2012.3.31-10Q


 

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, 2012.
 
 
 
[   ]
 
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______ to ______
 
 
 
 
 
Commission file number 001-15373
 
ENTERPRISE FINANCIAL SERVICES CORP

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

 
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act
Yes [   ]  No [X]
 
As of May 2, 2012, the Registrant had 17,833,341 shares of outstanding common stock.
 
This document is also available through our website at http://www.enterprisebank.com.

 





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




PART 1 – ITEM 1 – FINANCIAL STATEMENTS
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except share and per share data)
March 31, 2012
 
December 31, 2011
Assets
 
 
 
Cash and due from banks
$
27,595

 
$
20,791

Federal funds sold
77

 
143

Interest-bearing deposits (including $2,870 and $2,650 pledged as collateral)
147,498

 
167,209

                  Total cash and cash equivalents
175,170

 
188,143

Interest-bearing deposits greater than 90 days
1,502

 
1,502

Securities available for sale
506,805

 
593,182

Mortgage loans held for sale
5,813

 
6,494

Portfolio loans not covered under FDIC loss share
1,917,550

 
1,897,074

   Less: Allowance for loan losses
37,596

 
37,989

Portfolio loans not covered under FDIC loss share, net
1,879,954

 
1,859,085

Portfolio loans covered under FDIC loss share at fair value, net of the allowance for loan losses ($3,010 and $1,635, respectively)
266,239

 
298,975

                  Portfolio loans, net
2,146,193

 
2,158,060

Other real estate not covered under FDIC loss share
19,655

 
17,217

Other real estate covered under FDIC loss share
25,725

 
36,471

Other investments, at cost
13,837

 
14,527

Fixed assets, net
21,543

 
18,986

Accrued interest receivable
9,905

 
9,193

State tax credits, held for sale, including $24,653 and $26,350 carried at fair value, respectively
48,165

 
50,446

FDIC loss share receivable
172,497

 
184,554

Goodwill
30,334

 
30,334

Intangibles, net
8,795

 
9,285

Other assets
59,215

 
59,385

Total assets
$
3,245,154

 
$
3,377,779

 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
Demand deposits
$
592,172

 
$
585,479

Interest-bearing transaction accounts
265,604

 
253,504

Money market accounts
1,062,801

 
1,084,304

Savings
63,955

 
51,145

Certificates of deposit:
 
 
 
$100 and over
484,403

 
550,535

Other
235,222

 
266,386

Total deposits
2,704,157

 
2,791,353

Subordinated debentures
85,081

 
85,081

Federal Home Loan Bank advances
87,000

 
102,000

Other borrowings
105,888

 
154,545

Accrued interest payable
1,586

 
1,762

Other liabilities
15,426

 
3,473

Total liabilities
2,999,138

 
3,138,214

 
 
 
 
Shareholders' equity:
 
 
 
Preferred stock, $0.01 par value;
5,000,000 shares authorized; 35,000 shares issued and outstanding
33,496

 
33,293

Common stock, $0.01 par value; 30,000,000 shares authorized; 17,871,511 and 17,849,862 shares issued, respectively
179

 
178

Treasury stock, at cost; 76,000 shares
(1,743
)
 
(1,743
)
Additional paid in capital
169,633

 
169,138

Retained earnings
39,707

 
35,097

Accumulated other comprehensive income
4,744

 
3,602

Total shareholders' equity
246,016

 
239,565

Total liabilities and shareholders' equity
$
3,245,154

 
$
3,377,779

See accompanying notes to condensed consolidated financial statements.

1


ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
 
Three months ended March 31,
(In thousands, except per share data)
2012
 
2011
Interest income:
 
 
 
Interest and fees on loans
$
34,361

 
$
27,631

Interest on debt securities:
 
 
 
Taxable
2,446

 
2,570

Nontaxable
234

 
110

Interest on federal funds sold
—

 
1

Interest on interest-bearing deposits
77

 
148

Dividends on equity securities
97

 
73

Total interest income
37,215

 
30,533

Interest expense:
 
 
 
Interest-bearing transaction accounts
191

 
189

Money market accounts
1,430

 
2,082

Savings
69

 
9

Certificates of deposit:
 
 
 
$100 and over
1,969

 
2,357

Other
810

 
1,053

Subordinated debentures
1,149

 
1,121

Federal Home Loan Bank advances
838

 
900

Notes payable and other borrowings
130

 
114

Total interest expense
6,586

 
7,825

Net interest income
30,629

 
22,708

Provision for loan losses not covered under FDIC loss share
1,718

 
3,600

Provision for loan losses covered under FDIC loss share
2,285

 
—

Net interest income after provision for loan losses
26,626

 
19,108

Noninterest income:
 
