ENTERPRISE FINANCIAL SERVICES CORP - Quarter Report: 2017 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q



[X]		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2017.

[ ]		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______ to ______

		Commission file number 001-15373

ENTERPRISE FINANCIAL SERVICES CORP

Incorporated in the State of Delaware

I.R.S. Employer Identification # 43-1706259

Address: 150 North Meramec

Clayton, MO 63105

Telephone: (314) 725-5500

___________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer [ ]	Accelerated filer [X]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)	Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes [ ] No [X]

As of April 26, 2017, the Registrant had 23,481,668 shares of outstanding common stock, $0.01 par value.

This document is also available through our website at http://www.enterprisebank.com.

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

TABLE OF CONTENTS



		Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets (Unaudited)		1

Condensed Consolidated Statements of Operations (Unaudited)		2

Condensed Consolidated Statements of Comprehensive Income (Unaudited)		3

Condensed Consolidated Statements of Shareholders' Equity (Unaudited)		4

Condensed Consolidated Statements of Cash Flows (Unaudited)		5

Notes to Condensed Consolidated Financial Statements (Unaudited)		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		27

Item 3. Quantitative and Qualitative Disclosures About Market Risk		49

Item 4. Controls and Procedures		50

PART II - OTHER INFORMATION

Item 1. Legal Proceedings		50

Item 1A. Risk Factors		50

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		51

Item 6. Exhibits		51

Signatures		52

PART 1 - ITEM 1 - FINANCIAL STATEMENTS

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)



(in thousands, except share and per share data)	March 31, 2017			December 31, 2016
Assets
Cash and due from banks	$	73,387		$	54,288
Federal funds sold	1,112			446
Interest-bearing deposits (including $2,011 and $675 pledged as collateral)	134,502			144,068
Total cash and cash equivalents	209,001			198,802
Interest-bearing deposits greater than 90 days	2,695			980
Securities available for sale	593,685			460,797
Securities held to maturity	79,236			80,463
Loans held for sale	5,380			9,562
Loans	3,891,064			3,158,161
Less: Allowance for loan losses	44,625			43,409
Total loans, net	3,846,439			3,114,752
Other real estate	2,925			980
Other investments, at cost	24,222			14,840
Fixed assets, net	34,291			14,910
Accrued interest receivable	12,229			11,117
State tax credits held for sale (including $1,458 and $3,585 carried at fair value)	35,431			38,071
Goodwill	113,886			30,334
Intangible assets, net	11,758			2,151
Other assets	135,048			103,569
Total assets	$	5,106,226		$	4,081,328

Liabilities and Shareholders' Equity
Demand deposits	$	1,037,001		$	866,756
Interest-bearing transaction accounts	844,775			731,539
Money market accounts	1,354,434			1,050,472
Savings	189,303			111,435
Certificates of deposit:
Brokered	145,436			117,145
Other	460,671			356,014
Total deposits	4,031,620			3,233,361
Subordinated debentures and notes (net of debt issuance cost of $1,234 and $1,267)	118,067			105,540
Federal Home Loan Bank advances	151,115			—
Other borrowings	235,052			276,980
Accrued interest payable	1,914			1,105
Other liabilities	30,537			77,244
Total liabilities	4,568,305			3,694,230

Shareholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized; 0 shares issued and outstanding	—			—
Common stock, $0.01 par value; 30,000,000 shares authorized; 23,699,453 and 20,306,353 shares issued	237			203
Treasury stock, at cost; 261,718 shares	(6,632		)	(6,632		)
Additional paid in capital	348,259			213,078
Retained earnings	197,231			182,190
Accumulated other comprehensive income	(1,174		)	(1,741		)
Total shareholders' equity	537,921			387,098
Total liabilities and shareholders' equity	$	5,106,226		$	4,081,328

See accompanying notes to consolidated financial statements.

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)



	Three months ended March 31,
(in thousands, except per share data)	2017			2016
Interest income:
Interest and fees on loans	$	39,926		$	32,608
Interest on debt securities:
Taxable	3,230			2,387
Nontaxable	386			332
Interest on interest-bearing deposits	130			61
Dividends on equity securities	68			72
Total interest income	43,740			35,460
Interest expense:
Interest-bearing transaction accounts	675			306
Money market accounts	1,493			1,006
Savings accounts	82			60
Certificates of deposit	1,215			1,019
Subordinated debentures and notes	1,164			348
Federal Home Loan Bank advances	330			182
Notes payable and other borrowings	139			111
Total interest expense	5,098			3,032
Net interest income	38,642			32,428
Provision for portfolio loan losses	1,533			833
Provision reversal for purchased credit impaired loan losses	(148		)	(73		)
Net interest income after provision for loan losses	37,257			31,668
Noninterest income:
Service charges on deposit accounts	2,510			2,043
Wealth management revenue	1,833			1,662
Other service charges and fee income	1,280			868
Gain on state tax credits, net	246			518
Gain on sale of other real estate	—			122
Miscellaneous income	1,107			792
Total noninterest income	6,976			6,005
Noninterest expense:
Employee compensation and benefits	15,208			12,647
Occupancy	1,929			1,683
Data processing	1,633			1,104
Professional fees	837			684
FDIC and other insurance	824			723
Loan legal and other real estate expense	345			357
Merger related expenses	1,667			—
Other	4,293			3,564
Total noninterest expense	26,736			20,762

Income before income tax expense	17,497			16,911
Income tax expense	5,106			5,886
Net income	$	12,391		$	11,025

Earnings per common share
Basic	$	0.57		$	0.55
Diluted	0.56			0.54

See accompanying notes to consolidated financial statements.

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Unaudited)



	Three months ended March 31,
(in thousands)	2017		2016
Net income	$	12,391	$	11,025
Other comprehensive income, net of tax:
Unrealized gains on investment securities arising during the period, net of income tax expense for three months of $348 and $2,304, respectively	567		3,711
Total other comprehensive income	567		3,711
Total comprehensive income	$	12,958	$	14,736

See accompanying notes to consolidated financial statements.

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)



(in thousands, except per share data)	Preferred Stock		Common Stock		Treasury Stock			Additional paid in capital			Retained earnings			Accumulated other comprehensive income (loss)			Total shareholders' equity
Balance December 31, 2016	$	—	$	203	$	(6,632	)	$	213,078		$	182,190		$	(1,741	)	$	387,098
Net income	—		—		—			—			12,391			—			12,391
Other comprehensive income	—		—		—			—			—			567			567
Total comprehensive income	—		—		—			—			12,391			567			12,958
Cash dividends paid on common shares, $0.11 per share	—		—		—			—			(2,579		)	—			(2,579		)
Issuance under equity compensation plans, 93,236 shares, net	—		1		—			(2,152		)	—			—			(2,151		)
Share-based compensation	—		—		—			866			—			—			866
Shares issued in connection with acquisition of Jefferson County Bancshares, Inc.	—		33		—			141,696			—			—			141,729
Reclassification for the adoption of ASU 2016-09	—		—		—			(5,229		)	5,229			—			—
Balance March 31, 2017	$	—	$	237	$	(6,632	)	$	348,259		$	197,231		$	(1,174	)	$	537,921

(in thousands, except per share data)	Preferred Stock		Common Stock		Treasury Stock			Additional paid in capital			Retained earnings			Accumulated other comprehensive income (loss)			Total shareholders' equity
Balance December 31, 2015	$	—	$	201	$	(1,743	)	$	210,589		$	141,564		$	218		$	350,829
Net income	—		—		—			—			11,025			—			11,025
Other comprehensive income	—		—		—			—			—			3,711			3,711
Cash dividends paid on common shares, $0.09 per share	—		—		—			—			(1,802		)	—			(1,802		)
Repurchase of common shares	—		—		(4,211		)	—			—			—			(4,211		)
Issuance under equity compensation plans, 136,010 shares, net	—		1		—			(1,746		)	—			—			(1,745		)
Share-based compensation	—		—		—			794			—			—			794
Excess tax benefit related to equity compensation plans	—		—		—			783			—			—			783
Balance March 31, 2016	$	—	$	202	$	(5,954	)	$	210,420		$	150,787		$	3,929		$	359,384

See accompanying notes to consolidated financial statements.

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)



	Three months ended March 31,
(in thousands, except share data)	2017			2016
Cash flows from operating activities:
Net income	$	12,391		$	11,025
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation	387			535
Provision for loan losses	1,385			760
Deferred income taxes	962			1,343
Net amortization of debt securities	1,310			721
Amortization of intangible assets	446			243
Mortgage loans originated for sale	(38,602		)	(29,287		)
Proceeds from mortgage loans sold	42,710			29,606
Gain on sale of other real estate	—			(122		)
Gain on state tax credits, net	(246		)	(518		)
Excess tax benefit of share-based compensation	—			(783		)
Share-based compensation	866			794
Valuation adjustment on other real estate	18			1
Net accretion of loan discount and indemnification asset	(1,014		)	(2,249		)
Changes in:
Accrued interest receivable	1,682			(398		)
Accrued interest payable	156			(87		)
Other assets	(1,746		)	(9,303		)
Other liabilities	(51,693		)	1,837
Net cash (used in) provided by operating activities	(30,988		)	4,118
Cash flows from investing activities:
Proceeds from JCB acquisition, net of cash purchase price	6,171			—
Net increase in loans	(57,054		)	(71,324		)
Proceeds from the sale of securities, available for sale	143,554			—
Proceeds from the paydown or maturity of securities, available for sale	42,223			12,894
Proceeds from the paydown or maturity of securities, held to maturity	1,180			431
Proceeds from the redemption of other investments	12,033			17,653
Proceeds from the sale of state tax credits held for sale	4,093			3,412
Proceeds from the sale of other real estate	—			671
Payments for the purchase/origination of:
Available for sale debt and equity securities	(169,842		)	(17,637		)
Other investments	(20,318		)	(19,430		)
State tax credits held for sale	(1,298		)	(2,349		)
Fixed assets	(247		)	(505		)
Net cash used in investing activities	(39,505		)	(76,184		)
Cash flows from financing activities:
Net increase in noninterest-bearing deposit accounts	9,646			2,192
Net increase in interest-bearing deposit accounts	23,316			144,963
Proceeds from Federal Home Loan Bank advances	681,181			509,000
Repayments of Federal Home Loan Bank advances	(530,681		)	(488,500		)
Net decrease in other borrowings	(98,040		)	(76,538		)
Cash dividends paid on common stock	(2,579		)	(1,802		)
Excess tax benefit of share-based compensation	—			783
Payments for the repurchase of common stock	—			(4,211		)
Issuance of common stock, net	(2,151		)	(1,745		)
Net cash provided by financing activities	80,692			84,142
Net increase in cash and cash equivalents	10,199			12,076
Cash and cash equivalents, beginning of period	198,802			94,157
Cash and cash equivalents, end of period	$	209,001		$	106,233
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	4,289		$	3,119
Income taxes	28			14,084
Noncash transactions:
Transfer to other real estate owned in settlement of loans	$	—		$	2,683
Sales of other real estate financed	—			140
Common shares issued in connection with JCB acquisition	141,729			—

See accompanying notes to consolidated financial statements.

