enterprise_10k.htm
 
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, 2010
   
[  ]       Transition Report Pursuant to Section 13 or 15(d) of the Securities and 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 checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [   ]   No [X]
 
Indicate by checkmark 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 [   ]   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 $175,674,752 based on the closing price of the common stock of $12.81 on March 1, 2011, as reported by the NASDAQ Global Select Market.
 
As of March 1, 2011, the Registrant had 14,928,324 shares of common stock outstanding.
 
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
2011 Annual Meeting of Shareholders, which will be filed within 120 days of December 31, 2010.
 
 
 

ENTERPRISE FINANCIAL SERVICES CORP
2010 ANNUAL REPORT ON FORM 10-K
 
TABLE OF CONTENTS
 
                Page
Part I        
         
Item 1:   Business   1
         
Item 1A:   Risk Factors   6
         
Item 1B:   Unresolved SEC Comments   11
         
Item 2:   Properties   11
         
Item 3:   Legal Proceedings   11
         
Part II        
         
Item 5:   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   12
         
Item 6:   Selected Financial Data   15
         
Item 7:   Management’s Discussion and Analysis of Financial Condition and Results of Operations   16
         
Item 7A:   Quantitative and Qualitative Disclosures About Market Risk   45
         
Item 8:   Financial Statements and Supplementary Data   46
         
Item 9:   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   95
         
Item 9A:   Controls and Procedures   97
         
Item 9B:   Other Information   99
         
Part III        
         
Item 10:   Directors, Executive Officers and Corporate Governance   99
         
Item 11:   Executive Compensation   99
         
Item 12:   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   99
         
Item 13:   Certain Relationships and Related Transactions, and Director Independence   99
         
Item 14:   Principal Accountant Fees and Services   99
         
Part IV        
         
Item 15:   Exhibits, Financial Statement Schedules   100
     
Signatures   103

 

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 the federal securities laws. Forward-looking statements typically are identified with use of terms such as “may,” “expect,” “anticipate,” “estimate,” “potential,” “could” and similar words, although some forward-looking statements are expressed differently. You should be aware that the Company’s actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including: burdens imposed by federal and state regulation, changes in accounting regulations or standards of banks; credit risk; exposure to general and local economic conditions; risks associated with rapid increase or decrease 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; or technological developments; and other risks discussed in more detail 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 only as of the date of the statements. The Company does not intend to publicly revise or update forward-looking statements to reflect events or circumstances that arise after the date of this report. Readers should carefully review all disclosures we file from time to time with the Securities and Exchange Commission (the “SEC”) which are available on our website at www.enterprisebank.com.
 
PART I
 
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 three agreements with the Federal Deposit Insurance Corporation (“FDIC”) to acquire certain assets and assume certain liabilities of three failed banks: Valley Capital Bank, Home National Bank and Legacy Bank. 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.
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On January 20, 2010, we sold our life insurance subsidiary, Millennium Brokerage Group, LLC (“Millennium”), for $4.0 million in cash. We acquired 60% of Millennium in October 2005 and acquired the remaining 40% in December 2007. As a result of the sale, Millennium is reported as a discontinued operation for all periods presented herein.
 
2010 Capital Raise
On January 25, 2010, we completed the sale of 1,931,610 shares, or $15.0 million, of our common stock in a private placement offering. In the first quarter of 2010, the proceeds of the offering were injected into the Bank to further strengthen the Bank’s capital position.
 
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 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.
 
Our banking line of business offers a broad range of business and personal banking services. Lending services include commercial, commercial real estate, financial and industrial development, 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 line of business includes the Company’s trust operations and Missouri state tax credit brokerage activities. Enterprise Trust, a division of the Bank (“Enterprise Trust” or “Trust”) provides financial planning, advisory, investment management and trust services to businesses, individuals, institutions and non-profit organizations. Business financial services are focused in the areas of retirement plans, management compensation and management succession planning. Personal advisory services include estate planning, financial planning, business succession planning and retirement planning services. State tax credit brokerage activities consist of the acquisition of Missouri state tax credits and sale of these tax credits to clients.
 
Key success factors in pursuing our strategy include a focused and relationship-oriented distribution and sales approach, emphasis on growing wealth management revenues, prudent credit and interest rate risk management, advanced technology and tightly managed 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 and associated relationships. Those relationships are maintained, cultivated and expanded over time by banking officers 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 Wealth Management 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.
 
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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, as well as a 24-hour voice response system. 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 four Enterprise banking facilities in the St. Louis metropolitan area. The St. Louis region enjoys a stable, diverse economic base and is ranked the 18th largest metropolitan statistical area in the United States. It is an attractive market for us with nearly 70,000 privately held businesses and 53,000 households with investable assets of $1.0 million or more. We are the largest publicly-held, locally headquartered bank in this market.
 
Kansas City – At December 31, 2010, we had seven banking facilities in the Kansas City Market. Kansas City is also an attractive private company market with over 50,000 privately held businesses and 38,000 households with investible assets of $1.0 million or more.
 
Phoenix – As described above, since December 2009, we have completed three FDIC-assisted transactions in the Phoenix market. At December 31, 2010, we had two full service branches in the Phoenix metropolitan area. In conjunction with the Legacy Bank acquisition, two additional Bank branches opened in Scottsdale in January 2011. See Note 2 – Acquisitions and Divestitures and Note 24 – Subsequent Events for more information.
 
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 has more than 90,000 privately held businesses and 79,000 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.
 
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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.
 
United States Department of the Treasury Capital Purchase Program: On December 19, 2008, the Company received an investment of approximately $35.0 million from the U.S. Treasury under the Capital Purchase Program (“CPP” or the “Capital Purchase Program”). In exchange for the investment, the Company issued and sold to the U.S. Treasury (i) 35,000 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $.01 per share, having a liquidation preference of $1,000 per share (the “Series A Preferred Stock”), and (ii) a ten-year warrant to purchase up to 324,074 shares of common stock, par value $.01 per share, of the Company’s common stock, at an initial exercise price of $16.20 per share, subject to certain anti-dilution and other adjustments (the “CPP Warrant”).
 
Pursuant to the terms of the purchase agreement with the U.S. Treasury, our ability to declare or pay dividends or distributions on, or purchase, redeem or otherwise acquire for consideration, shares of junior stock and parity stock is subject to restrictions, including a restriction against increasing dividends from the last quarterly cash dividend per share ($0.0525) declared on the common stock prior to December 19, 2008. The redemption, purchase or other acquisition of trust preferred securities of the Company or our affiliates is also restricted. These restrictions will terminate on the earlier of (a) the third anniversary of the date of issuance of the Series A Preferred Stock and (b) the date on which the Series A Preferred Stock has been redeemed in whole or U.S. Treasury has transferred all of the Series A Preferred Stock to third parties.
 
In addition, the ability of the Company to declare or pay dividends or distributions on, or repurchase, redeem or otherwise acquire for consideration, shares of its other classes of stock is subject to restrictions in the event that the Company fails to declare and pay full dividends (or declare and set aside a sum sufficient for payment thereof) on its Series A Preferred Stock.
 
We are also subject to restrictions on the amount and type of compensation that we can pay our employees and are required to provide monthly reports to the U.S. Treasury regarding our lending activity during the time that the U.S. Treasury owns shares of the Series A Preferred Stock.
 
Dividend Restrictions: In addition to the restrictions imposed by the CPP on our ability to pay dividends to holders of our common stock, under Federal Reserve Board policies, bank holding companies may pay cash dividends on common stock only out of income available over the past year and only 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, 2010, 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.
 
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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, 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.
 
To fund this program, pursuant to the Federal Deposit Insurance Reform Act of 2005, the FDIC adopted a new risk-based deposit insurance premium system that provides for quarterly assessments. To restore its reserve ratio, the FDIC raised the base annual assessment rate for all institutions in 2009. As a result of this increase, institutions pay an assessment of between 12 and 77.5 basis points depending on the institution’s risk classification. Under the new assessment structure, the Bank’s average annual assessment during 2010 was 15.48 basis points. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to the regulators. Institutions assigned to higher-risk classifications pay assessments at higher rates than institutions that pose a lower risk. Each institution’s assessment rate is further adjusted based on the institution’s reliance on brokered deposits and/or other secured liabilities and the amount of unsecured debt.
 
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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 $3.5 million of this prepayment was expensed in 2010.
 
Employees
At December 31, 2010, we had approximately 331 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 Related 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 continue to 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 will 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 or an increase in net loss 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 have a high degree of risk from a downturn in our real estate markets. If real estate values continue to 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 where 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.
 
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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 loans and other sources could have a substantial material adverse effect on our liquidity. Our access to funding sources in amounts 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 downtown, 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 as the recent turmoil faced by banking organizations in the domestic and worldwide credit markets deteriorates.
 
We believe the level of liquid assets at the Bank is sufficient to meet our current and anticipated funding needs. In addition, we believe our current level of cash at the holding company will be sufficient to meet all projected cash needs in 2011. See “Liquidity and Capital Resources” for more information.
 
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 business does 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 taxes represent 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, 2010, the Company did not carry a valuation allowance against its deferred tax asset balance of $16.1 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 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 it 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 and closing and liquidating the Bank. See “Supervision and Regulation”.
 
Changes in government regulation and supervision may increase our costs.
Our operations are subject to extensive regulations by federal, state and local governmental authorities. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not stockholders. We are now also subject to supervision, regulation and investigation by the U.S. Treasury and the Office of the Special Inspector General for the Troubled Asset Relief Program (“TARP”) by virtue of our participation in the Capital Purchase Program. Changes to statutes, regulations or regulatory policies; changes in the interpretation or implementation of statutes, regulations or policies could subject us to additional costs, limit the types of financial services and products that we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things.
 
Any future increases in FDIC insurance premiums might adversely impact our earnings.
In 2009, the FDIC charged a “special assessment” on each insured depository institution’s assets minus Tier 1 capital. Our special assessment amounted to $$1.1 million. In 2009, the FDIC also raised our annual assessment rate by 9.11 basis points to an average of 15.43 basis points. Our average annual assessment rate in 2010 was 15.48 basis points. 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.
 
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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 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 which are realized may be offset by losses in revenues or other charges to earnings.
 
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 value, and, therefore, some dilution of our tangible book value 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.
 
Loss of our key employees could adversely affect our business.
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, business relationships and the difficulty of promptly finding qualified replacement personnel.
 
Pursuant to our participation in the CPP, we adopted certain standards for executive compensation and corporate governance for the period during which the U.S. Treasury holds the equity issued pursuant to our participation in the CPP. These standards generally apply to our Chief Executive Officer, Chief Financial Officer and the three next most highly compensated senior executive officers, although certain restrictions apply to as many as twenty-five (25) of our most highly compensated employees. The restrictions severely limit the amount and types of compensation we can pay our executive officers and key employees, including a complete prohibition on any severance or other compensation upon termination of employment, significant caps on bonuses and retention payments. Such restrictions may impede our ability to attract and retain skilled people in our top management ranks.
 
We may need to raise additional capital in the future, which 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 a number of 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.
 
8
 
 

Risks Associated With Our Shares
 
Our share price can be volatile.
The trading price of our common stock has fluctuated significantly and may do so in the future. These fluctuations may result from a number of factors, many of which are outside of our control. The stock market and, in particular, the market for financial institution stocks, has experienced significant volatility recently. In addition, the trading volume in our common stock is lower than for many other publicly traded companies. As a result of these factors, the market price of our common stock may be volatile.
 
An investment in our common stock is not an insured deposit.
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 are not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire our common shares, 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, which is also limited by various statutes and regulations.
Enterprise depends on payments from the Bank, including dividends, management fees and payments under tax sharing agreements, for substantially all of its revenue. Federal and state regulations limit the amount of dividends and the amount of payments that the Bank may make to Enterprise 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 Enterprise or make payments under the tax sharing agreement, Enterprise may not be able to service its debt, pay dividends on our Series A Preferred Stock or pay dividends on its common stock. If we are unable or determine not to pay dividends on our common stock, the market price of the common stock could be materially adversely affected.
 
The terms of our outstanding preferred stock limit our ability to pay dividends on and repurchase our common stock.
The terms of our Series A Preferred Stock provide that prior to the earlier of (i) December 19, 2011 and (ii) the date on which all of the shares of the Series A Preferred Stock have been redeemed by us or transferred by the U.S. Treasury to third parties, we may not, without the consent of the U.S. Treasury, (a) increase the cash dividend on our common stock above $0.0525 per share per quarter or (b) subject to limited exceptions, redeem, repurchase or otherwise acquire shares of our common stock or preferred stock other than shares of our Series A Preferred Stock. These restrictions could have a negative effect on the value of our common stock.
 
Our outstanding preferred stock impacts net income available to our common stockholders and earnings per common share.
The dividends declared and the accretion of discount on our outstanding Series A Preferred Stock reduce the net income available to common stockholders and our earnings per common share. Our outstanding Series A Preferred Stock will also receive preferential treatment in the event of liquidation, dissolution or winding up of the Company.
 
