Document


 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
 
FORM 10-Q
 
[X]
 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2018.
 
 
 
[   ]
 
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______ to ______
 
 
 
 
 
Commission file number 001-15373
 
ENTERPRISE FINANCIAL SERVICES CORP

Incorporated in the State of Delaware
I.R.S. Employer Identification # 43-1706259
Address: 150 North Meramec
Clayton, MO 63105
Telephone: (314) 725-5500
___________________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X]  No [   ] 

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [X]
 
 
 
Accelerated filer [ ]
Non-accelerated filer [ ]
 
(Do not check if a smaller reporting company)
 
Smaller reporting company [ ]
 
 
 
 
Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes [   ]  No [X]
 
As of April 25, 2018, the Registrant had 23,111,255 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, 2018
 
December 31, 2017
Assets
 
 
 
Cash and due from banks
$
81,604

 
$
91,084

Federal funds sold
1,099

 
1,223

Interest-bearing deposits (including $1,295 and $1,365 pledged as collateral, respectively)
60,398

 
61,016

Total cash and cash equivalents
143,101

 
153,323

Interest-bearing deposits greater than 90 days
2,400

 
2,645

Securities available for sale
652,272

 
641,382

Securities held to maturity
70,579

 
73,749

Loans held for sale
1,748

 
3,155

Loans
4,190,845

 
4,097,050

Less: Allowance for loan losses
44,650

 
42,577

Total loans, net
4,146,195

 
4,054,473

Other real estate
455

 
498

Other investments, at cost
29,263

 
26,661

Fixed assets, net
32,127

 
32,618

Accrued interest receivable
17,277

 
14,069

State tax credits held for sale (including $350 and $400 carried at fair value, respectively)
42,364

 
43,468

Goodwill
117,345

 
117,345

Intangible assets, net
10,399

 
11,056

Other assets
117,577

 
114,783

Total assets
$
5,383,102

 
$
5,289,225

 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
Demand deposits
$
1,101,705

 
$
1,123,907

Interest-bearing transaction accounts
875,880

 
915,653

Money market accounts
1,445,459

 
1,342,931

Savings
210,029

 
195,150

Certificates of deposit:
 
 
 
Brokered
201,082

 
115,306

Other
447,222

 
463,467

Total deposits
4,281,377

 
4,156,414

Subordinated debentures and notes (net of debt issuance cost of $1,103 and $1,136, respectively)
118,118

 
118,105

Federal Home Loan Bank advances
224,624

 
172,743

Other borrowings
166,589

 
253,674

Accrued interest payable
2,046

 
1,730

Other liabilities
35,333

 
37,986

Total liabilities
4,828,087

 
4,740,652

 
 
 
 
Shareholders' equity:
 
 
 
Preferred stock, $0.01 par value;
5,000,000 shares authorized; 0 shares issued and outstanding
—

 
—

Common stock, $0.01 par value; 30,000,000 shares authorized; 23,867,710 and 23,781,112 shares issued, respectively
239

 
238

Treasury stock, at cost; 756,588 and 691,673 shares, respectively
(26,326
)
 
(23,268
)
Additional paid in capital
348,092

 
350,061

Retained earnings
244,573

 
225,360

Accumulated other comprehensive loss
(11,563
)
 
(3,818
)
Total shareholders' equity
555,015

 
548,573

Total liabilities and shareholders' equity
$
5,383,102

 
$
5,289,225

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)
2018
 
2017
Interest income:
 
 
 
Interest and fees on loans
$
50,450

 
$
39,926

Interest on debt securities:
 
 
 
Taxable
3,987

 
3,230

Nontaxable
282

 
386

Interest on interest-bearing deposits
240

 
130

Dividends on equity securities
205

 
68

Total interest income
55,164

 
43,740

Interest expense:
 
 
 
Interest-bearing transaction accounts
806

 
675

Money market accounts
3,353

 
1,493

Savings accounts
125

 
82

Certificates of deposit
1,899

 
1,215

Subordinated debentures and notes
1,368

 
1,164

Federal Home Loan Bank advances
1,258

 
330

Notes payable and other borrowings
184

 
139

Total interest expense
8,993

 
5,098

Net interest income
46,171

 
38,642

Provision for portfolio loan losses
1,871

 
1,533

Provision reversal for purchased credit impaired loan losses
—

 
(148
)
Net interest income after provision for loan losses
44,300

 
37,257

Noninterest income:
 
