2015.3.31-10Q


 

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 March 31, 2015.
 
 
 
[   ]
 
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______ to ______
 
 
 
 
 
Commission file number 001-15373
 
ENTERPRISE FINANCIAL SERVICES CORP

 
Incorporated in the State of Delaware
I.R.S. Employer Identification # 43-1706259
Address: 150 North Meramec
Clayton, MO 63105
Telephone: (314) 725-5500
___________________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X]  No [   ] 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files ). Yes [X]  No [   ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer [ ]
Accelerated filer [X]
  Non-accelerated filer [ ]
Smaller reporting company [ ]
 
 
(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 April 27, 2015, the Registrant had 19,935,455 shares of outstanding common stock, $0.01 par value.
 
This document is also available through our website at http://www.enterprisebank.com.

 





ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
 
Page
PART I - FINANCIAL INFORMATION
 
 
 
 
Item 1.  Financial Statements
 
 
 
Condensed Consolidated Balance Sheets (Unaudited)
 
 
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 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)
March 31, 2015
 
December 31, 2014
Assets
 
 
 
Cash and due from banks
$
56,420

 
$
42,903

Federal funds sold
48

 
35

Interest-bearing deposits (including $980 and $980 pledged as collateral)
42,865

 
57,758

                  Total cash and cash equivalents
99,333

 
100,696

Interest-bearing deposits greater than 90 days
1,000

 
5,300

Securities available for sale
410,061

 
400,146

Securities held to maturity
45,563

 
45,985

Loans held for sale
7,843

 
4,033

Portfolio loans
2,435,559

 
2,433,916

   Less: Allowance for loan losses
30,288

 
30,185

Portfolio loans, net
2,405,271

 
2,403,731

Purchase credit impaired loans, net of the allowance for loan losses ($11,625 and $15,410, respectively)
83,163

 
83,693

                  Total loans, net
2,488,434

 
2,487,424

Other real estate not covered under FDIC loss share
2,024

 
1,896

Other real estate covered under FDIC loss share
3,560

 
5,944

Other investments, at cost
11,719

 
17,037

Fixed assets, net
14,911

 
14,753

Accrued interest receivable
8,061

 
7,956

State tax credits held for sale, including $10,286 and $11,689 carried at fair value, respectively
42,411

 
38,309

FDIC loss share receivable
11,644

 
15,866

Goodwill
30,334

 
30,334

Intangible assets, net
3,880

 
4,164

Other assets
94,517

 
97,160

Total assets
$
3,275,295

 
$
3,277,003

 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
Demand deposits
$
680,997

 
$
642,930

Interest-bearing transaction accounts
494,228

 
508,941

Money market accounts
848,139

 
755,569

Savings
85,769

 
78,718

Certificates of deposit:
 
 
 
$100 and over
441,775

 
377,544

Other
123,723

 
127,808

Total deposits
2,674,631

 
2,491,510

Subordinated debentures
56,807

 
56,807

Federal Home Loan Bank advances
6,000

 
144,000

Other borrowings
181,164

 
234,183

Notes payable
5,700

 
5,700

Accrued interest payable
845

 
843

Other liabilities
24,039

 
27,719

Total liabilities
2,949,186

 
2,960,762

 
 
 
 
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; 20,011,455 and 19,913,519 shares issued, respectively
200

 
199

Treasury stock, at cost; 76,000 shares
(1,743
)
 
(1,743
)
Additional paid in capital
207,605

 
207,731

Retained earnings
116,668

 
108,373

Accumulated other comprehensive income
3,379

 
1,681

Total shareholders' equity
326,109

 
316,241

Total liabilities and shareholders' equity
$
3,275,295

 
$
3,277,003

See accompanying notes to consolidated financial statements.

