10-K 1 a20141231-10k.htm 10-K 2014.12.31-10K


 

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, 2014.
 
 
 
[   ]
 
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______ to ______
 
 
 
 
 
Commission file number 001-15373

 ENTERPRISE FINANCIAL SERVICES CORP
 
Incorporated in the State of Delaware
I.R.S. Employer Identification # 43-1706259
Address: 150 North Meramec, Clayton, MO 63105
Telephone: (314) 725-5500
___________________
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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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 or any amendment to 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 $338,461,720 based on the closing price of the common stock of $18.06 as of the last business day of the registrant's most recently completed second fiscal quarter (June 30, 2014) as reported by the NASDAQ Global Select Market.

As of February 23, 2015, the Registrant had 19,838,840 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 2015 Annual Meeting of Shareholders, which will be filed within 120 days of December 31, 2014.
 





ENTERPRISE FINANCIAL SERVICES CORP
2014 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 primarily 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. The Company has one segment for purposes of its financial reporting.

The Company offers a broad range of business and personal banking services, and wealth management 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. The Company also provides trust

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services 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.

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 advanced 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.
Life Insurance Premium Finance. We specialize in financing high-end whole life insurance premiums utilized in high net worth estate planning.
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, 2013, and 2014, we were selected as one of the relatively few banks for New Markets Tax Credits. In this capacity, we were responsible for allocating a total of $118 million of 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.
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 service, which we feel often creates a competitive advantage over larger, nationwide banks. Technology is also

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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 credit committee of our Bank's 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”) for the term of the agreement. 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.

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 four of its branches in the Kansas City market. The sale agreement called for two 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.

Debt Repayments
During 2014, the Company completed two transactions that significantly reduced its long term debt. On March 14, 2014, the Company converted $5.0 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 $5.0 million and issued an aggregate of approximately 0.3 million shares of common stock. On December 23, 2014, the Company prepaid $50.0 million of debt with the Federal Home Loan Bank ("FHLB") with a weighted average interest rate of 3.17% and a maturity of 3 years and incurred a prepayment penalty of $2.9 million before taxes. These transactions are expected to further reduce our cost of interest bearing liabilities in future periods as we continue to manage interest rate risk.

During 2013, the Company completed two transactions similar to the 2014 events to reduce long term debt and improve our overall cost of funding. 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.

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.

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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 30th 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. Phoenix is the nation's 12th 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.

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. 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.

On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("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 our 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 more generally.

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However, it is likely that the Dodd-Frank Act will increase the regulatory burden, compliance costs and interest expense for the Company and Bank.

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 the Bank must continue to be considered well managed and well capitalized by the FDIC 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.

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 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

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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, 2014, 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.

On July 2, 2013, the Federal Reserve approved a final rule to establish a new comprehensive regulatory capital framework for all U.S. banking organizations. On July 9, 2013, the final rule was approved (as an interim final rule) by the FDIC. This regulatory capital framework, commonly referred to as Basel III, implements several changes to the U.S. regulatory capital framework required by the Dodd-Frank Act. The new U.S. 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 U.S. 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 CET1 capital 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, when fully implemented, will effectively increase the minimum CET1 capital, Tier 1 capital , and total capital ratios for U.S. 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.


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The Basel III final rule provided 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 ("AOCI") from CET1 and Tier 1 capital. The Company will make this election, which is irrevocable, on the Bank's Call Report for the period ended March 31, 2015 and is effective 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 an 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.

Prompt Corrective Action: 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. 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, beginning on January 1, 2015, a bank that (1) has a total capital to risk-weighted assets ratio (the “Total Capital Ratio”) of 10.0% or greater, a CET1 Capital to risk-weighted assets ratio (the "CET1 Capital Ratio") of 6.5% or greater, a Tier 1 Capital to risk-weighted assets ratio (the “Tier 1 Capital Ratio”) of 8.0% 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 6.0% or greater, a CET1 Capital Ratio of 4.5% 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 6.0%, a CET1 Capital Ratio of less than 4.5%, 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 4.0%, a CET1 Capital Ratio of less than 3.0% is considered to be “significantly undercapitalized,” and a bank that has a tangible equity capital to total 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.
Prior to January 1, 2015, a Bank was considered to be "well capitalized" if the Bank (1) had Total Capital Ratio of 10.0% or greater, a Tier 1 Capital Ratio of 6.0% or greater, and a Leverage Ratio of 5.0% or greater, and (2) was not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the FDIC.

