10-Q 1 a2018930-10q.htm 10-Q Document


 

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 September 30, 2018.
 
 
 
[   ]
 
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, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [X]
 
 
 
Accelerated filer [ ]
Non-accelerated filer [ ]
 
(Do not check if a smaller reporting company)
 
Smaller reporting company [ ]
 
 
 
 
Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. [ ]
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 October 24, 2018, the Registrant had 23,073,472 shares of outstanding common stock, $0.01 par value per share.
This document is also available through our website at http://www.enterprisebank.com.
 






ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
 
Page
PART I - FINANCIAL INFORMATION
 
 
 
 
Item 1.  Financial Statements
 
 
 
Condensed Consolidated Balance Sheets (Unaudited)
 
 
Condensed Consolidated Statements of Operations (Unaudited)
 
 
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 
 
Condensed Consolidated Statements of Shareholders' Equity (Unaudited)
 
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4. Controls and Procedures
 
 
PART II - OTHER INFORMATION
 
 
 
 
Item 1.  Legal Proceedings
 
 
 
Item 1A.  Risk Factors
 
 
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 3. Defaults Upon Senior Securities
 
 
 
Item 4. Mine Safety Disclosures
 
 
 
Item 5. Other Information
 
 
 
Item 6. Exhibits
 
 
Signatures
 
 
 
 




PART 1 - ITEM 1 - FINANCIAL STATEMENTS
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except share and per share data)
September 30, 2018
 
December 31, 2017
Assets
 
 
 
Cash and due from banks
$
78,119

 
$
91,084

Federal funds sold
1,571

 
1,223

Interest-bearing deposits (including $1,295 and $1,365 pledged as collateral, respectively)
76,375

 
61,016

Total cash and cash equivalents
156,065

 
153,323

Interest-bearing deposits greater than 90 days
3,405

 
2,645

Securities available for sale
670,328

 
641,382

Securities held to maturity
67,131

 
73,749

Loans held for sale
738

 
3,155

Loans
4,267,430

 
4,097,050

Less: Allowance for loan losses
44,186

 
42,577

Total loans, net
4,223,244

 
4,054,473

Other real estate
408

 
498

Other investments, at cost
37,885

 
26,661

Fixed assets, net
32,354

 
32,618

Accrued interest receivable
19,879

 
14,069

State tax credits held for sale (including $171 and $400 carried at fair value, respectively)
45,625

 
43,468

Goodwill
117,345

 
117,345

Intangible assets, net
9,148

 
11,056

Other assets
133,984

 
114,783

Total assets
$
5,517,539

 
$
5,289,225

 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
Demand deposits
$
1,062,126

 
$
1,123,907

Interest-bearing transaction accounts
743,351

 
915,653

Money market accounts
1,523,416

 
1,342,931

Savings
207,346

 
195,150

Certificates of deposit:
 
 
 
Brokered
202,323

 
115,306

Other
471,914

 
463,467

Total deposits
4,210,476

 
4,156,414

Subordinated debentures and notes (net of debt issuance cost of $1,038 and $1,136, respectively)
118,144

 
118,105

Federal Home Loan Bank advances
401,000

 
172,743

Other borrowings
161,795

 
253,674

Accrued interest payable
2,433

 
1,730

Other liabilities
36,854

 
37,986

Total liabilities
4,930,702

 
4,740,652

 
 
 
 
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; 23,919,261 and 23,781,112 shares issued, respectively
239

 
238

Treasury stock, at cost; 827,595 and 691,673 shares, respectively
(30,108
)
 
(23,268
)
Additional paid in capital
349,317

 
350,061

Retained earnings
284,016

 
225,360

Accumulated other comprehensive loss
(16,627
)
 
(3,818
)
Total shareholders' equity
586,837

 
548,573

Total liabilities and shareholders' equity
$
5,517,539

 
$
5,289,225

The accompanying notes are an integral part of these consolidated financial statements.

