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Section 1: 10-Q (10-Q)

Document
UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-20293
UNION BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
Virginia
54-1598552
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
 1051 East Cary Street
Suite 1200
Richmond, Virginia 23219
(Address of principal executive offices) (Zip Code)
 
(804) 633-5031
(Registrant’s telephone number, including area code)
 
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 (or for such shorter period that the registrant was required to file such reports), 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 every Interactive Data File required to be submitted 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.) 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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨
 
 
 
Smaller reporting company
¨
 
 
Emerging growth company
¨

If an emerging growth company, indicate by check mark if the registrant has elected not 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

The number of shares of common stock outstanding as of October 31, 2018 was 65,983,874.



UNION BANKSHARES CORPORATION
FORM 10-Q
INDEX
 
ITEM
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 






Glossary of Acronyms and Defined Terms
 
2017 Form 10-K
Annual Report on Form 10-K for the year ended December 31, 2017
Access
Access National Corporation
AFS
Available for sale
ALCO
Asset Liability Committee
ALL
Allowance for loan losses
AOCI
Accumulated other comprehensive income (loss)
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
ATM
Automated teller machine
the Bank
Union Bank & Trust
BOLI
Bank-owned life insurance
bps
Basis points
CECL
Current expected credit losses
the Company
Union Bankshares Corporation and its subsidiaries
DHFB
Dixon, Hubard, Feinour, & Brown, Inc.
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
EPS
Earnings per share
Exchange Act
Securities Exchange Act of 1934, as amended
FASB
Financial Accounting Standards Board
FDIC
Federal Deposit Insurance Corporation
Federal Reserve
Board of Governors of the Federal Reserve System
Federal Reserve Act
Federal Reserve Act of 1913, as amended
Federal Reserve Bank
 
Federal Reserve Bank of Richmond
FHLB
Federal Home Loan Bank of Atlanta
FTE
Fully taxable equivalent
U.S. GAAP or GAAP
Accounting principles generally accepted in the United States
HELOC
Home equity line of credit
HTM
Held to maturity
IDC
Interactive Data Corporation
LIBOR
London Interbank Offered Rate
MD&A
Management's Discussion and Analysis of Financial Condition and Results of Operations
NOW
Negotiable order of withdrawal
NPA
Nonperforming assets
OAL
Outfitter Advisors, Ltd.
OCI
Other comprehensive income
ODCM
Old Dominion Capital Management, Inc.
OREO
Other real estate owned
OTTI
Other than temporary impairment
PCI
Purchased credit impaired
ROA
Return on average assets
ROE
Return on average common equity
ROTCE
Return on average tangible common equity
SEC
Securities and Exchange Commission
Securities Act
Securities Act of 1933, as amended
Shore Premier
Shore Premier Finance, a division of the Bank
Shore Premier sale
The sale of substantially all of the assets and certain specific liabilities of Shore Premier
Tax Act
Tax Cuts and Jobs Act of 2017
TDR
Troubled debt restructuring
TFSB
The Federal Savings Bank
UMG
Union Mortgage Group, Inc.
Xenith
Xenith Bankshares, Inc.



PART I – FINANCIAL INFORMATION
 
ITEM 1 – FINANCIAL STATEMENTS
 
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands, except share data)
 
September 30,
2018
 
December 31,
2017
ASSETS
 

 
 

Cash and cash equivalents:
 

 
 

Cash and due from banks
$
143,693

 
$
117,586

Interest-bearing deposits in other banks
130,098

 
81,291

Federal funds sold
8,421

 
496

Total cash and cash equivalents
282,212

 
199,373

Securities available for sale, at fair value
1,883,141

 
974,222

Securities held to maturity, at carrying value
235,333

 
199,639

Marketable equity securities, at fair value
27,375

 

Restricted stock, at cost
112,390

 
75,283

Net loans held for investment
9,411,598

 
7,141,552

Less allowance for loan losses
41,294

 
38,208

Total loans held for investment, net of deferred fees
9,370,304

 
7,103,344

Premises and equipment, net
155,001

 
119,604

Goodwill
727,699

 
298,528

Amortizable intangibles, net
51,563

 
14,803

Bank owned life insurance
261,874

 
182,854

Other assets
262,716

 
102,871

Assets of discontinued operations
2,134

 
44,658

Total assets
$
13,371,742

 
$
9,315,179

LIABILITIES
 

 
 

Noninterest-bearing demand deposits
$
2,189,887

 
$
1,502,208

Interest-bearing deposits
7,644,808

 
5,489,510

Total deposits
9,834,695

 
6,991,718

Securities sold under agreements to repurchase
40,624

 
49,152

Other short-term borrowings
1,016,250

 
745,000

Long-term borrowings
497,768

 
425,262

Other liabilities
99,757

 
54,008

Liabilities of discontinued operations
2,619

 
3,710

Total liabilities
11,491,713

 
8,268,850

Commitments and contingencies (Note 7)


 


STOCKHOLDERS' EQUITY
 

 
 

Common stock, $1.33 par value, shares authorized 100,000,000; issued and outstanding shares at September 30, 2018 and December 31, 2017, 65,982,669 and 43,743,318, respectively.
87,192

 
57,744

Additional paid-in capital
1,378,940

 
610,001

Retained earnings
438,513

 
379,468

Accumulated other comprehensive income (loss)
(24,616
)
 
(884
)
Total stockholders' equity
1,880,029

 
1,046,329

Total liabilities and stockholders' equity
$
13,371,742

 
$
9,315,179

See accompanying notes to consolidated financial statements.

-2-


UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands, except share and per share data)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
Interest and dividend income:
 
 
 
 
 
 
 
Interest and fees on loans
$
115,817

 
$
75,597

 
$
348,009

 
$
215,797

Interest on deposits in other banks
492

 
181

 
1,815

 
367

Interest and dividends on securities:
 
 
 
 
 
 
 
Taxable
10,145

 
5,175

 
25,229

 
15,081

Nontaxable
4,909

 
3,546

 
13,098

 
10,620

Total interest and dividend income
131,363

 
84,499

 
388,151

 
241,865

Interest expense:
 
 
 
 
 
 
 
Interest on deposits
15,928

 
7,234

 
40,187

 
18,410

Interest on short-term borrowings
3,379

 
1,871

 
12,794

 
4,221

Interest on long-term borrowings
6,093

 
4,547

 
17,568

 
13,316

Total interest expense
25,400

 
13,652

 
70,549

 
35,947

Net interest income
105,963

 
70,847

 
317,602

 
205,918

Provision for credit losses
3,340

 
3,056

 
9,011

 
7,344

Net interest income after provision for credit losses
102,623

 
67,791

 
308,591

 
198,574

Noninterest income:
 
 
 
 
 

 
 

