ENTERPRISE FINANCIAL SERVICES CORP - Quarter Report: 2018 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, 2018.

[ ]		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, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):



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

If an emerging growth company, indicate by check mark if the registrant has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. [ ]

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 25, 2018, the Registrant had 23,111,255 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		23

Item 3. Quantitative and Qualitative Disclosures About Market Risk		43

Item 4. Controls and Procedures		44

PART II - OTHER INFORMATION

Item 1. Legal Proceedings		44

Item 1A. Risk Factors		44

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		45

Item 6. Exhibits		46

Signatures		47

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, 2018			December 31, 2017
Assets
Cash and due from banks	$	81,604		$	91,084
Federal funds sold	1,099			1,223
Interest-bearing deposits (including $1,295 and $1,365 pledged as collateral, respectively)	60,398			61,016
Total cash and cash equivalents	143,101			153,323
Interest-bearing deposits greater than 90 days	2,400			2,645
Securities available for sale	652,272			641,382
Securities held to maturity	70,579			73,749
Loans held for sale	1,748			3,155
Loans	4,190,845			4,097,050
Less: Allowance for loan losses	44,650			42,577
Total loans, net	4,146,195			4,054,473
Other real estate	455			498
Other investments, at cost	29,263			26,661
Fixed assets, net	32,127			32,618
Accrued interest receivable	17,277			14,069
State tax credits held for sale (including $350 and $400 carried at fair value, respectively)	42,364			43,468
Goodwill	117,345			117,345
Intangible assets, net	10,399			11,056
Other assets	117,577			114,783
Total assets	$	5,383,102		$	5,289,225

Liabilities and Shareholders' Equity
Demand deposits	$	1,101,705		$	1,123,907
Interest-bearing transaction accounts	875,880			915,653
Money market accounts	1,445,459			1,342,931
Savings	210,029			195,150
Certificates of deposit:
Brokered	201,082			115,306
Other	447,222			463,467
Total deposits	4,281,377			4,156,414
Subordinated debentures and notes (net of debt issuance cost of $1,103 and $1,136, respectively)	118,118			118,105
Federal Home Loan Bank advances	224,624			172,743
Other borrowings	166,589			253,674
Accrued interest payable	2,046			1,730
Other liabilities	35,333			37,986
Total liabilities	4,828,087			4,740,652

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; 23,867,710 and 23,781,112 shares issued, respectively	239			238
Treasury stock, at cost; 756,588 and 691,673 shares, respectively	(26,326		)	(23,268		)
Additional paid in capital	348,092			350,061
Retained earnings	244,573			225,360
Accumulated other comprehensive loss	(11,563		)	(3,818		)
Total shareholders' equity	555,015			548,573
Total liabilities and shareholders' equity	$	5,383,102		$	5,289,225

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)	2018		2017
Interest income:
Interest and fees on loans	$	50,450	$	39,926
Interest on debt securities:
Taxable	3,987		3,230
Nontaxable	282		386
Interest on interest-bearing deposits	240		130
Dividends on equity securities	205		68
Total interest income	55,164		43,740
Interest expense:
Interest-bearing transaction accounts	806		675
Money market accounts	3,353		1,493
Savings accounts	125		82
Certificates of deposit	1,899		1,215
Subordinated debentures and notes	1,368		1,164
Federal Home Loan Bank advances	1,258		330
Notes payable and other borrowings	184		139
Total interest expense	8,993		5,098
Net interest income	46,171		38,642
Provision for portfolio loan losses	1,871		1,533
Provision reversal for purchased credit impaired loan losses	—		(148		)
Net interest income after provision for loan losses	44,300		37,257
Noninterest income:
Service charges on deposit accounts	2,851		2,510
Wealth management revenue	2,114		1,833
Card services revenue	1,516		1,037
Gain on state tax credits, net	252		246
Gain on sale of investment securities	9		—
Miscellaneous income	2,800		1,350
Total noninterest income	9,542		6,976
Noninterest expense:
Employee compensation and benefits	16,491		15,208
Occupancy	2,406		1,929
Data processing	1,467		1,633
Professional fees	849		837
FDIC and other insurance	917		824
Loan legal and other real estate expense	299		345
Merger related expenses	—		1,667
Other	6,714		4,293
Total noninterest expense	29,143		26,736

Income before income tax expense	24,699		17,497
Income tax expense	3,778		5,106
Net income	$	20,921	$	12,391

Earnings per common share
Basic	$	0.91	$	0.57
Diluted	0.90		0.56

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)	2018			2017
Net income	$	20,921		$	12,391
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on investment securities arising during the period, net of income tax expense (benefit) for three months of $(2,265) and $348, respectively	(6,904		)	567
Less: Reclassification adjustment for realized gains on sale of securities available for sale included in net income, net of income tax expense for three months of $2 and $0, respectively	(7		)	—
Total other comprehensive income (loss)	(6,911		)	567
Total comprehensive income	$	14,010		$	12,958

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)	Common Stock			Treasury Stock			Additional paid in capital			Retained earnings			Accumulated other comprehensive income (loss)			Total shareholders' equity
Balance December 31, 2017	$	238		$	(23,268	)	$	350,061		$	225,360		$	(3,818	)	$	548,573
Net income	—			—			—			20,921			—			20,921
Other comprehensive income	—			—			—			—			(6,911		)	(6,911		)
Total comprehensive income	—			—			—			20,921			(6,911		)	14,010
Cash dividends paid on common shares, $0.11 per share	—			—			—			(2,542		)	—			(2,542		)
Repurchase of common shares	—			(3,058		)	—			—			—			(3,058		)
Issuance under equity compensation plans, 86,598 shares, net	1			—			(2,687		)	—			—			(2,686		)
Share-based compensation	—			—			718			—			—			718
Reclassification adjustments for change in accounting policies	—		—	—			—			834			(834		)	—
Balance March 31, 2018	$	239		$	(26,326	)	$	348,092		$	244,573		$	(11,563	)	$	555,015


(in thousands, except per share data)	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., 3,299,865 shares, net	33			—			141,696			—			—			141,729
Reclassification for the adoption of share-based payment guidance	—			—			(5,229		)	5,229			—			—
Balance March 31, 2017	$	237		$	(6,632	)	$	348,259		$	197,231		$	(1,174	)	$	537,921

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)	2018			2017
Cash flows from operating activities:
Net income	$	20,921		$	12,391
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation	849			387
Provision for loan losses	1,870			1,385
Deferred income taxes	2,290			962
Net amortization of debt securities	533			1,310
Amortization of intangible assets	656			446
Gain on sale of investment securities	(9		)	—
Mortgage loans originated for sale	(12,389		)	(38,602		)
Proceeds from mortgage loans sold	13,917			42,710
Gain on state tax credits, net	(252		)	(246		)
Share-based compensation	718			866
Net accretion of loan discount	(467		)	(1,014		)
Changes in:
Accrued interest receivable	(3,209		)	1,682
Accrued interest payable	315			156
Other assets	(888		)	(1,728		)
Other liabilities	(2,640		)	(51,693		)
Net cash provided by (used in) operating activities	22,215			(30,988		)
Cash flows from investing activities:
Proceeds from JCB acquisition, net of cash purchase price	—			6,171
Net increase in loans	(93,125		)	(57,054		)
Proceeds from the sale of securities, available for sale	1,451			143,554
Proceeds from the paydown or maturity of securities, available for sale	19,683			42,223
Proceeds from the paydown or maturity of securities, held to maturity	1,639			1,180
Proceeds from the redemption of other investments	13,514			12,033
Proceeds from the sale of state tax credits held for sale	1,356			4,093
Payments for the purchase/origination of:
Available for sale debt securities	(40,313		)	(169,842		)
Other investments	(17,864		)	(20,318		)
State tax credits held for sale	—			(1,298		)
Fixed assets	(370		)	(247		)
Net cash used in investing activities	(114,029		)	(39,505		)
Cash flows from financing activities:
Net increase (decrease) in noninterest-bearing deposit accounts	(22,202		)	9,646
Net increase in interest-bearing deposit accounts	147,165			23,316
Proceeds from Federal Home Loan Bank advances	484,500			681,181
Repayments of Federal Home Loan Bank advances	(432,500		)	(530,681		)
Net decrease in other borrowings	(87,085		)	(98,040		)
Cash dividends paid on common stock	(2,542		)	(2,579		)
Payments for the repurchase of common stock	(3,058		)	—
Payments for the issuance of equity instruments, net	(2,686		)	(2,151		)
Net cash provided by financing activities	81,592			80,692
Net increase (decrease) in cash and cash equivalents	(10,222		)	10,199
Cash and cash equivalents, beginning of period	153,323			198,802
Cash and cash equivalents, end of period	$	143,101		$	209,001
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	8,677		$	4,289
Income taxes	685			28
Noncash transactions:
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, 2018 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2018. 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, 2017.

