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, 2015.
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______ to ______
Commission file number 001-15373
ENTERPRISE FINANCIAL SERVICES CORP
Incorporated in the State of Delaware
I.R.S. Employer Identification # 43-1706259
Address: 150 North Meramec, Clayton, MO 63105
Telephone: (314) 725-5500
___________________
Securities registered pursuant to Section 12(b) of the Act:
(Title of class)
Common Stock, par value $.01 per share
(Name of each exchange on which registered)
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 $432,920,454 based
on the closing price of the common stock of $22.77 as of the last business day of the registrant's most recently completed second
fiscal quarter (June 30, 2015) as reported by the NASDAQ Global Select Market.
As of February 22, 2016, the Registrant had 20,173,107 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
2016 Annual Meeting of Shareholders, which will be filed within 120 days of December 31, 2015.
ENTERPRISE FINANCIAL SERVICES CORP
2015 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Controls and Procedures
Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers, and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners, and Management and
Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
Item 15.
Signatures
Exhibits and Financial Statement Schedules
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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 under "Investor Relations."
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 corporate 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
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 at www.enterprisebank.com under "Investor Relations." 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 deliver customer and financial performance that positions us in the top quartile of our peers.”
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
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management and international trade services complement our lending capabilities. Tax credit brokerage activities
consist of the acquisition of Federal and State tax credits and the sale of these tax credits to clients. 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.
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, while maintaining prudent credit and interest rate risk
management, appropriate supporting 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 businesses, 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.
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. We also offer 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 Company continues to offer robust
treasury systems that employ advanced mobile technology and fraud detection/mitigation. The Company also offers
card services, international banking, and tax credit businesses 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. 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, 2014, and 2015, we were selected as one of the relatively few banks to be allocated to distribute New Markets
Tax Credits. In this capacity, we have been responsible for allocating a total of $183 million of tax credits to clients
and projects.
• Tax Credit Brokerage. We acquire Missouri state tax credits from affordable housing development funds and sell
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.
• Enterprise Aircraft Finance. Beginning in 2016, we established a unit specializing in financing and leasing solutions
for the acquisition of fixed and rotor wing aircraft.
Capitalizing on technology - We view our technological capabilities to be a competitive advantage. Our systems
provide Internet banking, expanded treasury management products, check and document imaging, and remote deposit
capture systems. Other services currently offered by the Bank include controlled disbursements, repurchase agreements,
and sweep investment accounts. Our treasury management suite of products blends advanced technology and personal
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service, which we believe often creates a competitive advantage over larger banks. Technology is also extensively
utilized in internal systems, operational support functions, customer service, associate productivity, 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 loan portfolio is subject to ongoing monitoring by a loan review function that reports directly to the Credit Committee
of the 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
Between December 2009 and August 2011, the Bank 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 agreed to reimburse the Bank for a percentage of
losses on certain loans and other real estate acquired for the term of the agreement. In December 2015, the Bank
entered into an agreement with the FDIC for early termination of all existing loss share agreements. The Bank will
fully recognize all future recoveries, losses, and expenses related to the assets formerly covered by the agreements,
and the FDIC will no longer share in those amounts. The Company expects its future earnings to be positively impacted
due to the early termination.
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 $1.4 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 FHLB with a weighted average interest rate of 3.17% and a maturity of three years, and incurred a
prepayment penalty of $2.9 million before income taxes.
During 2013, the Company completed two transactions similar to the 2014 events to reduce long term debt and improve
the 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 FHLB with a weighted average interest rate of 4.09% and a maturity of three years, and incurred a
prepayment penalty of $2.6 million before income 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.
St. Louis - We operate 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
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market 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 operate 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 29th largest metropolitan area in the U.S.
Phoenix - We operate two banking facilities in the Phoenix metropolitan area. 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. We believe Phoenix is a dynamic growth market and offers attractive growth prospects for
our business.
Competition
The Company and its subsidiaries operate in highly competitive markets. Our geographic markets are served by a
number of large financial and 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 related statutes and
regulations.
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 in the process of being implemented while other aspects remain subject to
further rulemaking. These regulations 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. However, it is likely that the
Dodd-Frank Act will increase the regulatory burden, compliance costs and interest expense for the Company.
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
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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 described 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
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.
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Bank Subsidiary
At December 31, 2015, 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 established 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 were 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 being phased in over a five year
period that began January 1, 2016.
As required by the Dodd-Frank Act, 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 smaller entities prior to May 19, 2010 (provided they do not exceed 25% of Tier 1 capital).
The Company's trust preferred securities are grandfathered under this provision.
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
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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.
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, a bank that (1) has a Total capital to risk-weighted assets ratio (the
“Total Capital Ratio”) of 10.0% or greater, a Tier 1 capital to risk-weighted assets ratio (the “Tier 1 Capital Ratio”) of
8.0% or greater, a CET1 capital to risk-weighted assets ratio (the "CET1 Capital Ratio") of 6.5% 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%, a CET1 Capital Ratio of less than 3.0%, or a Leverage
Ratio of less than 4.0%, 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.
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, 2015, 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
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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: 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 brought a variety of enforcement actions for violations of
UDAAP provisions and CFPB guidance continues to evolve.
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
“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.
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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 became effective July 21, 2015, 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 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, 2015, we had 459 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
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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 or specialty lending products, could adversely affect
our financial condition, results of operations or cash flows.
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 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. 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 clients 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.
There are material risks involved in commercial lending that could adversely affect our business.
Our business plan calls for continued efforts to increase our assets invested in commercial loans. Our credit-rated
commercial loans include commercial and industrial loans to our privately-owned business clients along with loans
to commercial borrowers that are secured by real estate (commercial property, multi-family residential property, 1 - 4
family residential property, and construction and land). Commercial loans generally involve a higher degree of credit
risk than residential mortgage loans due, in part, to their larger average size and less readily-marketable collateral. In
addition, unlike residential mortgage loans, commercial loans generally depend on the cash flow of the borrower’s
business to service the debt. Adverse economic conditions or other factors adversely affecting our target markets may
have a greater adverse effect on us than on other financial institutions that have a more diversified client base. Increases
in non-performing commercial loans could result in operating losses, impaired liquidity and erosion of our capital,
and could have a material adverse effect on our financial condition and results of operations. Credit market tightening
could adversely affect our commercial borrowers through declines in their business activities and adversely impact
their overall liquidity through the diminished availability of other borrowing sources or otherwise.
Our loan portfolio has loans secured by real estate, which could result in increased credit risk.
A 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 in our markets, our ability to recover on defaulted loans for which
the primary reliance for repayment is on the real estate collateral by foreclosing and selling that real estate would then
be diminished, and we would be more likely to suffer losses on defaulted loans.
Additionally, 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.
Our enterprise value lending / senior debt financing transactions are underwritten based primarily on cash flow,
profitability and enterprise value of the client and are not fully covered by the value of tangible assets or collateral of
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the client. Consequently, if any of these transactions becomes non-performing, we could suffer a loss of some or all
of our value in the assets.
Cash flow lending involves lending money to a client based primarily on the expected cash flow, profitability and
enterprise value of a client, with the value of any tangible assets as secondary protection. In some cases, these loans
may have more leverage than traditional bank debt. In the case of our senior cash flow loans, we generally take a lien
on substantially all of a client's assets, but the value of those assets is typically substantially less than the amount of
money we advance to the client under a cash flow transaction. In addition, some of our cash flow loans may be viewed
as stretch loans, meaning they may be at leverage multiples that exceed traditional accepted bank lending standards
for senior cash flow loans. Thus, if a cash flow transaction becomes non-performing, our primary recourse to recover
some or all of the principal of our loan or other debt product would be to force the sale of all or part of the company
as a going concern. Additionally, we may obtain equity ownership in a borrower as a means to recover some or all of
the principal of our loan. The risks inherent in cash flow lending include, among other things:
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reduced use of or demand for the client's products or services and, thus, reduced cash flow of the client to
service the loan and other debt product as well as reduced value of the client as a going concern;
inability of the client to manage working capital, which could result in lower cash flow;
inaccurate or fraudulent reporting of our client's positions or financial statements;
economic downturns, political events, regulatory changes, litigation or acts of terrorism that affect the client's
business, financial condition and prospects; and
our client's poor management of their business.
Additionally, many of our clients use the proceeds of our cash flow transactions to make acquisitions. Poorly executed
or poorly conceived acquisitions can tax management, systems and the operations of the existing business, causing a
decline in both the client's cash flow and the value of its business as a going concern. In addition, many acquisitions
involve new management teams taking over control of a business. These new management teams may fail to execute
at the same level as the former management team, which could reduce the cash flow of the client available to service
the loan or other debt product, as well as reduce the value of the client as a going concern.
Widespread financial difficulties or downgrades in the financial strength or credit ratings of life insurance providers
could lessen the value of the collateral securing our life insurance premium finance loans and impair our financial
condition and liquidity.
One of the specialty products we offer is financing high-end whole life insurance premiums utilized in high net worth
estate planning. These loans are primarily secured by the insurance policies financed by the loans, i.e., the obligations
of the life insurance providers under those policies. Nationally Recognized Statistical Rating Organizations
(“NRSROs”) such as Standard & Poor’s, Moody’s and A.M. Best evaluate the life insurance providers that are the
payors on the life insurance policies that we finance. The value of our collateral could be materially impaired in the
event there are widespread financial difficulties among life insurance providers or the NRSROs downgrade the financial
strength ratings or credit ratings of the life insurance providers, indicating the NRSROs’ opinion that the life insurance
provider’s ability to meet policyholder obligations is impaired, or the ability of the life insurance provider to meet the
terms of its debt obligations is impaired. The value of our collateral is also subject to the risk that a life insurance
provider could become insolvent. In particular, if one or more large nationwide life insurance providers were to fail,
the value of our portfolio could be significantly negatively impacted. A significant downgrade in the value of the
collateral supporting our premium finance business could impair our ability to create liquidity for this business, which,
in turn could negatively impact our ability to expand.
We engage in aircraft financing transactions, in which high-value collateral is susceptible to potential catastrophic
loss. Consequently, if any of these transactions becomes non-performing, we could suffer a loss of some or all of our
value in the assets.
In January 2016, we acquired an aircraft financing platform and the associated portfolio of aircraft loans. These
transactions are secured by the aircraft financed by the loans. Aircraft as collateral presents unique risks: it is high-
value, but susceptible to rapid movement across different locations and potential catastrophic loss. Although the loan
documentation for these transactions includes insurance covenants and other provisions to protect the lender against
risk of loss, there can be no assurance that, in the event of a catastrophic loss, the insurance proceeds would be sufficient
to ensure our full recovery of the aircraft loan. Moreover, a relatively small number of non-performing aircraft loans
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could have a significant negative impact on the value of our portfolio. If we must make additional provisions to increase
our allowance for loan losses, we could experience a decrease in net income and possibly a reduction in capital, which
could have a material adverse effect on our financial condition and results of operations.
We may be obligated to indemnify certain counterparties in financing transactions we enter into pursuant to the New
Markets Tax Credit Program.
We participate in and are an allocatee of the New Markets Tax Credit Program of the U.S. Department of the Treasury
Community Development Financial Institutions Fund. Through this program, we provide our allocation to certain
projects, which in turn for an equity investment from an Investor in the project generate federal tax credits to those
investors. This equity, coupled with any debt or equity from the project sponsor is in turn invested in a certified
community development entity for a period of at least seven years. Community development entities must use this
capital to make loans to, or other investments in, qualified businesses in low-income communities in accordance with
New Markets Tax Credit Program criteria. Investors receive an overall tax credit equal to 39% of their total equity
investment, credited at a rate of five percent in each of the first three years and six percent in each of the final four
years. However, after the exhaustion of all cure periods and remedies, the entire credit is subject to recapture if the
certified community development entity fails to maintain its certified status, or if substantially all of the equity
investment proceeds associated with the tax credits we allocate are no longer continuously invested in a qualified
business who meet the New Markets Tax Credit Program criteria, or if the equity investment is redeemed prior to the
end of the minimum seven-year term. As part of these financing transactions, we as the parent to CDE provide
customary indemnities to the tax credit investors, which require us to indemnify and hold harmless the investors in
the event a credit recapture event occurs, unless the recapture is a result of action or inaction of the investor. No
assurance can be given that these counterparties will not call upon us to discharge these obligations in the circumstances
under which they are owed. If this were to occur, the amount we may be required to pay a bank investor could be
substantial and could have a material adverse effect on our results of operations and financial condition.
If we fail to comply with requirements of the federal New Markets Tax Credit program, the U.S. Department of the
Treasury Community Development Financial Institutions Fund could seek any remedies available under its Allocation
Agreement with us, and we could suffer significant reputational harm and be subject to greater scrutiny from banking
regulators.
Because we have been designated as an “Allocatee” under the New Markets Tax Credit Program, we are required to
provide allocation fund qualifying projects under the New Markets Tax Credit Program, and we are responsible for
monitoring those projects, ensuring their ongoing compliance with the requirements of the New Markets Tax Credit
Program and satisfying the various recordkeeping and reporting requirements under the New Markets Tax Credit
Program. If we default in our obligations under the New Markets Tax Credit Program, the U.S. Department of the
Treasury may revoke our participation in any other CDFI Fund programs, reallocate the new market tax credits that
were originally allocated to us, and take any other remedial actions that it is empowered to take under the Allocation
Agreement they have entered into with us with respect to the New Markets Tax Credit Program, with the full range of
such remedies being unknown. If we were to default under the New Markets Tax Credit Program, we could suffer
negative publicity in the communities in which we operate, and we could face greater scrutiny from federal and state
bank regulators, especially with regard to our compliance with the Community Reinvestment Act. These developments
could have a material adverse impact on our reputation, business, financial condition, results of operations and liquidity.
We face potential risks from litigation brought against the Company or its subsidiaries.
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
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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.
Loss of customer deposits could increase our funding costs.
We rely on bank deposits to be a low cost and stable source of funding. We compete with banks and other financial
services companies for deposits. If our competitors raise the rates they pay on deposits, our funding costs may increase,
either because we raise our rates to avoid losing deposits or because we lose deposits and must rely on more expensive
sources of funding. Higher funding costs could reduce our net interest margin and net interest income and could have
a material adverse effect on our business, financial condition and results of operations.
Our utilization of brokered deposits could adversely affect our liquidity and results of operations.
Since our inception, we have utilized both brokered and non-brokered deposits as a source of funds to support our
growing loan demand and other liquidity needs. As a bank regulatory supervisory matter, reliance upon brokered
deposits as a significant source of funding is discouraged. Brokered deposits may not be as stable as other types of
deposits, and, in the future, those depositors may not renew their deposits when they mature, or we may have to pay
a higher rate of interest to keep those deposits or may have to replace them with other deposits or with funds from
other sources. Additionally, if the Bank ceases to be categorized as “well capitalized” for bank regulatory purposes,
it will not be able to accept, renew or roll over brokered deposits without a waiver from the FDIC. Our inability to
maintain or replace these brokered deposits as they mature could adversely affect our liquidity and results of operations.
Further, paying higher interests rates to maintain or replace these deposits could adversely affect our net interest margin
and results of operations.
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 may 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, deposits, funding availability, 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.
The ability of our borrowers to repay their loans may be adversely affected by an increase in market interest rates
which could result in increased credit losses. These increased credit losses, where the Bank has retained credit exposure,
could decrease our assets, net income and cash available.
The loans we make to our borrowers typically bear interest at a variable or floating interest rate. When market interest
rates increase, the amount of revenue borrowers need to service their debt also increases. Some borrowers may be
unable to make their debt service payments. As a result, an increase in market interest rates will increase the risk of
loan default. An increase in non-performing loans could result in a net loss of earnings from these loans, an increase
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in the provision for loan and covered loan losses, and an increase in loan charge-offs, all of which could have a material
adverse effect on our business, financial condition and results of operations.
By engaging in derivative transactions, we are exposed to additional credit and market risk in our banking business.
We may use interest rate swaps to help manage our interest rate risk in our banking business from recorded financial
assets and liabilities when they can be demonstrated to effectively hedge a designated asset or liability and the asset
or liability exposes us to interest rate risk or risks inherent in client related derivatives. We may use other derivative
financial instruments to help manage other economic risks, such as liquidity and credit risk, including exposures that
arise from business activities that result in the receipt or payment of future known or uncertain cash amounts, the value
of which are determined by interest rates. We also have derivatives that result from a service we provide to certain
qualifying clients approved through our credit process, and therefore, are not used to manage interest rate risk in our
assets or liabilities. Hedging interest rate risk is a complex process, requiring sophisticated models and routine
monitoring, and is not a perfect science. As a result of interest rate fluctuations, hedged assets and liabilities will
appreciate or depreciate in market value. The effect of this unrealized appreciation or depreciation will generally be
offset by income or loss on the derivative instruments that are linked to the hedged assets and liabilities. By engaging
in derivative transactions, we are exposed to credit and market risk. If the counterparty fails to perform, credit risk
exists to the extent of the fair value gain in the derivative. Market risk exists to the extent that interest rates change in
ways that are significantly different from what we expected when we entered into the derivative transaction. The
existence of credit and market risk associated with our derivative instruments could adversely affect our net interest
income and, therefore, could have a material adverse effect on our business, financial condition, results of operations
and future prospects.
If the Company 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, or impact our ability to operate in certain
lines of business.
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 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.
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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 but not limited to, 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:
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the ability to develop, maintain, and build upon long-term client relationships based on top quality service and
high ethical standards;
the scope, relevance, and pricing of products and services offered to meet client needs and demands;
the rate at which we introduce new products and services relative to our competitors;
client 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 clients of the target company;
difficulty in estimating the value of the target company;
payment of a premium over book and market values that may dilute our tangible book value and
earnings per share in the short- and long-term;
inability to realize the expected revenue increases, cost savings, increases in geographic or product
presence, and/or other projected benefits; and/or
potential changes in banking or tax laws or regulations that may affect the target company.
15
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,
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.
We may not be able to maintain our historical rate of growth, which could have a material adverse effect on our ability
to successfully implement our business strategy.
Successful growth requires that we follow adequate loan underwriting standards, balance loan and deposit growth
without increasing interest rate risk or compressing our net interest margin, maintain adequate capital at all times,
produce investment performance results competitive with our peers and benchmarks, further diversify our revenue
sources, meet the expectations of our clients and hire and retain qualified employees. If we do not manage our growth
successfully, then our business, results of operations or financial condition may be adversely affected.
We may be unable to successfully integrate new business lines into our existing operations.
In January 2016, we added a team focused on the niche product of aircraft financing, marking our entry into that arena,
in order to further broaden our offerings to our middle market commercial clients. From time to time, we may implement
other new lines of business or offer new products or services within existing lines of business. There can be substantial
risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed.
Although we continue to expend substantial managerial, operating and financial resources as our business grows, we
may be unable to successfully continue the integration of new business lines, and price and profitability targets may
not prove feasible. External factors such as compliance with regulations, competitive alternatives and shifting market
preferences, may also impact the successful implementation of a new line of business or a new product or service.
Furthermore, any new line of business and new product or service could have a significant impact on the effectiveness
of our system of internal controls. Failure to successfully manage these risks in the development and implementation
of new lines of business or new products or services could have a material adverse effect on our business, financial
condition and results of operations.
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.
Loss of key employees may disrupt relationships with certain clients.
Our client relationships are critical to the success of our business, and loss of key employees with significant client
relationships may lead to the loss of business if the clients follow that employee to a competitor. While we believe
our relationships with our key personnel are strong, we cannot guarantee that all of our key personnel will remain with
us, which could result in the loss of some of our clients and could have an adverse impact on our business, financial
condition and results of operations.
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 growth or adverse developments such as any
additional provisions for loan losses, to maintain our capital ratios, or for other reasons. The condition of the financial
16
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.
We may incur impairments to goodwill.
At December 31, 2015, we had $30.3 million recorded as goodwill. We evaluate our goodwill for impairment at least
annually. Significant negative industry or economic trends, including the lack of recovery in the market price of our
common stock, or reduced estimates of future cash flows or disruptions to our business, could result in impairments
to goodwill. Our valuation methodology for assessing impairment requires management to make judgments and
assumptions based on historical experience and to rely on projections of future operating performance. We operate in
competitive environments and projections of future operating results and cash flows may vary significantly from actual
results. If our analysis results in impairment to goodwill, we would be required to record an impairment charge to
earnings in its financial statements during the period in which such impairment is determined to exist. Any such change
could have a material adverse effect on our results of operations and stock price.
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 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.
We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and
fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.
The Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending
laws and regulations impose nondiscriminatory lending requirements on financial institutions. The Consumer
Financial Protection Bureau, the Department of Justice and other federal agencies are responsible for enforcing
these laws and regulations. A successful regulatory challenge to an institution's performance under the Community
Reinvestment Act or fair lending laws and regulations could result in a wide variety of sanctions, including damages
and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on
expansion, and restrictions on entering new business lines. Private parties may also have the ability to challenge an
institution's performance under fair lending laws in private class action litigation. Such actions could have a
material adverse effect on our business, financial condition, results of operations and future prospects.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money
laundering statutes and regulations.
The Bank Secrecy Act, the USA PATRIOT Act of 2001, and other laws and regulations require financial
institutions, among other duties, to institute and maintain an effective anti-money laundering program and file
17
suspicious activity and currency transaction reports when appropriate. In addition to other bank regulatory agencies,
the federal Financial Crimes Enforcement Network of the Department of the Treasury is authorized to impose
significant civil money penalties for violations of those requirements and has recently engaged in coordinated
enforcement efforts with the state and federal banking regulators, as well as the U.S. Department of Justice,
Consumer Financial Protection Bureau, Drug Enforcement Administration, and Internal Revenue Service. We are
also subject to increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control of
the Department of the Treasury regarding, among other things, the prohibition of transacting business with, and the
need to freeze assets of, certain persons and organizations identified as a threat to the national security, foreign
policy or economy of the United States. If our policies, procedures and systems are deemed deficient, we would be
subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay
dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan,
including any acquisition plans. Failure to maintain and implement adequate programs to combat money laundering
and terrorist financing could also have serious reputational consequences for us. Any of these results could have a
material adverse effect on our business, financial condition, results of operations and future prospects.
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.
Declines in asset values may result in impairment charges and adversely impact the value of our investments and our
financial performance and capital.
We hold an investment securities portfolio that includes, but is not limited to, government securities and agency
mortgage-backed securities. Factors beyond our control can significantly influence the fair value of securities in our
portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are
not limited to, rating agency actions in respect to the securities, defaults by the issuer or with respect to the underlying
securities, changes in market interest rates and instability in the capital markets. Any of these factors, among others,
could cause other-than-temporary impairments and realized or unrealized losses in future periods and declines in other
comprehensive income (loss), which could have a material adverse effect on our business, results of operations, financial
condition and future prospects. The process for determining whether impairment of a security is other-than-temporary
often requires complex, subjective judgments about whether there has been significant deterioration in the financial
condition of the issuer, whether management has the intent or ability to hold a security for a period of time sufficient
to allow for any anticipated recovery in fair value, the future financial performance and liquidity of the issuer and any
collateral underlying the security and other relevant factors.
Our investment securities portfolio includes $8.3 million in capital stock of the FHLB of Des Moines as of December
31, 2015. This stock ownership is required for us to qualify for membership in the FHLB system, which enables it to
borrow funds under the FHLB advance program. If the FHLB experiences a capital shortfall, it could suspend its
quarterly cash dividend, and possibly require its members, including us, to make additional capital investments in the
FHLB. If the FHLB were to cease operations, or if we would be required to write-off our investment in the FHLB,
our financial condition, and results of operations may be materially and adversely affected.
We primarily invest in mortgage-backed obligations and such obligations have been, and are likely to continue to be,
impacted by market dislocations, declining home values and prepayment risk, which may lead to volatility in cash flow
and market risk and declines in the value of our investment portfolio.
Our investment portfolio largely consists of mortgage-backed obligations primarily secured by pools of mortgages on
single-family residences. The value of mortgage-backed obligations in our investment portfolio may fluctuate for
several reasons, including (i) delinquencies and defaults on the mortgages underlying such obligations, due in part to
high unemployment rates, (ii) falling home prices, (iii) lack of a liquid market for such obligations, (iv) uncertainties
18
in respect of government-sponsored enterprises such as the Federal National Mortgage Association (“Fannie Mae”)
or the Federal Home Loan Mortgage Corporation (“Freddie Mac”), which guarantee such obligations, and (v) the
expiration of government stimulus initiatives. Home values have declined significantly over the last several years.
Although home prices appear to have leveled off, if the value of homes were to further materially decline, the fair
value of the mortgage-backed obligations in which we invest may also decline. Any such decline in the fair value of
mortgage-backed obligations, or perceived market uncertainty about their fair value, could adversely affect our financial
position and results of operations. In addition, when we acquire a mortgage-backed security, we anticipate that the
underlying mortgages will prepay at a projected rate, thereby generating an expected yield. Prepayment rates generally
increase as interest rates fall and decrease when rates rise, but changes in prepayment rates are difficult to predict. In
light of historically low interest rates, many of our mortgage-backed securities have a higher interest rate than prevailing
market rates, resulting in a premium purchase price. In accordance with applicable accounting standards, we amortize
the premium over the expected life of the mortgage-backed security. If the mortgage loans securing the mortgage-
backed security prepay more rapidly than anticipated, we would have to amortize the premium on an accelerated basis,
which would thereby adversely affect our profitability.
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 client 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 rely on third-party vendors to provide key components of our business infrastructure.
We rely heavily on third-party service providers for much of our communications, information, operating and financial
control systems technology, including relationship management, mobile banking, general ledger, investment, deposit,
loan servicing and loan origination systems. While we have selected these third-party vendors carefully, we do not
control their actions. Any problems caused by these third parties, including as a result of inadequate or interrupted
service, could adversely affect our ability to deliver products and services to our clients and otherwise conduct our
business. Financial or operational difficulties of a third-party vendor could also hurt our operations if those difficulties
interfere with the vendor’s ability to serve us, and replacing these third-party vendors could result in significant delay
and expense. Accordingly use of such third parties creates an unavoidable inherent risk to our business operations as
well as reputational risk.
19
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 Company 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
Company 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 Company takes a role in managing
those operations after a default. The Company 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:
•
•
•
•
•
•
•
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•
•
•
actual or anticipated quarterly fluctuations in our operating results and financial condition;
changes in revenue or earnings estimates or publication of research reports and recommendations by
financial analysts;
failure to meet analysts' revenue or earnings estimates;
speculation in the press or investment community;
strategic actions by us or our competitors, such as acquisitions or restructurings;
actions by institutional stockholders;
fluctuations in the stock prices and operating results of our competitors;
general market conditions and, in particular, developments related to market conditions for the financial
services industry;
proposed or adopted regulatory changes or developments;
anticipated or pending investigations, proceedings or litigation that involve or affect us; and/or
domestic and international economic factors unrelated to our performance.
The stock market and, in particular, the market for financial institution stocks, has historically experienced significant
volatility. 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.
The trading volume in our common stock is less than that of other larger financial institutions.
Although our common stock is listed for trading on the NASDAQ Global Select Market, its trading volume may be
less than that of other, larger financial services companies. A public trading market having the desired characteristics
of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our
common stock at any given time, a factor over which we have no control. During any period of lower trading volume
of our common stock, significant sales of shares of our common stock or the expectation of these sales could cause
our common stock price to fall.
An investment in our common stock is not insured and you could lose the value of your entire investment.
20
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,
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.
21
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, 2015, we
had six banking locations in the St. Louis metropolitan area, eight banking locations in the Kansas City metropolitan
area, and two banking locations in the Phoenix metropolitan area. We own four of the facilities and lease the remainder.
Most of the leases expire between 2016 and 2024 and include one or more renewal options of up to five years. One
lease expires in 2028. All the leases are classified as operating leases. 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.
22
ITEM 4: MINE SAFETY DISCLOSURES
Not applicable.
23
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 22, 2016, the Company had 415 common
stock shareholders of record and a market price of $26.96 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.
2015
2014
4th Qtr
3rd Qtr
2nd Qtr
1st Qtr
4th Qtr
3rd Qtr
2nd Qtr
1st Qtr
Closing Price
$
28.35
$
25.17
$
22.77
$
20.66
$
19.73
$
16.72
$
18.06
$
30.73
24.18
25.46
22.03
23.35
19.68
20.93
18.80
20.23
16.38
18.95
16.70
20.93
17.02
20.07
20.65
17.67
High
Low
Cash dividends paid
on common shares
0.0800
0.0700
0.0600
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.
Issuer Purchases of Equity Securities
The following table provides information on repurchases by the Company of its common stock in each month of the
quarter ended December 31, 2015.
Period
October 1, 2015 through October 31, 2015
November 1, 2015 through November 30, 2015
December 1, 2015 through December 31, 2015
Total
Total number
of shares
purchased (a)
Weighted-
average price
paid per share
—
—
28.28
— $
—
1,128
1,128
Total number of
shares purchased
as part of publicly
announced plans
or programs
Maximum number
of shares that may
yet be purchased
under the plans or
programs (b)
—
—
—
—
2,000,000
2,000,000
2,000,000
(a) Represents shares of the Company’s common stock shares withheld to satisfy tax withholding obligations upon the vesting of awards of
restricted stock. These shares were purchased pursuant to the terms of the applicable plan and not pursuant to a publicly announced
repurchase plan or program.
(b) In May 2015, the Company’s board of directors authorized the repurchase of up to two million shares of the Company’s common stock.
The repurchases may be made in open market or privately negotiated transactions and the repurchase program will remain in effect until fully
utilized or until modified, superseded or terminated. The timing and exact amount of common stock repurchases will depend on a number of
factors including, among others, market and general economic conditions, economic capital and regulatory capital considerations, alternative
uses of capital, the potential impact on our credit ratings, and contractual and regulatory limitations.
24
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, 2010 through December 31, 2015. 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, 2010 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.
Index
2010
2011
2012
2013
2014
2015
Enterprise Financial Services Corp
NASDAQ Composite
SNL Bank $1B-$5B
100.00
100.00
100.00
143.75
99.21
91.20
129.19
116.82
112.45
204.47
163.75
163.52
199.82
188.03
170.98
290.32
201.40
191.39
Period Ending December 31,
*Source: SNL Financial L.C. Used with permission. All rights reserved.
25
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, 2015. 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.
(in thousands, except per share and percentage data)
2015
2014
2013
2012
2011
Years ended December 31,
EARNINGS SUMMARY:
Interest income
Interest expense
Net interest income
Provision (provision reversal) for portfolio loan losses
Provision (provision reversal) for purchased credit impaired
loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net income
PER SHARE DATA:
Basic earnings per common share
Diluted earnings per common share
Cash dividends paid on common shares
Book value per common share
Tangible book value per common share
BALANCE SHEET DATA:
Ending balances:
Portfolio loans
Allowance for loan losses (1)
Purchased credit impaired loans, net of the allowance for
loan losses
Goodwill
Other intangible assets, net
Total assets
Deposits
Subordinated debentures
Other borrowings
Shareholders' equity
Tangible common equity
Average balances:
Portfolio loans
Purchased credit impaired loans
Earning assets
Total assets
Interest-bearing liabilities
Shareholders' equity
Tangible common equity
$
132,779
$
131,754
$
153,289
$
165,464
$
142,840
12,369
120,410
4,872
(4,414)
20,675
82,226
58,401
19,951
38,450
1.92
1.89
0.26
17.53
15.86
$
$
14,386
117,368
4,409
1,083
16,631
87,463
41,044
13,871
27,173
1.38
1.35
0.21
15.94
14.20
$
$
18,137
135,152
(642)
4,974
9,899
90,639
50,080
16,976
33,104
1.78
1.73
0.21
14.47
12.62
$
$
23,167
142,297
8,757
14,033
9,084
85,761
42,830
14,534
28,296
1.41
1.37
0.21
13.09
10.99
$
$
30,155
112,685
13,300
2,803
18,508
76,865
38,225
12,802
25,423
1.37
1.34
0.21
11.61
9.38
$
$
$
2,750,737
$
2,433,916
$
2,137,313
$
2,106,039
$
1,897,074
33,441
64,583
30,334
3,075
3,608,483
2,784,591
56,807
380,326
350,829
317,420
30,185
83,693
30,334
4,164
3,277,003
2,491,510
56,807
383,883
316,241
281,743
27,289
34,330
37,989
125,100
30,334
5,418
3,170,197
2,534,953
62,581
264,331
279,705
243,953
189,571
30,334
7,406
3,325,786
2,658,851
85,081
325,070
235,745
198,005
298,975
30,334
9,285
3,377,779
2,791,353
85,081
256,545
239,565
166,653
$
2,520,734
$
2,255,180
$
2,097,920
$
1,953,427
$
1,819,536
87,940
3,163,339
3,381,831
2,344,861
335,095
301,165
119,504
2,921,978
3,156,994
2,209,188
301,756
266,655
168,662
2,875,765
3,126,537
2,237,111
259,106
222,186
243,359
2,909,532
3,230,928
2,340,612
252,464
185,252
232,363
2,766,240
3,096,147
2,377,044
213,650
161,887
26
(in thousands, except per share and percentage data)
2015
2014
2013
2012
2011
Years ended December 31,
SELECTED RATIOS:
Return on average common equity
Return on average tangible common equity
Return on average assets
Efficiency ratio
Total portfolio loan yield - tax equivalent
Cost of interest-bearing liabilities
Net interest spread
Net interest margin
Nonperforming loans to total loans (1)
Nonperforming assets to total assets (1) (2)
Net chargeoffs to average loans (1)
Allowance for loan losses to total loans (1)
Dividend payout ratio - basic
11.47%
9.01%
12.78%
11.21%
12.67%
12.77
1.14
58.28
4.72
0.53
3.72
3.86
0.33
0.48
0.06
1.22
10.19
0.86
65.27
5.14
0.65
3.91
4.07
0.91
0.74
0.07
1.24
14.90
1.06
62.49
6.36
0.81
4.60
4.78
0.98
0.90
0.31
1.28
13.55
0.78
56.65
7.05
0.99
4.75
4.94
1.84
1.44
0.64
1.63
14.15
0.74
58.59
6.38
1.27
3.94
4.12
2.19
1.74
0.99
2.00
13.68
15.37
11.92
13.28
14.07
(1) Amounts and ratios exclude Purchased credit impaired ("PCI") loans and related assets, except for their inclusion in total assets.
(2) Other real estate from PCI loans included in Nonperforming assets beginning with the year ended December 31, 2015 due to termination of all existing
FDIC loss share agreements.
27
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, 2015. 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, 2015 as compared to the years
ended December 31, 2014 and 2013.
(in thousands, except per share data)
EARNINGS
Total interest income
Total interest expense
Net interest income
Provision (provision reversal) for portfolio loans
Provision (provision reversal) for purchased credit impaired loans
Net interest income after provision for loan losses
Total noninterest income
Total noninterest expense
Income before income tax expense
Income tax expense
Net income
Basic earnings per share
Diluted earnings per share
Return on average assets
Return on average common equity
Return on average tangible common equity
Net interest margin (fully tax equivalent)
Efficiency ratio
ASSET QUALITY (1)
Net charge-offs
Nonperforming loans
Classified assets
Nonperforming loans to total loans
Nonperforming assets to total assets (2)
Allowance for loan losses to total loans
Net charge-offs to average loans
For the Years ended December 31,
2015
2014
2013
$
132,779
$
131,754
$
153,289
12,369
120,410
4,872
(4,414)
119,952
20,675
82,226
58,401
19,951
38,450
1.92
1.89
1.14%
11.47%
12.77%
3.86%
58.28%
1,616
9,100
67,761
0.33%
0.48%
1.22%
0.06%
14,386
117,368
4,409
1,083
111,876
16,631
87,463
41,044
13,871
27,173
1.38
1.35
0.86%
9.01%
10.19%
4.07%
65.27%
$
$
$
$
$
1,512
$
22,244
77,898
0.91%
0.74%
1.24%
0.07%
18,137
135,152
(642)
4,974
130,820
9,899
90,639
50,080
16,976
33,104
1.78
1.73
1.06%
12.78%
14.90%
4.78%
62.49%
6,400
20,840
83,843
0.98%
0.90%
1.28%
0.31%
$
$
$
(1) Excludes PCI loans and related assets, except for their inclusion in total assets.
(2) Other real estate from PCI loans included in Nonperforming assets beginning with the year ended December 31, 2015 due to
termination of all existing FDIC loss share agreements.
28
Below are highlights of the Company's Core performance measures, which we believe are important measures of
financial performance, but are not generally accepted accounting principles ("GAAP") measures. Core
performance measures include contractual interest on Purchased credit impaired ("PCI") loans, but exclude
incremental accretion on these loans, and exclude the Change in the FDIC receivable, Gain or loss on sale of other
real estate from PCI loans, 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."
(in thousands)
CORE PERFORMANCE MEASURES (1)
Net interest income
Provision (provision reversal) for portfolio loan losses
Noninterest income
Noninterest expense
Income before income tax expense
Income tax expense
Net income
Earnings per share
Return on average assets
Return on average common equity
Return on average tangible common equity
Net interest margin (fully tax equivalent)
Efficiency ratio
For the Years ended December 31,
2015
2014
2013
$
107,618
$
98,438
$
$
$
4,872
25,575
77,472
50,849
17,058
33,791
1.66
1.00%
10.08%
11.22%
3.46%
58.17%
$
$
4,409
24,548
79,369
39,208
13,165
26,043
1.29
0.82%
8.63%
9.77%
3.42%
64.53%
$
$
99,805
(642)
24,662
81,736
43,373
14,407
28,966
1.47
0.93%
11.18%
13.04%
3.55%
65.67%
(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 2015:
• The Company reported net income of $38.5 million for 2015, compared to $27.2 million for 2014. The
Company reported diluted earnings per share of $1.89 and $1.35 in the same respective periods. The
increase in net income over the prior year was primarily due to an increase in reversal of provision for PCI
loan losses, an increase in noninterest income, and a decrease in noninterest expenses from lower legal
expense on problem loans and expense management.
• On a core basis1, net income was $33.8 million, or $1.66 per share in 2015, compared to $26.0 million, or
$1.29 per share in 2014. The increase was primarily due to increases in earning asset balances, driving
growth in core net interest income, combined with a reduction in noninterest expenses and increases in
noninterest income from service charges on deposits and other fee income.
• Net interest income increased $3.0 million, or 3% in 2015 from 2014, due to strong portfolio loan growth
during the year, offset by a decline in accelerations from PCI loans. On a core basis1, net interest income
increased $9.2 million, or 9%, when compared to the prior year due to strong portfolio loan growth and
improvements in funding costs during 2015. The Company continues to manage its balance sheet to grow
core net interest income and expects to maintain or improve core net interest margin over the coming
quarters; however, pressure on funding costs and continued reductions in PCI loan balances could negate
expected trends in core net interest margin.
• Net interest margin declined 21 basis points to 3.86% during 2015, compared to 4.07% in 2014, largely due
to lower accelerated cash flows from PCI loans. Core net interest margin1, defined as Net interest margin
29
(fully tax equivalent), including contractual interest on PCI loans, but excluding the incremental accretion
on these loans, increased four basis points to 3.46%, from 3.42% in the prior year. The Average Balance
Sheet and Rate/Volume sections following contain additional information regarding our net interest income.
• Core noninterest income1, which includes the Company's wealth management revenue, service charges and
other fees on deposit accounts, sales of other real estate, and state tax brokerage activity, increased $1.0
million compared to 2014 primarily due to an increase in service charges on deposit accounts.
• Noninterest expenses declined $5.2 million, or 6% in 2015 from 2014, and the Company's efficiency ratio
improved to 58.3% from 65.3% when compared to the prior year. Core noninterest expenses1 declined $1.9
million, or 2%, when compared to the prior year, and the Core efficiency ratio improved to 58.2% from
64.5% when compared to the prior year, primarily due to growth in revenue.
1Non-GAAP measures. A reconciliation has been included in this MD&A section under the caption "Use of Non-GAAP Financial Measures."
2015 Significant Transactions
During 2015, we completed the following significant transactions:
• The Company's Board approved three consecutive increases in the Company's quarterly cash dividend to $0.08
per common share for the fourth quarter of 2015, up from $0.0525 for the first quarter of 2015.
• The Company's Board also authorized the repurchase of up to two million common shares, representing
approximately 10% of the Company's currently outstanding shares. Shares may be bought back in open market
or privately negotiated transactions over an indeterminate time period based on market and business conditions.
During 2015, the Company did not repurchase any shares pursuant to this publicly announced program.
• The Company received a $65 million allocation of New Markets Tax Credits ("NMTC"), which is the fourth
allocation of NMTC received in the past five years, for a total of $183 million.
• On December 7, 2015, the Company successfully completed early termination of all existing loss share
agreements with the FDIC, resulting in a pretax charge of $2.4 million, or $0.07 per diluted share. The
Company expects its future income to be positively impacted by no longer amortizing the FDIC loss share
receivable or providing for further increases to the clawback liability, as well as recovering amounts greater
than the carrying value of the formerly covered assets. The charge from the termination is expected to be
earned back within the next year.
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 0.3 million 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.
Balance sheet highlights
• Loans - Loans totaled $2.8 billion at December 31, 2015, including $74.8 million of PCI loans. Portfolio loans
excluding PCI loans increased $316.8 million, or 13%, from December 31, 2014. Commercial and industrial loans
increased $219.8 million, or 17%, Consumer and other loans increased $38.3 million, or 38%, Construction and
land development and Residential real estate loans increased $28.4 million, or 9%, and Commercial real estate
increased $30.3 million, or 4%. See Item 8, Note 5 – Portfolio Loans for more information.
30
• Deposits – Total deposits at December 31, 2015 were $2.8 billion, an increase of $293.1 million, or 12%, from
December 31, 2014, largely due to the Company's deposit gathering initiatives, offset slightly by reductions in
higher cost time deposit balances.
• Asset quality – Nonperforming loans, including troubled debt restructurings, were $9.1 million at December 31,
2015, compared to $22.2 million at December 31, 2014. Nonperforming loans represented 0.33% of Portfolio
loans at December 31, 2015, versus 0.91% at December 31, 2014. There were $0.9 million of portfolio loans
30-89 days delinquent and still accruing at December 31, 2015, as compared to $1.9 million at December 31,
2014.
Provision for portfolio loan losses was $4.9 million in 2015, compared to $4.4 million in 2014. The Company
experienced low levels of net chargeoffs in 2015, similar to 2014, but recorded provision expense as loan balances
increased 13% in 2015. See Item 8, Note 5 – Portfolio Loans and, Provision for Loan Losses and Allowance for
Loan Losses in this section for more information.
