Edgar Filing: ENTERPRISE FINANCIAL SERVICES CORP

2012.12.31-10K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-K



[X]		Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 For the fiscal year ended December 31, 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

___________________

Securities registered pursuant to Section 12(b) of the Act:



(Title of class)	(Name of each exchange on which registered)
Common Stock, par value $.01 per share	NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [ ] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes [ ] No [X]

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its website, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-7 (§ 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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer [ ]	Accelerated filer [X]	Non-accelerated filer [ ]	Smaller reporting company [ ]
		(Other than a smaller reporting company)

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

Yes [ ] No [X]

The aggregate market value of the common stock held by non-affiliates of the Registrant was approximately $182,393,876 based on the closing price of the common stock of $10.96 as of the last business day of the registrant's most recently completed second fiscal quarter (June 30, 2012) as reported by the NASDAQ Global Select Market.

As of March 1, 2013, the Registrant had 18,038,212 shares of outstanding common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required for Part III of this report is incorporated by reference to the Registrant's Proxy Statement for the 2013 Annual Meeting of Shareholders, which will be filed within 120 days of December 31, 2012.

ENTERPRISE FINANCIAL SERVICES CORP

2012 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS



		Page
PART I

Item 1.	Business	1
Item 1A.	Risk Factors	8
Item 1B.	Unresolved SEC Comments	14
Item 2.	Properties	14
Item 3.	Legal Proceedings	14
Item 4.	Mine Safety Disclosures	15

PART II

Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	16
Item 6.	Selected Financial Data	18
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	56
Item 8.	Financial Statements and Supplementary Data	57
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	120
Item 9A.	Controls and Procedures	120
Item 9B.	Other Information	121

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	122
Item 11.	Executive Compensation	122
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	122
Item 13.	Certain Relationships and Related Transactions, and Director Independence	122
Item 14.	Principal Accountant Fees and Services	122

PART IV

Item 15.	Exhibits and Financial Statement Schedules	123
Signatures		127

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

Some of the information in this report contains “forward-looking statements” within the meaning of and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements typically are identified with use of terms such as “may,” “might,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “could,” “continue” and the negative of these terms and similar words, although some forward-looking statements are expressed differently. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. You should be aware that our actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including, but not limited to: credit risk; changes in the appraised valuation of real estate securing impaired loans; outcomes of litigation and other contingencies; exposure to general and local economic conditions; risks associated with rapid increases or decreases in prevailing interest rates; consolidation within the banking industry; competition from banks and other financial institutions; our ability to attract and retain relationship officers and other key personnel; burdens imposed by federal and state regulation; changes in regulatory requirements; changes in accounting regulation or standards applicable to banks; and other risks discussed under in Item 1A: “Risk Factors,” all of which could cause the Company's actual results to differ from those set forth in the forward-looking statements.

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

PART 1

ITEM 1: BUSINESS

General

Enterprise Financial Services Corp (“we” or the “Company” or “Enterprise”), a Delaware corporation, is a financial holding company headquartered in St. Louis, Missouri. We are the holding company for a full service banking subsidiary, Enterprise Bank & Trust (the “Bank”), offering banking and wealth management services to individuals and business customers located in the St. Louis, Kansas City and Phoenix metropolitan markets. Our executive offices are located at 150 North Meramec, Clayton, Missouri 63105 and our telephone number is (314) 725-5500.

Acquisitions and Divestitures

Since December 2009, the Bank has entered into four agreements with the Federal Deposit Insurance Corporation (“FDIC”) to acquire certain assets and assume certain liabilities of four failed banks: Valley Capital Bank, Home National Bank, Legacy Bank and The First National Bank of Olathe. In conjunction with each of these, the Bank entered into loss share agreements, under which the FDIC has agreed to reimburse the Bank for a percentage of losses on certain loans and other real estate acquired (“Covered Assets”). The reimbursable losses from the FDIC are based on the book value of the acquired loans and foreclosed assets as determined by the FDIC as of the date of each acquisition.

•

Valley Capital Bank (“Valley Capital”) - On December 11, 2009, the Bank acquired certain assets and assumed certain liabilities of Valley Capital, a full service community bank that was headquartered in Mesa, Arizona. Under the terms of the purchase and assumption agreement, the Bank acquired tangible assets of approximately $44.1 million and assumed liabilities of approximately $43.4 million. The FDIC will reimburse the Bank for 80% of the losses on Covered Assets up to $11.0 million and 95% of the losses on Covered Assets exceeding $11.0 million.


•	Home National Bank (“Home National”) - On July 9, 2010, the Bank acquired approximately $256.0 million in Arizona-originated assets from the FDIC in connection with the failure of Home National, an Oklahoma bank with operations in Arizona. Under the terms of the loan sale agreement, the Bank acquired the loans

originated and other real estate of Home National. The Bank did not assume any deposits or acquire any branches or other assets of Home National in the transaction. The FDIC will reimburse the Bank for 80% of all losses on Covered Assets.

•

Legacy Bank (“Legacy”) - On January 7, 2011, the Bank acquired certain assets and assumed certain liabilities of Legacy, a full service community bank that was headquartered in Scottsdale, Arizona. The acquisition consisted of tangible assets with fair values of approximately $128.0 million and liabilities of approximately $130.4 million. In addition, the Bank also acquired approximately $55.6 million of discretionary and $13.6 million of non-discretionary trust assets. The FDIC will reimburse the Bank for 80% of all losses on Covered Assets.

In conjunction with the Legacy acquisition, the Company provided the FDIC with a Value Appreciation Instrument (“VAI”) whereby 372,500 units were awarded to the FDIC at an exercise price of $10.63 per unit. The units were exercisable at any time from January 14, 2011 until January 6, 2012. The FDIC exercised the units on January 20, 2011 at a settlement price of $11.8444. A cash payment of $452,364 was made to the FDIC on January 21, 2011.

•

The First National Bank of Olathe (“FNBO") - On August 12, 2011, the Bank acquired certain assets and assumed certain liabilities of FNBO, a full service community bank that was headquartered in Olathe, Kansas. The acquisition consisted of tangible assets at fair value of approximately $481.6 million and liabilities with a fair value of approximately $516.2 million. The FDIC will reimburse the Bank for 80% of losses up to $112.6 million, 0% of losses between $112.6 million and $148.9 million and 80% of losses in excess of $148.9 million with respect to the Covered Assets.

In conjunction with the FNBO acquisition, the Company provided the FDIC with a VAI whereby 1.0 million units were awarded to the FDIC at an exercise price of $13.59 per unit. The units were exercisable any time from August 19, 2011 until August 10, 2012. The units were exercised on October 31, 2011 at a settlement price of $15.8393. A cash payment of approximately $2.2 million was made to the FDIC on November 1, 2011.

On October 21, 2011, the Bank purchased certain assets and assumed certain deposit liabilities from BankLiberty of Liberty, Missouri. The Bank assumed $43.0 million in deposits associated with the BankLiberty branch located at 11401 Olive Boulevard, in the St. Louis suburb of Creve Coeur, Missouri. The deposits consisted of $2.6 million in demand deposits, $21.9 million in money market and other interest bearing deposits, and $18.5 million in certificates of deposit. The Bank also paid a deposit premium of $323,000 on these deposits and purchased $150,000 of personal property in the branch. The Bank executed a sublease on approximately 6,556 square feet at the above address. Enterprise currently operates the location as a full-service branch of the Bank.

2011 Capital Raise

On May 24, 2011, we issued 2,743,900 shares, or $35.0 million in common stock through a public offering. The shares in the offering were issued pursuant to a prospectus supplement filed with the Securities and Exchange Commission as part of the Company's effective registration statement. The net proceeds to the Company, after deducting underwriting discounts and commissions and offering expenses, was approximately $32.6 million. At June 30, 2011, approximately $20.0 million of the offering proceeds were injected into the Bank to support expected growth.

2012 TARP Repayment

On November 7, 2012, the Company repurchased from the United States Department of the Treasury (the “Treasury”) all 35,000 outstanding shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred”) pursuant to a letter agreement with the Treasury of that date (the “Repurchase Agreement”). The Company paid an aggregate purchase price of approximately $35.4 million to the Treasury, which included a $1,000 per share liquidation amount and approximately $399,000 for accrued and unpaid dividends. The Company originally sold the Series A Preferred to the Treasury on December 19, 2008 pursuant to the Treasury's Capital Purchase Program.

Available Information

Our website is www.enterprisebank.com. Various reports provided to the SEC, including our annual reports, quarterly reports, current reports and proxy statements are available free of charge on our website. These reports are made available as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Our filings with the SEC are also available on the SEC's website at http://www.sec.gov.

Business Strategy

Our stated mission is “to guide our clients to a lifetime of financial success.” We have established an accompanying corporate vision “to build an exceptional company that clients value, shareholders prize and where our associates flourish.” These tenets are fundamental to our business strategies and operations.

Our general business strategy is to generate superior shareholder returns by providing comprehensive financial services primarily to private businesses, their owner families, and other success-minded individuals through banking and wealth management lines of business each of which constitutes a separate segment for purposes of our financial reporting.

Our banking segment offers a broad range of business and personal banking services. Lending services include commercial and industrial, commercial real estate, real estate construction and development, residential real estate, and consumer loans. A wide variety of deposit products and a complete suite of treasury management and international trade services complement our lending capabilities.

The wealth management segment includes the Company's trust operations and Federal and Missouri State tax credit brokerage activities. Enterprise Trust, a division of the Bank (“Enterprise Trust” or “Trust”) provides financial planning, estate planning, investment management and trust services to businesses, individuals, institutions, retirement plans and non-profit organizations. Tax credit brokerage activities consist of the acquisition of Missouri State tax credits and sale of these tax credits to clients. See Item 8. Note 21 - Segment Reporting for more information about our segments.

Key components of our strategy include a focused and relationship-oriented distribution and sales approach, emphasis on growing fee income and niche businesses, prudent credit and interest rate risk management, advanced technology and controlled expense growth.

Building long-term client relationships - Our growth strategy is largely client relationship driven. We continuously seek to add clients who fit our target market of business owners, professionals, and associated relationships. Those relationships are maintained, cultivated and expanded over time by banking officers and wealth advisors who generally are highly experienced. We fund loan growth primarily with core deposits from our business and professional clients in addition to consumers in our branch market areas. This is supplemented by borrowing from the Federal Home Loan Bank of Des Moines (the “FHLB”), the Federal Reserve, and by issuing brokered certificates of deposits, priced at or below alternative cost of funds.

Growing fee income business - Enterprise Trust offers a wide range of fiduciary, investment management and financial advisory services. We employ attorneys, certified financial planners, estate planning professionals and other investment professionals. Enterprise Trust representatives assist clients in defining lifetime goals and designing plans to achieve them, consistent with the Company's long-term relationship strategy. The Bank also operates treasury management, mortgage and international banking divisions that generate fee income.

Specialty Lending and Product Niches - We have focused an increasing amount of our lending activities in specialty markets where we believe our expertise and experience as a sophisticated commercial lender provides advantages over other competitors. These specialty lending activities focus on the following areas:


•	Enterprise Value Lending/Senior Debt Financing. We support mid-market company mergers and acquisitions primarily for Midwest-based manufacturing companies. We market directly to targeted private equity firms and provide a combination of senior debt and mezzanine debt financing.


