10-Q


 

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, 2016.
 
 
 
[   ]
 
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______ to ______
 
 
 
 
 
Commission file number 001-15373
 
ENTERPRISE FINANCIAL SERVICES CORP

 
Incorporated in the State of Delaware
I.R.S. Employer Identification # 43-1706259
Address: 150 North Meramec
Clayton, MO 63105
Telephone: (314) 725-5500
___________________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X]  No [   ] 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files ). Yes [X]  No [   ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ]
Accelerated filer [X]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)
Smaller reporting company [ ]

 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes [   ]  No [X]
 
As of April 25, 2016, the Registrant had 20,021,499 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 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)
March 31, 2016
 
December 31, 2015
Assets
 
 
 
Cash and due from banks
$
56,251

 
$
47,935

Federal funds sold
193

 
91

Interest-bearing deposits (including $1,870 and $1,320 pledged as collateral)
49,789

 
46,131

                  Total cash and cash equivalents
106,233

 
94,157

Interest-bearing deposits greater than 90 days
1,000

 
1,000

Securities available for sale
461,832

 
451,770

Securities held to maturity
43,257

 
43,714

Loans held for sale
6,409

 
6,598

Portfolio loans
2,832,616

 
2,750,737

   Less: Allowance for loan losses
34,373

 
33,441

Portfolio loans, net
2,798,243

 
2,717,296

Purchased credit impaired loans, net of the allowance for loan losses ($9,569 and $10,175, respectively)
53,908

 
64,583

                  Total loans, net
2,852,151

 
2,781,879

Other real estate
9,880

 
8,366

Other investments, at cost
19,231

 
17,455

Fixed assets, net
14,812

 
14,842

Accrued interest receivable
8,797

 
8,399

State tax credits held for sale, including $4,733 and $5,941 carried at fair value, respectively
45,305

 
45,850

Goodwill
30,334

 
30,334

Intangible assets, net
2,832

 
3,075

Other assets
107,832

 
101,044

Total assets
$
3,709,905

 
$
3,608,483

 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
Demand deposits
$
719,652

 
$
717,460

Interest-bearing transaction accounts
589,635

 
564,420

Money market accounts
1,061,407

 
1,053,662

Savings
100,203

 
92,861

Certificates of deposit:
 
 
 
Brokered
157,939

 
39,573

Other
302,910

 
316,615

Total deposits
2,931,746

 
2,784,591

Subordinated debentures
56,807

 
56,807

Federal Home Loan Bank advances
130,500

 
110,000

Other borrowings
193,788

 
270,326

Accrued interest payable
542

 
629

Other liabilities
37,138

 
35,301

Total liabilities
3,350,521

 
3,257,654

 
 
 
 
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; 20,229,129 and 20,093,119 shares issued, respectively
202

 
201

Treasury stock, at cost; 236,100 and 76,000 shares, respectively
(5,954
)
 
(1,743
)
Additional paid in capital
210,420

 
210,589

Retained earnings
150,787

 
141,564

Accumulated other comprehensive income
3,929

 
218

Total shareholders' equity
359,384

 
350,829

Total liabilities and shareholders' equity
$
3,709,905

 
$
3,608,483

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)
2016
 
2015
Interest income:
 
 
 
Interest and fees on loans
$
32,608

 
$
29,608

Interest on debt securities:
 
 
 
Taxable
2,387

 
2,141

Nontaxable
332

 
297

Interest on interest-bearing deposits
61

 
47

Dividends on equity securities
72

 
58

Total interest income
35,460

 
32,151

Interest expense:
 
 
 
Interest-bearing transaction accounts
306

 
277

Money market accounts
1,006

 
642

Savings accounts
60

 
50

Certificates of deposit
1,019

 
1,591

Subordinated debentures
348

 
302

Federal Home Loan Bank advances
182

 
49

Notes payable and other borrowings
111

 
195

Total interest expense
3,032

 
3,106

Net interest income
32,428

 
29,045

Provision for portfolio loan losses
833

 
1,580

Provision reversal for purchased credit impaired loan losses
(73
)
 
(3,270
)
Net interest income after provision for loan losses
31,668

 
30,735

Noninterest income:
 
 
 