 
 
Service charges on deposit accounts
2,851

 
2,510

Wealth management revenue
2,114

 
1,833

Card services revenue
1,516

 
1,037

Gain on state tax credits, net
252

 
246

Gain on sale of investment securities
9

 
—

Miscellaneous income
2,800

 
1,350

Total noninterest income
9,542

 
6,976

Noninterest expense:
 
 
 
Employee compensation and benefits
16,491

 
15,208

Occupancy
2,406

 
1,929

Data processing
1,467

 
1,633

Professional fees
849

 
837

FDIC and other insurance
917

 
824

Loan legal and other real estate expense
299

 
345

Merger related expenses
—

 
1,667

Other
6,714

 
4,293

Total noninterest expense
29,143

 
26,736

 
 
 
 
Income before income tax expense
24,699

 
17,497

Income tax expense
3,778

 
5,106

Net income
$
20,921

 
$
12,391

 
 
 
 
Earnings per common share
 
 
 
Basic
$
0.91

 
$
0.57

Diluted
0.90

 
0.56

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)
2018
 
2017
Net income
$
20,921

 
$
12,391

Other comprehensive income (loss), net of tax:
 
 
 
Unrealized gains (losses) on investment securities arising during the period, net of income tax expense (benefit) for three months of $(2,265) and $348, respectively
(6,904
)
 
567

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 $2 and $0, respectively
(7
)
 
—

Total other comprehensive income (loss)
(6,911
)
 
567

Total comprehensive income
$
14,010

 
$
12,958


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)
Common Stock
 
Treasury Stock
 
Additional paid in capital
 
Retained earnings
 
Accumulated
other
comprehensive income (loss)
 
Total
shareholders' equity
Balance December 31, 2017
$
238

 
$
(23,268
)
 
$
350,061

 
$
225,360

 
$
(3,818
)
 
$
548,573

Net income
—

 
—

 
—

 
20,921

 
—

 
20,921

Other comprehensive income
—

 
—

 
—

 
—

 
(6,911
)
 
(6,911
)
Total comprehensive income
—

 
—

 
—

 
20,921

 
(6,911
)
 
14,010

Cash dividends paid on common shares, $0.11 per share
—

 
—

 
—

 
(2,542
)
 
—

 
(2,542
)
Repurchase of common shares
—

 
(3,058
)
 
—

 
—

 
—

 
(3,058
)
Issuance under equity compensation plans, 86,598 shares, net
1

 
—

 
(2,687
)
 
—

 
—

 
(2,686
)
Share-based compensation
—

 
—

 
718

 
—

 
—

 
718

Reclassification adjustments for change in accounting policies
—

—

—

 
—

 
834

 
(834
)
 
—

Balance March 31, 2018
$
239

 
$
(26,326
)
 
$
348,092

 
$
244,573

 
$
(11,563
)
 
$
555,015

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

 
$
(6,632
)
 
$
213,078

 
$
182,190

 
$
(1,741
)
 
$
387,098

Net income
—

 
—

 
—

 
12,391

 
—

 
12,391

Other comprehensive income
—

 
—

 
—

 
—

 
567

 
567

Total comprehensive income
—

 
—

 
—

 
12,391

 
567

 
12,958

Cash dividends paid on common shares, $0.11 per share
—

 
—

 
—

 
(2,579
)
 
—

 
(2,579
)
Issuance under equity compensation plans, 93,236 shares, net
1

 
—

 
(2,152
)
 
—

 
—

 
(2,151
)
Share-based compensation
—

 
—

 
866

 
—

 
—

 
866

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

 
—

 
141,696

 
—

 
—

 
141,729

Reclassification for the adoption of share-based payment guidance
—

 
—

 
(5,229
)
 
5,229

 
—

 
—

Balance March 31, 2017
$
237

 
$
(6,632
)
 
$
348,259

 
$
197,231

 
$
(1,174
)
 
