 declined 3% when compared to the prior year, and the Core efficiency ratio1 improved to 58.9% from 65.1% when compared to the prior year period primarily due to growth in revenue.

Other highlights:

The Company's Board approved an increase in the Company’s quarterly cash dividend to $0.08 per common share for the fourth quarter of 2015 from $0.07, payable on December 31, 2015 to shareholders of record as of the close of business on December 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 two 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. The Company had not repurchased any shares pursuant to this publicly announced program as of September 30, 2015.

Balance sheet highlights:

Loans – Loans totaled $2.7 billion at September 30, 2015, including $83.7 million of PCI loans. Portfolio loans excluding PCI loans increased $168.2 million, or 7%, from December 31, 2014. Commercial and industrial loans increased $100.8 million, or 8%, Consumer and other loans increased $47.7 million, or 76%, Construction loans and Residential real estate loans increased $11.9 million, or 4%, and Commercial real estate increased $7.7 million, or 1%. See Item 1, Note 4 – Portfolio Loans for more information.
Deposits – Total deposits at September 30, 2015 were $2.8 billion, an increase of $322.5 million, or 13%, from December 31, 2014, partially due to enhanced deposit gathering efforts in both commercial and business banking.
Asset quality – Nonperforming loans, including troubled debt restructurings, were $9.1 million at September 30, 2015, compared to $22.2 million at December 31, 2014. Nonperforming loans represented 0.35% of portfolio loans at September 30, 2015 versus 0.91% at December 31, 2014. There were no portfolio loans that were over 90 days delinquent and still accruing at September 30, 2015 or December 31, 2014.
Provision for portfolio loan losses was $4.3 million for the nine months ended September 30, 2015, compared to $2.4 million for the nine months ended September 30, 2014. See Item 1, Note 4 – Portfolio Loans, and Provision and Allowance for Loan Losses in this section for more information.




29



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 September 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)
$
2,505,985

 
$
26,061

 
4.13
%
 
$
2,251,765

 
$
23,766

 
4.19
%
Tax-exempt portfolio loans (2)
39,218

 
644

 
6.51

 
34,012

 
565

 
6.59

Purchase credit impaired loans
85,155

 
4,167

 
19.41

 
115,709

 
4,280

 
14.68

Total loans
2,630,358

 
30,872

 
4.66

 
2,401,486

 
28,611

 
4.73

Taxable investments in debt and equity securities
431,313

 
2,188

 
2.01

 
434,159

 
2,300

 
2.10

Non-taxable investments in debt and equity securities (2)
43,867

 
483

 
4.37

 
43,529

 
481

 
4.38

Short-term investments
95,642

 
68

 
0.28

 
63,896

 
43

 
0.27

Total securities and short-term investments
570,822

 
2,739

 
1.90

 
541,584

 
2,824

 
2.07

Total interest-earning assets
3,201,180

 
33,611

 
4.17

 
2,943,070

 
31,435

 
4.24

Noninterest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
49,057

 
 
 
 
 
36,167

 
 
 
 
Other assets
210,109

 
 
 
 
 
247,846

 
 
 
 
Allowance for loan losses
(43,630
)
 
 
 
 
 
(46,723
)
 
 
 
 
 Total assets
$
3,416,716

 
 
 
 
 
$
3,180,360

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing transaction accounts
$
518,260

 
$
293

 
0.22
%
 
$
327,113

 
$
163

 
0.20
%
Money market accounts
1,023,062

 
822

 
0.32

 
809,766

 
653

 
0.32

Savings
92,596

 
58

 
0.25

 
82,955

 
52

 
0.25

Certificates of deposit
500,877

 
1,543

 
1.22

 
580,186

 
1,741

 
1.19

Total interest-bearing deposits
2,134,795

 
2,716

 
0.50

 
1,800,020

 
2,609

 
0.58

Subordinated debentures
56,807

 
314

 
2.19

 
56,807

 
306

 
2.14

Other borrowed funds
203,133

 
144

 
0.28

 
354,637

 
677

 
0.76

Total interest-bearing liabilities
2,394,735

 
3,174

 
0.53

 
2,211,464

 
3,592

 
0.64

Noninterest bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
653,450

 
 
 
 
 
637,425

 
 
 
 
Other liabilities
30,163

 
 
 
 
 
25,164

 
 
 
 
Total liabilities
3,078,348

 
 
 
 
 
2,874,053

 
 
 
 
Shareholders' equity
338,368

 
 
 
 
 
306,307

 
 
 
 
Total liabilities & shareholders' equity
$
3,416,716

 
 
 
 
 
$
3,180,360

 
 
 
 
Net interest income
 
 
$
30,437

 
 
 
 
 
$
27,843

 
 
Net interest spread
 
 
 
 
3.64
%
 
 
 
 
 
3.60
%
Net interest margin
 
 
 
 
3.77
%
 
 
 
 
 
3.75
%



30



(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 $0.6 million and $0.2 million for the three months ended September 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 September 30, 2015 and 2014.