Service charges on deposit accounts
6,483

 
4,795

 
18,566

 
13,924

Other service charges and fees
1,625

 
1,131

 
4,137

 
3,391

Interchange fees, net
4,882

 
3,756

 
14,163

 
11,205

Fiduciary and asset management fees
4,411

 
2,794

 
11,507

 
8,313

Gains (losses) on securities transactions, net
97

 
184

 
222

 
782

Bank owned life insurance income
1,732

 
1,377

 
5,126

 
4,837

Loan-related interest rate swap fees
562

 
416

 
2,178

 
2,627

Gain on Shore Premier sale
(933
)
 

 
19,966

 

Other operating income
1,028

 
777

 
4,887

 
2,226

Total noninterest income
19,887

 
15,230

 
80,752

 
47,305

Noninterest expenses:
 
 
 
 
 

 
 

Salaries and benefits
39,279

 
28,187

 
120,797

 
87,740

Occupancy expenses
6,551

 
4,678

 
18,778

 
13,783

Furniture and equipment expenses
2,983

 
2,454

 
9,024

 
7,518

Printing, postage, and supplies
1,183

 
1,139

 
3,525

 
3,664

Communications expense
872

 
796

 
2,976

 
2,567

Technology and data processing
4,841

 
4,148

 
13,722

 
11,793

Professional services
2,875

 
1,948

 
8,101

 
5,611

Marketing and advertising expense
3,109

 
1,931

 
7,834

 
5,933

FDIC assessment premiums and other insurance
1,363

 
1,141

 
5,430

 
2,793

Other taxes
2,878

 
2,022

 
8,660

 
6,065

Loan-related expenses
1,939

 
1,193

 
5,097

 
3,484

OREO and credit-related expenses
452

 
1,139

 
3,106

 
2,023

Amortization of intangible assets
3,490

 
1,480

 
9,885

 
4,661

Training and other personnel costs
1,024

 
861

 
3,155

 
2,829

Merger-related costs
1,429

 
732

 
37,414

 
3,476

Other expenses
2,081

 
1,355

 
5,730

 
3,931

Total noninterest expenses
76,349

 
55,204

 
263,234

 
167,871

Income from continuing operations before income taxes
46,161

 
27,817

 
126,109

 
78,008

Income tax expense
7,399

 
7,397

 
20,973

 
20,924

Income from continuing operations
38,762

 
20,420

 
105,136

 
57,084


-3-


 
Three Months Ended
 
Nine Months Ended
 
September 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
Discontinued operations:
 
 
 
 
 
 
 
Income (loss) from operations of discontinued mortgage segment
(761
)
 
371

 
(3,768
)
 
1,021

Income tax expense (benefit)
(196
)
 
133

 
(795
)
 
368

Income (loss) on discontinued operations
(565
)
 
238

 
(2,973
)
 
653

Net income
$
38,197

 
$
20,658

 
$
102,163

 
$
57,737

Basic earnings per common share
$
0.58

 
$
0.47

 
$
1.55

 
$
1.32

Diluted earnings per common share
$
0.58

 
$
0.47

 
$
1.55

 
$
1.32

Dividends declared per common share
$
0.23

 
$
0.20

 
$
0.65

 
$
0.60

Basic weighted average number of common shares outstanding
65,974,702

 
43,706,635

 
65,817,668

 
43,685,045

Diluted weighted average number of common shares outstanding
66,013,152

 
43,792,058

 
65,873,202

 
43,767,502


See accompanying notes to consolidated financial statements.











-4-


UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Dollars in thousands)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Net income
$
38,197

 
$
20,658

 
$
102,163

 
$
57,737

Other comprehensive income (loss):
 

 
 

 
 

 
 

Cash flow hedges:
 
 
 
 
 
 
 
Change in fair value of cash flow hedges
575

 
41

 
3,214

 
(766
)
Reclassification adjustment for losses included in net income (net of tax, $60 and $102 for the three months and $205 and $370 for the nine months ended September 30, 2018 and 2017, respectively) (1)
227

 
189

 
770

 
688

AFS securities:
 

 
 
 
 

 
 
Unrealized holding gains (losses) arising during period (net of tax, $3,007 and $1,470 for the three months and $7,200 and $3,195 for the nine months ended September 30, 2018 and 2017, respectively)
(11,310
)
 
(2,729
)
 
(27,087
)
 
5,935

Reclassification adjustment for losses (gains) included in net income (net of tax, $20 and $64 for the three months and $46 and $274 for the nine months ended September 30, 2018 and 2017, respectively) (2)
(77
)
 
(119
)
 
(176
)
 
(508
)
HTM securities:
 

 
 
 
 

 
 
Reclassification adjustment for accretion of unrealized gain on AFS securities transferred to HTM (net of tax, $1 and $88 for the three months and $107 and $273 for the nine months ended September 30, 2018 and 2017, respectively) (3)
(5
)
 
(163
)
 
(403
)
 
(507
)
Bank owned life insurance:
 
 
 
 
 
 
 
  Reclassification adjustment for losses included in net income (4)
19

 
84

 
57

 
278

Other comprehensive income (loss)
(10,571
)
 
(2,697
)
 
(23,625
)
 
5,120

Comprehensive income
$
27,626

 
$
17,961

 
$
78,538

 
$
62,857


(1) The gross amounts reclassified into earnings are reported in the interest income and interest expense sections of the Company's Consolidated Statements of Income with the corresponding income tax effect being reflected as a component of income tax expense.
(2) The gross amounts reclassified into earnings are reported as "Gains (losses) on securities transactions, net" on the Company's Consolidated Statements of Income with the corresponding income tax effect being reflected as a component of income tax expense.
(3) The gross amounts reclassified into earnings are reported within interest income on the Company's Consolidated Statements of Income with the corresponding income tax effect being reflected as a component of income tax expense.
(4) Reclassifications in earnings are reported in "Salaries and benefits" expense on the Company's Consolidated Statements of Income.

See accompanying notes to consolidated financial statements.

-5-


UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
(Dollars in thousands, except share and per share amounts)
 
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
 
 
 
 
 
 
 
 
 
 
Balance - December 31, 2016
$
57,506

 
$
605,397

 
$
341,938

 
$
(3,809
)
 
$
1,001,032

Net income - 2017
 

 
 

 
57,737

 
 

 
57,737

Other comprehensive income (net of taxes of $3,018)
 

 
 

 
 

 
5,120

 
5,120

Dividends on common stock ($0.60 per share)
 

 
 

 
(26,207
)
 
 

 
(26,207
)
Issuance of common stock under Equity Compensation Plans (58,421 shares)
78

 
891

 
 

 
 

 
969

Issuance of common stock for services rendered (16,529 shares)
22

 
539

 
 

 
 

 
561

Vesting of restricted stock, net of shares held for taxes, under Equity Compensation Plans (76,505 shares)
102

 
(1,415
)
 
 

 
 

 
(1,313
)
Stock-based compensation expense
 

 
3,472

 
 

 
 

 
3,472

Balance - September 30, 2017
$
57,708

 
$
608,884

 
$
373,468

 
$
1,311

 
$
1,041,371

 
 
 
 