$
537,921


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, except share data)
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
20,921

 
$
12,391

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation
849

 
387

Provision for loan losses
1,870

 
1,385

Deferred income taxes
2,290

 
962

Net amortization of debt securities
533

 
1,310

Amortization of intangible assets
656

 
446

Gain on sale of investment securities
(9
)
 
—

Mortgage loans originated for sale
(12,389
)
 
(38,602
)
Proceeds from mortgage loans sold
13,917

 
42,710

Gain on state tax credits, net
(252
)
 
(246
)
Share-based compensation
718

 
866

Net accretion of loan discount
(467
)
 
(1,014
)
Changes in:
 
 
 
Accrued interest receivable
(3,209
)
 
1,682

Accrued interest payable
315

 
156

Other assets
(888
)
 
(1,728
)
Other liabilities
(2,640
)
 
(51,693
)
Net cash provided by (used in) operating activities
22,215

 
(30,988
)
Cash flows from investing activities:
 
 
 
Proceeds from JCB acquisition, net of cash purchase price
—

 
6,171

Net increase in loans
(93,125
)
 
(57,054
)
Proceeds from the sale of securities, available for sale
1,451

 
143,554

Proceeds from the paydown or maturity of securities, available for sale
19,683

 
42,223

Proceeds from the paydown or maturity of securities, held to maturity
1,639

 
1,180

Proceeds from the redemption of other investments
13,514

 
12,033

Proceeds from the sale of state tax credits held for sale
1,356

 
4,093

Payments for the purchase/origination of:
 
 
 
Available for sale debt securities
(40,313
)
 
(169,842
)
Other investments
(17,864
)
 
(20,318
)
State tax credits held for sale
—

 
(1,298
)
Fixed assets
(370
)
 
(247
)
Net cash used in investing activities
(114,029
)
 
(39,505
)
Cash flows from financing activities:
 
 
 
Net increase (decrease) in noninterest-bearing deposit accounts
(22,202
)
 
9,646

Net increase in interest-bearing deposit accounts
147,165

 
23,316

Proceeds from Federal Home Loan Bank advances
484,500

 
681,181

Repayments of Federal Home Loan Bank advances
(432,500
)
 
(530,681
)
Net decrease in other borrowings
(87,085
)
 
(98,040
)
Cash dividends paid on common stock
(2,542
)
 
(2,579
)
Payments for the repurchase of common stock
(3,058
)
 
—

Payments for the issuance of equity instruments, net
(2,686
)
 
(2,151
)
Net cash provided by financing activities
81,592

 
80,692

Net increase (decrease) in cash and cash equivalents
(10,222
)
 
10,199

Cash and cash equivalents, beginning of period
153,323

 
198,802

Cash and cash equivalents, end of period
$
143,101

 
$
209,001

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
8,677

 
$
4,289

Income taxes
685

 
28

Noncash transactions:
 
 
 
Common shares issued in connection with JCB acquisition
—

 
141,729


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, 2018 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2018. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

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.

During the first quarter of 2018, the Company adopted Accounting Standards Update ("ASU") 2016-01, "Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." ASU 2016-01 requires equity investments to be measured at fair value through earnings, and eliminates the available-for-sale classification for equity securities with readily determinable fair values. The guidance also provides an alternative to measure equity securities without readily determinable fair values at cost less impairment (if any), plus or minus observable price changes from an identical or similar investment of the same issuer (the “measurement alternative”). The Company elected the measurement alternative for its qualifying equity securities. The adoption of this update resulted in an insignificant increase to retained earnings which was reclassified from accumulated other comprehensive income.

In addition, the Company early adopted ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." The objective of ASU 2017-12 is to improve the financial reporting of hedging relationships by better aligning an entity's risk management activity with the economic objectives in undertaking those activities. The adoption of this update had an insignificant impact on the Company's consolidated financial statements.

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

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.