 
Nine months ended September 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)
$
2,449,606

 
$
75,560

 
4.12
%
 
$
2,185,744

 
$
69,135

 
4.23
%
Tax-exempt portfolio loans (2)
38,691

 
1,896

 
6.55

 
34,973

 
1,776

 
6.79

Purchase credit impaired loans
91,464

 
13,376

 
19.55

 
124,481

 
19,348

 
20.78

Total loans
2,579,761

 
90,832

 
4.71

 
2,345,198

 
90,259

 
5.15

Taxable investments in debt and equity securities
424,058

 
6,541

 
2.06

 
421,015

 
6,747

 
2.14

Non-taxable investments in debt and equity securities (2)
42,913

 
1,421

 
4.43

 
43,777

 
1,446

 
4.42

Short-term investments
68,926

 
153

 
0.30

 
86,212

 
146

 
0.23

Total securities and short-term investments
535,897

 
8,115

 
2.02

 
551,004

 
8,339

 
2.02

Total interest-earning assets
3,115,658

 
98,947

 
4.25

 
2,896,202

 
98,598

 
4.55

Noninterest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
48,633

 
 
 
 
 
22,903

 
 
 
 
Other assets
212,419

 
 
 
 
 
257,494

 
 
 
 
Allowance for loan losses
(44,280
)
 
 
 
 
 
(45,718
)
 
 
 
 
 Total assets
$
3,332,430

 
 
 
 
 
$
3,130,881

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing transaction accounts
$
503,142

 
$
849

 
0.23
%
 
$
257,749

 
$
385

 
0.20
%
Money market accounts
915,989

 
2,136

 
0.31

 
882,496

 
2,093

 
0.32

Savings
86,996

 
162

 
0.25

 
81,519

 
151

 
0.25

Certificates of deposit
522,157

 
4,728

 
1.21

 
602,332

 
5,248

 
1.16

Total interest-bearing deposits
2,028,284

 
7,875

 
0.52

 
1,824,096

 
7,877

 
0.58

Subordinated debentures
56,807

 
924

 
2.18

 
58,309

 
1,016

 
2.33

Other borrowed funds
235,622

 
553

 
0.31

 
315,165

 
1,924

 
0.82

Total interest-bearing liabilities
2,320,713

 
9,352

 
0.54

 
2,197,570

 
10,817

 
0.66

Noninterest bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
654,721

 
 
 
 
 
614,105

 
 
 
 
Other liabilities
26,556

 
 
 
 
 
22,101

 
 
 
 
Total liabilities
3,001,990

 
 
 
 
 
2,833,776

 
 
 
 
Shareholders' equity
330,440

 
 
 
 
 
297,105

 
 
 
 
Total liabilities & shareholders' equity
$
3,332,430

 
 
 
 
 
$
3,130,881

 
 
 
 
Net interest income
 
 
$
89,595

 
 
 
 
 
$
87,781

 
 
Net interest spread
 
 
 
 
3.71
%
 
 
 
 
 
3.89
%
Net interest margin
 
 
 
 
3.84
%
 
 
 
 
 
4.05
%

(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 $1.5 million and $0.5 million for the nine months ended September 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 $1.3 million and $1.2 million for the nine months ended September 30, 2015 and 2014.

31



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 September 30,
 
Nine months ended September 30,
 
Increase (decrease) due to
 
Increase (decrease) due to
(in thousands)
Volume(1)
 
Rate(2)
 
Net
 
Volume(1)
 
Rate(2)
 
Net
Interest earned on:
 
 
 
 
 
 
 
 
 
 
 
Taxable portfolio loans
$
2,648

 
$
(353
)
 
$
2,295

 
$
8,174

 
$
(1,749
)
 
$
6,425

Tax-exempt portfolio loans (3)
85

 
(6
)
 
79

 
184

 
(64
)
 
120

Purchase credit impaired loans
(1,294
)
 
1,181

 
(113
)
 
(4,884
)
 
(1,088
)
 
(5,972
)
Taxable investments in debt and equity securities
(15
)
 
(97
)
 
(112
)
 
49

 
(255
)
 
(206
)
Non-taxable investments in debt and equity securities (3)
4

 
(2
)
 
2

 
(29
)
 
4

 
(25
)
Short-term investments
23

 
2

 
25

 
(33
)
 
40

 
7

Total interest-earning assets
$
1,451

 
$
725

 
$
2,176

 
$
3,461

 
$
(3,112
)
 
$
349

 
 
 
 
 
 
 
 
 
 
 
 
Interest paid on:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing transaction accounts
$
106

 
$
24

 
$
130

 
$
408

 
$
56

 
$
464

Money market accounts
171

 
(2
)
 
169

 
78

 
(35
)
 
43

Savings
6

 

 
6

 
10

 
1

 
11

Certificates of deposit
(243
)
 
45

 
(198
)
 
(720
)
 
200

 
(520
)
Subordinated debentures

 
8

 
8

 
(27
)
 
(65
)
 
(92
)
Borrowed funds
(215
)
 
(318
)
 
(533
)
 
(399
)
 
(972
)
 
(1,371
)
Total interest-bearing liabilities
(175
)
 
(243
)
 
(418
)
 
(650
)
 
(815
)
 
(1,465
)
Net interest income
$
1,626

 
$
968

 
$
2,594

 
$
4,111

 
$
(2,297
)
 
$
1,814


(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 $30.4 million for the three months ended September 30, 2015, compared to $27.8 million for the same period of 2014, an increase of $2.6 million, or 9%. Total interest income increased $2.2 million and total interest expense decreased $0.4 million. The tax-equivalent net interest rate margin was 3.77% for the third quarter of 2015, compared to 3.85% for the second quarter of 2015, and 3.75% in the third quarter of 2014.

