Edgar Filing: ENTERPRISE FINANCIAL SERVICES CORP

2013.6.30-10Q

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, 2013.

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

		Commission file number 001-15373

ENTERPRISE FINANCIAL SERVICES CORP

Incorporated in the State of Delaware

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

Address: 150 North Meramec

Clayton, MO 63105

Telephone: (314) 725-5500

___________________

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

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

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



Large accelerated filer o	Accelerated filer R	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

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

Yes [ ] No [X]

As of July 31, 2013, the Registrant had 18,237,767 shares of outstanding common stock.

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

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

TABLE OF CONTENTS



		Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets (Unaudited)		1

Condensed Consolidated Statements of Operations (Unaudited)		2

Condensed Consolidated Statements of Comprehensive Income (Unaudited)		3

Condensed Consolidated Statements of Shareholders' Equity (Unaudited)		4

Condensed Consolidated Statements of Cash Flows (Unaudited)		5

Notes to Condensed Consolidated Financial Statements (Unaudited)		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		28

Item 3. Quantitative and Qualitative Disclosures About Market Risk		47

Item 4. Controls and Procedures		48

PART II - OTHER INFORMATION

Item 1. Legal Proceedings		49

Item 1A. Risk Factors		50

Item 6. Exhibits		51

Signatures		52

PART 1 – ITEM 1 – FINANCIAL STATEMENTS

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)



(In thousands, except share and per share data)	June 30, 2013			December 31, 2012
Assets
Cash and due from banks	$	32,019		$	21,906
Federal funds sold	41			51
Interest-bearing deposits (including $2,140 and $3,270 pledged as collateral)	66,276			94,413
Total cash and cash equivalents	98,336			116,370
Interest-bearing deposits greater than 90 days	5,300			1,000
Securities available for sale	471,017			640,212
Mortgage loans held for sale	5,583			11,792
Portfolio loans not covered under FDIC loss share	2,078,568			2,106,039
Less: Allowance for loan losses	27,619			34,330
Portfolio loans not covered under FDIC loss share, net	2,050,949			2,071,709
Portfolio loans covered under FDIC loss share, net of the allowance for loan losses ($11,045 and $11,547, respectively)	158,818			189,571
Portfolio loans, net	2,209,767			2,261,280
Other real estate not covered under FDIC loss share	8,213			9,327
Other real estate covered under FDIC loss share	17,150			17,173
Other investments, at cost	19,205			14,294
Fixed assets, net	20,544			21,121
Accrued interest receivable	9,235			8,497
State tax credits, held for sale, including $19,822 and $23,020 carried at fair value, respectively	55,493			61,284
FDIC loss share receivable	44,982			61,475
Goodwill	30,334			30,334
Intangibles, net	6,746			7,406
Other assets	92,515			64,221
Total assets	$	3,094,420		$	3,325,786

Liabilities and Shareholders' Equity
Demand deposits	$	618,278		$	686,805
Interest-bearing transaction accounts	217,178			272,753
Money market accounts	885,400			1,036,125
Savings	90,693			83,458
Certificates of deposit:
$100 and over	397,478			396,896
Other	159,207			182,814
Total deposits	2,368,234			2,658,851
Subordinated debentures	83,081			85,081
Federal Home Loan Bank advances	191,000			80,000
Other borrowings	178,212			233,370
Notes payable	11,100			11,700
Accrued interest payable	1,044			1,282
Other liabilities	14,074			19,757
Total liabilities	2,846,745			3,090,041

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; 18,299,466 and 18,088,152 shares issued, respectively	183			181
Treasury stock, at cost; 76,000 shares	(1,743		)	(1,743		)
Additional paid in capital	176,395			173,299
Retained earnings	75,387			56,218
Accumulated other comprehensive income	(2,547		)	7,790
Total shareholders' equity	247,675			235,745
Total liabilities and shareholders' equity	$	3,094,420		$	3,325,786

See accompanying notes to condensed consolidated financial statements.