•	Tax Credit Related Lending. We are a secured lender on affordable housing projects funded through the use of Federal and Missouri State Low Income housing tax credits. The Company also brokers State Low Income credits

from its inventory to its Bank and Wealth Management clients. In addition, we provide leveraged and other loans on projects funded through the Department of the Treasury CDFI New Markets Tax Credit program. In 2011, we were selected as one of 99 total allocatees, and one of only 18 banks, for New Markets Tax Credits. In this capacity, we were responsible for allocating $35 million of New Markets Tax Credits to clients and projects. We currently have an application in process for an additional allocation of New Markets Tax Credits.


•	Tax Credit Brokerage. Our wealth management business acquires Missouri state tax credits from affordable housing development funds and sells the tax credits to wealth management clients and other individuals.


•	Life Insurance Premium Finance. We specialize in financing high end whole life insurance premiums utilized in high net worth estate planning.


•	Enterprise Advisory Services. We have developed a proprietary deposit platform allowing registered investment advisory firms to offer FDIC insured cash deposits in addition to other investment products.

Capitalizing on technology - We view our technological capabilities to be a competitive advantage. Our systems provide Internet banking, expanded treasury management products, check and document imaging and remote deposit capture systems. Other services currently offered by the Bank include controlled disbursements, repurchase agreements and sweep investment accounts. Our treasury management suite of products blends advanced technology and personal service, often creating a competitive advantage over larger, nationwide banks. Technology is also extensively utilized in internal systems, operational support functions to improve customer service, and management reporting and analysis.

Maintaining asset quality - The Company monitors asset quality through ongoing, multiple-level formal reviews of loans in each market. These reviews are overseen by the Company's credit administration department. In addition, the Bank's loan portfolio is subject to ongoing monitoring by a loan review function that reports directly to the audit committee of our board of directors.

Expense management - The Company manages expenses carefully through detailed budgeting and expense approval processes. We measure the “efficiency ratio” as a benchmark for improvement. The efficiency ratio is equal to noninterest expense divided by total revenue (net interest income plus noninterest income). Continued improvement is targeted to increase earnings per share and generate higher returns on equity.

Market Areas and Approach to Geographic Expansion

We operate in the St. Louis, Kansas City and Phoenix metropolitan areas. The Company, as part of its expansion effort, plans to continue its strategy of operating branches with larger average deposits, and employing experienced staff who are compensated on the basis of performance and customer service.

St. Louis - We have six Enterprise banking facilities in the St. Louis metropolitan area. The St. Louis market enjoys a stable, diverse economic base and is ranked the 19^th largest metropolitan statistical area in the United States. It is an attractive market for us with nearly 70,000 privately held businesses and more than 50,000 households with investable assets of $1.0 million or more.

Kansas City - We have eleven banking facilities in the Kansas City market. Kansas City is also an attractive private company market with over 50,000 privately held businesses and more than 40,000 households with investable assets of $1.0 million or more. It is the 29^th largest metropolitan area in the U.S.

Phoenix - As described above, since December 2009, we have completed four FDIC-assisted transactions in the Phoenix market. At December 31, 2012, we had four full service branches in the Phoenix metropolitan area. The Company has announced its intention to close one branch in the Phoenix market in March 2013.

We believe the Phoenix market offers substantial long-term growth opportunities for the Company. The underlying demographic and geographic factors that propelled Phoenix into one of the fastest growing and most dynamic markets in the country still exist, and we believe these factors should drive continued growth in that market long after the current real estate slump is over. Today, Phoenix is the nation's 14^th largest metropolitan area, and has more than 90,000 privately held businesses and more than 80,000 households with investable assets over $1.0 million each.

Competition

The Company and its subsidiaries operate in highly competitive markets. Our geographic markets are served by a number of large multi-bank holding companies with substantial capital resources and lending capacity. Many of the larger banks have established specialized units, which target private businesses and high net worth individuals. Also, the St. Louis, Kansas City and Phoenix markets have numerous small community banks. In addition to other financial holding companies and commercial banks, we compete with credit unions, thrifts, investment managers, brokerage firms, and other providers of financial services and products.

Supervision and Regulation

Financial Holding Company

The Company is a financial holding company registered under the Bank Holding Company Act of 1956, as amended (“BHCA”). As a financial holding company, the Company is subject to regulation and examination by the Federal Reserve Board, and is required to file periodic reports of its operations and such additional information as the Federal Reserve may require. In order to remain a financial holding company, the Company must continue to be considered well managed and well capitalized by the Federal Reserve and have at least a “satisfactory” rating under the Community Reinvestment Act. See “Liquidity and Capital Resources” in the Management Discussion and Analysis for more information on our capital adequacy and “Bank Subsidiary - Community Reinvestment Act” below for more information on Community Reinvestment.

Acquisitions: With certain limited exceptions, the BHCA requires every financial holding company or bank holding company to obtain the prior approval of the Federal Reserve before (i) acquiring substantially all the assets of any bank, (ii) acquiring direct or indirect ownership or control of any voting shares of any bank if, after such acquisition, it would own or control more than 5% of the voting shares of such bank (unless it already owns or controls the majority of such shares), or (iii) merging or consolidating with another bank holding company. The BHCA also prohibits a financial holding company generally from engaging directly or indirectly in activities other than those involving banking, activities closely related to banking that are permitted for a bank holding company, securities, insurance or merchant banking. Federal legislation permits bank holding companies to acquire control of banks throughout the United States.

Dividend Restrictions: Under Federal Reserve Board policies, bank holding companies may pay cash dividends on common stock only out of income available over the past year if prospective earnings retention is consistent with the organization's expected future needs and financial condition and if the organization is not in danger of not meeting its minimum regulatory capital requirements. Federal Reserve Board policy also provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company's ability to serve as a source of strength to its banking subsidiaries.

Bank Subsidiary

At December 31, 2012, Enterprise Bank & Trust was our only bank subsidiary. The Bank is a Missouri trust company with banking powers and is subject to supervision and regulation by the Missouri Division of Finance. In addition, as a Federal Reserve non-member bank, it is subject to supervision and regulation by the FDIC. The Bank is a member of the FHLB of Des Moines.

The Bank is subject to extensive federal and state regulatory oversight. The various regulatory authorities regulate or monitor all areas of the banking operations, including security devices and procedures, adequacy of capitalization and loss reserves, loans, investments, borrowings, deposits, mergers, issuance of securities, payment of dividends, interest rates payable on deposits, interest rates or fees chargeable on loans, establishment of branches, corporate reorganizations, maintenance of books and records, and adequacy of staff training to carry on safe lending and deposit gathering practices. The Bank must maintain certain capital ratios and is subject to limitations on aggregate investments in real estate, bank premises, low income housing projects, and furniture and fixtures. The Bank is subject to periodic examination by the FDIC and Missouri Division of Finance.

Dividends by the Bank Subsidiary: Under Missouri law, the Bank may pay dividends to the Company only from a portion of its undivided profits and may not pay dividends if its capital is impaired.

Transactions with Affiliates and Insiders: The Bank is subject to the provisions of Regulation W promulgated by the Federal Reserve, which encompasses Sections 23A and 23B of the Federal Reserve Act. Regulation W places limits and conditions on the amount of loans or extensions of credit to, investments in, or certain other transactions with, affiliates and on the amount of advances to third parties collateralized by the securities or obligations of affiliates. Regulation W also prohibits, among other things, an institution from engaging in certain transactions with certain affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.

Community Reinvestment Act: The Community Reinvestment Act (“CRA”) requires that, in connection with examinations of financial institutions within its jurisdiction, the FDIC shall evaluate the record of the financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those institutions. These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. The Bank has a satisfactory rating under CRA.

USA Patriot Act: The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA PATRIOT Act") requires each financial institution to: (i) establish an anti-money laundering program; (ii) establish due diligence policies, procedures and controls with respect to its private banking accounts and correspondent banking accounts involving foreign individuals and certain foreign banks; and (iii) implement certain due diligence policies, procedures and controls with regard to correspondent accounts in the United States for, or on behalf of, a foreign bank that does not have a physical presence in any country. In addition, the USA PATRIOT Act contains a provision encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities.

Limitations on Loans and Transactions: The Federal Reserve Act generally imposes certain limitations on extensions of credit and other transactions by and between banks that are members of the Federal Reserve and other affiliates (which includes any holding company of which a bank is a subsidiary and any other non-bank subsidiary of such holding company). Banks that are not members of the Federal Reserve are also subject to these limitations. Further, federal law prohibits a bank holding company and its subsidiaries from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or the furnishing of services.

Deposit Insurance Fund: The FDIC establishes rates for the payment of premiums by federally insured banks for deposit insurance. The Deposit Insurance Fund (“DIF”) is maintained for commercial banks, with insurance premiums from the industry used to offset losses from insurance payouts when banks and thrifts fail.

Financial Regulatory Reform

On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which contains a comprehensive set of provisions designed to govern the practices and oversight of financial institutions and other participants in the financial markets. The Dodd-Frank Act made extensive changes in the regulation of financial institutions and their holding companies. It requires various federal agencies to adopt a broad range of new rules and regulations, and to prepare numerous studies and reports for Congress. These studies could potentially result in additional legislative or regulatory action.

The following provisions have been implemented since the passage of the Dodd-Frank Act:

•

The Consumer Financial Protection Bureau (the “CFPB”) centralized responsibility for consumer financial protection including implementing, examining and enforcing compliance with federal consumer financial laws. Depository institutions with less than $10 billion in assets, such as our Bank, will be subject to rules promulgated by the CFPB but will continue to be examined and supervised by federal banking regulators for consumer compliance purposes. The CFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. The Dodd-Frank Act authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower's ability to repay. In addition, the

Dodd-Frank Act allows borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB.


•	Changed the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminated the ceiling on the size of the Deposit Insurance Fund (“DIF”), and increased the floor on the size of the DIF, which generally will require an increase in the level of assessments for institutions with assets in excess of $10 billion.


•	Made permanent the $250,000 limit for federal deposit insurance for noninterest-bearing demand transaction accounts at all insured depository institutions.


•	Repealed the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transactions and other accounts.

On November 12, 2009, the FDIC adopted a final rule imposing a 13-quarter prepayment of FDIC premiums. As a result, the Bank prepaid $11.5 million in December 2009. Approximately $2.6 million, $3.2 million and $3.5 million of this prepayment was expensed in 2012, 2011 and 2010, respectively.

Capital Adequacy

In December 2010, the Basel Committee on Banking Supervision ("the Basel Committee") presented to the public the Basel III rules text, which proposes new global regulatory standards on bank capital adequacy and liquidity. The Basel Committee continued to refine Basel III during 2011 and seeks to strengthen global capital and liquidity rules with the goal of promoting a more resilient banking sector. The framework set out tougher capital requirements, the introduction of a new leverage ratio calculation, higher requirements for minimum capital ratios, and higher risk-weightings for assets, as they relate to capital calculations.