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.

During the first quarter of 2018, the Company adopted Accounting Standards Update ("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. The guidance also provides an alternative to measure equity securities without readily determinable fair values at cost less impairment (if any), plus or minus observable price changes from an identical or similar investment of the same issuer (the “measurement alternative”). The Company elected the measurement alternative for its qualifying equity securities. The adoption of this update resulted in an insignificant increase to retained earnings which was reclassified from accumulated other comprehensive income.

In addition, the Company early adopted ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." The objective of ASU 2017-12 is to improve the financial reporting of hedging relationships by better aligning an entity's risk management activity with the economic objectives in undertaking those activities. The adoption of this update had an insignificant impact on the Company's consolidated financial statements.

The Company also early adopted ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" during the first quarter of 2018. The ASU allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The adoption of this update resulted in an increase to retained earnings of $0.8 million being reclassified from accumulated other comprehensive income.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

Revenue

The Company adopted ASU 2014-09 in the first quarter of 2018 using the modified retrospective approach. The Company's revenues are primarily composed of interest income on financial instruments, including investment securities, which are excluded from the scope of the new guidance. Certain other noninterest income from loans, investment securities and derivative financial instruments is also excluded from this guidance. Service charges on deposit accounts, wealth management revenue, card services revenue, and gain on sale of other real estate are within the scope of the guidance; however, there were no accounting policy changes as the Company's policies were consistent with the new guidance. Other noninterest income sources of revenue are considered immaterial. Implementation of this guidance did not change current business practices or have any changes to the Company's consolidated financial statements.

Descriptions of our revenue-generating activities that are within the scope of this guidance, which are presented in our income statement as components of noninterest income are as follows:


•	Service charges on deposit accounts - represents fees generated from a variety of deposit products and services provided to customers under a day-to-day contract. These fees are recognized on a daily or monthly basis.


•	Wealth management revenue - represents monthly fees earned from directing, holding, and managing customers’ assets. Revenue is recognized over regular intervals, either monthly or quarterly.


•	Card services revenue - represents revenue earned from merchant, debit and credit cards as incurred and includes a contra revenue account for rebates.


•	Gain on sale of other real estate - represents income recognized at delivery of control of a property at the time of a real estate closing.

Income Taxes

The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Cuts and Jobs Act of 2017 (“Tax Act”). SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. The Company has recorded amounts based on the information known and reasonable estimates used as of March 31, 2018, but are subject to change based on a number of factors. The Company will complete its analysis of certain tax positions at the time it files its tax returns for the year ended December 31, 2017 and will be able to conclude if any further adjustments to the provisional estimate of the impact recorded is required.

NOTE 2 - 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)	2018		2017
Net income as reported	$	20,921	$	12,391

Weighted average common shares outstanding	23,115		21,928
Additional dilutive common stock equivalents	172		381
Weighted average diluted common shares outstanding	23,287		22,309

Basic earnings per common share:	$	0.91	$	0.57
Diluted earnings per common share:	$	0.90	$	0.56

For the three months ended March 31, 2018 and 2017, there were no common stock equivalents excluded from the earnings per share calculations because their effect would have been anti-dilutive.

NOTE 3 - 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, 2018
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for sale securities:
Obligations of U.S. Government-sponsored enterprises	$	99,890	$	—	$	(1,698	)	$	98,192
Obligations of states and political subdivisions	32,611		386		(209		)	32,788
Agency mortgage-backed securities	524,738		360		(13,713		)	511,385
U.S. Treasury bills	9,955		—		(48		)	9,907
Total securities available for sale	$	667,194	$	746	$	(15,668	)	$	652,272
Held to maturity securities:
Obligations of states and political subdivisions	$	12,552	$	7	$	(241	)	$	12,318
Agency mortgage-backed securities	58,027		—		(1,579		)	56,448
Total securities held to maturity	$	70,579	$	7	$	(1,820	)	$	68,766



	December 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	$	99,878	$	6	$	(660	)	$	99,224
Obligations of states and political subdivisions	34,181		674		(213		)	34,642
Agency mortgage-backed securities	513,082		727		(6,293		)	507,516
Total securities available for sale	$	647,141	$	1,407	$	(7,166	)	$	641,382
Held to maturity securities:
Obligations of states and political subdivisions	$	14,031	$	69	$	(46	)	$	14,054
Agency mortgage-backed securities	59,718		16		(330		)	59,404
Total securities held to maturity	$	73,749	$	85	$	(376	)	$	73,458

At March 31, 2018, and December 31, 2017, 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. Securities having a fair value of $401.1 million and $500.0 million at March 31, 2018, and December 31, 2017, 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, 2018, 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	$	2,404	$	2,419	$	—	$	—
Due after one year through five years	120,488		118,875		865		858
Due after five years through ten years	14,514		14,647		10,820		10,613
Due after ten years	5,050		4,946		867		847
Agency mortgage-backed securities	524,738		511,385		58,027		56,448
	$	667,194	$	652,272	$	70,579	$	68,766

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



	March 31, 2018
	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	$	98,192	$	1,698	$	—	$	—	$	98,192	$	1,698
Obligations of states and political subdivisions	23,766		423		361		27		24,127		450
Agency mortgage-backed securities	408,153		10,017		121,046		5,275		529,199		15,292
U.S. Treasury bills	9,907		48		—		—		9,907		48
	$	540,018	$	12,186	$	121,407	$	5,302	$	661,425	$	17,488

	December 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	$	89,309	$	660	$	—	$	—	$	89,309	$	660
Obligations of states and political subdivisions	13,951		259		—		—		13,951		259
Agency mortgage-backed securities	469,655		6,034		12,229		589		481,884		6,623
	$	572,915	$	6,953	$	12,229	$	589	$	585,144	$	7,542

The unrealized losses at both March 31, 2018, and December 31, 2017, 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, 2018, management performed its quarterly analysis of all securities with an unrealized loss and concluded no individual securities were other-than-temporarily impaired.

NOTE 4 - 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 ("PCI") loans.

The table below shows the loan portfolio composition including carrying value by segment of loans accounted for at amortized cost, which includes our originated loans, and loans accounted for as PCI.



(in thousands)	March 31, 2018		December 31, 2017
Loans accounted for at amortized cost	$	4,124,239	$	4,022,896
Loans accounted for as PCI	66,606		74,154
Total loans	$	4,190,845	$	4,097,050

The following tables refer to loans not accounted for as PCI loans.

Below is a summary of loans by category at March 31, 2018 and December 31, 2017:



(in thousands)	March 31, 2018			December 31, 2017
Commercial and industrial	$	1,981,684		$	1,918,720
Real estate:
Commercial - investor owned	811,244			769,275
Commercial - owner occupied	568,773			554,589
Construction and land development	306,824			303,091
Residential	328,192			341,312
Total real estate loans	2,015,033			1,968,267
Consumer and other	128,436			137,234
Loans, before unearned loan fees	4,125,153			4,024,221
Unearned loan fees, net	(914		)	(1,325		)
Loans, including unearned loan fees	$	4,124,239		$	4,022,896

A summary of the activity in the allowance for loan losses and the recorded investment in loans by class and category based on impairment methodology through March 31, 2018, and at December 31, 2017, 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, 2017	$	26,406		$	3,890	$	3,308	$	1,487	$	2,237		$	838		$	38,166
Provision (provision reversal) for loan losses	780			648		190		35		259			(41		)	1,871
Losses charged off	(732		)	—		—		—		(254		)	(49		)	(1,035		)
Recoveries	956			8		4		206		73			14			1,261
Balance at March 31, 2018	$	27,410		$	4,546	$	3,502	$	1,728	$	2,315		$	762		$	40,263