Service charges on deposit accounts
2,043

 
1,856

Wealth management revenue
1,662

 
1,740

Other service charges and fee income
868

 
753

Gain on state tax credits, net
518

 
674

Gain on sale of other real estate
122

 
20

Gain on sale of investment securities
—

 
23

Change in FDIC loss share receivable
—

 
(2,264
)
Miscellaneous income
792

 
781

Total noninterest income
6,005

 
3,583

Noninterest expense:
 
 
 
Employee compensation and benefits
12,647

 
11,513

Occupancy
1,683

 
1,694

Data processing
1,104

 
1,030

FDIC and other insurance
723

 
726

Professional fees
684

 
972

Loan legal and other real estate expense
357

 
278

FDIC clawback
—

 
412

Other
3,564

 
3,325

Total noninterest expense
20,762

 
19,950

 
 
 
 
Income before income tax expense
16,911

 
14,368

Income tax expense
5,886

 
5,022

Net income
$
11,025

 
$
9,346

 
 
 
 
Earnings per common share
 
 
 
Basic
$
0.55

 
$
0.47

Diluted
0.54

 
0.46

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)
2016
 
2015
Net income
$
11,025

 
$
9,346

Other comprehensive income, net of tax:
 
 
 
Unrealized gains on investment securities arising during the period, net of income tax expense for three months of $2,304 and $1,045, respectively
3,711

 
1,712

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 $9, respectively
—

 
(14
)
Total other comprehensive income
3,711

 
1,698

Total comprehensive income
$
14,736

 
$
11,044


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
 
Total
shareholders' equity
Balance January 1, 2016
 
$
—

 
$
201

 
$
(1,743
)
 
$
210,589

 
$
141,564

 
$
218

 
$
350,829

Net income
 
—

 
—

 
—

 
—

 
11,025

 
—

 
11,025

Other comprehensive income
 
—

 
—

 
—

 
—

 
—

 
3,711

 
3,711

Cash dividends paid on common shares, $0.09 per share
 
—

 
—

 
—

 
—

 
(1,802
)
 
—

 
(1,802
)
Repurchase of common shares
 
—

 
—

 
(4,211
)
 
—

 
—

 
—

 
(4,211
)
Issuance under equity compensation plans, 136,010 shares, net
 
—

 
1

 
—

 
(1,746
)
 
—

 
—

 
(1,745
)
Share-based compensation
 
—

 
—

 
—

 
794

 
—

 
—

 
794

Excess tax benefit related to equity compensation plans
 
—

 
—

 
—

 
783

 
—

 
—

 
783

Balance March 31, 2016
 
$
—

 
$
202

 
$
(5,954
)
 
$
210,420

 
$
150,787

 
$
3,929

 
$
359,384

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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, 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


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)
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
11,025

 
$
9,346

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation
535

 
489

Provision for loan losses
760

 
(1,690
)
Deferred income taxes
1,343

 
(152
)
Net amortization of debt securities
721

 
851

Amortization of intangible assets
243

 
284

Gain on sale of investment securities
—

 
(23
)
Mortgage loans originated for sale
(29,287
)
 
(31,603
)
Proceeds from mortgage loans sold
29,606

 
27,767

Gain on sale of other real estate
(122
)
 
(20
)
Gain on state tax credits, net
(518
)
 
(674
)
Excess tax benefit of share-based compensation
(783
)
 
(153
)
Share-based compensation
794

 
768

Valuation adjustment on other real estate
1

 
41

Net accretion of loan discount and indemnification asset
(2,249
)
 
(1,390
)
Changes in:
 
 
 
Accrued interest receivable
(398
)
 
(104
)
Accrued interest payable
(87
)
 
2

Other assets
(9,303
)
 
(1,666
)
Other liabilities
1,837

 
(3,681
)
Net cash provided (used) by operating activities
4,118

 
(1,608
)
Cash flows from investing activities:
 
 
 
Net decrease (increase) in loans
(71,324
)
 
3,443

Net cash proceeds received from FDIC loss share receivable
—

 
1,395

Proceeds from the sale of securities, available for sale
—

 
41,069

Proceeds from the paydown or maturity of securities, available for sale
12,894

 
10,715

Proceeds from the paydown or maturity of securities, held to maturity
431

 
515

Proceeds from the redemption of other investments
17,653

 
19,593

Proceeds from the sale of state tax credits held for sale
3,412

 
4,066

Proceeds from the sale of other real estate
671

 
2,896

Payments for the purchase/origination of:
 
