0001025835-17-000133.txt : 20171027 0001025835-17-000133.hdr.sgml : 20171027 20171027151830 ACCESSION NUMBER: 0001025835-17-000133 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 78 CONFORMED PERIOD OF REPORT: 20170930 FILED AS OF DATE: 20171027 DATE AS OF CHANGE: 20171027 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENTERPRISE FINANCIAL SERVICES CORP CENTRAL INDEX KEY: 0001025835 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 431706259 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15373 FILM NUMBER: 171159234 BUSINESS ADDRESS: STREET 1: 150 NORTH MERAMEC STREET 2: 150 NORTH MERAMEC CITY: CLAYTON STATE: MO ZIP: 63105 BUSINESS PHONE: 3147255500 MAIL ADDRESS: STREET 1: 150 NORTH MERAMEC STREET 2: 150 NORTH MERAMEC CITY: CLAYTON STATE: MO ZIP: 63105 FORMER COMPANY: FORMER CONFORMED NAME: ENTERBANK HOLDINGS INC DATE OF NAME CHANGE: 19961024 10-Q 1 a2017930-10q.htm 10-Q Document


 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
 
FORM 10-Q
 
[X]
 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2017.
 
 
 
[   ]
 
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______ to ______
 
 
 
 
 
Commission file number 001-15373
 
ENTERPRISE FINANCIAL SERVICES CORP

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

 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes [   ]  No [X]
 
As of October 25, 2017, the Registrant had 23,064,850 shares of outstanding common stock, $0.01 par value.
 
This document is also available through our website at http://www.enterprisebank.com.

 






ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
 
Page
PART I - FINANCIAL INFORMATION
 
 
 
 
Item 1.  Financial Statements
 
 
 
Condensed Consolidated Balance Sheets (Unaudited)
 
 
Condensed Consolidated Statements of Operations (Unaudited)
 
 
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 
 
Condensed Consolidated Statements of Shareholders' Equity (Unaudited)
 
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4. Controls and Procedures
 
 
PART II - OTHER INFORMATION
 
 
 
 
Item 1.  Legal Proceedings
 
 
 
Item 1A.  Risk Factors
 
 
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 5. Other Information
 
 
 
 
Item 6. Exhibits
 
 
Signatures
 
 
 
 





PART 1 - ITEM 1 - FINANCIAL STATEMENTS
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except share and per share data)
September 30, 2017
 
December 31, 2016
Assets
 
 
 
Cash and due from banks
$
76,777

 
$
54,288

Federal funds sold
1,155

 
446

Interest-bearing deposits (including $2,949 and $675 pledged as collateral)
105,176

 
144,068

Total cash and cash equivalents
183,108

 
198,802

Interest-bearing deposits greater than 90 days
2,645

 
980

Securities available for sale
603,121

 
460,797

Securities held to maturity
76,168

 
80,463

Loans held for sale
6,411

 
9,562

Loans
4,030,658

 
3,158,161

Less: Allowance for loan losses
43,191

 
43,409

Total loans, net
3,987,467

 
3,114,752

Other real estate
491

 
980

Other investments, at cost
29,436

 
14,840

Fixed assets, net
32,803

 
14,910

Accrued interest receivable
14,213

 
11,117

State tax credits held for sale (including $1,274 and $3,585 carried at fair value)
35,291

 
38,071

Goodwill
117,345

 
30,334

Intangible assets, net
11,745

 
2,151

Other assets
131,244

 
103,569

Total assets
$
5,231,488

 
$
4,081,328

 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
Demand deposits
$
1,047,910

 
$
866,756

Interest-bearing transaction accounts
814,338

 
731,539

Money market accounts
1,375,844

 
1,050,472

Savings
203,923

 
111,435

Certificates of deposit:
 
 
 
Brokered
170,701

 
117,145

Other
446,495

 
356,014

Total deposits
4,059,211

 
3,233,361

Subordinated debentures and notes (net of debt issuance cost of $1,169 and $1,267)
118,093

 
105,540

Federal Home Loan Bank advances
248,868

 

Other borrowings
209,104

 
276,980

Notes payable
10,000

 

Accrued interest payable
2,007

 
1,105

Other liabilities
37,869

 
77,244

Total liabilities
4,685,152

 
3,694,230

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

 

Common stock, $0.01 par value; 30,000,000 shares authorized; 23,754,814 and 20,306,353 shares issued
237

 
203

Treasury stock, at cost; 691,673 and 261,718 shares, respectively
(23,268
)
 
(6,632
)
Additional paid in capital
349,485

 
213,078

Retained earnings
220,371

 
182,190

Accumulated other comprehensive loss
(489
)
 
(1,741
)
Total shareholders' equity
546,336

 
387,098

Total liabilities and shareholders' equity
$
5,231,488

 
$
4,081,328

See accompanying notes to consolidated financial statements.