1


ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
 
Three months ended March 31,
(in thousands, except per share data)
2015
 
2014
Interest income:
 
 
 
Interest and fees on loans
$
29,608

 
$
31,444

Interest on debt securities:
 
 
 
Taxable
2,141

 
2,166

Nontaxable
297

 
299

Interest on interest-bearing deposits
47

 
66

Dividends on equity securities
58

 
49

Total interest income
32,151

 
34,024

Interest expense:
 
 
 
Interest-bearing transaction accounts
277

 
112

Money market accounts
642

 
742

Savings accounts
50

 
49

Certificates of deposit:
 
 
 
$100 and over
1,226

 
1,326

Other
365

 
424

Subordinated debentures
302

 
407

Federal Home Loan Bank advances
49

 
399

Notes payable and other borrowings
195

 
199

Total interest expense
3,106

 
3,658

Net interest income
29,045

 
30,366

Provision for portfolio loan losses
1,580

 
1,027

Provision (provision reversal) for purchase credit impaired loan losses
(3,270
)
 
3,304

Net interest income after provision for loan losses
30,735

 
26,035

Noninterest income:
 
 
 
Wealth management revenue
1,740

 
1,722

Service charges on deposit accounts
1,856

 
1,738

Other service charges and fee income
753

 
637

Gain on sale of other real estate
20

 
683

Gain on state tax credits, net
674

 
497

Gain on sale of investment securities
23

 
—

Change in FDIC loss share receivable
(2,264
)
 
(2,410
)
Miscellaneous income
781

 
1,055

Total noninterest income
3,583

 
3,922

Noninterest expense:
 
 
 
Employee compensation and benefits
11,513

 
12,116

Occupancy
1,694

 
1,640

Data processing
1,030

 
1,126

FDIC and other insurance
726

 
699

Loan legal and other real estate expense
278

 
1,134

Professional fees
972

 
1,267

FDIC clawback
412

 
(111
)
Other
3,325

 
3,231

Total noninterest expense
19,950

 
21,102

 
 
 
 
Income before income tax expense
14,368

 
8,855

Income tax expense
5,022

 
3,007

Net income
$
9,346

 
$
5,848

 
 
 
 
Earnings per common share
 
 
 
Basic
$
0.47

 
$
0.30

Diluted
0.46

 
0.30

See accompanying notes to consolidated financial statements.

2



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

 
Three months ended March 31,
(in thousands)
2015
 
2014
Net income
$
9,346

 
$
5,848

Other comprehensive income, net of tax:
 
 
 
Unrealized gains on investment securities arising during the period, net of income tax expense of $1,045, and $1,091, respectively
1,712

 
1,757

Less: Reclassification adjustment for realized gains on sale of securities available for sale included in net income, net of income tax expense of $9, and $0, respectively
(14
)
 
—

Total other comprehensive income (loss)
1,698

 
1,757

Total comprehensive income
$
11,044

 
$
7,605


See accompanying notes to consolidated financial statements.


3


ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)
(in thousands, except per share data)
 
Preferred Stock
 
Common Stock
 
Treasury Stock
 
Additional paid in capital
 
Retained earnings
 
Accumulated
other
comprehensive income (loss)
 
Total
shareholders' equity
Balance January 1, 2015
 
$
—

 
$
199

 
$
(1,743
)
 
$
207,731

 
$
108,373

 
$
1,681

 
$
316,241

Net income
 
—

 
—

 
—

 
—

 
9,346

 
—

 
9,346

Other comprehensive income
 
—

 
—

 
—

 
—

 
—

 
1,698

 
1,698

Cash dividends paid on common shares, $0.0525 per share
 
—

 
—

 
—

 
—

 
(1,051
)
 
—

 
(1,051
)
Issuance under equity compensation plans, 97,936 shares, net
 
—

 
1

 
—

 
(1,047
)
 
—

 
—

 
(1,046
)
Share-based compensation
 
—

 
—

 
—

 
768

 
—

 
—

 
768

Excess tax benefit related to equity compensation plans
 
—

 
—

 
—

 
153

 
—

 
—

 
153

Balance March 31, 2015
 
$
—

 
$
200

 
$
(1,743
)
 
$
207,605

 
$
116,668

 
$
3,379

 
$
326,109

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands, except per share data)
 
Preferred Stock
 
Common Stock
 
Treasury Stock
 
Additional paid in capital
 
Retained earnings
 
Accumulated
other
comprehensive income (loss)
 
Total
shareholders' equity
Balance January 1, 2014
 
$
—

 
$
194

 
$
(1,743
)
 