 
 
Available for sale debt and equity securities
(17,637
)
 
(59,869
)
Other investments
(19,430
)
 
(9,975
)
State tax credits held for sale
(2,349
)
 
(3,112
)
Fixed assets
(505
)
 
(648
)
Net cash provided (used) in investing activities
(76,184
)
 
10,088

Cash flows from financing activities:
 
 
 
Net increase in noninterest-bearing deposit accounts
2,192

 
38,066

Net increase in interest-bearing deposit accounts
144,963

 
145,054

Proceeds from Federal Home Loan Bank advances
509,000

 
302,000

Repayments of Federal Home Loan Bank advances
(488,500
)
 
(440,000
)
Net decrease in other borrowings
(76,538
)
 
(53,019
)
Cash dividends paid on common stock
(1,802
)
 
(1,051
)
Excess tax benefit of share-based compensation
783

 
153

Payments for the repurchase of common stock
(4,211
)
 
—

Issuance of common stock, net
(1,745
)
 
(1,046
)
Net cash provided (used) by financing activities
84,142

 
(9,843
)
Net increase (decrease) in cash and cash equivalents
12,076

 
(1,363
)
Cash and cash equivalents, beginning of period
94,157

 
100,696

Cash and cash equivalents, end of period
$
106,233

 
$
99,333

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
3,119

 
$
3,105

Income taxes
14,084

 
3,500

Noncash transactions:
 
 
 
Transfer to other real estate owned in settlement of loans
$
2,683

 
$
890

Sales of other real estate financed
140

 
—


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, 2016 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2016. 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, 2015.

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 2016 the Company changed its presentation of certificates of deposit on the Condensed Consolidated Balance Sheets to separate brokered deposit sources from other sources.  The corresponding prior period balances were reclassified to conform to the current year presentation. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.


6


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.

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)
2016
 
2015
Net income as reported
$
11,025

 
$
9,346

 
 
 
 
Weighted average common shares outstanding
20,004

 
19,934

Additional dilutive common stock equivalents
229

 
223

Weighted average diluted common shares outstanding
20,233

 
20,157

 
 
 
 
Basic earnings per common share:
$
0.55

 
$
0.47

Diluted earnings per common share:
$
0.54

 
$
0.46


For the three months ended March 31, 2016 and 2015, the amount of common stock equivalents excluded from the earnings per share calculations because their effect was anti-dilutive was zero, and 0.3 million common stock equivalents, respectively.

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, 2016
(in thousands)
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair Value
Available for sale securities:
 
 
 
 
 
 
 
    Obligations of U.S. Government-sponsored enterprises
$
98,382

 
$
1,413

 
$
—

 
$
99,795

    Obligations of states and political subdivisions
39,437

 
1,404

 
(322
)
 
40,519

    Agency mortgage-backed securities
317,146

 
4,821

 
(449
)
 
321,518

          Total securities available for sale
$
454,965

 
$
7,638

 
$
(771
)
 
$
461,832

Held to maturity securities:
 
 
 
 
 
 
 
    Obligations of states and political subdivisions
$
14,813

 
$
168

 
$
(24
)
 
$
14,957

    Agency mortgage-backed securities
28,444

 
452

 
—

 
28,896

          Total securities held to maturity
$
43,257

 
$
620


$
(24
)

$
43,853


 
December 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
$
98,699

 
$
309

 
$
—

 
$
99,008

    Obligations of states and political subdivisions
40,700

 
1,343

 
(342
)
 
41,701

    Agency mortgage-backed securities
311,516

 
2,046

 
(2,501
)
 
311,061

          Total securities available for sale
$
450,915

 
$
3,698

 
$
(2,843
)
 
$
451,770

Held to maturity securities:
 
 
 
 
 
 
 
   Obligations of states and political subdivisions
$
14,831

 
$
63

 
$
(50
)
 
$
14,844

   Agency mortgage-backed securities
28,883

 
—

 
(286
)
 