6


Revenue

The Company adopted ASU 2014-09 in the first quarter of 2018 using the modified retrospective approach. The Company's revenues are primarily composed of interest income on financial instruments, including investment securities, which are excluded from the scope of the new guidance. Certain other noninterest income from loans, investment securities and derivative financial instruments is also excluded from this guidance. Service charges on deposit accounts, wealth management revenue, card services revenue, and gain on sale of other real estate are within the scope of the guidance; however, there were no accounting policy changes as the Company's policies were consistent with the new guidance. Other noninterest income sources of revenue are considered immaterial. Implementation of this guidance did not change current business practices or have any changes to the Company's consolidated financial statements.
Descriptions of our revenue-generating activities that are within the scope of this guidance, which are presented in our income statement as components of noninterest income are as follows:
•
Service charges on deposit accounts - represents fees generated from a variety of deposit products and services provided to customers under a day-to-day contract. These fees are recognized on a daily or monthly basis.
•
Wealth management revenue - represents monthly fees earned from directing, holding, and managing customers’ assets. Revenue is recognized over regular intervals, either monthly or quarterly.
•
Card services revenue - represents revenue earned from merchant, debit and credit cards as incurred and includes a contra revenue account for rebates.
•
Gain on sale of other real estate - represents income recognized at delivery of control of a property at the time of a real estate closing.

Income Taxes

The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Cuts and Jobs Act of 2017 (“Tax Act”). SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. The Company has recorded amounts based on the information known and reasonable estimates used as of March 31, 2018, but are subject to change based on a number of factors. The Company will complete its analysis of certain tax positions at the time it files its tax returns for the year ended December 31, 2017 and will be able to conclude if any further adjustments to the provisional estimate of the impact recorded is required.


NOTE 2 - EARNINGS PER SHARE

Basic earnings per common share data is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Common shares outstanding include common stock and restricted stock awards where recipients have satisfied the vesting terms. Diluted earnings per common share gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method.

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)
2018
 
2017
Net income as reported
$
20,921

 
$
12,391

 
 
 
 
Weighted average common shares outstanding
23,115

 
21,928

Additional dilutive common stock equivalents
172

 
381

Weighted average diluted common shares outstanding
23,287

 
22,309

 
 
 
 
Basic earnings per common share:
$
0.91

 
$
0.57

Diluted earnings per common share:
$
0.90

 
$
0.56


For the three months ended March 31, 2018 and 2017, there were no common stock equivalents excluded from the earnings per share calculations because their effect would have been 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, 2018
(in thousands)
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair Value
Available for sale securities:
 
 
 
 
 
 
 
Obligations of U.S. Government-sponsored enterprises
$
99,890

 
$
—

 
$
(1,698
)
 
$
98,192

Obligations of states and political subdivisions
32,611

 
386

 
(209
)
 
32,788

Agency mortgage-backed securities
524,738

 
360

 
(13,713
)
 
511,385

U.S. Treasury bills
9,955

 
—

 
(48
)
 
9,907

          Total securities available for sale
$
667,194

 
$
746

 
$
(15,668
)
 
$
652,272

Held to maturity securities:
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
12,552

 
$
7

 
$
(241
)
 
$
12,318

Agency mortgage-backed securities
58,027

 
—

 
(1,579
)
 
56,448

          Total securities held to maturity
$
70,579

 
$
7


$
(1,820
)

$
68,766


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

 
$
6

 
$
(660
)
 
$
99,224

    Obligations of states and political subdivisions
34,181

 
674

 
(213
)
 
34,642

    Agency mortgage-backed securities
513,082

 
727

 
(6,293
)
 
507,516

          Total securities available for sale
$
647,141

 
$
1,407

 
$
(7,166
)
 
$
641,382

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

 
$
69

 
$
(46
)
 
$
14,054

   Agency mortgage-backed securities
59,718

 
16

 
(330
)
 
59,404

          Total securities held to maturity
$
73,749

 
$
85

 
$
(376
)
 
$
73,458


At March 31, 2018, and December 31, 2017, there were no holdings of securities of any one issuer in an amount greater than 10% of shareholders’ equity, other than U.S. Government agencies and sponsored enterprises. The agency mortgage-backed securities are all issued by U.S. Government-sponsored enterprises. Securities having a fair value of $401.1 million and $500.0 million at March 31, 2018, and December 31, 2017, respectively, were pledged as collateral to secure deposits of public institutions and for other purposes as required by law or contract provisions.


