0001025835-14-000012.txt : 20140317 0001025835-14-000012.hdr.sgml : 20140317 20140317123626 ACCESSION NUMBER: 0001025835-14-000012 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 20131231 FILED AS OF DATE: 20140317 DATE AS OF CHANGE: 20140317 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENTERPRISE FINANCIAL SERVICES CORP CENTRAL INDEX KEY: 0001025835 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 431706259 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-15373 FILM NUMBER: 14696762 BUSINESS ADDRESS: STREET 1: 150 NORTH MERAMEC STREET 2: 150 NORTH MERAMEC CITY: CLAYTON STATE: MO ZIP: 63105 BUSINESS PHONE: 3147255500 MAIL ADDRESS: STREET 1: 150 NORTH MERAMEC STREET 2: 150 NORTH MERAMEC CITY: CLAYTON STATE: MO ZIP: 63105 FORMER COMPANY: FORMER CONFORMED NAME: ENTERBANK HOLDINGS INC DATE OF NAME CHANGE: 19961024 10-K 1 a20131231-10k.htm 10-K 2013.12.31-10K


 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X]
 
Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
For the fiscal year ended December 31, 2013.
 
 
 
[   ]
 
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
___________________
Securities registered pursuant to Section 12(b) of the Act:
(Title of class)
(Name of each exchange on which registered)
Common Stock, par value $.01 per share
 NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X] 

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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. [ ]

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 the definitions of “large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ]
Accelerated filer [X]
  Non-accelerated filer [ ]
Smaller reporting company [ ]
 
 
(Do not check if a smaller reporting company)

 
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act
Yes [   ]  No [X]

The aggregate market value of the common stock held by non-affiliates of the Registrant was approximately $271,085,899 based on the closing price of the common stock of $15.96 as of the last business day of the registrant's most recently completed second fiscal quarter (June 30, 2013) as reported by the NASDAQ Global Select Market.

As of March 3, 2014, the Registrant had 19,410,048 shares of outstanding common stock.

DOCUMENTS INCORPORATED BY REFERENCE
Certain information required for Part III of this report is incorporated by reference to the Registrant's Proxy Statement for the 2014 Annual Meeting of Shareholders, which will be filed within 120 days of December 31, 2013.
 





ENTERPRISE FINANCIAL SERVICES CORP
2013 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
 
 
 
Page
PART I
 
 
 
 
 
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
 
 
 
PART II
 
 
 
 
 
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
 
 
 
PART III
 
 
 
 
 
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
 
 
 
PART IV
 
 
 
 
 
Item 15.
Exhibits and Financial Statement Schedules
Signatures
 






Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Some of the information in this report contains “forward-looking statements” within the meaning of and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements typically are identified with use of terms such as “may,” “might,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “could,” “continue” and the negative of these terms and similar words, although some forward-looking statements are expressed differently. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. You should be aware that our actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including, but not limited to: credit risk; changes in the appraised valuation of real estate securing impaired loans; outcomes of litigation and other contingencies; exposure to general and local economic conditions; risks associated with rapid increases or decreases in prevailing interest rates; consolidation within the banking industry; competition from banks and other financial institutions; our ability to attract and retain relationship officers and other key personnel; burdens imposed by federal and state regulation; changes in regulatory requirements; changes in accounting regulation or standards applicable to banks; and other risks discussed under Part I-Item 1A: “Risk Factors,” 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.

PART 1
ITEM 1: BUSINESS

General
Enterprise Financial Services Corp (“we” or the “Company” or “Enterprise”), a Delaware corporation, is a financial holding company headquartered in St. Louis, Missouri. We are the holding company for a full service banking subsidiary, Enterprise Bank & Trust (the “Bank”), offering banking and wealth management services to individuals and business customers located in the St. Louis, Kansas City and Phoenix metropolitan markets. Our executive offices are located at 150 North Meramec, Clayton, Missouri 63105 and our telephone number is (314) 725-5500.

Available Information
Our website is www.enterprisebank.com. Various reports provided to the SEC, including our annual reports, quarterly reports, current reports and proxy statements are available free of charge on our website. These reports are made available as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Our filings with the SEC are also available on the SEC's website at http://www.sec.gov.

Business Strategy
Our stated mission is “to guide our clients to a lifetime of financial success.” We have established an accompanying corporate vision “to build an exceptional company that clients value, shareholders prize and where our associates flourish.” These tenets are fundamental to our business strategies and operations.

Our general business strategy is to generate superior shareholder returns by providing comprehensive financial services primarily to private businesses, their owner families, and other success-minded individuals through banking and wealth management lines of business. Each of which constitutes a separate segment for purposes of our financial reporting.

Our banking segment offers a broad range of business and personal banking services. Lending services include commercial and industrial, commercial real estate, real estate construction and development, residential real estate, and consumer loans. A wide variety of deposit products and a complete suite of treasury management and international trade services complement our lending capabilities.

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The wealth management segment includes the Company's trust operations and Federal and Missouri State tax credit brokerage activities. Enterprise Trust, a division of the Bank (“Enterprise Trust” or “Trust”) provides financial planning, estate planning, investment management and trust services to businesses, individuals, institutions, retirement plans and non-profit organizations. Tax credit brokerage activities consist of the acquisition of tax credits and sale of these tax credits to clients. See Item 8. Note 21 - Segment Reporting for more information about our segments.

Key components of our strategy include a focused and relationship-oriented distribution and sales approach, with an emphasis on growing fee income and niche businesses, prudent credit and interest rate risk management, advanced technology and controlled expense growth.

Building long-term client relationships - Our growth strategy is largely client relationship driven. We continuously seek to add clients who fit our target market of business owners, professionals, and associated relationships. Those relationships are maintained, cultivated and expanded over time by trained, experienced banking officers and wealth advisors. We fund loan growth primarily with core deposits from our business and professional clients in addition to consumers in our branch market areas. This is supplemented by borrowing from the Federal Home Loan Bank of Des Moines (the “FHLB”), the Federal Reserve, and by issuing brokered certificates of deposits.

Growing fee income business - Enterprise Trust offers a wide range of fiduciary, investment management and financial advisory services. We employ attorneys, certified financial planners, estate planning professionals and other investment professionals. Enterprise Trust representatives assist clients in defining lifetime goals and designing plans to achieve them, consistent with the Company's long-term relationship strategy. The Bank offers a broad range of Treasury Management products and services that benefit businesses ranging from large national clients to the smallest local merchants. Customized solutions and special product bundles are available to clients of all sizes.  Responding to ever increasing needs for tightened security and improved functional efficiency, the Bank continues to offer robust treasury systems that employ the latest in mobile technology and fraud detection/mitigation. The Bank also operates treasury management, card services and international banking divisions that generate fee income.

Specialty Lending and Product Niches - We have focused an increasing amount of our lending activities in specialty markets where we believe our expertise and experience as a sophisticated commercial lender provides advantages over other competitors. In addition, we have developed expertise in certain product niches. These specialty niche activities focus on the following areas:
Enterprise Value Lending/Senior Debt Financing. We support mid-market company mergers and acquisitions primarily for Midwest-based manufacturing companies. We market directly to targeted private equity firms and provide a combination of senior debt and mezzanine debt financing.
Tax Credit Related Lending. We are a secured lender on affordable housing projects funded through the use of Federal and Missouri State Low Income housing tax credits. The Company also brokers State Low Income credits from its inventory to its clients. In addition, we provide leveraged and other loans on projects funded through the Department of the Treasury CDFI New Markets Tax Credit program. In 2011 and 2013, we were selected as one of the relatively few banks for New Markets Tax Credits. In this capacity, we were responsible for allocating $75 million of New Markets Tax Credits to clients and projects.
Tax Credit Brokerage. We acquire Missouri state tax credits from affordable housing development funds and sells the tax credits to clients and other individuals for tax planning purposes.
Life Insurance Premium Finance. We specialize in financing high-end whole life insurance premiums utilized in high net worth estate planning.
Enterprise Advisory Services. We have developed a proprietary deposit platform allowing registered investment advisory firms to offer FDIC insured cash deposits in addition to other investment products.
Capitalizing on technology - We view our technological capabilities to be a competitive advantage. Our systems provide Internet banking, expanded treasury management products, check and document imaging and remote deposit capture systems. Other services currently offered by the Bank include controlled disbursements, repurchase agreements and sweep investment accounts. Our treasury management suite of products blends advanced technology and personal

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service, often creating a competitive advantage over larger, nationwide banks. Technology is also extensively utilized in internal systems, operational support functions to improve customer service, and management reporting and analysis.

Maintaining asset quality - The Company monitors asset quality through formal ongoing, multiple-level reviews of loans in each market. These reviews are overseen by the Company's credit administration department. In addition, the Bank's loan portfolio is subject to ongoing monitoring by a loan review function that reports directly to the audit committee of our board of directors.

Expense management - The Company manages expenses carefully through detailed budgeting and expense approval processes. We measure the “efficiency ratio” as a benchmark for improvement. The efficiency ratio is equal to noninterest expense divided by total revenue (net interest income plus noninterest income). Continued improvement is targeted to increase earnings per share and generate higher returns on equity.

Acquisitions and Divestitures
Since December 2009, the Bank has entered into four agreements with the Federal Deposit Insurance Corporation (“FDIC”) to acquire certain assets and assume certain liabilities of four failed banks: Valley Capital Bank, Home National Bank, Legacy Bank and The First National Bank of Olathe. In conjunction with each of these, the Bank entered into loss share agreements, under which the FDIC has agreed to reimburse the Bank for a percentage of losses on certain loans and other real estate acquired (“Covered Assets”). The reimbursable losses from the FDIC are based on the book value of the acquired loans and foreclosed assets as determined by the FDIC as of the date of each acquisition.

Valley Capital Bank (“Valley Capital”) - On December 11, 2009, the Bank acquired certain assets and assumed certain liabilities of Valley Capital, a full service community bank that was headquartered in Mesa, Arizona. 

Home National Bank (“Home National”) - On July 9, 2010, the Bank acquired approximately $256.0 million in Arizona-originated assets from the FDIC in connection with the failure of Home National, an Oklahoma bank with operations in Arizona.

Legacy Bank (“Legacy”) - On January 7, 2011, the Bank acquired certain assets and assumed certain liabilities of Legacy, a full service community bank that was headquartered in Scottsdale, Arizona. 

The First National Bank of Olathe (“FNBO") - On August 12, 2011, the Bank acquired certain assets and assumed certain liabilities of FNBO, a full service community bank that was headquartered in Olathe, Kansas. 


On October 21, 2011, the Bank purchased certain assets and assumed certain deposit liabilities from BankLiberty of Liberty, Missouri. The Bank assumed $43.0 million in deposits associated with the BankLiberty branch located at 11401 Olive Boulevard, in the St. Louis suburb of Creve Coeur, Missouri. The deposits consisted of $2.6 million in demand deposits, $21.9 million in money market and other interest bearing deposits, and $18.5 million in certificates of deposit. The Bank also paid a deposit premium of $323,000 on these deposits and purchased $150,000 of personal property in the branch. The Bank executed a sublease on approximately 6,556 square feet at the above address. Enterprise currently operates the location as a full-service branch of the Bank.

On May 16, 2013, the Company finalized its acquisition of certain assets of Gorman & Gorman Home Loans. In addition, Mark Gorman, founder and president of Gorman & Gorman, and the firm's mortgage production and operations staff joined the Company. The Gorman & Gorman and legacy Enterprise mortgage operations were combined into a division of the Bank named Enterprise Home Loans. The Company anticipates that the acquisition will strengthen its mortgage business.

On December 6, 2013, the Bank completed the sale and closure of 4 of its branches in the Kansas City market. The sale agreement called for 2 branches to be sold to another financial institution as well as $7.6 million of loans, $78.4 million of deposits, and $1.5 million of other assets. The sale resulted in a pre-tax gain of approximately $1.0 million primarily due to a premium received on the deposits sold as part of the transaction.

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TARP Repayment and Common Stock Warrant Repurchase
On November 7, 2012, the Company repurchased from the United States Department of the Treasury (the “Treasury”) all 35,000 outstanding shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred”) pursuant to a letter agreement with the Treasury of that date (the “Repurchase Agreement”). The Company paid an aggregate purchase price of approximately $35.4 million to the Treasury, which included a $1,000 per share liquidation amount and approximately $399,000 for accrued and unpaid dividends. The Company originally sold the Series A Preferred to the Treasury on December 19, 2008 pursuant to the Treasury's Capital Purchase Program.

On January 9, 2013, the Company repurchased the warrants issued to the U.S. Treasury as part of the Capital Purchase Program. The warrants provided the right to purchase 324,074 shares of the Company's common stock. Enterprise and the Treasury department agreed upon a repurchase price of approximately $1.0 million for the warrants. This transaction completed the Company's participation in the Treasury's Capital Purchase Program.

Debt Repayments
During 2013 the Company completed two transactions that significantly reduced its long term debt. On August 15, 2013, the Company converted $20.0 million, 9% coupon, trust preferred securities to shares of common stock. As a result of the transaction, the Company reduced its long-term debt by $20.0 million and issued an aggregate of 1.2 million shares of common stock. The Company issued 25,060 shares of additional common stock as an inducement for the conversion. On December 30, 2013, the Company prepaid $30.0 million of debt with the Federal Home Loan Bank ("FHLB") with a weighted average interest rate of 4.09% and a maturity of 3 years and incurred a prepayment penalty of $2.6 million before taxes. These transactions are expected to further reduce our cost of interest bearing liabilities in future periods and continue to manage interest rate risk.

Market Areas and Approach to Geographic Expansion
We operate in the St. Louis, Kansas City and Phoenix metropolitan areas. The Company, as part of its expansion effort, plans to continue its strategy of operating branches with larger average deposits, and employing experienced staff who are compensated on the basis of performance and customer service.