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)



	Three months ended June 30,						Six months ended June 30,
(In thousands, except per share data)	2013			2012			2013			2012
Interest income:
Interest and fees on loans	$	35,585		$	37,272		$	74,934		$	71,633
Interest on debt securities:
Taxable	2,054			2,366			4,167			4,812
Nontaxable	305			236			606			470
Interest on interest-bearing deposits	46			65			93			142
Dividends on equity securities	71			90			171			187
Total interest income	38,061			40,029			79,971			77,244
Interest expense:
Interest-bearing transaction accounts	123			193			261			384
Money market accounts	752			1,240			1,634			2,670
Savings	56			72			115			141
Certificates of deposit:
$100 and over	1,429			1,840			2,881			3,809
Other	460			696			946			1,506
Subordinated debentures	949			980			1,901			2,129
Federal Home Loan Bank advances	730			768			1,464			1,606
Notes payable and other borrowings	254			107			562			237
Total interest expense	4,753			5,896			9,764			12,482
Net interest income	33,308			34,133			70,207			64,762
Provision for loan losses not covered under FDIC loss share	(4,295		)	75			(2,442		)	1,793
Provision for loan losses covered under FDIC loss share	(2,278		)	206			(22		)	2,491
Net interest income after provision for loan losses	39,881			33,852			72,671			60,478
Noninterest income:
Wealth Management revenue	1,778			1,991			3,721			3,700
Service charges on deposit accounts	1,724			1,413			3,257			2,743
Other service charges and fee income	661			578			1,308			1,172
Gain on sale of other real estate	362			1,256			1,090			2,413
Gain on state tax credits, net	39			587			906			924
Gain on sale of investment securities	—			134			684			1,156
Change in FDIC loss share receivable	(6,713		)	(5,694		)	(10,798		)	(8,650		)
Miscellaneous income	472			580			1,069			1,370
Total noninterest income	(1,677		)	845			1,237			4,828
Noninterest expense:
Employee compensation and benefits	10,766			11,052			22,229			21,515
Occupancy	1,316			1,379			2,765			2,763
Furniture and equipment	377			386			844			850
Data processing	936			829			1,857			1,649
FDIC and other insurance	833			843			1,692			1,796
Loan legal and other real estate expense	2,075			1,955			2,108			4,029
Other	5,076			4,970			10,401			10,176
Total noninterest expense	21,379			21,414			41,896			42,778

Income before income tax expense	16,825			13,283			32,012			22,528
Income tax expense	5,792			4,517			10,939			7,577
Net income	$	11,033		$	8,766		$	21,073		$	14,951

Net income available to common shareholders	$	11,033		$	8,122		$	21,073		$	13,666

Earnings per common share
Basic	$	0.61		$	0.46		$	1.17		$	0.77
Diluted	0.58			0.44			1.11			0.75

See accompanying notes to condensed consolidated financial statements.

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Unaudited)



	Three months ended June 30,						Six months ended June 30,
(in thousands)	2013			2012			2013			2012
Net income	$	11,033		$	8,766		$	21,073		$	14,951
Other comprehensive income, net of tax:
Unrealized (loss) gain on investment securities arising during the period, net of income tax (benefit)/expense for three months of $(5,155) and $833, and for the six months of ($6,314) and $2,098, respectively	(8,098		)	1,482			(9,920		)	3,278
Less reclassification adjustment for realized gain on sale of securities included in net income, net of income tax expense for three months of $0 and $48, and for the six months of $267 and $416, respectively	—			(86		)	(417		)	(740		)
Total other comprehensive (loss) income	(8,098		)	1,396			(10,337		)	2,538
Total comprehensive income	$	2,935		$	10,162		$	10,736		$	17,489

See accompanying notes to condensed consolidated financial statements.