Holders of the Series A Preferred Stock may, under certain circumstances, have the right to elect two directors to our board of directors.
In the event that we fail to pay dividends on the Series A Preferred Stock for an aggregate of six or more quarters (whether or not consecutive), the authorized number of directors then constituting our board of directors will be increased by two. Holders of the Series A Preferred Stock, together with the holders of any outstanding parity stock with like voting rights voting as a single class, will be entitled to elect the two additional directors at the next annual meeting (or at a special meeting called for the purpose of electing the preferred stock directors prior to the next annual meeting) and at each subsequent annual meeting until all accrued and unpaid dividends for all past dividend periods have been paid in full.
 
Holders of the Series A Preferred Stock have voting rights in certain circumstances.
Except as otherwise required by law and in connection with the rights to elect directors as described above, holders of the Series A Preferred Stock have voting rights in certain circumstances. So long as shares of the Series A Preferred Stock are outstanding, in addition to any other vote or consent of shareholders required by law or our amended and restated charter, the vote or consent of holders owning at least 66 2/3% of the shares of Series A Preferred Stock outstanding is required for (1) any authorization or issuance of shares ranking senior to the Series A Preferred Stock; (2) any amendment to the rights of the Series A Preferred Stock so as to adversely affect the rights, preferences, privileges or voting power of the Series A Preferred Stock; or (3) consummation of any merger, share exchange or similar transaction unless the shares of Series A Preferred Stock remain outstanding, or if we are not the surviving entity in such transaction, are converted into or exchanged for preference securities of the surviving entity and the shares of Series A Preferred Stock remaining outstanding or such preference securities have such rights, preferences, privileges and voting power as are not materially less favorable to the holders than the rights, preferences, privileges and voting power of the shares of Series A Preferred Stock.
 
9
 
 

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. The Company’s board of directors has broad discretion regarding the type and price of such securities. A variety of factors, including financial market conditions, may influence the timing of any such issuance. To allow us to timely respond to opportunities to raise capital, we filed a shelf registration statement on Form S-3 which became effective on July 1, 2009. Under Rule 415 of the Securities Act of 1933, we have until July 1, 2012 to issue securities pursuant to this registration statement.
 
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, or the perception that such sales could occur. Holders of our common stock do not have anti-dilution or preemptive rights under the Delaware General Corporation Law, as amended (“DGCL”), the Company’s certificate of incorporation (as amended and together with all certificates of designations) or by-laws. Shares of our common stock are not redeemable and have no subscription or conversion rights.
 
Additionally, the ownership interest of holders of our common stock could be diluted to the extent the CPP Warrant is exercised for up to 324,074 shares of our common stock. Although the U.S. Treasury has agreed not to vote any of the shares of common stock it receives upon exercise of the CPP Warrant, a transferee of any portion of the CPP Warrant or of any shares of common stock acquired upon exercise of the CPP Warrant is not bound by this restriction. 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 terms of the CPP Warrant include an anti-dilution adjustment, which provides that, if we issue common stock or securities convertible into or exercisable, or exchangeable for, common stock at a price that is less than ninety percent (90%) of the market price of such shares on the last trading day preceding the date we agree to sell such shares, the number of shares of our common stock to be issued would increase and the per share price of the common stock to be purchased pursuant to the warrant would decrease.
 
We have outstanding subordinated debentures issued to statutory trust subsidiaries, which have issued and sold preferred securities to investors.
If we are unable to make payments on any of our subordinated debentures for more than twenty (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 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 DGCL, 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 and preferred stock 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 interest of our stockholders. Although we have no present intention to issue any additional shares of its authorized preferred stock, there can be no assurance that the Company will not do so in the future.
 
10
 
 

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, 2010, we had four banking locations and a support center in the St. Louis metropolitan area, seven banking locations in the Kansas City metropolitan area, and two banking locations in the Phoenix metropolitan area. We own four of the facilities and lease the remainder. Most of the leases expire between 2011 and 2022 and include one or more renewal options of 5 years. One lease expires in 2026. 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. 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, financial condition, results of operations or cash flows of the Company or any of its subsidiaries.
 
11
 
 

PART II
 
ITEM 5: MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASE 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 closing sales prices for the common stock. There may have been other transactions at prices not known to the Company. As of March 1, 2011, the Company had 595 common stock shareholders of record and a market price of $12.81 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.
 
    2010   2009
        4th Qtr       3rd Qtr       2nd Qtr       1st Qtr       4th Qtr       3rd Qtr       2nd Qtr       1st Qtr
Closing Price   $      10.46   $      9.30   $      9.64   $      11.06   $      7.71   $      9.25   $      9.09   $      9.76
High     10.95     10.82     11.42     11.37     9.25     12.24     11.46     14.81
Low     8.86     7.96     9.12     7.62     7.25     8.96     7.88     7.52
Cash dividends paid                                                
       on common shares     0.0525     0.0525     0.0525     0.0525     0.0525     0.0525     0.0525     0.0525

Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2010, regarding securities issued and to be issued under our equity compensation plans that were in effect during the year ended December 31, 2010:
 
                Number of securities
                remaining available for
    Number of securities to   Weighted-average   future issuance under
    be issued upon exercise   exercise price of   equity compensation plans
    of outstanding options,   outstanding options,   (excluding shares
        warrants and rights       warrants and rights       reflected in column (a))
Plan Category   (a)   (b)   (c)
Equity compensation                  
plans approved by the                  
Company's shareholders                               902,932     $      15.71                                   705,194  
Equity compensation                  
plans not approved by                  
the Company's                  
shareholders   --       --   --  
Total   902,932  (1)   $ 15.71   705,194  (2)
                   

(1)       Includes the following:
  - 23,590 shares of common stock to be issued upon exercise of outstanding stock options under the 1996 Stock Incentive Plan (Plan III);
  - 153,785 shares of common stock to be issued upon exercise of outstanding stock options under the 1999 Stock Incentive Plan (Plan IV);
  - 190,670 shares of common stock to be issued upon exercise of outstanding stock options under the 2002 Stock Incentive Plan (Plan V);
  - 532,387 shares of common stock used as the base for grants of stock settled stock appreciation rights under the 2002 Stock Incentive Plan (Plan V);
  - 2,500 shares of common stock to be issued upon exercise of outstanding stock options under the 1998 Nonqualified Plan.
    
(2) Includes the following:
  - 665,742 shares of common stock available for issuance under the 2002 Stock Incentive Plan (Plan V);
  - 39,452 shares of common stock available for issuance under the Non-management Director Stock Plan.

12
 
 

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. Holders of our Series A Preferred Stock originally issued to the U.S. Treasury on December 19, 2008, are entitled to cumulative dividends of 5% per annum. Dividends on the Series A Preferred Stock are currently payable at the rate of $1.8 million per annum. Dividends on the Series A Preferred Stock are 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, prior to December 19, 2011 our ability to declare or pay dividends on junior securities is subject to restrictions, including a restriction against increasing the dividend rate on our common stock from the last quarterly cash dividend per share ($0.0525) declared on our common stock prior to December 19, 2008. 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 our balance sheet given the weak economic environment.
 
13
 
 

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, 2005 through December 31, 2010. 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, 2005 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
Index       12/31/05       12/31/06       12/31/07       12/31/08       12/31/09       12/31/10
Enterprise Financial Services Corp          100.00          144.58          106.57          69.02          35.72          49.54
NASDAQ Composite   100.00   110.39   122.15   73.32   106.57   125.91
SNL Bank $1B-$5B   100.00   115.72   84.29   69.91   50.11   56.81

*Source: SNL Financial L.C. Used with permission. All rights reserved.
 
14
 
 

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, 2010. 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.
 
    Year ended December 31,
(in thousands, except per share data)   2010   2009   2008   2007   2006
EARNINGS SUMMARY:                                                            
Interest income   $      122,035     $      118,486     $      127,021     $      130,249     $      98,545  
Interest expense     32,411       48,845       60,338       69,242       47,308  
Net interest income     89,624       69,641       66,683       61,007       51,236  
Provision for loan losses     33,735       40,412       26,510       5,120       2,273  
Noninterest income     18,360       19,877       20,341       12,852       9,897  
Noninterest expense     62,908       98,427       48,776       44,695       37,754  
Income (loss) from continuing operations     11,341       (49,321 )     11,738       24,044       21,107  
Income tax expense (benefit) from continuing operations     2,221       (2,650 )     3,672       8,098       7,357  
Net income (loss) from continuing operations     9,120       (46,671 )     8,066       15,946       13,750  
Net income (loss)   $ 9,120     $ (47,955 )   $ 1,848     $ 17,255     $ 15,379  
                                         
PER SHARE DATA:                                        
Basic earnings (loss) per common share:                                        
       From continuing operations   $ 0.45     $ (3.82 )   $ 0.63     $ 1.30     $ 1.25  
       Total     0.45       (3.92 )     0.14       1.41       1.40  
Diluted earnings (loss) per common share:                                        
       From continuing operations     0.45       (3.82 )     0.63       1.27       1.21  
       Total     0.45       (3.92 )     0.14       1.37       1.35  
Cash dividends paid on common shares     0.21       0.21       0.21       0.21       0.18  
Book value per common share     10.13       10.25       14.33       13.91       11.50  
Tangible book value per common share     9.91       9.97       10.27       8.81       8.40  
                                         
BALANCE SHEET DATA:                                        
Ending balances:                                        
       Portfolio loans not covered under FDIC loss share     1,766,351       1,818,481       2,201,457       1,784,278       1,376,452  
       Portfolio loans covered under FDIC loss share at fair value     126,711       13,644       -       -       -  
       Allowance for loan losses     42,759       42,995       33,808       22,585       17,475  
       Goodwill     2,064       2,064       48,512       57,177       29,983  
       Intangibles, net     1,223       1,643       3,504       6,053       5,789  
       Assets     2,805,840       2,365,655       2,493,767       2,141,329       1,600,004  
       Deposits     2,297,721       1,941,416       1,792,784       1,585,013       1,315,508  
       Subordinated debentures     85,081       85,081       85,081       56,807       35,054  
       Borrowings     226,633       167,438       392,926       312,427       105,481  
       Shareholders' equity     183,348       163,912       214,572       172,515       132,683  
Average balances:                                        
       Loans not covered under FDIC loss share     1,782,023       2,097,028       2,001,073       1,599,596       1,214,436  
       Loans covered under FDIC loss share     72,724       1,244       -       -       -  
       Earning assets     2,262,430       2,334,697       2,125,581       1,723,214       1,355,704  
       Assets     2,455,555       2,462,237       2,298,882       1,856,466       1,440,685  
       Interest-bearing liabilities     1,957,390       2,025,339       1,883,904       1,469,258       1,110,845  
       Shareholders' equity     179,896       177,374       182,175       160,783       112,633  
                                         
SELECTED RATIOS:                                        
Return on average common equity     4.50 %     (34.51 ) %     0.98 %     10.73 %     13.65 %
Return on average assets     0.27       (2.05 )     0.08       0.93       1.07  
Efficiency ratio     58.26       109.95       56.05       60.51       61.76  
Average common equity to average assets     6.02       5.92       7.89       8.65       7.78  
Yield on average interest-earning assets     5.44       5.15       6.04       7.63       7.34  
Cost of interest-bearing liabilities     1.66       2.41       3.20       4.71       4.26  
Net interest rate spread     3.78       2.74       2.84       2.92       3.08  
Net interest rate margin     4.01       3.06       3.20       3.61       3.85  
Nonperforming loans to total loans     2.45       2.10       1.61       0.71       0.47  
Nonperforming assets to total assets     2.97       2.69       1.98       0.73       0.50  
Net chargeoffs to average loans     1.83       1.42       0.76       0.13       0.10  
Allowance for loan losses to total loans     2.26       2.35       1.54       1.27       1.27  
Dividend payout ratio - basic     34.22       (5.62 )     144.02       15.29       12.85  

15
 
 

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, 2010. 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.
 
2010 Operating Results
For 2010, we reported net income of $9.1 million compared to a net loss of $48.0 million in 2009. The net loss for 2009 was primarily attributable to a $45.4 million non-cash accounting charge to eliminate goodwill related to the Company’s banking segment. After deducting preferred stock dividends, net income available to common shareholders was $6.7 million, or $0.45 per diluted share, compared to a net loss available to common shareholders of $50.4 million, or $3.92 per diluted share in 2009.
 
On July 9, 2010, the Bank acquired approximately $256.0 million in assets from the FDIC in connection with the failure of Home National Bank, an Oklahoma bank with operations in Arizona. The Company acquired the loans originated and other real estate at a discount of 12.5%. As part of the purchase transaction, the Bank and the FDIC entered into a loss sharing agreement on the assets acquired. The Bank did not assume any deposits or acquire any branches or other assets of Home National in the transaction. The asset purchase contributed approximately $11.8 million to the 2010 pre-tax results. See Note 2 – Acquisitions and Divestitures for more information.
 