Net interest income (on a tax equivalent basis) was $89.6 million for the nine months ended September 30, 2015, compared to $87.8 million for the same period of 2014, an increase of $1.8 million, or 2%. Total interest income increased $0.3 million and total interest expense decreased $1.5 million. The tax-equivalent net interest rate margin was 3.84% for the nine months ended September 30, 2015, compared to 4.05% for the nine months ended September 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 nine months ended September 30, 2015, changes in interest

32



rates have led to a $1.8 million, and $1.1 million reduction in interest income in our portfolio and PCI loans, respectively. Additionally, the run-off of higher yielding PCI loans continue to negatively impact net interest margin leading to a $4.9 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 3.44% for the nine months ended September 30, 2015, compared to 3.42% for the prior year period.  Core net interest margin1 increased two 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 remaining three months of 2015 and into 2016.


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 periods indicated.

 
For the Three Months ended
 
For the Nine Months ended
(in thousands)
September 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
Contractual interest income
$
1,248

 
$
1,701

 
$
3,996

 
$
5,567

Accelerated cash flows and other incremental accretion
2,919

 
2,579

 
9,380

 
13,781

Estimated funding cost
(293
)
 
(314
)
 
(939
)
 
(1,078
)
Total net interest income
3,874

 
3,966

 
12,437

 
18,270

(Provision) benefit for loan losses
227

 
1,877

 
3,497

 
(957
)
Gain (loss) on sale of other real estate
31

 
(45
)
 
26

 
250

Change in FDIC loss share receivable
(1,241
)
 
(2,374
)
 
(4,450
)
 
(7,526
)
Change in FDIC clawback liability
(298
)
 
(1,028
)
 
(760
)
 
(1,060
)
Other expenses
(287
)
 
(731
)
 
(1,136
)
 
(2,386
)
PCI assets income before income tax expense
$
2,306

 
$
1,665

 
$
9,614

 
$
6,591


At September 30, 2015, the remaining accretable yield on the portfolio was estimated to be $26 million and the non-accretable difference was approximately $35 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 $11 million to $13 million in 2015.


33



Noninterest Income

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

 
Three months ended September 30,
(in thousands)
2015
 
2014
 
Increase (decrease)
 Wealth management revenue
$
1,773

 
$
1,754

 
$
19

 
1
 %
 Service charges on deposit accounts
2,044

 
1,812

 
232

 
13
 %
 Other service charges and fee income
871

 
849

 
22

 
3
 %
 Sale of other real estate
1

 
159

 
(158
)
 
(99
)%
 State tax credit activity, net
321

 
156

 
165

 
106
 %
 Miscellaneous income
929

 
1,196

 
(267
)
 
(22
)%
Core noninterest income (1)
5,939

 
5,926

 
13

 
 %
Gain (loss) on sale of other real estate covered under FDIC loss share agreements
31

 
(45
)
 
76

 
(169
)%
Change in FDIC loss share receivable
(1,241
)
 
(2,374
)
 
1,133

 
(48
)%
Closing fee

 
945

 
(945
)
 
(100
)%
Total noninterest income
$
4,729

 
$
4,452

 
$
277

 
6
 %
 
 
 
 
 
 
 
 
(1) A non-GAAP measure. A reconciliation has been included in this MD&A section under the caption "Use of Non-GAAP Financial Measures."

 
Nine months ended September 30,
(in thousands)
2015
 
2014
 
Increase (decrease)
 Wealth management revenue
$
5,291

 
$
5,191

 
$
100

 
2
 %
 Service charges on deposit accounts
5,898

 
5,317

 
581

 
11
 %
 Other service charges and fee income
2,464

 
2,188

 
276

 
13
 %
 Sale of other real estate
35

 
1,264

 
(1,229
)
 
(97
)%
 State tax credit activity, net
1,069

 
860

 
209

 
24
 %
 Miscellaneous income
3,762

 
3,290

 
472

 
14
 %
Core noninterest income (1)
18,519

 
18,110

 
409

 
2
 %
Gain (loss) on sale of other real estate covered under FDIC loss share agreements
26

 
250

 
(224
)
 
(90
)%
Gain on sale of investment securities
23

 

 
23

 

Change in FDIC loss share receivable
(4,450
)
 
(7,526
)
 
3,076

 
(41
)%
Closing fee

 
$
945

 
(945
)
 
(100
)%
Total noninterest income
$
14,118

 
$
11,779

 
$
2,339

 
20
 %
 
 
 
 
 
 
 
 
(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 $2.3 million, or 20% in the first nine months of 2015 compared to the first nine months of 2014. Core noninterest income1 grew 2% in the first nine months of 2015 due to an increase in allocation fees from tax credit projects, increases in fees earned from recoveries, gain on sales of mortgages, and swap fee income. Service charges on deposit accounts for the first nine months of 2015 increased 11% compared to the prior year period due to an increase in deposit balances and growth in relationships.