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)



(in thousands, except per share data)	Preferred Stock		Common Stock		Treasury Stock			Additional paid in capital			Retained earnings			Accumulated other comprehensive income			Total shareholders' equity
Balance January 1, 2013	$	—	$	181	$	(1,743	)	$	173,299		$	56,218		$	7,790		$	235,745
Net income	—		—		—			—			21,073			—			21,073
Other comprehensive loss	—		—		—			—			—			(10,337		)	(10,337		)
Cash dividends paid on common shares, $0.105 per share	—		—		—			—			(1,904		)	—			(1,904		)
Repurchase of common stock warrants	—		—		—			(1,006		)	—			—			(1,006		)
Issuance under equity compensation plans, 211,314 shares	—		2		—			2,262			—			—			2,264
Share-based compensation	—		—		—			1,788			—			—			1,788
Excess tax benefit related to equity compensation plans	—		—		—			52			—			—			52
Balance June 30, 2013	$	—	$	183	$	(1,743	)	$	176,395		$	75,387		$	(2,547	)	$	247,675



(in thousands, except per share data)	Preferred Stock		Common Stock		Treasury Stock			Additional paid in capital		Retained earnings			Accumulated other comprehensive income		Total shareholders' equity
Balance January 1, 2012	$	33,293	$	178	$	(1,743	)	$	169,138	$	35,097		$	3,602	$	239,565
Net income	—		—		—			—		14,951			—		14,951
Other comprehensive income	—		—		—			—		—			2,538		2,538
Cash dividends paid on common shares, $0.105 per share	—		—		—			—		(1,871		)	—		(1,871		)
Cash dividends paid on preferred stock	—		—		—			—		(875		)	—		(875		)
Preferred stock accretion of discount	410		—		—			—		(410		)	—		—
Issuance under equity compensation plans, 83,189 shares	—		1		—			455		—			—		456
Share-based compensation	—		—		—			1,124		—			—		1,124
Balance June 30, 2012	$	33,703	$	179	$	(1,743	)	$	170,717	$	46,892		$	6,140	$	255,888

See accompanying notes to condensed consolidated financial statements.

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)



	Six months ended June 30,
(in thousands)	2013			2012
Cash flows from operating activities:
Net income	$	21,073		$	14,951
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation	1,360			1,278
Provision for loan losses	(2,464		)	4,284
Deferred income taxes	1,267			(1,622		)
Net amortization of debt securities	3,299			3,999
Amortization of intangible assets	930			975
Gain on sale of investment securities	(684		)	(1,156		)
Mortgage loans originated for sale	(34,645		)	(47,839		)
Proceeds from mortgage loans sold	39,474			49,158
Gain on sale of other real estate	(1,090		)	(2,413		)
Gain on state tax credits, net	(906		)	(924		)
Share-based compensation	1,788			1,124
Valuation adjustment on other real estate	754			1,814
Net accretion of loan discount and indemnification asset	(8,725		)	(5,011		)
Changes in:
Accrued interest receivable	(737		)	(472		)
Accrued interest payable	(238		)	(303		)
Prepaid FDIC insurance	2,607			1,252
Other assets	(11,002		)	(2,710		)
Other liabilities	(5,683		)	9,981
Net cash provided by operating activities	6,378			26,366
Cash flows from investing activities:
Net decrease in loans	65,771			3,340
Net cash proceeds received from FDIC loss share receivable	7,442			70,014
Proceeds from the sale of debt and equity securities, available for sale	122,894			110,876
Proceeds from the maturity of debt and equity securities, available for sale	50,468			63,233
Proceeds from the redemption of other investments	15,689			4,498
Proceeds from the sale of state tax credits held for sale	8,126			4,134
Proceeds from the sale of other real estate	9,925			34,327
Payments for the purchase/origination of:
Available for sale debt and equity securities	(23,700		)	(179,285		)
Other investments	(20,858		)	(4,481		)
Bank owned life insurance	(20,000		)	—
State tax credits held for sale	(1,365		)	(18,347		)
Fixed assets	(834		)	(3,904		)
Net cash provided by investing activities	213,558			84,405
Cash flows from financing activities:
Net (decrease) increase in noninterest-bearing deposit accounts	(68,527		)	38,477
Net decrease in interest-bearing deposit accounts	(222,091		)	(225,558		)
Proceeds from Federal Home Loan Bank advances	459,000			91,500
Repayments of Federal Home Loan Bank advances	(348,000		)	(103,000		)
Repayments of notes payable	(600		)	—
Repayments of subordinated debt	(2,000		)	—
Net decrease in other borrowings	(55,158		)	(22,066		)
Cash dividends paid on common stock	(1,904		)	(1,871		)
Excess tax benefit of share-based compensation	52			—
Payment for the repurchase of common stock warrants	(1,006		)	—
Cash dividends paid on preferred stock	—			(875		)
Proceeds from the issuance of equity instruments	2,264			456
Net cash used by financing activities	(237,970		)	(222,937		)
Net decrease in cash and cash equivalents	(18,034		)	(112,166		)
Cash and cash equivalents, beginning of period	116,370			188,143
Cash and cash equivalents, end of period	$	98,336		$	75,977
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	10,002		$	12,179
Income taxes	16,936			10,378
Noncash transactions:
Transfer to other real estate owned in settlement of loans	$	10,908		$	13,481
Sales of other real estate financed	2,881			2,673