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Business and Consolidation

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

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

Basis of Financial Statement Presentation

The condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with the accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The condensed consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All intercompany accounts and transactions have been eliminated. In 2017, the Company changed its presentation of loans on the face of the Condensed Consolidated Balance Sheets to combine originated loans with purchased loans. See Note 5 - Loans for more information. The Company adopted Accounting Standards Update (ASU) 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting during the first quarter of 2017. Among other elements, the ASU requires an entity to recognize all excess tax benefits and deficiencies related to stock-based compensation expense as income tax expense or benefit in the statements of operations. The ASU requires adjustments be reflected as of the beginning of the fiscal year of adoption and as a result, $5.2 million of previously recognized excess tax benefits were reclassified from Additional paid in capital to Retained earnings during the first quarter of 2017. The adoption resulted in a decrease to income tax expense of $1.3 million for the three months ended March 31, 2017. Excess tax benefits related to stock compensation are presented as a cash inflow from operating activities for the three months ended March 31, 2017 due to the prospective adoption of employee share-based payment guidance in 2017. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

Acquisitions

Acquisitions and business combinations are accounted for using the acquisition method of accounting. The assets and liabilities of the acquired entities have been recorded at their estimated fair values at the date of acquisition. Goodwill represents the excess of the purchase price over the fair value of net assets acquired, including the amount assigned to indentifiable intangible assets.

Consolidated Statements of Operations. Merger related expenses include costs directly related to merger or acquisition activity and include legal and professional fees, system consolidation and conversion costs, and compensation costs such as severance and retention incentives for employees impacted by acquisition activity. The Company accounts for merger-related costs as expenses in the periods in which the costs are incurred and the services are received.

NOTE 2 - ACQUISITIONS

Acquisition of Jefferson County Bancshares, Inc.

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

JCB shareholders received, based on their election, cash consideration in an amount of $85.39 per share of JCB common stock or 2.75 shares of EFSC common stock per share of JCB common stock, subject to allocation and proration procedures. Aggregate consideration at closing was 3.3 million shares of EFSC common stock and $29.3 million cash paid to JCB shareholders and holders of JCB stock options. Based on EFSC’s closing stock price of $42.95 on February 10, 2017, the overall transaction had a value of $171.0 million, including JCB’s common stock and stock options. The Company also recognized $1.7 million and $1.4 million of merger related costs that were recorded in noninterest expense in the statement of operations for the three months ended March 31, 2017, and year ended December 31, 2016, respectively.

The acquisition of JCB has been accounted for as a business combination using the acquisition method of accounting which requires assets acquired and liabilities assumed to be recognized at fair value as of the acquisition date. The estimates of fair value are preliminary and subject to refinement as the Company completes its evaluation of the acquired assets and liabilities. Goodwill of $83.6 million arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of JCB into Enterprise. The goodwill is assigned as part of the Company's Banking reporting unit. None of the goodwill recognized is expected to be deductible for income tax purposes.

The following table presents the assets acquired and liabilities assumed of JCB as of February 10, 2017, and their preliminary estimated fair values:



(in thousands, except shares data)	As Recorded by JCB		Adjustments				As Recorded by EFSC
Assets acquired:
Cash and cash equivalents	$	35,454	$	—			$	35,454
Securities	148,670		—				148,670
Portfolio loans, net	685,905		(10,619		)	(a)	675,286
Other real estate owned	6,762		(5,082		)	(b)	1,680
Other investments	2,695		—				2,695
Fixed assets, net	21,780		(2,259		)	(c)	19,521
Accrued interest receivable	2,794		—				2,794
Goodwill	7,806		(7,806		)	(d)	—
Other intangible assets	25		10,028			(e)	10,053
Deferred tax assets	4,634		7,086			(f)	11,720
Other assets	19,159		—				19,159
Total assets acquired	$	935,684	$	(8,652	)		$	927,032

Liabilities assumed:
Deposits	$	764,668	$	629		(g)	$	765,297
Other borrowings	55,430		681			(h)	56,111
Trust preferred securities	12,887		(382		)	(i)	12,505
Accrued interest payable	653		—				653
Other liabilities	5,006		—				5,006
Total liabilities assumed	$	838,644	$	928			$	839,572

Net assets acquired	$	97,040	$	(9,580	)		$	87,460

Consideration paid:
Cash							$	29,283
Common stock							141,729
Total consideration paid							$	171,012

Goodwill							$	83,552


(a)	Fair value adjustments based on the Company’s evaluation of the acquired loan portfolio, write-off of net deferred loan costs, reclassification from other real estate owned, and elimination of the allowance for loan losses recorded by JCB. The fair value discount recorded to the loan portfolio is $24.2 million.


(b)	Fair value adjustment based on the Company’s evaluation of the acquired other real estate portfolio, and reclassification to portfolio loans.


(c)	Fair value adjustments based on the Company’s evaluation of the acquired premises and equipment.


(d)	Eliminate JCB’s recorded goodwill.


(e)	Recording of the core deposit intangible asset on the acquired core deposit accounts. Amount to be amortized using a sum of years digits method over a 10 year useful life.


(f)	Adjustment for deferred taxes at the acquisition date.


(g)	Fair value adjustment to time deposits based on current interest rates.


(h)	Fair value adjustment to the FHLB advances based on current interest rates.


(i)	Fair value adjustment based on the Company's evaluation of the trust preferred securities.

The following table provides the unaudited pro forma information for the results of operations for the three months ended March 31, 2017 and 2016, as if the acquisition had occurred on January 1, 2016. The pro forma results combine the historical results of JCB with the Company’s Consolidated Statements of Income, adjusted for the impact of the application of the acquisition method of accounting including loan discount accretion, intangible assets amortization, and deposit and trust preferred securities premium accretion, net of taxes. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been obtained had the acquisition actually occurred on January 1, 2016. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions. Only the acquisition related expenses that have been incurred as of March 31, 2017 are included in net income in the table below.



	Pro Forma
	Three months ended March 31,
(in thousands, except per share data)	2017		2016
Total revenues (net interest income plus noninterest income)	$	49,598	$	47,275
Net income	13,054		12,961
Diluted earnings per common share	0.55		0.55

NOTE 3 - EARNINGS PER SHARE

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

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



	Three months ended March 31,
(in thousands, except per share data)	2017		2016
Net income as reported	$	12,391	$	11,025

Weighted average common shares outstanding	21,928		20,004
Additional dilutive common stock equivalents	381		229
Weighted average diluted common shares outstanding	22,309		20,233

Basic earnings per common share:	$	0.57	$	0.55
Diluted earnings per common share:	$	0.56	$	0.54

For the three months ended March 31, 2017 and 2016, there were no common stock equivalents excluded from the earnings per share calculations because their effect was anti-dilutive.

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:



	March 31, 2017
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for sale securities:
Obligations of U.S. Government-sponsored enterprises	$	104,979	$	262	$	(66	)	$	105,175
Obligations of states and political subdivisions	34,113		762		(365		)	34,510
Agency mortgage-backed securities	431,030		1,508		(3,537		)	429,001
U.S Treasury bills	24,998		1		—			24,999
Total securities available for sale	$	595,120	$	2,533	$	(3,968	)	$	593,685
Held to maturity securities:
Obligations of states and political subdivisions	$	14,741	$	33	$	(99	)	$	14,675
Agency mortgage-backed securities	64,495		76		(629		)	63,942
Total securities held to maturity	$	79,236	$	109	$	(728	)	$	78,617



	December 31, 2016
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for sale securities:
Obligations of U.S. Government-sponsored enterprises	$	107,312	$	348	$	—		$	107,660
Obligations of states and political subdivisions	36,486		630		(485		)	36,631
Agency mortgage-backed securities	319,345		1,101		(3,940		)	316,506
Total securities available for sale	$	463,143	$	2,079	$	(4,425	)	$	460,797
Held to maturity securities:
Obligations of states and political subdivisions	$	14,759	$	11	$	(242	)	$	14,528
Agency mortgage-backed securities	65,704		45		(638		)	65,111
Total securities held to maturity	$	80,463	$	56	$	(880	)	$	79,639

At March 31, 2017, and December 31, 2016, there were no holdings of securities of any one issuer in an amount greater than 10% of shareholders’ equity, other than U.S. Government agencies and sponsored enterprises. The agency mortgage-backed securities are all issued by U.S. Government-sponsored enterprises. Available for sale securities having a fair value of $466.1 million and $407.3 million at March 31, 2017, and December 31, 2016, respectively, were pledged as collateral to secure deposits of public institutions and for other purposes as required by law or contract provisions.

The amortized cost and estimated fair value of debt securities at March 31, 2017, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The weighted average life of the mortgage-backed securities is approximately 5 years.



	Available for sale				Held to maturity
(in thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	27,529	$	27,563	$	657	$	656
Due after one year through five years	94,131		94,743		7,056		7,043
Due after five years through ten years	14,532		14,759		6,523		6,479
Due after ten years	2,900		2,620		505		497
Agency mortgage-backed securities	431,030		429,001		64,495		63,942
U.S Treasury bills	24,998		24,999		—		—
	$	595,120	$	593,685	$	79,236	$	78,617

The following table represents a summary of investment securities that had an unrealized loss:



	March 31, 2017
	Less than 12 months				12 months or more				Total
(in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S. Government-sponsored enterprises	$	20,110	$	66	$	—	$	—	$	20,110	$	66
Obligations of states and political subdivisions	$	14,371	$	152	$	3,559	$	312	$	17,930	$	464
Agency mortgage-backed securities	298,238		3,686		13,311		480		311,549		4,166
	$	332,719	$	3,904	$	16,870	$	792	$	349,589	$	4,696

	December 31, 2016
	Less than 12 months				12 months or more				Total
(in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of states and political subdivisions	$	21,361	$	408	$	3,553	$	320	$	24,914	$	728
Agency mortgage-backed securities	267,734		4,084		12,883		493		280,617		4,577
	$	289,095	$	4,492	$	16,436	$	813	$	305,531	$	5,305

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

NOTE 5 - LOANS

The loan portfolio is comprised of loans originated by the Company and loans that were acquired in connection with the Company’s acquisitions. These loans are accounted for using the guidance in the Accounting Standards Codification (ASC) section 310-30 and 310-20. Loans accounted for using ASC 310-30 are sometimes referred to as purchased credit impaired, or PCI, loans.

The table below shows the loan portfolio composition including carrying value by segment of loans accounted for under ASC 310-30 (PCI loans) and loans not accounted for under this guidance, which includes our originated loans.