28,597

          Total securities held to maturity
$
43,714

 
$
63

 
$
(336
)
 
$
43,441


At March 31, 2016, and December 31, 2015, 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 $271.1 million and $334.4 million at March 31, 2016, and December 31, 2015, 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, 2016, 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
$
27,884

 
$
28,031

 
$
—

 
$
—

Due after one year through five years
96,110

 
98,303

 
5,233

 
5,279

Due after five years through ten years
10,291

 
10,710

 
9,580

 
9,678

Due after ten years
3,534

 
3,270

 
—

 
—

Agency mortgage-backed securities
317,146

 
321,518

 
28,444

 
28,896

 
$
454,965

 
$
461,832


$
43,257


$
43,853



The following table represents a summary of investment securities that had an unrealized loss:
 
 
March 31, 2016
Less than 12 months
 
12 months or more
 
Total
(in thousands)
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Obligations of states and political subdivisions
$
3,302

 
$
14

 
$
3,680

 
$
332

 
$
6,982

 
$
346

Agency mortgage-backed securities
335

 
—

 
51,133

 
449

 
51,468

 
449

 
$
3,637

 
$
14


$
54,813


$
781


$
58,450


$
795

 
 
 
 
 
 
 
 
 
 
 
 
 
December 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 states and political subdivisions
$
2,199

 
$
12

 
$
9,395

 
$
380

 
$
11,594

 
$
392

Agency mortgage-backed securities
189,229

 
2,050

 
21,020

 
737

 
210,249

 
2,787

 
$
191,428

 
$
2,062


$
30,415


$
1,117


$
221,843


$
3,179



The unrealized losses at both March 31, 2016, and December 31, 2015, 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 March 31, 2016, 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 March 31,
(in thousands)
2016
 
2015
Gross gains realized
$
—

 
$
63

Gross losses realized
—

 
(40
)
Proceeds from sales
—

 
41,069




9


 
NOTE 4 - PORTFOLIO LOANS

Below is a summary of Portfolio loans by category at March 31, 2016 and December 31, 2015:
 
(in thousands)
March 31, 2016
 
December 31, 2015
Commercial and industrial
$
1,544,980

 
$
1,484,327

Real estate:
 
 
 
    Commercial - investor owned
439,355

 
428,064

    Commercial - owner occupied
334,180

 
342,959

    Construction and land development
175,324

 
161,061

    Residential
202,255

 
196,498

Total real estate loans
1,151,114

 
1,128,582

Consumer and other
136,358

 
137,537

Portfolio loans
2,832,452

 
2,750,446

Unearned loan fees, net
164

 
291

    Portfolio loans, including unearned loan fees
$
2,832,616

 
$
2,750,737




10


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, 2016, and at December 31, 2015, 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, 2015
$
22,056

 
$
3,484

 
$
2,969

 
$
1,704

 
$
1,796

 
$
1,432

 
$
33,441

Provision (provision reversal) charged to expense
1,120

 
(116
)
 
80

 
(65
)
 
11

 
(197
)
 
833

Losses charged off
(68
)
 
—

 
—

 
—

 
—

 
(5
)
 
(73
)
Recoveries
53

 
7

 
68

 
6

 
34

 
4

 
172

Balance at March 31, 2016
$
23,161

 
$
3,375


$
3,117


$
1,645


$
1,841


$
1,234


$
34,373


(in thousands)
Commercial and industrial
 
CRE - investor owned
 
CRE -
owner occupied
 
Construction and land development
 
Residential real estate
 
Consumer and other
 
Total
Balance March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses - Ending balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
2,042

 
$
—

 
$
28

 
$
298

 
$
4

 
$
—

 
$
2,372

Collectively evaluated for impairment
21,119

 
3,375

 
3,089

 
1,347

 
1,837

 
1,234

 
32,001

Total
$
23,161

 
$
3,375


$
3,117


$
1,645


$
1,841


$
1,234


$
34,373

Loans - Ending balance:
 
 
 
 
 
 
 

 
 
 
 
 
 