 
 
Wealth Management revenue
1,709

 
1,683

Service charges on deposit accounts
1,330

 
1,137

Other service charges and fee income
594

 
310

Gain on sale of other real estate
1,157

 
423

Gain on state tax credits, net
337

 
155

Gain on sale of investment securities
1,022

 
174

Change in FDIC loss share receivable
(2,956
)
 
716

Miscellaneous income
790

 
365

Total noninterest income
3,983

 
4,963

Noninterest expense:
 
 
 
Employee compensation and benefits
10,463

 
8,688

Occupancy
1,384

 
1,139

Furniture and equipment
464

 
354

Data processing
820

 
626

FDIC and other insurance
953

 
1,222

Loan legal and other real estate expense
2,074

 
2,436

Other
5,206

 
3,500

Total noninterest expense
21,364

 
17,965

 
 
 
 
Income before income tax expense
9,245

 
6,106

Income tax expense
3,060

 
1,994

Net income
$
6,185

 
$
4,112

 
 
 
 
Net income available to common shareholders
$
5,544

 
$
3,486

 
 
 
 
Earnings per common share
 
 
 
Basic
$
0.31

 
$
0.23

Diluted
0.31

 
0.23


See accompanying notes to condensed consolidated financial statements.

2



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

 
Three months ended March 31,
(in thousands)
2012
 
2011
Net income
$
6,185

 
$
4,112

Other comprehensive income, net of tax:
 
 
 
Unrealized gain on investment securities
arising during the period, net of tax
1,796

 
958

Less reclassification adjustment for realized gain
on sale of securities included in net income, net of tax
(654
)
 
(112
)
Reclassification of cash flow hedge, net of tax
—

 
(28
)
Total other comprehensive income
1,142

 
818

Total comprehensive income
$
7,327

 
$
4,930


See accompanying notes to condensed consolidated financial statements.


3


ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)
 
(in thousands, except per share data)
 
Preferred Stock
 
Common Stock
 
Treasury Stock
 
Additional paid in capital
 
Retained earnings
 
Accumulated
other
comprehensive income (loss)
 
Total
shareholders' equity
Balance January 1, 2012
 
$
33,293

 
$
178

 
$
(1,743
)
 
$
169,138

 
$
35,097

 
$
3,602

 
$
239,565

Net income
 
—

 
—

 
—

 
—

 
6,185

 
—

 
6,185

Change in fair value of available for sale securities, net of tax
 
—

 
—

 
—

 
—

 
—

 
1,796

 
1,796

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

 
—

 
—

 
—

 
—

 
(654
)
 
(654
)
Total comprehensive income
 
 

 
 
 
 
 
 
 
 
 
 
 
7,327

Cash dividends paid on common shares, $0.0525 per share
 
—

 
—

 
—

 
—

 
(934
)
 
—

 
(934
)
Cash dividends paid on preferred stock
 
—

 
—

 
—

 
—

 
(438
)
 
—

 
(438
)
Preferred stock accretion of discount
 
203

 
—

 
—

 
—

 
(203
)
 
—

 
—

Issuance under equity compensation plans, net, 21,649 shares
 
—

 
1

 
—

 
252

 
—

 
—

 
253

Share-based compensation
 
—

 
—

 
—

 
243

 
—

 
—

 
243

Balance March 31, 2012
 
$
33,496

 
$
179

 
$
(1,743
)
 
$
169,633

 
$
39,707

 
$
4,744

 
$
246,016


(in thousands, except per share data)
 
Preferred Stock
 
Common Stock
 
Treasury Stock
 
Additional paid in capital
 
Retained earnings
 
Accumulated
other
comprehensive income (loss)
 
Total
shareholders' equity
Balance January 1, 2011
 
$
32,519

 
$
150

 
$
(1,743
)
 
$
133,673

 
$
15,775

 
$
(573
)
 
$
179,801

Net income
 
—

 
—

 
—

 
—

 
4,112

 
—

 
4,112

Change in fair value of available for sale securities, net of tax
 
—

 
—

 
—

 
—

 
—

 
958

 
958

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

 
—

 
—

 
—

 
—

 
(112
)
 
(112
)
Reclassification of cash flow hedge, net of tax
 
—

 
—

 
—

 
—

 
—

 
(28
)
 
(28
)
Total comprehensive income
 
 

 
 
 
 
 
 
 
 
 
 