On a pre-tax, pre-provision basis, the Company’s operating income from continuing operations was $48.6 million, for the year 2010 compared to $31.9 million in 2009. The pre-tax earnings associated with the Home National asset purchase drove most of the increased earnings from 2009. In addition to the acquisition impact, results for 2010 were favorably impacted by lower provision for loan losses, level loan yields, and decreasing deposit costs. Finally, Wealth management revenues continue to improve, with revenues growing steadily in each of the past four quarters.
 
We are presenting pre-tax, pre-provision income from continuing operations, which is a non-GAAP (Generally Accepted Accounting Principles) financial measure, because we believe adjusting our results to exclude discontinued operations, loan loss provision expense, impairment charges, special FDIC assessments and unusual gains or losses provide shareholders with a more comparable basis for evaluating period-to-period operating results. A schedule reconciling pre-tax income (loss) from continuing operations to pre-tax, pre-provision income from continuing operations is provided in the following tables.
 
    For the Quarter Ended        
    Dec 31,   Sep 30,   Jun 30,   Mar 31,   Total Year
(In thousands)       2010       2010       2010       2010       2010
Pre-tax income (loss) from continuing operations   $ 8,347     $ 7,233     $ 537     $ (4,776 )   $ 11,341  
       Sales and fair value writedowns of other real estate     2,683       1,606       678       586       5,553  
       Sale of securities     (781 )     (124 )     (525 )     (557 )     (1,987 )
Income (loss) before income tax     10,249       8,715       690       (4,747 )     14,907  
       Provision for loan losses     3,325       7,650       8,960              13,800       33,735  
Pre-tax, pre-provision income from continuing operations   $        13,574     $        16,365     $        9,650     $ 9,053     $        48,642  
                                 
    For the Quarter Ended        
    Dec 31,   Sep 30,   Jun 30,   Mar 31,   Total Year
(In thousands)   2009   2009   2009   2009   2009
Pre-tax income (loss) from continuing operations   $ 8     $ 7,003     $ (1,634 )   $ (54,698 )   $ (49,321 )
       Goodwill impairment charge     -       -       -       45,377       45,377  
       Sales and fair value writedowns of other real estate     1,166       602       508       549       2,825  
       Sale of securities     (3 )     -       (636 )     (316 )     (955 )
       Gain on extinguishment of debt     (2,062 )     (5,326 )     -       -       (7,388 )
       FDIC special assessment (included in Other noninterest expense)     -       (105 )     1,100       -       995  
Income (loss) before income tax     (891 )     2,174       (662 )     (9,088 )     (8,467 )
       Provision for loan losses     8,400       6,480       9,073       16,459       40,412  
Pre-tax, pre-provision income from continuing operations   $ 7,509     $ 8,654     $ 8,411     $ 7,371     $ 31,945  
 

16
 
 

On January 7, 2011, the Bank continued its expansion into the Arizona market through an FDIC-assisted transaction in which the Bank acquired certain assets and assumed certain liabilities of Legacy Bank of Scottsdale, Arizona. See Item 8, Note 24 – Subsequent Events for more information.
 
Below are highlights of our Banking and Wealth Management segments. For more information on our segments, see Item 8, Note 20 – Segment Reporting. Unless otherwise noted, this discussion excludes discontinued operations.
 
Banking
For 2010, the Banking segment recorded net income of $14.0 million compared to a net loss of $43.2 million for 2009. Excluding the non-tax deductible goodwill impairment of $45.4 million, the Banking segment recorded net income of $2.2 million for 2009. Below is a summary of 2010:
  December 31,
(in thousands) 2010   2009
Commercial and industrial       $ 593,938       31%       $ 553,988       30 %
Commercial real estate- Non owner occupied     444,724   23%     470,621   26 %
Commercial real estate- Owner occupied     331,544   18%     346,711   19 %
Construction real estate     190,285   10%     221,397   12 %
Residential real estate     189,484   10%     209,743   11 %
Consumer and other     16,376   1%     16,021   1 %
Portfolio loans covered under FDIC loss share     126,711   7%     13,644   1 %
       Total loan portfolio   $        1,893,062          100%   $        1,832,125          100 %
  

We expect modest loan growth in 2011 as business activity should improve slightly and additional capacity from new hires and more focused sales teams take effect.
17
 
 

Provision for loan losses was $33.7 million for 2010 compared to $40.4 million for 2009. The decrease in provision was due to fewer risk rating downgrades and lack of net loan growth. Excluding the loans under FDIC loss share agreements, the Company’s watch list credits as a percentage of total loans have remained relatively flat since year end 2009. The Company continues to monitor loan portfolio risk closely. See Provision for Loan Losses and Nonperforming Assets below for more information.
 
Excluding the loans under FDIC loss share agreements, the Company expects modest improvement in nonperforming loan levels and loss rates in 2011.
Wealth Management
The Wealth Management segment is comprised of Enterprise Trust and our state tax credit brokerage activities. Wealth Management is a strategic line of business consistent with our Company mission of “guiding our clients to a lifetime of financial success.” It is a driver of fee income and is intended to help us diversify our dependency on bank spread income.
 
For 2010, Wealth Management recorded a $178,000 net loss from continuing operation compared to a $608,000 net loss from continuing operations in 2009.
RESULTS OF CONTINUING OPERATIONS ANALYSIS
 
Net Interest Income
Comparison of 2010 vs. 2009
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) increased $19.2 million, or 27%, from $71.4 million for 2009 to $90.7 million for 2010. Total interest income increased $2.8 million while total interest expense decreased $16.4 million.
 
18
 
 

Average interest-earning assets were $2.262 billion in 2010, a decrease of $72.3 million, or 3%, from 2009. Loans accounted for the majority of the reduction, decreasing by $243.5 million, or 12%, to $1.855 billion. The decrease in loans was partially offset by an increase in securities and short-term investments of $171.3 million, or 72% to $407.7 million. Interest income decreased $11.2 million due to volume declines and increased by $14.0 million due to the impact of rates, for a net increase of $2.8 million versus 2009.
 
Average interest-bearing liabilities decreased $67.9 million, or 3%, to $1.957 billion compared to $2.025 billion for 2009. The decrease in interest-bearing liabilities resulted from a $199.3 million decrease in borrowed funds. The decrease in borrowed funds was partially offset by a $131.3 million increase in interest-bearing deposits. For 2010, interest expense on interest-bearing liabilities decreased $4.8 million due to volume while the impact of declining rates decreased interest expense on interest-bearing liabilities by $11.6 million, for a net decrease of $16.4 million versus 2009. See “Liquidity and Capital Resources” for more information.
 
For the year ended December 31, 2010, the tax-equivalent net interest rate margin was 4.01% compared to 3.06% for 2009. The net interest margin was favorably impacted by lower deposit costs and the net interest income generated by the loans acquired in the Home National asset purchase. Approximately 0.26% of the increase is related to the loan participation restatement which decreased the 2009 interest rate margin. See Item 8, Note 2 – Loan Participation Restatement in the Form 10-K for the year ended December 31, 2009 for more information.
 
Comparison of 2009 vs. 2008
Net interest income (on a tax-equivalent basis) increased $3.3 million, or 5%, from $68.1 million for 2008 to $71.4 million for 2009. Total interest income decreased $8.2 million while total interest expense decreased $11.5 million.
 
Average interest-earning assets were $2.335 billion in 2009, an increase of $209.1 million, or 10%, from 2008. Securities and short-term investments accounted for the majority of the growth, increasing by $112.0 million, or 90%, to $236.4 million. Loans increased $97.2 million, or 5%, to $2.098 billion. Interest income on loans increased $6.1 million from growth and decreased by $14.6 million due to the impact of rates, for a net decrease of $8.5 million versus 2008.
 
Average interest-bearing liabilities increased $141.4 million, or 8%, to $2.025 billion compared to $1.884 billion for 2008. The growth in interest-bearing liabilities resulted from a $132.3 million increase in interest-bearing core deposits, a $15.0 million increase in brokered certificates of deposit, and a $26.2 million increase in subordinated debentures. Borrowed funds declined by $32.1 million in 2009. For 2009, interest expense on interest-bearing liabilities increased $6.4 million due to growth while the impact of declining rates decreased interest expense on interest-bearing liabilities by $17.9 million, for a net decrease of $11.5 million versus 2008. See “Liquidity and Capital Resources” for more information.
 
For the year ended December 31, 2009, the tax-equivalent net interest rate margin was 3.06% compared to 3.20% for 2008. The margin has been compressed as a result of sharply declining interest rates, an increase in securities and short-term investments as a percentage of earning assets, higher levels of nonperforming loans and a change in core deposit mix from money market deposits to higher rate time deposits.
 
19
 
 

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.
 
Approximately $30.0 million of deposits associated with a former branch in DeSoto, Kansas are included for seven months of 2008.
 
    For the years ended December 31,
    2010   2009   2008
            Interest   Average           Interest   Average           Interest   Average
    Average   Income/   Yield/   Average   Income/   Yield/   Average   Income/   Yield/
(in thousands)    Balance    Expense    Rate    Balance    Expense    Rate    Balance    Expense    Rate
Assets                                                            
Interest-earning assets:                                                            
    Taxable loans (1)   $     1,751,459     $     95,798   5.47 %   $     2,043,202     $     109,413   5.35 %   $     1,958,806     $     119,018   6.08 %
    Tax-exempt loans (2)     30,564       2,621   8.58       53,826       4,868   9.04       42,267       3,850   9.11  
    Covered loans (3)     72,724       16,565   22.78       1,244       38   3.05       -       -   0.00  
       Total loans     1,854,747       114,984   6.20       2,098,272       114,319   5.45       2,001,073       122,868   6.14  
    Taxable investments in debt and
                     equity securities		     276,493       7,458   2.70       172,815       5,778   3.34       111,902       5,268   4.71  
    Non-taxable investments in                                                            
                     debt and equity securities (2)     5,132       245   4.77       634       37   5.84       804       48   5.97  
    Short-term investments     126,058       380   0.30       62,976       136   0.22       11,802       254   2.15  
       Total securities and short-term investments     407,683       8,083   1.98       236,425       5,951   2.52       124,508       5,570   4.47  
Total interest-earning assets     2,262,430       123,067   5.44       2,334,697       120,270   5.15       2,125,581       128,438   6.04  
Noninterest-earning assets:                                                            
    Cash and due from banks     11,800                   23,959                   40,349              
    Other assets     226,998                   146,674                   159,832              
    Allowance for loan losses     (45,673 )                 (43,093 )                 (26,880 )            
    Total assets   $ 2,455,555                 $ 2,462,237                 $ 2,298,882              
                                                             
Liabilities and Shareholders' Equity                                                            
Interest-bearing liabilities:                                                            
    Interest-bearing transaction accounts   $ 190,275     $ 847   0.45 %   $ 122,563       662   0.54 %   $ 121,371       1,554   1.28 %
    Money market accounts     701,360       6,245   0.89       636,350       6,079   0.96       687,867       13,786   2.00  
    Savings     10,022       35   0.35       9,147       35   0.38       9,594       55   0.57  
    Certificates of deposit     784,369       15,740   2.01       786,631       23,427   2.98       588,561       24,525   4.17  
Total interest-bearing deposits     1,686,026       22,867   1.36       1,554,691       30,203   1.94       1,407,393       39,920   2.84  
    Subordinated debentures     85,081       4,954   5.82       85,081       5,171   6.08       58,851       3,536   6.01  
    Borrowed funds     186,283       4,590   2.46       385,567       13,471   3.49       417,660       16,882   4.04  
Total interest-bearing liabilities     1,957,390       32,411   1.66       2,025,339       48,845   2.41       1,883,904       60,338   3.20  
Noninterest-bearing liabilities:                                                            
    Demand deposits     305,887                   250,435                   221,925              
    Other liabilities     12,383                   9,089                   10,878              
    Total liabilities     2,275,660                   2,284,863                   2,116,707              
    Shareholders' equity     179,896                   177,374                   182,175              
    Total liabilities & shareholders' equity   $ 2,455,555                 $ 2,462,237                 $ 2,298,882              
Net interest income           $ 90,656                 $ 71,425                 $ 68,100      
Net interest spread                 3.78 %                 2.74 %                 2.84 %
Net interest rate margin (4)                 4.01                   3.06                   3.20  

(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 $1,440,000, $1,626,000 and $1,394,000 for the years ended December 31, 2010, 2009, and 2008, respectively.
(2)   Non-taxable income is presented on a fully tax-equivalent basis using the combined statutory federal and state income tax in effect for the year.
The tax-equivalent adjustments were $1,032,000, $1,784,000 and $1,417,000 for the years ended December 31, 2010, 2009, and 2008 respectively.
(3)   Covered loans are loans covered by FDIC loss share agreements and are recorded at fair value.
(4)   Net interest income divided by average total interest-earning assets.
 