 
 
 
 
 
 
Balance - December 31, 2017
$
57,744

 
$
610,001

 
$
379,468

 
$
(884
)
 
$
1,046,329

Net income - 2018
 

 
 

 
102,163

 
 

 
102,163

Other comprehensive income (net of taxes of $7,148)
 

 
 

 
 

 
(23,625
)
 
(23,625
)
Issuance of common stock in regard to acquisitions (21,922,077 shares)(1)
29,156

 
765,653

 
 
 
 
 
794,809

Dividends on common stock ($0.65 per share)
 

 
 

 
(42,825
)
 
 

 
(42,825
)
Issuance of common stock under Equity Compensation Plans (120,030 shares)
160

 
2,170

 
 

 
 

 
2,330

Issuance of common stock for services rendered (17,421 shares)
23

 
674

 
 

 
 

 
697

Vesting of restricted stock, net of shares held for taxes, under Equity Compensation Plans (81,832 shares)
109

 
(2,610
)
 
 

 
 

 
(2,501
)
Cancellation of warrants
 
 
(1,530
)
 
 
 
 
 
(1,530
)
Impact of adoption of new guidance
 
 
 
 
(293
)
 
(107
)
 
(400
)
Stock-based compensation expense
 

 
4,582

 
 

 
 

 
4,582

Balance - September 30, 2018
$
87,192

 
$
1,378,940

 
$
438,513

 
$
(24,616
)
 
$
1,880,029

(1) Includes conversion of Xenith warrants to the Company's warrants.
See accompanying notes to consolidated financial statements.

-6-


UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
(Dollar in thousands)
 
2018
 
2017
Operating activities (1):
 

 
 

Net income
$
102,163

 
$
57,737

Adjustments to reconcile net income to net cash and cash equivalents provided by (used in) operating activities:
 

 
 

Depreciation of premises and equipment
10,411

 
8,307

Writedown of foreclosed properties and former bank premises
1,184

 
845

Amortization, net
9,333

 
10,500

Amortization (accretion) related to acquisitions, net
(6,014
)
 
(158
)
Provision for credit losses
8,830

 
7,345

Gains on securities transactions, net
(222
)
 
(782
)
BOLI income
(5,126
)
 
(3,999
)
Decrease (increase) in loans held for sale, net
40,302

 
5,591

Losses (gains) on sales of foreclosed properties and former bank premises, net
(413
)
 
83

Gain on Shore Premier sale
(19,966
)
 

Goodwill impairment losses
864

 

Stock-based compensation expenses
4,582

 
3,472

Issuance of common stock for services
697

 
561

Net decrease (increase) in other assets
(16,270
)
 
4,952

Net increase in other liabilities
16,283

 
909

Net cash and cash equivalents provided by (used in) operating activities
146,638

 
95,363

Investing activities:
 

 
 

Purchases of AFS securities and restricted stock
(926,764
)
 
(205,965
)
Purchases of HTM securities
(228,104
)
 
(7,836
)
Proceeds from sales of AFS securities and restricted stock
337,109

 
91,911

Proceeds from maturities, calls and paydowns of AFS securities
117,813

 
88,675

Proceeds from maturities, calls and paydowns of HTM securities

 
818

Proceeds from sale of loans held for investment
581,324

 

Net increase in loans held for investment
(397,725
)
 
(594,967
)
Net increase in premises and equipment
(4,334
)
 
(7,139
)
Proceeds from BOLI settlements

 
2,497

Proceeds from sales of foreclosed properties and former bank premises
3,617

 
1,028

Cash paid in acquisitions
(14,284
)
 

Cash acquired in acquisitions
174,515

 

Net cash and cash equivalents provided by (used in) investing activities
(356,833
)
 
(630,978
)
Financing activities:
 

 
 

Net increase in noninterest-bearing deposits
176,308

 
141,524

Net increase in interest-bearing deposits
119,095

 
360,813

Net increase (decrease) in short-term borrowings
27,722

 
40,556

Cash paid for contingent consideration
(565
)
 
(3,003
)
Proceeds from issuance of long-term debt
25,000

 
20,000

Repayments of long-term debt
(10,000
)
 

Cash dividends paid - common stock
(42,825
)
 
(26,207
)
Cancellation of warrants
(1,530
)
 

Issuance of common stock
2,330

 
969

Vesting of restricted stock, net of shares held for taxes
(2,501
)
 
(1,313
)
Net cash and cash equivalents provided by (used in) financing activities
293,034

 
533,339

Increase (decrease) in cash and cash equivalents
82,839

 
(2,276
)
Cash and cash equivalents at beginning of the period
199,373

 
179,237

Cash and cash equivalents at end of the period
$
282,212

 
$
176,961




-7-



UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
(Dollars in thousands)
 
2018
 
2017
Supplemental Disclosure of Cash Flow Information
 
 
 
Cash payments for:
 
 
 
Interest
$
67,214

 
$
33,947

Income taxes
10,830

 
19,600

 
 
 
 
Supplemental schedule of noncash investing and financing activities
 
 
 
Transfers from loans (foreclosed properties) to foreclosed properties (loans)
106

 
585

Stock received as consideration for sale of loans held for investment
28,913

 

Securities transferred from HTM to AFS
187,425

 

Issuance of common stock in exchange for net assets in acquisitions
794,809

 

 
 
 
 
Transactions related to acquisitions
 
 
 
Assets acquired
3,252,377

 

Liabilities assumed (2)
2,873,318

 

(1) Discontinued operations have an immaterial impact to the Company's Consolidated Statement of Cash Flows. The change in loans held for sale and goodwill impairment losses included in the Operating Activities section above are fully attributable to discontinued operations.
(2) 2018 includes contingent consideration related to DHFB and OAL acquisitions.

See accompanying notes to consolidated financial statements.

-8-


UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

1. ACCOUNTING POLICIES

The Company
Headquartered in Richmond, Virginia, the Company is the holding company for the Bank which has 140 branches,
seven of which are operated as Xenith Bank, a division of Union Bank & Trust of Richmond, Virginia, and approximately 190 ATMs located throughout Virginia and in portions of Maryland and North Carolina. Non-bank affiliates of the Company include: ODCM, DHFB, and OAL, each of which both provide investment advisory services, and Union Insurance Group, LLC, which offers various lines of insurance products.

The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Significant inter-company accounts and transactions have been eliminated in consolidation.

The unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and follow general practice within the banking industry. Accordingly, the unaudited consolidated financial statements do not include all the information and footnotes required by U.S. GAAP for complete financial statements; however, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of the interim periods presented have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other period.
 
These unaudited consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company’s 2017 Form 10-K. Certain prior period amounts have been reclassified to conform to current period presentation.

Business Combinations and Divestitures
On January 1, 2018, the Company completed the acquisition of Xenith, a bank holding company based in Richmond, Virginia.

On April 1, 2018, the Bank completed its acquisition of DHFB, a Roanoke, Virginia-based investment advisory firm with approximately $600 million in assets under management and advisement at the time of acquisition. DHFB operates as a subsidiary of the Bank.