1



ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in thousands, except per share data)
2018
 
2017
 
2018
 
2017
Interest income:
 
 
 
 
 
 
 
Interest and fees on loans
$
55,383

 
$
48,020

 
$
158,781

 
$
135,253

Interest on debt securities:
 
 
 
 
 
 
 
Taxable
4,482

 
3,855

 
12,697

 
10,670

Nontaxable
263

 
294

 
816

 
984

Interest on interest-bearing deposits
306

 
173

 
777

 
537

Dividends on equity securities
323

 
126

 
729

 
306

Total interest income
60,757

 
52,468


173,800


147,750

Interest expense:
 
 
 
 
 
 
 
Interest-bearing transaction accounts
799

 
523

 
2,422

 
1,721

Money market accounts
5,423

 
2,410

 
13,221

 
5,841

Savings accounts
157

 
125

 
429

 
332

Certificates of deposit
2,878

 
1,493

 
7,115

 
4,081

Subordinated debentures and notes
1,483

 
1,316

 
4,305

 
3,768

Federal Home Loan Bank advances
1,729

 
832

 
4,435

 
1,684

Notes payable and other borrowings
195

 
144

 
561

 
423

Total interest expense
12,664

 
6,843


32,488


17,850

Net interest income
48,093

 
45,625

 
141,312

 
129,900

Provision for portfolio loan losses
2,332

 
2,422

 
6,588

 
7,578

Provision reversal for purchased credit impaired loan losses
(69
)
 

 
(2,064
)
 
(355
)
Net interest income after provision for loan losses
45,830

 
43,203


136,788


122,677

Noninterest income:
 
 
 
 
 
 
 
Service charges on deposit accounts
2,997

 
2,820

 
8,855

 
8,146

Wealth management revenue
2,012

 
2,062

 
6,267

 
5,949

Card services revenue
1,760

 
1,459

 
4,926

 
3,888

Gain on sale of other real estate
13

 

 
13

 
17

Gain on state tax credits, net
192

 
77

 
508

 
332

Gain on sale of investment securities

 
22

 
9

 
22

Miscellaneous income
1,436

 
1,932

 
7,067

 
4,928

Total noninterest income
8,410

 
8,372


27,645


23,282

Noninterest expense:
 
 
 
 
 
 
 
Employee compensation and benefits
16,297

 
15,090

 
49,370

 
46,096

Occupancy
2,394

 
2,434

 
7,142

 
6,628

Data processing
1,634

 
1,389

 
4,634

 
4,828

Professional fees
1,023

 
922

 
2,619

 
2,838

FDIC and other insurance
845

 
882

 
2,682

 
2,356

Loan legal and other real estate expense
322

 
586

 
598

 
1,544

Merger related expenses

 
315

 

 
6,462

Other
7,407

 
5,786

 
21,239

 
16,039

Total noninterest expense
29,922

 
27,404


88,284


86,791

 
 
 
 
 
 
 
 
Income before income tax expense
24,318

 
24,171


76,149


59,168

Income tax expense
1,802

 
7,856

 
10,461

 
18,507

Net income
$
22,516

 
$
16,315


$
65,688


$
40,661

 
 
 
 
 
 
 
 
Earnings per common share
 
 
 
 
 
 
 
Basic
$
0.97

 
$
0.70

 
$
2.84

 
$
1.77

Diluted
0.97

 
0.69

 
2.81

 
1.75

The accompanying notes are an integral part of these consolidated financial statements.

2




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

 
Three months ended
September 30,
 
Nine months ended
September 30,
(in thousands)
2018
 
2017
 
2018
 
2017
Net income
$
22,516

 
$
16,315

 
$
65,688

 
$
40,661

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gains (losses) on investment securities arising during the period, net of income tax expense (benefit) for three months of $(1,328) and $(493), and for nine months of $(3,926) and $775, respectively
(4,048
)
 
(805
)
 
(11,968
)
 
1,265

Less: Reclassification adjustment for realized gains on sale of securities available for sale included in net income, net of income tax expense for three months of $0 and $8, and for nine months of $2 and $8, respectively

 
(13
)
 
(7
)
 
(13
)
Total other comprehensive income (loss)
(4,048
)
 
(818
)
 
(11,975
)
 
1,252

Total comprehensive income
$
18,468

 
$
15,497

 
$
53,713

 
$
41,913


The accompanying notes are an integral part of these consolidated financial statements.