34



Noninterest Expense

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

 
Three months ended September 30,
(in thousands)
2015
 
2014
 
Increase (decrease)
Core expenses (1):
 
 
 
 
 
 
 
 Employee compensation and benefits - core
$
11,237

 
$
11,622

 
$
(385
)
 
(3
)%
 Occupancy - core
1,580

 
1,655

 
(75
)
 
(5
)%
 Data processing - core
1,107

 
978

 
129

 
13
 %
 FDIC and other insurance
654

 
710

 
(56
)
 
(8
)%
 Professional fees - core
772

 
721

 
51

 
7
 %
 Loan, legal and other real estate expense - core
567

 
446

 
121

 
27
 %
 Other - core
3,430

 
3,215

 
215

 
7
 %
Core noninterest expense (1)
19,347

 
19,347

 

 
 %
FDIC clawback
298

 
1,028

 
(730
)
 
(71
)%
Other loss share expenses
287

 
746

 
(459
)
 
(62
)%
Total noninterest expense
$
19,932

 
$
21,121

 
$
(1,189
)
 
(6
)%
 
 
 
 
 
 
 
 
(1) A non-GAAP measure. A reconciliation has been included in this MD&A section under the caption "Use of Non-GAAP Financial Measures."

 
Nine months ended September 30,
(in thousands)
2015
 
2014
 
Increase (decrease)
Core expenses (1):
 
 
 
 
 
 
 
 Employee compensation and benefits - core
$
33,517

 
$
34,609

 
$
(1,092
)
 
(3
)%
 Occupancy - core
4,845

 
4,917

 
(72
)
 
(1
)%
 Data processing - core
3,205

 
3,098

 
107

 
3
 %
 FDIC and other insurance
2,046

 
2,170

 
(124
)
 
(6
)%
 Professional fees - core
2,582

 
2,569

 
13

 
1
 %
 Loan, legal and other real estate expense - core
1,188

 
2,152

 
(964
)
 
(45
)%
 Other - core
10,062

 
9,684

 
378

 
4
 %
Core noninterest expense (1)
57,445

 
59,199

 
(1,754
)
 
(3
)%
FDIC clawback
760

 
1,060

 
(300
)
 
(28
)%
Other loss share expenses
1,135

 
2,409

 
(1,274
)
 
(53
)%
Total noninterest expense
$
59,340

 
$
62,668

 
$
(3,328
)
 
(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 $59.3 million for the nine months ended September 30, 2015, compared to $62.7 million for the nine months ended September 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 $57.4 million for the nine months ended September 30, 2015, from $59.2 million for the prior year period.

The Company's Core efficiency ratio1 was 58.9% for the nine months ended September 30, 2015, compared to 65.1% 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. A reconciliation of Core efficiency ratio has been included in this MD&A section under the caption "Use of Non-GAAP Financial Measures".

35




The Company anticipates total noninterest expenses to be between $19 million and $21 million per quarter for the remainder of 2015 and throughout 2016.


Income Taxes

The Company's income tax expense for the three and nine months ended September 30, 2015, which includes both federal and state taxes, was $4.7 million and $14.5 million, respectively, compared to $4.4 million and $11.1 million for the same periods of 2014. The combined federal and state effective income tax rates for the three and nine months ended September 30, 2015 were 32.7% and 34.3%, respectively, compared to 34.9% and 34.3% for the same periods of 2014, respectively. The decrease in the effective tax rate as compared to the prior year quarter was mainly due to lower state income tax expense, including $0.3 million related to prior years.