See accompanying notes to condensed consolidated financial statements.

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Business and Consolidation

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

Operating results for the three and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2013. 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, 2012.

Basis of Financial Statement Presentation

The condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with 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. They do not include all information and footnotes required by U.S. GAAP for annual financial statements. The condensed consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All intercompany accounts and transactions have been eliminated. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain 2012 amounts in the consolidated financial statements have been reclassified to conform to the 2013 presentation. These reclassifications have no effect on Net income or Shareholders' equity as previously reported.

The Company has adopted the new accounting guidance surrounding comprehensive income by presenting a separate Statement of Comprehensive Income. The Statement of Comprehensive Income includes the amount and the related tax impact that have been reclassified from accumulated other comprehensive income to net income. The reclassification adjustment for unrealized gain on sale of securities included in net income has been recorded through the Gain on sale of investment securities line item, within Noninterest income, in the Company's Condensed Consolidated Statements of Operations.

NOTE 2 - EARNINGS PER SHARE

Basic earnings per common share data is calculated by dividing net income available to common shareholders 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 and the if-converted method for convertible trust preferred securities.

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



	Three months ended June 30,					Six months ended June 30,
(in thousands, except per share data)	2013		2012			2013		2012
Net income as reported	$	11,033	$	8,766		$	21,073	$	14,951
Preferred stock dividend	—		(438		)	—		(875		)
Accretion of preferred stock discount	—		(206		)	—		(410		)
Net income available to common shareholders	$	11,033	$	8,122		$	21,073	$	13,666

Impact of assumed conversions
Interest on 9% convertible trust preferred securities, net of income tax	354		371			709		742
Net income available to common shareholders and assumed conversions	$	11,387	$	8,493		$	21,782	$	14,408

Weighted average common shares outstanding	18,119		17,833			18,052		17,808
Incremental shares from assumed conversions of convertible trust preferred securities	1,439		1,439			1,439		1,439
Additional dilutive common stock equivalents	153		14			115		32
Weighted average diluted common shares outstanding	19,711		19,286			19,606		19,279

Basic earnings per common share:	$	0.61	$	0.46		$	1.17	$	0.77
Diluted earnings per common share:	$	0.58	$	0.44		$	1.11	$	0.75

For the three months ended June 30, 2013 and 2012, the amount of common stock equivalents that were excluded from the earnings per share calculations because their effect was anti-dilutive was 551,667, and 1.1 million common stock equivalents (including 324,074 common stock warrants), respectively. For the six months ended June 30, 2013 and 2012, the amount of common stock equivalents that were excluded from the earnings per share calculations because their effect was anti-dilutive was 547,356 (including 14,324 average common stock warrants), and 1.0 million common stock equivalents (including 324,074 common stock warrants), respectively.