31
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,
2015
2014
2013
Average
Balance
Interest
Income/
Expense
Average
Yield/
Rate
Average
Balance
Interest
Income/
Expense
Average
Yield/
Rate
Average
Balance
Interest
Income/
Expense
Average
Yield/
Rate
(in thousands)
Assets
Interest-earning assets:
Taxable portfolio loans (1)
$2,486,369
$102,562
4.12% $2,223,835
$ 93,604
4.21% $2,058,086
$ 94,428
4.59%
Tax-exempt portfolio loans (2)
Purchased credit impaired loans
39,347
87,940
2,570
6.53
35,058
2,358
6.73
45,932
3,738
8.14
18,218
20.72
119,504
26,336
22.04
168,662
46,468
27.55
Total loans
2,613,656
123,350
4.72
2,378,397
122,298
5.14
2,272,680
144,634
6.36
436,023
8,983
2.06
424,882
8,984
2.11
462,015
8,689
1.88
Taxable investments in debt and equity
securities
Non-taxable investments in debt and
equity securities (2)
Short-term investments
44,738
68,922
1,966
211
Total securities and short-term investments
549,683
11,160
Total interest-earning assets
3,163,339
134,510
Noninterest-earning assets:
Cash and due from banks
Other assets
Allowance for loan losses
50,017
212,710
(44,235)
Total assets $3,381,831
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
4.39
0.31
2.03
4.25
41,088
77,611
1,919
187
543,581
11,090
2,921,978
133,388
4.67
0.24
2.04
4.56
44,158
96,912
1,979
210
603,085
10,878
2,875,765
155,512
4.48
0.22
1.80
5.41
29,680
250,985
(45,649)
$3,156,994
17,315
276,443
(42,986)
$3,126,537
Interest-bearing transaction accounts
$ 512,272
$
1,149
0.22% $ 311,974
$
653
0.21% $ 232,010
$
461
0.20%
Money market accounts
Savings
Certificates of deposit
949,814
88,399
496,449
2,993
219
6,051
Total interest-bearing deposits
2,046,934
10,412
Subordinated debentures
Other borrowed funds
56,807
241,120
1,248
709
Total interest-bearing liabilities
2,344,861
12,369
0.32
0.25
1.22
0.51
2.21
0.29
0.53
852,015
81,131
586,220
2,716
201
6,917
1,831,340
10,487
57,930
319,918
1,322
2,577
2,209,188
14,386
0.32
0.25
1.18
0.57
2.28
0.81
0.65
939,857
88,633
578,562
3,080
225
7,376
1,839,062
11,142
76,297
321,752
3,019
3,976
2,237,111
18,137
0.33
0.25
1.27
0.61
3.96
1.24
0.81
Noninterest bearing liabilities:
Demand deposits
Other liabilities
673,704
28,171
Total liabilities
3,046,736
Shareholders' equity
335,095
Total liabilities & shareholders' equity $3,381,831
622,714
23,336
2,855,238
301,756
$3,156,994
614,413
15,907
2,867,431
259,106
$3,126,537
Net interest income
$122,141
$119,002
$137,375
Net interest spread
Net interest margin (tax equivalent)
3.72%
3.86%
32
3.91%
4.07%
4.60%
4.78%
(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 $2.3 million, $0.9 million, and $1.5 million for the years ended December 31, 2015, 2014, and 2013 respectively.
(2) Non-taxable income is presented on a fully tax-equivalent basis using a 38% tax rate. The tax-equivalent adjustments were $1.7 million,
$1.6 million, and $2.2 million for the years ended December 31, 2015, 2014, and 2013 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.
(in thousands)
Interest earned on:
2015 compared to 2014
2014 compared to 2013
Increase (decrease) due to
Increase (decrease) due to
Volume(1)
Rate(2)
Net
Volume(1)
Rate(2)
Net
Taxable portfolio loans
$
10,861
$
Tax-exempt portfolio loans (3)
Purchased credit impaired loans
Taxable investments in debt and
equity securities
Non-taxable investments in debt and
equity securities (3)
Short-term investments
282
(6,616)
233
164
(23)
Total interest-earning assets
$
4,901
$
Interest paid on:
Interest-bearing transaction accounts
$
Money market accounts
Savings
Certificates of deposit
Subordinated debentures
Borrowed funds
Total interest-bearing liabilities
$
446
308
18
(1,088)
(27)
(522)
(865)
Net interest income
$
5,766
$
(1) Change in volume multiplied by yield/rate of prior period.
(2) Change in yield/rate multiplied by volume of prior period.
(1,903) $
(70)
(1,502)
8,958
$
212
(8,118)
$
7,295
(796)
(11,937)
(8,119) $
(584)
(8,195)
(824)
(1,380)
(20,132)
(234)
(117)
47
(3,779) $
(1)
47
24
1,122
$
$
50
(31)
1
222
(47)
(1,347)
(1,152)
(2,627) $
$
496
277
19
(866)
(74)
(1,869)
(2,017)
3,139
$
(732)
1,027
295
81
(141)
(45)
(60)
(23)
(6,356) $ (15,768) $ (22,124)
22
$
$
166
(282)
(19)
97
(615)
(23)
(676)
192
26
(364)
(82)
(24)
(5)
(459)
(556)
(1,697)
(1,082)
(1,399)
(1,376)
(3,751)
(3,075)
(5,680) $ (12,693) $ (18,373)
(3) Nontaxable income is presented on a fully-tax equivalent basis using a 38% tax rate.
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.
33
Purchased credit impaired ("PCI") Contribution
On December 7, 2015, the Company entered into an agreement with the FDIC to terminate all existing loss share
agreements associated with the assets and assumption of liabilities acquired in four FDIC-assisted transactions from
2009 through 2011. Under the terms of the agreement, the FDIC made a net payment to the bank of $1.3 million.
The agreement eliminated the FDIC clawback liability of $3.5 million and the FDIC loss share receivable of $7.2
million. Accordingly, a required expense of $2.4 million was recorded as part of noninterest expense in the fourth
quarter of 2015, which the Company expects to earn back within the next 12 months. The normal activity of
covered assets during the fourth quarter of 2015 prior to the date of the termination agreement was recorded in the
applicable line items, and the Change in FDIC receivable of $5.0 million reflects this activity. The termination
agreement does not change the Company's accounting for PCI loans, therefore, contractual and expected cash flows
on PCI loans will continue to be remeasured on a periodic basis. Following the date of the termination agreement,
the FDIC will not share in any remaining loan losses or expenses, nor recoveries of prior losses.
The following table illustrates the financial contribution of PCI loans and other assets related to PCI loans for the
most recent three fiscal years.
(in thousands)
Contractual interest income
Accelerated cash flows and other incremental accretion
$
Estimated funding cost
Total net interest income
Provision reversal (Provision) for loan losses
Gain on sale of other real estate
FDIC loss share termination
Change in FDIC loss share receivable
Change in FDIC clawback liability
Other expenses
PCI assets income before income tax expense
$
For the Years ended December 31,
2015
2014
2013
5,426
12,792
(1,276)
16,942
4,414
107
(2,436)
(5,030)
(760)
(1,558)
11,679
$
$
7,408
18,930
(1,404)
24,934
(1,083)
445
—
(9,307)
(1,201)
(2,928)
10,860
$
$
11,121
35,347
(3,429)
43,039
(4,974)
1,071
—
(18,173)
(951)
(4,552)
15,460
At December 31, 2015, the remaining accretable yield on the portfolio was estimated to be $25 million and the non-
accretable difference was approximately $27 million.
Comparison of 2015 and 2014
Net interest income (on a tax equivalent basis) was $122.1 million for 2015, compared to $119.0 million for 2014, an
increase of $3.1 million, or 3%. Total interest income increased $1.1 million and total interest expense decreased $2.0
million.
Average interest-earning assets increased $241.4 million, or 8%, to $3.2 billion for the year ended December 31, 2015.
Average loans increased $235.3 million, or 10%, to $2.6 billion for the year ended December 31, 2015, from $2.4
billion for the year ended December 31, 2014, primarily due to strong C&I origination in 2015. Average securities
and short-term investments increased $6.1 million, to $549.7 million from 2014. Interest income on earning assets
increased $4.9 million due primarily to loan growth outpacing interest rate headwinds, which offset net interest income
by $3.8 million resulting from economic and competitive conditions. The increase in volume was primarily due to
strong loan growth during the year. Portfolio loans saw an $11.1 million increase in interest income due to volume,
offset by a $2.0 million decrease in interest income due to rates.
For the year ended December 31, 2015, average interest-bearing liabilities increased $135.7 million, or 6%, to $2.3
billion, compared to $2.2 billion for the year ended December 31, 2014. The increase in average interest-bearing
liabilities resulted from a $105.1 million increase in average money market accounts and savings accounts. The
significant increase in money market and saving accounts was due to the Company's enhanced focus on deposit
34
gathering in both commercial and business banking. For the year ended December 31, 2015, interest expense on
interest-bearing liabilities decreased $1.2 million due to lower rates from management actions and market conditions,
and $0.9 million due to the impact of changes in mix as higher cost borrowings and certificates of deposit were replaced
by lower cost core deposits and other funds, versus the same period in 2014.
For the year ended December 31, 2015, the tax-equivalent net interest margin was 3.86%, compared to 4.07% in the
same period of 2014. The decrease in margin was largely due to lower accelerated cash flows from PCI loans.
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.
Noninterest Income
The following table presents a comparative summary of the major components of noninterest income.
35
(in thousands)
2015
2014
2013
2015 vs. 2014
2014 vs. 2013
Years ended December 31,
Change from
Service charges on deposit accounts
$
7,923
$
7,181
$
6,825
$
742
$
Wealth management revenue
Other service charges and fee income
Gain on state tax credits, net
Gain on sale of other real estate - core
Miscellaneous income - core
Core noninterest income (1)
Change in FDIC loss share receivable
Gain on sale of other real estate from
PCI assets
Gain on sale of investment securities
Closing fee
Gain on sale of branches
7,007
3,241
2,720
35
4,649
25,575
(5,030)
107
23
—
—
6,942
2,953
2,252
1,086
4,134
24,548
(9,307)
445
—
945
—
7,118
2,717
2,503
2,292
3,207
24,662
(18,173)
1,071
1,295
—
1,044
65
288
468
(1,051)
515
1,027
4,277
(338)
23
(945)
—
Total noninterest income
$
20,675
$
16,631
$
9,899
$
4,044
$
356
(176)
236
(251)
(1,206)
927
(114)
8,866
(626)
(1,295)
945
(1,044)
6,732
(1) A non-GAAP measure. A reconciliation has been included in this MD&A section under the caption "Use of Non-GAAP Financial
Measures."
Noninterest income increased $4.0 million, or 24% in 2015 compared to 2014. The increase was largely due to a
decrease in the loss from the Change in FDIC loss share receivable of $4.3 million. Core noninterest income1 increased
$1.0 million in 2015 largely due to an increase in Service charges on deposit accounts due to new customer additions
and expansion of existing relationships, offset by lower gains on sale of other real estate. Wealth management revenues
increased slightly in 2015. Assets under administration at December 31, 2015 of $1.5 billion remained stable compared
to December 31, 2014. Miscellaneous income increased in 2015 primarily due to an increase in allocation fees received
from tax credit projects.
Noninterest Expense
The following table presents a comparative summary of the major components of noninterest expense.
36
(in thousands)
Core expenses (1):
Years ended December 31,
Change from
2015
2014
2013
2015 vs.
2014
2014 vs.
2013
Employee compensation and benefits - core
$
45,102
$
45,717
$
43,817
$
Occupancy - core
Data processing - core
Professional fees - core
FDIC and other insurance
Loan, legal, and other real estate expense - core
Other - core
Core noninterest expense (1)
FDIC loss share termination
FDIC clawback
FHLB prepayment penalty
Facilities disposal charge
Other PCI related expenses
6,474
4,229
3,401
2,790
1,535
13,941
77,472
2,436
760
—
—
1,558
6,420
4,214
3,815
2,884
2,909
13,410
79,369
—
1,201
2,936
1,004
2,953
7,166
3,865
4,777
3,244
3,926
14,941
81,736
—
951
2,590
797
4,565
Total noninterest expense
$
82,226
$
87,463
$
90,639
$
(615) $
54
15
(414)
(94)
(1,374)
531
(1,897)
2,436
(441)
(2,936)
(1,004)
(1,395)
(5,237) $
1,900
(746)
349
(962)
(360)
(1,017)
(1,531)
(2,367)
—
250
346
207
(1,612)
(3,176)
(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 $5.2 million, or 6%, in 2015, partially due to the $2.9 million FHLB prepayment
penalty expense, and the $1.0 million Facilities disposal charge incurred in 2014. Noninterest expenses during 2015
included a charge of $2.4 million for the aforementioned FDIC loss share termination. Core noninterest expenses1
declined $1.9 million due to lower loan, legal, and other real estate expense from improved asset quality, and lower
professional fees.
The Company expects noninterest expenses to be between $19 million and $21 million per quarter in 2016.
Income Taxes
In 2015, the Company recorded income tax expense of $20.0 million on pre-tax income of $58.4 million, resulting in
an effective tax rate of 34.2%. The Company's effective tax rate was slightly higher than 2014 as pre-tax income was
significantly higher than 2014, reducing the savings impact of permanent items. The following items impacted the
2015 effective tax rate:
•
•
interest income on tax exempt mortgages and municipal bonds of $1.0 million.
release of reserves for uncertain tax positions due to remeasurement of $0.4 million.
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 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.
37
FINANCIAL CONDITION
Summary Balance Sheet
(in thousands)
2015
2014
2013
2015 vs. 2014
2014 vs. 2013
December 31,
% Increase (Decrease)
Total cash and cash equivalents
$
94,157
$
100,696
$ 210,569
Securities
Portfolio loans
495,484
446,131
434,587
2,750,737
2,433,916
2,137,313
Purchased credit impaired loans
64,583
83,693
125,100
Total assets
Deposits
Total liabilities
3,608,483
3,277,003
3,170,197
2,784,591
2,491,510
2,534,953
3,257,654
2,960,762
2,890,492
Total shareholders' equity
350,829
316,241
279,705
(6.49)%
11.06 %
13.02 %
(22.83)%
10.12 %
11.76 %
10.03 %
10.94 %
(52.18)%
2.66 %
13.88 %
(33.10)%
3.37 %
(1.71)%
2.43 %
13.06 %
Assets
Loans by Type
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.
(in thousands)
2015
2014
2013
2012
2011
Commercial and industrial
$ 1,484,327
$ 1,264,487
$ 1,041,576
$
962,884
$
763,202
December 31,
Real estate:
Commercial
Construction and land development
Residential
Consumer and other
Portfolio loans
771,023
161,061
196,498
137,828
740,754
143,878
185,252
99,545
779,319
117,032
158,527
40,859
819,709
160,911
145,558
16,977
811,570
140,147
171,034
11,121
$ 2,750,737
$ 2,433,916
$ 2,137,313
$ 2,106,039
$ 1,897,074
2015
2014
2013
2012
2011
December 31,
Commercial and industrial
54.0%
52.0%
48.7%
45.7%
40.2%
Real estate:
Commercial
Construction and land development
Residential
Consumer and other
Portfolio loans
28.0%
5.9%
7.1%
5.0%
30.4%
5.9%
7.6%
4.1%
36.5%
5.5%
7.4%
1.9%
38.9%
7.6%
6.9%
0.9%
42.8%
7.4%
9.0%
0.6%
100.0%
100.0%
100.0%
100.0%
100.0%
Note: In 2015, the Company redefined certain loan categories by borrower type and purpose of the loan. To conform to the
current year classification, the Company reclassified $36.4 million into Consumer and other loans as of December 31,
2014. This includes $5.8 million from C&I, $29.7 million from Commercial real estate, and $0.9 million from
Construction and land development.
38
Commercial and industrial loans are made based on the borrower's ability to generate cash flows for repayment from
income sources, general credit strength, experience, and character, even though such loans may also be secured by
real estate or other assets. The credit risk related to commercial loans is largely influenced by general economic
conditions and the resulting impact on a borrower's operations.
Real estate loans are also based on the borrower's character, but more emphasis is placed on the estimated cash flows
from the operation of the property, or the underlying collateral values, or both.
At December 31, 2015, $287.8 million, or 37%, of the commercial real estate loans were owner-occupied by commercial
and industrial businesses where the primary source of repayment is dependent on sources other than the underlying
collateral. Multifamily properties and other commercial properties on which income from the property is the primary
source of repayment represent the balance of this category. The majority of this category of loans is secured by
commercial and multi-family properties located within our St. Louis, Kansas City, and Phoenix markets. These loans
are underwritten based on the cash flow coverage of the property, the Company's loan to value guidelines, and generally
require either the limited or full guaranty of principal sponsors of the credit.
Real estate construction loans, relating to residential and commercial properties, represent financing secured by real
estate under development for eventual sale or undeveloped ground. $50.3 million of these loans include the use of
interest reserves and follow standard underwriting guidelines. Construction projects are monitored by the loan officer
and a centralized independent loan disbursement function is employed.
Residential real estate loans include residential mortgages, which are loans that, due to size or other attributes, do not
qualify for conventional home mortgages available for sale in the secondary market, second mortgages and home
equity lines. Residential mortgage loans are usually limited to a maximum of 80% of collateral value.
Consumer and other loans represent loans to individuals, loans to state and political subdivisions, loans to nondepository
financial institutions, and loans to purchase or are fully secured by investment securities. Credit risk is managed by
thoroughly reviewing the creditworthiness of the borrowers prior to origination.
The following table illustrates loan growth, including selected specialty lending detail, at December 31, 2015 and
2014:
(in thousands)
Enterprise value lending
C&I - general
Life insurance premium financing
Tax credits
CRE, Construction, and land development
Residential
Other
Portfolio loans
December 31,
2015
2014
Change
% Change
$
350,266
$
213,973
$
136,293
732,186
265,184
136,691
932,084
196,498
137,828
687,975
220,909
141,630
884,632
185,252
99,545
44,211
44,275
(4,939)
47,452
11,246
38,283
2,750,737
2,433,916
316,821
63.7 %
6.4 %
20.0 %
(3.5)%
5.4 %
6.1 %
38.5 %
13.0 %
Our specialty lending products, especially Enterprise value lending, Life insurance premium financing, and Tax
credits, consists of primarily C&I loans, and have contributed significantly to the Company's 2015 loan growth.
These loans are sourced through relationships developed with estate planning and private equity funds, and are not
bound geographically by our traditional three markets. These specialized loan products offer opportunities to
expand and diversify our overall geographic concentration by entering into new markets. The Company continues
to focus on originating high-quality C&I relationships as they typically have variable interest rates and allow for
cross selling opportunities involving other banking products. C&I loan growth also supports our efforts to maintain
the Company's asset sensitive interest rate risk position. The Company experienced 13% loan growth during 2015
and expects to achieve a 10% or above total portfolio loan growth rate for 2016.
39
Following is a further breakdown of our loan categories at December 31, 2015 and 2014:
2015
Purchased
Credit
Impaired
Loans
Portfolio
Loans
% of portfolio
Total
Loans
Portfolio
Loans
2014
Purchased
Credit
Impaired
Loans
Total
Loans
54%
5%
59%
4%
4%
2%
3%
2%
15%
11%
2%
13%
6%
1%
6%
7%
41%
5%
—%
5%
20%
12%
1%
1%
—%
34%
19%
7%
26%
9%
6%
20%
26%
95%
53%
5%
58%
5%
5%
2%
3%
1%
52%
4%
56%
5%
5%
2%
3%
1%
16%
16%
11%
2%
13%
6%
1%
6%
7%
13%
1%
14%
6%
2%
6%
8%
42%
44%
4%
—%
4%
23%
10%
1%
6%
1%
41%
16%
6%
22%
8%
3%
22%
25%
96%
50%
5%
55%
6%
5%
2%
3%
1%
17%
13%
1%
14%
6%
2%
6%
8%
45%
100%
100%
100%
100%
100%
100%
Non Real estate
Commercial and industrial
Consumer and other
Total Non Real estate
Real estate:
Commercial - investor owned
Retail
Commercial office
Multi-family housing
Industrial/ Warehouse
Other
Total
Commercial - owner occupied
Commercial and industrial
Other
Total
Construction and land development
Residential
Investor owned
Owner occupied
Total
Total Real estate
Total
The following descriptions focus on Portfolio loans at December 31, 2015, and exclude PCI loans.
The Construction and land development category represents $161.1 million, or 6%, of the total loan portfolio. Within
that category, there was $3.3 million of loans secured by raw ground, $124.8 million of commercial construction, and
$32.9 million of residential construction.
The Commercial construction component of the portfolio consisted of approximately 61 loan relationships with an
average outstanding loan balance of $1.9 million. The largest loans include a $9.2 million line of credit secured by
improved lots on commercially zoned land and an $8.7 million line of credit secured by a nursing home both located
in St. Louis.
The Residential construction component of the portfolio consisted of single family housing development properties
primarily in our St. Louis and Kansas City markets. There were approximately 63 loan relationships in this category
with an average outstanding loan balance of $0.5 million. The largest loans include a $1.9 million loan secured by a
40
single family home under construction in the St. Louis market, and a $1.8 million loan secured by residential lots in
the Kansas City market.
The largest non-owner occupied components of the commercial real estate portfolio are retail and commercial office
permanent loans.
The Company had $118.0 million of non-owner occupied permanent loans secured by retail properties. There were
approximately 45 loan relationships in this category with an average outstanding loan balance of $2.6 million. The
largest loans outstanding at year-end were a $10.7 million loan secured by a retail center in St. Louis, and $7.9 million
and $6.5 million loans, both secured by hotels in Phoenix.
The Company had $119.3 million of non-owner occupied permanent loans secured by commercial office properties.
There were approximately 61 loan relationships with an average outstanding loan balance of $2.0 million. The largest
loans outstanding at year end were an $8.3 million loan secured by a multi-tenant office building in Phoenix, a $7.1
million loan secured by a medical office building in St. Louis, and a $7.0 million loan secured by a multi-tenant office
building in the Kansas City region.
Factors that are critical to managing overall credit quality are sound loan underwriting and administration, systematic
monitoring of existing loans and commitments, early identification of potential problems, an adequate allowance for
loan losses, and sound non-accrual and charge-off policies.
Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to
numerous borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other
conditions. At December 31, 2015, no significant concentrations exceeding 10% of total loans existed in the Company's
loan portfolio, except as described above.
41
Loans at December 31, 2015 mature or reprice as follows:
(in thousands)
Fixed rate loans (1) (2) (3)
Commercial and industrial
Real estate:
Commercial
Construction and land development
Residential
Consumer and other
Purchased credit impaired loans
Total
Variable rate loans (1) (2)
Commercial and industrial
Real estate:
Commercial
Construction and land development
Residential
Consumer and other
Purchased credit impaired loans
Total
Loans (1) (2)
Commercial and industrial
$ 1,240,635
Real estate:
Commercial
Construction and land development
Residential
Consumer and other
Purchased credit impaired loans
316,638
117,871
70,125
60,183
47,420
Loans Maturing or Repricing
In One
Year or Less
After One
Through
Five Years
After
Five Years
Total
Percent of
Total Loans
$
184,909
$
200,422
$
23,904
$
409,235
132,423
339,750
53,551
34,036
28,665
37,562
$
471,146
$ 1,055,726
184,215
64,320
36,089
31,518
9,858
$ 1,381,726
$
$
$
$
$
$
$
$
31,330
72,384
16,110
17,151
677,147
19,366
66,126
1,830
32,537
31,495
7,341
158,695
219,788
405,876
33,160
104,921
47,605
24,492
48,509
8,249
17,144
30,040
2,695
520,682
93,130
123,564
74,815
57,408
130,541
$ 1,278,834
— $ 1,075,092
—
1,781
4,308
—
151
250,341
67,931
72,934
63,013
17,350
6,240
$ 1,546,661
23,904
$ 1,484,327
48,509
10,030
21,452
30,040
2,846
771,023
161,061
196,498
137,828
74,758
15%
18%
3%
4%
3%
2%
45%
38%
9%
2%
3%
2%
1%
55%
53%
27%
5%
7%
5%
3%
Total
$ 1,852,872
$
835,842
$
136,781
$ 2,825,495
100%
(1) Loan balances are net of unearned loan fees.
(2) Not adjusted for impact of interest rate swap agreements.
(3) Fixed rate loans include variable rate loans with a rate floor that are currently accruing interest at the floor.
Fixed rate loans comprise approximately 45% of the loan portfolio at December 31, 2015. Variable rate loans are
based on the prime rate or the London Interbank Offered Rate (“LIBOR”). The Bank's “prime rate” has been 4.00%
for the last several years. In December 2015, the Federal Reserve raised the targeted Fed Funds rate 25 basis points
to a range of 0.25% to 0.50%. Some of the variable rate loans also use the “Wall Street Journal Prime Rate” which
was raised to 3.50% in December 2015, from 3.25%. Most loan originations have one to three year maturities.
Management monitors this mix as part of its interest rate risk management. See "Interest Rate Risk" of this MD&A
section.
Of the $316.6 million of commercial real estate loans maturing in one year or less, $190.2 million, or 60%, represents
loans secured by non-owner occupied commercial properties.
42
Provision and Allowance for Loan Losses
The following table summarizes changes in the allowance for loan losses arising from loans charged off and recoveries
on loans previously charged off, by loan category, and additions to the allowance charged to expense.
($ in thousands)
2015
2014
At December 31,
2013
2012
2011
Allowance for portfolio loans, at beginning of period
$
30,185
$
27,289
$
34,330
$
37,989
$
42,759
Loans charged off:
Commercial and industrial
Real estate:
Commercial
Construction and land development
Residential
Consumer and other
Total loans charged off
Recoveries of loans previously charged off:
Commercial and industrial
Real estate:
Commercial
Construction and land development
Residential
Consumer and other
Total recoveries of loans
Net loan chargeoffs
Provision (benefit) for loan losses
Allowance for portfolio loans, at end of period
Allowance for PCI loans, at beginning of period
Loans charged off
Recoveries of loans
Other
Net loan chargeoffs
Provision (benefit) for loan losses
Allowance for PCI loans, at end of period
Total allowance, at end of period
Portfolio loans, average
Portfolio loans, ending
Net chargeoffs to average portfolio loans
Allowance for portfolio loan losses to loans
(3,699)
(3,738)
(3,404)
(3,233)
(5,488)
(702)
(350)
(1,313)
(27)
(6,091)
(700)
(905)
(48)
(165)
(5,556)
(4,991)
(896)
(1,053)
(34)
(10,378)
(6,054)
(4,384)
(1,605)
—
(15,276)
(2,429)
(10,627)
(1,613)
(5)
(20,162)
1,796
1,768
1,776
578
583
1,567
674
337
101
4,475
(1,616)
4,872
33,441
15,410
(25)
—
(796)
(821)
(4,414)
10,175
43,616
$
$
$
$
1,101
806
334
34
4,043
(1,513)
4,409
30,185
15,438
(341)
—
(770)
(1,111)
1,083
15,410
45,595
$
$
$
$
776
488
939
—
3,979
(6,399)
(642)
27,289
11,547
(522)
114
(675)
(1,083)
4,974
15,438
42,727
134
695
1,451
2
2,860
(12,416)
8,757
34,330
1,635
(3,823)
27
(325)
(4,121)
14,033
11,547
45,877
$
$
$
$
729
415
303
62
2,092
(18,070)
13,300
37,989
—
(1,168)
—
—
(1,168)
2,803
1,635
39,624
$
$
$
$
$
$
$
$
$ 2,520,734
2,750,737
$ 2,255,180
2,433,916
$ 2,097,920
2,137,313
$ 1,953,427
2,106,039
$ 1,819,536
1,897,074
0.06%
1.22%
0.07%
1.24%
0.31%
1.28%
0.64%
1.63%
0.99%
2.00%
43
The following table is a summary of the allocation of the Allowance for loan losses on portfolio loans for the five years
ended December 31, 2015:
2015
2014
December 31,
2013
2012
2011
(in thousands)
Allowance
Percent by
Category
to Portfolio
Loans
Percent by
Category to
Portfolio
Loans
Percent by
Category
to Portfolio
Loans
Allowance
Percent by
Category
to Portfolio
Loans
Allowance
Allowance
Percent by
Category to
Portfolio
Loans
Allowance
Commercial and
industrial
Real estate:
Commercial
Construction and
land development
Residential
Consumer and other
Unallocated
$
22,056
54.0% $
16,983
52.0% $
12,246
48.7% $
10,064
45.7% $
11,945
40.2%
6,453
1,704
1,796
1,432
—
28.0%
7,517
30.4%
10,696
36.5%
14,595
38.9%
13,048
42.8%
5.9%
7.1%
5.0%
1,715
2,830
1,140
—
5.9%
7.6%
4.1%
2,136
2,019
192
—
5.5%
7.4%
1.9%
5,239
2,026
31
2,375
7.7%
6.9%
0.8%
5,847
3,931
14
3,204
7.4%
9.0%
0.6%
Total allowance
$
33,441
100.0% $
30,185
100.0% $
27,289
100.0% $
34,330
100.0% $
37,989
100.0%
The provision for loan losses on portfolio loans for the years ended December 31, 2015 was $4.9 million, compared
to a $4.4 million expense, and a $0.6 million benefit for the comparable 2014 and 2013 periods, respectively. The
provision for loan losses for the year ended December 31, 2015 was primarily to provide for charge-offs incurred on
newly impaired loans, as well as loan growth in the portfolio. The provision for loan losses for the prior year period
ended December 31, 2014 was primarily to provide for charge-offs, as well as loan growth in the portfolio.
For PCI loans, the Company remeasures contractual and expected cash flows periodically. When the re-measurement
process results in a decrease in expected cash flows, typically due to an increase in expected credit losses, impairment
is recorded through provision for loan losses. Similarly, when expected credit losses decrease in the re-measurement
process, prior recorded impairment is reversed before the yield is increased prospectively. The benefit in loan provision
on PCI loans for the year ended December 31, 2015 was $4.4 million compared to expenses of $1.1 million and $5.0
million for the comparable 2014 and 2013 periods, respectively.
The allowance for loan losses on portfolio loans was 1.22% of Portfolio loans at December 31, 2015, compared to
1.24%, and 1.28%, at December 31, 2014 and 2013, respectively. Management believes the allowance for loan losses
is adequate to absorb inherent losses in the loan portfolio. The slight reduction in the ratio of allowance for loan losses
to total loans over the prior year period is due to continued strong credit performance, as well as continued improvement
in loss migration results.
Nonperforming assets
Nonperforming loans are defined as loans on non-accrual status, generally loans 90 days or more past due but still
accruing, and restructured loans still accruing interest or in a non-accrual status. Restructured loans involve the granting
of a concession to a borrower experiencing financial difficulty involving the modification of terms of the loan, such
as changes in payment schedule or interest rate. Nonperforming assets include nonperforming loans plus other real
estate.
Nonperforming loans exclude PCI loans. PCI loans are accounted for on a pool basis, and the pools are considered
to be performing. See Item 8, Note 6 – Purchased Credit Impaired Loans for more information.
The Company's nonperforming loans meet the definition of “impaired loans” in accordance with U.S. GAAP. As of
December 31, 2015, 2014, and 2013, the Company had 18, 18, and 20 impaired loan relationships, respectively. The
following table presents the categories of Nonperforming assets and other ratios as of the dates indicated.
44
(in thousands)
Non-accrual loans
Loans past due 90 days or more and still accruing
interest
Restructured loans
Total nonperforming loans
Other real estate from originated loans
Other real estate from acquired loans
December 31,
2015
2014
2013
2012
2011
$
8,797
$
20,892
$
20,163
$
37,287
$
30,885
—
303
9,100
3,218
5,148
—
1,352
22,244
1,896
—
—
677
20,840
7,576
—
—
1,440
38,727
9,327
—
755
9,982
41,622
17,217
—
Total nonperforming assets (1) (2)
$
17,466
$
24,140
$
28,416
$
48,054
$
58,839
Total assets
Portfolio loans
$3,608,483
$3,277,003
$3,170,197
$3,325,786
$3,377,779
2,750,737
2,433,916
2,137,313
2,106,039
2,115,366
1,897,074
1,914,291
Portfolio loans plus other real estate
2,759,103
2,435,812
2,144,889
Nonperforming loans to total loans (1)
Nonperforming assets to portfolio loans plus other
real estate (1) (2)
Nonperforming assets to total assets (1) (2)
Allowance for portfolio loans to nonperforming
loans (1)
0.33%
0.63%
0.48%
0.91%
0.99%
0.74%
0.98%
1.32%
0.90%
1.84%
2.27%
1.44%
2.19%
3.07%
1.74%
367%
136%
131%
89%
91%
(1) Excludes PCI loans, except for their inclusion in total assets.
(2) Other real estate from PCI loans included in Nonperforming assets beginning with the year ended December 31, 2015 due to termination
of all existing FDIC loss share agreements.
The increase in other real estate included in Nonperforming assets from the prior year resulted from the reclassification
of $5.1 million of other real estate previously covered under FDIC loss share agreements into Nonperforming assets.
Excluding this reclassification, Nonperforming assets as a percentage of total assets at December 31, 2015 were 0.34%.
Nonperforming loans
Nonperforming loans at December 31, 2015 and 2014 based on Call Report codes were as follows:
(in thousands)
Commercial and industrial
$
Commercial real estate
Construction and land development
Residential real estate
Consumer and other
Total
2015
4,514
1,105
2,800
681
—
50%
12%
31%
7%
—%
Number
of loans
10
$
2014
5,998
6,298
6,866
3,082
—
27%
28%
31%
14%
—%
Number
of loans
8
6
6
2
—
22
$
22,244
100%
4
4
3
—
21
$
9,100
100%
45
The following table summarizes the changes in nonperforming loans for 2015 and 2014.
(in thousands)
Nonperforming loans beginning of period
Additions to nonaccrual loans
Additions to restructured loans
Chargeoffs
Other principal reductions
Moved to other real estate
Moved to performing
Nonperforming loans end of period
December 31,
2015
2014
$
$
22,244
21,582
217
(6,213)
(25,813)
(2,094)
(823)
9,100
$
$
20,840
24,634
1,522
(5,363)
(11,289)
(5,332)
(2,768)
22,244
Nonperforming loans at December 31, 2015 decreased $13.1 million, or 59%, when compared to December 31, 2014.
Other principal reductions of $25.8 million includes $15.8 million of proceeds received from sales of collateral, $5.6
million of payments received from borrowers, and $4.4 million of proceeds from sales of notes.
At December 31, 2015, Nonperforming loans were comprised of approximately 17 relationships with the largest being
a $2.3 million C&I loan. Five relationships comprise 67% of the nonperforming loans. Approximately 80% were
located in the St. Louis market, 20% of the nonperforming loans were located in the Kansas City market, and none
were located in the Phoenix market. At December 31, 2015, there were two performing restructured loans that were
excluded from nonperforming loans in the amount of $1.8 million. Nonperforming loans represented 0.33% of Portfolio
loans at December 31, 2015, versus 0.91% at December 31, 2014.
At December 31, 2014, Nonperforming loans were comprised of approximately 18 relationships with the largest being
a $4.5 million Commercial real estate loan. Five relationships comprise 68% of the nonperforming loans.
Approximately 76% were located in the St. Louis market, 24% of the nonperforming loans were located in the Kansas
City market, and none were located in the Arizona market. At December 31, 2014, there were two performing
restructured loans that were excluded from nonperforming loans in the amount of $2.1 million. Nonperforming loans
represented 0.91% of Portfolio loans at December 31, 2014, versus 0.98% at December 31, 2013.
Potential problem loans
Potential problem loans, which are not included in nonperforming loans, amounted to approximately $50.3 million,
or 1.80%, of Portfolio loans outstanding at December 31, 2015, compared to $53.8 million, or 2.20%, of Portfolio
loans outstanding at December 31, 2014. Potential problem loans are unimpaired loans with a risk rating of 8-
Substandard still accruing interest. See Item 8, Note 5 – Portfolio Loans for the definitions of risk ratings. For these
loans, payment of principal and interest is current and the loans are performing, however some doubts exist as to the
borrower's ability to continue to comply with present repayment terms. Potential problem loans include companies
that are characterized by significant losses or where sustained downward trends in financial performance have been
identified, or are in an industry that is experiencing significant difficulty.
Other real estate
Other real estate at December 31, 2015 was $8.4 million, compared to $7.8 million, at December 31, 2014. Due to
termination of the Company's loss share agreements with the FDIC in 2015, $5.1 million of other real estate previously
covered under FDIC loss share agreements was reclassified into Other real estate.
At December 31, 2015, Other real estate was comprised of 3% residential lots, 1% completed homes, and 96%
commercial real estate. Of the total Other real estate, 4%, or four properties, are located in the Kansas City region,
36%, or five properties, are located in the St. Louis region and 60%, or two properties, are located in the Arizona
region.
The following table summarizes the changes in Other real estate for 2015 and 2014.
46
(in thousands)
Other real estate, beginning of period
Additions and expenses capitalized to prepare property for sale
Writedowns in value
Sales
Other real estate, end of period
December 31,
2015
2014
$
7,840
$
23,252
8,248
(299)
(7,423)
8,366
$
9,869
(2,778)
(22,503)
7,840
$
The writedowns in fair value were recorded in Loan, legal, and other real estate expense based on current market
activity shown in the appraisals. In addition, for the year ended December 31, 2015, the Company realized a net gain
of $0.1 million on the sale of other real estate and recorded these gains as part of Noninterest income.
Investments
At December 31, 2015, our portfolio of Securities was $495 million, or 14%, of total assets. This portfolio is primarily
comprised of agency mortgage-backed securities and obligations of U.S. Government-sponsored enterprises. The
portfolio is comprised of both available for sale and held to maturity securities.
Our Other investments, at cost, primarily consist of the FHLB capital stock, common stock investments related to our
trust preferred securities and other private equity investments. At December 31, 2015, of the $8.3 million in FHLB
capital stock, $3.9 million is required for FHLB membership and $4.4 million is required to support our outstanding
advances. Historically, it has been the FHLB's practice to automatically repurchase activity-based stock that became
excess because of a member's reduction in advances. The FHLB has the discretion, but is not required, to repurchase
any shares a member is not required to hold.
The table below sets forth the carrying value of investment securities held by the Company at the dates indicated:
(in thousands)
Amount
%
Amount
%
Amount
%
2015
December 31,
2014
2013
Obligations of U.S. Government sponsored enterprises $ 99,008
19.3% $ 91,827
19.8% $ 93,530
Obligations of states and political subdivisions
Agency mortgage-backed securities
FHLB capital stock
Other investments
Total
56,532
339,944
8,344
9,111
11.0%
49,457
10.7%
48,943
66.3% 304,847
65.9% 292,114
1.6%
1.8%
9,924
7,113
2.1%
1.5%
6,711
5,894
$ 512,939
100.0% $ 463,168
100.0% $ 447,192
100.0%
20.9%
10.9%
65.4%
1.5%
1.3%
The Company had no securities classified as trading at December 31, 2015, 2014, or 2013.
47
The following table summarizes expected maturity and tax equivalent yield information on the investment portfolio
at December 31, 2015:
Within 1 year
1 to 5 years
5 to 10 years
Over 10 years
No Stated
Maturity
Total
(in thousands)
Amount Yield
Amount Yield
Amount Yield Amount Yield Amount Yield
Amount Yield
Obligations of U.S. Government-
sponsored enterprises
Obligations of states and political
subdivisions
—
—%
99,008 1.54%
— —%
— —%
— —%
99,008 1.54%
3,225
3.88%
28,307 4.10%
21,732 3.55%
3,268 1.29%
— —%
56,532 3.71%
Agency mortgage-backed securities
1,075
2.27% 192,206 2.16% 110,731 2.47% 35,932 2.54%
— —% 339,944 2.30%
FHLB capital stock
Other investments
Total
—
—
—%
—%
— —%
— —%
— —%
8,344 1.48%
8,344 1.48%
— —%
— —%
— —%
9,111 0.45%
9,111 0.45%
$ 4,300
3.48% $319,521 2.14% $132,463 2.65% $ 39,200 2.44% $ 17,455 0.94% $512,939 2.25%
Yields on tax-exempt securities are computed on a taxable equivalent basis using a tax rate of 38.3%. Expected
maturities will differ from contractual maturities, as borrowers may have the right to call or repay obligations with or
without prepayment penalties.
FDIC Loss Share Receivable
Prior to termination of the loss share agreements, the Change in FDIC loss share receivable represented the amortization
and other changes necessary to adjust the value of our FDIC loss share receivable to the estimated recoveries from the
FDIC subject to the contractual limitations of the loss sharing agreements.
Deposits
The following table shows the breakdown of the Company's deposits by type for the periods indicated:
(in thousands)
Demand deposits
Interest-bearing transaction accounts
Money market accounts
Savings
Certificates of deposit:
$100 and over
Other
Total deposits
For the year ended December 31,
% Increase (decrease)
2015
2014
2013
2015 vs. 2014
2014 vs. 2013
$ 717,460
$ 642,930
$ 653,686
564,420
1,053,662
92,861
508,941
755,569
78,718
219,802
948,884
79,666
256,760
99,428
377,544
475,544
127,808
$ 157,371
$2,784,591
$2,491,510
$2,534,953
11.59 %
10.90 %
39.45 %
17.97 %
(31.99)%
(22.21)%
11.76 %
(1.65)%
131.55 %
(20.37)%
(1.19)%
(20.61)%
(18.79)%
(1.71)%
Non-time deposits / Total deposits
Demand deposits / Total deposits
87%
26%
80%
26%
75%
26%
The Bank continued to lower its cost of deposits during 2015. An increase in deposits from 2015 to 2014 occurred in
all areas except Certificates of deposit accounts. The Company has developed its pricing strategy to favor adjustable
rate transaction accounts over longer term time deposits consistent with asset mix and duration. The result was to lower
the percentage of time deposits and better position the bank for a prolonged low rate cycle.
Brokered certificates of deposits at December 31, 2015 were $39.6 million, or 1%, of total deposits compared to $71.3
million, or 3%, at December 31, 2014. Maturities of certificates of deposit of $100,000 or more were as follows as of
December 31, 2015:
48
(in thousands)
Three months or less
Over three through six months
Over six through twelve months
Over twelve months
Total
$
Total
76,448
31,286
62,201
86,825
$
256,760
Shareholders' equity
Shareholders' equity totaled $351 million at December 31, 2015, an increase of $34.6 million from December 31,
2014. Significant activity during the year ended December 31, 2015:
• Net income of $38.5 million,
• Decrease in Other comprehensive income of $1.5 million from the change in unrealized gains on
investment securities,
• Dividends paid on common stock of $5.3 million.
Liquidity and Capital Resources
Liquidity
The objective of liquidity management is to ensure we have the ability to generate sufficient cash or cash equivalents
in a timely and cost-effective manner to meet our commitments as they become due. Typical demands on liquidity
are changes in deposit levels, maturing time deposits which are not renewed, and fundings under credit commitments
to customers. Funds are available from a number of sources, such as from the core deposit base and from loans and
securities repayments and maturities.
Additionally, liquidity is provided from federal fund lines with correspondent banks, the Federal Reserve and the
FHLB, the ability to acquire large and brokered deposits, sales of the securities portfolio, and the ability to sell loan
participations to other banks. These alternatives are an important part of our liquidity plan and provide flexibility and
efficient execution of the asset-liability management strategy.
The Bank's Asset-Liability Management Committee oversees our liquidity position, the parameters of which are
approved by the Bank's Board of Directors. Our liquidity position is monitored monthly by producing a liquidity
report, which measures the amount of liquid versus non-liquid assets and liabilities. Our liquidity management
framework includes measurement of several key elements, such as the loan to deposit ratio, a liquidity ratio, and a
dependency ratio. The Company's liquidity framework also incorporates contingency planning to assess the nature
and volatility of funding sources and to determine alternatives to these sources. While core deposits and loan and
investment repayments are principal sources of liquidity, funding diversification is another key element of liquidity
management and is achieved by strategically varying depositor types, terms, funding markets, and instruments.
For the year ended December 31, 2015, net cash used by investing activities was $337.3 million, versus net cash used
of $212.8 million in 2014. The significant increase in 2015 was due to the purchase of available for sale debt securities,
as well as an overall increase in loan balances in 2015. Net cash provided by financing activities was $283.5 million
in 2015, versus net cash provided of $71.5 million in 2014. The change in cash provided by financing activities was
primarily due to an overall increase in deposit accounts, as well as an increase in other borrowings in 2015. The
Company's cash flow from investing and financing activities in 2015 reflects its deposit gathering efforts which funded
new loan advances, and increases in its available for sale debt securities portfolio. Additions to debt securities available
for sale are an important source of enhanced liquidity as these securities can be sold as necessary.
Strong capital ratios, credit quality and core earnings are essential to retaining cost-effective access to the wholesale
funding markets. Deterioration in any of these factors could have a negative impact on the Company's ability to access
these funding sources and, as a result, these factors are monitored on an ongoing basis as part of the liquidity management
49
process. The Bank is subject to regulations and, among other things, may be limited in its ability to pay dividends or
transfer funds to the parent company. Accordingly, consolidated cash flows as presented in the consolidated statements
of cash flows may not represent cash immediately available for the payment of cash dividends to the Company's
shareholders or for other cash needs.