20
 
 

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.
 
Approximately $30.0 million of deposits associated with a former branch in DeSoto, Kansas are included for seven months of 2008.
 
        2010 compared to 2009       2009 compared to 2008
    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   $     (12,533 )   $     15,445     $     2,912     $     5,038     $     (14,605 )   $     (9,567 )
       Nontaxable loans (3)     (2,007 )     (240 )     (2,247 )     1,045       (27 )     1,018  
       Taxable investments in debt                                                
              and equity securities
     2,960       (1,280 )     1,680       2,326       (1,816 )     510  
       Nontaxable investments in debt                                                
              and equity securities (3)
     216       (8 )     208       (10 )     (1 )     (11 )
Short-term investments     175       69       244       281       (399 )     (118 )
              Total interest-earning assets
   $ (11,189 )   $ 13,986     $ 2,797     $ 8,680     $     (16,848 )   $ (8,168 )
                                                 
Interest paid on:                                                
       Interest-bearing transaction accounts   $ 317     $ (132 )   $ 185       15       (907 )     (892 )
       Money market accounts     596       (430 )     166       (964 )     (6,743 )     (7,707 )
       Savings     3       (3 )     -       (3 )     (17 )     (20 )
       Certificates of deposit     (67 )     (7,620 )     (7,687 )     6,979       (8,077 )     (1,098 )
       Subordinated debentures     -       (217 )     (217 )     1,594       41       1,635  
       Borrowed funds     (5,656 )     (3,225 )     (8,881 )     (1,233 )     (2,178 )     (3,411 )
              Total interest-bearing liabilities
     (4,807 )     (11,627 )     (16,434 )     6,388       (17,881 )     (11,493 )
Net interest income   $ (6,382 )   $ 25,613     $ 19,231     $ 2,292     $ 1,033     $ 3,325  
                                                 
(1)       Change in volume multiplied by yield/rate of prior period.
(2)       Change in yield/rate multiplied by volume of prior period.
(3)       Nontaxable income is presented on a fully tax-equivalent basis using the combined statutory federal and state income tax rate in effect for each year.
    NOTE: The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each.
 
Provision for loan losses. The provision for loan losses was $33.7 million for 2010 compared to $40.4 million for 2009 and $26.5 million for 2008. The volatility in the provision for loan losses since 2008 is due to varying levels of adverse risk rating changes and trends in nonperforming loans.
 
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,                
                                    Change 2010       Change 2009
(in thousands)   2010   2009   2008   over 2009   over 2008
Wealth Management revenue   $     6,414   $     4,524     $     5,916   $        1,890     $        (1,392 )
Service charges on deposit accounts     4,739     5,012       4,376     (273 )     636  
Other service charges and fee income     1,128     963       1,000     165       (37 )
Sale of branches/charter     -     -       3,400     -       (3,400 )
Sale of other real estate     79     (436 )     552     515       (988 )
State tax credit activity, net     2,250     1,035       4,201     1,215       (3,166 )
Sale of securities     1,987     955       161     1,032       794  
Extinguishment of debt     -     7,388       -     (7,388 )     7,388  
Miscellaneous income     1,763     436       735     1,327       (299 )
       Total noninterest income   $ 18,360   $ 19,877     $ 20,341   $ (1,517 )   $ (464 )
                                     
21
 
 

Comparison 2010 vs. 2009
The 2009 results include a $7.4 million pre-tax gain from the extinguishment of debt. See Item 8, Note 2 – Loan Participation Restatement in the Form 10-K for the year ended December 31, 2009 for more information. Excluding the gain on extinguishment of debt, noninterest income increased $5.9 million, or 47%, during 2010.
 
Wealth Management revenue from the Trust division increased $1.9 million, or 42%. The increase in revenue was attributable to higher account asset values, several estate planning-related insurance sales and generally improving sales momentum in the Trust organization. In 2010, we elected to record Wealth Management revenue on a gross basis resulting in a $971,000 increase in Wealth Management revenue which was offset by a related $971,000 increase in Other expenses. Assets under administration were $1.499 billion at December 31, 2010, a $219 million, or 17% increase from one year ago primarily due to higher asset values from stronger financial markets.
 
In 2010, we sold $26.0 million of other real estate at a gain of $79,000. In 2009, we sold $22.3 million of other real estate at a loss of $436,000.
 
Gains from state tax credit brokerage activities were $2.3 million in 2010, compared to $1.0 million in 2009. The increase is due to a $142,000 increase from the sale of state tax credits to clients, and a $3.0 million positive fair value adjustment on the tax credit assets offset by a $1.9 million decrease in the fair value adjustment on the related interest rate caps used to economically hedge the tax credits.
 
In 2010, the Company elected to reposition a portion of the investment portfolio and sold approximately $126.7 million of securities realizing a gain of $2.0 million on these sales. With the proceeds from securities sales and maturities and excess cash, we purchased approximately $323.8 million in mortgage backed securities, including collateralized mortgage obligations, government sponsored agency debentures, and federally tax free municipal securities.
 
The increase in Miscellaneous income was primarily due to $776,000 of income on bank-owned life insurance policies, and $524,000 related to two interest rate swaps terminated by the Company in 2009.
 
Comparison 2009 vs. 2008
Noninterest income decreased 2% during 2009. The 2009 results include a $7.4 million pre-tax gain from the extinguishment of debt. See Item 8, Note 2 – Loan Participation Restatement in the Form 10-K for the year ended December 31, 2009 for more information. The 2008 results include a $3.4 million pre-tax gain on the sale of the Great American charter along with the Desoto, Kansas and the Liberty, Missouri branches. Excluding these amounts, noninterest income decreased $4.5 million, or 26%, during 2009. This decrease is mainly due to lower wealth management revenue and lower gains from the state tax credit activities.
 
Wealth Management revenue from the Trust division decreased $1.4 million, or 24%. The revenue declines were primarily due to lower average asset values from net client attrition and adverse financial markets in late 2008 and early 2009. Assets under administration were $1.280 billion at December 31, 2009, a $59 million, or 5% increase from one year ago due to stronger fourth quarter financial markets.
 
Increases in Service charges on deposit accounts were primarily due to the declining earnings crediting rate on commercial accounts, which increased service charges earned.
 
In 2009, we sold $22.3 million of other real estate at a loss of $436,000. In 2008, we sold $7.9 million of other real estate at a gain of $552,000.
 
Gains from state tax credit brokerage activities were $1.0 million in 2009, compared to $4.2 million in 2008. The $3.2 million decrease is primarily due to a $5.9 million negative fair value adjustment on the tax credit assets offset by a $2.1 million increase in the fair value adjustment on the related interest rate caps used to economically hedge the tax credits and a $660,000 increase from the sale of state tax credits to clients.
 
In 2009, given the anticipated acceleration in prepayments on mortgage-backed securities and resultant loss in fair value, we elected to sell and reinvest a portion of our investment portfolio. We sold approximately $49.0 million of agency mortgage backed securities realizing a gain of $955,000 on these sales. With the proceeds from the securities sales, certain borrowings and excess cash, we purchased approximately $272.0 million of fixed rate agency mortgage backed, floating rate Small Business Administration securities and Municipal securities in 2009.
 
22
 
 

The decrease in Miscellaneous income resulted from a $530,000 loss realized in 2009 from the termination of two interest rate swaps and a $638,500 gain recognized in 2008 for ineffectiveness related to a terminated cash flow hedge. See Item 8, Note 7 – Derivative Financial Instruments for more information.
 
Noninterest Expense
The following table presents a comparative summary of the major components of noninterest expense.
 
        Years ended December 31,                
                                  Change 2010       Change 2009
(in thousands)   2010   2009   2008   over 2009   over 2008
Employee compensation and benefits     28,513     25,969     27,656     2,543       (1,687 )
Occupancy     4,297     4,709     3,985     (412 )     724  
Furniture and equipment     1,393     1,425     1,390     (32 )     35  
Data processing     2,234     2,147     2,139     86       8  
Communications     554     556     536     (2 )     20  
Director related expense     607     459     481     148       (22 )
Meals and entertainment     1,258     1,037     1,181     221       (144 )
Marketing and public relations     902     504     674     398       (171 )
FDIC and other insurance     4,402     4,204     1,617     197       2,587  
Amortization of intangibles     420     482     599     (62 )     (116 )
Goodwill impairment charges     -     45,377     -     (45 )     45  
Postage, courier, and armored car     769     772     863     (2 )     (92 )
Professional, legal, and consulting     1,736     2,278     1,971     (542 )     307  
Loan, legal and other real estate expense     9,941     4,788     1,717     5,154       3,071  
Other taxes     635     566     542     68       24  
Other     5,247     3,154     3,425     2,094       (272 )
       Total noninterest expense   $     62,908   $     53,095   $     48,776   $        9,812     $        4,317  
                                   
Comparison of 2010 vs. 2009
Noninterest expense decreased $35.5 million, or 36%, in 2010. The decrease was primarily due to a $45.4 million goodwill impairment charge associated with the banking segment in 2009. Excluding the goodwill impairment charge, noninterest expenses increased $9.9 million, or 19%. The Company’s efficiency ratio, which measures noninterest expense as a percentage of total revenue, for 2010 was 58%. Excluding the goodwill impairment charge, the efficiency ratio was 59% in 2009.
 
Employee compensation and benefits. Employee compensation and benefits increased $2.5 million, or 10%, over 2009. Employee compensation and benefits increased primarily due the recruitment of several prominent St. Louis bankers, higher variable compensation accruals, and staff additions to support our Arizona acquisition activity.
 
All other expense categories. Excluding the goodwill impairment charge, all other expense categories increased $7.3 million, or 27%, over 2009. With the exception of loan, legal and other real estate expenses, most categories of expenses were relatively flat year over year.
 
Occupancy expense decreases were due to lower amortization of leasehold improvements in 2010.
 
Loan, legal and other real estate expenses increased $5.2 million due to increased levels of nonperforming loans and other real estate properties. Approximately, $3.2 million of the increase represents fair value writedowns on other real estate. Other real estate expenses for items such as utilities, legal fees and insurance increased $1.1 million over 2009. Approximately $278,000 of the increase was related to estimated losses attributable to the unadvanced commitments on impaired loans.
 
In 2010, we elected to record Wealth Management revenue on a gross basis resulting in a $971,000 increase in Other expenses offset by a related $971,000 increase in Wealth Management revenue. Other expenses also include a $750,000 accrual for a potential fraud loss on a depository account.
 
Comparison of 2009 vs. 2008
Noninterest expense increased $49.7 million, or 102%, in 2009. The increase was primarily due to a $45.4 million goodwill impairment charge associated with the banking segment. Excluding the goodwill impairment charge, noninterest expenses increased $4.3 million, or 9%. The Company’s efficiency ratio for 2009 was 110%. Excluding the goodwill impairment charge, the efficiency ratio was 59%, compared to 56% in 2008.
 
23
 
 

Employee compensation and benefits. Employee compensation and benefits decreased $1.7 million, or 6%, over 2008. Included in the 2008 results are expenses of $1.0 million related to the final stock payment pursuant to the expiration of an executive retention agreement associated with the acquisition of Great American. Excluding this amount, employee compensation and benefits decreased $687,000 or 3%, primarily due to headcount reductions and stringent controls on staffing and compensation levels.
 
All other expense categories. Excluding the goodwill impairment charge, all other expense categories increased $6.0 million, or 28%, over 2008.
 
Occupancy expense increases were due to scheduled rent increases on various Company facilities and expenses related to a new Wealth Management location which was occupied in the fourth quarter of 2008.
 
FDIC and other insurance increased $2.6 million primarily due to additional FDIC premiums for the FDIC special assessment and newly implemented rate structure. On December 29, 2009, we were required to prepay an estimated quarterly risk-based assessment for fourth quarter 2009 and for all of 2010, 2011 and 2012. The prepayment amount was $11.5 million, which will be expensed over the subsequent three years. See “Supervision and Regulation – Deposit Insurance Fund” in Part I – Item I for more information.
 
Professional, legal and consulting increased due to various legal and consulting projects related to new federal regulations, compensation committee assistance, board governance, significant accounting issues and litigation defense.
 
Loan legal and other real estate expense increased $3.1 million due to increased levels of nonperforming loans and other real estate properties. The increase includes $2.4 million of fair value adjustments on other real estate due to the softening real estate markets for both residential and commercial properties.
 
Discontinued Operations
On January 20, 2010, we sold Millennium to an investor group led mostly by former managers of Millennium for $4.0 million in cash, resulting in a $1.6 million pre-tax loss recognized in 2009. As a result of the sale, we have reclassified the results of Millennium for 2009 and prior periods to discontinued operations. The amount of the loss on the sale is primarily due to the write-off of the remaining goodwill associated with the Millennium reporting unit.
 