Summary Balance Sheet

(in thousands)
September 30, 2015
 
December 31, 2014
 
Increase (decrease)
Total cash and cash equivalents
$
126,890

 
$
100,696

 
26,194

26.0
 %
Securities available for sale
470,496

 
400,146

 
70,350

17.6
 %
Securities held to maturity
44,175

 
45,985

 
(1,810
)
(3.9
)%
Portfolio loans
2,602,156

 
2,433,916

 
168,240

6.9
 %
Purchase credit impaired loans
83,736

 
99,103

 
(15,367
)
(15.5
)%
Total assets
3,516,541

 
3,277,003

 
239,538

7.3
 %
Deposits
2,813,963

 
2,491,510

 
322,453

12.9
 %
Total liabilities
3,172,978

 
2,960,762

 
212,216

7.2
 %
Total shareholders' equity
343,563

 
316,241

 
27,322

8.6
 %

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)
September 30, 2015
 
December 31, 2014
 
Increase (decrease)
Commercial and industrial
$
1,371,095

 
$
1,270,259

 
$
100,836

7.9
 %
Commercial real estate - investor owned
424,090

 
413,026

 
11,064

2.7
 %
Commercial real estate - owner occupied
354,178

 
357,503

 
(3,325
)
(0.9
)%
Construction and land development
152,979

 
144,773

 
8,206

5.7
 %
Residential real estate
188,985

 
185,252

 
3,733

2.0
 %
Consumer and other
110,829

 
63,103

 
47,726

75.6
 %
   Portfolio loans
2,602,156

 
2,433,916

 
168,240

6.9
 %
Purchase credit impaired loans
83,736

 
99,103

 
(15,367
)
(15.5
)%
   Total loans
$
2,685,892

 
$
2,533,019

 
$
152,873

6.0
 %

36




Portfolio loans grew by $168.2 million to $2.6 billion at September 30, 2015 when compared to December 31, 2014. PCI loans totaled $83.7 million at September 30, 2015, a decrease of $15.4 million, or 16%, from December 31, 2014, primarily as a result of principal paydowns and accelerated loan payoffs.

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

(in thousands)
September 30, 2015
 
December 31, 2014
 
$ Change
 
% Change
Enterprise value lending
245,814

 
202,468

 
43,346

 
21.4
%
Life insurance premium financing
247,736

 
220,909

 
26,827

 
12.1
%
Tax credits
145,207

 
129,782

 
15,425

 
11.9
%

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


37



Provision and Allowance for Loan Losses
The following table summarizes changes in the allowance for loan losses arising from loans charged off and recoveries on loans previously charged off, by loan category, and additions to the allowance charged to expense.
 
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)
2015
 
2014
 
2015
 
2014
Allowance at beginning of period, for portfolio loans
$
31,765

 
$
28,422

 
$
30,185

 
$
27,289

Loans charged off:
 
 
 
 
 
 
 
Commercial and industrial
(572
)
 
(215
)
 
(3,634
)
 
(1,694
)
Real estate:
 
 
 
 
 
 
 
Commercial

 
(50
)
 
(664
)
 
(724
)
Construction and land development

 
(600
)
 
(350
)
 
(905
)
Residential
(240
)
 

 
(1,313
)
 

Consumer and other
(9
)
 

 
(24
)
 
(4
)
Total loans charged off
(821
)
 
(865
)
 
(5,985
)
 
(3,327
)
Recoveries of loans previously charged off:
 
 
 
 
 
 
 
Commercial and industrial
389

 
880

 
1,578

 
1,221

Real estate:
 
 
 
 
 
 
 
Commercial
84

 
31

 
1,540

 
106

Construction and land development
125

 
35

 
300

 
759

Residential
108

 
230

 
221

 
310

Consumer and other
2

 
1

 
83

 
1

Total recoveries of loans
708

 
1,177

 
3,722

 
2,397

Net loan chargeoffs
(113
)
 
312

 
(2,263
)
 
(930
)
Provision for loan losses
599

 
66

 
4,329

 
2,441

Allowance at end of period, for portfolio loans
$
32,251

 
$
28,800

 
$
32,251

 
$
28,800

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

 
$
17,539

 
$
15,410

 
$
15,438

   Loans charged off
(10
)
 
(8
)
 
(12
)
 
(171
)
Other
(18
)
 
(110
)
 
(562
)
 
(680
)
Net loan chargeoffs
(28
)
 
(118
)
 
(574
)
 
(851
)
Provision (provision reversal) for loan losses
(227
)
 
(1,877
)
 
(3,497
)
 
957

Allowance at end of period, for purchase credit impaired loans
$
11,339

 
$
15,544

 
$
11,339

 
$
15,544

 
 
 
 
 
 
 
 
Total allowance at end of period
$
43,590

 
$
44,344

 
$
43,590

 
$
44,344

 
 
 
 
 
 
 
 
Excludes purchase credit impaired loans
 
 
 
 
 
 
 
Average loans
$
2,540,948

 
$
2,280,377

 
$
2,483,488

 
$
2,217,000

Total portfolio loans
2,602,156

 
2,294,905

 
2,602,156

 
2,294,905

Net chargeoffs to average loans (annualized)
0.02
%
 
(0.05
)%
 
0.12
%
 
0.06
%
Allowance for loan losses to total loans
1.24

 
1.25

 
1.24

 
1.25


The provision for loan losses on portfolio loans for the nine months ended September 30, 2015 was $4.3 million compared to $2.4 million for the comparable 2014 period. The provision for loan losses for the nine month period ended September 30, 2015 was primarily to provide for strong loan growth and to provide for changes in charge-off trends.


38



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 $3.5 million of provision reversal for loan losses on PCI loans for the nine months ended September 30, 2015, compared to provision of $1.0 million for the comparable 2014 period.