Parent Company liquidity
The parent company's liquidity is managed to provide the funds necessary to pay dividends to shareholders, service
debt, invest in subsidiaries as necessary, and satisfy other operating requirements. The parent company's primary
funding sources to meet its liquidity requirements are dividends and payments from the Bank and proceeds from the
issuance of equity (i.e. stock option exercises, stock offerings). Another source of funding for the parent company
includes the issuance of subordinated debentures and other debt instruments.
In August 2014, the Company's shelf registration statement on Form S-3 registering up to $50.0 million of common
stock, preferred stock, debt securities, and various other securities, including combinations of such securities was
declared effective by the Securities and Exchange Commission. The Company's ability to offer securities pursuant to
the registration statement depends on market conditions and the Company's continuing eligibility to use the Form S-3
under rules of the Securities and Exchange Commission.
On November 6, 2012, the parent company entered into a $12.0 million unsecured term loan agreement ("Term Loan")
with another bank with the proceeds being used to redeem the Company's preferred stock held by the U.S. Treasury.
The loan was paid in full on November 6, 2015, the original date of maturity.
In February 2016, the Company entered into a senior unsecured revolving credit agreement (the Revolving Agreement)
with another bank allowing for borrowings up to $20 million. The proceeds can be used for general corporate purposes.
The Revolving Agreement is subject to ongoing compliance with a number of customary affirmative and negative
covenants as well as specified financial covenants. As of February 26, 2016, there are no outstanding balances under
the Revolving Agreement.
Periodically, management of the Bank will provide a dividend to supplement the parent company's liquidity. This
included a $10.0 million dividend in the fourth quarter of 2015, 2014, and 2013. Management currently believes the
current level of cash at the holding company of approximately $12.0 million will be sufficient to meet all projected
cash needs for at least the next year.
As of December 31, 2015, the Company had $56.8 million of outstanding subordinated debentures as part of eight
Trust Preferred Securities Pools. These securities are classified as debt but are included in regulatory capital and the
related interest expense is tax-deductible, which makes them an attractive source of funding. On March 14, 2014, the
Company converted the remaining $5.0 million, 9% coupon, trust preferred securities from EFSC Capital Trust VIII
to shares of common stock. As a result of this transaction the Company reduced its long-term debt by $5.0 million
and issued 0.3 million shares of common stock. On August 15, 2013, the Company converted $20.0 million, 9%
coupon, of these trust preferred securities to common stock at the election of one of the holders. As a result of these
transactions, the Company reduced its long-term debt by $25.0 million and issued an aggregate of 1.5 million shares
of common stock. The Company issued 25,060 shares of additional common stock as inducement for the holder's
election. The inducement resulted in a $0.4 million, one-time, non-cash expense recorded in Other noninterest expense
in 2013.
Regulations issued by the Federal Reserve Board under the Basel III regulatory capital reforms allow our currently
outstanding trust preferred securities to retain Tier 1 capital status.
Bank liquidity
The Bank has a variety of funding sources available to increase financial flexibility. In addition to amounts currently
borrowed, at December 31, 2015, the Bank could borrow an additional $239.6 million from the FHLB of Des Moines
under blanket loan pledges and has an additional $815.6 million available from the Federal Reserve Bank under a
pledged loan agreement. The Bank has unsecured federal funds lines with five correspondent banks totaling $60.0
50
million. On December 30, 2013, the Company prepaid $30.0 million of debt with the Federal Home Loan Bank with
a weighted average interest rate of 4.09% and a maturity of 3 years and incurred a prepayment penalty of $2.6 million.
On December 23, 2014, the Company prepaid an additional $50.0 million of debt with the Federal Home Loan Bank
with a weighted average interest rate of 3.17%, a maturity of 3 years and incurred a prepayment penalty of $2.9 million.
These transactions have helped to reduce our cost of interest bearing liabilities and mitigate net interest margin
compression.
Investment securities are another important tool to the Bank's liquidity objectives. Of the $451.8 million of the securities
available for sale at December 31, 2015, $334.4 million was pledged as collateral for deposits of public institutions,
treasury, loan notes, and other requirements. The remaining $117.4 million could be pledged or sold to enhance
liquidity, if necessary.
In the normal course of business, the Bank enters into certain forms of off-balance sheet transactions, including unfunded
loan commitments and letters of credit. These transactions are managed through the Bank's various risk management
processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of the
Company's liquidity. The Bank has $1.2 billion in unused commitments as of December 31, 2015. While this
commitment level would exhaust the majority the Company's current liquidity resources, the nature of these
commitments is such that the likelihood of funding them in the aggregate at any one time is low.
Capital Resources
The Company and the Bank are subject to various regulatory capital requirements administered by the Federal banking
agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional
discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its
bank affiliate must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The banking affiliate’s capital amounts
and classification are also subject to qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to
maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital to risk-weighted
assets, and of Tier 1 capital to average assets. To be categorized as “well capitalized”, banks must maintain minimum
total risk-based (10%), Tier 1 risk-based (8%), Common equity tier 1 risk-based (6.5%), and Tier 1 leverage ratios
(5%). As of December 31, 2015, and December 31, 2014, the Company and the Bank met all capital adequacy
requirements to which they are subject.
The Bank continues to meet the definition of “well capitalized” at December 31, 2015, 2014, and 2013. Refer to Item
8 - Note 15 Regulatory Matters for a summary of our risk-based capital and leverage ratios. Beginning with reporting
for the first quarter of 2015, the Company adopted the Regulatory Capital Framework (Basel III).
The following table summarizes the Company's various capital ratios at the dates indicated:
51
(in thousands)
Tier 1 capital to risk weighted assets
Total capital to risk weighted assets
Common equity tier 1 capital to risk weighted assets1
Leverage ratio (Tier 1 capital to average assets)
Tangible common equity to tangible assets2
Tier 1 capital
Total risk-based capital
For the Year ended December 31,
2015
2014
2013
10.61%
11.85%
9.05%
10.71%
8.88%
12.14%
13.40%
10.15%
10.48%
8.69%
$
374,676
$
335,221
$
418,367
369,868
12.52%
13.78%
10.08%
9.94%
7.78%
308,490
339,433
1 Not an applicable regulatory ratio until implementation of Basel III in 2015
2 Not a required regulatory capital ratio
The Company believes the tangible common equity and regulatory capital ratios are important measures of capital
strength even though they are considered to be non-GAAP measures. The tables further within MD&A reconcile these
ratios to U.S. GAAP.
Risk Management
Market risk arises from exposure to changes in interest rates and other relevant market rate or price risk. The Company
faces market risk in the form of interest rate risk through transactions other than trading activities. Market risk from
these activities, in the form of interest rate risk, is measured and managed through a number of methods. The Company
uses financial modeling techniques to measure interest rate risk. These techniques measure the sensitivity of future
earnings due to changing interest rate environments. Guidelines established by the Bank's Asset/Liability Management
Committee and approved by the Bank's Board of Directors are used to monitor exposure of earnings at risk. General
interest rate movements are used to develop sensitivity as management believes it has no primary exposure to a specific
point on the yield curve. These limits are based on the Company's exposure to immediate and sustained parallel rate
movements up to 400 basis points, either upward or downward.
52
Interest Rate Risk
Our interest rate risk management practices are aimed at optimizing net interest income, while guarding against
deterioration that could be caused by certain interest rate scenarios. Interest rate sensitivity varies with different types
of interest-earning assets and interest-bearing liabilities. We attempt to maintain interest-earning assets, comprised
primarily of both loans and investments, and interest-bearing liabilities, comprised primarily of deposits, maturing or
repricing in similar time horizons in order to manage any impact from market interest rate changes according to our
risk tolerance. In order to measure earnings sensitivity to changing rates, the Company uses an earnings simulation
model.
The Company determines the sensitivity of its short-term future earnings to a hypothetical plus or minus 100 to 400
basis point parallel rate shock through the use of simulation modeling. The simulation of earnings includes the modeling
of the balance sheet as an ongoing entity. Future business assumptions involving administered rate products,
prepayments for future rate-sensitive balances, and the reinvestment of maturing assets and liabilities are included.
These items are then modeled to project net interest income based on a hypothetical change in interest rates. The
resulting net interest income for the next 12-month period is compared to the net interest income amount calculated
using flat rates. This difference represents the Company's earnings sensitivity to a plus or minus 100 basis points
parallel rate shock.
The following table summarizes the expected impact of interest rate shocks on net interest income (due to the current
level of interest rates, the 200 and 300 basis point downward shock scenarios are not shown):
Rate Shock
+ 300 bp
+ 200 bp
+ 100 bp
- 100 bp
Annual % change
in net interest income
6.1%
4.1%
2.0%
-3.3%
The Company occasionally uses interest rate derivative financial instruments as an asset/liability management tool to
hedge mismatches in interest rate exposure indicated by the net interest income simulation described above. They are
used to modify the Company's exposures to interest rate fluctuations and provide more stable spreads between loan
yields and the rate on their funding sources. At December 31, 2015, the Company had $3.5 million in notional amount
of outstanding interest rate caps, to help manage interest rate risk. Derivative financial instruments are also discussed
in Item 8, Note 7 – Derivative Financial Instruments.
53
Contractual Obligations, Off-Balance Sheet Risk, and Contingent Liabilities
Through the normal course of operations, the Company has entered into certain contractual obligations and other
commitments. Such obligations relate to funding of operations through deposits or debt issuances, as well as leases
for premises and equipment. As a financial services provider, the Company routinely enters into commitments to
extend credit. While contractual obligations represent future cash requirements of the Company, a significant portion
of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same
credit policies and approval process accorded to loans made by the Company.
The required contractual obligations and other commitments, excluding any contractual interest1, at December 31,
2015, were as follows:
(in thousands)
Operating leases
Certificates of deposit
Subordinated debentures
Federal Home Loan Bank advances
356,188
56,807
110,000
Commitments to extend credit
1,140,028
Commitments - state tax credits
Standby letters of credit
Private equity funds (2)
6,632
54,648
7,515
Total
Less Than
1 Year
Over 1 Year
Less than
3 Years
Over 3 Years
Less than
5 Years
Over 5 Years
$
21,168
$
3,019
$
5,051
$
4,736
$
8,362
231,131
90,966
34,082
—
110,000
362,843
3,042
54,648
3,500
—
—
—
—
455,745
102,953
3,590
—
4,015
—
—
—
9
56,807
—
218,487
—
—
—
(1) Interest charges on related contractual obligations were excluded from reported amounts as the potential cash outflows would
have corresponding cash inflows from interest-earning assets.
(2) Represents the estimated timing of various capital raises for private equity investments.
As of December 31, 2015, we had liabilities associated with uncertain tax positions of $0.9 million. The table above
does not include these liabilities due to the high degree of uncertainty regarding the future cash flows associated with
these amounts.
The Company also enters into derivative contracts under which the Company either receives cash from or pays cash
to counterparties depending on changes in interest rates. Derivative contracts are carried at fair value on the consolidated
balance sheet with the fair value representing the net present value of expected future cash receipts or payments based
on market interest rates as of the balance sheet date. The fair value of these contracts changes daily as market interest
rates change.
CRITICAL ACCOUNTING POLICIES
The following accounting policies are considered most critical to the understanding of the Company's financial condition
and results of operations. These critical accounting policies require management's most difficult, subjective and
complex judgments about matters that are inherently uncertain. Because these estimates and judgments are based on
current circumstances, they may change over time or prove to be inaccurate based on actual experiences. In the event
that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility
of a materially different financial condition and/or results of operations could reasonably be expected. The impact
and any associated risks related to our critical accounting policies on our business operations are discussed throughout
“Management's Discussion and Analysis of Financial Condition and Results of Operations,” where such policies affect
our reported and expected financial results. For a detailed discussion on the application of these and other accounting
policies, see Item 8, Note 1 – Summary of Significant Accounting Policies.
The Company has prepared all of the consolidated financial information in this report in accordance with U.S. GAAP.
The Company makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue
54
and expenses during the reporting period. Such estimates include the valuation of loans, goodwill, intangible assets,
and other long-lived assets, along with assumptions used in the calculation of income taxes, among others. These
estimates and assumptions are based on management's best estimates and judgment. Management evaluates its
estimates and assumptions on an ongoing basis using historical experience and other factors, including the current
economic environment, which management believes to be reasonable under the circumstances. We adjust such
estimates and assumptions when facts and circumstances dictate. Decreased real estate values, volatile credit markets,
and persistent high unemployment have combined to increase the uncertainty inherent in such estimates and
assumptions. As future events and their effects cannot be determined with precision, actual results could differ
significantly from these estimates. Changes in estimates resulting from continuing changes in the economic
environment will be reflected in the financial statement in future periods. There can be no assurances that actual results
will not differ from those estimates.
Allowance for Loan Losses
The Company maintains an allowance for loan losses (“the allowance”), which is management's estimate of probable,
inherent losses in the outstanding loan portfolio. The allowance is based on management's continuous review and
evaluation of the loan portfolio. The review and evaluation combines several factors including: consideration of loan
loss experience; trends in past due and nonperforming loans; changes in lending policies and procedures; existing
business and economic conditions; the fair value of underlying collateral; changes in the nature and volume of the
Company's loan portfolio; changes in the lending department of the Company; volume and severity of past due loans;
the quality of the loan review system; concentrations of credit and other qualitative and other factors which affect
probable credit losses. Because current economic conditions can change and are difficult to predict, the anticipated
amount of estimated loan losses, and therefore the adequacy of the allowance, could change significantly.
In determining the allowance and the related provision for loan losses for Portfolio Loans, three principal elements
are considered:
1) specific allocations based upon probable losses identified during a quarterly review of the loan portfolio,
2) allocations based principally on the Company's risk rating formulas, and
3) a qualitative adjustment based on other economic, environmental and portfolio factors.
The first element reflects management's estimate of probable losses based upon a systematic review of specific loans
considered to be impaired. These estimates are based upon discounted cash flows as estimated and used to assign loss
or collateral exposure, if they are collateral dependent for collection.
The second element reflects the application of our loan rating system. Loans are rated and assigned a loss allocation
factor for each category that is based on a loss migration analysis using the Company's loss experience over the last
five years. The higher the rating assigned to a loan, the greater the loss allocation percentage that is applied. This
element also incorporates an estimate of the loss emergence period, which is an estimate of the time between when a
credit event occurs and when the charge-off of a loan occurs. The process is an estimate and is, therefore, imprecise.
For example, if our estimate of the loss emergence period would have been increased/decreased by one quarter, it
would have resulted in a $2.9 million increase and $2.6 million decrease, respectively, in our allowance at December 31,
2015.
The qualitative adjustment is based on management's evaluation of conditions that are not directly reflected in the loss
migration analysis and/or specific reserve. The evaluation of the inherent loss with respect to these conditions is subject
to a higher degree of uncertainty because they may not be identified with specific problem credits. The conditions
evaluated in connection with the qualitative or environmental adjustment include the following:
• changes in lending policies and procedures;
• changes in business and economic conditions;
• changes in the nature and volume of our loan portfolio;
• changes in our lending department;
• changes in volume and/or severity of past due loans;
• changes in the quality of our loan review system;
55
• changes in the value of underlying collateral related to loans;
• existence and effect of concentrations of credit within our loan portfolio; and
• other external factors such as asset quality trends (including trends in nonperforming loans expected to result
from existing conditions), and related allowance metrics of our peers.
Executive management reviews these conditions quarterly based on discussion with our lending staff. Management
then assigns a specified number of basis points of allowance to each factor above by loan category. To the extent that
any of these conditions is evidenced by a specifically identifiable problem credit or loan category as of the evaluation
date, management's estimate of the effect of such conditions may be reflected as a specific allowance, applicable to
such credit or loan category.
The allocation of the allowance for loan losses by loan category is a result of the analysis above. The allocation
methodology applied by the Company focuses on changes in the size and character of the loan portfolio, changes in
levels of impaired and other nonperforming loans, the risk inherent in specific loans, concentrations of loans to specific
borrowers or industries, existing economic conditions, and historical losses on each portfolio category.
Management believes that the allowance for loan losses is adequate at December 31, 2015.
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 are 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. Any disposals of loans, including sales of loans, payments in full or foreclosures result in the
removal of the loan from the loan pool at the carrying amount with differences in actual results reflected in interest
income.
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. 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.
56
Goodwill and Other Intangible Assets
Our goodwill impairment test is completed in the fourth quarter each year or whenever events or changes in
circumstances indicate that the Company may not be able to recover the goodwill, or intangible assets, respective
carrying amount. In 2015, we performed a qualitative ("Step 0") assessment to determine if our goodwill was impaired.
The qualitative assessment involved the examination of changes that have occurred since our last quantitative ("Step
1") goodwill impairment test took place including macroeconomic conditions, industry and market conditions, overall
financial performance, changes in management and other key personnel, changes in our reporting units, and changes
in the share price of the Company's common stock.
Goodwill is evaluated for impairment at the reporting unit level. Reporting units are defined as the same level as, or
one level below, an operating segment. An operating segment is a component of a business for which separate financial
information is available that management regularly evaluates in deciding how to allocate resources and assess
performance. At December 31, 2015 and 2014, the Company had $30.3 million goodwill.
Businesses must identify potential impairments by performing the qualitative assessment noted above or when a formal
test is required comparing the fair value of a reporting unit to its carrying amount, including goodwill. Goodwill
impairment does not occur as long as it is probable an impairment has not occurred under the Step 0 assessment or the
fair value of the unit is greater than its carrying value under the Step 1 assessment. The second step ("Step 2") of the
impairment test is only required if the carrying value of the reporting unit is greater than its fair value as determined
in Step 1. Step 2 of the test compares the implied fair market value of goodwill to its carrying amount. If the carrying
amount of goodwill exceeds its implied fair market value, an impairment loss is recognized. That loss is equal to the
carrying amount of goodwill that is in excess of its implied fair market value.
Intangible assets other than goodwill, such as core deposit intangibles, that are determined to have finite lives are
amortized over their estimated remaining useful lives. These assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future
cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset.
The 2015 annual impairment evaluation of goodwill and intangible balances did not identify any impairment.
Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities are recognized for future tax effects of temporary differences, net operating loss
carry forwards and tax credits. Deferred tax assets are reduced if necessary, by a deferred tax asset valuation allowance.
A valuation allowance is established when in the judgment of management, it is more likely than not that such deferred
tax assets will not become realizable. In this case, we would adjust the recorded value of our deferred tax assets, which
would result in a direct charge to income tax expense in the period that the determination is made. Likewise, we would
reverse the valuation allowance when realization of the deferred tax asset is expected. At December 31, 2015, the
Company did not have any valuation allowances for federal or state income taxes.
Effects of New Accounting Pronouncements
See Item 8, Note 22 – New Authoritative Accounting Guidance for information on recent accounting pronouncements
and their impact, if any, on our consolidated financial statements.
Use of Non-GAAP Financial Measures
The Company's accounting and reporting policies conform to generally accepted accounting principles ("GAAP") in
the U.S. and the prevailing practices in the banking industry. However, the Company provides other financial measures,
such as Core net interest margin, tangible common equity ratio and Tier 1 common equity ratio, in this filing that are
considered “non-GAAP financial measures.” Generally, a non-GAAP financial measure is a measure of a company's
financial performance, financial position or cash flows that exclude (or include) amounts that are included in (or
excluded from) the most directly comparable measure calculated and presented in accordance with U.S. GAAP.
57
The Company considers its Core performance measures as important measures of financial performance, even though
they are non-GAAP measures, as they provide supplemental information by which to evaluate the impact of PCI loans
and related income and expenses, and the impact of certain other income and expense items. Core performance
measures include contractual interest on PCI loans, but exclude incremental accretion on these loans. Core performance
measures also exclude the Change in FDIC receivable, Gain or loss on sale of other real estate previously covered
under FDIC loss share agreements, and expenses directly related to the PCI loans and related assets. Core performance
measures also exclude certain other income and expense items the Company believes to be not indicative of or useful
to measure the Company's operating performance on an ongoing basis.
The Company believes that Core net interest margin is an important measure of our financial performance, even though
it is a non-GAAP financial measure, because it provides supplemental information by which to evaluate the impact of
PCI loan accretion on the Company's net interest margin, and the Company's operating performance on an ongoing
basis, excluding such impact.
The Company believes that the tangible common equity ratio provides useful information to investors about the
Company's capital strength, even though they are considered to be non-GAAP financial measures and are not part of
the regulatory capital requirements to which the Company is subject.
The Company believes these non-GAAP financial measures and ratios, when taken together with the corresponding
U.S. GAAP measures and ratios, provide meaningful supplemental information regarding the Company's performance
and capital strength. The Company's management uses, and believes that investors benefit from referring to, these non-
GAAP measures and ratios in assessing the Company's financial and operating results and related trends and when
planning and forecasting future periods. However, these non-GAAP measures and ratios should be considered in
addition to, and not as a substitute for or preferable to, ratios prepared in accordance with U.S. GAAP. The Company
has provided a reconciliation of, where applicable, the most comparable GAAP financial measures and ratios to the
non-GAAP financial measures and ratios, or a reconciliation of the non-GAAP calculation of the financial measure.
58
Core Performance Measures
(in thousands)
December 31, 2015 December 31, 2014 December 31, 2013
For the Years ended
CORE PERFORMANCE MEASURES
Net interest income
Less: Incremental accretion income
Core net interest income
Total noninterest income
Less: Change in FDIC loss share receivable
Less: Gain on sale of other real estate from PCI loans
Less: Gain on sale of branches
Less: Gain on sale of investment securities
Less: Closing fee
Core noninterest income
Total core revenue
Provision (provision reversal) for portfolio loans
Total noninterest expense
Less: FDIC clawback
Less: FDIC loss share termination
Less: Other PCI expenses
Less: FHLB prepayment penalty
Less: Facilities disposal charge
Core noninterest expense
Core income before income tax expense
Total income tax expense
Less: Income tax expense of PCI assets
Core income tax expense
Core net income
Core earnings per share
Core efficiency ratio
Core return on average assets
Core return on average common equity
Core return on average tangible common equity
135,152
35,347
99,805
9,899
(18,173)
1,071
1,044
1,295
—
24,662
124,467
(642)
90,639
951
—
4,565
2,590
797
81,736
43,373
16,976
2,569
14,407
28,966
1.47
65.67%
0.93%
11.18%
13.04%
$
120,410
$
117,368
$
12,792
107,618
20,675
(5,030)
107
—
23
—
25,575
133,193
4,872
82,226
760
2,436
1,558
—
—
77,472
50,849
19,951
2,893
17,058
33,791
1.66
58.17%
1.00%
10.08%
11.22%
$
$
18,930
98,438
16,631
(9,307)
445
—
—
945
24,548
122,986
4,409
87,463
1,201
—
2,953
2,936
1,004
79,369
39,208
13,871
706
13,165
26,043
1.29
64.53%
0.82%
8.63%
9.77%
$
$
$
$
59
Net Interest Margin to Core Net Interest Margin
(in thousands)
Net interest income (fully tax equivalent)
Less: Incremental accretion income
Core net interest income (fully tax equivalent)
For the Years ended December 31,
2015
122,141
12,792
109,349
$
$
2014
119,002
18,930
100,072
$
$
2013
137,375
35,347
102,028
$
$
Average earning assets
$ 3,163,339
$ 2,921,978
$ 2,875,765
Reported net interest margin (fully tax equivalent)
Core net interest margin (fully tax equivalent)
3.86%
3.46%
4.07%
3.42%
4.78%
3.55%
Tangible common equity ratio
(in thousands)
Total shareholders' equity
Less: Goodwill
Less: Intangible assets
Tangible common equity
Total assets
Less: Goodwill
Less: Intangible assets
Tangible assets
For the Years ended December 31,
2015
2014
2013
350,829
$
316,241
$
30,334
3,075
317,420
3,608,483
30,334
3,075
$
$
30,334
4,164
281,743
3,277,003
30,334
4,164
$
$
279,705
30,334
5,418
243,953
3,170,197
30,334
5,418
3,575,074
$
3,242,505
$
3,134,445
$
$
$
$
Tangible common equity to tangible assets
8.88%
8.69%
7.78%
60
Common equity tier 1 ratio
(in thousands)
Total shareholders' equity
Less: Goodwill
Less: Intangible assets, net of deferred tax
liabilities1
Less: Unrealized gains; (Plus:) Unrealized losses
Plus: Qualifying trust preferred securities
Plus: Other
Tier 1 capital
Less: Qualifying trust preferred securities
Less: Other1
Common equity tier 1 capital
Total risk weighted assets determined in
accordance with prescribed regulatory
requirements
$
$
For the Years ended December 31,
2015
2014
2013
$
350,829
$
316,241
$
30,334
759
218
55,100
58
374,676
55,100
23
30,334
4,164
1,681
55,100
59
335,221
55,100
—
279,705
30,334
5,418
(4,380)
60,100
57
308,490
60,100
—
319,553
$
280,121
$
248,390
3,530,521
$
2,760,729
$
2,463,605
Common equity tier 1 to risk weighted assets
9.05%
10.15%
10.08%
1 Beginning January 1, 2015, the implementation of revised regulatory capital guidelines under Basel III has resulted in
differences in these items when compared to prior periods.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Please refer to “Risk Factors” included in Item 1A and “Risk Management” included in Management's Discussion and
Analysis under Item 7.
61
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Enterprise Financial Services Corp and Subsidiaries
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2015 and 2014
Consolidated Statements of Operations for the years ended
December 31, 2015, 2014, and 2013
Consolidated Statements of Comprehensive Income for the years ended
December 31, 2015, 2014, and 2013
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2015, 2014, and 2013
Consolidated Statements of Cash Flows for the years ended
December 31, 2015, 2014, and 2013
Notes to Consolidated Financial Statements
Page Number
63
65
66
67
68
69
71
62
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Enterprise Financial Services Corp
St. Louis, Missouri
We have audited the accompanying consolidated balance sheets of Enterprise Financial Services Corp and subsidiaries
(the "Company") as of December 31, 2015 and 2014, and the related consolidated statements of operations,
comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31,
2015. These consolidated financial statements are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of
Enterprise Financial Services Corp and subsidiaries as of December 31, 2015 and 2014, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with
accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the Company's internal control over financial reporting as of December 31, 2015, based on the criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated February 26, 2016 expressed an unqualified opinion on the
Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
St. Louis, Missouri
February 26, 2016
63
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Enterprise Financial Services Corp
St. Louis, Missouri
We have audited the internal control over financial reporting of Enterprise Financial Services Corp and subsidiaries
(the "Company") as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's
management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying Management's
Assessment on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's
principal executive and principal financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on
the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion
or improper management override of controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial
reporting to future periods are subject to the risk that the controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as
of December 31, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated financial statements as of and for the year ended December 31, 2015 of the Company and
our report dated February 26, 2016 expressed an unqualified opinion on those consolidated financial statements.
/s/ Deloitte & Touche LLP
St. Louis, Missouri
February 26, 2016
64
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31, 2015 and 2014
(in thousands, except share and per share data)
Assets
Cash and due from banks
Federal funds sold
Interest-earning deposits (including $1,320 and $980 pledged as collateral, respectively)
Total cash and cash equivalents
Interest-earning deposits greater than 90 days
Securities available for sale
Securities held to maturity
Loans held for sale
Portfolio loans
Less: Allowance for loan losses
Portfolio loans, net
Purchased credit impaired loans, net of the allowance for loan losses ($10,175 and
$15,410, respectively)
Total loans, net
Other real estate
Other real estate covered under FDIC loss share
Other investments, at cost
Fixed assets, net
Accrued interest receivable
State tax credits, held for sale, including $5,941 and $11,689 carried at fair value,
respectively
FDIC loss share receivable
Goodwill
Intangible assets, net
Other assets
Total assets
Liabilities and Shareholders' equity
Demand deposits
Interest-bearing transaction accounts
Money market accounts
Savings
Certificates of deposit:
$100 and over
Other
Total deposits
Subordinated debentures
Federal Home Loan Bank advances
Other borrowings
Notes payable
Accrued interest payable
Other liabilities
Total liabilities
Shareholders' equity:
Preferred stock, $0.01 par value;
5,000,000 shares authorized; 0 shares issued and outstanding
Common stock, $0.01 par value; 30,000,000 shares authorized; 20,093,119 and
19,913,519 shares issued, respectively
Treasury stock, at cost; 76,000 shares
Additional paid in capital
Retained earnings
Accumulated other comprehensive income
Total shareholders' equity
Total liabilities and shareholders' equity
See accompanying notes to consolidated financial statements.
65
December 31, 2015
December 31, 2014
$
$
$
$
47,935
91
46,131
94,157
1,000
451,770
43,714
6,598
2,750,737
33,441
2,717,296
64,583
2,781,879
8,366
—
17,455
14,842
8,399
45,850
—
30,334
3,075
101,044
3,608,483
717,460
564,420
1,053,662
92,861
256,760
99,428
2,784,591
56,807
110,000
270,326
—
629
35,301
3,257,654
—
201
(1,743)
210,589
141,564
218
350,829
3,608,483
$
$
$
$
42,903
35
57,758
100,696
5,300
400,146
45,985
4,033
2,433,916
30,185
2,403,731
83,693
2,487,424
1,896
5,944
17,037
14,753
7,956
38,309
15,866
30,334
4,164
97,160
3,277,003
642,930
508,941
755,569
78,718
377,544
127,808
2,491,510
56,807
144,000
234,183
5,700
843
27,719
2,960,762
—
199
(1,743)
207,731
108,373
1,681
316,241
3,277,003
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2015, 2014, and 2013
(in thousands, except per share data)
Interest income:
Interest and fees on loans
Interest on debt securities:
Taxable
Nontaxable
Interest on interest-bearing deposits
Dividends on equity securities
Total interest income
Interest expense:
Interest-bearing transaction accounts
Money market accounts
Savings accounts
Certificates of deposit:
$100 and over
Other
Subordinated debentures
Federal Home Loan Bank advances
Notes payable and other borrowings
Total interest expense
Net interest income
Provision (provision reversal) for portfolio loan losses
Provision (provision reversal) for purchased credit impaired loan losses
Net interest income after provision for loan losses
Noninterest income:
Wealth management revenue
Service charges on deposit accounts
Other service charges and fee income
Gain on sale of branches
Gain on sale of other real estate
Gain on state tax credits, net
Gain on sale of investment securities
Change in FDIC loss share receivable
Miscellaneous income
Total noninterest income
Noninterest expense:
Employee compensation and benefits
Occupancy
FDIC clawback
FDIC loss share termination
Data processing
FDIC and other insurance
Loan legal and other real estate expense
Professional fees
FHLB prepayment penalty
Other
Total noninterest expense
Income before income tax expense
Income tax expense
Net income
Earnings per common share
Basic
Diluted
See accompanying notes to consolidated financial statements.
$
$
66
Years ended December 31,
2014
2013
2015
$
122,370
$
121,395
$
143,181
8,842
1,215
211
141
132,779
1,149
2,993
219
4,664
1,387
1,248
127
582
12,369
120,410
4,872
(4,414)
119,952
7,007
7,923
3,241
—
142
2,720
23
(5,030)
4,649
20,675
46,095
6,573
760
2,436
4,339
2,790
1,812
3,465
—
13,956
82,226
58,401
19,951
38,450
1.92
1.89
$
$
8,711
1,188
187
273
131,754
653
2,716
201
5,281
1,636
1,322
1,799
778
14,386
117,368
4,409
1,083
111,876
6,942
7,181
2,953
—
1,531
2,252
—
(9,307)
5,079
16,631
47,232
6,527
1,201
—
4,481
2,884
3,936
3,825
2,936
14,441
87,463
41,044
13,871
27,173
1.38
1.35
$
$
8,325
1,209
210
364
153,289
461
3,080
225
5,554
1,822
3,019
2,938
1,038
18,137
135,152
(642)
4,974
130,820
7,118
6,825
2,717
1,044
3,363
2,503
1,295
(18,173)
3,207
9,899
47,278
7,277
951
—
4,137
3,244
4,496
4,876
2,590
15,790
90,639
50,080
16,976
33,104
1.78
1.73
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years ended December 31, 2015, 2014, and 2013
(in thousands)
Net income
Other comprehensive (loss) income, net of tax:
Unrealized (losses) gains on investment securities arising
during the period, net of income tax (benefit) expense of
($899), $3,762, and $(7,059), respectively
Less: Reclassification adjustment for realized gains
on sale of securities available for sale included in net
income, net of income tax expense of $9, $0, and $496,
respectively
Total other comprehensive (loss) income
Total comprehensive income
See accompanying notes to consolidated financial statements.
Years ended December 31,
2015
2014
2013
$
38,450
$
27,173
$
33,104
(1,449)
6,061
(11,371)
(14)
(1,463)
36,987
$
—
6,061
$
33,234
$
(799)
(12,170)
20,934
67
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
Years ended December 31, 2015, 2014, and 2013
(in thousands, except per share data)
Balance January 1, 2013
Net income
Other comprehensive income
Cash dividends paid on common shares, $0.21 per share
Repurchase of preferred stock
Issuance under equity compensation plans, 135,087
shares, net
Trust preferred securities conversion 1,176,470 shares
Share-based compensation
Excess tax benefit related to equity compensation plans
Preferred
Stock
Common
Stock
Treasury
Stock
Additional
paid in
capital
Retained
earnings
Accumulated
other
comprehensive
income (loss)
Total
shareholders'
equity
$
— $
181
$ (1,743) $ 173,299
$ 56,218
$
7,790
$
235,745
—
—
—
—
—
—
—
—
—
—
—
—
1
12
—
—
—
—
—
—
—
—
—
—
—
—
—
33,104
—
(3,946)
(1,006)
2,264
20,431
5,048
222
—
—
—
—
—
—
(12,170)
—
—
—
—
—
—
33,104
(12,170)
(3,946)
(1,006)
2,265
20,443
5,048
222
Balance December 31, 2013
$
— $
194
$ (1,743) $ 200,258
$ 85,376
$
(4,380) $
279,705
Net income
Other comprehensive income
Cash dividends paid on common shares, $0.21 per share
Issuance under equity compensation plans, 225,958
shares, net
Trust preferred securities conversion 287,852 shares
Share-based compensation
Excess tax benefit related to equity compensation plans
—
—
—
—
—
—
—
—
—
—
2
3
—
—
—
—
—
—
—
—
—
—
—
—
27,173
—
(4,176)
(681)
4,999
2,950
205
—
—
—
—
—
6,061
—
—
—
—
—
27,173
6,061
(4,176)
(679)
5,002
2,950
205
Balance December 31, 2014
$
— $
199
$ (1,743) $ 207,731
$ 108,373
$
1,681
$
316,241
Net income
Other comprehensive income
Cash dividends paid on common shares, $0.2625 per
share
Issuance under equity compensation plans, 179,600
shares, net
Share-based compensation
Excess tax benefit related to equity compensation plans
—
—
—
—
—
—
—
—
—
2
—
—
—
—
—
—
—
—
—
—
—
38,450
—
(5,259)
(1,192)
3,601
449
—
—
—
—
(1,463)
—
—
—
—
38,450
(1,463)
(5,259)
(1,190)
3,601
449
Balance December 31, 2015
$
— $
201
$ (1,743) $ 210,589
$ 141,564
$
218
$
350,829
See accompanying notes to consolidated financial statements.
68
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2015, 2014, and 2013
(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities
Years ended December 31,
2015
2014
2013
$
38,450
$
27,173
$
33,104
Depreciation
Provision for loan losses
Deferred income taxes
Net amortization of debt securities
Amortization of intangible assets
Gain on sale of investment securities
Mortgage loans originated for sale
Proceeds from mortgage loans sold
Gain on sale of other real estate
Gain on state tax credits, net
Excess tax benefit of share-based compensation
Share-based compensation
Valuation adjustment on other real estate
Net accretion of loan discount and indemnification asset
Gain on sale of branches
Changes in:
Accrued interest receivable
Accrued interest payable
Prepaid FDIC insurance
Other assets
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Net cash paid for acquisitions and dispositions
Net decrease (increase) in loans
Net cash proceeds received from FDIC loss share receivable
Proceeds from the termination of FDIC loss share agreements
Proceeds from the sale of debt securities, available for sale
Proceeds from the paydown or maturity of debt securities, available for sale
Proceeds from the paydown or maturity of debt securities, held to maturity
Proceeds from the redemption of other investments
Proceeds from the sale of state tax credits held for sale
Proceeds from the sale of other real estate
Payments for the purchase of:
Available for sale debt and equity securities
Other investments
Bank owned life insurance
State tax credits held for sale
Fixed assets
Net cash provided by (used in) investing activities
69
2,022
458
(5,763)
3,256
1,089
(23)
(135,721)
133,552
(142)
(2,720)
(449)
3,601
82
(7,805)
—
(443)
(214)
—
10,375
7,582
47,187
—
(290,326)
2,275
1,253
41,069
53,733
2,284
39,929
16,337
7,378
(152,044)
(36,046)
—
(20,981)
(2,111)
(337,250)
2,238
5,492
4,277
3,810
1,254
—
(74,135)
72,529
(1,531)
(2,252)
(205)
2,950
696
(9,879)
—
(653)
(114)
—
(205)
49
31,494
—
(240,640)
9,605
—
—
47,678
455
29,045
12,814
17,259
(53,664)
(33,477)
—
—
(1,901)
(212,826)
2,783
4,332
(9,943)
5,593
1,905
(1,295)
(78,335)
88,845
(3,363)
(2,503)
(222)
5,048
1,443
(16,435)
(1,044)
1,179
(303)
2,607
(12,002)
7,914
29,308
(67,564)
36,169
10,981
—
159,604
82,641
—
30,632
16,723
19,558
(60,732)
(29,225)
(20,000)
(1,365)
(1,338)
176,084
(in thousands)
Cash flows from financing activities:
Net increase (decrease) in noninterest-bearing deposit accounts
Net increase (decrease) in interest-bearing deposit accounts
Proceeds from Federal Home Loan Bank advances
Repayments of Federal Home Loan Bank advances
Repayments of notes payable
Repayments of subordinated debentures
Net increase (decrease) increase in other borrowings
Cash dividends paid on common stock
Excess tax benefit of share-based compensation
Payments for the repurchase of common stock warrants
Issuance of common stock
Proceeds from the issuance of equity instruments, net
Net cash provided (used) by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
Income taxes
Noncash transactions:
Transfer to other real estate owned in settlement of loans
Sales of other real estate financed
Issuance of common stock from Trust Preferred Securities conversion
Transfer of securities from available for sale to held to maturity
See accompanying notes to consolidated financial statements.
Years ended December 31,
2015
2014
2013
74,530
218,551
945,900
(979,900)
(5,700)
—
36,143
(5,259)
449
—
2
(1,192)
283,524
(6,539)
100,696
(10,756)
(32,686)
1,227,500
(1,133,500)
(4,800)
—
30,352
(4,177)
205
—
2
(681)
71,459
(109,873)
210,569
$
$
$
94,157
$
100,696
$
12,583
$
14,500
$
15,763
8,993
8,248
$
9,869
$
—
—
—
8,083
5,002
46,574
(19,719)
(32,876)
765,000
(795,000)
(1,200)
(2,500)
(22,433)
(3,946)
222
(1,006)
1
2,264
(111,193)
94,199
116,370
210,569
18,462
27,133
22,623
9,244
20,443
—
70
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies used by the Company in the preparation of the consolidated financial statements
are summarized below.
Business and Consolidation
Enterprise Financial Services Corp and subsidiaries (the “Company” or “Enterprise”) is a financial holding company
that provides a full range of banking and wealth management services to individuals and corporate customers primarily
located in the St. Louis, Kansas City, and Phoenix metropolitan markets through its banking subsidiary, Enterprise
Bank & Trust (the “Bank”). The 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.
The Company is subject to competition from other financial and nonfinancial institutions providing financial services
in the markets served by the Company's subsidiary. Additionally, the Company and its banking subsidiary are subject
to the regulations of certain federal and state agencies and undergo periodic examinations by those regulatory agencies.
The Company has one reportable segment.
Use of Estimates
The consolidated financial statements of the Company have been prepared in conformity in accordance with U.S.
generally accepted accounting principles (“U.S. GAAP”.) In preparing the consolidated financial statements,
management is required to make estimates and assumptions, which significantly affect the reported amounts in the
consolidated financial statements. Such estimates include the valuation of loans, goodwill, intangible assets,
indemnification assets, and other long-lived assets, along with assumptions used in the calculation of income taxes,
among others. These estimates and assumptions are based on management's best estimates and judgment. Management
evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including
the current economic environment, which management believes to be reasonable under the circumstances. Management
adjusts such estimates and assumptions when facts and circumstances dictate. Decreased real estate values, volatile
credit markets, and unemployment have combined to increase the uncertainty inherent in such estimates and
assumptions. As future events and their effects cannot be determined with precision, actual results could differ
significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic
environment will be reflected in the financial statements in future periods.
Cash Flow Information
For purposes of reporting cash flows, the Company considers cash and due from banks, interest-bearing deposits and
federal funds sold that mature within 90 days to be cash and cash equivalents. At December 31, 2015 and 2014,
approximately $13.8 million, and $16.1 million, respectively, of cash and due from banks represented required reserves
on deposits maintained by the Company in accordance with Federal Reserve Bank requirements.
Investments
The Company has classified all investments in debt securities as available for sale or held to maturity.
Securities classified as available for sale are carried at fair value. Unrealized holding gains and losses for available
for sale securities are excluded from earnings and reported as a net amount in a separate component of shareholders'
equity until realized. All previous fair value adjustments included in the separate component of shareholders' equity
are reversed upon sale.
Securities classified as held to maturity are carried at historical cost and adjusted for amortization of premiums and
accretion of discounts.
71
Declines in the fair value of securities below their cost deemed to be other-than-temporary are reflected in operations
as realized losses. In estimating other-than-temporary impairment losses, 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 (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's more
likely than not the Company would be required to sell the security before its anticipated recovery in market value.
Premiums and discounts are amortized or accreted over the expected lives of the respective securities as an adjustment
to yield using the interest method. Dividend and interest income is recognized when earned. Realized gains and losses
are included in earnings and are derived using the specific identification method for determining the cost of securities
sold.
Loans Held for Sale
The Company provides long-term financing of one-to-four-family residential real estate by originating fixed and
variable rate loans. Long-term fixed and variable rate loans are sold into the secondary market with limited recourse.
Upon receipt of an application for a real estate loan, the Company determines whether the loan will be sold into the
secondary market or retained in the Company's loan portfolio. The interest rates on the loans sold are locked with the
buyer and the Company bears no interest rate risk related to these loans. Mortgage loans held for sale are carried at
the lower of cost or fair value, which is determined on a specific identification method. The Company does not retain
servicing on any loans sold, nor did the Company have any capitalized mortgage servicing rights at December 31,
2015 or 2014. Gains on the sale of loans held for sale are reported net of direct origination fees and costs in the
Company's consolidated statements of operations.
Portfolio Loans
Loans are reported at the principal balance outstanding, net of unearned fees, costs, and premiums or discounts on
acquired loans. Loan origination fees, direct origination costs, and premiums or discounts resulting from acquired
loans are deferred and recognized over the lives of the related loans as a yield adjustment using the interest method.
Interest income on loans is accrued to income based on the principal amount outstanding. The recognition of interest
income is discontinued when a loan becomes 90 days past due or a significant deterioration in the borrower's credit
has occurred which, in management's judgment, negatively impacts the collectibility of the loan. Unpaid interest on
such loans is reversed at the time the loan becomes uncollectible and subsequent interest payments received are applied
to principal if any doubt exists as to the collectibility of such principal; otherwise, such receipts are recorded as interest
income. Loans that have not been restructured are returned to accrual status when management believes full
collectibility of principal and interest is expected. Non-accrual loans that have been restructured will remain in a non-
accrual status until the borrower has made at least six months of consecutive contractual payments.
Purchased Credit Impaired ("PCI") Loans
Loans acquired through the completion of a transfer, including loans acquired in a business combination, 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, are 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 (meaning the present value of all cash flows expected at acquisition that ultimately are not to be
received). Any disposals of loans, including sales of loans, payments in full or foreclosures result in the removal of
the loan from the loan pool at the carrying amount with differences in actual results reflected in interest income.