On July 1, 2018, ODCM, a subsidiary of the Bank completed its acquisition of OAL, a McLean, Virginia-based investment advisory firm with approximately $400 million in assets under management and advisement at the time of acquisition. OAL operates as a subsidiary of ODCM.

These transactions were accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition. The resulting goodwill from these transactions is not deductible for tax purposes.

Refer to Note 2 “Acquisitions" for further discussion on the Company's business combinations during the period.
On May 23, 2018, the Bank announced that it had entered into an agreement with a third party mortgage company, TFSB, to allow TFSB to offer residential mortgages from certain Bank locations on the terms and conditions set forth in the agreement. Concurrently with this arrangement, the Bank began the process of winding down the operations of UMG, the Company's reportable mortgage segment. Refer to Note 13 "Segment Reporting & Discontinued Operations" for further discussion of this agreement.
On June 29, 2018, the Bank entered into an agreement to sell substantially all of the assets and certain specific liabilities of Shore Premier, consisting primarily of marine loans totaling approximately $383.9 million, for a purchase price consisting of approximately $375.0 million in cash and 1,250,000 shares of the purchasing company's common stock. The purchasing company has agreed for a period of 30 days to pay additional cash consideration to the Company to the extent any sales of its common stock by the Company, following satisfaction of any required holding periods or other requirements under the Securities Act, are at prices lower than the agreed upon value at the time of entry into the agreement. The fair value of the purchasing company's common stock is evaluated quarterly and amounts that fall below the original purchase price are recorded as miscellaneous receivable on the Company's Consolidated Balance Sheets. At September 30, 2018, the fair value of

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the purchasing company's common stock was $27.4 million, which was included as "Marketable Equity Securities" in the Company's Consolidated Balance Sheet. The purchase of the loans was completed on June 29, 2018 and became effective at the end of the day on June 30, 2018. The sale generated an after-tax gain of approximately $15.8 million, net of transaction and other related costs. Refer to Note 3 "Securities" and Note 8 "Derivatives" for further discussion on the Shore Premier sale.

On June 29, 2018, the Bank sold approximately $206.3 million in consumer home improvement loans that had been originated through a third-party lending program. These loans were sold at par.

Affordable Housing Entities
The Company invests in private investment funds that make equity investments in multifamily affordable housing properties that provide affordable housing tax credits for these investments. The activities of these entities are financed with a combination of invested equity capital and debt. For the three and nine months ended September 30, 2018, the Company recognized amortization of $227,000 and $699,000, respectively, and tax credits of $275,000 and $839,000, respectively, associated with these investments within “Income tax expense” on the Company’s Consolidated Statements of Income. For the three and nine months ended September 30, 2017, the Company recognized amortization of $229,000 and $643,000, respectively, and tax credits of $240,000 and $724,000, respectively. The carrying value of the Company’s investments in these qualified affordable housing projects was $11.1 million and $11.0 million as of September 30, 2018 and December 31, 2017, respectively. At September 30, 2018 and December 31, 2017, the Company's recorded liability totaled $5.6 million and $7.3 million, respectively, for the related unfunded commitments, which are expected to be paid during the last quarter of 2018 or 2019.

Reclassifications
The accompanying unaudited consolidated financial statements and notes reflect reclassification of certain prior period amounts to conform to the current period presentation. The Company historically presented former bank premises and foreclosed properties as OREO; however, during the current quarter the Company segregated former bank premises and foreclosed properties due to the distinct differences underlying these assets. Foreclosed properties and former bank premises have been reclassified to "Other Assets" within the Company's Consolidated Balance Sheet for all periods presented.
 
Adoption of New Accounting Standards
On January 1, 2018, the Company adopted ASU No. 2014-09, “Revenue from Contracts with Customers: Topic 606” and all subsequent amendments to the ASU No. 2014-09 (“Topic 606”). This ASU revised guidance for the recognition, measurement, and disclosure of revenue from contracts with customers. The guidance, as amended, is applicable to all entities and replaces a significant portion of existing industry and transaction-specific revenue recognition rules with a more principles-based recognition model. Most revenue associated with financial instruments, including interest income, loan origination fees, and credit card fees, is outside the scope of the guidance. Gains and losses on investment securities, derivatives, and sales of financial instruments are similarly excluded from the scope. The Company adopted this ASU using the modified retrospective approach, which requires a cumulative effect adjustment to retained earnings as of the beginning of the reporting period in which the entity first applies the new guidance. The adoption of Topic 606 did not have a material impact on the Company’s consolidated financial results but did result in expanded disclosures related to noninterest income and enhanced qualitative disclosures on the revenues within the scope of the new guidance. Refer to Note 11 “Revenue" for further discussion on the Company's accounting policies for revenue sources within the scope of Topic 606.
On January 1, 2018, the Company adopted ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU requires an entity to, among other things: (i) measure equity investments at fair value through net income, with certain exceptions; (ii) present in OCI the changes in instrument-specific credit risk for financial liabilities measured using the fair value option; (iii) present financial assets and financial liabilities by measurement category and form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit price and; (v) assess a valuation allowance on deferred tax assets related to unrealized losses of AFS debt securities in combination with other deferred tax assets. This ASU provides an election to subsequently measure certain nonmarketable equity investments at cost less any impairment and adjusted for certain observable price changes. This ASU also requires a qualitative impairment assessment of such equity investments and amends certain fair value disclosure requirements. The adoption of ASU No. 2016-01 did not have a material impact on the Company’s consolidated financial statements and resulted in enhancements to the financial instrument disclosures.

On May 1, 2018, the Company early adopted ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” This ASU simplifies the application of the hedge accounting guidance and improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The targeted improvements in ASU No. 2017-12 allowed the Company a one-time transfer of certain debt securities from HTM to AFS. The Company adopted this ASU using the modified retrospective approach. As

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part of this adoption, the Company made a one-time election to transfer eligible HTM securities to the AFS category in order to optimize the investment portfolio management for capital and risk management considerations. The Company transferred HTM securities with a carrying amount of $187.4 million, which resulted in an increase of approximately $400,000 to AOCI. Refer to Note 3 "Securities" and Note 9 "Stockholders' Equity" for further discussion regarding the adoption.

On May 1, 2018, the Company early adopted ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU allows for a reclassification from AOCI to retained earnings for stranded tax effects resulting from the Tax Act and requires certain disclosures about the stranded tax effects. The Company reclassified approximately $107,000 from AOCI to retained earnings during the second quarter 2018. Refer to Note 9 "Stockholders' Equity" for further discussion regarding the adoption.

The net impact to retained earnings of the adoption of ASU No. 2017-12 and ASU No. 2018-02 was $293,000.

Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” This ASU requires lessees to put most leases on their balance sheets, but recognize expenses in the income statement in a manner similar to today’s accounting. This ASU also eliminates the real estate-specific provisions and changes the guidance on sale-leaseback transactions, initial direct costs, and lease executory costs for all entities. For lessors, this ASU modifies the classification criteria and the accounting for sales-type and direct financing leases. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company has implemented new lease systems in conjunction with the adoption. Management is progressing with implementation, including the review of service contracts for embedded leases, development of lease accounting policies, and evaluating potential new internal controls related to the implementation of this ASU. While the Company continues to evaluate this ASU and the effect of related disclosures, the primary effect of adoption will be to require recording right-of-use assets and corresponding lease obligations for current operating leases. Other implementation matters to be addressed include, but are not limited to, the determination of effects on the financial and capital ratios and the quantification of the impacts that this ASU will have on the Company's consolidated financial statements. Upon adoption, the Company expects to record a right of use asset and a corresponding lease liability for operating leases where the Company is the lessee. The potential impact to the Company’s consolidated financial statements is largely based on the present value of future minimum lease payments, the amount of which will depend upon the population of leases in effect at the date of adoption. Refer to Note 5 "Premises and Equipment” of the Company’s 2017 Form 10-K for information about the Company’s future minimum lease payment for leases that were present as of December 31, 2017. As previously disclosed, the Company’s 2017 Form 10-K does not include Xenith, which was acquired on January 1, 2018. The Company does not expect material changes to the recognition of operating lease expense in our consolidated statements of income.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU updates the existing guidance to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. This ASU replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The CECL model will replace the Company's current accounting for PCI and impaired loans. This ASU also amends the AFS debt securities OTTI model. This ASU is effective for fiscal years beginning after December 15, 2019. The Company has established a cross-functional governance structure for the implementation of CECL. The Company is continuing to evaluate the impact ASU No. 2016-13 will have on its consolidated financial statements. This ASU contains significant differences from existing GAAP, and the implementation of this ASU may result in increases to the Company's reserves for credit losses of financial instruments; however, the quantitative impact cannot be reasonably estimated since this ASU relies on economic conditions and trends that will impact the Company's portfolio at the time of adoption.

In August 2018, the FASB issued ASU No. 2018-15, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." This ASU amends the Intangibles—Goodwill and Other Topic of the Accounting Standards Codification to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This ASU will be effective for the Company for fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company does not expect this ASU to have a material effect on its financial statements.


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2. ACQUISITIONS

Xenith Acquisition
On January 1, 2018, the Company completed its acquisition of Xenith, a bank holding company based in Richmond, Virginia. Holders of shares of Xenith's common stock received 0.9354 shares of the Company's common stock in exchange for each share of Xenith's common stock, resulting in the Company issuing 21,922,077 shares of the Company's common stock at a fair value of $794.8 million. In addition, the Company paid $6.2 million in exchange for Xenith's outstanding stock options.

The transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition, in accordance with ASC 350, Intangibles-Goodwill and Other. Measurement period adjustments that were made in the third quarter of 2018 include immaterial changes to the fair value of loans, accrued interest, and deferred rent. The Company will continue to keep the measurement period open for certain accounts, including loans, real estate, and deferred tax assets, where its review procedures of any updated information related to the transaction are ongoing. If considered necessary, additional adjustments to the fair value measurement of these accounts will be made until all information is finalized, the Company's review procedures are complete, and the measurement period is closed. The following table provides a preliminary assessment of the consideration transferred, assets acquired, and liabilities assumed as of the date of the acquisition (dollars in thousands):
Purchase Price:
 
 
Fair value of shares of the Company's common stock issued & warrants converted
 
$
794,809

Cash paid for Xenith stock options
 
6,170

Total purchase price
 
$
800,979

 
 
 
Fair value of assets acquired:
 
 
Cash and cash equivalents
$
174,218

 
AFS securities
295,782

 
Restricted stock, at cost
27,569

 
Net loans
2,454,151

 
Premises and equipment
44,912

 
OREO
5,250

 
Core deposit intangibles
38,470

 
Other assets
202,871

 
Total assets
$
3,243,223

 
 
 
 
Fair value of liabilities assumed:
 
 
Deposits
$
2,549,683

 
Other short-term borrowings
235,000

 
Borrowings
55,542

 
Other liabilities
26,664

 
Total liabilities
$
2,866,889

 
 
 
 
Net assets acquired
 
$
376,334

Preliminary goodwill
 
$
424,645


The acquired loans were recorded at fair value at the acquisition date without carryover of Xenith’s previously established ALL. The fair value of the loans was determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected on the loans and leases and then applying a market-based discount rate to those cash flows. In this regard, the acquired loans were segregated into pools based on loan type and credit risk. Loan type was determined based on collateral type, purpose, and lien position. Credit risk characteristics included risk rating groups (pass rated loans and adversely classified loans) and past due status. For valuation purposes, these pools were further disaggregated by maturity, pricing characteristics (e.g., fixed-rate, adjustable-rate) and re-payment structure (e.g., interest only, fully amortizing, balloon). If new information is obtained about facts and circumstances about expected cash flows that existed as of the acquisition date, management will adjust fair values in accordance with accounting for business combinations.

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The acquired loans were divided into loans with evidence of credit quality deterioration which are accounted for under ASC 310-30, Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality, (acquired impaired) and loans that do not meet these criteria, which are accounted for under ASC 310-20, Receivables - Nonrefundable Fees and Other Costs, (acquired performing). The fair values of the acquired performing loans were $2.4 billion and the fair values of the acquired impaired loans were $79.3 million. The gross contractually required principal and interest payments receivable for acquired performing loans was $2.7 billion. The best estimate of contractual cash flows not expected to be collected related to the acquired performing loans is $20.6 million.

The following table presents the acquired impaired loans receivable at the acquisition date (dollars in thousands):
Contractually required principal and interest payments
$
114,270

Nonaccretable difference
(19,800
)
Cash flows expected to be collected
94,470

Accretable difference
(15,206
)
Fair value of loans acquired with a deterioration of credit quality
$
79,264


The following table presents certain pro forma information as if Xenith had been acquired on January 1, 2017. These results combine the historical results of Xenith in the Company's Consolidated Statements of Income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2017. In particular, no adjustments have been made to eliminate the amount of Xenith’s provision for credit losses that would not have been necessary had the acquired loans been recorded at fair value as of January 1, 2017. Pro forma adjustments below include the net impact of accretion for 2017 and the elimination of merger-related costs for 2018. The Company expects to achieve further operating cost savings and other business synergies, including branch closures, as a result of the acquisition which are not reflected in the pro forma amounts below (dollars in thousands):
 
Pro forma for the three months ended
 
Pro forma for the nine months ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
Total revenues (1)
$
125,850

 
$
118,039

 
$
398,354

 
$
350,465

Net income
$
39,326

 
$
28,997

 
$
132,065

 
$
83,675

EPS
$
0.60

 
$
0.44

 
$
2.01

 
$
1.27

(1) Includes net interest income and noninterest income.