1



ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
 
Three months ended September 30,
 
Nine months ended September 30,
(in thousands, except per share data)
2017
 
2016
 
2017
 
2016
Interest income:
 
 
 
 
 
 
 
Interest and fees on loans
$
48,020

 
$
34,442

 
$
135,253

 
$
101,233

Interest on debt securities:
 
 
 
 
 
 
 
Taxable
3,855

 
2,410

 
10,670

 
7,194

Nontaxable
294

 
322

 
984

 
982

Interest on interest-bearing deposits
173

 
67

 
537

 
186

Dividends on equity securities
126

 
52

 
306

 
191

Total interest income
52,468

 
37,293


147,750


109,786

Interest expense:
 
 
 
 
 
 
 
Interest-bearing transaction accounts
523

 
332

 
1,721

 
967

Money market accounts
2,410

 
1,143

 
5,841

 
3,162

Savings accounts
125

 
68

 
332

 
191

Certificates of deposit
1,493

 
1,319

 
4,081

 
3,521

Subordinated debentures and notes
1,316

 
369

 
3,768

 
1,078

Federal Home Loan Bank advances
832

 
126

 
1,684

 
499

Notes payable and other borrowings
144

 
106

 
423

 
327

Total interest expense
6,843

 
3,463


17,850


9,745

Net interest income
45,625

 
33,830

 
129,900

 
100,041

Provision for portfolio loan losses
2,422

 
3,038

 
7,578

 
4,587

Provision reversal for purchased credit impaired loan losses

 
(1,194
)
 
(355
)
 
(1,603
)
Net interest income after provision for loan losses
43,203

 
31,986


122,677


97,057

Noninterest income:
 
 
 
 
 
 
 
Service charges on deposit accounts
2,820

 
2,200

 
8,146

 
6,431

Wealth management revenue
2,062

 
1,694

 
5,949

 
5,000

Card services revenue
1,459

 
804

 
3,888

 
2,236

Gain (loss) on sale of other real estate

 
(226
)
 
17

 
602

Gain on state tax credits, net
77

 
228

 
332

 
899

Gain on sale of investment securities
22

 
86

 
22

 
86

Miscellaneous income
1,932

 
2,190

 
4,928

 
4,776

Total noninterest income
8,372

 
6,976


23,282


20,030

Noninterest expense:
 
 
 
 
 
 
 
Employee compensation and benefits
15,090

 
12,091

 
46,096

 
37,398

Occupancy
2,434

 
1,705

 
6,628

 
4,997

Data processing
1,389

 
1,150

 
4,828

 
3,441

Professional fees
922

 
757

 
2,838

 
2,160

FDIC and other insurance
882

 
780

 
2,356

 
2,241

Loan legal and other real estate expense
586

 
416

 
1,544

 
1,126

Merger related expenses
315

 
302

 
6,462

 
302

Other
5,786

 
3,613

 
16,039

 
11,264

Total noninterest expense
27,404

 
20,814


86,791


62,929

 
 
 
 
 
 
 
 
Income before income tax expense
24,171

 
18,148


59,168


54,158

Income tax expense
7,856

 
6,316

 
18,507

 
18,949

Net income
$
16,315

 
$
11,832


$
40,661


$
35,209

 
 
 
 
 
 
 
 
Earnings per common share
 
 
 
 
 
 
 
Basic
$
0.70

 
$
0.59

 
$
1.77

 
$
1.76

Diluted
0.69

 
0.59

 
1.75

 
1.74

See accompanying notes to consolidated financial statements.

2




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

 
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)
2017
 
2016
 
2017
 
2016
Net income
$
16,315

 
$
11,832

 
$
40,661

 
$
35,209

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gains (losses) on investment securities arising during the period, net of income tax expense (benefit) for three months of $(493) and $(494), and for nine months of $775 and $2,795, respectively
(805
)
 
(796
)
 
1,265

 
4,503

Less: Reclassification adjustment for realized gains on sale of securities available for sale included in net income, net of income tax expense for three months of $8 and $33, and for nine months of $8 and $33, respectively
(13
)
 
(53
)
 
(13
)
 
(53
)
Total other comprehensive income (loss)
(818
)
 
(849
)
 
1,252

 
4,450

Total comprehensive income
$
15,497

 
$
10,983

 
$
41,913

 
$
39,659


See accompanying notes to consolidated financial statements.


3



ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)
(in thousands, except per share data)
Preferred Stock
 
Common Stock
 
Treasury Stock
 
Additional paid in capital
 
Retained earnings
 
Accumulated
other
comprehensive income (loss)
 
Total
shareholders' equity
Balance December 31, 2016
$

 
$
203

 
$
(6,632
)
 
$
213,078

 
$
182,190

 
$
(1,741
)
 
$
387,098

Net income

 

 

 

 
40,661

 

 
40,661

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

 

 

 

 

 
1,252

 
1,252

Total comprehensive income

 

 

 

 
40,661

 
1,252

 
41,913

Cash dividends paid on common shares, $0.33 per share

 

 

 

 
(7,709
)
 

 
(7,709
)
Repurchase of common shares

 

 
(16,636
)
 

 

 

 
(16,636
)
Issuance under equity compensation plans, 148,597 shares, net

 
1

 

 
(2,574
)
 

 

 
(2,573
)
Share-based compensation

 

 

 
2,514

 

 

 
2,514

Shares issued in connection with acquisition of Jefferson County Bancshares, Inc.

