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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                

Commission file number 001-37416

 

PEOPLE’S UTAH BANCORP

(Exact name of registrant as specified in its charter)

 

 

UTAH

 

87-0622021

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification No.)

 

1 East Main Street, American Fork, Utah

 

84003

(Address of principal executive offices)

 

(Zip Code)

(801) 642-3998

Registrant’s telephone number, including area code

Not Applicable

(Former name, former address, and former fiscal year, if changed since last report)

 

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    No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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    No  

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

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes    No  

The number of shares of Registrant’s common stock outstanding on October 31, 2016 was 17,790,549. No preferred shares are issued or outstanding.

 

 

 


TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

Item 1 – Financial Statements

 

Unaudited Consolidated Balance Sheets

3

Unaudited Consolidated Statements of Income

4

Unaudited Consolidated Statements of Comprehensive Income

5

Unaudited Consolidated Statements of Changes in Shareholders’ Equity

6

Unaudited Consolidated Statements of Cash Flows

7

Notes to Unaudited Consolidated Financial Statements

8

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

21

Item 3 – Quantitative and Qualitative Disclosure about Market Risk

40

Item 4 – Controls and Procedures

40

PART II. OTHER INFORMATION

 

Item 1 – Legal Proceedings

40

Item 1A – Risk Factors

40

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

40

Item 3 – Defaults upon Senior Securities

40

Item 4 – Mine Safety Disclosures

40

Item 5 – Other Information

41

Item 6 – Exhibits

41

Signatures

42

 

 

 

 

 


 

PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS

 

 

 

 

September 30,

 

 

December 31,

 

(Dollars in thousands, except share data)

 

2016

 

 

2015

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

29,852

 

 

$

19,745

 

Interest bearing deposits

 

 

67,930

 

 

 

20,428

 

Federal funds sold

 

 

253

 

 

 

2,176

 

Total cash and cash equivalents

 

 

98,035

 

 

 

42,349

 

Investment securities:

 

 

 

 

 

 

 

 

Available-for-sale, at fair value

 

 

326,096

 

 

 

332,736

 

Held-to-maturity, at historical cost

 

 

61,471

 

 

 

65,882

 

Total investment securities

 

 

387,567

 

 

 

398,618

 

Non-marketable equity securities

 

 

1,827

 

 

 

2,244

 

Loans held for sale

 

 

15,178

 

 

 

17,947

 

Loans:

 

 

 

 

 

 

 

 

Loans held for investment

 

 

1,105,398

 

 

 

1,047,975

 

Less allowance for loan losses

 

 

(16,181

)

 

 

(15,557

)

Total loans held for investment, net

 

 

1,089,217

 

 

 

1,032,418

 

Premises and equipment, net

 

 

22,056

 

 

 

22,104

 

Accrued interest receivable

 

 

5,801

 

 

 

5,767

 

Deferred income tax assets

 

 

8,248

 

 

 

8,606

 

Other real estate owned

 

 

407

 

 

 

568

 

Bank-owned life insurance

 

 

19,581

 

 

 

19,170

 

Other assets

 

 

5,940

 

 

 

6,191

 

Total assets

 

$

1,653,857

 

 

$

1,555,982

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Non-interest bearing deposits

 

$

464,638

 

 

$

408,508

 

Interest bearing deposits

 

 

947,201

 

 

 

900,677

 

Total deposits

 

 

1,411,839

 

 

 

1,309,185

 

Short-term borrowings

 

 

3,188

 

 

 

27,204

 

Accrued interest payable

 

 

293

 

 

 

314

 

Other liabilities

 

 

13,387

 

 

 

9,871

 

Total liabilities

 

 

1,428,707

 

 

 

1,346,574

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Preferred shares, $0.01 par value: 3,000,000 shares authorized, no shares issued

 

 

 

 

 

 

Common shares, $0.01 par value: 30,000,000 shares authorized; 17,790,549

   and 17,567,154 shares issued and outstanding as of September 30, 2016

   and December 31, 2015, respectively

 

 

178

 

 

 

176

 

Additional paid-in capital

 

 

68,415

 

 

 

67,338

 

Retained earnings

 

 

155,573

 

 

 

142,223

 

Accumulated other comprehensive income (loss)

 

 

984

 

 

 

(329

)

Total shareholders’ equity

 

 

225,150

 

 

 

209,408

 

Total liabilities and shareholders’ equity

 

$

1,653,857

 

 

$

1,555,982

 

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

 

3


 

PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(Dollars in thousands, except share and per share data)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

16,876

 

 

$

15,095

 

 

$

49,147

 

 

$

43,250

 

Interest and dividends on investments

 

 

1,471

 

 

 

1,424

 

 

 

4,563

 

 

 

4,171

 

Total interest income

 

 

18,347

 

 

 

16,519

 

 

 

53,710

 

 

 

47,421

 

Interest expense

 

 

710

 

 

 

730

 

 

 

2,162

 

 

 

2,230

 

Net interest income

 

 

17,637

 

 

 

15,789

 

 

 

51,548

 

 

 

45,191

 

Provision for loan losses

 

 

325

 

 

 

200

 

 

 

750

 

 

 

800

 

Net interest income after provision for loan losses

 

 

17,312

 

 

 

15,589

 

 

 

50,798

 

 

 

44,391

 

Non-interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

582

 

 

 

613

 

 

 

1,626

 

 

 

1,870

 

Card processing

 

 

1,129

 

 

 

1,079

 

 

 

3,296

 

 

 

3,147

 

Mortgage banking

 

 

2,244

 

 

 

1,841

 

 

 

6,269

 

 

 

5,638

 

Other operating

 

 

431

 

 

 

432

 

 

 

1,356

 

 

 

1,597

 

Total non-interest income

 

 

4,386

 

 

 

3,965

 

 

 

12,547

 

 

 

12,252

 

Non-interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

7,674

 

 

 

7,323

 

 

 

23,517

 

 

 

21,825

 

Occupancy, equipment and depreciation

 

 

1,101

 

 

 

969

 

 

 

3,165

 

 

 

2,914

 

Data processing

 

 

665

 

 

 

729

 

 

 

2,112

 

 

 

2,020

 

FDIC premiums

 

 

124

 

 

 

186

 

 

 

507

 

 

 

564

 

Card processing

 

 

509

 

 

 

512

 

 

 

1,648

 

 

 

1,516

 

Marketing and advertising

 

 

301

 

 

 

279

 

 

 

760

 

 

 

656

 

Other

 

 

1,528

 

 

 

1,446

 

 

 

4,728

 

 

 

4,651

 

Total non-interest expense

 

 

11,902

 

 

 

11,444

 

 

 

36,437

 

 

 

34,146

 

Income before income tax expense

 

 

9,796

 

 

 

8,110

 

 

 

26,908

 

 

 

22,497

 

Income tax expense

 

 

3,548

 

 

 

2,844

 

 

 

9,840

 

 

 

7,769

 

Net income

 

$

6,248

 

 

$

5,266

 

 

$

17,068

 

 

$

14,728

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.35

 

 

$

0.30

 

 

$

0.96

 

 

$

0.93

 

Diluted

 

$

0.34

 

 

$

0.29

 

 

$

0.94

 

 

$

0.90

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

17,764,647

 

 

 

17,467,161

 

 

 

17,711,899

 

 

 

15,821,403

 

Diluted

 

 

18,248,008

 

 

 

18,105,766

 

 

 

18,182,053

 

 

 

16,374,034

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

4


 

PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(in thousands)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net income

 

$

6,248

 

 

$

5,266

 

 

$

17,068

 

 

$

14,728

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) on securities available for sale

 

 

(779

)

 

 

761

 

 

 

2,125

 

 

 

799

 

Tax effect

 

 

(298

)

 

 

285

 

 

 

812

 

 

 

301

 

Unrealized holding gains (losses) on securities available for sale, net of tax

 

 

(481

)

 

 

476

 

 

 

1,313

 

 

 

498

 

Total comprehensive income

 

$

5,767

 

 

$

5,742

 

 

$

18,381

 

 

$

15,226

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

5


 

PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Common

 

 

 

 

 

 

Paid-in

 

 

Retained

 

 

Comprehensive

 

 

 

 

 

(Dollars in thousands, except share data)

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Income (Loss)

 

 

Total

 

Balance as of January 1, 2015

 

 

14,758,121

 

 

$

148

 

 

$

31,137

 

 

$

125,595

 

 

$

779

 

 

$

157,659

 

Comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

14,728

 

 

 

498

 

 

 

15,226

 

Cash dividends declared ( $0.12 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,935

)

 

 

-

 

 

 

(1,935

)

Share-based compensation

 

 

-

 

 

 

-

 

 

 

363

 

 

 

-

 

 

 

-

 

 

 

363

 

Issuance of common shares

 

 

2,657,000

 

 

 

27

 

 

 

34,870

 

 

 

-

 

 

 

-

 

 

 

34,897

 

Exercise of stock options

 

 

76,431

 

 

 

-

 

 

 

399

 

 

 

-

 

 

 

-

 

 

 

399

 

Balance as of September 30, 2015

 

 

17,491,552

 

 

$

175

 

 

$

66,769

 

 

$

138,388

 

 

$

1,277

 

 

$

206,609

 

Balance as of January 1, 2016

 

 

17,567,154

 

 

$

176

 

 

$

67,338

 

 

$

142,223

 

 

$

(329

)

 

$

209,408

 

Comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

17,068

 

 

 

1,313

 

 

 

18,381

 

Cash dividends declared ($0.21 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,718

)

 

 

-

 

 

 

(3,718

)

Share-based compensation

 

 

-

 

 

 

-

 

 

 

410

 

 

 

-

 

 

 

-

 

 

 

410

 

Exercise of stock options

 

 

223,395

 

 

 

2

 

 

 

667

 

 

 

-

 

 

 

-

 

 

 

669

 

Balance as of September 30, 2016

 

 

17,790,549

 

 

$

178

 

 

$

68,415

 

 

$

155,573

 

 

$

984

 

 

$

225,150

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

 

6


 

PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Nine Months Ended

 

 

 

September 30,

 

(in thousands)

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

17,068

 

 

$

14,728

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

750

 

 

 

800

 

Depreciation and amortization

 

 

1,916

 

 

 

1,901

 

Net gain on sales of other real estate owned

 

 

 

 

 

(153

)

Deferred income taxes

 

 

(455

)

 

 

(26

)

Net amortization of securities discounts and premiums

 

 

2,254

 

 

 

2,354

 

Other

 

 

406

 

 

 

344

 

Gain on sale of loans held for sale

 

 

(4,787

)

 

 

(4,086

)

Originations of loans held for sale

 

 

(199,991

)

 

 

(173,366

)

Proceeds from sale of loans held for sale

 

 

207,547

 

 

 

179,817

 

Net changes in:

 

 

 

 

 

 

 

 

Accrued interest receivable

 

 

(34

)

 

 

(657

)

Other assets

 

 

(160

)

 

 

(13,461

)

Accrued interest payable

 

 

(21

)

 

 

(31

)

Other liabilities

 

 

3,516

 

 

 

5,419

 

Net cash provided by operating activities

 

 

28,009

 

 

 

13,583

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Net change in loans held for investment

 

 

(57,786

)

 

 

(53,431

)

Purchase of available-for-sale securities

 

 

(100,372

)

 

 

(105,728

)

Purchase of held-to-maturity securities

 

 

(1,764

)

 

 

(22,532

)

Proceeds from maturities/sales of available-for-sale securities

 

 

107,340

 

 

 

88,917

 

Proceeds from maturities of held-to-maturity securities

 

 

5,718

 

 

 

8,196

 

Purchase of premises and equipment

 

 

(1,864

)

 

 

(2,668

)

