Enterprise Financial Services Corp - 10-Q quarterly report FY2017 Q2

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q



[X]		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2017.

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

		Commission file number 001-15373

ENTERPRISE FINANCIAL SERVICES CORP

Incorporated in the State of Delaware

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

Address: 150 North Meramec

Clayton, MO 63105

Telephone: (314) 725-5500

___________________

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

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

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



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

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

Yes [ ] No [X]

As of July 26, 2017, the Registrant had 23,462,997 shares of outstanding common stock, $0.01 par value.

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

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

TABLE OF CONTENTS



		Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets (Unaudited)		1

Condensed Consolidated Statements of Operations (Unaudited)		2

Condensed Consolidated Statements of Comprehensive Income (Unaudited)		3

Condensed Consolidated Statements of Shareholders' Equity (Unaudited)		4

Condensed Consolidated Statements of Cash Flows (Unaudited)		5

Notes to Condensed Consolidated Financial Statements (Unaudited)		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		29

Item 3. Quantitative and Qualitative Disclosures About Market Risk		52

Item 4. Controls and Procedures		53

PART II - OTHER INFORMATION

Item 1. Legal Proceedings		53

Item 1A. Risk Factors		53

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		54

Item 6. Exhibits		54

Signatures		55

PART 1 - ITEM 1 - FINANCIAL STATEMENTS

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)



(in thousands, except share and per share data)	June 30, 2017			December 31, 2016
Assets
Cash and due from banks	$	77,815		$	54,288
Federal funds sold	912			446
Interest-bearing deposits (including $2,574 and $675 pledged as collateral)	39,037			144,068
Total cash and cash equivalents	117,764			198,802
Interest-bearing deposits greater than 90 days	1,470			980
Securities available for sale	623,857			460,797
Securities held to maturity	77,641			80,463
Loans held for sale	4,285			9,562
Loans	3,894,770			3,158,161
Less: Allowance for loan losses	41,799			43,409
Total loans, net	3,852,971			3,114,752
Other real estate	529			980
Other investments, at cost	26,477			14,840
Fixed assets, net	33,987			14,910
Accrued interest receivable	11,923			11,117
State tax credits held for sale (including $1,274 and $3,585 carried at fair value)	35,247			38,071
Goodwill	116,186			30,334
Intangible assets, net	12,458			2,151
Other assets	123,901			103,569
Total assets	$	5,038,696		$	4,081,328

Liabilities and Shareholders' Equity
Demand deposits	$	1,019,064		$	866,756
Interest-bearing transaction accounts	803,104			731,539
Money market accounts	1,306,051			1,050,472
Savings	199,950			111,435
Certificates of deposit:
Brokered	133,606			117,145
Other	459,476			356,014
Total deposits	3,921,251			3,233,361
Subordinated debentures and notes (net of debt issuance cost of $1,201 and $1,267)	118,080			105,540
Federal Home Loan Bank advances	200,992			—
Other borrowings	217,180			276,980
Accrued interest payable	1,459			1,105
Other liabilities	30,981			77,244
Total liabilities	4,489,943			3,694,230

Shareholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized; 0 shares issued and outstanding	—			—
Common stock, $0.01 par value; 30,000,000 shares authorized; 23,746,748 and 20,306,353 shares issued	237			203
Treasury stock, at cost; 261,718 shares	(6,632		)	(6,632		)
Additional paid in capital	348,217			213,078
Retained earnings	206,602			182,190
Accumulated other comprehensive income (loss)	329			(1,741		)
Total shareholders' equity	548,753			387,098
Total liabilities and shareholders' equity	$	5,038,696		$	4,081,328

See accompanying notes to consolidated financial statements.

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)



	Three months ended June 30,						Six months ended June 30,
(in thousands, except per share data)	2017			2016			2017			2016
Interest income:
Interest and fees on loans	$	47,307		$	34,183		$	87,233		$	66,791
Interest on debt securities:
Taxable	3,585			2,397			6,815			4,784
Nontaxable	304			328			690			660
Interest on interest-bearing deposits	234			58			364			119
Dividends on equity securities	112			67			180			139
Total interest income	51,542			37,033			95,282			72,493
Interest expense:
Interest-bearing transaction accounts	523			329			1,198			635
Money market accounts	1,938			1,013			3,431			2,019
Savings accounts	125			63			207			123
Certificates of deposit	1,373			1,183			2,588			2,202
Subordinated debentures and notes	1,288			361			2,452			709
Federal Home Loan Bank advances	522			191			852			373
Notes payable and other borrowings	140			110			279			221
Total interest expense	5,909			3,250			11,007			6,282
Net interest income	45,633			33,783			84,275			66,211
Provision for portfolio loan losses	3,623			716			5,156			1,549
Provision reversal for purchased credit impaired loan losses	(207		)	(336		)	(355		)	(409		)
Net interest income after provision for loan losses	42,217			33,403			79,474			65,071
Noninterest income:
Service charges on deposit accounts	2,816			2,188			5,326			4,231
Wealth management revenue	2,054			1,644			3,887			3,306
Other service charges and fee income	1,661			952			2,941			1,820
Gain on sale of other real estate	17			706			17			828
Gain on state tax credits, net	9			153			255			671
Miscellaneous income	1,377			1,406			2,484			2,198
Total noninterest income	7,934			7,049			14,910			13,054
Noninterest expense:
Employee compensation and benefits	15,798			12,660			31,006			25,307
Occupancy	2,265			1,609			4,194			3,292
Data processing	1,806			1,187			3,439			2,291
Professional fees	1,079			719			1,916			1,403
FDIC and other insurance	650			738			1,474			1,461
Loan legal and other real estate expense	613			353			958			710
Merger related expenses	4,480			—			6,147			—
Other	5,960			4,087			10,253			7,651
Total noninterest expense	32,651			21,353			59,387			42,115

Income before income tax expense	17,500			19,099			34,997			36,010
Income tax expense	5,545			6,747			10,651			12,633
Net income	$	11,955		$	12,352		$	24,346		$	23,377

Earnings per common share
Basic	$	0.51		$	0.62		$	1.07		$	1.17
Diluted	0.50			0.61			1.06			1.16

See accompanying notes to consolidated financial statements.

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Unaudited)



	Three months ended June 30,				Six months ended June 30,
(in thousands)	2017		2016		2017		2016
Net income	$	11,955	$	12,352	$	24,346	$	23,377
Other comprehensive income, net of tax:
Unrealized gains on investment securities arising during the period, net of income tax expense for three months of $921 and $986, and for six months of $1,268 and $3,290, respectively	1,502		1,588		2,070		5,299
Total other comprehensive income	1,502		1,588		2,070		5,299
Total comprehensive income	$	13,457	$	13,940	$	26,416	$	28,676

See accompanying notes to consolidated financial statements.

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)



(in thousands, except per share data)	Preferred Stock		Common Stock		Treasury Stock			Additional paid in capital			Retained earnings			Accumulated other comprehensive income (loss)			Total shareholders' equity
Balance December 31, 2016	$	—	$	203	$	(6,632	)	$	213,078		$	182,190		$	(1,741	)	$	387,098
Net income	—		—		—			—			24,346			—			24,346
Reclassification adjustment for realized gain on sale of securities included in net income, net of tax	—		—		—			—			—			2,070			2,070
Total comprehensive income	—		—		—			—			24,346			2,070			26,416
Cash dividends paid on common shares, $0.22 per share	—		—		—			—			(5,163		)	—			(5,163		)
Issuance under equity compensation plans, 140,531 shares, net	—		1		—			(2,904		)	—			—			(2,903		)
Share-based compensation	—		—		—			1,576			—			—			1,576
Shares issued in connection with acquisition of Jefferson County Bancshares, Inc.	—		33		—			141,696			—			—			141,729
Reclassification for the adoption of ASU 2016-09	—		—		—			(5,229		)	5,229			—			—
Balance June 30, 2017	$	—	$	237	$	(6,632	)	$	348,217		$	206,602		$	329		$	548,753

(in thousands, except per share data)	Preferred Stock		Common Stock		Treasury Stock			Additional paid in capital			Retained earnings			Accumulated other comprehensive income (loss)			Total shareholders' equity
Balance December 31, 2015	$	—	$	201	$	(1,743	)	$	210,589		$	141,564		$	218		$	350,829
Net income	—		—		—			—			23,377			—			23,377
Other comprehensive income	—		—		—			—			—			5,299			5,299
Cash dividends paid on common shares, $0.19 per share	—		—		—			—			(3,804		)	—			(3,804		)
Repurchase of common shares	—		—		(4,711		)	—			—			—			(4,711		)
Issuance under equity compensation plans, 141,116 shares, net	—		1		—			(1,812		)	—			—			(1,811		)
Share-based compensation	—		—		—			1,626			—			—			1,626
Excess tax benefit related to equity compensation plans	—		—		—			824			—			—			824
Balance June 30, 2016	$	—	$	202	$	(6,454	)	$	211,227		$	161,137		$	5,517		$	371,629

See accompanying notes to consolidated financial statements.

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)



	Six months ended June 30,
(in thousands, except share data)	2017			2016
Cash flows from operating activities:
Net income	$	24,346		$	23,377
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation	1,583			1,070
Provision for loan losses	4,800			1,140
Deferred income taxes	4,166			3,509
Net amortization of debt securities	1,708			1,513
Amortization of intangible assets	1,207			486
Mortgage loans originated for sale	(80,697		)	(70,018		)
Proceeds from mortgage loans sold	86,127			67,278
Gain on sale of other real estate	(17		)	(828		)
Gain on state tax credits, net	(255		)	(671		)
Excess tax benefit of share-based compensation	—			(824		)
Share-based compensation	1,576			1,626
Valuation adjustment on other real estate	18			1
Net accretion of loan discount	(3,001		)	(5,692		)
Changes in:
Accrued interest receivable	1,988			276
Accrued interest payable	(299		)	(4		)
Other assets	465			(5,284		)
Other liabilities	(51,359		)	(9,295		)
Net cash (used in) provided by operating activities	(7,644		)	7,660
Cash flows from investing activities:
Proceeds from JCB acquisition, net of cash purchase price	4,456			—
Net increase in loans	(65,592		)	(112,500		)
Proceeds from the sale of securities, available for sale	143,554			—
Proceeds from the paydown or maturity of securities, available for sale	107,603			29,398
Proceeds from the paydown or maturity of securities, held to maturity	2,722			1,145
Proceeds from the redemption of other investments	23,390			34,314
Proceeds from the sale of state tax credits held for sale	4,286			3,952
Proceeds from the sale of other real estate	2,513			6,355
Payments for the purchase/origination of:
Available for sale debt and equity securities	(263,453		)	(49,012		)
Other investments	(30,977		)	(34,263		)
State tax credits held for sale	—			(2,349		)
Fixed assets	(1,140		)	(740		)
Net cash used in investing activities	(72,638		)	(123,700		)
Cash flows from financing activities:
Net increase (decrease) in noninterest-bearing deposit accounts	(8,162		)	35,713
Net increase (decrease) in interest-bearing deposit accounts	(69,117		)	207,932
Proceeds from Federal Home Loan Bank advances	1,141,181			981,000
Repayments of Federal Home Loan Bank advances	(940,681		)	(1,013,000		)
Net decrease in other borrowings	(115,911		)	(69,964		)
Cash dividends paid on common stock	(5,163		)	(3,804		)
Excess tax benefit of share-based compensation	—			824
Payments for the repurchase of common stock	—			(4,711		)
Issuance of common stock, net	(2,903		)	(1,811		)
Net cash (used in) provided by financing activities	(756		)	132,179
Net increase (decrease) in cash and cash equivalents	(81,038		)	16,139
Cash and cash equivalents, beginning of period	198,802			94,157
Cash and cash equivalents, end of period	$	117,764		$	110,296
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	10,653		$	6,286
Income taxes	6,386			19,124
Noncash transactions:
Transfer to other real estate owned in settlement of loans	$	289		$	2,683
Sales of other real estate financed	—			140
Common shares issued in connection with JCB acquisition	141,729			—

See accompanying notes to consolidated financial statements.