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Prior to January 1, 2015, 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, was considered to be "adequately capitalized"; a bank that had 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%, was considered to be "undercapitalized"; a bank that had 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%, was considered to be "significantly undercapitalized"; and a bank that had a tangible equity capital to assets ratio equal to or less than 2.0% was deemed to be "critically undercapitalized."
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, 2014, all of the Bank’s capital ratios were at levels that would qualify it to be “well capitalized” for regulatory purposes.
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.
The Bank is also subject to other 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.
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 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.
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

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“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 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.

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.

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 were to 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. In addition, the Federal Reserve

9



has granted an extension to conform with the retention of ownership interest in private equity and hedge funds until July 21, 2016 and has indicated that they will grant an additional one year extension to July 21, 2017. The Company plans to comply within the conformance period and does not believe that the Volcker Rule will have a material impact on its investment portfolio.

Employees
At December 31, 2014, we had 452 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.

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 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.
A majority 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

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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, Kansas and Arizona have foreclosure laws that hinder our ability to recover on defaulted loans secured by property in their states. Kansas is a judicial foreclosure state, therefore 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 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. Arizona has a non-deficiency statute with regards to certain types of residential mortgage loans. Our ability to recover on defaulted loans secured by residential mortgages may be limited to the fair value of the real estate securing the loan at the time of foreclosure.

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 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.


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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, the Federal Reserve, and the FDIC 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 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 several loss share agreements with the FDIC that call 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 these agreements. The requirements of the agreements relate primarily to our administration of the assets covered by the agreements, 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 agreements, 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 agreements 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 loss share agreements with the FDIC that provide 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 a loss share agreement, and any such charge-offs could negatively impact our net income. Moreover, the loss share provisions in the loss share agreements may be administered improperly, or the FDIC may interpret those provisions in a way different than 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.

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 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 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.

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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 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.

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.


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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.

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,

16



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 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


Our executive offices are located at 150 North Meramec, Clayton, Missouri, 63105. As of December 31, 2014, 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 2015 and 2022 and include one or more renewal options of up to 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. In February 2015, the headquarters for Enterprise Trust was relocated from commercial condominium space in Clayton, Missouri, approximately two blocks from the executive offices, to leased space in the same building as the executive offices. We believe all our properties are in good condition.


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.



17



ITEM 4: MINE SAFETY DISCLOSURES

Not applicable.


18



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 closing, 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 February 23, 2015, the Company had 439 common stock shareholders of record and a market price of $20.07 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.

 
2014
 
2013
 
4th Qtr
 
3rd Qtr
 
2nd Qtr
 
1st Qtr
 
4th Qtr
 
3rd Qtr
 
2nd Qtr
 
1st Qtr
Closing Price
$
19.73

 
$
16.72

 
$
18.06

 
$
20.07

 
$
20.42

 
$
16.90

 
$
15.96

 
$
14.34

High
20.23

 
18.95

 
20.93

 
20.65

 
20.96

 
18.99

 
16.00

 
15.04

Low
16.38

 
16.70

 
17.02

 
17.67

 
16.38

 
15.94

 
13.06

 
12.97

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.



19



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, 2009 through December 31, 2014. 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, 2009 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
2009
2010
2011
2012
2013
2014
Enterprise Financial Services Corp
100.00

138.70

199.39

179.18

283.59

277.14

NASDAQ Composite
100.00

118.15

117.22

138.02

193.47

222.16

SNL Bank $1B-$5B
100.00

113.35

103.38

127.47

185.36

193.81



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



20



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, 2014. 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 and percentage data)
2014
 
2013
 
2012
 
2011
 
2010
EARNINGS SUMMARY:
 
 
 
 
 
 
 
 
 
Interest income
$
131,754

 
$
153,289

 
$
165,464

 
$
142,840

 
$
116,394

Interest expense
14,386

 
18,137

 
23,167

 
30,155

 
32,411

Net interest income
117,368

 
135,152

 
142,297

 
112,685

 
83,983

Provision (benefit) for portfolio loan losses
4,409

 
(642
)
 
8,757

 
13,300

 
33,735

Provision for purchase credit impaired loan losses
1,083

 
4,974

 
14,033

 
2,803

 

Noninterest income
16,631

 
9,899

 
9,084

 
18,508

 
18,360

Noninterest expense
87,463

 
90,639

 
85,761

 
76,865

 
61,412

Income before income taxes
41,044

 
50,080

 
42,830

 
38,225

 
7,196

Income tax expense
13,871

 
16,976

 
14,534

 
12,802

 
1,623

Net income
$
27,173

 
$
33,104

 
$
28,296

 
$
25,423

 
$
5,573

 
 
 
 
 
 
 
 
 
 
PER SHARE DATA:
 
 
 
 
 
 
 
 
 