 
33

 

 
141,696

 

 

 
141,729

Reclassification for the adoption of ASU 2016-09

 

 

 
(5,229
)
 
5,229

 

 

Balance September 30, 2017
$

 
$
237

 
$
(23,268
)
 
$
349,485

 
$
220,371

 
$
(489
)
 
$
546,336

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands, except per share data)
Preferred Stock
 
Common Stock
 
Treasury Stock
 
Additional paid in capital
 
Retained earnings
 
Accumulated
other
comprehensive income (loss)
 
Total
shareholders' equity
Balance December 31, 2015
$

 
$
201

 
$
(1,743
)
 
$
210,589

 
$
141,564

 
$
218

 
$
350,829

Net income

 

 

 

 
35,209

 

 
35,209

Other comprehensive income

 

 

 

 

 
4,450

 
4,450

Cash dividends paid on common shares, $0.30 per share

 

 

 

 
(6,005
)
 

 
(6,005
)
Repurchase of common shares

 

 
(4,889
)
 

 

 

 
(4,889
)
Issuance under equity compensation plans, 156,592 shares, net

 
2

 

 
(1,652
)
 

 

 
(1,650
)
Share-based compensation

 

 

 
2,410

 

 

 
2,410

Excess tax benefit related to equity compensation plans

 

 

 
744

 

 

 
744

Balance September 30, 2016
$

 
$
203

 
$
(6,632
)
 
$
212,091

 
$
170,768

 
$
4,668

 
$
381,098


See accompanying notes to consolidated financial statements.

4



ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
Nine months ended September 30,
(in thousands, except share data)
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
40,661

 
$
35,209

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation
2,426

 
1,628

Provision for loan losses
7,223

 
2,984

Deferred income taxes
1,239

 
3,881

Net amortization of debt securities
2,064

 
2,350

Amortization of intangible assets
1,920

 
718

Gain on sale of investment securities
(22
)
 
(86
)
Mortgage loans originated for sale
(115,365
)
 
(117,975
)
Proceeds from mortgage loans sold
118,798

 
117,639

Gain on sale of other real estate
(17
)
 
(602
)
Gain on state tax credits, net
(332
)
 
(899
)
Excess tax benefit of share-based compensation

 
(744
)
Share-based compensation
2,514

 
2,410

Net accretion of loan discount
(3,796
)
 
(8,165
)
Changes in:
 
 
 
Accrued interest receivable
(302
)
 
(127
)
Accrued interest payable
249

 
19

Other assets
755

 
(2,100
)
Other liabilities
(44,398
)
 
(8,057
)
Net cash provided by operating activities
13,617

 
28,083

Cash flows from investing activities:
 
 
 
Proceeds from JCB acquisition, net of cash purchase price
4,456

 

Net increase in loans
(201,715
)
 
(256,706
)
Proceeds from the sale of securities, available for sale
144,076

 
2,493

Proceeds from the paydown or maturity of securities, available for sale
126,073

 
46,017

Proceeds from the paydown or maturity of securities, held to maturity
4,145

 
2,592

Proceeds from the redemption of other investments
29,159

 
44,968

Proceeds from the sale of state tax credits held for sale
4,391

 
4,918

Proceeds from the sale of other real estate
2,513

 
8,072

Payments for the purchase/origination of:
 
 
 
Available for sale debt and equity securities
(263,453
)
 
(71,309
)
Other investments
(45,224
)
 
(48,283
)
State tax credits held for sale
(145
)
 
(2,349
)
Fixed assets
(1,864
)
 
(1,284
)
Net cash used in investing activities
(197,588
)
 
(270,871
)
Cash flows from financing activities:
 
 
 
Net increase in noninterest-bearing deposit accounts
20,684

 
44,695

Net increase in interest-bearing deposit accounts
39,998

 
295,539

Proceeds from Federal Home Loan Bank advances
1,394,181

 
1,309,000

Repayments of Federal Home Loan Bank advances
(1,145,681
)
 
(1,290,000
)
Proceeds from notes payable
10,000

 

Net decrease in other borrowings
(123,987
)
 
(80,304
)
Cash dividends paid on common stock
(7,709
)
 
(6,005
)
Excess tax benefit of share-based compensation

 
744

Payments for the repurchase of common stock
(16,636
)
 
(4,889
)
Issuance of common stock, net
(2,573
)
 
(1,650
)
Net cash provided by financing activities
168,277

 
267,130

Net increase (decrease) in cash and cash equivalents
(15,694
)
 
24,342

Cash and cash equivalents, beginning of period
198,802

 
94,157

Cash and cash equivalents, end of period
$
183,108

 
$
118,499

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
16,948

 
$
9,726

Income taxes
9,382

 
19,868

Noncash transactions:
 
 
 
Transfer to other real estate owned in settlement of loans
$
289

 
$
2,683

Sales of other real estate financed

 
140

Common shares issued in connection with JCB acquisition
141,729

 


See accompanying notes to consolidated financial statements.