	March 31, 2017		December 31, 2016
Loans not accounted for as ASC 310-30	$	3,802,681	$	3,118,392
Loans accounted for as ASC 310-30	88,383		39,769
Total loans	$	3,891,064	$	3,158,161

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

Below is a summary of loans by category at March 31, 2017 and December 31, 2016:



(in thousands)	March 31, 2017			December 31, 2016
Commercial and industrial	$	1,773,105		$	1,632,714
Real estate:
Commercial - investor owned	726,413			544,808
Commercial - owner occupied	480,281			350,148
Construction and land development	288,342			194,542
Residential	356,415			240,760
Total real estate loans	1,851,451			1,330,258
Consumer and other	179,100			156,182
Loans, before unearned loan fees	3,803,656			3,119,154
Unearned loan fees, net	(975		)	(762		)
Loans, including unearned loan fees	$	3,802,681		$	3,118,392

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



(in thousands)	Commercial and industrial			CRE - investor owned			CRE - owner occupied			Construction and land development			Residential real estate			Consumer and other			Total
Allowance for loan losses:
Balance at December 31, 2016	$	26,996		$	3,420		$	2,890		$	1,304		$	2,023		$	932		$	37,565
Provision (provision reversal) for loan losses	1,835			(105		)	(249		)	(11		)	(3		)	66			1,533
Losses charged off	(133		)	—			—			—			(9		)	(29		)	(171		)
Recoveries	80			9			89			9			25			9			221
Balance at March 31, 2017	$	28,778		$	3,324		$	2,730		$	1,302		$	2,036		$	978		$	39,148



(in thousands)	Commercial and industrial		CRE - investor owned		CRE - owner occupied		Construction and land development		Residential real estate		Consumer and other		Total
Balance March 31, 2017
Allowance for loan losses - Ending balance:
Individually evaluated for impairment	$	5,047	$	—	$	—	$	140	$	—	$	—	$	5,187
Collectively evaluated for impairment	23,731		3,324		2,730		1,162		2,036		978		33,961
Total	$	28,778	$	3,324	$	2,730	$	1,302	$	2,036	$	978	$	39,148
Loans - Ending balance:
Individually evaluated for impairment	$	12,152	$	281	$	1,591	$	1,575	$	61	$	—	$	15,660
Collectively evaluated for impairment	1,760,953		726,132		478,690		286,767		356,354		178,125		3,787,021
Total	$	1,773,105	$	726,413	$	480,281	$	288,342	$	356,415	$	178,125	$	3,802,681

Balance December 31, 2016
Allowance for loan losses - Ending balance:
Individually evaluated for impairment	$	2,909	$	—	$	—	$	155	$	—	$	—	$	3,064
Collectively evaluated for impairment	24,087		3,420		2,890		1,149		2,023		932		34,501
Total	$	26,996	$	3,420	$	2,890	$	1,304	$	2,023	$	932	$	37,565
Loans - Ending balance:
Individually evaluated for impairment	$	12,523	$	430	$	1,854	$	1,903	$	62	$	—	$	16,772
Collectively evaluated for impairment	1,620,191		544,378		348,294		192,639		240,698		155,420		3,101,620
Total	$	1,632,714	$	544,808	$	350,148	$	194,542	$	240,760	$	155,420	$	3,118,392

A summary of loans individually evaluated for impairment by category at March 31, 2017 and December 31, 2016, is as follows:



	March 31, 2017
(in thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Commercial and industrial	$	11,930	$	40	$	11,963	$	12,003	$	5,047	$	12,017
Real estate:
Commercial - investor owned	281		282		—		282		—		272
Commercial - owner occupied	—		—		—		—		—		—
Construction and land development	1,575		1,658		341		1,999		140		1,813
Residential	62		62		—		62		—		62
Consumer and other	—		—		—		—		—		—
Total	$	13,848	$	2,042	$	12,304	$	14,346	$	5,187	$	14,164



	December 31, 2016
(in thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Commercial and industrial	$	12,341	$	566	$	11,791	$	12,357	$	2,909	$	4,489
Real estate:
Commercial - investor owned	525		435		—		435		—		668
Commercial - owner occupied	225		231		—		231		—		227
Construction and land development	1,904		1,947		359		2,306		155		1,918
Residential	62		62		—		62		—		64
Consumer and other	—		—		—		—		—		—
Total	$	15,057	$	3,241	$	12,150	$	15,391	$	3,064	$	7,366

The following table presents details for past due and impaired loans:



	Three months ended March 31,
(in thousands)	2017		2016
Total interest income that would have been recognized under original terms	$	315	$	148
Total cash received and recognized as interest income on non-accrual loans	23		6
Total interest income recognized on impaired loans	33		6

There were no loans over 90 days past due and still accruing interest at March 31, 2017 or December 31, 2016.

The recorded investment in impaired loans by category at March 31, 2017 and December 31, 2016, is as follows:



	March 31, 2017
(in thousands)	Non-accrual		Restructured		Loans over 90 days past due and still accruing interest		Total
Commercial and industrial	$	9,692	$	2,311	$	—	$	12,003
Real estate:
Commercial - investor owned	282		—		—		282
Commercial - owner occupied	—		—		—		—
Construction and land development	1,979		20		—		1,999
Residential	62		—		—		62
Consumer and other	—		—		—		—
Total	$	12,015	$	2,331	$	—	$	14,346



	December 31, 2016
(in thousands)	Non-accrual		Restructured		Loans over 90 days past due and still accruing interest		Total
Commercial and industrial	$	10,046	$	2,311	$	—	$	12,357
Real estate:
Commercial - investor owned	435		—		—		435
Commercial - owner occupied	231		—		—		231
Construction and land development	2,286		20		—		2,306
Residential	62		—		—		62
Consumer and other	—		—		—		—
Total	$	13,060	$	2,331	$	—	$	15,391

There were no restructured loans during the three months ended March 31, 2017 and 2016.

As of March 31, 2017, the Company had $0.7 million specific reserves allocated to loans that have been restructured. There were no loans restructured that subsequently defaulted during the three months ended March 31, 2017 or 2016.

The aging of the recorded investment in past due loans by portfolio class and category at March 31, 2017 and December 31, 2016 is shown below.



	March 31, 2017
(in thousands)	30-89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total
Commercial and industrial	$	10,624	$	—	$	10,624	$	1,762,481	$	1,773,105
Real estate:
Commercial - investor owned	708		—		708		725,705		726,413
Commercial - owner occupied	529		—		529		479,752		480,281
Construction and land development	—		1,214		1,214		287,128		288,342
Residential	285		—		285		356,130		356,415
Consumer and other	2		—		2		178,123		178,125
Total	$	12,148	$	1,214	$	13,362	$	3,789,319	$	3,802,681



	December 31, 2016
(in thousands)	30-89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total
Commercial and industrial	$	334	$	171	$	505	$	1,632,209	$	1,632,714
Real estate:
Commercial - investor owned	—		175		175		544,633		544,808
Commercial - owner occupied	212		225		437		349,711		350,148
Construction and land development	355		1,528		1,883		192,659		194,542
Residential	91		—		91		240,669		240,760
Consumer and other	7		—		7		155,413		155,420
Total	$	999	$	2,099	$	3,098	$	3,115,294	$	3,118,392

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, 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 loans by portfolio class and category at March 31, 2017, which is based upon the most recent analysis performed, and December 31, 2016 is as follows:



	March 31, 2017
(in thousands)	Pass (1-6)		Watch (7)		Substandard (8)		Doubtful (9)		Total
Commercial and industrial	$	1,629,105	$	75,946	$	68,054	$	—	$	1,773,105
Real estate:
Commercial - investor owned	706,958		15,777		3,678		—		726,413
Commercial - owner occupied	440,319		35,505		4,457		—		480,281
Construction and land development	283,410		2,841		2,091		—		288,342
Residential	347,118		5,051		4,246		—		356,415
Consumer and other	176,340		375		1,410		—		178,125
Total	$	3,583,250	$	135,495	$	83,936	$	—	$	3,802,681



	December 31, 2016
(in thousands)	Pass (1-6)		Watch (7)		Substandard (8)		Doubtful (9)		Total
Commercial and industrial	$	1,499,114	$	57,416	$	76,184	$	—	$	1,632,714
Real estate:
Commercial - investor owned	530,494		10,449		3,865		—		544,808
Commercial - owner occupied	306,658		39,249		4,241		—		350,148
Construction and land development	185,505		6,575		2,462		—		194,542
Residential	233,479		2,997		4,284		—		240,760
Consumer and other	153,984		—		1,436		—		155,420
Total	$	2,909,234	$	116,686	$	92,472	$	—	$	3,118,392

The following tables refer to loans accounted for using ASC 310-30 (purchased credit impaired loans):

Below is a summary of PCI loans by category at March 31, 2017 and December 31, 2016:



	March 31, 2017			December 31, 2016
(in thousands)	Weighted- Average Risk Rating¹	Recorded Investment PCI Loans		Weighted- Average Risk Rating¹	Recorded Investment PCI Loans
Commercial and industrial	5.84	$	4,335	5.87	$	3,523
Real estate:
Commercial - investor owned	7.00	42,532		6.95	8,162
Commercial - owner occupied	6.47	13,580		6.39	11,863
Construction and land development	6.18	12,914		5.80	4,365
Residential	6.06	14,943		5.64	11,792
Total real estate loans		83,969			36,182
Consumer and other	3.50	79		1.64	64
Purchased credit impaired loans		$	88,383		$	39,769
¹Risk 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 March 31, 2017 and December 31, 2016 is shown below:



	March 31, 2017
(in thousands)	30-89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total
Commercial and industrial	$	—	$	21	$	21	$	4,314	$	4,335
Real estate:
Commercial - investor owned	—		—		—		42,532		42,532
Commercial - owner occupied	—		—		—		13,580		13,580
Construction and land development	—		—		—		12,914		12,914
Residential	403		29		432		14,511		14,943
Consumer and other	—		—		—		79		79
Total	$	403	$	50	$	453	$	87,930	$	88,383



	December 31, 2016
(in thousands)	30-89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total
Commercial and industrial	$	—	$	—	$	—	$	3,523	$	3,523
Real estate:
Commercial - investor owned	—		—		—		8,162		8,162
Commercial - owner occupied	—		—		—		11,863		11,863
Construction and land development	—		—		—		4,365		4,365
Residential	169		51		220		11,572		11,792
Consumer and other	—		—		—		64		64
Total	$	169	$	51	$	220	$	39,549	$	39,769

The following table is a rollforward of PCI loans, net of the allowance for loan losses, for the three months ended March 31, 2017 and 2016.



(in thousands)	Contractual Cashflows			Non-accretable Difference			Accretable Yield			Carrying Amount
Balance December 31, 2016	$	66,003		$	18,902		$	13,176		$	33,925
Acquisitions	70,435			11,669			8,550			50,216
Principal reductions and interest payments	(4,310		)	—			—			(4,310		)
Accretion of loan discount	—			—			(1,389		)	1,389
Changes in contractual and expected cash flows due to remeasurement	3,166			(307		)	1,165			2,308
Reductions due to disposals	(1,341		)	(345		)	(264		)	(732		)
Balance March 31, 2017	$	133,953		$	29,919		$	21,238		$	82,796

Balance December 31, 2015	$	116,689		$	26,765		$	25,341		$	64,583
Principal reductions and interest payments	(5,965		)	—			—			(5,965		)
Accretion of loan discount	—			—			(1,845		)	1,845
Changes in contractual and expected cash flows due to remeasurement	4,012			2,375			(1,032		)	2,669
Reductions due to disposals	(12,869		)	(2,127		)	(1,518		)	(9,224		)
Balance March 31, 2016	$	101,867		$	27,013		$	20,946		$	53,908

The accretable yield is recognized in interest income over the estimated life of the acquired loans using the effective yield method. Outstanding customer balances on PCI loans were $119.1 million and $54.6 million as of March 31, 2017, and December 31, 2016, respectively.

NOTE 6 - COMMITMENTS AND CONTINGENCIES

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

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

The Company uses the same credit policies in making commitments and conditional obligations as it does for financial instruments included on its consolidated balance sheets. At March 31, 2017, there were no unadvanced commitments on impaired loans.

The contractual amounts of off-balance-sheet financial instruments as of March 31, 2017, and December 31, 2016, are as follows:



(in thousands)	March 31, 2017		December 31, 2016
Commitments to extend credit	$	1,193,968	$	1,075,170
Letters of credit	79,719		78,954

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 March 31, 2017, and December 31, 2016, approximately $115 million and $90 million, respectively, represent fixed rate loan commitments. Since certain of the commitments may expire without being drawn upon or may be revoked, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, premises and equipment, and real estate. Other liabilities include $0.3 million for estimated losses attributable to the unadvanced commitments at March 31, 2017, and December 31, 2016.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance or payment 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. As of March 31, 2017, the approximate remaining term of standby letters of credit range from 1 month to 4 years and 6 months.

Contingencies

The Company and its subsidiaries are, from time to time, parties to various legal proceedings arising out of their businesses. Management believes there are no such proceedings pending or threatened against the Company or its subsidiaries which, if determined adversely, would have a material adverse effect on the business, consolidated financial condition, results of operations or cash flows of the Company or any of its subsidiaries.

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.