In addition, the Dodd-Frank Act required the Federal Reserve to apply consolidated capital requirements to depository institution holding companies that are no less stringent than those currently applied to depository institutions.

On June 7, 2012, the Federal Reserve issued a notice of proposed rulemaking on increased regulatory capital requirements, implementing changes required by the Dodd-Frank Act and portions of the Basel III regulatory capital reforms. In September 2012, the federal banking regulatory agencies announced that final rules implementing the Basel III reforms would be delayed. At present, final rules have not been adopted and no implementation dates have been announced.

We are still analyzing the proposed capital regulations and the effect they would have on us and our business. Notably, the new capital regulations proposed in June 2012 are more strict in their treatment of trust preferred securities than required by the Dodd-Frank Act. The Dodd-Frank Act does not require phasing out trust preferred securities issued before May 19, 2010 from Tier 1 capital status for bank holding companies with total assets less than $15 billion. However, the proposed new capital requirements would phase out Tier 1 capital treatment of trust preferred securities over 10 years beginning in 2013 with full phase out occurring on January 1, 2022.

Employees

At December 31, 2012, we had approximately 450 full-time equivalent employees. None of the Company's employees are covered by a collective bargaining agreement. Management believes that its relationship with its employees is good.

ITEM 1A: RISK FACTORS

An investment in our common shares is subject to risks inherent to our business. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report. The risks and uncertainties described below are not the only ones we face. Although we have significant risk management policies, procedures and verification processes in place, additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also materially and adversely impair our business operations. The value of our common shares could decline due to any of these risks, and you could lose all or part of your investment.

Risks Relating to Our Business

Various factors may cause our allowance for loan losses to increase.

We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, that represents management's estimate of probable losses within the existing portfolio of loans. The allowance, in the judgment of management, is sufficient to reserve for estimated loan losses and risks inherent in the loan portfolio. We continue to monitor the adequacy of our loan loss allowance and may need to increase it if economic conditions deteriorate. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments that can differ somewhat from those of our own management. In addition, if charge-offs in future periods exceed the allowance for loan losses (i.e., if the loan allowance is inadequate), we may need additional loan loss provisions to increase the allowance for loan losses. Additional provisions to increase the allowance for loan losses, should they become necessary, would result in a decrease in net income and a reduction in capital, and may have a material adverse effect on our financial condition and results of operations.

Our loan portfolio is concentrated in certain markets which could result in increased credit risk.

Substantially all of our loans are to businesses and individuals in the St. Louis, Kansas City, and Phoenix metropolitan areas. The regional economic conditions in areas where we conduct our business have an impact on the demand for our products and services as well as the ability of our customers to repay loans, the value of the collateral securing loans, and the stability of our deposit funding sources.

Our loan portfolio mix, which has a concentration of loans secured by real estate, could result in increased credit risk.

A significant portion of our portfolio is secured by real estate and thus we face a high degree of risk from a downturn in our real estate markets. If real estate values would decline further in our markets, the value of real estate collateral securing our loans could be significantly reduced. Our ability to recover on defaulted loans for which the primary reliance for repayment is on the real estate collateral by foreclosing and selling that real estate would then be diminished, and we would be more likely to suffer losses on defaulted loans.

Additionally, because Kansas is a judicial foreclosure state, all foreclosures must be processed through the Kansas state courts. Due to this process, it takes approximately one year for us to foreclose on real estate collateral located in the State of Kansas. Our ability to recover on defaulted loans secured by Kansas property may be delayed and our recovery efforts are lengthened due to this process.

Our controls and procedures may fail or be circumvented.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As disclosed in Item 9A of our Annual Report on Form 10-K for the 2011 fiscal year, management identified a material weakness in our internal control over financial reporting related to accounting for loans we acquired in FDIC assisted transactions. As a result of this material weakness, our management concluded that our internal control over financial reporting was not then effective. During the second quarter of 2012, management completed the actions which it believes were necessary to remediate this material weakness. Although we believe that this material weakness has been remediated, there can be no assurance that similar weaknesses will not occur in the future which could adversely affect our future results of operations or our stock price.

We face potential risks from litigation brought against the Company and the Bank.

We are from time to time involved in various lawsuits and legal proceedings. As discussed in “Legal Proceedings” in Part I, Item 3 of this Form 10-K, the Bank, along with other co-defendants, including a former President and Chief Executive Officer of the Bank's trust division, has been named as a defendant in two lawsuits filed by clients, or purported clients, of the Bank's trust division who invested in promissory notes issued by Distinctive Properties (UK) Limited, a company involved in the purchase and development of real estate in the United Kingdom. In one of the lawsuits, the plaintiffs allege that the investments in the notes were part of a multi-million dollar Ponzi scheme. The Company has also been named as a defendant in a lawsuit by a stockholder in a purported class action claim arising from the restatement of our 2010 and 2011 financial statements. While we cannot with certainty determine the potential outcome of this or any other pending or threatened litigation against the Company or the Bank, litigation-related costs and any legal liability as a result of an adverse determination with respect to one or more of these legal proceedings could have a material adverse effect on our business, cash flows, financial position and results of operations and could cause us significant reputational harm, including without limitation as a result of negative publicity the Company may face even if it prevails in such legal proceedings, which could adversely affect our business prospects.

Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of investment securities and other sources could have a substantial material adverse effect on our liquidity. Our access to funding sources in amounts that are adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity due to a market downturn, our failure to remain well capitalized, or adverse regulatory action against us. Our ability to acquire deposits or borrow could also be impaired by factors that are not specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole.

Our business is subject to interest rate risk and variations in interest rates may negatively affect our financial performance.

A substantial portion of our income is derived from the differential or “spread” between the interest earned on loans, investment securities and other interest-earning assets, and the interest paid on deposits, borrowings and other interest-bearing liabilities. Because of the differences in the maturities and repricing characteristics of our interest-earning assets and interest-bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Significant fluctuations in market interest rates could materially and adversely affect not only our net interest spread, but also our asset quality and loan origination volume.

If our businesses do not perform well, we may be required to establish a valuation allowance against the deferred income tax asset, which could have a material adverse effect on our results of operations and financial condition.

Deferred income tax represents the tax effect of the differences between the book and tax basis of assets and liabilities. Deferred tax assets are assessed periodically by management to determine if they are realizable. If based on available information, it is more likely than not that the deferred income tax asset will not be realized, then a valuation allowance must be established with a corresponding charge to net income. As of December 31, 2012, the Company did not carry a valuation allowance against its deferred tax asset balance of $21.8 million. Future facts and circumstances may require a valuation allowance. Charges to establish a valuation allowance could have a material adverse effect on our results of operations and financial position.

If the Bank incurs losses that erode its capital, it may become subject to enhanced regulation or supervisory action.

Under federal and state laws and regulations pertaining to the safety and soundness of insured depository institutions, the Missouri Division of Finance and the Federal Reserve, and separately the FDIC as insurer of the Bank's deposits, have the authority to compel or restrict certain actions if the Bank's capital should fall below adequate capital standards as a result of future operating losses, or if its bank regulators determine that it has insufficient capital. Among other matters, the corrective actions include but are not limited to requiring affirmative action to correct any conditions resulting from any violation or practice; directing an increase in capital and the maintenance of specific minimum capital ratios; restricting the Bank's operations; limiting the rate of interest the bank may pay on brokered deposits; restricting the amount of distributions and dividends and payment of interest on its trust preferred securities; requiring

the Bank to enter into informal or formal enforcement orders, including memoranda of understanding, written agreements and consent or cease and desist orders to take corrective action and enjoin unsafe and unsound practices; removing officers and directors and assessing civil monetary penalties; and taking possession of and closing and liquidating the Bank.

Changes in government regulation and supervision may increase our costs.

Our operations are subject to extensive regulation by federal, state and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of our operations. Banking regulations are primarily intended to protect depositors' funds, federal deposit insurance funds and the banking system as a whole, not stockholders. Because our business is highly regulated, the laws, rules, regulations and supervisory guidance and policies applicable to us are subject to regular modification and change.

Any future increases in FDIC insurance premiums might adversely impact our earnings.

Over the past several years, the FDIC has adopted several rules which have resulted in a number of changes to the FDIC assessments, including modification of the assessment system and a special assessment. It is possible that the FDIC may impose additional special assessments in the future or further increase our annual assessment, which could adversely affect our earnings.

We may be adversely affected by the soundness of other financial institutions.

Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to different institutions and counterparties, and we execute transactions with various counterparties in the financial industry, including federal home loan banks, commercial banks, brokers and dealers, investment banks and other institutional clients. Defaults by financial services institutions, and even rumors or questions about one or more financial services institutions or the financial services industry in general, have led to market-wide liquidity problems in prior years and could lead to losses or defaults by us or by other institutions. Any such losses could materially and adversely affect our results of operations.

We have engaged in and may continue to engage in further expansion through acquisitions, including FDIC-assisted transactions, which could negatively affect our business and earnings.

Our earnings, financial condition, and prospects after a merger or acquisition depend in part on our ability to successfully integrate the operations of the acquired company. We may be unable to integrate operations successfully or to achieve expected cost savings. Any cost savings that are realized may be offset by losses in revenues or other charges to earnings.

Acquiring other banks or businesses involves various risks commonly associated with acquisitions, including, among other things:


•	potential exposure to unknown or contingent liabilities of the target company;


•	exposure to potential asset quality issues of the target company;


•	difficulty and expense of integrating the operations and personnel of the target company;


•	potential disruption to our business;


•	potential diversion of our management's time and attention;


•	the possible loss of key employees and customers of the target company;


•	difficulty in estimating the value (including goodwill) of the target company; and


•	potential changes in banking or tax laws or regulations that may affect the target company.

We periodically evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, merger or acquisition discussions and, in some cases, negotiations may take place, and future mergers or acquisitions involving cash, debt or equity securities may occur at any time. Acquisitions may involve the payment of a premium over book and market values, and, therefore, some dilution of our tangible book value and net income per common share may occur in connection with any future transaction. Furthermore, failure to realize the expected revenue increases, cost savings, reimbursements of losses from the FDIC, increases in geographic or product presence, and/or other projected benefits from an acquisition could have a material adverse effect on our financial condition and results of operations. Finally, to the extent that we issue capital stock in connection with transactions, such transactions and related stock issuances may have a dilutive effect on earnings per share of our common stock and share ownership of our stockholders.

We may not be able to attract and retain skilled people.

Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people in most activities in which we are engaged can be intense, and we may not be able to hire or retain the people we want and/or need. Although we maintain employment agreements with certain key employees, and have incentive compensation plans aimed, in part, at long-term employee retention, the unexpected loss of services of one or more of our key personnel could still occur, and such events may have a material adverse impact on our business because of the loss of the employee's skills, knowledge of our market, and years of industry experience and the difficulty of promptly finding qualified replacement personnel.

We may need to raise additional capital in the future, and such capital may not be available to us or may only be available on unfavorable terms.

We may need to raise additional capital in the future in order to support any additional provisions for loan losses and loan charge-offs, to maintain our capital ratios, or for other reasons. The condition of the financial markets may be such that we may not be able to obtain additional capital, or the additional capital may only be available on terms that are not attractive to us.