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Business and Consolidation

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

Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2017. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

Basis of Financial Statement Presentation

The condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with the accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The condensed consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All intercompany accounts and transactions have been eliminated. In 2017, the Company changed its presentation of loans on the face of the Condensed Consolidated Balance Sheets to combine originated loans with purchased loans. See Note 5 - Loans for more information. The Company adopted Accounting Standards Update (ASU) 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting during the first quarter of 2017. Among other elements, the ASU requires an entity to recognize all excess tax benefits and deficiencies related to stock-based compensation expense as income tax expense or benefit in the statements of operations. The ASU requires adjustments be reflected as of the beginning of the fiscal year of adoption and as a result, $5.2 million of previously recognized excess tax benefits were reclassified from Additional paid in capital to Retained earnings during the first quarter of 2017. The adoption resulted in a decrease to income tax expense of $1.8 million for the six months ended June 30, 2017. Excess tax benefits related to stock compensation are presented as a cash inflow from operating activities for the six months ended June 30, 2017 due to the prospective adoption of employee share-based payment guidance in 2017. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

Acquisitions

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

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

Purchased Credit Impaired ("PCI") Loans

Purchased credit impaired ("PCI") loans were acquired in a business combination or transaction that have evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments receivable. PCI loans were initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance. The difference between the undiscounted cash flows expected at acquisition and the investment in the loans, or the “accretable yield,” is recognized as interest income on a level-yield method over the life of the loans. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “nonaccretable difference,” are not recognized as a yield adjustment or as a loss accrual or a valuation allowance. The Company aggregates individual loans with common risk characteristics into pools of loans. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loans over their remaining lives. Decreases in expected cash flows due to an inability to collect contractual cash flows are recognized as impairment through the provision for loan losses account. Any allowance for loan loss on these pools reflect only losses incurred after the acquisition. Disposals of loans, including sales of loans, paydowns, payments in full or foreclosures result in the removal or reduction of the loan from the loan pool.

PCI loans are generally considered accruing and performing, as the loans accrete income over the estimated life of the loan, in circumstances where cash flows are reasonably estimable by management. Accordingly, PCI loans that could be contractually past due could be considered to be accruing and performing. If the timing and amount of future cash flows is not reasonably estimable or is less than the carrying value, the loans may be classified as nonaccrual loans and the purchase price discount on those loans is not recorded as interest income until the timing and amount of future cash flows can be reasonably estimable.

Allowance for Loan Losses on PCI Loans

The Company updates its cash flow projections for purchased credit-impaired loans on a periodic basis. Assumptions utilized in this process include projections related to probability of default, loss severity, prepayment, extensions and recovery lag. Projections related to probability of default and prepayment are calculated utilizing a loan migration analysis and management’s assessment of loss exposure including the fair value of underlying collateral. The loan migration analysis is a matrix that specifies the probability of a loan pool transitioning into a particular delinquency or liquidation state given its current performance at the measurement date. Loss severity factors are based upon industry data and historical experience.

Any decreases in expected cash flows after the acquisition date and subsequent measurement periods are recognized by recording an impairment in allowance for loan losses through a provision for loan losses.

NOTE 2 - ACQUISITIONS

Acquisition of Jefferson County Bancshares, Inc.

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

JCB shareholders received, based on their election, cash consideration in an amount of $85.39 per share of JCB common stock or 2.75 shares of EFSC common stock per share of JCB common stock, subject to allocation and proration procedures. Aggregate consideration at closing was 3.3 million shares of EFSC common stock and $29.3 million cash

paid to JCB shareholders and holders of JCB stock options. Based on EFSC’s closing stock price of $42.95 on February 10, 2017, the overall transaction had a value of $171.0 million, including JCB’s common stock and stock options. The Company also recognized $6.1 million and $1.4 million of merger related costs that were recorded in noninterest expense in the statement of operations for the six months ended June 30, 2017, and year ended December 31, 2016, respectively.

The acquisition of JCB has been accounted for as a business combination using the acquisition method of accounting which requires assets acquired and liabilities assumed to be recognized at fair value as of the acquisition date. The estimates of fair value are preliminary and subject to refinement as the Company completes its evaluation of the acquired assets and liabilities. Goodwill of $85.9 million arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of JCB into Enterprise. The goodwill is assigned as part of the Company's Banking reporting unit. None of the goodwill recognized is expected to be deductible for income tax purposes.

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



(in thousands)	As Recorded by JCB		Adjustments				As Recorded by EFSC
Assets acquired:
Cash and cash equivalents	$	33,739	$	—			$	33,739
Interest-bearing deposits	1,715		—				1,715
Securities	148,670		—				148,670
Portfolio loans, net	685,905		(11,094		)	(a)	674,811
Other real estate owned	6,762		(5,082		)	(b)	1,680
Other investments	2,695		—				2,695
Fixed assets, net	21,780		(2,259		)	(c)	19,521
Accrued interest receivable	2,794		—				2,794
Goodwill	7,806		(7,806		)	(d)	—
Other intangible assets	25		11,489			(e)	11,514
Deferred tax assets	4,634		4,144			(f)	8,778
Other assets	19,107		(296		)	(g)	18,811
Total assets acquired	$	935,632	$	(10,904	)		$	924,728

Liabilities assumed:
Deposits	$	764,539	$	629		(h)	$	765,168
Other borrowings	55,430		681			(i)	56,111
Trust preferred securities	12,887		(382		)	(j)	12,505
Accrued interest payable	653		—				653
Other liabilities	5,006		125				5,131
Total liabilities assumed	$	838,515	$	1,053			$	839,568

Net assets acquired	$	97,117	$	(11,957	)		$	85,160

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

Goodwill							$	85,852

(a)

Fair value adjustments based on the Company’s evaluation of the acquired loan portfolio, write-off of net deferred loan costs, reclassification from other real estate owned, and elimination of the allowance for loan losses recorded by JCB. The fair value discount recorded to the loan portfolio is $24.7 million. An increase in the loan fair value discount was recorded during the second quarter of 2017 in the amount of $0.5 million upon continued refinement of the fair values.


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


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


(d)	Eliminate JCB’s recorded goodwill.


(e)	Record the core deposit intangible asset on the acquired core deposit accounts. Amount to be amortized using a sum of years digits method over a 10 year useful life. The adjustment was increased $1.5 million during the second quarter due to continued refinement of the purchase accounting calculations.


(f)	Adjustment for deferred taxes at the acquisition date. The adjustment decreased by $2.9 million during the current quarter due to continued refinement of the purchase accounting calculations.


(g)	Fair value adjustment based on evaluation of other assets.


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


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


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

The following table provides the unaudited pro forma information for the results of operations for the six months ended June 30, 2017 and 2016, as if the acquisition had occurred on January 1, 2016. The pro forma results combine the historical results of JCB with the Company’s Consolidated Statements of Income, adjusted for the impact of the application of the acquisition method of accounting including loan discount accretion, intangible assets amortization, and deposit and trust preferred securities premium accretion, net of taxes. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been obtained had the acquisition actually occurred on January 1, 2016. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions. Only the acquisition related expenses that have been incurred as of June 30, 2017 are included in net income in the table below.



	Pro Forma
	Six months ended June 30,
(in thousands, except per share data)	2017		2016
Total revenues (net interest income plus noninterest income)	$	101,954	$	97,208
Net income	23,845		27,721
Diluted earnings per common share	1.00		1.18

NOTE 3 - EARNINGS PER SHARE

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

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



	Three months ended June 30,				Six months ended June 30,
(in thousands, except per share data)	2017		2016		2017		2016
Net income as reported	$	11,955	$	12,352	$	24,346	$	23,377

Weighted average common shares outstanding	23,475		20,003		22,706		20,002
Additional dilutive common stock equivalents	257		213		314		224
Weighted average diluted common shares outstanding	23,732		20,216		23,020		20,226

Basic earnings per common share:	$	0.51	$	0.62	$	1.07	$	1.17
Diluted earnings per common share:	$	0.50	$	0.61	$	1.06	$	1.16

For the three and six months ended June 30, 2017 and 2016, there were no common stock equivalents excluded from the earnings per share calculations because their effect would have been anti-dilutive.

NOTE 4 - INVESTMENTS

The following table presents the amortized cost, gross unrealized gains and losses and fair value of securities available for sale and held to maturity:



	June 30, 2017
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for sale securities:
Obligations of U.S. Government-sponsored enterprises	$	99,855	$	386	$	(6	)	$	100,235
Obligations of states and political subdivisions	34,083		1,001		—			35,084
Agency mortgage-backed securities	488,951		2,108		(2,521		)	488,538
Total securities available for sale	$	622,889	$	3,495	$	(2,527	)	$	623,857
Held to maturity securities:
Obligations of states and political subdivisions	$	14,722	$	189	$	(7	)	$	14,904
Agency mortgage-backed securities	62,919		135		(127		)	62,927
Total securities held to maturity	$	77,641	$	324	$	(134	)	$	77,831



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

At June 30, 2017, and December 31, 2016, there were no holdings of securities of any one issuer in an amount greater than 10% of shareholders’ equity, other than U.S. Government agencies and sponsored enterprises. The agency mortgage-backed securities are all issued by U.S. Government-sponsored enterprises. Available for sale securities having a fair value of $418.9 million and $407.3 million at June 30, 2017, and December 31, 2016, respectively, were pledged as collateral to secure deposits of public institutions and for other purposes as required by law or contract provisions.

The amortized cost and estimated fair value of debt securities at June 30, 2017, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The weighted average life of the mortgage-backed securities is approximately 5 years.



	Available for sale				Held to maturity
(in thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	1,780	$	1,791	$	—	$	—
Due after one year through five years	111,987		112,761		—		—
Due after five years through ten years	16,807		17,391		12,367		12,529
Due after ten years	3,364		3,375		2,355		2,375
Agency mortgage-backed securities	488,951		488,539		62,919		62,927
	$	622,889	$	623,857	$	77,641	$	77,831

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



	June 30, 2017
	Less than 12 months				12 months or more				Total
(in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S. Government-sponsored enterprises	$	10,142	$	6	$	—	$	—	$	10,142	$	6
Obligations of states and political subdivisions	$	1,642	$	7	$	—	$	—	$	1,642	$	7
Agency mortgage-backed securities	293,426		2,197		12,918		451		306,344		2,648
	$	305,210	$	2,210	$	12,918	$	451	$	318,128	$	2,661

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

The unrealized losses at both June 30, 2017, and December 31, 2016, were primarily attributable to changes in market interest rates since the securities were purchased. Management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. This analysis requires management to consider various factors, which include among other considerations (1) the present value of the cash flows expected to be collected compared to the amortized cost of the security, (2) duration and magnitude of the decline in value, (3) the financial condition of the issuer or issuers, (4) structure of the security, and (5) the intent to sell the security or whether it is more likely than not the Company would be required to sell the security before its anticipated recovery in market value. At June 30, 2017, management performed its quarterly analysis of all securities with an unrealized loss and concluded no individual securities were other-than-temporarily impaired.