Proceeds from sale of other real estate owned, net of improvements

 

 

399

 

 

 

1,207

 

Purchase of non-marketable equity securities

 

 

(2,663

)

 

 

 

Proceeds from sale of non-marketable equity securities

 

 

3,080

 

 

 

984

 

Net cash provided by (used in) investing activities

 

 

(47,912

)

 

 

(85,055

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net increase in non-interest bearing deposits

 

 

56,130

 

 

 

101,777

 

Net increase in interest bearing deposits

 

 

46,524

 

 

 

31,863

 

Issuance of common shares

 

 

 

 

 

34,897

 

Proceeds related to exercise of stock options

 

 

669

 

 

 

399

 

Net change in short-term borrowings

 

 

(24,016

)

 

 

918

 

Cash dividends paid

 

 

(3,718

)

 

 

(4,001

)

Net cash provided by financing activities

 

 

75,589

 

 

 

165,853

 

Net change in cash and cash equivalents

 

 

55,686

 

 

 

94,381

 

Cash and cash equivalents, beginning of period

 

 

42,349

 

 

 

47,702

 

Cash and cash equivalents, end of period

 

$

98,035

 

 

$

142,083

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,915

 

 

$

2,032

 

Income taxes paid

 

 

9,163

 

 

$

7,380

 

Supplemental disclosures of non-cash transactions:

 

 

 

 

 

 

 

 

Reclassifications from loans to other real estate owned

 

$

237

 

 

$

-

 

Unrealized gains on securities available for sale

 

$

2,125

 

 

$

799

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

 

 

7


PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 — Basis of Presentation

People’s Utah Bancorp, Inc. (“PUB” or the “Company”) is a Utah corporation headquartered in American Fork, Utah. The Company’s subsidiary is People’s Intermountain Bank (“PIB” or the “Bank”), which includes two banking divisions doing business as (“dba”) Bank of American Fork (“BAF”) and Lewiston State Bank (“LSB”) and an equipment leasing division dba GrowthFunding Equipment Finance.  BAF and LSB have over 100 years of history and will continue to do business as registered names of PIB.

The interim consolidated financial statements include the accounts of the Company together with its subsidiary Bank. All intercompany transactions and balances have been eliminated.

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial information. In the opinion of management, the interim statements reflect all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows of the Company on a consolidated basis and all such adjustments are of a normal recurring nature. These financial statements and the accompanying notes should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2015 which are included in the Company’s 2015 Form 10-K.  Operating results for the nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016 or any other period.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of real estate acquired through foreclosure, deferred tax assets, and share-based compensation.

Earnings per share — Basic earnings per common share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares includes shares that may be issued by the Company for outstanding stock options determined using the treasury stock method and for all outstanding restricted stock units (“RSU”).

Earnings per common share have been computed based on the following:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(in thousands, except share and per share data)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

6,248

 

 

$

5,266

 

 

$

17,068

 

 

$

14,728

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding

 

 

17,764,647

 

 

 

17,467,161

 

 

 

17,711,899

 

 

 

15,821,403

 

Incremental shares assumed for stock options and RSUs

 

 

483,361

 

 

 

638,605

 

 

 

470,154

 

 

 

552,631

 

Weighted-average number of dilutive shares outstanding

 

 

18,248,008

 

 

 

18,105,766

 

 

 

18,182,053

 

 

 

16,374,034

 

Basic earnings per common share

 

$

0.35

 

 

$

0.30

 

 

$

0.96

 

 

$

0.93

 

Diluted earnings per common share

 

$

0.34

 

 

$

0.29

 

 

$

0.94

 

 

$

0.90

 

 


 

8


PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Note 1 — Basis of Presentation – Continued

 

Reclassifications Certain amounts in the prior period’s financial statements have been reclassified to conform to the current period’s presentation.

 

Impact of Recent Authoritative Accounting Guidance The Financial Accounting Standards Board issued Accounting Standards Codification (“ASC”) 2016-13, Measurement of Credit Losses on Financial Instruments.  The standard significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard replaces today’s “incurred loss” approach with an “expected loss” model for instruments such as loans and held-to-maturity securities that are measured at amortized cost. The standard requires credit losses relating to available-for-sale debt securities to be recorded through an allowance for credit losses rather than a reduction of the carrying amount. It also changes the accounting for purchased credit-impaired debt securities and loans. The standard retains many of the current disclosure requirements in current GAAP and expands certain disclosure requirements. While we expect this standard will have a material impact on the Company’s financial statements, we are still in the process of conducting our evaluation.  The standard will become effective for the Company in the first quarter of 2020.

 

 

 

 

Note 2 — Investment Securities

Amortized cost and approximate fair values of investment securities available for sale are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

Gross Unrealized Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less

 

 

12

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

Than

 

 

Months

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

12

 

 

or

 

 

Fair

 

(in thousands)

 

Cost

 

 

Gains

 

 

Months

 

 

Longer

 

 

Value

 

As of September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government-sponsored securities

 

$

117,241

 

 

$

112

 

 

$

(91

)

 

$

 

 

$

117,262

 

Municipal securities

 

 

28,479

 

 

 

724

 

 

 

(4

)

 

 

 

 

 

29,199

 

Mortgage-backed securities

 

 

168,783

 

 

 

1,808

 

 

 

(186

)

 

 

(346

)

 

 

170,059

 

Corporate securities

 

 

10,000

 

 

 

5

 

 

 

(32

)

 

 

(397

)

 

 

9,576

 

 

 

$

324,503

 

 

$

2,649

 

 

$

(313

)

 

$

(743

)

 

$

326,096

 

As of December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government-sponsored securities

 

$

104,591

 

 

$

11

 

 

$

(612

)

 

$

-

 

 

$

103,990

 

Municipal securities

 

 

36,820

 

 

 

926

 

 

 

(7

)

 

 

(9

)

 

 

37,730

 

Mortgage-backed securities

 

 

181,857

 

 

 

940

 

 

 

(724

)

 

 

(687

)

 

 

181,386

 

Corporate securities

 

 

10,000

 

 

 

-

 

 

 

(253

)

 

 

(117

)

 

 

9,630

 

 

 

$

333,268

 

 

$

1,877

 

 

$

(1,596

)

 

$

(813

)

 

$

332,736

 

 

Carrying amounts and estimated fair values of securities held-to-maturity are as follows:

 

 

 

 

 

 

 

 

 

 

 

Gross Unrealized Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less

 

 

12

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

Than

 

 

Months

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

12

 

 

or

 

 

Fair

 

(in thousands)

 

Cost

 

 

Gains

 

 

Months

 

 

Longer

 

 

Value

 

As of September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal securities

 

$

59,239

 

 

$

584

 

 

$

(13

)

 

$

(7

)

 

$

59,803

 

Certificates of deposit

 

 

2,232

 

 

 

1

 

 

 

 

 

 

 

 

 

2,233

 

 

 

$

61,471

 

 

$

585

 

 

$

(13

)

 

$

(7

)

 

$

62,036

 

As of December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal securities

 

$

63,650

 

 

$

238

 

 

$

(74

)

 

$

(2

)

 

$

63,812

 

Certificates of deposit

 

 

2,232

 

 

 

5

 

 

 

-

 

 

 

 

 

 

2,237

 

 

 

$

65,882

 

 

$

243

 

 

$

(74

)

 

$

(2

)

 

$

66,049

 

 

 

9


PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Note 2 — Investment Securities – continued

 

The amortized cost and estimated fair values of investment securities that are available-for-sale and held-to-maturity at September 30, 2016, by contractual maturity, are as follows:

 

 

 

Available-for-sale

 

 

Held-to-maturity

 

 

 

Amortized

 

 

Fair

 

 

Amortized

 

 

Fair

 

(in thousands)

 

Cost

 

 

Value

 

 

Cost

 

 

Value

 

Securities maturing in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One year or less

 

$

21,055

 

 

$

21,140

 

 

$

10,767

 

 

$

10,772

 

After one year through five years

 

 

123,786

 

 

 

124,171

 

 

 

39,850

 

 

 

40,175

 

After five years through ten years

 

 

71,359

 

 

 

71,661

 

 

 

10,854

 

 

 

11,089

 

After ten years

 

 

108,303

 

 

 

109,124

 

 

 

 

 

 

 

 

 

$

324,503

 

 

$

326,096

 

 

$

61,471

 

 

$

62,036

 

 

Expected maturities may differ from contractual maturities because issuers may have the right to call obligations with or without penalties.

As of September 30, 2016 and December 31, 2015, the Company held 131 and 234 investment securities, respectively, with fair values less than amortized cost. Management evaluated these investment securities and determined that the decline in value is temporary and related to the change in market interest rates since purchase. The decline in value is not related to any company or industry specific event. The Company anticipates full recovery of the amortized cost with respect to these securities at maturity, or sooner in the event of a more favorable market interest rate environment.

 

 

Note 3 — Loans and Allowance for Loan Losses

Loans are summarized as follows:

 

 

 

September 30,

 

 

December 31,

 

(in thousands)

 

2016

 

 

2015

 

Loans held for investment:

 

 

 

 

 

 

 

 

Commercial real estate loans:

 

 

 

 

 

 

 

 

Real estate term

 

$

578,462

 

 

$

577,804

 

Construction and land development

 

 

235,350

 

 

 

179,664

 

Total commercial real estate loans

 

 

813,812

 

 

 

757,468

 

Commercial and industrial loans

 

 

205,443

 

 

 

208,277

 

Consumer loans:

 

 

 

 

 

 

 

 

Residential and home equity

 

 

75,571

 

 

 

71,169

 

Consumer and other

 

 

15,062

 

 

 

14,945

 

Total consumer loans

 

 

90,633

 

 

 

86,114

 

Total gross loans

 

 

1,109,888

 

 

 

1,051,859

 

Less:

 

 

 

 

 

 

 

 

Net deferred loan fees

 

 

(4,490

)

 

 

(3,884

)

Total loans held for investment

 

 

1,105,398

 

 

 

1,047,975

 

Less: allowance for loan losses

 

 

(16,181

)

 

 

(15,557

)

Total loans held for investment, net

 

$

1,089,217

 

 

$

1,032,418

 

 


 

10


PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Note 3 — Loans and Allowance for Loan Losses – Continued

 

Changes in the allowance for loan losses (“ALLL”) are as follows:

 

 

 

 

Three Months Ended September 30, 2016

 

 

 

Real

 

 

Construction

 

 

Commercial

 

 

Residential

 

 

Consumer

 

 

 

 

 

 

 

Estate

 

 

and Land

 

 

and

 

 

and

 

 

and

 

 

 

 

 

(in thousands)

 

Term

 

 

Development

 

 

Industrial

 

 

Home Equity

 

 

Other

 

 

Total

 

Balance at beginning of period

 

$

6,869

 

 

$

4,725

 

 

$

3,768

 

 

$

628

 

 

$

162

 

 

$

16,152

 

Additions: Provisions for loan losses

 

 

(426

)

 

 

413

 

 

 

411

 

 

 

(24

)

 

 

(49

)

 

 

325

 

Deductions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross loan charge-offs

 

 

 

 

 

 

 

 

(558

)

 

 

 

 

 

(57

)

 

 

(615

)

Recoveries

 

 

3

 

 

 

148

 

 

 

81

 

 

 

8

 

 

 

79

 

 

 

319

 

Net loan charge-offs

 

 

3

 

 

 

148

 

 

 

(477

)

 

 

8

 

 

 

22

 

 

 

(296

)

Balance at end of period

 

$

6,446

 

 

$

5,286

 

 

$

3,702

 

 

$

612

 

 

$

135

 

 

$

16,181

 

 

 

 

 

 

Three Months Ended September 30, 2015

 

 

 

Real

 

 

Construction

 

 