$
200,258

 
$
85,376

 
$
(4,380
)
 
$
279,705

Net income
 
—

 
—

 
—

 
—

 
5,848

 
—

 
5,848

Other comprehensive income
 
—

 
—

 
—

 
—

 
—

 
1,757

 
1,757

Cash dividends paid on common shares, $0.0525 per share
 
—

 
—

 
—

 
—

 
(1,043
)
 
—

 
(1,043
)
Issuance under equity compensation plans, 94,047 shares, net
 
—

 
1

 
—

 
(630
)
 
—

 
—

 
(629
)
Trust preferred securities conversion 287,852 shares
 
—

 
3

 
—

 
4,999

 
—

 
—

 
5,002

Share-based compensation
 
—

 
—

 
—

 
735

 
—

 
—

 
735

Excess tax benefit related to equity compensation plans
 
—

 
—

 
—

 
74

 
—

 
—

 
74

Balance March 31, 2014
 
$
—

 
$
198

 
$
(1,743
)
 
$
205,436

 
$
90,181

 
$
(2,623
)
 
$
291,449


See accompanying notes to consolidated financial statements.

4


ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
Three months ended March 31,
(in thousands)
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
9,346

 
$
5,848

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation
489

 
533

Provision for loan losses
(1,690
)
 
4,331

Deferred income taxes
(152
)
 
1,032

Net amortization of debt securities
851

 
951

Amortization of intangible assets
284

 
383

Gain on sale of investment securities
(23
)
 
—

Mortgage loans originated for sale
(31,603
)
 
(10,050
)
Proceeds from mortgage loans sold
27,767

 
10,008

Gain on sale of other real estate
(20
)
 
(683
)
Gain on state tax credits, net
(674
)
 
(497
)
Excess tax benefit of share-based compensation
(153
)
 
(74
)
Share-based compensation
768

 
735

Valuation adjustment on other real estate
41

 
344

Net accretion of loan discount and indemnification asset
(1,390
)
 
(4,096
)
Changes in:
 
 
 
Accrued interest receivable
(104
)
 
(173
)
Accrued interest payable
2

 
(83
)
Other assets
(1,666
)
 
(6,621
)
Other liabilities
(3,681
)
 
(9,285
)
Net cash used by operating activities
(1,608
)
 
(7,397
)
Cash flows from investing activities:
 
 
 
Net decrease (increase) in loans
3,443

 
(23,344
)
Net cash proceeds received from FDIC loss share receivable
1,395

 
2,255

Proceeds from the sale of securities, available for sale
41,069

 
—

Proceeds from the paydown or maturity of securities, available for sale
10,715

 
10,278

Proceeds from the paydown or maturity of securities, held to maturity
515

 
—

Proceeds from the redemption of other investments
19,593

 
1,118

Proceeds from the sale of state tax credits held for sale
4,066

 
3,294

Proceeds from the sale of other real estate
2,896

 
3,014

Payments for the purchase/origination of:
 
 
 
Available for sale debt and equity securities
(59,869
)
 
(29,853
)
Other investments
(9,975
)
 
(3,457
)
State tax credits held for sale
(3,112
)
 
—

Fixed assets
(648
)
 
(381
)
Net cash provided (used) by investing activities
10,088

 
(37,076
)
Cash flows from financing activities:
 
 
 
Net increase (decrease) in noninterest-bearing deposit accounts
38,066

 
(40,971
)
Net increase (decrease) in interest-bearing deposit accounts
145,054

 
(41,863
)
Proceeds from Federal Home Loan Bank advances
302,000

 
80,000

Repayments of Federal Home Loan Bank advances
(440,000
)
 
—

Proceeds from notes payable
—

 
(3,900
)
Net decrease in other borrowings
(53,019
)
 
(20,113
)
Cash dividends paid on common stock
(1,051
)
 
(1,043
)
Excess tax benefit of share-based compensation
153

 
74

Proceeds from the issuance of equity instruments, net
(1,046
)
 
(629
)
Net cash used by financing activities
(9,843
)
 
(28,445
)
Net decrease in cash and cash equivalents
(1,363
)
 
(72,918
)
Cash and cash equivalents, beginning of period
100,696

 
210,569

Cash and cash equivalents, end of period
$
99,333

 
$
137,651

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
3,105

 
$
3,741

Income taxes
3,500

 
8,549

Noncash transactions:
 
 
 
Transfer to other real estate owned in settlement of loans
$
890

 
$
4,721

Sales of other real estate financed
—

 
495

Issuance of common stock from Trust Preferred Securities conversion
—

 
5,002


See accompanying notes to 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 months ended March 31, 2015 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2015. 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, 2014.