The allowance for loan losses on portfolio loans was 1.24% of total loans at September 30, 2015 compared to 1.25% at September 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 lower levels of nonperforming loans, 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)
September 30, 2015
 
December 31, 2014
 
September 30, 2014
Non-accrual loans
$
9,123

 
$
20,892

 
$
16,507

Loans past due 90 days or more and still accruing interest

 

 
345

Restructured loans

 
1,352

 
1,360

Total nonperforming loans
9,123

 
22,244

 
18,212

Foreclosed property (1)
1,575

 
1,896

 
2,261

Total nonperforming assets (1)
$
10,698

 
$
24,140

 
$
20,473

 
 
 
 
 
 
Excludes assets covered under FDIC loss share (1)
 
 
 
 
 
Total assets
$
3,516,541

 
$
3,277,003

 
$
3,209,590

Total portfolio loans
2,602,156

 
2,433,916

 
2,294,905

Total loans plus foreclosed property
2,603,731

 
2,435,812

 
2,297,166

Nonperforming loans to total loans
0.35
%
 
0.91
%
 
0.79
%
Nonperforming assets to total loans plus foreclosed property
0.41

 
0.99

 
0.89

Nonperforming assets to total assets
0.30

 
0.74

 
0.64

 
 
 
 
 
 
Allowance for portfolio loans to nonperforming loans
354
%
 
136
%
 
158
%
 
(1)
Excludes purchase credit impaired loans and assets covered under FDIC shared-loss agreements, except for their inclusion in total assets.


39



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)
September 30, 2015
 
December 31, 2014
 
September 30, 2014
Commercial and industrial
$
2,975

 
$
5,998

 
$
3,543

Commercial real estate
2,611

 
6,298

 
7,055

Construction and land development
2,823

 
6,866

 
6,455

Residential real estate
714

 
3,082

 
386

Consumer and other

 

 
773

Total
$
9,123

 
$
22,244

 
$
18,212


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

 
$
20,840

Additions to nonaccrual loans
18,854

 
11,847

Additions to restructured loans

 
1,522

Chargeoffs
(6,109
)
 
(3,299
)
Other principal reductions
(24,840
)
 
(7,852
)
Moved to other real estate
(450
)
 
(4,722
)
Moved to performing
(576
)
 
(469
)
Loans past due 90 days or more and still accruing interest

 
345

Nonperforming loans end of period
$
9,123

 
$
18,212


Nonperforming loans at September 30, 2015 decreased by $9.1 million, or 50%,when compared to September 30, 2014. Other principal reductions of $24.8 million include $17.1 million of proceeds from the sale of collateral or business liquidation, $4.4 million of loans sold to an independent third party, and $3.3 million of payments.

Other real estate
Other real estate at September 30, 2015, was $8.4 million, compared to $11.1 million at September 30, 2014. Approximately 81% of total Other real estate, or $6.8 million, is covered by FDIC shared-loss agreements.

The following table summarizes the changes in Other real estate:

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

 
$
23,252

Additions and expenses capitalized to prepare property for sale
6,604

 
7,468

Writedowns in value
(299
)
 
(2,310
)
Sales
(5,775
)
 
(17,323
)
Other real estate end of period
$
8,370

 
$
11,087


The writedowns in fair value were recorded in Loan legal and other real estate expense based on current market activity shown in the appraisals.

40



Liabilities

Liabilities totaled $3.2 billion at September 30, 2015, compared to $3.0 billion at December 31, 2014. Liabilities increased slightly due to a $322 million increase in total deposits, offset by a decrease of $69 million in short-term Federal Home Loan Bank advances and a decrease of $45 million in other borrowings.

Deposits
(in thousands)
September 30, 2015
 
December 31, 2014
 
Increase (decrease)
Demand deposits
$
691,758

 
$
642,930

 
48,828

 
7.59
 %
Interest-bearing transaction accounts
529,052

 
508,941

 
20,111

 
3.95
 %
Money market accounts
1,045,699

 
755,569

 
290,130

 
38.40
 %
Savings
90,858

 
78,718

 
12,140

 
15.42
 %
Certificates of deposit:
 
 
 
 
 
 
 
$100 and over
353,488

 
377,544

 
(24,056
)
 
(6.37
)%
Other
103,108

 
127,808

 
(24,700
)
 
(19.33
)%
Total deposits
$
2,813,963

 
$
2,491,510

 
322,453

 
12.94
 %
 
 
 
 
 
 
 
 
Non-time deposits / total deposits
84
%
 
80
%
 
 
 
 
Demand deposits / total deposits
25
%
 
26
%
 
 
 
 

Total deposits at September 30, 2015 were $2.8 billion, an increase of $322 million, or 12.9%, 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 25% of total deposits at September 30, 2015 compared to December 31, 2014. Growth in balances and the change in composition modestly improved deposit costs during the first nine months of 2015 at 0.39%, as compared to 0.43% for the prior year period.

Shareholders' Equity

Shareholders' equity totaled $344 million at September 30, 2015, an increase of $27.3 million from December 31, 2014. Significant activity during the nine months ended September 30, 2015:

Net income of $27.8 million,
Other comprehensive income of $1.3 million from the change in unrealized gains on investment securities,
Dividends paid on common stock of $3.7 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

41



participations to other banks. These alternatives are an important part of our liquidity plan and provide flexibility and efficient execution of the asset-liability management strategy.