 
4,930

Cash dividends paid on common shares, $0.0525 per share
 
—

 
—

 
—

 
—

 
(783
)
 
—

 
(783
)
Cash dividends paid on preferred stock
 
—

 
—

 
—

 
—

 
(438
)
 
—

 
(438
)
Preferred stock accretion of discount
 
188

 
—

 
—

 
—

 
(188
)
 
—

 
—

Issuance under equity compensation plans, net, 51,576 shares
 
—

 
—

 
—

 
611

 
—

 
—

 
611

Share-based compensation
 
—

 
—

 
—

 
374

 
—

 
—

 
374

Excess tax expense related to equity compensation plans
 
—

 
—

 
—

 
6

 
—

 
—

 
6

Balance March 31, 2011
 
$
32,707

 
$
150

 
$
(1,743
)
 
$
134,664

 
$
18,478

 
$
245

 
$
184,501


See accompanying notes to condensed consolidated financial statements.

4


ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
Three months ended March 31,
(in thousands)
2012
 
2011
Cash flows from operating activities:
 
 
 
Net income
$
6,185

 
$
4,112

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation
655

 
694

Provision for loan losses
4,003

 
3,600

Deferred income taxes
(486
)
 
2,732

Net amortization of debt securities
1,995

 
1,251

Amortization of intangible assets
490

 
135

Gain on sale of investment securities
(1,022
)
 
(174
)
Mortgage loans originated for sale
(25,541
)
 
(14,897
)
Proceeds from mortgage loans sold
26,033

 
17,360

Gain on sale of other real estate
(1,157
)
 
(423
)
Gain on state tax credits, net
(337
)
 
(155
)
Excess tax benefit of share-based compensation
—

 
(6
)
Share-based compensation
243

 
374

Valuation adjustment on other real estate
1,036

 
442

Net accretion of loan discount and indemnification asset
(2,210
)
 
(1,565
)
Changes in:
 
 
 
Accrued interest receivable
(712
)
 
(12
)
Accrued interest payable
(176
)
 
18

Prepaid FDIC insurance
666

 
852

Other assets
(6,764
)
 
(1,553
)
Other liabilities
11,954

 
(1,037
)
Net cash provided by operating activities
14,855

 
11,748

Cash flows from investing activities:
 
 
 
Cash received from acquisition of Legacy Bank
—

 
8,926

Net decrease in loans
5,932

 
4,098

Net cash proceeds received from FDIC loss share receivable
11,614

 
11,785

Proceeds from the sale of debt and equity securities, available for sale
64,476

 
5,299

Proceeds from the maturity of debt and equity securities, available for sale
33,160

 
31,021

Proceeds from the redemption of other investments
1,027

 
78

Proceeds from the sale of state tax credits held for sale
2,980

 
1,527

Proceeds from the sale of other real estate
19,219

 
4,382

Payments for the purchase/origination of:
 
 
 
Available for sale debt and equity securities
(10,192
)
 
(147,040
)
Other investments
(338
)
 
(261
)
State tax credits held for sale
(336
)
 
—

Fixed assets
(3,145
)
 
(212
)
Net cash provided by (used in) investing activities
124,397

 
(80,397
)
Cash flows from financing activities:
 
 
 
Net increase in noninterest-bearing deposit accounts
6,693

 
52,074

Net decrease in interest-bearing deposit accounts
(93,889
)
 
(32,987
)
Proceeds from Federal Home Loan Bank advances
20,000

 
—

Repayments of Federal Home Loan Bank advances
(35,000
)
 
(16,256
)
Net decrease in other borrowings
(48,657
)
 
(21,435
)
Cash dividends paid on common stock
(934
)
 
(783
)
Excess tax benefit of share-based compensation
—

 
6

Cash dividends paid on preferred stock
(438
)
 
(438
)
Proceeds from the issuance of equity instruments
—

 
611

Net cash used in financing activities
(152,225
)
 
(19,208
)
Net decrease in cash and cash equivalents
(12,973
)
 
(87,857
)
Cash and cash equivalents, beginning of period
188,143

 
293,668

Cash and cash equivalents, end of period
$
175,170

 
$
205,811

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
6,410

 
$
7,767

Income taxes
1,668

 
696

Noncash transactions:
 
 
 
Transfer to other real estate owned in settlement of loans
$
7,138

 
$
11,229

Sales of other real estate financed
40

 
442

See accompanying notes to condensed consolidated financial statements.