3



ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)
(in thousands, except per share data)
Common Stock
 
Treasury Stock
 
Additional paid in capital
 
Retained earnings
 
Accumulated
other
comprehensive income (loss)
 
Total
shareholders' equity
Balance at December 31, 2017
$
238

 
$
(23,268
)
 
$
350,061

 
$
225,360

 
$
(3,818
)
 
$
548,573

Net income

 

 

 
65,688

 

 
65,688

Other comprehensive loss

 

 

 

 
(11,975
)
 
(11,975
)
Total comprehensive income (loss)

 

 

 
65,688

 
(11,975
)
 
53,713

Cash dividends paid on common shares, $0.34 per share

 

 

 
(7,866
)
 

 
(7,866
)
Repurchase of common shares

 
(6,840
)
 

 

 

 
(6,840
)
Issuance under equity compensation plans, 138,149 shares, net
1

 

 
(3,298
)
 

 

 
(3,297
)
Share-based compensation

 

 
2,554

 

 

 
2,554

Reclassification adjustments for change in accounting policies



 

 
834

 
(834
)
 

Balance at September 30, 2018
$
239

 
$
(30,108
)
 
$
349,317

 
$
284,016

 
$
(16,627
)
 
$
586,837

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands, except per share data)
Common Stock
 
Treasury Stock
 
Additional paid in capital
 
Retained earnings
 
Accumulated
other
comprehensive income (loss)
 
Total
shareholders' equity
Balance at December 31, 2016
$
203

 
$
(6,632
)
 
$
213,078

 
$
182,190

 
$
(1,741
)
 
$
387,098

Net income

 

 

 
40,661

 

 
40,661

Other comprehensive income

 

 

 

 
1,252

 
1,252

Total comprehensive income

 

 

 
40,661

 
1,252

 
41,913

Cash dividends paid on common shares, $0.33 per share

 

 

 
(7,709
)
 

 
(7,709
)
Repurchase of common shares

 
(16,636
)
 

 

 

 
(16,636
)
Issuance under equity compensation plans, 148,597 shares, net
1

 

 
(2,574
)
 

 

 
(2,573
)
Share-based compensation

 

 
2,514

 

 

 
2,514

Shares issued in connection with acquisition of Jefferson County Bancshares, Inc., 3,299,865 shares, net
33

 

 
141,696

 

 

 
141,729

Reclassification for the adoption of share-based payment guidance

 

 
(5,229
)
 
5,229

 

 

Balance at September 30, 2017
$
237

 
$
(23,268
)
 
$
349,485

 
$
220,371

 
$
(489
)
 
$
546,336


The accompanying notes are an integral part of these consolidated financial statements.

4



ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
Nine months ended September 30,
(in thousands, except share data)
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
65,688

 
$
40,661

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation
2,622

 
2,426

Provision for loan losses
4,524

 
7,223

Deferred income taxes
2,822

 
1,239

Net amortization of debt securities
1,338

 
2,064

Amortization of intangible assets
1,908

 
1,920

Gain on sale of investment securities
(9
)
 
(22
)
Mortgage loans originated for sale
(30,136
)
 
(115,365
)
Proceeds from mortgage loans sold
32,839

 
118,798

Gain on sale of other real estate
(13
)
 
(17
)
Gain on state tax credits, net
(508
)
 
(332
)
Share-based compensation
2,554

 
2,514

Net accretion of loan discount
(1,253
)
 
(3,796
)
Changes in:
 
 
 
Accrued interest receivable
(5,811
)
 