Basis of Financial Statement Presentation

The condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with the accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The condensed consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All intercompany accounts and transactions have been eliminated. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

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.

6



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

 
Three months ended March 31,
(in thousands, except per share data)
2015
 
2014
Net income as reported
$
9,346

 
$
5,848

Impact of assumed conversions
 
 
 
Interest on 9% convertible trust preferred securities, net of income tax
—

 
66

Net income available to common shareholders and assumed conversions
$
9,346

 
$
5,914

 
 
 
 
Weighted average common shares outstanding
19,934

 
19,521

Incremental shares from assumed conversions of convertible trust preferred securities
—

 
230

Additional dilutive common stock equivalents
223

 
198

Weighted average diluted common shares outstanding
$
20,157

 
$
19,949

 
 
 
 
Basic earnings per common share:
$
0.47

 
$
0.30

Diluted earnings per common share:
$
0.46

 
$
0.30


The calculation of diluted earnings per common share for the three months ended March 31, 2015, and 2014, excludes the impact of 0.3 million common stock equivalents, because their effect was anti-dilutive.



7


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:
 
 
March 31, 2015
(in thousands)
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair Value
Available for sale securities:
 
 
 
 
 
 
 
    Obligations of U.S. Government-sponsored enterprises
$
99,643

 
$
1,256

 
$
—

 
$
100,899

    Obligations of states and political subdivisions
33,965

 
1,441

 
(359
)
 
35,047

    Agency mortgage-backed securities
270,455

 
4,470

 
(810
)
 
274,115

          Total securities available for sale
$
404,063

 
$
7,167

 
$
(1,169
)
 
$
410,061

Held to maturity securities:
 
 
 
 
 
 
 
    Obligations of states and political subdivisions
$
14,883

 
$
2

 
$
(109
)
 
$
14,776

    Agency mortgage-backed securities
30,680

 
355

 
—

 
31,035

          Total securities held to maturity
$
45,563

 
$
357

 
$
(109
)
 
$
45,811

 
 
 
 
 
 
 
 
 
December 31, 2014
(in thousands)
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair Value
Available for sale securities:
 
 
 
 
 
 
 
    Obligations of U.S. Government-sponsored enterprises
$
91,355

 
$
624

 
$
(153
)
 
$
91,826

    Obligations of states and political subdivisions
33,997

 
1,300

 
(416
)
 
34,881

    Agency mortgage-backed securities
271,430

 
3,577

 
(1,568
)
 
273,439

Total securities available for sale
$
396,782

 
$
5,501

 
$
(2,137
)
 
$
400,146

Held to maturity securities:
 
 
 
 
 
 
 
   Obligations of states and political subdivisions
$
14,900

 
$
—

 
$
(325
)
 
$
14,575

   Agency mortgage-backed securities
31,085

 
150

 
(15
)
 
31,220

          Total securities held to maturity
$
45,985

 
$
150

 
$
(340
)
 
$
45,795


At March 31, 2015, and December 31, 2014, 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 agency mortgage-backed securities are all issued by U.S. Government-sponsored enterprises. Available for sale securities having a fair value of $251.4 million and $315.8 million at March 31, 2015, and December 31, 2014, respectively, were pledged as collateral to secure deposits of public institutions and for other purposes as required by law or contract provisions.
 
The amortized cost and estimated fair value of debt securities at March 31, 2015, 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 4 years.
 