St. Louis - We have six banking facilities in the St. Louis metropolitan area. The St. Louis market enjoys a stable, diverse economic base and is ranked the 19th largest metropolitan statistical area in the United States. It is an attractive market for us with nearly 70,000 privately held businesses and more than 50,000 households with investable assets of $1.0 million or more.

Kansas City - We have eight banking facilities in the Kansas City market. Kansas City is also an attractive private company market with over 50,000 privately held businesses and more than 40,000 households with investable assets of $1.0 million or more. It is the 31st largest metropolitan area in the U.S.

Phoenix - Since December 2009, we have completed four FDIC-assisted transactions in the Phoenix market. We have two banking facilities in the Phoenix metropolitan area.

We believe the Phoenix market offers long-term growth opportunities for the Company. The underlying demographic and geographic factors that propelled Phoenix into one of the fastest growing and most dynamic markets in the country should drive continued growth in that market. Today, Phoenix is the nation's 13th largest metropolitan area, and has more than 90,000 privately held businesses and more than 80,000 households with investable assets over $1.0 million.

Competition
The Company and its subsidiaries operate in highly competitive markets. Our geographic markets are served by a number of large multi-bank holding companies with substantial capital resources and lending capacity. Many of the larger banks have established specialized units, which target private businesses and high net worth individuals. Also, the St. Louis, Kansas City and Phoenix markets have numerous small community banks. In addition to other financial holding companies and commercial banks, we compete with credit unions, thrifts, investment managers, brokerage firms, and other providers of financial services and products.


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Supervision and Regulation
The following is a summary description of the relevant laws, rules, and regulations governing banks and financial holding companies. The description of, and references to, the statutes and regulations below are brief summaries and do not purport to be complete. The descriptions are qualified in their entirety by reference to the specific statutes and regulations discussed.

The regulatory and supervisory structure establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of depositors, the deposit insurance funds and the banking system as a whole, rather than for the protection of shareholders or creditors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies concerning the establishment of deposit insurance assessment fees, classification of assets and establishment of adequate loan loss reserves for regulatory purposes.

Various legislation is from time to time introduced in Congress and Missouri's legislature, including proposals to overhaul the bank regulatory system, expand the powers of depository institutions, and limit the investments that depository institutions may make with insured funds. Such legislation may change applicable statutes and the operating environment in substantial and unpredictable ways. We cannot determine the ultimate effect that future legislation or implementing regulations would have upon our financial condition or upon our results of operations or the results of operations of any of our subsidiaries. As is further described below, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), has significantly changed the bank regulatory structure and may affect the lending, investment and general operating activities of depository institutions and their holding companies

Financial Holding Company
The Company is a financial holding company registered under the Bank Holding Company Act of 1956, as amended (“BHCA”). As a financial holding company, the Company is subject to regulation and examination by the Federal Reserve, and is required to file periodic reports of its operations and such additional information as the Federal Reserve may require. In order to remain a financial holding company, the Company must continue to be considered well managed and well capitalized by the Federal Reserve and have at least a “satisfactory” rating under the Community Reinvestment Act. See “Liquidity and Capital Resources” in the Management Discussion and Analysis for more information on our capital adequacy and “Bank Subsidiary - Community Reinvestment Act” below for more information on the Community Reinvestment Act.

Acquisitions: With certain limited exceptions, the BHCA requires every financial holding company or bank holding company to obtain the prior approval of the Federal Reserve before (i) acquiring substantially all the assets of any bank, (ii) acquiring direct or indirect ownership or control of any voting shares of any bank if, after such acquisition, it would own or control more than 5% of the voting shares of such bank (unless it already owns or controls the majority of such shares), or (iii) merging or consolidating with another bank holding company. Additionally, the BHCA provides that the Federal Reserve may not approve any of these transactions if it would result in or tend to create a monopoly, substantially lessen competition, or otherwise function as a restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the community to be served. The Federal Reserve’s consideration of financial resources generally focuses on capital adequacy, which is discussed below.

Change in Bank Control: Subject to various exceptions, the BHCA and the Change in Bank Control Act, together with related regulations, require Federal Reserve approval prior to any person or company acquiring “control” of a bank or financial holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the Company. Control is rebuttably presumed to exist if a person or company acquires 10% or more, but less than 25%, of any class of voting securities of the Company. The regulations provide a procedure for challenging rebuttable presumptions of control.


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Permitted Activities: The BHCA has generally prohibited a bank holding company from engaging in activities other than banking or managing or controlling banks or other permissible subsidiaries and from acquiring or retaining direct or indirect control of any company engaged in any activities other than those determined by the Federal Reserve to be closely related to banking or managing or controlling banks as to be a proper incident thereto. Provisions of the Gramm-Leach-Bliley Act have expanded the permissible activities of a bank holding company that qualifies as a financial holding company. Under the regulations implementing the Gramm-Leach-Bliley Act, a financial holding company may engage in additional activities that are financial in nature or incidental or complementary to financial activities. Those activities include, among other activities, certain insurance, advisory and securities activities.

Support of Bank Subsidiaries: Under Federal Reserve policy, the Company is expected to act as a source of financial strength for the Bank and to commit resources to support the Bank. In addition, pursuant to the Dodd-Frank Act, this longstanding policy has been given the force of law and additional regulations promulgated by the Federal Reserve to further implement the intent of the new statute are possible. As in the past, such financial support from the Company may be required at times when, without this legal requirement, the Company may not be inclined to provide it.

Capital Adequacy: The Company is also subject to capital requirements applied on a consolidated basis, which are substantially similar to those required of the Bank (summarized below).
  
Dividend Restrictions: Under Federal Reserve policies, financial holding companies may pay cash dividends on common stock only out of income available over the past year if prospective earnings retention is consistent with the organization's expected future needs and financial condition and if the organization is not in danger of not meeting its minimum regulatory capital requirements. Federal Reserve policy also provides that financial holding companies should not maintain a level of cash dividends that undermines the financial holding company's ability to serve as a source of strength to its banking subsidiaries.

Bank Subsidiary
At December 31, 2013, Enterprise Bank & Trust was our only bank subsidiary. The Bank is a Missouri trust company with banking powers and is subject to supervision and regulation by the Missouri Division of Finance. In addition, as a Federal Reserve non-member bank, it is subject to supervision and regulation by the FDIC. The Bank is a member of the FHLB of Des Moines.

The Bank is subject to extensive federal and state regulatory oversight. The various regulatory authorities regulate or monitor all areas of the banking operations, including security devices and procedures, adequacy of capitalization and loss reserves, loans, investments, borrowings, deposits, mergers, issuance of securities, payment of dividends, interest rates payable on deposits, interest rates or fees chargeable on loans, establishment of branches, corporate reorganizations, maintenance of books and records, and adequacy of staff training to carry on safe lending and deposit gathering practices. The Bank must maintain certain capital ratios and is subject to limitations on aggregate investments in real estate, bank premises, low income housing projects, and furniture and fixtures. In connection with their supervision and regulation responsibilities, the Bank is subject to periodic examination by the FDIC and Missouri Division of Finance.

Capital Adequacy: The Bank is required to comply with the FDIC’s capital adequacy standards for insured banks. The FDIC has issued risk-based capital and leverage capital guidelines for measuring capital adequacy, and all applicable capital standards must be satisfied for the Bank to be considered in compliance with regulatory capital requirements.

Under the regulatory capital requirements, at least half of the Bank’s total capital must be composed of “Tier 1 Capital.” Tier 1 Capital includes common equity, undivided profits, minority interests in the equity accounts of consolidated subsidiaries, qualifying noncumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock, less goodwill and various other intangible assets.


The Bank’s capital categories are determined for the purpose of applying the “prompt corrective action” rules described below and may be taken into consideration by banking regulators in evaluating proposals for expansion or new activities.

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They are not necessarily an accurate representation of a bank's overall financial condition or prospects for other purposes. A failure to meet the capital guidelines could subject the Bank to a variety of enforcement actions under those rules, including the issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on the taking of brokered deposits, and other restrictions on its business. As described below, the FDIC also can impose other substantial restrictions on banks that fail to meet applicable capital requirements.

Federal law establishes a system of prompt corrective action to resolve the problems of undercapitalized banks. Under this system, the FDIC has established five capital categories (“well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized”) and is required to take various mandatory supervisory actions, and is authorized to take other discretionary actions with respect to banks in the three undercapitalized categories. The severity of any such actions taken will depend upon the capital category in which a bank is placed. Generally, subject to a narrow exception, current federal law requires the FDIC to appoint a receiver or conservator for a bank that is critically undercapitalized.

Under the FDIC’s prompt corrective action rules, a bank that (1) has a total capital to risk-weighted assets ratio (the “Total Capital Ratio”) of 10.0% or greater, a Tier 1 Capital to risk-weighted assets ratio (the “Tier 1 Capital Ratio”) of 6.0% or greater, and a Tier 1 Capital to average assets (the “Leverage Ratio”) of 5.0% or greater, and (2) is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the FDIC, is considered to be “well capitalized.” A bank with a Total Capital Ratio of 8.0% or greater, a Tier 1 Capital Ratio of 4.0% or greater, and a Leverage Ratio of 4.0% or greater, is considered to be “adequately capitalized.” A bank that has a Total Capital Ratio of less than 8.0%, a Tier 1 Capital Ratio of less than 4.0%, or a Leverage Ratio of less than 4.0%, is considered to be “undercapitalized.” A bank that has a Total Capital Ratio of less than 6.0%, a Tier 1 Capital Ratio of less than 3.0%, or a Leverage Ratio of less than 3.0%, is considered to be “significantly undercapitalized,” and a bank that has a tangible equity capital to assets ratio equal to or less than 2.0% is deemed to be “critically undercapitalized.” A bank may be considered to be in a capitalization category lower than indicated by its actual capital position if it receives an unsatisfactory examination rating or is subject to a regulatory action that requires heightened levels of capital.
A bank that becomes “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized” is required to submit an acceptable capital restoration plan to the FDIC. An “undercapitalized” bank also is generally prohibited from increasing its average total assets, making acquisitions, establishing new branches, or engaging in any new line of business, except in accordance with an accepted capital restoration plan or with the approval of the FDIC. Also, the FDIC may treat an “undercapitalized” bank as being “significantly undercapitalized” if it determines that those actions are necessary to carry out the purpose of the law.
At December 31, 2013, all of the Bank’s capital ratios were at levels that would qualify it to be “well capitalized” for regulatory purposes.
Dividends by the Bank Subsidiary: Under Missouri law, the Bank may pay dividends to the Company only from a portion of its undivided profits and may not pay dividends if its capital is impaired. As an insured depository institution, federal law prohibits the Bank from making any capital distributions, including the payment of a cash dividend if it is “undercapitalized” or after making the distribution would become undercapitalized. If the FDIC believes that the Bank is engaged in, or about to engage in, an unsafe or unsound practice, the FDIC may require, after notice and hearing, that the bank cease and desist from that practice. The FDIC has indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. The FDIC has issued policy statements that provide that insured banks generally should pay dividends only from their current operating earnings. The Bank’s payment of dividends also could be affected or limited by other factors, such as events or circumstances which lead the FDIC to require that it maintain capital in excess of regulatory guidelines.

Transactions with Affiliates and Insiders: The Bank is subject to the provisions of Regulation W promulgated by the Federal Reserve, which encompasses Sections 23A and 23B of the Federal Reserve Act. Regulation W places limits and conditions on the amount of loans or extensions of credit to, investments in, or certain other transactions with, affiliates and on the amount of advances to third parties collateralized by the securities or obligations of affiliates. Regulation W also prohibits, among other things, an institution from engaging in certain transactions with certain

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affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies. Federal law also places restrictions on the Bank’s ability to extend credit to its executive officers, directors, principal shareholders and their related interests. These extensions of credit must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated third parties; and must not involve more than the normal risk of repayment or present other unfavorable features.

Customer Protection: The Bank is also subject to consumer laws and regulations intended to protect consumers in transactions with depository institutions, as well as other laws or regulations affecting customers of financial institutions generally. While the list set forth herein is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement and Procedures Act, the Fair Credit Reporting Act and the Federal Trade Commission Act, among others. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits or making loans to such customers. The Bank must comply with the applicable provisions of these consumer protection laws and regulations as part of its ongoing customer relations.

Community Reinvestment Act: The Community Reinvestment Act (“CRA”) requires that, in connection with examinations of financial institutions within its jurisdiction, the FDIC shall evaluate the record of the financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those institutions. These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. The Bank has a satisfactory rating under CRA.

USA Patriot Act: The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA PATRIOT Act") requires each financial institution to: (i) establish an anti-money laundering program; (ii) establish due diligence policies, procedures and controls with respect to its private banking accounts and correspondent banking accounts involving foreign individuals and certain foreign banks; and (iii) implement certain due diligence policies, procedures and controls with regard to correspondent accounts in the United States for, or on behalf of, a foreign bank that does not have a physical presence in any country. In addition, the USA PATRIOT Act contains a provision encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities.

Commercial Real Estate Lending: The Bank’s lending operations may be subject to enhanced scrutiny by federal banking regulators based on its concentration of commercial real estate loans. On December 6, 2006, the federal banking regulators issued final guidance to remind financial institutions of the risk posed by commercial real estate (“CRE”) lending concentrations. CRE loans generally include land development, construction loans, and loans secured by multifamily property, and non-farm, nonresidential real property where the primary source of repayment is derived from rental income associated with the property. The guidance prescribes the following guidelines for its examiners to help identify institutions that are potentially exposed to significant CRE risk, including concentrations in certain types of CRE that may warrant greater supervisory scrutiny: total reported loans for construction, land development, and other land represent 100% or more of the institutions total capital; or total commercial real estate loans represent 300% or more of the institution’s total capital, and the outstanding balance of the institution’s commercial real estate loan portfolio has increased by 50% or more.