Risk Management Instruments. At March 31, 2017, the Company has no derivative contracts used to manage risk.

Client-Related Derivative Instruments. The Company enters into interest rate swaps to allow customers to hedge changes in fair value of certain loans while maintaining a variable rate loan on its own books. The Company also enters into foreign exchange forward contracts with clients, and enters into offsetting foreign exchange forward contracts with established financial institution counterparties. The table below summarizes the notional amounts and fair values of the client-related derivative instruments:



					Asset Derivatives (Other Assets)				Liability Derivatives (Other Liabilities)
	Notional Amount				Fair Value				Fair Value
(in thousands)	March 31, 2017		December 31, 2016		March 31, 2017		December 31, 2016		March 31, 2017		December 31, 2016
Non-designated hedging instruments
Interest rate swap contracts	$	153,069	$	124,322	$	1,449	$	982	$	1,449	$	982
Foreign exchange forward contracts	3,954		3,034		3,954		3,034		3,954		3,034

Changes in the fair value of client-related derivative instruments are recognized currently in operations. For the three months ended March 31, 2017 and 2016, the gains and losses offset each other due to the Company's hedging of the client swaps and foreign exchange contracts with other bank counterparties.

NOTE 8 - FAIR VALUE MEASUREMENTS

Below is a description of certain assets and liabilities measured at fair value.

The following table summarizes financial instruments measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:



	March 31, 2017
(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
Assets
Securities available for sale
Obligations of U.S. Government-sponsored enterprises	$	—	$	105,175	$	—	$	105,175
Obligations of states and political subdivisions	—		31,417		3,093		34,510
Residential mortgage-backed securities	—		429,001		—		429,001
U.S. Treasury Bills	24,999		—		—		24,999
Total securities available for sale	$	24,999	$	565,593	$	3,093	$	593,685
State tax credits held for sale	—		—		1,458		1,458
Derivative financial instruments	—		5,403		—		5,403
Total assets	$	24,999	$	570,996	$	4,551	$	600,546

Liabilities
Derivative financial instruments	$	—	$	5,403	$	—	$	5,403
Total liabilities	$	—	$	5,403	$	—	$	5,403



	December 31, 2016
(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
Assets
Securities available for sale
Obligations of U.S. Government-sponsored enterprises	$	—	$	107,660	$	—	$	107,660
Obligations of states and political subdivisions	—		33,542		3,089		36,631
Residential mortgage-backed securities	—		316,506		—		316,506
Total securities available for sale	$	—	$	457,708	$	3,089	$	460,797
State tax credits held for sale	—		—		3,585		3,585
Derivative financial instruments	—		4,016		—		4,016
Total assets	$	—	$	461,724	$	6,674	$	468,398

Liabilities
Derivative financial instruments	$	—	$	4,016	$	—	$	4,016
Total liabilities	$	—	$	4,016	$	—	$	4,016


•	Securities available for sale. Securities classified as available for sale are reported at fair value utilizing Level 2 and Level 3 inputs. U.S. Treasury Bills at March 31, 2017 were valued using Level 1 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 March 31, 2017, Level 3 securities available for sale consist primarily of three Auction Rate Securities that are valued based on the securities' estimated cash flows, yields of comparable securities, and live trading levels.


•	State tax credits held for sale. At March 31, 2017, of the $35.4 million of state tax credits held for sale on the condensed consolidated balance sheet, approximately $1.5 million were carried at fair value. The remaining $34.0 million of state tax credits were accounted for at cost.

The Company is not aware of an active market that exists for the 10-year streams of state tax credit financial instruments. However, the Company’s principal market for these tax credits consists of Missouri state residents who buy these credits and local and regional accounting firms who broker them. As such, the Company employed a discounted cash flow analysis (income approach) to determine the fair value.

The fair value measurement is calculated using an internal valuation model with market data including discounted cash flows based upon the terms and conditions of the tax credits. If the underlying project remains in compliance with the various federal and state rules governing the tax credit program, each project will generate about 10 years of tax credits. The inputs to the discounted cash flow calculation include: the amount of tax credits generated each year, the anticipated sale price of the tax credit, the timing of the sale and a discount rate. The discount rate is estimated using the LIBOR swap curve at a point equal to the remaining life in years of credits plus a 205 basis point spread. With the exception of the discount rate, the other inputs to the fair value calculation are observable and readily available. The discount rate is considered a Level 3 input because it is an “unobservable input” and is based on the Company’s assumptions. An increase in the discount rate utilized would generally result in a lower estimated fair value of the tax credits. Alternatively, a decrease in the discount rate utilized would generally result in a higher estimated fair value of the tax credits. Given the significance of this input to the fair value calculation, the state tax credit assets are reported as Level 3 assets.

•

Derivatives. Derivatives are reported at fair value utilizing Level 2 inputs. The Company obtains counterparty quotations to value its interest rate swaps. 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.

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 March 31, 2017 and 2016.


•	Purchases, sales, issuances and settlements. There were no Level 3 purchases during the quarters ended March 31, 2017 or 2016.


•	Transfers in and/or out of Level 3. There were no Level 3 transfers during the quarters ended March 31, 2017 and 2016.



	Securities available for sale, at fair value
	Three months ended March 31,
(in thousands)	2017		2016
Beginning balance	$	3,089	$	3,077
Total gains:
Included in other comprehensive income	4		8
Purchases, sales, issuances and settlements:
Purchases	—		—
Ending balance	$	3,093	$	3,085

Change in unrealized gains relating to assets still held at the reporting date	$	4	$	8



	State tax credits held for sale
	Three months ended March 31,
(in thousands)	2017			2016
Beginning balance	$	3,585		$	5,941
Total gains:
Included in earnings	40			76
Purchases, sales, issuances and settlements:
Sales	(2,167		)	(1,284		)
Ending balance	$	1,458		$	4,733

Change in unrealized gains (losses) relating to assets still held at the reporting date	$	(606	)	$	(305	)

From time to time, the Company measures certain assets at fair value on a nonrecurring basis. These include assets that are measured at the lower of cost or fair value that were recognized at fair value below cost at the end of the period. The following table presents financial instruments and non-financial assets measured at fair value on a non-recurring basis as of March 31, 2017.



	(1)		(1)		(1)		(1)
(in thousands)	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total losses for the three months ended March 31, 2017
Impaired loans	$	—	$	—	$	—	$	—	$	157
Other real estate	177		—		—		177		18
Total	$	177	$	—	$	—	$	177	$	175

(1) The amounts represent only balances measured at fair value during the period and still held as of the reporting date.

Impaired loans are reported at the fair value of the underlying collateral for collateral dependent loans. Fair values for impaired loans are obtained from current appraisals by qualified licensed appraisers or independent valuation specialists. Other real estate owned is adjusted to fair value upon foreclosure of the underlying loan. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value less costs to sell. Fair value of other real estate is based upon the current appraised values of the properties as determined by qualified licensed appraisers and the Company’s judgment of other relevant market conditions. Certain state tax credits are reported at cost.

Following is a summary of the carrying amounts and fair values of the Company’s financial instruments on the consolidated balance sheets at March 31, 2017 and December 31, 2016.



	March 31, 2017				December 31, 2016
(in thousands)	Carrying Amount		Estimated fair value		Carrying Amount		Estimated fair value
Balance sheet assets
Cash and due from banks	$	73,387	$	73,387	$	54,288	$	54,288
Federal funds sold	1,112		1,112		446		446
Interest-bearing deposits	137,197		137,197		145,048		145,048
Securities available for sale	593,685		593,685		460,797		460,797
Securities held to maturity	79,236		78,617		80,463		79,639
Other investments, at cost	24,222		24,222		14,840		14,840
Loans held for sale	5,380		5,380		9,562		9,562
Derivative financial instruments	5,403		5,403		4,016		4,016
Loans, net	3,846,439		3,852,858		3,114,752		3,125,701
State tax credits, held for sale	35,431		37,041		38,071		41,264
Accrued interest receivable	12,229		12,229		11,117		11,117

Balance sheet liabilities
Deposits	4,031,620		4,029,423		3,233,361		3,232,414
Subordinated debentures and notes	118,067		99,517		105,540		86,052
Federal Home Loan Bank advances	151,115		151,020		—		—
Other borrowings	235,052		234,964		276,980		276,905
Derivative financial instruments	5,403		5,403		4,016		4,016
Accrued interest payable	1,914		1,914		1,105		1,105

For information regarding the methods and assumptions used to estimate the fair value of each class of financial instruments for which it is practical to estimate such value, refer to Note 19 – Fair Value Measurements in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

The following table presents the level in the fair value hierarchy for the estimated fair values of only the Company’s financial instruments that are not already presented on the condensed consolidated balance sheets at fair value at March 31, 2017, and December 31, 2016.



	Estimated Fair Value Measurement at Reporting Date Using						Balance at March 31, 2017
(in thousands)	Level 1		Level 2		Level 3
Financial Assets:
Securities held to maturity	$	—	$	78,617	$	—	$	78,617
Portfolio loans, net	—		—		3,852,858		3,852,858
State tax credits, held for sale	—		—		—		—
Financial Liabilities:
Deposits	3,425,513		—		603,910		4,029,423
Subordinated debentures and notes	—		99,517		—		99,517
Federal Home Loan Bank advances	—		151,020		—		151,020
Other borrowings	—		234,964		—		234,964

	Estimated Fair Value Measurement at Reporting Date Using						Balance at December 31, 2016
(in thousands)	Level 1		Level 2		Level 3
Financial Assets:
Securities held to maturity	$	—	$	79,639	$	—	$	79,639
Portfolio loans, net	—		—		3,125,701		3,125,701
State tax credits, held for sale	—		—		37,679		37,679
Financial Liabilities:
Deposits	2,760,202		—		472,212		3,232,414
Subordinated debentures and notes	—		86,052		—		86,052
Other borrowings	—		276,905		—		276,905

NOTE 9 - NEW AUTHORITATIVE ACCOUNTING GUIDANCE

Financial Accounting Standards Board (the "FASB") Accounting Standards Update (the "ASU") 2017-08 "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities" In March 2017, the FASB issued ASU 2017-08, "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20)" which shortens the amortization period of certain callable debt securities held at a premium to the earliest call date. The amendments are effective for public business entities for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption being permitted. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on its financial statements.

FASB ASU 2017-04 "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" In January 2017, the FASB issued ASU 2017-04 "Simplifying the Test for Goodwill Impairment" which simplifies the measurement of goodwill impairment by removing step two of the goodwill impairment test. The new guidance requires goodwill impairment to be measured as the amount by which a reporting unit's carrying value exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments should be applied on a prospective basis. The guidance becomes effective for testing periods beginning

after January 1, 2017. The new guidance will be applied in the Company's 2017 annual impairment testing and is expected to not have an impact on the Company's consolidated financial statements.

FASB ASU 2016-15 "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230)" which addresses changes to reduce the presentation diversity of certain cash receipts and cash payments in the statement of cash flows, including debt prepayment or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, and distributions received from equity method investees. The guidance becomes effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. An entity that elects early adoption must adopt all of the amendments in the same period. The new standard will be applied retrospectively, but may be applied prospectively if retrospective application would be impracticable. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on its consolidated statement of cash flows.

FASB ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" In June 2016, the FASB issued ASU 2016-13, "Financial Instruments (Topic 326)" which changes the methodology for evaluating impairment of most financial instruments. The ASU replaces the currently used incurred loss model with a forward-looking expected loss model, which will generally result in a more timely recognition of losses. The guidance becomes effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on its financial statements.