8


The amortized cost and estimated fair value of debt securities at March 31, 2018, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The weighted average life of the mortgage-backed securities is approximately 5 years.
 
 
Available for sale
 
Held to maturity
(in thousands)
Amortized Cost
 
Estimated Fair Value
 
Amortized Cost
 
Estimated Fair Value
Due in one year or less
$
2,404

 
$
2,419

 
$
—

 
$
—

Due after one year through five years
120,488

 
118,875

 
865

 
858

Due after five years through ten years
14,514

 
14,647

 
10,820

 
10,613

Due after ten years
5,050

 
4,946

 
867

 
847

Agency mortgage-backed securities
524,738

 
511,385

 
58,027

 
56,448

 
$
667,194

 
$
652,272


$
70,579


$
68,766



The following table represents a summary of investment securities that had an unrealized loss:
 
 
March 31, 2018
Less than 12 months
 
12 months or more
 
Total
(in thousands)
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Obligations of U.S. Government-sponsored enterprises
$
98,192

 
$
1,698

 
$
—

 
$
—

 
$
98,192

 
$
1,698

Obligations of states and political subdivisions
23,766

 
423

 
361

 
27

 
24,127

 
450

Agency mortgage-backed securities
408,153

 
10,017

 
121,046

 
5,275

 
529,199

 
15,292

U.S. Treasury bills
9,907

 
48

 
—

 
—

 
9,907

 
48

 
$
540,018

 
$
12,186


$
121,407


$
5,302


$
661,425


$
17,488

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
Less than 12 months
 
12 months or more
 
Total
(in thousands)
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Obligations of U.S. Government-sponsored enterprises
$
89,309

 
$
660

 
$
—

 
$
—

 
$
89,309

 
$
660

Obligations of states and political subdivisions
13,951

 
259

 
—

 
—

 
13,951

 
259

Agency mortgage-backed securities
469,655

 
6,034

 
12,229

 
589

 
481,884

 
6,623

 
$
572,915

 
$
6,953


$
12,229


$
589


$
585,144


$
7,542



The unrealized losses at both March 31, 2018, and December 31, 2017, were primarily attributable to changes in market interest rates since the securities were purchased. Management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. This analysis requires management to consider various factors, which include among other considerations (1) the present value of the cash flows expected to be collected compared to the amortized cost of the security, (2) duration and magnitude of the decline in value, (3) the financial condition of the issuer or issuers, (4) structure of the security, and (5) the intent to sell the security or whether it is more likely than not the Company would be required to sell the security before its anticipated recovery in market value. At March 31, 2018, management performed its quarterly analysis of all securities with an unrealized loss and concluded no individual securities were other-than-temporarily impaired.
NOTE 4 - LOANS

The loan portfolio is comprised of loans originated by the Company and loans that were acquired in connection with the Company’s acquisitions. These loans are accounted for using the guidance in the Accounting Standards Codification (ASC) section 310-30 and 310-20. Loans accounted for using ASC 310-30 are sometimes referred to as purchased credit impaired ("PCI") loans.
 
The table below shows the loan portfolio composition including carrying value by segment of loans accounted for at amortized cost, which includes our originated loans, and loans accounted for as PCI. 

(in thousands)

March 31, 2018
 
December 31, 2017
Loans accounted for at amortized cost
$
4,124,239

 
$
4,022,896

Loans accounted for as PCI
66,606

 
74,154

Total loans
$
4,190,845

 
$
4,097,050


The following tables refer to loans not accounted for as PCI loans.