5


ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
The significant accounting policies used by Enterprise Financial Services Corp (the “Company” or “Enterprise”) in the preparation of the condensed consolidated financial statements are summarized below:
 
Business and Consolidation

Enterprise is a financial holding company that provides a full range of banking and wealth management services to individuals and corporate customers located in the St. Louis, Kansas City and Phoenix metropolitan markets through its banking subsidiary, Enterprise Bank & Trust (the “Bank”).
 
Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2012. 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, 2011.

Basis of Financial Statement Presentation

The condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with 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. They do not include all information and footnotes required by U.S. GAAP for annual financial statements. The condensed consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All intercompany accounts and transactions have been eliminated. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain 2011 amounts in the consolidated financial statements have been reclassified to conform to the 2012 presentation. These reclassifications have no effect on Net income or Shareholders' equity as previously reported.

 
NOTE 2 - EARNINGS PER SHARE

Basic earnings per common share data is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and the if-converted method for convertible securities related to the issuance of trust preferred securities.


6


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)
2012
 
2011
Net income as reported
$
6,185

 
$
4,112

Preferred stock dividend
(438
)
 
(438
)
Accretion of preferred stock discount
(203
)
 
(188
)
Net income available to common shareholders
$
5,544

 
$
3,486

 
 
 
 
Impact of assumed conversions
 
 
 
Interest on 9% convertible trust preferred securities, net of income tax
371

 
—

Net income available to common shareholders and assumed conversions
$
5,915

 
$
3,486

 
 
 
 
Weighted average common shares outstanding
17,790

 
14,920

Incremental shares from assumed conversions of convertible trust preferred securities
1,439

 
—

Additional dilutive common stock equivalents
14

 
16

Diluted common shares outstanding
19,243

 
14,936

 
 
 
 
Basic earnings per common share:
$
0.31

 
$
0.23

Diluted earnings per common share:
$
0.31

 
$
0.23


There were 1.0 million common stock equivalents (including 324,074 common stock warrants) for the three months ended March 31, 2012, and 2.4 million common stock equivalents (including 324,074 common stock warrants) for the three months ended March 31, 2011 which were excluded from the earnings per share calculations because their effect was anti-dilutive.
 


7


NOTE 3 - INVESTMENTS
 
The following table presents the amortized cost, gross unrealized gains and losses and fair value of securities available-for-sale:
 
 
March 31, 2012
(in thousands)
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair Value
Available for sale securities:
 
 
 
 
 
 
 
    Obligations of U.S. Government sponsored enterprises
$
74,105

 
$
712

 
$
—

 
$
74,817

    Obligations of states and political subdivisions
38,883

 
1,632

 
(395
)
 
40,120

    Residential mortgage-backed securities
386,150

 
5,979

 
(261
)
 
391,868

 
$
499,138

 
$
8,323

 
$
(656
)
 
$
506,805

 
 
 
 
 
 
 
 
 
December 31, 2011
(in thousands)
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair Value
Available for sale securities:
 
 
 
 
 
 
 
    Obligations of U.S. Government sponsored enterprises
$
126,305

 
$
678

 
$
(66
)
 
$
126,917

    Obligations of states and political subdivisions
38,489

 
1,729

 
(381
)
 
39,837

    Residential mortgage-backed securities
422,761

 
5,269

 
(1,602
)
 
426,428

 
$
587,555

 
$
7,676

 
$
(2,049
)
 
$
593,182


At March 31, 2012, and December 31, 2011, there were no holdings of securities of any one issuer in an amount greater than 10% of shareholders’ equity, other than the U.S. government agencies and sponsored enterprises. The residential mortgage-backed securities are all issued by U.S. government sponsored enterprises. Available for sale securities having a carrying value of $225.7 million and $287.8 million at March 31, 2012, and December 31, 2011, 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 classified as available for sale at March 31, 2012, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The weighted average life of the mortgage-backed securities is approximately 4 years.
 
(in thousands)
Amortized Cost
 
Estimated Fair Value
Due in one year or less
$
1,329

 
$
1,348

Due after one year through five years
51,651

 
52,407

Due after five years through ten years
55,624

 
56,986

Due after ten years
4,384

 
4,196

Mortgage-backed securities
386,150

 
391,868

 
$
499,138

 
$
506,805



8


The following table represents a summary of available-for-sale investment securities that had an unrealized loss:
 
 
March 31, 2012
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 the state and political subdivisions
$
1,498

 
$
19

 
$
3,024

 
$
376

 
$
4,522

 
$
395

Residential mortgage-backed securities
78,492

 
261

 
—

 
—

 
78,492

 
261

 
$
79,990

 
$
280

 
$
3,024

 
$
376

 
$
83,014

 
$
656

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011
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
$
23,389