(302
)
Accrued interest payable
703

 
249

Other assets
(16,309
)
 
755

Other liabilities
(1,093
)
 
(44,398
)
Net cash provided by operating activities
59,866

 
13,617

Cash flows from investing activities:
 
 
 
Proceeds from JCB acquisition, net of cash purchase price

 
4,456

Net increase in loans
(172,449
)
 
(201,715
)
Proceeds from the sale of securities, available for sale
1,451

 
144,076

Proceeds from the paydown or maturity of securities, available for sale
61,881

 
126,073

Proceeds from the paydown or maturity of securities, held to maturity
4,988

 
4,145

Proceeds from the redemption of other investments
30,593

 
29,159

Proceeds from the sale of state tax credits held for sale
3,056

 
4,391

Proceeds from the sale of other real estate
467

 
2,513

Payments for the purchase/origination of:
 
 
 
Available for sale debt securities
(108,121
)
 
(263,453
)
Other investments
(44,597
)
 
(45,224
)
State tax credits held for sale
(4,704
)
 
(145
)
Fixed assets, net
(2,369
)
 
(1,864
)
Net cash used in investing activities
(229,804
)
 
(197,588
)
Cash flows from financing activities:
 
 
 
Net (decrease) increase in noninterest-bearing deposit accounts
(61,781
)
 
20,684

Net increase in interest-bearing deposit accounts
115,843

 
39,998

Proceeds from Federal Home Loan Bank advances
1,142,500

 
1,394,181

Repayments of Federal Home Loan Bank advances
(914,000
)
 
(1,145,681
)
Proceeds from notes payable

 
10,000

Net decrease in other borrowings
(91,879
)
 
(123,987
)
Cash dividends paid on common stock
(7,866
)
 
(7,709
)
Payments for the repurchase of common stock
(6,840
)
 
(16,636
)
Payments for the issuance of equity instruments, net
(3,297
)
 
(2,573
)
Net cash provided by financing activities
172,680

 
168,277

Net increase (decrease) in cash and cash equivalents
2,742

 
(15,694
)
Cash and cash equivalents, beginning of period
153,323

 
198,802

Cash and cash equivalents, end of period
$
156,065

 
$
183,108

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
31,785

 
$
16,948

Income taxes
8,492

 
9,382

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

 
$
289

Common shares issued in connection with JCB acquisition

 
141,729


The accompanying notes are an integral part of these consolidated financial statements.

5



ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Business and Consolidation

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

Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2018. 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, 2017, as filed with the Securities and Exchange Commission.

Basis of Financial Statement Presentation

The accompanying unaudited 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.

During the first quarter of 2018, the Company adopted Accounting Standards Update ("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. The guidance also provides an alternative to measure equity securities without readily determinable fair values at cost less impairment (if any), plus or minus observable price changes from an identical or similar investment of the same issuer (the “measurement alternative”). The Company elected the measurement alternative for its qualifying equity securities. The adoption of this update resulted in an insignificant increase to retained earnings which was reclassified from accumulated other comprehensive income.

In addition, the Company early adopted ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities" during the first quarter of 2018. The objective of ASU 2017-12 is to improve the financial reporting of hedging relationships by better aligning an entity's risk management activity with the economic objectives in undertaking those activities. The adoption of this update did not have a material effect on the Company's consolidated financial statements.

The Company also early adopted ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" during the first quarter of 2018. The ASU allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017, which among other things, reduced the maximum federal corporate tax rate from 35% to 21%. The adoption of this update resulted in an increase to retained earnings of $0.8 million which was reclassified from accumulated other comprehensive income.

In the opinion of management, the consolidated financial statements contain all adjustments (consisting of normal recurring accruals) considered necessary for the fair presentation of the statements of financial position, results of operations, and cash flow for the interim periods.