NOTE 3 - INVESTMENTS

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



	June 30, 2013
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for sale securities:
Obligations of U.S. Government-sponsored enterprises	$	130,241	$	998	$	(519	)	$	130,720
Obligations of states and political subdivisions	52,245		904		(2,165		)	50,984
Residential mortgage-backed securities	292,700		2,647		(6,034		)	289,313
	$	475,186	$	4,549	$	(8,718	)	$	471,017

	December 31, 2012
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for sale securities:
Obligations of U.S. Government-sponsored enterprises	$	149,039	$	3,329	$	—		$	152,368
Obligations of states and political subdivisions	51,202		2,279		(478		)	53,003
Residential mortgage-backed securities	427,221		7,884		(264		)	434,841
	$	627,462	$	13,492	$	(742	)	$	640,212

At June 30, 2013, and December 31, 2012, there were no holdings of securities of any one issuer in an amount greater than 10% of shareholders’ equity, other than the U.S. government agencies and sponsored enterprises. The residential mortgage-backed securities are all issued by U.S. government sponsored enterprises. Available for sale securities having a fair value of $219.7 million and $359.3 million at June 30, 2013, and December 31, 2012, respectively, were pledged as collateral to secure deposits of public institutions and for other purposes as required by law or contract provisions.

The amortized cost and estimated fair value of debt securities classified as available for sale at June 30, 2013, 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.



(in thousands)	Amortized Cost		Estimated Fair Value
Due in one year or less	$	1,534	$	1,547
Due after one year through five years	142,301		143,018
Due after five years through ten years	22,412		22,384
Due after ten years	16,239		14,755
Mortgage-backed securities	292,700		289,313
	$	475,186	$	471,017

The following table represents a summary of available-for-sale investment securities that had an unrealized loss:



	June 30, 2013
	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	$	51,649	$	519	$	—	$	—	$	51,649	$	519
Obligations of states and political subdivisions	$	21,668	$	1,803	$	3,039	$	362	$	24,707	$	2,165
Residential mortgage-backed securities	161,101		6,034		—		—		161,101		6,034
	$	234,418	$	8,356	$	3,039	$	362	$	237,457	$	8,718

	December 31, 2012
	Less than 12 months				12 months or more				Total
(in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of states and political subdivisions	6,434		122		3,389		356		9,823		478
Residential mortgage-backed securities	40,471		143		11,266		121		51,737		264
	$	46,905	$	265	$	14,655	$	477	$	61,560	$	742

The unrealized losses at both June 30, 2013, and December 31, 2012, 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 (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 that the Company would be required to sell the security before its anticipated recovery in market value. At June 30, 2013, management performed its quarterly analysis of all securities with an unrealized loss and concluded no individual securities were other-than-temporarily impaired.

The gross gains and gross losses realized from sales of available-for-sale investment securities were as follows:



	Three months ended June 30,					Six months ended June 30,
(in thousands)	2013		2012			2013			2012
Gross gains realized	$	—	$	324		$	866		$	1,399
Gross losses realized	—		(190		)	(182		)	(243		)
Proceeds from sales	—		46,400			122,894			110,876

NOTE 4 - PORTFOLIO LOANS NOT COVERED BY LOSS SHARE ("Non-covered")

Below is a summary of Non-covered loans by category at June 30, 2013, and December 31, 2012:



(in thousands)	June 30, 2013		December 31, 2012
Real Estate Loans:
Construction and Land Development	$	147,888	$	160,911
Commercial real estate - Investor Owned	447,754		486,467
Commercial real estate - Owner Occupied	337,946		333,242
Residential real estate	151,098		145,558
Total real estate loans	$	1,084,686	$	1,126,178
Commercial and industrial	962,920		962,884
Consumer & other	30,220		16,966
Portfolio Loans	$	2,077,826	$	2,106,028
Unearned loan costs, net	742		11
Portfolio loans, including unearned loan costs	$	2,078,568	$	2,106,039

The Company grants commercial, residential, and consumer loans primarily in the St. Louis, Kansas City and Phoenix metropolitan areas. The Company has a diversified loan portfolio, with no particular concentration of credit in any one economic sector; however, a substantial portion of the portfolio is concentrated in and secured by real estate. The ability of the Company’s borrowers to honor their contractual obligations is partially dependent upon the local economy and its effect on the real estate market.