 
$
66

 
$
—

 
$
—

 
$
23,389

 
$
66

Obligations of the state and political subdivisions
1,503

 
8

 
3,027

 
373

 
4,530

 
381

Residential mortgage-backed securities
86,954

 
1,598

 
4,203

 
4

 
91,157

 
1,602

 
$
111,846

 
$
1,672

 
$
7,230

 
$
377

 
$
119,076

 
$
2,049


The unrealized losses at both March 31, 2012, and December 31, 2011, were 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 (1) the present value of the cash flows expected to be collected compared to the amortized cost of the security, (2) duration and magnitude of the decline in value, (3) the financial condition of the issuer or issuers, (4) structure of the security and (5) the intent to sell the security or whether it is more likely than not that the Company would be required to sell the security before its anticipated recovery in market value. At March 31, 2012, management performed its quarterly analysis of all securities with an unrealized loss and concluded no individual securities were other-than-temporarily impaired.
 
The gross gains and gross losses realized from sales of available-for-sale investment securities were as follows:
 
 
Three months ended March 31,
(in thousands)
2012
 
2011
Gross gains realized
$
1,075

 
$
174

Gross losses realized
(53
)
 
—

Proceeds from sales
64,476

 
5,299



NOTE 4 - GOODWILL AND INTANGIBLE ASSETS
 
Goodwill is tested for impairment annually and more frequently if events or changes in circumstances indicate that the asset might be impaired.
 
At March 31, 2012, and December 31, 2011, the Company's Banking segment had $30.3 million of Goodwill.








9


The table below summarizes the changes to core deposit intangible asset balances in the Banking segment.
 
(in thousands)
Core Deposit Intangible
Balance at January 1, 2012
$
9,285

    Amortization expense
(490
)
Balance at March 31, 2012
$
8,795


The following table reflects the expected amortization schedule for the core deposit intangibles.
 
Year
Core Deposit Intangible
2012
$
1,389

2013
1,653

2014
1,426

2015
1,199

2016
973

After 2016
2,155

 
$
8,795



NOTE 5 - PORTFOLIO LOANS NOT COVERED BY LOSS SHARE ("Non-covered")
 
Non-covered loans include loans originated through our branch network.

Below is a summary of Non-covered loans by category at March 31, 2012, and December 31, 2011:
 
(in thousands)
March 31, 2012
 
December 31, 2011
Real Estate Loans:
 
 
 
    Construction and Land Development
$
148,494

 
$
140,147

    Commercial real estate - Investor Owned
480,590

 
477,154

    Commercial real estate - Owner Occupied
326,407

 
334,416

    Residential real estate
157,706

 
171,034

Total real estate loans
$
1,113,197

 
$
1,122,751

    Commercial and industrial
792,055

 
763,202

    Consumer & other
12,579

 
11,459

    Portfolio Loans
$
1,917,831

 
$
1,897,412

Unearned loan costs, net
(281
)
 
(338
)
    Portfolio loans, including unearned loan costs
$
1,917,550

 
$
1,897,074


The Company grants commercial, residential, and consumer loans primarily in the St. Louis, Kansas City and Phoenix metropolitan areas. The Company has a diversified loan portfolio, with no particular concentration of credit in any one economic sector; however, a substantial portion of the portfolio is concentrated in and secured by real estate. 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.
 

10



A summary of the year-to-date activity in the allowance for loan losses and the recorded investment in Non-covered loans by portfolio class and category based on impairment method through March 31, 2012, and at December 31, 2011, is as follows:

(in thousands)
Commercial & Industrial
 
Commercial
Real Estate
Owner Occupied
 
Commercial
Real Estate
Investor Owned
 
Construction and Land Development
 
Residential Real Estate
 
Consumer & Other
 
Qualitative Adjustment
 
Total
Allowance for Loan Losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at
December 31, 2011
$
11,945

 
$
6,297

 
$
6,751

 
$
5,847

 
$
3,931

 
$
14

 
$
3,204

 
$
37,989

Provision charged to expense
929

 
1,231

 
216

 
269

 
(555
)
 
—

 
(372
)
 
1,718

Losses charged off
585

 
746

 
185

 
856

 
362

 
—

 
—

 
2,734

Recoveries
96

 
2

 
15

 
152

 
356

 
2

 
—

 
623

Balance at
March 31, 2012
$
12,385

 
$
6,784

 
$
6,797

 
$
5,412

 
$
3,370

 
$
16

 
$
2,832

 
$
37,596

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for Loan Losses - Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
4,797