NOTE 5 - LOANS

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

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



(in thousands)	June 30, 2017		December 31, 2016
Loans not accounted for as ASC 310-30	$	3,810,470	$	3,118,392
Loans accounted for as ASC 310-30	84,300		39,769
Total loans	$	3,894,770	$	3,158,161

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

Below is a summary of loans by category at June 30, 2017 and December 31, 2016:



(in thousands)	June 30, 2017			December 31, 2016
Commercial and industrial	$	1,795,667		$	1,632,714
Real estate:
Commercial - investor owned	711,702			544,808
Commercial - owner occupied	523,185			350,148
Construction and land development	283,226			194,542
Residential	345,895			240,760
Total real estate loans	1,864,008			1,330,258
Consumer and other	151,670			156,182
Loans, before unearned loan fees	3,811,345			3,119,154
Unearned loan fees, net	(875		)	(762		)
Loans, including unearned loan fees	$	3,810,470		$	3,118,392

A summary of the activity in the allowance for loan losses and the recorded investment in loans by class and category based on impairment method through June 30, 2017, and at December 31, 2016, is as follows:



(in thousands)	Commercial and industrial			CRE - investor owned			CRE - owner occupied			Construction and land development			Residential real estate			Consumer and other			Total
Allowance for loan losses:
Balance at December 31, 2016	$	26,996		$	3,420		$	2,890		$	1,304		$	2,023		$	932		$	37,565
Provision (provision reversal) for loan losses	1,835			(105		)	(249		)	(11		)	(3		)	66			1,533
Losses charged off	(133		)	—			—			—			(9		)	(29		)	(171		)
Recoveries	80			9			89			9			25			9			221
Balance at March 31, 2017	$	28,778		$	3,324		$	2,730		$	1,302		$	2,036		$	978		$	39,148
Provision (provision reversal) for loan losses	2,955			(39		)	354			(51		)	451			(47		)	3,623
Losses charged off	(6,035		)	—			(45		)	(5		)	(265		)	(39		)	(6,389		)
Recoveries	57			102			1			49			62			20			291
Balance at June 30, 2017	$	25,755		$	3,387		$	3,040		$	1,295		$	2,284		$	912		$	36,673



(in thousands)	Commercial and industrial		CRE - investor owned		CRE - owner occupied		Construction and land development		Residential real estate		Consumer and other		Total
Balance June 30, 2017
Allowance for loan losses - Ending balance:
Individually evaluated for impairment	$	1,616	$	—	$	—	$	131	$	52	$	—	$	1,799
Collectively evaluated for impairment	24,139		3,387		3,040		1,164		2,232		912		34,874
Total	$	25,755	$	3,387	$	3,040	$	1,295	$	2,284	$	912	$	36,673
Loans - Ending balance:
Individually evaluated for impairment	$	10,209	$	287	$	1,552	$	1,489	$	1,293	$	9	$	14,839
Collectively evaluated for impairment	1,785,458		711,415		521,633		281,737		344,602		150,786		3,795,631
Total	$	1,795,667	$	711,702	$	523,185	$	283,226	$	345,895	$	150,795	$	3,810,470

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

A summary of non-performing loans individually evaluated for impairment by category at June 30, 2017 and December 31, 2016, is as follows:



	June 30, 2017
(in thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Commercial and industrial	$	15,548	$	3,751	$	6,534	$	10,285	$	1,572	$	15,283
Real estate:
Commercial - investor owned	288		288		—		288		—		288
Commercial - owner occupied	—		—		—		—		—		—
Construction and land development	1,935		1,603		332		1,935		131		1,550
Residential	1,540		632		678		1,310		52		1,514
Consumer and other	9		9		—		9		—		9
Total	$	19,320	$	6,283	$	7,544	$	13,827	$	1,755	$	18,644



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

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



	Three months ended June 30,				Six months ended June 30,
(in thousands)	2017		2016		2017		2016
Total interest income that would have been recognized under original terms	$	340	$	329	$	655	$	477
Total cash received and recognized as interest income on non-accrual loans	16		44		39		50
Total interest income recognized on impaired loans	14		25		47		31

There were no loans over 90 days past due and still accruing interest at June 30, 2017 or December 31, 2016.

The recorded investment in impaired loans by category at June 30, 2017 and December 31, 2016, is as follows:



	June 30, 2017
(in thousands)	Non-accrual		Restructured		Total
Commercial and industrial	$	9,608	$	677	$	10,285
Real estate:
Commercial - investor owned	288		—		288
Commercial - owner occupied	—		—		—
Construction and land development	1,935		—		1,935
Residential	1,310		—		1,310
Consumer and other	9		—		9
Total	$	13,150	$	677	$	13,827



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

The recorded investment by category for the Portfolio loans that have been restructured during the three and six months ended June 30, 2017 and 2016, is as follows:



	Three months ended June 30, 2017					Three months ended June 30, 2016
(in thousands, except for number of loans)	Number of loans	Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance		Number of loans	Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance
Commercial and industrial	1	$	676	$	676	1	$	2,300	$	2,300
Real estate:
Commercial - investor owned	—	—		—		—	—		—
Commercial - owner occupied	—	—		—		—	—		—
Construction and land development	—	—		—		1	20		20
Residential	—	—		—		—	—		—
Consumer and other	—	—		—		—	—		—
Total	1	$	676	$	676	2	$	2,320	$	2,320



	Six months ended June 30, 2017					Six months ended June 30, 2016
(in thousands, except for number of loans)	Number of loans	Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance		Number of loans	Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance
Commercial and industrial	1	$	676	$	676	2	$	2,341	$	2,341
Real estate:
Commercial - investor owned	—	—		—		1	248		248
Commercial - owner occupied	—	—		—		—	—		—
Construction and land development	—	—		—		1	20		20
Residential	—	—		—		—	—		—
Consumer and other	—	—		—		—	—		—
Total	1	$	676	$	676	4	$	2,609	$	2,609

As of June 30, 2017, the Company had $0.7 million specific reserves allocated to loans that have been restructured. During the three and six months ended June 30, 2016, there were no portfolio loans that subsequently defaulted. Portfolio loans restructured that subsequently defaulted during the three and six months ended June 30, 2017, are as follows:



	Three months ended June 30, 2017			Six months ended June 30, 2017
(in thousands, except for number of loans)	Number of loans	Recorded Balance		Number of loans	Recorded Balance
Commercial and industrial	2	$	343	2	$	343
Real estate:
Commercial - investor owned	—	—		—	—
Commercial - owner occupied	—	—		—	—
Construction and land development	—	—		—	—
Residential	1	5		1	5
Consumer and other	—	—		—	—
Total	3	$	348	3	$	348

The aging of the recorded investment in past due loans by portfolio class and category at June 30, 2017 and December 31, 2016 is shown below.



	June 30, 2017
(in thousands)	30-89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total
Commercial and industrial	$	936	$	—	$	936	$	1,794,731	$	1,795,667
Real estate:
Commercial - investor owned	205		—		205		711,497		711,702
Commercial - owner occupied	—		—		—		523,185		523,185
Construction and land development	47		1,489		1,536		281,690		283,226
Residential	836		621		1,457		344,438		345,895
Consumer and other	11		9		20		150,775		150,795
Total	$	2,035	$	2,119	$	4,154	$	3,806,316	$	3,810,470



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

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, payment experience, credit documentation, and current economic factors among other factors. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:


•	Grades 1, 2, and 3 – Includes loans to borrowers with a continuous record of strong earnings, sound balance sheet condition and capitalization, ample liquidity with solid cash flow, and whose management team has experience and depth within their industry.


•	Grade 4 – Includes loans to borrowers with positive trends in profitability, satisfactory capitalization and balance sheet condition, and sufficient liquidity and cash flow.


•	Grade 5 – Includes loans to borrowers that may display fluctuating trends in sales, profitability, capitalization, liquidity, and cash flow.


•	Grade 6 – Includes loans to borrowers where an adverse change or perceived weakness has occurred, but may be correctable in the near future. Alternatively, this rating category may also include circumstances where the borrower is starting to reverse a negative trend or condition, or has recently been upgraded from a 7, 8, or 9 rating.


•	Grade 7 – Watch credits are borrowers that have experienced financial setback of a nature that is not determined to be severe or influence ‘ongoing concern’ expectations. Although possible, no loss is anticipated, due to strong collateral and/or guarantor support.


•	Grade 8 – Substandard credits will include those borrowers characterized by significant losses and sustained downward trends in balance sheet condition, liquidity, and cash flow. Repayment reliance may have shifted to secondary sources. Collateral exposure may exist and additional reserves may be warranted.


•	Grade 9 – Doubtful credits include borrowers that may show deteriorating trends that are unlikely to be corrected. Collateral values may appear insufficient for full recovery, therefore requiring a partial charge-off, or debt renegotiation with the borrower. The borrower may have declared bankruptcy or bankruptcy is likely in the near term. All doubtful rated credits will be on non-accrual.

The recorded investment by risk category of the loans by portfolio class and category at June 30, 2017, which is based upon the most recent analysis performed, and December 31, 2016 is as follows:



	June 30, 2017
(in thousands)	Pass (1-6)		Watch (7)		Substandard (8)		Doubtful (9)		Total
Commercial and industrial	$	1,656,173	$	67,262	$	72,232	$	—	$	1,795,667
Real estate:
Commercial - investor owned	692,743		14,955		4,004		—		711,702
Commercial - owner occupied	483,183		32,800		7,202		—		523,185
Construction and land development	278,365		2,730		2,131		—		283,226
Residential	335,818		2,743		7,334		—		345,895
Consumer and other	149,060		375		1,360		—		150,795
Total	$	3,595,342	$	120,865	$	94,263	$	—	$	3,810,470



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

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

Below is a summary of PCI loans by category at June 30, 2017 and December 31, 2016:



	June 30, 2017			December 31, 2016
(in thousands)	Weighted- Average Risk Rating¹	Recorded Investment PCI Loans		Weighted- Average Risk Rating¹	Recorded Investment PCI Loans
Commercial and industrial	6.02	$	4,059	5.87	$	3,523
Real estate:
Commercial - investor owned	7.35	46,180		6.95	8,162
Commercial - owner occupied	6.55	12,743		6.39	11,863
Construction and land development	5.84	7,883		5.80	4,365
Residential	6.15	13,370		5.64	11,792
Total real estate loans		80,176			36,182
Consumer and other	2.81	65		1.64	64
Purchased credit impaired loans		$	84,300		$	39,769
¹Risk ratings are based on the borrower's contractual obligation, which is not reflective of the purchase discount.

The aging of the recorded investment in past due PCI loans by portfolio class and category at June 30, 2017 and December 31, 2016 is shown below:



	June 30, 2017
(in thousands)	30-89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total
Commercial and industrial	$	—	$	50	$	50	$	4,009	$	4,059
Real estate:
Commercial - investor owned	4,052		—		4,052		42,128		46,180
Commercial - owner occupied	653		401		1,054		11,689		12,743
Construction and land development	—		366		366		7,517		7,883
Residential	400		1,303		1,703		11,667		13,370
Consumer and other	—		—		—		65		65
Total	$	5,105	$	2,120	$	7,225	$	77,075	$	84,300



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

The following table is a rollforward of PCI loans, net of the allowance for loan losses, for the six months ended June 30, 2017 and 2016.



(in thousands)	Contractual Cashflows			Non-accretable Difference			Accretable Yield			Carrying Amount
Balance December 31, 2016	$	66,003		$	18,902		$	13,176		$	33,925
Acquisitions	68,763			14,296			5,312			49,155
Principal reductions and interest payments	(10,781		)	—			—			(10,781		)
Accretion of loan discount	—			—			(3,534		)	3,534
Changes in contractual and expected cash flows due to remeasurement	5,641			(1,383		)	1,328			5,696
Reductions due to disposals	(5,070		)	(1,317		)	(1,398		)	(2,355		)
Balance June 30, 2017	$	124,556		$	30,498		$	14,884		$	79,174

Balance December 31, 2015	$	116,689		$	26,765		$	25,341		$	64,583
Principal reductions and interest payments	(11,768		)	—			—			(11,768		)
Accretion of loan discount	—			—			(3,431		)	3,431
Changes in contractual and expected cash flows due to remeasurement	6,144			1,522			(788		)	5,410
Reductions due to disposals	(21,663		)	(4,912		)	(3,073		)	(13,678		)
Balance June 30, 2016	$	89,402		$	23,375		$	18,049		$	47,978

The accretable yield is recognized in interest income over the estimated life of the acquired loans using the effective yield method. Outstanding customer balances on PCI loans were $112.6 million and $54.6 million as of June 30, 2017, and December 31, 2016, respectively.