Below is a summary of loans by category at March 31, 2018 and December 31, 2017:
 
(in thousands)
March 31, 2018
 
December 31, 2017
Commercial and industrial
$
1,981,684

 
$
1,918,720

Real estate:
 
 
 
Commercial - investor owned
811,244

 
769,275

Commercial - owner occupied
568,773

 
554,589

Construction and land development
306,824

 
303,091

Residential
328,192

 
341,312

Total real estate loans
2,015,033

 
1,968,267

Consumer and other
128,436

 
137,234

Loans, before unearned loan fees
4,125,153

 
4,024,221

Unearned loan fees, net
(914
)
 
(1,325
)
    Loans, including unearned loan fees
$
4,124,239

 
$
4,022,896


A summary of the activity in the allowance for loan losses and the recorded investment in loans by class and category based on impairment methodology through March 31, 2018, and at December 31, 2017, is as follows:

(in thousands)
Commercial and industrial
 
CRE - investor owned
 
CRE -
owner occupied
 
Construction and land development
 
Residential real estate
 
Consumer and other
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
$
26,406

 
$
3,890

 
$
3,308

 
$
1,487

 
$
2,237

 
$
838

 
$
38,166

Provision (provision reversal) for loan losses
780

 
648

 
190

 
35

 
259

 
(41
)
 
1,871

Losses charged off
(732
)
 
—

 
—

 
—

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

 
8

 
4

 
206

 
73

 
14

 
1,261

Balance at March 31, 2018
$
27,410

 
$
4,546


$
3,502


$
1,728


$
2,315


$
762


$
40,263


9


(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, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses - Ending balance:
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
2,794

 
$
—

 
$
99

 
$
—

 
$
—

 
$
—

 
$
2,893

Collectively evaluated for impairment
24,616

 
4,546

 
3,403

 
1,728

 
2,315

 
762

 
37,370

Total
$
27,410

 
$
4,546


$
3,502


$
1,728


$
2,315


$
762


$
40,263

Loans - Ending balance:
 
 
 
 
 
 
 

 
 
 
 
 
 
Individually evaluated for impairment
$
12,313

 
$
416

 
$
2,198

 
$
—

 
$
1,777

 
$
325

 
$
17,029

Collectively evaluated for impairment
1,969,371

 
810,828

 
566,575

 
306,824

 
326,415

 
127,197

 
4,107,210

Total
$
1,981,684

 
$
811,244


$
568,773


$
306,824


$
328,192


$
127,522


$
4,124,239

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

 
$
—

 
$
71

 
$
—

 
$
—

 
$
—

 
$
2,579

Collectively evaluated for impairment
23,898

 
3,890

 
3,237

 
1,487

 
2,237

 
838

 
35,587

Total
$
26,406

 
$
3,890


$
3,308


$
1,487


$
2,237


$
838


$
38,166

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

 
$
422

 
$
1,975

 
$
136

 
$
1,602

 
$
375

 
$
17,175

Collectively evaluated for impairment
1,906,055

 
768,853

 
552,614

 
302,955

 
339,710

 
135,534

 
4,005,721

Total
$
1,918,720

 
$
769,275


$
554,589


$
303,091


$
341,312


$
135,909


$
4,022,896


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

 
March 31, 2018
(in thousands)
Unpaid
Contractual
Principal Balance
 
Recorded
Investment
With No Allowance
 
Recorded
Investment
With
Allowance
 
Total
Recorded Investment
 
Related Allowance
 
Average
Recorded Investment
Commercial and industrial
$
21,353

 
$
2,470

 
$
9,843

 
$
12,313

 
$
2,794

 
$
13,278

Real estate:
 
 
 
 
 
 
 
 
 
 
 
    Commercial - investor owned
558

 
416

 
—

 
416

 
—

 
418

    Commercial - owner occupied
755

 
267

 
484

 
751

 
99

 
753

    Construction and land development
—

 
—

 
—

 
—

 
—

 
—

    Residential
2,103

 
1,777

 
—

 
1,777

 
—

 
1,985

Consumer and other
325

 
325

 
—

 
325

 
—

 
341

Total
$
25,094

 
$
5,255


$
10,327


$
15,582


$
2,893


$
16,775


 
December 31, 2017
(in thousands)
Unpaid
Contractual
Principal Balance
 
Recorded
Investment
With No Allowance
 
Recorded
Investment
With
Allowance
 
Total
Recorded Investment
 
Related Allowance
 
Average
Recorded Investment
Commercial and industrial
$
20,750

 
$
2,321

 
$
10,344

 
$
12,665

 
$
2,508

 
$
16,270

Real estate:
 
 
 
 
 
 
 
 
 
 
 