5



ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Business and Consolidation

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

Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2017. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

Basis of Financial Statement Presentation

The condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with the accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The condensed consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All intercompany accounts and transactions have been eliminated. In 2017, the Company changed its presentation of loans on the face of the Condensed Consolidated Balance Sheets to combine originated loans with purchased loans. See Note 5 - Loans for more information. The Company also changed its presentation of the Noninterest Income section on the face of the Condensed Consolidated Statements of Operations to separate card services revenue out of miscellaneous income. The Company adopted Accounting Standards Update (ASU) 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting during the first quarter of 2017. Among other elements, the ASU requires an entity to recognize all excess tax benefits and deficiencies related to stock-based compensation expense as income tax expense or benefit in the statements of operations. The ASU requires adjustments be reflected as of the beginning of the fiscal year of adoption and as a result, $5.2 million of previously recognized excess tax benefits were reclassified from Additional paid in capital to Retained earnings during the first quarter of 2017. The adoption resulted in a decrease to income tax expense of $1.8 million for the nine months ended September 30, 2017. Excess tax benefits related to stock compensation are presented as a cash inflow from operating activities for the nine months ended September 30, 2017 due to the prospective adoption of employee share-based payment guidance in 2017. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

Acquisitions

Acquisitions and business combinations are accounted for using the acquisition method of accounting.  The assets and liabilities of the acquired entities have been recorded at their estimated fair values at the date of acquisition. Goodwill represents the excess of the purchase price over the fair value of net assets acquired, including the amount assigned to identifiable intangible assets.
 
The purchase price allocation process requires an estimation of the fair values of the assets acquired and the liabilities assumed. When a business combination agreement provides for an adjustment to the cost of the combination contingent on future events, the Company includes an estimate of the acquisition-date fair value as part of the cost of the combination. To determine the fair values, the Company relies on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. The results of operations of the

6



acquired business are included in the Company's consolidated financial statements from the date of acquisition. Merger-related costs are costs the Company incurs to effect a business combination. In 2017, the Company changed its presentation of Merger related expenses as a separate component of Noninterest expenses on the Condensed Consolidated Statements of Operations.  Merger related expenses include costs directly related to merger or acquisition activity and include legal and professional fees, system consolidation and conversion costs, and compensation costs such as severance and retention incentives for employees impacted by acquisition activity. The Company accounts for merger-related costs as expenses in the periods in which the costs are incurred and the services are received.

Purchased Credit Impaired ("PCI") Loans

Purchased credit impaired ("PCI") loans were acquired in a business combination or transaction that have evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments receivable. PCI loans were initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance. The difference between the undiscounted cash flows expected at acquisition and the investment in the loans, or the “accretable yield,” is recognized as interest income on a level-yield method over the life of the loans. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “nonaccretable difference,” are not recognized as a yield adjustment or as a loss accrual or a valuation allowance. The Company aggregates individual loans with common risk characteristics into pools of loans. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loans over their remaining lives. Decreases in expected cash flows due to an inability to collect contractual cash flows are recognized as impairment through the provision for loan losses account. Any allowance for loan loss on these pools reflect only losses incurred after the acquisition. Disposals of loans, including sales of loans, paydowns, payments in full or foreclosures result in the removal or reduction of the loan from the loan pool.

PCI loans are generally considered accruing and performing, as the loans accrete income over the estimated life of the loan, in circumstances where cash flows are reasonably estimable by management. Accordingly, PCI loans that could be contractually past due could be considered to be accruing and performing. If the timing and amount of future cash flows is not reasonably estimable or is less than the carrying value, the loans may be classified as nonaccrual loans and the purchase price discount on those loans is not recorded as interest income until the timing and amount of future cash flows can be reasonably estimable.

Allowance for Loan Losses on PCI Loans

The Company updates its cash flow projections for purchased credit-impaired loans on a periodic basis. Assumptions utilized in this process include projections related to probability of default, loss severity, prepayment, extensions and recovery lag. Projections related to probability of default and prepayment are calculated utilizing a loan migration analysis and management’s assessment of loss exposure including the fair value of underlying collateral. The loan migration analysis is a matrix that specifies the probability of a loan pool transitioning into a particular delinquency or liquidation state given its current performance at the measurement date. Loss severity factors are based upon industry data and historical experience.

Any decreases in expected cash flows after the acquisition date and subsequent measurement periods are recognized by recording an impairment in allowance for loan losses through a provision for loan losses.