6




Revenue

The Company adopted the accounting standard regarding revenue recognition in the first quarter of 2018 using the modified retrospective approach. The Company's revenues are primarily composed of interest income on financial instruments, including investment securities, which are excluded from the scope of the new guidance. Certain other noninterest income from loans, investment securities and derivative financial instruments is also excluded from this guidance. Service charges on deposit accounts, wealth management revenue, card services revenue, and gain on sale of other real estate are within the scope of the guidance; however, there were no accounting policy changes as the Company's policies were consistent with the new guidance. Other noninterest income sources of revenue are considered immaterial. Implementation of this guidance did not change current business practices or have any changes to the Company's consolidated financial statements.
Descriptions of our revenue-generating activities within the scope of this guidance, which are presented in our income statement as components of noninterest income are as follows:
Service charges on deposit accounts - represents fees generated from a variety of deposit products and services provided to customers under a day-to-day contract. These fees are recognized on a daily or monthly basis.
Wealth management revenue - represents monthly fees earned from directing, holding, and managing customers’ assets. Revenue is recognized over regular intervals, either monthly or quarterly.
Card services revenue - represents revenue earned from merchant, debit and credit cards as incurred and includes a contra revenue account for rebates.
Gain on sale of other real estate - represents income recognized at delivery of control of a property at the time of a real estate closing.

Income Taxes

The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Cuts and Jobs Act of 2017 (“Tax Act”). SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. The Company has recorded amounts for the effects of the Tax Act using reasonable estimates based on currently available information and its interpretations thereof. This accounting may change due to, among other things, changes in interpretations the Company has made and the issuance of new tax or accounting guidance.

NOTE 2 - 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.


7



The following table presents a summary of per common share data and amounts for the periods indicated.
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in thousands, except per share data)
2018
 
2017
 
2018
 
2017
Net income as reported
$
22,516

 
$
16,315

 
$
65,688

 
$
40,661

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
23,148

 
23,324

 
23,129

 
22,914

Additional dilutive common stock equivalents
181

 
250

 
211

 
295

Weighted average diluted common shares outstanding
23,329

 
23,574

 
23,340

 
23,209

 
 
 
 
 
 
 
 
Basic earnings per common share:
$
0.97

 
$
0.70

 
$
2.84

 
$
1.77

Diluted earnings per common share:
$
0.97

 
$
0.69

 
$
2.81

 
$
1.75


For the three and nine months ended September 30, 2018 and 2017, there were no common stock equivalents excluded from the earnings per share calculations because their effect would have been anti-dilutive.

8



NOTE 3 - 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:
 
 
September 30, 2018
(in thousands)
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair Value
Available for sale securities:
 
 
 
 
 
 
 
Obligations of U.S. Government-sponsored enterprises
$
99,914

 
$

 
$
(2,233
)
 
$
97,681

Obligations of states and political subdivisions
30,563

 
238

 
(268
)
 
30,533

Agency mortgage-backed securities
551,552

 
180

 
(19,385
)
 
532,347

U.S. Treasury bills
9,960

 

 
(193
)
 
9,767

          Total securities available for sale
$
691,989

 
$
418

 
$
(22,079
)
 
$
670,328

Held to maturity securities:
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
12,521

 
$
6

 
$
(324
)
 
$
12,203

Agency mortgage-backed securities
54,610

 

 
(2,397
)
 
52,213

          Total securities held to maturity
$
67,131

 
$
6


$
(2,721
)

$
64,416


 
December 31, 2017
(in thousands)
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair Value
Available for sale securities:
 
 
 
 
 
 
 
    Obligations of U.S. Government-sponsored enterprises
$
99,878

 
$
6

 
$
(660
)
 
$
99,224

    Obligations of states and political subdivisions
34,181

 
674

 
(213
)
 
34,642

    Agency mortgage-backed securities
513,082

 
727

 
(6,293
)
 
507,516

          Total securities available for sale
$
647,141

 
$
1,407

 
$
(7,166
)
 
$
641,382

Held to maturity securities:
 
 
 
 
 
 
 
   Obligations of states and political subdivisions
$
14,031

 
$
69

 
$
(46
)
 
$
14,054

   Agency mortgage-backed securities
59,718

 
16

 
(330
)
 
59,404

          Total securities held to maturity
$
73,749

 
$
85

 
$
(376
)
 
$
73,458


At September 30, 2018, and December 31, 2017, 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 agencies and sponsored enterprises. Securities having a fair value of $365.3 million and $500.0 million at September 30, 2018, and December 31, 2017, respectively, were pledged as collateral to secure deposits of public institutions and for other purposes as required by law or contract provisions.