(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, 2018
Allowance for loan losses - Ending balance:
Individually evaluated for impairment	$	2,794	$	—	$	99	$	—	$	—	$	—	$	2,893
Collectively evaluated for impairment	24,616		4,546		3,403		1,728		2,315		762		37,370
Total	$	27,410	$	4,546	$	3,502	$	1,728	$	2,315	$	762	$	40,263
Loans - Ending balance:
Individually evaluated for impairment	$	12,313	$	416	$	2,198	$	—	$	1,777	$	325	$	17,029
Collectively evaluated for impairment	1,969,371		810,828		566,575		306,824		326,415		127,197		4,107,210
Total	$	1,981,684	$	811,244	$	568,773	$	306,824	$	328,192	$	127,522	$	4,124,239

Balance December 31, 2017
Allowance for loan losses - Ending balance:
Individually evaluated for impairment	$	2,508	$	—	$	71	$	—	$	—	$	—	$	2,579
Collectively evaluated for impairment	23,898		3,890		3,237		1,487		2,237		838		35,587
Total	$	26,406	$	3,890	$	3,308	$	1,487	$	2,237	$	838	$	38,166
Loans - Ending balance:
Individually evaluated for impairment	$	12,665	$	422	$	1,975	$	136	$	1,602	$	375	$	17,175
Collectively evaluated for impairment	1,906,055		768,853		552,614		302,955		339,710		135,534		4,005,721
Total	$	1,918,720	$	769,275	$	554,589	$	303,091	$	341,312	$	135,909	$	4,022,896

A summary of nonperforming loans individually evaluated for impairment by category at March 31, 2018 and December 31, 2017, and the income recognized on impaired loans is as follows:



	March 31, 2018
(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	$	21,353	$	2,470	$	9,843	$	12,313	$	2,794	$	13,278
Real estate:
Commercial - investor owned	558		416		—		416		—		418
Commercial - owner occupied	755		267		484		751		99		753
Construction and land development	—		—		—		—		—		—
Residential	2,103		1,777		—		1,777		—		1,985
Consumer and other	325		325		—		325		—		341
Total	$	25,094	$	5,255	$	10,327	$	15,582	$	2,893	$	16,775



	December 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	$	20,750	$	2,321	$	10,344	$	12,665	$	2,508	$	16,270
Real estate:
Commercial - investor owned	560		422		—		422		—		521
Commercial - owner occupied	487		—		487		487		71		490
Construction and land development	441		136		—		136		—		331
Residential	1,730		1,602		—		1,602		—		1,735
Consumer and other	375		375		—		375		—		375
Total	$	24,343	$	4,856	$	10,831	$	15,687	$	2,579	$	19,722



	Three months ended March 31,
(in thousands)	2018		2017
Total interest income that would have been recognized under original terms	$	534	$	315
Total cash received and recognized as interest income on non-accrual loans	11		23
Total interest income recognized on accruing, impaired loans	11		33

The recorded investment in nonperforming loans by category at March 31, 2018 and December 31, 2017, is as follows:



	March 31, 2018
(in thousands)	Non-accrual		Restructured, not on non-accrual		Total
Commercial and industrial	$	11,589	$	724	$	12,313
Real estate:
Commercial - investor owned	416		—		416
Commercial - owner occupied	751		—		751
Construction and land development	—		—		—
Residential	1,777		—		1,777
Consumer and other	325		—		325
Total	$	14,858	$	724	$	15,582



	December 31, 2017
(in thousands)	Non-accrual		Restructured, not on non-accrual		Total
Commercial and industrial	$	11,946	$	719	$	12,665
Real estate:
Commercial - investor owned	422		—		422
Commercial - owner occupied	487		—		487
Construction and land development	136		—		136
Residential	1,602		—		1,602
Consumer and other	375		—		375
Total	$	14,968	$	719	$	15,687

At March 31, 2018, loans over 90 days past due and still accruing interest totaled $0.3 million. There were no loans over 90 days past due and still accruing interest at December 31, 2017.

There were no portfolio loans restructured during the three months ended March 31, 2018 and 2017.

As of March 31, 2018, the Company had $1.9 million in specific reserves allocated to $8.1 million of loans that have been restructured. During the three months ended March 31, 2018 and 2017, there were no portfolio loans that subsequently defaulted.

The aging of the recorded investment in past due loans by portfolio class and category at March 31, 2018 and December 31, 2017 is shown below.



	March 31, 2018
(in thousands)	30-89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total
Commercial and industrial	$	3,669	$	5,150	$	8,819	$	1,972,865	$	1,981,684
Real estate:
Commercial - investor owned	—		—		—		811,244		811,244
Commercial - owner occupied	945		—		945		567,828		568,773
Construction and land development	497		—		497		306,327		306,824
Residential	401		1,026		1,427		326,765		328,192
Consumer and other	—		325		325		127,197		127,522
Total	$	5,512	$	6,501	$	12,013	$	4,112,226	$	4,124,239



	December 31, 2017
(in thousands)	30-89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total
Commercial and industrial	$	7,882	$	1,770	$	9,652	$	1,909,068	$	1,918,720
Real estate:
Commercial - investor owned	934		—		934		768,341		769,275
Commercial - owner occupied	—		—		—		554,589		554,589
Construction and land development	76		—		76		303,015		303,091
Residential	1,529		945		2,474		338,838		341,312
Consumer and other	407		—		407		135,502		135,909
Total	$	10,828	$	2,715	$	13,543	$	4,009,353	$	4,022,896

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, 2018, which is based upon the most recent analysis performed, and December 31, 2017 is as follows:



	March 31, 2018
(in thousands)	Pass (1-6)		Watch (7)		Substandard (8)		Total
Commercial and industrial	$	1,823,444	$	99,251	$	58,989	$	1,981,684
Real estate:
Commercial - investor owned	784,937		21,371		4,936		811,244
Commercial - owner occupied	534,493		28,834		5,446		568,773
Construction and land development	295,632		10,989		203		306,824
Residential	317,750		2,606		7,836		328,192
Consumer and other	126,394		9		1,119		127,522
Total	$	3,882,650	$	163,060	$	78,529	$	4,124,239



	December 31, 2017
(in thousands)	Pass (1-6)		Watch (7)		Substandard (8)		Total
Commercial and industrial	$	1,769,102	$	94,002	$	55,616	$	1,918,720
Real estate:
Commercial - investor owned	754,010		10,840		4,425		769,275
Commercial - owner occupied	514,616		34,440		5,533		554,589
Construction and land development	292,766		9,983		342		303,091
Residential	329,742		3,648		7,922		341,312
Consumer and other	134,704		10		1,195		135,909
Total	$	3,794,940	$	152,923	$	75,033	$	4,022,896

Below is a summary of PCI loans by category at March 31, 2018 and December 31, 2017:



	March 31, 2018			December 31, 2017
(in thousands)	Weighted- Average Risk Rating¹	Recorded Investment PCI Loans		Weighted- Average Risk Rating¹	Recorded Investment PCI Loans
Commercial and industrial	6.35	$	2,966	6.38	$	3,212
Real estate:
Commercial - investor owned	7.26	37,137		7.36	42,887
Commercial - owner occupied	6.39	10,886		6.48	11,332
Construction and land development	6.04	5,553		5.99	5,883
Residential	6.02	10,008		5.99	10,781
Consumer and other	2.76	56		2.84	59
Total		$	66,606		$	74,154
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, 2018 and December 31, 2017 is shown below:



	March 31, 2018
(in thousands)	30-89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total
Commercial and industrial	$	—	$	—	$	—	$	2,966	$	2,966
Real estate:
Commercial - investor owned	944		—		944		36,193		37,137
Commercial - owner occupied	—		665		665		10,221		10,886
Construction and land development	88		—		88		5,465		5,553
Residential	84		294		378		9,630		10,008
Consumer and other	—		—		—		56		56
Total	$	1,116	$	959	$	2,075	$	64,531	$	66,606



	December 31, 2017
(in thousands)	30-89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total
Commercial and industrial	$	—	$	—	$	—	$	3,212	$	3,212
Real estate:
Commercial - investor owned	—		3,034		3,034		39,853		42,887
Commercial - owner occupied	—		673		673		10,659		11,332
Construction and land development	—		—		—		5,883		5,883
Residential	328		255		583		10,198		10,781
Consumer and other	—		—		—		59		59
Total	$	328	$	3,962	$	4,290	$	69,864	$	74,154

The following table is a roll forward of PCI loans, net of the allowance for loan losses, for the three months ended March 31, 2018 and 2017.