8


 
Available for sale
 
Held to maturity
(in thousands)
Amortized Cost
 
Estimated Fair Value
 
Amortized Cost
 
Estimated Fair Value
Due in one year or less
$
4,331

 
$
4,382

 
$
—

 
$
—

Due after one year through five years
100,610

 
102,383

 
662

 
664

Due after five years through ten years
25,767

 
26,561

 
12,963

 
12,875

Due after ten years
2,900

 
2,620

 
1,258

 
1,237

Mortgage-backed securities
270,455

 
274,115

 
30,680

 
31,035

 
$
404,063

 
$
410,061

 
$
45,563

 
$
45,811


The following table represents a summary of investment securities that had an unrealized loss:
 
 
March 31, 2015
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
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Obligations of states and political subdivisions
14,982

 
127

 
4,321

 
341

 
19,303

 
468

Agency mortgage-backed securities
28,750

 
179

 
21,868

 
631

 
50,618

 
810

 
$
43,732

 
$
306

 
$
26,189

 
$
972

 
$
69,921

 
$
1,278

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
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
$
5,399

 
$
10

 
$
24,852

 
$
143

 
$
30,251

 
$
153

Obligations of states and political subdivisions
16,827

 
343

 
5,349

 
398

 
22,176

 
741

Agency mortgage-backed securities
26,367

 
56

 
97,054

 
1,527

 
123,421

 
1,583

 
$
48,593

 
$
409

 
$
127,255

 
$
2,068

 
$
175,848

 
$
2,477


The unrealized losses at both March 31, 2015, and December 31, 2014, 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 that the Company would be required to sell the security before its anticipated recovery in market value. At March 31, 2015, management performed its quarterly analysis of all securities with an unrealized loss and concluded no individual securities were other-than-temporarily impaired.









9


 The gross gains and gross losses realized from sales of available for sale investment securities were as follows:
 
 
Three months ended March 31,
(in thousands)
2015
 
2014
Gross gains realized
$
63

 
$
—

Gross losses realized
(40
)
 
—

Proceeds from sales
41,069

 
—


10


NOTE 4 - PORTFOLIO LOANS

Below is a summary of Portfolio loans by category at March 31, 2015 and December 31, 2014:
 
(in thousands)
March 31, 2015
 
December 31, 2014
Real estate loans:
 
 
 
    Construction and land development
$
138,924

 
$
144,773

    Commercial - Investor Owned
413,170

 
413,026

    Commercial - Owner Occupied
368,313

 
357,503

    Residential real estate
180,253

 
185,252

Total real estate loans
1,100,660

 
1,100,554

    Commercial and industrial
1,265,104

 
1,270,259

    Consumer and other
68,830

 
62,208

Portfolio loans
2,434,594

 
2,433,021

Unearned loan costs, net
965

 
895

    Portfolio loans, including unearned loan costs
$
2,435,559

 
$
2,433,916



A summary of the year-to-date activity in the allowance for loan losses and the recorded investment in Portfolio loans by class and category based on impairment method through March 31, 2015, and at December 31, 2014, 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
 
Total
Allowance for Loan Losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at
December 31, 2014
$
17,004

 
$
3,625

 
$
4,598

 
$
1,720

 
$
2,830

 
$
408

 
$
30,185

Provision charged to expense
823

 
(175
)
 
(12
)
 
914

 
74

 
(44
)
 
1,580

Losses charged off
(1,484
)
 
—

 
—

 
—

 
(1,073
)
 
(11
)
 
(2,568
)
Recoveries
769

 
127

 
29

 
60

 
26

 
80

 
1,091

Balance at
March 31, 2015
$
17,112

 
$
3,577

 
$
4,615

 
$
2,694

 
$
1,857

 
$
433

 
$
30,288



11


(in thousands)
Commercial & Industrial
 
Commercial
Real Estate
Owner Occupied
 
Commercial
Real Estate
Investor Owned
 
Construction and Land Development
 
Residential Real Estate
 
Consumer & Other
 
Total
Balance March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for Loan Losses - Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
1,196

 
$
297

 
$
—

 
$
1,370

 
$
—

 
$
—

 
$
2,863

Collectively evaluated for impairment
15,916

 
3,280

 
4,615

 
1,324

 
1,857

 
433

 
27,425

Total
$
17,112

 
$
3,577

 
$
4,615

 
$
2,694

 
$
1,857

 
$
433

 
$
30,288

Loans - Ending Balance:
 
 
 