Financial Regulatory Reform
On July 21, 2010, the President signed into law the Dodd-Frank Act, which contains a comprehensive set of provisions designed to govern the practices and oversight of financial institutions and other participants in the financial markets. The Dodd-Frank Act made extensive changes in the regulation of financial institutions and their holding companies.
Uncertainty remains as to the ultimate impact of the Dodd-Frank Act, which could have a material adverse impact on the financial services industry as a whole or on ours and the Bank’s business, results of operations, and financial condition. Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers or the financial industry

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more generally. However, it is likely that the Dodd-Frank Act will increase the regulatory burden, compliance costs and interest expense for the Company and Bank. Some of the rules that have been adopted to comply with the Dodd-Frank Act's mandates are discussed below.
Consumer Financial Protection Bureau: The Dodd-Frank Act centralized responsibility for consumer financial protection including implementing, examining and enforcing compliance with federal consumer financial laws with Consumer Financial Protection Bureau (the “CFPB”). Depository institutions with less than $10 billion in assets, such as our Bank, will be subject to rules promulgated by the CFPB but will continue to be examined and supervised by federal banking regulators for consumer compliance purposes.
UDAP and UDAAP: Recently, banking regulatory agencies have increasingly used a general consumer protection statute to address "unethical" or otherwise "bad" business practices that may not necessarily fall directly under the purview of a specific banking or consumer finance law. The law of choice for enforcement against such business practices has been Section 5 of the Federal Trade Commission Act-the primary federal law that prohibits unfair or deceptive acts or practices and unfair methods of competition in or affecting commerce ("UDAP" or "FTC Act"). "Unjustified consumer injury" is the principal focus of the FTC Act. Prior to the Dodd-Frank Act, there was little formal guidance to provide insight to the parameters for compliance with the UDAP law. However, the UDAP provisions have been expanded under the Dodd-Frank Act to apply to "unfair, deceptive or abusive acts or practices" ("UDAAP"), which has been delegated to the CFPB for supervision. The CFPB has published its first Supervision and Examination Manual that addresses compliance with and the examination of UDAAP.

Mortgage Reform: The CFPB has adopted final rules implementing minimum standards for the origination of residential mortgages, including standards regarding a customer's ability to repay, restricting variable-rate lending by requiring that the ability to repay variable-rate loans be determined by using the maximum rate that will apply during the first five years of a variable-rate loan term, and making more loans subject to provisions for higher cost loans, new disclosures, and certain other revisions. In addition, the Dodd-Frank Act allows borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB.

Deposit Insurance and Assessments: The $250,000 limit for federal deposit insurance for noninterest-bearing demand transaction accounts at all insured depository institutions was made permanent by the Dodd-Frank Act. The Dodd-Frank Act also changed the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminated the ceiling on the size of the Deposit Insurance Fund (“DIF”), and increased the floor on the size of the DIF, which generally will require an increase in the level of assessments for institutions with assets in excess of $10 billion.

Demand Deposits: The Dodd-Frank Act repealed the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transactions and other accounts.

Interchange Fees: The Federal Reserve has issued final rules limiting the amount of any debit card interchange fee that an issuer may receive or charge with respect to electronic debit card transactions to be reasonable and proportional to the cost incurred by the issuer with respect to the transaction.

Volcker Rule: On December 10, 2013, the federal regulators adopted final regulations to implement the proprietary trading and private fund prohibitions of the Volcker Rule under the Dodd-Frank Act. Under the final regulations, which will become effective on April 1, 2014, banking entities are generally prohibited, subject to significant exceptions from: (i) short-term proprietary trading as principal in securities and other financial instruments, and (ii) sponsoring or acquiring or retaining an ownership interest in private equity and hedge funds. The Federal Reserve has granted an extension for compliance with the Volcker Rule until July 21, 2015. The Company is reviewing the impact of the Volcker Rule on its investment portfolio.

Many of the provisions of the Dodd-Frank Act are subject to delayed effective dates or require the adoption of further implementing regulations and, therefore, their impact on the Company’s operations cannot be fully determined at this time.


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BASEL III        
On July 2, 2013, the Federal Reserve approved a final rule to establish a new comprehensive regulatory capital framework for all US banking organizations. On July 9, 2013, the final rule was approved (as an interim final rule) by the FDIC. The Regulatory Capitol Framework (Basel III) implements several changes to the US regulatory capital framework required by the Dodd-Frank Act. The new US capital framework imposes higher minimum capital requirements, additional capital buffers above those minimum requirements, a more restrictive definition of capital, and higher risk weights for various enumerated classifications of assets, the combined impact of which effectively results in substantially more demanding capital standards for US banking organizations.
 
The Basel III final rule establishes a new common equity Tier 1 capital (“CET1”) requirement, an increase in the Tier 1 capital requirement from 4.0% to 6.0% and maintains the current 8.0% total capital requirement. The new CET1 and minimum Tier 1 capital requirements are effective January 1, 2015. In addition to these minimum risk-based capital ratios, the Basel III final rule requires that all banking organizations maintain a “capital conservation buffer” consisting of common equity Tier 1 capital (“CET1”) in an amount equal to 2.5% of risk-weighted assets in order to avoid restrictions on their ability to make capital distributions and to pay certain discretionary bonus payments to executive officers. In order to avoid those restrictions, the capital conservation buffer effectively increases the minimum CET1 capital, Tier 1 capital, and total capital ratios for US banking organizations to 7.0%, 8.5%, and 10.5%, respectively. Banking organizations with capital levels that fall within the buffer will be required to limit dividends, share repurchases or redemptions (unless replaced within the same calendar quarter by capital instruments of equal or higher quality), and discretionary bonus payments. The capital conservation buffer is phased in over a 5-year period beginning January 1, 2016.

As required by Dodd-Frank, the Basel III final rule requires that capital instruments such as trust preferred securities and cumulative preferred shares be phased-out of Tier 1 capital by January 1, 2016, for banking organizations that had $15 billion or more in total consolidated assets as of December 31, 2009 and grandfathers as Tier 1 capital such instruments issued by these smaller entities prior to May 19, 2010 (provided they do not exceed 25 percent of Tier 1 capital). The Company’s trust preferred securities are grandfathered under this provision.
 
The Basel III final rule provides banking organizations under $250 billion in total consolidated assets or under $10 billion in foreign exposures with a one-time “opt-out” right to continue excluding Accumulated Other Comprehensive Income from CET1 capital. The election to opt out must be made on the banking organization’s first Call Report filed after January 1, 2015.
 
The Basel III final rule requires that goodwill and other intangible assets (other than mortgage servicing assets), net of associated deferred tax liabilities (“DTLs”), be deducted from CET1 capital. Additionally, deferred tax assets (“DTAs”) that arise from net operating loss and tax credit carryforwards, net of associated DTLs and valuation allowances, are fully deducted from CET1 capital. However, DTAs arising from temporary differences that could not be realized through net operating loss carrybacks, along with mortgage servicing assets and “significant” (defined as greater than 10% of the issued and outstanding common stock of the unconsolidated financial institution) investments in the common stock of unconsolidated “financial institutions” are partially includible in CET1 capital, subject to deductions defined in the final rule.
 
Based on a preliminary assessment of the impact of Basel III and in consideration of the capital plan for the Company, management of the Company anticipates that the Company and Bank will be in compliance with the Basel III guidelines within the implementation periods.


Employees
At December 31, 2013, we had approximately 455 full-time equivalent employees. None of the Company's employees are covered by a collective bargaining agreement. Management believes that its relationship with its employees is good.



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ITEM 1A: RISK FACTORS

An investment in our common shares is subject to risks inherent to our business. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report. The risks and uncertainties described below are not the only ones we face. Although we have significant risk management policies, procedures and verification processes in place, additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also materially and adversely impair our business operations. The value of our common shares could decline due to any of these risks, and you could lose all or part of your investment.

Risks Relating to Our Business

Our allowance for loan losses may not be adequate to cover actual loan losses.
We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, that represents management's estimate of probable losses within the existing portfolio of loans. The allowance, in the judgment of management, is sufficient to reserve for estimated loan losses and risks inherent in the loan portfolio. We continue to monitor the adequacy of our loan loss allowance and may need to increase it if economic conditions deteriorate. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments that can differ somewhat from those of our own management. In addition, if charge-offs in future periods exceed the allowance for loan losses (i.e., if the loan allowance is inadequate), we may need additional loan loss provisions to increase the allowance for loan losses. Additional provisions to increase the allowance for loan losses, should they become necessary, would result in a decrease in net income and a reduction in capital, and may have a material adverse effect on our financial condition and results of operations.

An economic downturn, especially one affecting our market areas, could adversely affect our financial condition, results of operations or cash flows.
Our success depends upon the economic prosperity in our primary market areas. If the communities in which we operate do not grow, or if prevailing economic conditions locally or nationally are unfavorable, our business may not succeed. Unpredictable economic conditions may have an adverse effect on the quality of our loan portfolio and our financial performance. Economic recession over a prolonged period or other economic problems in our market areas could have a material adverse impact on the quality of the loan portfolio and the demand for our products and services. Future adverse changes in the economies in our market areas may have a material adverse effect on our financial condition, results of operations or cash flows. As a community bank, we bear increased risk of unfavorable local economic conditions. Moreover, we cannot give any assurance that we will benefit from any market growth or favorable economic conditions in our primary market areas even if they do occur.

Our loan portfolio is concentrated in certain markets which could result in increased credit risk.
Substantially all of our loans are to businesses and individuals in the St. Louis, Kansas City, and Phoenix metropolitan areas. The regional economic conditions in areas where we conduct our business have an impact on the demand for our products and services as well as the ability of our customers to repay loans, the value of the collateral securing loans, and the stability of our deposit funding sources. Consequently, a decline in local economic conditions may adversely affect our earnings.

Our loan portfolio mix, which has a concentration of loans secured by real estate, could result in increased credit risk.
A significant portion of our portfolio is secured by real estate and thus we face a high degree of risk from a downturn in our real estate markets. If real estate values would decline further in our markets, the value of real estate collateral securing our loans could be significantly reduced. Our ability to recover on defaulted loans for which the primary reliance for repayment is on the real estate collateral by foreclosing and selling that real estate would then be diminished, and we would be more likely to suffer losses on defaulted loans.

Additionally, because Kansas is a judicial foreclosure state, all foreclosures must be processed through the Kansas state courts. Due to this process, it takes approximately one year for us to foreclose on real estate collateral located

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in the State of Kansas. Our ability to recover on defaulted loans secured by Kansas property may be delayed and our recovery efforts are lengthened due to this process.

We face potential risks from litigation brought against the Company or the Bank.
We are involved in various lawsuits and legal proceedings. Pending or threatened litigation against the Company or the Bank, litigation-related costs and any legal liability as a result of an adverse determination with respect to one or more of these legal proceedings could have a material adverse effect on our business, cash flows, financial position or results of operations and/or could cause us significant reputational harm, including without limitation as a result of negative publicity the Company may face even if it prevails in such legal proceedings, which could adversely affect our business prospects.

Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
Liquidity is essential to our business.  An inability to raise funds through deposits, borrowings, the sale of investment securities and other sources could have a substantial material adverse effect on our liquidity.  Our access to funding sources in amounts that are adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general.  Factors that could detrimentally impact our access to liquidity sources include but are not limited to a decrease in the level of our business activity due to a market downturn, our failure to remain well capitalized, or adverse regulatory action against us. Our ability to acquire deposits or borrow could also be impaired by factors that are not specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole.

Our business is subject to interest rate risk and variations in interest rates may negatively affect our financial performance.
A substantial portion of our income is derived from the differential or “spread” between the interest earned on loans, investment securities and other interest-earning assets, and the interest paid on deposits, borrowings and other interest-bearing liabilities. Because of the differences in the maturities and repricing characteristics of our interest-earning assets and interest-bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Significant fluctuations in market interest rates could materially and adversely affect not only our net interest spread, but also our asset quality and loan origination volume, and/or net income.

We face potential risk from changes in Governmental Monetary Policies.
The Bank’s earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve, including its ongoing “Quantitative Easing” program, affect the levels of bank loans, investments, and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks, and its influence over reserve requirements to which member banks are subject. The Bank cannot predict the nature or impact of future changes in monetary and fiscal policies.

Deferred tax assets may not be realizable and we may be required to establish a valuation allowance against the deferred income tax assets, which could have a material adverse effect on our results of operations and financial condition.
Deferred tax represents the tax effect of the differences between the book and tax basis of assets and liabilities. Deferred tax assets are assessed periodically by management to determine if they are realizable. If based on available information, it is not more likely than not that the deferred income tax asset will be realized, then a valuation allowance must be established with a corresponding charge to net income. Future facts and circumstances may require a valuation allowance. Charges to establish a valuation allowance could have a material adverse effect on our results of operations and financial position.


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If the Bank incurs losses that erode its capital, it may become subject to enhanced regulation or supervisory action.
Under federal and state laws and regulations pertaining to the safety and soundness of insured depository institutions, the Missouri Division of Finance and the Federal Reserve, and separately the FDIC as insurer of the Bank's deposits, have the authority to compel or restrict certain actions if the Company's or the Bank's capital should fall below adequate capital standards as a result of future operating losses, or if its bank regulators determine that it has insufficient capital. Among other matters, the corrective actions include but are not limited to requiring affirmative action to correct any conditions resulting from any violation or practice; directing an increase in capital and the maintenance of specific minimum capital ratios; restricting the Bank's operations; limiting the rate of interest the bank may pay on brokered deposits; restricting the amount of distributions and dividends and payment of interest on its trust preferred securities; requiring the Bank to enter into informal or formal enforcement orders, including memoranda of understanding, written agreements and consent or cease and desist orders to take corrective action and enjoin unsafe and unsound practices; removing officers and directors and assessing civil monetary penalties; and taking possession of and closing and liquidating the Bank. These actions may limit the ability of the Bank or Company to execute its business plan and thus can lead to an adverse impact on the the results of operations or financial position.

