Enterprise Financial Services (EFSC) 10-Q 2006 Q2 Quarterly report

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, 2006
o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from _____ to _____
	Commission file number 001-15373

ENTERPRISE FINANCIAL SERVICES CORP

Incorporated in the State of Delaware

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

Address: 150 North Meramec

Clayton, MO  63105

Telephone: (314) 725-5500

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

None

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

Common Stock, par value $.01 per share

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  o

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

Large accelerated filer: o Accelerated filer: x Non-accelerated filer: o

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

Yes  o No  x

As of August 4, 2006, the Registrant had outstanding 11,605,669 of outstanding common stock.

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
TABLE OF CONTENTS

		Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
	Consolidated Balance Sheets at June 30, 2006 (unaudited) and December 31, 2005	1
	Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 2006 and 2005 (unaudited)	2
	Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the Three Months and Six Months Ended June 30, 2006 and 2005 (unaudited)	3
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005 (unaudited)	4
	Notes to Unaudited Consolidated Financial Statements	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3. Quantitative and Qualitative Disclosures About Market Risk		24
Item 4. Controls and Procedures		25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings		25
Item 1A. Risk Factors		25
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds		25
Item 3. Defaults Upon Senior Securities		25
Item 4. Submission of Matters to a Vote of Securities Holders		26
Item 5. Other Information		27
Item 6. Exhibits		28
Signatures		29
Certifications

PART I – ITEM 1 – FINANCIAL STATEMENTS

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Balance Sheets

(In thousands)	At June 30, 2006			At December 31, 2005
		(Unaudited)			(Audited)
Assets
Cash and due from banks	$	50,063		$	54,118
Federal funds sold		3,034			64,709
Interest-bearing deposits		607			84
Total cash and cash equivalents		53,704			118,911
Investments in debt and equity securities available for sale, at estimated fair value		109,449			135,559
Loans held for sale		3,028			2,761
Portfolio loans		1,108,906			1,002,379
Less: Allowance for loan losses		14,449			12,990
Portfolio loans, net		1,094,457			989,389
Fixed assets, net		13,941			10,276
Accrued interest receivable		6,018			5,598
Goodwill		12,004			12,042
Intangibles, net		4,092			4,548
Prepaid expenses and other assets		9,848			7,884
Total assets	$	1,306,541		$	1,286,968
Liabilities and Shareholders’ Equity
Deposits:
Demand	$	195,719		$	229,325
Interest-bearing transaction accounts		99,887			108,712
Money market accounts		466,999			479,507
Savings		4,527			3,679
Certificates of deposit:
$100 and over		242,045			229,839
Other		66,537			65,182
Total deposits		1,075,714			1,116,244
Subordinated debentures		30,930			30,930
Federal Home Loan Bank advances		88,653			28,584
Other borrowings		4,810			6,847
Notes payable		—			1,500
Accrued interest payable		1,914			2,704
Accounts payable and accrued expenses		5,323			7,221
Total liabilities		1,207,344			1,194,030
Minority interest in equity of consolidated subsidiary		—			333
Shareholders’ equity:
Common stock, $.01 par value; authorized
20,000,000 shares; issued and outstanding
10,508,415 shares at June 30, 2006 and
10,458,852 at December 31, 2005.		105			105
Additional paid in capital		52,764			53,218
Unearned compensation		—			(1,531	)
Retained earnings		47,905			41,950
Accumulated other comprehensive loss		(1,577	)		(1,137	)
Total shareholders’ equity		99,197			92,605
Total liabilities and shareholders’ equity	$	1,306,541		$	1,286,968

See accompanying notes to consolidated financial statements

1

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Statements of Income (unaudited)

	Three months ended June 30,				Six months ended June 30,
(In thousands, except per share data)	2006		2005		2006			2005
Interest income:
Interest and fees on loans	$	20,425	$	15,424	$	38,441		$	29,311
Interest on debt and equity securities:
Taxable		1,021		664		2,045			1,380
Nontaxable		9		10		17			20
Interest on federal funds sold		110		76		445			87
Interest on interest-bearing deposits		16		1		22			1
Dividends on equity securities		78		57		118			87
Total interest income		21,659		16,232		41,088			30,886
Interest expense:
Interest-bearing transaction accounts		568		220		1,023			370
Money market accounts		4,367		2,311		8,332			4,090
Savings		15		9		25			14
Certificates of deposit:
$100 and over		2,232		1,532		4,397			2,787
Other		628		320		1,234			594
Subordinated debentures		546		288		1,068			548
Federal Home Loan Bank advances		1,123		522		1,512			899
Notes payable and other borrowings		38		28		98			59
Total interest expense		9,517		5,230		17,689			9,361
Net interest income		12,142		11,002		23,399			21,525
Provision for loan losses		737		226		1,537			1,012
Net interest income after provision for loan losses		11,405		10,776		21,862			20,513
Noninterest income:
Wealth Management revenue		3,231		1,471		6,549			2,684
Service charges on deposit accounts		532		537		1,033			1,020
Other service charges and fee income		136		121		262			229
Gain on sale of mortgage loans		48		80		71			102
Miscellaneous income		5		16		14			27
Total noninterest income		3,952		2,225		7,929			4,062
Noninterest expense:
Employee compensation and benefits		5,843		5,402		11,643			10,600
Occupancy		608		554		1,219			1,084
Furniture and equipment		239		188		490			360
Data processing		315		248		624			473
Other		2,315		1,779		4,638			3,372
Total noninterest expense		9,320		8,171		18,614			15,889
Minority interest in net income of consolidated subsidiary		60		0		(393	)		0
Income before income tax expense		6,097		4,830		10,784			8,686
Income tax expense		2,196		1,689		3,885			3,098
Net income	$	3,901	$	3,141	$	6,899		$	5,588
Per share amounts:
Basic earnings per share	$	0.37	$	0.31	$	0.66		$	0.56
Basic weighted average common shares outstanding		10,490		10,046		10,477			9,984
Diluted earnings per share	$	0.36	$	0.29	$	0.64		$	0.53
Diluted weighted average common shares outstanding		10,876		10,676		10,864			10,601

See accompanying notes to consolidated financial statements

2

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity and Comprehensive Income
For the Six Months ended June 30, 2006 (unaudited)

(in thousands, except shares)	Common Stock					Additional Paid in Capital			Unearned Compensation			Retained earnings			Accumulated other comprehensive income (loss)			Total shareholders’ equity
	Shares			Amount
Balance December 31, 2005		10,458,852		$	105	$	53,218		$	(1,531	)	$	41,950		$	(1,137	)	$	92,605
Net income													6,899						6,899
Unrealized loss on securities, net of tax																(703	)		(703	)
Unrealized gain on cash flow hedges, net of tax		—			—		—			—			—			263			263
Total comprehensive income																			6,459
Dividends declared ($0.045 per share)		—			—		—						(944	)		—			(944	)
Stock options exercised, including related tax benefit		51,636			—		723			—			—			—			723
Restricted stock unit activity		(2,073	)		—		(44	)		—			—			—			(44	)
Noncash compensation attributed to stock option grants					—		33			—			—			—			33
Noncash compensation attributed to restricted share units		—			—		365			—			—			—			365
Reclassification of unearned compensation to additional paid in capital		—			—		(1,531	)		1,531			—			—			—
Balance June 30, 2006		10,508,415		$	105	$	52,764		$	—		$	47,905		$	(1,577	)	$	99,197

See accompanying notes to consolidated financial statements.