 
 
 
 

 
 
 
 
 
 
Individually evaluated for impairment
$
4,250

 
$
3,380

 
$
581

 
$
6,366

 
$
2,655

 
$
—

 
$
17,232

Collectively evaluated for impairment
1,260,854

 
364,933

 
412,589

 
132,558

 
177,598

 
69,795

 
2,418,327

Total
$
1,265,104

 
$
368,313

 
$
413,170

 
$
138,924

 
$
180,253

 
$
69,795

 
$
2,435,559

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for Loan Losses - Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
704

 
$
286

 
$
—

 
$
352

 
$
1,052

 
$
—

 
$
2,394

Collectively evaluated for impairment
16,300

 
3,339

 
4,598

 
1,368

 
1,778

 
408

 
27,791

Total
$
17,004

 
$
3,625

 
$
4,598

 
$
1,720

 
$
2,830

 
$
408

 
$
30,185

Loans - Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
5,998

 
$
3,384

 
$
5,036

 
$
6,866

 
$
3,082

 
$
—

 
$
24,366

Collectively evaluated for impairment
1,264,261

 
354,119

 
407,990

 
137,907

 
182,170

 
63,103

 
2,409,550

Total
$
1,270,259

 
$
357,503

 
$
413,026

 
$
144,773

 
$
185,252

 
$
63,103

 
$
2,433,916


12


A summary of Portfolio loans individually evaluated for impairment by category at March 31, 2015 and December 31, 2014, is as follows:

 
March 31, 2015
(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
$
5,141

 
$
3,223

 
$
1,068

 
$
4,291

 
$
1,196

 
$
8,956

Real estate:
 
 
 
 
 
 
 
 
 
 
 
    Commercial - Owner occupied
1,383

 
759

 
560

 
1,319

 
297

 
649

    Commercial - Investor owned
581

 
—

 
581

 
581

 
—

 
632

    Construction and land development
7,271

 
3,881

 
2,973

 
6,854

 
1,370

 
6,682

    Residential
3,707

 
—

 
2,696

 
2,696

 
—

 
2,940

Consumer and other
—

 
—

 
—

 
—

 
—

 
759

Total
$
18,083

 
$
7,863

 
$
7,878

 
$
15,741

 
$
2,863

 
$
20,618


 
December 31, 2014
(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
$
8,042

 
$
2,609

 
$
3,464

 
$
6,073

 
$
704

 
$
4,136

Real estate:
 
 
 
 
 
 
 
 
 
 
 
    Commercial - Owner occupied
1,376

 
770

 
519

 
1,289

 
286

 
1,281

    Commercial - Investor owned
5,036

 
—

 
5,187

 
5,187

 
—

 
4,375

    Construction and land development
7,961

 
419

 
6,929

 
7,348

 
352

 
7,280

    Residential
3,082

 
2,943

 
150

 
3,093

 
1,052

 
954

Consumer and other
—

 
—

 
—

 
—

 
—

 
581

Total
$
25,497

 
$
6,741

 
$
16,249

 
$
22,990

 
$
2,394

 
$
18,607


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

 
For the three months ended
(in thousands)
March 31, 2015
 
March 31, 2014
Total interest income that would have been recognized under original terms
$
315

 
$
320

Total cash received and recognized as interest income on non-accrual loans
27

 
9

Total interest income recognized on impaired loans
13

 
6


There were no loans over 90 days past due and still accruing interest at March 31, 2015 or December 31, 2014. At March 31, 2015, there were no unadvanced commitments on impaired loans. Other liabilities include approximately $0.2 million for estimated losses attributable to the unadvanced commitments.