A summary of the year-to-date activity in the allowance for loan losses and the recorded investment in Non-covered loans by portfolio class and category based on impairment method through June 30, 2013, and at December 31, 2012, is as follows:



(in thousands)	Commercial & Industrial			Commercial Real Estate Owner Occupied			Commercial Real Estate Investor Owned			Construction and Land Development			Residential Real Estate			Consumer & Other			Qualitative Adjustment			Total
Allowance for Loan Losses:
Balance at December 31, 2012	$	10,064		$	4,192		$	10,403		$	5,239		$	2,026		$	31		$	2,375		$	34,330
Provision charged to expense	120			179			953			(127		)	675			46			7			1,853
Losses charged off	(206		)	(312		)	(3,052		)	(190		)	(986		)	(34		)	—			(4,780		)
Recoveries	298			5			336			14			396			—			—			1,049
Balance at March 31, 2013	$	10,276		$	4,064		$	8,640		$	4,936		$	2,111		$	43		$	2,382		$	32,452
Provision charged to expense	(320		)	(139		)	(2,273		)	(998		)	(299		)	1			(267		)	(4,295		)
Losses charged off	(400		)	(32		)	(176		)	(144		)	—			—			—			(752		)
Recoveries	118			17			24			21			34			—			—			214
Balance at June 30, 2013	$	9,674		$	3,910		$	6,215		$	3,815		$	1,846		$	44		$	2,115		$	27,619



(in thousands)	Commercial & Industrial		Commercial Real Estate Owner Occupied		Commercial Real Estate Investor Owned		Construction and Land Development		Residential Real Estate		Consumer & Other		Qualitative Adjustment		Total
Balance June 30, 2013
Allowance for Loan Losses - Ending Balance:
Individually evaluated for impairment	$	3,221	$	—	$	591	$	452	$	67	$	—	$	—	$	4,331
Collectively evaluated for impairment	6,453		3,910		5,624		3,363		1,779		44		2,115		23,288
Total	$	9,674	$	3,910	$	6,215	$	3,815	$	1,846	$	44	$	2,115	$	27,619
Loans - Ending Balance:
Individually evaluated for impairment	$	6,681	$	761	$	11,678	$	4,396	$	2,432	$	—	$	—	$	25,948
Collectively evaluated for impairment	956,239		337,185		436,076		143,492		148,666		30,962		—		2,052,620
Total	$	962,920	$	337,946	$	447,754	$	147,888	$	151,098	$	30,962	$	—	$	2,078,568

Balance at December 31, 2012
Allowance for Loan Losses - Ending Balance:
Individually evaluated for impairment	$	3,446	$	339	$	3,400	$	732	$	259	$	—	$	—	$	8,176
Collectively evaluated for impairment	6,618		3,853		7,003		4,507		1,767		31		2,375		26,154
Total	$	10,064	$	4,192	$	10,403	$	5,239	$	2,026	$	31	$	2,375	$	34,330
Loans - Ending Balance:
Individually evaluated for impairment	$	8,934	$	5,772	$	16,762	$	4,695	$	2,564	$	—	$	—	$	38,727
Collectively evaluated for impairment	953,950		327,470		469,705		156,216		142,994		16,977		—		2,067,312
Total	$	962,884	$	333,242	$	486,467	$	160,911	$	145,558	$	16,977	$	—	$	2,106,039

A summary of Non-covered loans individually evaluated for impairment by category at June 30, 2013, and December 31, 2012, is as follows:



	June 30, 2013
(in thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Commercial & Industrial	$	6,841	$	—	$	6,788	$	6,788	$	3,221	$	7,959
Real Estate:
Commercial - Owner Occupied	1,137		778		—		778		—		3,529
Commercial - Investor Owned	14,776		7,925		4,069		11,994		591		12,798
Construction and Land Development	5,477		3,380		1,145		4,525		452		5,059
Residential	3,149		1,918		596		2,514		67		2,567
Consumer & Other	—		—		—		—		—		—
Total	$	31,380	$	14,001	$	12,598	$	26,599	$	4,331	$	31,912



	December 31, 2012
(in thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Commercial & Industrial	$	9,005	$	96	$	8,838	$	8,934	$	3,446	$	6,379
Real Estate:
Commercial - Owner Occupied	6,726		2,178		3,594		5,772		339		7,985
Commercial - Investor Owned	19,864		185		16,577		16,762		3,400		10,500
Construction and Land Development	6,491		1,560		3,135		4,695		732		10,259
Residential	3,132		1,626		938		2,564		259		4,368
Consumer & Other	—		—		—		—		—		—
Total	$	45,218	$	5,645	$	33,082	$	38,727	$	8,176	$	39,491