NOTE 6 - COMMITMENTS AND CONTINGENCIES

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

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

The Company uses the same credit policies in making commitments and conditional obligations as it does for financial instruments included on its consolidated balance sheets. At June 30, 2017, the amount of unadvanced commitments on impaired loans was insignificant.

The contractual amounts of off-balance-sheet financial instruments as of June 30, 2017, and December 31, 2016, are as follows:



(in thousands)	June 30, 2017		December 31, 2016
Commitments to extend credit	$	1,232,326	$	1,075,170
Letters of credit	81,154		78,954

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments usually have fixed expiration dates or other termination clauses, may have significant usage restrictions, and may require payment of a fee. Of the total commitments to extend credit at June 30, 2017, and December 31, 2016, approximately $119 million and $90 million, respectively, represent fixed rate loan commitments. Since certain of the commitments may expire without being drawn upon or may be revoked, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, premises and equipment, and real estate. Other liabilities include $0.3 million for estimated losses attributable to the unadvanced commitments at June 30, 2017, and December 31, 2016.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance or payment of a customer to a third party. These standby letters of credit are issued to support contractual obligations of the Company’s customers. The credit risk involved in issuing letters of credit is essentially the same as the risk involved in extending loans to customers. As of June 30, 2017, the approximate remaining term of standby letters of credit range from 1 month to 4 years and 3 months.

Contingencies

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

NOTE 7 - DERIVATIVE FINANCIAL INSTRUMENTS

The Company is a party to various derivative financial instruments that are used in the normal course of business to meet the needs of its clients and as part of its risk management activities. These instruments include interest rate swaps and option contracts and foreign exchange forward contracts. The Company does not enter into derivative financial instruments for trading purposes.

Risk Management Instruments. At June 30, 2017, the company has no derivative contracts used to manage risk.

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



					Asset Derivatives (Other Assets)				Liability Derivatives (Other Liabilities)
	Notional Amount				Fair Value				Fair Value
(in thousands)	June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016
Non-designated hedging instruments
Interest rate swap contracts	$	229,238	$	124,322	$	1,951	$	982	$	1,951	$	982
Foreign exchange forward contracts	1,625		3,034		1,625		3,034		1,625		3,034

Changes in the fair value of client-related derivative instruments are recognized currently in operations. For the three and six months ended June 30, 2017 and 2016, the gains and losses offset each other due to the Company's hedging of the client swaps and foreign exchange contracts with other bank counterparties.

NOTE 8 - FAIR VALUE MEASUREMENTS

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

The following table summarizes financial instruments measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:



	June 30, 2017
(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
Assets
Securities available for sale
Obligations of U.S. Government-sponsored enterprises	$	—	$	100,235	$	—	$	100,235
Obligations of states and political subdivisions	—		35,084		—		35,084
Residential mortgage-backed securities	—		488,538		—		488,538
Total securities available for sale	$	—	$	623,857	$	—	$	623,857
State tax credits held for sale	—		—		1,274		1,274
Derivative financial instruments	—		3,577		—		3,577
Total assets	$	—	$	627,434	$	1,274	$	628,708

Liabilities
Derivative financial instruments	$	—	$	3,577	$	—	$	3,577
Total liabilities	$	—	$	3,577	$	—	$	3,577



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

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


•	Securities available for sale. Securities classified as available for sale are reported at fair value utilizing Level 2 and Level 3 inputs. Fair values for Level 2 securities are based upon dealer quotes, market spreads, the U.S. Treasury yield curve, trade execution data, market consensus prepayment speeds, credit information and the

bond's terms and conditions at the security level. At June 30, 2017, there were no Level 3 Auction Rate Securities. Auction Rate Securities at June 30, 2017 were valued using a Level 2 pricing source similar to our other securities available for sale.


•	State tax credits held for sale. At June 30, 2017, of the $35.2 million of state tax credits held for sale on the condensed consolidated balance sheet, approximately $1.3 million were carried at fair value. The remaining $34.0 million of state tax credits were accounted for at cost.

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

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

•

Derivatives. Derivatives are reported at fair value utilizing Level 2 inputs. The Company obtains counterparty quotations to value its interest rate swaps. In addition, the Company validates the counterparty quotations with third party valuation sources. Derivatives with negative fair values are included in Other liabilities in the consolidated balance sheets. Derivatives with positive fair value are included in Other assets in the consolidated balance sheets.

Level 3 financial instruments

The following table presents the changes in Level 3 financial instruments measured at fair value on a recurring basis as of June 30, 2017 and 2016.


•	Purchases, sales, issuances and settlements. There were no Level 3 purchases during the quarters ended June 30, 2017 or 2016.


•	Transfers in and/or out of Level 3. There was $3.1 million in Level 3 transfers to Level 2 during the current quarter and none during the quarter ended June 30, 2016.



	Securities available for sale, at fair value
	Three months ended June 30,					Six months ended June 30,
(in thousands)	2017			2016		2017			2016
Beginning balance	$	3,093		$	3,085	$	3,089		$	3,077
Total gains:
Included in other comprehensive income	—			8		4			16
Purchases, sales, issuances and settlements:
Purchases	—			—		—			—
Transfer in and/or out of Level 3	(3,093		)	—		(3,093		)	—
Ending balance	$	—		$	3,093	$	—		$	3,093

Change in unrealized gains relating to assets still held at the reporting date	$	—		$	8	$	—		$	16



	State tax credits held for sale
	Three months ended June 30,					Six months ended June 30,
(in thousands)	2017			2016		2017			2016
Beginning balance	$	1,458		$	4,733	$	3,585		$	5,941
Total gains:
Included in earnings	9			41		49			117
Purchases, sales, issuances and settlements:
Sales	(193		)	—		(2,360		)	(1,284		)
Ending balance	$	1,274		$	4,774	$	1,274		$	4,774

Change in unrealized gains (losses) relating to assets still held at the reporting date	$	(49	)	$	41	$	(655	)	$	(264	)

From time to time, the Company measures certain assets at fair value on a nonrecurring basis. These include assets that are measured at the lower of cost or fair value that were recognized at fair value below cost at the end of the period. The following table presents financial instruments and non-financial assets measured at fair value on a non-recurring basis as of June 30, 2017.



	(1)		(1)		(1)		(1)
(in thousands)	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total losses for the three months ended June 30, 2017		Total losses for the six months ended June 30, 2017
Impaired loans	$	10,073	$	—	$	—	$	10,073	$	6,403	$	6,560
Other real estate	—		—		—		—		—		18
Total	$	10,073	$	—	$	—	$	10,073	$	6,403	$	6,578

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

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

Following is a summary of the carrying amounts and fair values of the Company’s financial instruments on the consolidated balance sheets at June 30, 2017 and December 31, 2016.



	June 30, 2017				December 31, 2016
(in thousands)	Carrying Amount		Estimated fair value		Carrying Amount		Estimated fair value
Balance sheet assets
Cash and due from banks	$	77,815	$	77,815	$	54,288	$	54,288
Federal funds sold	912		912		446		446
Interest-bearing deposits	40,507		40,507		145,048		145,048
Securities available for sale	623,857		623,857		460,797		460,797
Securities held to maturity	77,641		77,831		80,463		79,639
Other investments, at cost	26,477		26,477		14,840		14,840
Loans held for sale	4,285		4,285		9,562		9,562
Derivative financial instruments	3,577		3,577		4,016		4,016
Loans, net	3,852,971		3,867,481		3,114,752		3,125,701
State tax credits, held for sale	35,247		36,857		38,071		41,264
Accrued interest receivable	11,923		11,923		11,117		11,117

Balance sheet liabilities
Deposits	3,921,251		3,919,379		3,233,361		3,232,414
Subordinated debentures and notes	118,080		99,873		105,540		86,052
Federal Home Loan Bank advances	200,992		201,397		—		—
Other borrowings	217,180		217,077		276,980		276,905
Derivative financial instruments	3,577		3,577		4,016		4,016
Accrued interest payable	1,459		1,459		1,105		1,105

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

The following table presents the level in the fair value hierarchy for the estimated fair values of only the Company’s financial instruments that are not already presented on the condensed consolidated balance sheets at fair value at June 30, 2017, and December 31, 2016.



	Estimated Fair Value Measurement at Reporting Date Using						Balance at June 30, 2017
(in thousands)	Level 1		Level 2		Level 3
Financial Assets:
Securities held to maturity	$	—	$	77,831	$	—	$	77,831
Portfolio loans, net	—		—		3,867,481		3,867,481
State tax credits, held for sale	—		—		35,583		35,583
Financial Liabilities:
Deposits	3,328,169		—		591,210		3,919,379
Subordinated debentures and notes	—		99,873		—		99,873
Federal Home Loan Bank advances	—		201,397		—		201,397
Other borrowings	—		217,077		—		217,077

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

NOTE 9 - NEW AUTHORITATIVE ACCOUNTING GUIDANCE

Financial Accounting Standards Board (the "FASB") Accounting Standards Update ( the "ASU") 2017-09 "Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting" In May 2017, the FASB issued ASU 2017-09, "Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting" which amends the scope of modification accounting for share-based payment awards. The amendments provide guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. The amendments are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption being permitted. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on its financial statements.

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

FASB ASU 2017-04 "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" In January 2017, the FASB issued ASU 2017-04 "Simplifying the Test for Goodwill Impairment" which simplifies the measurement of goodwill impairment by removing step two of the goodwill impairment test. The new guidance requires goodwill impairment to be measured as the amount by which a reporting unit's carrying value exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments should be applied on a prospective basis. The guidance becomes effective for testing periods beginning after January 1, 2017. The new guidance will be applied in the Company's 2017 annual impairment testing and is expected to not have an impact on the Company's consolidated financial statements.

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

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

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

FASB ASU 2016-01 "Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities" In January 2016, the FASB issued ASU 2016-01, "Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." ASU 2016-01 requires equity investments to be measured at fair value through earnings, and eliminates the available-for-sale classification for equity securities with readily determinable fair values. For financial liabilities where the fair value option has been elected, changes in fair value due to instrument-specific credit risk must be recognized in other comprehensive income. When measuring the fair value of financial instruments at amortized cost, the exit price must be used for disclosure purposes. The ASU also requires that financial assets and liabilities be presented separately in the notes to the financial statements. This ASU becomes effective for fiscal years beginning after December 15, 2017, including interim periods therein. Early adoption is permitted with some exceptions. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on its financial statements.

FASB ASU 2014-09, "Revenue from Contracts with Customers" In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”. The objective of ASU 2014-09 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle of ASU 2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the new guidance, an entity will (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract’s performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. The new guidance was originally effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2016 for public companies. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of this guidance to annual reporting periods beginning after December 15, 2017 for public companies, and permits early adoption on a limited basis. The Company has conducted its initial assessment and is currently evaluating contracts to assess and quantify accounting methodology changes resulting from the adoption of ASU 2014-09. The majority of the Company’s revenues are derived from loans which are excluded from the new standard; therefore, the new guidance is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows. The Company has not decided upon the method of adoption. Entities have the option of using either a full retrospective or modified approach of adoption.

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

RESULTS OF OPERATIONS

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

Some of the information in this report contains “forward-looking statements” within the meaning of and intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements typically are identified with use of terms such as “may,” “might,” “will, “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “could,” “continue” and the negative of these terms and similar words, although some forward-looking statements may be expressed differently. Forward-looking statements also include, but are not limited to, statements regarding plans, objectives, expectations or consequences of statements about the future performance, operations products and services of the Company and its subsidiaries. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. You should be aware that our actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including, but not limited to: our ability to efficiently integrate acquisitions into our operations, retain the customers of these businesses and grow the acquired operations: credit risk; changes in the appraised valuation of real estate securing impaired loans; outcomes of litigation and other contingencies; exposure to general and local economic conditions; risks associated with rapid increases or decreases in prevailing interest rates; consolidation within the banking industry; competition from banks and other financial institutions; our ability to attract and retain relationship officers and other key personnel; burdens imposed by federal and state regulation; changes in regulatory requirements; changes in accounting regulation or standards applicable to banks; and other risks discussed under the caption “Risk Factors” of our most recently filed Form 10-K or within this Form 10-Q, all of which could cause the Company’s actual results to differ from those set forth in the forward-looking statements.