3

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)

	Six months ended June 30,
(in thousands)	2006			2005
Cash flows from operating activities:
Net income	$	6,899		$	5,588
Adjustments to reconcile net income to net cash from operating activities:
Depreciation		744			521
Provision for loan losses		1,537			1,012
Net amortization of debt and equity securities		21			280
Amortization of intangible assets		456			90
Mortgage loans originated		(24,969	)		(28,524	)
Proceeds from mortgage loans sold		24,772			27,006
Gain on sale of mortgage loans		(71	)		(102	)
Excess tax benefit for nonqualified stock options		—			267
Noncash compensation for stock option grants & restricted share units		354			306
Changes in:
Accrued interest receivable		(420	)		(382	)
Accrued interest and other liabilities		(2,427	)		(707	)
Other, net		(1,859	)		(509	)
Net cash provided by operating activities		5,037			4,846
Cash flows from investing activities:
Net increase in loans		(106,827	)		(60,555	)
Purchases of available for sale debt and equity securities		(39,785	)		(5,596	)
Proceeds from sales of available for sale debt securities		—			9,995
Proceeds from redemption of equity securities		2,949			3,455
Proceeds from maturities and principal paydowns on available for sale debt and equity securities		61,825			23,970
Recoveries of loans previously charged off		222			274
Purchases of fixed assets		(4,408	)		(2,034	)
Net cash used in investing activities		(86,024	)		(30,491	)
Cash flows from financing activities:
Net (decrease) increase in non-interest bearing deposit accounts		(33,607	)		1,853
Net (decrease) increase in interest bearing deposit accounts		(6,924	)		54,203
Proceeds from Federal Home Loan Bank advances		608,533			299,200
Repayments of Federal Home Loan Bank advances		(548,464	)		(278,935	)
Decrease in other borrowings		(2,037	)		(2,386	)
Paydowns on notes payable		(1,500	)		(250	)
Cash dividends paid on common stock		(944	)		(702	)
Excess tax benefit for nonqualified stock options		135			—
Proceeds from the exercise of common stock options		588			2,581
Net cash provided by financing activities		15,780			75,564
Net (decrease) increase in cash and cash equivalents		(65,207	)		49,919
Cash and cash equivalents, beginning of year		118,911			28,480
Cash and cash equivalents, end of period	$	53,704		$	78,399
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	18,479		$	9,097
Income taxes		2,884			2,916

See accompanying notes to consolidated financial statements.

4

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The more significant accounting policies used by the Company in the preparation of the consolidated financial statements are summarized below:

Basis of Financial Statement Presentation

Enterprise Financial Services Corp (the “Company” or “EFSC”) 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 and Kansas City metropolitan markets through its subsidiary, Enterprise Bank & Trust (the “Bank”.)  In addition, as of October 21, 2005, the Company owns 60% of Millennium Brokerage Group, LLC (“Millennum”) through its wholly-owned subsidiary, Millennium Holding Company, Inc.  Millennium is headquartered in Nashville, Tennessee and operates life insurance advisory and brokerage operations from thirteen offices serving life agents, banks, CPA firms, property & casualty groups, and financial advisors in 49 states.

The consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  They do not include all information and footnotes required by U.S. GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.   

The consolidated financial statements include the accounts of the Company, Bank (100% owned) and Millennium (60% owned).  Acquired businesses are included in the consolidated financial statements from the date of acquisition.  All material intercompany accounts and transactions have been eliminated.  Minority ownership interests are reported in our Consolidated Balance Sheets.  The minority ownership interest of our earnings or loss, net of tax, is classified as “Minority interest in net income of consolidated subsidiary” in our Consolidated Statements of Income.   For more information, please refer to “Minority Interest in Net Income of Consolidated Subsidiary” discussed in Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this filing.  

Operating results for the three and six month periods ended June 30, 2006 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2006.  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, 2005.  Certain reclassifications have been made to prior year balances to conform to the current year presentation. Such reclassifications had no effect on previously reported consolidated net income or shareholders’ equity.

New Accounting Standards

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation 48, “Accounting for Uncertainty in Income Taxes”, an Interpretation of FAS No. 109, Accounting for Income Taxes.  The interpretation defines the threshold for recognizing the financial impact of uncertain tax positions in accordance with FAS 109.   A company would be required to recognize, in its financial statements, the best estimate of the impact of a tax position only if that position is “more-likely-than-not” of being sustained on audit based solely on the technical merits of the position on the reporting date. In evaluating whether the probable recognition threshold has been met, the Interpretation would require the presumption that the tax position will be evaluated during an audit by taxing authorities. The term “more-likely-than-not” is defined as a likelihood of more than 50 percent.  Individual t ax positions that fail to meet the recognition threshold will generally result in either (a) a reduction in the deferred tax asset or an increase in a deferred tax liability or (b) an increase in a liability for income taxes payable or the reduction of an income tax refund receivable. The impact may also include both (a) and (b). This Interpretation also provides guidance on disclosure, accrual of interest and penalties, accounting in interim periods, and transition.  The Interpretation is effective for reporting periods after December 15, 2006.  The Company is evaluating the Interpretation and is presently unable to determine its overall impact on the Company’s consolidated financial statements or results of operations.

5

NOTE 2—EARNINGS PER SHARE

The following table shows the components of basic and diluted earnings per share for the periods indicated.

	Three months ended June 30,				Six months ended June 30,
(in thousands, except per share data)	2006		2005		2006		2005
Basic
Net income, as reported	$	3,901	$	3,141	$	6,899	$	5,588
Weighted average common shares outstanding		10,490		10,046		10,477		9,984
Basic earnings per share	$	0.37	$	0.31	$	0.66	$	0.56
Diluted
Net income	$	3,901	$	3,141	$	6,899	$	5,588
Expense related to dilutive stock options and appreciation rights, net of tax		—		6		—		11
	$	3,901	$	3,147	$	6,899	$	5,599
Weighted average common shares outstanding		10,490		10,046		10,477		9,984
Effect of dilutive stock options and restricted stock units		386		630		387		617
Diluted weighted average common shares outstanding		10,876		10,676		10,864		10,601
Diluted earnings per share	$	0.36	$	0.29	$	0.64	$	0.53

For the three months ended June 30, 2006 and 2005, 59,263 restricted share units and 3,253 stock appreciation rights, respectively, were excluded from the earnings per share calculation because their effect was anti-dilutive.   For the six months ended June 30, 2006 and 2005, 29,795 restricted stock units and 3,200 stock appreciation rights, respectively, were excluded from the earnings per share calculation because their effect was anti-dilutive.  

NOTE 3—SHARE-BASED COMPENSATION

The Company maintains a number of stock-based incentive programs, which are discussed in more detail in Note 17 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.  Prior to fiscal 2006, the Company applied the intrinsic value-based method, as outlined in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB No. 25”) and related interpretations, in accounting for stock options granted under these programs. Under the intrinsic value-based method, no compensation expense was recognized if the exercise price of the Company’s employee stock options equaled the market price of the underlying stock on the date of the grant. Accordingly, prior to fiscal year 2006, no compensation cost was recognized in the accompanying consolidated statements of income on stock options granted to employees, since all options granted under the Company’s share incentive programs had an exercise price equal to the market value of the underlying common stock on the date of the grant.   

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R (“SFAS No. 123R”) “Share-based Payment.” This statement replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB No. 25. SFAS No. 123R requires that all stock-based compensation be recognized as an expense in the financial statements and that such cost be measured at the fair value of the award. This statement was adopted using the modified prospective method of application, which requires the Company to recognize compensation expense on a prospective basis. Therefore, prior period financial statements have not been restated. Under this method, in addition to reflecting compensation expense for new share-based awards, expense is also recognized to reflect the remaining service period of awards that had been included in pro forma disclosures in prior periods. SFAS No. 123R also requires that excess tax benefits related to stock option exercises be reflected as financing cash inflows instead of operating cash inflows.  For the six months ended June 30, 2006 and 2005, the Company recognized a tax benefit of $135,000 and $267,000, respectively, related to the exercise of non-qualified stock options as a component of paid-in capital.

6

For the three and six months ended June 30, 2005, the following table includes the disclosures required by Statement 123R and illustrates the pro forma impact on net income and earnings per share as if SFAS 123R had been applied to all outstanding awards for that period.  The impact of adopting SFAS 123R increased the compensation expense in the second quarter and first half of 2006 by $13,000 and $26,000, respectively, before income taxes, and had less than a $0.01 impact on basic and diluted earnings per share.  