NOTE 2 - ACQUISITIONS

Acquisition of Jefferson County Bancshares, Inc.
On February 10, 2017, the Company closed its acquisition of 100% of Jefferson County Bancshares, Inc. ("JCB") and its wholly-owned subsidiary, Eagle Bank and Trust Company of Missouri. JCB operated 13 full service retail and commercial banking offices in the metropolitan St. Louis area and one in Perry County, Missouri.

JCB shareholders received, based on their election, cash consideration in an amount of $85.39 per share of JCB common stock or 2.75 shares of EFSC common stock per share of JCB common stock, subject to allocation and proration procedures. Aggregate consideration at closing was 3.3 million shares of EFSC common stock and $29.3 million cash paid to JCB shareholders and holders of JCB stock options. Based on EFSC’s closing stock price of $42.95 on February 10, 2017, the overall transaction had a value of $171.0 million, including JCB’s common stock and stock options. The Company also recognized $6.5 million and $1.4 million of merger related costs that were recorded in noninterest expense in the statement of operations for the nine months ended September 30, 2017, and year ended December 31, 2016, respectively.

The acquisition of JCB has been accounted for as a business combination using the acquisition method of accounting which requires assets acquired and liabilities assumed to be recognized at fair value as of the acquisition date. Goodwill of $87.0 million arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of JCB into Enterprise. The goodwill is assigned as part of the Company's Banking reporting unit.  None of the goodwill recognized is expected to be deductible for income tax purposes.
  


7



The following table presents the assets acquired and liabilities assumed of JCB as of February 10, 2017, and their preliminary estimated fair values:
(in thousands)
As Recorded by JCB
 
Adjustments
 
As Recorded by EFSC
Assets acquired:
 
 
 
 
 
Cash and cash equivalents
$
33,739

 
$

 
$
33,739

Interest-bearing deposits
1,715

 

 
1,715

Securities
148,670

 

 
148,670

Portfolio loans, net
685,905

 
(11,094
)
(a)
674,811

Other real estate owned
6,762

 
(5,082
)
(b)
1,680

Other investments
2,695

 

 
2,695

Fixed assets, net
21,780

 
(3,325
)
(c)
18,455

Accrued interest receivable
2,794

 

 
2,794

Goodwill
7,806

 
(7,806
)
(d)

Other intangible assets
25

 
11,489

(e)
11,514

Deferred tax assets
4,634

 
3,991

(f)
8,625

Other assets
19,107

 
(296
)
(g)
18,811

Total assets acquired
$
935,632

 
$
(12,123
)
 
$
923,509

 
 
 
 
 
 
Liabilities assumed:
 
 
 
 
 
Deposits
$
764,539

 
$
629

(h)
$
765,168

Other borrowings
55,430

 
681

(i)
56,111

Trust preferred securities
12,887

 
(382
)
(j)
12,505

Accrued interest payable
653

 

 
653

Other liabilities
5,006

 
65

(k)
5,071

Total liabilities assumed
$
838,515

 
$
993

 
$
839,508

 
 
 
 
 
 
Net assets acquired
$
97,117

 
$
(13,116
)
 
$
84,001

 
 
 
 
 
 
Consideration paid:
 
 
 
 
 
Cash
 
 
 
 
$
29,283

Common stock
 
 
 
 
141,729

Total consideration paid
 
 
 
 
$
171,012

 
 
 
 
 
 
Goodwill
 
 
 
 
$
87,011


(a)
Fair value adjustments based on the Company’s evaluation of the acquired loan portfolio, write-off of net deferred loan costs, reclassification from other real estate owned, and elimination of the allowance for loan losses recorded by JCB. The fair value discount recorded to the loan portfolio is $24.7 million.
(b)
Fair value adjustment based on the Company’s evaluation of the acquired other real estate portfolio, and reclassification to portfolio loans.
(c)
Fair value adjustments based on the Company’s evaluation of the acquired premises and equipment. A decrease of $1.1 million was recorded during the third quarter of 2017 due to continued refinement of the purchase accounting calculations.
(d)
Eliminate JCB’s recorded goodwill.
(e)
Record the core deposit intangible asset on the acquired core deposit accounts.  Amount to be amortized using a sum of years digits method over a 10 year useful life.
(f)
Adjustment for deferred taxes at the acquisition date. The adjustment decreased by $0.2 million during the current quarter due to continued refinement of the purchase accounting calculations.

8



(g)
Fair value adjustment based on evaluation of other assets.
(h)
Fair value adjustment to time deposits based on current interest rates. 
(i)
Fair value adjustment to the FHLB advances based on current interest rates. 
(j)
Fair value adjustment based on the Company's evaluation of the trust preferred securities.
(k)
A decrease of $0.1 million was recorded during the current quarter due to further refinement of the purchase accounting calculations.