Individually evaluated for impairment
$
5,209

 
$
894

 
$
1,820

 
$
2,652

 
$
679

 
$
—

 
$
11,254

Collectively evaluated for impairment
1,539,771

 
438,461

 
332,360

 
172,672

 
201,576

 
136,522

 
2,821,362

Total
$
1,544,980

 
$
439,355


$
334,180


$
175,324


$
202,255


$
136,522


$
2,832,616

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for Loan Losses - Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
1,953

 
$
—

 
$
6

 
$
369

 
$
7

 
$
—

 
$
2,335

Collectively evaluated for impairment
20,103

 
3,484

 
2,963

 
1,335

 
1,789

 
1,432

 
31,106

Total
$
22,056

 
$
3,484


$
2,969


$
1,704


$
1,796


$
1,432


$
33,441

Loans - Ending balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
4,514

 
$
921

 
$
1,962

 
$
2,800

 
$
681

 
$
—

 
$
10,878

Collectively evaluated for impairment
1,479,813

 
427,143

 
340,997

 
158,261

 
195,817

 
137,828

 
2,739,859

Total
$
1,484,327

 
$
428,064


$
342,959


$
161,061


$
196,498


$
137,828


$
2,750,737


A summary of Portfolio loans individually evaluated for impairment by category at March 31, 2016 and December 31, 2015, is as follows:

 
March 31, 2016
(in thousands)
Unpaid
Contractual
Principal Balance
 
Recorded
Investment
With No Allowance
 
Recorded
Investment
With
Allowance
 
Total
Recorded Investment
 
Related Allowance
 
Average
Recorded Investment
Commercial and industrial
$
6,683

 
$
1,362

 
$
4,444

 
$
5,806

 
$
2,042

 
$
7,182

Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
    Commercial - investor owned
896

 
648

 
248

 
896

 
—

 
908

    Commercial - owner occupied
86

 
86

 
—

 
86

 
28

 
79

    Construction and land development
4,259

 
2,975

 
379

 
3,354

 
298

 
2,747

    Residential
709

 
644

 
65

 
709

 
4

 
680

Consumer and other
—

 
—

 
—

 
—

 
—

 
—

Total
$
12,633

 
$
5,715


$
5,136


$
10,851


$
2,372


$
11,596


11



 
December 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
$
5,554

 
$
509

 
$
4,204

 
$
4,713

 
$
1,953

 
$
6,970

Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
    Commercial - investor owned
927

 
927

 
—

 
927

 
—

 
970

    Commercial - owner occupied
329

 
85

 
113

 
198

 
6

 
301

    Construction and land development
4,349

 
2,914

 
530

 
3,444

 
369

 
3,001

    Residential
705

 
637

 
68

 
705

 
7

 
682

Consumer and other
—

 
—

 
—

 
—

 
—

 
—

Total
$
11,864

 
$
5,072


$
4,915


$
9,987


$
2,335


$
11,924


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

 
Three months ended March 31,
(in thousands)
2016
 
2015
Total interest income that would have been recognized under original terms
$
148

 
$
315

Total cash received and recognized as interest income on non-accrual loans
6

 
27

Total interest income recognized on impaired loans
6

 
13


There were no loans over 90 days past due and still accruing interest at March 31, 2016 or December 31, 2015. At March 31, 2016, there were no unadvanced commitments on impaired loans.

The recorded investment in impaired Portfolio loans by category at March 31, 2016 and December 31, 2015, is as follows:
 
 
March 31, 2016
(in thousands)
Non-accrual
 
Restructured
 
Loans over 90 days past due and still accruing interest
 
Total
Commercial and industrial
$
5,516

 
$
290

 
$
—

 
$
5,806

Real estate:
 
 
 
 
 
 
 
    Commercial - investor owned
896

 
—

 
—

 
896

    Commercial - owner occupied
86

 
—

 
—

 
86

    Construction and land development
3,354

 
—

 
—

 
3,354

    Residential
709

 
—

 
—

 
709

Consumer and other
—

 
—

 
—

 
—

       Total
$
10,561

 
$
290


$
—


$
10,851



12


 
December 31, 2015
(in thousands)
Non-accrual
 
Restructured
 
Loans over 90 days past due and still accruing interest
 
Total
Commercial and industrial
$
4,406

 
$
307

 
$
—

 
$
4,713

Real estate:
 
 
 
 
 
 
 