72
Impaired Loans
Loans are considered “impaired” when it becomes probable that the Company will be unable to collect all amounts
due according to the loan's contractual terms. Non-accrual loans, loans past due greater than 90 days and still accruing,
unless adequately secured and in the process of collection, and restructured loans qualify as “impaired loans.”
Restructured loans involve the granting of a concession to a borrower experiencing financial difficulty involving the
modification of terms of the loan, such as changes in payment schedule or interest rate.
When measuring impairment, the expected future cash flows of an impaired loan are discounted at the loan's effective
interest rate at origination. Alternatively, impairment can be measured by reference to an observable market price, if
one exists, or the fair value of the collateral for a collateral-dependent loan. Interest income on impaired loans is not
accrued but is recorded when cash is received and only if principal is considered to be fully collectible. Loans and
leases, which are deemed uncollectible, are charged off to the allowance for loan losses, while recoveries of amounts
previously charged off are credited to the allowance for loan losses.
Impaired loans exclude PCI loans, which are accounted for on a pool basis and are generally considered accruing and
performing loans, as the loans accrete interest income over the estimated life of the loan when cash flows are reasonably
estimable. Accordingly, PCI loans that are contractually past due may still be considered to be accruing and performing
loans. If the timing and amount of future cash flows is not reasonably estimable, 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 estimated. See Note 6 – Purchased Credit Impaired Loans for more
information on these loans.
Loans are generally placed on non-accrual status when contractually past due 90 days or more as to interest or principal
payments. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact
the collectability of principal or interest on loans, it is management's practice to place such loans on non-accrual status
immediately, rather than delaying such action until the loans become 90 days past due. Previously accrued and
uncollected interest on such loans is reversed. Income is recorded only to the extent that a determination has been
made that the principal balance of the loan is collectable and the interest payments are subsequently received in cash,
or for a restructured loan, the borrower has made six consecutive contractual payments. If collectability of the principal
is in doubt, payments received are applied to loan principal.
Loans past due 90 days or more but still accruing interest are also generally included in nonperforming loans. Loans
past due 90 days or more but still accruing are classified as such where the underlying loans are both well secured (the
collateral value is sufficient to cover principal and accrued interest) and are in the process of collection. At December 31,
2015, we did not have any loans past due greater than 90 days and not included in nonperforming loans.
Loan Charge-Offs
Loans are charged-off when the primary and secondary sources of repayment (cash flow, collateral, guarantors, etc.)
are less than their carrying value.
Allowance For Loan Losses
The allowance for loan losses is increased by provision charged to expense and is available to absorb charge-offs, net
of recoveries. Management utilizes a systematic, documented approach in determining the appropriate level of the
allowance for loan losses. The level of the allowance reflects management's continuing evaluation of industry
concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political
and regulatory conditions; and probable losses inherent in the current loan portfolio. The determination of the
appropriate level of the allowance for loan losses inherently involves a degree of subjectivity and requires that the
Company make significant estimates of current credit risks and future trends, all of which may undergo material
changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification
of additional problem loans and other factors, both within and outside of our control, may require an increase in the
allowance for loan losses.
73
Management believes the allowance for loan losses is adequate to absorb inherent losses in the loan portfolio. While
management uses available information to recognize losses on loans, future additions to the allowance may be necessary
based on changes in economic conditions and other factors. In addition, various regulatory agencies, as an integral
part of the examination process, periodically review the Bank's loan portfolio. Such agencies may require additions
to the allowance for loan losses based on their judgments and interpretations of information available to them at the
time of their examinations.
Allowance for Loan Losses on PCI Loans
The Company updates its cash flow projections for PCI 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. The loan migration
analysis is a matrix of probability that specifies the probability of a loan pool transitioning into a particular delinquency
or liquidation state given its current state at the re-measurement date. Loss severity factors are based upon industry
data and experience.
Any decreases in expected cash flows after the acquisition date and subsequent measurement periods are recognized
by recording an impairment in the provision for loan losses. See Purchased Credit Impaired Loans above for further
discussion. Any increase in expected future cash flows due to a decrease in expected credit losses will reverse previously
recorded impairment, if any, and add to the accretable yield on the loan pool, prospectively.
Other Real Estate
Other real estate represents property acquired through foreclosure or deeded to the Company in lieu of foreclosure on
loans on which the borrowers have defaulted on the payment of principal or interest. Other real estate is recorded on
an individual asset basis at the lower of cost or fair value less estimated costs to sell. The fair value of other real estate
is based upon estimates of future cash flows, market value of similar assets, if available, or independent appraisals.
These estimates involve significant uncertainties and judgments. As a result, fair value estimates may not be realizable
in a current sale or settlement of the other real estate. Subsequent reductions in fair value are expensed within noninterest
expense.
Gains and losses resulting from the sale of other real estate are credited or charged to current period earnings. Costs
of maintaining and operating other real estate are expensed as incurred, and expenditures to complete or improve other
real estate properties are capitalized if the expenditures are expected to be recovered upon ultimate sale of the property.
FDIC Loss Share Receivable and Clawback Liability
As part of FDIC-assisted transactions, the Bank entered into loss sharing agreements with the FDIC from 2009-2011.
In 2015, the Bank entered into an agreement with the FDIC to terminate all existing loss sharing agreements. This
termination resulted in the removal of the remaining clawback liability of $3.5 million and FDIC receivable of $7.2
million. The following policy discussion refers to transactions prior to December 7, 2015. The FDIC reimbursed the
Bank for a percentage of realized losses on loans and foreclosed real estate covered under the agreement (“Covered
assets”). In addition, the Bank was reimbursed for certain expenses related to the Covered assets. At the acquisition
date, the fair value of the amount due from the FDIC (“FDIC Loss Share Receivable") was estimated based on expected
losses and cash flows on the Covered assets. The FDIC Loss Share Receivable was measured separately from the
related Covered assets and recorded separately on the balance sheet, because it is not contractually embedded in the
Covered assets and was not transferable. Although these assets are contractual receivables from the FDIC, there are
no contractual interest rates.
Subsequent to initial recognition but prior to early termination in the fourth quarter of 2015, the FDIC Loss Share
Receivable was reviewed quarterly and adjusted for any changes in expected cash flows. These adjustments were
measured on the same basis as the related Covered assets. Any decrease in expected cash flows due to an increase in
expected credit losses increased the FDIC Loss Share Receivable which will partially offset the impairment recorded
on the PCI loans. The amount of the increase was recorded in noninterest income and was determined based on the
specific loss share agreement, but was generally 80% of the losses. Any increase in expected future cash flows due
to a decrease in expected credit losses decreased the accretion of the FDIC Loss Share Receivable prospectively over
74
its remaining life. Increases and decreases to the FDIC Loss Share Receivable were recorded as adjustments to
noninterest income.
As stipulated in some of its agreements with the FDIC, the Company may have been required to reimburse the FDIC
if certain levels of cash flows were met over the duration of a loss share agreement. This reimbursement, or clawback
liability, was measured quarterly over the duration of the agreement.
Fixed Assets
Buildings, leasehold improvements, furniture, fixtures, equipment, and capitalized software are stated at cost less
accumulated depreciation. All categories are computed using the straight-line method over their respective estimated
useful lives. Furniture, fixtures and equipment is depreciated over three to ten years, buildings and leasehold
improvements over ten to forty years, and capitalized software over three years based upon estimated lives or lease
obligation periods.
State Tax Credits Held for Sale
The Company has purchased the rights to receive 10-year streams of state tax credits at agreed upon discount rates
and sells such tax credits to wealth management customers and others. All state tax credits purchased prior to 2009
are accounted for at fair value. All state tax credits purchased since 2009 are accounted for at cost. The Company
elected not to account for the state tax credits purchased since 2009 at fair value in order to limit the volatility of the
fair value changes in the Company's consolidated statements of operations.
Cash Surrender Value of Life Insurance
The Company has purchased bank-owned life insurance policies on certain bank officers. Bank-owned life insurance
is recorded at its cash surrender value. Changes in the cash surrender values are included in noninterest income.
Federal Home Loan Bank Stock
The Bank, as a member of the Federal Home Loan Bank of Des Moines (“FHLB”), is required to maintain an investment
in the capital stock of the FHLB. The stock is redeemable at par by the FHLB, and is, therefore, carried at cost and
periodically evaluated for impairment. The Company records FHLB dividends in interest income on the ex-dividend
date.
Goodwill and Other Intangible Assets
The Company tests goodwill for impairment on an annual basis and whenever events or changes in circumstances
indicate that the Company may not be able to recover the respective asset's carrying amount. The Company's annual
test for impairment was performed in the fourth quarter of 2015. Such tests involve the use of estimates and assumptions.
Core deposit intangibles are amortized using an accelerated method over an estimated useful life of approximately 10
years.
The Company identifies potential goodwill impairments by first performing a qualitative assessment and then by
comparing the fair value of a reporting unit to its carrying amount, including goodwill. Goodwill impairment is not
indicated as long as it is more likely than not that impairment has not occurred based on the qualitative assessment or
based on the quantitative assessment the fair value of the reporting unit is greater than its carrying value. The second
step of the impairment test is only required if a goodwill impairment is identified in step one. The second step of the
test compares the implied fair value of goodwill to its carrying amount. If the carrying amount of goodwill exceeds
its implied fair value, an impairment loss is recognized. That loss is equal to the carrying amount of goodwill that is
in excess of its implied fair market value.
75
Impairment of Long-Lived Assets
Long-lived assets, such as fixed assets and purchased intangibles subject to amortization, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the
asset exceeds the fair value of the asset. Assets to be disposed of are separately presented in the balance sheet and
reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets
and liabilities of a disposal group classified as held for sale are presented separately in the appropriate asset and liability
sections of the balance sheet.
Derivative Financial Instruments and Hedging Activities
The Company uses derivative financial instruments to assist in the management of interest rate sensitivity and to modify
the repricing, maturity and option characteristics of certain assets and liabilities. In addition, the Company also offers
an interest rate hedge program that includes interest rate swaps to assist its customers in managing their interest rate
risk profile. In order to eliminate the interest rate risk associated with offering these products, the Company enters into
derivative contracts with third parties to offset the customer contracts.
Derivative instruments are required to be measured at fair value and recognized as either assets or liabilities in the
consolidated financial statements. Fair value represents the payment the Company would receive or pay if the item
were sold or bought in a current transaction. The accounting for changes in fair value (gains or losses) of a hedged
item is dependent on whether the related derivative is designated and qualifies for “hedge accounting.” The Company
assigns derivatives to one of these categories at the purchase date: cash flow hedge, fair value hedge, or non-designated
derivatives. An assessment of the expected and ongoing hedge effectiveness of any derivative designated a fair value
hedge or cash flow hedge is performed as required by the accounting standards. Derivatives are included in other assets
and other liabilities in the consolidated balance sheets. Generally, the only derivative instruments used by the Company
have been interest rate swaps and interest rate caps.
The Company does not currently have derivative instruments designated as fair value or cash flow hedges. Certain
derivative financial instruments are not designated as cash flow or as fair value hedges for accounting purposes. These
non-designated derivatives are intended to provide interest rate protection on net interest income or noninterest income
but do not meet hedge accounting treatment. Customer accommodation interest rate swap contracts are not designated
as hedging instruments. Changes in the fair value of these instruments are recorded in interest income or noninterest
income in the consolidated statements of income depending on the underlying hedged item.
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return. Deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or
settled. We evaluated the need for deferred tax asset valuation allowances based on a more-likely-than-not standard.
The ability to realize deferred tax assets depends on the ability to generate sufficient positive taxable income within
the carryback or carryforward periods provided for in the laws for each applicable taxing jurisdiction. We consider
the following possible sources of taxable income: future reversal patterns of existing taxable temporary differences,
future taxable income exclusive of reversing temporary differences, taxable income in prior carryback years and the
availability of qualified tax planning strategies. The assessment regarding whether a valuation allowance is required
or should be adjusted depends on all available positive and negative factors including, but not limited to, nature,
frequency, and severity of recent losses, duration of available carryforward periods, historical experience with tax
attributes expiring unused and near and medium term financial outlook. Because of the complexity of tax laws and
regulations, interpretation can be difficult and subject to legal judgment given specific facts and circumstances. It is
possible that others, given the same information, may at any point in time reach different reasonable conclusions
regarding the estimated amounts of accrued taxes.
Stock-Based Compensation
76
Stock-based compensation is recognized as an expense in the consolidated financial statements and measured at the
grant date fair value for all equity classified awards and recognized over the required service period.
Acquisitions and Divestitures
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, 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. The results of operations of the acquired business are included in the Company's consolidated financial
statements from the respective date of acquisition. As a general rule, goodwill established in connection with a stock
purchase is non-deductible for tax purposes.
For divestitures, the Company measures an asset (disposal group) classified as held for sale at the lower of its carrying
value at the date the asset is initially classified as held for sale or its fair value less costs to sell. The Company reports
the results of operations of an entity or group of components that either has been disposed of or held for sale as
discontinued operations only if the disposal of that component represents a strategic shift that has or will have a major
effect on an entity's operations and financial results.
Any incremental direct costs incurred to transact the sale are allocated against the gain or loss on the sale. These costs
would include items like legal fees, title transfer fees, broker fees, etc. Any goodwill and intangible assets associated
with the portion of the reporting unit to be disposed of is included in the carrying amount of the business in determining
the gain or loss on the sale.
The Company has acquired a portfolio of PCI assets through FDIC assisted transactions. The PCI loans acquired were
recorded at estimated fair value. As such, there was no allowance for credit losses established related to the acquired
loans at the various acquisition dates and no carryover of the related allowance from the failed banks. The loans are
accounted for in accordance with guidance for certain loans acquired in a transfer, when the loans have evidence of
credit deterioration and it is probable at the date of acquisition that the acquirer will not collect all contractually required
principal and interest payments. The difference between contractually required payments and the cash flows expected
to be collected at acquisition is referred to as the non-accretable difference. Subsequent decreases to the expected cash
flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the
provision for loan losses to the extent of prior charges and an adjustment in accretable yield, which will have a positive
impact on interest income, prospectively.
Basic and Diluted Earnings Per Common Share
Basic earnings per common share data is calculated by dividing net income available to common shareholders by the
weighted average number of common shares outstanding during the period. Common shares outstanding include
common stock and restricted stock awards where recipients have satisfied the vesting terms. Diluted earnings per
common share gives effect to all dilutive potential common shares outstanding during the period using the treasury
stock method and the if-converted method for convertible securities related to the issuance of trust preferred securities.
Consolidated Statement of Comprehensive Income
The Consolidated Statement of Comprehensive Income includes the amount and the related tax impact that have been
reclassified from accumulated other comprehensive income to net income. The classification adjustment for unrealized
loss/gain on sale of securities included in net income has been recorded through the gain on sale of investment securities
line item, within noninterest income, in the Company's Consolidated Statements of Operations.
77
NOTE 2 - ACQUISITIONS & DIVESTITURES
Branch Sale
On December 6, 2013, the Company sold two of its Kansas City branches to another financial institution. The agreement
called for the sale of substantially all of the deposits at these branches, or $78.4 million, as well as cash and cash
equivalents of $0.4 million, loans of $7.6 million, and other assets of $1.0 million. The Company recorded a pre-tax
gain of $1.0 million upon completion of the transaction primarily attributed to a premium on the deposits sold.
As part of this branch sale, the Company also closed two branches in the Kansas City region. In conjunction with the
closure, the Company recorded a liability and corresponding expense for the difference between the net present value
of future lease payments and its estimated sublease income at one of the closed branches. As of December 31, 2015,
this liability was $0.7 million. The Company recorded expense for the estimated net lease liability of $0.1 million,
$0.4 million, and $0.5 million in 2015, 2014, and 2013, respectively. The expense is recorded within other noninterest
expense.
NOTE 3 - EARNINGS PER SHARE
The following table presents a summary of per common share data and amounts for the periods indicated.
(in thousands, except per share data)
Net income as reported
Years ended December 31,
2015
2014
2013
$
38,450
$
27,173
$
33,104
Impact of assumed conversions
Interest on 9% convertible trust preferred securities, net
of income tax
Net income available to common shareholders and assumed
conversions
—
66
1,015
$
38,450
$
27,239
$
34,119
Weighted average common shares outstanding
19,984
19,761
18,582
Incremental shares from assumed conversions of convertible
trust preferred securities
Additional dilutive common stock equivalents
—
333
57
292
Weighted average diluted common shares outstanding
20,317
20,110
Basic earnings per common share:
Diluted earnings per common share:
$
$
1.92
1.89
$
$
1.38
1.35
$
$
1,001
168
19,751
1.78
1.73
There were 0.1 million common stock equivalents for fiscal year 2015; 0.3 million common stock equivalents for
fiscal year 2014; and 0.5 million common stock equivalents for fiscal year 2013, which were excluded from the earnings
per share calculations because their effect was anti-dilutive.
78
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:
(in thousands)
Available for sale securities:
December 31, 2015
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Amortized
Cost
Fair Value
Obligations of U.S. Government-sponsored enterprises
$
98,699
$
309
$
— $
Obligations of states and political subdivisions
Agency mortgage-backed securities
Total securities available for sale
40,700
311,516
1,343
2,046
$
450,915
$
3,698
$
(342)
(2,501)
(2,843) $
99,008
41,701
311,061
451,770
Held to maturity securities:
Obligations of states and political subdivisions
Agency mortgage-backed securities
Total securities held to maturity
(in thousands)
Available for sale securities:
$
$
14,831
28,883
43,714
$
$
63
—
63
$
$
(50) $
(286)
(336) $
14,844
28,597
43,441
December 31, 2014
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Amortized
Cost
Fair Value
Obligations of U.S. Government-sponsored enterprises
$
91,355
$
624
$
Obligations of states and political subdivisions
Agency mortgage-backed securities
Total securities available for sale
33,997
271,430
1,300
3,577
$
396,782
$
5,501
$
(153) $
(416)
(1,568)
(2,137) $
91,826
34,881
273,439
400,146
Held to maturity securities:
Obligations of states and political subdivisions
Agency mortgage-backed securities
Total securities held to maturity
$
$
14,900
31,085
45,985
$
$
— $
150
150
$
(325) $
(15)
(340) $
14,575
31,220
45,795
At December 31, 2015, and 2014, there were no holdings of securities of any one issuer in an amount greater than
10% of shareholders’ equity, other than the U.S. Government agencies and sponsored enterprises. The agency mortgage-
backed securities are all issued by U.S. Government-sponsored enterprises. Available for sale securities having a fair
value of $334.4 million and $315.8 million at December 31, 2015, and December 31, 2014, respectively, were pledged
as collateral to secure deposits of public institutions and for other purposes as required by law or contract provisions.
During the fourth quarter of 2014, $46.6 million of available for sale securities were transferred to a held to maturity
portfolio. The transfers of debt securities into the held to maturity category from the available for sale category were
made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer was retained in
other comprehensive income and in the carrying value of the held to maturity securities. This amount is being amortized
over the remaining life of the securities.
The amortized cost and estimated fair value of debt securities at December 31, 2015, by contractual maturity, are shown
below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or
79
prepay obligations with or without call or prepayment penalties. The weighted average life of the mortgage-backed
securities is approximately 4 years.
(in thousands)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage-backed securities
Available for sale
Held to maturity
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
$
3,199
$
3,225
$
— $
121,522
11,141
3,537
311,516
122,673
11,543
3,268
311,061
4,641
10,190
—
28,883
$
450,915
$
451,770
$
43,714
$
—
4,662
10,182
—
28,597
43,441
The following table represents a summary of investment securities that had an unrealized loss:
(in thousands)
Obligations of U.S. Government-sponsored
enterprises
Obligations of states and political
subdivisions
Agency mortgage-backed securities
(in thousands)
Obligations of U.S. Government-sponsored
enterprises
Obligations of states and political
subdivisions
Agency mortgage-backed securities
December 31, 2015
Less than 12 months
12 months or more
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
$
— $
— $
— $
— $
— $
—
2,199
189,229
$ 191,428
$
12
2,050
2,062
9,395
21,020
$ 30,415
$
380
737
1,117
11,594
210,249
$ 221,843
$
392
2,787
3,179
December 31, 2014
Less than 12 months
12 months or more
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
$
5,399
$
10
$ 24,852
$
143
$ 30,251
$
153
16,827
26,367
$ 48,593
$
343
56
409
5,349
97,054
$ 127,255
$
398
1,527
2,068
22,176
123,421
$ 175,848
$
741
1,583
2,477
The unrealized losses at both December 31, 2015, and 2014, were primarily attributable to changes in market interest
rates since the securities were purchased. Management systematically evaluates investment securities for other-than-
temporary declines in fair value on a quarterly basis. This analysis requires management to consider various factors,
which include among other considerations (1) the present value of the cash flows expected to be collected compared
to the amortized cost of the security, (2) duration and magnitude of the decline in value, (3) the financial condition of
the issuer or issuers, (4) structure of the security, and (5) the intent to sell the security or whether it is more likely than
not that the Company would be required to sell the security before its anticipated recovery in market value. At
December 31, 2015 and 2014, management performed its quarterly analysis of all securities with an unrealized loss
and concluded no individual securities were other-than-temporarily impaired.
80
The gross gains and losses realized from sales of available for sale investment securities were as follows:
(in thousands)
Gross gains realized
Gross losses realized
Proceeds from sales
December 31,
2015
2014
2013
$
63
$
(40)
41,069
— $
—
—
1,477
(182)
159,604
Other Investments, At Cost
As a member of the FHLB system administered by the Federal Housing Finance Agency, the Bank is required to
maintain a minimum investment in capital stock with the FHLB Des Moines consisting of membership stock and
activity-based stock. The FHLB capital stock of $8.3 million is recorded at cost, which represents redemption value,
and is included in Other investments in the consolidated balance sheets. The remaining amounts in Other investments
include the Company's investment in unconsolidated trusts used to issue preferred securities to third parties (see Note
11 – Subordinated Debentures) and various private equity investments.
81
NOTE 5 - PORTFOLIO LOANS
Below is a summary of Portfolio loans by category at December 31, 2015 and 2014:
(in thousands)
Commercial and industrial
Real estate loans:
Commercial - investor owned
Commercial - owner occupied
Construction and land development
Residential
Total real estate loans
Consumer and other
Portfolio loans
Unearned loan fees, net
December 31, 2015
December 31, 2014
$
1,484,327
$
1,264,487
428,064
342,959
161,061
196,498
1,128,582
137,537
2,750,446
291
396,751
344,003
143,878
185,252
1,069,884
98,650
2,433,021
895
Portfolio loans, including unearned loan fees
$
2,750,737
$
2,433,916
Note: In 2015, the Company redefined certain loan categories by borrower type and purpose of the loan. To conform
to the current year classification, the Company reclassified $36.4 million into Consumer and other loans as of
December 31, 2014. This includes $5.8 million from C&I, $16.2 million from CRE-investor owned, $13.5 million
from CRE-owner occupied, and $0.9 million from Construction and land development.
Following is a summary of activity for the years ended December 31, 2015, 2014, and 2013 of loans to executive
officers and directors, or to entities in which such individuals had beneficial interests as a shareholder, officer, or
director. Such loans were made in the normal course of business on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable transactions with other customers and did not
involve more than the normal risk of collectibility.
(in thousands)
December 31, 2015
December 31, 2014
December 31, 2013
Balance at beginning of year
New loans and advances
Payments and other reductions
Balance at end of year
$
$
13,513
$
641
(9,760)
4,394
$
11,752
$
11,796
(10,035)
13,513
$
16,875
6,519
(11,642)
11,752
82
A summary of activity in the allowance for loan losses and the recorded investment in Portfolio loans by class and
category based on impairment method for the years ended indicated below is as follows:
(in thousands)
Balance at
December 31, 2015
Allowance for Loan
Losses:
Balance, beginning of
year
Provision (provision
reversal)
Losses charged off
Recoveries
Commercial
and
industrial
CRE -
investor
owned
CRE -
owner
occupied
Construction
and land
development
Residential
real estate
Consumer
and other
Unallocated
Total
$
16,983
$
4,382
$
3,135
$
1,715
$
2,830
$
1,140
$
— $
30,185
6,976
(3,699)
1,796
(303)
(664)
69
(1,626)
(38)
1,498
(335)
(350)
674
(58)
(1,313)
337
218
(27)
101
—
—
—
4,872
(6,091)
4,475
Balance, end of year
$
22,056
$
3,484
$
2,969
$
1,704
$
1,796
$
1,432
$
— $
33,441
Balance at
December 31, 2014
Allowance for Loan
Losses:
Balance, beginning of
year
Provision (provision
reversal)
Losses charged off
Recoveries
$
12,246
$
6,600
$
4,096
$
2,136
$
2,019
$
192
$
— $
27,289
6,707
(3,738)
1,768
(2,063)
(250)
95
(1,517)
(450)
1,006
(322)
(905)
806
525
(48)
334
1,079
(165)
34
—
—
—
4,409
(5,556)
4,043
Balance, end of year
$
16,983
$
4,382
$
3,135
$
1,715
$
2,830
$
1,140
$
— $
30,185
Balance at
December 31, 2013
Allowance for Loan
Losses:
Balance, beginning of
year
Provision (provision
reversal)
Losses charged off
Recoveries
$
10,064
$
10,403
$
4,192
$
5,239
$
2,026
$
31
$
2,375
$
34,330
3,810
(3,404)
1,776
(94)
(4,441)
732
410
(550)
44
(2,695)
(896)
488
107
(1,053)
939
195
(34)
—
(2,375)
—
—
(642)
(10,378)
3,979
Balance, end of year
$
12,246
$
6,600
$
4,096
$
2,136
$
2,019
$
192
$
— $
27,289
83
(in thousands)
Balance December 31,
2015
Allowance for Loan
Losses - Ending Balance:
Individually evaluated for
impairment
Collectively evaluated for
impairment
Total
Loans - Ending Balance:
Individually evaluated for
impairment
Collectively evaluated for
impairment
Commercial
and
industrial
CRE -
investor
owned
CRE -
owner
occupied
Construction
and land
development
Residential
real estate
Consumer
and other
Total
$
$
$
1,953
$
— $
6
$
369
$
7
$
— $
2,335
20,103
3,484
2,963
1,335
1,789
1,432
31,106
22,056
$
3,484
$
2,969
$
1,704
$
1,796
$
1,432
$
33,441
4,514
$
921
$
1,962
$
2,800
$
681
$
— $
10,878
1,479,813
427,143
340,997
158,261
195,817
137,828
2,739,859
Total
$ 1,484,327
$
428,064
$
342,959
$
161,061
$
196,498
$
137,828
$ 2,750,737
Balance December 31,
2014
Allowance for Loan
Losses - Ending Balance:
Individually evaluated for
impairment
Collectively evaluated for
impairment
Total
Loans - Ending Balance:
Individually evaluated for
impairment
Collectively evaluated for
impairment
$
$
$
704
$
— $
— $
352
$
1,052
$
286
$
2,394
16,279
4,382
3,135
1,363
1,778
854
27,791
16,983
$
4,382
$
3,135
$
1,715
$
2,830
$
1,140
$
30,185
5,998
$
5,036
$
2,618
$
6,866
$
3,082
$
766
$
24,366
1,258,489
391,715
341,385
137,012
182,170
98,779
2,409,550
Total
$ 1,264,487
$
396,751
$
344,003
$
143,878
$
185,252
$
99,545
$ 2,433,916
84
A summary of Portfolio loans individually evaluated for impairment by category at December 31, 2015 and 2014, is
as follows:
(in thousands)
December 31, 2015
Unpaid
Contractual
Principal
Balance
Recorded
Investment
With No
Allowance
Recorded
Investment
With
Allowance
Total
Recorded
Investment
Related
Allowance
Average
Recorded
Investment
Commercial and industrial
$
5,554
$
509
$
4,204
$
4,713
$
1,953
$
6,970
Real estate:
Commercial - investor owned
Commercial - owner occupied
Construction and land development
Residential
Consumer and other
Total
927
329
4,349
705
—
927
85
2,914
637
—
—
113
530
68
—
927
198
3,444
705
—
—
6
369
7
—
970
301
3,001
682
—
$
11,864
$
5,072
$
4,915
$
9,987
$
2,335
$
11,924
(in thousands)
December 31, 2014
Unpaid
Contractual
Principal
Balance
Recorded
Investment
With No
Allowance
Recorded
Investment
With
Allowance
Total
Recorded
Investment
Related
Allowance
Average
Recorded
Investment
Commercial and industrial
$
8,042
$
2,609
$
3,464
$
6,073
$
704
$
4,136
Real estate:
Commercial - investor owned
Commercial - owner occupied
Construction and land development
Residential
Consumer and other
Total
5,036
610
7,961
3,082
766
—
—
419
2,943
770
5,187
519
6,929
150
—
5,187
519
7,348
3,093
770
—
—
352
1,052
286
4,375
1,281
7,280
954
581
$
25,497
$
6,741
$
16,249
$
22,990
$
2,394
$
18,607
The following table presents details for past due and impaired loans:
(in thousands)
Total interest income that would have been recognized
under original terms on impaired loans
Total cash received and recognized as interest income on
impaired loans
Total interest income recognized on impaired loans still
accruing
December 31,
2015
2014
2013
$
1,038
$
1,013
$
1,538
226
36
118
39
257
16
There were no loans over 90 days past due and still accruing interest at December 31, 2015 or 2014. At December 31,
2015, there were $0.01 million of unadvanced commitments on impaired loans.
85
The recorded investment in impaired Portfolio loans by category at December 31, 2015 and 2014, is as follows:
(in thousands)
Commercial and industrial
Real estate:
Commercial - investor owned
Commercial - owner occupied
Construction and land development
Residential
Consumer and other
Total
(in thousands)
Commercial and industrial
Real estate:
Commercial - investor owned
Commercial - owner occupied
Construction and land development
Residential
Consumer and other
Total
December 31, 2015
Non-accrual
Restructured
Loans over 90
days past due
and still
accruing
interest
Total
$
4,406
$
307
$
— $
4,713
927
198
3,444
705
—
9,680
$
—
—
—
—
$
—
307
$
December 31, 2014
—
—
—
—
—
— $
927
198
3,444
705
—
9,987
Non-accrual
Restructured
Loans over 90
days past due
and still
accruing
interest
Total
$
6,073
$
— $
— $
6,073
4,597
519
7,348
3,093
590
—
—
—
—
21,630
$
$
770
1,360
$
—
—
—
—
—
— $
5,187
519
7,348
3,093
770
22,990
The recorded investment by category for the Portfolio loans that have been restructured during the years ended
December 31, 2015 and 2014, is as follows:
(in thousands, except for number of loans)
Year ended December 31, 2015
Year ended December 31, 2014
Pre-
Modification
Outstanding
Recorded
Balance
Post-
Modification
Outstanding
Recorded
Balance
Number
of Loans
Pre-
Modification
Outstanding
Recorded
Balance
Post-
Modification
Outstanding
Recorded
Balance
Number
of Loans
Commercial and industrial
1
$
303
$
303
2
$
658
$
658
Real estate:
Commercial - investor owned
Commercial - owner occupied
Construction and land development
Residential
Consumer and other
Total
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1
$
303
$
303
1
2
1
1
1
8
603
606
2,827
125
1,043
$
5,862
$
603
606
2,827
125
793
5,612
86
The restructured Portfolio loans primarily resulted from interest rate concessions and changing the terms of the loans.
As of December 31, 2015, the Company allocated $0.2 million of specific reserves to the loans that have been
restructured.
The recorded investment by category for Portfolio loans that have been restructured and subsequently defaulted during
2015 and 2014 is as follows:
(in thousands, except for number of loans)
Number of Loans
Recorded Balance
Number of Loans
Recorded Balance
Year ended December 31, 2015
Year ended December 31, 2014
Commercial and industrial
Real estate:
Commercial - investor owned
Commercial - owner occupied
Construction and land development
Residential
Consumer and other
Total
— $
—
—
—
—
—
— $
—
—
—
—
—
—
—
— $
—
—
1
—
—
1
$
—
—
—
241
—
—
241
The aging of the recorded investment in past due Portfolio loans by portfolio class and category at December 31,
2015 and 2014 is shown below.
(in thousands)
Commercial and industrial
Real estate:
Commercial - investor owned
Commercial - owner occupied
Construction and land development
Residential
Consumer and other
Total
December 31, 2015
30-89 Days
Past Due
90 or More
Days
Past Due
Total
Past Due
Current
$
505
$
888
$
1,393
$
1,482,934
$
464
94
384
70
20
1,537
$
—
184
2,273
681
—
4,026
$
464
278
2,657
751
20
5,563
$
427,600
342,681
158,404
195,747
137,808
2,745,174
$
$
Total
1,484,327
428,064
342,959
161,061
196,498
137,828
2,750,737
(in thousands)
December 31, 2014
30-89 Days
Past Due
90 or More
Days
Past Due
Total
Past Due
Current
Total
Commercial and industrial
$
3,059
$
232
$
3,291
$
1,261,196
$
1,264,487
Real estate:
Commercial - investor owned
Commercial - owner occupied
Construction and land development
Residential
Consumer and other
Total
261
—
702
168
774
4,450
496
2,524
—
—
4,711
496
3,226
168
774
392,040
343,507
140,652
185,084
98,771
396,751
344,003
143,878
185,252
99,545
$
4,964
$
7,702
$
12,666
$
2,421,250
$
2,433,916
87
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to
service their debt, such as current financial information, historical payment experience, credit documentation, and
current economic factors among other factors. This analysis is performed on a quarterly basis. The Company uses the
following definitions for risk ratings:
• Grades 1, 2, and 3 – Includes loans to borrowers with a continuous record of strong earnings, sound balance
sheet condition and capitalization, ample liquidity with solid cash flow, and whose management team has
experience and depth within their industry.
• Grade 4 – Includes loans to borrowers with positive trends in profitability, satisfactory capitalization and
balance sheet condition, and sufficient liquidity and cash flow.
• Grade 5 – Includes loans to borrowers that may display fluctuating trends in sales, profitability, capitalization,
liquidity, and cash flow.
• Grade 6 – Includes loans to borrowers where an adverse change or perceived weakness has occurred, but may
be correctable in the near future. Alternatively, this rating category may also include circumstances where the
borrower is starting to reverse a negative trend or condition, or has recently been upgraded from a 7, 8, or 9
rating.
• Grade 7 – Watch credits are borrowers that have experienced financial setback of a nature that is not determined
to be severe or influence ‘ongoing concern’ expectations. Although possible, no loss is anticipated, due to
strong collateral and/or guarantor support.
• Grade 8 – Substandard credits will include those borrowers characterized by significant losses and sustained
downward trends in balance sheet condition, liquidity, and cash flow. Repayment reliance may have shifted
to secondary sources. Collateral exposure may exist and additional reserves may be warranted.
• Grade 9 – Doubtful credits include borrowers that may show deteriorating trends that are unlikely to be
corrected. Collateral values may appear insufficient for full recovery, therefore requiring a partial charge-off,
or debt renegotiation with the borrower. The borrower may have declared bankruptcy or bankruptcy is likely
in the near term. All doubtful rated credits will be on non-accrual.
The recorded investment by risk category of the Portfolio loans by portfolio class and category at December 31, 2015
and December 31, 2014 is as follows:
(in thousands)
Commercial and industrial
Real estate:
Commercial - investor owned
Commercial - owner occupied
Construction and land development
Residential
Consumer and other
Total
December 31, 2015
Pass (1-6)
Watch (7)
Substandard (8)
Doubtful (9)
Total
$
1,356,864
$
90,370
$
37,093
$
— $
1,484,327
403,820
314,791
146,601
188,269
131,060
18,868
24,727
10,114
5,138
721
5,376
3,441
4,346
3,091
6,047
—
—
—
—
—
428,064
342,959
161,061
196,498
137,828
$
2,541,405
$
149,938
$
59,394
$
— $
2,750,737
88
(in thousands)
Commercial and industrial
Real estate:
Commercial - investor owned
Commercial - owner occupied
Construction and land development
Residential
Consumer and other
Total
December 31, 2014
Pass (1-6)
Watch (7)
Substandard (8)
Doubtful (9)
Total
$
1,161,979
$
62,315
$
40,193
$
— $
1,264,487
361,991
322,725
122,365
168,543
91,827
18,640
18,025
12,993
11,012
5,499
16,120
3,253
8,520
5,697
2,219
—
—
—
—
—
396,751
344,003
143,878
185,252
99,545
$
2,229,430
$
128,484
$
76,002
$
— $
2,433,916
89
NOTE 6 - PURCHASED CREDIT IMPAIRED ("PCI") LOANS
Below is a summary of PCI loans by category at December 31, 2015 and 2014:
(in thousands)
Commercial and industrial
Real estate loans:
Commercial - investor owned
Commercial - owner occupied
Construction and land development
Residential
Total real estate loans
Consumer and other
Purchased credit impaired loans
December 31, 2015
December 31, 2014
Weighted-
Average
Risk Rating1
Recorded
Investment
PCI Loans
Weighted-
Average
Risk Rating1
Recorded
Investment
PCI Loans
6.70 $
3,863
6.57 $
4,012
6.98
6.30
6.28
5.44
1.89
$
25,272
19,414
6,838
19,287
70,811
84
74,758
7.07
6.35
6.16
5.54
5.39
$
39,066
22,695
7,740
25,121
94,622
469
99,103
(1) Risk ratings are based on the borrower's contractual obligation, which is not reflective of the purchase discount.
The aging of the recorded investment in past due PCI loans by portfolio class and category at December 31, 2015 and
2014 is shown below:
(in thousands)
Commercial and industrial
Real estate:
Commercial - investor owned
Commercial - owner occupied
Construction and land development
Residential
Consumer and other
Total
(in thousands)
Commercial and industrial
Real estate:
Commercial - investor owned
Commercial - owner occupied
Construction and land development
Residential
Consumer and other
Total
$
$
$
$
December 31, 2015
30-89 Days
Past Due
90 or More
Days
Past Due
Total
Past Due
Current
Total
— $
— $
— $
3,863
$
3,863
2,342
731
—
1,594
4
4,671
$
3,661
—
—
130
—
3,791
$
6,003
731
—
1,724
4
8,462
$
19,269
18,683
6,838
17,563
80
66,296
$
25,272
19,414
6,838
19,287
84
74,758
December 31, 2014
30-89 Days
Past Due
90 or More
Days
Past Due
Total
Past Due
Current
Total
— $
16
$
16
$
3,996
$
4,012
6,484
2,759
—
1,451
12
10,722
$
7,362
2,759
774
3,471
12
14,394
$
31,704
19,936
6,966
21,650
457
84,709
$
39,066
22,695
7,740
25,121
469
99,103
878
—
774
2,020
—
3,672
$
90
The following table is a rollforward of PCI loans, net of the allowance for loan losses, for the years ended
December 31, 2015 and 2014.
(in thousands)
Balance January 1, 2015
Principal reductions and interest payments
Accretion of loan discount
Changes in contractual and expected cash flows due to
remeasurement
Reductions due to disposals
Balance December 31, 2015
Balance January 1, 2014
Principal reductions and interest payments
Accretion of loan discount
Changes in contractual and expected cash flows due to
remeasurement
Reductions due to disposals
Balance December 31, 2014
$
$
$
$
Contractual
Cashflows
Non-
accretable
Difference
Accretable
Yield
Carrying
Amount
178,145
(24,441)
—
(3,574)
(33,441)
116,689
266,068
(35,718)
—
(2,170)
(50,035)
178,145
$
65,719
$
28,733
$
—
—
(30,413)
(8,541)
26,765
87,438
—
—
(7,403)
(14,316)
65,719
$
$
$
—
(10,775)
12,132
(4,749)
25,341
53,530
—
(15,747)
(3,234)
(5,816)
28,733
$
$
$
$
$
$
83,693
(24,441)
10,775
14,707
(20,151)
64,583
125,100
(35,718)
15,747
8,467
(29,903)
83,693
The accretable yield is accreted into interest income over the estimated life of the acquired loans using the effective
yield method.
A summary of activity in the FDIC loss share receivable for the years ended December 31, 2015 and 2014 is as
follows:
(in thousands)
Balance at beginning of period
Adjustments not reflected in income:
Cash received from the FDIC for covered assets
FDIC reimbursable losses (recoveries)
Reductions for loss share termination
Adjustments reflected in income:
Amortization, net
Loan impairment (impairment reversal)
Reductions for payments on covered assets in excess of
expected cash flows
December 31, 2015
December 31, 2014
$
15,866
$
34,319
(3,528)
(1,386)
(5,922)
(2,293)
(1,113)
(1,624)
(9,605)
459
—
(6,342)
841
(3,806)
15,866
Balance at end of period
$
— $
Outstanding customer balances on PCI loans were $98.6 million and $135.3 million as of December 31, 2015, and
December 31, 2014, respectively.
On December 7, 2015, the Company entered into an agreement to terminate all existing loss share agreements with
the FDIC. Under the terms of the agreement, the FDIC made a net payment to the bank of $1.3 million. The agreement
eliminated the FDIC clawback liability of $3.5 million and the FDIC loss share receivable of $7.2 million. Accordingly,
a one-time pretax charge of $2.4 million was recorded in 2015 as a separate component of noninterest expense. See
FDIC Loss Share Receivable and Clawback Liability in Note 1 – Summary of Significant Accounting Policies for
information on the Company's accounting in prior years.
91
NOTE 7 - DERIVATIVE FINANCIAL INSTRUMENTS
The Company is a party to various derivative financial instruments that are used in the normal course of business to
meet the needs of its clients and as part of its risk management activities. These instruments include interest rate swaps
and option contracts and foreign exchange forward contracts. The Company does not enter into derivative financial
instruments for trading purposes.
Using derivative instruments can involve assuming counterparty credit risk to varying degrees. Counterparty credit
risk relates to the loss the Company could incur if a counterparty were to default on a derivative contract. Notional
amounts of derivative financial instruments do not represent credit risk, and are not recorded in the consolidated
balance sheet. The overall credit risk and exposure to individual counterparties is monitored. The Company does
not anticipate nonperformance by any counterparties. The amount of counterparty credit exposure is the unrealized
gains in excess of collateral pledged, if any, on such derivative contracts along with the value of foreign exchange
forward contracts. At December 31, 2015, the Company had $1.2 million of counterparty credit exposure on
derivatives. This counterparty risk is considered as part of underwriting and on-going monitoring policies. At
December 31, 2015 and 2014, the Company had pledged cash of $1.3 million and $1.0 million, respectively, as
collateral in connection with interest rate swap agreements.
Risk Management Instruments. The Company enters into certain derivative contracts to economically hedge state
tax credits and certain loans.
• Economic hedge of state tax credits. The Company enters into interest rate caps in order to economically
hedge changes in fair value of the State tax credits held for sale. See Note 19 – Fair Value Measurements for
further discussion of the fair value of the state tax credits.
The table below summarizes the notional amounts and fair values of the derivative instruments used to manage risk.
Notional Amount
Asset Derivatives
(Other Assets)
Fair Value
Liability Derivatives
(Other Liabilities)
Fair Value
December 31,
2015
December 31,
2014
December 31,
2015
December 31,
2014
December 31,
2015
December 31,
2014
(in thousands)
Non-designated hedging instruments
Interest rate cap contracts
$
3,500
$
23,800
$
— $
2
$
— $
—
Client-Related Derivative Instruments. The Company enters into interest rate swaps to allow customers to hedge
changes in fair value of certain loans. The table below summarizes the notional amounts and fair values of the client-
related derivative instruments.
Notional Amount
Asset Derivatives
(Other Assets)
Fair Value
Liability Derivatives
(Other Liabilities)
Fair Value
December 31,
2015
December 31,
2014
December 31,
2015
December 31,
2014
December 31,
2015
December 31,
2014
(in thousands)
Non-designated hedging instruments
Interest rate swap contracts
$
153,630
$
141,263
$
1,155
$
907
$
1,155
$
907
Changes in the fair value of client-related derivative instruments are recognized currently in operations. For the years
ended December 31, 2015 and 2014, the gains and losses offset each other due to the Company's hedging of the client
swaps with other bank counterparties.