The following table provides the unaudited pro forma information for the results of operations for the nine months ended September 30, 2017 and 2016, as if the acquisition had occurred on January 1, 2016. The pro forma results combine the historical results of JCB with the Company’s Consolidated Statements of Income, adjusted for the impact of the application of the acquisition method of accounting including loan discount accretion, intangible assets amortization, and deposit and trust preferred securities premium accretion, net of taxes.  The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been obtained had the acquisition actually occurred on January 1, 2016. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions. Only the acquisition related expenses that have been incurred as of September 30, 2017 are included in net income in the table below. 
 
Pro Forma
 
Nine months ended September 30,
(in thousands, except per share data)
2017
 
2016
Total revenues (net interest income plus noninterest income)
$
155,907

 
$
146,623

Net income
40,151

 
42,298

Diluted earnings per common share
1.70

 
1.80


NOTE 3 - EARNINGS PER SHARE

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

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

 
Three months ended September 30,
 
Nine months ended September 30,
(in thousands, except per share data)
2017
 
2016
 
2017
 
2016
Net income as reported
$
16,315

 
$
11,832

 
$
40,661

 
$
35,209

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
23,324

 
19,997

 
22,914

 
20,002

Additional dilutive common stock equivalents
250

 
227

 
295

 
229

Weighted average diluted common shares outstanding
23,574

 
20,224

 
23,209

 
20,231

 
 
 
 
 
 
 
 
Basic earnings per common share:
$
0.70

 
$
0.59

 
$
1.77

 
$
1.76

Diluted earnings per common share:
$
0.69

 
$
0.59

 
$
1.75

 
$
1.74


For the three and nine months ended September 30, 2017 and 2016, there were no common stock equivalents excluded from the earnings per share calculations because their effect would have been anti-dilutive.

9



NOTE 4 - INVESTMENTS

The following table presents the amortized cost, gross unrealized gains and losses and fair value of securities available for sale and held to maturity:
 
 
September 30, 2017
(in thousands)
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair Value
Available for sale securities:
 
 
 
 
 
 
 
Obligations of U.S. Government-sponsored enterprises
$
99,866

 
$
271

 
$
(14
)
 
$
100,123

Obligations of states and political subdivisions
32,684

 
887

 
(229
)
 
33,342

Agency mortgage-backed securities
470,941

 
1,760

 
(3,045
)
 
469,656

          Total securities available for sale
$
603,491

 
$
2,918

 
$
(3,288
)
 
$
603,121

Held to maturity securities:
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
14,704

 
$
159

 
$
(15
)
 
$
14,848

Agency mortgage-backed securities
61,464

 
93

 
(145
)
 
61,412

          Total securities held to maturity
$
76,168

 
$
252


$
(160
)

$
76,260


 
December 31, 2016
(in thousands)
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair Value
Available for sale securities:
 
 
 
 
 
 
 
    Obligations of U.S. Government-sponsored enterprises
$
107,312

 
$
348

 
$

 
$
107,660

    Obligations of states and political subdivisions
36,486

 
630

 
(485
)
 
36,631

    Agency mortgage-backed securities
319,345

 
1,101

 
(3,940
)
 
316,506

          Total securities available for sale
$
463,143

 
$
2,079

 
$
(4,425
)
 
$
460,797

Held to maturity securities:
 
 
 
 
 
 
 
   Obligations of states and political subdivisions
$
14,759

 
$
11

 
$
(242
)
 
$
14,528

   Agency mortgage-backed securities
65,704

 
45

 
(638
)
 
65,111

          Total securities held to maturity
$
80,463

 
$
56

 
$
(880
)
 
$
79,639


At September 30, 2017, and December 31, 2016, there were no holdings of securities of any one issuer in an amount greater than 10% of shareholders’ equity, other than U.S. Government agencies and sponsored enterprises. The agency mortgage-backed securities are all issued by U.S. Government-sponsored enterprises. Available for sale securities having a fair value of $449.8 million and $407.3 million at September 30, 2017, and December 31, 2016, respectively, were pledged as collateral to secure deposits of public institutions and for other purposes as required by law or contract provisions.


10



The amortized cost and estimated fair value of debt securities at September 30, 2017, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The weighted average life of the mortgage-backed securities is approximately 4 years.
 