Recently enacted financial reform legislation and rules promulgated thereunder may adversely affect us.

The Dodd-Frank Act was signed into law by President Obama on July 21, 2010. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States, establishes the new federal Consumer Financial Protection Bureau (the “CFPB”), and will require the CFPB and other federal agencies to implement many new rules.

Among the many requirements in the Dodd-Frank Act for new banking regulations is a requirement for new capital regulations to be adopted. These regulations must be at least as stringent as, and may call for higher levels of capital than, current regulations. Generally, trust preferred securities will no longer be eligible as Tier 1 capital, but the Company's currently outstanding trust preferred securities will be grandfathered, subject to the potential changes from Basel III reforms.

The CFPB has broad powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks, including the authority to prohibit unfair, deceptive or abusive acts and practices.

The Dodd-Frank Act and the resulting regulations will likely affect the Company's business and operations in other ways which are difficult to predict at this time. However, compliance with these new laws and regulations will result in additional costs, which may adversely impact the Company's results of operations, financial condition or liquidity, any of which may impact the market price of the Company's common stock.

The Federal Reserve has proposed new capital requirements for financial institutions which, if adopted in their current form, may require us to retain or raise additional capital or and/or reduce dividends.

As previously disclosed, on June 7, 2012, the Federal Reserve issued a notice of proposed rulemaking on increased regulatory capital requirements, implementing changes required by the Dodd-Frank Act and portions of the Basel III regulatory capital reforms.

While the regulations may change before adoption in their final form, the proposed capital requirements for bank holding companies may require us to retain or raise additional capital, restrict our ability to pay dividends and repurchase shares of our common stock and/or require other changes to our strategic plans. While these proposed rules have not become final and the proposed implementation dates have been delayed indefinitely, we are analyzing the proposed capital regulations and the effect they would have on us and our business.

A failure in or breach of our operational or security systems, or those of our third party service providers, including as a result of cyber attacks, could disrupt our business, result in unintentional disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and adversely impact our earnings.

As a financial institution, our operations rely heavily on the secure processing, storage and transmission of confidential and other information on our computer systems and networks. Any failure, interruption or breach in security or operational integrity of these systems could result in failures or disruptions in our Internet banking system, treasury management products, check and document imaging, remote deposit capture systems, ,general ledger, and other systems. The security and integrity of our systems could be threatened by a variety of interruptions or information security breaches, including those caused by computer hacking, cyber attacks, electronic fraudulent activity or attempted theft of financial assets. We cannot assure you that any such failures, interruption or security breaches will not occur, or if they do occur, that they will be adequately addressed. While we have certain protective policies and procedures in place, the nature and sophistication of the threats continue to evolve. We may be required to expend significant additional resources in the future to modify and enhance our protective measures. Additionally, we face the risk of operational disruption, failure, termination or capacity constraints of any of the third parties that facilitate our business activities, including exchanges, clearing agents, clearing houses or other financial intermediaries. Such parties could also be the source of an attack on, or breach of, our operational systems. Any failures, interruptions or security breaches in our information systems could damage our reputation, result in a loss of customer business, result in a violation of privacy or other laws, or expose us to civil litigation, regulatory fines or losses not covered by insurance.

Risks Relating to Our Common Stock

The price of our common stock may be volatile or may decline.

The trading price of our common stock may fluctuate widely as a result of a number of factors, many of which are outside our control. In addition, the stock market is subject to fluctuations in the share prices and trading volumes that affect the market prices of the shares of many companies. These broad market fluctuations could make it more difficult for you to resell your common stock when you want and at prices you find attractive. Our stock price can fluctuate significantly in response to a variety of factors including, among other things:


•	actual or anticipated quarterly fluctuations in our operating results and financial condition;


•	changes in revenue or earnings estimates or publication of research reports and recommendations by financial analysts;


•	failure to meet analysts' revenue or earnings estimates;


•	speculation in the press or investment community;


•	strategic actions by us or our competitors, such as acquisitions or restructurings;


•	actions by institutional stockholders;


•	fluctuations in the stock prices and operating results of our competitors;


•	general market conditions and, in particular, developments related to market conditions for the financial services industry;


•	proposed or adopted regulatory changes or developments;


•	anticipated or pending investigations, proceedings or litigation that involve or affect us; or


•	domestic and international economic factors unrelated to our performance.

The stock market and, in particular, the market for financial institution stocks, has experienced significant volatility over the last several years. As a result, the market price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate more than usual and cause significant price variations to occur. The trading price of the shares of our common stock and the value of our other securities will depend on many factors, which may change from time to time, including, without limitation, our financial condition, performance, creditworthiness and

prospects, future sales of our equity or equity related securities, and other factors identified in this annual report and other reports by the Company. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers' underlying financial strength or operating results. A significant decline in our stock price could result in substantial losses for individual stockholders and could lead to costly and disruptive securities litigation.

An investment in our common stock is not insured and you could lose the value of your entire investment.

An investment in our common stock is not a savings account, deposit or other obligation of our bank subsidiary, any non-bank subsidiary or any other bank, and such investment is not insured or guaranteed by the FDIC or any other governmental agency. As a result, if you acquire our common stock, you may lose some or all of your investment.

Our ability to pay dividends is limited by various statutes and regulations and depends primarily on the Bank's ability to distribute funds to us, and is also limited by various statutes and regulations.

The Company depends on payments from the Bank, including dividends, management fees and payments under tax sharing agreements, for substantially all of the Company's revenue. Federal and state regulations limit the amount of dividends and the amount of payments that the Bank may make to the Company under tax sharing agreements. In certain circumstances, the Missouri Division of Finance, FDIC, or Federal Reserve could restrict or prohibit the Bank from distributing dividends or making other payments to us. In the event that the Bank was restricted from paying dividends to the Company or making payments under the tax sharing agreement, the Company may not be able to service its debt, pay its other obligations or pay dividends on its common stock. If we are unable or determine not to pay dividends on our outstanding equity securities, the market price of such securities could be materially adversely affected.

There can be no assurance of any future dividends on our common stock.

Holders of our common stock are entitled to receive dividends only when, as and if declared by our board of directors. Although we have historically paid cash dividends on our common stock, we are not required to do so.

There may be future sales or other dilution of our equity, which may adversely affect the market price of our common stock.

We are not restricted from issuing additional common stock or preferred stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or preferred stock or any substantially similar securities.

In addition, to the extent options to purchase common stock under our employee stock option plans are exercised, holders of our common stock could incur additional dilution. Further, if we sell additional equity or convertible debt securities, such sales could result in increased dilution to our stockholders. The market price of our common stock could decline as a result of sales of a large number of shares of common stock or preferred stock or similar securities in the market after an offering or the perception that such sales could occur.

Our outstanding debt securities restrict our ability to pay dividends on our capital stock.

We have outstanding subordinated debentures issued to statutory trust subsidiaries, which have issued and sold preferred securities in the Trusts to investors.

If we are unable to make payments on any of our subordinated debentures for more than 20 consecutive quarters, we would be in default under the governing agreements for such securities and the amounts due under such agreements would be immediately due and payable. Additionally, if for any interest payment period we do not pay interest in respect of the subordinated debentures (which will be used to make distributions on the trust preferred securities), or if for any interest payment period we do not pay interest in respect of the subordinated debentures, or if any other event of default occurs, then we generally will be prohibited from declaring or paying any dividends or other distributions, or redeeming, purchasing or acquiring, any of our capital securities, including the common stock, during the next succeeding interest payment period applicable to any of the subordinated debentures, or next succeeding interest payment period, as the case may be.

Moreover, any other financing agreements that we enter into in the future may limit our ability to pay cash dividends on our capital stock, including the common stock. In the event that our existing or future financing agreements restrict our ability to pay dividends in cash on the common stock, we may be unable to pay dividends in cash on the common stock unless we can refinance amounts outstanding under those agreements. In addition, if we are unable or determine not to pay interest on our subordinated debentures, the market price of our common stock could be materially or adversely affected.

Anti-takeover provisions could negatively impact our stockholders.

Provisions of Delaware law and of our certificate of incorporation, as amended, and bylaws, as well as various provisions of federal and Missouri state law applicable to bank and bank holding companies, could make it more difficult for a third party to acquire control of us or have the effect of discouraging a third party from attempting to acquire control of us. We are subject to Section 203 of the Delaware General Corporation Law, which would make it more difficult for another party to acquire us without the approval of our board of directors. Additionally, our certificate of incorporation, as amended, authorizes our board of directors to issue preferred stock which could be issued as a defensive measure in response to a takeover proposal. In the event of a proposed merger, tender offer or other attempt to gain control of the Company, our board of directors would have the ability to readily issue available shares of preferred stock as a method of discouraging, delaying or preventing a change in control of the Company. Such issuance could occur whether or not our stockholders favorably view the merger, tender offer or other attempt to gain control of the Company. These and other provisions could make it more difficult for a third party to acquire us even if an acquisition might be in the best interests of our stockholders. Although we have no present intention to issue any shares of our authorized preferred stock, there can be no assurance that the Company will not do so in the future.

ITEM 1B: UNRESOLVED SEC COMMENTS

Not applicable.

ITEM 2: PROPERTIES

Banking facilities

Our executive offices are located at 150 North Meramec, Clayton, Missouri, 63105. As of December 31, 2012, we had six banking locations and a support center in the St. Louis metropolitan area, eleven banking facilities in the Kansas City metropolitan area, and four banking locations in the Phoenix metropolitan area. We own four of the facilities and lease the remainder. Most of the leases expire between 2013 and 2022 and include one or more renewal options of 5 years. One lease expires in 2028. All the leases are classified as operating leases. We believe all our properties are in good condition.

Wealth management facilities

Our Wealth Management operations are headquartered in approximately 11,000 square feet of commercial condominium space in Clayton, Missouri, located approximately two blocks from our executive offices. Enterprise Trust also has offices in one of our banking locations in Kansas City. Expenses related to the space used by Enterprise Trust are allocated to the Wealth Management segment.

ITEM 3: LEGAL PROCEEDINGS

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

Distinctive Notes

The Bank, along with other co-defendants has been named as a defendant in two lawsuits filed by persons alleging to be clients of the Bank’s Trust division who invested in promissory notes (the "Distinctive Notes") issued by Distinctive Properties (UK) Limited (“Distinctive Properties”), a company involved in the purchase and development of real estate in the United Kingdom. The Company is unable to estimate a reasonably possible loss for the cases described below because there are significant factual issues to be determined and resolved in each case. The Company denies plaintiffs’ allegations and is vigorously defending the lawsuits.

Rosemann, et al. v. Martin Sigillito, et al.

In one of the lawsuits filed in United States District Court for the Eastern District of Missouri, the plaintiffs allege that the investments in the Distinctive Notes were part of a multi-million dollar Ponzi scheme. Plaintiffs allege to hold such promissory notes in accounts with the Trust division and that, among other things, the Bank was negligent and breached its contracts. Plaintiffs also allege that the Bank violated the Racketeer Influenced and Corrupt Organizations Act (“RICO”). Plaintiffs, in the aggregate, are seeking damages from defendants, including the Bank, in excess of $44.0 million as well as their costs and attorneys’ fees and trebled damages under RICO.