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

Parent Company liquidity
The parent company's liquidity is managed to provide the funds necessary to pay dividends to shareholders, service debt, invest in subsidiaries as necessary, and satisfy other operating requirements. The parent company's primary funding sources to meet its liquidity requirements are dividends and payments from the Bank and proceeds from the issuance of equity (i.e. stock option exercises, stock offerings). Another source of funding for the parent company includes the issuance of subordinated debentures and other debt instruments. The parent company has an unsecured term loan agreement maturing in the fourth quarter with a $4.7 million balloon payment due on November 6, 2015.  The Company expects to refinance or payoff the note with existing parent company cash.  Additionally, the Company expects the Bank to pay a dividend to the parent company in the fourth quarter to bolster holding company liquidity.  Management believes our current level of cash at the holding company of $9.0 million will be sufficient to meet all projected cash needs for the remainder of 2015, inclusive of the term note repayment.

As of September 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 September 30, 2015, the Bank could borrow an additional $282.4 million from the FHLB of Des Moines under blanket loan pledges and has an additional $746.2 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 three 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 three 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 $470.5 million of the securities available for sale at September 30, 2015, $260.0 million was pledged as collateral for deposits of public institutions, treasury, loan notes, and other requirements. The remaining $210.5 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 $1.2 billion in unused commitments as of September 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.

42




Capital Resources

The Company and the Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its bank affiliate must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The banking affiliate’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
 
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 September 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 September 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)
September 30, 2015
 
December 31, 2014
Total capital to risk-weighted assets
12.55
%
 
13.40
%
Tier 1 capital to risk-weighted assets
11.30
%
 
12.14
%
Common equity tier 1 capital to risk-weighted assets1
9.59
%
 
10.15
%
Leverage ratio (Tier 1 capital to average assets)
10.77
%
 
10.48
%
Tangible common equity to tangible assets2
8.90
%
 
8.69
%
Tier 1 capital
$
364,594

 
$
335,220

Total risk-based capital
404,979

 
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 September 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.

43



The Company believes these non-GAAP financial measures and ratios, when taken together with the corresponding U.S. GAAP measures and ratios, provide meaningful supplemental information regarding the Company's performance and capital strength. The Company's management uses, and believes investors benefit from referring to, these non-GAAP measures and ratios in assessing the Company's financial and operating results and related trends and when planning and forecasting future periods. However, these non-GAAP measures and ratios should be considered in addition to, and not as a substitute for or preferable to, ratios prepared in accordance with U.S. GAAP. The Company has provided a reconciliation of, where applicable, the most comparable GAAP financial measures and ratios to the non-GAAP financial measures and ratios, or a reconciliation of the non-GAAP calculation of the financial measure.
The Company believes the tangible common equity and 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 September 30,
 
Nine months ended September 30,
(in thousands)
2015
 
2014
 
2015
 
2014
CORE PERFORMANCE MEASURES
 
 
 
 
 
 
 
Net interest income
$
30,006

 
$
27,444

 
$
88,331

 
$
86,552

Less: Incremental accretion income
2,919

 
2,579

 
9,380

 
13,781

Core net interest income
27,087

 
24,865

 
78,951

 
72,771

 
 
 
 
 
 
 
 
Total noninterest income
4,729

 
4,452

 
14,118

 
11,779

Less: Change in FDIC loss share receivable
(1,241
)
 
(2,374
)
 
(4,450
)
 
(7,526
)
Less: Gain (loss) on sale of other real estate covered under FDIC loss share
31

 
(45
)
 
26

 
250

Less: Gain on sale of investment securities

 

 
23

 

Less: Closing fee

 
945

 

 
945

Core noninterest income
5,939

 
5,926

 
18,519

 
18,110

 
 
 
 
 
 
 
 
Total core revenue
33,026

 
30,791

 
97,470

 
90,881

 
 
 
 
 
 
 
 
Provision for portfolio loans
599

 
66

 
4,329

 
2,441

 
 
 
 
 
 
 
 
Total noninterest expense
19,932

 
21,121

 
59,340

 
62,668

Less: FDIC clawback
298

 
1,028

 
760

 
1,060

Less: Other loss share expenses
287

 
746

 
1,135

 
2,409

Core noninterest expense
19,347

 
19,347

 
57,445

 
59,199

 
 
 
 
 
 
 
 
Core income before income tax expense
13,080

 
11,378

 
35,696

 
29,241

 
 
 
 
 
 
 
 
Total income tax expense
4,722

 
4,388

 
14,506

 
11,059

Less: Income tax expense of PCI assets
518

 
462

 
2,521

 
1,158

Core income tax expense
4,204

 
3,926

 
11,985

 
9,901

Core net income
$
8,876

 
$
7,452

 
$
23,711

 
$
19,340

 
 
 
 
 
 
 
 
Core diluted earnings per share
$
0.44

 
$
0.37

 
$
1.17

 
$
0.97

Core efficiency ratio
58.58
%
 
62.83
%
 
58.94
%
 
65.14
%
Core return on average assets
1.03
%
 
0.93
%
 
0.95
%
 
0.83
%
Core return on average common equity
10.41
%
 
9.65
%
 
9.59
%
 
8.70
%
Core return on average tangible common equity
11.56
%
 
10.89
%
 
10.70
%
 
9.88
%
 
 
 