 
Available for sale
 
Held to maturity
(in thousands)
Amortized Cost
 
Estimated Fair Value
 
Amortized Cost
 
Estimated Fair Value
Due in one year or less
$
2,940

 
$
2,960

 
$

 
$

Due after one year through five years
110,538

 
111,122

 
184

 
194

Due after five years through ten years
15,710

 
16,241

 
12,996

 
13,126

Due after ten years
3,362

 
3,142

 
1,524

 
1,528

Agency mortgage-backed securities
470,941

 
469,656

 
61,464

 
61,412

 
$
603,491

 
$
603,121


$
76,168


$
76,260



The following table represents a summary of investment securities that had an unrealized loss:
 
 
September 30, 2017
Less than 12 months
 
12 months or more
 
Total
(in thousands)
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Obligations of U.S. Government-sponsored enterprises
$
10,127

 
$
14

 
$

 
$

 
$
10,127

 
$
14

Obligations of states and political subdivisions
4,907

 
244

 

 

 
4,907

 
244

Agency mortgage-backed securities
332,037

 
2,721

 
11,307

 
469

 
343,344

 
3,190

 
$
347,071

 
$
2,979


$
11,307


$
469


$
358,378


$
3,448

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
Less than 12 months
 
12 months or more
 
Total
(in thousands)
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Obligations of states and political subdivisions
$
21,361

 
$
408

 
$
3,553

 
$
320

 
$
24,914

 
$
728

Agency mortgage-backed securities
267,734

 
4,084

 
12,883

 
493

 
280,617

 
4,577

 
$
289,095

 
$
4,492


$
16,436


$
813


$
305,531


$
5,305



The unrealized losses at both September 30, 2017, and December 31, 2016, were primarily attributable to changes in market interest rates since the securities were purchased. Management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. This analysis requires management to consider various factors, which include among other considerations (1) the present value of the cash flows expected to be collected compared to the amortized cost of the security, (2) duration and magnitude of the decline in value, (3) the financial condition of the issuer or issuers, (4) structure of the security, and (5) the intent to sell the security or whether it is more likely than not the Company would be required to sell the security before its anticipated recovery in market value. At September 30, 2017, management performed its quarterly analysis of all securities with an unrealized loss and concluded no individual securities were other-than-temporarily impaired.



11



NOTE 5 - LOANS

The loan portfolio is comprised of loans originated by the Company and loans that were acquired in connection with the Company’s acquisitions. These loans are accounted for using the guidance in the Accounting Standards Codification (ASC) section 310-30 and 310-20. Loans accounted for using ASC 310-30 are sometimes referred to as purchased credit impaired, or PCI, loans.
 
The table below shows the loan portfolio composition including carrying value by segment of loans accounted for under ASC 310-30 (PCI loans) and loans not accounted for under this guidance, which includes our originated loans. 

(in thousands)

September 30, 2017
 
December 31, 2016
Loans not accounted for as ASC 310-30
$
3,948,676

 
$
3,118,392

Loans accounted for as ASC 310-30
81,982

 
39,769

Total loans
$
4,030,658

 
$
3,158,161


The following tables refer to loans not accounted for as ASC 310-30 loans.

Below is a summary of loans by category at September 30, 2017 and December 31, 2016:
 
(in thousands)
September 30, 2017
 
December 31, 2016
Commercial and industrial
$
1,861,285

 
$
1,632,714

Real estate:
 
 
 
    Commercial - investor owned
737,986

 
544,808

    Commercial - owner occupied
553,512

 
350,148

    Construction and land development
302,182

 
194,542

    Residential
339,377

 
240,760

Total real estate loans
1,933,057

 
1,330,258

Consumer and other
155,514

 
156,182

Loans, before unearned loan fees
3,949,856

 
3,119,154

Unearned loan fees, net
(1,180
)
 
(762
)
    Loans, including unearned loan fees
$
3,948,676

 
$
3,118,392



12



A summary of the activity in the allowance for loan losses and the recorded investment in loans by class and category based on impairment methodology through September 30, 2017, and at December 31, 2016, is as follows:

(in thousands)
Commercial and industrial
 
CRE - investor owned
 
CRE -
owner occupied
 
Construction and land development
 
Residential real estate
 
Consumer and other
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
$
26,996

 
$
3,420

 
$
2,890

 
$
1,304

 
$
2,023

 
$
932

 
$
37,565

Provision (provision reversal) for loan losses
1,835

 
(105
)
 
(249
)
 
(11
)
 
(3
)
 
66

 
1,533

Losses charged off
(133
)
 

 

 

 
(9
)
 
(29
)
 
(171
)
Recoveries
80

 
9

 
89

 
9

 
25

 
9

 
221

Balance at March 31, 2017
$
28,778

 
$
3,324


$
2,730


$
1,302


$
2,036


$
978


$
39,148

Provision (provision reversal) for loan losses
2,955

 
(39
)
 
354

 
(51
)
 
451

 
(47
)
 
3,623

Losses charged off
(6,035
)
 

 
(45
)
 
(5
)
 
(265
)
 
(39
)
 
(6,389
)
Recoveries
57

 
102

 
1

 
49

 
62

 
20

 
291

Balance at June 30, 2017
$
25,755

 
$
3,387


$
3,040


$
1,295


$
2,284


$
912


$
36,673

Provision (provision reversal) for loan losses
1,126

 
376

 
245

 
305

 
299

 
71

 
2,422

Losses charged off
(613
)
 

 
(45
)
 

 
(503
)
 
(75
)
 