FASB ASU 2016-02 "Leases (Topic 842)" In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" which requires organizations that lease assets ("lessees") to recognize the assets and liabilities for the rights and obligations created by leases with terms of more than 12 months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee remains dependent on its classification as a finance or operating lease. The criteria for determining whether a lease is a finance or operating lease has not been significantly changed by this ASU. The ASU also requires additional disclosure of the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements. The guidance becomes effective for periods beginning after December 15, 2018, including interim periods therein. Early adoption will be permitted. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on its consolidated balance sheets.

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 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 fiscal years beginning after December 15, 2017, including interim periods therein. Early adoption is permitted with some exceptions. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on its financial statements.

FASB ASU 2014-09, "Revenue from Contracts with Customers" In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”. The objective of ASU 2014-09 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle of ASU 2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying

the new guidance, an entity will (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract’s performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. The new guidance was originally effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2016 for public companies. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of this guidance to annual reporting periods beginning after December 15, 2017 for public companies, and permits early adoption on a limited basis. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on its financial statements, nor decided upon the method of adoption. Entities have the option of using either a full retrospective or modified approach of adoption.

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

RESULTS OF OPERATIONS

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 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 may be expressed differently. Forward-looking statements also include, but are not limited to, statements regarding plans, objectives, expectations or consequences of statements about the future performance, operations products and services of the Company and its subsidiaries. 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: our ability to efficiently integrate acquisitions into our operations, retain the customers of these businesses and grow the acquired operations: credit risk; changes in the appraised valuation of real estate securing impaired loans; outcomes of litigation and other contingencies; exposure to general and local economic conditions; risks associated with rapid increases or decreases in prevailing interest rates; consolidation within the banking industry; competition from banks and other financial institutions; our ability to attract and retain relationship officers and other key personnel; burdens imposed by federal and state regulation; changes in regulatory requirements; changes in accounting regulation or standards applicable to banks; and other risks discussed under the caption “Risk Factors” of our most recently filed Form 10-K or within this Form 10-Q, all of which could cause the Company’s actual results to differ from those set forth in the forward-looking statements.

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

Introduction

The following discussion describes the significant changes to the financial condition of the Company that have occurred during the first three months of 2017 compared to the financial condition as of December 31, 2016. In addition, this discussion summarizes the significant factors affecting the results of operations, liquidity and cash flows of the Company for the three months ended March 31, 2017, compared to the same period in 2016. This discussion should be read in conjunction with the accompanying condensed consolidated financial statements included in this report and our Annual Report on Form 10-K for the year ended December 31, 2016.

Executive Summary

The Company closed its acquisition of Jefferson County Bancshares, Inc. (JCB) on February 10, 2017. The results of operations of JCB are included in our consolidated results since this date. The following table indicates a summary of the acquired assets and liabilities at fair value, which estimates are preliminary and subject to refinement as the company completes its evaluation of acquired assets and liabilities:



(in thousands)
Assets acquired:
Cash and cash equivalents	$	35,454
Securities	148,670
Portfolio loans, net	675,286
Other real estate owned	1,680
Other investments	2,695
Fixed assets, net	19,521
Accrued interest receivable	2,794
Other intangible assets	10,053
Deferred tax assets	11,720
Other assets	19,159
Total assets acquired	$	927,032

Liabilities assumed:
Deposits	$	765,297
Other borrowings	56,111
Trust preferred securities	12,505
Accrued interest payable	653
Other liabilities	5,006
Total liabilities assumed	$	839,572

Net assets acquired	$	87,460

Consideration paid:
Cash	$	29,283
Common stock	141,729
Total consideration paid	$	171,012

Goodwill	$	83,552

Below are highlights of our financial performance for the quarter ended March 31, 2017, as compared to the linked quarter ended December 31, 2016, and prior year quarter ended March 31, 2016.



(in thousands, except per share data)	For the Three Months ended and At
	March 31, 2017			December 31, 2016			March 31, 2016
EARNINGS
Total interest income	$	43,740		$	39,438		$	35,460
Total interest expense	5,098			3,984			3,032
Net interest income	38,642			35,454			32,428
Provision for portfolio loans	1,533			964			833
Provision reversal for PCI loans	(148		)	(343		)	(73		)
Net interest income after provision for loan losses	37,257			34,833			31,668
Total noninterest income	6,976			9,029			6,005
Total noninterest expense	26,736			23,181			20,762
Income before income tax expense	17,497			20,681			16,911
Income tax expense	5,106			7,053			5,886
Net income	$	12,391		$	13,628		$	11,025

Basic earnings per share	$	0.57		$	0.68		$	0.55
Diluted earnings per share	0.56			0.67			0.54

Return on average assets	1.10		%	1.36		%	1.22		%
Return on average common equity	10.65		%	14.04		%	12.46		%
Return on average tangible common equity	12.96		%	15.33		%	13.74		%
Net interest margin (fully tax equivalent)	3.73		%	3.79		%	3.87		%
Efficiency ratio	58.61		%	52.11		%	54.02		%

ASSET QUALITY⁽¹⁾
Net charge-offs (recoveries)	$	(56	)	$	897		$	(99	)
Nonperforming loans	13,847			14,905			9,513
Classified assets	86,879			93,452			73,194
Nonperforming loans to portfolio loans	0.36		%	0.48		%	0.34		%
Nonperforming assets to total assets ⁽¹⁾⁽²⁾	0.33		%	0.39		%	0.52		%
Allowance for loan losses to portfolio loans	1.02		%	1.20		%	1.21		%
Net charge-offs (recoveries) to average loans (annualized)	(0.01		)%	0.12		%	(0.01		)%

(1) Excludes non-core acquired 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 period ended December 31, 2015 due to termination of FDIC loss share agreements.

Below are highlights of the Company's Core performance measures, which we believe are important measures of financial performance, but are non-GAAP measures. Core performance measures include contractual interest on non-core acquired loans, but exclude incremental accretion on these loans, Gain or loss on the sale of other real estate from non-core acquired loans, and expenses directly related to non-core acquired loans and other assets formerly covered under FDIC loss share agreements. Core performance measures also exclude certain other income and expense items, such as executive separation costs, merger related expenses, and the gain or loss on sale of investment securities, the Company believes to be not indicative of or useful to measure the Company's operating performance on an ongoing basis. A reconciliation of Core performance measures has been included in this MD&A section under the caption "Use of Non-GAAP Financial Measures".



	For the Three Months ended
(in thousands)	March 31, 2017			December 31, 2016			March 31, 2016
CORE PERFORMANCE MEASURES(1)
Net interest income	$	37,567		$	32,175		$	29,594
Provision for portfolio loans	1,533			964			833
Noninterest income	6,976			7,849			6,005
Noninterest expense	24,946			21,094			20,435
Income before income tax expense	18,064			17,966			14,331
Income tax expense	4,916			6,021			4,897
Net income	$	13,148		$	11,945		$	9,434

Earnings per share	$	0.59		$	0.59		$	0.47
Return on average assets	1.17		%	1.19		%	1.04		%
Return on average common equity	11.29		%	12.31		%	10.66		%
Return on average tangible common equity	13.75		%	13.44		%	11.76		%
Net interest margin (fully tax equivalent)	3.63		%	3.44		%	3.54		%
Efficiency ratio	56.01		%	52.70		%	57.40		%

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

For the three months ended March 31, 2017 compared to the three months ended March 31, 2016, the Company noted the following trends:


•	The Company reported net income of $12.4 million, or $0.56 per share, for the three months ended March 31, 2017, compared to $11.0 million, or $0.54 per share, for the same period in 2016. The 12% increase in net income was largely due to an increase in net interest income from core deposit-funded portfolio loan growth and growth in noninterest income.

•

On a core basis¹, net income was $13.1 million, or $0.59 per share, for the three months ended March 31, 2017, compared to $9.4 million, or $0.47 per share, in the prior year period. The diluted earnings per share increase of $0.12 was primarily due to higher levels of core net interest income from continued growth in earning asset balances combined with nine basis points of core net interest margin expansion. The earnings per share contribution from this growth was partially offset by a higher provision for portfolio loan losses.


•	Net interest income for the first three months of 2017 increased $6.2 million or 19%, from the prior year period due to strong portfolio loan growth and the acquisition of JCB.


•	Net interest margin for the first three months of 2017 decreased 14 basis points to 3.73% when compared to the prior year period due to charges of incremental accretion of non-core acquired loans, as those results vary

due to prepayment activity. Core net interest margin¹, for the first three months of 2017, defined as Net interest margin (fully tax equivalent), including contractual interest on non-core acquired loans, but excluding the incremental accretion on these loans, increased nine basis points from the prior year primarily due to core deposit-funded portfolio loan growth improving the earning asset mix, combined with increased yield on portfolio loans out-pacing the increase to borrowing costs.


•	Noninterest income for the first three months of 2017 increased $1.0 million, or 16%, compared to the prior year period largely due to an overall increase in service charges on deposit accounts and increased wealth management revenue. Additionally, JCB added $0.7 million of fee income during the first quarter of 2017.


•	Noninterest expenses were $26.7 million for the quarter ended March 31, 2017, compared to $20.8 million for the quarter ended March 31, 2016. Noninterest expenses for the quarter included $1.7 million of merger related expenses. Core noninterest expenses¹ were $24.9 million for the quarter ended March 31, 2017, compared to $20.4 million for the prior year period.

Balance sheet highlights:

•

Loans – Portfolio loans increased to $3.9 billion at March 31, 2017, increasing $735 million when compared to the linked quarter. Excluding the acquisition of JCB, portfolio loans organically grew by $56.1 million, or 7% annualized, in the first quarter of 2017. On a year over year basis, portfolio loans increased $1.0 billion of which $322 million was organic loan growth and $678 million was from the acquisition of JCB. The Company expects continued loan growth, excluding the acquisition of JCB, at or above 10% for 2017. See Item 1, Note 5 – Portfolio Loans for more information.

•

Deposits – Total deposits at March 31, 2017 were $4.0 billion, an increase of $798 million, or 25% from December 31, 2016, and $1.1 billion, or 38%, from March 31, 2016. $774 million of the increase in both periods is attributed to the acquisition of JCB. Core deposits, defined as total deposits excluding time deposits, were $3.4 billion at March 31, 2017, an increase of $665 million, or 24% from the linked quarter, and $955 million, or 39%, when compared to the prior year period. The overall positive trends in deposits reflect continued progress across our business lines, $774 million of core deposits from JCB, and some seasonality.


•	Asset quality – Nonperforming loans were $13.8 million at March 31, 2017, compared to $14.9 million at December 31, 2016. Nonperforming loans represented 0.36% of portfolio loans at March 31, 2017 versus 0.33% at December 31, 2016. There were no portfolio loans that were over 90 days delinquent and still accruing at March 31, 2017 or December 31, 2016.

Provision for portfolio loan losses was $1.5 million for the three months ended March 31, 2017, compared to $0.8 million for the three months ended March 31, 2016. See Item 1, Note 5 – Portfolio Loans, and Provision and Allowance for Loan Losses in this section for more information.

RESULTS OF OPERATIONS

Net Interest Income

Average Balance Sheet

Non-core acquired loans were those acquired from the FDIC and were previously covered by shared-loss agreements. These loans continue to be accounted for as purchased credit impaired loans. Approximately $50 million of loans acquired from JCB's portfolio are also accounted for as purchased credit impaired loans. However, all loans acquired from JCB are included in portfolio loans. The following table presents, for the periods indicated, certain information related to our average interest-earning assets and interest-bearing liabilities, as well as, the corresponding interest rates earned and paid, all on a tax equivalent basis.