Commercial

 

 

Residential

 

 

Consumer

 

 

 

 

 

 

 

Estate

 

 

and Land

 

 

and

 

 

and

 

 

and

 

 

 

 

 

(in thousands)

 

Term

 

 

Development

 

 

Industrial

 

 

Home Equity

 

 

Other

 

 

Total

 

Balance at beginning of period

 

$

5,184

 

 

$

3,852

 

 

$

5,694

 

 

$

692

 

 

$

233

 

 

$

15,655

 

Additions: Provisions for loan losses

 

 

1,381

 

 

 

(78

)

 

 

(1,133

)

 

 

(15

)

 

 

45

 

 

 

200

 

Deductions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross loan charge-offs

 

 

(1

)

 

 

(151

)

 

 

(201

)

 

 

-

 

 

 

(53

)

 

 

(406

)

Recoveries

 

 

5

 

 

 

2

 

 

 

31

 

 

 

16

 

 

 

24

 

 

 

78

 

Net loan charge-offs

 

 

4

 

 

 

(149

)

 

 

(170

)

 

 

16

 

 

 

(29

)

 

 

(328

)

Balance at end of period

 

$

6,569

 

 

$

3,625

 

 

$

4,391

 

 

$

693

 

 

$

249

 

 

$

15,527

 

 

 

 

 

 

 

Nine Months Ended September 30, 2016

 

 

 

Real

 

 

Construction

 

 

Commercial

 

 

Residential

 

 

Consumer

 

 

 

 

 

 

 

Estate

 

 

and Land

 

 

and

 

 

and

 

 

and

 

 

 

 

 

(in thousands)

 

Term

 

 

Development

 

 

Industrial

 

 

Home Equity

 

 

Other

 

 

Total

 

Balance at beginning of period

 

$

6,783

 

 

$

3,984

 

 

$

3,941

 

 

$

603

 

 

$

246

 

 

$

15,557

 

Additions: Provisions for loan losses

 

 

(349

)

 

 

1,108

 

 

 

202

 

 

 

(80

)

 

 

(131

)

 

 

750

 

Deductions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross loan charge-offs

 

 

 

 

 

 

 

 

(630

)

 

 

 

 

 

(177

)

 

 

(807

)

Recoveries

 

 

12

 

 

 

194

 

 

 

189

 

 

 

89

 

 

 

197

 

 

 

681

 

Net loan charge-offs

 

 

12

 

 

 

194

 

 

 

(441

)

 

 

89

 

 

 

20

 

 

 

(126

)

Balance at end of period

 

$

6,446

 

 

$

5,286

 

 

$

3,702

 

 

$

612

 

 

$

135

 

 

$

16,181

 

 

 


 

11


PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

Note 3 — Loans and Allowance for Loan Losses – Continued

 

 

 

Nine Months Ended September 30, 2015

 

 

 

Real

 

 

Construction

 

 

Commercial

 

 

Residential

 

 

Consumer

 

 

 

 

 

 

 

Estate

 

 

and Land

 

 

and

 

 

and

 

 

and

 

 

 

 

 

(in thousands)

 

Term

 

 

Development

 

 

Industrial

 

 

Home Equity

 

 

Other

 

 

Total

 

Balance at beginning of period

 

$

5,181

 

 

$

4,425

 

 

$

4,608

 

 

$

671

 

 

$

266

 

 

$

15,151

 

Additions: Provisions for loan losses

 

 

1,316

 

 

 

(442

)

 

 

(129

)

 

 

(41

)

 

 

96

 

 

 

800

 

Deductions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross loan charge-offs

 

 

(2

)

 

 

(396

)

 

 

(235

)

 

 

-

 

 

 

(174

)

 

 

(807

)

Recoveries

 

 

74

 

 

 

38

 

 

 

147

 

 

 

63

 

 

 

61

 

 

 

383

 

Net loan charge-offs

 

 

72

 

 

 

(358

)

 

 

(88

)

 

 

63

 

 

 

(113

)

 

 

(424

)

Balance at end of period

 

$

6,569

 

 

$

3,625

 

 

$

4,391

 

 

$

693

 

 

$

249

 

 

$

15,527

 

 

Non-accrual loans are summarized as follows:

 

 

 

September 30,

 

 

December 31,

 

(in thousands)

 

2016

 

 

2015

 

Non-accrual loans, not troubled debt restructured:

 

 

 

 

 

 

 

 

Real estate term

 

$

2,483

 

 

$

2,961

 

Construction and land development

 

 

85

 

 

 

56

 

Commercial and industrial

 

 

605

 

 

 

1,176

 

Residential and home equity

 

 

152

 

 

 

631

 

Consumer and other

 

 

69

 

 

 

88

 

Total non-accrual loans, not troubled debt restructured

 

 

3,394

 

 

 

4,912

 

Troubled debt restructured loans, non-accrual:

 

 

 

 

 

 

 

 

Real estate term

 

 

824

 

 

 

1,153

 

Construction and land development

 

 

667

 

 

 

1,329

 

Commercial and industrial

 

 

17

 

 

 

21

 

Residential and home equity

 

 

 

 

 

 

Consumer and other

 

 

 

 

 

 

Total troubled debt restructured loans, non-accrual

 

 

1,508

 

 

 

2,503

 

Total non-accrual loans

 

$

4,902

 

 

$

7,415

 

 

Troubled debt restructured loans are summarized as follows:

 

 

 

September 30,

 

 

December 31,

 

(in thousands)

 

2016

 

 

2015

 

Accruing troubled debt restructured loans

 

$

6,006

 

 

$

7,049

 

Non-accrual troubled debt restructured loans

 

 

1,508

 

 

 

2,503

 

Total troubled debt restructured loans

 

$

7,514

 

 

$

9,552

 

 

A restructured loan is considered a troubled debt restructured loan (“TDR”), if the Company, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession in terms or a below-market interest rate to the debtor that it would not otherwise consider. Each TDR loan is separately negotiated with the borrower and includes terms and conditions that reflect the borrower’s prospective ability to service the debt as modified.

 

12


PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

Note 3 — Loans and Allowance for Loan Losses – Continued

Current and past due loans held for investment (accruing and non-accruing) are summarized as follows:

 

 

 

September 30, 2016

 

 

 

 

 

 

 

30-89 Days

 

 

90+ Days

 

 

 

 

 

 

Total

 

 

Total

 

(in thousands)

 

Current

 

 

Past Due

 

 

Past Due

 

 

Non-accrual

 

 

Past Due

 

 

Loans

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate term

 

$

574,515

 

 

$

640

 

 

$

 

 

$

3,307

 

 

$

3,947

 

 

$

578,462

 

Construction and land development

 

 

234,000

 

 

 

598

 

 

 

 

 

 

752

 

 

 

1,350

 

 

 

235,350

 

Total commercial real estate

 

 

808,515

 

 

 

1,238

 

 

 

 

 

 

4,059

 

 

 

5,297

 

 

 

813,812

 

Commercial and industrial

 

 

204,327

 

 

 

494

 

 

 

 

 

 

622

 

 

 

1,116

 

 

 

205,443

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and home equity

 

 

74,953

 

 

 

466

 

 

 

 

 

 

152

 

 

 

618

 

 

 

75,571

 

Consumer and other

 

 

14,765

 

 

 

226

 

 

 

2

 

 

 

69

 

 

 

297

 

 

 

15,062

 

Total consumer

 

 

89,718

 

 

 

692

 

 

 

2

 

 

 

221

 

 

 

915

 

 

 

90,633

 

Total gross loans

 

$

1,102,560

 

 

$

2,424

 

 

$

2

 

 

$

4,902

 

 

$

7,328

 

 

$

1,109,888

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

30-89 Days

 

 

90+ Days

 

 

 

 

 

 

Total

 

 

Total

 

(in thousands)

 

Current

 

 

Past Due

 

 

Past Due

 

 

Non-accrual

 

 

Past Due

 

 

Loans

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate term

 

$

567,886

 

 

$

5,804

 

 

$

 

 

$

4,114

 

 

$

9,918

 

 

$

577,804

 

Construction and land development

 

 

170,495

 

 

 

7,784

 

 

 

 

 

 

1,385

 

 

 

9,169

 

 

 

179,664

 

Total commercial real estate

 

 

738,381

 

 

 

13,588

 

 

 

 

 

 

5,499

 

 

 

19,087

 

 

 

757,468

 

Commercial and industrial

 

 

205,765

 

 

 

1,315

 

 

 

 

 

 

1,197

 

 

 

2,512

 

 

 

208,277

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and home equity

 

 

69,950

 

 

 

588

 

 

 

 

 

 

631

 

 

 

1,219

 

 

 

71,169

 

Consumer and other

 

 

14,596

 

 

 

258

 

 

 

3

 

 

 

88

 

 

 

349

 

 

 

14,945

 

Total consumer

 

 

84,546

 

 

 

846

 

 

 

3

 

 

 

719

 

 

 

1,568

 

 

 

86,114

 

Total gross loans

 

$

1,028,692

 

 

$

15,749

 

 

$

3

 

 

$

7,415

 

 

$

23,167

 

 

$

1,051,859

 

Credit Quality Indicators:

In addition to past due and non-accrual criteria, the Company also analyzes loans using a loan grading system. Performance-based grading follows the Company’s definitions of Pass, Special Mention, Substandard and Doubtful, which are consistent with published definitions of regulatory risk classifications.

Definitions of Pass, Special Mention, Substandard and Doubtful are summarized as follows:

Pass: A Pass asset is higher quality and does not fit any of the other categories described below. The likelihood of loss is considered remote.

Special Mention: A Special Mention asset has potential weaknesses that may be temporary or, if left uncorrected, may result in a loss. While concerns exist, the Company is currently protected and loss is considered unlikely and not imminent.

Substandard: A Substandard asset is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified have well defined weaknesses and are characterized by the distinct possibility that the Company may sustain some loss if deficiencies are not corrected.

Doubtful: A Doubtful asset has all the weaknesses inherent in a Substandard asset with the added characteristics that the weaknesses make collection or liquidation in full highly questionable.

For Consumer loans, the Company generally assigns internal risk grades similar to those described above based on payment performance.