For 2009, net loss from discontinued operations was $1.3 million, compared to a net loss of $6.2 million from discontinued operations in 2008. The 2008 loss includes $9.2 million of pre-tax goodwill impairment charges and lower levels of paid premium sales and lower sales margins which significantly reduced Millennium’s operating results.
 
Income Taxes
In 2010, the Company recorded income tax expense of $2.2 million on pre-tax income of $11.3 million, resulting in an effective tax rate of 19.6%. The following items were included in Income tax expense (benefit) and impacted the 2010 effective tax rate:
In 2009, the Company recorded income tax benefit of $3.4 million on a pre-tax loss of $51.3 million, resulting in an effective tax rate of (6.6%). The goodwill impairment charge of $45.4 million was not tax-deductible. The pre-tax loss includes a loss of $1.6 million related to the sale of Millennium which is reported as discontinued operations for all periods. The following items were included in Income tax (benefit) expense and impacted the 2009 effective tax rate:
24
 
 

FINANCIAL CONDITION
 
Comparison for December 31, 2010 and 2009
Total assets at December 31, 2010 were $2.806 billion compared to $2.37 billion at December 31, 2009, an increase of $440.2 million, or 19%. The increase was due to a $186.7 million increase in cash and cash equivalents, a $79.1 million increase in securities available for sale, a $60.9 million increase in portfolio loans, a $77.9 million increase in the FDIC loss share receivable, $9.9 million of additional state tax credits, held for sale, and $20.0 million of additional bank-owned life insurance.
 
At December 31, 2010, portfolio loans totaled $1.9 billion, an increase of $60.9 million, or 3% from December 31, 2009. For the year, Portfolio loans covered by FDIC loss share agreements increased $113.1 million to $126.7 million, while portfolio loans not covered by FDIC loss share declined $52.1 million.
 
Strong core deposit growth in 2010, led to significant increases in cash. A portion of the cash was used to increase the available for sale securities portfolio. Securities available for sale were $361.5 million at December 31, 2010 compared to $282.5 million at December 31, 2009. In 2010, securities purchases included government sponsored agency debentures, mortgage backed securities, including collateralized mortgage obligations, and federally tax free municipal securities.
 
At December 31, 2010, Other assets included $20.7 million of bank-owned life insurance and $8.4 million of prepaid FDIC insurance.
 
At December 31, 2010, deposits were $2.298 billion, an increase of $356.3 million, or 18%, from $1.941 billion at December 31, 2009. Total brokered CD’s at December 31, 2010 were $156.7 million compared to $156.2 million at December 31, 2009.
 
Other borrowings at December 31, 2010 and 2009 represent customer repurchase agreements.
 
On January 25, 2010, the Company completed the sale of 1,931,610 shares, or $15.0 million of its common stock in a private placement offering.
 
Loans
Excluding loans covered under FDIC loss share agreement, portfolio loans, less unearned loan fees, decreased $52.1 million, or 3% during 2010. Commercial & Industrial loans increased 7.2% during the year and represent more than 30% of the loan portfolio at December 31, 2010. The Company’s lending strategy emphasizes commercial, residential real estate, 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. Payoffs and paydowns, along with higher net charge-offs contributed to the decline in loan balances.
 
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 $12.0 million or less of aggregate credit exposure (both direct and indirect) with one borrower, in spite of a legal lending limit of over $68.0 million. There are five borrowing relationships where we have committed more than $10.0 million with the largest being a $20.0 million line of credit with minimal usage. For the $1.9 billion loan portfolio, the Company’s average loan relationship size was just under $1.0 million, 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, 2010 the Company had purchased $245.0 million ($162.0 million outstanding) and had sold $357.0 million ($286.0 million outstanding.) Approximately 60 borrowers make up our participations purchased, with an average outstanding loan balance of $2.7 million. Fifteen relationships, or $67.1 million of the $162.0 million in participations purchased, met the definition of a “Shared National Credit”; however, only two of the relationships, or $6.7 million, were considered out of our market.
 
25
 
 

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)       2010       2009       2008       2007       2006
Commercial and industrial   $ 593,938     $ 553,988     $ 675,216     $ 549,479     $ 380,065  
Real estate:                                        
       Commercial     776,268       817,332       887,963       720,072       597,547  
       Construction     190,285       221,397       378,092       301,710       207,189  
       Residential     189,484       209,743       235,019       175,258       156,109  
Consumer and other     16,376       16,021       25,167       37,759       35,542  
Portfolio loans covered under FDIC loss share     126,711       13,644       -       -       -  
       Total Loans   $      1,893,062     $      1,832,125     $      2,201,457     $      1,784,278     $      1,376,452  
                                         
    December 31,
    2010   2009   2008   2007   2006
Commercial and industrial     31.4 %     30.2 %     30.7 %     30.8 %     27.6 %
Real estate:                                        
       Commercial     41.0 %     44.6 %     40.3 %     40.4 %     43.4 %
       Construction     10.1 %     12.1 %     17.2 %     16.9 %     15.1 %
       Residential     10.0 %     11.4 %     10.7 %     9.8 %     11.3 %
Consumer and other     0.8 %     1.0 %     1.1 %     2.1 %     2.6 %
Portfolio loans covered under FDIC loss share     6.7 %     0.7 %     0.0 %     0.0 %     0.0 %
       Total Loans     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 $323.8 million, or 17%, of 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 two primary metropolitan 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 $69.0 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. Given the weak demand and stress in both the residential and commercial real estate markets, the Company reduced the level of these loan types in 2010.
 
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 represent loans to individuals on both a secured and unsecured basis. Credit risk is mitigated by thoroughly reviewing the creditworthiness of the borrowers prior to origination.
 
26
 
 

Following is a further breakdown of our loan categories using Call report codes at December 31, 2010 and 2009:
 
    % of portfolio
        2010       2009
Real Estate:            
       Construction & Land Development   12 %   12 %
             
       Commercial Owner Occupied            
    Commercial & Industrial   17 %   17 %
    Churches/ Schools/ Nursing Homes/ Other   2 %   2 %
    Total   19 %   19 %
             
       Commercial Non Owner Occupied            
    Retail   8 %   8 %
    Commercial Office   7 %   8 %
    Multi-Family Housing   3 %   5 %
    Churches/ Schools/ Nursing Homes/ Other   3 %   2 %
    Industrial/ Warehouse   4 %   3 %
    Total   25 %   26 %
             
Residential:            
    Owner Occupied   7 %   8 %
    Non Owner Occupied   4 %   4 %
    Total   11 %   12 %
    Total Real Estate   67 %   69 %
             
Non Real Estate            
       Commercial & Industrial   32 %   30 %
       Consumer & Other   1 %   1 %
    33 %   31 %
    100 %   100 %
             
The Construction and Land Development category represents $223.0 million, or 12%, of the total loan portfolio. Within that category, there was $17.9 million of loans secured by raw ground, $115.1 million of commercial construction, and $90.0 million of residential construction.
 
The commercial construction component of the portfolio consisted of approximately 75 loan relationships with an average outstanding loan balance of $1.5 million. The largest loans were a $7.5 million line of credit secured by commercially zoned land in St. Louis, and a $5.8 million fixed line secured by commercially zoned land in Kansas City.
 
The residential construction component of the portfolio consists of single family housing development properties primarily in our St. Louis and Kansas City markets. There were approximately 110 loan relationships in this category with an average outstanding loan balance of $769,000. The largest loan was a $11.4 million residential development in Arizona that is covered under an 80% FDIC loss guarantee.
 
The largest segments of the non-owner occupied components of the commercial real estate portfolio are retail and commercial office permanent loans. At December 31, 2010, we had $156.6 million of non-owner occupied permanent loans secured by retail properties. There were approximately 115 loan relationships in this category with an average outstanding loan balance of $1.3 million. The three largest loans outstanding at year end were an $8.1 million loan secured by various retail properties in Kansas City, a $7.0 million loan secured by a hotel in Arizona, and a $6.0 million loan secured by a commercial retail building in St. Louis.
 
At December 31, 2010, we had $137.7 million of non-owner occupied permanent loans secured by commercial office properties. There were approximately 90 loan relationships with an average outstanding loan balance of $1.4 million. The three largest loans outstanding at year end were an $8.7 million loan secured by a single tenant office building in Kansas City, a $6.0 million loan secured by several office properties in Kansas City, and a $6.0 million loan secured by an office building in St. Louis.
 
27
 
 

Vacancy rates for commercial office space in the St. Louis, Kansas City and Phoenix markets totaled 16%, 16.8%, and 26.2%, respectively at year end, as compared to the national commercial office vacancy rate of 16.4%.
 
Factors that are critical to managing overall credit quality are sound loan underwriting and administration, systematic monitoring of existing loans and commitments, early identification of potential problems, an adequate allowance for loan losses, and sound non-accrual and charge-off policies.
 
Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to numerous borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At December 31, 2010, no significant concentrations exceeding 10% of total loans existed in the Company's loan portfolio, except as described above.
 
Loans at December 31, 2010 mature or reprice as follows:
 
    Loans Maturing or Repricing
          After One            
    In One   Through   After      
(in thousands)       Year or Less       Five Years       Five Years       Total
Fixed Rate Loans (1) (2)                        
                         
Commercial and industrial   $ 96,974   $ 134,752   $ 7,159   $ 238,885
Real estate:                        
       Commercial     164,203     406,548     37,673     608,424
       Construction     79,847     31,312     4,597     115,756
       Residential     50,406     65,547     2,094     118,047
Consumer and other     5,388     1,740     -     7,128
Portfolio loans covered under FDIC loss share     12,949     38,009     7,396     58,354
              Total   $ 409,767   $ 677,908   $ 58,919   $ 1,146,594
                         
Variable Rate Loans (1)                        
                         
Commercial and industrial   $ 226,891   $ 101,145   $ 27,017   $ 355,053
Real estate:                        
       Commercial     69,350     82,936     15,558     167,844
       Construction     63,444     10,733     352     74,529
       Residential     34,776     9,866     26,795     71,437
Consumer and other     8,222     1,026     -     9,248
Portfolio loans covered under FDIC loss share     14,721     11,959     41,677     68,357
              Total   $ 417,404   $ 217,665   $ 111,399   $ 746,468
                         
Loans (1) (2)                        
                         
Commercial and industrial   $ 323,865   $ 235,897   $ 34,176   $ 593,938
Real estate:                        
       Commercial     233,553     489,484     53,231     776,268
       Construction     143,291     42,045     4,949     190,285
       Residential     85,182     75,413     28,889     189,484
Consumer and other     13,610     2,766     -     16,376
Portfolio loans covered under FDIC loss share     27,670     49,968     49,073     126,711
              Total   $      827,171   $      895,573   $      170,318   $      1,893,062
                         
(1)       Loan balances include unearned loan (fees) costs, net.
(2)   Not adjusted for impact of interest rate swap agreements.
 
Fixed rate loans comprise approximately 61% of the loan portfolio at December 31, 2010 and 56% at December 31, 2009. Variable rate loans are based on the prime rate or the London Interbank Offered Rate (“LIBOR”). The Bank’s “prime rate” has been 4.00% since late 2008 when the Federal Reserve lowered the targeted Fed Funds rate to 0.25%. Some of the variable rate loans also use the “Wall Street Journal Prime Rate” which has been 3.25% since late 2008. Most loan originations have one to three year maturities. While the loan relationship has a much longer life, the shorter maturities allow the Company to revisit the underwriting and pricing on each relationship periodically. Management monitors this mix as part of its interest rate risk management. See “Interest Rate Risk” section.
 
28
 
 

Of the $233.6 million of commercial real estate loans maturing in one year or less, $143.2 million or 60% represents loans secured by non-owner occupied commercial properties.
 
Allowance for Loan Losses
The loan portfolio is the primary asset subject to credit risk. Credit risk is controlled and monitored through the use of lending standards, a thorough review of potential borrowers, and ongoing review of loan payment performance. Active asset quality administration, including early problem loan identification and timely resolution of problems, further ensures appropriate management of credit risk. Credit risk management for each loan type is discussed briefly in the section entitled “Loans.” The allowance for loan losses represents management’s estimate of an amount adequate to provide for probable credit losses in the loan portfolio at the balance sheet date. Various quantitative and qualitative factors are analyzed and provisions are made to the allowance for loan losses. Such provisions are reflected in our consolidated statements of income. The evaluation of the adequacy of the allowance for loan losses is based on management’s ongoing review and grading of the loan portfolio, consideration of past loss experience, trends in past due and nonperforming loans, risk characteristics of the various classifications of loans, existing economic conditions, the fair value of underlying collateral, and other factors that could affect probable credit losses. Assessing these numerous factors involves significant judgment and could be significantly impacted by the current economic conditions. Management considers the allowance for loan losses a critical accounting policy. See “Critical Accounting Policies” for more information.
 
In determining the allowance and the related provision for loan losses, three principal elements are considered:
 
     1) specific allocations based upon probable losses identified during a quarterly review of the loan portfolio,
     2) allocations based principally on the Company’s risk rating formulas, and
     3) a qualitative adjustment based on subjective factors.
 