The case was stayed while criminal proceedings against Sigillito were completed. After a four week trial, Sigillito was found guilty of 20 counts of wire fraud, mail fraud, conspiracy, and money laundering. Following the verdict, the judge lifted the stay and set the case for a four week jury trial starting August 26, 2013. Discovery is currently proceeding.

BJD, LLC and Barbara Dunning v. Enterprise Bank & Trust, et. al.

The Bank has also been named as a defendant in this case filed in Circuit Court of St. Louis County, relating to BJD’s investment in the Distinctive Notes. Plaintiffs allege that the Bank, and the other defendants breached their fiduciary duties and were negligent in allowing plaintiffs to invest in the Distinctive Notes because the loan program was allegedly never funded and the assets of the borrower did not exist or were overvalued. Plaintiffs are seeking approximately $800,000 in damages, 9% interest, punitive damages, attorneys’ fees and costs. Like Rosemann, this case was stayed while the Sigillito criminal case was pending. The court has now granted the Bank's motion to compel arbitration and stay proceedings. Arbitration proceedings are not yet underway.

William Mark Scott v. Enterprise Financial Services Corp, et. al.

On April 10, 2012, a putative class action was filed in the United States District Court for the Eastern District of Missouri captioned William Mark Scott v. Enterprise Financial Services Corp, Peter F. Benoist, and Frank H. Sanfilippo. The complaint asserts claims for violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 on behalf of a putative class of purchasers of the Company's stock between April 20, 2010 and January 25, 2012, inclusive. The complaint alleges, among other things, that defendants allegedly made false and misleading statements and allegedly "failed to disclose that the Company was improperly recording income on loans covered under loss share agreements with the FDIC" and that, as a result, "the Company's financial statements were materially false and misleading at all relevant times." The action seeks unspecified damages and costs and expenses. On October 10, 2012, plaintiff filed an amended complaint. The Company moved to dismiss the complaint on December 11, 2012 and the plaintiff recently filed their response to the Company's motion. The Company is unable to estimate a reasonably possible loss for the case because the proceeding is in an early stage and there are significant factual issues to be determined and resolved. The Company denies plaintiffs’ allegations and is vigorously defending the lawsuit.

ITEM 4: MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Common Stock Market Prices

The Company's common stock trades on the NASDAQ Global Select Market under the symbol “EFSC”. Below are the dividends declared by quarter along with what the Company believes are the high and low sales prices for the common stock. There may have been other transactions at prices not known to the Company. As of March 1, 2013, the Company had 530 common stock shareholders of record and a market price of $13.98 per share. The number of holders of record does not represent the actual number of beneficial owners of our common stock because securities dealers and others frequently hold shares in “street name” for the benefit of individual owners who have the right to vote shares.



	2012								2011
	4th Qtr		3rd Qtr		2nd Qtr		1st Qtr		4th Qtr		3rd Qtr		2nd Qtr		1st Qtr
Closing Price	$	13.07	$	13.60	$	10.96	$	11.74	$	14.80	$	13.59	$	13.53	$	14.07
High	14.22		14.41		12.49		15.60		16.45		15.25		15.00		14.10
Low	12.17		10.83		9.94		11.13		12.51		12.21		12.34		10.52
Cash dividends paid on common shares	0.0525		0.0525		0.0525		0.0525		0.0525		0.0525		0.0525		0.0525

Dividends

The holders of shares of our common stock are entitled to receive dividends when declared by our Board of Directors out of funds legally available for the purpose of paying dividends. Prior to the repurchase in November 2012, holders of our Series A Preferred Stock originally issued to the U.S. Treasury on December 19, 2008, were entitled to cumulative dividends of 5% per annum. Dividends on the Series A Preferred Stock were payable at the rate of $1.8 million per annum. Dividends on the Series A Preferred Stock were prior to and in preference to any dividends payable on our common stock. Pursuant to the terms of the purchase agreement with the U.S. Treasury under the Capital Purchase Program, the Company could not pay dividends on our common stock unless the Company had fully paid all required dividends on the Series A Preferred Stock. The amount of dividends, if any, that may be declared by the Company also depends on many other factors, including future earnings, bank regulatory capital requirements and business conditions as they affect the Company and its subsidiaries. As a result, no assurance can be given that dividends will be paid in the future with respect to our common stock. In addition, the Company currently plans to retain most of its earnings to strengthen its capital position.

Performance Graph

The following Stock Performance Graph and related information should not be deemed “soliciting material” or to be “filed” with the SEC nor shall such performance be incorporated by reference into any future filings under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.

The following graph* compares the cumulative total shareholder return on the Company's common stock from December 31, 2007 through December 31, 2012. The graph compares the Company's common stock with the NASDAQ Composite and the SNL $1B-$5B Bank Index. The graph assumes an investment of $100.00 in the Company's common stock and each index on December 31, 2007 and reinvestment of all quarterly dividends. The investment is measured as of each subsequent fiscal year end. There is no assurance that the Company's common stock performance will continue in the future with the same or similar results as shown in the graph.



	Period Ending December 31,
Index	2007	2008	2009	2010	2011	2012
Enterprise Financial Services Corp	100.00	64.77	33.52	46.49	66.83	60.06
NASDAQ Composite	100.00	60.02	87.24	103.08	102.26	120.42
SNL Bank $1B-$5B	100.00	82.94	59.45	67.39	61.46	75.78

ITEM 6: SELECTED FINANCIAL DATA

The following consolidated selected financial data is derived from the Company's audited financial statements as of and for the five years ended December 31, 2012. This information should be read in connection with our audited consolidated financial statements, related notes and “Management's Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this report.



	Years ended December 31,
(in thousands, except per share data)	2012		2011		2010		2009			2008
EARNINGS SUMMARY:
Interest income	$	165,464	$	142,840	$	116,394	$	118,486		$	127,021
Interest expense	23,167		30,155		32,411		48,845			60,338
Net interest income	142,297		112,685		83,983		69,641			66,683
Provision for loan losses not covered under FDIC loss share	8,757		13,300		33,735		40,412			26,510
Provision for loan losses covered under FDIC loss share	14,033		2,803		—		—			—
Noninterest income	9,084		18,508		18,360		19,877			20,341
Noninterest expense	86,677		77,718		62,212		98,427			48,776
Income (loss) from continuing operations	41,914		37,372		6,396		(49,321		)	11,738
Income tax expense (benefit) from continuing operations	13,618		11,949		823		(2,650		)	3,672
Net income (loss) from continuing operations	28,296		25,423		5,573		(46,671		)	8,066
Net income (loss)	$	28,296	$	25,423	$	5,573	$	(47,955	)	$	1,848

PER SHARE DATA:
Basic earnings (loss) per common share:
From continuing operations	$	1.41	$	1.37	$	0.21	$	(3.82	)	$	0.63
Total	1.41		1.37		0.21		(3.92		)	0.14
Diluted earnings (loss) per common share:
From continuing operations	1.37		1.34		0.21		(3.82		)	0.63
Total	1.37		1.34		0.21		(3.92		)	0.14
Cash dividends paid on common shares	0.21		0.21		0.21		0.21			0.21
Book value per common share	13.09		11.61		9.89		10.25			14.33
Tangible book value per common share	10.99		9.38		9.67		9.97			10.27

BALANCE SHEET DATA:
Ending balances:
Portfolio loans not covered under FDIC loss share	2,106,039		1,897,074		1,766,351		1,818,481			2,201,457
Portfolio loans covered under FDIC loss share, net of the allowance for loan losses	189,571		298,975		121,570		13,644			—
Allowance for loan losses (2)	34,330		37,989		42,759		42,995			33,808
Goodwill (1)	30,334		30,334		2,064		2,064			48,512
Intangibles, net	7,406		9,285		1,223		1,643			3,504
Assets	3,325,786		3,377,779		2,800,199		2,365,655			2,493,767
Deposits	2,658,851		2,791,353		2,297,721		1,941,416			1,792,784
Subordinated debentures	85,081		85,081		85,081		85,081			85,081
Borrowings	325,070		256,545		226,633		167,438			392,926
Shareholders' equity	235,745		239,565		179,801		163,912			214,572
Average balances:
Loans not covered under FDIC loss share	1,953,427		1,819,536		1,782,023		2,097,028			2,001,073
Loans covered under FDIC loss share	243,359		232,363		71,152		1,244			—
Earning assets	2,909,532		2,766,240		2,260,858		2,334,697			2,125,581
Assets	3,230,928		3,096,147		2,454,023		2,462,237			2,298,882
Interest-bearing liabilities	2,340,612		2,377,044		1,957,390		2,025,339			1,883,904
Shareholders' equity	252,464		213,650		178,631		177,374			182,175



	Years ended December 31,
(in thousands, except per share data)	2012		2011		2010		2009		2008
EARNINGS SUMMARY:
SELECTED RATIOS:
Return on average common equity	11.21	%	12.67	%	2.12	%	(34.51	)%	0.98	%
Return on average assets	0.78		0.74		0.13		(2.05	)	0.08
Efficiency ratio	57.26		59.24		60.79		109.95		56.05
Average common equity to average assets	6.93		5.84		5.97		5.92		7.89
Yield on average interest-earning assets	5.74		5.21		5.19		5.15		6.04
Cost of interest-bearing liabilities	0.99		1.27		1.66		2.41		3.20
Net interest rate spread	4.75		3.94		3.53		2.74		2.84
Net interest rate margin	4.94		4.12		3.76		3.06		3.20
Nonperforming loans to total loans (2)	1.84		2.19		2.62		2.12		1.61
Nonperforming assets to total assets (2)	1.44		1.74		2.59		2.60		1.98
Net chargeoffs to average loans (2)	0.64		0.99		1.91		1.42		0.76
Allowance for loan losses to total loans (2)	1.63		2.00		2.42		2.36		1.54
Dividend payout ratio - basic	13.28		14.07		56.00		(5.62	)	144.02

(1) Includes the impact of the $45.4 million goodwill impairment charge in the Company's Banking operating unit.

(2) Amounts and ratios exclude Covered Assets under FDIC loss share agreements, except for their inclusion in total assets.

ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Introduction

The objective of this section is to provide an overview of the results of operations and financial condition of the Company for the three years ended December 31, 2012. It should be read in conjunction with the Consolidated Financial Statements, Notes and other financial data presented elsewhere in this report, particularly the information regarding the Company's business operations described in Item 1.

Executive Summary

This overview of management's discussion and analysis highlights selected information in this document and may not contain all of the information that is important to you. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources and critical accounting estimates, you should carefully read this entire document.

2012 Operating Results

For 2012, we reported net income of $28.3 million compared to net income of $25.4 million in 2011. After deducting preferred stock dividends, net income available to common shareholders was $25.1 million, or $1.37 per diluted share, compared to net income available to common shareholders of $22.9 million, or $1.34 per diluted share in 2011.

Below are highlights of our Banking and Wealth Management segments. For more information on our segments, see Item 8, Note 21 - Segment Reporting.