Changes in government regulation and supervision may increase our costs.
Our operations are subject to extensive regulation by federal, state and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of our operations. Banking regulations are primarily intended to protect depositors' funds, federal deposit insurance funds and the banking system as a whole, not stockholders. Because our business is highly regulated, the laws, rules, regulations and supervisory guidance and policies applicable to us are subject to regular modification and change and could result in an adverse impact on our results of operations.

Any future increases in FDIC insurance premiums might adversely impact our earnings.
Over the past several years, the FDIC has adopted several rules which have resulted in a number of changes to the FDIC assessments, including modification of the assessment system and a special assessment. It is possible that the FDIC may impose additional special assessments in the future or further increase our annual assessment, which could adversely affect our earnings.

We may be adversely affected by the soundness of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to different institutions and counterparties, and we execute transactions with various counterparties in the financial industry, including federal home loan banks, commercial banks, brokers and dealers, investment banks and other institutional clients. Defaults by financial services institutions, and even rumors or questions about one or more financial services institutions or the financial services industry in general, have led to market-wide liquidity problems in prior years and could lead to losses or defaults by us or by other institutions. Any such losses could materially and adversely affect our results of operations or financial position.

We face significant competition.
The financial services industry, including commercial banking, mortgage banking, consumer lending, and home equity lending, is highly competitive, and we encounter strong competition for deposits, loans, and other financial services in all of our market areas in each of our lines of business. Our principal competitors include other commercial banks, savings banks, savings and loan associations, mutual funds, money market funds, finance companies, trust companies, insurers, credit unions, and mortgage companies among others. Many of our non-bank competitors are not subject to the same degree of regulation as us and have advantages over us in providing certain services. Many of our competitors are significantly larger than us and have greater access to capital and other resources. Also, our ability to compete effectively in our business is dependent on our ability to adapt successfully to regulatory and technological changes within the banking and financial services industry, generally. If we are unable to compete effectively, we will lose market share and our income from loans and other products may diminish.

Our ability to compete successfully depends on a number of factors, including, among other things:
the ability to develop, maintain, and build upon long-term customer relationships based on top quality service and high ethical standards;
the scope, relevance, and pricing of products and services offered to meet customer needs and demands;

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the rate at which we introduce new products and services relative to our competitors;
customer satisfaction with our level of service; and/or
industry and general economic trends.

Failure to perform in any of these areas could significantly weaken our competitive position, and could adversely affect our growth and profitability, which, in turn, could have a material adverse effect on our financial condition and results of operations.

We have engaged in and may continue to engage in further expansion through acquisitions, including FDIC-assisted transactions, which could negatively affect our business and earnings.
Our earnings, financial condition, and prospects after a merger or acquisition depend in part on our ability to successfully integrate the operations of the acquired company. We may be unable to integrate operations successfully or to achieve expected results or cost savings.

Acquiring other banks or businesses involves various risks commonly associated with acquisitions, including, among other things:
potential exposure to unknown or contingent liabilities of the target company;
exposure to potential asset quality issues of the target company;
difficulty and expense of integrating the operations and personnel of the target company;
potential disruption to our business;
potential diversion of our management's time and attention;
the possible loss of key employees and customers of the target company;
difficulty in estimating the value of the target company; and/or
potential changes in banking or tax laws or regulations that may affect the target company.

We periodically evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, merger or acquisition discussions and, in some cases, negotiations may take place, and future mergers or acquisitions involving cash, debt or equity securities may occur at any time. Acquisitions may involve the payment of a premium over book and/or market values, and, therefore, some dilution of our tangible book value and net income per common share may occur in connection with any future transaction. Furthermore, failure to realize the expected revenue increases, cost savings, reimbursements of losses from the FDIC, increases in geographic or product presence, and/or other projected benefits from an acquisition could have a material adverse effect on our financial condition and results of operations. Finally, to the extent that we issue capital stock in connection with transactions, such transactions and related stock issuances may have a dilutive effect on earnings per share of our common stock and share ownership of our stockholders.

Our ability to continue to receive the benefits of our loss share arrangements with the FDIC is conditioned upon our compliance with certain requirements under the agreements.
We are the beneficiary of a loss share agreement with the FDIC that calls for the FDIC to fund a portion of our losses on loss share assets we acquired in connection with our FDIC-assisted transactions. To recover a portion of our losses and retain the loss share protection, we must comply with certain requirements imposed by the agreement. The requirements of the agreement relate primarily to our administration of the assets covered by the agreement, as well as our obtaining the consent of the FDIC to engage in certain corporate transactions that may be deemed under the agreements to constitute a transfer of the loss share benefits. When the consent of the FDIC is required under the loss share agreement, the FDIC may withhold its consent or may condition its consent on terms that we do not find acceptable. If the FDIC does not grant its consent to a transaction we would like to pursue, or conditions its consent on terms that we do not find acceptable, we may be unable to engage in a corporate transaction that might otherwise benefit our shareholders or we may elect to pursue such a transaction without obtaining the FDIC's consent, which could result in termination of our loss share agreement with the FDIC.

Our loss sharing arrangements with the FDIC will not cover all of our losses on loans we acquired.
Although we have entered into a loss share agreement with the FDIC that provides that the FDIC will bear a significant portion of losses related to specified loan portfolios that we acquired, we are not protected for all losses resulting from

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charge-offs with respect to those specified loan portfolios. Additionally, the loss sharing agreements have limited terms. Therefore, the FDIC will not reimburse us for any charge-off or related losses that we experience after the term of the loss share agreement, and any such charge-offs would negatively impact our net income. Moreover, the loss share provisions in the loss share agreement may be administered improperly, or the FDIC may interpret those provisions in a way different that we do. In any of those events, our losses could increase.

We may not be able to attract and retain skilled people.
Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people in most activities in which we are engaged can be intense, and we may not be able to hire or retain the people we want and/or need. Although we maintain employment agreements with certain key employees, and have incentive compensation plans aimed, in part, at long-term employee retention, the unexpected loss of services of one or more of our key personnel could still occur, and such events may have a material adverse impact on our business because of the loss of the employee's skills, knowledge of our market, and years of industry experience and the difficulty of promptly finding qualified replacement personnel.

We may need to raise additional capital in the future, and such capital may not be available to us or may only be available on unfavorable terms.
We may need to raise additional capital in the future in order to support any additional provisions for loan losses and loan charge-offs, to maintain our capital ratios, or for other reasons. The condition of the financial markets may be such that we may not be able to obtain additional capital, or the additional capital may only be available on terms that are not attractive to us.

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

The CFPB has broad powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks, including the authority to prohibit unfair, deceptive or abusive acts and practices. In addition, the Dodd-Frank Act enhanced the regulation of mortgage banking and gave to the CFPB oversight of many of the core laws which regulate the mortgage industry and the authority to implement mortgage regulations. New regulations adopted and anticipated to be adopted by the CFPB will significantly impact consumer mortgage lending and servicing.
 
The Dodd-Frank Act and the resulting regulations will likely affect the Company's business and operations in other ways which are difficult to predict at this time. However, compliance with these new laws and regulations will result in additional costs, which may adversely impact the Company's results of operations, financial condition or liquidity, any of which may impact the market price of the Company's common stock.
The CFPB’s "qualified mortgage" rules could have a negative impact on our loan origination process and foreclosure proceedings.
The CFPB has adopted rules that are likely to impact our residential mortgage lending practices, and the residential mortgage market generally, through rules that implement minimum standards for the origination of residential mortgages, including standards regarding a customer’s ability to repay, restricting variable-rate lending, and making more loans subject to provisions for higher cost loans, new disclosures, and certain other revisions. Although new "qualified mortgage" rules may provide better definition and more certainty regarding regulatory requirements, the rules may also increase our compliance burden and reduce our lending flexibility and discretion, which could negatively impact our ability to originate new loans and the cost of originating new loans. Any loans that we make outside of the "qualified mortgage" criteria could expose us to an increased risk of liability and reduce or delay our ability to foreclose on the underlying property. It is difficult to predict how the CFPB''s "qualified mortgage" rules will impact us, but any decreases in loan origination volume or increases in compliance and foreclosure costs could negatively affect our business, operating results and financial condition.

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The CFPB may reshape the consumer financial laws through rulemaking and enforcement of unfair, deceptive or abusive acts or practices, which may directly impact the business operations of depository institutions offering consumer financial products or services including the Bank.
The CFPB has broad rulemaking authority to administer and carry out the purposes and objectives of the "Federal consumer financial laws, and to prevent evasions thereof," with respect to all financial institutions that offer financial products and services to consumers. The CFPB is also authorized to prescribe rules applicable to any covered person or service provider identifying and prohibiting acts or practices that are "unfair, deceptive, or abusive" in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. The potential reach of the CFPB's broad new rulemaking powers and UDAAP authority on the operations of financial institutions offering consumer financial products or services including the Bank is currently unknown.

The Volcker Rule limits the permissible strategies for managing our investment portfolio.
Effective December 10, 2013, pursuant to the Dodd-Frank Act, federal banking and securities regulators issued final rules to implement Section 619 of the Dodd-Frank Act (the "Volcker Rule"). Generally, subject to a transition period and certain exceptions, the Volcker Rule restricts insured depository institutions and their affiliated companies from: (i) short-term proprietary trading as principal in securities and other financial instruments, and (ii) sponsoring or acquiring or retaining an ownership interest in private equity and hedge funds. After the transition period, the Volcker Rule prohibitions and restrictions will apply to banking entities, including the Company, unless an exception applies. We are analyzing the impact of the Volcker Rule on our investment portfolio and changes to our investment strategies may occur, which could negatively affect our earnings.

The Federal Reserve has adopted new capital requirements for financial institutions that may require us to retain or raise additional capital or and/or reduce dividends.
On July 2, 2013, the Federal Reserve adopted final rules that, when effective, will increase regulatory capital requirements, implement changes required by the Dodd-Frank Act and implement portions of the Basel III regulatory capital reforms. In the future, the capital requirements for bank holding companies may require us to retain or raise additional capital, restrict our ability to pay dividends and repurchase shares of our common stock, restrict our ability to provide certain forms of discretionary executive compensation and/or require other changes to our strategic plans. The rules could restrict our ability to grow and implement our future business strategies, which could have an adverse impact on our results of operations.

A failure in or breach of our operational or security systems, or those of our third party service providers, including as a result of cyber attacks, could disrupt our business, result in unintentional disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and adversely impact our earnings.
As a financial institution, our operations rely heavily on the secure processing, storage and transmission of confidential and other information on our computer systems and networks.  Any failure, interruption or breach in security or operational integrity of these systems could result in failures or disruptions in our Internet banking system, treasury management products, check and document imaging, remote deposit capture systems, general ledger, and other systems. The security and integrity of our systems could be threatened by a variety of interruptions or information security breaches, including those caused by computer hacking, cyber attacks, electronic fraudulent activity or attempted theft of financial assets.  We cannot assure you that any such failures, interruption or security breaches will not occur, or if they do occur, that they will be adequately addressed.  While we have certain protective policies and procedures in place, the nature and sophistication of the threats continue to evolve.  We may be required to expend significant additional resources in the future to modify and enhance our protective measures. Additionally, we face the risk of operational disruption, failure, termination or capacity constraints of any of the third parties that facilitate our business activities, including exchanges, clearing agents, clearing houses or other financial intermediaries.  Such parties could also be the source of an attack on, or breach of, our operational systems.  Any failures, interruptions or security breaches in our information systems could damage our reputation, result in a loss of customer business, result in a violation of privacy or other laws, or expose us to civil litigation, regulatory fines or losses not covered by insurance.


16



We are subject to environmental risks associated with owning real estate or collateral.
When a borrower defaults on a loan secured by real property, the Bank may purchase the property in foreclosure or accept a deed to the property surrendered by the borrower. We may also take over the management of commercial properties whose owners have defaulted on loans. We may also own and lease premises where branches and other facilities are located. While we will have lending, foreclosure and facilities guidelines intended to exclude properties with an unreasonable risk of contamination, hazardous substances could exist on some of the properties that the Bank may own, manage or occupy. We face the risk that environmental laws could force us to clean up the properties at the Company's expense. The cost of cleaning up or paying damages and penalties associated with environmental problems could increase our operating expenses. It may cost much more to clean a property than the property is worth. We could also be liable for pollution generated by a borrower's operations if the Bank takes a role in managing those operations after a default. The Bank may also find it difficult or impossible to sell contaminated properties.

Risks Relating to Our Common Stock

The price of our common stock may be volatile or may decline.
The trading price of our common stock may fluctuate widely as a result of a number of factors, many of which are outside our control. In addition, the stock market is subject to fluctuations in the share prices and trading volumes that affect the market prices of the shares of many companies. These broad market fluctuations could make it more difficult for you to resell your common stock when you want and at prices you find attractive. Our stock price can fluctuate significantly in response to a variety of factors including, among other things:
actual or anticipated quarterly fluctuations in our operating results and financial condition;
changes in revenue or earnings estimates or publication of research reports and recommendations by financial analysts;
failure to meet analysts' revenue or earnings estimates;
speculation in the press or investment community;
strategic actions by us or our competitors, such as acquisitions or restructurings;
actions by institutional stockholders;
fluctuations in the stock prices and operating results of our competitors;
general market conditions and, in particular, developments related to market conditions for the financial services industry;
proposed or adopted regulatory changes or developments;
anticipated or pending investigations, proceedings or litigation that involve or affect us; and/or
domestic and international economic factors unrelated to our performance.