13


The recorded investment in impaired Portfolio loans by category at March 31, 2015 and December 31, 2014, is as follows:
 
 
March 31, 2015
(in thousands)
Non-accrual
 
Restructured
 
Loans over 90 days past due and still accruing interest
 
Total
Commercial and industrial
$
4,291

 
$
—

 
$
—

 
$
4,291

Real estate:
 
 
 
 
 
 
 
    Commercial - Investor owned
—

 
581

 
—

 
581

    Commercial - Owner occupied
560

 
759

 
—

 
1,319

    Construction and land development
6,854

 
—

 
—

 
6,854

    Residential
2,696

 
—

 
—

 
2,696

Consumer and other
—

 
—

 
—

 
—

       Total
$
14,401

 
$
1,340

 
$
—

 
$
15,741


 
December 31, 2014
(in thousands)
Non-accrual
 
Restructured
 
Loans over 90 days past due and still accruing interest
 
Total
Commercial and industrial
$
6,073

 
$
—

 
$
—

 
$
6,073

Real estate:
 
 
 
 
 
 
 
    Commercial - Investor owned
4,597

 
590

 
—

 
5,187

    Commercial - Owner occupied
519

 
770

 
—

 
1,289

    Construction and land development
7,348

 
—

 
—

 
7,348

    Residential
3,093

 
—

 
—

 
3,093

Consumer and other
—

 
—

 
—

 
—

       Total
$
21,630

 
$
1,360

 
$
—

 
$
22,990



The recorded investment by category for the Portfolio loans that have been restructured during the three months ended March 31, 2015 and 2014, is as follows:

 
Three months ended March 31, 2015
 
Three months ended March 31, 2014
(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
—

 
$
—

 
$
—

 
—

 
$
—

 
$
—

Real estate:
 
 
 
 
 
 
 
 
 
 
 
     Commercial - Owner occupied
—

 
—

 
—

 
2

 
1,292

 
1,042

     Commercial - Investor owned
—

 
—

 
—

 
—

 
—

 
—

     Construction and land development
—

 
—

 
—

 
—

 
—

 
—

     Residential
—

 
—

 
—

 
—

 
—

 
—

Consumer and other
—

 
—

 
—

 
—

 
—

 
—

  Total
—

 
$
—

 
$
—

 
2

 
$
1,292

 
$
1,042


14



The restructured Portfolio loans primarily resulted from interest rate concessions and changing the terms of the loans. As of March 31, 2015, the Company allocated $0.3 million of specific reserves to the loans that have been restructured.

There were no Portfolio loans that were restructured and subsequently defaulted during the three months ended March 31, 2015 or 2014.

The aging of the recorded investment in past due Portfolio loans by portfolio class and category at March 31, 2015 and December 31, 2014 is shown below.

 
March 31, 2015
(in thousands)
30-89 Days
 Past Due
 
90 or More
Days
Past Due
 
Total
Past Due
 
Current
 
Total
    Commercial and industrial
$
2,931

 
$
932

 
$
3,863

 
$
1,261,241

 
$
1,265,104

    Real estate:
 
 
 
 
 
 
 
 
 
       Commercial - Owner occupied
267

 
267

 
534

 
367,779

 
368,313

       Commercial - Investor owned
—

 
—

 
—

 
413,170

 
413,170

       Construction and land development
—

 
3,226

 
3,226

 
135,698

 
138,924

       Residential
974

 
1,977

 
2,951

 
177,302

 
180,253

    Consumer and other
18

 
—

 
18

 
69,777

 
69,795

          Total
$
4,190

 
$
6,402

 
$
10,592

 
$
2,424,967

 
$
2,435,559


 
December 31, 2014
(in thousands)
30-89 Days
 Past Due
 
90 or More
Days
Past Due
 
Total
Past Due
 
Current
 
Total
    Commercial and industrial
$
3,059

 
$
232

 
$
3,291

 
$
1,266,968

 
$
1,270,259

    Real estate:
 
 
 
 
 
 
 
 
 
       Commercial - Owner occupied
766

 
496

 
1,262

 
356,241

 
357,503

       Commercial - Investor owned
261

 
4,450

 
4,711

 
408,315

 
413,026

       Construction and land development
702

 
2,524

 
3,226

 
141,547

 
144,773

       Residential
168

 
—

 
168

 
185,084

 
185,252

    Consumer and other
8

 
—

 
8

 
63,095

 
63,103

          Total
$
4,964

 
$
7,702

 
$
12,666

 
$
2,421,250

 
$
2,433,916



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 – Includes loans to borrowers with a continuous record of strong earnings, sound balance sheet condition and capitalization, ample liquidity with solid cash flow, and whose management team has experience and depth within their industry.
•
Grade 4 – Includes loans to borrowers with positive trends in profitability, satisfactory capitalization and balance sheet condition, and sufficient liquidity and cash flow.
•
Grade 5 – Includes loans to borrowers that may display fluctuating trends in sales, profitability, capitalization, liquidity, and cash flow.
•
Grade 6 – Includes loans to borrowers where an adverse change or perceived weakness has occurred, but may be correctable in the near future. Alternatively, this rating category may also include circumstances where the