	Three months ended June 30,			Six months ended June 30,
(In thousands, except per share data)	2005			2005
Net income, as reported	$	3,141		$	5,588
Add total stock-based employee compensation expense included in reported net income, net of tax		68			185
Deduct total stock-based employee compensation expense determined under fair-value-based method for all awards, net of tax		(70	)		(187	)
Pro forma net income	$	3,139		$	5,586
Earnings per share:
Basic:
As reported	$	0.31		$	0.56
Pro forma		0.31			0.56
Diluted:
As reported	$	0.29		$	0.53
Pro forma		0.29			0.53

Stock Options

	Number Of Shares			Average Exercise Price		Weighted Average Contractual Term		Remaining Intrinsic Value
						(in years)		(in  thousands)
Outstanding at December 31, 2005		901,528		$	12.03		—
Granted		3,850			22.73		—
Exercised		(38,134	)		11.63		—
Forfeited		—			—		—
Outstanding at June 30, 2006		867,244		$	12.10		5.87	$	11,582
Exercisable at June 30, 2006		853,932		$	11.96		5.80	$	11,523

The Company awarded 3,850 and 5,000 options, respectively during the six months ended June 30, 2006 and 2005. The fair value of stock options granted in the three and six months ended June 30, 2006 and 2005 is estimated on the date of grant using the Black-Scholes option pricing model with the following average assumptions:

	Three months ended June 30,					Six months ended June 30,
	2006		2005			2006			2005
Risk-free interest rate		—		4.47	%		4.36	%		4.36	%
Expected dividend rate		—		0.60	%		0.60	%		0.60	%
Expected volatility		—		39.13	%		50.45	%		37.65	%
Expected life (years)		—		10			10			10
Weighted-average grant-date fair value of options		—	$	10.11		$	13.94		$	9.68

7

Restricted Stock Units

	Number Of Shares			Weighted Average Grant Date Fair Value
Unvested at December 31, 2005		95,613		$	19.04
Granted		114,495			25.56
Vested		—			—
Forfeited		(2,713	)		18.75
Unvested at June 30, 2006		207,395		$	22.64

Compensation expense related to restricted share units (“RSUs”) was $365,000 in the first half of 2006.  As of June 30, 2006, the total unrecognized compensation expense related to non-vested stock awards, including restricted stock units, was $4.2 million and the related weighted average period over which it is expected to be recognized is approximately 4 years. 

Stock Appreciation Rights

Expense to record the market value of the stock appreciation rights (“SARS”) was $21,000 and $40,000 for the six months ended June 30, 2006 and 2005, respectively.  There have been no changes in SARS outstanding since December 31, 2005.

Moneta Plan

The Company recognized Moneta option-related expenses of $8,600 and $17,000 for the six months ended June 30, 2006 and 2005, respectively.  During second quarter of 2006, 13,502 Moneta options were exercised with a weighted average price of $10.71.  

NOTE 4—SUBSEQUENT EVENTS 

Acquisition of NorthStar Bancshares

On July 5, 2006, the Company completed its acquisition of Kansas City-based NorthStar Bancshares, Inc. (“NorthStar”) for $36 million in EFSC common stock (80%) and cash (20%.)   The acquisition served to expand the Company’s banking franchise in the greater Kansas City area.   All shares issued by EFSC were issued in reliance upon an exemption from registration set forth in Section 4(2) and Rule 506 of the Securities Act of 1933.  As a result, the 1.1 million EFSC shares issued for the acquisition will be “restricted securities” and may not be offered or sold in the United States absent registration of an applicable exemption from registration requirements.  The cash portion of the transaction was funded through internally generated funds and borrowing on the Company’s line of credit.  Subsequently, on July 28, 2006, the Company issued $4 million of trust preferred securities (“TRUPS”) through a newly formed affiliated statutory trust, as further discussed below.  The TRUPS proceeds were used to pay off a portion of the line of credit borrowing.  

At the time of the acquisition, NorthStar had assets of $187.5 million, loans, net of unearned discount, of $167.2 million, deposits of $158.5 million and stockholders’ equity of $18.8 million.  The assets acquired and liabilities assumed were recorded at their estimated fair value on the acquisition date.  The fair value adjustments represent current estimates and are subject to further adjustments as the valuation data is finalized.  Preliminary goodwill, which is not deductible for tax purposes, was approximately $14.9 million.  Core deposit intangibles were approximately $2.4 million and will be amortized over five years utilizing an accelerated method.  Core deposit intangibles are not deductible for tax purposes.  NorthStar Bank NA, a subsidiary of EFSC, is expected to be merged with and into the Bank in the fourth quarter of 2006.  Please refer to the Form 8-K filed by the Company on July 5, 2006 for more information.

Trust Preferred Securities - EFSC Capital Trust V

On July 28, 2006, EFSC Statutory Capital Trust V (“EFSC Trust V”), a newly formed Delaware statutory trust and subsidiary of EFSC, issued 4,000 floating rate Trust Preferred Securities at $1,000 per share to a Trust Preferred Securities Pool.   The floating rate is equal to three-month LIBOR + 1.60%, and is payable quarterly beginning September 15, 2006.  The TRUPS are fully, irrevocably and unconditionally guaranteed on a subordinated basis by the Company.  The proceeds were invested in junior subordinated debentures of the Company.  The net proceeds to the Company from the sale of the junior subordinated debentures, were approximately $4 million.   The TRUPS mature on September 15, 2036.  The mandatory date may be shortened to a date not earlier than September 15, 2011 if certain conditions are met.  The TRUPS are classified as subordinated debentures and the distributions are recorded as interest expense in the Company’s consolidated financial statements.  The proceeds from the offering were used to partially fund the acquisition of NorthStar Bancshares, Inc., as discussed above.

8

NOTE 5—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Bank utilizes interest rate swap derivatives as one method to manage some of its interest rate risks from recorded financial assets and liabilities. These derivatives are utilized when they can be demonstrated to effectively hedge a designated asset or liability and such asset or liability exposes the Bank to interest rate risk.  

The Bank accounts for its derivatives under SFAS No. 149, An Amendment of Statement 133 on Derivative Instruments and Hedging Activities and SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.  These Standards require recognition of all derivatives as either assets or liabilities in the balance sheet and require measurement of those instruments at fair value through adjustments to other comprehensive income, current earnings, or both, as appropriate.

The decision to enter into an interest rate swap is made after considering the asset/liability mix of the Bank, the desired asset/liability sensitivity and by interest rate levels.  Prior to entering into a hedge transaction, the Bank formally documents the relationship between hedging instruments and hedged items, as well as the risk management objective for undertaking the various hedge transactions.

The following is a summary of the Company’s accounting policies for derivative instruments and its activities under SFAS No. 149, SFAS No. 133 and DIG Issue G25.

Cash Flow Hedges – The Bank entered into interest rate swaps to convert floating-rate loan assets to fixed rates.   The swap agreements provide for the Bank to pay a variable rate of interest equivalent to the prime rate and to receive a fixed rate of interest.  Under the swap agreements the Bank is to pay or receive interest quarterly.  Amounts to be paid or received under these swap agreements are accounted for on an accrual basis and recognized as interest income of the related asset.  The net cash flows related to cash flow hedges decreased interest income on loans by $74,000 and $411,000 for the three and six months ended June 30, 2006, respectively.  The net cash flows related to cash flow hedges decreased interest income on loans by $91,000 and $71,000 for the three and six months ended June 30, 2005, respectively.  In addition, swaps with notional amounts of $30 million and $40 million under which the Bank received a fixed rate of 5.3425% and 5.415% matured in March and April 2006, respectively.  

Cash flow hedges are accounted for at fair value.   The effective portion of the change in the cash flow hedge’s gain or loss is reported as a component of other comprehensive income, net of taxes.  The ineffective portion of the change in the cash flow hedge’s gain or loss is recorded in earnings on each quarterly measurement date.  At December 31, 2005 deferred losses of $263,000, net of tax, related to cash flow hedges were recorded in accumulated other comprehensive income.  All cash flow hedges were effective, therefore, no gain or loss was recorded in earnings.

Fair Value Hedges - The Bank has entered into interest rate swap agreements with the objective of converting the fixed interest rate on brokered CDs to a variable interest rate.  The swap agreements provide for the Bank to pay a variable rate of interest based on a spread to the three-month London Interbank Offered Rate (LIBOR) and to receive a fixed rate of interest equal to that of the brokered CD (hedged instrument.) Under the swap agreements the Bank is to pay or receive interest semiannually.  Amounts to be paid or received under these swap agreements are accounted for on an accrual basis and recognized as interest expense of the related liability.   The net cash flows related to fair value hedges increased interest expense on certificates of deposit by $73,000 and $230,000 for the three and six months ended June 30, 2006, respectively.  The net cash flows related to fair value hedges increased interest expense on certificates of deposit by $54,000 and $110,000 for three and six months ended June 30, 2005, respectively.  In addition, two swaps, each with a $10 million notional amount, under which the Bank received a fixed rate of 2.30% and 2.45% matured in February and April 2006, respectively.