The stock market and, in particular, the market for financial institution stocks, has experienced significant volatility over the last several years. As a result, the market price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate more than usual and cause significant price variations to occur. The trading price of the shares of our common stock and the value of our other securities will depend on many factors, which may change from time to time, including, without limitation, our financial condition, performance, creditworthiness and prospects, future sales of our equity or equity related securities, and other factors identified in this annual report and other reports by the Company. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers' underlying financial strength or operating results. A significant decline in our stock price could result in substantial losses for individual stockholders and could lead to costly and disruptive securities litigation.

An investment in our common stock is not insured and you could lose the value of your entire investment.
An investment in our common stock is not a savings account, deposit or other obligation of our bank subsidiary, any non-bank subsidiary or any other bank, and such investment is not insured or guaranteed by the FDIC or any other governmental agency. As a result, if you acquire our common stock, you may lose some or all of your investment.


17



Our ability to pay dividends is limited by various statutes and regulations and depends primarily on the Bank's ability to distribute funds to us, and is also limited by various statutes and regulations.
The Company depends on payments from the Bank, including dividends, management fees and payments under tax sharing agreements, for substantially all of the Company's revenue. Federal and state regulations limit the amount of dividends and the amount of payments that the Bank may make to the Company under tax sharing agreements. In certain circumstances, the Missouri Division of Finance, FDIC, or Federal Reserve could restrict or prohibit the Bank from distributing dividends or making other payments to us. In the event that the Bank was restricted from paying dividends to the Company or making payments under the tax sharing agreement, the Company may not be able to service its debt, pay its other obligations or pay dividends on its common stock. If we are unable or determine not to pay dividends on our outstanding equity securities, the market price of such securities could be materially adversely affected.

There can be no assurance of any future dividends on our common stock.
Holders of our common stock are entitled to receive dividends only when, as and if declared by our board of directors. Although we have historically paid cash dividends on our common stock, we are not required to do so.
There may be future sales or other dilution of our equity, which may adversely affect the market price of our common stock.
We are not restricted from issuing additional common stock or preferred stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or preferred stock or any substantially similar securities.

In addition, to the extent options to purchase common stock under our employee stock option plans are exercised, or shares are issued, holders of our common stock could incur additional dilution. Further, if we sell additional equity or convertible debt securities, such sales could result in increased dilution to our stockholders. The market price of our common stock could decline as a result of sales of a large number of shares of common stock or preferred stock or similar securities in the market after an offering or the perception that such sales could occur.

Our outstanding debt securities restrict our ability to pay dividends on our capital stock.
We have outstanding subordinated debentures issued to statutory trust subsidiaries, which have issued and sold preferred securities in the Trusts to investors.

If we are unable to make payments on any of our subordinated debentures for more than 20 consecutive quarters, we would be in default under the governing agreements for such securities and the amounts due under such agreements would be immediately due and payable. Additionally, if for any interest payment period we do not pay interest in respect of the subordinated debentures (which will be used to make distributions on the trust preferred securities), or if for any interest payment period we do not pay interest in respect of the subordinated debentures, or if any other event of default occurs, then we generally will be prohibited from declaring or paying any dividends or other distributions, or redeeming, purchasing or acquiring, any of our capital securities, including the common stock, during the next succeeding interest payment period applicable to any of the subordinated debentures, or next succeeding interest payment period, as the case may be.

Moreover, any other financing agreements that we enter into in the future may limit our ability to pay cash dividends on our capital stock, including the common stock. In the event that our existing or future financing agreements restrict our ability to pay dividends in cash on the common stock, we may be unable to pay dividends in cash on the common stock unless we can refinance amounts outstanding under those agreements. In addition, if we are unable or determine not to pay interest on our subordinated debentures, the market price of our common stock could be materially or adversely affected.

Anti-takeover provisions could negatively impact our stockholders.
Provisions of Delaware law and of our certificate of incorporation, as amended, and bylaws, as well as various provisions of federal and Missouri state law applicable to bank and bank holding companies, could make it more difficult for a third party to acquire control of us or have the effect of discouraging a third party from attempting to acquire control of us. We are subject to Section 203 of the Delaware General Corporation Law, which would make it more difficult

18



for another party to acquire us without the approval of our board of directors. Additionally, our certificate of incorporation, as amended, authorizes our board of directors to issue preferred stock which could be issued as a defensive measure in response to a takeover proposal. In the event of a proposed merger, tender offer or other attempt to gain control of the Company, our board of directors would have the ability to readily issue available shares of preferred stock as a method of discouraging, delaying or preventing a change in control of the Company. Such issuance could occur whether or not our stockholders favorably view the merger, tender offer or other attempt to gain control of the Company. These and other provisions could make it more difficult for a third party to acquire us even if an acquisition might be in the best interests of our stockholders. Although we have no present intention to issue any shares of our authorized preferred stock, there can be no assurance that the Company will not do so in the future.

ITEM 1B: UNRESOLVED STAFF COMMENTS

Not applicable.


ITEM 2: PROPERTIES

Banking facilities
Our executive offices are located at 150 North Meramec, Clayton, Missouri, 63105. As of December 31, 2013, we had six banking locations and a support center in the St. Louis metropolitan area, eight banking facilities in the Kansas City metropolitan area, and two banking locations in the Phoenix metropolitan area. We own three of the facilities and lease the remainder. Most of the leases expire between 2014 and 2022 and include one or more renewal options of 5 years. One lease expires in 2028. All the leases are classified as operating leases. We are actively pursuing a sublease arrangement for one of our banking locations in the Kansas City market that was closed in 2013. We believe all our properties are in good condition.

Wealth management facilities
Our Wealth Management operations are headquartered in approximately 11,000 square feet of commercial condominium space in Clayton, Missouri, located approximately two blocks from our executive offices. Enterprise Trust also has offices in two of our banking locations in Kansas City. Expenses related to the space used by Enterprise Trust are allocated to the Wealth Management segment.


ITEM 3: LEGAL PROCEEDINGS

The Company and its subsidiaries are, from time to time, parties to various legal proceedings arising out of their businesses. Management believes that 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



ITEM 4: MINE SAFETY DISCLOSURES

Not applicable.


20



PART II
 
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Common Stock Market Prices
The Company's common stock trades on the NASDAQ Global Select Market under the symbol “EFSC”. Below are the dividends declared by quarter along with what the Company believes are the high and low sales prices for the common stock for the periods indicated, as reported by the NASDAQ Global Select Market. There may have been other transactions at prices not known to the Company. As of March 3, 2014, the Company had 479 common stock shareholders of record and a market price of $18.63 per share. The number of holders of record does not represent the actual number of beneficial owners of our common stock because securities dealers and others frequently hold shares in “street name” for the benefit of individual owners who have the right to vote shares.

 
2013
 
2012
 
4th Qtr
 
3rd Qtr
 
2nd Qtr
 
1st Qtr
 
4th Qtr
 
3rd Qtr
 
2nd Qtr
 
1st Qtr
Closing Price
$
20.42

 
$
16.90

 
$
15.96

 
$
14.34

 
$
13.07

 
$
13.60

 
$
10.96

 
$
11.74

High
20.96

 
18.99

 
16.00

 
15.04

 
14.22

 
14.41

 
12.49

 
15.60

Low
16.38

 
15.94

 
13.06

 
12.97

 
12.17

 
10.83

 
9.94

 
11.13

Cash dividends paid
on common shares
0.0525

 
0.0525

 
0.0525

 
0.0525

 
0.0525

 
0.0525

 
0.0525

 
0.0525


Dividends
The holders of shares of our common stock are entitled to receive dividends when declared by our Board of Directors out of funds legally available for the purpose of paying dividends. Our ability to pay dividends is substantially dependent upon the ability of our subsidiaries to pay cash dividends to us. Information on regulatory restrictions on our ability to pay dividends is set forth in Part I- Item 1. Business - Supervision and Regulation - Financial Holding Company - Dividend Restrictions. The amount of dividends, if any, that may be declared by the Company also depends on many other factors, including future earnings, bank regulatory capital requirements and business conditions as they affect the Company and its subsidiaries. As a result, no assurance can be given that dividends will be paid in the future with respect to our common stock.



21



Performance Graph
The following Stock Performance Graph and related information should not be deemed “soliciting material” or to be “filed” with the SEC nor shall such performance be incorporated by reference into any future filings under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.

The following graph* compares the cumulative total shareholder return on the Company's common stock from December 31, 2008 through December 31, 2013. The graph compares the Company's common stock with the NASDAQ Composite and the SNL $1B-$5B Bank Index. The graph assumes an investment of $100.00 in the Company's common stock and each index on December 31, 2008 and reinvestment of all quarterly dividends. The investment is measured as of each subsequent fiscal year end. There is no assurance that the Company's common stock performance will continue in the future with the same or similar results as shown in the graph.


 
Period Ending December 31,
Index
2008
2009
2010
2011
2012
2013
Enterprise Financial Services Corp
100.00

51.75

71.78

103.19

92.73

146.77

NASDAQ Composite
100.00

145.36

171.74

170.38

200.63

281.22

SNL Bank $1B-$5B
100.00

71.68

81.25

74.10

91.37

132.87



*Source: SNL Financial L.C.  Used with permission.  All rights reserved.



22



ITEM 6: SELECTED FINANCIAL DATA

The following consolidated selected financial data is derived from the Company's audited financial statements as of and for the five years ended December 31, 2013. This information should be read in connection with our audited consolidated financial statements, related notes and “Management's Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this report.
 
Years ended December 31,
(in thousands, except per share data)
2013
 
2012
 
2011
 
2010
 
2009 (1)
EARNINGS SUMMARY:
 
 
 
 
 
 
 
 
 
Interest income
$
153,289

 
$
165,464

 
$
142,840

 
$
116,394

 
$
118,486

Interest expense
18,137

 
23,167

 
30,155

 
32,411

 
48,845

Net interest income
135,152

 
142,297

 
112,685

 
83,983

 
69,641

Provision for portfolio loan losses
(642
)
 
8,757

 
13,300

 
33,735

 
40,412

Provision for purchase credit impaired loan losses
4,974

 
14,033

 
2,803

 

 

Noninterest income
9,899

 
9,084

 
18,508

 
18,360

 
19,877

Noninterest expense (3)
90,639

 
85,761

 
76,865

 
61,412

 
97,650

Income (loss) from continuing operations (3)
50,080

 
42,830

 
38,225

 
7,196

 
(48,544
)
Income tax expense (benefit) from continuing operations (3)
16,976

 
14,534

 
12,802

 
1,623

 
(1,873
)
Net income (loss) from continuing operations
33,104

 
28,296

 
25,423

 
5,573

 
(46,671
)
Net income (loss)
$
33,104

 
$
28,296

 
$
25,423

 
$
5,573

 
$
(47,955
)
 
 
 
 
 
 
 
 
 
 
PER SHARE DATA:
 
 
 
 
 
 
 
 
 
Basic earnings (loss) per common share:
 
 
 
 
 
 
 
 
 
From continuing operations
$
1.78

 
$
1.41

 
$
1.37

 
$
0.21

 
$
(3.82
)
Total
1.78

 
1.41

 
1.37

 
0.21

 
(3.92
)
Diluted earnings (loss) per common share:
 
 
 
 
 
 
 
 
 
From continuing operations
1.73

 
1.37

 
1.34

 
0.21

 
(3.82
)
Total
1.73

 
1.37

 
1.34

 
0.21

 
(3.92
)
Cash dividends paid on common shares
0.21

 
0.21

 
0.21

 
0.21

 
0.21

Book value per common share
14.47

 
13.09

 
11.61

 
9.89

 
10.25

Tangible book value per common share
12.62

 
10.99

 
9.38

 
9.67

 
9.97

 
 
 
 
 
 
 
 
 
 
BALANCE SHEET DATA:
 
 
 
 
 
 
 
 
 
Ending balances:
 
 
 
 
 
 
 
 
 
Portfolio loans
2,137,313

 
2,106,039

 
1,897,074

 
1,766,351

 
1,818,481

Purchase credit impaired loans, net of the allowance for loan losses
125,100

 
189,571

 
298,975

 
121,570

 
13,644

Allowance for loan losses (2)
27,289

 
34,330

 
37,989

 
42,759

 
42,995

Goodwill (1)
30,334

 
30,334

 
30,334

 
2,064

 
2,064

Intangibles, net
5,418

 
7,406

 
9,285

 
1,223

 
1,643

Assets
3,170,197

 
3,325,786

 
3,377,779

 
2,800,199

 
2,365,655

Deposits
2,534,953

 
2,658,851

 
2,791,353

 
2,297,721

 
1,941,416

Subordinated debentures
62,581

 
85,081

 
85,081

 
85,081

 
85,081

Borrowings
264,331

 
325,070

 
256,545

 
226,633

 
167,438

Shareholders' equity
279,705

 
235,745

 
239,565

 
179,801

 
163,912

Average balances:
 
 
 
 
 
 
 
 
 
Portfolio loans
2,104,018

 
1,953,427

 
1,819,536

 
1,782,023

 
2,097,028

Purchase credit impaired loans
168,662

 
243,359

 
232,363

 
71,152

 
1,244

Earning assets
2,875,765

 
2,909,532

 
2,766,240

 
2,260,858

 
2,334,697

Assets
3,126,537

 
3,230,928

 
3,096,147

 
2,454,023

 
2,462,237

Interest-bearing liabilities
2,237,111

 
2,340,612

 
2,377,044

 
1,957,390

 
2,025,339

Shareholders' equity
259,106

 
252,464

 
213,650

 
178,631

 
177,374


23



 
Years ended December 31,
(in thousands, except per share data)
2013
 
2012
 
2011
 
2010
 
2009 (1)
EARNINGS SUMMARY:
 
 
 
 
 
 
 
 
 
SELECTED RATIOS:
 
 
 
 
 
 
 
 
 
Return on average common equity
12.78
%
 
11.21
%
 
12.67
%
 
2.12
%
 
(34.51
)%
Return on average assets
1.06

 
0.78

 
0.74

 
0.13

 
(2.05
)
Efficiency ratio (3)
62.49

 
56.65

 
58.59

 
60.01

 
109.08

Average common equity to average assets
8.29

 
6.93

 
5.84

 
5.97

 
5.92

Total portfolio loan yield - tax equivalent
6.36

 
7.05

 
6.38

 
5.90

 
5.45

Cost of interest-bearing liabilities
0.81

 
0.99

 
1.27

 
1.66

 
2.41

Net interest spread
4.60

 
4.75

 
3.94

 
3.53

 
2.74

Net interest margin
4.78

 
4.94

 
4.12

 
3.76

 
3.06

Nonperforming loans to total loans (2)
0.98

 
1.84

 
2.19

 
2.62

 
2.12

Nonperforming assets to total assets (2)
0.90

 
1.44

 
1.74

 
2.59

 
2.60

Net chargeoffs to average loans (2)
0.31

 
0.64

 
0.99

 
1.91

 
1.42

Allowance for loan losses to total loans (2)
1.28

 
1.63

 
2.00

 
2.42

 
2.36

Dividend payout ratio - basic
11.92

 
13.28

 
14.07

 
56.00

 
(5.62
)

(1) Includes the impact of the $45.4 million goodwill impairment charge in the Company's Banking operating unit.
(2) Amounts and ratios exclude Covered Assets under FDIC loss share agreements, except for their inclusion in total assets.
(3) Results and corresponding ratios for the years ended December 31, 2012, 2011, 2010, and 2009 have been reclassified to reflect the adoption of ASU 2014-1 "Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects."