Basic earnings per common share
$
1.38

 
$
1.78

 
$
1.41

 
$
1.37

 
$
0.21

Diluted earnings per common share
1.35

 
1.73

 
1.37

 
1.34

 
0.21

Cash dividends paid on common shares
0.21

 
0.21

 
0.21

 
0.21

 
0.21

Book value per common share
15.94

 
14.47

 
13.09

 
11.61

 
9.89

Tangible book value per common share
14.20

 
12.62

 
10.99

 
9.38

 
9.67

 
 
 
 
 
 
 
 
 
 
BALANCE SHEET DATA:
 
 
 
 
 
 
 
 
 
Ending balances:
 
 
 
 
 
 
 
 
 
Portfolio loans
$
2,433,916

 
$
2,137,313

 
$
2,106,039

 
$
1,897,074

 
$
1,766,351

 Allowance for loan losses (1)
30,185

 
27,289

 
34,330

 
37,989

 
42,759

Purchase credit impaired loans, net of the allowance for loan losses
83,693

 
125,100

 
189,571

 
298,975

 
121,570

Goodwill
30,334

 
30,334

 
30,334

 
30,334

 
2,064

Other intangible assets, net
4,164

 
5,418

 
7,406

 
9,285

 
1,223

Total assets
3,277,003

 
3,170,197

 
3,325,786

 
3,377,779

 
2,800,199

Deposits
2,491,510

 
2,534,953

 
2,658,851

 
2,791,353

 
2,297,721

Subordinated debentures
56,807

 
62,581

 
85,081

 
85,081

 
85,081

Other borrowings
383,883

 
264,331

 
325,070

 
256,545

 
226,633

Shareholders' equity
316,241

 
279,705

 
235,745

 
239,565

 
179,801

 
 
 
 
 
 
 
 
 
 
Average balances:
 
 
 
 
 
 
 
 
 
Portfolio loans
$
2,255,180

 
$
2,097,920

 
$
1,953,427

 
$
1,819,536

 
$
1,782,023

Purchase credit impaired loans
119,504

 
168,662

 
243,359

 
232,363

 
71,152

Earning assets
2,921,978

 
2,875,765

 
2,909,532

 
2,766,240

 
2,260,858

Total assets
3,156,994

 
3,126,537

 
3,230,928

 
3,096,147

 
2,454,023

Interest-bearing liabilities
2,209,188

 
2,237,111

 
2,340,612

 
2,377,044

 
1,957,390

Shareholders' equity
301,756

 
259,106

 
252,464

 
213,650

 
178,631


21



 
Years ended December 31,
(in thousands, except per share and percentage data)
2014
 
2013
 
2012
 
2011
 
2010
SELECTED RATIOS:
 
 
 
 
 
 
 
 
 
Return on average common equity
9.01
%
 
12.78
%
 
11.21
%
 
12.67
%
 
2.12
%
Return on average assets
0.86

 
1.06

 
0.78

 
0.74

 
0.13

Efficiency ratio
65.27

 
62.49

 
56.65

 
58.59

 
60.01

Average common equity to average assets
9.56

 
8.29

 
6.93

 
5.84

 
5.97

Total portfolio loan yield - tax equivalent
5.14

 
6.36

 
7.05

 
6.38

 
5.90

Cost of interest-bearing liabilities
0.65

 
0.81

 
0.99

 
1.27

 
1.66

Net interest spread
3.91

 
4.60

 
4.75

 
3.94

 
3.53

Net interest margin
4.07

 
4.78

 
4.94

 
4.12

 
3.76

Nonperforming loans to total loans (1)
0.91

 
0.98

 
1.84

 
2.19

 
2.62

Nonperforming assets to total assets (1)
0.74

 
0.90

 
1.44

 
1.74

 
2.59

Net chargeoffs to average loans (1)
0.07

 
0.31

 
0.64

 
0.99

 
1.91

Allowance for loan losses to total loans (1)
1.24

 
1.28

 
1.63

 
2.00

 
2.42

Dividend payout ratio - basic
15.37

 
11.92

 
13.28

 
14.07

 
56.00


(1) Amounts and ratios exclude PCI loans and other assets covered under FDIC loss share agreements, except for their inclusion in total assets.


22



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, 2014. 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
Below are highlights of our financial performance for the year ended December 31, 2014 as compared to the years ended December 31, 2013 and December 31, 2012.