 
$
2,923

 
$
1,781

 
$
2,108

 
$
497

 
$
—

 
$
—

 
$
12,106

Collectively evaluated for impairment
7,588

 
3,861

 
5,016

 
3,304

 
2,873

 
16

 
2,832

 
25,490

Total
$
12,385

 
$
6,784

 
$
6,797

 
$
5,412

 
$
3,370

 
$
16

 
$
2,832

 
$
37,596

Loans - Ending Balance:
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
9,219

 
$
11,075

 
$
10,150

 
$
12,109

 
$
4,631

 
$
—

 
$
—

 
$
47,184

Collectively evaluated for impairment
782,836

 
315,332

 
470,440

 
136,385

 
153,075

 
12,298

 
—

 
1,870,366

Total
$
792,055

 
$
326,407

 
$
480,590

 
$
148,494

 
$
157,706

 
$
12,298

 
$
—

 
$
1,917,550



(in thousands)
Commercial & Industrial
 
Commercial
Real Estate
Owner Occupied
 
Commercial
Real Estate
Investor Owned
 
Construction and Land Development
 
Residential Real Estate
 
Consumer & Other
 
Qualitative Adjustment
 
Total
Balance at December 31, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for Loan Losses - Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
3,214

 
$
1,377

 
$
2,315

 
$
2,927

 
$
896

 
$
—

 
$
—

 
$
10,729

Collectively evaluated for impairment
8,731

 
4,920

 
4,436

 
2,920

 
3,035

 
14

 
3,204

 
27,260

Total
$
11,945

 
$
6,297

 
$
6,751

 
$
5,847

 
$
3,931

 
$
14

 
$
3,204

 
$
37,989

Loans - Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
5,634

 
$
4,572

 
$
11,127

 
$
14,767

 
$
5,522

 
$
—

 
$
—

 
$
41,622

Collectively evaluated for impairment
757,568

 
329,844

 
466,027

 
125,380

 
165,512

 
11,121

 
—

 
1,855,452

Total
$
763,202

 
$
334,416

 
$
477,154

 
$
140,147

 
$
171,034

 
$
11,121

 
$
—

 
$
1,897,074


11


A summary of Non-covered loans individually evaluated for impairment by category at March 31, 2012, and December 31, 2011, is as follows: 

 
March 31, 2012
(in thousands)
Unpaid
Contractual
Principal Balance
 
Recorded
Investment
With No Allowance
 
Recorded
Investment
With
Allowance
 
Total
Recorded Investment
 
Related Allowance
 
Average
Recorded Investment
Commercial & Industrial
$
9,694

 
$
277

 
$
8,942

 
$
9,219

 
$
4,797

 
$
8,297

Real Estate:
 
 
 
 
 
 
 
 
 
 
 
    Commercial - Owner Occupied
11,931

 
1,014

 
10,061

 
11,075

 
2,923

 
6,867

    Commercial - Investor Owned
14,699

 
2,273

 
7,877

 
10,150

 
1,781

 
9,722

    Construction and Land Development
17,013

 
1,450

 
10,659

 
12,109

 
2,108

 
12,449

    Residential
4,967

 
1,912

 
2,719

 
4,631

 
497

 
5,265

Consumer & Other
—

 
—

 
—

 
—

 
—

 
—

Total
$
58,304

 
$
6,926

 
$
40,258

 
$
47,184

 
$
12,106

 
$
42,600


 
December 31, 2011
(in thousands)
Unpaid
Contractual
Principal Balance
 
Recorded
Investment
With No Allowance
 
Recorded
Investment
With
Allowance
 
Total
Recorded Investment
 
Related Allowance
 
Average
Recorded Investment
Commercial & Industrial
$
7,517

 
$
128

 
$
5,506

 
$
5,634

 
$
3,214

 
$
6,571

Real Estate:
 
 
 
 
 
 
 
 
 
 
 
    Commercial - Owner Occupied
5,099

 
—

 
4,572

 
4,572

 
1,377

 
2,711

    Commercial - Investor Owned
15,676

 
914

 
10,213

 
11,127

 
2,315

 
10,562

    Construction and Land Development
19,685

 
1,628

 
13,139

 
14,767

 
2,927

 
16,114

    Residential
6,465

 
2,211

 
3,311

 
5,522

 
896

 
9,588

Consumer & Other
—

 
—

 
—

 
—

 
—

 
—

Total
$
54,442

 
$
4,881

 
$
36,741

 
$
41,622

 
$
10,729

 
$
45,546



There were no loans over 90 days past due and still accruing interest at March 31, 2012. If interest on impaired loans would have been accrued based upon the original contractual terms, such income would have been $846,000 and $703,000 for the three months ended March 31, 2012 and 2011, respectively. The cash amount collected and recognized as interest income on impaired loans was $126,000 and $130,000 for the three months ended March 31, 2012 and 2011, respectively. The amount recognized as interest income on impaired loans continuing to accrue interest was $160,000 and $150,000 for the three months ended March 31, 2012 and 2011, respectively. At March 31, 2012, there were $1.1 million of unadvanced commitments on impaired loans. Other Liabilities include approximately $212,000 for estimated losses attributable to the unadvanced commitments on impaired loans.