24



ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 
Introduction
The objective of this section is to provide an overview of the results of operations and financial condition of the Company for the three years ended December 31, 2013. It should be read in conjunction with the Consolidated Financial Statements, Notes and other financial data presented elsewhere in this report, particularly the information regarding the Company's business operations described in Item 1.

Executive Summary
This overview of management's discussion and analysis highlights selected information in this document and may not contain all of the information that is important to you. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources and critical accounting estimates, you should carefully read this entire document. Results and corresponding ratios for the years ended December 31, 2012 and 2011 have been reclassified to reflect the adoption of ASU 2014-1 "Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects." The impact of ASU 2014-1 was a decrease to Other Non-interest Expense and a similar increase to Income Tax Expense of $0.9 million for the years ended December 31, 2013, 2012 and 2011, respectively.

2013 Operating Results
For 2013, we reported net income of $33.1 million compared to net income of $28.3 million in 2012. After deducting preferred stock dividends in 2012, net income available to common shareholders was $33.1 million, or $1.73 per diluted share in 2013, compared to net income available to common shareholders of $25.1 million, or $1.37 per diluted share in 2012.

Income before income tax expense on the Company's Core Bank and Covered assets for the twelve months ended December 31, 2013, 2012 and 2011 were as follows:

(In thousands)
Twelve months ended December 31,
2013
 
2012
 
2011
Income before income tax expense
 
 
 
 
 
Core Bank
$
34,621

 
$
26,495

 
$
18,936

Covered assets
15,459

 
16,335

 
19,289

Total
$
50,080

 
$
42,830

 
$
38,225


Income before income tax expense for the Core Bank represents results without direct income and expenses related to Covered assets, as well as an internal estimate of associated asset funding costs. Core Bank pre-tax income grew $8.1 million or 31% in 2013 as compared to 2012 fueled by solid commercial loan growth and declining credit costs. Income from our Covered assets remained relatively stable at $15.5 million, a modest decrease of 5% despite declining balances in our PCI loans. Declining balances in our PCI loans were primarily due to continued early pay-offs of our PCI loans. Income from Covered assets remained relatively stable due to lower charge-offs than generally anticipated.

2013 Significant Transactions
During 2013, we completed the following transactions:

On January 9, 2013, the Company repurchased the warrants issued to the U.S Treasury as part of the Capital Purchase Program for approximately $1.0 million. After completing the warrant repurchase the Company exited the Capital Purchase Program.


25



On May 16, 2013, the Company finalized its acquisition of Gorman & Gorman Home Loans. The Company anticipates the acquisition will strengthen its mortgage business. As part of the transaction Gorman and Gorman and legacy Enterprise mortgage operations were combined into a single division named Enterprise Home Loans.

On August 15, 2013, the Company converted $20.0 million, 9% coupon, trust preferred securities to shares of common stock. As a result of the transaction, the Company reduced its long-term debt by $20.0 million and issued an aggregate of 1.2 million shares of common stock. The Company issued 25,060 shares of additional common stock as inducement for the conversion, which resulted in a $0.4 million, one-time, non-cash expense being recorded.

On December 6, 2013, the Company completed the sale and closure of four of its branches in the Kansas City region. Two of the branches, as well as $7.6 million of loans and $78.4 million of deposits, as well as $1.5 million of other assets were sold to another financial institution. The Company recorded a pre-tax gain of approximately $1.0 million upon completion of the transaction primarily attributed to a premium on the deposits that were sold.

On December 30, 2013 the Company prepaid $30.0 million of debt with the FHLB with a weighted average interest rate of 4.09%, and a maturity of 3 years, and incurred a prepayment penalty of $2.6 million before taxes.

Below are highlights of our Banking and Wealth Management segments. For more information on our segments, see Item 8, Note 21 - Segment Reporting.

Banking Segment
Loans - Loans totaled $2.3 billion at December 31, 2013, including $140.5 million of purchase credit impaired ("PCI") loans (formerly referred to as Portfolio loans covered under FDIC loss share or Covered loans). Portfolio loans excluding PCI loans increased $31.3 million, or 1%, from December 31, 2012. Commercial & Industrial loans increased $78.7 million, or 8%, Consumer and other loans increased $23.9 million or 141%, Construction loans and Residential real estate loans decreased $30.9 million, or 10%, and Commercial Real Estate decreased $40.4 million, or 5%.
PCI loans decreased $60.6 million, or 30%, in 2013, due to loans that paid off, charged-off and principal paydowns. Based on the most recent remeasurement of expected cash flows, the Company expects the average balance of PCI loans to be approximately $108 million, $67 million, and $39 million in 2014, 2015, and 2016, respectively.
See Note 6 – Portfolio Loans and Note 7 – Purchase Credit Impaired Loans for more information.
 
December 31,
(in thousands)
2013
 
2012
Commercial and Industrial
1,041,576

 
46
%
 
962,884

 
42
%
Commercial real estate - Investor Owned
437,688

 
19
%
 
486,467

 
21
%
Commercial real estate - Owner Occupied
341,631

 
15
%
 
333,242

 
14
%
Construction and land development
117,032

 
5
%
 
160,911

 
7
%
Residential real estate
158,527

 
7
%
 
145,558

 
6
%
Consumer & other
40,859

 
2
%
 
16,977

 
1
%
     Portfolio loans
2,137,313

 
94
%
 
2,106,039

 
91
%
PCI loans
140,538

 
6
%
 
201,118

 
9
%
Total loans
2,277,851

 
100
%
 
2,307,157

 
100
%


26



Deposits – Total deposits at December 31, 2013 were $2.5 billion, a decrease of $123.9 million, or 5%, from December 31, 2012 as the Company continued to experience run-off in its interest bearing deposits from lower cost pricing.
Non-interest bearing accounts decreased primarily due to the sale and closure of four branches in our Kansas City market.
Core deposits, which exclude brokered certificates of deposit and include reciprocal CDARS deposits, decreased $168.9 million, or 7%, for 2013 as compared to 2012. Interest bearing transaction accounts including money market accounts decreased $144.0 million, or 10%. Core deposits represented 94% of total deposits at December 31, 2013, compared to 96% at December 31, 2012.
Due to the run-off in other deposit accounts brokered certificates of deposit increased to $139.5 million at December 31, 2013 compared to $94.5 million at December 31, 2012.
Asset quality – Nonperforming loans, including troubled debt restructurings, were $20.8 million at December 31, 2013, compared to $38.7 million at December 31, 2012. Nonperforming loans represented 0.98% of portfolio loans at December 31, 2013 versus 1.84% at December 31, 2012. Excluding non-accrual loans and PCI loans, there were $0.1 million of portfolio loans that were 30-89 days delinquent at December 31, 2013 as compared to $2.1 million at December 31, 2012.
Provision for portfolio loan losses was a benefit of $0.6 million in 2013, compared to $8.8 million in 2012. The decrease in the provision for loan losses in 2013 was due to lower net chargeoffs, lower levels of criticized loans due to less downgrade activity and lower levels of non-performing loans in 2013 as compared to 2012. See Note 6 – Portfolio Loans and Provision for Loan Losses and Allowance for Loan Losses in this section for more information.
 Net Interest margin – The net interest margin (fully tax equivalent) was 4.78% for 2013, compared to 4.94% for 2012. See Net Interest Income in this section for more information.

PCI loans and other assets covered under FDIC shared loss agreements - The following table illustrates the net revenue contribution of covered assets for the most recent 3 fiscal years. This presentation excludes the cost of funding the related assets and the operating expenses to service the assets.
 
For the Years ended
(in thousands)
December 31, 2013
 
December 31, 2012
 
December 31, 2011
Accretion income
$
25,319

 
$
29,673

 
$
18,494

Accelerated cash flows
20,318

 
25,230

 
14,294

Other
831

 
758

 
138

Total interest income
46,468

 
55,661

 
32,926

Provision for loan losses
(4,974
)
 
(14,033
)
 
(2,803
)
Gain on sale of other real estate
1,071

 
2,081

 
992

Change in FDIC loss share receivable
(18,173
)
 
(14,869
)
 
(3,494
)
Change in FDIC clawback liability
(951
)
 
(575
)
 

Pre-tax net revenue
$
23,441

 
$
28,265

 
$
27,621


Net revenue from PCI loans was $23.4 million for the year ended December 31, 2013 a $4.8 million decrease from December 31, 2012. The decrease in net revenue was primarily due to lower accretion and accelerated cash flows from lower PCI loan balances, as well as a negative impact from the Change in the FDIC loss share receivable due to loan pay offs in which the losses on the loans were less than expected.


27



Wealth Management Segment
Fee income from the Wealth Management segment includes Wealth Management revenue and income from state tax credit brokerage activities. Wealth Management revenue was $7.1 million in 2013, a decrease of $0.2 million, or 2% over 2012. The slight decrease was due to the termination of several less profitable relationships during the year. See Noninterest Income in this section for more information.


28



RESULTS OF CONTINUING OPERATIONS ANALYSIS

Net Interest Income 
Comparison of 2013 and 2012
Net interest income (on a tax equivalent basis) was $137.4 million for 2013 compared to $143.8 million for 2012, a decrease of $6.4 million, or 4%. Total interest income decreased $11.4 million and total interest expense decreased $5.0 million.
 
Average interest-earning assets decreased $33.8 million, or 1%, to $2.9 billion for the year ended December 31, 2013. Average loans increased $75.9 million, or 3%, to $2.3 billion for the year ended December 31, 2013 from $2.2 billion for the year ended December 31, 2012 primarily due to strong C&I origination in 2013. Average securities and short-term investments decreased $109.7 million, to $603.1 million from 2012 as core deposits declined and portfolio loan volume accelerated slightly. Interest income on earning assets decreased $13.1 million due to lower volumes and increased $1.7 million due to higher rates. The decrease in volume was primarily due to the continued pay-off of PCI loans, offset by higher yields on the remaining balance of related loans. Portfolio loans saw a $7.6 million increase in interest income due to volume, offset by an $8.7 million decrease in interest income due to rates.

For the year ended December 31, 2013, average interest-bearing liabilities decreased $103.5 million, or 4%, to $2.2 billion compared to $2.3 billion for the year ended December 31, 2012. The decrease in average interest-bearing liabilities resulted from a $190.3 million decrease in average interest-bearing deposits. This decrease resulted from a $96.7 million decline in certificates of deposits, $68.4 million decline in average money market accounts and savings accounts, and a decrease of $25.2 million in interest-bearing transaction accounts. The significant decrease in certificates of deposits and money market and saving accounts was due to the Company's continued initiative to lower its cost of funds as well as continued historically low rates deterring clients from deposit accounts. For the year ended December 31, 2013, interest expense on interest-bearing liabilities decreased $4.3 million due to declining rates and $0.8 million due to the impact of lower volumes, versus the same period in 2012.
 
For the year ended December 31, 2013, the tax-equivalent net interest margin was 4.78%, compared to 4.94% in the same period of 2012. The decrease in margin was primarily due to lower yields on newly originated portfolio loans, the pay-off of higher-yielding PCI loans lessening their impact on the overall margin, offset by reduced rates on interest-bearing liabilities due to continued low interest rates, as well as the conversion of $20 million of our trust preferred securities with a 9% coupon rate to common equity.

The Core net interest margin, defined as Net interest margin (fully tax equivalent), including contractual interest on PCI loans, but excluding the incremental accretion on these loans, for the years ended December 31, 2013 and 2012 is as follows:

 
Twelve months ended December 31,
 
2013
 
2012
Core net interest margin
3.55
%
 
3.57
%

The Core net interest margin decline in 2013 from 2012 was due to lower loan yields partially offset by an improved earning asset mix and lower deposit and overall funding costs. The Company believes the Core net interest margin is an important measure of our financial performance even though it is a non-GAAP measure. Included in this MD&A under the caption "Use of Non-GAAP Financial Measures" is a reconciliation of net interest margin to Core net interest margin. The Average Balance Sheet and Rate/Volume sections following contain additional information regarding our net interest income.


29



Comparison of 2012 and 2011
Net interest income (on a tax equivalent basis) was $143.8 million for 2012 compared to $114.0 million for 2011, an increase of $29.8 million, or 26%. Total interest income increased $22.8 million and total interest expense decreased $7.0 million.