 
 
 
 
 


44




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


Net Interest Margin to Core Net Interest Margin

 
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)
2015
 
2014
 
2015
 
2014
Net interest income (fully tax equivalent)
$
30,437

 
$
27,843

 
$
89,595

 
$
87,779

Less: Incremental accretion income
2,919

 
2,579

 
9,380

 
13,781

Core net interest income (fully tax equivalent)
$
27,518

 
$
25,264

 
$
80,215

 
$
73,998

 
 
 
 
 
 
 
 
Average earning assets
$
3,201,181

 
$
2,943,070

 
$
3,115,658

 
$
2,896,202

Reported net interest margin (fully tax equivalent)
3.77
%
 
3.75
%
 
3.84
%
 
4.05
%
Core net interest margin (fully tax equivalent)
3.41
%
 
3.41
%
 
3.44
%
 
3.42
%


Tangible common equity ratio

(in thousands)
September 30, 2015
 
December 31, 2014
Total shareholders' equity
$
343,563

 
$
316,241

Less: Goodwill
30,334

 
30,334

Less: Intangible assets
3,323

 
4,164

Tangible common equity
$
309,906

 
$
281,743

 
 
 
 
Total assets
$
3,516,541

 
$
3,277,003

Less: Goodwill
30,334

 
30,334

Less: Intangible assets
3,323

 
4,164

Tangible assets
$
3,482,884

 
$
3,242,505

 
 
 
 
Tangible common equity to tangible assets
8.90
%
 
8.69
%














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Common equity tier 1 ratio

(in thousands)
September 30, 2015
 
December 31, 2014
Total shareholders' equity
$
343,563

 
$
316,241

Less: Goodwill
30,334

 
30,334

Less: Intangible assets, net of deferred tax liabilities1
820

 
4,164

Less: Unrealized gains
2,973

 
1,681

Plus: Qualifying trust preferred securities
55,100

 
55,100

Plus: Other
58

 
58

Total tier 1 capital
364,594

 
335,220

Less: Qualifying trust preferred securities
55,100

 
55,100

Less: Other1
23

 

Common equity tier 1 capital
$
309,471

 
$
280,120

 
 
 
 
Total risk-weighted assets determined in accordance with prescribed regulatory requirements
$
3,227,604

 
$
2,760,729

 
 
 
 
Common equity tier 1 capital to risk-weighted assets
9.59
%
 
10.15
%
 
 
 
 
1 Beginning with quarter ended March 31, 2015, the implementation of revised regulatory capital guidelines under Basel III has resulted in differences in these items when compared to prior periods.



Critical Accounting Policies

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

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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

Rate Shock
 
Annual % change
in net interest income
+ 300 bp
 
5.2%
+ 200 bp
 
3.3%
+ 100 bp
 
1.4%
 - 100 bp
 
-1.4%

Interest rate simulations for September 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 September 30, 2015, the Company had $23.8 million in notional amount of outstanding interest rate caps, to help manage interest rate risk.

 





47



ITEM 4: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of the Company’s Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15, as of September 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 September 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.


48



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 September 30, 2015.

Period
 
Total number of shares purchased
 
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 (a)
July 1, 2015 through July 31, 2015
 

 
$

 

 
2,000,000

August 1, 2015 through August 31, 2015
 

 

 

 
2,000,000

September 1, 2015 through September 30, 2015
 

 

 

 
2,000,000

Total
 

 
 
 

 
 

(a) In May 2015, the Company’s board of directors authorized the repurchase of up to two 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.



49



ITEM 6: EXHIBITS

Exhibit
No.
 
Description
 
 
Registrant hereby agrees to furnish to the Commission, upon request, the instruments defining the rights of holders of each issue of long-term debt of Registrant and its consolidated subsidiaries.
 
 
 
10.1.1
 
Amendment of Executive Employment Agreement dated as of October 29, 2015 by and between Registrant and Peter F. Benoist.
 
 
 
10.1.2
 
Amendment of Executive Employment Agreement dated as of October 29, 2015 by and between Registrant and Keene S. Turner.

 
 
 
*12.1
 
Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends.
 
 
 
*31.1
 
Chief Executive Officer's Certification required by Rule 13(a)-14(a).
 
 
 
*31.2
 
Chief Financial Officer's Certification required by Rule 13(a)-14(a).
 
 
 
**32.1
 
Chief Executive Officer Certification pursuant to 18 U.S.C. § 1350, as adopted pursuant to section § 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
**32.2
 
Chief Financial Officer Certification pursuant to 18 U.S.C. § 1350, as adopted pursuant to section § 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101
 
Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2015, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheet at September 30, 2015 and December 31, 2014; (ii) Consolidated Statement of Income for the three and nine months ended September 30, 2015 and 2014; (iii) Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2015 and 2014; (iv) Consolidated Statement of Changes in Equity for the nine months ended September 30, 2015 and 2014; (v) Consolidated Statement of Cash Flows for the nine months ended September 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.

50



SIGNATURES

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



51