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

Introduction

The following discussion describes the significant changes to the financial condition of the Company that have occurred during the first six months of 2017 compared to the financial condition as of December 31, 2016. In addition, this discussion summarizes the significant factors affecting the results of operations, liquidity and cash flows of the Company for the three and six months ended June 30, 2017, compared to the same periods in 2016. This discussion should be read in conjunction with the accompanying condensed consolidated financial statements included in this report and our Annual Report on Form 10-K for the year ended December 31, 2016.

Executive Summary

The Company closed its acquisition of Jefferson County Bancshares, Inc. (JCB) on February 10, 2017. The results of operations of JCB are included in our consolidated results since this date. See Item 1-Note 2 - Acquisitions for more information.

Below are highlights of our financial performance for the three and six months ended June 30, 2017, as compared to the linked quarter ended March 31, 2017, and prior year period.



(in thousands, except per share data)	For the Three Months ended/At									For the Six Months ended
(in thousands, except per share data)	June 30, 2017			March 31, 2017			June 30, 2016			June 30, 2017			June 30, 2016
EARNINGS
Total interest income	$	51,542		$	43,740		$	37,033		$	95,282		$	72,493
Total interest expense	5,909			5,098			3,250			11,007			6,282
Net interest income	45,633			38,642			33,783			84,275			66,211
Provision for portfolio loans	3,623			1,533			716			5,156			1,549
Provision reversal for PCI loans	(207		)	(148		)	(336		)	(355		)	(409		)
Net interest income after provision for loan losses	42,217			37,257			33,403			79,474			65,071
Total noninterest income	7,934			6,976			7,049			14,910			13,054
Total noninterest expense	32,651			26,736			21,353			59,387			42,115
Income before income tax expense	17,500			17,497			19,099			34,997			36,010
Income tax expense	5,545			5,106			6,747			10,651			12,633
Net income	$	11,955		$	12,391		$	12,352		$	24,346		$	23,377

Basic earnings per share	$	0.51		$	0.57		$	0.62		$	1.07		$	1.17
Diluted earnings per share	0.50			0.56			0.61			1.06			1.16

Return on average assets	0.96		%	1.10		%	1.33		%	1.02		%	1.27		%
Return on average common equity	8.78		%	10.65		%	13.57		%	9.64		%	13.02		%
Return on average tangible common equity	11.49		%	12.96		%	14.91		%	12.20		%	14.34		%
Net interest margin (fully tax equivalent)	3.98		%	3.73		%	3.93		%	3.86		%	3.90		%
Efficiency ratio	60.95		%	58.61		%	52.29		%	59.87		%	53.13		%
Tangible book value per common share	$	17.89		$	17.59		$	16.95

ASSET QUALITY⁽¹⁾
Net charge-offs (recoveries)	$	6,104		$	(56	)	$	(409	)	$	6,048		$	(508	)
Nonperforming loans	13,081			13,847			12,813
Classified assets	93,795			86,879			87,532
Nonperforming loans to portfolio loans	0.34		%	0.36		%	0.44		%
Nonperforming assets to total assets ⁽¹⁾	0.27		%	0.33		%	0.47		%
Allowance for loan losses to portfolio loans	0.96		%	1.02		%	1.23		%
Net charge-offs (recoveries) to average loans (annualized)	0.64		%	(0.01		)%	(0.06		)%	0.33		%	(0.04		)%

(1) Excludes non-core acquired loans and related assets, except for their inclusion in total assets.

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



	For the Three Months ended									For the Six Months ended
(in thousands)	June 30, 2017			March 31, 2017			June 30, 2016			June 30, 2017			June 30, 2016
CORE PERFORMANCE MEASURES(1)
Net interest income	$	43,049		$	37,567		$	30,212		$	80,616		$	59,806
Provision for portfolio loans	3,623			1,533			716			5,156			1,549
Noninterest income	7,934			6,976			6,105			14,910			12,110
Noninterest expense	27,798			24,946			20,446			52,744			40,881
Income before income tax expense	19,562			18,064			15,155			37,626			29,486
Income tax expense	6,329			4,916			5,237			11,245			10,134
Net income	$	13,233		$	13,148		$	9,918		$	26,381		$	19,352

Earnings per share	$	0.56		$	0.59		$	0.49		$	1.15		$	0.96
Return on average assets	1.06		%	1.17		%	1.07		%	1.11		%	1.06		%
Return on average common equity	9.72		%	11.29		%	10.89		%	10.44		%	10.78		%
Return on average tangible common equity	12.72		%	13.75		%	11.98		%	13.22		%	11.87		%
Net interest margin (fully tax equivalent)	3.76		%	3.63		%	3.52		%	3.70		%	3.53		%
Efficiency ratio	54.52		%	56.01		%	56.30		%	55.21		%	56.85		%

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

For the six months ended June 30, 2017 compared to the six months ended June 30, 2016, the Company noted the following trends:

•

The Company reported net income of $24.3 million, or $1.06 per share, for the six months ended June 30, 2017, compared to $23.4 million, or $1.16 per share, for the same period in 2016. The 5% decrease in earnings per share primarily resulted from the impact of merger related expenses and higher provision for portfolio loan losses offset by increases in net interest income from core deposit-funded portfolio loan growth, growth in noninterest income, and the acquisition of JCB.

•

On a core basis¹, net income was $26.4 million, or $1.15 per share, for the six months ended June 30, 2017, compared to $19.4 million, or $0.96 per share, in the prior year period. The diluted earnings per share increase of $0.19 was primarily due to higher levels of core net interest income from continued growth in earning asset balances combined with 17 basis points of core net interest margin expansion. The earnings per share contribution from this growth was partially offset by a higher provision for portfolio loan losses.


•	Net interest income for the first six months of 2017 increased $18.1 million or 27%, from the prior year period due to strong portfolio loan growth, net interest margin expansion and the acquisition of JCB.

•

Net interest margin for the first six months of 2017 decreased four basis points to 3.86% when compared to the prior year period due to changes in incremental accretion of non-core acquired loans, as those results vary due to prepayment activity. Core net interest margin¹, for the first six months of 2017,excludes incremental accretion on non-core acquired loans, increased 17 basis points from the prior year primarily due to core deposit-funded portfolio loan growth improving the earning asset mix, increased yield on portfolio loans, controlled increases in deposit costs, and the acquisition of JCB.


•	Noninterest income for the first six months of 2017 increased $1.9 million, or 14%, compared to the prior year period due primarily to the acquisition of JCB ($2.2 million) as well as higher fees from customer swaps, card products, and wealth management. These increases were offset by a non-core Gain on sale of other real estate in the prior year.

•

Noninterest expenses were $59.4 million for the six months ended June 30, 2017, compared to $42.1 million for the six months ended June 30, 2016. Noninterest expenses for the six months included $6.1 million of merger related expenses. Core noninterest expenses¹ were $52.7 million for the six months ended June 30, 2017, compared to $40.9 million for the prior year period due to the JCB acquisition and a full quarter of JCB's expense base.

Balance sheet highlights:

•

Loans – Portfolio loans increased to $3.9 billion at June 30, 2017, increasing $741 million when compared to December 31, 2016. Excluding the acquisition of JCB, portfolio loans organically grew by $63 million in the first six months of 2017. On a year over year basis, portfolio loans increased $975 million of which $297 million was organic loan growth and $678 million was from the acquisition of JCB. See Item 1, Note 5 – Portfolio Loans for more information.

•

Deposits – Total deposits at June 30, 2017 were $3.9 billion, an increase of $688 million, or 21% from December 31, 2016, and $893 million, or 29%, from June 30, 2016. $774 million of the increase in both periods is attributed to the acquisition of JCB. Core deposits, defined as total deposits excluding time deposits, were $3.3 billion at June 30, 2017, a decrease of $97 million, or 3% from the linked quarter, but an increase of $822 million, or 33%, when compared to the prior year period. The trends in deposits reflect continued progress across our business lines, $636 million of core deposits from JCB, and some seasonality.


•	Asset quality – Nonperforming loans were $13.1 million at June 30, 2017, compared to $14.9 million at December 31, 2016. Nonperforming loans represented 0.34% of portfolio loans at June 30, 2017 versus 0.48% at December 31, 2016. There were no portfolio loans that were over 90 days delinquent and still accruing at June 30, 2017 or December 31, 2016.

Provision for portfolio loan losses was $5.2 million for the six months ended June 30, 2017, compared to $1.5 million for the six months ended June 30, 2016. See Item 1, Note 5 – Portfolio Loans, and Provision and Allowance for Loan Losses in this section for more information.

RESULTS OF OPERATIONS

Net Interest Income

Average Balance Sheet

Non-core acquired loans were those acquired from the FDIC and were previously covered by shared-loss agreements. These loans continue to be accounted for as purchased credit impaired loans. Approximately $48 million of loans acquired from JCB's portfolio are also accounted for as purchased credit impaired loans. However, all loans acquired from JCB are included in portfolio loans. The following table presents, for the periods indicated, certain information related to our average interest-earning assets and interest-bearing liabilities, as well as, the corresponding interest rates earned and paid, all on a tax equivalent basis.



	Three months ended June 30,
	2017							2016
(in thousands)	Average Balance			Interest Income/Expense		Average Yield/ Rate		Average Balance			Interest Income/Expense		Average Yield/ Rate
Assets
Interest-earning assets:
Taxable portfolio loans (1)	$	3,802,103		$	43,678	4.61	%	$	2,832,279		$	29,377	4.17	%
Tax-exempt portfolio loans (2)	42,157			712		6.77		42,253			628		5.98
Non-core acquired loans	36,767			3,189		34.79		59,110			4,419		30.07
Total loans	3,881,027			47,579		4.92		2,933,642			34,424		4.72
Taxable investments in debt and equity securities	623,305			3,697		2.38		479,844			2,464		2.07
Non-taxable investments in debt and equity securities (2)	44,476			489		4.41		48,276			531		4.42
Short-term investments	92,390			234		1.02		45,039			58		0.52
Total securities and short-term investments	760,171			4,420		2.33		573,159			3,053		2.14
Total interest-earning assets	4,641,198			51,999		4.49		3,506,801			37,477		4.30
Noninterest-earning assets:
Cash and due from banks	76,355							56,662
Other assets	345,167							214,880
Allowance for loan losses	(45,507		)					(44,151		)
Total assets	$	5,017,213						$	3,734,192

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing transaction accounts	$	789,922		$	523	0.27	%	$	582,482		$	329	0.23	%
Money market accounts	1,309,864			1,938		0.59		1,029,122			1,013		0.40
Savings	200,405			125		0.25		103,564			63		0.24
Certificates of deposit	600,709			1,373		0.92		481,140			1,183		0.99
Total interest-bearing deposits	2,900,900			3,959		0.55		2,196,308			2,588		0.47
Subordinated debentures	118,072			1,288		4.37		56,807			361		2.56
Other borrowed funds	415,873			662		0.64		350,783			301		0.35
Total interest-bearing liabilities	3,434,845			5,909		0.69		2,603,898			3,250		0.50
Noninterest bearing liabilities:
Demand deposits	1,008,700							735,580
Other liabilities	27,386							28,582
Total liabilities	4,470,931							3,368,060
Shareholders' equity	546,282							366,132
Total liabilities & shareholders' equity	$	5,017,213						$	3,734,192
Net interest income				$	46,090						$	34,227
Net interest spread						3.80	%						3.80	%
Net interest margin						3.98	%						3.93	%


(1)	Average balances include non-accrual loans. The income on such loans is included in interest but is recognized only upon receipt. Loan fees, net of amortization of deferred loan origination fees and costs, included in interest income are approximately $0.8 million and $0.4 million for the three months ended June 30, 2017 and 2016 respectively.