The first element reflects management’s estimate of probable losses based upon a systematic review of specific loans considered to be impaired. These estimates are based upon collateral exposure, if they are collateral dependent for collection. Otherwise, discounted cash flows are estimated and used to assign loss. At December 31, 2010 the allocated allowance for loan losses on individually impaired loans was $9.1 million, or 20% of the total impaired loans, with approximately 50% of the allocation being in the Commercial and Industrial segment. At December 31, 2009, the allocated allowance for loan losses on individually impaired loans was $8.1 million, or 21% of the total impaired loans, with the 50% of the allocation being in the Construction Real Estate segment.
 
The second element reflects the application of our loan rating system. This rating system is similar to those employed by state and federal banking regulators. Loans are rated and assigned a loss allocation factor for each category that is based on a loss migration analysis using the Company’s loss experience and heavily weighting the most recent twelve months. The higher the rating assigned to a loan, the greater the loss allocation percentage that is applied.
 
The qualitative adjustment is based on management’s evaluation of conditions that are not directly reflected in the determination of the formula and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they may not be identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the qualitative adjustment include the following:
Executive management reviews these conditions quarterly in discussion with our entire lending staff. To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s estimate of the effect of such conditions may be reflected as a specific allowance, applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s evaluation of the probable loss related to such condition is reflected in the qualitative adjustment.
 
29
 
 

The allocation of the allowance for loan losses by loan category is a result of the analysis above. The allocation methodology applied by the Company, designed to assess the adequacy of the allowance for loan losses, focuses on changes in the size and character of the loan portfolio, changes in levels of impaired and other nonperforming loans, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing economic conditions, and historical losses on each portfolio category. Because each of the criteria used is subject to change, the allocation of the allowance for loan losses is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular loan category. The total allowance is available to absorb losses from any segment of the portfolio. Management continues to target and maintain the allowance for loan losses equal to the allocation methodology plus a qualitative adjustment, as determined by economic conditions and other qualitative and quantitative factors affecting the Company’s borrowers, as described above.
 
Management believes that the allowance for loan losses is adequate at December 31, 2010.
 
The following table summarizes changes in the allowance for loan losses arising from loans charged off and recoveries on loans previously charged off, by loan category, and additions to the allowance charged to expense.
 
        At December 31,
(in thousands)   2010       2009       2008       2007       2006
Allowance at beginning of year   $     42,995     $     33,808     $     22,585     $     17,475     $     13,331  
(Disposed) acquired allowance for loan losses     -       -       (50 )     2,010       3,069  
Release of allowance related to loan participations sold     -       (1,383 )     -       -       -  
Loans charged off:                                        
       Commercial and industrial     3,865       3,663       3,783       238       1,067  
       Real estate:                                        
              Commercial
     15,482       5,710       1,384       43       25  
              Construction
     12,148       15,086       8,044       705       -  
              Residential
     4,391       5,931       2,367       1,418       504  
       Consumer and other     274       42       31       125       2  
       Total loans charged off     36,160       30,432       15,609       2,529       1,598  
Recoveries of loans previously charged off:                                        
       Commercial and industrial     157       62       64       347       362  
       Real estate:                                        
              Commercial     1,001       66       -       15       1  
              Construction     314       28       241       25       -  
              Residential     536       422       56       17       31  
       Consumer and other     181       12       11       105       6  
       Total recoveries of loans     2,189       590       372       509       400  
Net loan chargeoffs     33,971       29,842       15,237       2,020       1,198  
Provision for loan losses     33,735       40,412       26,510       5,120       2,273  
                                         
Allowance at end of year   $ 42,759     $ 42,995     $ 33,808     $ 22,585     $ 17,475  
                                         
Excludes loans covered under FDIC loss share agreements                                        
Average loans   $ 1,782,023     $ 2,097,028     $ 2,001,073     $ 1,599,596     $ 1,214,437  
Total portfolio loans     1,766,351       1,818,481       2,201,457       1,784,278       1,376,452  
Net chargeoffs to average loans     1.91 %     1.42 %     0.76 %     0.13 %     0.10 %
Allowance for loan losses to loans     2.42       2.36       1.54       1.27       1.27  
                                         
Includes loans covered under FDIC loss share agreements                                        
Average loans   $ 1,854,747     $ 2,098,272     $ 2,001,073     $ 1,599,596     $ 1,214,437  
Total portfolio loans     1,893,062       1,832,125       2,201,457       1,784,278       1,376,452  
Net chargeoffs to average loans     1.83 %     1.42 %     0.76 %     0.13 %     0.10 %
Allowance for loan losses to loans     2.26       2.35       1.54       1.27       1.27  

30
 
 

The following table is a summary of the allocation of the allowance for loan losses for the five years ended December 31, 2010:
 
  2010   2009   2008   2007   2006
         Percent by           Percent by           Percent by           Percent by           Percent by
        Category to         Category to         Category to         Category to         Category to
(in thousands) Allowance   Total Loans   Allowance   Total Loans   Allowance   Total Loans   Allowance   Total Loans   Allowance   Total Loans
Commercial and industrial $   12,727        31.4 %   $   9,715   30.2 %   $   6,431   30.7 %   $   4,582   30.8 %   $   3,673   27.6 %
Real estate:                                                          
       Commercial
   10,689   41.0       19,600   44.7       11,085   40.3       7,229   40.4       5,900   43.4  
       Construction
   8,407   10.0       4,289   12.1       7,886   17.2       5,418   16.9       2,970   15.1  
       Residential
   5,485   10.0       3,859   11.4       2,762   10.7       2,632   9.8       2,070   11.3  
Consumer and other   93   0.9       45   0.9       188   1.1       438   2.1       513   2.6  
Portfolio loans covered under FDIC loss share   -   6.7       -   0.7       -   -       -   -       -   -  
Not allocated   5,358           5,487           5,456           2,286           2,349      
       Total allowance $ 42,759        100.0 %   $ 42,995        100.0 %   $ 3 3,808        100.0 %   $   22,585   100.0 %   $   17,475   100.0 %
                                                           
Nonperforming assets
Nonperforming loans are defined as loans on non-accrual status, loans 90 days or more past due but still accruing, and restructured loans that are still accruing interest or in a non-accrual status. Restructured loans involve the granting of a concession to a borrower experiencing financial difficulty involving the modification of terms of the loan, such as changes in payment schedule or interest rate. Nonperforming assets include nonperforming loans plus foreclosed real estate.
 
Nonperforming loans exclude credit-impaired loans that were acquired in the December 2009 and July 2010 FDIC-assisted transactions in Arizona. These purchased credit-impaired loans are accounted for on a pool basis, and the pools are considered to be performing. See Item 8, Note 2 – Acquisition and Divestitures for more information on these loans.
 
Loans are placed on non-accrual status when contractually past due 90 days or more as to interest or principal payments. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collectibility of principal or interest on loans, it is management’s practice to place such loans on non-accrual status immediately, rather than delaying such action until the loans become 90 days past due. Previously accrued and uncollected interest on such loans is reversed. Income is recorded only to the extent that a determination has been made that the principal balance of the loan is collectable and the interest payments are subsequently received in cash, or for a restructured loan, the borrower has made six consecutive contractual payments. If collectability of the principal is in doubt, payments received are applied to loan principal.
 
Loans past due 90 days or more but still accruing interest are also included in nonperforming loans. Loans past due 90 days or more but still accruing are classified as such where the underlying loans are both well secured (the collateral value is sufficient to cover principal and accrued interest) and are in the process of collection.
 
The Company’s nonperforming loans meet the definition of “impaired loans” under U.S. GAAP. As of December 31, 2010, 2009, and 2008, the Company had 43, 39, and 26 impaired loan relationships, respectively.
 
31
 
 

The following table presents the categories of nonperforming assets and certain ratios as of the dates indicated:
 
        At December 31,
(in thousands)   2010   2009   2008   2007   2006
Non-accrual loans   $     38,477         $     37,441         $     35,487         $     12,720         $     6,363  
Loans past due 90 days or more and still accruing interest     -       -       -       -       112  
Restructured loans     7,880       1,099       -       -       -  
              Total nonperforming loans     46,357       38,540       35,487       12,720       6,475  
Foreclosed property (1)     25,373       22,918       13,868       2,963       1,500  
Other bank owned assets     850       -       -       -       -  
Total nonperforming assets (1)   $ 72,580     $ 61,458     $ 49,355     $ 15,683     $ 7,975  
Excludes assets covered under FDIC loss share agreements                                        
       Total assets   $ 2,805,840     $ 2,365,655     $ 2,493,767     $ 2,141,329     $ 1,600,004  
       Total portfolio loans     1,766,351       1,818,481       2,201,457       1,784,278       1,376,452  
       Total loans plus foreclosed property     1,792,574       1,841,399       2,215,325       1,787,241       1,377,952  
       Nonperforming loans to total loans     2.62 %     2.12 %     1.61 %     0.71 %     0.47 %
       Nonperforming assets to total loans plus foreclosed property     4.05       3.34       2.23       0.88       0.58  
       Nonperforming assets to total assets (1)     2.59       2.60       1.98       0.73       0.50  
Includes assets covered under FDIC loss share agreements                                        
       Total assets   $ 2,805,840     $ 2,365,655     $ 2,493,767     $ 2,141,329     $ 1,600,004  
       Total portfolio loans     1,893,062       1,832,125       2,201,457       1,784,278       1,376,452  
       Total loans plus foreclosed property     1,930,120       1,857,209       2,215,325       1,787,241       1,377,952  
       Nonperforming loans to total loans     2.45 %     2.10 %     1.61 %     0.71 %     0.47 %
       Nonperforming assets to total loans plus foreclosed property     4.32       3.43       2.23       0.88       0.58  
       Nonperforming assets to total assets     2.97       2.69       1.98       0.73       0.50  
Allowance for loan losses to nonperforming loans     92.00 %     112.00 %     95.00 %     178.00 %     270.00 %

(1)     Excludes assets covered by FDIC loss share agreements, except for their inclusion in total assets
 
Nonperforming loans
Nonperforming loans at December 31, 2010 and 2009 based on Call Report codes were as follows:
 
(in thousands)       2010       2009
Construction Real Estate/Land Acquisition and Development   $     9,934   $     19,927
Commercial Real Estate - Non owner occupied     10,935     5,869
Commercial Real Estate - Owner occupied     2,024     5,093
Residential Real Estate     12,188     4,307
Commercial and Industrial     11,276     3,254
Consumer & Other     -     90
Total   $ 46,357   $ 38,540
             
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The following table summarizes the changes in nonperforming loans by quarter for 2010 and 2009.
 
                2010
(in thousands)   4th Qtr         3rd Qtr       2nd Qtr       1st Qtr       Total Year
Nonperforming loans beginning of period   $     51,955     $     46,550     $     55,785     $     38,540     $     38,540  
       Additions to nonaccrual loans     15,877       19,373       15,440       39,663       90,353  
       Additions to restructured loans     3,430       2,286       454       611       6,781  
       Chargeoffs     (7,860 )     (7,023 )     (8,314 )     (12,963 )     (36,160 )
       Other principal reductions     (7,288 )     (1,881 )     (4,580 )     (2,739 )     (16,488 )
       Moved to Other real estate     (8,743 )     (7,122 )     (11,350 )     (5,564 )     (32,779 )
       Moved to Other bank owned assets             -       -       (955 )     (955 )
       Moved to performing     (1,014 )     (228 )     -       (1,693 )     (2,935 )
       Loans past due 90 days or more and still accruing interest             -       (885 )     885       -  
Nonperforming loans end of period   $ 46,357     $ 51,955     $ 46,550     $ 55,785     $ 46,357  
 
    2009
(in thousands)   4th Qtr   3rd Qtr   2nd Qtr   1st Qtr   Total Year
Nonperforming loans beginning of period   $ 46,982     $ 54,699     $ 54,421     $ 35,487     $ 35,487  
       Additions to nonaccrual loans     16,318       17,900       26,790       31,421       92,429  
       Additions to restructured loans     1,099       -       -       -       1,099  
       Chargeoffs     (11,519 )     (6,254 )     (5,018 )     (7,051 )     (29,842 )
       Other principal reductions     (559 )     (4,113 )     (5,252 )     (2,596 )     (12,520 )
       Moved to Other real estate     (11,339 )     (9,903 )     (11,497 )     (978 )     (33,717 )
       Moved to Other bank owned assets     -       -       -       -       -  
       Moved to performing     (2,442 )     (5,347 )     (4,745 )     (1,862 )     (14,396 )
       Loans past due 90 days or more and still accruing interest     -       -       -       -       -  
Nonperforming loans end of period   $ 38,540     $ 46,982     $ 54,699     $ 54,421     $ 38,540  
                                         
At December 31, 2010, the nonperforming loans represent 43 relationships. The largest of these is a $4.1 million commercial real estate loan. Five relationships comprise 45% of the nonperforming loans. Approximately 57% of the nonperforming loans were in the St. Louis market and 43% were in the Kansas City market.
 