 

13


PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

Note 3 — Loans and Allowance for Loan Losses – Continued

 

Outstanding loan balances (accruing and non-accruing) categorized by these credit quality indicators are summarized as follows:

 

 

 

September 30, 2016

 

 

 

 

 

 

 

Special

 

 

Substandard

 

 

Total

 

 

Total

 

(in thousands)

 

Pass

 

 

Mention

 

 

and Doubtful

 

 

Loans

 

 

Allowance

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate term

 

$

557,377

 

 

$

13,078

 

 

$

8,007

 

 

$

578,462

 

 

$

6,446

 

Construction and land development

 

 

229,804

 

 

 

2,250

 

 

 

3,296

 

 

 

235,350

 

 

 

5,286

 

Total commercial real estate

 

 

787,181

 

 

 

15,328

 

 

 

11,303

 

 

 

813,812

 

 

 

11,732

 

Commercial and industrial

 

 

197,741

 

 

 

899

 

 

 

6,803

 

 

 

205,443

 

 

 

3,702

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and home equity

 

 

71,763

 

 

 

1,918

 

 

 

1,890

 

 

 

75,571

 

 

 

612

 

Consumer and other

 

 

14,928

 

 

 

1

 

 

 

133

 

 

 

15,062

 

 

 

135

 

Total consumer

 

 

86,691

 

 

 

1,919

 

 

 

2,023

 

 

 

90,633

 

 

 

747

 

Total

 

$

1,071,613

 

 

$

18,146

 

 

$

20,129

 

 

$

1,109,888

 

 

$

16,181

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

Special

 

 

Substandard

 

 

Total

 

 

Total

 

(in thousands)

 

Pass

 

 

Mention

 

 

and Doubtful

 

 

Loans

 

 

Allowance

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate term

 

$

551,001

 

 

$

16,326

 

 

$

10,477

 

 

$

577,804

 

 

$

6,783

 

Construction and land development

 

 

172,368

 

 

 

2,934

 

 

 

4,362

 

 

 

179,664

 

 

 

3,984

 

Total commercial real estate

 

 

723,369

 

 

 

19,260

 

 

 

14,839

 

 

 

757,468

 

 

 

10,767

 

Commercial and industrial

 

 

195,611

 

 

 

5,626

 

 

 

7,040

 

 

 

208,277

 

 

 

3,941

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and home equity

 

 

67,088

 

 

 

1,666

 

 

 

2,415

 

 

 

71,169

 

 

 

603

 

Consumer and other

 

 

14,816

 

 

 

36

 

 

 

93

 

 

 

14,945

 

 

 

246

 

Total consumer

 

 

81,904

 

 

 

1,702

 

 

 

2,508

 

 

 

86,114

 

 

 

849

 

Total

 

$

1,000,884

 

 

$

26,588

 

 

$

24,387

 

 

$

1,051,859

 

 

$

15,557

 

The ALLL and outstanding loan balances reviewed according to the Company’s impairment method are summarized as follows:

 

 

 

September 30, 2016

 

 

 

Real

 

 

Construction

 

 

Commercial

 

 

Residential

 

 

Consumer

 

 

 

 

 

 

 

Estate

 

 

and Land

 

 

and

 

 

and

 

 

and

 

 

 

 

 

(in thousands)

 

Term

 

 

Development

 

 

Industrial

 

 

Home Equity

 

 

Other

 

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

271

 

 

$

67

 

 

$

664

 

 

$

76

 

 

$

-

 

 

$

1,078

 

Collectively evaluated for impairment

 

 

6,175

 

 

 

5,219

 

 

 

3,038

 

 

 

536

 

 

 

135

 

 

 

15,103

 

Total

 

$

6,446

 

 

$

5,286

 

 

$

3,702

 

 

$

612

 

 

$

135

 

 

$

16,181

 

Outstanding loan balances:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

7,910

 

 

$

3,285

 

 

$

6,879

 

 

$

1,503

 

 

$

14

 

 

$

19,591

 

Collectively evaluated for impairment

 

 

570,552

 

 

 

232,065

 

 

 

198,564

 

 

 

74,068

 

 

 

15,048

 

 

 

1,090,297

 

Total gross loans

 

$

578,462

 

 

$

235,350

 

 

$

205,443

 

 

$

75,571

 

 

$

15,062

 

 

$

1,109,888

 

 

14


PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

Note 3 — Loans and Allowance for Loan Losses – Continued

 

 

 

December 31, 2015

 

 

 

Real

 

 

Construction

 

 

Commercial

 

 

Residential

 

 

Consumer

 

 

 

 

 

 

 

Estate

 

 

and Land

 

 

and

 

 

and

 

 

and

 

 

 

 

 

(in thousands)

 

Term

 

 

Development

 

 

Industrial

 

 

Home Equity

 

 

Other

 

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

283

 

 

$

67

 

 

$

1,078

 

 

$

79

 

 

$

15

 

 

$

1,522

 

Collectively evaluated for impairment

 

 

6,500

 

 

 

3,917

 

 

 

2,863

 

 

 

524

 

 

 

231

 

 

 

14,035

 

Total

 

$

6,783

 

 

$

3,984

 

 

$

3,941

 

 

$

603

 

 

$

246

 

 

$

15,557

 

Outstanding loan balances:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

10,225

 

 

$

4,219

 

 

$

7,009

 

 

$

2,451

 

 

$

15

 

 

$

23,919

 

Collectively evaluated for impairment

 

 

567,579

 

 

 

175,445

 

 

 

201,268

 

 

 

68,718

 

 

 

14,930

 

 

 

1,027,940

 

Total gross loans

 

$

577,804

 

 

$

179,664

 

 

$

208,277

 

 

$

71,169

 

 

$

14,945

 

 

$

1,051,859

 

 

Information on impaired loans is summarized as follows:

 

 

 

September 30, 2016

 

 

 

 

 

 

 

Recorded Investment

 

 

 

 

 

 

 

 

 

 

 

Unpaid

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

Principal

 

 

With No

 

 

With

 

 

Recorded

 

 

Related

 

(in thousands)

 

Balance

 

 

Allowance

 

 

Allowance

 

 

Investment

 

 

Allowance

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate term

 

$

8,104

 

 

$

5,032

 

 

$

2,878

 

 

$

7,910

 

 

$

271

 

Construction and land development

 

 

5,137

 

 

 

3,081

 

 

 

204

 

 

 

3,285

 

 

 

67

 

Total commercial real estate

 

 

13,241

 

 

 

8,113

 

 

 

3,082

 

 

 

11,195

 

 

 

338

 

Commercial and industrial

 

 

7,362

 

 

 

4,076

 

 

 

2,803

 

 

 

6,879

 

 

 

664

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and home equity

 

 

1,562

 

 

 

1,096

 

 

 

407

 

 

 

1,503

 

 

 

76

 

Consumer and other

 

 

14

 

 

 

14

 

 

 

-

 

 

 

14

 

 

 

-

 

Total consumer

 

 

1,576

 

 

 

1,110

 

 

 

407

 

 

 

1,517

 

 

 

76

 

Total

 

$

22,179

 

 

$

13,299

 

 

$

6,292

 

 

$

19,591

 

 

$

1,078

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

Recorded Investment

 

 

 

 

 

 

 

 

 

 

 

Unpaid

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

Principal

 

 

With No

 

 

With

 

 

Recorded

 

 

Related

 

(in thousands)

 

Balance

 

 

Allowance

 

 

Allowance

 

 

Investment

 

 

Allowance

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate term

 

$

10,430

 

 

$

7,266

 

 

$

2,959

 

 

$

10,225

 

 

$

283

 

Construction and land development

 

 

6,055

 

 

 

4,007

 

 

 

212

 

 

 

4,219

 

 

 

67

 

Total commercial real estate

 

 

16,485

 

 

 

11,273

 

 

 

3,171

 

 

 

14,444

 

 

 

350

 

Commercial and industrial

 

 

7,562

 

 

 

3,510

 

 

 

3,499

 

 

 

7,009

 

 

 

1,078

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and home equity

 

 

2,514

 

 

 

2,019

 

 

 

432

 

 

 

2,451

 

 

 

79

 

Consumer and other

 

 

58

 

 

 

15

 

 

 

-

 

 

 

15

 

 

 

15

 

Total consumer

 

 

2,572

 

 

 

2,034

 

 

 

432

 

 

 

2,466

 

 

 

94

 

Total

 

$

26,619

 

 

$

16,817

 

 

$

7,102

 

 

$

23,919

 

 

$

1,522

 

 

 

15


PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

Note 3 — Loans and Allowance for Loan Losses – Concluded

 

 

The interest income recognized on impaired loans was as follows:  

 

 

 

Three Months Ended

 

 

 

September 30, 2016

 

 

September 30, 2015

 

 

 

Average

 

 

Interest

 

 

Average

 

 

Interest

 

 

 

Recorded

 

 

Income

 

 

Recorded

 

 

Income

 

(in thousands)

 

Investment

 

 

Recognition

 

 

Investment

 

 

Recognition

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate term

 

$

8,990

 

 

$

65

 

 

$

10,440

 

 

$

85

 

Construction and land development

 

 

3,528

 

 

 

54

 

 

 

5,161

 

 

 

109

 

Total commercial real estate

 

 

12,518

 

 

 

119

 

 

 

15,601

 

 

 

194

 

Commercial and industrial

 

 

6,353

 

 

 

88

 

 

 

5,024

 

 

 

44

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and home equity

 

 

1,971

 

 

 

23

 

 

 

2,819

 

 

 

24

 

Consumer and other

 

 

15

 

 

 

1

 

 

 

32

 

 

 

-

 

Total consumer

 

 

1,986

 

 

 

24

 

 

 

2,851

 

 

 

24

 

Total

 

$

20,857

 

 

$

231

 

 

$

23,476

 

 

$

262

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 2016

 

 

September 30, 2015

 

 

 

Average

 

 

Interest

 

 

Average

 

 

Interest

 

 

 

Recorded

 

 

Income

 

 

Recorded

 

 

Income

 

(in thousands)

 

Investment

 

 

Recognition

 

 

Investment

 

 

Recognition

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate term

 

$

9,067

 

 

$

218

 

 

$

11,792

 

 

$

300

 

Construction and land development

 

 

3,752

 

 

 

156

 

 

 

5,234

 

 

 

255

 

Total commercial real estate

 

 

12,819

 

 

 

374

 

 

 

17,026

 

 

 

555

 

Commercial and industrial

 

 

6,944

 

 

 

273

 

 

 

5,004

 

 

 

136

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and home equity

 

 

1,977

 

 

 

57

 

 

 

3,179

 

 

 

93

 

Consumer and other

 

 

15

 

 

 

1

 

 

 

32

 

 

 

1

 

Total consumer

 

 

1,992

 

 

 

58

 

 

 

3,211

 

 

 

94

 

Total

 

$

21,755

 

 

$

705

 

 

$

25,241

 

 

$

785

 

 

Loans and Deposits to affiliates The Company has entered into loan transactions with certain directors, affiliated companies and executive committee members (“affiliates”). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. Total outstanding loans with affiliates were approximately $336,000 and $48,000 as of September 30, 2016 and December 31, 2015, respectively.  Available lines of credit for loans and credit cards to affiliates were approximately $533,000 as of September 30, 2016.  Deposits held by affiliates were $8.6 million and $7.9 million as of September 30, 2016 and December 31, 2015, respectively.

 

 

Note 4 — Income Taxes

Income tax expense was $9.8 million and $7.8 million for the nine months ended September 30, 2016 and 2015, respectively. The Company’s effective tax rate was 36.6% and 34.5% for the nine months ended September 30, 2016 and 2015, respectively.

 

 

 

 

16


PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Note 5 — Commitments and Contingencies

Litigation contingencies— The Company is involved in various claims, legal actions and complaints which arise in the ordinary course of business. In the Company’s opinion, all such matters are adequately covered by insurance, are without merit or are of such kind, or involve such amounts, that unfavorable disposition would not have a material adverse effect on the financial condition or results of operations of the Company.

Commitments to extend credit — In the normal course of business, the Company has outstanding commitments and contingent liabilities, such as commitments to extend credit and unused credit card lines, which are not included in the accompanying consolidated financial statements. The Company’s exposure to credit loss in the event of non-performance by other parties to the financial instruments for commitments to extend credit and unused credit card lines is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making such commitments as it does for instruments that are included in the consolidated balance sheets.

Contractual amounts of off-balance sheet financial instruments were as follows:

 

 

 

September 30,

 

 

December 31,

 

(in thousands)

 

2016

 

 

2015

 

Commitments to extend credit, including unsecured

   commitments of $13,419 and $12,869 as of

   September 30, 2016 and December 31, 2015,

   respectively

 

$

481,566

 

 

$

382,928

 

Stand-by letters of credit and bond commitments,

   including unsecured commitments of $668 and

   $1,391 as of September 30, 2016 and December 31,

   2015, respectively

 

 

33,322

 

 

 

36,333

 

Unused credit card lines, all unsecured

 

 

26,488

 

 

 

25,512

 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments to extend credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.

Unused credit card lines are commitments for possible future extensions of credit to existing customers. These lines of credit are uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed.