    Commercial - investor owned
560

 
422

 
—

 
422

 
—

 
521

    Commercial - owner occupied
487

 
—

 
487

 
487

 
71

 
490

    Construction and land development
441

 
136

 
—

 
136

 
—

 
331

    Residential
1,730

 
1,602

 
—

 
1,602

 
—

 
1,735

Consumer and other
375

 
375

 
—

 
375

 
—

 
375

Total
$
24,343

 
$
4,856


$
10,831


$
15,687


$
2,579


$
19,722



10


 
Three months ended March 31,
(in thousands)
2018
 
2017
Total interest income that would have been recognized under original terms
$
534

 
$
315

Total cash received and recognized as interest income on non-accrual loans
11

 
23

Total interest income recognized on accruing, impaired loans
11

 
33


The recorded investment in nonperforming loans by category at March 31, 2018 and December 31, 2017, is as follows: 
 
March 31, 2018
(in thousands)
Non-accrual
 
Restructured, not on non-accrual
 
Total
Commercial and industrial
$
11,589

 
$
724

 
$
12,313

Real estate:
 
 
 
 
 
    Commercial - investor owned
416

 
—

 
416

    Commercial - owner occupied
751

 
—

 
751

    Construction and land development
—

 
—

 
—

    Residential
1,777

 
—

 
1,777

Consumer and other
325

 
—

 
325

       Total
$
14,858

 
$
724


$
15,582


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

 
$
719

 
$
12,665

Real estate:
 
 
 
 
 
    Commercial - investor owned
422

 
—

 
422

    Commercial - owner occupied
487

 
—

 
487

    Construction and land development
136

 
—

 
136

    Residential
1,602

 
—

 
1,602

Consumer and other
375

 
—

 
375

       Total
$
14,968

 
$
719

 
$
15,687


At March 31, 2018, loans over 90 days past due and still accruing interest totaled $0.3 million. There were no loans over 90 days past due and still accruing interest at December 31, 2017.

There were no portfolio loans restructured during the three months ended March 31, 2018 and 2017.

As of March 31, 2018, the Company had $1.9 million in specific reserves allocated to $8.1 million of loans that have been restructured. During the three months ended March 31, 2018 and 2017, there were no portfolio loans that subsequently defaulted.


11


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

 
March 31, 2018
(in thousands)
30-89 Days
 Past Due
 
90 or More
Days
Past Due
 
Total
Past Due
 
Current
 
Total
Commercial and industrial
$
3,669

 
$
5,150

 
$
8,819

 
$
1,972,865

 
$
1,981,684

Real estate:
 
 
 
 
 
 
 
 
 
Commercial - investor owned
—

 
—

 
—

 
811,244

 
811,244

Commercial - owner occupied
945

 
—

 
945

 
567,828

 
568,773

Construction and land development
497

 
—

 
497

 
306,327

 
306,824

Residential
401

 
1,026

 
1,427

 
326,765

 
328,192

Consumer and other
—

 
325

 
325

 
127,197

 
127,522

Total
$
5,512

 
$
6,501


$
12,013


$
4,112,226


$
4,124,239


 
December 31, 2017
(in thousands)
30-89 Days
 Past Due
 
90 or More
Days
Past Due
 
Total
Past Due
 
Current
 
Total
Commercial and industrial
$
7,882

 
$
1,770

 
$
9,652

 
$
1,909,068

 
$
1,918,720

Real estate:
 
 
 
 
 
 
 
 
 
Commercial - investor owned
934

 
—

 
934

 
768,341

 
769,275

Commercial - owner occupied
—

 
—

 
—

 
554,589

 
554,589

Construction and land development
76

 
—

 
76

 
303,015

 
303,091

Residential
1,529

 
945

 
2,474

 
338,838

 
341,312

Consumer and other
407

 
—

 
407

 
135,502

 
135,909

Total
$
10,828

 
$
2,715


$
13,543


$
4,009,353


$
4,022,896


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.