Banking Segment

•

Loans - Portfolio loans totaled $2.3 billion at December 31, 2012, including $201.1 million of loans covered under FDIC shared loss agreements ("Covered loans"). Portfolio loans excluding Covered loans ("Noncovered loans") increased $209.0 million , or 11%, from December 31, 2011. Commercial & industrial loans increased $199.7 million, or 26% , Consumer loans increased $5.9 million or 53%, Construction and Residential real estate decreased $13.3 million or 5%, and Commercial Real Estate decreased $17.8 million or 2%.

Covered loans decreased $99.5 million, or 33%, in 2012, due to loans that paid off and principal paydowns. Based on the most recent remeasurement of expected cash flows, the Company expects the average balance of Covered loans to be approximately $163 million, $118 million, and $60 million in 2013, 2014, and 2015, respectively.

See Note 6 – Portfolio Loans not covered by loss share and Note 7 – Portfolio Loans covered by loss share for more information.



	December 31,
(in thousands)	2012			2011
Commercial and industrial	962,884	42	%	763,202	35	%
Commercial real estate - Investor Owned	486,467	21	%	477,154	22	%
Commercial real estate - Owner Occupied	333,242	14	%	334,416	15	%
Construction and land development	160,911	7	%	140,147	6	%
Residential real estate	145,558	6	%	171,034	8	%
Consumer & other	16,977	1	%	11,121	1	%
Portfolio loans covered under FDIC loss share	201,118	9	%	300,610	13	%
Total loan portfolio	2,307,157	100	%	2,197,684	100	%


•	Deposits – Total deposits at December 31, 2012 were $2.7 billion, a decrease of $132.5 million, or 5%, from December 31, 2011 as the Company is forcing a decline in certificates of deposit through lower cost pricing.

Core deposits, which exclude brokered certificates of deposit and include reciprocal CDARS deposits, decreased $100.4 million, or 4%, for 2012 as compared to 2011. Interest bearing transaction accounts decreased $3.4 million, or less than 1%, non CDARS certificates of deposit decreased $196.0 million , or 29%, while noninterest bearing demand deposit accounts increased $101.3 million or 17%. Core deposits represented 96% of total deposits at December 31, 2012, compared to 95% at December 31, 2011.

Reciprocal CDARS certificates were $5.4 million at December 31, 2012 compared to $14.5 million at December 31, 2011. Brokered certificates of deposit were $94.5 million at December 31, 2012 compared to $126.6 million at December 31, 2011.

•

Asset quality – Nonperforming loans, including troubled debt restructurings were $38.7 million at December 31, 2012, compared to $41.6 million at December 31, 2011. Nonperforming loans represented 1.84% of total loans excluding Covered loans at December 31, 2012 versus 2.19% at December 31, 2011. Excluding non-accrual loans and Covered loans, portfolio loans that were 30-89 days delinquent at December 31, 2012 remained at very low levels, representing 0.10% of the portfolio compared to 0.36% at December 31, 2011.

Provision for loan losses not covered under FDIC loss share was $8.8 million in 2012, compared to $13.3 million in 2011. The decrease in the provision for loan losses in 2012 was due to lower levels of loan risk rating downgrades, and less movement of loans to non-performing assets in 2012 as compared to 2011. See Note 6 – Portfolio Loans Not Covered by Loss Share and Provision for Loan Losses and Allowance for Loan Losses in this section for more information.


•	Interest rate margin – The net interest rate margin (fully tax equivalent) was 4.94% for 2012, compared to 4.12% for 2011. See Net Interest Income in this section for more information.


•	Covered loans and other assets covered under FDIC shared loss agreements - The following table illustrates the net revenue contribution of covered assets for the most recent 3 fiscal years. This presentation excludes the cost of funding the related assets and the operating expenses to service the assets.



	For the Years ended
(in thousands)	December 31, 2012			December 31, 2011			December 31, 2010
Accretion income	$	29,673		$	18,494		$	6,597
Accelerated cash flows	25,230			14,294			4,097
Other	758			138			230
Total interest income	55,661			32,926			10,924
Provision for loan losses	(14,033		)	(2,803		)	—
Gain on sale of other real estate	2,081			992			184
Change in FDIC loss share receivable	(14,869		)	(3,494		)	99
Change in FDIC clawback liability	(575		)	—			—
Pre-tax net revenue	$	28,265		$	27,621		$	11,207

Wealth Management Segment

Fee income from the Wealth Management segment includes Wealth Management revenue and income from state tax credit brokerage activities. Wealth Management revenue was $7.3 million in 2012, an increase of $459,000, or 7% over 2011. See Noninterest Income in this section for more information.

RESULTS OF CONTINUING OPERATIONS ANALYSIS

Net Interest Income

Comparison of 2012 and 2011

Net interest income is the primary source of the Company's revenue. Net interest income is the difference between interest income on earning assets, such as loans and securities, and the interest expense on interest-bearing deposits and other borrowings used to fund interest earning and other assets. The amount of net interest income is affected by changes in interest rates and by the amount and composition of interest-earning assets and interest-bearing liabilities, such as the mix of fixed vs. variable rate loans. When and how often loans and deposits mature and re-price also impacts net interest income.

Net interest spread and net interest rate margin are utilized to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on interest-earning assets and the rate paid for interest-bearing liabilities that fund those assets. The net interest rate margin is expressed as the percentage of net interest income to average interest-earning assets. The net interest rate margin exceeds the interest rate spread because noninterest-bearing sources of funds (net free funds), principally demand deposits and shareholders' equity, also support earning assets.

Net interest income (on a tax equivalent basis) was $143.8 million for 2012 compared to $114.0 million for 2011, an increase of $29.8 million, or 26%. Total interest income increased $22.8 million and total interest expense decreased $7.0 million.

Average interest-earning assets increased $143.3 million, or 5%, to $2.9 billion for the year ended December 31, 2012 from $2.8 billion for the year ended December 31, 2011. Average loans increased $144.9 million, or 7%, to $2.2 billion for the year ended December 31, 2012 from $2.1 billion for the year ended December 31, 2011. Average securities and short-term investments remained relatively flat decreasing only $1.6 million, to $712.7 million from 2011 as core deposit growth was consistent with loan demand. Interest income on earning assets increased $10.9 million due to higher volumes and $11.9 million due primarily to higher yields on covered loans during 2012 for a total increase of $22.8 million in interest income from 2011.

For the year ended December 31, 2012, average interest-bearing liabilities decreased $36.4 million, or 2%, to $2.3 billion compared to $2.4 billion for the year ended December 31, 2011. The decrease in average interest-bearing liabilities resulted from a $54.5 million decrease in average interest-bearing deposits. This decrease resulted from a decrease of $171.8 million in certificates of deposits, which was partially offset by a $72.4 million increase in average money market accounts and savings accounts, and an increase of $44.9 million in interest-bearing transaction accounts. The significant decrease in certificates of deposits was due to an initiative by the Company to lower its cost of funds. For the year ended December 31, 2012, interest expense on interest-bearing liabilities decreased $5.4 million due to declining rates and $1.6 million due to the impact of lower volumes, for a total decrease of $7.0 million versus the same period in 2011.

For the year ended December 31, 2012, the tax-equivalent net interest rate margin was 4.94%, compared to 4.12% in the same period of 2011. The increase in the margin was primarily due to better earning asset mix and lower funding costs.

Comparison of 2011 and 2010

Net interest income (on a tax-equivalent basis) increased $29.0 million, or 34%, from $85.0 million for 2010 to $114.0 million for 2011. Total interest income increased $26.7 million while total interest expense decreased $2.3 million.

Average interest-earning assets were $2.8 billion in 2011, an increase of $505.4 million, or 22%, from 2010. Loans increased by $198.7 million, or 11%, to $2.1 billion. Securities and short-term investments increased $306.7 million, or 75% to $714.3 million from 2010. Interest income increased $30.9 million due to volume and decreased by $4.2 million due to the impact of rates, for a net increase of $26.7 million versus 2010.

Average interest-bearing liabilities increased $419.7 million, or 21%, to $2.4 billion compared to $2.0 billion for 2010. The increase in interest-bearing liabilities primarily resulted from a $397.8 million increase in interest-bearing deposits. For 2011, interest expense on interest-bearing liabilities increased $4.3 million due to volume while the impact of declining rates decreased interest expense on interest-bearing liabilities by $6.5 million, for a net decrease of $2.3 million versus 2010. See Liquidity and Capital Resources in this section for more information.

For the year ended December 31, 2011, the tax-equivalent net interest rate margin was 4.12% compared to 3.76% for 2010. The net interest margin was favorably impacted by lower deposit costs and the net interest income generated by the loans acquired in the Legacy and FNBO acquisitions. For 2011, the net interest rate margin, less the FDIC loss share loans, related nonearning assets and acquired deposits, was 3.42% compared to 3.53% for 2010.

Average Balance Sheet

The following table presents, for the periods indicated, certain information related to our average interest-earning assets and interest-bearing liabilities, as well as, the corresponding interest rates earned and paid, all on a tax equivalent basis.



	For the years ended December 31,
	2012							2011							2010
(in thousands)	Average Balance			Interest Income/Expense		Average Yield/ Rate		Average Balance			Interest Income/Expense		Average Yield/ Rate		Average Balance			Interest Income/Expense		Average Yield/ Rate
Assets
Interest-earning assets:
Taxable loans (1)	$	1,918,567		$	96,694	5.04	%	$	1,786,601		$	95,520	5.35	%	$	1,751,459		$	95,798	5.47	%
Tax-exempt loans (2)	34,860			2,580		7.40		32,935			2,542		7.72		30,564			2,621		8.58
Covered loans (3)	243,359			55,661		22.87		232,363			32,926		14.17		71,152			10,924		15.35
Total loans	2,196,786			154,935		7.05		2,051,899			130,988		6.38		1,853,175			109,343		5.90
Taxable investments in debt and equity securities	568,264			10,192		1.79		473,620			11,510		2.43		276,493			7,458		2.70
Non-taxable investments in debt and equity securities (2)	34,432			1,577		4.58		22,434			1,086		4.84		5,132			245		4.77
Short-term investments	110,050			257		0.23		218,287			562		0.26		126,058			380		0.30
Total securities and short-term investments	712,746			12,026		1.69		714,341			13,158		1.84		407,683			8,083		1.98
Total interest-earning assets	2,909,532			166,961		5.74		2,766,240			144,146		5.21		2,260,858			117,426		5.19
Noninterest-earning assets:
Cash and due from banks	16,311							15,801							11,800
Other assets	345,325							357,993							227,038
Allowance for loan losses	(40,240		)					(43,887		)					(45,673		)
Total assets	$	3,230,928						$	3,096,147						$	2,454,023

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing transaction accounts	$	257,193		$	721	0.28	%	$	212,257		$	811	0.38	%	$	190,275		$	847	0.45	%
Money market accounts	1,026,444			4,679		0.46		997,415			7,987		0.80		701,360			6,245		0.89
Savings	70,470			275		0.39		27,106			112		0.41		10,022			35		0.35
Certificates of deposit	675,224			9,731		1.44		847,057			12,748		1.50		784,369			15,740		2.01
Total interest-bearing deposits	2,029,331			15,406		0.76		2,083,835			21,658		1.04		1,686,026			22,867		1.36
Subordinated debentures	85,081			4,082		4.80		85,081			4,515		5.31		85,081			4,954		5.82
Borrowed funds	226,200			3,679		1.63		208,128			3,982		1.91		186,283			4,590		2.46
Total interest-bearing liabilities	2,340,612			23,167		0.99		2,377,044			30,155		1.27		1,957,390			32,411		1.66
Noninterest bearing liabilities:
Demand deposits	627,197							494,609							305,887
Other liabilities	10,655							10,844							12,115
Total liabilities	2,978,464							2,882,497							2,275,392
Shareholders' equity	252,464							213,650							178,631
Total liabilities & shareholders' equity	$	3,230,928						$	3,096,147						$	2,454,023
Net interest income				$	143,794						$	113,991						$	85,015
Net interest spread						4.75	%						3.94	%						3.53	%
Net interest rate margin (4)						4.94							4.12							3.76


(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 $1.5 million, $1.0 million, and $1.4 million for the years ended December 31, 2012, 2011, and 2010 respectively.