(in thousands)	Contractual Cashflows			Non-accretable Difference			Accretable Yield			Carrying Amount
Balance December 31, 2017	$	112,710		$	29,005		$	13,962		$	69,743
Principal reductions and interest payments	(12,142		)	—			—			(12,142		)
Accretion of loan discount	—			—			(1,755		)	1,755
Changes in contractual and expected cash flows due to remeasurement	2,863			—			—			2,863
Balance March 31, 2018	$	103,431		$	29,005		$	12,207		$	62,219

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

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 $85.9 million and $94.9 million as of March 31, 2018, and December 31, 2017, respectively.

NOTE 5 - 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, 2018, the amount of unadvanced commitments on impaired loans was insignificant.

The contractual amounts of off-balance-sheet financial instruments as of March 31, 2018, and December 31, 2017, are as follows:



(in thousands)	March 31, 2018		December 31, 2017
Commitments to extend credit	$	1,267,362	$	1,298,423
Letters of credit	51,836		73,790

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, 2018, and December 31, 2017, approximately $123.9 million and $112.0 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 includes $0.4 million for estimated losses attributable to the unadvanced commitments at March 31, 2018, and December 31, 2017.

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, 2018, the approximate remaining terms of standby letters of credit range from 1 month to 3 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 6 - 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.

Hedging Instruments. At March 31, 2018, the Company has no outstanding 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, 2018		December 31, 2017		March 31, 2018		December 31, 2017		March 31, 2018		December 31, 2017
Non-designated hedging instruments
Interest rate swap contracts	$	379,778	$	394,852	$	2,524	$	2,061	$	2,524	$	2,061
Foreign exchange forward contracts	1,482		1,528		1,482		1,528		1,482		1,528

Changes in the fair value of client-related derivative instruments are recognized currently in operations. For the three months ended March 31, 2018 and 2017, 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 7 - 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, 2018 and December 31, 2017, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:



	March 31, 2018
(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	$	—	$	98,192	$	—	$	98,192
Obligations of states and political subdivisions	—		32,788		—		32,788
Residential mortgage-backed securities	—		511,385		—		511,385
U.S. Treasury bills	—		9,907		—		9,907
Total securities available for sale	$	—	$	652,272	$	—	$	652,272
Other investments	171		—		—		171
State tax credits held for sale	—		—		350		350
Derivative financial instruments	—		4,006		—		4,006
Total assets	$	171	$	656,278	$	350	$	656,799

Liabilities
Derivative financial instruments	$	—	$	4,006	$	—	$	4,006
Total liabilities	$	—	$	4,006	$	—	$	4,006



	December 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	$	—	$	99,224	$	—	$	99,224
Obligations of states and political subdivisions	—		34,642		—		34,642
Residential mortgage-backed securities	—		507,516		—		507,516
Total securities available for sale	$	—	$	641,382	$	—	$	641,382
State tax credits held for sale	—		—		400		400
Derivative financial instruments	—		3,589		—		3,589
Total assets	$	—	$	644,971	$	400	$	645,371

Liabilities
Derivative financial instruments	$	—	$	3,589	$	—	$	3,589
Total liabilities	$	—	$	3,589	$	—	$	3,589


•	Securities available for sale. Securities classified as available for sale are reported at fair value utilizing Level 2 and Level 3 inputs. Fair values for Level 2 securities are based upon dealer quotes, market spreads, the U.S.

Treasury yield curve, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions at the security level.


•	Other investments. At March 31, 2018, of the $29.3 million of other investments on the condensed consolidated balance sheet, approximately $0.2 million were carried at fair value. The remaining $29.1 million of other investments were accounted for at cost. Other investments reported at fair value represent equity securities with quoted market prices (Level 1).


•	State tax credits held for sale. At March 31, 2018, of the $42.4 million of state tax credits held for sale on the condensed consolidated balance sheet, approximately $0.4 million were carried at fair value. The remaining $42.0 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 remaining state tax credits carried at fair value are expected to be sold within the next several quarters. 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.

There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2018 and 2017.

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, 2018 and 2017.


•	Purchases, sales, issuances and settlements. There were no Level 3 purchases during the quarters ended March 31, 2018 or 2017.


•	Transfers in and/or out of Level 3. There were no Level 3 transfers during the quarters ended March 31, 2018 and 2017.



	Securities available for sale, at fair value
	Three months ended March 31,
(in thousands)	2018		2017
Beginning balance	$	—	$	3,089
Total gains:
Included in other comprehensive income	—		4
Purchases, sales, issuances and settlements:
Purchases	—		—
Transfer in and/or out of Level 3	—		—
Ending balance	$	—	$	3,093

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



	State tax credits held for sale
	Three months ended March 31,
(in thousands)	2018			2017
Beginning balance	$	400		$	3,585
Total gains:
Included in earnings	3			40
Purchases, sales, issuances and settlements:
Sales	(53		)	(2,167		)
Ending balance	$	350		$	1,458

Change in unrealized gains (losses) relating to assets still held at the reporting date	$	(13	)	$	(606	)

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, 2018.



	(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, 2018
Impaired loans	$	2,929	$	—	$	—	$	2,929	$	882
Other real estate	455		—		—		455		43
Total	$	3,384	$	—	$	—	$	3,384	$	925

(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. At March 31, 2018, impaired loans measured on a non-recurring basis had a principal balance of $3.5 million, with a valuation allowance of $0.6 million.

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.

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, 2018 and December 31, 2017. Fair values that are not estimable are listed at the carrying value.



	March 31, 2018				December 31, 2017
(in thousands)	Carrying Amount		Estimated fair value		Carrying Amount		Estimated fair value
Balance sheet assets
Cash and due from banks	$	81,604	$	81,604	$	91,084	$	91,084
Federal funds sold	1,099		1,099		1,223		1,223
Interest-bearing deposits	62,798		62,798		63,661		63,661
Securities available for sale	652,272		652,272		641,382		641,382
Securities held to maturity	70,579		68,766		73,749		73,458
Other investments, at cost	29,263		29,263		26,661		26,661
Loans held for sale	1,748		1,748		3,155		3,155
Derivative financial instruments	4,006		4,006		3,589		3,589
Portfolio loans, net	4,146,195		4,158,694		4,054,473		4,096,741
State tax credits, held for sale	42,364		41,072		43,468		44,271
Accrued interest receivable	17,277		17,277		14,069		14,069

Balance sheet liabilities
Deposits	4,281,377		4,276,096		4,156,414		4,153,323
Subordinated debentures and notes	118,118		105,751		118,105		105,031
Federal Home Loan Bank advances	224,624		224,665		172,743		172,893
Other borrowings	166,589		166,471		253,674		253,530
Derivative financial instruments	4,006		4,006		3,589		3,589
Accrued interest payable	2,046		2,046		1,730		1,730

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 18 – Fair Value Measurements in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

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, 2018, and December 31, 2017.



	Estimated Fair Value Measurement at Reporting Date Using						Balance at March 31, 2018
(in thousands)	Level 1		Level 2		Level 3
Financial Assets:
Securities held to maturity	$	—	$	68,766	$	—	$	68,766
Portfolio loans, net	—		—		4,158,694		4,158,694
State tax credits, held for sale	—		—		40,722		40,722
Financial Liabilities:
Deposits	3,633,073		—		643,023		4,276,096
Subordinated debentures and notes	—		105,751		—		105,751
Federal Home Loan Bank advances	—		224,665		—		224,665
Other borrowings	—		166,471		—		166,471

	Estimated Fair Value Measurement at Reporting Date Using						Balance at December 31, 2017
(in thousands)	Level 1		Level 2		Level 3
Financial Assets:
Securities held to maturity	$	—	$	73,458	$	—	$	73,458
Portfolio loans, net	—		—		4,096,741		4,096,741
State tax credits, held for sale	—		—		43,871		43,871
Financial Liabilities:
Deposits	3,577,641		—		575,682		4,153,323
Subordinated debentures and notes	—		105,031		—		105,031
Federal Home Loan Bank advances	—		172,893		—		172,893
Other borrowings	—		253,530		—		253,530

NOTE 8 - NEW AUTHORITATIVE ACCOUNTING GUIDANCE

Financial Accounting Standards Board (the "FASB") 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 has evaluated the new guidance and does not expect it to have a material impact on the Company's consolidated financial statements.