(2)	Non-taxable income is presented on a fully tax-equivalent basis using a 38.0% tax rate in 2017 and 2016. The tax-equivalent adjustments were $0.5 million and $0.4 million for the three months ended June 30, 2017 and 2016.



	Six months ended June 30,
	2017							2016
(in thousands)	Average Balance			Interest Income/Expense		Average Yield/ Rate		Average Balance			Interest Income/Expense		Average Yield/ Rate
Assets
Interest-earning assets:
Taxable portfolio loans (1)	$	3,635,296		$	81,505	4.52	%	$	2,786,733		$	57,687	4.16	%
Tax-exempt portfolio loans (2)	43,482			1,405		6.52		41,542			1,288		6.24
Non-core acquired loans	38,020			4,859		25.77		64,071			8,310		26.08
Total loans	3,716,798			87,769		4.76		2,892,346			67,285		4.68
Taxable investments in debt and equity securities	602,070			6,995		2.34		472,567			4,923		2.09
Non-taxable investments in debt and equity securities (2)	50,518			1,111		4.43		48,836			1,069		4.40
Short-term investments	81,867			364		0.90		46,547			119		0.51
Total securities and short-term investments	734,455			8,470		2.33		567,950			6,111		2.16
Total interest-earning assets	4,451,253			96,239		4.36		3,460,296			73,396		4.27
Noninterest-earning assets:
Cash and due from banks	75,794							55,829
Other assets	314,478							215,623
Allowance for loan losses	(44,899		)					(43,998		)
Total assets	$	4,796,626						$	3,687,750

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing transaction accounts	$	777,731		$	1,198	0.31	%	$	567,083		$	635	0.23	%
Money market accounts	1,251,929			3,431		0.55		1,046,869			2,019		0.39
Savings	177,504			207		0.24		99,815			123		0.25
Certificates of deposit	574,850			2,588		0.91		432,616			2,202		1.02
Total interest-bearing deposits	2,782,014			7,424		0.54		2,146,383			4,979		0.47
Subordinated debentures	115,300			2,452		4.29		56,807			709		2.51
Other borrowed funds	403,478			1,131		0.57		366,616			594		0.33
Total interest-bearing liabilities	3,300,792			11,007		0.67		2,569,806			6,282		0.49
Noninterest bearing liabilities:
Demand deposits	958,107							725,165
Other liabilities	28,343							31,723
Total liabilities	4,287,242							3,326,694
Shareholders' equity	509,384							361,056
Total liabilities & shareholders' equity	$	4,796,626						$	3,687,750
Net interest income				$	85,232						$	67,114
Net interest spread						3.69	%						3.78	%
Net interest margin						3.86	%						3.90	%


(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 $1.6 million and $0.8 million for the six months ended June 30, 2017 and 2016 respectively.


(2)	Non-taxable income is presented on a fully tax-equivalent basis using a 38.0% tax rate in 2017 and 2016. The tax-equivalent adjustments were $1.0 million and $0.9 million for the six months ended June 30, 2017 and 2016.

Rate/Volume

The following table sets forth, on a tax-equivalent basis for the periods indicated, a summary of the changes in interest income and interest expense resulting from changes in yield/rates and volume.



	2017 compared to 2016
	Three months ended June 30,									Six months ended June 30,
	Increase (decrease) due to									Increase (decrease) due to
(in thousands)	Volume(1)			Rate(2)			Net			Volume(1)			Rate(2)			Net
Interest earned on:
Taxable portfolio loans	$	10,957		$	3,344		$	14,301		$	18,568		$	5,250		$	23,818
Tax-exempt portfolio loans (3)	(1		)	85			84			59			58			117
Non-core acquired loans	(1,852		)	622			(1,230		)	(3,352		)	(99		)	(3,451		)
Taxable investments in debt and equity securities	818			415			1,233			1,447			625			2,072
Non-taxable investments in debt and equity securities (3)	(40		)	(2		)	(42		)	35			7			42
Short-term investments	92			84			176			124			121			245
Total interest-earning assets	$	9,974		$	4,548		$	14,522		$	16,881		$	5,962		$	22,843

Interest paid on:
Interest-bearing transaction accounts	$	131		$	63		$	194		$	279		$	284		$	563
Money market accounts	327			598			925			445			967			1,412
Savings	61			1			62			90			(6		)	84
Certificates of deposit	281			(91		)	190			656			(270		)	386
Subordinated debentures	560			367			927			1,037			706			1,743
Borrowed funds	65			296			361			65			472			537
Total interest-bearing liabilities	1,425			1,234			2,659			2,572			2,153			4,725
Net interest income	$	8,549		$	3,314		$	11,863		$	14,309		$	3,809		$	18,118
(1) Change in volume multiplied by yield/rate of prior period.
(2) Change in yield/rate multiplied by volume of prior period.
(3) Nontaxable income is presented on a fully-tax equivalent basis using the combined statutory federal and state income tax rate in effect for each tax year.
NOTE: The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each.

Net interest income (on a tax equivalent basis) was $46.1 million for the three months ended June 30, 2017, compared to $34.2 million for the same period of 2016, an increase of $11.9 million, or 35%. The tax-equivalent net interest margin was 3.98% for the second quarter of 2017, compared to 3.73% for the first quarter of 2017, and 3.93% in the second quarter of 2016, and combined with the acquisition of JCB and portfolio loan growth, supported the $14.5 million increase in interest income. The yield on taxable portfolio loans increased 44 basis points from the prior year period to 4.61% for the three months ended June 30, 2017. The increase was due to the impact of interest rate increases which increased yields on variable rate loans and an improved earning asset mix. The run-off of higher yielding non-core acquired loans continues to negatively impact net interest margin and resulted in a $1.2 million decrease in interest income for the three months ended June 30, 2017.

Net interest income (on a tax equivalent basis) was $85.2 million for the six months ended June 30, 2017, compared to $67.1 million for the same period of 2016, an increase of $18.1 million, or 27%. The tax-equivalent net interest margin was 3.86% for the six months ended June 30, 2017, compared to 3.90% for the prior year period. The yield on taxable portfolio loans increased 36 basis points from the prior year period to 4.52% for the six months ended June 30, 2017. The increase was due to the impact of interest rate increases which increased yields on variable rate loans and an improved earning asset mix.

Core net interest margin¹ expanded 17 basis points from the prior year to 3.70% for the six months ended June 30, 2017, primarily due to loan growth improving the earning asset mix, combined with increased yield on portfolio loans out-pacing the increase to borrowing costs. Core net interest margin also increased modestly from JCB purchase

accounting adjustments. The Company continues to manage its balance sheet to grow core net interest income and expects to increase or maintain core net interest margin over the coming quarters; however, pressure on funding costs could negate the expected trends in core net interest margin.

Non-Core Acquired Assets Contribution

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



	For the Three Months ended					For the Six Months ended
(in thousands)	June 30, 2017		June 30, 2016			June 30, 2017			June 30, 2016
Accelerated cash flows and other incremental accretion	$	2,584	$	3,571		$	3,659		$	6,405
Provision reversal for non-core acquired loan losses	207		336			355			409
Gain (loss) on sale of other real estate	—		705			—			705
Other income from other real estate	—		239			—			239
Other (expenses) recovery	16		(325		)	(107		)	(652		)
Non-core acquired assets income before income tax expense	$	2,807	$	4,526		$	3,907		$	7,106

Accelerated cash flows and other incremental accretion consists of the interest income on non-core acquired loans in excess of contractual interest on the loans. The contractual amount of interest is included in the Company's core results. At June 30, 2017, the remaining accretable yield on the remaining non-core acquired portfolio was estimated to be $12 million and the non-accretable difference was approximately $16 million. Accelerated cash flows and other incremental accretion from these was $3.7 million for the six months ended June 30, 2017, and $6.4 million for the same period in 2016. The Company estimates 2017 income from accelerated cash flows and other incremental accretion to be between $6 million and $8 million.

Noninterest Income

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



	Three months ended June 30,
(in thousands)	2017		2016		Increase (decrease)
Service charges on deposit accounts	$	2,816	$	2,188	$	628		29	%
Wealth management revenue	2,054		1,644		410			25	%
Other service charges and fee income	1,661		952		709			74	%
Gain on state tax credits, net	9		153		(144		)	(94	)%
Gain on sale of other real estate - core	17		—		17			—	%
Miscellaneous income - core	1,377		1,168		209			18	%
Core noninterest income(1)	7,934		6,105		1,829			30	%
Gain (loss) on sale of other real estate from PCI loans	—		705		(705		)	(100	)%
Other income from PCI assets	—		239		(239		)	(100	)%
Total noninterest income	$	7,934	$	7,049	$	885		13	%

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



	Six months ended June 30,
(in thousands)	2017		2016		Increase (decrease)
Service charges on deposit accounts	$	5,326	$	4,231	$	1,095		26	%
Wealth management revenue	3,887		3,306		581			18	%
Other service charges and fee income	2,941		1,820		1,121			62	%
Gain on state tax credits, net	255		671		(416		)	(62	)%
Gain on sale of other real estate - core	17		123		(106		)	(86	)%
Miscellaneous income - core	2,484		1,959		525			27	%
Core noninterest income(1)	14,910		12,110		2,800			23	%
Gain (loss) on sale of other real estate from PCI loans	—		705		(705		)	(100	)%
Other income from PCI assets	—		239		(239		)	(100	)%
Total noninterest income	$	14,910	$	13,054	$	1,856		14	%

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

Noninterest income increased $1.9 million, or 14% in the first six months of 2017 compared to the first six months of 2016. Core noninterest income¹ grew 23% in the first six months of 2017 due primarily to the JCB acquisition, approximately $2.2 million. The Company's customer swap, card services and wealth management businesses all experienced growth in addition to JCB due to increased customer activity and new customer additions.

Noninterest Expense

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



	Three months ended June 30,
(in thousands)	2017			2016		Increase (decrease)
Core expenses (1):
Employee compensation and benefits - core	$	15,798		$	12,185	$	3,613		30	%
Occupancy - core	2,265			1,584		681			43	%
Data processing - core	1,806			1,172		634			54	%
FDIC and other insurance	650			738		(88		)	(12	)%
Professional fees - core	1,079			718		361			50	%
Loan, legal and other real estate expense - core	629			218		411			189	%
Other - core	5,571			3,831		1,740			45	%
Core noninterest expense(1)	27,798			20,446		7,352			36	%
Executive severance	—			332		(332		)	(100	)%
Merger related expenses	4,480			—		4,480			—	%
Other non-core	389			250		139			56	%
Other expenses related to non-core acquired loans	(16		)	325		(341		)	(105	)%
Total noninterest expense	$	32,651		$	21,353	$	11,298		53	%
(1) A non-GAAP measure. A reconciliation has been included in this MD&A section under the caption "Use of Non-GAAP Financial Measures."



	Six months ended June 30,
(in thousands)	2017		2016		Increase (decrease)
Core expenses (1):
Employee compensation and benefits - core	$	31,006	$	24,650	$	6,356		26	%
Occupancy - core	4,194		3,241		953			29	%
Data processing - core	3,439		2,261		1,178			52	%
FDIC and other insurance	1,474		1,461		13			1	%
Professional fees - core	1,916		1,402		514			37	%
Loan, legal and other real estate expense - core	851		472		379			80	%
Other - core	9,864		7,394		2,470			33	%
Core noninterest expense(1)	52,744		40,881		11,863			29	%
Executive severance	—		332		(332		)	(100	)%
Merger related expenses	6,147		—		6,147			—	%
Other non-core expenses	389		250		139			56	%
Other expenses related to non-core acquired loans	107		652		(545		)	(84	)%
Total noninterest expense	$	59,387	$	42,115	$	17,272		41	%
(1) A non-GAAP measure. A reconciliation has been included in this MD&A section under the caption "Use of Non-GAAP Financial Measures."