(2)	Non-taxable income is presented on a fully tax-equivalent basis using a 36% tax rate. The tax-equivalent adjustments were $1.5 million, $1.3 million, and $1.0 million for the years ended December 31, 2012, 2011, and 2010 respectively.


(3)	Covered loans are loans covered under FDIC shared-loss agreements.


(4)	Net interest income divided by average total interest-earning assets.

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.



	2012 compared to 2011									2011 compared to 2010
	Increase (decrease) due to									Increase (decrease) due to
(in thousands)	Volume(1)			Rate(2)			Net			Volume(1)		Rate(2)			Net
Interest earned on:
Taxable loans	$	6,828		$	(5,654	)	$	1,174		$	1,902	$	(2,180	)	$	(278	)
Tax-exempt loans (3)	145			(107		)	38			194		(273		)	(79		)
Covered loans	1,626			21,109			22,735			22,907		(905		)	22,002
Taxable investments in debt and equity securities	2,039			(3,357		)	(1,318		)	4,855		(803		)	4,052
Non-taxable investments in debt and equity securities (3)	553			(62		)	491			838		3			841
Short-term investments	(257		)	(48		)	(305		)	244		(62		)	182
Total interest-earning assets	$	10,934		$	11,881		$	22,815		$	30,940	$	(4,220	)	$	26,720

Interest paid on:
Interest-bearing transaction accounts	$	152		$	(242	)	$	(90	)	$	92	$	(128	)	$	(36	)
Money market accounts	226			(3,534		)	(3,308		)	2,422		(680		)	1,742
Savings	169			(6		)	163			70		7			77
Certificates of deposit	(2,495		)	(522		)	(3,017		)	1,182		(4,174		)	(2,992		)
Subordinated debentures	—			(433		)	(433		)	—		(439		)	(439		)
Borrowed funds	327			(630		)	(303		)	497		(1,105		)	(608		)
Total interest-bearing liabilities	(1,621		)	(5,367		)	(6,988		)	4,263		(6,519		)	(2,256		)
Net interest income	$	12,555		$	17,248		$	29,803		$	26,677	$	2,299		$	28,976


(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 a 36% tax rate.

NOTE: The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each.

Provision for loan losses.

The provision for loan losses not covered under FDIC loss share was $8.8 million for 2012 compared to $13.3 million for 2011 and $33.7 million for 2010. The lower loan loss provision for 2012 compared to 2011 and 2011 as compared to 2010 was due to lower levels of loan risk rating downgrades, and lower additions to non-performing loans during the year.

For Covered loans, the Company remeasures contractual and expected cash flows on a quarterly basis. When the remeasurement process results in an increase in expected losses, impairment is recorded through provision for loan losses. As a result of this impairment, the FDIC loss share receivable is increased to reflect anticipated future cash to be received from the FDIC. The amount of the increase is determined based on the specific loss share agreement, but is generally 80% of the losses. Changes in the FDIC loss share receivable are recorded in noninterest income. The provision for loan losses on Covered loans was $14.0 million for 2012 compared to $2.8 million in 2011.

See the sections below captioned Loans and Allowance for Loan Losses for more information on our loan portfolio and asset quality.

Noninterest Income

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



	Years ended December 31,
(in thousands)	2012			2011			2010		Change 2012 over 2011			Change 2011 over 2010
Wealth Management revenue	$	7,300		$	6,841		$	6,414	$	459		$	427
Service charges on deposit accounts	5,664			5,091			4,739		573			352
Other service charges and fee income	2,504			1,679			1,128		825			551
Sale of other real estate	2,225			862			79		1,363			783
State tax credit activity, net	2,207			3,645			2,250		(1,438		)	1,395
Sale of securities	1,156			1,450			1,987		(294		)	(537		)
Change in FDIC loss share receivable	(14,869		)	(3,494		)	99		(11,375		)	(3,593		)
Miscellaneous income	2,897			2,434			1,664		463			770
Total noninterest income	$	9,084		$	18,508		$	18,360	$	(9,424	)	$	148

Comparison of 2012 and 2011

Noninterest income decreased $9.4 million, or 51%, in 2012 compared to 2011. The decrease is primarily due to decreases in income related to changes in the FDIC loss share receivable partially offset by increased amounts across most other noninterest income accounts.

•

Wealth Management revenue – For the year ended December 31, 2012, Wealth Management revenue from the Trust division increased $459,000, or 7%, compared to 2011. The increase in Wealth Management revenue was primarily due to increased investment advisory revenue. Assets under administration were $1.8 billion at December 31, 2012, a 13% increase from December 31, 2011 due to market value increases and additional accounts from new and existing clients.


•	Service charges and other fee income – For the year ended December 31, 2012, service charges and other fee income increased $1.4 million compared to 2011 due to an increase in service charges on business accounts, debit card and credit card income, and overdraft fees, primarily due to the acquisition of FNBO.


•	Sale of other real estate – For the year ended December 31, 2012, we sold $48.8 million of other real estate for a gain of $2.2 million which included a gain of $144,000 from other real estate not covered by loss share agreements and a gain of $2.1 million from other real estate covered by loss share agreements. In 2011, we sold $13.1 million of other real estate for a net gain of $862,000.

•

State tax credit activity, net – For the year ended December 31, 2012, the Company recorded a gain of $2.2 million compared to a gain of $3.6 million in 2011. The decrease is due to the timing of client purchases of the state tax credits in 2012 as compared to 2011, as well as a reduction in the gain on the fair value of tax credits. For more information on the fair value treatment of the state tax credits, see Note 20 – Fair Value Measurements.


•	Sale of securities – During 2012, the Company realized approximately $110.9 million of proceeds on the sale of investment securities, generating a net gain of $1.2 million. This compared to 2011 amounts of approximately $84.5 million of proceeds, and a net gain of $1.5 million.

•

Change in FDIC loss share receivable – Income related to changes in the FDIC loss share receivable reduced noninterest income by $14.9 million in 2012 compared to $3.5 million in 2011. The decrease in income related to the FDIC loss share receivable was primarily due to loan pay offs in which the losses on the loans were less than expected along with lower loss expectations on certain loan pools offset with an increase in income due to the impact of provision expense. To correlate with the new lower projected loss amounts, the FDIC loss share receivable must be reduced.


•	Miscellaneous income – For the year ended December 31, 2012, Miscellaneous income rose $463,000, or 19%. The increase in Miscellaneous income is due to an increase in fees related to client swap transactions, as well as increased gains on the sale of mortgages.

Comparison of 2011 and 2010

Noninterest income increased $148,000, or 1% in 2011 compared to 2010. Our ratio of noninterest income to total revenue for 2011 was 14%, compared to 18% in 2010.


•	Wealth Management revenue – Wealth Management revenue from the Trust division increased $427,000, or 7%. The increase in Trust revenue was primarily attributable to the impact of the additional Legacy and FNBO trust business. Assets under administration were $1.6 billion at December 31, 2011, a $104.0 million, or 7% increase from one year ago.


•	Service charges and other fee income – For the year ended December 31, 2011, service charges and other fee income increased $352,000 compared to 2010 due to an increase in service charges on business accounts, debit card and credit card income, and overdraft fees, primarily due to the acquisition of FNBO.


•	Sale of other real estate – In 2011, we sold $44.6 million of other real estate at a gain of $862,000. In 2010, we sold $26.0 million of other real estate at a gain of $79,000.

•

State tax credit activity, net – Gains from state tax credit brokerage activities were $3.6 million in 2011, compared to $2.3 million in 2010, an increase of $1.4 million. The increase is due to a $1.7 million increase from the sale of state tax credits to clients, and a $905,000 increase in the fair value adjustment on the related interest rate caps used to economically hedge the tax credits partially offset by a $1.2 million negative fair value adjustment on the tax credit assets.


•	Sale of securities – In 2011, the Company purchased approximately $431.4 million in securities primarily in U.S. Government sponsored enterprises and residential mortgage-backed securities and sold approximately $84.5 million of securities realizing a gain of $1.5 million on these sales.


•	Change in FDIC loss share receivable – The decrease in income related to the FDIC loss share receivable was primarily due to loan pay offs in which the losses on the loans were less than expected along with lower loss expectations on certain loan pools. To correlate with the lower projected loss amounts, the FDIC loss share receivable must be reduced.


•	Miscellaneous income - The increase in Miscellaneous income was primarily due to $313,000 in fee income earned related to the allocation of New Market Tax Credits to developers and projects along with distributions from private equity fund investments.

Noninterest Expense

The following table presents a comparative summary of the major components of noninterest expense:



	Years ended December 31,
(in thousands)	2012		2011		2010		Change 2012 over 2011			Change 2011 over 2010
Employee compensation and benefits	43,497		36,839		28,316		6,658			8,523
Occupancy	5,393		5,001		4,297		392			704
Furniture and equipment	1,636		1,601		1,393		35			208
Data processing	3,454		3,159		2,234		295			925
Communications	640		636		554		4			82
Director related expense	665		599		607		66			(8		)
Meals and entertainment	1,921		1,747		1,258		174			489
Marketing and public relations	1,777		1,063		902		714			161
FDIC and other insurance	3,491		4,119		4,402		(628		)	(283		)
Amortization of intangibles	1,879		999		420		880			579
Postage, courier, and armored car	1,009		909		769		100			140
Professional, legal, and consulting	5,120		3,138		1,736		1,982			1,402
Loan, legal and other real estate expense	6,732		10,703		9,941		(3,971		)	762
Other taxes	803		675		635		128			40
Other	8,660		6,530		4,748		2,130			1,782
Total noninterest expense	$	86,677	$	77,718	$	62,212	$	8,959		$	15,506

Comparison of 2012 and 2011

Noninterest expenses increased $9.0 milllion or 12% in 2012. The Company's efficiency ratio, which measures noninterest expense as a percentage of total revenue, for 2012 was 57.3% compared to 59.2% for 2011.

Employee compensation and benefits. Employee compensation and benefits increased $6.7 million, or 18%, over 2011. Employee compensation and benefits increased due to a full year of salaries of FNBO employees, increased headcount in functions to support our growth, and higher variable compensation accruals.