9



The amortized cost and estimated fair value of debt securities at September 30, 2018, 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
$
12,193

 
$
12,107

 
$

 
$

Due after one year through five years
110,517

 
108,231

 
868

 
856

Due after five years through ten years
12,688

 
12,678

 
11,294

 
10,995

Due after ten years
5,039

 
4,965

 
359

 
352

Agency mortgage-backed securities
551,552

 
532,347

 
54,610

 
52,213

 
$
691,989

 
$
670,328


$
67,131


$
64,416



The following table represents a summary of investment securities that had an unrealized loss:
 
 
September 30, 2018
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
$
58,592

 
$
1,353

 
$
39,089

 
$
880

 
$
97,681

 
$
2,233

Obligations of states and political subdivisions
24,152

 
468

 
3,296

 
124

 
27,448

 
592

Agency mortgage-backed securities
297,577

 
8,216

 
270,949

 
13,566

 
568,526

 
21,782

U.S. Treasury bills
9,767

 
193

 

 

 
9,767

 
193

 
$
390,088

 
$
10,230


$
313,334


$
14,570


$
703,422


$
24,800

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 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
$
89,309

 
$
660

 
$

 
$

 
$
89,309

 
$
660

Obligations of states and political subdivisions
13,951

 
259

 

 

 
13,951

 
259

Agency mortgage-backed securities
469,655

 
6,034

 
12,229

 
589

 
481,884

 
6,623

 
$
572,915

 
$
6,953


$
12,229


$
589


$
585,144


$
7,542



The unrealized losses at both September 30, 2018, and December 31, 2017, 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 September 30, 2018, management performed its quarterly analysis of all securities with an unrealized loss and concluded no individual securities were other-than-temporarily impaired.

10



NOTE 4 - LOANS

The loan portfolio is comprised of loans originated by the Company and loans 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 ("PCI") loans.
 
The table below shows the loan portfolio composition including carrying value categorized by loans accounted for at amortized cost, which includes our originated loans, and by loans accounted for as PCI. 

(in thousands)

September 30, 2018
 
December 31, 2017
Loans accounted for at amortized cost
$
4,218,341

 
$
4,022,896

Loans accounted for as PCI
49,089

 
74,154

Total loans
$
4,267,430

 
$
4,097,050


The following tables refer to loans accounted for at amortized cost.

Below is a summary of loans by category at September 30, 2018 and December 31, 2017:
 
(in thousands)
September 30, 2018
 
December 31, 2017
Commercial and industrial
$
2,032,929

 
$
1,918,720

Real estate:
 
 
 
Commercial - investor owned
826,447

 
769,275

Commercial - owner occupied
589,045

 
554,589

Construction and land development
326,858

 
303,091

Residential
308,385

 
341,312

Total real estate loans
2,050,735

 
1,968,267

Consumer and other
136,025

 
137,234

Loans, before unearned loan fees
4,219,689

 
4,024,221

Unearned loan fees, net
(1,348
)
 
(1,325
)
Loans, including unearned loan fees
$
4,218,341

 
$
4,022,896



11



A summary of the activity in the allowance for loan losses and the recorded investment in loans by class and category based on impairment methodology through September 30, 2018, and at December 31, 2017, 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, 2017
$
26,406

 
$
3,890

 
$
3,308

 
$
1,487

 
$
2,237

 
$
838

 
$
38,166

Provision (provision reversal) for loan losses
780

 
648

 
190

 
35

 
259

 
(41
)
 