(in thousands, except per share data)
For the Years ended December 31,
2014
 
2013
 
2012
EARNINGS
 
 
 
 
 
Total interest income
$
131,754

 
$
153,289

 
$
165,464

Total interest expense
14,386

 
18,137

 
23,167

Net interest income
117,368

 
135,152

 
142,297

Provision (benefit) for portfolio loans
4,409

 
(642
)
 
8,757

Provision for purchase credit impaired loans
1,083

 
4,974

 
14,033

Net interest income after provision for loan losses
111,876

 
130,820

 
119,507

 
 
 
 
 
 
Fee income
20,859

 
22,526

 
19,901

Other noninterest income
(4,228
)
 
(12,627
)
 
(10,817
)
Total noninterest income
16,631

 
9,899

 
9,084

 
 
 
 
 
 
Total noninterest expenses
87,463

 
90,639

 
85,761

Income before income tax expense
41,044

 
50,080

 
42,830

Income tax expense
13,871

 
16,976

 
14,534

Net income
$
27,173

 
$
33,104

 
$
28,296

 
 
 
 
 
 
Basic earnings per share
$
1.38

 
$
1.78

 
$
1.41

Diluted earnings per share
1.35

 
1.73

 
1.37

 
 
 
 
 
 
Return on average assets
0.86
%
 
1.06
%
 
0.78
%
Return on average common equity
9.01
%
 
12.78
%
 
11.21
%
Net interest margin (fully tax equivalent)
4.07
%
 
4.78
%
 
4.94
%
Efficiency ratio
65.27
%
 
62.49
%
 
56.65
%
 
 
 
 
 
 
ASSET QUALITY (1)
 
 
 
 
 
Net charge-offs
$
1,512

 
$
6,400

 
$
12,416

Nonperforming loans
22,244

 
20,840

 
38,727

Classified assets
77,898

 
83,843

 
111,266

Nonperforming loans to total loans
0.91
%
 
0.98
%
 
1.84
%
Nonperforming assets to total assets
0.74
%
 
0.90
%
 
1.44
%
Allowance for loan losses to total loans
1.24
%
 
1.28
%
 
1.63
%
Net charge-offs to average loans
0.07
%
 
0.31
%
 
0.64
%
 
 
 
 
 
 
(1) Excludes PCI loans and other assets covered under FDIC loss share agreements, except for their inclusion in total assets.

23



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

 
For the Years ended December 31,
(in thousands)
2014
 
2013
 
2012
CORE PERFORMANCE MEASURES (1)
Net interest income
$
98,438

 
$
99,805

 
$
102,376

Provision (benefit) for portfolio loans
4,409

 
(642
)
 
8,757

Noninterest income
24,548

 
24,662

 
20,716

Noninterest expense
79,369

 
81,736

 
78,552

Income before income tax expense
39,208

 
43,373

 
35,783

Income tax expense
13,165

 
14,407

 
11,835

Net income
$
26,043

 
$
28,966

 
$
23,948

 
 
 
 
 
 
Earnings per share
$
1.29

 
$
1.47

 
$
1.24

Return on average assets
0.82
%
 
0.93
%
 
0.74
%
Return on average common equity
8.63
%
 
11.18
%
 
9.49
%
Net interest margin (fully tax equivalent)
3.42
%
 
3.55
%
 
3.57
%
Efficiency ratio
64.53
%
 
65.67
%
 
63.82
%
 
 
 
 
 
 
(1) A non-GAAP measure. A reconciliation has been included in this MD&A section under the caption "Use of Non-GAAP Financial Measures."

The Company noted the following trends during 2014:

The Company reported net income of $27.2 million for 2014, compared to $33.1 million for 2013. The Company reported diluted earnings per share of $1.35 and $1.73 in the same respective periods. The decrease in net income for the current year is due primarily to reduced revenue from our PCI loans, lower interest yields on our portfolio loans offsetting volume gains, as well as lower investment security gains.

On a core basis1, net income was $26.0 million, or $1.29 per share in 2014 compared to $29.0 million, or $1.47 per share in 2013. The decrease was primarily due to a benefit for provision for loan losses recorded in the prior year, partially offset by reduced noninterest expenses.

Net interest income decreased $17.8 million in 2014 from 2013. The decrease was due to lower balances and lower accelerated payments on PCI loans, lower prepayment fees on portfolio loans, and lower interest rates on newly originated loans. These items were offset by higher balances of portfolio loans and lower interest expense from the conversion of $25.0 million of trust preferred securities to common equity and the prepayment of FHLB borrowings, both of which carried relatively higher interest rates.

On a core basis1, net interest income declined $1.4 million as increases in portfolio loan balances and improved funding costs were slightly outweighed by lower loan yields.

The Core net interest margin1, defined as Net interest margin (fully tax equivalent), including contractual interest on PCI loans, but excluding the incremental accretion on these loans, declined 13 basis points from the prior year primarily due to lower balances of PCI loans. The Average Balance Sheet and Rate/Volume sections following contain additional information regarding our net interest income.