12


•
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 loans by portfolio class and category at March 31, 2018, which is based upon the most recent analysis performed, and December 31, 2017 is as follows:

 
March 31, 2018
(in thousands)
Pass (1-6)
 
Watch (7)
 
Substandard (8)
 
Total
Commercial and industrial
$
1,823,444

 
$
99,251

 
$
58,989

 
$
1,981,684

Real estate:
 
 
 
 
 
 
 
Commercial - investor owned
784,937

 
21,371

 
4,936

 
811,244

Commercial - owner occupied
534,493

 
28,834

 
5,446

 
568,773

Construction and land development
295,632

 
10,989

 
203

 
306,824

Residential
317,750

 
2,606

 
7,836

 
328,192

Consumer and other
126,394

 
9

 
1,119

 
127,522

Total
$
3,882,650

 
$
163,060

 
$
78,529

 
$
4,124,239


 
December 31, 2017
(in thousands)
Pass (1-6)
 
Watch (7)
 
Substandard (8)
 
Total
Commercial and industrial
$
1,769,102

 
$
94,002

 
$
55,616

 
$
1,918,720

Real estate:
 
 
 
 
 
 
 
Commercial - investor owned
754,010

 
10,840

 
4,425

 
769,275

Commercial - owner occupied
514,616

 
34,440

 
5,533

 
554,589

Construction and land development
292,766

 
9,983

 
342

 
303,091

Residential
329,742

 
3,648

 
7,922

 
341,312

Consumer and other
134,704

 
10

 
1,195

 
135,909

Total
$
3,794,940

 
$
152,923


$
75,033


$
4,022,896



13


Below is a summary of PCI loans by category at March 31, 2018 and December 31, 2017:
 
 
March 31, 2018
 
December 31, 2017
(in thousands)
Weighted-
Average
Risk Rating1
Recorded
Investment
PCI Loans
 
Weighted-
Average
Risk Rating1
Recorded
Investment
PCI Loans
Commercial and industrial
6.35
$
2,966

 
6.38
$
3,212

Real estate:
 
 
 
 
 
Commercial - investor owned
7.26
37,137

 
7.36
42,887

Commercial - owner occupied
6.39
10,886

 
6.48
11,332

Construction and land development
6.04
5,553

 
5.99
5,883

Residential
6.02
10,008

 
5.99
10,781

Consumer and other
2.76
56

 
2.84
59

Total
 
$
66,606

 
 
$
74,154

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, 2018 and December 31, 2017 is shown below:

 
March 31, 2018
(in thousands)
30-89 Days
 Past Due
 
90 or More
Days
Past Due
 
Total
Past Due
 
Current
 
Total
Commercial and industrial
$
—

 
$
—

 
$
—

 
$
2,966

 
$
2,966

Real estate:
 
 
 
 
 
 
 
 
 
Commercial - investor owned
944

 
—

 
944

 
36,193

 
37,137

Commercial - owner occupied
—

 
665

 
665

 
10,221

 
10,886

Construction and land development
88

 
—

 
88

 
5,465

 
5,553

Residential
84

 
294

 
378

 
9,630

 
10,008

Consumer and other
—

 
—

 
—

 
56

 
56

Total
$
1,116

 
$
959


$
2,075


$
64,531


$
66,606


 
December 31, 2017
(in thousands)
30-89 Days
 Past Due
 
90 or More
Days
Past Due
 
Total
Past Due
 
Current
 
Total
Commercial and industrial
$
—

 
$
—

 
$
—

 
$
3,212

 
$
3,212

Real estate:
 
 
 
 
 
 
 
 
 
Commercial - investor owned
—

 
3,034

 
3,034

 
39,853

 
42,887

Commercial - owner occupied
—

 
673

 
673

 
10,659

 
11,332

Construction and land development
—

 
—

 
—

 
5,883

 
5,883

Residential
328

 
255

 
583

 
10,198

 
10,781

Consumer and other
—

 
—

 
—

 
59

 
59

Total
$
328

 
$
3,962


$
4,290


$
69,864


$
74,154



14


The following table is a roll forward of PCI loans, net of the allowance for loan losses, for the three months ended March 31, 2018 and 2017.

(in thousands)
Contractual Cashflows
 
Non-accretable Difference
 
Accretable Yield
 
Carrying Amount
Balance December 31, 2017
$
112,710

 
$
29,005