	Three months ended March 31,
	2017							2016
(in thousands)	Average Balance			Interest Income/Expense		Average Yield/ Rate		Average Balance			Interest Income/Expense		Average Yield/ Rate
Assets
Interest-earning assets:
Taxable portfolio loans (1)	$	3,466,637		$	37,827	4.43	%	$	2,741,188		$	28,310	4.15	%
Tax-exempt portfolio loans (2)	44,820			693		6.27		40,832			660		6.50
Non-core acquired loans	39,287			1,670		17.24		69,031			3,891		22.67
Total loans	3,550,744			40,190		4.59		2,851,051			32,861		4.64
Taxable investments in debt and equity securities	580,600			3,298		2.30		465,291			2,459		2.13
Non-taxable investments in debt and equity securities (2)	56,626			622		4.45		49,396			538		4.38
Short-term investments	71,228			130		0.74		48,054			61		0.51
Total securities and short-term investments	708,454			4,050		2.32		562,741			3,058		2.19
Total interest-earning assets	4,259,198			44,240		4.21		3,413,792			35,919		4.23
Noninterest-earning assets:
Cash and due from banks	75,226							54,996
Other assets	283,448							216,366
Allowance for loan losses	(44,284		)					(43,846		)
Total assets	$	4,573,588						$	3,641,308

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing transaction accounts	$	765,405		$	675	0.36	%	$	551,684		$	306	0.22	%
Money market accounts	1,193,350			1,493		0.51		1,064,616			1,006		0.38
Savings	154,348			82		0.22		96,067			60		0.25
Certificates of deposit	548,705			1,215		0.90		384,092			1,019		1.07
Total interest-bearing deposits	2,661,808			3,465		0.53		2,096,459			2,391		0.46
Subordinated debentures	112,497			1,164		4.19		56,807			348		2.46
Other borrowed funds	390,944			469		0.49		382,448			293		0.31
Total interest-bearing liabilities	3,165,249			5,098		0.65		2,535,714			3,032		0.48
Noninterest bearing liabilities:
Demand deposits	906,951							714,750
Other liabilities	29,311							34,864
Total liabilities	4,101,511							3,285,328
Shareholders' equity	472,077							355,980
Total liabilities & shareholders' equity	$	4,573,588						$	3,641,308
Net interest income				$	39,142						$	32,887
Net interest spread						3.56	%						3.75	%
Net interest margin						3.73	%						3.87	%


(1)	Average balances include non-accrual loans. The income on such loans is included in interest but is recognized only upon receipt. Loan fees, net of amortization of deferred loan origination fees and costs, included in interest income are approximately $0.8 million and $0.4 million for the three months ended March 31, 2017 and 2016 respectively.


(2)	Non-taxable income is presented on a fully tax-equivalent basis using a 38.0% tax rate in 2017 and 2016. The tax-equivalent adjustments were $0.5 million and $0.5 million for the three months ended March 31, 2017 and 2016.

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.



	2017 compared to 2016
	Three months ended March 31,
	Increase (decrease) due to
(in thousands)	Volume(1)			Rate(2)			Net
Interest earned on:
Taxable portfolio loans	$	7,632		$	1,885		$	9,517
Tax-exempt portfolio loans (3)	58			(25		)	33
Non-core acquired loans	(1,428		)	(793		)	(2,221		)
Taxable investments in debt and equity securities	627			212			839
Non-taxable investments in debt and equity securities (3)	75			9			84
Short-term investments	36			33			69
Total interest-earning assets	$	7,000		$	1,321		$	8,321

Interest paid on:
Interest-bearing transaction accounts	$	145		$	224		$	369
Money market accounts	130			357			487
Savings	31			(9		)	22
Certificates of deposit	377			(181		)	196
Subordinated debentures	476			340			816
Borrowed funds	6			170			176
Total interest-bearing liabilities	1,165			901			2,066
Net interest income	$	5,835		$	420		$	6,255
(1) Change in volume multiplied by yield/rate of prior period.
(2) Change in yield/rate multiplied by volume of prior period.
(3) Nontaxable income is presented on a fully-tax equivalent basis using the combined statutory federal and state income tax rate in effect for each tax year.
NOTE: The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each.

Net interest income (on a tax equivalent basis) was $39.1 million for the three months ended March 31, 2017, compared to $32.9 million for the same period of 2016, an increase of $6.3 million, or 19%. Total interest income increased $8.3 million and total interest expense increased $2.1 million. The tax-equivalent net interest margin was 3.73% for the first quarter of 2017, compared to 3.79% for the fourth quarter of 2016, and 3.87% in the first quarter of 2016, and combined with portfolio loan growth, supported the $8.3 million increase in interest income. The yield on taxable portfolio loans increased 28 basis points from the prior year period to 4.43% for the three months ended March 31, 2017. The increase was due to the impact of interest rate increases and improved earning asset mix which increased yields on variable rate loans. The run-off of higher yielding non-core acquired loans continues to negatively impact net interest margin and resulted in a $2.2 million decrease in interest income for the three months ended March 31, 2017.

Core net interest margin expanded nine basis points from the prior year quarter to 3.63%, primarily due to loan growth, core-deposit funded portfolio loan growth, combined with the aforementioned increase in the yield on portfolio loans. Core net interest margin also increased modestly from JCB purchase accounting adjustments. The Company continues to manage its balance sheet to grow core net interest income and expects to increase or maintain core net interest margin over the coming quarters; however, pressure on funding costs could negate the expected trends in core net interest margin.

Non-Core Acquired Assets Contribution

The following table illustrates the non-core contribution of non-core acquired loans and related assets for the periods indicated.



	For the Three Months ended
(in thousands)	March 31, 2017			March 31, 2016
Accelerated cash flows and other incremental accretion	$	1,075		$	2,834
Provision reversal for non-core acquired loan losses	148			73
Other expenses	(123		)	(327		)
Non-core acquired assets income before income tax expense	$	1,100		$	2,580

Accelerated cash flows and other incremental accretion consists of the interest income on non-core acquired loans in excess of contractual interest on the loans. The contractual amount of interest is included in the Company's core results. At March 31, 2017, the remaining accretable yield on the remaining non-core acquired portfolio was estimated to be $13 million and the non-accretable difference was approximately $18 million. Accelerated cash flows and other incremental accretion from these was $1.1 million for the three months ended March 31, 2017, and $2.8 million for the same period in 2016. The Company estimates 2017 income from accelerated cash flows and other incremental accretion to be between $5 million and $7 million.

Noninterest Income

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



	Three months ended March 31,
(in thousands)	2017		2016		Increase (decrease)
Service charges on deposit accounts	$	2,510	$	2,043	$	467		23	%
Wealth management revenue	1,833		1,662		171			10	%
Other service charges and fee income	1,280		868		412			47	%
Gain on state tax credits, net	246		518		(272		)	(53	)%
Gain on sale of other real estate - core	—		122		(122		)	(100	)%
Miscellaneous income - core	1,107		792		315			40	%
Core noninterest income(1)	6,976		6,005		971			16	%
Total noninterest income	$	6,976	$	6,005	$	971		16	%

(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 $1.0 million, or 16% in the first three months of 2017 compared to the first three months of 2016, largely from an increase in service charges on deposit accounts. Core noninterest income¹ grew 16% in the first three months of 2017 due primarily to the JCB acquisition including an increase in service charges on deposit accounts, and fee income from card products, when compared to the first three months of 2016. The JCB contribution totaled $0.7 million for the three months ended March 31, 2017.

Noninterest Expense

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



	Three months ended March 31,
(in thousands)	2017		2016		Increase (decrease)
Core expenses (1):
Employee compensation and benefits - core	$	16,016	$	12,465	$	3,551		28	%
Occupancy - core	1,929		1,657		272			16	%
Data processing - core	1,688		1,089		599			55	%
FDIC and other insurance	975		723		252			35	%
Professional fees - core	1,362		684		678			99	%
Loan, legal and other real estate expense - core	222		254		(32		)	(13	)%
Other - core	2,754		3,563		(809		)	(23	)%
Core noninterest expense(1)	24,946		20,435		4,511			22	%
Merger related expenses	1,666		—		1,666			—	%
Other expenses related to non-core acquired loans	124		327		(203		)	(62	)%
Total noninterest expense	$	26,736	$	20,762	$	5,974		29	%
(1) A non-GAAP measure. A reconciliation has been included in this MD&A section under the caption "Use of Non-GAAP Financial Measures."

Noninterest expenses were $26.7 million for the three months ended March 31, 2017, compared to $20.8 million for the three months ended March 31, 2016. The increase was primarily due to an increase in Employee compensation and benefits from investments in revenue producing personnel and the acquisition of JCB. Core noninterest expenses¹ increased $4.5 million to $24.9 million for the three months ended March 31, 2017, from $20.4 million for the prior year period of which $3.0 million was due to the acquisition of JCB.

The Company's Core efficiency ratio¹ improved to 56.0% for the three months ended March 31, 2017 from 57.4% for the prior year, and reflects overall expense management and revenue growth trends mitigated by the acquisition of JCB. The Company expects to achieve additional cost savings from the JCB transaction throughout 2017 and expects to continue to leverage its expense base. The Company anticipates core expenses, which exclude merger related costs, to be between $25 and $28 million per quarter for the rest of 2017. Core efficiency ratio is a non-GAAP measure. A reconciliation of Core efficiency ratio has been included in this MD&A section under the caption "Use of Non-GAAP Financial Measures".

Income Taxes

The Company's income tax expense for the three months ended March 31, 2017, which includes both federal and state taxes, was $5.1 million compared to $5.9 million for the same period of 2016. The combined federal and state effective income tax rate for the three months ended March 31, 2017 was 29.2%, compared to 34.8% for the same period in 2016. The decrease in the effective tax rate over the prior year period was caused by a change in accounting guidance that requires recording excess tax benefits on equity compensation awards to the income statement.

Summary Balance Sheet



	March 31, 2017
(in thousands)	JCB		Legacy Enterprise		Consolidated		December 31, 2016		Increase (decrease)
Total cash and cash equivalents	$	35,454	$	173,547	$	209,001	$	198,802	10,199		5.1	%
Securities	148,670		524,251		672,921		541,260		131,661		24.3	%
Loans	678,409		3,212,655		3,891,064		3,158,161		732,903		23.2	%
Non-core acquired loans	—		38,092		38,092		39,769		(1,677	)	(4.2	)%
Total assets	927,032		4,179,194		5,106,226		4,081,328		1,024,898		25.1	%
Deposits	765,297		3,266,323		4,031,620		3,233,361		798,259		24.7	%
Total liabilities	839,572		3,728,733		4,568,305		3,694,230		874,075		23.7	%
Total shareholders' equity	178,510		359,411		537,921		387,098		150,823		39.0	%

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 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 summarizes the composition of the Company's loan portfolio:



(in thousands)	March 31, 2017		December 31, 2016		Increase (decrease)
Commercial and industrial	$	1,773,864	$	1,632,714	$	141,150		8.6	%
Commercial real estate - investor owned	761,100		544,808		216,292			39.7	%
Commercial real estate - owner occupied	482,379		350,148		132,231			37.8	%
Construction and land development	297,165		194,542		102,623			52.8	%
Residential real estate	360,312		240,760		119,552			49.7	%
Consumer and other	178,152		155,420		22,732			14.6	%
Portfolio loans	3,852,972		3,118,392		734,580			23.6	%
Non-core acquired loans	38,092		39,769		(1,677		)	(4.2	)%
Total loans	$	3,891,064	$	3,158,161	$	732,903		23.2	%

Portfolio loans grew by $734.6 million, to $3.9 billion at March 31, 2017, when compared to December 31, 2016. Non-core acquired loans totaled $38.1 million at March 31, 2017, a decrease of $1.7 million, or 4%, from December 31, 2016, primarily as a result of principal paydowns and accelerated loan payoffs.