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 has formed an implementation team that includes members of accounting, credit, and loan operations to review the requirements of ASU 2016-13. The Company 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 has formed a lease implementation team that includes members of accounting, facilities and operations to review lease contracts and the requirements of ASU 2016-02. The Company expects the adoption of this standard will increase total assets on the Company's consolidated balance sheet and utilize capital.

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 2018 compared to the financial condition as of December 31, 2017. 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, 2018, compared to the same periods in 2017. 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, 2017.

Executive Summary

Below are highlights of our financial performance for the three months ended March 31, 2018, as compared to the linked quarter ended December 31, 2017, and prior year period. 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 and, therefore, were not included for the full prior year period.



(in thousands, except per share data)	For the Three Months ended/At
(in thousands, except per share data)	March 31, 2018			December 31, 2017			March 31, 2017
EARNINGS
Total interest income	$	55,164		$	54,789		$	43,740
Total interest expense	8,993			7,385			5,098
Net interest income	46,171			47,404			38,642
Provision for portfolio loans	1,871			3,186			1,533
Provision reversal for PCI loans	—			(279		)	(148		)
Net interest income after provision for loan losses	44,300			44,497			37,257
Total noninterest income	9,542			11,112			6,976
Total noninterest expense	29,143			28,260			26,736
Income before income tax expense	24,699			27,349			17,497
Income tax expense	3,778			19,820			5,106
Net income	$	20,921		$	7,529		$	12,391

Basic earnings per share	$	0.91		$	0.33		$	0.57
Diluted earnings per share	0.90			0.32			0.56

Return on average assets	1.59		%	0.57		%	1.10		%
Return on average common equity	15.31		%	5.37		%	10.65		%
Return on average tangible common equity	19.92		%	6.99		%	12.96		%
Net interest margin (fully tax equivalent)	3.80		%	3.93		%	3.73		%
Efficiency ratio	52.31		%	48.29		%	58.61		%
Tangible book value per common share	$	18.49		$	18.20		$	17.59

ASSET QUALITY⁽¹⁾
Net charge-offs (recoveries)	$	(226	)	$	3,313		$	(56	)
Nonperforming loans	15,582			15,687			13,847
Classified assets	77,195			73,239			86,879
Nonperforming loans to portfolio loans	0.38		%	0.39		%	0.36		%
Nonperforming assets to total assets ⁽¹⁾	0.30		%	0.31		%	0.33		%
Allowance for loan losses to portfolio loans	0.98		%	0.95		%	1.03		%
Net charge-offs to average loans (annualized)	(0.02		)%	0.33		%	(0.01		)%

(1) Excludes purchased credit impaired loans and related assets, except for their inclusion in total assets.

Below are highlights of the Company's Core performance measures, which we believe are important measures of financial performance, but are non-GAAP measures. For additional information, refer to the reconciliation of Core performance measures included in this MD&A section under the caption "Use of Non-GAAP Financial Measures".



	For the Three Months ended
(in thousands)	March 31, 2018			December 31, 2017			March 31, 2017
CORE PERFORMANCE MEASURES(1)
Net interest income	$	45,405		$	44,901		$	37,567
Provision for portfolio loans	1,871			3,186			1,533
Noninterest income	8,520			11,118			6,976
Noninterest expense	29,129			28,146			24,946
Income before income tax expense	22,925			24,687			18,064
Income tax expense	3,340			6,692			4,916
Net income	$	19,585		$	17,995		$	13,148

Earnings per share	$	0.84		$	0.77		$	0.59
Return on average assets	1.49		%	1.37		%	1.17		%
Return on average common equity	14.34		%	12.84		%	11.29		%
Return on average tangible common equity	18.64		%	16.71		%	13.75		%
Net interest margin (fully tax equivalent)	3.74		%	3.73		%	3.63		%
Efficiency ratio	54.02		%	50.24		%	56.01		%

(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, 2018 compared to the three months ended March 31, 2017, the Company noted the following trends:

•

The Company reported net income of $20.9 million, or $0.90 per diluted share, for the three months ended March 31, 2018, compared to $12.4 million, or $0.56 per diluted share, for the same period in 2017. The $0.34 increase in earnings per share primarily increased from growth in the balance sheet related to the acquisition of JCB as well as organic loan and deposit growth. The Company's efficiency ratio improved to 52.3% for the quarter ended March 31, 2018, compared to 58.6% for the prior year period.

•

On a core basis¹, net income grew 49% to $19.6 million, or $0.84 per diluted share, for the quarter ended March 31, 2018, compared to $13.1 million, or $0.59 per diluted share, in the prior year period. The diluted core earnings per share¹ increase of $0.25 was primarily due to higher levels of core net interest income from continued growth in earning asset balances combined with 11 basis points of core net interest margin¹ expansion, and a lower effective tax rate, which resulted from U.S. corporate tax reform.


•	Net interest income for the first three months of 2018 increased $7.5 million or 19%, from the prior year period due to strong portfolio loan growth, net interest margin expansion and the acquisition of JCB.

•

Net interest margin for the first quarter of 2018 increased seven basis points to 3.80% when compared to the prior year period of 3.73%. Core net interest margin¹, which excludes incremental accretion on non-core acquired loans, increased 11 basis points to 3.74% for the first three months of 2018 from the prior year period primarily due to the impact of interest rate increases on portfolio loans out-pacing the increase in deposit and borrowing costs.


•	Noninterest income for the first three months of 2018 increased $2.6 million or 37%, compared to the prior year period primarily due to $1.2 million from certain recoveries, in addition to higher income from deposit

service charges, wealth management revenue, and card services from the acquisition of JCB, as well as growth in the client base.

•

Noninterest expenses were $29.1 million for the quarter ended March 31, 2018, compared to $26.7 million for the quarter ended March 31, 2017. Noninterest expenses for the 2017 period included $1.7 million of merger related expenses. Core noninterest expenses¹ were $29.1 million for the three months ended March 31, 2018, compared to $24.9 million for the prior year period primarily due to increases in compensation and benefit expense and other operating expenses from the acquisition of JCB, along with tax credit amortization of $0.8 million.

Balance sheet highlights:


•	Loans – Portfolio loans increased to $4.2 billion at March 31, 2018, increasing $95 million when compared to December 31, 2017 primarily in the commercial and industrial, and commercial real estate categories.


•	Deposits – Total deposits at March 31, 2018 were $4.3 billion, an increase of $125 million, or 3% from December 31, 2017. Core deposits, defined as total deposits excluding time deposits, were $3.6 billion at March 31, 2018, an increase of $55 million from the linked quarter.


•	Asset quality – Nonperforming loans were $15.6 million at March 31, 2018, compared to $14.9 million at December 31, 2017. Nonperforming loans represented 0.38% and 0.39% of portfolio loans at March 31, 2018 and December 31, 2017, respectively.

Provision for portfolio loan losses was $1.9 million for the three months ended March 31, 2018, compared to $1.5 million for the three months ended March 31, 2017. See Item 1, Note 5 – Portfolio Loans, and Provision and Allowance for Loan Losses in this section for more information.