Merger-related costs associated with the acquisition of Xenith were $1.4 million and $732,000 for the three months ended September 30, 2018 and 2017, respectively, and $37.4 million and $3.5 million for the nine months ended September 30, 2018 and 2017, respectively. Such costs include legal and accounting fees, lease and contract termination expenses, system conversion, and employee severances, which have been expensed as incurred.

DHFB Acquisition
On April 1, 2018, the Bank completed its acquisition of DHFB, a Roanoke, Virginia-based investment advisory firm with approximately $600.0 million in assets under management and advisement at the time of the acquisition. The acquisition date fair value of consideration transferred totaled $7.4 million, which consisted of $4.8 million in cash and the remainder being contingent on achieving certain performance metrics. The contingent consideration is carried at fair value and is reported as a component of "Other Liabilities" in the Company's Consolidated Balance Sheet. The fair value of this liability will be assessed at each reporting period.

In connection with this transaction, the Company recorded $3.6 million in goodwill and $4.1 million of amortizable intangible assets, which primarily relate to the value of customer relationships. The Company is amortizing these intangible assets over the period of expected benefit, which ranges from 5 to 16 years using various methods. The transaction was accounted for using the acquisition method of accounting, and accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the acquisition date. The fair values are subject to refinement for up to one year after

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the closing date of the acquisition, in accordance with ASC 350, Intangibles-Goodwill and Other. Measurement period adjustments that were made in the third quarter of 2018 include immaterial changes to the fair value of intangible assets. The Company did not incur any material expenses related to the acquisition of DHFB.

OAL Acquisition
On July 1, 2018, ODCM, a subsidiary of the Bank, completed its acquisition of OAL, a McLean, Virginia-based investment advisory firm with approximately $400 million in assets under management and advisement at the time of the acquisition. The acquisition date fair value of consideration transferred totaled $5.9 million, which consisted of $3.4 million in cash and the remainder being contingent on achieving certain performance metrics. The contingent consideration is carried at fair value and is reported as a component of "Other Liabilities" in the Company's Consolidated Balance Sheet. The fair value of this liability will be assessed at each reporting period.

In connection with this transaction, the Company recorded $1.8 million in goodwill and $3.8 million of amortizable intangible assets, which primarily relate to the value of customer relationships. The Company is amortizing these intangible assets over the period of expected benefit, which ranges from 1 to 14 years using various methods. The transaction was accounted for using the acquisition method of accounting, and accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the acquisition date. The fair values are subject to refinement for up to one year after the closing date of the acquisition, in accordance with ASC 350, Intangibles-Goodwill and Other. The Company did not incur any material expenses related to the acquisition of OAL.

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3. SECURITIES 

Available for Sale
The amortized cost, gross unrealized gains and losses, and estimated fair values of AFS securities as of September 30, 2018 and December 31, 2017 are summarized as follows (dollars in thousands):
 
 
Amortized
 
Gross Unrealized
 
Estimated
 
Cost
 
Gains
 
(Losses)
 
Fair Value
September 30, 2018
 

 
 

 
 

 
 

Obligations of states and political subdivisions
$
566,268

 
$
3,380

 
$
(6,175
)
 
$
563,473

Corporate and other bonds (1)
163,117

 
382

 
(2,007
)
 
161,492

Mortgage-backed securities
1,170,410

 
798

 
(24,295
)
 
1,146,913

Other securities
11,447

 

 
(184
)
 
11,263

Total AFS securities
$
1,911,242

 
$
4,560

 
$
(32,661
)
 
$
1,883,141

 
 
 
 
 
 
 
 
December 31, 2017
 

 
 

 
 

 
 

Obligations of states and political subdivisions
$
295,546

 
$
6,842

 
$
(564
)
 
$
301,824

Corporate and other bonds
113,625

 
1,131

 
(876
)
 
113,880

Mortgage-backed securities
552,431

 
2,596

 
(6,169
)
 
548,858

Other securities
9,737

 

 
(77
)
 
9,660

Total AFS securities
$
971,339

 
$
10,569

 
$
(7,686
)
 
$
974,222

(1) Other bonds includes asset-backed securities.

The following table shows the gross unrealized losses and fair value of the Company’s AFS securities with unrealized losses that are not deemed to be other-than-temporarily impaired as of September 30, 2018 and December 31, 2017 (dollars in thousands). These are aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.
 
 
Less than 12 months
 
More than 12 months
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
September 30, 2018
 

 
 

 
 

 
 

 
 

 
 

Obligations of states and political subdivisions
$
377,882

 
$
(5,814
)
 
$
7,674

 
$
(361
)
 
$
385,556

 
$
(6,175
)
Mortgage-backed securities
794,067

 
(14,057
)
 
245,879

 
(10,237
)
 
1,039,946

 
(24,294
)
Corporate bonds and other securities
89,225

 
(1,003
)
 
38,557

 
(1,189
)
 
127,782

 
(2,192
)
Total AFS securities
$
1,261,174

 
$
(20,874
)
 
$
292,110

 
$
(11,787
)
 
$
1,553,284

 
$
(32,661
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 

 
 

 
 

 
 

 
 

 
 

Obligations of states and political subdivisions
$
25,790

 
$
(132
)
 
$
16,934

 
$
(432
)
 
$
42,724

 
$
(564
)
Mortgage-backed securities
298,439

 
(3,267
)
 
136,298

 
(2,902
)
 
434,737

 
(6,169
)
Corporate bonds and other securities
10,976

 
(99
)
 
44,408

 
(854
)
 
55,384

 
(953
)
Total AFS securities
$
335,205

 
$
(3,498
)
 
$
197,640

 
$
(4,188
)
 
$
532,845

 
$
(7,686
)
 
As of September 30, 2018, there were $292.1 million, or 108 issues, of individual AFS securities that had been in a continuous loss position for more than 12 months and had an aggregate unrealized loss of $11.8 million. As of December 31, 2017, there were $197.6 million, or 71 issues, of individual securities that had been in a continuous loss position for more than 12 months and had an aggregate unrealized loss of $4.2 million. The Company has determined that these securities are temporarily impaired at September 30, 2018 and December 31, 2017 for the reasons set out below:
 

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Mortgage-backed securities. This category’s unrealized losses are primarily the result of interest rate fluctuations. Because the decline in market value is attributable to changes in interest rates and not credit quality, the Company does not intend to sell the investments, and the accounting standard of "more likely than not" has not been met for the Company to be required to sell any of the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired. Also, the majority of the Company’s mortgage-backed securities are agency-backed securities, which have a government guarantee.
 
Obligations of state and political subdivisions. This category’s unrealized losses are primarily the result of interest rate fluctuations and ratings downgrades for a limited number of securities brought about by the impact of the credit crisis on states and political subdivisions. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the cost basis of each investment. Because the Company does not intend to sell any of the investments and the accounting standard of “more likely than not” has not been met for the Company to be required to sell any of the investments before recovery of its amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired.
 