Fair value hedges are accounted for at fair value.   At inception, each hedging transaction is evaluated against the eight criteria applicable to fair value hedges pursuant to paragraph 68 of SFAS No. 133.  Based on our evaluation, the swaps qualify for the “shortcut method” under SFAS No. 133; therefore, no ineffectiveness is assumed.  As a result, changes in the fair value of the swaps directly offset changes in the fair value of the underlying hedged item (i.e., brokered CDs).  All changes in fair value are measured on a quarterly basis.  

The Company paid broker placement fees by reducing the proceeds received from the issued CD. The fees did not affect the inception value of the interest rate swap.  Placement fees are capitalized and amortized into interest expense over the life of the CD in a manner similar to debt issuance costs. 

9

The following table summarizes the Bank’s derivative instruments at the periods indicated below.

(in thousand)	June 30, 2006			December 31, 2005
Cash Flow Hedges
Notional amount	$	—		$	70,000
Weighted average pay rate		—	%		7.25	%
Weighted average receive rate		—	%		5.39	%
Weighted average maturity in months		—			3
Unrealized gain (loss) related to interest rate swaps	$	—		$	(395	)
Fair Value Hedges
Notional amount	$	10,000		$	30,000
Weighted average pay rate		5.33	%		4.42	%
Weighted average receive rate		2.90	%		2.55	%
Weighted average maturity in months		8			6
Unrealized loss related to interest rate swaps	$	(184	)	$	(341	)

The notional amounts of derivative financial instruments do not represent amounts exchanged by the parties, and therefore, are not a measure of the Bank’s credit exposure through its use of these instruments.  The credit exposure represents the accounting loss the Bank would incur in the event the counterparties failed completely to perform according to the terms of the derivative financial instruments and the collateral held to support the credit exposure was of no value.    At June 30, 2006 and December 31, 2005, in connection with our interest rate swap agreements we had pledged investment securities available for sale with a fair value of $2.5 million and $5.0 million, respectively.  At June 30, 2006 and December 31, 2005, we had accepted, as collateral in connection with our interest rate swap agreements, cash of $196,300.

NOTE 6—DISCLOSURES ABOUT FINANCIAL INSTRUMENTS

The Bank 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 Bank 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, 2006, no amounts have been accrued for any estimated losses for these financial instruments.  

The following table summarizes the contractual amount of off-balance-sheet financial instruments at the periods indicated below.   

(in thousands)	June 30, 2006		December 31, 2005
Commitments to extend credit	$	415,496	$	346,205
Standby letters of credit		29,976		28,013

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 and may require payment of a fee.  Of the total commitments to extend credit at June 30, 2006 and December 31, 2005, approximately $16.7 million and $10.5 million, respectively, represents fixed rate loan commitments.  Since certain of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  The Bank evaluates each customer’s credit worthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary by the Bank 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.

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Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party.  These standby letters of credit are issued to support contractual obligations of the Bank’s customers.  The credit risk involved in issuing letters of credit is essentially the same as the risk involved in extending loans to customers.  The approximate remaining terms of standby letters of credit range from 1 month to 5 years at June 30, 2006.

NOTE 7—SEGMENT REPORTING

Management segregates the Company into three distinct businesses for evaluation purposes.  The three segments are Banking, Wealth Management, and Corporate and Intercompany.  The segments are evaluated separately on their individual performance, as well as, their contribution to the Company as a whole.

The majority of the Company’s assets and income result from the Banking segment.  The Bank is a full-service commercial bank with four St. Louis locations and two locations in the Kansas City region.

The Wealth Management segment includes the Trust division of the Bank along with Millennium.  The Trust division of the Bank provides estate planning, investment management, and retirement planning as well as, consulting on management compensation, strategic planning and management succession issues.  Millennium operates life insurance advisory and brokerage operations from thirteen offices serving life agents, banks, CPA firms, property & casualty groups, and financial advisors in 49 states.

The Corporate and Intercompany segment includes the holding company and subordinated debentures.  The Company incurs general corporate expenses and owns the Bank and a 60% controlling ownership of Millennium. 

The financial information for each business segment reflects that information which is specifically identifiable or which is allocated based on an internal allocation method.

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Following are the financial results for the Company’s operating segments.

Balance Sheet Information

	At June 30, 2006
(in thousands)	Banking		Wealth Management		Corporate and Intercompany			Total
Portfolio loans	$	1,108,906	$	—	$	—		$	1,108,906
Goodwill		1,938		10,066		—			12,004
Deposits		1,079,431		—		(3,717	)		1,075,714
Borrowings		93,463		—		30,930			124,393
Total assets		1,288,995		16,830		411			1,306,236

	At December 31, 2005
Portfolio loans	$	1,002,379	$	—	$	—		$	1,002,379
Goodwill		1,938		10,104		—			12,042
Deposits		1,117,110		—		(866	)		1,116,244
Borrowings		35,431		—		32,430			67,861
Total assets		1,269,212		16,253		1,503			1,286,968

Income Statement Information

	Three months ended June 30, 2006
(in thousands)	Banking		Wealth Management		Corporate and Intercompany			Total
Net interest income	$	12,638	$	28	$	(524	)	$	12,142
Provision for loan losses		737		—		—			737
Noninterest income		717		3,230		5			3,952
Noninterest expense		6,284		2,149		887			9,320
Minority interest		—		60		—			60
Income (loss) before income tax expense		6,334		1,169		(1,406	)		6,097
Income tax expense (benefit)		2,280		421		(505	)		2,196
Net income (loss)	$	4,054	$	748	$	(901	)	$	3,901

	Three months ended June 30, 2005
Net interest income	$	11,266	$	16	$	(280	)	$	11,002
Provision for loan losses		226		—		—			226
Noninterest income		725		1,472		28			2,225
Noninterest expense		6,081		1,184		906			8,171
Minority interest		—		—		—			—
Income (loss) before income tax expense		5,684		304		(1,158	)		4,830
Income tax expense (benefit)		1,999		109		(419	)		1,689
Net income (loss)	$	3,685	$	195	$	(739	)	$	3,141

	Six months ended June 30, 2006
Net interest income	$	24,391	$	50		$	(1,042	)	$	23,399
Provision for loan losses		1,537		—			—			1,537
Noninterest income		1,361		6,549			19			7,929
Noninterest expense		12,419		4,459			1,736			18,614
Minority interest		—		(393	)		—			(393	)
Income (loss) before income tax expense		11,796		1,747			(2,759	)		10,784
Income tax expense (benefit)		4,248		629			(992	)		3,885
Net income (loss)	$	7,548	$	1,118		$	(1,767	)	$	6,899

	Six months ended June 30, 2005
Net interest income	$	22,023	$	35	$	(533	)	$	21,525
Provision for loan losses		1,012		—		—			1,012
Noninterest income		1,331		2,684		47			4,062
Noninterest expense		11,900		2,295		1,694			15,889
Minority interest		—		—		—			—
Income (loss) before income tax expense		10,442		424		(2,180	)		8,686
Income tax expense (benefit)		3,737		153		(792	)		3,098
Net income (loss)	$	6,705	$	271	$	(1,388	)	$	5,588

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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

Readers should note that in addition to the historical information contained herein, some of the information in this report contains forward-looking statements within the meaning of the federal securities laws.  Forward-looking statements typically are identified with use of terms such as “may,” “will,” “expect,” “anticipate,” “estimate,” “potential,” “could”: and similar words, although some forward-looking statements are expressed differently.  You should be aware that Enterprise Financial Services Corp’s actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including: burdens imposed by federal and state regulation, including changes in accounting regulation or standards of banks; credit risk; exposure to general and local economic conditions; risks associated with rapid increase or decrease in prevailing interest rates; consolidation within the banking industry; competition from banks and other financial institutions; our ability to attract and retain relationship officers and other key personnel and technological developments; all of which could cause Enterprise Financial Services Corp’s actual results to differ from those set forth in the forward-looking statements.

Other factors that could cause results to differ from expected results include the acquisition of Millennium and the integration of our recent acquisition of NorthStar, both of which could result in costs and expenses that are greater, or benefits that are less, than we currently anticipate, or the assumption of unanticipated liabilities.

In addition to the foregoing, readers should refer to the risk factors discussed in our Annual Report of Form 10-K for the year ended December 31, 2005.  Readers are cautioned not to place undue reliance on our forward-looking statements, which reflect management’s analysis only as of the date of the statements.  The Company does not intend to publicly revise or update forward-looking statements to reflect events or circumstances that arise after the date of this report.  Readers should carefully review all disclosures we file from time to time with the Securities and Exchange Commission which are available on our website at www.enterprisebank.com.