 

 

Note 6 — Regulatory Capital Matters

The consolidated Tier 1 Leverage ratio increased from 13.42% at December 31, 2015 to 13.93% as of September 30, 2016. Federal Reserve Board Regulations require maintenance of certain minimum reserve balances based on certain average deposits which as of September 30, 2016 and December 31, 2015 were $8.6 million and $8.7 million, respectively. The Company’s Board of Directors may declare a cash or stock dividend out of retained earnings provided the regulatory minimum capital ratios are met. The Company plans to maintain capital ratios that meet the well-capitalized standards per the regulations and, therefore, plans to limit dividends to amounts that are appropriate to maintain those well-capitalized regulatory capital ratios.

 

 

Note 7 — Shareholders’ Equity

The Board of Directors began declaring quarterly dividends in April 2015.  Dividends on quarterly earnings are generally declared and paid subsequent to the end of the quarter.  

 

 

 

17


PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Note 8 — Incentive Share-Based Plan and Other Employee Benefits  

In June 2014, the Board of Directors (“Board”) and shareholders of the Company approved a share-based incentive plan (“the Plan”). The Plan provides for various share-based incentive awards including incentive share-based options, non-qualified share-based options, restricted shares, and stock appreciation rights to be granted to officers, directors and other key employees. The maximum aggregate number of shares that may be issued under the Plan is 800,000 common shares. The share-based awards are granted to participants under the Plan at a price not less than the fair value on the date of grant and for terms of up to ten years. The Plan also allows for granting of share-based awards to directors and consultants who are not employees of the Company.

During the nine months ended September 30, 2016, the Company granted options for the purchase of 86,831 common shares, which have a weighted average exercise price of $15.66 per share and a weighted average fair value as of the date of grant of $2.26 per share.  Additionally, the Company granted 3,866 restricted stock units (“RSU”) at a weighted-average fair value of $16.50 per unit.  The options and RSU’s generally vest over periods from one to three years. The Company recorded share-based compensation expense of $410,000 and $363,000 for the nine months ended September 30, 2016 and 2015, respectively.

 

 

Note 9 — Fair Value

Fair value measurements — Fair value represents the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value, GAAP has established a hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs. This hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:

 

Level 1

Quoted prices in active markets for identical assets or liabilities.

 

 

Level 2

Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data.

 

 

Level 3

Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

 

 

 

 

18


PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Note 9 — Fair Value – Continued

The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation methodology:

Investment securities, available for sale — Where quoted prices are available in an active market, securities are classified within Level 1 of the hierarchy. Level 1 includes securities that have quoted prices in an active market for identical assets. If quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics or discounted cash flows, and accordingly, are classified as Level 2 or 3. The Company has categorized its available-for-sale investment securities as Level 1 or 2.

Impaired loans and other real estate owned — Fair value applies to loans and other real estate owned measured for impairment. Impaired loans are measured at an observable market price (if available) or at the fair value of the loan’s collateral (if collateral dependent). Fair value of the loan’s collateral is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral. The Company has categorized its impaired loans and other real estate owned as Level 2.    

Assets measured at fair value are summarized as follows:

 

(in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

As of September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair valued on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available for sale

 

$

4,709

 

 

$

321,387

 

 

$

 

 

$

326,096

 

Fair valued on a non-recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

 

 

 

 

5,214

 

 

 

 

 

 

5,214

 

Other real estate owned

 

 

 

 

 

407

 

 

 

 

 

 

407

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair valued on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available for sale

 

$

2,017

 

 

$

330,719

 

 

$

 

 

$

332,736

 

Fair valued on a non-recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

 

 

 

 

5,580

 

 

 

 

 

 

5,580

 

Other real estate owned

 

 

 

 

 

460

 

 

 

 

 

 

460

 

 

 

19


PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Note 9 — Fair Value – Continued

Fair value of financial instruments — The following table summarizes carrying amounts, estimated fair values and assumptions used to estimate fair values of financial instruments:

 

 

 

Carrying

 

 

Estimated

 

(in thousands)

 

Value

 

 

Fair Value

 

As of December 31, 2015

 

 

 

 

 

 

 

 

Financial Assets:

 

 

 

 

 

 

 

 

Net loans held for investment

 

$

1,032,418

 

 

$

1,029,540

 

Financial Liabilities:

 

 

 

 

 

 

 

 

Interest bearing deposits

 

 

900,677

 

 

 

901,211

 

 

The fair values of financial assets and liabilities as of September 30, 2016 were not presented because the assumptions used to estimate fair values have not changed significantly from those used at December 31, 2015.

The above summary excludes financial assets and liabilities for which carrying value approximates fair value. For financial assets, these include cash and cash equivalents, held-to-maturity securities (see Note 2), loans held for sale, bank-owned life insurance, accrued interest receivable and FHLB stock. For financial liabilities, these include non-interest bearing deposits, short-term borrowings, and accrued interest payable. Also excluded from the summary are financial instruments recorded at fair value on a recurring basis, as previously described.

Fair values of off-balance sheet commitments such as lending commitments, standby letters of credit and guarantees are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of the fees as of September 30, 2016 and December 31, 2015 were insignificant.

The following methods and assumptions were used to estimate the fair value of financial instruments:

Net loans — The fair value is estimated by discounting the future cash flows and estimated prepayments using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining term. Some loan types were valued at carrying value because of their floating rate or expected maturity characteristics.

Interest bearing deposits — The fair value of interest bearing deposits is estimated by discounting the estimated future cash flows using the rates currently offered for deposits with similar remaining maturities.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in the above methodologies and assumptions could significantly affect the estimates. Further, certain financial instruments and all non-financial instruments are excluded from the applicable disclosure requirements. Therefore, the fair value amounts shown in the table do not, by themselves, represent the underlying value of the Company as a whole.

 

 

 

 

 

 

20


 

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

The following discussion is intended to provide a more comprehensive review of People’s Utah Bancorp’s operating results and financial condition than can be obtained from reading the Unaudited Consolidated Financial Statements alone. The discussion should be read in conjunction with the Unaudited Consolidated Financial Statements and the notes thereto included in “Part I. Item 1. Financial Statements.”

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10–Q may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views and are not historical facts.  These statements can generally be identified by use of phrases such as “believe,” “expect,” “will,” “seek,” “should,” “anticipate,” “estimate,” “intend,” “plan,” “target,” “project,” “commit” or other words of similar import. Similarly, statements that describe our future financial condition, results of operations, objectives, strategies, plans, goals or future performance and business are also forward-looking statements. These forward-looking statements include but are not limited to, (i) our plans to open new branches in the first half of 2017 and to pursue potential acquisitions, and (ii) statements concerning future growth trends in our residential mortgage business.  Statements that project future financial conditions, results of operations and shareholder value are not guarantees of performance and many of the factors that will determine these results and values are beyond our ability to control or predict. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. These are forward-looking statements and involve known and unknown risks, uncertainties and other factors, including, but not limited to, those described in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections in this report and our Annual Report on Form 10-K for the year ended December 31, 2015 (“Form 10-K”), and other parts of this report that could cause our actual results to differ materially from those anticipated in these forward-looking statements. The following is a non-exclusive list of factors which could cause our actual results to differ materially from our forward-looking statements in this prospectus:

 

changes in general economic conditions, either nationally or in our local market;

 

inflation, interest rates, securities market volatility and monetary fluctuations;

 

increases in competitive pressures among financial institutions and businesses offering similar products and services;

 

higher defaults on our loan portfolio than we expect;

 

changes in management’s estimate of the adequacy of the allowance for loan losses;

 

risks associated with our growth and expansion strategy and related costs;

 

increased lending risks associated with our high concentration of real estate loans;

 

ability to successfully grow our business in Utah and neighboring states;

 

legislative or regulatory changes or changes in accounting principles, policies or guidelines;

 

technological changes;

 

regulatory or judicial proceedings; and

 

other factors and risks including those described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report and our Annual Report on Form 10-K for the year ended December 31, 2015.

Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed.

Please take into account that forward-looking statements speak only as of the date of this Form 10-Q. We do not undertake any obligation to release publicly our revisions to such forward-looking statements to reflect events or circumstances after the date of this Form 10-Q.


 

21


 

Overview

We are a bank holding company, formed in 1998 and headquartered in American Fork, Utah, which is located on the I-15 corridor between the cities of Salt Lake City and Provo. We have three divisions in our wholly-owned subsidiary, People’s Intermountain Bank (“PIB” or the “Bank”). We have 18 banking locations operating through two banking divisions, dba, BAF and LSB, which began offering banking services in 1913 and 1905, respectively.  Our third division is GrowthFunding Equipment Finance, an equipment leasing operation which originates direct equipment leasing products to businesses nationwide and to our banking customers.  In the past we have acquired rental streams of payments from third-party leasing companies. We provide full-service retail banking in many of the leading population centers in the state of Utah, including a wide range of banking and related services to locally-owned businesses, professional firms, real estate developers, residential home builders, high net-worth individuals, investors and other customers. Our primary customers are small and medium-sized businesses that require highly personalized commercial banking products and services.

We believe our growth is a result of our ability to attract and retain high-quality associates, add branches in attractive markets and provide good customer service, as well as due to the expansion of our construction, land acquisition and development and commercial and industrial lending. The primary source of funding for our asset growth has been the generation of core deposits, which we accomplish through a combination of competitive pricing for local deposits coupled with expansion of our branch system. We plan to open two new branches in the first half of 2017.  We had anticipated opening one of the branches at the end of this year, but permitting delays have moved the opening to next year.

Our results of operations are largely dependent on net interest income. Net interest income is the difference between interest income we earn on interest earning assets, which are comprised of loans, investment securities and short-term investments and the interest we pay on our interest bearing liabilities, which are primarily deposits, and, to a lesser extent, other borrowings. Deposits are our primary source of funding. Management strives to match the re-pricing characteristics of the interest earning assets and interest bearing liabilities to protect net interest income from changes in market interest rates and changes in the shape of the yield curve.

We measure our performance by calculating our net interest margin, return on average assets, and return on average equity. Net interest margin is calculated by dividing net interest income, which is the difference between interest income on interest earning assets and interest expense on interest bearing liabilities, by average interest earning assets. Net interest income is our largest source of revenue. Interest rate fluctuations, as well as changes in the amount and type of earning assets and liabilities, combine to affect net interest income. We also measure our performance by our efficiency ratio, which is calculated by dividing non-interest expense less merger-related costs, if applicable, by the sum of net interest income and non-interest income.


 

22


 

Key Factors in Evaluating Our Financial Condition and Results of Operations

As a bank holding company, we focus on a number of key factors in evaluating our financial condition and results of operations including:

 

Return on average equity;

 

Return on average assets;

 

Asset quality;

 

Asset growth;

 

Capital and liquidity;

 

Net interest margin; and

 

Operating efficiency.

The chart below shows these key financial measures:

 

 

Year to Date

 

 

 

September 30,

 

 

September 30,

 

(Dollars in thousands except per share amounts)

 

2016

 

 

2015

 

Net income

 

$

17,068

 

 

$

14,728

 

Basic earnings per share

 

 

0.96

 

 

 

0.93

 

Diluted earnings per share

 

 

0.94

 

 

 

0.90

 

Total assets

 

 

1,653,857

 

 

 

1,553,955

 

Total loans held for investment

 

 

1,105,398

 

 

 

993,464

 

Total deposits

 

 

1,411,839

 

 

 

1,332,873

 

Net interest margin

 

 

4.62

%

 

 

4.43

%

Efficiency ratio

 

 

56.85

%

 

 

59.44

%

Return on average assets

 

 

1.45

%

 

 

1.37

%

Return on average equity

 

 

10.42

%

 

 

10.98

%

Average equity to average assets

 

 

13.91

%

 

 

12.48

%

Non-performing assets to total assets

 

 

0.32

%

 

 

0.64

%

Liquidity ratio (1)

 

 

31.19

%

 

 

34.35

%

Dividend Payout Ratio (2)

 

 

21.80

%

 

 

13.14

%

 

(1)

The liquidity ratio is the sum of cash equivalents and investment securities, less investment securities pledged as collateral against short-term borrowings, all divided by total liabilities. Pledged investment securities were $39.9 million and $39.7 million at September 30, 2016 and 2015, respectively.