Noninterest expenses were $59.4 million for the six months ended June 30, 2017, compared to $42.1 million for the six months ended June 30, 2016. The increase was primarily due to the acquisition of JCB including merger related expenses. Core noninterest expenses¹ increased $11.9 million to $52.7 million for the six months ended June 30, 2017, from $40.9 million for the prior year period. Core expenses increased from the acquisition as well as increases in Employee compensation and benefits from investments in revenue producing personnel.

The Company's Core efficiency ratio¹ improved to 55.2% for the six months ended June 30, 2017 from 56.9% for the prior year, and reflects overall expense management and revenue growth trends mitigated by the acquisition of JCB. The conversion of JCB's core systems was completed late in the second quarter. The Company expects to achieve additional cost savings from the JCB transaction throughout 2017 and expects to continue to leverage its expense base principally through revenue growth. The Company anticipates core expenses, which exclude merger related costs, to be between $25 and $28 million per quarter for the rest of 2017. Core efficiency ratio is a non-GAAP measure. A reconciliation of Core efficiency ratio has been included in this MD&A section under the caption "Use of Non-GAAP Financial Measures".

Income Taxes

The Company's income tax expense for the six months ended June 30, 2017, which includes both federal and state taxes, was $5.5 million compared to $6.7 million for the same period of 2016. The combined federal and state effective income tax rate for the six months ended June 30, 2017 was 30.4%, compared to 35.1% for the same period in 2016. The decrease in the effective tax rate over the prior year period was caused by a change in accounting guidance that requires recording excess tax benefits on equity compensation awards to the income statement. For additional discussion of this guidance, refer to Note 1, Summary of Significant Accounting Policies.

Summary Balance Sheet



(in thousands)	June 30, 2017		December 31, 2016		Increase (decrease)
Total cash and cash equivalents	$	117,764	$	198,802	(81,038	)	(40.8	)%
Securities	701,498		541,260		160,238		29.6	%
Loans	3,894,770		3,158,161		736,609		23.3	%
Non-core acquired loans	35,807		39,769		(3,962	)	(10.0	)%
Total assets	5,038,696		4,081,328		957,368		23.5	%
Deposits	3,921,251		3,233,361		687,890		21.3	%
Total liabilities	4,489,943		3,694,230		795,713		21.5	%
Total shareholders' equity	548,753		387,098		161,655		41.8	%

Assets

Loans by Type

The Company has a diversified loan portfolio, with no particular concentration of credit in any one economic sector; however, a substantial portion of the portfolio is secured by real estate, including loans classified as C&I loans. The ability of the Company's borrowers to honor their contractual obligations is partially dependent upon the local economy and its effect on the real estate market. The following table summarizes the composition of the Company's loan portfolio:



(in thousands)	June 30, 2017		December 31, 2016		Increase (decrease)
Commercial and industrial	$	1,796,342	$	1,632,714	$	163,628		10.0	%
Commercial real estate - investor owned	750,256		544,808		205,448			37.7	%
Commercial real estate - owner occupied	525,515		350,148		175,367			50.1	%
Construction and land development	287,360		194,542		92,818			47.7	%
Residential real estate	348,678		240,760		107,918			44.8	%
Consumer and other	150,812		155,420		(4,608		)	(3.0	)%
Portfolio loans	3,858,963		3,118,392		740,571			23.7	%
Non-core acquired loans	35,807		39,769		(3,962		)	(10.0	)%
Total loans	$	3,894,770	$	3,158,161	$	736,609		23.3	%

Portfolio loans grew by $740.6 million, ($675 million from JCB) to $3.9 billion at June 30, 2017, when compared to December 31, 2016. Non-core acquired loans totaled $35.8 million at June 30, 2017, a decrease of $4.0 million, or 10%, from December 31, 2016, primarily as a result of principal paydowns and accelerated loan payoffs.

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



	At the quarter ended
(in thousands)	June 30, 2017		December 31, 2016		Increase (decrease)
Enterprise value lending	$	433,766	$	388,798	$	44,968		11.6	%
C&I - general	894,787		794,451		100,336			12.6	%
Life insurance premium financing	317,848		305,779		12,069			3.9	%
Tax credits	149,941		143,686		6,255			4.4	%
CRE, Construction, and land development	1,563,131		1,089,498		473,633			43.5	%
Residential	348,678		240,760		107,918			44.8	%
Other	150,812		155,420		(4,608		)	(3.0	)%
Portfolio loans	$	3,858,963	$	3,118,392	$	740,571		23.7	%

Specialized lending products, especially Enterprise value lending, Life insurance premium financing, and Tax credits, consist of primarily C&I loans, and have contributed significantly to the Company's loan growth. These loans are sourced through relationships developed with estate planning firms and private equity funds, and are not bound geographically by our traditional three markets. These specialized loan products offer opportunities to expand and diversify geographically by entering into new markets. The Company continues to focus on originating high-quality C&I relationships as they typically have variable interest rates and allow for cross selling opportunities involving other banking products. C&I loan growth also supports our efforts to maintain the Company's asset sensitive interest rate risk position. The Company expects continued loan growth, excluding the acquisition of JCB, at or above 10% for 2017.

Provision and Allowance for Loan Losses

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



	Three months ended June 30,						Six months ended June 30,
(in thousands)	2017			2016			2017			2016
Allowance at beginning of period, for portfolio loans	$	39,148		$	34,373		$	37,565		$	33,441
Loans charged off:
Commercial and industrial	(6,035		)	(157		)	(6,168		)	(225		)
Real estate:
Commercial	(45		)	—			(45		)	—
Construction and land development	(5		)	—			(5		)	—
Residential	(265		)	—			(274		)	—
Consumer and other	(39		)	(6		)	(68		)	(11		)
Total loans charged off	(6,389		)	(163		)	(6,560		)	(236		)
Recoveries of loans previously charged off:
Commercial and industrial	57			502			137			555
Real estate:
Commercial	103			23			201			98
Construction and land development	49			8			58			14
Residential	62			36			87			70
Consumer and other	20			3			29			7
Total recoveries of loans	291			572			512			744
Net loan charge-offs	(6,098		)	409			(6,048		)	508
Provision for loan losses	3,623			716			5,156			1,549
Allowance at end of period, for portfolio loans (1)	$	36,673		$	35,498		$	36,673		$	35,498

Allowance at beginning of period, for purchased credit impaired loans	$	5,477		$	9,569		$	5,844		$	10,175
Loans charged off	(48		)	(495		)	(48		)	(983		)
Recoveries of loans	—			—			—			—
Other	(96		)	(187		)	(315		)	(232		)
Net loan charge-offs	(144		)	(682		)	(363		)	(1,215		)
Provision reversal for PCI loan losses	(207		)	(336		)	(355		)	(409		)
Allowance at end of period, for purchased credit impaired loans	$	5,126		$	8,551		$	5,126		$	8,551

Total allowance at end of period	$	41,799		$	44,049		$	41,799		$	44,049

Portfolio loans, average	$	3,839,266		$	2,874,532		$	3,673,012		$	2,483,488
Portfolio loans, ending(1)	3,810,470			2,883,909			3,810,470			2,883,909
Net charge-offs to average portfolio loans (1)	0.64		%	(0.06		)%	0.33		%	(0.04		)%
Allowance for portfolio loan losses to loans (1)	0.96		%	1.23		%	0.96		%	1.23		%

(1) Excludes PCI loans.

The provision for loan losses on portfolio loans for the six months ended June 30, 2017 was $5.2 million, compared to $1.5 million for the comparable 2016 period. The provision is reflective of a chargeoff and reserve increase on a single nonperforming relationship, growth in the portfolio, and maintaining a prudent credit risk posture.

There was $0.4 million of provision reversal for loan losses on PCI loans for the six months ended June 30, 2017, compared to provision reversal of $0.4 million for the comparable 2016 period.

The allowance for loan losses on portfolio loans was 0.96% (1.15% excluding loans acquired from JCB) of portfolio loans at June 30, 2017 compared to 1.23% at June 30, 2016. Management believes the allowance for loan losses is adequate to absorb inherent losses in the loan portfolio.

Nonperforming assets

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



(in thousands)	June 30, 2017			December 31, 2016			June 30, 2016
Non-accrual loans	$	12,405		$	12,585		$	10,493
Restructured loans	676			2,320			2,320
Total nonperforming loans (1)	13,081			14,905			12,813
Other real estate from originated loans	283			740			2,741
Other real estate from acquired loans	246			240			2,160
Total nonperforming assets (1) (2)	$	13,610		$	15,885		$	17,714

Total assets	$	5,038,696		$	4,081,328		$	3,761,665
Portfolio loans (1)	3,810,470			3,158,161			2,883,909
Portfolio loans plus other real estate (1)	3,810,999			3,159,141			2,888,810
Nonperforming loans to portfolio loans (1)	0.34		%	0.47		%	0.44		%
Nonperforming assets to total loans plus other real estate (1) (2)	0.36			0.50			0.61
Nonperforming assets to total assets (1) (2)	0.27			0.39			0.47
Allowance for loans to nonperforming loans (1)	280		%	252		%	277		%

(1) Excludes PCI loans, except for their inclusion in total assets.
(2) Other real estate from PCI loans included in Nonperforming assets beginning with the year ended December 31, 2015 due to termination of all existing FDIC loss share agreements.

Nonperforming loans

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

Nonperforming loans based on loan type were as follows:



(in thousands)	June 30, 2017		December 31, 2016		June 30, 2016
Commercial and industrial	$	10,003	$	12,284	$	4,748
Commercial real estate	287		655		248
Construction and land development	1,489		1,904		2,576
Residential real estate	1,293		62		670
Consumer and other	9		—		4,571
Total	$	13,081	$	14,905	$	12,813

The following table summarizes the changes in nonperforming loans:



	Six months ended June 30,
(in thousands)	2017			2016
Nonperforming loans beginning of period	$	14,905		$	9,100
Additions to nonaccrual loans	6,111			7,555
Additions to restructured loans	676			2,320
Charge-offs	(6,508		)	(35		)
Other principal reductions	(1,820		)	(4,932		)
Moved to other real estate	(283		)	(283		)
Nonperforming loans end of period	$	13,081		$	12,813

Other real estate

Other real estate at June 30, 2017, was $0.5 million, compared to $4.9 million at June 30, 2016.

The following table summarizes the changes in Other real estate:



	Six months ended June 30,
(in thousands)	2017			2016
Other real estate beginning of period	$	980		$	8,366
Additions and expenses capitalized to prepare property for sale	2,063			2,203
Writedowns in value	(18		)	—
Sales	(2,496		)	(5,668		)
Other real estate end of period	$	529		$	4,901

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

Liabilities

Liabilities totaled $4.5 billion at June 30, 2017, compared to $3.7 billion at December 31, 2016. The increase in liabilities was largely due to a $688 million increase in total deposits and a $201 million increase in Federal Home Loan Bank advances, partially offset by a decrease of $60 million in other borrowings.

Deposits



(in thousands)	June 30, 2017			December 31, 2016			Increase (decrease)
Demand deposits	$	1,019,064		$	866,756		152,308	17.6	%
Interest-bearing transaction accounts	803,104			731,539			71,565	9.8	%
Money market accounts	1,306,051			1,050,472			255,579	24.3	%
Savings	199,950			111,435			88,515	79.4	%
Certificates of deposit:
Brokered	133,606			117,145			16,461	14.1	%
Other	459,476			356,014			103,462	29.1	%
Total deposits	$	3,921,251		$	3,233,361		687,890	21.3	%

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

Total deposits at June 30, 2017 were $3.9 billion, an increase of $688 million, or 21%, from December 31, 2016, primarily from the acquisition of JCB ($675 million). The composition of our noninterest bearing deposits remained relatively stable at 26% of total deposits at June 30, 2017 compared to 27% at December 31, 2016.

Shareholders' Equity

Shareholders' equity totaled $549 million at June 30, 2017, an increase of $161.7 million from December 31, 2016. Significant activity during the six months ended June 30, 2017 was as follows:


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


•	Net income of $24.3 million,


•	Dividends paid on common shares of $5.2 million.