Introduction

The following discussion describes significant changes in the financial condition of the Company that have occurred during the first six months of 2006 compared to December 31, 2005.  In addition, this discussion summarizes the significant factors affecting the consolidated results of operations, liquidity and cash flows of the Company for the three and six months ended June 30, 2006 compared to the three and six months ended June 30, 2005.  This discussion should be read in conjunction with the accompanying consolidated financial statements included in this report and our Annual Report of Form 10-K for the year ended December 31, 2005.

Critical Accounting Policies

The impact and any associated risks related to the Company’s critical accounting policies on business operations are discussed 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 discussion on the application of these and other accounting policies, see the Company’s Annual Report of Form 10-K for the year ended December 31, 2005. Management believes there have been no material changes to our critical accounting policies.

Management believes there have been no material changes to our critical accounting policies.

Results of Operations

Net income for the three and six months ended June 30, 2006 was $3.9 million and $6.9 million, an increase of 24% and 23%, respectively, compared to $3.1 million and $5.6 million for the same periods in 2005.  Fully diluted earnings per share for the three and six months ended June 30, 2006 were $0.36 and $0.64, an increase of 24% and 21%, respectively, compared to $0.29 and $0.53 for the same periods in 2005.

On July 5, the Company completed its acquisition of NorthStar Bancshares, Inc, a Kansas City-based commercial bank.  Please refer to the Form 8-K filed by the Company on July 5, 2006 for more information and to Note 4 – Subsequent Events included in this filing.

Financial Condition

Portfolio loans grew by $107 million – a 21% annualized growth rate from December 31, 2005 and were up $150 million or 16% from June 30, 2005.  Since December 31, 2005, deposits have declined $40 million or 4%.

The $107 million growth in loans and $40 million decline in deposits were funded by a $65 million reduction in cash and cash equivalents (primarily Federal funds sold), $26 million in maturities of debt securities and a $60 million increase in Federal Home Loan Bank advances (“FHLB Advances”).

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Historically, deposits decline in the first four months of the calendar year due to the seasonal cash demands of our client base and then increase as the year progresses along with new client growth.  The rebound in balances has been slow, but pipelines for the treasury management business are strong.  In addition, during 2006, the Bank is focusing on obtaining deposit transaction accounts rather than client-based certificates of deposit.  Transaction accounts generally cost less and tend to be more relationship oriented than certificates of deposit.  We believe this may result in lower deposit growth than in the prior year.  We plan to utilize FHLB advances and short-term brokered certificates of deposit to fund shortfalls due to loan demand.  Through June 30, 2006, we have utilized approximately $60 million in short-term FHLB Advances and $30 million net in short-term brokered certificates of deposit to fund the loan demand.

The growth in loans in the first half of 2006 was strong in both of our primary markets and is in part a result of the addition of experienced relationship managers in both St. Louis and Kansas City.  The Bank continues to experience strong loan and deposit pricing competition in both markets.  We continue to monitor competitive trends and intend to remain disciplined in our pricing practices in order to maintain margins.

Net Interest Income

Net interest income is the primary source of the Company’s revenue.  Net interest income is the difference between interest income on interest-earning assets, such as loans and securities, and the interest expense on interest-bearing deposits and other borrowings, used to fund interest-earning and other assets.  The amount of net interest income is affected by changes in interest rates and by the amount and composition of interest-earning assets and interest-bearing liabilities.  Additionally, net interest income is impacted by the sensitivity of the balance sheet to changes in interest rates, which factors in characteristics such as the fixed or variable nature of the financial instruments, contractual maturities, and repricing frequencies.

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

While the Company remains asset-sensitive, with approximately 57% of the loan portfolio floating with prime rate, we are trending toward a more neutral position.  Increases by the Federal Open Market Committee (“FOMC”) should not have a significant positive influence on net interest income.  The shift in our loan portfolio over the past year toward a 50/50 split on fixed/floating percentages, along with higher levels of variable rate liabilities and the expiration of cash flow hedges is naturally increasingly our protection against falling rates, which management deems prudent given the current economic environment.

Net interest income (presented on a tax-equivalent basis) was $12.3 million for the three months ended June 30, 2006, compared to $11.1 million for the same period of 2005, an increase of 11%.  Average interest-earning assets increased $133 million, or 12% to $1.203 billion for the quarter ended June 30, 2006 compared to $1.070 billion for the same period in 2005.   For the quarter ended June 30, 2006, average interest-bearing liabilities increased $143 million, or 17% to $972 million compared to $829 million for the quarter ended June 30, 2005.

The net interest rate margin (on a tax-equivalent basis) was 4.11% for the second quarter of 2006, compared to 4.18% in the second quarter of 2005.  The margin was negatively impacted by a refinement in the methodology of deferring direct loan origination costs.  This subsequently resulted in additional amortization costs and reduced the loan yield and net interest rate margin by approximately 17 bp and 16 bp, respectively.   Excluding this refinement, the net interest margin would have been 4.28% in the second quarter of 2006.

We continue to benefit from the repositioning of a portion of the investment portfolio during the second half of 2005, which has led to an increase in the yield on securities.   The increase in cost of funds was primarily due to increases in money market and certificate of deposit rates given competitor pricing and the increasing interest rate environment.

Net interest income (on a tax-equivalent basis) was $23.8 million for the six months ended June 30, 2006, compared to $21.8 million for the same period of 2005, an increase of 9%.  Average interest-earning assets for the six months ended June 30, 2006 were $1.184 billion, an increase of $132 million, or 13% over $1.052 million, for the same period in 2005.

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Average interest-bearing liabilities increased $138 million, or 17% to $954 million for the six months ended June 30, 2006 compared to $816 million for the six months ended June 30, 2005.

Net interest rate margin (on a tax-equivalent basis) was 4.05% for the first half of 2006, down from 4.18% in the first half of 2005.  Increases in yields and cost of funds are similar to those described above.  Excluding the refinement for deferring direct loan origination costs, the net interest margin would have been 4.21% in the first half of 2006.

For more information see the “Rate/Volume” table below.

15

Average Balance Sheet

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

	Three months ended June 30,
	2006								2005
(in thousands)	Average Balance			Interest Income/ Expense		Average Yield/ Rate			Average Balance			Interest Income/ Expense		Average Yield/ Rate
Assets
Interest-earning assets:
Taxable loans (1)	$	1,057,256		$	20,085		7.62	%	$	949,338		$	15,178		6.41	%
Tax-exempt loans(2)		24,176			532		8.83			17,402			385		8.87
Total loans		1,081,432			20,617		7.65			966,740			15,563		6.46
Taxable investments in debt and equity securities		110,543			1,099		3.99			88,960			721		3.25
Non-taxable investments in debt and equity securities(2)		1,123			14		5.00			1,530			15		3.93
Short-term investments		9,578			126		5.28			12,939			77		2.39
Total securities and short-term investments		121,244			1,239		4.10			103,429			813		3.15
Total interest-earning assets		1,202,676			21,856		7.29			1,070,169			16,376		6.14
Non-interest-earning assets:
Cash and due from banks		43,287								33,701
Other assets		45,064								21,965
Allowance for loan losses		(14,149	)							(12,760	)
Total assets	$	1,276,878							$	1,113,075
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing transaction accounts	$	104,610		$	568		2.18	%	$	85,204		$	220		1.04	%
Money market accounts		464,880			4,367		3.77			413,531			2,311		2.24
Savings		4,215			15		1.43			4,658			9		0.77
Certificates of deposit		271,353			2,860		4.23			239,464			1,852		3.10
Total interest-bearing deposits		845,058			7,810		3.71			742,857			4,392		2.37
Subordinated debentures		30,930			546		7.08			20,620			288		5.60
Borrowed funds		96,088			1,162		4.85			65,077			550		3.39
Total interest-bearing liabilities		972,076			9,518		3.93			828,554			5,230		2.53
Noninterest-bearing liabilities:
Demand deposits		199,440								199,609
Other liabilities		7,576								6,211
Total liabilities		1,179,092								1,034,374
Shareholders’ equity		97,786								78,701
Total liabilities & shareholders’ equity	$	1,276,878							$	1,113,075
Net interest income				$	12,338							$	11,146
Net interest spread							3.36	%							3.61	%
Net interest rate margin(3)							4.11	%							4.18	%

(1)	Average balances include non-accrual loans. The income on such loans is included in interest but is recognized only upon receipt. Loan fees, prior to deferral adjustment, included in interest income are approximately $530,000 and $349,000 for the quarters ended June 30, 2006 and 2005, respectively.
(2)	Non-taxable income is presented on a fully tax-equivalent basis using the combined statutory federal and state income tax rate in effect for each year. The tax-equivalent adjustments were $196,000 and $144,000 for the quarters ended June 30, 2006 and 2005, respectively.
(3)	Net interest income divided by average total interest-earning assets.