    Commercial - investor owned
927

 
—

 
—

 
927

    Commercial - owner occupied
198

 
—

 
—

 
198

    Construction and land development
3,444

 
—

 
—

 
3,444

    Residential
705

 
—

 
—

 
705

Consumer and other
—

 
—

 
—

 
—

       Total
$
9,680

 
$
307

 
$
—

 
$
9,987



The Company restructured two Portfolio loans with a recorded balance of $0.3 million during the three months ended March 31, 2016, and none during the three months ended March 31, 2015. The restructured loans primarily resulted from interest rate concessions and changing the terms of the loans. As of March 31, 2016, the Company had $0.2 million specific reserves allocated to loans that have been restructured. There were no Portfolio loans restructured that subsequently defaulted during the three months ended March 31, 2016 or 2015.

The aging of the recorded investment in past due Portfolio loans by portfolio class and category at March 31, 2016 and December 31, 2015 is shown below.

 
March 31, 2016
(in thousands)
30-89 Days
 Past Due
 
90 or More
Days
Past Due
 
Total
Past Due
 
Current
 
Total
    Commercial and industrial
$
865

 
$
716

 
$
1,581

 
$
1,543,399

 
$
1,544,980

    Real estate:
 
 
 
 
 
 
 
 
 
       Commercial - investor owned
3,990

 
—

 
3,990

 
435,365

 
439,355

       Commercial - owner occupied
—

 
79

 
79

 
334,101

 
334,180

       Construction and land development
—

 
2,273

 
2,273

 
173,051

 
175,324

       Residential
161

 
614

 
775

 
201,480

 
202,255

    Consumer and other
15

 
—

 
15

 
136,507

 
136,522

          Total
$
5,031

 
$
3,682


$
8,713


$
2,823,903


$
2,832,616


 
December 31, 2015
(in thousands)
30-89 Days
 Past Due
 
90 or More
Days
Past Due
 
Total
Past Due
 
Current
 
Total
    Commercial and industrial
$
505

 
$
888

 
$
1,393

 
$
1,482,934

 
$
1,484,327

    Real estate:
 
 
 
 
 
 
 
 
 
       Commercial - investor owned
464

 
—

 
464

 
427,600

 
428,064

       Commercial - owner occupied
94

 
184

 
278

 
342,681

 
342,959

       Construction and land development
384

 
2,273

 
2,657

 
158,404

 
161,061

       Residential
70

 
681

 
751

 
195,747

 
196,498

    Consumer and other
20

 
—

 
20

 
137,808

 
137,828

          Total
$
1,537

 
$
4,026


$
5,563


$
2,745,174


$
2,750,737



13


The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, payment experience, credit documentation, and current economic factors among other factors. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:
•
Grades 1, 2, and 3 – Includes loans to borrowers with a continuous record of strong earnings, sound balance sheet condition and capitalization, ample liquidity with solid cash flow, and whose management team has experience and depth within their industry.
•
Grade 4 – Includes loans to borrowers with positive trends in profitability, satisfactory capitalization and balance sheet condition, and sufficient liquidity and cash flow.
•
Grade 5 – Includes loans to borrowers that may display fluctuating trends in sales, profitability, capitalization, liquidity, and cash flow.
•
Grade 6 – Includes loans to borrowers where an adverse change or perceived weakness has occurred, but may be correctable in the near future. Alternatively, this rating category may also include circumstances where the borrower is starting to reverse a negative trend or condition, or has recently been upgraded from a 7, 8, or 9 rating.
•
Grade 7 – Watch credits are borrowers that have experienced financial setback of a nature that is not determined to be severe or influence ‘ongoing concern’ expectations. Although possible, no loss is anticipated, due to strong collateral and/or guarantor support.
•
Grade 8 – Substandard credits will include those borrowers characterized by significant losses and sustained downward trends in balance sheet condition, liquidity, and cash flow. Repayment reliance may have shifted to secondary sources. Collateral exposure may exist and additional reserves may be warranted.
•
Grade 9 – Doubtful credits include borrowers that may show deteriorating trends that are unlikely to be corrected. Collateral values may appear insufficient for full recovery, therefore requiring a partial charge-off, or debt renegotiation with the borrower. The borrower may have declared bankruptcy or bankruptcy is likely in the near term. All doubtful rated credits will be on non-accrual.