92
NOTE 8 - FIXED ASSETS
A summary of fixed assets at December 31, 2015 and 2014, is as follows:
(in thousands)
Land
Buildings and leasehold improvements
Furniture, fixtures and equipment
Capitalized software
Less accumulated depreciation and amortization
Total fixed assets
December 31,
2015
2014
3,103
$
17,837
4,892
1,030
26,862
12,020
14,842
$
3,103
17,170
3,750
735
24,758
10,005
14,753
$
$
Depreciation and amortization of fixed assets included in noninterest expense amounted to $2.0 million, $2.2 million,
and $2.8 million in 2015, 2014, and 2013, respectively.
The Company has facilities leased under agreements that expire in various years through 2028. The Company's rent
expense totaled $3.1 million, $2.9 million, and $3.0 million in 2015, 2014, and 2013, respectively. Sublease rental
income was $0.1 million, $0.2 million, and $0.2 million for 2015, 2014, and 2013, respectively. For leases which
renew or are subject to periodic rental adjustments, the monthly rental payments will be adjusted based on current
market conditions and rates of inflation.
The future aggregate minimum rental commitments (in thousands) required under the leases are shown below:
Year
2016
2017
2018
2019
2020
Thereafter
Total
$
$
Amount
3,019
2,656
2,395
2,388
2,348
8,362
21,168
NOTE 9 - GOODWILL AND INTANGIBLE ASSETS
Goodwill has remained at $30.3 million as of December 31, 2015, 2014, and 2013. The annual goodwill impairment
evaluations in 2015, 2014, and 2013 did not identify any impairment.
The table below presents a summary of the intangible assets for the years ended December 31, 2015 and 2014.
(in thousands)
Gross core deposit intangible balance, beginning of year
Accumulated amortization
Core deposit intangible, net, end of year
Years ended December 31,
2015
2014
$
$
9,060
(5,985)
3,075
$
$
9,060
(4,896)
4,164
93
Amortization expense on the core deposit intangibles was $1.1 million, $1.3 million, and $1.6 million for the years
ended December 31, 2015, 2014, and 2013, respectively. The core deposit intangibles are being amortized over a
10 year period.
The following table reflects the expected amortization schedule for the core deposit intangible (in thousands) at
December 31, 2015.
Year
2016
2017
2018
2019
2020
After 2020
$
$
Core Deposit
Intangible
924
760
595
430
265
101
3,075
NOTE 10 - MATURITY OF CERTIFICATES OF DEPOSIT
Following is a summary of certificates of deposit maturities at December 31, 2015:
(in thousands)
Less than 1 year
Greater than 1 year and less than 2 years
Greater than 2 years and less than 3 years
Greater than 3 years and less than 4 years
Greater than 4 years and less than 5 years
Greater than 5 years
$100,000
and Over
Other
Total
$
169,936
$
61,195
$
231,131
13,993
48,619
20,942
3,270
—
14,844
13,510
7,367
2,503
9
28,837
62,129
28,309
5,773
9
$
256,760
$
99,428
$
356,188
NOTE 11 - SUBORDINATED DEBENTURES
The Company currently has eight unconsolidated statutory business trusts. These trusts issued preferred securities
that were sold to third parties. The sole purpose of the trusts was to invest the proceeds in junior subordinated debentures
of the Company that have terms identical to the trust preferred securities.
94
The amounts and terms of each respective issuance at December 31, 2015 and 2014 were as follows:
Amount
(in thousands)
2015
2014
Maturity Date
Call Date
Interest Rate
EFSC Clayco Statutory Trust I
$
3,196
$
3,196 December 17, 2033
December 17, 2008
Floats @ 3MO LIBOR + 2.85%
EFSC Capital Trust II
5,155
5,155
June 17, 2034
June 17, 2009
Floats @ 3MO LIBOR + 2.65%
EFSC Statutory Trust III
11,341
11,341 December 15, 2034
December 15, 2009
Floats @ 3MO LIBOR + 1.97%
EFSC Clayco Statutory Trust II
4,124
4,124 September 15, 2035
September 15, 2010
Floats @ 3MO LIBOR + 1.83%
EFSC Statutory Trust IV
10,310
10,310 December 15, 2035
December 15, 2010
Floats @ 3MO LIBOR + 1.44%
EFSC Statutory Trust V
4,124
4,124 September 15, 2036
September 15, 2011
Floats @ 3MO LIBOR + 1.60%
EFSC Capital Trust VI
14,433
14,433 March 30, 2037
March 30, 2012
Floats @ 3MO LIBOR + 1.60%
EFSC Capital Trust VII
4,124
4,124 December 15, 2037
December 15, 2012
Floats @ 3MO LIBOR + 2.25%
Total subordinated debentures
$ 56,807
$ 56,807
The subordinated debentures, which are the sole assets of the trusts, are subordinate and junior in right of payment to
all present and future senior and subordinated indebtedness and certain other financial conditions of the Company.
The Company fully and unconditionally guarantees each trust's securities obligations. Under current regulations, the
trust preferred securities are included in Tier 1 capital for regulatory capital purposes, subject to certain limitations.
The securities are redeemable in whole or in part on or after their respective call dates. Mandatory redemption dates
may be shortened if certain conditions are met. The securities are classified as subordinated debentures in the Company's
consolidated balance sheets. Interest on the subordinated debentures held by the trusts is recorded as interest expense
in the Company's consolidated statements of operations. The Company's investment of $1.7 million at December 31,
2015, in these trusts is included in other investments in the consolidated balance sheets.
On August 15, 2013, the Company converted $20.0 million of its trust preferred in EFSC Capital Trust VIII into 1.2
million shares of common stock. The Company issued 25,060 shares of additional common stock as an inducement
for the conversion. The inducement resulted in a $0.4 million expense recorded in Other noninterest expense during
2013. On March 14, 2014, the remaining $5.0 million trust preferred securities issued through EFSC Capital Trust
VIII were converted into 287,852 shares of the Company's common stock at a conversion price of $17.37.
NOTE 12 - FEDERAL HOME LOAN BANK ADVANCES
FHLB advances are collateralized by 1-4 family residential real estate loans, business loans and certain commercial
real estate loans. At December 31, 2015 and 2014, the carrying value of the loans pledged to the FHLB of Des Moines
was $633.5 million and $649.7 million, respectively. The secured line of credit had availability of approximately
$239.6 million at December 31, 2015.
The Company also has an $8.3 million investment in the capital stock of the FHLB of Des Moines at December 31,
2015.
The following table summarizes the type, maturity, and rate of the Company's FHLB advances at December 31:
95
(in thousands)
Non-amortizing fixed advance
Non-amortizing fixed advance
Term
Less than 1 year
Greater than 1 year
Total Federal Home Loan Bank Advances
2015
2014
Outstanding
Balance
Weighted
Rate
Outstanding
Balance
Weighted
Rate
$
$
110,000
0.45% $
144,000
—
—%
—
110,000
0.45% $
144,000
0.28%
—%
0.28%
In December 2014, the Company prepaid $50 million of FHLB advances with a weighted average interest rate of
3.17%, and a maturity of 3 years, and incurred a prepayment penalty of $2.9 million for asset/liability management
purposes. In December 2013, the Company prepaid $30.0 million of FHLB advances with a weighted average interest
rate of 4.09%, and a maturity of 3 years, and incurred a prepayment penalty of $2.6 million.
In addition to the above advances, at December 31, 2015, the Company used $11.4 million of collateral value to secure
confirming letters of credit for public unit deposits and industrial development bonds.
NOTE 13 - OTHER BORROWINGS AND NOTES PAYABLE
A summary of other borrowings is as follows:
(in thousands)
Securities sold under repurchase agreements
Secured borrowings
Total
Average balance during the year
Maximum balance outstanding at any month-end
Average interest rate during the year
Average interest rate at December 31
December 31,
$
$
$
2015
270,326
—
270,326
195,328
270,326
$
$
$
2014
230,373
3,810
234,183
184,964
234,183
0.22%
0.16%
0.32%
0.30%
Federal Reserve line
The Bank also has a line with the Federal Reserve Bank of St. Louis which provides additional liquidity to the Company.
As of December 31, 2015, $815.6 million was available under this line. This line is secured by a pledge of certain
eligible loans aggregating $1.1 billion. There were no amounts drawn on the Federal Reserve line of credit as of
December 31, 2015.
96
Term Loan
On November 6, 2012, the Company entered into a $12.0 million unsecured term loan agreement ("Term Loan") with
another bank with the proceeds being used to redeem the Company's preferred stock held by the U.S. Treasury. The
Term Loan was paid off on November 6, 2015, the maturity date of the loan. A summary of the Term Loan is as
follows:
(in thousands)
Term Loan
Average balance during the year
Maximum balance outstanding at any month-end
Weighted average interest rate during the year
Average interest rate at December 31
$
$
December 31,
2015
2014
— $
5,700
$
4,509
5,700
3.01%
—%
6,464
6,900
2.99%
2.94%
NOTE 14 - LITIGATION AND OTHER CONTINGENCIES
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.
NOTE 15 - REGULATORY MATTERS
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum
amounts and ratios (set forth in the following table) of total, Tier 1, and Common equity tier 1 capital to risk-weighted
assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 2015 and 2014, that the
Company met all capital adequacy requirements to which it is subject.
As of December 31, 2015 and 2014, the Bank was categorized as “well capitalized” under the regulatory framework
for prompt corrective action. To be categorized as “well capitalized” the Bank must maintain minimum total risk-
based capital, Tier 1 risk-based capital, Common equity tier 1 risk-based capital, and Tier 1 leverage ratios as set forth
in the table.
97
The actual capital amounts and ratios are presented in the table below:
Actual
For Capital
Adequacy Purposes
To Be Well
Capitalized
Under Applicable
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(in thousands)
As of December 31, 2015:
Total Capital (to Risk Weighted Assets)
Enterprise Financial Services Corp
$ 418,367
11.85% $ 282,442
8.00% $
—
—%
Enterprise Bank & Trust
386,531
10.98
281,632
8.00
352,040
10.00
Tier 1 Capital (to Risk Weighted Assets)
Enterprise Financial Services Corp
Enterprise Bank & Trust
Common Equity Tier 1 Capital (to Risk
Weighted Assets)1
Enterprise Financial Services Corp
Enterprise Bank & Trust
Leverage Ratio (Tier 1 Capital to Average
Assets)
374,676
342,840
10.61
9.74
211,831
211,224
319,553
342,816
9.05
9.74
158,873
158,418
Enterprise Financial Services Corp
Enterprise Bank & Trust
374,676
342,840
10.71
9.84
139,893
139,311
6.00
6.00
4.50
4.50
4.00
4.00
—
281,632
—
228,826
—
174,138
—
8.00
—
6.50
—
5.00
As of December 31, 2014:
Total Capital (to Risk Weighted Assets)
Enterprise Financial Services Corp
$ 369,868
13.40% $ 220,858
8.00% $
—
—%
Enterprise Bank & Trust
343,334
12.51
219,645
8.00
274,556
10.00
Tier 1 Capital (to Risk Weighted Assets)
Enterprise Financial Services Corp
Enterprise Bank & Trust
Leverage Ratio (Tier 1 Capital to Average
Assets)
335,221
308,874
12.14
11.25
110,429
109,823
Enterprise Financial Services Corp
Enterprise Bank & Trust
335,221
308,874
10.48
9.71
96,000
95,411
4.00
4.00
3.00
3.00
—
164,734
—
159,018
—
6.00
—
5.00
1 Not an applicable regulatory ratio until implementation of Basel III in 2015
98
NOTE 16 - COMPENSATION PLANS
The Company has adopted share-based compensation plans to reward and provide long-term incentive for directors
and key employees of the Company. These plans provide for the granting of stock, stock options, stock-settled stock
appreciation rights ("SSARs"), and restricted stock units (“RSUs”), as designated by the Company's Board of Directors
upon the recommendation of the Compensation Committee of the Board. The Company uses authorized and unissued
shares to satisfy share award exercises. At December 31, 2015, there were 415,104 shares available for grant under
the various share-based compensation plans.
Total share-based compensation expense that was charged against income was $3.6 million, $2.9 million, and $5.0
million for the years ended December 31, 2015, 2014, and 2013 respectively. The total income tax benefit/(expense)
recognized in additional paid in capital for share-based compensation arrangements was $0.4 million, $0.2 million,
and $0.2 million for the years ended December 31, 2015, 2014, and 2013, respectively.
Employee Stock Options and Stock-settled Stock Appreciation Rights
In determining compensation cost for stock options and SSARs, the Black-Scholes option-pricing model is used to
estimate the fair value on date of grant. There were no grants of employee stock options or SSARs during the years
ended December 31, 2015, 2014, or 2013.
Stock options have been granted to key employees with exercise prices equal to the market price of the Company's
common stock at the date of grant and 10-year contractual terms. Stock options have a vesting schedule of three to
five years. The SSARs are subject to continued employment, have a 10-year contractual term and vest ratably over
five years. Neither stock options nor SSARs carry voting or dividend rights until exercised. At December 31, 2015,
there was no remaining unrecognized compensation expense related to stock options and SSARs and all outstanding
awards are vested. Various information related to the stock options and SSARs is shown below.
(in thousands)
Compensation expense
Intrinsic value of option exercises on date of exercise
Cash received from the exercise of stock options
2015
2014
2013
$
$
$
50
74
126
$
$
$
103
226
149
$
$
$
213
300
2,040
Following is a summary of the employee stock option and SSAR activity for 2015.
(in thousands, except share and per share data)
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Outstanding at January 1, 2015
401,581
$
19.24
Granted
Exercised
Forfeited
Outstanding at December 31, 2015
Exercisable at December 31, 2015
—
(13,478)
—
388,103
388,103
$
$
—
21.54
—
19.15
19.15
2.8 years
2.8 years
$
$
3,569
3,569
99
Restricted Stock Units
The Company awards nonvested stock, in the form of RSUs to employees. RSUs are subject to continued employment
and vest ratably over three to five years. Vesting is accelerated upon a change in control or the employee meeting
certain retirement criteria. RSUs do not carry voting or dividend rights until vested. Sales of the units are restricted
prior to vesting. Various information related to the RSUs is shown below.
(in thousands)
Compensation expense
Total fair value at vesting date
Total unrecognized compensation cost for nonvested stock units
2015
2014
2013
$
$
725
809
942
$
945
913
1,462
1,142
828
2,168
Expected years to recognize unearned compensation
1.7 years
2.7 years
3.6 years
A summary of the status of the Company's RSU awards as of December 31, 2015 and changes during the year then
ended is presented below.
Outstanding at January 1, 2015
Granted
Vested
Forfeited
Outstanding at December 31, 2015
Weighted
Average
Grant Date
Fair Value
13.81
20.69
13.79
13.33
14.31
Shares
139,849
$
6,088
(58,679)
(904)
86,354
$
Stock Plan for Non-Management Directors
The Company has adopted a Stock Plan for Non-Management Directors, which provides for issuing up to 200,000
shares of common stock to non-management directors as compensation in lieu of cash. At December 31, 2015, there
were 42,222 shares of stock available for issuance under the Stock Plan for Non-Management Directors.
Various information related to the Director Plan is shown below.
(in thousands, except share and per share data)
2015
2014
2013
Shares issued
Weighted average fair value
Compensation expense
16,283
24.43
373
$
$
23,135
19.20
329
$
$
16,990
15.40
262
$
$
Employee Stock Issuance
Restricted stock was issued to certain key employees as part of their compensation. The restricted stock may be in the
form of a one-time award or paid in pro rata installments. The stock is restricted for at least 2 years and upon issuance
may be fully vested or vest over 5 years. The Company recognized $0.2 million, $0.1 million, and $0.6 million of
stock-based compensation expense for the shares issued to the employees in 2015, 2014, and 2013, respectively. The
Company issued 14,110, 34,034, and 37,943 shares in 2015, 2014, and 2013, respectively.
Long-term incentives
The Company has entered into long-term incentive agreements with certain key employees. These awards are
conditioned on certain performance criteria and market criteria measured against a group of peer banks over a 3 year
period for each grant. The awards contain minimum (threshold), target, and maximum (exceptional) performance
levels. In the event of a change in control, as defined in the plan, the awards will vest at a minimum of the target level.
The amount of the awards are determined at the end of the 3 year vesting and performance period. In January 2016,
100
the Company issued 159,094 shares to employees upon completion of the 2013-2015 performance cycle. In February
2015, the Company issued 122,470 shares to employees upon completion of the 2012-2014 performance cycle. In
February 2014, the Company issued 146,700 shares to employees upon completion of the 2011-2013 performance
cycle. Information related to the outstanding awards at December 31, 2015 is shown below.
(in thousands, except share and per share data)
2014 - 2016 Cycle
2015 - 2017 Cycle
Shares issuable at target
Maximum shares issuable
Unrecognized compensation cost
Weighted average grant date fair value
$
$
107,642
141,577
746
16.84
$
$
126,000
157,250
1,454
19.21
The Company recorded $2.7 million, $1.8 million and $3.2 million of stock-based compensation expense for these
awards during 2015, 2014 and 2013, respectively.
401(k) plans
The Company has a 401(k) savings plan which covers substantially all full-time employees over the age of 21. The
amount charged to expense for the Company's contributions to the plan was $1.6 million, $1.4 million and $1.2 million
for 2015, 2014, and 2013, respectively.
101
NOTE 17 - INCOME TAXES
The components of income tax expense for the years ended December 31 are as follows:
(in thousands)
Current:
Federal
State and local
Total current
Deferred:
Federal
State and local
Total deferred
Years ended December 31,
2015
2014
2013
$
22,916
$
9,399
$
2,798
25,714
(5,266)
(497)
(5,763)
19,951
195
9,594
3,908
369
4,277
$
13,871
$
24,029
2,890
26,919
(9,393)
(550)
(9,943)
16,976
Total income tax expense
$
A reconciliation of expected income tax expense, computed by applying the statutory federal income tax rate of 35%
in 2015, 2014, and 2013 to income before income taxes and the amounts reflected in the consolidated statements of
operations is as follows:
(in thousands)
Years ended December 31,
2015
2014
2013
Income tax expense at statutory rate
$
20,440
$
14,365
$
17,528
Increase (reduction) in income tax resulting from:
Tax-exempt income, net
State and local income taxes, net
Bank-owned life insurance, net
Non-deductible expenses
Change in estimated rate for deferred taxes
Tax benefits of LIHTC investments, net
Other, net
Total income tax expense
$
(931)
1,414
(462)
259
—
(179)
(590)
19,951
(857)
741
(535)
290
—
(158)
25
$
13,871
$
(1,128)
1,314
(484)
222
336
(204)
(608)
16,976
The amount of tax credits and other tax benefits from low-income housing tax credit ("LIHTC") investments recognized
during the year were $1.1 million during each of the years ended December 31, 2015, 2014, and 2013. The amount
recognized as a component of income tax expense per the table above was $0.3 million for the year ended December 31,
2015, and $0.2 million for the years ended December 31, 2014 and 2013. As of December 31, 2015 and 2014, the
carrying value of the investments related to low-income housing tax credits was $2.3 million and $3.2 million,
respectively. No impairment losses have been recognized from forfeiture or ineligibility of tax credits or other
circumstances during the life of any of the investments. As of December 31, 2015, the Company has future capital
commitments of $0.3 million related to low-income housing tax credit investments. The capital commitments are
expected to be called between the years 2016 - 2024.
102
A net deferred income tax asset of $38.5 million and $31.4 million is included in Other assets in the consolidated
balance sheets at December 31, 2015 and 2014, respectively. The tax effect of temporary differences that gave rise to
significant portions of the deferred tax assets and deferred tax liabilities is as follows:
(in thousands)
Deferred tax assets:
Allowance for loan losses
Basis difference on PCI assets, net
Basis difference on Other real estate
Deferred compensation
Goodwill and other intangible assets
Accrued compensation
Other, net
Total deferred tax assets
Deferred tax liabilities:
FDIC loss share receivable, net
Unrealized gains on securities available for sale
State tax credits held for sale, net of economic hedge
Core deposit intangibles
Total deferred tax liabilities
Net deferred tax asset
Years ended December 31,
2015
2014
$
16,705
$
8,806
328
4,509
6,973
2,222
907
17,463
5,477
516
4,854
9,001
2,364
979
$
$
40,450
$
40,654
— $
183
594
1,178
1,955
5,542
1,091
1,051
1,595
9,279
$
38,495
$
31,375
A valuation allowance is provided on deferred tax assets when it is more likely than not that some portion of the assets
will not be realized. The Company did not have any valuation allowances for federal or state income taxes as of
December 31, 2015 or 2014.
The Company and its subsidiaries file income tax returns in the federal jurisdiction and in nine states. The Company
is no longer subject to federal, state or local income tax audits by tax authorities for years before 2012, with the
exception of 2011 being an open year by one state taxing authority. The Company is not currently under audit by any
taxing jurisdiction.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense and classifies
such interest and penalties in the liability for unrecognized tax benefits. The amounts accrued for interest and penalties
as of December 31, 2015, 2014, and 2013 were not significant.
As of December 31, 2015, the gross amount of unrecognized tax benefits was $1.4 million and the total amount of net
unrecognized tax benefits that would impact the effective tax rate, if recognized, was $0.9 million. As of December 31,
2014 and 2013, the total amount of the net unrecognized tax benefits that would impact the effective tax rate, if
recognized, was $1.3 million and $0.8 million, respectively. The Company believes it is reasonably possible that the
gross amount of unrecognized benefits will be reduced by approximately $0.5 million as a result of a lapse of statute
of limitations in the next 12 months.
103
The activity in the gross liability for unrecognized tax benefits was as follows:
(in thousands)
Balance at beginning of year
2015
2014
2013
$
1,884
$
1,257
$
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Settlements or lapse of statute of limitations
Balance at end of year
$
230
46
(437)
(364)
1,359
$
401
523
—
(297)
1,884
$
1,148
233
53
—
(177)
1,257
NOTE 18 - COMMITMENTS
The Company issues financial instruments in the normal course of the business of meeting the financing needs of its
customers. These financial instruments include commitments to extend credit and standby letters of credit. These
instruments may involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized
in the consolidated balance sheets.
The Company’s extent of involvement and maximum potential exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend credit and standby letters of credit is not more
than the contractual amount of these instruments.
The Company uses the same credit policies in making commitments and conditional obligations as it does for financial
instruments included on its consolidated balance sheets. At December 31, 2015, there were $0.01 million of unadvanced
commitments on impaired loans. Other liabilities include approximately $0.3 million for estimated losses attributable
to the unadvanced commitments. At December 31, 2014, there were $0.2 million of unadvanced commitments on
impaired loans.
The contractual amounts of off-balance-sheet financial instruments as of December 31, 2015, and December 31, 2014,
are as follows:
(in thousands)
December 31,
2015
December 31,
2014
Commitments to extend credit
$
1,140,028
$
947,424
Standby letters of credit
54,648
50,108
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the contract. Commitments usually have fixed expiration dates or other termination clauses, may have
significant usage restrictions, and may require payment of a fee. Of the total commitments to extend credit at
December 31, 2015, and December 31, 2014, approximately $93.9 million and $65.9 million, respectively, represent
fixed rate loan commitments. Since certain of the commitments may expire without being drawn upon or may be
revoked, the total commitment amounts do not necessarily represent future cash obligations. The Company evaluates
each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held
varies, but may include accounts receivable, inventory, premises and equipment, and real estate.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a
customer to a third party. These standby letters of credit are issued to support contractual obligations of the Company’s
customers. The credit risk involved in issuing letters of credit is essentially the same as the risk involved in extending
loans to customers. The approximate remaining term of standby letters of credit range from 1 month to 2 years and 3
months at December 31, 2015.
104
NOTE 19 - FAIR VALUE MEASUREMENTS
The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability
in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal
market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent
with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently
applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset
or liability. ASC Topic 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy for valuation
inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest
priority to unobservable inputs. The fair value hierarchy is as follows:
• Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity
has the ability to access at the measurement date.
• Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability,
either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets,
quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted
prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit
risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.
• Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity's
own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
105
Fair value on a recurring basis
The following table summarizes financial instruments measured at fair value on a recurring basis as of December 31,
2015 and 2014, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair
value.
Quoted Prices
in
Active Markets
for Identical
Assets
(Level 1)
December 31, 2015
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total Fair
Value
(in thousands)
Assets
Securities available for sale
Obligations of U.S. Government-sponsored enterprises $
Obligations of states and political subdivisions
Residential mortgage-backed securities
Total securities available for sale
$
State tax credits held for sale
Derivative financial instruments
Total assets
Liabilities
Derivative financial instruments
Total liabilities
$
$
$
— $
—
—
— $
—
—
— $
— $
— $
99,008
38,624
311,061
448,693
—
1,155
449,848
1,155
1,155
$
$
$
$
$
— $
3,077
—
3,077
5,941
—
9,018
$
$
99,008
41,701
311,061
451,770
5,941
1,155
458,866
— $
— $
1,155
1,155
Quoted Prices
in
Active Markets
for Identical
Assets
(Level 1)
December 31, 2014
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total Fair
Value
(in thousands)
Assets
Securities available for sale
Obligations of U.S. Government-sponsored enterprises $
Obligations of states and political subdivisions
Residential mortgage-backed securities
Total securities available for sale
State tax credits held for sale
Derivative financial instruments
Total assets
Liabilities
Derivative financial instruments
Total liabilities
$
$
$
$
— $
—
—
— $
—
—
— $
— $
— $
91,826
31,822
273,439
397,087
—
909
397,996
907
907
$
$
$
$
$
— $
3,059
—
3,059
11,689
—
14,748
$
$
91,826
34,881
273,439
400,146
11,689
909
412,744
— $
— $
907
907
•
Securities available for sale. Securities classified as available for sale are reported at fair value utilizing Level
2 and Level 3 inputs. Fair values for Level 2 securities are based upon dealer quotes, market spreads, the U.S.
Treasury yield curve, trade execution data, market consensus prepayment speeds, credit information and the
bond's terms and conditions at the security level. At December 31, 2015, Level 3 securities available for sale
consist primarily of three Auction Rate Securities that are valued based on the securities' estimated cash flows,
yields of comparable securities, and live trading levels.
106
•
State tax credits held for sale. At December 31, 2015, of the $45.9 million of state tax credits held for sale on
the consolidated balance sheet, approximately $5.9 million were carried at fair value. The remaining $39.9
million of state tax credits were accounted for at cost. The Company elected not to account for the state tax
credits purchased since 2010 at fair value in order to limit the volatility of the fair value changes in our
consolidated statements of operations.
The Company is not aware of an active market that exists for the 10-year streams of state tax credit financial
instruments. However, the Company’s principal market for these tax credits consists of Missouri state residents
who buy these credits and local and regional accounting firms who broker them. As such, the Company
employed a discounted cash flow analysis (income approach) to determine the fair value.
The fair value measurement is calculated using an internal valuation model with market data including
discounted cash flows based upon the terms and conditions of the tax credits. If the underlying project remains
in compliance with the various federal and state rules governing the tax credit program, each project will
generate about 10 years of tax credits. The inputs to the discounted cash flow calculation include: the amount
of tax credits generated each year, the anticipated sale price of the tax credit, the timing of the sale and a
discount rate. The discount rate is estimated using the LIBOR swap curve at a point equal to the remaining
life in years of credits plus a 205 basis point spread. With the exception of the discount rate, the other inputs
to the fair value calculation are observable and readily available. The discount rate is considered a Level 3
input because it is an “unobservable input” and is based on the Company’s assumptions. An increase in the
discount rate utilized would generally result in a lower estimated fair value of the tax credits. Alternatively,
a decrease in the discount rate utilized would generally result in a higher estimated fair value of the tax credits.
Given the significance of this input to the fair value calculation, the state tax credit assets are reported as Level
3 assets.
Economically, the Company equates the state tax credits to a fixed rate loan. After considering various risks,
such as credit risk, compliance risk, and recapture risk, management concluded the state tax credits are
equivalent to a fixed rate loan priced at Prime minus 75 basis points. When pricing a fixed rate loan, most
banks utilize the Prime-based swap curve, which is based on the LIBOR swap curve plus a prime equivalent
spread of 265 to 285 basis points depending on market pricing and the maturity of the underlying loan. The
Prime-based swap curve is available daily on Bloomberg or other national pricing services. As a result, at
December 31, 2015 and 2014, management concluded the spread of 205 basis points to the LIBOR curve
should be utilized in the fair value calculation.
At December 31, 2015, the discount rates utilized in our state tax credits fair value calculation ranged from
2.30% to 4.82%. Resulting changes in the fair value of the state tax credits held for sale decreased Gain on
state tax credits, net in the consolidated statement of operations by $1.2 million for the year ended December 31,
2015.
• Derivatives. Derivatives are reported at fair value utilizing Level 2 inputs. The Company obtains counterparty
quotations to value its interest rate swaps and caps. In addition, the Company validates the counterparty
quotations with third party valuation sources. Derivatives with negative fair values are included in Other
liabilities in the consolidated balance sheets. Derivatives with positive fair value are included in Other assets
in the consolidated balance sheets.
107
Level 3 financial instruments
The following table presents the changes in Level 3 financial instruments measured at fair value on a recurring basis
as of December 31, 2015 and 2014.
• Purchases, sales, issuances and settlements. There were no Level 3 purchases during the year ended
December 31, 2015.
• Transfers in and/or out of Level 3. There were no transfers in and/or out of Level 3 for the years ending
December 31, 2015 and 2014.
(in thousands)
Beginning balance
Total gains:
Included in other comprehensive income
Purchases, sales, issuances and settlements:
Purchases
Transfer in and/or out of Level 3
Ending balance
Change in unrealized gains (losses) relating to
assets still held at the reporting date
$
$
$
Securities available for sale, at fair value
Years ended December 31,
2015
2014
3,059
$
3,040
18
—
—
19
—
—
3,077
$
3,059
18
$
19
(in thousands)
Beginning balance
Total gains:
Included in earnings
Purchases, sales, issuances and settlements:
Sales
Ending balance
Change in unrealized gains (losses) relating to
assets still held at the reporting date
State tax credits held for sale, at fair value
Years ended December 31,
2015
2014
11,689
$
16,491
406
558
(6,154)
5,941
$
(5,360)
11,689
(1,212) $
(868)
$
$
$
108
Fair value on a non-recurring basis
Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis; that is, the instruments
are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances
(for example, when there is evidence of impairment).
•
Impaired loans. Impaired loans are included as Portfolio loans on the Company's consolidated balance sheets with
amounts specifically reserved for credit impairment in the Allowance for loan losses. On a quarterly basis, fair
value adjustments are recorded on impaired loans to account for (1) partial write-downs that are based on the
current appraised or market-quoted value of the underlying collateral or (2) the full charge-off of the loan carrying
value. In some cases, the properties for which market quotes or appraised values have been obtained are located
in areas where comparable sales data is limited, outdated, or unavailable. In addition, the Company may adjust
the valuations based on other relevant market conditions or information. Accordingly, fair value estimates,
including those obtained from real estate brokers or other third-party consultants, for collateral-dependent impaired
loans are classified in Level 3 of the valuation hierarchy.
• Other Real Estate. These assets are reported at the lower of the loan carrying amount at foreclosure or fair value.
Fair value is based on third party appraisals of each property and the Company's judgment of other relevant market
conditions. These are considered Level 3 inputs.
The following table presents financial instruments and non-financial assets measured at fair value on a non-recurring
basis as of December 31, 2015 and 2014.
(1)
(1)
(1)
(1)
December 31, 2015
Quoted Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Total Fair
Value
Significant
Unobservable
Inputs
(Level 3)
Total losses for
the year ended
December 31,
2015
$
$
2,561
753
3,314
$
$
— $
—
— $
— $
—
— $
2,561 $
753
3,314 $
(6,091)
(83)
(6,174)
(1)
(1)
(1)
(1)
December 31, 2014
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Total Fair
Value
Significant
Unobservable
Inputs
(Level 3)
Total losses for
the year ended
December 31,
2014
$
$
6,726
3,788
10,514
$
$
— $
—
— $
— $
—
6,726 $
3,788
— $
10,514 $
(5,556)
(696)
(6,252)
(in thousands)
Impaired loans
Other real estate
Total
(in thousands)
Impaired loans
Other real estate
Total
(1) The amounts represent only balances measured at fair value during the period and still held as of the reporting date.
Impaired loans are reported at the fair value of the underlying collateral. Fair values for impaired loans are obtained
from current appraisals by qualified licensed appraisers or independent valuation specialists. Other real estate owned
is adjusted to fair value upon foreclosure of the underlying loan. Subsequently, foreclosed assets are carried at the
109
lower of carrying value or fair value less costs to sell. Fair value of other real estate is based upon the current appraised
values of the properties as determined by qualified licensed appraisers and the Company’s judgment of other relevant
market conditions. Certain state tax credits are reported at cost.
Carrying amount and fair value at December 31, 2015 and 2014
Following is a summary of the carrying amounts and fair values of the Company’s financial instruments on the
consolidated balance sheets at December 31, 2015 and 2014.
(in thousands)
Balance sheet assets
Cash and due from banks
Federal funds sold
Interest-bearing deposits
Securities available for sale
Securities held to maturity
Other investments, at cost
Loans held for sale
Derivative financial instruments
Portfolio loans, net
State tax credits, held for sale
Accrued interest receivable
Balance sheet liabilities
Deposits
Subordinated debentures
Federal Home Loan Bank advances
Other borrowings
Derivative financial instruments
Accrued interest payable
December 31, 2015
December 31, 2014
Carrying
Amount
Estimated
fair value
Carrying
Amount
Estimated
fair value
$
47,935
91
47,131
451,770
43,714
17,455
6,598
1,155
2,781,879
45,850
8,399
2,784,591
56,807
110,000
270,326
1,155
629
$
47,935
91
47,131
451,770
43,441
17,455
6,598
1,155
2,782,704
49,588
8,399
2,784,654
35,432
109,994
270,286
1,155
629
$
42,903
35
63,058
400,146
45,985
17,037
4,033
909
2,487,424
38,309
7,956
2,491,510
56,807
144,000
239,883
907
843
$
42,903
35
63,058
400,146
45,795
17,037
4,033
909
2,482,700
42,970
7,956
2,494,624
34,124
144,000
239,950
907
843
110
The following table presents the level in the fair value hierarchy for the estimated fair values of only the Company’s
financial instruments that are not already on the consolidated balance sheets at fair value at December 31, 2015, and
December 31, 2014.
(in thousands)
Financial Assets:
Estimated Fair Value Measurement at Reporting Date Using
Level 1
Level 2
Level 3
Balance at
December 31, 2015
Securities held to maturity
$
— $
43,441
$
— $
Portfolio loans, net
State tax credits, held for sale
Financial Liabilities:
Deposits
Subordinated debentures
Federal Home Loan Bank advances
Other borrowings
—
—
2,428,403
—
—
—
—
—
—
35,432
109,994
270,286
2,782,704
43,647
356,251
—
—
—
43,441
2,782,704
43,647
2,784,654
35,432
109,994
270,286
(in thousands)
Financial Assets:
Estimated Fair Value Measurement at Reporting Date Using
Level 2
Level 1
Level 3
Balance at
December 31, 2014
Securities held to maturity
$
— $
45,795
$
— $
Portfolio loans, net
State tax credits, held for sale
Financial Liabilities:
Deposits
Subordinated debentures
Federal Home Loan Bank advances
Other borrowings
—
—
1,986,158
—
—
—
—
—
—
34,124
144,000
239,950
2,482,700
31,281
508,466
—
—
—
45,795
2,482,700
31,281
2,494,624
34,124
144,000
239,950
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for
which it is practical to estimate such value:
Cash, Federal funds sold, and other short-term instruments
For cash and due from banks, federal funds purchased, interest-bearing deposits, and accrued interest receivable
(payable), the carrying amount is a reasonable estimate of fair value, as such instruments reprice in a short time period
(Level 1).
Securities available for sale and held to maturity
The Company obtains fair value measurements for debt instruments from an independent pricing service. The fair
value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S.
Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information
and the bond's terms and conditions (Level 2).
Other investments
Other investments, which primarily consists of membership stock in the FHLB, is reported at cost, which approximates
fair value (Level 2).
Loans held for sale
These loans consist of mortgages that are sold on the secondary market generally within three months of origination.
They are reported at cost, which approximates fair value (Level 2).
111
Portfolio loans, net
The fair value of adjustable-rate loans approximates cost. The fair value of fixed-rate loans is estimated by discounting
the future cash flows using the current rates at which similar loans would be made to borrowers for the same remaining
maturities. The fair value of the acquired loans are based on the present value of expected future cash flows (Level
3). The method of estimating fair value does not incorporate the exit-price concept of fair value prescribed by ASC
Topic 820.
State tax credits held for sale
The fair value of state tax credits held for sale is calculated using an internal valuation model with unobservable market
data as discussed in further detail above (Level 3).
Derivative financial instruments
The fair value of derivative financial instruments is based on quoted market prices by the counterparty and verified
by the Company using public pricing information (Level 2).
Deposits
The fair value of demand deposits, interest-bearing transaction accounts, money market accounts and savings deposits
is the amount payable on demand at the reporting date (Level 1). The fair value of fixed-maturity certificates of deposit
is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining
maturities (Level 3).
Subordinated debentures
Fair value of subordinated debentures is based on discounting the future cash flows using rates currently offered for
financial instruments of similar remaining maturities (Level 2).
Federal Home Loan Bank advances
The fair value of the FHLB advances is based on the discounted value of contractual cash flows. The discount rate
is estimated using current rates on borrowed money with similar remaining maturities (Level 2).
Other borrowed funds
Other borrowed funds include customer repurchase agreements, federal funds purchased, notes payable, and secured
borrowings related to loan participations. The fair value of federal funds purchased, customer repurchase agreements
and notes payable are assumed to be equal to their carrying amount since they have an adjustable interest rate (Level
2).
Commitments to extend credit and standby letters of credit
The fair value of commitments to extend credit and standby letters of credit are estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining terms of the agreements, the likelihood of
the counterparties drawing on such financial instruments, and the present creditworthiness of such counterparties (Level
2). The Company believes such commitments have been made on terms which are competitive in the markets in which
it operates; however, no premium or discount is offered thereon and accordingly, the Company has not assigned a
value to such instruments for purposes of this disclosure.
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about
the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant
judgment, and therefore, cannot be determined with precision. Such estimates include the valuation of loans, goodwill,
intangible assets, and other long-lived assets, along with assumptions used in the calculation of income taxes, among
others. These estimates and assumptions are based on management's best estimates and judgment. Management
evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including
the current economic environment, which management believes to be reasonable under the circumstances. We adjust
such estimates and assumptions when facts and circumstances dictate. Decreasing real estate values, illiquid credit
markets, volatile equity markets, and declines in consumer spending have combined to increase the uncertainty inherent
in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual
112
results could differ significantly from these estimates. Changes in estimates resulting from continuing changes in the
economic environment will be reflected in the financial statement in future periods. In addition, these estimates do
not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings
of a particular financial instrument. Fair value estimates are based on existing on-balance and off-balance-sheet
financial instruments without attempting to estimate the value of anticipated future business and the value of assets
and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization
of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered
in many of the estimates.
NOTE 20 - PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
Condensed Balance Sheets
(in thousands)
Cash
Assets
Investment in Enterprise Bank & Trust
Investment in Enterprise Financial CDE, LLC
Other assets
Total assets
Liabilities and Shareholders' Equity
Subordinated debentures
Notes payable
Accounts payable and other liabilities
Shareholders' equity
Total liabilities and shareholders' equity
December 31,
2015
2014
$
$
$
$
12,032
$
374,092
1,510
20,357
407,991
$
56,807
$
—
355
350,829
407,991
$
14,532
344,995
772
19,223
379,522
56,807
5,700
774
316,241
379,522
113
Condensed Statements of Operations
Years ended December 31,
2015
2014
2013
(in thousands)
Income:
Dividends from subsidiaries
$
10,000
$
10,000
$
Other
Total income
Expenses:
249
10,249
225
10,225
Interest expense-subordinated debentures
Interest expense-notes payable
Other expenses
Total expenses
Income before taxes and equity in undistributed
earnings of subsidiaries
Income tax benefit
1,248
144
3,823
5,215
5,034
2,118
1,322
193
4,402
5,917
4,308
2,305
Net income before equity in undistributed
earnings of subsidiaries
7,152
6,613
Equity in undistributed earnings of subsidiaries
Net income and comprehensive income
$
31,298
38,450
$
20,560
27,173
$
10,000
256
10,256
2,884
396
5,142
8,422
1,834
3,394
5,228
27,876
33,104
114
Condensed Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Share-based compensation
Net income of subsidiaries
Dividends from subsidiaries
Excess tax expense of share-based compensation
Other, net
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of other investments
Proceeds from distributions on other investments
Net cash used by investing activities
Cash flows from financing activities:
Repayments of notes payable
Cash dividends paid
Excess tax benefit of share-based compensation
Issuance of common stock
Common stock repurchased
Proceeds from the issuance of equity instruments, net
Net cash used by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Years Ended December 31,
2015
2014
2013
$
38,450
$
27,173
$
33,104
3,601
(41,298)
10,000
(449)
848
11,152
(2,832)
880
(1,952)
(5,700)
(5,259)
449
2
—
(1,192)
(11,700)
(2,500)
14,532
2,950
(30,560)
10,000
(205)
704
10,062
(2,224)
176
(2,048)
(4,800)
(4,177)
205
2
—
(681)
(9,451)
(1,437)
15,969
$
12,032
$
14,532
$
5,049
(37,876)
10,000
(222)
2,004
12,059
(761)
243
(518)
(1,200)
(3,947)
222
13
(1,006)
2,266
(3,652)
7,889
8,080
15,969
115
NOTE 21 - QUARTERLY CONDENSED FINANCIAL INFORMATION (Unaudited)
The following table presents the unaudited quarterly financial information for the years ended December 31, 2015 and
2014:
(in thousands, except per share data)
Interest income
Interest expense
Net interest income
Provision for portfolio loan losses
Provision (provision reversal) for PCI loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Income before income tax expense
Income tax expense
Net income
Earnings per common share:
Basic
Diluted
(in thousands, except per share data)
Interest income
Interest expense
Net interest income
Provision for portfolio loan losses
Provision (provision reversal) for PCI loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Income before income tax expense
Income tax expense
Net income
Earnings per common share:
Basic
Diluted
2015
4th
Quarter
3rd
Quarter
2nd
Quarter
1st
Quarter
$
35,096
$
33,180
$
32,352
$
3,017
32,079
543
(917)
32,453
6,557
22,886
16,124
5,445
10,679
0.53
0.52
$
$
$
$
3,174
30,006
599
(227)
29,634
4,729
19,932
14,431
4,722
9,709
0.49
0.48
$
$
2014
3,072
29,280
2,150
—
27,130
5,806
19,458
13,478
4,762
8,716
0.44
0.43
$
$
32,151
3,106
29,045
1,580
(3,270)
30,735
3,583
19,950
14,368
5,022
9,346
0.47
0.46
4th
Quarter
3rd
Quarter
2nd
Quarter
1st
Quarter
$
34,385
$
31,036
$
32,309
$
3,569
30,816
1,968
126
28,722
4,852
24,795
8,779
2,812
3,592
27,444
66
(1,877)
29,255
4,452
21,121
12,586
4,388
3,567
28,742
1,348
(470)
27,864
3,405
20,445
10,824
3,664
5,967
$
8,198
$
7,160
$
34,024
3,658
30,366
1,027
3,304
26,035
3,922
21,102
8,855
3,007
5,848
$
0.30
0.30
$
0.41
0.41
$
0.36
0.36
0.30
0.30
$
$
116
NOTE 22 - NEW AUTHORITATIVE ACCOUNTING GUIDANCE
FASB ASU 2014-09, "Revenue from Contracts with Customers" In May 2014, the FASB issued ASU No. 2014-09,
“Revenue from Contracts with Customers.” The objective of ASU 2014-09 is to establish a single comprehensive
model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of
the existing revenue recognition guidance, including industry-specific guidance. The core principle of ASU 2014-09
is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying
the new guidance, an entity will (1) identify the contract(s) with a customer; (2) identify the performance obligations
in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract’s performance
obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies
to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards
Codification. The new guidance was originally effective for annual reporting periods (including interim periods within
those periods) beginning after December 15, 2016 for public companies. In August 2015, the FASB issued ASU
2015-14, which defers the effective date of this guidance to annual reporting periods beginning after December 15,
2017 for public companies, and permits early adoption on a limited basis. Entities have the option of using either a
full retrospective or modified approach to adopt ASU 2014-09. The Company is currently evaluating the new guidance
and has not determined the impact this standard may have on its financial statements, nor decided upon the method of
adoption.