1,871

Losses charged off
(732
)
 

 

 

 
(254
)
 
(49
)
 
(1,035
)
Recoveries
956

 
8

 
4

 
206

 
73

 
14

 
1,261

Balance at March 31, 2018
$
27,410

 
$
4,546


$
3,502


$
1,728


$
2,315


$
762


$
40,263

Provision (provision reversal) for loan losses
2,852

 
5

 
340

 
(206
)
 
(573
)
 
(33
)
 
2,385

Losses charged off
(956
)
 

 

 

 
(38
)
 
(33
)
 
(1,027
)
Recoveries
118

 
10

 
3

 
168

 
59

 
28

 
386

Balance at June 30, 2018
$
29,424

 
$
4,561


$
3,845


$
1,690


$
1,763


$
724


$
42,007

Provision (provision reversal) for loan losses
2,569

 
3

 
(197
)
 
154

 
(187
)
 
(10
)
 
2,332

Losses charged off
(2,405
)
 

 
(22
)
 

 
(122
)
 
(46
)
 
(2,595
)
Recoveries
2

 
8

 
4

 
21

 
88

 
25

 
148

Balance at September 30, 2018
$
29,590

 
$
4,572


$
3,630


$
1,865


$
1,542


$
693


$
41,892

(in thousands)
Commercial and industrial
 
CRE - investor owned
 
CRE -
owner occupied
 
Construction and land development
 
Residential real estate
 
Consumer and other
 
Total
Balance September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses - Ending balance:
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
4,128

 
$

 
$
177

 
$

 
$
9

 
$

 
$
4,314

Collectively evaluated for impairment
25,462

 
4,572

 
3,453

 
1,865

 
1,533

 
693

 
37,578

Total
$
29,590

 
$
4,572


$
3,630


$
1,865


$
1,542


$
693


$
41,892

Loans - Ending balance:
 
 
 
 
 
 
 

 
 
 
 
 
 
Individually evaluated for impairment
$
12,197

 
$
770

 
$
2,655

 
$

 
$
2,477

 
$
312

 
$
18,411

Collectively evaluated for impairment
2,020,732

 
825,677

 
586,390

 
326,858

 
305,908

 
134,365

 
4,199,930

Total
$
2,032,929

 
$
826,447


$
589,045


$
326,858


$
308,385


$
134,677


$
4,218,341

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses - Ending balance:
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
2,508

 
$

 
$
71

 
$

 
$

 
$

 
$
2,579

Collectively evaluated for impairment
23,898

 
3,890

 
3,237

 
1,487

 
2,237

 
838

 
35,587

Total
$
26,406

 
$
3,890


$
3,308


$
1,487


$
2,237


$
838


$
38,166

Loans - Ending balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
12,665

 
$
422

 
$
1,975

 
$
136

 
$
1,602

 
$
375

 
$
17,175

Collectively evaluated for impairment
1,906,055

 
768,853

 
552,614

 
302,955

 
339,710

 
135,534

 
4,005,721

Total
$
1,918,720

 
$
769,275


$
554,589


$
303,091


$
341,312


$
135,909


$
4,022,896



12



A summary of nonperforming loans individually evaluated for impairment by category at September 30, 2018 and December 31, 2017, and the income recognized on impaired loans is as follows:

 
September 30, 2018
(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
$
20,938

 
$
3,266

 
$
8,931

 
$
12,197

 
$
4,128

 
$
10,414

Real estate:
 
 
 
 
 
 
 
 
 
 
 
    Commercial - investor owned
1,039

 
770

 

 
770

 

 
657

    Commercial - owner occupied
1,328

 
826

 
462

 
1,288

 
177

 
1,074

    Construction and land development

 

 

 

 

 

    Residential
2,600

 
2,008

 
469

 
2,477

 
9

 
2,410

Consumer and other
329

 
312

 

 
312

 