24




Fee income, which primarily includes the Company's wealth management revenue, service charges and other fees on deposit accounts, sales of other real estate, and state tax brokerage activity, decreased $1.7 million compared to 2013 primarily due to lower gains on sales of other real estate.

Total Noninterest expenses declined $3.2 million in 2014 from 2013, or $2.4 million on a Core basis1 due to lower professional fees, loan legal expenses, and occupancy costs.

2014 Significant Transactions
During 2014, we completed the following significant transactions resulting from the Company's focus on expense and interest rate risk management:

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

On December 23, 2014, the Company prepaid $50.0 million of debt with the FHLB with a weighted average interest rate of 3.17%, and a maturity of 3 years, and incurred a prepayment penalty of $2.9 million before taxes.

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

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.


Balance sheet highlights

Loans - Loans totaled $2.5 billion at December 31, 2014, including $99.1 million of purchase credit impaired ("PCI") loans. Portfolio loans excluding PCI loans increased $296.6 million, or 14%, from December 31, 2013. Commercial & Industrial loans increased $228.7 million, or 22%, Consumer and other loans increased $22.2 million, or 54%, Construction loans and Residential real estate loans increased $54.5 million, or 20%, and Commercial Real Estate decreased $8.8 million, or 1%. See Item 8, Note 6 – Portfolio Loans for more information.
Deposits – Total deposits at December 31, 2014 were $2.5 billion, a decrease of $43.4 million, or 2%, from December 31, 2013 primarily from reductions in higher cost time deposit balances.
Asset quality – Nonperforming loans, including troubled debt restructurings, were $22.2 million at December 31, 2014, compared to $20.8 million at December 31, 2013. Nonperforming loans represented 0.91% of portfolio loans at December 31, 2014 versus 0.98% at December 31, 2013. There were $1.9 million of portfolio loans that were 30-89 days delinquent and still accruing at December 31, 2014 as compared to $0.1 million at December 31, 2013.

25



Provision for portfolio loan losses was an expense of $4.4 million in 2014, compared to a benefit of $0.6 million in 2013. The Company experienced lower levels of net chargeoffs in 2014 as compared to 2013 and 2012, but recorded more provision expense as loan balances increased 14% in 2014. See Item 8, Note 6 – Portfolio Loans and, Provision for Loan Losses and Allowance for Loan Losses in this section for more information.




26



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

 
For the years ended December 31,
 
2014
 
2013
 
2012
(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)
$
2,223,835

 
$
93,604

 
4.21
%
 
$
2,058,086

 
$
94,428

 
4.59
%
 
$
1,918,567

 
$
96,694

 
5.04
%
Tax-exempt portfolio loans (2)
35,058

 
2,358

 
6.73

 
45,932

 
3,738

 
8.14

 
34,860

 
2,580

 
7.40

Purchase credit impaired loans
119,504

 
26,336

 
22.04

 
168,662

 
46,468

 
27.55

 
243,359

 
55,661

 
22.87

Total loans
2,378,397

 
122,298

 
5.14

 
2,272,680

 
144,634

 
6.36

 
2,196,786

 
154,935

 
7.05

Taxable investments in debt and equity securities
424,882

 
8,984

 
2.11

 
462,015

 
8,689

 
1.88

 
568,264

 
10,192

 
1.79

Non-taxable investments in debt and equity securities (2)
41,088

 
1,919

 
4.67

 
44,158

 
1,979

 
4.48

 
34,432

 
1,577

 
4.58

Short-term investments
77,611

 
187

 
0.24

 
96,912

 
210

 
0.22

 
110,050

 
257

 
0.23

Total securities and short-term investments
543,581

 
11,090

 
2.04

 
603,085

 
10,878

 
1.80

 
712,746

 
12,026

 
1.69

Total interest-earning assets
2,921,978

 
133,388

 
4.56

 
2,875,765

 
155,512

 
5.41

 
2,909,532

 
166,961

 
5.74

Noninterest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
29,680

 
 
 
 
 
17,315

 
 
 
 
 
16,311

 
 
 
 
Other assets
250,985

 
 
 
 
 
276,443

 
 
 
 
 
345,325

 
 
 
 
Allowance for loan losses
(45,649
)
 
 
 
 
 
(42,986
)
 
 
 
 
 
(40,240
)
 
 
 
 
 Total assets
$
3,156,994

 
 
 
 
 
$
3,126,537

 
 
 
 
 
$
3,230,928

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing transaction accounts
$
311,974