FASB ASU 2014-11, "Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase
Financings, and Disclosures" In June 2014, the FASB issued ASU No. 2014-11, "Transfers and Servicing (Topic
860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures." The objective of ASU
2014-11 is to amend the accounting for certain secured financing transactions, and requires enhanced disclosures
with respect to transactions recognized as sales in which exposure to the derecognized asset is retained through a
separate agreement with the counterparty. In addition, the guidance requires enhanced disclosures with respect to
the types and quality of financial assets pledged in secured financing transactions. The guidance became effective
in the first quarter of 2015, except for the disclosures regarding the types and quality of financial assets pledged,
which became effective in the second quarter of 2015. The adoption of this guidance did not have a material impact
on the Company's consolidated balance sheets or statements of operations.
FASB ASU 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis" In February 2015,
the FASB issued ASU No. 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis,"
which changes the guidance with respect to the analysis that a reporting entity must perform to determine whether it
should consolidate certain types of legal entities. All legal entities are subject to reevaluation under the revised
consolidation model. The new guidance affects the following areas: (1) limited partnerships and similar legal
entities, (2) evaluating fees paid to a decision maker or a service provider as a variable interest, (3) the effect of fee
arrangements on the primary beneficiary determination, (4) the effect of related parties on the primary beneficiary
determination, and (5) certain investment funds. This standard became effective in the first quarter of 2016. Early
adoption is permitted. The adoption of this guidance will not have a material impact on the Company's
consolidated balance sheets or statements of operations.
FASB ASU 2015-03, "Interest-Imputation of Interest (Subtopic 835-30): FASB Accounting Standards
Codification-Simplifying the Presentation of Debt Issuance Costs" In April 2015, the FASB issued ASU No.
2015-03, "Interest-Imputation of Interest (Subtopic 835-30): FASB Accounting Standards Codification-Simplifying
the Presentation of Debt Issuance Costs." ASU 2015-03 requires that debt issuance costs related to a recognized
debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability.
The objective is to reduce cost and complexity in accounting standards while maintaining the usefulness of
information being provided to users of financial statements. The guidance became effective in the first quarter of
2016 and requires the Company to apply the new guidance on a retrospective basis upon adoption. Early adoption
is permitted for financial statements that have not been previously issued. The adoption of this guidance will not
have a material impact on the Company's consolidated balance sheets.
117
FASB ASU 2016-01 "Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of
Financial Assets and Financial Liabilities" In January 2016, the FASB issued ASU No. 2016-01, "Financial
Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial
Liabilities." ASU 2016-01 requires equity investments to be measured at fair value through earnings, and
eliminates the available-for-sale classification for equity securities with readily determinable fair values. For
financial liabilities where the fair value option has been elected, changes in fair value due to instrument-specific
credit risk must be recognized in other comprehensive income. When measuring the fair value of financial
instruments at amortized cost, the exit price must be used for disclosure purposes. The ASU also requires that
financial assets and liabilities be presented separately in the notes to the financial statements. This ASU becomes
effective for the Company in the first quarter of 2018. Early adoption is permitted. The Company is currently
evaluating the new guidance and has not determined the impact this standard may have on its financial statements,
nor decided upon the method of adoption.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the
Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended, the “Act”) as of December 31, 2015. Based upon this evaluation, our Chief
Executive Officer and our Chief Financial Officer have concluded that as of December 31, 2015, such disclosure
controls and procedures were effective to ensure that information required to be disclosed by the Company in the
reports it files or submits under the Act is accumulated and communicated to the Company’s management (including
the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure, and
is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Management's Assessment of Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial
reporting (as defined in Rule 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended, the
“Act”). The Company’s internal control system is a process designed to provide reasonable assurance to the Company’s
management and Board of Directors regarding the preparation and fair presentation of published financial statements.
The Company’s internal control over financial reporting includes policies and procedures that pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide
reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of America, and that receipts and
expenditures are being made only in accordance with authorizations of management and the directors of the Company;
and provide reasonable assurance regarding prevention or untimely detection of unauthorized acquisition, use or
disposition of the Company’s assets that could have a material effect on the Company’s financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to financial reporting. Further, because
of changes in conditions, the effectiveness of any system of internal control may vary over time. The design of any
internal control system also factors in resource constraints and consideration for the benefit of the control relative to
the cost of implementing the control. Because of these inherent limitations in any system of internal control, management
cannot provide absolute assurance that all control issues and instances of fraud within the Company have been detected.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31,
2015. In making this assessment, management used the criteria set forth by the 2013 Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control - Integrated Framework. Management has concluded
118
that the Company maintained an effective system of internal control over financial reporting based on these criteria
as of December 31, 2015.
The Company’s independent registered public accounting firm, Deloitte & Touche LLP, who audited the consolidated
financial statements, has issued an audit report on the Company’s internal control over financial reporting as of
December 31, 2015, and it is included herein.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f)
and 15d-15(f) under the Act) that occurred during the Company’s quarter ended December 31, 2015 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B: OTHER INFORMATION
Item 1.01. Entry Into a Material Definitive Agreement.
On February 24, 2016, the Company entered into a credit agreement (the “Agreement”) with U.S. Bank National
Association (“U.S. Bank”) pursuant to which U.S. Bank committed, subject to the terms and conditions set forth in
the Agreement, to make a revolving loan facility available to the Company in the maximum principal amount of
$20.0 million (the “Loan”), which matures on February 23, 2017 (the “Termination Date”). The proceeds of the
Loan will be used for general corporate purposes.
The Loan has an annual interest rate of 2.25% plus the one-month LIBOR rate. The Loan also bears a non-usage
fee calculated based on the average daily principal balance of the Loan outstanding during the prior fiscal quarter.
The Agreement contains customary representations, warranties, covenants and events of default, including without
limitation, financial covenants requiring that the Company, or its Bank subsidiary, as applicable, maintain: (1) a
ratio of Loan Loss Reserves to Non-Performing Loans of not less than 80%; (2) a ratio of Non-Performing Assets to
Tangible Primary Capital not to exceed 18%; (3) such capital as may be necessary to be classified as a “well
capitalized” institution under regulatory guidelines; (4) a Total Risk-Based Capital Ratio equal to or greater than
11.25% and 10.5% for the Company and Enterprise Bank, respectively; and (5) a Debt Service Coverage Ratio of
not less than 1.35 to 1. At any time after the occurrence of an event of default under the Agreement, U.S. Bank
may, among other options, terminate its commitment to make loans to the Company and declare any amounts
outstanding under the Agreement immediately due and payable.
The foregoing summary of the Agreement is only a brief description of the terms and conditions, and does not
purport to be a complete description of the rights and obligations of the parties thereunder, and is qualified in its
entirety by the complete terms of the Agreement, a copy of which is attached hereto as Exhibit 10.2 and is
incorporated herein by reference.
Item 2.03. Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet
Arrangement of a Registrant.
The information included above in Item 1.01 of this Form 10-K, Item 9B is incorporated into this Item 2.03 by
reference.
119
PART III
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated herein by reference to the Board and Committee Information
and Executive Officer sections of the Company's Proxy Statement for its annual meeting to be held on Thursday,
May 5, 2016.
ITEM 11: EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the Executive Compensation section of
the Company's Proxy Statement for its annual meeting to be held on Thursday, May 5, 2016.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference to the Information Regarding Beneficial
Ownership section of the Company's Proxy Statement for its annual meeting to be held on Thursday, May 5, 2016.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
The information required by this item is incorporated herein by reference to the Related Person Transactions section
of the Company's Proxy Statement for its annual meeting to be held on Thursday, May 5, 2016.
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to the Fees Paid to Independent Registered Public
Accounting Firm section of the Company's Proxy Statement for its annual meeting to be held on Thursday, May 5,
2016.
120
PART IV
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements
The consolidated financial statements of Enterprise Financial Services Corp and its subsidiaries and independent
auditors' reports are included in Part II (Item 8) of this Form 10-K.
2. Financial Statement Schedules
All financial statement schedules have been omitted, as they are either inapplicable or included in the Notes to
Consolidated Financial Statements.
3. Exhibits
Exhibit
No.
Description
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
Certificate of Incorporation of Registrant, (incorporated herein by reference to Exhibit 3.1 of Registrant's
Registration Statement on Form S-1 filed on December 19, 1996 (File No. 333-14737)).
Amendment to the Certificate of Incorporation of Registrant (incorporated herein by reference to Exhibit 4.2 to
Registrant's Registration Statement on Form S-8 filed on July 1, 1999 (File No. 333-82087)).
Amendment to the Certificate of Incorporation of Registrant (incorporated herein by reference to Exhibit 3.1 to
Registrant's Quarterly Report on Form 10-Q for the period ending September 30, 1999).
Amendment to the Certificate of Incorporation of Registrant (incorporated herein by reference to Exhibit 99.2 to
Registrant's Current Report on Form 8-K filed on April 30, 2002).
Amendment to the Certificate of Incorporation of Registrant (incorporated herein by reference to Appendix A to
Registrant's Proxy Statement on Form 14-A filed on November 20, 2008).
Certificate of Designations of Registrant for Fixed Rate Cumulative Perpetual Preferred Stock, Series A, dated
December 17, 2008 (incorporated herein by reference to Exhibit 3.1 to Registrant's Current Report on Form 8-K filed
on December 23, 2008).
Amendment to the Certificate of Incorporation of Registrant (incorporated herein by reference to Exhibit 3.1 to
the Registrant's Quarterly Report on Form 10-Q for the period ending June 30, 2014).
Amended and Restated Bylaws of Registrant (incorporated herein by reference to Exhibit 3.1 to Registrant's
Current Report on Form 8-K filed on June 12, 2015).
10.1.1*
Key Executive Employment Agreement dated effective as of July 1, 2008 by and between Registrant and Stephen
P. Marsh (incorporated herein by reference to Exhibit 99.1 to Registrant's Current Report on Form 8-K filed on
November 25, 2008), and amended by that First Amendment of Executive Employment Agreement dated as of
December 19, 2008 (incorporated herein by reference to Exhibit 99.6 to Registrant's Current Report on Form 8-K
filed on December 23, 2008).
10.1.2*
Amended and Restated Executive Employment Agreement effective as of August 8, 2014 by and between
Registrant and Frank H. Sanfilippo (incorporated herein by reference to Exhibit 10.1 to Registrant's Quarterly
Report on Form 10-Q for the period ending September 30, 2014).
121
10.1.3*
Key Executive Employment Agreement dated effective as of September 24, 2008, by and between Registrant and
Peter F. Benoist (incorporated herein by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K
filed on September 30, 2008), amended by that First Amendment of Executive Employment Agreement dated as
of December 19, 2008 (incorporated herein by reference to Exhibit 99.3 to Registrant's Current Report on Form 8-
K filed on December 23, 2008), amended by that Second Amendment of Executive Employment Agreement dated
as of March 25, 2013 (incorporated herein by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-
K filed on March 26, 2013), amended by that Third Amendment of Executive Employment Agreement dated as of
February 4, 2014 (incorporated herein by reference to Exhibit 10.1.3 to the Registrant's Annual Report on Form
10-K filed on March 17, 2014) and amended by that Amendment to Executive Employment Agreement dated as
of October 29, 2015 (incorporated herein by reference to Exhibit 10.1.1 to the Registrant's Quarterly Report on
Form 10-Q filed on September 30, 2015).
10.1.4*
Key Executive Employment Agreement dated effective as of October 16, 2002, by and between Registrant and
Richard C. Leuck, and amended by that First Amendment of Executive Employment Agreement dated as of
December 31, 2008 (incorporated herein by reference to Exhibit 10.1.4 to Registrant's Annual Report on Form 10-
K filed on March 15, 2013).
10.1.5*
Employment separation and release agreement dated effective September 29, 2014 by and between Registrant and
Richard C. Leuck (incorporated herein by reference to Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q
for the period ending September 30, 2014).
10.1.6*
10.1.7*
Executive Employment Agreement dated effective January 1, 2005 by and between Registrant and Scott R.
Goodman, amended by that First Amendment of Executive Employment Agreement dated as of December 31,
2008 (incorporated herein by reference to Exhibit 10.1.5 to Registrant's Annual Report on Form 10-K filed on
March 15, 2013), and amended by that Second Amendment of Executive Employment Agreement dated October
11, 2013 (incorporated herein by reference to Exhibit 10.1.5 to Registrant's Annual Report on Form 10-K filed on
March 17, 2014).
Executive Employment Agreement dated September 13, 2013 by and between Registrant and Keene S. Turner
(incorporated by reference herein to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the period
ending September 30, 2013), amended by that First Amendment of Executive Employment Agreement dated as of
February 27, 2015 (incorporated herein by reference to Exhibit 10.1.7 to the Registrant's Annual Report on Form
10-K filed on February 27, 2015), and amended by that Second Amendment to Executive Employment Agreement
dated as of October 29, 2015 (incorporated by reference to Exhibit 10.1.2 to the Registrant's Quarterly Report on
Form 10-Q for the period ending September 30, 2015).
10.1.8*
Enterprise Financial Services Corp Deferred Compensation Plan I (incorporated herein by reference to Exhibit
10.1 of Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 2000).
10.1.9*
Enterprise Financial Services Corp Amended and Restated Deferred Compensation Plan I dated effective as of
December 31, 2008 (incorporated by reference to Exhibit 10.9 to Registrant's Report on Form 10-K for the year
ended December 31, 2008).
10.1.10* Enterprise Financial Services Corp, Third Incentive Stock Option Plan (incorporated herein by reference to
Exhibit 4.5 to Registrant's Registration Statement on Form S-8 filed on December 29, 1997 (File No. 333-43365)).
10.1.11* Enterprise Financial Services Corp, Fourth Incentive Stock Option Plan (incorporated herein by reference to
Registrant's 1998 Proxy Statement on Schedule 14A).
10.1.12*
Enterprise Financial Services Corp, Stock Plan for Non-Management Directors (incorporated herein by reference
to Registrant's Proxy Statement on Schedule 14-A filed on March 7, 2006 and as amended on Schedule 14-A filed
on April 23, 2012).
10.1.13* Enterprise Financial Services Corp, 2002 Stock Incentive Plan, as amended (incorporated herein by reference to
Appendix A to Registrant's Proxy Statement on Schedule 14A, filed on March 17, 2008).
10.1.14* Enterprise Financial Services Corp, Annual Incentive Plan (incorporated herein by reference to Appendix C to
Registrant's Proxy Statement on Schedule 14A, filed on March 7, 2006).
122
10.1.15* Enterprise Financial Services Corp, Incentive Stock Purchase Plan (incorporated herein by reference to Exhibit
4.6 to Registrant's Registration Statement on Form S-8 filed on November 1, 2002 (File No. 333-100928)).
10.1.16*
Form of Enterprise Financial Services Corp Restricted Stock Award Agreement (incorporated herein by reference
to Exhibit 99.1 to Registrant's Current Report on Form 8-K filed on February 19, 2010);
10.1.17* Enterprise Financial Services Corp, 2013 Stock Incentive Plan (incorporated herein by reference to Appendix A to
Registrant's Proxy statement on Schedule 14A, filed on March 26, 2013).
10.1.18*
Form of Enterprise Financial Services Corp Restricted Stock Unit Award Agreement (incorporated herein by
reference to Exhibit 10.2 to Registrant's Current Report on Form 10-Q filed on August 8, 2012);
10.1.19*
Form of Enterprise Financial Services Corp Restricted Stock Award Agreement (incorporated herein by reference
to Exhibit 10.3 to Registrant's Current Report on Form 10-Q filed on August 8, 2012);
10.1.20* Restricted Stock Unit Agreement by and between Registrant and Keene S. Turner (incorporated herein by
reference to Exhibit 10.1.2 to Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 2014).
10.1.21*
Form of Enterprise Financial Services Corp LTIP Grant Agreement pursuant to 2013 Stock Incentive Plan
(incorporated herein by reference to Exhibit 10.1.3 to the Registrant's Quarterly Report on Form 10-Q for the
period ended March 31, 2014).
10.1.22*
Form of Enterprise Financial Services Corp LTIP Grant Agreement pursuant to 2013 Stock Incentive Plan
(incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the period
ended March 31, 2015).
10.2
Revolving Credit Agreement dated February 24, 2016 between US Bank National Association and Registrant
12.1
Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends
21.1
Subsidiaries of Registrant.
23.1
Consent of Deloitte & Touche LLP.
24.1
Power of Attorney.
31.1
Chief Executive Officer's Certification required by Rule 13(a)-14(a).
31.2
Chief Financial Officer's Certification required by Rule 13(a)-14(a).
32.1
32.2
Chief Executive Officer Certification pursuant to 18 U.S.C. § 1350, as adopted pursuant to section § 906 of the
Sarbanes-Oxley Act of 2002.
Chief Financial Officer Certification pursuant to 18 U.S.C. § 1350, as adopted pursuant to section § 906 of the
Sarbanes-Oxley Act of 2002.
* Management contract or compensatory plan or arrangement.
Note:
In accordance with Item 601 (b) (4) (iii) of Regulation S-K, Registrant hereby agrees to furnish to the SEC, upon its request, a
copy of any instrument that defines the rights of holders of each issue of long-term debt of Registrant and its consolidated subsidiaries
123
for which consolidated and unconsolidated financial statements are required to be filed and that authorizes a total amount of
securities not in excess of ten percent of the total assets of the Registrant on a consolidated basis.
(b) The exhibits not incorporated by reference herein are filed herewith.
(c) The financial statement schedules are either included in the Notes to Consolidated Financial Statements or
omitted if inapplicable.
124
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 26, 2016.
SIGNATURES
ENTERPRISE FINANCIAL SERVICES CORP
/s/ Peter F. Benoist
Peter F. Benoist
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this Report on Form 10-K has been signed by the following
persons in the capacities indicated on February 26, 2016.
125
Signatures
/s/ Peter F. Benoist
Peter F. Benoist
/s/ Keene S. Turner
Keene S. Turner
/s/ Mark G. Ponder
Mark G. Ponder
/s/ James J. Murphy, Jr.*
James J. Murphy, Jr.
/s/ John Q. Arnold*
John Q. Arnold
/s/ Michael A. DeCola*
Michael A. DeCola
/s/ William H. Downey*
William H. Downey
/s/ John S. Eulich*
John S. Eulich
/s/ Robert E. Guest, Jr.*
Robert E. Guest, Jr.
/s/ James M. Havel*
James M. Havel
/s/ Judith S. Heeter*
Judith S. Heeter
/s/ Michael R. Holmes*
Michael R. Holmes
/s/ Birch M. Mullins*
Birch M. Mullins
/s/ Sandra A. Van Trease*
Sandra A. Van Trease
*Signed by Power of Attorney.
Title
President and Chief Executive Officer and Director
(Principal Executive Officer)
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Senior Vice President and Controller
(Principal Accounting Officer)
Chairman of the Board of Directors
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
126
Exhibit 10.2
EXECUTION VERSION
LOAN AGREEMENT
BY AND BETWEEN
ENTERPRISE FINANCIAL SERVICES CORP, Borrower
AND
U.S. BANK NATIONAL ASSOCIATION, Lender
February 24, 2016
SECTION 1 - DEFINITIONS
SECTION 2 - THE REVOLVING CREDIT
TABLE OF CONTENTS
2.01
2.02
2.03
2.04
2.05
2.06
2.07
Revolving Credit Commitment
Revolving Credit Note
Interest Rates and Payments
General Provisions as to Payments
Fees
Increased Costs
Taxes
SECTION 3 - PRECONDITIONS TO REVOLVING CREDIT LOANS
3.01
3.02
Initial Revolving Credit Loan
All Revolving Credit Loans
SECTION 4 - REPRESENTATIONS AND WARRANTIES
4.01
4.02
4.03
4.04
4.05
4.06
4.07
4.08
4.09
4.10
4.11
4.12
4.13
4.14
4.15
Corporate Existence and Power
Corporate Authorization
Binding Effect
Financial Statements
Litigation
Pension and Welfare Plans
Tax Returns
Subsidiaries
Compliance with Other Instruments; None Burdensome
Other Loans and Guarantees
Title to Property
Regulation U
Environmental Matters
Shares of Subsidiary Bank
Anti-Corruption Laws; Sanctions; Anti-Terrorism Laws
SECTION 5 - AFFIRMATIVE COVENANTS
5.01
5.02
5.03
5.04
5.05
5.06
5.07
5.08
5.09
5.10
5.11
5.12
5.13
5.14
5.15
5.16
Insurance
Payment of Taxes
Financial Data
Maintenance of Property
Inspection
Corporate Existence
Compliance with Law
ERISA Compliance
Risk-Based Capital Adequacy Guidelines
Loan Loss Reserves to Non-Performing Loans
Fixed Charge Coverage Ratio
Non-Performing Loans plus Other Real Estate to Primary Capital
Holding Company Liquidity
Notices
Utilization of Loan Proceeds
Rest Period
1
7
7
8
8
8
9
9
9
10
10
10
11
11
11
11
11
12
12
12
12
12
13
13
13
13
13
13
14
14
14
14
15
15
15
16
16
16
17
17
17
17
17
18
18
SECTION 6 - NEGATIVE COVENANTS
6.01
6.02
6.03
6.04
6.05
6.06
6.07
6.08
6.09
6.10
6.11
6.12
Indebtedness
Merger or Consolidation; Acquisitions
Sale of Property
Distributions
Issuance of Stock etc
[RESERVED]
Investments
Liens
Related Parties
Margin Stock
Nature of Business
Other Agreements
SECTION 7 - EVENTS OF DEFAULT
SECTION 8 - GENERAL
8.01
8.02
8.03
8.04
8.05
8.06
8.07
8.08
8.09
8.10
8.11
8.12
8.13
8.14
8.15
8.16
8.17
8.18
8.19
8.20
8.21
No Waiver
Right of Set-Off
Cost and Expenses
Environmental Indemnity
General Indemnity
Authority to Act
Notices
Consent to Jurisdiction; Waiver of Jury Trial
Lender's Books and Records
Governing Law; Amendments
References; Headings for Convenience
Binding Agreement
Severability
Counterparts
Resurrection of Obligations
Entire Agreement
USA PATRIOT Act
Confidentiality
Waiver of Consequential Damages, etc
Termination of this Agreement
Computations
Exhibits
A - Form of Note
B - Form of Certificate
18
18
18
18
18
19
19
19
19
19
19
19
20
20
22
22
22
22
22
23
23
23
23
24
24
24
24
24
24
24
25
25
25
25
26
26
LOAN AGREEMENT
THIS LOAN AGREEMENT (this “Agreement”) is made and entered into as of February 24, 2016 by and
between: ENTERPRISE FINANCIAL SERVICES CORP, a Delaware corporation (“Borrower”); and U.S. BANK
NATIONAL ASSOCIATION, a national banking association (“Lender”); and has reference to the following facts and
circumstances:
A.
Borrower has applied to Lender for a revolving line of credit in the original principal amount of up to
$20,000,000.
B.
Lender is willing to make said revolving line of credit available to the Borrower upon, and subject to,
the terms, provisions and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby mutually agree and promise as
follows:
SECTION 1 - DEFINITIONS
In addition to the terms defined elsewhere in this Agreement or in any Exhibits or Schedules hereto, when
used in this Agreement, the following terms shall have the following meanings (such meanings shall be equally
applicable to the singular and plural forms of the terms used, as the context requires):
Acquisition means any transaction or series of related transactions, consummated on or after the date of this
Agreement, by which Borrower or any Subsidiary directly or indirectly acquires (in one transaction or as the most recent
transaction in a series of transactions) (a) all or substantially all of the Property of, or of one or more business units
of, any other Person, whether through purchase of Property, merger, consolidation or otherwise or (b) at least a majority
(in number of votes) of the Voting Stock of or in any corporation, partnership, limited liability company or other entity.
Anti-Corruption Laws means all Laws of any jurisdiction applicable to Borrower, Subsidiary Bank or their
Subsidiaries from time to time concerning or relating to bribery or corruption.
Anti-Terrorism Laws means any Law relating to terrorism or money laundering, including Executive Order
No. 13224, the USA PATRIOT Act, the Laws compromising or implementing the Bank Secrecy Act and the Laws
administered by the United States Treasury Department’s Office of Foreign Asset Control (as any of the foregoing may
from time to time be amended).
Applicable Fee Percentage initially means an annual rate of 0.30%; provided that the Applicable Fee
Percentage shall be reduced by 0.10% for each average quarterly balance of $10,000,000 that Borrower invests in
any of the following deposit products offered by Lender with a maturity of greater than 31 days: (i) certificates of
deposit; (ii) convertible Eurodollar time deposits or (iii) U.S. Bank commercial paper; provided that in no event will the
Applicable Fee Percentage be reduced below 0.00%.
Applicable Margin means an annual rate of 2.25%.
Attorneys’ Fees means the reasonable value of the services (and costs, charges and expenses related
thereto) of the attorneys employed by Lender (including, without limitation, attorneys who are employees of Lender)
from time to time to represent Lender (a) in the preparation or amendment of this Agreement and the other Loan
Documents, (b) in any litigation, contest or proceeding or to take any other action in or with respect to any litigation,
contest or proceeding (whether instituted by Lender, Borrower or any other Person and whether in bankruptcy or
otherwise) in any way or respect relating to this Agreement or any of the other Loan Documents, Borrower, Subsidiary
Bank or any other Obligor, and (c) to enforce any of Lender’s rights to collect any of the Obligations; provided, that
such Attorneys’ Fees shall be determined on the basis of rates then generally applicable to the attorneys (and all
paralegals, accountants and other staff employed by such attorneys) employed by Lender, which may be higher than
the rates such attorneys (and all paralegals, accountants and other staff employed by such attorneys) charge Lender
in certain matters.
Authorized Person is defined in Section 2.01(b).
Blocked Person means any Person (a) that is listed in the annex to, or is otherwise subject to the provisions
of, Executive Order No. 13224, (b) owned or controlled by, or acting for or on behalf of, any Person that is listed in the
annex to, or is otherwise subject to the provisions of, Executive Order No. 13224, (c) with which Lender is prohibited
from dealing or otherwise engaging in any transaction by any Anti-Terrorism Law, (d) that commits, threatens or
conspires to commit or supports “terrorism” as defined in Executive Order No. 13224, (e) that is named as a “specially
designated national” on the most current list published by OFAC at its official website or any replacement website or
other replacement official publication of such list or (f) who is affiliated or associated with a Person listed above.
Business Day means any day except a Saturday, Sunday or legal holiday observed by Lender.
Capital Stock means, with respect to any corporation, partnership, limited liability company or other entity,
any Capital Stock, partnership interests, limited liability company interests, membership interests or other equity or
ownership interests of or in such corporation, partnership, limited liability company or other entity and any warrants,
rights or options to purchase or acquire any such capital stock, partnership interests, limited liability company interests,
membership interests or other equity or ownership interests.
Capitalized Lease means any lease which, in accordance with GAAP, is required to be capitalized on the
balance sheet of the lessee.
Cash Equivalents means (a) commercial paper maturing in 270 days or less from the date of issuance which,
at the time of acquisition, are rated no lower than “A-1” by S&P or “Prime-1” by Moody’s, (b) commercial paper maturing
in 30 days or less from the date of acquisition which, at the time of purchase, is rated no lower than “A-2” by S&P or
“Prime-2” by Moody’s, (c) direct obligations of the United States or any agency or instrumentality of the United States,
the payment or guarantee of which constitutes a full faith and credit obligation of the United States, in any case,
maturing within one (1) year from the date of acquisition, (d) direct obligations of any state of the United States or any
agency or instrumentality of any state of the United States, the payment or guarantee of which constitutes a full faith
and credit obligation of such state, in either case, maturing within one (1) year from the date of acquisition and accorded
the highest rating by each of S&P and Moody’s, (e) certificates of deposit maturing within one (1) year from the date
of issuance, issued by a commercial bank or trust company organized under the Laws of the United States or any
state thereof, having capital, surplus and undivided profits aggregating at least $100,000,000 and whose long-term
certificates of deposit are, at the time of the making of such Investment, rated “A2” or better by S&P and “A” or better
by Moody’s and (f) certificates of deposit or demand deposits (i) maturing in less than one (1) year from the date of
issuance thereof, issued by a primary depositary institution of Borrower or any Subsidiary, whose long-term certificates
of deposits are, at the time of the making of such Investment, rated “A2” or better by S&P and “A” or better Moody’s
or (ii) which constitute the normal operating checking accounts of Borrower or any Subsidiary.
Change in Control means (a) the acquisition by any Person, or two or more Persons acting in concert, of
beneficial ownership (within the meaning of Rule 13d-3 of the SEC under the Securities Exchange Act of 1934) of 20%
or more of the outstanding voting Equity Interests of Borrower on a fully diluted basis; or (b) within any twelve-month
period, occupation of a majority of the seats (other than vacant seats) on the board of directors of Borrower by Persons
who were neither (i) nominated by the board of directors of Borrower nor (ii) appointed or approved by directors so
nominated.
Code means the United States Internal Revenue Code of 1986, as amended, and any successor statute of
similar import, together with the regulations thereunder, in each case as in effect from time to time. References to
sections of the Code shall be construed to also refer to any successor sections.
Consolidated Net Assets means the aggregate amount of assets of Borrower and its Subsidiaries (less
applicable reserves and other properly deductible items) after deducting therefrom all current liabilities, as set forth on
the consolidated balance sheet of Borrower and its Subsidiaries most recently furnished to Lender pursuant to Section
5.03(a) prior to the time as of which Consolidated Net Assets, all as determined in accordance with GAAP.
Consolidated Subsidiary means with respect to any Person at any date, any Subsidiary or other entity the
assets and liabilities of which are or should be consolidated with those of such Person in its consolidated financial
statements as of such date in accordance with GAAP.
Default means an event or condition the occurrence of which would, with the lapse of time, the giving of notice,
or both, become or constitute an Event of Default as defined in Section 7 hereof.
Distribution in respect of any corporation or other entity means: (a) dividends or other distributions (other
than stock dividends and stock splits) on or in respect of any of the Capital Stock or other equity interests of such
corporation or other entity; and (b) the redemption, repurchase or other acquisition of any Capital Stock or other equity
interests of such corporation or other entity or of any warrants, rights or other options to purchase any such Capital
Stock or other equity interests.
Environmental Laws are defined in Section 8.04.
Environmental Lien is defined in Section 5.14(g).
ERISA means the Employee Retirement Income Security Act of 1974, as amended, and any successor statute
of similar import, together with the regulations thereunder, in each case as in effect from time to time. References to
sections of ERISA shall be construed to also refer to any successor sections.
ERISA Affiliate means any corporation, trade or business that is, along with Borrower, a member of a controlled
group of corporations or a controlled group of trades or businesses, as described in Sections 414(b) and 414(c),
respectively, of the Code or Section 4001 of ERISA.
Event(s) of Default is/are defined in Section 7.
FDIC means the Federal Deposit Insurance Corporation.
FDIC Capital Guidelines is defined in Section 5.09.
Fiscal Quarter means a fiscal quarter of Borrower or Subsidiary Bank.
Fiscal Year means a fiscal year of Borrower or Subsidiary Bank.
Fixed Charge Coverage Ratio means, for any period of determination, the ratio of the following: (a) the sum
of (i) Net Income, minus (ii) noncash income, plus (iii) noncash expenses, plus (iv) interest expense, minus (vi) cash
Distributions; to (b) the sum of (i) interest expense plus (ii) 20% of the Revolving Credit Commitment in each Fiscal
Year; in each case calculated with respect to Borrower only and in accordance with GAAP.
GAAP means generally accepted accounting principles in the United States of America set forth in the opinions
and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants
and statements and pronouncements of the Financial Accounting Standards Board, consistently applied and in effect
as of the effective date of this Agreement (and not any changes thereto after such effective date).
Holding Company Liquidity means all cash and Cash-Equivalents reflected as assets on the financial
statements of Borrower.
Indebtedness of any Person means and include all obligations of such Person which in accordance with
GAAP are or should be classified upon a balance sheet of such Person as liabilities of such Person, any and all
obligations of other Persons which such Person has guaranteed (other than those incurred in the ordinary course of
banking business), all reimbursement obligations in connection with letters of credit or letter of credit guaranties issued
for the account of such Person (other than those incurred in the ordinary course of banking business) and any and all
obligations of such Person under any Capitalized Lease.
Indemnified Liabilities are defined in Section 8.05.
Indemnitees are defined in Section 8.05.
Knowledge means the actual knowledge of the President or another executive officer of the Subsidiary Bank
as defined in 12 C.F.R. 215.2, as amended from time to time, or in any successor Law, rule or regulation of similar
import, or the Chief Executive Officer, Chief Financial Officer or another executive officer of the Borrower as defined
in 12 C.F.R. 215.2, as amended from time to time, or in any successor law, rule or regulation of similar import.
Laws means, collectively, all international, foreign, federal, state, local and other statutes, treaties, rules,
regulations, guidelines, ordinances, codes and administrative or judicial precedents or authorities, including the
interpretation or administration thereof by any Regulatory Agency charged with the enforcement, interpretation or
administration thereof, and all applicable administrative orders, directed duties, requests, licenses, authorizations and
permits of, and agreements with, any Regulatory Agency, in each case whether or not having the force of law and Law
means each or any of them.
Lien means any interest in Property securing an obligation owed to, or a claim by, a Person other than the
owner of the Property, whether such interest is based on common law, statute or contract, including, without limitation,
any security interest, mortgage, deed of trust, pledge, lien or other encumbrance of any kind or nature whatsoever,
any conditional sale or trust receipt and any lease, consignment or bailment for security purposes.
Loan Documents mean this Agreement, the Note, and all other agreements, documents, instruments and
certificates connected with or otherwise relating to this Agreement or the Revolving Credit Loans made hereunder, all
as the same may from time to time be amended, modified, extended or renewed
Loan Loss Reserves mean the loan loss reserves of Subsidiary Bank as reported in the most recent call
reports of Subsidiary Bank.
Material Adverse Effect means (a) a material adverse effect on the Properties, assets, liabilities, business,
operations, income or financial condition of Borrower, Subsidiary Bank, and/or any Subsidiary, taken as a whole,
(b) material impairment of the ability of Borrower, Subsidiary Bank, and/or any Subsidiary, taken as a whole, to perform
any of its obligations under this Agreement, the Note, or any of the other Loan Documents or (c) material impairment
of the enforceability of the rights of, or benefits available to, Lender under this Agreement, the Note, or any of the other
Loan Documents.
Moody’s means Moody’s Investors Service, Inc. or any successor thereto.
Multiemployer Plan means a “multiemployer plan” as defined in Section 4001(a) (3) of ERISA which is
maintained for employees of Borrower, any other Obligor, any ERISA Affiliate or Subsidiary Bank.
Net Income means, with respect to any Person for any period, the aggregate net income (or net loss) of such
Person for such period equal to net revenues and other proper income less the aggregate amount of any and all items
which are treated as expenses under GAAP, and less Federal, state and local income taxes, but excluding from the
definition of Net Income any extraordinary gains or losses, all determined in accordance with GAAP.
New York Banking Day means any day (other than a Saturday or Sunday) on which commercial banks are
open for business in New York, New York.
Non-Performing Loans means the sum of (a) those loans ninety (90) days or more past due (either principal
or interest), and (ii) those loans classified as “non-accrual” as reported in the most recent call reports of Subsidiary
Bank; provided, that Non-Performing Loans will not include the portions of any Non-Performing Loans that are protected
by FDIC Loss Sharing Agreements.
Note is defined in Section 2.02(a).
Notice of Borrowing is defined in Section 2.01(b).
Obligations mean any and all indebtedness, liabilities and obligations of Borrower to Lender under the Note,
this Agreement, any of the other Loan Documents, any letters of credit and related agreements, any interest rate
derivative agreements, or any other agreement, instrument or document heretofore, now or hereafter executed and
delivered by Borrower to Lender, in each case whether now existing or hereafter arising, absolute or contingent, joint
and/or several, secured or unsecured, direct or indirect, expressed or implied in law, contractual or tortious, liquidated
or unliquidated, at law or in equity, or otherwise, and whether created directly or acquired by Lender by assignment
or otherwise, and any and all costs of collection and/or Attorneys’ Fees incurred or to be incurred in connection therewith.
Obligor means Borrower and each other Person who is or shall become primarily or secondarily liable on any
of the Obligations or who grants Lender a Lien upon any Property or assets of such Person as collateral for any of the
Obligations.
OFAC means the Treasury’s Office of Foreign Assets Control and any successor thereto.
Other Real Estate means the value of (i) all real estate owned by Subsidiary Bank, or (ii) listed as such in the
most recent reports to any Regulatory Authority, whichever is most current; provided, that Other Real Estate will not
include the portions of any Other Real Estate that are protected by FDIC Loss Sharing Agreements.
Other Taxes is defined in Section 2.07(b).
PBGC means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions
under ERISA.
Pension Plan means any “pension plan” as such term is defined in Section 3(2) of ERISA which is subject to
the provisions of Title IV of ERISA and which is established or maintained by Borrower, any other Obligor, any ERISA
Affiliate or Subsidiary Bank, other than a Multiemployer Plan.
Permitted Acquisition means any Acquisition by Borrower of the assets or Capital Stock of an ongoing
business similar to, consistent with or complementary of the lines of business of Borrower, Subsidiary Bank and their
Subsidiaries as of the date of this Agreement which satisfies each of the following conditions: (a) Borrower has given
Lender at least ten (10) Business Days’ prior written notice of such Acquisition (or such lesser notice as Lender may
agree to in writing) and has provided Lender with such financial and other information concerning such Acquisition as
Lender may reasonably request; (b) the total purchase price (including fees and expenses) for the Acquisition in
question (whether payable at closing or at any time or times after closing of such Acquisition, and if payable after
closing and not determinable prior to closing, as reasonably estimated by Borrower and in any event including the
amount of any Indebtedness or liabilities assumed by Borrower as a part of such Acquisition) does not exceed an
amount greater than 30% of Consolidated Net Assets; (c) both immediately before and immediately after giving effect
to such Acquisition, no Default or Event of Default shall exist; and (d) such Acquisition is not prohibited under the terms
of any other agreement executed by Borrower, Subsidiary Bank or any of their Subsidiaries, including, without limitation,
any agreement pertaining to or evidencing any other permitted Indebtedness of Borrower, Subsidiary Bank or any of
their Subsidiaries.
Person means an individual, partnership, corporation, limited liability company, trust, unincorporated
organization or association, and a government or agency or political subdivision thereof.
Primary Capital means Total Tangible Equity plus Loan Loss Reserves, all as determined in accordance with
GAAP.
Property means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or
intangible; and Properties mean the plural of Property. For purposes of this Agreement, Borrower, and Subsidiary
Bank, as the case may be, shall be deemed to be the owner of any Property which it has acquired or holds subject to
a conditional sale agreement, financing lease or other arrangement pursuant to which title to the Property has been
retained by or vested in some other Person for security purposes.
Regulation is defined in Section 2.06.
Regulatory Agency means any Federal, state or local governmental or regulatory agency, authority, entity
or official having jurisdiction over the banking or other related activities of Borrower, Subsidiary Bank, and/or any
Subsidiary, including, without limitation (to the extent applicable), the Treasury, the Board of Governors of the Federal
Reserve System, the FDIC, the SEC, and the Missouri Division of Finance, and any successors thereto.
Related Party means any Person which directly or indirectly through one or more intermediaries controls, or
is controlled by or is under common control with, Borrower, or Subsidiary Bank. The term “control” means the
possession, directly or indirectly, of the power to vote 10% or more of the Capital Stock of any Person or the power to
direct or cause the direction of the management and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise; provided that a Person that “controls” Borrower shall be limited to any Person that
has the authority to vote 10% or more of the Capital Stock of Borrower.
Reportable Event has the meaning given to such term in ERISA.
Reprice Date means the first day of each month; provided that if the initial Revolving Credit Loan under occurs
other than on a Reprice Date, the initial one-month LIBOR rate shall be that one-month LIBOR rate in effect two (2)
New York Banking Days prior to the date of the initial Revolving Credit Loan, which rate plus the Applicable Margin
shall be in effect until the next Reprice Date.
Revolving Credit Commitment means, subject to any reduction thereof pursuant to Section 2.01(c),
$20,000,000.
Revolving Credit Loan and Revolving Credit Loans are defined in Section 2.01(a).
Revolving Credit Period means the period commencing on the date of this Agreement and ending February
23, 2017; provided, however, that the Revolving Credit Period shall end on the date the Revolving Credit Commitment
is terminated pursuant to Section 6 or otherwise.
S&P means Standard and Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc. or any
successor thereto.
Sanctioned Country means, at any time, any country or territory which is itself the
subject or target of any comprehensive Sanctions.
Sanctioned Person means, at any time, (a) any Person or group listed in any Sanctions related
list of designated Persons maintained by OFAC or the U.S. Department of State, the United Nations Security Council,
the European Union or any EU member state, (b) any Person or group operating, organized or resident in a Sanctioned
Country, (c) any agency, political subdivision or instrumentality of the government of a Sanctioned Country, or (d) any
Person 50% or more owned, directly or indirectly, by any of the above.
Sanctions means economic or financial sanctions or trade embargoes imposed, administered or enforced
from time to time by (a) the U.S. government, including those administered by OFAC or the U.S. Department of State
or (b) the United Nations Security Council, the European Union or Her Majesty’s Treasury of the United Kingdom.
SEC means the United States Securities and Exchange Commission.
Subsidiary means, with respect to any Person, any corporation of which 50% or more of the issued and
outstanding Capital Stock entitled to vote for the election of directors (other than by reason of default in the payment
of dividends) is at the time owned directly or indirectly by such Person.
Subsidiary Bank means Enterprise Bank & Trust, a Missouri trust company with banking powers.
Total Tangible Equity means the total amount of the Capital Stock, surplus and undivided profits, accounts
and capital qualified notes and debentures of Borrower, minus intangibles, all of which will be determined in accordance
with GAAP applicable to banks consistently applied.
Treasury means the United States Department of the Treasury.
USA PATRIOT Act means the Uniting and Strengthening America by Providing Appropriate Tools Required
to Intercept and Obstruct Terrorism Act of 2001, Public Law 107-56, as from time to time amended.
Voting Stock means, with respect to any corporation, partnership, limited liability company or other entity,
any Capital Stock of or in such corporation, limited liability company, partnership or other entity whose holders are
entitled under ordinary circumstances to vote for the election of directors (or Persons performing similar functions) of
such corporation, limited liability company, partnership or other entity (irrespective of whether at the time Capital Stock
of any other class or classes shall have or might have voting power by reason of the happening of any contingency).
SECTION 2 - THE REVOLVING CREDIT
2.01 Revolving Credit Commitment
Subject to the terms and conditions set forth in this
Agreement and so long as no Default or Event of Default has occurred and is continuing, during the Revolving Credit
Period, Lender agrees to make such loans to Borrower (individually, a “Revolving Credit Loan”; and collectively, the
“Revolving Credit Loans”) as Borrower may from time to time request pursuant to Section 2.01(b). Each Revolving
Credit Loan under this Section 2.01(a) shall be for an aggregate principal amount of at least $100,000 or any larger
multiple of $50,000. The aggregate principal amount of Revolving Credit Loans which Lender shall be required to
(a)
have outstanding under this Agreement as of any date shall not exceed the amount of the Revolving Credit Commitment
as of such date. Within the foregoing limits, Borrower may borrow under this Section 2.01(a), prepay under Section
2.03(c) and reborrow at any time during the Revolving Credit Period under this Section 2.01(a). All Revolving Credit
Loans not paid prior to the last day of the Revolving Credit Period, together with all accrued and unpaid interest thereon
and all fees and other amounts owing by Borrower to Lender with respect thereto, shall be due and payable on the
last day of the Revolving Credit Period.