Average interest-earning assets increased $143.3 million, or 5%, to $2.9 billion for the year ended December 31, 2012 from $2.8 billion for the year ended December 31, 2011. Average loans increased $144.9 million, or 7%, to $2.2 billion for the year ended December 31, 2012 from $2.1 billion for the year ended December 31, 2011. Average securities and short-term investments remained relatively flat decreasing only $1.6 million, to $712.7 million from 2011 as core deposit growth was consistent with loan demand. Interest income on earning assets increased $10.9 million due to higher volumes and $11.9 million due primarily to higher yields on PCI loans during 2012 for a total increase of $22.8 million in interest income from 2011.

For the year ended December 31, 2012, average interest-bearing liabilities decreased $36.4 million, or 2%, to $2.3 billion compared to $2.4 billion for the year ended December 31, 2011. The decrease in average interest-bearing liabilities resulted from a $54.5 million decrease in average interest-bearing deposits. This decrease resulted from a decrease of $171.8 million in certificates of deposits, which was partially offset by a $72.4 million increase in average money market accounts and savings accounts, and an increase of $44.9 million in interest-bearing transaction accounts. The significant decrease in certificates of deposits was due to an initiative by the Company to lower its cost of funds. For the year ended December 31, 2012, interest expense on interest-bearing liabilities decreased $5.4 million due to declining rates and $1.6 million due to the impact of lower volumes, for a total decrease of $7.0 million versus the same period in 2011.

For the year ended December 31, 2012, the tax-equivalent net interest rate margin was 4.94%, compared to 4.12% in the same period of 2011. The increase in the margin was primarily due to better earning asset mix, higher yields on Covered assets, and lower funding costs. For the year ended December 31, 2012, the Core net interest margin increased to 3.57% as compared to 3.49% for 2011 due to improvement in our earning asset mix and lower funding costs. These factors were partially offset by declines in our earning asset yields. The Core net interest margin includes the contractual interest on PCI loans, but excludes the incremental accretion income on these loans. The Company believes the Core net interest margin is an important measure of our financial performance even though it is a non-GAAP measure. Included in this MD&A is a reconciliation of net interest margin to Core net interest margin. The Average Balance Sheet and Rate/ Volume sections following contain additional information regarding our net interest income.

The Core net interest margin, defined as Net interest margin (fully tax equivalent), including contractual interest on PCI loans, but excluding the incremental accretion on these loans, for the years ended December 31, 2012 and 2011 is as follows:

 
Twelve months ended December 31,
 
2012
 
2011
Core net interest margin
3.57
%
 
3.49
%



30



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.

 
For the years ended December 31,
 
2013
 
2012
 
2011
(in thousands)
Average Balance
 
Interest
Income/Expense
 
Average
Yield/
Rate
 
Average Balance
 
Interest
Income/Expense
 
Average
Yield/
Rate
 
Average Balance
 
Interest
Income/Expense
 
Average
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable portfolio loans (1)
$
2,058,086

 
$
94,428

 
4.59
%
 
$
1,918,567

 
$
96,694

 
5.04
%
 
$
1,786,601

 
$
95,520

 
5.35
%
Tax-exempt portfolio loans (2)
45,932

 
3,738

 
8.14

 
34,860

 
2,580

 
7.40

 
32,935

 
2,542

 
7.72

Purchase credit impaired loans (3)
168,662

 
46,468

 
27.55

 
243,359

 
55,661

 
22.87

 
232,363

 
32,926

 
14.17

Total loans
2,272,680

 
144,634

 
6.36

 
2,196,786

 
154,935

 
7.05

 
2,051,899

 
130,988

 
6.38

Taxable investments in debt and equity securities
462,015

 
8,689

 
1.88

 
568,264

 
10,192

 
1.79

 
473,620

 
11,510

 
2.43

Non-taxable investments in debt and equity securities (2)
44,158

 
1,979

 
4.48

 
34,432

 
1,577

 
4.58

 
22,434

 
1,086

 
4.84

Short-term investments
96,912

 
210

 
0.22

 
110,050

 
257

 
0.23

 
218,287

 
562

 
0.26

Total securities and short-term investments
603,085

 
10,878

 
1.80

 
712,746

 
12,026

 
1.69

 
714,341

 
13,158

 
1.84

Total interest-earning assets
2,875,765

 
155,512

 
5.41

 
2,909,532

 
166,961

 
5.74

 
2,766,240

 
144,146

 
5.21

Noninterest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
17,315

 
 
 
 
 
16,311

 
 
 
 
 
15,801

 
 
 
 
Other assets
276,443

 
 
 
 
 
345,325

 
 
 
 
 
357,993

 
 
 
 
Allowance for loan losses
(42,986
)
 
 
 
 
 
(40,240
)
 
 
 
 
 
(43,887
)
 
 
 
 
 Total assets
$
3,126,537

 
 
 
 
 
$
3,230,928

 
 
 
 
 
$
3,096,147

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing transaction accounts
$
232,010

 
$
461

 
0.20
%
 
$
257,193

 
$
721

 
0.28
%
 
$
212,257

 
$
811

 
0.38
%
Money market accounts
939,857

 
3,080

 
0.33

 
1,026,444

 
4,679

 
0.46

 
997,415

 
7,987

 
0.80

Savings
88,633

 
225

 
0.25

 
70,470

 
275

 
0.39

 
27,106

 
112

 
0.41

Certificates of deposit
578,562

 
7,376

 
1.27

 
675,224

 
9,731

 
1.44

 
847,057

 
12,748

 
1.50

Total interest-bearing deposits
1,839,062

 
11,142

 
0.61

 
2,029,331

 
15,406

 
0.76

 
2,083,835

 
21,658

 
1.04

Subordinated debentures
76,297

 
3,019

 
3.96

 
85,081

 
4,082

 
4.80

 
85,081

 
4,515

 
5.31

Borrowed funds
321,752

 
3,976

 
1.24

 
226,200

 
3,679

 
1.63

 
208,128

 
3,982

 
1.91

Total interest-bearing liabilities
2,237,111

 
18,137

 
0.81

 
2,340,612

 
23,167

 
0.99

 
2,377,044

 
30,155

 
1.27

Noninterest bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
614,413

 
 
 
 
 
627,197

 
 
 
 
 
494,609

 
 
 
 
Other liabilities
15,907

 
 
 
 
 
10,655

 
 
 
 
 
10,844

 
 
 
 
Total liabilities
2,867,431

 
 
 
 
 
2,978,464

 
 
 
 
 
2,882,497

 
 
 
 
Shareholders' equity
259,106

 
 
 
 
 
252,464

 
 
 
 
 
213,650

 
 
 
 
Total liabilities & shareholders' equity
$
3,126,537

 
 
 
 
 
$
3,230,928

 
 
 
 
 
$
3,096,147

 
 
 
 
Net interest income
 
 
$
137,375

 
 
 
 
 
$
143,794

 
 
 
 
 
$
113,991

 
 
Net interest spread
 
 
 
 
4.60
%
 
 
 
 
 
4.75
%
 
 
 
 
 
3.94
%
Net interest rate margin (4)
 
 
 
 
4.78
%
 
 
 
 
 
4.94
%
 
 
 
 
 
4.12
%


(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, $1.5 million, and $1.0 million for the years ended December 31, 2013, 2012, and 2011 respectively.

31



(2)
Non-taxable income is presented on a fully tax-equivalent basis using a 39% tax rate in 2013 and 36% tax rate in 2012 and 2011. The tax-equivalent adjustments were $2.2 million, $1.5 million, and $1.3 million for the years ended December 31, 2013, 2012, and 2011 respectively.
(3)
Purchase credit impaired loans are loans acquired as part of our acquisitions of Valley Capital, Home National, Legacy, and/or FNBO.
(4)
Net interest income divided by average total interest-earning assets.


Rate/Volume
The following table sets forth, on a tax-equivalent basis for the periods indicated, a summary of the changes in interest income and interest expense resulting from changes in yield/rates and volume.
  
 
2013 compared to 2012
 
2012 compared to 2011
 
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
$
6,749

 
$
(9,015
)
 
$
(2,266
)
 
$
6,828

 
$
(5,654
)
 
$
1,174

Tax-exempt portfolio loans (3)
881

 
277

 
1,158

 
145

 
(107
)
 
38

Purchase credit impaired loans
(19,182
)
 
9,989

 
(9,193
)
 
1,626

 
21,109

 
22,735

Taxable investments in debt and equity securities
(1,979
)
 
476

 
(1,503
)
 
2,039

 
(3,357
)
 
(1,318
)
Non-taxable investments in debt and equity securities (3)
437

 
(35
)
 
402

 
553

 
(62
)
 
491

Short-term investments
(29
)
 
(18
)
 
(47
)
 
(257
)
 
(48
)
 
(305
)
Total interest-earning assets
$
(13,123
)
 
$
1,674

 
$
(11,449
)
 
$
10,934

 
$
11,881

 
$
22,815

 
 
 
 
 
 
 
 
 
 
 
 
Interest paid on:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing transaction accounts
$
(66
)
 
$
(194
)
 
$
(260
)
 
$
152

 
$
(242
)
 
$
(90
)
Money market accounts
(369
)
 
(1,230
)
 
(1,599
)
 
226

 
(3,534
)
 
(3,308
)
Savings
60

 
(110
)
 
(50
)
 
169

 
(6
)
 
163

Certificates of deposit
(1,304
)
 
(1,051
)
 
(2,355
)
 
(2,495
)
 
(522
)
 
(3,017
)
Subordinated debentures
(394
)
 
(669
)
 
(1,063
)
 

 
(433
)
 
(433
)
Borrowed funds
1,316

 
(1,019
)
 
297

 
327

 
(630
)
 
(303
)
Total interest-bearing liabilities
(757
)
 
(4,273
)
 
(5,030
)
 
(1,621
)
 
(5,367
)
 
(6,988
)
Net interest income
$
(12,366
)
 
$
5,947

 
$
(6,419
)
 
$
12,555

 
$
17,248

 
$
29,803


(1)
Change in volume multiplied by yield/rate of prior period.
(2)
Change in yield/rate multiplied by volume of prior period.
(3)
Nontaxable income is presented on a fully-tax equivalent basis using a 39% tax rate for 2013 and 36% for 2012.
NOTE: The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each.


Provision for loan losses.
The provision for loan losses excluding PCI loans was a benefit of $0.6 million for 2013 compared to expense of $8.8 million for 2012 and $13.3 million for 2011. The lower provision for loan losses for 2013 compared to 2012 and 2011 was due to lower levels of loan risk rating downgrades, lower levels of non-performing loans, and significantly lower net charge-offs incurred during the year.

For PCI loans, the Company remeasures contractual and expected cash flows on a quarterly basis. When the remeasurement process results in an increase in expected losses, impairment is recorded through provision for loan losses. As a result of this impairment, the FDIC loss share receivable is increased to reflect anticipated future cash to be received from the FDIC. The amount of the increase is determined based on the specific loss share agreement, but is generally 80% of the losses. Changes in the FDIC loss share receivable are recorded in noninterest income. The provision for loan losses on PCI loans was $5.0 million for 2013 compared to $14.0 million in 2012.

32




See the sections below captioned "Portfolio Loans" and "Allowance for Loan Losses" for more information on our loan portfolio and asset quality.

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

 
Years ended December 31,
 
Change from
(in thousands)
2013
 
2012
 
2011
 
2013 vs 2012
 
2012 vs 2011
 Wealth Management revenue
$
7,118

 
$
7,300

 
$
6,841

 
$
(182
)
 
$
459

 Service charges on deposit accounts
6,825

 
5,664

 
5,091

 
1,161

 
573

 Other service charges and fee income
2,717

 
2,504

 
1,679

 
213

 
825

Gain on sale of branches
1,044

 

 

 
1,044

 

 Sale of other real estate
3,363

 
2,225

 
862

 
1,138

 
1,363

 State tax credit activity, net
2,503

 
2,207

 
3,645

 
296

 
(1,438
)
 Sale of securities
1,295

 
1,156

 
1,450

 
139

 
(294
)
Change in FDIC loss share receivable
(18,173
)
 
(14,869
)
 
(3,494
)
 
(3,304
)
 
(11,375
)
 Miscellaneous income
3,207

 
2,897

 
2,434

 
310

 
463

Total noninterest income
$
9,899

 
$
9,084

 
$
18,508

 
$
815

 
$
(9,424
)

Comparison of 2013 and 2012
Noninterest income increased $0.8 million, or 9%, in 2013 compared to 2012. The increase is primarily due to the gain recorded on the sale of branches in our Kansas City market, as well as increased service charges on deposit accounts, and gains on other real estate, offset by decreases in income related to changes in the FDIC loss share receivable.
Wealth Management revenue For the year ended December 31, 2013, Wealth Management revenue decreased $0.2 million, or 2%, compared to 2012. Assets under administration were $1.4 billion at December 31, 2013, a 20% decrease from December 31, 2012. Assets under management were $830 million at December 31, 2013, a 3% decrease from December 31, 2012. The decrease in Wealth Management revenue and assets under management was primarily due to the termination of several less profitable relationships during the year. The decline in assets under administration was due to the loss of a large custody relationship in the fourth quarter of 2013.
Service charges and other fee income For the year ended December 31, 2013, service charges and other fee income increased $1.4 million compared to 2012 due to an increase in service charges on business accounts, as well as higher sales of treasury management services, including better pricing and reductions in the amount of fees waived.
Gain on sale of branches - For the year ended December 31, 2013 the Company sold two of its Kansas City branches to another financial institution. As part of the transaction the Company recorded a gain of $1.0 million upon completion of the transaction primarily attributable to a premium on the deposits that were sold.
Sale of other real estate – For the year ended December 31, 2013, we sold $22.4 million of other real estate for a gain of $3.4 million which included a gain of $2.3 million from other real estate not covered by loss share agreements and a gain of $1.1 million from other real estate covered by loss share agreements. In 2012, we sold $48.8 million of other real estate for a net gain of $2.2 million, which included a gain of $0.1 million from other real estate not covered by loss share agreements and a gain of $2.1 million from other real estate covered by loss share agreements.
State tax credit activity, net For the year ended December 31, 2013, the Company recorded a gain of $2.5 million compared to a gain of $2.2 million in 2012. The increase is due to the timing of client purchases of the state tax credits in 2013 as compared to 2012, slightly offset by a mark to market loss for our tax credits carried

33



at fair value. Refer to Item 8 -Note 20 -Fair Value Measurements for additional information on the fair value of State tax credits.
Sale of securities – During 2013, the Company realized $160 million of proceeds on the sale of investment securities, generating a net gain of $1.3 million. This compared to 2012 amounts of $111 million of proceeds, and a net gain of $1.2 million.
Change in FDIC loss share receivable – Income related to changes in the FDIC loss share receivable reduced noninterest income by $18.2 million in 2013 compared to $14.9 million in 2012. The decrease in income related to the FDIC loss share receivable was primarily due to amortization expense and loan pay-offs in which the losses on the loans were less than expected. This was offset with an increase in income due to the impact of provision expense. See Item 8 - Note 7 for more information on the FDIC loss share receivable.
Miscellaneous income For the year ended December 31, 2013, Miscellaneous income increased $0.3 million, or 10%. The increase in Miscellaneous income is primarily due to income earned on an additional $20 million of bank owned life insurance ("BOLI") policy purchased in the second quarter of 2013.