The following table illustrates portfolio loan growth with selected specialized lending detail:



	At the Quarter ended
	March 31, 2017
(in thousands)	JCB		Legacy Enterprise		Consolidated		Dec 31, 2016		Increase (decrease)
Enterprise value lending	$	—	$	429,957	$	429,957	$	388,798	$	41,159		10.6	%
C&I - general	79,021		810,781		889,802		794,451		95,351			12.0	%
Life insurance premium financing	—		312,335		312,335		305,779		6,556			2.1	%
Tax credits	—		141,770		141,770		143,686		(1,916		)	(1.3	)%
CRE, Construction, and land development	465,736		1,074,909		1,540,645		1,089,498		451,147			41.4	%
Residential	121,232		239,080		360,312		240,760		119,552			49.7	%
Other	12,420		165,731		178,151		155,420		22,731			14.6	%
Portfolio loans	$	678,409	$	3,174,563	$	3,852,972	$	3,118,392	$	734,580		23.6	%

Specialized lending products, especially Enterprise value lending, Life insurance premium financing, and Tax credits, consist of primarily C&I loans, and have contributed significantly to the Company's loan growth. These loans are sourced through relationships developed with estate planning firms and private equity funds, and are not bound geographically by our traditional three markets. These specialized loan products offer opportunities to expand and diversify geographically 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 expects continued loan growth in the fourth quarter of 2016, and loan growth, excluding the acquisition of JCB, at or above 10% for 2017.

Provision and Allowance for Loan Losses

The following table summarizes changes in the allowance for loan losses arising from loans charged off and recoveries on loans previously charged off, by loan category, and additions to the allowance charged to expense.



	Three months ended March 31,
(in thousands)	2017			2016
Allowance at beginning of period, for loans	$	37,565		$	33,441
Loans charged off:
Commercial and industrial	(133		)	(68		)
Real estate:
Commercial	—
Construction and land development	—			—
Residential	(9		)	—
Consumer and other	(29		)	(5		)
Total loans charged off	(171		)	(73		)
Recoveries of loans previously charged off:
Commercial and industrial	80			53
Real estate:
Commercial	98			75
Construction and land development	9			6
Residential	25			34
Consumer and other	9			4
Total recoveries of loans	221			172
Net loan charge-offs	50			99
Provision for loan losses	1,533			833
Allowance at end of period, for portfolio loans	$	39,148		$	34,373

Allowance at beginning of period, for purchased credit impaired loans	$	5,844		$	10,175
Loans charged off	—			(488		)
Other	(219		)	(45		)
Net loan charge-offs	(219		)	(533		)
Provision reversal for PCI loan losses	(148		)	(73		)
Allowance at end of period, for purchased credit impaired loans	$	5,477		$	9,569

Total allowance at end of period	$	44,625		$	43,942

Portfolio loans, average(1)	$	3,511,457		$	2,777,456
Portfolio loans, ending(1)	3,852,972			2,769,139
Net charge-offs to average portfolio loans	(0.01		)%	(0.01		)%
Allowance for portfolio loan losses to loans	1.02		%	1.21		%

(1) Excludes PCI loans.

The provision for loan losses on portfolio loans for the three months ended March 31, 2017 was $1.5 million, compared to $0.8 million for the comparable 2016 period. The provision for loan losses for the three month period ended March 31, 2017 is reflective of growth in the portfolio as well as reflecting additional reserves on loans evaluated individually for impairment.

For PCI loans, the Company remeasures contractual and expected cash flows periodically. When the remeasurement process results in a decrease in expected cash flows, typically due to an increase in expected credit losses, impairment is recorded through provision for loan losses. Similarly, when expected credit losses decrease in the remeasurement process, prior recorded impairment is reversed before the yield is increased prospectively. There was $0.1 million of provision reversal for loan losses on PCI loans for the three months ended March 31, 2017, compared to provision reversal of $0.1 million for the comparable 2016 period.

The allowance for loan losses on portfolio loans was 1.02% (1.23% excluding loans acquired from JCB) of portfolio loans at March 31, 2017 compared to 1.21% at March 31, 2016. Management believes the allowance for loan losses is adequate to absorb inherent losses in the loan portfolio.

Nonperforming assets

The following table presents the categories of nonperforming assets and other ratios as of the dates indicated.



(in thousands)	March 31, 2017			December 31, 2016			March 31, 2016
Non-accrual loans	$	11,527		$	12,585		$	9,226
Restructured loans	2,320			2,320			287
Total nonperforming loans (1)	13,847			14,905			9,513
Other real estate from originated loans	2,685			740			2,813
Other real estate from acquired loans	240			240			7,067
Total nonperforming assets (1) (2)	$	16,772		$	15,885		$	19,393

Total assets	$	5,106,226		$	4,081,328		$	3,709,905
Loans (1)	3,891,064			3,158,161			2,832,616
Portfolio loans plus other real estate	3,893,989			3,159,141			2,842,496
Nonperforming loans to portfolio loans (1)	0.36		%	0.47		%	0.34		%
Nonperforming assets to total loans plus other real estate (1) (2)	0.43			0.50			0.68
Nonperforming assets to total assets (1) (2)	0.33			0.39			0.52
Allowance for loans to nonperforming loans (1)	283		%	252		%	361		%

(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.

Nonperforming loans

Nonperforming loans exclude PCI loans that are accounted for on a pool basis, as the pools are considered to be performing. See Item 1, Note 5 – Purchased Credit Impaired Loans for more information on these loans.

Nonperforming loans based on loan type were as follows:



(in thousands)	March 31, 2017		December 31, 2016		March 31, 2016
Commercial and industrial	$	11,930	$	12,284	$	5,209
Commercial real estate	281		655		973
Construction and land development	1,575		1,904		2,652
Residential real estate	61		62		679
Consumer and other	—		—		—
Total	$	13,847	$	14,905	$	9,513

The following table summarizes the changes in nonperforming loans:



	Three months ended March 31,
(in thousands)	2017			2016
Nonperforming loans beginning of period	$	14,905		$	9,100
Additions to nonaccrual loans	291			2,933
Charge-offs	(141		)	(35		)
Other principal reductions	(925		)	(2,202		)
Moved to other real estate	(283		)	(283		)
Nonperforming loans end of period	$	13,847		$	9,513

Other real estate

Other real estate at March 31, 2017, was $2.9 million, compared to $9.9 million at March 31, 2016.

The following table summarizes the changes in Other real estate:



	Three months ended March 31,
(in thousands)	2017			2016
Other real estate beginning of period	$	980		$	8,366
Additions and expenses capitalized to prepare property for sale	1,963			2,203
Writedowns in value	(18		)	—
Sales	—			(689		)
Other real estate end of period	$	2,925		$	9,880

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

Liabilities

Liabilities totaled $4.6 billion at March 31, 2017, compared to $3.7 billion at December 31, 2016. The increase in liabilities was largely due to a $798 million increase in total deposits, offset by a decrease of $80 million in other borrowings.

Deposits



	March 31, 2017
(in thousands)	JCB			Legacy Enterprise			Consolidated			December 31, 2016			Increase (decrease)
Demand deposits	$	168,775		$	868,226		$	1,037,001		$	866,756		170,245	19.6	%
Interest-bearing transaction accounts	96,207			748,568			844,775			731,539			113,236	15.5	%
Money market accounts	292,845			1,061,589			1,354,434			1,050,472			303,962	28.9	%
Savings	78,155			111,148			189,303			111,435			77,868	69.9	%
Certificates of deposit:
Brokered	—			145,436			145,436			117,145			28,291	24.2	%
Other	138,012			322,659			460,671			356,014			104,657	29.4	%
Total deposits	$	773,994		$	3,257,626		$	4,031,620		$	3,233,361		798,259	24.7	%

Non-time deposits / total deposits	82		%	86		%	85		%	85		%
Demand deposits / total deposits	22		%	27		%	26		%	27		%

Total deposits at March 31, 2017 were $4.0 billion, an increase of $798 million, or 25%, from December 31, 2016, primarily from the acquisition of JCB. The composition of our noninterest bearing deposits remained relatively stable at 26% of total deposits at March 31, 2017 compared to 27% at December 31, 2016.

Shareholders' Equity

Shareholders' equity totaled $538 million at March 31, 2017, an increase of $150.8 million from December 31, 2016. Significant activity during the three months ended March 31, 2017 was as follows:


•	Issuance of 3.3 million shares common stock for the JCB acquisition of $141.7 million


•	Net income of $12.4 million,


•	Dividends paid on common shares of $2.6 million.

Liquidity and Capital Resources

Liquidity

The objective of liquidity management is to ensure we have the ability to generate sufficient cash or cash equivalents in a timely and cost-effective manner to meet our commitments as they become due. Typical demands on liquidity are run-off from demand deposits, maturing time deposits which are not renewed, and fundings under credit commitments to customers. Funds are available from a number of sources, such as from the core deposit base and from loans and securities repayments and maturities.

Additionally, liquidity is provided from sales of the securities portfolio, fed fund lines with correspondent banks, borrowings from the Federal Reserve and the FHLB, the ability to acquire large and brokered deposits, 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.

Parent Company liquidity

The parent company's liquidity is managed to provide the funds necessary to pay dividends to shareholders, service debt, invest in subsidiaries as necessary, and satisfy other operating requirements. The parent company's primary funding sources to meet its liquidity requirements are dividends and payments from the Bank and proceeds from the issuance of equity (i.e. stock option exercises, stock offerings). Another source of funding for the parent company includes the issuance of subordinated debentures and other debt instruments.

The Company has an effective shelf registration statement on Form S-3 registering up to $100 million of common stock, preferred stock, debt securities, and various other securities, including combinations of such securities. 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 SEC.

On November 1, 2016, the Company issued $50 million aggregate principal amount of 4.75% fixed-to-floating rate subordinated notes with a maturity date of November 1, 2026. The subordinated notes will initially bear an annual interest rate of 4.75%, with interest payable semiannually. The notes were registered pursuant to a Form S-3 which was declared effective in August 2014. Beginning November 1, 2021, the interest rate resets quarterly to the three-month LIBOR rate plus a spread of 338.7 basis points, payable quarterly. The Company used a portion of the proceeds from the issuance to pay the cash consideration at the closing of the acquisition of JCB. Regulatory guidance allows for this subordinated debt to be treated as tier 2 regulatory capital for the first five years of its term, subject to certain limitations, and then phased out of tier 2 capital pro rata over the next five years.

The Company has a senior unsecured revolving credit agreement (the "Revolving Agreement") with another bank allowing for borrowings up to $20 million which is renewed through February 2018. 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 March 31, 2017, there were no outstanding balances under the Revolving Agreement.

As of March 31, 2017, the Company had $69.3 million of outstanding subordinated debentures as part of ten Trust Preferred Securities Pools. These securities are classified as debt but are included in regulatory capital and the related interest expense is tax-deductible, which makes them an attractive source of funding.

Bank liquidity

The Bank has a variety of funding sources available to increase financial flexibility. In addition to amounts currently borrowed, at March 31, 2017 the Bank has borrowing capacity of $290.7 million from the FHLB of Des Moines under blanket loan pledges, and has an additional $911.4 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 million.

Investment securities are another important tool to the Bank's liquidity objectives. Of the $593.7 million of the securities available for sale at March 31, 2017, $466.1 million was pledged as collateral for deposits of public institutions, treasury, loan notes, and other requirements. The remaining $127.6 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 $1.3 billion in unused commitments as of March 31, 2017. 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, Tier 1, and Common equity tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. To be categorized as “well capitalized”, banks must maintain minimum total risk-based (10%), Tier 1 risk-based (8%), Common equity tier 1 risk-based (6.5%), and Tier 1 leverage ratios (5%). As of March 31, 2017, and December 31, 2016, the Company and the Bank met all capital adequacy requirements to which they are subject.