(b)
Borrower shall give oral or written notice (a “Notice of Borrowing”) to Lender by 10:00 a.m. (Central
Time) on the Business Day of each advance of a Revolving Credit Loan specifying (i) the date of such Revolving Credit
Loan, which must be a Business Day, and (ii) the aggregate principal amount of such Revolving Credit Loan. Unless
Lender determines that any applicable condition specified in Section 3 of this Agreement has not been satisfied, Lender
shall make the proceeds of any Revolving Credit Loan available to Borrower by crediting such funds to a demand
deposit account at Lender specified by Borrower (or such other account mutually agreed upon in writing between
Lender and Borrower). Borrower hereby irrevocably authorizes Lender to rely on telephonic, electronic mail, telecopy,
telex or written instructions of any individual identifying himself or herself as one of the individuals listed on Schedule
2.01(b) attached hereto (or any other individual from time to time authorized to act on behalf of Borrower pursuant to
a resolution adopted by the Board of Directors of Borrower and certified by the Secretary of Borrower and delivered
to Lender) (“Authorized Persons”) with respect to any request to make a Revolving Credit Loan or a repayment
hereunder, and on any signature which Lender in good faith believes to be genuine, and Borrower shall be bound
thereby in the same manner as if such individual were actually authorized or such signature were genuine. Borrower
also hereby agrees to indemnify Lender and hold Lender harmless from and against any and all claims, demands,
damages, liabilities, losses, costs and expenses (including, without limitation, Attorneys’ Fees and expenses) relating
to or arising out of or in connection with Lender’s good faith acceptance of instructions for making Revolving Credit
Loans or repayments hereunder.
(c)
If the amount of the Revolving Credit Commitment on any date is less than the aggregate principal
amount of all Revolving Credit Loans outstanding as of such date, Borrower shall be automatically required (without
demand or notice of any kind by Lender, all of which are hereby expressly waived by Borrower) to immediately repay
the Revolving Credit Loans in an amount sufficient to reduce the amount of the aggregate principal amount of all
Revolving Credit Loans outstanding as of such date to an amount equal to or less than the amount of the Revolving
Credit Commitment.
2.02 Revolving Credit Note The Revolving Credit Loans shall be evidenced by the Revolving Credit Note
of Borrower dated as of the date hereof, and payable to the order of Lender in the principal amount equal to the
maximum amount of the Revolving Credit Commitment, which Revolving Credit Note shall be in substantially the form
of Exhibit A attached hereto and incorporated herein by reference (as the same may from time to time be amended,
modified, extended, renewed or restated, the “Note”).
(b)
Lender shall record in its books and records the date and amount of each Revolving Credit Loan and
each payment of principal and/or interest made by Borrower with respect thereto; provided, however, that the obligation
of Borrower to repay each Revolving Credit Loan made to Borrower hereunder shall be absolute and unconditional,
notwithstanding any failure of Lender to make any such recordation or any mistake by Lender in connection with any
such recordation. The books and records of Lender showing the account between Lender and Borrower shall be
admissible in evidence in any action or proceeding and shall constitute prima facie proof of the items therein set forth
absent manifest error.
2.03
Interest Rates and Payments
(a)
Interest on the principal balance of each Revolving Credit Loan shall accrue at an annual rate equal
to the Applicable Margin plus the greater of (i) 0% and (ii) the one-month LIBOR rate quoted by Lender from Reuters
Screen LIBOR01 Page or any successor thereto, which shall be that one-month LIBOR rate in effect two (2) New York
Banking Days prior to the Reprice Date, adjusted for any reserve requirement and any subsequent costs arising from
a change in government regulation, such rate rounded up to the nearest one-sixteenth percent and such rate to be
reset monthly on each Reprice Date.
(b)
After maturity of the Revolving Credit Loans, whether by reason of acceleration or otherwise, interest
shall continue to accrue on each Revolving Credit Loan and be payable on demand on the entire outstanding principal
balance thereof at an annual rate equal to 2% over and above the otherwise applicable interest rate. Interest on each
Revolving Credit Loan shall be payable quarterly in arrears on each March 31, June 30, September 30 and
December 31, and at the maturity of the Revolving Credit Loans, whether by reason of acceleration or otherwise. All
payments shall be applied first to the payment of all accrued and unpaid interest, with the balance, if any, to be applied
to the payment of principal. Lender’s internal records of applicable interest rates shall be determinative in the absence
of manifest error.
(c)
Borrower shall have the right to prepay the Revolving Credit Loans in whole or in part at any time,
provided that: (i) all billed/due and unpaid interest shall accompany such prepayment; (ii) there is no Default or Event
of Default at the time of prepayment; and (iii) all prepayments shall be credited and applied to the installments of
principal in the inverse order of their stated maturity.
2.04 General Provisions as to Payments
Borrower shall make each payment of principal of, and
interest on, the Revolving Credit Loans and all interest, fees and other amounts payable by Borrower under this
Section 2 not later than 2:00 p.m. (Central Time) on the date when due, in Federal or other collected funds immediately
available in St. Louis, Missouri, to Lender at its address referred to in Section 8.07. Any such payment received by
Lender after 2:00 p.m. (Central Time) shall be deemed to have been paid on the next succeeding Business Day.
Whenever any payment of principal of, or interest on, the Revolving Credit Loans shall be due on a day which is not
a Business Day, the date for payment thereof shall be extended to the next succeeding Business Day. If the date for
any payment of principal is extended by operation of law or otherwise, interest thereon, at the then applicable rate,
shall be payable for such extended time.
(a)
2.05
Fees
From and including the date of this Agreement to but excluding the last day of the
Revolving Credit Period, Borrower shall pay to Lender a nonrefundable commitment fee on the unused portion of the
Revolving Credit Commitment (determined by subtracting the aggregate amount of all Revolving Credit Loans from
the amount of the Revolving Credit Commitment) multiplied by the Applicable Fee Percentage. Said commitment fee
shall be (i) calculated on a daily basis, (ii) payable quarterly in arrears on the last day of each Fiscal Quarter during
the Revolving Credit Period and on the last day of the Revolving Credit Period and (iii) calculated on an actual day,
360-day year basis.
(b)
If Borrower fails to make any payment of any principal of or interest on any Revolving Credit Loan
within ten (10) days after the same becomes due, whether by reason of maturity, acceleration or otherwise, in addition
to all of the other rights and remedies of Lender under this Agreement and at law or in equity, Borrower shall pay
Lender on demand with respect to each such late payment a late fee in an amount not to exceed 5% of each late
payment.
2.06
Increased Costs
If there shall occur any adoption or implementation of, or change to, any
Regulation, or interpretation or administration thereof, which shall have the effect of imposing on Lender (or Lender’s
holding company) any increase or expansion of or any new: tax (excluding taxes on its overall income and franchise
taxes), charge, fee, assessment or deduction of any kind whatsoever, or reserve, capital adequacy, special deposits
or similar requirements against credit extended by, assets of, or deposits with or for the account of Lender or other
conditions affecting the extensions of credit under this Agreement or evidenced by the Note; then Borrower shall pay
to Lender such additional amount as Lender deems necessary to compensate Lender for any increased cost to Lender
attributable to the extension(s) of credit under this Agreement or evidenced by the Note and/or for any reduction in the
rate of return on Lender’s capital and/or Lender’s revenue attributable to such extension(s) of credit. As used above,
the term “Regulation” shall include any federal, state or international law, governmental or quasi-governmental rule,
regulation, policy, guideline or directive (including but not limited to the Dodd-Frank Wall Street Reform and Consumer
Protection Act and enactments, issuances or similar pronouncements by the Bank for International Settlements, the
Basel Committee on Banking Regulations and Supervisory Practices or any similar authority and any successor thereto)
that applies to Lender. Lender’s determination of the additional amount(s) due under this paragraph shall be binding
in the absence of manifest error, and such amount(s) shall be payable within 15 days of demand and, if recurring, as
otherwise billed by Lender.
2.07
Taxes
(a)
Any and all payments by Borrower to or for the account of Lender under or in respect of this Agreement,
the Note and/or any other Loan Document shall be made free and clear of and without deduction for any and all present
or future taxes, duties, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto,
excluding, taxes imposed on or measured by Lender’s net income, and franchise taxes imposed on Lender, by the
jurisdiction under the Laws of which it is organized or any political subdivision, state or taxing authority thereof or
therein (all such non-excluded taxes, duties, levies, imposts, deductions, charges, withholdings and liabilities being
hereinafter referred to as “Taxes”). If Borrower shall be required by Law to deduct any Taxes from or in respect of any
sum payable by Borrower to Lender under or in respect of this Agreement, the Note and/or any other Loan Document,
(i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions
applicable to additional sums payable under this Section 2.07(a)) Lender receives an amount equal to the sum it would
have received had no such deduction of Taxes been made, (ii) Borrower shall make such deductions, (iii) Borrower
shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable
law and (iv) Borrower shall furnish to Lender at its address referred to in Section 7.07, the original or a certified copy
of a receipt evidencing payment thereof.
(b)
In addition, Borrower agrees to pay any present or future stamp or documentary taxes and any other
excise or property taxes, or charges or similar levies which arise from any payment made under or in respect of this
Agreement, the Note and/or any other Loan Document or from the execution or delivery of, or otherwise with respect
to, this Agreement, the Note and/or any other Loan Document (hereinafter referred to as “Other Taxes”).
(c)
Borrower agrees to indemnify Lender for the full amount of Taxes or Other Taxes, respectively
(including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable
under this Section 2.07), paid by Lender and any liability (including penalties, interest and expenses) arising therefrom
or with respect thereto. This indemnification shall be made within fifteen (15) days from the date Lender makes demand
therefor, accompanied by a certificate of Lender setting forth in reasonable detail its computation of the amount or
amounts to be paid to it hereunder.
(d)
The provisions of this Section 2.07 shall survive any expiration or termination of this Agreement and
the payment of the Notes and the other Borrower’s Obligations.
SECTION 3 - PRECONDITIONS TO REVOLVING CREDIT LOANS. Initial Revolving Credit Loan
Notwithstanding any provision contained in this Agreement to the contrary, Lender shall have no obligation to make
the initial Revolving Credit Loan under this Agreement unless Lender shall have first received the following, all in form
and substance acceptable to Lender:
(a)
this Agreement and the Note, each executed by a duly authorized officer of Borrower;
(b)
copies of resolutions of the Board of Directors of Borrower, duly adopted, which authorize the execution,
delivery and performance of this Agreement, the Note, and the other Loan Documents, certified by the Secretary of
Borrower;
(c)
copies of the Restated Articles of Incorporation of Borrower, including any amendments thereto,
certified by the Delaware Secretary of State;
(d)
Borrower;
copies of the Bylaws of Borrower, including any amendments thereto, certified by the Secretary of
(e)
certificates of good standing for Borrower issued by the Delaware and Missouri Secretaries of State;
(f)
an opinion of counsel from Bryan Cave LLP, counsel to Borrower and Subsidiary Bank, in a form
acceptable to Lender; and
(g)
reasonably request.
such other agreements, documents, instruments, certificates and assurances as Lender may
Any one or more of the conditions set forth above which have not been satisfied by Borrower on or prior to the date
of disbursement of the initial Revolving Credit Loan under this Agreement shall not be deemed permanently waived
by Lender unless Lender shall waive the same in a writing which expressly states that the waiver is permanent, and
in all cases in which the waiver is not stated to be permanent Lender may at any time subsequent thereto insist upon
compliance and satisfaction of any such condition as a condition to any subsequent Revolving Credit Loan under this
Agreement and failure of Borrower to comply with any such condition within five (5) Business Day’s written notice from
Lender to Borrower shall constitute an Event of Default.
3.02
All Revolving Credit Loans
Notwithstanding any provision contained in this Agreement to the contrary, Lender shall have no obligation to make
any Revolving Credit Loan under this Agreement unless:
(a)
Lender shall have received a Notice of Borrowing;
(b)
both immediately before and immediately after giving effect to the making, continuation or conversion
of such Revolving Credit Loan, no Default or Event of Default under this Agreement shall have occurred and be
continuing;
(c)
all of the representations and warranties made Borrower in this Agreement and/or in any other Loan
Document shall be true and correct in all material respects (or, with respect to any such representation or warranty
that is qualified as to “materiality” or “Material Adverse Effect”, shall be true and correct in all respects) on and as of
the date of the making, continuation or conversion of such Revolving Credit Loan as if made on and as of the date of
the making, continuation or conversion of such Revolving Credit Loan (except (x) to the extent such representations
and warranties specifically refer to an earlier date, in which case they shall be true and correct in all material respects
(or, with respect to any such representation or warranty that is qualified as to “materiality” or “Material Adverse Effect”,
shall be true and correct in all respects) as of such earlier date and (y) that for purposes of this Section 3.02(c), the
representations and warranties made by Borrower in Section 4.04 shall be deemed to refer to the most recent financial
statements of Borrower and its Consolidated Subsidiaries delivered to Lender pursuant to Sections 5.03).
Each request for the making of a Revolving Credit Loan by Borrower under this Agreement shall be deemed to be a
representation and warranty by Borrower on the date of the making of such Revolving Credit Loan as to the facts
specified in clauses (b) and (c) of this Section 3.02.
SECTION 4 - REPRESENTATIONS AND WARRANTIES
To induce Lender to make the Revolving Credit Loans, Borrower hereby represents and warrants to Lender
that:
4.01 Corporate Existence and Power Each of Borrower, Subsidiary Bank, and each Subsidiary: (a) is duly
incorporated or organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation
or organization; (b) has all requisite corporate or other powers and all governmental licenses, authorizations, consents
and approvals required to carry on its business as now conducted; and (c) is duly qualified to do business in all
jurisdictions in which the nature of the business conducted by it makes such qualification necessary and where failure
to so qualify would have a Material Adverse Effect on its business, financial condition or operations. Borrower is a
“bank holding company” as defined in and within the meaning of 12 U.S.C. §1841(a)(1), and as such Borrower has
filed all necessary reports with and received all necessary approvals from The Board of Governors of the Federal
Reserve System. Subsidiary Bank is an “insured bank” as defined in and within the meaning of 12 U.S.C. §1813(h).
4.02 Corporate Authorization The execution, delivery and performance by Borrower of this Agreement, the
Note, and the other Loan Documents are within the corporate powers of Borrower and have been duly authorized by
all necessary corporate action.
4.03
Binding Effect This Agreement, the Note, and the other Loan Documents have been duly authorized,
executed and delivered and constitute the legal, valid and binding obligations of Borrower enforceable in accordance
with their respective terms, except as such enforceability may be limited by bankruptcy, insolvency or other similar
laws affecting creditors’ rights in general.
4.04
Financial Statements Borrower has furnished Lender with the following financial statements,
identified by the President, Chief Executive Officer or Controller of Borrower: (a) consolidated balance sheets and
profit and loss statements of Borrower and its Consolidated Subsidiaries as of December 31, 2014, all certified by
Borrower’s independent certified public accountants, which financial statements have been prepared in accordance
with GAAP; and (b) the Consolidated Financial Statements for Bank Holding Companies (FR Y-9C) of Borrower and
its Consolidated Subsidiaries as of September 30, 2015; (c) the Parent Company Only Financial Statements for Large
Bank Holding Companies (FR Y-9LP) for Borrower as of September 30, 2015; and (d) the Consolidated Reports of
Condition and Income For A Bank With Domestic Offices Only (FFIEC 041) of Subsidiary Bank as of September 30,
2015, certified by the President, Chief Executive Officer, Vice Chairman, or Chief Financial Officer of Subsidiary Bank.
Borrower further represents that: (i) said financial statements fairly present in all material respects the financial condition
of Borrower and its Consolidated Subsidiaries as of the dates thereof, (ii) there has been no change in the financial
condition or operation of Borrower or any of its Consolidated Subsidiaries since December 31, 2014 that could have
a Material Adverse Effect, and (iii) neither Borrower nor any of its Consolidated Subsidiaries has any direct or contingent
liabilities which are not disclosed on said financial statements which could have a Material Adverse Effect.
4.05
Litigation
Except as disclosed in Schedule 4.05 attached hereto, there is no action or proceeding
pending or, to the Knowledge of Borrower, threatened against or affecting Borrower or Subsidiary Bank before any
court, arbitrator or governmental, regulatory or administrative body, agency or official which could result in any change
in the financial condition or operation of Borrower or Subsidiary Bank that could have a Material Adverse Effect, and
neither Borrower nor Subsidiary Bank is in default with respect to any order, writ, injunction, decision or decree of any
court, arbitrator or governmental, regulatory or administrative body, agency or official which could have a Material
Adverse Effect on Borrower or Subsidiary Bank.
4.06
Pension and Welfare Plans
Each Pension Plan complies with all applicable statutes and
governmental rules and regulations; no Reportable Event has occurred and is continuing with respect to any Pension
Plan; neither Borrower, any ERISA Affiliate, nor Subsidiary Bank has withdrawn from any Multiemployer Plan in a
“complete withdrawal” or a “partial withdrawal” as defined in Sections 4203 or 4205 of ERISA, respectively; no steps
have been instituted by Borrower, any ERISA Affiliate or Subsidiary Bank to terminate any Pension Plan; no condition
exists or event or transaction has occurred in connection with any Pension Plan or Multiemployer Plan which could
result in the incurrence by Borrower, any ERISA Affiliate or Subsidiary Bank of any material liability, fine or penalty;
and neither Borrower, any ERISA Affiliate, nor Subsidiary Bank is a “contributing sponsor” as defined in Section 4001
(a) (13) of ERISA of a “single-employer plan” as defined in Section 4001(a) (15) of ERISA which has two or more
contributing sponsors at least two of whom are not under common control. Neither Borrower nor Subsidiary Bank has
any contingent liability with respect to any “employee welfare benefit plans”, as such term is defined in Section 3(a)
of ERISA, which covers retired employees and their beneficiaries.
4.07
Tax Returns
Borrower, Subsidiary Bank, and each Subsidiary has filed all Federal, state and local
income tax returns and all other tax returns which are required to be filed and has paid all taxes due pursuant to such
returns or pursuant to any assessment received by Borrower or Subsidiary Bank, except for the filing of such returns,
if any, in respect of which an extension of time for filing is in effect, and except where the payment of such tax,
assessment, government charge or levy is being contested in good faith and by appropriate proceedings and adequate
reserves in compliance with GAAP have been set aside on the books of Borrower, Subsidiary Bank or such Subsidiary,
as appropriate.
4.08
Subsidiaries
Borrower has no Subsidiaries other than as identified on Schedule 4.08 attached
hereto, as the same may from time to time be amended, modified or supplemented as provided herein. All of the
issued and outstanding Capital Stock of each Subsidiary owned by Borrower is duly authorized, validly issued and
fully paid and nonassessable. Except as disclosed on Schedule 4.08 attached hereto, neither the Borrower nor any
Subsidiary, individually or collectively, owns or holds, directly or indirectly, more than 50% of the Capital Stock of or in
any corporation, partnership, limited liability company or business other than the Borrower’s Subsidiaries.
4.09 Compliance With Other Instruments; None Burdensome None of the execution and delivery by
Borrower of the Loan Documents, the consummation of the transactions therein contemplated or the compliance with
the provisions thereof will violate any law, rule, regulation, order, writ, judgment, injunction, decree or award binding
on Borrower or Subsidiary Bank, or any of the provisions of their Articles or Certificate of Incorporation or Association,
or Bylaws or any of the provisions of any indenture, agreement, document, instrument or undertaking to which Borrower
or Subsidiary Bank is a party or subject, or by which it or its Property is bound. No order, consent, approval, license,
authorization or validation of, or filing, recording or registration with, the exemption by, any governmental, regulatory,
administrative or public body or authority, or any subdivision thereof, which has not already been obtained, is required
to authorize, or is otherwise required in connection with, the execution, delivery or performance of, or the legality,
validity, binding effect or enforceability of, any of the Loan Documents.
4.10 Other Loans and Guarantees. Except as disclosed on Schedule 4.10 attached hereto, neither
Borrower nor Subsidiary Bank (except in the ordinary course of the business of Subsidiary Bank) is borrower, guarantor
or obligor with respect to any loan transaction, guarantee or other indebtedness for borrowed money.
Borrower, Subsidiary Bank and each Subsidiary are each the sole and
absolute owner of, or has the legal right to use and occupy, all Property it claims to own or which is necessary for
Title to Property.
4.11
Borrower, Subsidiary Bank and each Subsidiary to conduct its business except where such failure would not have a
Material Adverse Effect. Neither Borrower nor Subsidiary Bank has signed (or authorized the filing of) any financing
statements, security agreements or chattel mortgages with respect to any of its Property, has granted or permitted any
Liens with respect to any of its Property or, to Borrower’s Knowledge, is there any Lien with respect to any Property
of Borrower or Subsidiary Bank, except relating to computer and office equipment (that is leased or purchased), and
as otherwise disclosed on Schedule 4.11 attached hereto.
4.12 Regulation U No part of the proceeds of any Revolving Credit Loan will be used, whether directly
or indirectly, and whether immediately, incidentally or ultimately (a) to purchase or carry margin stock or to extend
credit to others for the purpose of purchasing or carrying margin stock, or to refund or repay indebtedness originally
incurred for such purpose or (b) for any purpose which entails a violation of, or which is inconsistent with, the provisions
of the Regulations of The Board of Governors of the Federal Reserve System, including, without limitation, Regulations
G, U, T or X thereof, as amended.
4.13
Environmental Matters There are no disputes relating to environmental matters pending (nor, to the
Knowledge of Borrower, are there any disputes threatened nor, to the Knowledge of Borrower, is there any basis
therefor) affecting Borrower, Subsidiary Bank or any Subsidiary whether or not in or before any court or arbitrator of
any kind or involving any governmental or regulatory body, which, if adversely determined could, singly or in the
aggregate, have a Material Adverse Effect, including, without limitation, any notice from any agency, state or Federal,
that Borrower, Subsidiary Bank or any Subsidiary is a potentially responsible party for the cleanup of any environmental
waste site, that Borrower, Subsidiary Bank or any Subsidiary is in violation of any environmental permit or regulation,
that Borrower, Subsidiary Bank or any Subsidiary has been placed on any registry of solid or hazardous waste disposal
sites, or of the expiration, revocation or denial of any environmental permit or other loss of interim status or other
current authorization to operate any unit or portion of the facilities of Borrower, Subsidiary Bank or any Subsidiary.
4.14
Shares of Subsidiary Bank
The authorized capital of Subsidiary Bank consists solely of 83,118
shares of common stock, $50.00 par value. Borrower is the sole legal and beneficial owner of 83,118 shares of common
stock of Subsidiary Bank, representing all of the outstanding and issued shares of common stock of Subsidiary Bank,
subject to no Liens, warrants, options, proxies, restrictions on transfer, resale or other disposition; that all of such
shares are all validly issued, fully paid and nonassessable; and that Borrower has the unqualified right and power to
grant a security interest in such shares without the consent of any other Person being required therefor. As of the date
hereof, there are no warrants or options, or any agreements to issue any warrants or options, outstanding with respect
to any class of Capital Stock of Subsidiary Bank.
4.15
Anti-Corruption Laws; Sanctions; Anti-Terrorism Laws
(a)
Borrower, Subsidiary Bank, all Subsidiaries and their respective officers and employees and, to the
Knowledge of Borrower, its directors and agents, are in compliance with Anti-Corruption Laws and applicable Sanctions
in all material respects. None of Borrower, Subsidiary Bank or any Subsidiary or to the Knowledge of Borrower,
Subsidiary Bank or any Subsidiary, any of their respective directors, officers or employees, is a Sanctioned Person.
No Revolving Credit Loan, use of the proceeds of any Revolving Credit Loan or other transactions contemplated hereby
will violate Anti-Corruption Laws or applicable Sanctions.
(b)
Neither the making of the Revolving Credit Loans hereunder nor the use of the proceeds thereof will
violate the USA PATRIOT Act and any other Anti-Terrorism Laws or any enabling legislation or executive order relating
thereto or successor statute thereto. Borrower and its Subsidiaries are in compliance in all material respects with the
USA PATRIOT Act.
SECTION 5 - AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, as long as any of the Obligations are outstanding, it will, and it will cause
or permit Subsidiary Bank or any Subsidiary to, do the following:
5.01
Insurance
Keep adequately insured, and cause Subsidiary Bank and each Subsidiary to keep
adequately insured, by financially sound and reputable insurers acceptable to Lender and in amounts reasonably
acceptable to Lender, all Property of Borrower, Subsidiary Bank, and each Subsidiary of the character usually insured
by corporations engaged in the same or similar businesses similarly situated, against loss or damage of the kind
customarily insured against by such Persons and reasonably acceptable to Lender, except to the extent that the failure
of any Subsidiary to keep its Property so insured would not have a Material Adverse Effect and (b) cause Subsidiary
Bank to maintain coverage under a banker’s blanket bond in an amount equal to the greater of the amount of coverage
currently maintained by Subsidiary Bank or the minimum coverage recommended by the applicable Regulatory
Authority(ies), plus such excess fidelity coverage as Lender may reasonably request from time to time. Promptly after
Lender’s request there for, Borrower shall provide Lender with evidence that Subsidiary Bank and each Subsidiary
maintain, the insurance required under this Section 5.01, and evidence of the payment of all premiums therefor.
5.02
Payment of Taxes
Duly file, and cause Subsidiary Bank and each Subsidiary to duly file prior to
delinquency, all Federal, state and local income tax returns and all other tax returns and reports of Borrower, Subsidiary
Bank, and each Subsidiary, as the case may be, which are required to be filed; and pay, and cause Subsidiary Bank,
and each Subsidiary to pay, when due, all taxes and governmental charges assessed against or upon Borrower,
Subsidiary Bank, and each Subsidiary, as the case may be, or upon their respective Properties, assets, income or
franchises except where the payment of such tax, assessment, government charge or levy is being contested in good
faith and by appropriate proceedings and adequate reserves in compliance with GAAP have been set aside on the
books of Borrower, Subsidiary Bank or such Subsidiary, as appropriate.
5.03
Financial Data Deliver to Lender:
(a)
As soon as practicable and in any event within 45 days after the end of each Fiscal Quarter,
unaudited consolidated balance sheets of Borrower and its Subsidiaries as of the end of such Fiscal Quarter (which
may be filed with the SEC as SEC Form 10Q) and the related consolidated statements of income, and cash flows for
such Fiscal Quarter and for the portion of the Fiscal Year ended at the end of such Fiscal Quarter, setting forth in
each case in comparative form, the figures for the corresponding Fiscal Quarter and the corresponding portion of the
previous Fiscal Year, all in form and detail reasonably satisfactory to the Lender and certified as being true, correct
and complete in all material respects and as being prepared in accordance with GAAP consistently applied (subject
to normal year-end adjustments and absence of footnote disclosures) by the President, Chief Executive Officer, or
Chief Financial Officer of Borrower;
(b)
As soon as practicable and in any event within 60 days after the end of each Fiscal Quarter,
the (i) Consolidated Financial Statements for Bank Holding Companies (FR Y-9C) of Borrower and its Consolidated
Subsidiaries, certified by the President, Chief Executive Officer, or Chief Financial Officer of Borrower; and (ii) Parent
Company Only Financial Statements for Large Bank Holding Companies (FR Y-9LP) for Borrower, certified by the
President, Chief Executive Officer, or Chief Financial Officer of Borrower.
(c)
As soon as practicable and in any event within 45 days after the end of each Fiscal Quarter,
the Consolidated Reports of Condition and Income For A Bank With Domestic Offices Only (FFIEC 041) of Subsidiary
Bank, certified by the President, Chief Executive Officer, or Chief Financial Officer of Subsidiary Bank.
(d)
As soon as practicable and in any event within 90 days after the end of each Fiscal Year,
consolidated statements of earnings and retained earnings of Borrower and its Consolidated Subsidiaries for such
year, consolidated statements of cash flow of Borrower and its Consolidated Subsidiaries for such year, and
consolidated balance sheets of Borrower and its Consolidated Subsidiaries as at the end of such year (which may
be filed with the SEC as SEC Form 10K), setting forth in each case in comparative form corresponding figures from
the preceding Fiscal Year, all such statements to be prepared in accordance with GAAP and reported and accompanied
by independent certified public accountants selected by Borrower and acceptable to Lender together with a certificate
from such accountants to the effect that, in making the examination necessary for the signing of such annual audit
report, such accountants have not become aware of any Default or Event of Default arising from any covenant set
forth in Sections 5.10, 5.11 or 5.12 hereof that has occurred or is continuing;
(e)
Contemporaneously with the delivery of the financial statements pursuant to Section 5.03(a)
(including electronic or deemed delivery as provided in Section 5.03(g)), a certificate in substantially the form of that
attached hereto and made a part hereof as Exhibit B (with appropriate insertions), executed by the President, Chief
Executive Officer, or Chief Financial Officer of Borrower and the President of Subsidiary Bank;
(f)
Promptly after filing with any Regulatory Agency, and in any event within ten (10) days after
the filing thereof, copies of all financial statements, reports, filings and other documents which Borrower, Subsidiary
Bank, and/or any Subsidiary shall file with any regulatory agency; and
(g)
time to time reasonably request.
With reasonable promptness, such other financial information and data as Lender may from
Lender is hereby authorized to deliver a copy of any financial statement or other information made available by Borrower,
Subsidiary Bank, and/or any Subsidiary to any Regulatory Authority having jurisdiction over Lender, pursuant to any
request therefore. Documents required to be delivered pursuant to this Section 5.03 (to the extent any such documents
are included in materials otherwise filed with the SEC or any other Regulatory Agency) may be delivered electronically
by posting such documents or providing a link thereto on Borrower’s or Subsidiary Bank’s website or by posting the
documents on an Internet or intranet website, if any, to which Lender has access (whether a commercial, third-party
website or whether sponsored by Lender, specifically including, without limitation, the SEC website, the FDIC website,
the website of the Board of Governors of the Federal Reserve Board and the website of the Missouri Division of
Finance) and, if so delivered, shall be deemed to have been delivered on the date (i) on which Borrower or Subsidiary
Bank posts such documents, or provides a link thereto on the Borrower’s website; or (ii) on which such documents
are posted on the Borrower’s or Subsidiary Bank’s behalf on an Internet or intranet website, if any, to which Lender
has access (whether a commercial, third-party website or whether sponsored by Lender, specifically including, without
limitation, the SEC website, the FDIC website, the website of the Board of Governors of the Federal Reserve Board
and the website of the Missouri Division of Finance).
5.04 Maintenance of Property
Maintain, and cause Subsidiary Bank, and each Subsidiary to
maintain, all Property, plants and equipment (except obsolete equipment) of Borrower, Subsidiary Bank, and each
Subsidiary in good operating order, except where the failure of any Subsidiary to so maintain its Property would not
have a Material Adverse Effect.
5.05
Inspection
Permit, and cause Subsidiary Bank, and each Subsidiary to permit, any person
designated by Lender to visit, inspect and audit any of the corporate books, loan documentation, loan portfolios, loan
files and financial records of Borrower, Subsidiary Bank, and each Subsidiary and to discuss the affairs, finances and
accounts of Borrower, Subsidiary Bank, and each Subsidiary with the principal officers of Borrower, Subsidiary Bank,
and each Subsidiary, all upon reasonable prior notice during normal business hours and, as long as no Event of Default
has occurred and is continuing, no more frequently than twice during any consecutive twelve (12) month period.
5.06 Corporate Existence
Do or cause to be done all things necessary to (a) preserve and keep in full
force and effect the corporate existence, rights and franchises of itself, Subsidiary Bank, and each Subsidiary except
where failure to maintain such existence would not have a Material Adverse Effect, (b) duly qualify itself, Subsidiary
Bank, and each Subsidiary to do business in all jurisdictions where the nature of Property owned or leased by Borrower,
Subsidiary Bank, and each Subsidiary, or the nature of the business of Borrower, Subsidiary Bank, and each Subsidiary
requires such qualification except where the failure to maintain such qualification would not have a Material Adverse
Effect, (c) maintain its status as a “bank holding company” under and within the meaning of 12 U.S.C. §1841(a)(i),
(d) cause Subsidiary Bank to preserve and keep in full force and effect its existence, franchise and right to do business
as a trust company with banking powers, as the case may be, under the laws of the jurisdiction of its incorporation,
and (e) maintain Subsidiary Bank’s status as an “insured bank” as defined in, or within the meaning of, 12 U.S.C.
§1813(h), and to otherwise maintain Subsidiary Bank’s eligibility for federal deposit insurance.
5.07 Compliance with Law Comply to the best of Borrower’s Knowledge in all material respects with,
and cause Subsidiary Bank, and each Subsidiary to comply to the best of Borrower’s Knowledge in all material respects
with, any and all Laws, to which it, Subsidiary Bank, and each Subsidiary is subject, including without limitation, all
Environmental Laws, Anti-Corruption Laws and applicable Sanctions; and obtain, and cause Subsidiary Bank, and
each Subsidiary to obtain, any and all licenses, permits, franchises and other governmental and regulatory
authorizations necessary to the conduct of the business of itself, Subsidiary Bank, and each Subsidiary, which violation
or failure to obtain does have or is likely to cause a Material Adverse Effect.
5.08
ERISA Compliance
If Borrower, Subsidiary Bank, or each Subsidiary shall have, or in the future
create, any Pension Plan, Borrower shall comply with, and shall cause Subsidiary Bank, and each Subsidiary to comply
with, all requirements of ERISA relating to such plan. Without limiting the generality of the foregoing, Borrower will
not: (a) permit, or cause or allow Subsidiary Bank, and each Subsidiary to permit, any Pension Plan maintained by
it, Subsidiary Bank, or each Subsidiary, as the case may be, to engage in any nonexempt “prohibited transaction”, as
such term is defined in section 4975 of the Internal Revenue Code of 1986, as amended; (b) permit, or cause or allow
Subsidiary Bank, and each Subsidiary to permit, any Pension Plan maintained by it, Subsidiary Bank to incur any
“accumulated funding deficiency,” as such term is defined in Section 302 of ERISA, 29 U.S.C. § 1082, whether or not
waived; (c) terminate, or cause or allow Subsidiary Bank, and each Subsidiary to terminate, any such Pension Plan
in a manner which could result in the imposition of a Lien on the Property of Borrower, Subsidiary Bank, or each
Subsidiary, as the case may be, pursuant to section 4068 of ERISA, 29 U.S.C. § 1368; or (d) take, or cause or allow
Subsidiary Bank, or each Subsidiary to take, any action which would constitute or give rise to a complete or partial
withdrawal from a multi-employer plan within the meaning of Sections 4203 and 4205 of Title IV of ERISA.
Notwithstanding any provision contained in this Section 5.08 to the contrary, an act by Borrower, Subsidiary Bank, or
each Subsidiary shall not be deemed to constitute a violation of subparagraphs (a) through (d) hereof unless Lender
determines in good faith that said action, individually or cumulatively with other acts of the Borrower, Subsidiary Bank,
or each Subsidiary, does have or is likely to cause a Material Adverse Effect on the financial condition of Borrower,
Subsidiary Bank, or each Subsidiary. Borrower shall have the affirmative obligation hereunder to report to Lender any
of those acts identified in subparagraphs (a) through (d) hereof, regardless of whether said act does or is likely to
cause a Material Adverse Effect on the financial condition of the Borrower, Subsidiary Bank, or each Subsidiary, and
failure by Borrower to report such act promptly upon Borrower’s becoming aware of the existence thereof shall constitute
an Event of Default hereunder.
5.09 Risk-Based Capital Adequacy Guidelines
Comply with, and it will cause Subsidiary Bank to
comply with, to the extent applicable, (a) the Risk-Based Capital Adequacy Guidelines for Bank Holding Companies
of The Board of Governors of the Federal Reserve System as set forth in Appendix A to 12 C.F.R. Part 225 (the “Holding
Company Guidelines”), as from time to time amended, or in any successor law, rule or regulation of similar import,
and (b) the Statement of Policy on Risk-Based Capital for State Nonmember Banks of the Federal Deposit Insurance
Corporation as set forth in Appendix A to 12 C.F.R. Part 325 (the “FDIC Capital Guidelines”), as from time to time
amended, or in any successor law, rule or regulation of similar import. In addition, Borrower will cause Subsidiary
Bank to maintain at all times a “well-capitalized” (or its equivalent) rating under the FDIC Capital Guidelines; provided,
that regardless of the requirements set forth in the Holding Company Guidelines or the FDIC Guidelines, (a) Borrower
shall at all times have consolidated, total risk based capital of at least 11.25% and (b) Subsidiary Bank shall at all times
have total risk based capital (as calculated under 12 C.F.R. 325.103(b)(1)(i)), of at least 10.50%.
5.10
Loan Loss Reserves to Non-Performing Loans Cause Subsidiary Bank to maintain at all times,
measured quarterly as of the last day of each Fiscal Quarter, a ratio of Loan Loss Reserves to Non-Performing Loans
of at least 80%.
5.11
Fixed Charge Coverage Ratio Maintain at all times, measured quarterly as of the last day of each
Fiscal Quarter (on a rolling four-quarter basis), a Fixed Charge Coverage Ratio of at least 1.35 to 1.00.
5.12 Non-Performing Loans plus Other Real Estate to Primary Capital Cause Subsidiary Bank to maintain
at all times, measured quarterly as of the last day of each Fiscal Quarter a ratio of total Non-Performing Loan plus
Other Real Estate of not more than 18% of Primary Capital.
5.13 Holding Company Liquidity
Maintain at all times during the Term of this Agreement, measured
quarterly as of the last day of each Fiscal Quarter, Holding Company Liquidity of at least $5,000,000.
5.14 Notices Notify Lender in writing of any of the following within five (5) Business Days of Borrower
obtaining Knowledge of the occurrence thereof, describing the same and, if applicable, the steps being taken by the
Person(s) affected with respect thereto:
(a)
Default. The occurrence of any Default or Event of Default under this Agreement;
(b)
Litigation. The institution of any litigation, arbitration proceeding or governmental or regulatory
proceeding affecting Borrower, Subsidiary Bank, any Subsidiary, any Collateral or any Third Party Collateral, whether
or not considered to be covered by insurance seeking monetary damages from Borrower, Subsidiary Bank and/or any
Subsidiary in an amount of greater than $2,500,000;
(c)
Judgment. The entry of any judgment or decree against Borrower, Subsidiary Bank, or any Subsidiary
in an amount of greater than $2,500,000 in the aggregate by a court having jurisdiction in the premises, which judgment
is not discharged, vacated, bonded or stayed pending appeal within a period of thirty (30) days from the date of entry;
(d)
Pension Plans. The occurrence of a Reportable Event with respect to any Pension Plan; the filing of
a notice of intent to terminate a Pension Plan by Borrower, any ERISA Affiliate, any other Obligor or Subsidiary Bank;
the institution of proceedings to terminate a Pension Plan by the PBGC or any other Person to terminate any Pension
Plan; the withdrawal in a “complete withdrawal” or a “partial withdrawal” as defined in Sections 4203 and 4205,
respectively, of ERISA by Borrower, any ERISA Affiliate, any other Obligor or Subsidiary Bank from any Multiemployer
Plan; or the incurrence of any material increase in the contingent liability of Borrower, any other Obligor or Subsidiary
Bank with respect to any “employee welfare benefit plan” as defined in Section 3(1) of ERISA which covers retired
employees and their beneficiaries;
(e)
Change of Name. Any change in the name of Borrower, Subsidiary Bank, or any Subsidiary;
(f)
Change in Place(s) of Business. Any proposed opening, closing or other change of the chief executive
office of Borrower, or the main banking branch of Subsidiary Bank;
(g)
Environmental Matters. Receipt of any notice that the operations of Borrower, Subsidiary Bank, or
any Subsidiary are not in full compliance with any of the requirements of any material Federal, state or local
environmental, health or safety law, rule or regulation; receipt of notice that Borrower, Subsidiary Bank, or any Subsidiary
is subject to any Federal, state or local investigation evaluating whether any material remedial action is needed to
respond to the release of any hazardous or toxic waste, substance or constituent or other substance into the
environment; or receipt of notice that any of the Properties or assets of Borrower, Subsidiary Bank, or any Subsidiary
are subject to an “Environmental Lien.” For purposes of this Section 5.13(g), “Environmental Lien” mean a Lien in
favor of any governmental or regulatory agency, entity, authority or official for (1) any liability under Federal, state or
local environmental laws, rules or regulations or (2) damages arising from or costs incurred by any such governmental
or regulatory agency, entity, authority or official in response to a release of a hazardous or toxic waste, substance or
constituent or other substance into the environment, each in excess of $1,000,000;
(h)
Material Adverse Effect. The occurrence of any change in the business, operations or condition,
financial or otherwise, of Borrower, Subsidiary Bank, or any Subsidiary that could have a Material Adverse Effect; and
(i)
Regulatory Matters. The issuance of any cease and desist order against Borrower, Subsidiary Bank,
or any Subsidiary and/or the entry of any memorandum of understanding or other agreement between Borrower,
Subsidiary Bank, or any Subsidiary and any Regulatory Agency, regardless of whether the same is voluntary or
involuntary if the impact of the same is adverse to Borrower, Subsidiary Bank or any Subsidiary.
5.15 Utilization of Loan Proceeds
Utilize the proceeds of the Revolving Credit Loans solely (a) for
working capital and general corporate purposes, (b) to finance Distributions, (c) to finance Permitted Acquisitions and
(d) to finance the repurchase of Borrower’s Capital Stock. Borrower will not request any Revolving Credit Loan and
Borrower shall not use, and the Borrower shall ensure that Subsidiary Bank and its other Subsidiaries and its or their
respective directors, officers, employees and agents shall not use, the proceeds of any Revolving Credit Loan (i) in
furtherance of an offer, payment, promise to pay, or authorization of the payment or giving of money, or anything else
of value, to any Person in violation of any Anti-Corruption Laws or (ii) in any manner that would result in the violation
of any applicable Sanctions.
5.16 Rest Period
Reduce the outstanding Revolving Credit Loans to $0.00 for a period of 30 consecutive
days at least one time during the Revolving Credit Period.
SECTION 6 - NEGATIVE COVENANTS
Borrower covenants and agrees that, as long as any of the Obligations are outstanding, it will not, and it will
not cause or permit Subsidiary Bank or any Subsidiary to, without the prior written consent of Lender, not to be
unreasonably withheld:
6.01
Indebtedness Create or incur any Indebtedness except (a) Indebtedness due Lender, (b) other
Indebtedness described on Schedule 4.10, (c) Indebtedness of Subsidiary Banks to creditors in the ordinary course
of its banking business, d) Indebtedness relating to trust preferred securities issued by Borrower (e) Indebtedness
under purchase money security agreements and Capitalized Leases and other unsecured Indebtedness, the aggregate
principal amount of which shall not exceed $1,000,000 at any one time and (f) Indebtedness incurred in connection
with Permitted Acquisitions.
6.02 Merger or Consolidation; Acquisitions Merge into or consolidate with any other entity or cause or
permit any change in the ownership of more than 10% of the Capital Stock of Subsidiary Bank, or any Subsidiary
except in connection with Permitted Acquisitions. Borrower will not, and it will cause or permit Subsidiary Bank or any
Subsidiary not to, directly or indirectly, consummate any Acquisitions other than Permitted Acquisitions.
6.03 Sale of Property Sell, lease, transfer or otherwise dispose of any Property or assets of Borrower,
Subsidiary Bank, or any Subsidiary, as the case may be, except in the ordinary course of business; provided, however,
that the foregoing shall not preclude Borrower, Subsidiary Bank, or any Subsidiary from selling, leasing, transferring
or otherwise disposing of less than substantially all of its assets other than in the ordinary course of business.