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	Six months ended June 30,
	2006								2005
(in thousands)	Average Balance			Interest Income/ Expense		Average Yield/ Rate			Average Balance			Interest Income/ Expense		Average Yield/ Rate
Assets
Interest-earning assets:
Taxable loans (1)	$	1,027,465		$	37,761		7.41	%	$	933,247		$	28,823		6.23	%
Tax-exempt loans(2)		24,602			1,063		8.71			17,528			762		8.77
Total loans		1,052,067			38,824		7.44			950,775			29,585		6.27
Taxable investments in debt and equity securities		110,624			2,163		3.94			92,526			1,467		3.20
Non-taxable investments in debt and equity securities(2)		1,162			27		4.69			1,558			31		4.01
Short-term investments		20,283			467		4.64			7,587			88		2.34
Total securities and short-term investments		132,069			2,657		4.06			101,671			1,586		3.15
Total interest-earning assets		1,184,136			41,481		7.06			1,052,446			31,171		5.97
Non-interest-earning assets:
Cash and due from banks		42,632								33,483
Other assets		43,370								21,027
Allowance for loan losses		(13,740	)							(12,454	)
Total assets	$	1,256,398							$	1,094,502
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing transaction accounts	$	104,545		$	1,023		1.97	%	$	85,138		$	370		0.88	%
Money market accounts		468,947			8,332		3.58			414,225			4,090		1.99
Savings		3,974			25		1.27			4,429			14		0.64
Certificates of deposit		276,400			5,631		4.11			232,118			3,381		2.94
Total interest-bearing deposits		853,866			15,011		3.55			735,910			7,855		2.15
Subordinated debentures		30,930			1,068		6.96			20,620			548		5.36
Borrowed funds		69,081			1,610		4.70			59,664			958		3.24
Total interest-bearing liabilities		953,877			17,689		3.74			816,194			9,361		2.31
Noninterest-bearing liabilities:
Demand deposits		198,357								195,340
Other liabilities		8,093								6,089
Total liabilities		1,160,327								1,017,623
Shareholders’ equity		96,071								76,879
Total liabilities & shareholders’ equity	$	1,256,398							$	1,094,502
Net interest income				$	23,792							$	21,810
Net interest spread							3.32	%							3.66	%
Net interest rate margin(3)							4.05	%							4.18	%

(1)	Average balances include non-accrual loans. The income on such loans is included in interest but is recognized only upon receipt. Loan fees, prior to deferral adjustment, included in interest income are approximately $1,031,000 and $740,000 for the six months ended June 30, 2006 and 2005 respectively.
(2)	Non-taxable income is presented on a fully tax-equivalent basis using the combined statutory federal and state income tax rate in effect for each year. The tax-equivalent adjustments were $393,000 and $286,000 for the six months ended June, 2006 and 2005, respectively.
(3)	Net interest income divided by average total interest-earning assets.

17

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.

	2006 Compared to 2005
	3 month Increase (decrease) due to									6 month Increase (decrease due to)
(in thousands)	Volume(1)			Rate(2)			Net			Volume(1)			Rate(2)			Net
Interest earned on:
Loans	$	1,847		$	3,060		$	4,907		$	3,102		$	5,836		$	8,938
Nontaxable loans (3)		149			(2	)		147			306			(5	)		301
Taxable investments in debt and equity securities		196			182			378			318			378			696
Nontaxable investments in debt and equity securities (3)		(5	)		4			(1	)		(9	)		5			(4	)
Short-term investments		(24	)		73			49			238			141			379
Total interest-earning assets	$	2,163		$	3,317		$	5,480		$	3,955		$	6,355		$	10,310
Interest paid on:
Interest-bearing transaction accounts	$	59		$	289		$	348		$	100		$	553		$	653
Money market accounts		317			1,739			2,056			601			3,641			4,242
Savings		(1	)		7			6			(1	)		12			11
Certificates of deposit		271			737			1,008			728			1,522			2,250
Subordinated debentures		169			89			258			325			195			520
Borrowed funds		321			291			612			169			483			652
Total interest-bearing liabilities		1,136			3,152			4,288			1,922			6,406			8,328
Net interest income	$	1,027		$	165		$	1,192		$	2,033		$	(51	)	$	1,982

(1)	Change in volume multiplied by yield/rate of prior period.
(2)	Change in yield/rate multiplied by volume of prior period.
(3)	Non taxable income is presented on a fully tax-equivalent basis using the combined statutory federal and state income tax rate in effect for each year.
NOTE:	The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each.

Provision for loan losses.   The provision for loan losses in the second quarter of 2006 was $737,000, compared to $226,000 in the same quarter of 2005.  Provision level increases were due to significant loan growth during the quarter versus declining loan balances in the second quarter of 2005.  The allowance for loan losses as a percentage of total loans was 1.30% at June 30, 2006 compared to 1.30% at December 31, 2005 and 1.33% at June 30, 2005.  Management believes that the allowance for loan losses is adequate.

Asset quality continues to be strong. Nonperforming loans were $893,000 or 8 basis points of total loans at June 30, 2006 versus 22 basis points at June 30, 2005 and 14 basis points at December 31, 2005.  At June 30, 2006, two relationships comprised the non-performing loans.  At June 30, 2005, three relationships comprised $1.5 million, or 69% of the non-performing loans.  The remaining non-performing loans represented four different relationships.

18

The following table summarizes changes in the allowance for loan losses for the periods presented.

	Three months ended June 30,						Six months ended June 30,
(in thousands)	2006			2005			2006			2005
Allowance at beginning of period	$	13,964		$	12,639		$	12,990		$	11,665
Loans charged off:
Commercial and industrial		300			65			300			68
Real estate:
Commercial		—			100			—			100
Construction		—			—			—			—
Residential		—			—			—			—
Consumer and other		—			14			—			14
Total loans charged off		300			179			300			182
Recoveries of loans previously charged off:
Commercial and industrial		46			57			205			77
Real estate:
Commercial		—			—			1			73
Construction		—			—			—			—
Residential		1			19			14			114
Consumer and other		1			7			2			10
Total recoveries of loans		48			83			222			274
Net loans charged off (recoveries)		252			96			78			(92	)
Provision for loan losses		737			226			1,537			1,012
Allowance at end of period	$	14,449		$	12,769		$	14,449		$	12,769
Average loans	$	1,081,432		$	966,740		$	1,052,067		$	950,775
Total portfolio loans		1,108,906			958,878			1,108,906			958,878
Net charge offs (recoveries) to average loans		0.09	%		0.04	%		0.01	%		(0.02%	)
Allowance for loan losses to loans		1.30			1.33			1.30			1.33

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The Bank had no loans 90 days past due still accruing interest at June 30, 2006 or December 31, 2005.  The following table presents the categories of nonperforming assets and certain ratios as of the dates indicated:

	June 30,			December 31,
(in thousands)	2006			2005
Non-accrual loans	$	893		$	1,421
Loans past due 90 days or more and still accruing interest		—			—
Restructured loans		—			—
Total noperforming loans		893			1,421
Foreclosed property		—			—
Total non performing assets	$	893		$	1,421
Total assets	$	1,306,236		$	1,286,968
Total loans		1,108,906			1,002,379
Total loans plus foreclosed property		1,108,906			1,002,379
Nonperforming loans to loans		0.08	%		0.14	%
Nonperforming assets to loans plus foreclosed property		0.08			0.14
Nonperforming assets to total assets		0.07			0.11
Allowance for loan losses to non-performing loans		1,618.03	%		914.00	%

The reduction in nonperforming assets is the direct result of loans being paid off or returning to an accrual basis due to acceptable payment history. At June 30, 2006, nonperforming loans consisted of two accounts.

The following is a summary of the Company’s credit management policies and procedures.

The Company’s credit management policies and procedures focus on identifying, measuring, and controlling credit exposure. These procedures employ a lender-initiated system of rating credits, which is ratified in the loan approval process and subsequently tested in internal loan reviews and regulatory bank examinations. The system requires rating all loans at the time they are made, at each renewal date and as conditions warrant.