Corporate and other bonds. This category's unrealized losses are the result of interest rate fluctuations and ratings downgrades for a limited number of securities. The majority of these securities remain investment grade and the Company’s analysis did not indicate the existence of a credit loss. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the cost basis of each investment. Because the Company does not intend to sell any of the investments and the accounting standard of “more likely than not” has not been met for the Company to be required to sell any of the investments before recovery of its amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired.
 
The following table presents the amortized cost and estimated fair value of AFS securities as of September 30, 2018 and December 31, 2017, by contractual maturity (dollars in thousands). 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.
 
 
September 30, 2018
 
December 31, 2017
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
Due in one year or less
$
40,367

 
$
40,342

 
$
25,179

 
$
25,326

Due after one year through five years
213,662

 
209,552

 
145,276

 
145,980

Due after five years through ten years
273,207

 
271,360

 
223,210

 
226,251

Due after ten years
1,384,006

 
1,361,887

 
577,674

 
576,665

Total AFS securities
$
1,911,242

 
$
1,883,141

 
$
971,339

 
$
974,222

 

Refer to Note 7 "Commitments and Contingencies" for information regarding the estimated fair value of AFS securities that were pledged to secure public deposits, repurchase agreements, and for other purposes as permitted or required by law as of September 30, 2018 and December 31, 2017.

Held to Maturity
During the second quarter of 2018, the Company adopted ASU No. 2017-12, “Derivatives and Hedging (Topic 825): Targeted Improvements to Accounting for Hedging Activities.” As part of this adoption, the Company made a one-time election to transfer eligible HTM securities to the AFS category in order to optimize the investment portfolio management for capital and risk management considerations. These securities had a carrying value of $187.4 million on the date of the transfer.

The Company reports HTM securities on the Company's Consolidated Balance Sheets at carrying value. Carrying value is amortized cost which includes any unamortized unrealized gains and losses recognized in accumulated other comprehensive income prior to reclassifying the securities from AFS securities to HTM securities. Investment securities transferred into the HTM category from the AFS category are recorded at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer is retained in accumulated other comprehensive income and in the carrying value of the HTM securities. Such unrealized gains or losses are accreted over the remaining life of the security with no impact on future net income.
 

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The carrying value, gross unrealized gains and losses, and estimated fair values of HTM securities as of September 30, 2018 and December 31, 2017 are summarized as follows (dollars in thousands):
 
 
Carrying
 
Gross Unrealized
 
Estimated
 
Value (1)
 
Gains
 
(Losses)
 
Fair Value
September 30, 2018
 

 
 

 
 

 
 

Obligations of states and political subdivisions
$
235,333

 
$
25

 
$
(2,648
)
 
$
232,710

 
 
 
 
 
 
 
 
December 31, 2017
 

 
 

 
 

 
 

Obligations of states and political subdivisions
$
199,639

 
$
4,014

 
$
(170
)
 
$
203,483

 
(1) The carrying value includes $125,000 as of September 30, 2018 and $3.6 million as of December 31, 2017 of net unrealized gains present at the time of transfer from AFS securities, net of any accretion.
 
The following table shows the gross unrealized losses and fair value of the Company’s HTM securities with unrealized losses that are not deemed to be other-than-temporarily impaired as of September 30, 2018 and December 31, 2017 (dollars in thousands). These are aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.
 
 
Less than 12 months
 
More than 12 months
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
September 30, 2018
 

 
 

 
 

 
 

 
 

 
 

Obligations of states and political subdivisions
$
213,882

 
$
(2,648
)
 
$

 
$

 
$
213,882

 
$
(2,648
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
18,896

 
$
(139
)
 
$
1,084

 
$
(31
)
 
$
19,980

 
$
(170
)
 
As of September 30, 2018, there were no issues of individual HTM securities that had been in a continuous loss position for more than 12 months. As of December 31, 2017, there was $1.1 million, or two issues, of individual HTM securities that had been in a continuous loss position for more than 12 months and had an aggregate unrealized loss of $31,000. These securities were municipal bonds with minimal credit exposure. For this reason, the Company has determined that these securities in a loss position were temporarily impaired as of December 31, 2017. Because the Company does not intend to sell these investments and the accounting standard of “more likely than not” has not been met for the Company to be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired.

The following table presents the amortized cost and estimated fair value of HTM securities as of September 30, 2018 and December 31, 2017, by contractual maturity (dollars in thousands). 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.
 
 
September 30, 2018
 
December 31, 2017
 
Carrying
Value (1)
 
Estimated
Fair Value
 
Carrying
Value
(1)
 
Estimated
Fair Value
Due in one year or less
$

 
$

 
$
3,221

 
$
3,230

Due after one year through five years
3,917

 
3,889

 
44,289

 
44,601

Due after five years through ten years
3,500

 
3,479

 
79,114

 
80,532

Due after ten years
227,916

 
225,342

 
73,015

 
75,120

Total HTM securities
$
235,333

 
$
232,710

 
$
199,639

 
$
203,483

 
(1) The carrying value includes $125,000 as of September 30, 2018 and $3.6 million as of December 31, 2017 of net unrealized gains present at the time of transfer from AFS securities, net of any accretion.
Refer to Note 7 "Commitments and Contingencies" for information regarding the estimated fair value of HTM securities that were pledged to secure public deposits as permitted or required by law as of September 30, 2018 and December 31, 2017.

-17-



Marketable Equity Securities
In connection with the Shore Premier sale, the Company received 1,250,000 shares of the purchasing company's common stock. For a limited time the purchasing company has agreed to pay additional cash consideration to the Company to the extent any sales of its common stock by the Company are at prices lower than agreed upon value at the time of entry into the agreement. The fair value of the common stock is evaluated quarterly and amounts that fall below the original purchase price are recorded as a miscellaneous receivable on the Company's Consolidated Balance Sheets. At September 30, 2018, the fair value of the purchasing company's common stock was $27.4 million and was included as "Marketable Equity Securities" in the Company's Consolidated Balance Sheet. Refer to Note 1 "Accounting Policies" and Note 8 "Derivatives" for more information regarding the Shore Premier sale.

Restricted Stock, at cost
Due to restrictions placed upon the Bank’s common stock investment in the Federal Reserve Bank and FHLB, these securities have been classified as restricted equity securities and carried at cost. These restricted securities are not subject to the investment security classifications and are included as a separate line item on the Company’s Consolidated Balance Sheets. At September 30, 2018 and December 31, 2017, the FHLB required the Bank to maintain stock in an amount equal to 4.25% of outstanding borrowings and a specific percentage of the Bank’s total assets. The Federal Reserve Bank required the Bank to maintain stock with a par value equal to 6% of the Bank's outstanding capital at both September 30, 2018 and December 31, 2017. Restricted equity securities consist of Federal Reserve Bank stock in the amount of $52.6 million and $27.6 million for September 30, 2018 and December 31, 2017 and FHLB stock in the amount of $59.8 million and $47.7 million as of September 30, 2018 and December 31, 2017, respectively.
 