At December 31, 2009, the nonperforming loans represent 39 relationships. The largest of these is a $4.0 million commercial real estate loan. Five relationships comprise 41% of the nonperforming loans. Approximately 52% of the nonperforming loans were in the Kansas City market, 47% were in the St. Louis market and less than 1% were in the Phoenix market. Approximately $5.3 million of the decline between third and fourth quarter of 2009 was the result of amending the loan participation agreements so that they qualified for sale accounting treatment. See Item 8, Note 2—Loan Participation Restatement in the Form 10-K for the year ended December 31, 2009 for more information.
 
At December 31, 2008, of the total nonperforming loans, $23.6 million, or 67%, related to five relationships: $10.6 million secured by a partially completed retail center; $3.5 million secured by commercial ground; $4.7 million secured by a medical office building; $2.8 million secured by a single family residence; and $1.9 million secured by a residential development. The remaining nonperforming loans consisted of 20 relationships. Eighty-four percent of the total nonperforming loans are located in the Kansas City market.
 
At December 31, 2007, of the total nonperforming loans, $7.3 million, or 57%, were related to eight residential homebuilders in St. Louis and Kansas City. The two largest related to a residential builder in Kansas City totaling $2.2 million and a single-family rehab builder in Kansas City totaling $1.6 million. The remaining nonperforming loans consisted of 11 relationships, nearly all of which were related to the soft residential housing markets in St. Louis and Kansas City.
 
Two credits in the Kansas City market secured by real estate represented $3.7 million of the total nonperforming loans at December 31, 2006. Six of the remaining ten relationships on non-accrual at December 31, 2006 and approximately 50% of the nonperforming loan balances related to smaller relationships acquired in the NorthStar transaction.
 
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Other real estate
Other real estate at December 31, 2010 was $36.2 million, an increase of $11.1 million over 2009. Approximately $10.8 million, or 30% of the Other real estate, is covered by an FDIC loss share agreement. At December 31, 2010, Other real estate represented 83 properties. The largest single component of Other real estate is a residence with a book value of $3.4 million that is covered under FDIC loss share. Eleven properties comprise 53% of the Other real estate. At December 31, 2010, Other real estate was comprised of 27% completed homes, 26% residential lots and 47% commercial real estate. The Other real estate is split evenly among Kansas City, St. Louis and Phoenix.
 
                2010        
    4th Quarter       3rd Quarter       2nd Quarter       1st Quarter       Year-to-date
Other real estate at beginning of period   $     34,685     $     25,884     $     20,947     $     25,084     $     25,084  
       Additions and expenses capitalized                                        
              to prepare property for sale     8,743       7,122       11,350       5,564       32,779  
       Addition of ORE from FDIC assisted transactions     4,871       5,469       -       113       10,453  
       Writedowns in fair value     (2,406 )     (1,750 )     (1,364 )     (574 )     (6,094 )
       Sales     (9,685 )     (2,040 )     (5,049 )     (9,240 )     (26,014 )
Other real estate end of period   $ 36,208     $ 34,685     $ 25,884     $ 20,947     $ 36,208  
                                         
            2009        
    4th Quarter   3rd Quarter   2nd Quarter   1st Quarter   Year-to-date
Other real estate at beginning of period   $ 19,273     $ 16,053     $ 13,251     $ 13,868     $ 13,868  
       Additions and expenses capitalized                                        
              to prepare property for sale     11,342       9,915       11,788       1,155       34,200  
       Addition of ORE from FDIC assisted transactions     2,167       -       -       -       2,167  
       Writedowns in fair value     (587 )     (688 )     (506 )     (608 )     (2,389 )
       Sales     (7,111 )     (6,007 )     (8,480 )     (1,164 )     (22,762 )
Other real estate at end of period   $ 25,084     $ 19,273     $ 16,053     $ 13,251     $ 25,084  
                                         
The writedowns in fair value were recorded in Loan legal and other real estate owned based on current market activity shown in the appraisals. In addition, the Company realized a net gain of $79,000 on sales of other real estate and recorded these gains as part of Noninterest income. Management believes it is prudent to sell these properties, rather than wait for an improved real estate market.
 
Potential problem loans
Potential problem loans, which are not included in nonperforming loans, amounted to approximately $85.4 million, or 4.50% of total loans outstanding at December 31, 2010, compared to $83.2 million, or 4.54% of total loans outstanding at December 31, 2009. Potential problem loans represent those loans where payment of principal and interest is up-to-date and the loans are therefore, fully performing, but where some doubts exist as to the borrower’s ability to continue to comply with present repayment terms. Given this level of potential problem loans combined with the Company’s demonstrated ability to work through this adverse credit cycle so far, we believe that nonperforming asset levels will remain elevated in 2011.
 
Investments
At December 31, 2010, our portfolio of Securities available for sale was $361.5 million, or 13%, of total assets. This portfolio is primarily comprised of mortgage-backed pools, collateralized mortgage obligations, and U.S. government agency obligations. The size of the investment portfolio is generally 5 to 15% of total assets and will vary within that range based on liquidity. Typically, management classifies securities as available for sale to maximize management flexibility, although securities may be purchased with the intention of holding to maturity. Securities available-for-sale are carried at fair value, with related unrealized gains or losses, net of deferred income taxes, recorded as an adjustment to equity capital.
 
Our Other investments, at cost primarily consist of the FHLB membership stock, common stock investments related to our trust preferred securities and other private equity investments. At December 31, 2010, of the $7.6 million in FHLB capital stock, $2.8 million is required for FHLB membership and $4.8 million is required to support our outstanding advances. Historically, it has been the FHLB practice to automatically repurchase activity-based stock that became excess because of a member's reduction in advances. The FHLB has the discretion, but is not required, to repurchase any shares that a member is not required to hold.
 
34
 
 

The table below sets forth the carrying value of investment securities held by the Company at the dates indicated:
 
        December 31,
    2010       2009       2008
(in thousands)   Amount       %   Amount       %   Amount       %
Obligations of U.S. Government agencies   $ 453   0.1 %   $ 27,189   9.2 %   $  -   0.0 %
Obligations of U.S. Government sponsored enterprises     32,119   8.6 %     75,814   25.6 %     -   0.0 %
Obligations of states and political subdivisions     17,676   4.7 %     3,408   1.2 %     772   0.7 %
Residential mortgage-backed securities     311,298   83.4 %     176,050   59.5 %     95,659   88.4 %
FHLB capital stock     7,633   2.0 %     8,476   2.9 %     7,517   6.9 %
Other investments     4,645   1.2 %     4,713   1.6 %     4,367   4.0 %
    $ 373,824   100.0 %   $ 295,650   100.0 %   $ 108,315   100.0 %
                                     
In 2010, the portfolio grew with additions to the mortgage backed securities, including collateralized mortgage obligations, government sponsored agency debentures, and federally tax free municipal securities. All residential mortgage-backed securities were issued by government sponsored enterprises. This combination gives us an appropriate balance between return and cashflow certainty given the current interest rate environment.
 
The Company had no securities classified as trading at December 31, 2010, 2009, or 2008.
 
The following table summarizes expected maturity and tax equivalent yield information on the investment portfolio at December 31, 2010:
 
    Within 1 year    1 to 5 years    5 to 10 years    Over 10 years    No Stated Maturity    Total
(in thousands)    Amount    Yield   Amount    Yield   Amount    Yield   Amount    Yield   Amount    Yield   Amount    Yield
Obligations of U.S. Government agencies   $  -   0.00 %   $  423   2.00 %   $  -   0.00 %   $  30   2.13 %   $  -   0.00 %   $  453   2.01 %
Obligations of U.S. Government sponsored enterprises     5,019   1.53 %     16,458   1.89 %     10,642   2.01 %     -   0.00 %     -   0.00 %     32,119   1.87 %
Obligations of states and political subdivisions     1,578   2.28 %     2,541   3.82 %     8,146   3.89 %     5,411   2.62 %     -   0.00 %     17,676   3.35 %
Residential mortgage-backed securities     14,026   3.41 %     222,954   2.26 %     67,588   3.12 %     6,730   4.01 %     -   0.00 %     311,298   2.54 %
FHLB capital stock     -   0.00 %     -   0.00 %     -   0.00 %     -   0.00 %     7,633   3.50 %     7,633   3.50 %
Other investments     -   0.00 %     -   0.00 %     -   0.00 %     -   0.00 %     4,645   3.42 %     4,645   3.42 %
       Total   $ 20,623   2.87 %   $ 242,376   2.25 %   $ 86,376   3.06 %   $ 12,171   3.39 %   $ 12,278   3.47 %   $ 373,824   2.55 %
                                                                         
Yields on tax exempt securities are computed on a taxable equivalent basis using a tax rate of 36%. Expected maturities will differ from contractual maturities, as borrowers may have the right to call on repay obligations with or without prepayment penalties.
 
35
 
 

Deposits
The following table shows, for the periods indicated, the average annual amount and the average rate paid by type of deposit:
 
        For the year ended December 31,
    2010       2009       2008
              Weighted             Weighted             Weighted
(in thousands)   Average balance   average rate   Average balance   average rate   Average balance   average rate
Interest-bearing transaction accounts   $     190,275        0.45 %   $     122,563        0.54 %   $     121,371        1.28 %
Money market accounts     701,360   0.89 %     636,350   0.96 %     687,867   2.00 %
Savings accounts     10,022   0.35 %     9,147   0.38 %     9,594   0.57 %
Certificates of deposit     784,369   2.01 %     786,631   2.98 %     588,561   4.17 %
      1,686,026   1.36 %     1,554,691   1.94 %     1,407,393   2.84 %
Noninterest-bearing demand deposits     305,887   --       250,435   --       221,925   --  
    $ 1,991,913   1.15 %   $ 1,805,126   1.67 %   $ 1,629,318   2.45 %
                                     
Our focus for 2010 was much the same as 2009 as we continued to place a strong emphasis on growing core deposits and increasing our percentage of non-interest bearing deposits. Incentives were designed around growing transaction accounts, primarily non-interest bearing deposits. Our marketing efforts primarily centered around growing our base of commercial clients through direct calling efforts. Several retail banking promotions were conducted during the year, including a money market campaign in the Phoenix market, which generated more than $50 million in new deposits. Various regional mail and telephone campaigns, targeting prospects located in close proximity to the banking units, were conducted. Most of these promotions were aimed at acquiring personal money market accounts and new small business relationships. Many new relationships were developed with closely-held businesses that prefer building strong relationships with locally owned banks. We believe such relationships are typically long term, stable sources of deposits.
 
In addition, we introduced a new proprietary deposit platform, Enterprise Advisory Services, which we marketed to registered investment advisory firms. Through this program, we allow investment advisors to offer FDIC-insured accounts to their clients within their traditional assets under management model. The model successfully raised over $150 million in new deposits in 2010.
 
Our Treasury Management program continued to be an important part of the services offered to commercial clients. In a difficult economy, businesses sought to use these products and services to help minimize expenses and improve backroom efficiency. It was a year in which our clients closely weighed the value of Treasury Management products and were careful to insure these services were cost justified. Despite this scrutiny, revenues generated exclusively from Treasury Management increased 7% and again topped $2 million for the year gross of the earnings credit rate.
 
Brokered certificates of deposits of $156.7 million remained flat with December 31, 2009. For the year ended December 31, 2010, brokered certificates of deposits represented 7% of total deposits compared to 8% for the year ended December 31, 2009. Noninterest-bearing demand deposits represented 16% of total deposits at December 31, 2010 compared to 15% at December 31, 2009. Noninterest-bearing demand deposit growth was particularly strong in the fourth quarter of 2010, with an increase of $61.9 million, or 20%.
 
Maturities of certificates of deposit of $100,000 or more were as follows as of December 31, 2010:
 
(in thousands)   Total
       Three months or less       $     68,996
       Over three through six months     58,722
       Over six through twelve months     183,416
       Over twelve months     232,764
Total   $ 543,898
       
36
 
 

Liquidity and Capital Resources
 
Liquidity
The objective of liquidity management is to ensure we have the ability to generate sufficient cash or cash equivalents in a timely and cost-effective manner to meet our commitments as they become due. Typical demands on liquidity are run-off from demand deposits, maturing time deposits which are not renewed, and fundings under credit commitments to customers. Funds are available from a number of sources, such as from the core deposit base and from loans and securities repayments and maturities. Additionally, liquidity is provided from sales of the securities portfolio, fed fund lines with correspondent banks, the Federal Reserve and the FHLB, the ability to acquire large and brokered deposits and the ability to sell loan participations to other banks. These alternatives are an important part of our liquidity plan and provide flexibility and efficient execution of the asset-liability management strategy.
 