(1,236
)
Recoveries
205

 
12

 
6

 
25

 
172

 
13

 
433

Balance at September 30, 2017
$
26,473

 
$
3,775


$
3,246


$
1,625


$
2,252


$
921


$
38,292

(in thousands)
Commercial and industrial
 
CRE - investor owned
 
CRE -
owner occupied
 
Construction and land development
 
Residential real estate
 
Consumer and other
 
Total
Balance September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses - Ending balance:
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
2,063

 
$
120

 
$

 
$
186

 
$
48

 
$

 
$
2,417

Collectively evaluated for impairment
24,410

 
3,655

 
3,246

 
1,439

 
2,204

 
921

 
35,875

Total
$
26,473

 
$
3,775


$
3,246


$
1,625


$
2,252


$
921


$
38,292

Loans - Ending balance:
 
 
 
 
 
 
 

 
 
 
 
 
 
Individually evaluated for impairment
$
7,646

 
$
544

 
$
1,513

 
$
323

 
$
667

 
$

 
$
10,693

Collectively evaluated for impairment
1,853,639

 
737,442

 
551,999

 
301,859

 
338,710

 
154,334

 
3,937,983

Total
$
1,861,285

 
$
737,986


$
553,512


$
302,182


$
339,377


$
154,334


$
3,948,676

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses - Ending balance:
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
2,909

 
$

 
$

 
$
155

 
$

 
$

 
$
3,064

Collectively evaluated for impairment
24,087

 
3,420

 
2,890

 
1,149

 
2,023

 
932

 
34,501

Total
$
26,996

 
$
3,420


$
2,890


$
1,304


$
2,023


$
932


$
37,565

Loans - Ending balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
12,523

 
$
430

 
$
1,854

 
$
1,903

 
$
62

 
$

 
$
16,772

Collectively evaluated for impairment
1,620,191

 
544,378

 
348,294

 
192,639

 
240,698

 
155,420

 
3,101,620

Total
$
1,632,714

 
$
544,808


$
350,148


$
194,542


$
240,760


$
155,420


$
3,118,392



13



A summary of nonperforming loans individually evaluated for impairment by category at September 30, 2017 and December 31, 2016, and the income recognized on impaired loans is as follows:

 
September 30, 2017
(in thousands)
Unpaid
Contractual
Principal Balance
 
Recorded
Investment
With No Allowance
 
Recorded
Investment
With
Allowance
 
Total
Recorded Investment
 
Related Allowance
 
Average
Recorded Investment
Commercial and industrial
$
13,981

 
$
6,407

 
$
1,044

 
$
7,451

 
$
2,020

 
$
11,735

Real estate:
 
 
 
 
 
 
 
 
 
 
 
    Commercial - investor owned
562

 
259

 
285

 
544

 
120

 
542

    Commercial - owner occupied

 

 

 

 

 

    Construction and land development
444

 
322

 

 
322

 
186

 
337

    Residential
673

 
668

 

 
668

 
48

 
676

Consumer and other

 

 

 

 

 

Total
$
15,660

 
$
7,656


$
1,329


$
8,985


$
2,374


$
13,290


 
December 31, 2016
(in thousands)
Unpaid
Contractual
Principal Balance
 
Recorded
Investment
With No Allowance
 
Recorded
Investment
With
Allowance
 
Total
Recorded Investment
 
Related Allowance
 
Average
Recorded Investment
Commercial and industrial
$
12,341

 
$
566

 
$
11,791

 
$
12,357

 
$
2,909

 
$
4,489

Real estate:
 
 
 
 
 
 
 
 
 
 
 
    Commercial - investor owned
525

 
435

 

 
435

 

 
668

    Commercial - owner occupied
225

 
231

 

 
231

 

 
227

    Construction and land development
1,904

 
1,947

 
359

 
2,306

 
155

 
1,918

    Residential
62

 
62

 

 
62

 

 
64

Consumer and other

 

 

 

 

 

Total
$
15,057

 
$
3,241


$
12,150


$
15,391


$
3,064


$
7,366


 
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)
2017
 
2016
 
2017
 
2016
Total interest income that would have been recognized under original terms
$
306

 
$
226

 
$
961

 
$
703

Total cash received and recognized as interest income on non-accrual loans
117

 
203

 
156

 
253

Total interest income recognized on accruing, impaired loans
8

 
32

 
55

 
63



14




There were no loans over 90 days past due and still accruing interest at September 30, 2017 or December 31, 2016. The recorded investment in nonperforming loans by category at September 30, 2017 and December 31, 2016, is as follows: 
 
September 30, 2017
(in thousands)
Non-accrual
 
Restructured, not on non-accrual
 
Total
Commercial and industrial
$
6,730

 
$
721

 
$
7,451

Real estate:
 
 
 
 
 
    Commercial - investor owned
544

 

 
544

    Commercial - owner occupied

 

 

    Construction and land development
322

 

 
322

    Residential
668

 

 
668

Consumer and other

 

 

       Total
$
8,264

 
$
721


$
8,985