The recorded investment by risk category of the Portfolio loans by portfolio class and category at March 31, 2016, which is based upon the most recent analysis performed, and December 31, 2015 is as follows:

 
March 31, 2016
(in thousands)
Pass (1-6)
 
Watch (7)
 
Substandard (8)
 
Doubtful (9)
 
Total
    Commercial and industrial
$
1,403,863

 
$
99,432

 
$
41,685

 
$
—

 
$
1,544,980

    Real estate:
 
 
 
 
 
 
 
 
 
       Commercial - investor owned
418,870

 
15,748

 
4,737

 
—

 
439,355

       Commercial - owner occupied
301,626

 
28,748

 
3,806

 
—

 
334,180

       Construction and land development
164,813

 
6,402

 
4,109

 
—

 
175,324

       Residential
193,681

 
5,569

 
3,005

 
—

 
202,255

    Consumer and other
129,833

 
717

 
5,972

 
—

 
136,522

          Total
$
2,612,686

 
$
156,616

 
$
63,314

 
$
—

 
$
2,832,616



14


 
December 31, 2015
(in thousands)
Pass (1-6)
 
Watch (7)
 
Substandard (8)
 
Doubtful (9)
 
Total
    Commercial and industrial
$
1,356,864

 
$
90,370

 
$
37,093

 
$
—

 
$
1,484,327

    Real estate:
 
 
 
 
 
 
 
 
 
       Commercial - investor owned
403,820

 
18,868

 
5,376

 
—

 
428,064

       Commercial - owner occupied
314,791

 
24,727

 
3,441

 
—

 
342,959

       Construction and land development
146,601

 
10,114

 
4,346

 
—

 
161,061

       Residential
188,269

 
5,138

 
3,091

 
—

 
196,498

    Consumer and other
131,060

 
721

 
6,047

 
—

 
137,828

          Total
$
2,541,405

 
$
149,938


$
59,394


$
—


$
2,750,737



15


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

Below is a summary of PCI loans by category at March 31, 2016 and December 31, 2015:
 
 
March 31, 2016
 
December 31, 2015
(in thousands)
Weighted-
Average
Risk Rating1
Recorded
Investment
PCI Loans
 
Weighted-
Average
Risk Rating1
Recorded
Investment
PCI Loans
Commercial and industrial
6.63
$
3,768

 
6.70
$
3,863

Real estate:
 
 
 
 
 
    Commercial - investor owned
7.07
20,449

 
6.98
25,272

    Commercial - owner occupied
6.12
15,880

 
6.30
19,414

    Construction and land development
6.10
6,149

 
6.28
6,838

    Residential
5.45
17,032

 
5.44
19,287

Total real estate loans
 
59,510

 
 
70,811

Consumer and other
5.89
199

 
1.89
84

    Purchased credit impaired loans
 
$
63,477

 
 
$
74,758

1Risk ratings are based on the borrower's contractual obligation, which is not reflective of the purchase discount.

The aging of the recorded investment in past due PCI loans by portfolio class and category at March 31, 2016 and December 31, 2015 is shown below:

 
March 31, 2016
(in thousands)
30-89 Days
 Past Due
 
90 or More
Days
Past Due
 
Total
Past Due
 
Current
 
Total
    Commercial and industrial
$
—

 
$
—

 
$
—

 
$
3,768

 
$
3,768

    Real estate:
 
 
 
 
 
 
 
 
 
       Commercial - investor owned
1,453

 
1,102

 
2,555

 
17,894

 
20,449

       Commercial - owner occupied
—

 
—

 
—

 
15,880

 
15,880

       Construction and land development
—

 
—

 
—

 
6,149

 
6,149

       Residential
479

 
28

 
507

 
16,525

 
17,032

    Consumer and other
—

 
—

 
—

 
199

 
199

          Total
$
1,932

 
$
1,130


$
3,062


$
60,415


$
63,477


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

 
$
—

 
$
—

 
$
3,863

 
$
3,863

    Real estate:
 
 
 
 
 
 
 
 
 
       Commercial - investor owned
2,342

 
3,661

 
6,003

 
19,269

 
25,272

       Commercial - owner occupied
731