12


The recorded investment in impaired Non-covered loans by category at March 31, 2012, and December 31, 2011, is as follows:
 
 
March 31, 2012
(in thousands)
Non-accrual
 
Restructured
 
Loans over 90 days past due and still accruing interest
 
Total
Commercial & Industrial
$
7,373

 
$
1,846

 
$
—

 
$
9,219

Real Estate:
 
 
 
 
 
 
 
    Commercial - Investor Owned
5,565

 
4,585

 
—

 
10,150

    Commercial - Owner Occupied
9,811

 
1,264

 
—

 
11,075

    Construction and Land Development
8,571

 
3,538

 
—

 
12,109

    Residential
2,643

 
1,988

 
—

 
4,631

Consumer & Other
—

 
—

 
—

 
—

       Total
$
33,963

 
$
13,221

 
$
—

 
$
47,184


 
December 31, 2011
(in thousands)
Non-accrual
 
Restructured
 
Loans over 90 days past due and still accruing interest
 
Total
Commercial & Industrial
$
4,475

 
$
1,159

 
$
—

 
$
5,634

Real Estate:
 
 
 
 
 
 
 
    Commercial - Investor Owned
6,647

 
4,480

 
—

 
11,127

    Commercial - Owner Occupied
4,129

 
443

 
—

 
4,572

    Construction and Land Development
10,335

 
3,677

 
755

 
14,767

    Residential
5,299

 
223

 
—

 
5,522

Consumer & Other
—

 
—

 
—

 
—

       Total
$
30,885

 
$
9,982

 
$
755

 
$
41,622



The recorded investment by category for the Non-covered loans that have been restructured for the three months ended March 31, 2012, is as follows:

 
Three months ended March 31, 2012
(in thousands, except for number of loans)
Number of Loans
 
Pre-Modification Outstanding
Recorded Balance
 
Post-Modification Outstanding
Recorded Balance
Commercial & Industrial
6

 
$
1,846

 
$
1,846

Real Estate:
 
 
 
 
 
     Commercial - Owner Occupied
1

 
1,264

 
1,264

     Commercial - Investor Owned
1

 
4,365

 
4,585

    Construction and Land Development
2

 
4,341

 
3,538

     Residential
3

 
1,988

 
1,988

Consumer & Other
—

 
—

 
—

  Total
13

 
$
13,804

 
$
13,221



13




The restructured Non-covered loans primarily resulted from interest rate concessions and changing the terms of the loans. As of March 31, 2012, the Company has allocated $2.5 million of specific reserves to the loans that have been restructured. At March 31, 2012, the Company has a commitment to lend an additional $1.1 million to a customer with an outstanding loan that has been classified as restructured and has allocated a $212,000 reserve to these loans.

The recorded investment by category for the Non-covered loans that have been restructured and subsequently defaulted for the three months ended March 31, 2012, is as follows:

 
Three months ended March 31, 2012
(in thousands, except for number of loans)
Number of Loans
 
Recorded Balance
Commercial & Industrial
1

 
$
16

Real Estate:
 
 
 
     Commercial - Owner Occupied
—

 
—

     Commercial - Investor Owned
—

 
—

    Construction and Land Development
—

 
—

     Residential
—

 
—

Consumer & Other
—

 
—

  Total
1

 
$
16



14


The aging of the recorded investment in past due Non-covered loans by portfolio class and category at March 31, 2012, and December 31, 2011, is shown below.