Adversely rated credits, including loans requiring close monitoring, which would normally not be considered criticized credits by regulators, are included on a monthly loan watch list. Other loans are added whenever any adverse circumstances are detected which might affect the borrower’s ability to meet the terms of the loan. This could be initiated by any of the following:

1)	delinquency of a scheduled loan payment,
2)	deterioration in the borrower’s financial condition identified in a review of periodic financial statements,
3)	decrease in the value of collateral securing the loan or,
4)	change in the economic environment in which the borrower operates.

Loans on the watch list require detailed loan status reports, including recommended corrective actions, prepared by the responsible loan officer every three months. These reports are then discussed in formal meetings with the Senior Credit Administration Officer, Chief Credit Officer and Chief Executive Officer of the Bank.

Downgrades of loan risk ratings may be initiated by the responsible loan officer, internal loan review, or the credit analyst department at any time. Upgrades of certain risk ratings may only be made with the concurrence of the Senior Credit Administration Officer, Chief Credit Officer and Loan Review Officer.

In determining the allowance and the related provision for loan losses, three principal elements are considered:

1)	specific allocations based upon probable losses identified during a monthly review of the loan portfolio,
2)	allocations based principally on the Company’s risk rating formulas, and
3)	an unallocated allowance based on subjective factors.

The first element reflects management’s estimate of probable losses based upon a systematic review of specific loans considered to be impaired. These estimates are based upon collateral exposure, if they are collateral dependent for collection. Otherwise, discounted cash flows are estimated and used to assign loss.

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The second element reflects the application of our loan rating system.  This rating system is similar to those  employed by state and federal banking regulators.  Loans are rated and assigned a loss allocation factor for each category that is consistent with our historical losses, adjusted for environmental factors.  The higher the rating assigned to a loan, the greater the allocation percentage that is applied.

The unallocated allowance is based on management’s evaluation of conditions that are not directly reflected in the determination of the formula and specific allowances.  The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they may not be identified with specific problem credits or portfolio segments.  The conditions evaluated in connection with the unallocated allowance include the following:

• general economic and business conditions affecting our key lending areas;

• credit quality trends (including trends in nonperforming loans expected to result from existing conditions);

• collateral values;

• loan volumes and concentrations;

• competitive factors resulting in shifts in underwriting criteria;

• specific industry conditions within portfolio segments;

• recent loss experience in particular segments of the portfolio;

• bank regulatory examination results; and

• findings of our internal loan review department.

Executive management reviews these conditions quarterly in discussion with our entire lending staff.  To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s estimate of the effect of such conditions may be reflected as a specific allowance, applicable to such credit or portfolio segment.  Where any of these conditions is not evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s evaluation of the probable loss related to such condition is reflected in the unallocated allowance.

Based on this quantitative and qualitative analysis, provisions are made to the allowance for loan losses.  Such provisions are reflected in our consolidated statements of income.

Noninterest Income

Wealth Management revenue increased $1.8 million, or 120%, from $1.5 million in the second quarter of 2005 to $3.2 million for the same period of 2006.   The increase includes $1.5 million of commission income earned by Millennium in the second quarter of 2006.  Revenue from the Company’s Trust operations increased 16% over second quarter of 2005.  The Company’s ratio of fee income to total revenue was 25% versus 16% in the same period of 2005 as the Wealth Management segment continues to expand in line with the Company’s income diversification strategies.

Wealth Management assets under administration were $1.54 billion at June 30, 2006, a 25% increase over one year ago after adjusting for the $250 million in common trust fund assets that were distributed in December 2005 in accordance with a related contract.

For the six months ended June 30, 2006, noninterest income was $7.9 million compared to $4.1 million for the same period in 2005.  Wealth management revenue increased $3.9 million, or 144%, to $6.5 million for the six month period ended June 30, 2006, compared to $2.7 million for the same period in 2005 as a result of the reasons stated above.

Service charges on deposit accounts were basically unchanged year over year due to a rising earnings credit rate on commercial accounts, which was offset by increased account activity.

Noninterest Expense

Our efficiency ratio, which expresses noninterest expense as a percentage of net interest income and other income, was 57.9% for second quarter of 2006, improved from 61.8% in the second quarter of 2005.  Excluding the refinement in the methodology of deferring direct loan origination costs, the efficiency ratio for the second quarter of 2006 would have been 59.3%.

Noninterest expenses increased from $8.2 million in the second quarter of 2005 to $9.3 million in the same quarter of 2006.  Approximately $775,000 of the $1.1 million increase was related to the addition of Millennium (including amortization of intangibles.)

Approximately $348,000, or 80%, of the increase in employee compensation and benefits of the quarter over quarter increase is related to Millennium.  Excluding Millennium, employee compensation and benefits increased less than 2%, or $93,000.  Increases in salaries due to new associates, annual merit salary adjustments and benefit costs were offset by declines in wealth management commissions and the deferral of direct loan origination costs.

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The addition of Millennium contributed $62,000 to the increase in occupancy expense.  The remaining occupancy increases were due to scheduled rent increases on various Company facilities along with expenses related to additional space at the Company’s Operation Center and related leasehold improvements.

Furniture and equipment increases were due to the new St. Charles bank location, Millennium and the expansion of the Operations Center.  

Data processing expenses increased due to upgrades to the Company’s AS400, licensing fee increases for our core banking system as a result of our increased asset size and increased maintenance fees for various Company systems.

Other noninterest expense includes $337,000 for Millennium expenses (including $228,000 for amortization of intangibles.)  The remaining increase in other noninterest expense is related to increases in travel, meals and entertainment, charitable contributions and loan-related expenses along with increases in general operating expenses such as telephone, marketing, postage, and courier charges.

Noninterest expenses were $18.6 million in the six months ended June 30, 2006, an increase of $2.7 million, or 17%, over the same period of 2005.  Approximately $1.6 million, or 60%, of the increase was related to the addition of Millennium (including amortization of intangibles.)   On a year-to-date basis, our efficiency ratio was 59.4%% and improved from 62.1% in the first half of 2005.  Excluding the refinement in the methodology of deferring direct loan origination costs, the efficiency ratio for the first half of 2006 would have been 60.7%.

Minority Interest in Net Income of Consolidated Subsidiary

On October 21, 2005, the Company acquired a 60% controlling interest in Millennium.  The Company records the 40% non-controlling interest in Millennium, related to Millennium’s results of operations, in minority interest on the consolidated statements of income.  Contractually, the Company is entitled to a priority return of 23.1% pre-tax on its current $15 million investment in Millennium before the minority interest holders are entitled to any distributions.  The Company adjusted minority interest by $457,000 during the quarter in order to recognize its priority return in line with its contractual rights.  In effect, rather than receiving 40% of the earnings during the first half, the minority interest holders accrued 19%, while the Company accrued 81%.  Insurance industry seasonality and Millennium sales pipeline suggest stronger financial results in the second half of 2006, therefore we expect minority interest to move closer to 40% for the year.

Income Taxes

The provision for income taxes was $2.2 million and $3.9 million for the three and six months ended June 30, 2006 compared to $1.7 million and $3.1 for the three and six months ended June 30, 2005.  The effective tax rate for the three and six months ended June 30, 2006 was 36.0%.  The effective tax rates for the three and six months ended June 30, 2005 were 35.0% and 35.7%, respectively.

Liquidity and Capital Resources

The objective of liquidity management is to ensure the Company has the ability to generate sufficient cash or cash equivalents in a timely and cost-effective manner to meet its commitments as they become due.  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, lines of credit with major banks, the Federal Reserve and the Federal Home Loan Bank, the ability to acquire large and brokered deposits and the ability to sell loan participations to other banks.

The Company’s liquidity management framework includes measurement of several key elements, such as the loan to deposit ratio, wholesale deposits as a percentage of total deposits, and various dependency ratios used by banking regulators.  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.

Strong capital ratios, credit quality and core earnings are essential to retaining cost-effective access to the wholesale funding markets.  Deterioration in any of these factors could have an impact on the Company’s ability to access these funding sources and, as a result, these factors are monitored on an ongoing basis as part of the liquidity management process.