All other expense categories. All other expense categories increased $2.3 million, or 6%, over 2011. Higher professional, legal and consulting expenses, amortization of intangibles, and miscellaneous expenses were offset by lower loan, legal and other real estate and FDIC and other insurance expenses. The remaining categories were relatively flat when compared to 2011 amounts.

Higher professional, legal and consulting fees were primarily due to the restatement of our financial statements in 2012, as well as continued ongoing litigation defense costs. Higher amortization of intangibles is due to a full year of amortization of customer deposit intangibles associated with the FNBO acquisition. Increased other expenses are due to a variety of items, including higher accruals and included the $575,000 liability recorded for estimated reimbursements to the FDIC at the end of our loss share agreements.

Lower loan, legal and other real estate expenses are primarily due to decreased other real estate balances which reduces expenses for utilities, legal fees, property taxes, and insurance. These amounts decreased by $1.2 million when compared to 2011. Further, write-downs in valuation of other real estate were $2.3 million lower when compared to 2011. FDIC and other insurance expenses are lower in 2012 primarily due to a reduction in FDIC premiums of approximately $662,000.

Comparison of 2011 and 2010

Noninterest expense increased $15.5 million, or 25%, in 2011. The Company's efficiency ratio, which measures noninterest expense as a percentage of total revenue, for 2011 was 59.2% compared to 60.8% for 2010.

Employee compensation and benefits. Employee compensation and benefits increased $8.5 million, or 30%, over 2010. Employee compensation and benefits increased primarily due to staff additions to support our Kansas and Arizona acquisition activity and higher variable compensation accruals.

All other expense categories. All other expense categories increased $7.0 million, or 21%, over 2010. With the exception of professional, legal and consulting and loan, legal and other real estate expenses, most categories of expenses were relatively flat year over year. Occupancy expense and data processing increases were due to the addition of new branches as part of our acquisition activity in 2011.

Professional, legal and consulting increased $1.4 million due to litigation defense costs, fees related to the FNBO acquisition, and various consulting expenses related to new business activities and regulatory compliance. Loan, legal and other real estate expenses increased $762,000 due to increased levels of other real estate properties. Other real estate expenses for items such as utilities, legal fees, property taxes, and insurance increased $1.8 million over 2010. These expenses were partially offset by a $930,000 decrease in expenses related to writedowns on other real estate.

Income Taxes

In 2012, the Company recorded income tax expense of $13.6 million on pre-tax income of $41.9 million, resulting in an effective tax rate of 32.5%. The following items were included in Income tax expense and impacted the 2012 effective tax rate:


•	interest income on tax exempt mortgages and municipal bonds of $931,000


•	recognition of federal tax benefits of $792,000 related to low income housing tax credits from limited partnership interests.


•	reversal of a $320,000 state deferred tax asset valuation allowance

In 2011, the Company recorded income tax expense of $11.9 million on pre-tax income of $37.4 million, resulting in an effective tax rate of 32.0%. The following items were included in Income tax expense and impacted the 2011 effective tax rate:


•	the expiration of the statute of limitations for the 2007 tax year warranted the release of $306,000 of reserves related to certain state tax positions;


•	recognition of federal tax benefits of $729,000 related to low income housing tax credits from limited partnership interests.

In 2010, the Company recorded income tax expense of $823,000 on pre-tax income of $6.4 million, resulting in an effective tax rate of 12.9%. The following items were included in Income tax expense and impacted the 2010 effective tax rate:


•	the expiration of the statute of limitations for the 2006 tax year warranted the release of $341,000 of reserves related to certain state tax positions;


•	recognition of federal tax benefits of $729,000 related to low income housing tax credits from limited partnership interests.

FINANCIAL CONDITION

Comparison for December 31, 2012 and 2011

Total assets at December 31, 2012 were $3.3 billion compared to $3.4 billion at December 31, 2011, a decrease of $52.0 million, or 2%. During 2012, we intentionally reduced deposits and funded organic loan growth with reductions in Covered Loans and the FDIC loss share receivable.

At December 31, 2012, portfolio loans not covered under FDIC loss share agreements totaled $2.1 billion, an increase of $209.0 million, or 11% from December 31, 2011. At December 31, 2011, Covered loans totaled $201.1 million, a decrease of $99.5 million, or 33%.

Increases in organic loans, especially late in the fourth quarter of 2012, contributed to $73.3 million lower interest bearing deposits at December 31, 2012. Securities available for sale were $640.2 million at December 31, 2012 compared to $593.2 million at December 31, 2011. In 2012, securities purchases included government-sponsored agency debentures, mortgage backed securities, including collateralized mortgage obligations, and federally tax-free municipal securities.

At December 31, 2012, Other assets included $22.3 million of bank-owned life insurance and $21.8 million of deferred tax assets.

At December 31, 2012, deposits were $2.7 billion, a decrease of $132.5 million, or 5%, from $2.8 billion at December 31, 2011. The decrease in deposits was largely comprised of an intentional $237.2 million, or 29% , reduction in higher cost certificates of deposit, offset by an increase in noninterest bearing demand deposits of $101.3 million, or 17.3%.

Other borrowings primarily consist of customer repurchase agreements and were $233.4 million at December 31, 2012, a $78.8 million or 51% increase from December 31, 2011. The increase was primarily due to the anticipated expiration of the FDIC's Transaction Account Guarantee ("TAG") program on December 31, 2012.

On November 7, 2012, the Company repurchased from the Treasury all 35,000 outstanding shares of Series A Preferred. The Company paid an aggregate purchase price of approximately $35.4 million to the Treasury, including accrued dividends of approximately $400,000. The repurchase reduced shareholders' equity by $35.0 million.

On May 24, 2011, the Company issued 2,743,900 shares, or $35.0 million in common stock through a public offering. The net proceeds to the Company, after deducting underwriting discounts and commissions and offering expenses, was approximately $32.6 million.

Loans

Non-covered portfolio loans less unearned loan fees, increased $208.6 million, or 11%, during 2012. Commercial & Industrial loans increased $199.7 million, or 26%, during the year and represent 46% of the loan portfolio at December 31, 2012. The Company's lending strategy emphasizes commercial and commercial real estate loans to small and medium sized businesses and their owners in the St. Louis, Kansas City and Phoenix metropolitan markets. Consumer lending, including residential real estate, is minimal.

A common underwriting policy is employed throughout the Company. Lending to small and medium sized businesses is riskier from a credit perspective than lending to larger companies, but the risk is appropriately considered with higher loan pricing and ancillary income from cash management activities. As additional risk mitigation, the Company will generally hold only $15 million or less of aggregate credit exposure (both direct and indirect) with one borrower, in spite of a legal lending limit of over $85 million. There are eight borrowing relationships where we have committed more than $10.0 million with the largest being a $17.5 million line of credit with minimal usage. For the $2.1 billion loan portfolio, the Company's average loan relationship size was just under $900,000, and the average note size is approximately $500,000.

The Company also buys and sells loan participations with other banks to help manage its credit concentration risk. At December 31, 2012, the Company had purchased loan participations of $252.0 million ($129.6 million outstanding) and had sold loan participations of $421.1 million ($338.3 million outstanding). Approximately 109 borrowers make up the participations purchased, with an average outstanding loan balance of $1.2 million. Thirteen relationships, or $70.5 million of the $129.6 million in participations purchased, met the definition of a “Shared National Credit.” None of the relationships were considered out of our markets.

The following table sets forth the composition of the Company's loan portfolio by type of loans as reported in the quarterly Federal Financial Institutions Examination Council Report of Condition and Income (“Call report”) at the dates indicated.



	December 31,
(in thousands)	2012			2011			2010			2009			2008
Commercial and industrial	$	962,884		$	763,202		$	593,938		$	553,988		$	675,216
Real Estate:
Commercial	819,709			811,570			776,268			817,332			887,963
Construction and land development	160,911			140,147			190,285			221,397			378,092
Residential	145,558			171,034			189,484			209,743			235,019
Consumer and other	16,977			11,121			16,376			16,021			25,167
Total Portfolio loans not covered under FDIC loss share	$	2,106,039		$	1,897,074		$	1,766,351		$	1,818,481		$	2,201,457

	December 31,
(in thousands)	2012			2011			2010			2009			2008
Commercial and industrial	45.7		%	40.2		%	33.6		%	30.5		%	30.7		%
Real Estate:
Commercial	38.9		%	42.8		%	43.9		%	44.9		%	40.3		%
Construction and land development	7.6		%	7.4		%	10.8		%	12.2		%	17.2		%
Residential	6.9		%	9.0		%	10.7		%	11.5		%	10.7		%
Consumer and other	0.9		%	0.6		%	1.0		%	0.9		%	1.1		%
Total Portfolio loans not covered under FDIC loss share	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%

Commercial and industrial loans are made based on the borrower's character, experience, general credit strength, and ability to generate cash flows for repayment from income sources, even though such loans may also be secured by real estate or other assets. The credit risk related to commercial loans is largely influenced by general economic conditions and the resulting impact on a borrower's operations. Commercial and industrial loans are primarily made to borrowers operating within the manufacturing industry.

Real estate loans are also based on the borrower's character, but more emphasis is placed on the estimated collateral values.

Approximately $308.6 million, or 38%, of the Non-covered commercial real estate loans were owner-occupied by commercial and industrial businesses where the primary source of repayment is dependent on sources other than the underlying collateral. Multifamily properties and other commercial properties on which income from the property is the primary source of repayment represent the balance of this category. The majority of this category of loans is secured by commercial and multi-family properties located within our St. Louis and Kansas City markets. These loans are underwritten based on the cash flow coverage of the property, typically meet the Company's loan to value guidelines, and generally require either the limited or full guaranty of principal sponsors of the credit.

Real estate construction loans, relating to residential and commercial properties, represent financing secured by raw ground or real estate under development for eventual sale. Approximately $37.3 million of these loans include the use of interest reserves and follow standard underwriting guidelines. Construction projects are monitored by the officer and a centralized independent loan disbursement function is employed.

Residential real estate loans include residential mortgages, which are loans that, due to size, do not qualify for conventional home mortgages that the Company sells into the secondary market, second mortgages and home equity lines. Residential mortgage loans are usually limited to a maximum of 80% of collateral value.

Consumer and other loans mainly represent loans to individuals on both a secured and unsecured basis. Credit risk is managed by thoroughly reviewing the creditworthiness of the borrowers prior to origination.

Following is a further breakdown of our loan categories using Call report codes at December 31, 2012 and 2011:



	% of portfolio
	2012						2011
	Portfolio Loans not Covered under FDIC loss share		Portfolio Loans Covered under FDIC loss share		Total		Portfolio Loans not Covered under FDIC loss share		Portfolio Loans Covered under FDIC loss share		Total
Real Estate:
Construction & Land Development	8	%	15	%	8	%	7	%	22	%	9	%

Commercial Owner Occupied
Commercial & Industrial	15	%	19	%	15	%	16	%	18	%	16	%
Other	1	%	4	%	1	%	2	%	3	%	2	%
Total	16	%	23	%	16	%	18	%	21	%	18	%

Commercial Investor Owned
Retail	7	%	16	%	8	%	8	%	13	%	9	%
Commercial Office	7	%	5	%	7	%	7	%	7	%	7