Other-Than-Temporary-Impairment
During each quarter, the Company conducts an assessment of the securities portfolio for OTTI consideration. The assessment considers factors such as external credit ratings, delinquency coverage ratios, market price, management’s judgment, expectations of future performance, and relevant industry research and analysis. An impairment is other-than-temporary if any of the following conditions exist: the entity intends to sell the security; it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis; or the entity does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell). If a credit loss exists, but an entity does not intend to sell the impaired debt security and is not more likely than not to be required to sell before recovery, the impairment is other-than-temporary and should be separated into a credit portion to be recognized in earnings and the remaining amount relating to all other factors recognized as other comprehensive loss. Based on the assessment for the three and nine months ended September 30, 2018, and in accordance with accounting guidance, no OTTI was recognized.

Realized Gains and Losses
The following table presents the gross realized gains and losses on and the proceeds from the sale of securities during the three and nine months ended September 30, 2018 and 2017 (dollars in thousands).
 
 
Three Months Ended
September 30, 2018
 
Nine Months Ended September 30, 2018
Realized gains (losses):
 

 
 

Gross realized gains
$
97

 
$
2,890

Gross realized losses

 
(2,668
)
Net realized gains
$
97

 
$
222

 
 
 
 
Proceeds from sales of securities
$
27,593

 
$
337,109


 
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2017
Realized gains (losses):
 

 
 

Gross realized gains
$
296

 
$
958

Gross realized losses
(112
)
 
(176
)
Net realized gains
$
184

 
$
782

 
 
 
 
Proceeds from sales of securities
$
39,284

 
$
91,911


-18-


4. LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans are stated at their face amount, net of deferred fees and costs, and consist of the following at September 30, 2018 and December 31, 2017 (dollars in thousands):
 
September 30, 2018
 
December 31, 2017
Construction and Land Development
$
1,178,054

 
$
948,791

Commercial Real Estate - Owner Occupied
1,283,125

 
943,933

Commercial Real Estate - Non-Owner Occupied
2,427,251

 
1,713,659

Multifamily Real Estate
542,662

 
357,079

Commercial & Industrial
1,154,583

 
612,023

Residential 1-4 Family - Commercial
719,798

 
612,395

Residential 1-4 Family - Mortgage
611,728

 
485,690

Auto
306,196

 
282,474

HELOC
612,116

 
537,521

Consumer
345,320

 
408,667

Other Commercial
230,765

 
239,320

Total loans held for investment, net (1)
$
9,411,598

 
$
7,141,552

 
(1) Loans, as presented, are net of deferred fees and costs totaling $3.5 million and $1.3 million as of September 30, 2018 and December 31, 2017, respectively.
 
The following table shows the aging of the Company’s loan portfolio, by segment, at September 30, 2018 (dollars in thousands):
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Greater than 90
Days and still
Accruing
 
PCI
 
Nonaccrual
 
Current
 
Total Loans
Construction and Land Development
$
1,351

 
$
1,826

 
$
442

 
$
5,042

 
$
9,221

 
$
1,160,172

 
$
1,178,054

Commercial Real Estate - Owner Occupied
4,218

 
539

 
3,586

 
25,896

 
3,202

 
1,245,684

 
1,283,125

Commercial Real Estate - Non-Owner Occupied
492

 

 

 
21,575

 
1,812

 
2,403,372

 
2,427,251

Multifamily Real Estate
553

 

 

 
86

 

 
542,023

 
542,662

Commercial & Industrial
2,239

 
428

 
256

 
2,299

 
1,404

 
1,147,957

 
1,154,583

Residential 1-4 Family - Commercial
2,535

 
1,892

 
378

 
16,073

 
1,956

 
696,964

 
719,798

Residential 1-4 Family - Mortgage
4,506

 
3,793

 
2,543

 
16,761

 
8,535

 
575,590

 
611,728

Auto
2,414

 
299

 
211

 
9

 
525

 
302,738

 
306,196

HELOC
4,783

 
1,392

 
1,291

 
6,179

 
1,273

 
597,198

 
612,116

Consumer and all
other(1)
2,640

 
1,140

 
825

 
826

 
182

 
570,472

 
576,085

Total loans held for investment
$
25,731

 
$
11,309

 
$
9,532

 
$
94,746

 
$
28,110

 
$
9,242,170

 
$
9,411,598

 (1)Consumer and Other Commercial are grouped together as Consumer and all other for reporting purposes.

-19-


The following table shows the aging of the Company’s loan portfolio, by segment, at December 31, 2017 (dollars in thousands):
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Greater than 90
Days and still
Accruing
 
PCI
 
Nonaccrual
 
Current
 
Total Loans
Construction and Land Development
$
1,248

 
$
898

 
$
1,340

 
$
2,838

 
$
5,610

 
$
936,857

 
$
948,791

Commercial Real Estate - Owner Occupied
444

 
81

 

 
14,790

 
2,708

 
925,910

 
943,933

Commercial Real Estate - Non-Owner Occupied
187

 
84

 
194

 
6,610

 
2,992

 
1,703,592

 
1,713,659

Multifamily Real Estate

 

 

 
80

 

 
356,999

 
357,079

Commercial & Industrial
1,147

 
109

 
214

 
408

 
316

 
609,829

 
612,023

Residential 1-4 Family - Commercial
1,682

 
700

 
579

 
9,414

 
1,085

 
598,935

 
612,395

Residential 1-4 Family - Mortgage
3,838

 
2,541

 
546

 
3,733

 
6,269

 
468,763

 
485,690

Auto
3,541

 
185

 
40

 

 
413

 
278,295

 
282,474

HELOC
2,382

 
717

 
217

 
950

 
2,075

 
531,180

 
537,521

Consumer and all other(1)
2,404

 
2,052

 
402

 
198

 
275

 
642,656

 
647,987

Total loans held for investment
$
16,873

 
$
7,367

 
$
3,532

 
$
39,021

 
$
21,743

 
$
7,053,016

 
$
7,141,552

 (1)Consumer and Other Commercial are grouped together as Consumer and all other for reporting purposes.

The following table shows the PCI loan portfolios, by segment and their delinquency status, at September 30, 2018 (dollars in thousands):
 
30-89 Days Past
Due
 
Greater than 90
Days
 
Current
 
Total
Construction and Land Development
$
78

 
$
1,324

 
$
3,640

 
$
5,042

Commercial Real Estate - Owner Occupied
435

 
3,487

 
21,974

 
25,896

Commercial Real Estate - Non-Owner Occupied
33

 
1,811

 
19,731

 
21,575

Multifamily Real Estate

 

 
86

 
86

Commercial & Industrial

 
1,134

 
1,165

 
2,299

Residential 1-4 Family - Commercial
3,677

 
2,011

 
10,385

 
16,073

Residential 1-4 Family - Mortgage
1,242

 
2,826

 
12,693

 
16,761

Auto

 

 
9

 
9
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