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

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 $38 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,
	2018							2017
(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)	$	4,072,639		$	48,891	4.87	%	$	3,466,637		$	37,827	4.43	%
Tax-exempt portfolio loans (2)	37,206			489		5.33		44,820			693		6.27
Non-core acquired loans - contractual	29,125			426		5.93		39,287			595		6.14
Non-core acquired loans - incremental accretion				766		10.67					1,075		11.10
Total loans	4,138,970			50,572		4.96		3,550,744			40,190		4.59
Taxable investments in debt and equity securities	698,459			4,192		2.43		580,600			3,298		2.30
Non-taxable investments in debt and equity securities (2)	42,128			375		3.61		56,626			622		4.45
Short-term investments	69,318			240		1.40		71,228			130		0.74
Total securities and short-term investments	809,905			4,807		2.41		708,454			4,050		2.32
Total interest-earning assets	4,948,875			55,379		4.54		4,259,198			44,240		4.21
Noninterest-earning assets:
Cash and due from banks	88,630							75,226
Other assets	346,376							283,448
Allowance for loan losses	(43,769		)					(44,284		)
Total assets	$	5,340,112						$	4,573,588

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing transaction accounts	$	862,912		$	806	0.38	%	$	765,405		$	675	0.36	%
Money market accounts	1,391,055			3,353		0.98		1,193,350			1,493		0.51
Savings	201,852			125		0.25		154,348			82		0.22
Certificates of deposit	603,736			1,899		1.28		548,705			1,215		0.90
Total interest-bearing deposits	3,059,555			6,183		0.82		2,661,808			3,465		0.53
Subordinated debentures	118,110			1,368		4.70		112,497			1,164		4.19
FHLB advances	302,548			1,258		1.69		144,903			330		0.91
Other borrowed funds	207,442			184		0.36		246,041			139		0.23
Total interest-bearing liabilities	3,687,655			8,993		0.99		3,165,249			5,098		0.65
Noninterest bearing liabilities:
Demand deposits	1,064,771							906,951
Other liabilities	33,620							29,311
Total liabilities	4,786,046							4,101,511
Shareholders' equity	554,066							472,077
Total liabilities & shareholders' equity	$	5,340,112						$	4,573,588
Net interest income				$	46,386						$	39,142
Net interest spread						3.55	%						3.56	%
Net interest margin						3.80	%						3.73	%
Core net interest margin (3)						3.74	%						3.63	%


(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 $1.0 million and $0.8 million for the three months ended March 31, 2018 and 2017 respectively.


(2)	Non-taxable income is presented on a fully tax-equivalent basis using a 24.7% and 38.0% tax rate in 2018 and 2017, respectively. The tax-equivalent adjustments were $0.2 million and $0.5 million for the three months ended March 31, 2018 and 2017, respectively.


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

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.



	2018 compared to 2017
	Three months ended March 31,
	Increase (decrease) due to
(in thousands)	Volume(1)			Rate(2)			Net
Interest earned on:
Taxable portfolio loans	$	7,056		$	4,008		$	11,064
Tax-exempt portfolio loans (3)	(108		)	(96		)	(204		)
Non-core acquired loans	(418		)	(60		)	(478		)
Taxable investments in debt and equity securities	699			195			894
Non-taxable investments in debt and equity securities (3)	(142		)	(105		)	(247		)
Short-term investments	(3		)	113			110
Total interest-earning assets	$	7,084		$	4,055		$	11,139

Interest paid on:
Interest-bearing transaction accounts	$	91		$	40		$	131
Money market accounts	284			1,576			1,860
Savings	30			13			43
Certificates of deposit	131			553			684
Subordinated debentures	59			145			204
FHLB advances	519			409			928
Borrowed funds	(25		)	70			45
Total interest-bearing liabilities	1,089			2,806			3,895
Net interest income	$	5,995		$	1,249		$	7,244

(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 $46.4 million for the three months ended March 31, 2018, compared to $39.1 million for the same period of 2017, an increase of $7.2 million, or 19%. The tax-equivalent net interest margin was 3.80% for the first quarter of 2018, compared to 3.73% in the first quarter of 2017. Portfolio loan growth and higher rates, combined with the acquisition of JCB, supported the $11.1 million increase in interest income over the prior year period. The yield on taxable portfolio loans increased 42 basis points from the prior year period to 4.87% for the three months ended March 31, 2018, due to increasing interest rates on the existing variable-rate loan portfolio and higher rates on newly originated loans. The run-off of higher yielding non-core acquired loans continues to negatively impact net interest margin and resulted in a $0.5 million decrease in interest income for the three months ended March 31, 2018 compared to the prior year period.

Core net interest margin¹ expanded 11 basis points from the prior year to 3.74% for the three months ended March 31, 2018, primarily due to loan growth improving the earning asset mix, combined with increased yield on portfolio loans out-pacing the increase to borrowing costs. The increase in the interest rate paid on deposits reflects market interest rate trends, as the Company continues to defend and attract new core deposit relationships. The Company continues to manage its balance sheet to grow core net interest income and expects to maintain core net interest margin over the coming quarters; however, pressure on funding costs could hinder 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, 2018			March 31, 2017
Accelerated cash flows and other incremental accretion	$	766		$	1,075
Provision reversal for non-core acquired loan losses	—			148
Other income	1,013			—
Other expenses	(14		)	(123		)
Non-core acquired assets income before income tax expense	$	1,765		$	1,100

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, 2018, the remaining accretable yield on the remaining non-core acquired portfolio was estimated to be $9 million and the non-accretable difference was approximately $13 million. Accelerated cash flows and other incremental accretion from these was $0.8 million for the three months ended March 31, 2018, and $1.1 million for the same period in 2017. The Company estimates income from accelerated cash flows and other incremental accretion to be between $3 million and $5 million in total for 2018.

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

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)	2018		2017		Increase (decrease)
Service charges on deposit accounts	$	2,851	$	2,510	$	341	14	%
Wealth management revenue	2,114		1,833		281		15	%
Card services revenue	1,516		1,037		479		46	%
Gain on state tax credits, net	252		246		6		2	%
Miscellaneous income - core	1,787		1,350		437		32	%
Core noninterest income(1)	8,520		6,976		1,544		22	%
Gain on sale of investment securities	9		—		9		NM
Other income from non-core acquired assets	1,013		—		1,013		NM
Total noninterest income	$	9,542	$	6,976	$	2,566	37	%

(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 $2.6 million, or 37% in the first three months of 2018 compared to the first three months of 2017. In the first quarter of 2018, the Company received certain recoveries from non-core acquired assets of $1.0 million. Core noninterest income¹ grew 22% in the first three months of 2018. This improvement was primarily due to higher income from deposit service charges, wealth management revenue, and card services from the acquisition of JCB, as well as growth in the client base.

The Company expects continued growth in fee income of 5% - 7% for 2018 compared to 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)	2018		2017		Increase (decrease)
Core expenses (1):
Employee compensation and benefits	$	16,491	$	15,208	$	1,283		8	%
Occupancy	2,406		1,929		477			25	%
Data processing	1,467		1,633		(166		)	(10	)%
FDIC and other insurance	917		824		93			11	%
Professional fees	849		837		12			1	%
Loan, legal and other real estate expense - core	285		222		63			28	%
Other	6,714		4,293		2,421			56	%
Core noninterest expense⁽¹⁾	29,129		24,946		4,183			17	%
Merger related expenses	—		1,667		(1,667		)	(100	)%
Other expenses related to non-core acquired loans	14		123		(109		)	(89	)%
Total noninterest expense	$	29,143	$	26,736	$	2,407		9	%
(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 $29.1 million for the three months ended March 31, 2018, compared to $26.7 million for the three months ended March 31, 2017. Noninterest expenses for 2017 period included $1.7 million of merger related expenses. Core noninterest expenses¹ increased $4.2 million to $29.1 million for the three months ended March 31, 2018, from $24.9 million for the prior year period. Core expenses increased from the JCB acquisition, tax credit amortization, and increases in employee compensation and benefits from investments in revenue producing personnel.

The Company's core efficiency ratio¹ decreased to 54.0% for the three months ended March 31, 2018, compared to 56.0% for the prior year period, and reflects continuing efforts to leverage its expense base. The Company expects to continue to invest in revenue producing associates and other infrastructure that supports additional growth. These investments are expected to result in expense growth, at a rate of 35% - 45% of projected revenue growth for 2018, resulting in continued improvements to the Company's efficiency ratio.

Income Taxes

The Company's income tax expense for the three months ended March 31, 2018, which includes both federal and state taxes, was $3.8 million compared to $19.8 million for the linked quarter, and $5.1 million for the same period in 2017.

The Company's effective tax rate was 15.3% for the quarter ended March 31, 2018 compared to 72.5% for the quarter ended December 31, 2017, and 29.2% for the quarter ended March 31, 2017. The linked quarter income tax expense included a $12.1 million deferred tax asset revaluation charge associated with the U.S. corporate income tax reform which increased the effective tax rate by 44.3%. The current period effective tax rate improvements resulted from the new 21% corporate federal tax rate as well as benefits recognized from the vesting of employee stock awards.