Liquidity and Capital Resources

Liquidity

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

Additionally, liquidity is provided from sales of the securities portfolio, fed fund lines with correspondent banks, borrowings from the Federal Reserve and the FHLB, the ability to acquire large and brokered deposits, and the ability to sell loan participations to other banks. These alternatives are an important part of our liquidity plan and provide flexibility and efficient execution of the asset-liability management strategy.

The Bank's Asset-Liability Management Committee oversees our liquidity position, the parameters of which are approved by the Bank's Board of Directors. Our liquidity position is monitored monthly by producing a liquidity report, which measures the amount of liquid versus non-liquid assets and liabilities. Our liquidity management framework includes measurement of several key elements, such as the loan to deposit ratio, a liquidity ratio, and a dependency ratio. The Company's liquidity framework also incorporates contingency planning to assess the nature and volatility of funding sources and to determine alternatives to these sources. While core deposits and loan and

investment repayments are principal sources of liquidity, funding diversification is another key element of liquidity management and is achieved by strategically varying depositor types, terms, funding markets, and instruments.

Parent Company liquidity

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

The Company has an effective shelf registration statement on Form S-3 registering up to $100 million of common stock, preferred stock, debt securities, and various other securities, including combinations of such securities. The Company's ability to offer securities pursuant to the registration statement depends on market conditions and the Company's continuing eligibility to use the Form S-3 under rules of the SEC.

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

The Company has a senior unsecured revolving credit agreement (the "Revolving Agreement") with another bank allowing for borrowings up to $20 million which is renewed through February 2018. The proceeds can be used for general corporate purposes. The Revolving Agreement is subject to ongoing compliance with a number of customary affirmative and negative covenants as well as specified financial covenants. As of June 30, 2017, there were no outstanding balances under the Revolving Agreement.

As of June 30, 2017, the Company had $69.3 million of outstanding subordinated debentures as part of ten Trust Preferred Securities Pools. These securities are classified as debt but are included in regulatory capital and the related interest expense is tax-deductible, which makes them an attractive source of funding.

Bank liquidity

The Bank has a variety of funding sources available to increase financial flexibility. In addition to amounts currently borrowed, at June 30, 2017 the Bank has borrowing capacity of $229.1 million from the FHLB of Des Moines under blanket loan pledges, and has an additional $917.2 million available from the Federal Reserve Bank under a pledged loan agreement. The Bank has unsecured federal funds lines with six correspondent banks totaling $85.0 million.

Investment securities are another important tool to the Bank's liquidity objectives. Of the $623.9 million of the securities available for sale at June 30, 2017, $418.9 million was pledged as collateral for deposits of public institutions, treasury, loan notes, and other requirements. The remaining $204.9 million could be pledged or sold to enhance liquidity, if necessary.

In the normal course of business, the Bank enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through the Bank's various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of the Company's liquidity. The Bank has $1.3 billion in unused commitments as of June 30, 2017. While this commitment level would exhaust the majority the Company's current liquidity resources, the nature of these commitments is such that the likelihood of funding them in the aggregate at any one time is low.

Capital Resources

The Company and the Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its bank affiliate must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The banking affiliate’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total, Tier 1, and Common equity tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. To be categorized as “well capitalized”, banks must maintain minimum total risk-based (10%), Tier 1 risk-based (8%), Common equity tier 1 risk-based (6.5%), and Tier 1 leverage ratios (5%). As of June 30, 2017, and December 31, 2016, the Company and the Bank met all capital adequacy requirements to which they are subject.

The Bank continues to exceed regulatory standards and met the definition of “well-capitalized” (the highest category) at June 30, 2017. The Company adopted the Regulatory Capital Framework (Basel III) in 2015, and has implemented the necessary processes and procedures to comply.

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



(in thousands)	June 30, 2017			December 31, 2016			Well Capitalized Minimum %
Total capital to risk-weighted assets	12.84		%	13.48		%	10.00	%
Tier 1 capital to risk-weighted assets	10.82		%	10.99		%	8.00	%
Common equity tier 1 capital to risk-weighted assets	9.34		%	9.52		%	6.50	%
Leverage ratio (Tier 1 capital to average assets)	10.09		%	10.42		%	5.00	%
Tangible common equity to tangible assets¹	8.56		%	8.76		%	N/A
Tier 1 capital	$	493,719		$	412,865
Total risk-based capital	585,593			506,349

¹ Not a required regulatory capital ratio

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

Use of Non-GAAP Financial Measures:

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

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

The Company believes these non-GAAP measures and ratios, when taken together with the corresponding GAAP measures and ratios, provide meaningful supplemental information regarding the Company's performance and capital strength. The Company's management uses, and believes that investors benefit from referring to, these non-GAAP measures and ratios in assessing the Company's operating results and related trends and when forecasting future periods. However, these non-GAAP measures and ratios should be considered in addition to, and not as a substitute for or preferable to, ratios prepared in accordance with GAAP. In the following tables, the Company has provided a reconciliation of, where applicable, the most comparable GAAP financial measures and ratios to the non-GAAP financial measures and ratios, or a reconciliation of the non-GAAP calculation of the financial measure for the periods indicated.

Core Performance Measures



	For the Three Months ended									For the Six Months ended
(in thousands)	June 30, 2017			March 31, 2017			June 30, 2016			June 30, 2017			June 30, 2016
Net interest income	$	45,633		$	38,642		$	33,783		$	84,275		$	66,211
Less: Incremental accretion income	2,584			1,075			3,571			3,659			6,405
Core net interest income	43,049			37,567			30,212			80,616			59,806

Total noninterest income	7,934			6,976			7,049			14,910			13,054
Less: Gain (loss) on sale of other real estate from non-core acquired loans	—			—			705			—			705
Less: Other income from non-core acquired assets	—			—			239			—			239
Core noninterest income	7,934			6,976			6,105			14,910			12,110

Total core revenue	50,983			44,543			36,317			95,526			71,916

Provision for portfolio loans	3,623			1,533			716			5,156			1,549

Total noninterest expense	32,651			26,736			21,353			59,387			42,115
Less: Other expenses related to non-core acquired loans	(16		)	123			325			107			652
Less: Merger related expenses	4,480			1,667			—			6,147			—
Less: Facilities disposal charge	389			—			—			389			—
Less: Executive severance	—			—			332			—			332
Less: Other non-core expenses	—			—			250			—			250
Core noninterest expense	27,798			24,946			20,446			52,744			40,881

Core income before income tax expense	19,562			18,064			15,155			37,626			29,486

Total income tax expense	5,545			5,106			6,747			10,651			12,633
Less: Non-core income tax expense¹	(784		)	190			1,510			(594		)	2,499
Core income tax expense	6,329			4,916			5,237			11,245			10,134
Core net income	$	13,233		$	13,148		$	9,918		$	26,381		$	19,352

Core diluted earnings per share	$	0.56		$	0.59		$	0.49		$	1.15		$	0.96
Core return on average assets	1.06		%	1.17		%	1.07		%	1.11		%	1.06		%
Core return on average common equity	9.72		%	11.29		%	10.89		%	10.44		%	10.78		%
Core return on average tangible common equity	12.72		%	13.75		%	11.98		%	13.22		%	11.87		%
Core efficiency ratio	54.52		%	56.01		%	56.30		%	55.21		%	56.85		%

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

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



	Three months ended June 30,						Six months ended June 30,
(in thousands)	2017			2016			2017			2016
Net interest income	$	46,096		$	34,227		$	85,243		$	67,114
Less: Incremental accretion income	2,584			3,571			3,659			6,405
Core net interest income	$	43,512		$	30,656		$	81,584		$	60,709

Average earning assets	$	4,641,198		$	3,506,801		$	4,451,253		$	3,460,296
Reported net interest margin	3.98		%	3.93		%	3.86		%	3.90		%
Core net interest margin	3.76		%	3.52		%	3.70		%	3.53		%

Tangible common equity ratio



(in thousands)	June 30, 2017			December 31, 2016
Total shareholders' equity	$	548,753		$	387,098
Less: Goodwill	116,186			30,334
Less: Intangible assets	12,458			2,151
Tangible common equity	$	420,109		$	354,613

Total assets	$	5,038,696		$	4,081,328
Less: Goodwill	116,186			30,334
Less: Intangible assets	12,458			2,151
Tangible assets	$	4,910,052		$	4,048,843

Tangible common equity to tangible assets	8.56		%	8.76		%

Regulatory Capital to Risk-Weighted Assets



(in thousands)	June 30, 2017			December 31, 2016
Total shareholders' equity	$	548,753		$	387,098
Less: Goodwill	116,186			30,334
Less: Intangible assets, net of deferred tax liabilities	6,179			800
Less: Unrealized gains	329			(1,741		)
Plus: Other	12			24
Common equity Tier 1 capital	426,071			357,729
Plus: Qualifying trust preferred securities	67,600			55,100
Plus: Other	48			36
Tier 1 capital	493,719			412,865
Plus: Tier 2 capital	91,874			93,484
Total risk-based capital	585,593			506,349

Total risk-weighted assets determined in accordance with prescribed regulatory requirements	$	4,562,322		$	3,757,161

Common equity tier 1 to risk-weighted assets	9.34		%	9.52		%
Tier 1 capital to risk-weighted assets	10.82		%	10.99		%
Total risk-based capital to risk-weighted assets	12.84		%	13.48		%

Critical Accounting Policies

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

Acquisitions

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

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

Purchased Credit Impaired ("PCI") Loans

Allowance for Loan Losses on PCI Loans

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk

Our interest rate risk management practices are aimed at optimizing net interest income, while guarding against deterioration that could be caused by certain interest rate scenarios. Interest rate sensitivity varies with different types of interest-earning assets and interest-bearing liabilities. We attempt to maintain interest-earning assets, comprised primarily of both loans and investments, and interest-bearing liabilities, comprised primarily of deposits, maturing or repricing in similar time horizons in order to minimize or eliminate any impact from market interest rate changes. In order to measure earnings sensitivity to changing rates, the Company uses an earnings simulation model.

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

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



Rate Shock	Annual % change in net interest income
+ 300 bp	4.6%
+ 200 bp	3.2%
+ 100 bp	1.6%
- 100 bp	-7.2%

The Company occasionally uses interest rate derivative financial instruments as an asset/liability management tool to hedge mismatches in interest rate exposure indicated by the net interest income simulation described above. They are used to modify the Company's exposures to interest rate fluctuations and provide more stable spreads between loan yields and the rate on their funding sources.

ITEM 4: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of the Company’s Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15, as of June 30, 2017. Disclosure controls and procedures include without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Based on that evaluation, the CEO and CFO concluded the Company’s disclosure controls and procedures were effective as of June 30, 2017 to provide reasonable assurance of the achievement of the objectives described above.

Changes to Internal Controls

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

PART II - OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

ITEM 1A: RISK FACTORS

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

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

Issuer Purchases of Equity Securities

There were no repurchases of common stock by the Company during the quarter ended June 30, 2017.

ITEM 6: EXHIBITS


Exhibit No.	Description

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


10.1	Executive Employment Agreement by and between Enterprise Financial Services Corp and James B. Lally, dated May 2, 2017. (1)


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


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


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


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


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

101

Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2017, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheet at June 30, 2017 and December 31, 2016; (ii) Consolidated Statement of Income for the three and six months ended June 30, 2017 and 2016; (iii) Consolidated Statement of Comprehensive Income for the three and six months ended June 30, 2017 and 2016; (iv) Consolidated Statement of Changes in Equity for the six months ended June 30, 2017 and 2016; (v) Consolidated Statement of Cash Flows for the six months ended June 30, 2017 and 2016; and (vi) Notes to Financial Statements.

(1) Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Enterprise Financial Services Corp, filed with the Commission on June 6, 2017.

* Filed herewith

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

SIGNATURES

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



	ENTERPRISE FINANCIAL SERVICES CORP

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

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

Enterprise Financial Services Corp - 10-Q quarterly report FY2017 Q2

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