 
$
653

 
0.21
%
 
$
232,010

 
$
461

 
0.20
%
 
$
257,193

 
$
721

 
0.28
%
Money market accounts
852,015

 
2,716

 
0.32

 
939,857

 
3,080

 
0.33

 
1,026,444

 
4,679

 
0.46

Savings
81,131

 
201

 
0.25

 
88,633

 
225

 
0.25

 
70,470

 
275

 
0.39

Certificates of deposit
586,220

 
6,917

 
1.18

 
578,562

 
7,376

 
1.27

 
675,224

 
9,731

 
1.44

Total interest-bearing deposits
1,831,340

 
10,487

 
0.57

 
1,839,062

 
11,142

 
0.61

 
2,029,331

 
15,406

 
0.76

Subordinated debentures
57,930

 
1,322

 
2.28

 
76,297

 
3,019

 
3.96

 
85,081

 
4,082

 
4.80

Other borrowed funds
319,918

 
2,577

 
0.81

 
321,752

 
3,976

 
1.24

 
226,200

 
3,679

 
1.63

Total interest-bearing liabilities
2,209,188

 
14,386

 
0.65

 
2,237,111

 
18,137

 
0.81

 
2,340,612

 
23,167

 
0.99

Noninterest bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
622,714

 
 
 
 
 
614,413

 
 
 
 
 
627,197

 
 
 
 
Other liabilities
23,336

 
 
 
 
 
15,907

 
 
 
 
 
10,655

 
 
 
 
Total liabilities
2,855,238

 
 
 
 
 
2,867,431

 
 
 
 
 
2,978,464

 
 
 
 
Shareholders' equity
301,756

 
 
 
 
 
259,106

 
 
 
 
 
252,464

 
 
 
 
Total liabilities & shareholders' equity
$
3,156,994

 
 
 
 
 
$
3,126,537

 
 
 
 
 
$
3,230,928

 
 
 
 
Net interest income
 
 
$
119,002

 
 
 
 
 
$
137,375

 
 
 
 
 
$
143,794

 
 
Net interest spread
 
 
 
 
3.91
%
 
 
 
 
 
4.60
%
 
 
 
 
 
4.75
%
Net interest margin
 
 
 
 
4.07
%
 
 
 
 
 
4.78
%
 
 
 
 
 
4.94
%



27



(1)
Average balances include non-accrual loans. Loan fees, net of amortization of deferred loan origination fees and costs, included in interest income are approximately $0.9 million, $1.5 million, and $1.5 million for the years ended December 31, 2014, 2013, and 2012 respectively.
(2)
Non-taxable income is presented on a fully tax-equivalent basis using a 38% tax rate in 2014 and 2013, and 36% for 2012. The tax-equivalent adjustments were $1.6 million, $2.2 million, and $1.5 million for the years ended December 31, 2014, 2013, and 2012 respectively.



Rate/Volume
The following table sets forth, on a tax-equivalent basis for the periods indicated, a summary of the changes in interest income and interest expense resulting from changes in yield/rates and volume.
  
 
2014 compared to 2013
 
2013 compared to 2012
 
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
$
7,295

 
$
(8,119
)
 
$
(824
)
 
$
6,749

 
$
(9,015
)
 
$
(2,266
)
Tax-exempt portfolio loans (3)
(796
)
 
(584
)
 
(1,380
)
 
881

 
277

 
1,158

Purchase credit impaired loans
(11,937
)
 
(8,195
)
 
(20,132
)
 
(19,182
)
 
9,989

 
(9,193
)
Taxable investments in debt and equity securities
(732
)
 
1,027

 
295

 
(1,979
)
 
476

 
(1,503
)
Non-taxable investments in debt and equity securities (3)
(141
)
 
81

 
(60
)
 
437

 
(35
)
 
402

Short-term investments
(45
)
 
22

 
(23
)
 
(29
)
 
(18
)
 
(47
)
Total interest-earning assets
$
(6,356
)
 
$
(15,768
)
 
$
(22,124
)
 
$
(13,123
)
 
$
1,674

 
$
(11,449
)
 
 
 
 
 
 
 
 
 
 
 
 
Interest paid on:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing transaction accounts
$
166

 
$
26

 
$
192

 
$
(66
)
 
$
(194
)
 
$
(260
)
Money market accounts
(282
)
 
(82
)
 
(364
)
 
(369
)
 
(1,230
)
 
(1,599
)
Savings
(19
)
 
(5
)
 
(24
)
 
60

 
(110
)
 
(50
)
Certificates of deposit
97

 
(556
)
 
(459
)
 
(1,304
)
 
(1,051
)
 
(2,355
)
Subordinated debentures
(615
)
 
(1,082
)
 
(1,697
)
 
(394
)
 
(669
)
 
(1,063
)
Borrowed funds
(23
)
 
(1,376
)
 
(1,399
)
 
1,316

 
(1,019
)
 
297

Total interest-bearing liabilities
(676
)
 
(3,075
)
 
(3,751
)
 
(757
)
 
(4,273
)
 
(5,030
)
Net interest income
$
(5,680
)
 
$
(12,693
)
 
$
(18,373
)
 
$
(12,366
)
 
$
5,947

 
$
(6,419
)

(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 38% tax rate for 2014 and 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.