 
334

Total
$
26,234

 
$
7,182


$
9,862


$
17,044


$
4,314


$
14,889


 
December 31, 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
$
20,750

 
$
2,321

 
$
10,344

 
$
12,665

 
$
2,508

 
$
16,270

Real estate:
 
 
 
 
 
 
 
 
 
 
 
    Commercial - investor owned
560

 
422

 

 
422

 

 
521

    Commercial - owner occupied
487

 

 
487

 
487

 
71

 
490

    Construction and land development
441

 
136

 

 
136

 

 
331

    Residential
1,730

 
1,602

 

 
1,602

 

 
1,735

Consumer and other
375

 
375

 

 
375

 

 
375

Total
$
24,343

 
$
4,856


$
10,831


$
15,687


$
2,579


$
19,722


 
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)
2018
 
2017
 
2018
 
2017
Total interest income that would have been recognized under original terms
$
614

 
$
306

 
$
1,615

 
$
961

Total cash received and recognized as interest income on non-accrual loans
68

 
117

 
157

 
156

Total interest income recognized on accruing, impaired loans
110

 
8

 
133

 
55



13



The recorded investment in nonperforming loans by category at September 30, 2018 and December 31, 2017, is as follows: 
 
September 30, 2018
(in thousands)
Non-accrual
 
Restructured, not on non-accrual
 
Loans over 90 days past due and still accruing interest
 
Total
Commercial and industrial
$
10,088

 
$
820

 
$
1,289

 
$
12,197

Real estate:
 
 
 
 
 
 
 
    Commercial - investor owned
770

 

 

 
770

    Commercial - owner occupied
1,288

 

 

 
1,288

    Construction and land development

 

 

 

    Residential
2,477

 

 

 
2,477

Consumer and other
312

 

 

 
312

       Total
$
14,935

 
$
820


$
1,289


$
17,044


 
December 31, 2017
(in thousands)
Non-accrual
 
Restructured, not on non-accrual
 
Total
Commercial and industrial
$
11,946

 
$
719

 
$
12,665

Real estate:
 
 
 
 
 
    Commercial - investor owned
422

 

 
422

    Commercial - owner occupied
487

 

 
487

    Construction and land development
136

 

 
136

    Residential
1,602

 

 
1,602

Consumer and other
375

 

 
375

       Total
$
14,968

 
$
719

 
$
15,687


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


14



The recorded investment by category for the portfolio loans that have been restructured during the three and nine months ended September 30, 2018 and 2017, is as follows:

 
Three months ended September 30, 2018
 
Three months ended September 30, 2017
(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

 
$
187

 
$
187

 

 
$

 
$

Total
1

 
$
187

 
$
187

 

 
$

 
$



 
Nine months ended September 30, 2018
 
Nine months ended September 30, 2017
(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

 
$
187

 
$
187

 
1

 
$
676

 
$
676

Total
1

 
$
187

 
$
187

 
1

 
$
676

 
$
676



As of September 30, 2018, the Company had $2.6 million in specific reserves allocated to $8.0 million of loans that have been restructured. During the three and nine months ended September 30, 2018 and 2017, there were no portfolio loans that subsequently defaulted.

The aging of the recorded investment in past due loans by portfolio class and category at September 30, 2018 and December 31, 2017, is shown below.

 
September 30, 2018
(in thousands)
30-89 Days
 Past Due
 
90 or More
Days
Past Due
 
Total
Past Due
 
Current
 
Total
Commercial and industrial
$
11,213

 
$
6,020

 
$
17,233

 
$
2,015,696

 
$
2,032,929

Real estate:
 
 
 
 
 
 
 
 
 
Commercial - investor owned
1,362

 
129

 
1,491

 
824,956

 
826,447

Commercial - owner occupied
258

 
808

 
1,066

 
587,979

 
589,045

Construction and land development

 

 

 
326,858

 
326,858

Residential
864

 
1,156

 
2,020

 
306,365

 
308,385

Consumer and other

 

 

 
134,677

 
134,677

Total
$
13,697

 
$