The Bank continues to exceed regulatory standards and met the definition of “well-capitalized” (the highest category) at March 31, 2017. The Company adopted the Regulatory Capital Framework (Basel III) in 2015, and has implemented the necessary processes and procedures to comply.

The following table summarizes the Company's various capital ratios at the dates indicated:



(in thousands)	March 31, 2017			December 31, 2016			Well Capitalized Minimum %
Total capital to risk-weighted assets	12.76		%	13.48		%	10.00	%
Tier 1 capital to risk-weighted assets	10.69		%	10.99		%	8.00	%
Common equity tier 1 capital to risk-weighted assets	9.20		%	9.52		%	6.50	%
Leverage ratio (Tier 1 capital to average assets)	10.94		%	10.42		%	5.00	%
Tangible common equity to tangible assets¹	8.28		%	8.76		%	N/A
Tier 1 capital	$	487,037		$	412,865
Total risk-based capital	581,737			506,349

¹ Not a required regulatory capital ratio

The Company believes the tangible common equity ratio and the common equity tier 1 capital ratio are important measures of capital strength even though they are considered to be non-GAAP measures. The tables further within MD&A reconcile these ratios to U.S. GAAP.

Use of Non-GAAP Financial Measures:

The Company's accounting and reporting policies conform to generally accepted accounting principles in the United States (“GAAP”) and the prevailing practices in the banking industry. However, the Company provides other financial measures, such as Core net income and net interest margin, and other Core performance measures, regulatory capital ratios, and the tangible common equity ratio, in this report that are considered “non-GAAP financial measures.” Generally, a non-GAAP financial measure is a numerical measure of a company's financial performance, financial position, or cash flows that exclude (or include) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP.

The Company considers its Core performance measures presented in this report and the included tables 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 non-core acquired loans and related income and expenses, the impact of certain non-comparable items, and the Company's operating performance on an ongoing basis. Core performance measures include contractual interest on non-core acquired 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 from non-core acquired loans, and expenses directly related to non-core acquired loans and other assets formerly covered under FDIC loss share agreements. Core performance measures also exclude certain other income and expense items, such as executive separation costs, merger related expenses, and the gain or loss on sale of investment securities, 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 the tangible common equity ratio provides useful information to investors about the Company's capital strength even though it is considered to be a non-GAAP financial measure and is not part of the regulatory capital requirements to which the Company is subject.

The Company believes these non-GAAP measures and ratios, when taken together with the corresponding 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 operating results and related trends and when 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 GAAP. In the following tables, 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 for the periods indicated.

Core Performance Measures



	For the Three Months ended
(in thousands)	March 31, 2017			December 31, 2016			March 31, 2016
Net interest income	$	38,642		$	35,454		$	32,428
Less: Incremental accretion income	1,075			3,279			2,834
Core net interest income	37,567			32,175			29,594

Total noninterest income	6,976			9,029			6,005
Less: Gain (loss) on sale of other real estate from non-core acquired loans	—			1,085			—
Less: Other income from non-core acquired assets	—			95			—
Core noninterest income	6,976			7,849			6,005

Total core revenue	44,543			40,024			35,599

Provision for portfolio loans	1,533			964			833

Total noninterest expense	26,736			23,181			20,762
Less: Other expenses related to non-core acquired loans	123			172			327
Less: Merger related expenses	1,667			1,084			—
Less: Facilities disposal charge	—			1,040			—
Less: Other non-core expenses	—			(209		)	—
Core noninterest expense	24,946			21,094			20,435

Core income before income tax expense	18,064			17,966			14,331

Total income tax expense	5,106			7,053			5,886
Less: Non-core income tax expense¹	190			1,032			989
Core income tax expense	4,916			6,021			4,897
Core net income	$	13,148		$	11,945		$	9,434

Core diluted earnings per share	$	0.59		$	0.59		$	0.47
Core return on average assets	1.17		%	1.19		%	1.04		%
Core return on average common equity	11.29		%	12.31		%	10.66		%
Core return on average tangible common equity	13.75		%	13.44		%	11.76		%
Core efficiency ratio	56.01		%	52.70		%	57.40		%

¹Non-core income tax expense calculated at 38% of non-core pretax income plus an estimate of taxes payable related to non-deductible JCB acquisition costs.

Net Interest Margin to Core Net Interest Margin (fully tax equivalent)



	Three months ended March 31,
(in thousands)	2017			2016
Net interest income	$	39,147		$	32,887
Less: Incremental accretion income	1,075			2,834
Core net interest income	$	38,072		$	30,053

Average earning assets	$	4,259,198		$	3,413,792
Reported net interest margin	3.73		%	3.87		%
Core net interest margin	3.63		%	3.54		%

Tangible common equity ratio



(in thousands)	March 31, 2017			December 31, 2016
Total shareholders' equity	$	537,921		$	387,098
Less: Goodwill	113,886			30,334
Less: Intangible assets	11,758			2,151
Tangible common equity	$	412,277		$	354,613

Total assets	$	5,106,226		$	4,081,328
Less: Goodwill	113,886			30,334
Less: Intangible assets	11,758			2,151
Tangible assets	$	4,980,582		$	4,048,843

Tangible common equity to tangible assets	8.28		%	8.76		%

Regulatory Capital to Risk-Weighted Assets



(in thousands)	March 31, 2017			December 31, 2016
Total shareholders' equity	$	537,921		$	387,098
Less: Goodwill	113,886			30,334
Less: Intangible assets, net of deferred tax liabilities	5,832			800
Less: Unrealized gains	(1,174		)	(1,741		)
Plus: Other	12			24
Tier 1 capital	419,389			357,729
Plus: Qualifying trust preferred securities	67,600			55,100
Plus: Other	48			36
Tier 1 capital	487,037			412,865
Plus: Tier 2 capital	94,700			93,484
Total risk-based capital	581,737			506,349

Total risk-weighted assets determined in accordance with prescribed regulatory requirements	$	4,557,860		$	3,757,161

Common equity tier 1 to risk-weighted assets	9.20		%	9.52		%
Tier 1 capital to risk-weighted assets	10.69		%	10.99		%
Total risk-based capital to risk-weighted assets	12.76		%	13.48		%

Critical Accounting Policies

The impact and any associated risks related to the Company's critical accounting policies on business operations are described throughout "Management's Discussion and Analysis of Financial Condition and Results of Operations," where such policies affect our reported and expected financial results. For a detailed description on the application of these and other accounting policies, see below under caption Acquisitions, as well as, the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

Acquisitions

Acquisitions and Business Combinations are accounted for using the acquisition method of accounting. The assets and liabilities of the acquired entities have been recorded at their estimated fair values at the date of acquisition. Goodwill represents the excess of the purchase price over the fair value of net assets acquired, including the amount assigned to indentifiable intangible assets.

The purchase price allocation process requires an estimation of the fair values of the assets acquired and the liabilities assumed. When a business combination agreement provides for an adjustment to the cost of the combination contingent on future events, the Company includes an estimate of the acquisition-date fair value as part of the cost of the combination. To determine the fair values, the Company relies on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. The results of operations of the acquired business are included in the Company's consolidated financial statements from the respective date of acquisition. Merger-related costs are costs the Company incurs to effect a business combination. In 2017, the Company changed its presentation of Merger related expenses as a separate component of Noninterest expenses on the Condensed Consolidated Statements of Operations. Merger related expenses include costs directly related to merger or acquisition activity and include legal and professional fees, system consolidation and conversion costs, and compensation costs such as severance and retention incentives for employees impacted by acquisition activity. The Company accounts for merger-related costs as expenses in the periods in which the costs are incurred and the services are received.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk

Our interest rate 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 minimize or eliminate any impact from market interest rate changes. In order to measure earnings sensitivity to changing rates, the Company uses an earnings simulation model.

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

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



Rate Shock	Annual % change in net interest income
+ 300 bp	6.3%
+ 200 bp	4.3%
+ 100 bp	2.1%
- 100 bp	-6.6%

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.

ITEM 4: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of the Company’s Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15, as of March 31, 2017. Disclosure controls and procedures include without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Based on that evaluation, the CEO and CFO concluded the Company’s disclosure controls and procedures were effective as of March 31, 2017 to provide reasonable assurance of the achievement of the objectives described above.

Changes to Internal Controls

There were no changes during the period covered by this Quarterly Report on Form 10-Q in the Company's internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, those controls.

PART II - OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

ITEM 1A: RISK FACTORS

For information regarding risk factors affecting the Company, please see the cautionary language regarding forward-looking statements in the introduction to Item 2 of Part I of this Report on Form 10-Q, and Part I, Item 1A of our Report on Form 10-K for the fiscal year ended December 31, 2016. There have been no material changes to the risk factors described in such Annual Report on Form 10-K.

ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

The following table provides information on repurchases by the Company of its common stock in each month of the quarter ended March 31, 2017.



Period	Total number of shares purchased (a)	Weighted-average price paid per share		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
January 1, 2017 through January 31, 2017	—	$	—	—	1,814,282
February 1, 2017 through February 28, 2017	1,098	45.55		—	1,814,282
March 1, 2017 through March 31, 2017	—	—		—	1,814,282
Total	1,098	$	45.55	—

(a) In May 2015, the Company’s board of directors authorized the repurchase of up to two million shares of the Company’s common stock. The repurchases may be made in open market or privately negotiated transactions and the repurchase program will remain in effect until fully utilized or until modified, superseded or terminated. The timing and exact amount of common stock repurchases will depend on a number of factors including, among others, market and general economic conditions, economic capital and regulatory capital considerations, alternative uses of capital, the potential impact on our credit ratings, and contractual and regulatory limitations.

ITEM 6: EXHIBITS


Exhibit No.	Description

Registrant hereby agrees to furnish to the Commission, upon request, the instruments defining the rights of holders of each issue of long-term debt of Registrant and its consolidated subsidiaries.


*12.1	Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends.


*31.1	Chief Executive Officer's Certification required by Rule 13(a)-14(a).


*31.2	Chief Financial Officer's Certification required by Rule 13(a)-14(a).


**32.1	Chief Executive Officer Certification pursuant to 18 U.S.C. § 1350, as adopted pursuant to section § 906 of the Sarbanes-Oxley Act of 2002.


**32.2	Chief Financial Officer Certification pursuant to 18 U.S.C. § 1350, as adopted pursuant to section § 906 of the Sarbanes-Oxley Act of 2002.

101

Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2017, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheet at March 31, 2017 and December 31, 2016; (ii) Consolidated Statement of Income for the three months ended March 31, 2017 and 2016; (iii) Consolidated Statement of Comprehensive Income for the three months ended March 31, 2017 and 2016; (iv) Consolidated Statement of Changes in Equity for the three months ended March 31, 2017 and 2016; (v) Consolidated Statement of Cash Flows for the three months ended March 31, 2017 and 2016; and (vi) Notes to Financial Statements.

* Filed herewith

** Furnished herewith. Notwithstanding any incorporation of this Quarterly Statement on Form 10-Q in any other filing by the Registrant, Exhibits furnished herewith and designated with two (**) shall not be deemed incorporated by reference to any other filing unless specifically otherwise set forth herein or therein.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Clayton, State of Missouri on the day of April 28, 2017.



	ENTERPRISE FINANCIAL SERVICES CORP

	By:	/s/ Peter F. Benoist
		Peter F. Benoist
		Chief Executive Officer

	By:	/s/ Keene S. Turner
		Keene S. Turner
		Chief Financial Officer