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


28



 
For the Years ended
(in thousands)
December 31, 2014
 
December 31, 2013
 
December 31, 2012
Contractual interest income
$
7,408

 
$
11,121

 
$
15,740

Accelerated cash flows and other incremental accretion
18,930

 
35,347

 
39,921

Estimated funding cost
(1,404
)
 
(3,429
)
 
(5,303
)
Total net interest income
24,934

 
43,039

 
50,358

(Provision) for loan losses
(1,083
)
 
(4,974
)
 
(14,033
)
Gain/(loss) on sale of other real estate
445

 
1,071

 
2,081

Change in FDIC loss share receivable
(9,307
)
 
(18,173
)
 
(14,869
)
Change in FDIC clawback liability
(1,201
)
 
(951
)
 
(575
)
Other expenses
(2,928
)
 
(4,552
)
 
(6,627
)
PCI assets income before income tax expense
$
10,860

 
$
15,460

 
$
16,335


At December 31, 2014, the remaining accretable yield on the portfolio was estimated to be $29 million and the non-accretable difference was approximately $66 million. Absent cash flow accelerations or pool impairment, the Company currently estimates average PCI loans balances to be approximately $80 million and income before tax expense on PCI assets will be approximately $6 million to $8 million in 2015.

Comparison of 2014 and 2013
Net interest income (on a tax equivalent basis) was $119.0 million for 2014 compared to $137.4 million for 2013, a decrease of $18.4 million, or 13%. Total interest income decreased $22.1 million and total interest expense decreased $3.8 million.
 
Average interest-earning assets increased $46.2 million, or 2%, to $2.9 billion for the year ended December 31, 2014. Average loans increased $105.7 million, or 5%, to $2.4 billion for the year ended December 31, 2014 from $2.3 billion for the year ended December 31, 2013 primarily due to strong C&I origination in 2014. Average securities and short-term investments decreased $59.5 million, to $543.6 million from 2013 as core deposits declined and portfolio loan volume accelerated slightly. Interest income on earning assets decreased $6.4 million due to lower volumes and decreased $15.8 million due to lower 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 $6.5 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, 2014, average interest-bearing liabilities decreased $27.9 million, or 1%, to $2.21 billion compared to $2.24 billion for the year ended December 31, 2013. The decrease in average interest-bearing liabilities resulted from the payoff of $5 million trust preferred securities and a $95.3 million decline in average money market accounts and savings accounts. The significant decrease in 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, 2014, interest expense on interest-bearing liabilities decreased $3.1 million due to lower rates and $0.7 million due to the impact of lower volumes, versus the same period in 2013.
 
For the year ended December 31, 2014, the tax-equivalent net interest margin was 4.07%, compared to 4.78% in the same period of 2013. 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 previously mentioned FHLB debt repayments and the conversion of $25 million of our trust preferred securities with a 9% coupon rate to common equity.

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.

29




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.

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

 
Years ended December 31,
 
Change from
(in thousands)
2014
 
2013
 
2012
 
2014 vs. 2013
 
2013 vs. 2012
 Wealth management revenue
$
6,942

 
$
7,118

 
$
7,300

 
$
(176
)
 
$
(182
)
 Service charges on deposit accounts
7,181

 
6,825

 
5,664

 
356

 
1,161

 Other service charges and fee income
2,953

 
2,717

 
2,504

 
236

 
213

 Sale of other real estate
1,086

 
2,292

 
144

 
(1,206
)
 
2,148

 State tax credit activity, net
2,252

 
2,503

 
2,207

 
(251
)
 
296

 Miscellaneous income
4,134

 
3,207

 
2,897

 
927

 
310

Core noninterest income (1)
24,548

 
24,662

 
20,716

 
(114
)
 
3,946

Gain on sale of branches

 
1,044

 

 
(1,044
)
 
1,044

Gain on sale of other real estate covered under FDIC loss share agreements
445

 
1,071

 
2,081

 
(626
)
 
(1,010
)
Gain on sale of investment securities

 
1,295

 
1,156

 
(1,295
)
 
139

Change in FDIC loss share receivable
(9,307
)
 
(18,173
)
 
(14,869
)
 
8,866

 
(3,304
)
Closing fee
945

 
$

 
$

 
945

 

Total noninterest income
$
16,631

 
$
9,899

 
$
9,084

 
$
6,732

 
$
815

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



30



Noninterest income increased $6.7 million, or 68% in 2014 compared to 2013. The increase was largely due to a decrease in the loss from the Change in FDIC loss share receivable of $8.9 million. Core noninterest income1 declined slightly in 2014 due to lower gains on sale of other real estate than in 2013. Wealth management revenues declined slightly in 2014 as the Company terminated less profitable relationships during 2013. Assets under administration at December 31, 2014 increased to $1.5 billion, compared to $1.4 billion at December 31, 2013. Miscellaneous income increased in 2014 due to higher average bank owned life insurance balances and an increase in management fees associated with our New Markets Tax Credit allocations.