There were no loans over 90 days past due and still accruing interest at June 30, 2013. If interest on impaired loans would have been accrued based upon the original contractual terms, such income would have been $279,000 and $1.0 million for the three and six months ended June 30, 2013, respectively. The cash amount collected and recognized as interest income on impaired loans was $9,000 and $24,000 for the three and six months ended June 30, 2013, respectively. There was no interest income recognized on impaired loans continuing to accrue interest for the three and six months ended June 30, 2013, respectively. At June 30, 2013, there were $1.7 million of unadvanced commitments on impaired loans. Other Liabilities include approximately $259,000 for estimated losses attributable to the unadvanced commitments on impaired loans.

The recorded investment in non-accrual, restructured, and 90 days past due and still accruing interest Non-covered loans by category at June 30, 2013, and December 31, 2012, is as follows:



	June 30, 2013
(in thousands)	Non-accrual		Restructured		Loans over 90 days past due and still accruing interest		Total
Commercial & Industrial	$	6,788	$	—	$	—	$	6,788
Real Estate:
Commercial - Investor Owned	11,994		—		—		11,994
Commercial - Owner Occupied	778		—		—		778
Construction and Land Development	4,525		—		—		4,525
Residential	2,514		—		—		2,514
Consumer & Other	—		—		—		—
Total	$	26,599	$	—	$	—	$	26,599



	December 31, 2012
(in thousands)	Non-accrual		Restructured		Loans over 90 days past due and still accruing interest		Total
Commercial & Industrial	$	8,929	$	5	$	—	$	8,934
Real Estate:
Commercial - Investor Owned	16,762		—		—		16,762
Commercial - Owner Occupied	5,772		—		—		5,772
Construction and Land Development	3,260		1,435		—		4,695
Residential	2,564		—		—		2,564
Consumer & Other	—		—		—		—
Total	$	37,287	$	1,440	$	—	$	38,727

There were no Non-covered loans that have been restructured and subsequently defaulted in the six months ended June 30, 2013.

The aging of the recorded investment in past due Non-covered loans by portfolio class and category at June 30, 2013, and December 31, 2012, is shown below.



	June 30, 2013
(in thousands)	30-89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total
Commercial & Industrial	$	597	$	1,166	$	1,763	$	961,157	$	962,920
Real Estate:
Commercial - Owner Occupied	1,016		761		1,777		336,169		337,946
Commercial - Investor Owned	2,961		7,498		10,459		437,295		447,754
Construction and Land Development	1,054		1,258		2,312		145,576		147,888
Residential	824		639		1,463		149,635		151,098
Consumer & Other	—		—		—		30,962		30,962
Total	$	6,452	$	11,322	$	17,774	$	2,060,794	$	2,078,568



	December 31, 2012
(in thousands)	30-89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total
Commercial & Industrial	$	14	$	—	$	14	$	962,870	$	962,884
Real Estate:
Commercial - Owner Occupied	1,352		2,081		3,433		329,809		333,242
Commercial - Investor Owned	—		4,045		4,045		482,422		486,467
Construction and Land Development	1,201		1,559		2,760		158,151		160,911
Residential	616		593		1,209		144,349		145,558
Consumer & Other	34		—		34		16,943		16,977
Total	$	3,217	$	8,278	$	11,495	$	2,094,544	$	2,106,039

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


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


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


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


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


•	Grade 7 – Watch credits are companies that have experienced financial setback of a nature that are not determined to be severe or influence ‘ongoing concern’ expectations. Borrowers within this category are expected to turnaround within a 12-month period of time. Although possible, no loss is anticipated, due to strong collateral and/or guarantor support.


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


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

The recorded investment by risk category of the Non-covered loans by portfolio class and category at June 30, 2013, which is based upon the most recent analysis performed, and December 31, 2012 is as follows:

June 30, 2013

(in thousands)

Pass (1-6)