Our Asset-Liability Management Committee oversees our liquidity position, the parameters of which are approved by the Board of Directors. Our liquidity position is monitored monthly by producing a liquidity report, which measures the amount of liquid versus non-liquid assets and liabilities. Our liquidity management framework includes measurement of several key elements, such as the loan to deposit ratio, a liquidity ratio, and a dependency ratio. The Company’s liquidity framework also incorporates contingency planning to assess the nature and volatility of funding sources and to determine alternatives to these sources. While core deposits and loan and investment repayments are principal sources of liquidity, funding diversification is another key element of liquidity management and is achieved by strategically varying depositor types, terms, funding markets, and instruments.
 
For the year ended December 31, 2010, net cash provided by operating activities was $11.5 million more than for 2009. Net cash used in investing activities was $278.9 million for 2010 versus $66.4 million in 2009. The increase of $212.5 million was primarily due to the asset acquisition of Home National. Net cash provided by financing activities was $425.4 million in 2010 versus $102.0 million in 2009. The change in cash provided by financing activities was due to a increase in interest-bearing deposits.
 
Strong capital ratios, credit quality and core earnings are essential to retaining cost-effective access to the wholesale funding markets. Deterioration in any of these factors could have a negative impact on the Company’s ability to access these funding sources and, as a result, these factors are monitored on an ongoing basis as part of the liquidity management process. The Bank is subject to regulations and, among other things, may be limited in its ability to pay dividends or transfer funds to the parent company. Accordingly, consolidated cash flows as presented in the consolidated statements of cash flows may not represent cash immediately available for the payment of cash dividends to the Company’s shareholders or for other cash needs.
 
Parent Company liquidity
The parent company’s liquidity is managed to provide the funds necessary to pay dividends to shareholders, service debt, invest in subsidiaries as necessary, and satisfy other operating requirements. The parent company had cash and cash equivalents of $15.4 million and $19.5 million, respectively, at December 31, 2010 and 2009. The parent company’s primary funding sources to meet its liquidity requirements are dividends and payments from the Bank and proceeds from the issuance of equity (i.e. stock option exercises). We believe our current level of cash at the parent company will be sufficient to meet all projected cash needs in 2011.
 
Another source of funding for the parent company includes the issuance of subordinated debentures. As of December 31, 2010, the parent company had $82.6 million of outstanding subordinated debentures as part of nine Trust Preferred Securities Pools. These securities are classified as debt but are included in regulatory capital and the related interest expense is tax-deductible, which makes them a very attractive source of funding. See Item 8, Note 11 – Subordinated Debentures for more information.
 
Bank liquidity
The Bank has a variety of funding sources available to increase financial flexibility. In addition to amounts currently borrowed at December 31, 2010, the Bank could borrow an additional $108.1 million from the FHLB of Des Moines under blanket loan pledges and has an additional $303.3 million available from the Federal Reserve Bank under pledged loan agreements. The Bank has unsecured federal funds lines with three correspondent banks totaling $30.0 million.
 
Investment securities are another important tool to the Bank’s liquidity objectives. As of December 31, 2010, the entire investment portfolio was available for sale. Of the $361.5 million investment portfolio available for sale, $249.6 million was pledged as collateral for depository client repurchase agreements, public deposits, treasury, tax and loan notes, and other requirements. The remaining debt securities could be pledged or sold to enhance liquidity, if necessary. 
 
37
 
 

The Bank participates in the Certificate of Deposit Account Registry Service, or CDARS, which allows us to provide our customers with access to additional levels of FDIC insurance coverage. The CDARS program is designed to provide full FDIC insurance on deposit amounts larger than the stated maximum by exchanging or reciprocating larger depository relationships with other member banks. Our depositors’ funds are broken into smaller amounts and placed with other banks that are members of the network. Each member bank issues CDs in amounts that are eligible for FDIC insurance. CDARS are considered brokered deposits according to banking regulations; however, the Company considers the reciprocal deposits placed through the CDARS program as core funding and does not report the balances as brokered sources in its external financial reports. The Bank must remain “well-capitalized” in order to utilize the CDARS program. As of December 31, 2010, the Bank had $160.5 million of reciprocal CDARS deposits outstanding compared to $134.8 million outstanding at December 31, 2009.
 
In addition to the reciprocal deposits available through CDARS, we also have access to the “one-way buy” program, which allows us to bid on the excess deposits of other CDARS member banks. The Company will report any outstanding “one-way buy” funds as brokered funds in its internal and external financial reports. At December 31, 2010, we had no outstanding “one-way buy” deposits.
 
As long as the Bank remains “well-capitalized”, we have the ability to sell certificates of deposit through various national or regional brokerage firms, if needed. At December 31, 2010, we had $156.7 million of brokered certificates of deposit outstanding.
 
Over the normal course of business, the Bank enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through the Company’s various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of the Bank’s liquidity. The Bank has $429.4 million in unused loan commitments as of December 31, 2010. While this commitment level would be very difficult to fund given the Bank’s current liquidity resources, the nature of these commitments is such that the likelihood of funding them is very low.
 
At December 31, 2010 and 2009, approximately $9.6 million and $8.4 million, respectively, of cash and due from banks represented required reserves on deposits maintained by the Bank in accordance with Federal Reserve Bank requirements.
 
Capital Resources
Since September 2008, we have raised $75.0 million in regulatory capital, raising our risk-based capital ratio to 14.30% - well in excess of the regulatory guidelines. On December 12, 2008, we completed a private placement of $25.0 million in Convertible Trust Preferred Securities that qualify as regulatory capital. On December 19, 2008, we received $35.0 million from the U.S. Treasury under the Capital Purchase Program. As of December 31, 2008, $20.0 million of the capital funds were used to pay off the Company’s line of credit and term loan. In December 2008, we also injected $18.0 million into the Bank to support continued loan growth and bolster its capital ratios. In January, 2010, the Company added $15.0 million of common equity in a private placement offering to accredited investors. The proceeds of the offering were injected into the Bank to further strengthen the Bank’s capital position.
 
From time to time we may choose to issue equity or debt securities to raise capital. A variety of factors, including financial market conditions, may influence the timing of any such issuance. To allow us to timely respond to opportunities to raise capital, we filed a shelf registration statement on Form S-3 which became effective on July 1, 2009. Under Rule 415 of the Securities Act of 1933, we have until July 1, 2012 to issue securities pursuant to this registration statement.
 
As a financial holding company, the Company is subject to “risk-based” capital adequacy guidelines established by the Federal Reserve. Risk-based capital guidelines were designed to relate regulatory capital requirements to the risk profile of the specific institution and to provide for uniform requirements among the various regulators. Currently, the risk-based capital guidelines require the Company to meet a minimum total capital ratio of 8.0% of which at least 4.0% must consist of Tier 1 capital. Tier 1 capital consists of (a) common shareholders’ equity (excluding the unrealized market value adjustments on the available-for-sale securities and cash flow hedges), (b) qualifying perpetual preferred stock and related additional paid in capital subject to certain limitations specified by the FDIC, (c) qualifying trust preferred securities, subject to certain limitations specified by the FDIC, and (d) minority interests in the equity accounts of consolidated subsidiaries less (e) goodwill, (f) mortgage servicing rights within certain limits, and (g) certain other intangible assets and investments in subsidiaries. The FDIC also requires a minimum leverage ratio of 3.0%, defined as the ratio of Tier 1 capital to average total assets for banking organizations deemed the strongest and most highly rated by banking regulators. A higher minimum leverage ratio is required of less highly rated banking organizations. Total capital, a measure of capital adequacy, includes Tier 1 capital, allowance for loan losses, and portions of subordinated debentures not eligible for Tier 1 treatment.
 
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The Company met the definition of “well-capitalized” (the highest category) at December 31, 2010, 2009, and 2008. The following table summarizes the Company’s risk-based capital, tangible common and leverage ratios at the dates indicated:
 
    At December 31,
(Dollars in thousands)       2010       2009       2008
Tier 1 capital to risk weighted assets     11.97 %     10.67 %     8.89 %
Total capital to risk weighted assets     14.30 %     13.32 %     12.81 %
Leverage ratio (Tier 1 capital to average assets)     9.15 %     8.96 %     8.67 %
Tangible common equity to tangible assets     5.26 %     5.44 %     5.38 %
Tier 1 capital   $ 241,829     $ 215,099     $ 190,254  
Total risk-based capital   $        288,754     $        268,458     $        273,977  

Below is a reconciliation of shareholders’ equity to tangible common equity and total assets to tangible assets. The tangible common equity ratio is widely followed by analysts of bank and financial holding companies and we believe it is an important financial measure of capital strength even though it is considered to be a non-GAAP measure.
 
    For the years ended December 31,
(In thousands)       2010       2009       2008
Shareholders' equity   $ 183,348     $ 163,912     $ 214,572  
Less: Preferred stock     (32,519 )     (31,802 )     (31,116 )
Less: Goodwill     (2,064 )     (2,064 )     (48,512 )
Less: Intangible assets     (1,223 )     (1,643 )     (3,504 )
       Tangible common equity   $ 147,542     $ 128,404     $ 131,440  
                         
Total assets   $ 2,805,840     $ 2,365,655     $ 2,493,767  
Less: Goodwill     (2,064 )     (2,064 )     (48,512 )
Less: Intangible assets     (1,223 )     (1,643 )     (3,504 )
       Tangible assets   $        2,802,553     $        2,361,948     $        2,441,751  
                         
Tangible common equity to tangible assets     5.26 %     5.44 %     5.38 %

Risk Management
Market risk arises from exposure to changes in interest rates and other relevant market rate or price risk. The Company faces market risk in the form of interest rate risk through transactions other than trading activities. Market risk from these activities, in the form of interest rate risk, is measured and managed through a number of methods. The Company uses financial modeling techniques to measure interest rate risk. These techniques measure the sensitivity of future earnings due to changing interest rate environments. Guidelines established by the Bank’s Asset/Liability Management Committee and approved by the Bank’s Board of Directors are used to monitor exposure of earnings at risk. General interest rate movements are used to develop sensitivity as the Company feels it has no primary exposure to a specific point on the yield curve. These limits are based on the Company’s exposure to a 100 basis points and 200 basis points immediate and sustained parallel rate move, either upward or downward. In today’s low interest rate environment, the Company also monitors its exposure to immediate and sustained parallel rate increases of 300 basis points and 400 basis points.
 
Interest Rate Risk
Our interest rate sensitivity management seeks to avoid fluctuating interest margins to provide for consistent growth of net interest income through periods of changing interest rates. Interest rate sensitivity varies with different types of interest-earning assets and interest-bearing liabilities. We attempt to maintain interest-earning assets, comprised primarily of both loans and investments, and interest-bearing liabilities, comprised primarily of deposits, maturing or repricing in similar time horizons in order to minimize or eliminate any impact from market interest rate changes.
 
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In order to measure earnings sensitivity to changing rates, the Company uses a static gap analysis and earnings simulation model.
 
The static GAP analysis starts with contractual repricing information for assets, liabilities, and off-balance sheet instruments. These items are then combined with repricing estimations for administered rate (interest-bearing demand deposits, savings, and money market accounts) and non-rate related products (demand deposit accounts, other assets, and other liabilities) to create a baseline repricing balance sheet. In addition, mortgage-backed securities are adjusted based on industry estimates of prepayment speeds.
 
The following table represents the estimated interest rate sensitivity and periodic and cumulative gap positions calculated as of December 31, 2010. Significant assumptions used for this table include: loans will repay their contractual repayment schedule; interest-bearing demand accounts and savings accounts are interest sensitive due to immediate repricing, and fixed maturity deposits will not be withdrawn prior to maturity. A significant variance in actual results from one or more of these assumptions could materially affect the results reflected in the table.
 
                                      Beyond      
                                      5 years      
                                      or no stated      
(in thousands)    Year 1    Year 2    Year 3    Year 4    Year 5    maturity    Total
Interest-Earning Assets                                              
Securities available for sale   $ 20,623     $ 63,869     $ 108,596   $ 37,809   $ 32,102   $ 98,547   $ 361,546
Other investments     -       -       -     -     -     12,278     12,278
Interest-bearing deposits     268,853       -       -     -     -     -     268,853
Federal funds sold     3,153       -       -     -     -     -     3,153
Loans (1)     1,164,655       230,913       306,126     53,953     137,415     -     1,893,062
Loans held for sale     5,640       -       -     -     -     -     5,640
Total interest-earning assets   $ 1,462,924     $ 294,782     $ 414,722   $ 91,762   $ 169,517   $ 110,825   $ 2,544,532
                                               
Interest-Bearing Liabilities                                              
Savings, NOW and Money market deposits   $ 1,070,390     $ -     $ -   $ -   $ -   $ -   $ 1,070,390
Certificates of deposit     576,437       103,170       109,482     6,406     65,230     520     861,245
Subordinated debentures     42,374       14,433       28,274     -     -     -     85,081
Other borrowings     124,633       22,000       -     -     10,000     70,000     226,633
Total interest-bearing liabilities