31



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

 
Years ended December 31,
 
Change from
(in thousands)
2014
 
2013
 
2012
 
2014 vs. 2013
 
2013 vs. 2012
Core expenses (1):
 
 
 
 
 
 
 
 
 
 Employee compensation and benefits - core
$
45,717

 
$
43,817

 
$
40,462

 
$
1,900

 
$
3,355

 Occupancy, furniture and equipment - core
6,420

 
7,166

 
6,929

 
(746
)
 
237

 Data processing - core
4,214

 
3,865

 
3,112

 
349

 
753

 FDIC and other insurance
2,884

 
3,244

 
3,491

 
(360
)
 
(247
)
 Professional fees - core
3,815

 
4,777

 
4,583

 
(962
)
 
194

 Loan, legal and other real estate expense - core
2,909

 
3,926

 
4,177

 
(1,017
)
 
(251
)
 Other - core
13,410

 
14,941

 
15,798

 
(1,531
)
 
(857
)
Core noninterest expense (1)
79,369

 
81,736

 
78,552

 
(2,367
)
 
3,184

FDIC clawback
1,201

 
951

 
575

 
250

 
376

FHLB prepayment penalty
2,936

 
2,590

 

 
346

 
2,590

Facilities charge
1,004

 
797

 

 
207

 
797

Other loss share expenses
2,953

 
4,565

 
6,634

 
(1,612
)
 
(2,069
)
Total noninterest expense
$
87,463

 
$
90,639

 
$
85,761

 
$
(3,176
)
 
$
4,878

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


Noninterest expenses decreased $3.1 million or 4% in 2014. Noninterest expenses during 2014 included a charge of $2.9 million for the aforementioned FHLB prepayment penalty and $1.0 million for costs associated with the sale of an office property. The office property sale will result in lower occupancy expenses prospectively. Core noninterest expense1 declined $2.3 million from lower loan, legal, and other real estate expenses due to improved asset quality, professional fees primarily from lower legal expenses, and other expenses reflecting reduced investment management expenses and intangible amortization.

The Company expects noninterest expenses to be between $19 million and $21 million per quarter in 2015.

Income Taxes
In 2014, the Company recorded income tax expense of $13.9 million on pre-tax income of $41.0 million, resulting in an effective tax rate of 33.8%. The Company's effective tax rate was slightly lower than 2013, as pre-tax income was lower than 2013 lessening the impact of permanent items. The following items impacted the 2014 effective tax rate:
interest income on tax exempt mortgages and municipal bonds of $0.9 million.

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 following items 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



32



FINANCIAL CONDITION

Summary Balance Sheet

(in thousands)
December 31,
 
% Increase (Decrease)
2014
 
2013
 
2012
 
2014 vs. 2013
 
2013 vs. 2012
Total cash and cash equivalents
$
100,696

 
$
210,569

 
$
116,370

 
(52.18
)%
 
80.95
 %
Securities
446,131

 
434,587

 
640,212

 
2.66
 %
 
(32.12
)%
Portfolio loans
2,433,916

 
2,137,313

 
2,106,039

 
13.88
 %
 
1.48
 %
Purchase credit impaired loans
83,693

 
125,100

 
189,571

 
(33.10
)%
 
(34.01
)%
Total assets
3,277,003

 
3,170,197

 
3,325,786

 
3.37
 %
 
(4.68
)%
Deposits
2,491,510

 
2,534,953

 
2,658,851

 
(1.71
)%
 
(4.66
)%
Total liabilities
2,960,762

 
2,890,492

 
3,090,041

 
2.43
 %
 
(6.46
)%
Total shareholders' equity
316,241

 
279,705

 
235,745

 
13.06
 %
 
18.65
 %

Assets

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

The following table 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)
2014
 
2013
 
2012
 
2011
 
2010
Commercial and industrial
$
1,270,259

 
$
1,041,576

 
$
962,884

 
$
763,202

 
$
593,938

Real Estate:
 
 
 
 
 
 
 
 
 
Commercial
770,529

 
779,319

 
819,709

 
811,570

 
776,268

Construction and land development
144,773

 
117,032