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

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The parent company’s liquidity is managed to provide the funds necessary to pay dividends to shareholders, service debt, invest in the Bank as necessary, and satisfy other operating requirements.  The parent company’s primary funding sources to meet its liquidity requirements are dividends from subsidiaries, borrowings against its $15 million line of credit with a major bank, and proceeds from the issuance of equity (i.e. stock option exercises). Another source of funding for the parent company includes the issuance of subordinated debentures.  As of June 30, 2006, the Company has $30 million of outstanding subordinated debentures as part of four Trust Preferred Securities Pools.  These securities are classified as debt but count as regulatory capital and the related interest expense is tax-deductible, which makes them very attractive.

Investment securities are an important tool to the Company’s liquidity objective.  As of June 30, 2006, the entire investment portfolio was available for sale.  Of the $109 million investment portfolio available for sale, $19.5 million was pledged as collateral for public deposits, treasury, tax and loan notes, and other requirements.  The remaining securities could be pledged or sold to enhance liquidity if necessary.

The Bank has a variety of funding sources (in addition to key liquidity sources, such as core deposits, loan repayments, loan participations sold, and investment portfolio sales) available to increase financial flexibility.  At June 30, 2006, the Bank had $74 million available from the Federal Home Loan Bank of Des Moines under a blanket loan pledge, absent the Bank being in default of its credit agreement, and $205 million available from the Federal Reserve Bank under a pledged loan agreement.  The Bank also has access to over $70 million in overnight federal funds lines purchased from various banking institutions.  Finally, because the Bank plans to remain a “well-capitalized” institution, it has the ability to sell certificates of deposit through various national or regional brokerage firms, if needed.

Over the normal course of business, the Company enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit.  These transactions are managed through the Company’s various risk management processes.  Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of the Company’s liquidity.  The Company has $415 million in unused loan commitments as of June 30, 2006.  While this commitment level would be very difficult to fund on a short term basis given the Company’s current liquidity resources, our experience is that the nature of these commitments are such that the likelihood of such a funding demand is very low.

The Company and 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 Bank’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank 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 Bank’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 Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets.  Management believes, as of June 30, 2006 and December 31, 2005, that the Company and Bank meet all capital adequacy requirements to which they are subject.

As of June 30, 2006 and December 31, 2005, the Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action.  To be categorized as “well capitalized” the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios.

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The following table summarizes the Company’s risk-based capital and leverage ratios at the dates indicated:

	At June 30,			At December 31,
(in thousands)	2006			2005
Tier I capital to risk weighted assets		9.87	%		10.31	%
Total capital to risk weighted assets		11.11	%		11.55	%
Leverage ratio (Tier I capital to average assets)		9.06	%		8.75	%
Tangible capital to tangible assets		6.44	%		5.98	%
Tier I capital	$	114,427		$	107,538
Total risk-based capital	$	128,876		$	120,528

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.

Market risk arises from exposure to changes in interest rates and other relevant market or price risks.  The Company faces market risk in the form of interest rate risk through transactions other than trading activities.  Market risk from these activities, in the form of interest rate risk, is measured and managed through a number of methods.  The Company uses financial modeling techniques to measure interest rate risk.  These techniques measure the sensitivity of future earnings due to changing interest rate environments.  Guidelines established by the Bank’s Asset/Liability Management Committee and approved by the Bank’s Board of Directors are used to monitor exposure of earnings at risk.  General interest rate movements are used to develop sensitivity as the Bank feels it has no primary exposure to a specific point on the yield curve.  These limits are based on the Bank’s exposure to a 100 bp and 200 bp immediate and sustained parallel rate move, either upward or downward.

The following table represents the estimated interest rate sensitivity and periodic and cumulative gap positions calculated as of June 30, 2006.

(in thousands)	Year 1			Year 2			Year 3		Year 4		Year 5		Beyond 5 years or no stated maturity		Total
Interest-Earning Assets
Investments in debt and equity securities	$	3,305		$	35,814		$	36,299	$	24,824	$	1,314	$	7,893	$	109,449
Interest-bearing deposits		607			—			—		—		—		—		607
Federal funds sold		3,034			—			—		—		—		—		3,034
Loans		723,401			131,974			93,530		57,001		52,148		50,852		1,108,906
Loans held for sale		3,028			—			—		—		—		—		3,028
Total interest-earning assets	$	733,375		$	167,788		$	129,829	$	81,825	$	53,462	$	58,745	$	1,225,024
Interest-Bearing Liabilities
Savings, NOW and Money market deposits	$	571,413		$	—		$	—	$	—	$	—	$	—	$	571,413
Certificates of deposit		250,387			48,918			6,798		2,277		202		—		308,582
Subordinated debentures		20,620			—			—		—		10,310		—		30,930
Other borrowings		66,735			950			1,050		5,650		1,100		17,978		93,463
Total interest-bearing liabilities	$	909,155		$	49,868		$	7,848	$	7,927	$	11,612	$	17,978	$	1,004,388
Interest-sensitivity GAP
GAP by period	$	(175,780	)	$	117,920		$	121,981	$	73,898	$	41,850	$	40,767	$	220,636
Cumulative GAP	$	(175,780	)	$	(57,860	)	$	64,121	$	138,019	$	179,869	$	220,636	$	220,636
Ratio of interest-earning assets to interest-bearing liabilities
Periodic		0.81			3.36			16.54		10.32		4.60		3.27		1.22
Cumulative GAP		0.81			0.94			1.07		1.14		1.18		1.22		1.22

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ITEM 4: CONTROLS AND PROCEDURES

As of June 30, 2006, 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.  Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2006, to ensure that information required to be disclosed in the Company’s periodic SEC filings is processed, recorded, summarized and reported when required.  There were no changes during the period covered by this Quarterly Report on Form 10-Q in the Company’s internal controls or in the other factors that have materially affected, or are reasonably likely to materially affect, those controls.

PART II

ITEM 1: LEGAL PROCEEDINGS

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

ITEM 1A: RISK FACTORS

There have not been any material changes in the risk factors disclosure from that contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

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

(a)	During the quarter ended June 30, 2006, there were no unregistered sales of equity securities by the Company.
(b)	Not applicable.
(c)	The Company has authorized the repurchase of up to 500,000 shares of its common stock.  There were no repurchases of the Company’s common stock during the quarter ended June 30, 2006.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

None.

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ITEM 4: SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

ANNUAL MEETING OF SHAREHOLDERS:  The annual meeting of shareholders was held on April 19, 2006.  Proxies were solicited pursuant to Regulation 14A of the Securities Exchange Act of 1934.  There was no solicitation in opposition to management’s nominees for Directors and all nominees were elected.  The appointment of KPMG LLP to serve as independent registered public accounting firm for the Company in 2006 was ratified.

The results of the voting on each proposal submitted at the meeting are as follows:

PROPOSAL NO. 1: ELECTION OF DIRECTORS

Director	For		Withheld
Kevin C. Eichner		8,333,527		31,782
Peter F. Benoist		8,331,927		33,382
Paul R. Cahn		8,332,627		32,682
William H. Downey		8,306,427		58,882
Robert E. Guest, Jr.		8,333,327		31,982
Lewis A. Levey		8,325,227		40,082
Richard S. Masinton		8,296,086		69,223
Birch M. Mullins		8,314,927		50,382
James J. Murphy		8,333,327		31,982
Robert E. Saur		8,331,927		33,382
Sandra Van Trease		8,318,527		46,782
Henry D. Warshaw		8,259,927		105,382

PROPOSAL NO. 2: INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Accountants	For		Against		Abstain
KPMG LLP		8,314,593		34,193		16,523

PROPOSAL NO. 3: APPROVAL OF STOCK PLAN FOR NON-MANAGEMENT DIRECTORS

	For		Against		Abstain
Stock Plan		6,404,132		251,111		212,371

PROPOSAL NO. 4: APPROVAL OF AMENDMENT & EXTENSION OF 2002 STOCK INCENTIVE PLAN

	For		Against		Abstain
2002 Incentive Plan		6,160,681		506,730		200,203

PROPOSAL NO. 5: APPROVAL OF ANNUAL INCENTIVE PLAN

	For		Against		Abstain
Annual Incentive Plan		7,888,689		261,911		214,709

26

ITEM 5: OTHER INFORMATION

None.

ITEM 6: EXHIBITS

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

* Filed herewith

27

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 August 8, 2006.

ENTERPRISE FINANCIAL SERVICES CORP
By:	/s/ Kevin C. Eichner
	Kevin C. Eichner Chief Executive Officer
By:	/s/ Frank H. Sanfilippo
	Frank H. Sanfilippo Chief Financial Officer

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