 

(2)

The dividend payout ratio is dividends declared divided by net income for the period.  During the year-to-date period in 2015 only two quarterly dividends were declared.  We began declaring quarterly dividends in April 2015.

Return on Average Equity. We measure the return to our shareholders through a return on average equity, or ROE, calculation. Our net income for the nine months ended September 30, 2016 increased 15.9% to $17.1 million from $14.7 million for the comparable period in 2015. Net income for the nine months ended September 30, 2016 increased primarily due to an increase to net loans from loan growth, a higher net interest margin, an increase in non-interest income, and offset by an increase in operating expenses and income tax expense.  Basic earnings per share, or EPS, was $0.96 for the nine months ended September 30, 2016 compared to $0.93 for the comparable period in 2015. Diluted EPS was $0.94 per share for the nine months ended September 30, 2016 compared to $0.90 per share for the comparable period in 2015. Earnings per share was impacted by a 2.7 million or 18.0% increase in weighted average shares resulting from our initial public offering (“IPO”) in June 2015.  Our ROE decreased to 10.42% for the nine months ended September 30, 2016 compared to 10.98% for the comparable period in 2015 due primarily from the additional equity of $34.9 million from our IPO. Future returns on average equity may be impacted by the additional equity from the IPO.

Return on Average Assets. We measure asset utilization through a return on average assets, or ROA, calculation. For the nine months ended September 30, 2016 our ROA increased to 1.45% compared to 1.37% for the nine months ended September 30, 2015. The increase in ROA is a result of improved operating results as discussed throughout this Management’s Discussion & Analysis.  

Asset Quality. Since the majority of our performing assets are loans, we measure asset quality in terms of non-performing assets as a percentage of total assets. This measurement is used in determining asset quality and its potential effect on future earnings. Due to improving asset quality, non-performing assets as a percentage of total assets were 0.32% as of September 30, 2016 compared to

 

23


 

0.64% as of September 30, 2015. Nonperforming assets are loans that are 90 days or more past due or have been placed on nonaccrual status, or are other real estate owned, or OREO.

Asset Growth. Revenue growth and EPS are directly related to earning assets growth. In descending order, our earning assets are loans, investments (including federal funds) and interest earning balances. As of September 30, 2016 compared to September 30, 2015, total assets grew 6.4%, total net loans increased by 11.8% and investment securities increased by 7.5%.  Loan growth in 2016 came primarily from the increased level of real estate lending activities offset by a small decline in commercial and industrial lending.

Capital and Liquidity. Maintaining appropriate capital and liquidity levels is imperative for us to continue our strong growth levels. We have been successful in maintaining capital levels well above the minimum regulatory requirements, which we believe has enabled our growth strategy. We raised approximately $34.9 million in new capital from our IPO. We plan to utilize the additional capital for expansion purposes, both organic and through acquisition, and for general corporate purposes.  Our average equity to average assets ratio as of September 30, 2016 was 13.91% compared to 12.48% as of September 30, 2015. We monitor liquidity levels to ensure we have adequate sources available to fund our loan growth and to accommodate daily operations. The key measure we use to monitor liquidity is our liquidity ratio which is calculated as cash and cash equivalents plus unpledged investment securities divided by total liabilities. Our liquidity ratio was 31.19% as of September 30, 2016, compared to 34.35% as of September 30, 2015.

Net Interest Margin. Net interest margin is a metric that allows us to gauge our loan pricing and funding cost relationship. For the nine months ended September 30, 2016 and 2015, our net interest margin was 4.62% and 4.43%, respectively. The improvement in net interest margin is attributable primarily to a higher loan volume which contributed to a higher percentage of loans in our earning asset mix, higher loan yields and lower costs of interest-bearing liabilities.

Operating Efficiency. Operating efficiency is the measure of how much it costs us to generate each dollar of revenue. A lower percentage indicates a better operating efficiency. Our efficiency ratio is calculated as the sum of non-interest expense less merger related expenses, if applicable, divided by the sum of net interest income and non-interest income and was 56.85% for the nine months ended September 30, 2016 as compared to 59.44% for the nine months ended September 30, 2015.

 

 

 

24


 

Results of Operations

Factors that determine the level of net income include the volume of earning assets and interest bearing liabilities, yields earned and rates paid, fee income, non-interest expense, the level of non-performing loans and other non-earning assets, and the amount of non-interest bearing liabilities supporting earning assets. Non-interest income primarily includes service charges and other fees on deposits, and mortgage banking income. Non-interest expense consists primarily of employee compensation and benefits, occupancy, equipment and depreciation expense, and other operating expenses.

Average Balance and Yields. The following tables set forth a summary of average balances with corresponding interest income and interest expense as well as average yield, cost and net interest margin information for the periods presented. Average balances are derived from daily balances. Average non-accrual loans are derived from quarterly balances and are included as non-interest earning assets for purposes of these tables.

 

 

Three Months Ended

 

 

 

September 30, 2016

 

 

September 30, 2015

 

 

 

 

 

 

 

Interest

 

 

Average

 

 

 

 

 

 

`

 

 

Average

 

 

 

Average

 

 

Income/

 

 

Yield/

 

 

Average

 

 

Income/

 

 

Yield/

 

(Dollars in thousands, except footnotes)

 

Balance

 

 

Expense

 

 

Rate

 

 

Balance

 

 

Expense

 

 

Rate

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning deposits in other banks and federal funds sold

 

$

58,875

 

 

$

74

 

 

 

0.50

%

 

$

79,061

 

 

$

49

 

 

 

0.25

%

Securities: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable securities

 

 

272,827

 

 

 

1,010

 

 

 

1.47

%

 

 

259,719

 

 

 

973

 

 

 

1.49

%

Non-taxable securities (2)

 

 

84,405

 

 

 

590

 

 

 

2.78

%

 

 

81,793

 

 

 

616

 

 

 

2.99

%

Loans (3) (4)

 

 

1,106,695

 

 

 

16,876

 

 

 

6.07

%

 

 

991,198

 

 

 

15,095

 

 

 

6.04

%

Non-marketable equity securities

 

 

1,826

 

 

 

4

 

 

 

0.87

%

 

 

1,644

 

 

 

1

 

 

 

0.24

%

Total interest earning assets

 

 

1,524,628

 

 

$

18,554

 

 

 

4.84

%

 

 

1,413,415

 

 

$

16,734

 

 

 

4.70

%

Allowance for loan losses

 

 

(16,165

)

 

 

 

 

 

 

 

 

 

 

(15,560

)

 

 

 

 

 

 

 

 

Non-interest earning assets

 

 

100,176

 

 

 

 

 

 

 

 

 

 

 

98,759

 

 

 

 

 

 

 

 

 

Total average assets

 

$

1,608,639

 

 

 

 

 

 

 

 

 

 

$

1,496,614

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand and savings accounts

 

$

611,994

 

 

$

431

 

 

 

0.28

%

 

$

551,378

 

 

$

389

 

 

 

0.28

%

Money market accounts

 

 

146,069

 

 

 

81

 

 

 

0.22

%

 

 

148,633

 

 

 

84

 

 

 

0.22

%

Certificates of deposit, under $100,000

 

 

93,829

 

 

 

77

 

 

 

0.33

%

 

 

103,564

 

 

 

104

 

 

 

0.40

%

Certificates of deposit, $100,000 and over

 

 

73,591

 

 

 

120

 

 

 

0.65

%

 

 

80,300

 

 

 

152

 

 

 

0.75

%

Total interest bearing deposits

 

 

925,483

 

 

 

709

 

 

 

0.30

%

 

 

883,875

 

 

 

729

 

 

 

0.33

%

Short-term borrowings

 

 

4,124

 

 

 

1

 

 

 

0.10

%

 

 

2,485

 

 

 

1

 

 

 

0.16

%

Total interest bearing liabilities

 

 

929,607

 

 

$

710

 

 

 

0.30

%

 

 

886,360

 

 

$

730

 

 

 

0.33

%

Other non-interest bearing liabilities

 

 

454,964

 

 

 

 

 

 

 

 

 

 

 

405,577

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

224,068

 

 

 

 

 

 

 

 

 

 

 

204,677

 

 

 

 

 

 

 

 

 

Total average liabilities and shareholders’ equity

 

$

1,608,639

 

 

 

 

 

 

 

 

 

 

$

1,496,614

 

 

 

 

 

 

 

 

 

Net interest income (tax-equivalent)

 

 

 

 

 

$

17,844

 

 

 

 

 

 

 

 

 

 

$

16,004

 

 

 

 

 

Interest rate spread (tax-equivalent)

 

 

 

 

 

 

 

 

 

 

4.54

%

 

 

 

 

 

 

 

 

 

 

4.37

%

Net interest margin (tax-equivalent) (5)

 

 

 

 

 

 

 

 

 

 

4.66

%

 

 

 

 

 

 

 

 

 

 

4.49

%

(1)

Excludes average unrealized gains of $2.0 million and $1.2 million for the three months ended September 30, 2016 and 2015, respectively, which are included in non-interest earning assets.

(2)

Calculated on a fully tax equivalent basis using an assumed tax rate of 35%, which includes federal tax benefits relating to income earned on municipal securities totaling $207,000 and $215,000 for the three months ended September 30, 2016 and 2015, respectively.  

(3)

Loan interest income includes loan fees of $1.6 million and $1.4 million for the three months ended September 30, 2016 and 2015, respectively.  

(4)

Average loans do not include average non-accrual loans of $5.1 million and $9.1 million for the three months ended September 30, 2016 and 2015, respectively, which are included in non-interest earning assets.

(5)

Net interest margin is computed by dividing net interest income (tax-equivalent) by average interest earning assets.