The Company expects its effective tax rate for the remainder of 2018 to be approximately 18% - 20%, which is expected to result in a full year effective tax rate of 17% - 19%.

Summary Balance Sheet



(in thousands)	March 31, 2018		December 31, 2017		Increase (decrease)
Total cash and cash equivalents	$	143,101	$	153,323	$	(10,222	)	(6.7	)%
Securities	722,851		715,131		7,720			1.1	%
Portfolio loans	4,162,082		4,066,659		95,423			2.3	%
Non-core acquired loans	28,763		30,391		(1,628		)	(5.4	)%
Total assets	5,383,102		5,289,225		93,877			1.8	%
Deposits	4,281,377		4,156,414		124,963			3.0	%
Total liabilities	4,828,087		4,740,652		87,435			1.8	%
Total shareholders' equity	555,015		548,573		6,442			1.2	%

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, including the C&I category, is secured by real estate. 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, 2018		December 31, 2017		Increase (decrease)
Commercial and industrial	$	1,982,086	$	1,919,145	$	62,941		3.3	%
Commercial real estate - investor owned	843,247		769,275		73,972			9.6	%
Commercial real estate - owner occupied	570,650		554,589		16,061			2.9	%
Construction and land development	309,227		345,209		(35,982		)	(10.4	)%
Residential real estate	329,337		342,518		(13,181		)	(3.8	)%
Consumer and other	127,535		135,923		(8,388		)	(6.2	)%
Portfolio loans	4,162,082		4,066,659		95,423			2.3	%
Non-core acquired loans	28,763		30,391		(1,628		)	(5.4	)%
Total loans	$	4,190,845	$	4,097,050	$	93,795		2.3	%

Portfolio loans grew by $95.4 million to $4.2 billion at March 31, 2018, when compared to December 31, 2017. Non-core acquired loans totaled $28.8 million at March 31, 2018, a decrease of $1.6 million, or 5%, from December 31, 2017, 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
(in thousands)	March 31, 2018		December 31, 2017		Increase (decrease)
C&I - general	$	945,682	$	936,588	$	9,094		1.0	%
CRE investor owned - general	836,499		801,156		35,343			4.4	%
CRE owner occupied - general	471,417		468,151		3,266			0.7	%
Enterprise value lending¹	439,352		407,644		31,708			7.8	%
Life insurance premium financing¹	365,377		364,876		501			0.1	%
Residential real estate - general	328,966		342,140		(13,174		)	(3.9	)%
Construction and land development - general	293,938		294,123		(185		)	(0.1	)%
Tax credits¹	244,088		234,835		9,253			3.9	%
Agriculture loans¹	118,862		91,031		27,831			30.6	%
Consumer and other - general	117,901		126,115		(8,214		)	(6.5	)%
Portfolio loans	$	4,162,082	$	4,066,659	$	95,423		2.3	%

Note: Certain prior period amounts have been reclassified among the categories to conform to the current period presentation.
¹Specialized categories may include a mix of C&I, CRE, construction and land development, or consumer and other loans.

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 loans increased $63 million during the first quarter of 2018 and represented 48% of the Company's loan portfolio at March 31, 2018. C&I loan growth also supports our efforts to maintain the Company's asset sensitive interest rate risk position. For 2018, portfolio loan growth is expected to be approximately 7% - 9%.

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)	2018			2017
Allowance at beginning of period, for portfolio loans	$	38,166		$	37,565
Loans charged off:
Commercial and industrial	(732		)	(133		)
Real estate:
Commercial	—			—
Construction and land development	—			—
Residential	(254		)	(9		)
Consumer and other	(49		)	(29		)
Total loans charged off	(1,035		)	(171		)
Recoveries of loans previously charged off:
Commercial and industrial	956			80
Real estate:
Commercial	12			98
Construction and land development	206			9
Residential	73			25
Consumer and other	14			9
Total recoveries of loans	1,261			221
Net loan charge-offs	226			50
Provision for loan losses	1,871			1,533
Allowance at end of period, for portfolio loans (1)	$	40,263		$	39,148

Allowance at beginning of period, for purchased credit impaired loans	$	4,411		$	5,844
Loans charged off	—			—
Recoveries of loans	—			—
Other	(24		)	(219		)
Net loan charge-offs	(24		)	(219		)
Provision reversal for purchased credit impaired loan losses	—			(148		)
Allowance at end of period, for purchased credit impaired loans	$	4,387		$	5,477

Total allowance at end of period	$	44,650		$	44,625

Portfolio loans, average	$	4,109,845		$	3,501,233
Portfolio loans, ending(1)	4,124,239			3,852,972
Net charge-offs to average portfolio loans (1)	(0.02		)%	(0.01		)%
Allowance for portfolio loan losses to loans (1)	0.98		%	1.02		%

(1) Excludes PCI loans.

The provision for loan losses on portfolio loans for the three months ended March 31, 2018 was $1.9 million, compared to $1.5 million for same period in 2017. The provision is reflective of growth in portfolio loan balances, and maintaining a prudent credit risk posture.

The allowance for loan losses on portfolio loans was 0.98% of portfolio loans at March 31, 2018 compared to 1.03% at March 31, 2017. 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, 2018			December 31, 2017			March 31, 2017
Non-accrual loans	$	14,858		$	14,968		$	11,527
Restructured loans	724			719			2,320
Total nonperforming loans (1)	15,582			15,687			13,847
Other real estate	455			498			2,925
Total nonperforming assets (1)	$	16,037		$	16,185		$	16,772

Total assets	$	5,383,102		$	5,289,225		$	5,106,226
Portfolio loans (1)	4,124,239			4,022,896			3,802,681
Portfolio loans plus other real estate (1)	4,124,694			4,023,394			3,805,606
Nonperforming loans to portfolio loans (1)	0.38		%	0.39		%	0.36		%
Nonperforming assets to total loans plus other real estate (1)	0.39			0.40			0.44
Nonperforming assets to total assets (1)	0.30			0.31			0.33
Allowance for loans to nonperforming loans (1)	258		%	243		%	283		%

(1) Excludes PCI loans, except for their inclusion in total assets.

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 – Loans for more information on these loans.

Nonperforming loans based on loan type were as follows:



(in thousands)	March 31, 2018		December 31, 2017		March 31, 2017
Commercial and industrial	$	12,313	$	12,665	$	11,930
Commercial real estate	1,167		909		281
Construction and land development	—		136		1,575
Residential real estate	1,777		1,602		61
Consumer and other	325		375		—
Total	$	15,582	$	15,687	$	13,847

The following table summarizes the changes in nonperforming loans:



	Three months ended March 31,
(in thousands)	2018			2017
Nonperforming loans beginning of period	$	15,687		$	14,905
Additions to nonaccrual loans	1,449			291
Additions to restructured loans	10			—
Charge-offs	(1,003		)	(141		)
Other principal reductions	(561		)	(925		)
Moved to other real estate	—			(283		)
Nonperforming loans end of period	$	15,582		$	13,847

Other real estate

Other real estate at March 31, 2018, was $0.5 million, compared to $2.9 million at March 31, 2017.

The following table summarizes the changes in other real estate:



	Three months ended March 31,
(in thousands)	2018			2017
Other real estate beginning of period	$	498		$	980
Additions and expenses capitalized to prepare property for sale	—			283
Additions from acquisition	—			1,680
Writedowns in value	(43		)	(18		)
Other real estate end of period	$	455		$	2,925

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 $4.8 billion at March 31, 2018, compared to $4.7 billion at December 31, 2017. The increase in liabilities was due to a $125 million increase in total deposits and a $52 million increase in Federal Home Loan Bank advances, partially offset by a decrease of $87 million in other borrowings.

Deposits



(in thousands)	March 31, 2018			December 31, 2017			Increase (decrease)
Demand deposits	$	1,101,705		$	1,123,907		$	(22,202	)	(2.0	)%
Interest-bearing transaction accounts	875,880			915,653			(39,773		)	(4.3	)%
Money market accounts	1,445,459			1,342,931			102,528			7.6	%
Savings	210,029			195,150			14,879			7.6	%
Certificates of deposit:
Brokered	201,082			115,306			85,776			74.4	%
Other	447,222			463,467			(16,245		)	(3.5	)%
Total deposits	$	4,281,377		$	4,156,414		$	124,963		3.0	%

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

Total deposits at March 31, 2018 were $4.3 billion, an increase of 3%, from December 31, 2017, primarily from increases in money market accounts and brokered certificates of deposit. The composition of our noninterest bearing deposits remained relatively stable at 26% of total deposits at March 31, 2018 compared to 27% at December 31, 2017.