6.04 Distributions Declare or incur any liability to make any Distribution in respect of the Capital Stock
of Borrower, Subsidiary Bank, or any Subsidiary; provided that as long as no Default or Event of Default under this
Agreement has occurred and is continuing or is created thereby, (a) Subsidiary Bank shall be permitted to pay cash
Distributions to Borrower to the extent necessary to pay (i) obligations due under trust preferred securities issued by
Borrower, and (ii) the Obligations then due and payable to Lender; and (b) Borrower shall be permitted to declare and
pay cash Distributions on its Capital Stock.
6.05
Issuance of Stock etc Authorize or issue any new types, varieties or classes of Capital Stock of
Subsidiary Bank, or any Subsidiary, either preferred or common, voting or nonvoting, or any bonds or debentures,
subordinated or otherwise, or any stock warrants or options, or authorize or issue any additional shares of stock of
any existing class of stock of Subsidiary Bank, or any Subsidiary, or grant any person other than Lender any proxy for
existing shares, or cause or allow or declare any stock splits or take any other action which could, directly or indirectly,
decrease Borrower’s ownership interest in Subsidiary Bank and its other Subsidiaries.
6.06
[RESERVED]
6.07
Investments Make any advances or loans or extensions of credit to, purchase any stock, bonds,
notes, debentures or other securities of, make any expenditures on behalf of or in any manner assume liability (direct,
contingent or otherwise) for the Indebtedness of, any Person, except (a) such guarantees, loans, advances and/or
investments made by Subsidiary Bank, or any Subsidiary in the ordinary course of their banking or other business,
(b) capital contributions, loans or advances from Borrower to Subsidiary Bank, or any Subsidiary, (c) shares of stock,
obligations and/or other securities received in settlement of claims arising in the ordinary course of business, (d)
investments in private equity funds not to exceed $20,000,000 in the aggregate, including those investments made or
committed but unfunded as of the Effective Date listed on Schedule 6.06; (e) Investments incurred in connection with
Permitted Acquisitions; and (f) other investments acquired or entered into from and after the Effective Date in an
aggregate amount which shall not exceed $1,000,000; provided that immediately before or after giving effect thereto,
no Default or Event of Default exists.
6.08
Liens Create, incur, assume, permit the imposition of or allow the continuance of any Lien on any
of the Property of Borrower, Subsidiary Bank, or any Subsidiary, except for (a) Liens securing government deposits
at Subsidiary Bank, (b) Liens on Property or assets which secure loans or other extensions of credit made by Subsidiary
Bank, (c) Liens on Property or assets acquired by Subsidiary Bank or any Subsidiary by foreclosure or by deed in lieu
of foreclosure, (d) Liens on Property and assets of Subsidiary Bank that secure Indebtedness of Subsidiary Banks to
creditors in the ordinary course of its banking business (including Federal Home Loan Banks, the Federal Reserve,
and in connection with repurchase transactions), (e) liens for taxes, assessments or governmental charges that are
not past due; (f) liens, pledges, and deposits under workers’ compensation, unemployment insurance, social security
and similar Laws, (g) judgment liens, provided enforcement thereof is effectively stayed and the claims secured thereby
are being contested in good faith by appropriate proceedings and for which reserves have been established in
accordance with GAAP; (h) purchase money security interests and Capitalized Leases securing indebtedness permitted
under Section 6.01; (i) Liens created in connection with Permitted Acquisitions; and (j) the Liens listed on Schedule
4.11.
6.09 Related Parties (a) Transfer any Property to any Person that Borrower has knowledge is a Related
Party other than transfers in the ordinary course of business or (b) purchase or sign any agreement to purchase any
securities of any Related Party (whether debt, equity or otherwise), underwrite or guarantee the same, or otherwise
become obligated with respect thereto.
6.10 Margin Stock Without Lender’s prior written consent, permit any proceeds of the Revolving Credit
Loans to be used either directly or indirectly for the purpose (whether immediate, incidental or ultimate) of “purchasing
or carrying any margin stock” within the meaning of Regulation U of the Board of Governors of the Federal Reserve
System, as from time to time amended.
Conduct or engage in any business if, as a result thereof, the general nature
of the business which would thereafter be engaged in by Borrower, Subsidiary Bank, or any Subsidiary, as the case
Nature of Business
6.11
may be, would be substantially changed from the general nature of the business engaged in on the date of this
Agreement by Borrower, Subsidiary Bank, or any Subsidiary, as the case may be, except to the extent such change
with respect to any Subsidiary would not have or cause a Material Adverse Effect.
6.12 Other Agreements
Enter into any material agreement containing any provision which would be
violated or breached by the performance of its obligations hereunder or under any instrument or document delivered
or to be delivered by it hereunder or in connection herewith.
SECTION 7 - EVENTS OF DEFAULT
If any of the following (each, an “Event of Default”; and collectively, “Events of Default”) shall occur and be
continuing, unless otherwise waived in writing by Lender:
7.01
Borrower shall fail to pay any of the Obligations as and when the same shall become due and payable,
whether by reason of demand, acceleration or otherwise and such failure remains unremedied for ten (10) days after
any such date;
7.02
Any representation or warranty of Borrower, and/or Subsidiary Bank made in this Agreement or in any
of the other Loan Documents or in any certificate, agreement, instrument or statement furnished or made or delivered
pursuant hereto or thereto or in connection herewith or therewith, shall prove to have been untrue or incorrect in any
material respect when made or effected;
7.03
Borrower shall fail to perform or observe any term, covenant or provision contained in Sections 5.09,
5.10, 5.11, 5.12, 5.14, or 6 hereof;
7.04
Borrower shall fail to perform or observe any other term, covenant or provision contained in this
Agreement, and any such failure shall remain unremedied for 30 days after the earlier of (a) written notice of default
is given to Borrower by Lender or (b) Borrower obtaining Knowledge of such failure;
7.05
This Agreement or any of the other Loan Documents shall at any time for any reason cease to be in
full force and effect or shall be declared to be null and void by a court of competent jurisdiction, or if the validity or
enforceability hereof or thereof shall be contested or denied by Borrower or any Obligor, or if Borrower or any Obligor
shall deny that it has any further liability or obligation hereunder or thereunder or if Borrower or any Obligor shall fail
to comply with or observe any of the terms, provisions or conditions contained in any of the Loan Documents (other
than this Agreement);
7.06
Borrower, Subsidiary Bank, any Subsidiary or any other Obligor shall (a) voluntarily commence any
proceeding or file any petition seeking relief under Title 11 of the United States Code or any other Federal, state or
foreign bankruptcy, insolvency, receivership, liquidation or similar law, (b) consent to the institution of, or fail to
contravene in a timely and appropriate manner, any such proceeding or the filing of any such petition, (c) apply for or
consent to the appointment of a receiver, trustee, custodian, sequestrator or similar official of itself, himself or herself
or of a substantial part of its Property or assets, (d) file an answer admitting the material allegations of a petition filed
against itself, himself or herself in any such proceeding, (e) make a general assignment for the benefit of creditors,
(f) become unable, admit in writing its, his or her inability or fail generally to pay its, his or her debts as they become
due, (g) become insolvent in either the equity or bankruptcy sense of the term or (h) take any corporate or other action
for the purpose of effecting any of the foregoing;
7.07
An involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of
competent jurisdiction seeking (a) relief in respect of Borrower, Subsidiary Bank, any Subsidiary or any other Obligor,
or of a substantial part of the Property or assets of Borrower, Subsidiary Bank, any Subsidiary or any other Obligor,
under Title 11 of the United States Code or any other Federal, state or foreign bankruptcy, insolvency, receivership,
liquidation or similar law, (b) the appointment of a receiver, trustee, custodian, sequestrator or similar official of Borrower,
Subsidiary Bank, any Subsidiary or any other Obligor or of a substantial part of the Property or assets of Borrower,
Subsidiary Bank, any Subsidiary or any other Obligor or (c) the winding-up or liquidation of Borrower, Subsidiary Bank,
any Subsidiary or any other Obligor; and any such proceeding or petition shall continue undismissed for 90 consecutive
days or an order or decree approving or ordering any of the foregoing shall continue unstayed and in effect for 90
consecutive days;
7.08
Subsidiary Bank shall be placed in receivership by any Regulatory Agency;
7.09
Any Regulatory Agency shall notify Subsidiary Bank that it is not rated as “well-capitalized” (or its
equivalent) under the FDIC Capital Guidelines and such is not corrected within 30 days after said notice;
7.10
Subsidiary Bank shall cease to be an “insured bank” under or within the meaning of the Federal Deposit
Insurance Act of 1959, as amended, or a cease and desist order, memorandum of understanding or other agreement
shall be issued by any Regulatory Authority against or affecting Borrower, Subsidiary Bank, any Subsidiary or any
other Obligor which (in Lender’s opinion) has or could have a Material Adverse Effect;
7.11
Any governmental or regulatory proceeding is instituted against Borrower, Subsidiary Bank, any
Subsidiary or any other Obligor which will have a Material Adverse Effect after taking into account insurance coverage
and reserves therefor (if any);
7.12
Any Property of Borrower, Subsidiary Bank, any Subsidiary or any other Obligor with a value in excess
of $100,000 shall be seized, attached or levied upon, unless released within thirty (30) days after being seized, attached
or levied upon;
7.13
Borrower, Subsidiary Bank, any Subsidiary or any other Obligor shall have a judgment for payment
of money in excess of $2,500,000 entered against it by a court having jurisdiction in the premises, which is not insured,
and such judgment shall not be appealed in good faith or satisfied by Borrower, Subsidiary Bank or such Obligor, as
the case may be, within 30 days after the entry of such judgment;
7.14
Borrower, Subsidiary Bank, any Subsidiary or any other Obligor shall fail (and such failure shall not
have been cured or waived) to perform or observe any term, provision or condition of, or any other default or event of
default shall occur under, any agreement, document or instrument evidencing or securing any outstanding indebtedness
of Borrower, Subsidiary Bank, any Subsidiary or any other Obligor, as the case may be, for borrowed money (other
than the Obligations) in excess of $2,500,000, if the effect of such failure or default is to cause or permit such
indebtedness to be declared to be due and payable or otherwise accelerated, or required to be prepaid (other than by
a regularly scheduled required prepayment), prior to the stated maturity thereof;
7.15
The institution by Borrower, any ERISA Affiliate, Subsidiary Bank, or any Subsidiary of steps to
terminate any Pension Plan if, in order to effectuate such termination, Borrower, any ERISA Affiliate, Subsidiary Bank,
or any Subsidiary would be required to make a contribution to such Pension Plan or would incur a liability or obligation
to such Pension Plan in excess of $2,500,000; or the institution by the PBGC of steps to terminate any Pension Plan;
7.16
Borrower, Subsidiary Bank, any Subsidiary or any other Obligor shall be declared by Lender to be in
default on, or pursuant to the terms of, (a) any other present or future obligation to Lender, including, without limitation,
any other loan, line of credit, revolving credit, guaranty, letter of credit reimbursement obligation, interest rate derivative
obligation, or (b) any other present or future agreement purporting to convey to Lender a Lien upon any of the Property
or assets of Borrower, Subsidiary Bank, any Subsidiary or any other Obligor;
7.17
Regulatory Agency); or
Subsidiary Bank is prohibited from making Distributions to Borrower (whether by court order or any
7.18
The occurrence of a Change in Control.
THEN, and in each such event (other than an event described in Sections 7.06, 7.07, or 7.08), Lender may declare
the entire outstanding principal balance of and all accrued and unpaid interest on the Note issued under this Agreement
and all other amounts payable by Borrower hereunder to be immediately due and payable, whereupon all of such
outstanding principal balance and accrued and unpaid interest and all such other amounts shall become and be
immediately due and payable, without presentment, demand, protest or further notice of any kind, all of which are
hereby expressly waived by Borrower, and Lender may exercise any and all other rights and remedies which it may
have under any of the other Loan Documents or under applicable law; provided, however, that upon the occurrence
of any event described in Sections 7.06, 7.07, or 7.08, the entire outstanding principal balance of and all accrued and
unpaid interest on the Note issued under this Agreement and all other amounts payable by Borrower hereunder shall
automatically become immediately due and payable, without presentment, demand, protest or further notice of any
kind, all of which are hereby expressly waived by Borrower, and Lender may exercise any and all other rights and
remedies which it may have under any of the other Loan Documents or under applicable law.
SECTION 8 -GENERAL
8.01 No Waiver
No failure or delay by Lender or the holder of the Note in exercising any right, remedy,
power or privilege hereunder or under any other Loan Document shall operate as a waiver thereof; nor shall any single
or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, remedy,
power or privilege. The remedies provided herein and in the other Loan Documents are cumulative and not exclusive
of any remedies provided by law. Nothing herein contained shall in any way affect the right of Lender to exercise any
statutory or common law right of banker’s lien or set-off.
8.02 Right of Set-Off Upon the occurrence and during the continuance of any Event of Default under this
Agreement, Lender is hereby authorized at any time and from time to time to set-off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held and any and all other indebtedness at any
time owing by Lender to or for the credit or the account of Borrower against any and all of the Obligations irrespective
of whether or not Lender shall have made any demand hereunder or thereunder. Lender agrees promptly to notify
Borrower after any such set-off and application made by Lender, provided, however, that the failure to give such notice
shall not affect the validity of such set-off and application. The rights of Lender under this Section 8.02 are in addition
to any other rights and remedies (including, without limitation, other rights of set-off) which Lender may have. Nothing
contained in this Agreement or any other Loan Document shall impair the right of Lender to exercise any right of set-
off or counterclaim it may have against Borrower and to apply the amount subject to such exercise to the payment of
indebtedness of Borrower unrelated to this Agreement or the other Loan Documents.
8.03 Cost and Expenses
Borrower agrees to pay (a) all out-of-pocket costs and expenses of Lender
in connection with the preparation, negotiation and execution of this Agreement, the Note and the other Loan
Documents, including, without limitation, Attorneys’ Fees, (b) all recording and filing fees incurred in connection with
this Agreement and the other Loan Documents, (c) all out-of-pocket expenses of Lender in connection with the
preparation of any waiver or consent hereunder or any amendment hereof or any Event of Default or alleged Event
of Default hereunder, including, without limitation, Attorneys’ Fees, (d) if an Event of Default occurs, all out-of-pocket
costs and expenses incurred by Lender, including, without limitation, Attorneys’ Fees, in connection with such Event
of Default and collection and other enforcement proceedings resulting there from and (e) all other Attorneys’ Fee
incurred by Lender relating to or arising out of or in connection with this Agreement or any of the other Loan Documents.
8.04
Environmental Indemnity
Borrower hereby agrees to indemnify Lender and hold Lender
harmless from and against any and all losses, liabilities, damages, injuries, costs, expenses and claims of any and
every kind whatsoever (including, without limitation, court costs and Attorneys’ Fees), to the extent such losses,
liabilities, damages, injuries, costs, expenses or claims have a Material Adverse Effect, which at any time or from time
to time may be paid, incurred or suffered by, or asserted against, Lender for, with respect to or as a direct or indirect
result of the violation by Borrower, Subsidiary Bank, or any Subsidiary of any laws or regulations relating to solid waste
and/or hazardous waste treatment, storage, disposal, generation and transportation, air, water and/or noise pollution,
soil or ground or water contamination, the handling, storage or release into the environment of hazardous materials
or hazardous substances, and the transportation of hazardous materials (“Environmental Laws”); or with respect to,
or as a direct or indirect result of the presence on or under, or the escape, seepage, leakage, spillage, discharge,
emission or release from, properties utilized by Borrower, Subsidiary Bank, or any Subsidiary in the conduct of their
respective businesses into or upon any land, the atmosphere or any watercourse, body of water or wetland, of any
hazardous material or substances (including, without limitation, any losses, liabilities, damages, injuries, costs,
expenses or claims asserted or arising under the Environmental Laws); and the provisions of and undertakings and
indemnification set out in this Section 8.04 shall survive the satisfaction and payment of the Obligations and termination
of this Agreement.
8.05 General Indemnity
In addition to the payment of expenses pursuant to Section 8.03, whether or
not the transactions contemplated hereby shall be consummated, Borrower hereby agrees to indemnify, pay and hold
Lender and any holder of Note, and the officers, directors, employees, agents and affiliates of Lender and such holder
(s) (collectively called the “Indemnitees”) harmless from and against any and all other liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature
whatsoever (including, without limitation, the reasonable fees and disbursements of counsel for such indemnities in
connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not such
Indemnitees shall be designated a party thereto), that may be imposed on, incurred by or asserted against the
Indemnitees, in any manner relating to or arising out of this Agreement or other agreements executed and delivered
by Borrower, or any other Obligor in connection with the Revolving Credit Loans (but not to any other transaction
entered into by and between Borrower or any other Obligor on one hand and Lender on the other hand), the statements
contained in any commitment letters delivered by Lender, Lender’s agreement to make the Revolving Credit Loans
hereunder or the use or intended use of the proceeds of the Revolving Credit Loans hereunder (the “Indemnified
Liabilities”); that Borrower shall have no obligation to the Indemnitees with respect to Indemnified Liabilities arising
from the negligence or willful misconduct of the Indemnitees as determined by a court of competent jurisdiction. To
the extent that the undertaking to indemnify, pay and hold harmless set forth in the preceding sentence may be
unenforceable because it is violative of any law or public policy, Borrower shall contribute the maximum portion that
it is permitted to pay and satisfy under applicable law to the payment and satisfaction of all Indemnified Liabilities
incurred by the Indemnitees or any of them. The provisions of the undertakings and indemnification set out in this
Section 9.05 shall survive satisfaction and payment of the Obligations and termination of this Agreement.
8.06
Authority to Act Lender shall be entitled to act on any notices and instructions (telephonic or written)
reasonably believed by Lender to have been delivered by any Person authorized to act on behalf of Borrower pursuant
hereto, regardless of whether such notice or instruction was in fact delivered by a Person authorized to act on behalf
of Borrower, and Borrower hereby agrees to indemnify Lender and hold Lender harmless from and against any and
all losses and expenses, if any, ensuing from any such action. Lender acknowledges and agrees that the only Persons
authorized to act on behalf of Borrower are the Chief Executive Officer, Chief Financial Officer and the Senior Vice
President & Controller of Borrower and the President of Subsidiary Bank.
8.07 Notices Each notice, request, demand, consent, confirmation and/or other communication under this
Agreement shall be in writing and delivered in person or sent by telecopy, recognized overnight courier or registered
or certified mail, return receipt requested and postage prepaid, to the applicable party at its address or telecopy number
set forth on the signature page(s) of this Agreement, or at such other address or telecopy number as any party hereto
may designate as its address or telecopy number for communications under this Agreement by notice so given. Such
notices shall be deemed effective on the day on which delivered or sent if delivered in person or sent by telecopy, on
the first Business Day after the day on which sent, if sent by recognized overnight courier or on the third Business Day
after the day on which mailed, if sent by registered or certified mail. Notices and other communications to Lender
hereunder may be delivered or furnished by electronic communication (including e mail) pursuant to procedures
approved by Lender. Lender or Borrower may, in its discretion, agree to accept notices and other communications to
it hereunder by electronic communications pursuant to procedures approved by it; provided that approval of such
procedures may be limited to particular notices or communications. Unless Lender otherwise prescribes, notices and
other communications sent to an e-mail address shall be deemed received upon the sender's receipt of an
acknowledgement from the intended recipient (such as by the “return receipt requested” function, as available, return
e-mail or other written acknowledgement); provided further that if such notice or other communication is not sent during
the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the
opening of business on the next Business Day for the recipient.
8.08 Consent to Jurisdiction; Waiver of Jury Trial
BORROWER IRREVOCABLY SUBMITS TO THE
NON-EXCLUSIVE JURISDICTION OF ANY MISSOURI STATE COURT SITTING IN ST. LOUIS COUNTY, MISSOURI,
OR ANY UNITED STATES OF AMERICA COURT SITTING IN THE EASTERN DISTRICT OF MISSOURI, EASTERN
DIVISION, AS LENDER MAY ELECT, IN ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING
TO THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT. BORROWER HEREBY IRREVOCABLY
AGREES THAT ALL CLAIMS IN RESPECT TO SUCH SUIT, ACTION OR PROCEEDING MAY BE HELD AND
DETERMINED IN ANY OF SUCH COURTS. BORROWER IRREVOCABLY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY LAW, ANY OBJECTION WHICH BORROWER MAY NOW OR HEREAFTER HAVE TO THE LAYING
OF VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT, AND BORROWER
FURTHER IRREVOCABLY WAIVES ANY CLAIM THAT SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY
SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. BORROWER HEREBY EXPRESSLY
WAIVES ALL RIGHTS OF ANY OTHER JURISDICTION WHICH BORROWER MAY NOW OR HEREAFTER HAVE
BY REASON OF ITS PRESENT OR SUBSEQUENT DOMICILES. BORROWER AUTHORIZES THE SERVICE OF
PROCESS UPON BORROWER BY REGISTERED MAIL SENT TO BORROWER AT ITS ADDRESS SET FORTH IN
SECTION 8.07. BORROWER AND LENDER IRREVOCABLY WAIVE THE RIGHT TO TRIAL BY JURY WITH
RESPECT TO ANY ACTION IN WHICH BORROWER AND LENDER ARE PARTIES.
Lender’s books and records showing the account between Borrower
and Lender shall be admissible in evidence in any action or proceeding and shall constitute prima facie proof thereof.
Lender's Books and Records
8.09
8.10 Governing Law; Amendments This Agreement, the Note, and all of the other Loan Documents shall
be governed by and construed in accordance with the internal laws of the State of Missouri, and this Agreement and
the other Loan Documents may not be changed, nor may any term, condition or Event of Default be waived, modified
or discharged orally but only by an agreement in writing, signed by the party against whom enforcement of any waiver,
change, modification or discharge is sought.
8.11
References; Headings for Convenience Unless otherwise specified herein, all references herein to
Section numbers refer to section numbers of this Agreement, and all references herein to Schedule 2.01(b), 4.05, 4.08,
4.10, or 4.11, or Exhibit A or B refer to attached Schedule 2.01(b), 4.05, 4.08, 4.10, or 4.11, or Exhibit A or B, which
are hereby incorporated herein by reference. The section headings are furnished for the convenience of the parties
and are not to be considered in the construction or interpretation of this Agreement.
8.12
Binding Agreement
This Agreement shall be binding upon and inure to the benefit of Borrower
and its successors and Lender and its successors and assigns. Borrower may not assign or delegate any of its rights
or obligations under this Agreement.
8.13
Severability
The provisions of this Agreement are intended to be severable. If any provision of
this Agreement shall be held invalid or unenforceable in whole or in part in any jurisdiction, such provision shall, as to
such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without in any manner affecting the
validity or enforceability thereof in any other jurisdiction or the remaining provisions hereof in any jurisdiction.
8.14 Counterparts This Agreement may be executed in any number of counterparts, each of which shall
be deemed an original, but all of which together shall constitute one and the same instrument. Delivery of an executed
counterpart of a signature page of this Agreement by telecopy or e-mail shall be effective as delivery of a manually
executed counterpart of this Agreement.
8.15 Resurrection of Obiliations
To the extent that Lender receives any payment on account of any
of the Obligations, and any such payment(s) or any part thereof are subsequently invalidated, declared to be fraudulent
or preferential, set aside, subordinated and/or required to be repaid to a trustee, receiver or any other Person under
any bankruptcy act, state or Federal law, common law or equitable cause, then, to the extent of such payment(s)
received, the Obligations or part thereof intended to be satisfied and any and all liens, security interests, mortgages,
deeds of trust and/or other encumbrances upon or pertaining to any assets of Borrower and theretofore created and/
or existing in favor of Lender as security for the payment of such the Obligations shall be revived and continue in full
force and effect, as if such payment(s) had not been received by Lender and applied on account of the Obligations.
8.16
Entire Agreement
This notice is provided pursuant to Section 432.047, R.S.Mo. As used herein,
“borrower” means Borrower, “creditor” means Lender and each of “the credit agreement” and “this writing” means this
Agreement and the other Loan Documents. ORAL OR UNEXECUTED AGREEMENTS OR COMMITMENTS TO
LOAN MONEY, EXTEND CREDIT OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT INCLUDING
PROMISES TO EXTEND OR RENEW SUCH DEBT ARE NOT ENFORCEABLE, REGARDLESS OF THE LEGAL
THEORY UPON WHICH IT IS BASED THAT IS IN ANY WAY RELATED TO THE CREDIT AGREEMENT. TO
PROTECT YOU (BORROWER(S)) AND US (CREDITOR) FROM MISUNDERSTANDING OR DISAPPOINTMENT,
ANY AGREEMENTS WE REACH COVERING SUCH MATTERS ARE CONTAINED IN THIS WRITING, WHICH IS
THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN US, EXCEPT AS WE MAY
LATER AGREE IN WRITING TO MODIFY IT. This Agreement embodies the entire agreement and understanding
between the parties hereto and supersedes all prior agreements and understandings (oral or written) relating to the
subject matter hereof.
8.17 USA PATRIOT Act
This notice is provided to Borrower pursuant to Section 326 of the USA
PATRIOT Act of 2001, 31 U.S.C. Section 5318. IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING
A NEW ACCOUNT. To help the government fight the funding of terrorism and money laundering activities, federal law
requires all financial institutions to obtain, verify and record information that identifies each person or entity that opens
an account, including any deposit account, treasury management account, loan, other extension of credit, or other
financial services product. What this means for Borrower: When Borrower opens an account, if Borrower is an
individual, Lender will ask for Borrower’s name, taxpayer identification number, business address, and other information
that will allow Lender to identify Borrower. Lender may also ask, if Borrower is an individual, to see Borrower’s driver’s
license or other identifying documents, and, if Borrower is not an individual, to see Borrower’s legal organizational
documents or other identifying documents.
8.18 Confidentiality Lender agrees to use reasonable precautions to keep confidential, in accordance with
its customary procedures for handling confidential information of this nature and in accordance with safe and sound
banking practices, any nonpublic information supplied to Lender, as the case may be, by Borrower, Subsidiary Bank,
or any Subsidiary pursuant to this Agreement or any other Loan Documents which is identified by Borrower as being
confidential at the time the same is delivered to Lender; provided, however, that nothing contained in this Section 8.18
shall prohibit or limit the disclosure by Lender of any such information (a) to the extent required by any statute, rule,
regulation, subpoena or judicial process, (b) to any Regulatory Agency having jurisdiction over Lender, (c) to any
professional advisors, including counsel and accountants, for Lender, (d) to any bank examiners or auditors, (e) in
connection with any litigation to which Lender is a party, (f) in connection with the enforcement of the rights and remedies
of Lender, under this Agreement and/or under other Loan Documents, or (g) to any assignee or participant (or
prospective assignee or participant); and provided further, that in no event shall Lender be obligated or required to
return any materials furnished to such Person by Borrower, Subsidiary Bank, or any Subsidiary under this Agreement
or any other Loan Documents. In no event shall Lender use any non-public information supplied to Lender by Borrower
(A) in violation of securities laws, including, without limitation, insider trading laws, rules and regulations or (B) in
connection with any activity in competition with the business of the Borrower or Subsidiary Bank, including without
limitation, in connection with proposing terms for loan transactions to existing or potential customers of Subsidiary
Bank. Notwithstanding the foregoing, Lender shall not have any liability to Borrower, Subsidiary Bank, or any Subsidiary,
or any stockholder, member, partner, joint venturer, director, officer, employee or agent of Borrower, Subsidiary Bank,
or any Subsidiary by reason of, or in any way claimed to be related to, any disclosure by such Person of any information
with respect to Borrower, Subsidiary Bank, or any Subsidiary except to the extent the same results from the gross
negligence or willful misconduct of such Person as determined by a court of competent jurisdiction in a final,
nonappealable order. The provisions of this Section 8.18 shall survive the expiration or termination of this Agreement.
8.19 Waiver of Consequential Damages, etc. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE
LAW, BORROWER SHALL NOT ASSERT, AND BORROWER HEREBY WAIVES, ANY CLAIM AGAINST LENDER,
ON ANY THEORY OF LIABILITY, FOR ANY SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES (AS
OPPOSED TO DIRECT OR ACTUAL DAMAGES) ARISING OUT OF, IN CONNECTION WITH, OR AS A RESULT OF,
THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT, THE TRANSACTIONS CONTEMPLATED
HEREBY OR THEREBY AND/OR ANY LOAN ADVANCE AND/OR THE USE OF THE PROCEEDS OF ANY LOAN
ADVANCE.
8.20
Termination of this Agreement This Agreement shall remain in full force and effect and may not be
terminated by Borrower unless and until (a) all of Borrower’s Obligations have been fully, finally and indefeasibly paid
in cash, and (b) Lender does not have any further commitment or obligation to advance funds, make loans, issue
letters of credit and/or extend credit to or for the account or benefit of Borrower under this Agreement, the Note or any
other Loan Documents.
8.21 Computations Where the character or amount of any asset or liability or item of income or expense
is required to be determined, or any consolidation or other accounting computation is required to be made, for the
purpose of this Agreement, such determination or calculation shall, to the extent applicable and except as otherwise
specified in this Agreement, be made in accordance with GAAP, consistently applied; provided that if Borrower notifies
Lender that Borrower wishes to amend any covenant in Sections 5.10, 5.11 or 5.12 (or any related definition) to eliminate
or to take into account the effect of any change in GAAP on the operation of such covenant (or if Lender notifies
Borrower that Lender wishes to amend Sections 5.10, 5.11 or 5.12 (or any related definition) for such purpose), then
Borrower’s compliance with such covenant shall be determined on the basis of GAAP in effect immediately before the
relevant change in GAAP became effective, until either such notice is withdrawn or such covenant (or related definition)
is amended in a manner satisfactory to Borrower and Lender.
The parties executed this Agreement as of the day and year first above written.
[SIGNATURES ON FOLLOWING PAGE]
SIGNATURE PAGE-
LOAN AGREEMENT- February 24, 2016
Borrower:
ENTERPRISE FINANCIAL SERVICES CORP
By: /s/ Keene S. Turner
Name: Keene S. Turner
Title: Executive Vice President and Chief Financial Officer
Address:
150 N. Meramec Avenue
Clayton, Missouri 63105
Attention: Keene S. Turner
Telecopier: (314) ________
Lender:
U.S. BANK NATIONAL ASSOCIATION
By: /s/ Phillip S. Hoerchler
Name: Phillip S. Hoerchler
Title: Vice President
Address:
One US Bank Plaza (SL-MO-T11S)
7th Street & Washington Avenue
St. Louis, Missouri 63101
Attention: Financial Institutions Banking Division
Telecopier: (314) 418-2173
EXHIBIT A
Form of Note
REVOLVING CREDIT NOTE
$20,000,000.00 St. Louis, Missouri
February 24, 2016
FOR VALUE RECEIVED, on the last day of the Revolving Credit Period, the undersigned, ENTERPRISE
FINANCIAL SERVICES CORP. a Delaware corporation (“Borrower”), promises to pay to the order of U.S. BANK
NATIONAL ASSOCIATION, a national banking association (“Lender”), the principal sum of Twenty Million Dollars
($20,000,000.00) or such lesser sum as may then constitute the aggregate unpaid principal amount of all Revolving
Credit Loans made by Lender to Borrower pursuant to the Loan Agreement (defined below). The aggregate principal
amount of Revolving Credit Loans which Lender shall be committed to have outstanding under this Revolving Credit
Note (this “Note”) at any one time shall not exceed $20,000,000, which amount may be borrowed, paid, reborrowed
and repaid, in whole or in part, subject to the terms and conditions of this Note and of the Loan Agreement.
Borrower further promises to pay to the order of Lender interest on the unpaid principal balance from time to
time outstanding under this Note at the rate(s) and on the dates set forth in the Loan Agreement.
All payments received by Lender under this Note shall be allocated among the principal, interest, collection
costs and expenses and other amounts due under this Note in such order and manner as Lender shall elect. The
amount of interest accruing under this Note shall be computed on an actual day, 360-day year basis.
All payments of principal and interest under this Note shall be made in lawful currency of the United States in
Federal or other immediately available funds at the office of Lender situated at One US Bank Plaza, 7th Street &
Washington Avenue, St. Louis, Missouri 63101, or at such other place as Lender may from time to time designate in
writing.
Lender shall record in its books and records the date and amount of each Revolving Credit Loan made by it
to Borrower under this Note and the date and amount of each payment of principal and/or interest made by Borrower
with respect thereto; provided, however, that the obligation of Borrower to repay each Revolving Credit Loan made to
Borrower under this Note shall be absolute and unconditional, notwithstanding any failure of Lender to make any such
recordation or any mistake by Lender in connection with any such recordation. The books and records of Lender
showing the account between Lender and Borrower shall be admissible in evidence in any action or proceeding and
shall constitute prima facie proof of the items therein set forth absent manifest error.
This Note is the “Note” referred to in the Loan Agreement dated as of the date hereof by and between Borrower
and Lender, as the same may from time to time be amended, modified, extended, renewed or restated (the “Loan
Agreement”; all capitalized terms used and not otherwise defined in this Note shall have the respective meanings
ascribed to them in the Loan Agreement). The Loan Agreement, among other things, contains provisions for
acceleration of the maturity of this Note upon the occurrence of certain stated events and also for prepayments on
account of the principal of this Note and interest on this Note prior to the maturity of this Note upon the terms and
conditions specified therein.
If Borrower shall fail to make any payment of any principal of or interest on this Note as and when the same
shall become due and payable subject to any applicable grace period, or if any Event of Default shall occur under or
within the meaning of the Loan Agreement, then Lender’s obligation to make additional Revolving Credit Loans under
this Note may be terminated in the manner and with the effect as provided in the Loan Agreement and the entire
outstanding principal balance of this Note and all accrued and unpaid interest thereon may be declared to be immediately
due and payable in the manner and with the effect as provided in the Loan Agreement.
In the event that any payment of any principal of or interest on this Note is not paid when due, whether by
reason of maturity, acceleration or otherwise, and this Note is placed in the hands of an attorney or attorneys for
collection, or if this Note is placed in the hands of an attorney or attorneys for representation of Lender in connection
with bankruptcy or insolvency proceedings relating to or affecting this Note, Borrower hereby promises to pay to the
order of Lender, in addition to all other amounts otherwise due on, under or in respect of this Note, the costs and
expenses of such collection, foreclosure and representation, including, without limitation, reasonable attorneys’ fees
and expenses (whether or not litigation shall be commenced in aid thereof). All parties hereto severally waive
presentment for payment, demand for payment, protest, notice of protest and notice of dishonor.
This Note shall be governed by and construed in accordance with the substantive laws of the State of Missouri
(without reference to conflict of law principles).
Borrower:
ENTERPRISE FINANCIAL SERVICES CORP
By:
Name: Keene S. Turner
Title: Executive Vice President and Chief Financial Officer
EXHIBIT B
Form of Certificate
______, 201__
U.S. Bank National Association
One US Bank Plaza (SL-MO-T11S)
7th Street & Washington Avenue
St. Louis, Missouri 63101
Attention: Financial Institutions Banking Division
Ladies and Gentlemen:
Reference is hereby made to the Loan Agreement dated as of February 24, 2016, by and between U.S. Bank National
Association (“Lender”) and Enterprise Financial Services Corp (“Borrower”) (as from time to time amended, the
“Agreement”; all capitalized terms used and not otherwise defined herein shall have the respective meanings ascribed
to them in the Agreement).
The undersigned hereby certify to you to the best of their knowledge that as of the date hereof:
(a)
(b)
all of the representations and warranties set forth in Section 4 of the Agreement are true and correct;
no violation or breach of any of the affirmative covenants set forth in Section 5 of the Agreement has
occurred and is continuing;
(c)
no violation or breach of any of the negative covenants set forth in Section 6 of the Agreement has
occurred and is continuing;
(d)
no Default or Event of Default under the Agreement has occurred and is continuing;
(e)
the financial statements of Borrower and Subsidiary Bank delivered to you with this letter or
contemporaneously delivered via electronic means pursuant to Section 5.03(g) of the Agreement, are true, correct
and complete and have been prepared in accordance with GAAP; and the financial covenant information set forth in
Schedule 1 to this letter is true and correct.
Very truly yours,
ENTERPRISE FINANCIAL SERVICES CORP
By:
Name:
Title:
ENTERPRISE BANK & TRUST
By:
Name:
Title:
SCHEDULE 1
Financial Covenant information
as of Fiscal Quarter ending ______, 201__
1.
(a)
Risk-Based Capital Adequacy Guidelines (Section 5.09)
Borrower (Holding Company Guidelines): In compliance yes no
Total risk based capital (12 C.F.R. Part 225):
_____%
(b)
Subsidiary Bank (FDIC Capital Guidelines): In compliance yes no
Total risk based capital (12 C.F.R. 325.103(b)(1)(i)):
_____%
[requirements- Borrower (consolidated)- at least 11.25%.
Subsidiary Bank- at 10.50%]]
2.
(a)
(b)
(c)
3.
(a)
(b)
(c)
(d)
(e)
(f)
(g)
Loan Loss Reserves to Non-Performing Loans (Section 5.10)
Loan Loss Reserves
$______
Non-Performing Loans
$______
[2.a. divided by 2.b.]
______%
[requirement- at least 80%]
Fixed Charge Coverage Ratio (measured on a rolling-four quarter basis) (Section 5.11)
Net Income
$______
Noncash income
$_______
Noncash expenses
$______
Interest expense
$_______
Distributions (cash)
$______
Numerator
[3.(a) minus 3(b) plus 3(c) plus 3(d) minus 3(e)]
$______
20% of Revolving
Credit Commitment
$4,000,000
(h)
Interest expense
$______
(i)
(j)
Denominator
[3.(g) plus 3.(h)]
Fixed Charge Coverage Ratio
[3.(f) divided by 3.(i)]
$______
______ to 1.00
[requirement- at least 1.35 to 1.00]
Non-Performing Loans plus Other Real Estate to Primary Capital (Section 5.12)
Non-Performing Loans
Other Real Estate
Numerator [4(a) plus 4.(b)]
Primary Capital
4.(c) divided by 4(d)
[requirement- not more than 18%]
Holding Company Liquidity (Section 5.13)
Cash
Cash Equivalents
$______
$______
$______
$______
$______
$______
_____%
Holding Company Liquidity [5(a) plus 5(b)]
$______
[requirement- at least $5,000,000]
4.
(a)
(b)
(c)
(d)
(e)
5.
(a)
(b)
(c)
Exhibit 12.1
Enterprise Financial Services Corp
Statement Regarding Computation of Ratios of Earnings to Fixed Charges and Preferred Stock Dividend Requirement
(unaudited)
($ in thousands)
Earnings (1):
Years ended December 31,
2015
2014
2013
2012
2011
Income (loss) before income taxes
$
58,401
$ 41,044
$ 50,080
$ 42,830
$ 38,225
Add: Fixed charges from below
12,369
14,386
18,137
28,002
33,950
Earnings including interest expense on deposits (a) $
70,770
$ 55,430
$ 68,217
$ 70,832
$ 72,175
Less: interest expense on deposits
Earnings excluding interest expense on deposits (b) $
(10,412)
60,358
(10,487)
$ 44,943
(11,142)
$ 57,075
(15,406)
$ 55,426
(21,658)
$ 50,517
Fixed charges (1):
Interest on deposits
Interest on borrowings
TARP preferred stock dividends (pre-tax)
$
10,412
$ 10,487
$ 11,142
$ 15,406
$ 21,658
1,957
—
3,899
—
6,995
—
7,761
4,835
8,497
3,795
Fixed charges including interest on deposits (c)
$
12,369
$ 14,386
$ 18,137
$ 28,002
$ 33,950
Less: interest expense on deposits
(10,412)
(10,487)
(11,142)
(15,406)
(21,658)
Fixed charges excluding interest expense on
deposits (d)
Ratio of earnings to combined fixed charges
Excluding interest on deposits (b/d) (2)
Including interest on deposits (a/c)
Ratio of earnings to combined fixed charges and
preferred dividends:
Excluding interest on deposits (b/d) (2)
Including interest on deposits (a/c)
(1) As defined in Item 503(d) of Regulation S-K.
$
1,957
$
3,899
$
6,995
$ 12,596
$ 12,292
30.85x
5.72x
11.53x
3.85x
8.16x
3.76x
4.40x
2.53x
4.11x
2.13x
30.85x
5.72x
11.53x
3.85x
8.16x
3.76x
6.52x
2.85x
5.50x
2.27x
(2) The ratio of earnings to fixed charges and preferred dividends, excluding interest on deposits, is being provided as an
additional measure to provide comparability to the ratios disclosed by all other issuers of debt securities.
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Company
Enterprise Financial Services Corp
Enterprise Bank & Trust
Enterprise Real Estate Mortgage Company, LLC
Enterprise IHC, LLC
State of Organization
Delaware
Missouri
Missouri
Missouri
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-156771, 333-165551, and
333-197818 on Form S-3, and Registration Statement Nos. 333-82087, 333-100928, 333-136230,
333-148328, 333-152985, 333-183177, and 333-192497 on Form S-8 of our reports dated February 26, 2016,
relating to the consolidated financial statements of Enterprise Financial Services Corp and subsidiaries (the
“Company”), and the effectiveness of the Company's internal control over financial reporting, appearing in
this Annual Report on Form 10-K of Enterprise Financial Services Corp for the year ended December 31,
2015.
/s/ Deloitte & Touche LLP
St. Louis, Missouri
February 26, 2016
POWER OF ATTORNEY
Exhibit 24.1
The undersigned members of the Board of Directors and Executive Officers of Enterprise Financial Services Corp, a
Delaware corporation (the "Company") hereby appoint Keene S. Turner or Peter F. Benoist as their Attorney-in-Fact
for the purpose of signing the Company's Securities Exchange Commission Form 10-K (and any amendments thereto)
for the year ended December 31, 2015.
Signature
/s/ James J. Murphy, Jr.
James J. Murphy, Jr.
/s/ John Q. Arnold
John Q. Arnold
/s/ Michael A. DeCola
Michael A. DeCola
/s/ William H. Downey
William H. Downey
/s/ John S. Eulich
John S. Eulich
/s/ Robert E. Guest, Jr.
Robert E. Guest, Jr.
/s/ James M. Havel
James M. Havel
/s/ Judith S. Heeter
Judith S. Heeter
/s/ Michael R. Holmes
Michael R. Holmes
/s/ Birch M. Mullins
Birch M. Mullins
/s/ Sandra A. Van Trease
Sandra A. Van Trease
Title
Date
Chairman of the Board
February 26, 2016
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Peter F. Benoist, certify that:
1.
I have reviewed this annual report on Form 10-K of Enterprise Financial Services Corp;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
/s/ Peter F. Benoist
By:
Peter F. Benoist
Chief Executive Officer
Date: February 26, 2016
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Keene S. Turner, certify that:
1.
I have reviewed this annual report on Form 10-K of Enterprise Financial Services Corp;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rule13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
By: /s/ Keene S. Turner
Date: February 26, 2016
Keene S. Turner
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Enterprise Financial Services Corp (the “Company”) on Form 10-K for the period ended
December 31, 2015 as filed with the Securities and Exchange Commission (the “Report”), I, Peter F. Benoist, Chief Executive
Officer of the Company, certify to the best of my knowledge and belief, pursuant to 18 U.S.C. § 1350, as enacted pursuant to §
906 of the Sarbanes-Oxley Act of 2002, that:
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and the
information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
/s/ Peter F. Benoist
Peter F. Benoist
Chief Executive Officer
February 26, 2016
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Enterprise Financial Services Corp (the “Company”) on Form 10-K for the period ended
December 31, 2015 as filed with the Securities and Exchange Commission (the “Report”), I, Keene S. Turner, Chief Financial
Officer of the Company, certify to the best of my knowledge and belief, pursuant to 18 U.S.C. § 1350, as enacted pursuant to §
906 of the Sarbanes-Oxley Act of 2002, that:
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and the
information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
/s/ Keene S. Turner
Keene S. Turner
Chief Financial Officer
February 26, 2016