 

25


 

 

 

 

Nine Months Ended

 

 

 

September 30, 2016

 

 

September 30, 2015

 

 

 

 

 

 

 

Interest

 

 

Average

 

 

 

 

 

 

Interest

 

 

Average

 

 

 

Average

 

 

Income/

 

 

Yield/

 

 

Average

 

 

Income/

 

 

Yield/

 

(Dollars in thousands, except footnotes)

 

Balance

 

 

Expense

 

 

Rate

 

 

Balance

 

 

Expense

 

 

Rate

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning deposits in other banks and federal funds sold

 

$

31,990

 

 

$

112

 

 

 

0.47

%

 

$

62,228

 

 

$

114

 

 

 

0.24

%

Securities: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable securities

 

 

278,746

 

 

 

3,196

 

 

 

1.53

%

 

 

247,586

 

 

 

2,863

 

 

 

1.55

%

Non-taxable securities (2)

 

 

90,063

 

 

 

1,918

 

 

 

2.84

%

 

 

78,799

 

 

 

1,832

 

 

 

3.11

%

Loans (3) (4)

 

 

1,088,091

 

 

 

49,147

 

 

 

6.03

%

 

 

972,541

 

 

 

43,250

 

 

 

5.95

%

Non-marketable equity securities

 

 

2,208

 

 

 

8

 

 

 

0.48

%

 

 

2,185

 

 

 

3

 

 

 

0.18

%

Total interest earning assets

 

 

1,491,098

 

 

$

54,381

 

 

 

4.87

%

 

 

1,363,339

 

 

$

48,062

 

 

 

4.71

%

Allowance for loan losses

 

 

(15,878

)

 

 

 

 

 

 

 

 

 

 

(15,381

)

 

 

 

 

 

 

 

 

Non-interest earning assets

 

 

97,941

 

 

 

 

 

 

 

 

 

 

 

89,764

 

 

 

 

 

 

 

 

 

Total average assets

 

$

1,573,161

 

 

 

 

 

 

 

 

 

 

$

1,437,722

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand and savings accounts

 

$

595,333

 

 

$

1,249

 

 

 

0.28

%

 

$

549,385

 

 

$

1,147

 

 

 

0.28

%

Money market accounts

 

 

146,035

 

 

 

258

 

 

 

0.24

%

 

 

142,493

 

 

 

241

 

 

 

0.23

%

Certificates of deposit, under $100,000

 

 

96,057

 

 

 

238

 

 

 

0.33

%

 

 

107,630

 

 

 

338

 

 

 

0.42

%

Certificates of deposit, $100,000 and over

 

 

74,889

 

 

 

378

 

 

 

0.67

%

 

 

84,182

 

 

 

501

 

 

 

0.80

%

Total interest bearing deposits

 

 

912,314

 

 

 

2,123

 

 

 

0.31

%

 

 

883,690

 

 

 

2,227

 

 

 

0.34

%

Short-term borrowings

 

 

15,006

 

 

 

39

 

 

 

0.35

%

 

 

2,149

 

 

 

3

 

 

 

0.19

%

Total interest bearing liabilities

 

 

927,320

 

 

$

2,162

 

 

 

0.31

%

 

 

885,839

 

 

$

2,230

 

 

 

0.34

%

Other non-interest bearing liabilities

 

 

427,083

 

 

 

 

 

 

 

 

 

 

 

372,501

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

218,758

 

 

 

 

 

 

 

 

 

 

 

179,382

 

 

 

 

 

 

 

 

 

Total average liabilities and shareholders’ equity

 

$

1,573,161

 

 

 

 

 

 

 

 

 

 

$

1,437,722

 

 

 

 

 

 

 

 

 

Net interest income (tax-equivalent)

 

 

 

 

 

$

52,219

 

 

 

 

 

 

 

 

 

 

$

45,832

 

 

 

 

 

Interest rate spread (tax-equivalent)

 

 

 

 

 

 

 

 

 

 

4.56

%

 

 

 

 

 

 

 

 

 

 

4.38

%

Net interest margin (tax-equivalent) (5)

 

 

 

 

 

 

 

 

 

 

4.68

%

 

 

 

 

 

 

 

 

 

 

4.49

%

 

(1)

Excludes average unrealized gains of $1.4 million and $1.8 million for the nine months ended September 30, 2016 and 2015, respectively, which are included in non-interest earning assets.

(2)

Calculated on a fully tax equivalent basis using an assumed tax rate of 35%, which includes federal tax benefits relating to income earned on municipal securities totaling $671,000 and $641,000 for the nine months ended September 30, 2016 and 2015, respectively.  

(3)

Loan interest income includes loan fees of $4.4 million and $3.5 million for the nine months ended September 30, 2016 and 2015, respectively.  

(4)

Average loans do not include average non-accrual loans of $5.6 million and $7.8 million for the nine months ended September 30, 2016 and 2015, respectively, which are included in non-interest earning assets.

(5)

Net interest margin is computed by dividing net interest income (tax-equivalent) by average interest earning assets.

 

 

 

 

 

26


 

Rate/Volume Analysis. The following table shows the change in interest income and interest expense and the amount of change attributable to variances in volume, rates and the combination of volume and rates based on the relative changes of volume and rates. For purposes of this table, the change in interest due to both volume and rate has been allocated to change due to volume and rate in proportion to the relationship of absolute dollar amounts of change in each.

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016 vs. 2015

 

 

2016 vs. 2015

 

 

 

Increase (Decrease) Due to:

 

 

Increase (Decrease) Due to:

 

(in thousands)

 

Volume

 

 

Rate

 

 

Net

 

 

Volume

 

 

Rate

 

 

Net

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning deposits in other banks and federal funds sold

 

$

(15

)

 

$

40

 

 

$

25

 

 

$

(73

)

 

$

71

 

 

$

(2

)

Taxable securities

 

 

49

 

 

 

(12

)

 

 

37

 

 

 

357

 

 

 

(24

)

 

 

333

 

Non-taxable securities (1)

 

 

19

 

 

 

(45

)

 

 

(26

)

 

 

248

 

 

 

(162

)

 

 

86

 

Loans

 

 

1,761

 

 

 

20

 

 

 

1,781

 

 

 

5,210

 

 

 

688

 

 

 

5,898

 

Federal Home Loan Bank stock

 

 

-

 

 

 

3

 

 

 

3

 

 

 

-

 

 

 

5

 

 

 

5

 

Total interest income (tax-equivalent)

 

 

1,814

 

 

 

6

 

 

 

1,820

 

 

 

5,742

 

 

 

578

 

 

 

6,320

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand and savings accounts

 

 

43

 

 

 

(2

)

 

 

41

 

 

 

96

 

 

 

5

 

 

 

101

 

Money market accounts

 

 

(1

)

 

 

(2

)

 

 

(3

)

 

 

6

 

 

 

11

 

 

 

17

 

Certificates of deposit, under $100,000

 

 

(9

)

 

 

(18

)

 

 

(27

)

 

 

(34

)

 

 

(66

)

 

 

(100

)

Certificates of deposit, $100,000 and over

 

 

(12

)

 

 

(20

)

 

 

(32

)

 

 

(52

)

 

 

(71

)

 

 

(123

)

Short-term borrowings

 

 

-

 

 

 

-

 

 

 

-

 

 

 

31

 

 

 

5

 

 

 

36

 

Total interest expense

 

 

21

 

 

 

(42

)

 

 

(21

)

 

 

47

 

 

 

(116

)

 

 

(69

)

Net interest income (tax-equivalent)

 

$

1,793

 

 

$

48

 

 

$

1,841

 

 

$

5,695

 

 

$

694

 

 

$

6,389

 

(1)

Tax equivalent income calculated on a fully tax-equivalent basis using an assumed tax rate of 35%.

Net interest income (tax-equivalent) increased $1.8 million for the three months ended September 30, 2016 compared to the same period in 2015. The increase in interest income was primarily driven by increased organic loan volumes. Additional increases in interest income from slightly higher loan yields were offset by lower average rates on investment securities. Additionally, interest expense also decreased for the three months ended September 30, 2016 compared to the same period in 2015 due principally to lower deposit interest rates.

Net interest income (tax-equivalent) increased $6.4 million for the nine months ended September 30, 2016 compared to the same period in 2015. The increase in interest income was primarily driven by increased organic loan volumes and higher loan yields, offset by lower average rates on investment securities. Additionally, interest expense also decreased for the nine months ended September 30, 2016 compared to the same period in 2015 due primarily from lower deposit interest rates.

 

 

 

 

 

27


 

Financial Overview for the Three Months Ended September 30, 2016 and 2015

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

September 30,

 

 

 

 

 

 

 

 

 

(in thousands)

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

Interest income

 

$

18,347

 

 

$

16,519

 

 

$

1,828

 

 

 

11.1

%

Interest expense

 

 

710

 

 

 

730

 

 

 

(20

)

 

 

-2.7

%

Net interest income

 

 

17,637

 

 

 

15,789

 

 

 

1,848

 

 

 

11.7

%

Provision for loan losses

 

 

325

 

 

 

200

 

 

 

125

 

 

 

62.5

%

Net interest income after provision for loan losses

 

 

17,312

 

 

 

15,589

 

 

 

1,723

 

 

 

11.1

%

Non-interest income

 

 

4,386

 

 

 

3,965

 

 

 

421

 

 

 

10.6

%

Non-interest expense

 

 

11,902

 

 

 

11,444

 

 

 

458

 

 

 

4.0

%

Income before income tax expense

 

 

9,796

 

 

 

8,110

 

 

 

1,686

 

 

 

20.8

%

Income tax expense

 

 

3,548

 

 

 

2,844

 

 

 

704

 

 

 

24.8

%

Net income

 

$

6,248

 

 

$

5,266

 

 

$

982

 

 

 

18.6

%

Net Income. Our net income grew by $982,000 or 18.6% to $6.2 million for the quarter ended September 30, 2016 as compared to $5.3 million for the same quarter in 2015. This was attributable principally to an increase in net interest income of $1.8 million, higher non-interest income of $421,000, and offset by an increase of $125,000 in provision for loan losses, $458,000 in non-interest expenses and $704,000 of higher income tax expense.

Net Interest Income and Net Interest Margin. The increase in net interest income for the quarter ended September 30, 2016 compared to the same quarter in 2015 was primarily driven by interest earned on a higher volume in average loans attributable to organic growth. An increase in interest income from slightly higher loan yields was offset by a decrease from lower yields on investment securities. Interest expense in the quarter ended September 30, 2016 decreased from the same period in 2015 due to lower rates paid on deposits.  Construction and land development loans (“C & D loans”) are our highest yielding assets within our earning asset mix and represents 21.2% of gross loans as of September 30, 2016.  If C & D loan activity declines as a percentage of earning asset mix in future quarters, the net interest margin could decline from current levels.

The tax-equivalent yield on our average interest earning assets was 4.84% for the quarter ended September 30, 2016 compared to 4.70% for the comparable quarter in 2015.  The cost of funding our earning assets declined in the quarter ended September 30, 2016 to 0.30% from 0.33% in the comparable quarter in 2015 because of lower rates paid on deposits and accretion of fair value adjustments to certificates of deposit.

Provision for Loan Losses. The provision for loan losses in each period is a charge against earnings in that period. The provision is that amount required to maintain the allowance for loan losses at a level that, in management’s judgment, is adequate to absorb loan losses inherent in the loan portfolio.

The provision for loan losses for the quarters ended September 30, 2016 and 2015 was $325,000 and $200,000, respectively. We have experienced net charge-offs of $296,000 in the current quarter compared to $328,000 in the comparable quarter in 2015. The provision for loan losses in both periods was primarily due to the impact of the charge-offs and relative increases in loan balances.

Non-interest Income. The following table presents, for the periods indicated, the major categories of non-interest income:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

September 30,

 

 

 

 

 

 

 

 

 

(in thousands)

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

Service charges on deposit accounts

 

$

582

 

 

$

613

 

 

$

(31

)

 

 

-5.1

%

Card processing

 

 

1,129

 

 

 

1,079

 

 

 

50

 

 

 

4.6

%

Mortgage banking

 

 

2,244

 

 

 

1,841

 

 

 

403

 

 

 

21.9

%

Other operating

 

 

431

 

 

 

432

 

 

 

(1

)

 

 

-0.2

%

Total non-interest income

 

$

4,386

 

 

$

3,965

 

 

$

421

 

 

 

10.6

%

The increase in total non-interest income during the quarter ended September 30, 2016 compared to the same quarter in 2015 was primarily influenced by higher mortgage banking income from higher mortgage volumes, offset by lower service charges on deposit accounts primarily due to a reduced volume of processed and returned items in the third quarter of 2016.  