 
March 31, 2012
(in thousands)
30-89 Days
 Past Due
 
90 or More
Days
Past Due
 
Total
Past Due
 
Current
 
Total
    Commercial & Industrial
$
7,358

 
$
3,708

 
$
11,066

 
$
780,989

 
$
792,055

    Real Estate:
 
 
 
 
 
 
 
 
 
       Commercial - Owner Occupied
2,796

 
6,866

 
9,662

 
316,745

 
326,407

       Commercial - Investor Owned
1,805

 
3,536

 
5,341

 
475,249

 
480,590

       Construction and Land Development
1,974

 
6,631

 
8,605

 
139,889

 
148,494

       Residential
489

 
1,989

 
2,478

 
155,228

 
157,706

    Consumer & Other
—

 
—

 
—

 
12,298

 
12,298

          Total
$
14,422

 
$
22,730

 
$
37,152

 
$
1,880,398

 
$
1,917,550


 
December 31, 2011
(in thousands)
30-89 Days
 Past Due
 
90 or More
Days
Past Due
 
Total
Past Due
 
Current
 
Total
    Commercial & Industrial
$
4,521

 
$
792

 
$
5,313

 
$
757,889

 
$
763,202

    Real Estate:
 
 
 
 
 
 
 
 
 
       Commercial - Owner Occupied
1,945

 
1,522

 
3,467

 
330,949

 
334,416

       Commercial - Investor Owned
2,308

 
4,209

 
6,517

 
470,637

 
477,154

       Construction and Land Development
1,356

 
9,786

 
11,142

 
129,005

 
140,147

       Residential
299

 
4,137

 
4,436

 
166,598

 
171,034

    Consumer & Other
—

 
—

 
—

 
11,121

 
11,121

          Total
$
10,429

 
$
20,446

 
$
30,875

 
$
1,866,199

 
$
1,897,074



The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, and current economic factors among other factors. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:
•
Grades 1, 2, and 3 - These grades include 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 – This grade includes loans to borrowers with positive trends in profitability, satisfactory capitalization and balance sheet condition, and sufficient liquidity and cash flow.
•
Grade 5 – This grade includes loans to borrowers that may display fluctuating trends in sales, profitability, capitalization, liquidity, and cash flow.
•
Grade 6 – This grade 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 company is starting to reverse a negative trend or condition, or have recently been upgraded from a 7, 8, or 9 rating.
•
Grade 7 – Watch credits are companies that have experienced financial setback of a nature that are not determined to be severe or influence ‘ongoing concern’ expectations. Borrowers within this category are expected to turnaround within a 12-month period of time. Although possible, no loss is anticipated, due to strong collateral and/or guarantor support.

15


•
Grade 8 – Substandard credits will include those companies that are 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. 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 Non-covered loans by portfolio class and category at March 31, 2012, which is based upon the most recent analysis performed, and December 31, 2011 is as follows:
 
 
March 31, 2012
(in thousands)
Pass (1-6)
 
Watch (7)
 
Substandard (8)
 
Doubtful (9)
 
Total
    Commercial & Industrial
$
710,023

 
$
54,671

 
$
25,506

 
$
1,855

 
$
792,055

    Real Estate:
 
 
 
 
 
 
 
 
 
       Commercial - Owner Occupied
272,238

 
34,276

 
18,289

 
1,604

 
326,407

       Commercial - Investor Owned
403,564

 
60,715

 
16,113

 
198

 
480,590

       Construction and Land Development
104,073

 
22,425

 
21,231

 
765

 
148,494

       Residential
136,005

 
4,698

 
17,003

 
—

 
157,706

    Consumer & Other
12,291

 
7

 
—

 
—

 
12,298

          Total
$
1,638,194

 
$
176,792

 
$
98,142

 
$
4,422

 
$
1,917,550


 
December 31, 2011
(in thousands)
Pass (1-6)
 
Watch (7)
 
Substandard (8)
 
Doubtful (9)
 
Total
    Commercial & Industrial
$
683,239

 
$
50,197

 
$
27,229

 
$
2,537

 
$
763,202

    Real Estate:
 
 
 
 
 
 
 
 


       Commercial - Owner Occupied
276,802

 
40,207

 
16,225

 
1,182

 
334,416

       Commercial - Investor Owned
405,686

 
56,370

 
14,894

 
204

 
477,154

       Construction and Land Development
91,286

 
27,056

 
21,461

 
344

 
140,147

       Residential
148,309

 
4,814

 
16,419

 
1,492

 
171,034

    Consumer & Other
11,112

 
9

 
—

 
—

 
11,121

          Total
$
1,616,434

 
$
178,653

 
$
96,228

 
$
5,759

 
$
1,897,074



NOTE 6 - PORTFOLIO LOANS COVERED BY LOSS SHARE ("Covered loans")

Purchased loans acquired in a business combination, including loans purchased in our FDIC-assisted transactions, are recorded at estimated fair value on their purchase date without a carryover of the related allowance for loan losses. Purchased credit-impaired loans are loans that have evidence of credit