Comparison of 2012 and 2011
Noninterest income decreased $9.4 million, or 51%, in 2012 compared to 2011. The decrease is primarily due to decreases in income related to changes in the FDIC loss share receivable partially offset by increased amounts across most other noninterest income accounts.
Wealth Management revenue For the year ended December 31, 2012, Wealth Management revenue from the Trust division increased $0.5 million, or 7%, compared to 2011. The increase in Wealth Management revenue was primarily due to increased investment advisory revenue. Assets under administration were $1.8 billion at December 31, 2012, a 13% increase from December 31, 2011 due to market value increases and additional accounts from new and existing clients.
Service charges and other fee income For the year ended December 31, 2012, service charges and other fee income increased $1.4 million compared to 2011 due to an increase in service charges on business accounts, debit card and credit card income, and overdraft fees, primarily due to the acquisition of FNBO.
Sale of other real estate – For the year ended December 31, 2012, we sold $48.8 million of other real estate for a gain of $2.2 million which included a gain of $0.1 million from other real estate not covered by loss share agreements and a gain of $2.1 million from other real estate covered by loss share agreements. In 2011, we sold $13.1 million of other real estate for a net gain of $0.9 million.
State tax credit activity, net For the year ended December 31, 2012, the Company recorded a gain of $2.2 million compared to a gain of $3.6 million in 2011. The decrease is due to the timing of client purchases of the state tax credits in 2012 as compared to 2011, as well as a reduction in the gain on the fair value of tax credits. For more information on the fair value treatment of the state tax credits, see Note 20 – Fair Value Measurements.
Sale of securities – During 2012, the Company realized approximately $110.9 million of proceeds on the sale of investment securities, generating a net gain of $1.2 million. This compared to 2011 amounts of approximately $84.5 million of proceeds, and a net gain of $1.5 million.
Change in FDIC loss share receivable– Income related to changes in the FDIC loss share receivable reduced noninterest income by $14.9 million in 2012 compared to $3.5 million in 2011. The decrease in income related to the FDIC loss share receivable was primarily due to amortization expense and loan pay offs in which the losses on the loans were less than expected offset with an increase in income due to the impact of provision expense.
Miscellaneous income For the year ended December 31, 2012, Miscellaneous income rose $0.5 million, or 19%. The increase in Miscellaneous income is due to an increase in fees related to client swap transactions, as well as increased gains on the sale of mortgages.

34



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

 
Years ended December 31,
 
Change from
(in thousands)
2013
 
2012
 
2011
 
2013 vs 2012
 
2012 vs 2011
 Employee compensation and benefits
$
47,278

 
$
43,497

 
$
36,839

 
$
3,781

 
$
6,658

 Occupancy
5,661

 
5,393

 
5,001

 
268

 
392

 Furniture and equipment
1,616

 
1,636

 
1,601

 
(20
)
 
35

 Data processing
4,137

 
3,454

 
3,159

 
683

 
295

 FDIC and other insurance
3,244

 
3,491

 
4,119

 
(247
)
 
(628
)
 Professional fees
4,876

 
5,120

 
3,138

 
(244
)
 
1,982

 Loan, legal and other real estate expense
4,496

 
6,732

 
10,703

 
(2,236
)
 
(3,971
)
FHLB prepayment penalty
2,590

 

 

 
2,590

 

 Other
16,741

 
16,438

 
12,305

 
303

 
4,133

Total noninterest expense
$
90,639

 
$
85,761

 
$
76,865

 
$
4,878

 
$
8,896


Comparison of 2013 and 2012
Noninterest expenses increased $4.9 million or 6% in 2013. The Company's efficiency ratio, which measures noninterest expense as a percentage of total revenue, for 2013 was 62.5% compared to 56.7% for 2012.

Employee compensation and benefits. Employee compensation and benefits increased $3.8 million, or 9%, over 2012. Employee compensation and benefits increased primarily due to higher variable and long-term incentive compensation from the Company's continued improved financial performance.

All other expense categories. All other expense categories increased $1.1 million, or 1%, over 2012. Significantly lower loan, legal and other real estate expenses and professional fees from improved credit quality, timing of reimbursements from the FDIC loss share arrangements, and the resolution of two significant legal cases were offset by the $2.6 million prepayment penalty on the redemption of $30.0 million of debt with the FHLB.

The Company expects noninterest expenses to be between $20 million and $22 million per quarter in 2014.

Comparison of 2012 and 2011
Noninterest expenses increased $8.9 million, or 12% in 2012. The Company's efficiency ratio, which measures noninterest expense as a percentage of total revenue, for 2012 was 56.7% compared to 58.6% for 2011.

Employee compensation and benefits. Employee compensation and benefits increased $6.7 million, or 18%, over 2011. Employee compensation and benefits increased due to a full year of salaries of FNBO employees, increased headcount in functions to support our growth, and higher variable compensation accruals.

All other expense categories. All other expense categories increased $2.3 million, or 6%, over 2011. Higher professional, legal and consulting expenses, amortization of intangibles, and miscellaneous expenses were offset by lower loan, legal and other real estate and FDIC and other insurance expenses. The remaining categories were relatively flat when compared to 2011 amounts.

Higher professional, legal and consulting fees were primarily due to the restatement of our financial statements in 2012, as well as continued ongoing litigation defense costs. Higher amortization of intangibles is due to a full year of amortization of customer deposit intangibles associated with the FNBO acquisition. Increased other expenses are due to a variety of items, including higher accruals and included the $575,000 clawback liability recorded for estimated reimbursements to the FDIC at the end of our loss share agreements.


35



Lower loan, legal and other real estate expenses are primarily due to decreased other real estate balances which reduces expenses for utilities, legal fees, property taxes, and insurance. These amounts decreased by $1.2 million when compared to 2011. Further, write-downs in valuation of other real estate were $2.3 million lower when compared to 2011. FDIC and other insurance expenses are lower in 2012 primarily due to a reduction in FDIC premiums of approximately $662,000.

Income Taxes
In 2013, the Company recorded income tax expense of $17.0 million on pre-tax income of $50.1 million, resulting in an effective tax rate of 33.9%. The Company's effective tax rate was consistent with 2012, even with higher pre-tax income in 2013. This was due to changes in tax rates between years from benefits in state apportionment factors. The following items were included in Income tax expense and impacted the 2013 effective tax rate:
interest income on tax exempt mortgages and municipal bonds of $1.2 million.
decrease in the tax rate used for deferred tax assets of $0.3 million.

In 2012, the Company recorded income tax expense of $14.5 million on pre-tax income of $42.8 million, resulting in an effective tax rate of 33.9%. The following items were included in Income tax expense and impacted the 2012 effective tax rate:
interest income on tax exempt mortgages and municipal bonds of $0.9 million.
reversal of a $0.3 million state deferred tax asset valuation allowance

In 2011, the Company recorded income tax expense of $12.8 million on pre-tax income of $38.2 million, resulting in an effective tax rate of 33.5%. The following items were included in Income tax expense and impacted the 2011 effective tax rate:
the expiration of the statute of limitations for the 2007 tax year warranted the release of $0.3 million of reserves related to certain state tax positions;


36



FINANCIAL CONDITION

Comparison for December 31, 2013 and 2012
Total assets at December 31, 2013 were $3.2 billion compared to $3.3 billion at December 31, 2012, a decrease of 155.6 million, or 5%. During 2013, we intentionally reduced higher interest bearing deposits, and paid off higher interest bearing debt to lower our cost of funding. This was accomplished by reducing our investment portfolio and funding Portfolio Loan growth through pay-offs in our PCI loan book.

At December 31, 2013, Portfolio Loans totaled $2.1 billion, an increase of $31.3 million, or 1% from December 31, 2012. At December 31, 2013, PCI loans totaled $140.5 million, a decrease of $60.6 million, or 30%.

Securities available for sale were $434.6 million at December 31, 2013 compared to $640.2 million at December 31, 2012. As noted above, sales in our securities available for sale were utilized to fund the run-off in our interest-bearing deposits and pay for the $30.0 million of FHLB advances redeemed. It also allowed us to improve the mix of interest earning assets toward higher yielding loans.

At December 31, 2013, Other assets included $45.3 million of bank-owned life insurance and $39.4 million of deferred tax assets.

At December 31, 2013, deposits were $2.5 billion, a decrease of $123.9 million, or 5%, from $2.7 billion at December 31, 2012. The decrease in deposits was largely comprised of our money market and savings accounts, as well as our interest bearing transaction accounts as clients continue to move away from these products due to their historically low rates.

The Company significantly reduced its long-term debt by prepaying $30.0 million of its FHLB advances, converting $20.0 million of its trust preferred securities in EFSC Capital Trust VIII to common stock, and paying off a $2.5 million subordinated note with a 10% interest rate during 2013.

Other borrowings primarily consist of customer repurchase agreements and were $214.3 million at December 31, 2013, a $30.7 million or 13% decrease from December 31, 2012. The decrease was primarily due to the sale of certain customer repurchase accounts associated with our branch sales and closures in our Kansas City market.

Portfolio Loans
Portfolio loans (defined as all loans other than PCI loans) net of unearned loan fees and costs, increased $31.3 million, or 1%, during 2013. Commercial & Industrial loans increased $78.7 million, or 8%, during the year and represent 49% of the loan portfolio at December 31, 2013. The Company's lending strategy emphasizes commercial and industrial and commercial real estate loans to small and medium sized businesses and their owners in the St. Louis, Kansas City and Phoenix metropolitan markets.

A common underwriting policy is employed throughout the Company. Lending to small and medium sized businesses is riskier from a credit perspective than lending to larger companies, but the risk is appropriately considered with higher loan pricing and ancillary income from cash management activities. As additional risk mitigation, the Company will generally hold only $15 million or less of aggregate credit exposure (both direct and indirect) with one borrower, in spite of a legal lending limit of over $91 million. There are seven borrowing relationships where we have committed more than $10.0 million with the largest being a $15.0 million line of credit with minimal usage. For the $2.1 billion loan portfolio, the Company's average loan relationship size was just under $950,000, and the average note size is approximately $625,000.

The Company also buys and sells loan participations with other banks to help manage its credit concentration risk. At December 31, 2013, the Company had purchased loan participations of $176.2 million ($108.1 million outstanding) and had sold loan participations of $424.5 million ($357.9 million outstanding). Approximately 76 borrowers make up the participations purchased, with an average outstanding loan balance of $1.4 million. Twelve relationships, or $66.5 million of the $108.1 million in participations purchased, met the definition of a “Shared National Credit.” None of the relationships were considered out of our markets.

37




The following table sets forth the composition of the Company's loan portfolio by type of loans as reported in the quarterly Federal Financial Institutions Examination Council Report of Condition and Income (“Call report”) at the dates indicated.

 
December 31,
(in thousands)
2013
 
2012
 
2011
 
2010
 
2009
Commercial and industrial
$
1,041,576

 
$
962,884

 
$
763,202

 
$
593,938

 
$
553,988

Real Estate:
 
 
 
 
 
 
 
 
 
Commercial
779,319

 
819,709

 
811,570

 
776,268

 
817,332

Construction and land development
117,032

 
160,911

 
140,147

 
190,285

 
221,397

Residential
158,527

 
145,558

 
171,034

 
189,484

 
209,743

Consumer and other
40,859

 
16,977

 
11,121

 
16,376

 
16,021

Total Portfolio loans
$
2,137,313

 
$
2,106,039

 
$
1,897,074

 
$
1,766,351

 
$
1,818,481

 
 
 
 
 
 
 
 
 
 
 
December 31,
(in thousands)
2013
 
2012
 
2011
 
2010
 
2009
Commercial and industrial
48.7
%
 
45.7
%
 
40.2
%
 
33.6
%
 
30.5
%
Real Estate:
 
 
 
 
 
 
 
 
 
Commercial
36.5
%
 
38.9
%
 
42.8
%
 
43.9
%
 
44.9
%
Construction and land development
5.5
%
 
7.6
%
 
7.4
%
 
10.8
%
 
12.2
%
Residential
7.4
%
 
6.9
%
 
9.0
%
 
10.7
%
 
11.5
%
Consumer and other
1.9