Shareholders' Equity

Shareholders' equity totaled $555.0 million at March 31, 2018, an increase of $6.4 million from December 31, 2017. Significant activity during the three months ended March 31, 2018 was as follows:


•	Net income of $20.9 million,


•	decrease in fair value of securities of $6.9 million,


•	issuance under equity compensation plans of $2.7 million,


•	dividends paid on common shares of $2.5 million, and


•	repurchase of 64,915 shares at an average price of $47.10 per share, or approximately $3.1 million in the aggregate, pursuant to its publicly announced program.

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). A $5 million dividend was paid to the parent company from the Bank in February of 2018. 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, which initially bear an annual interest rate of 4.75%, with interest payable semiannually. 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 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 2019. 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, 2018, there were no outstanding balances under the Revolving Agreement.

As of March 31, 2018, the Company had $69.2 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.

Management believes our current level of cash at the holding company of $5.1 million, along with the Company's other available funding sources, will be sufficient to meet all projected cash needs for the remainder of 2018.

Bank liquidity

The Bank has a variety of funding sources available to increase financial flexibility. In addition to amounts currently borrowed, at March 31, 2018, the Bank had borrowing capacity of $465.9 million from the FHLB of Des Moines under blanket loan pledges, and has an additional $803.9 million available from the Federal Reserve Bank under a pledged loan agreement. The Bank has unsecured federal funds lines with six correspondent banks totaling $95.0 million, and $79.0 million of unsecured credit through the American Financial Exchange.

Investment securities are another important tool to the Bank's liquidity objectives. Total securities available for sale of $652.3 million at March 31, 2018, included $346.7 million of securities that were pledged as collateral for deposits of public institutions, treasury, loan notes, and other requirements. The remaining $305.6 million could be pledged or sold to enhance liquidity, if necessary. In addition, $14.4 million of unpledged held to maturity securities could also be pledged for liquidity purposes.

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, 2018. While this commitment

level would exhaust the majority of 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, 2018, and December 31, 2017, 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, 2018. 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, 2018			December 31, 2017			Well Capitalized Minimum %
Total capital to risk-weighted assets	12.41		%	12.21		%	10.00	%
Tier 1 capital to risk-weighted assets	10.46		%	10.29		%	8.00	%
Common equity tier 1 capital to risk-weighted assets	9.07		%	8.88		%	6.50	%
Leverage ratio (Tier 1 capital to average assets)	9.75		%	9.72		%	5.00	%
Tangible common equity to tangible assets¹	8.13		%	8.14		%	N/A
Tier 1 capital	$	509,062		$	496,045
Total risk-based capital	604,137			589,047

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

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 gain or loss on sale of other real estate from non-core acquired loans, deferred tax asset revaluation due to U.S. corporate income tax reform, 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, facilities disposal 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, 2018			December 31, 2017			March 31, 2017
Net interest income	$	46,171		$	47,404		$	38,642
Less: Incremental accretion income	766			2,503			1,075
Core net interest income	45,405			44,901			37,567

Total noninterest income	9,542			11,112			6,976
Less: Gain (loss) on sale of other real estate from non-core acquired loans	—			(6		)	—
Less: Gain on sale of investment securities	9			—			—
Less: Other income from non-core acquired assets	1,013			—			—
Core noninterest income	8,520			11,118			6,976

Total core revenue	53,925			56,019			44,543

Provision for portfolio loans	1,871			3,186			1,533

Total noninterest expense	29,143			28,260			26,736
Less: Other expenses related to non-core acquired loans	14			114			123
Less: Merger related expenses	—			—			1,667
Core noninterest expense	29,129			28,146			24,946

Core income before income tax expense	22,925			24,687			18,064

Total income tax expense	3,778			19,820			5,106
Less: income tax expense from deferred tax asset revaluation¹	—			12,117			—
Less: Other non-core income tax expense²	438			1,011			190
Core income tax expense	3,340			6,692			4,916
Core net income	$	19,585		$	17,995		$	13,148

Core diluted earnings per share	$	0.84		$	0.77		$	0.59
Core return on average assets	1.49		%	1.37		%	1.17		%
Core return on average common equity	14.34		%	12.84		%	11.29		%
Core return on average tangible common equity	18.64		%	16.71		%	13.75		%
Core efficiency ratio	54.02		%	50.24		%	56.01		%

¹Deferred tax asset revaluation associated with U.S. corporate income tax reform.
²Other non-core income tax expense calculated at 24.7% of non-core pretax income for 2018. For 2017, the calculation is 38.0% 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)	2018			2017
Net interest income	$	46,386		$	39,147
Less: Incremental accretion income	766			1,075
Core net interest income	$	45,620		$	38,072

Average earning assets	$	4,948,875		$	4,259,198
Reported net interest margin	3.80		%	3.73		%
Core net interest margin	3.74		%	3.63		%

Tangible common equity ratio



(in thousands)	March 31, 2018			December 31, 2017
Total shareholders' equity	$	555,015		$	548,573
Less: Goodwill	117,345			117,345
Less: Intangible assets	10,399			11,056
Tangible common equity	$	427,271		$	420,172

Total assets	$	5,383,102		$	5,289,225
Less: Goodwill	117,345			117,345
Less: Intangible assets	10,399			11,056
Tangible assets	$	5,255,358		$	5,160,824

Tangible common equity to tangible assets	8.13		%	8.14		%

Regulatory Capital to Risk-Weighted Assets



(in thousands)	March 31, 2018			December 31, 2017
Total shareholders' equity	$	555,015		$	548,573
Less: Goodwill	117,345			117,345
Less: Intangible assets, net of deferred tax liabilities	7,831			6,661
Less: Unrealized gains (losses)	(11,563		)	(3,818		)
Plus: Other	12			12
Common equity Tier 1 capital	441,414			428,397
Plus: Qualifying trust preferred securities	67,600			67,600
Plus: Other	48			48
Tier 1 capital	509,062			496,045
Plus: Tier 2 capital	95,075			93,002
Total risk-based capital	604,137			589,047

Total risk-weighted assets determined in accordance with prescribed regulatory requirements	$	4,867,491		$	4,822,695

Common equity tier 1 to risk-weighted assets	9.07		%	8.88		%
Tier 1 capital to risk-weighted assets	10.46		%	10.29		%
Total risk-based capital to risk-weighted assets	12.41		%	12.21		%

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 the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

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	5.9%
+ 200 bp	4.0%
+ 100 bp	2.0%
- 100 bp	(5.9)%

In addition to the rate shocks shown in the table above, the Company models net interest income under various dynamic

interest rate scenarios. In general, changes in interest rates are positively correlated with changes in net interest income.

The exception to this is a bear flattener scenario (a yield rate environment where short term rates move up more than long term rates), which results in a mild decrease in net interest income.

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, 2018. 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, 2018 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, 2017. 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, 2018.



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, 2018 through January 31, 2018	—	—		—	1,384,327
February 1, 2018 through February 28, 2018	64,915	47.10		64,915	1,319,412
March 1, 2018 through March 31, 2018	—	—		—	1,319,412
Total	64,915	$	47.10	64,915	1,319,412

(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.


*10.1	Form of Enterprise Financial Services Corp LTIP Grant Agreement (filed herewith), pursuant to 2018 Stock Incentive Plan (incorporated herein by reference to Appendix A to Registrant's Proxy Statement on Schedule 14-A filed on March 14, 2018).


*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, 2018, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheet at March 31, 2018 and December 31, 2017; (ii) Consolidated Statement of Income for the three months ended March 31, 2018 and 2017; (iii) Consolidated Statement of Comprehensive Income for the three months ended March 31, 2018 and 2017; (iv) Consolidated Statement of Changes in Equity for the three months ended March 31, 2018 and 2017; (v) Consolidated Statement of Cash Flows for the three months ended March 31, 2018 and 2017; 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 27, 2018.



	ENTERPRISE FINANCIAL SERVICES CORP

	By:	/s/ James B. Lally
		James B. Lally
		Chief Executive Officer

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