15


borrower is starting to reverse a negative trend or condition, or has recently been upgraded from a 7, 8, or 9 rating.
•
Grade 7 – Watch credits are borrowers that have experienced financial setback of a nature that is not determined to be severe or influence ‘ongoing concern’ expectations. Although possible, no loss is anticipated, due to strong collateral and/or guarantor support.
•
Grade 8 – Substandard credits will include those borrowers characterized by significant losses and sustained downward trends in balance sheet condition, liquidity, and cash flow. Repayment reliance may have shifted to secondary sources. Collateral exposure may exist and additional reserves may be warranted.
•
Grade 9 – Doubtful credits include borrowers that may show deteriorating trends that are unlikely to be corrected. Collateral values may appear insufficient for full recovery, therefore requiring a partial charge-off, or debt renegotiation with the borrower. The borrower may have declared bankruptcy or bankruptcy is likely in the near term. All doubtful rated credits will be on non-accrual.

The recorded investment by risk category of the Portfolio loans by portfolio class and category at March 31, 2015, which is based upon the most recent analysis performed, and December 31, 2014 is as follows:

 
March 31, 2015
(in thousands)
Pass (1-6)
 
Watch (7)
 
Substandard (8)
 
Doubtful (9)
 
Total
    Commercial and industrial
$
1,149,860

 
$
84,786

 
$
29,799

 
$
659

 
$
1,265,104

    Real estate:
 
 
 
 
 
 
 
 
 
       Commercial - Owner occupied
346,073

 
17,730

 
4,510

 
—

 
368,313

       Commercial - Investor owned
378,017

 
23,581

 
11,572

 
—

 
413,170

       Construction and land development
117,768

 
13,178

 
7,276

 
702

 
138,924

       Residential
162,387

 
11,681

 
6,185

 
—

 
180,253

    Consumer and other
69,473

 
48

 
274

 
—

 
69,795

          Total
$
2,223,578

 
$
151,004

 
$
59,616

 
$
1,361

 
$
2,435,559


 
December 31, 2014
(in thousands)
Pass (1-6)
 
Watch (7)
 
Substandard (8)
 
Doubtful (9)
 
Total
    Commercial and industrial
$
1,167,751

 
$
62,315

 
$
40,193

 
$
—

 
$
1,270,259

    Real estate:
 
 
 
 
 
 
 
 
 
       Commercial - Owner occupied
334,347

 
18,025

 
5,131

 
—

 
357,503

       Commercial - Investor owned
372,818

 
24,088

 
16,120

 
—

 
413,026

       Construction and land development
123,260

 
12,993

 
8,520

 
—

 
144,773

       Residential
168,543

 
11,012

 
5,697

 
—

 
185,252

    Consumer and other
62,711

 
51

 
341

 
—

 
63,103

          Total
$
2,229,430

 
$
128,484

 
$
76,002

 
$
—

 
$
2,433,916



16



NOTE 5 - PURCHASE CREDIT IMPAIRED ("PCI") LOANS

Below is a summary of PCI loans by category at March 31, 2015 and December 31, 2014:
 
 
March 31, 2015
 
December 31, 2014
(in thousands)
Weighted-
Average
Risk Rating
Recorded
Investment
PCI Loans
 
Weighted-
Average
Risk Rating
Recorded
Investment
PCI Loans
Real estate loans:
 
 
 
 
 
    Construction and land development
6.26
$
7,574

 
6.16
$
7,740

    Commercial - Investor Owned
7.12
37,524

 
7.07
39,066

    Commercial - Owner Occupied
6.39
20,935

 
6.35
22,695

    Residential real estate
5.52
24,314

 
5.54
25,121

Total real estate loans
 
90,347

 
 
94,622