 

28


 

Non-interest Expense. The following table presents, for the periods indicated, the major categories of non-interest expense:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

September 30,

 

 

 

 

 

 

 

 

 

(in thousands)

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

Salaries and employee benefits

 

$

7,674

 

 

$

7,323

 

 

$

351

 

 

 

4.8

%

Occupancy, equipment and depreciation

 

 

1,101

 

 

 

969

 

 

 

132

 

 

 

13.6

%

Data processing

 

 

665

 

 

 

729

 

 

 

(64

)

 

 

-8.8

%

FDIC premiums

 

 

124

 

 

 

186

 

 

 

(62

)

 

 

-33.3

%

Card processing

 

 

509

 

 

 

512

 

 

 

(3

)

 

 

-0.6

%

Marketing and advertising

 

 

301

 

 

 

279

 

 

 

22

 

 

 

7.9

%

Other

 

 

1,528

 

 

 

1,446

 

 

 

82

 

 

 

5.7

%

Total non-interest expense

 

$

11,902

 

 

$

11,444

 

 

$

458

 

 

 

4.0

%

Non-interest expense for the third quarter of 2016 increased $458,000 compared to the comparable period in 2015, primarily due to higher salaries and benefits of $0.4 million and various other expenses of $0.1 million, including expenses related primarily to higher occupancy, marketing and other costs, and offset by lower data processing and lower rates on FDIC premiums. During the third quarter of 2016 we received an infrequent health insurance premium refund of $345,000 related to a prior year.  The increase in salaries and benefits is primarily due to annual salary increases, higher variable compensation costs, higher payroll tax and medical benefits (net of the insurance refund) to support our balance sheet and income growth.

   Provision for Income Taxes. We recorded a tax provision of $3.5 million for the third quarter ended September 30, 2016 compared to $2.8 million for the same period in 2015. The effective tax rate for the third quarter of 2016 was 36.2% compared to 35.1% in the corresponding third quarter of 2015. The tax rate in 2016 is higher than 2015 due primarily to a one-time tax credit of approximately $400,000 in 2015.  

Financial Overview for the Nine Months Ended September 30, 2016 and 2015

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

September 30,

 

 

 

 

 

 

 

 

 

(in thousands)

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

Interest income

 

$

53,710

 

 

$

47,421

 

 

$

6,289

 

 

 

13.3

%

Interest expense

 

 

2,162

 

 

 

2,230

 

 

 

(68

)

 

 

-3.0

%

Net interest income

 

 

51,548

 

 

 

45,191

 

 

 

6,357

 

 

 

14.1

%

Provision for loan losses

 

 

750

 

 

 

800

 

 

 

(50

)

 

 

-6.3

%

Net interest income after provision for loan losses

 

 

50,798

 

 

 

44,391

 

 

 

6,407

 

 

 

14.4

%

Non-interest income

 

 

12,547

 

 

 

12,252

 

 

 

295

 

 

 

2.4

%

Non-interest expense

 

 

36,437

 

 

 

34,146

 

 

 

2,291

 

 

 

6.7

%

Income before income tax expense

 

 

26,908

 

 

 

22,497

 

 

 

4,411

 

 

 

19.6

%

Income tax expense

 

 

9,840

 

 

 

7,769

 

 

 

2,071

 

 

 

26.7

%

Net income

 

$

17,068

 

 

$

14,728

 

 

$

2,340

 

 

 

15.9

%

Net Income. Our net income grew by $2.3 million or 15.9% to $17.1 million for the nine months ended September 30, 2016 as compared to $14.7 million for the same period in 2015. This was attributable principally to an increase in net interest income of $6.4 million, higher non-interest income of $295,000, a slightly lower loan loss provision expense of $50,000, offset by an increase of $2.3 million in non-interest expenses and $2.1 million of higher income tax expense.

Net Interest Income and Net Interest Margin. The increase in net interest income for the nine months ended September 30, 2016 compared to the same period in 2015 was primarily driven by interest earned on a higher volume in average loans attributable to internal growth, which contributed to a higher mix of loans in our earning assets portfolio. An increase in interest income from higher loan yields was offset by a decrease from lower yields on investment securities. Interest expense in the nine months ended September 30, 2016 declined from the same period in 2015 due to lower rates paid on deposits.

The tax-equivalent yield on our average interest earning assets was 4.87% for the nine months ended September 30, 2016 compared to 4.71% for the comparable quarter in 2015.  The cost of funding our earning assets declined in the nine months ended

 

29


 

September 30, 2016 to 0.31% from 0.34% in the comparable period in 2015 because of lower rates paid on deposits and accretion of fair value adjustments to certificates of deposit.

Provision for Loan Losses. The provision for loan losses in each period is a charge against earnings in that period. The provision is that amount required to maintain the allowance for loan losses at a level that, in management’s judgment, is adequate to absorb loan losses inherent in the loan portfolio.

The provision for loan losses for the nine months ended September 30, 2016 and 2015 was $750,000 and $800,000, respectively. We have experienced improving credit quality in our loan portfolio and experienced net charge-offs of $126,000 and $424,000 during the nine months ended September 30, 2016 and 2015, respectively.  The provision for loan losses in both periods was primarily due to the impact of the charge-offs and relative increases in loan balances.

Non-interest Income. The following table presents, for the periods indicated, the major categories of non-interest income:

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

September 30,

 

 

 

 

 

 

 

 

 

(in thousands)

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

Service charges on deposit accounts

 

$

1,626

 

 

 

1,870

 

 

$

(244

)

 

 

-13.0

%

Card processing

 

 

3,296

 

 

 

3,147

 

 

 

149

 

 

 

4.7

%

Mortgage banking

 

 

6,269

 

 

 

5,638

 

 

 

631

 

 

 

11.2

%

Other operating

 

 

1,356

 

 

 

1,597

 

 

 

(241

)

 

 

-15.1

%

Total non-interest income

 

$

12,547

 

 

$

12,252

 

 

$

295

 

 

 

2.4

%

The increase in total non-interest income during the nine months ended September 30, 2016 compared to the same period in 2015 was primarily influenced by higher mortgage banking income from higher mortgage volumes, higher card processing fees, offset by lower service charges on deposit accounts primarily due to reduced volume of processed and returned items in the nine months ended September 30, 2016.  The nine months ended September 30, 2015 included a gain of approximately $330,000 on the sale of other foreclosed assets during the period.

Non-interest Expense. The following table presents, for the periods indicated, the major categories of non-interest expense:

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

September 30,

 

 

 

 

 

 

 

 

 

(in thousands)

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

Salaries and employee benefits

 

$

23,517

 

 

 

21,825

 

 

$

1,692

 

 

 

7.8

%

Occupancy, equipment and depreciation

 

 

3,165

 

 

 

2,914

 

 

 

251

 

 

 

8.6

%

Data processing

 

 

2,112

 

 

 

2,020

 

 

 

92

 

 

 

4.6

%

FDIC premiums

 

 

507

 

 

 

564

 

 

 

(57

)

 

 

-10.1

%

Card processing

 

 

1,648

 

 

 

1,516

 

 

 

132

 

 

 

8.7

%

Marketing and advertising

 

 

760

 

 

 

656

 

 

 

104

 

 

 

15.9

%

Other

 

 

4,728

 

 

 

4,651

 

 

 

77

 

 

 

1.7

%

Total non-interest expense

 

$

36,437

 

 

$

34,146

 

 

$

2,291

 

 

 

6.7

%

Non-interest expense for the nine months ended 2016 increased $2.3 million compared to the comparable period in 2015, primarily due to higher salaries and benefits of $1.7 million and various other expenses of $0.6 million, including expenses related primarily to higher occupancy, card processing, marketing and other expenses. During the third quarter of 2016 we received an infrequent health insurance premium refund of $345,000 related to a prior year. The increase in salaries and benefits during the year-to-date period in 2016 is primarily from annual salary increases, higher variable compensation costs, higher payroll tax and medical benefits (net of the insurance refund) and new hires related to the expansion of our leasing division to support our balance sheet and income growth.

   Provision for Income Taxes. We recorded a tax provision of $9.8 million for the nine months ended September 30, 2016 compared to $7.8 million for the same period in 2015. The effective tax rate for the first nine months of 2016 was 36.6% compared to 34.5% in the comparable period of 2015. The tax rate in 2016 is higher than 2015 due primarily to a one-time tax credit of approximately $400,000 in 2015 and due to adjustments in the expected recoverability of certain tax credits in 2016.

 

30


 

 

 

 

Financial Condition

Our total assets as of September 30, 2016 were $1.65 billion, a 6.3% increase compared to December 31, 2015. Our total loans held for investment as of September 30, 2016 were $1.11 billion, an increase of 5.5% from December 31, 2015. Total deposits as of September 30, 2016 were $1.41 billion, an increase of 7.8% compared to December 31, 2015.  We had approximately $25 million in Federal Home Loan Bank borrowings as of December 31, 2015, which was paid down during the second quarter of 2016.

Loans

The following table sets forth information regarding the composition of the loan portfolio at the end of each of the periods presented.

 

 

September 30,

 

 

December 31,

 

(Dollars in thousands)

 

2016

 

 

2015

 

Loans held for sale

 

$

15,178

 

 

$

17,947

 

Loans held for investment:

 

 

 

 

 

 

 

 

Commercial real estate loans:

 

 

 

 

 

 

 

 

Real estate term

 

 

578,462

 

 

 

577,804

 

Construction and land development

 

 

235,350

 

 

 

179,664

 

Total commercial real estate loans

 

 

813,812

 

 

 

757,468

 

Commercial and industrial

 

 

205,443

 

 

 

208,277

 

Consumer loans:

 

 

 

 

 

 

 

 

Residential and home equity

 

 

75,571

 

 

 

71,169

 

Consumer and other

 

 

15,062

 

 

 

14,945

 

Total consumer loans

 

 

90,633

 

 

 

86,114

 

Total gross loans

 

 

1,109,888

 

 

 

1,051,859

 

Net deferred loan fees

 

 

(4,490

)

 

 

(3,884

)

Allowance for loan losses

 

 

(16,181

)

 

 

(15,557

)

Loans held for investment, net

 

 

1,089,217

 

 

 

1,032,418

 

Total loans, net

 

$

1,104,395

 

 

$

1,050,365

 

 

 

 

September 30,

 

 

December 31,

 

(Percentage of total loans held for investment)

 

2016

 

 

2015

 

Loans held for investment:

 

 

 

 

 

 

 

 

Commercial real estate loans:

 

 

 

 

 

 

 

 

Real estate term

 

 

52.1

%

 

 

54.9

%

Construction and land development

 

 

21.2

%

 

 

17.1

%

Total commercial real estate loans

 

 

73.3

%

 

 

72.0

%

Commercial and industrial

 

 

18.5

%

 

 

19.8

%

Consumer loans:

 

 

 

 

 

 

 

 

Residential and home equity

 

 

6.8

%

 

 

6.8

%

Consumer and other

 

 

1.4

%

 

 

1.4

%

Total consumer loans

 

 

8.2

%

 

 

8.2

%

Total loans held for investment

 

 

100.0

%

 

 

100.0

%

We originate certain residential mortgage loans for sale to investors that are carried at cost. Due to the short period held, generally less than 90 days, we consider these loans held for sale to be carried at fair value.

The following tables show the amounts of outstanding loans, which, based on remaining scheduled repayments of principal, were due in one year or less, more than one year through five years, and more than five years. Lines of credit or other loans having no stated maturity and no stated schedule of repayments are reported as due in one year or less. In the table below, loans are classified as real estate related if they are collateralized by real estate. The tables also present, for loans with maturities over one year, an analysis with respect to fixed interest rate loans and adjustable interest rate loans.

 

31


 

Contractual maturities as of September 30, 2016 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rate Structure for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans Maturing Over

 

 

 

 

Maturity

 

 

One Year

 

 

 

 

 

 

 

 

One

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One

 

 

through

 

 

After

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year

 

 

Five

 

 

Five

 

 

 

 

 

 

 

 

 

 

Adjustable

 

 

(in thousands)

 

or Less

 

 

Years

 

 

Years

 

 

Total

 

 

Fixed Rate

 

 

Rate

 

 

Loans held for investment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate term

 

$

56,243

 

 

$

234,768

 

 

$

287,451

 

 

$

578,462

 

 

$

159,509

 

 

$

362,710

 

 

Construction and land development

 

 

205,662

 

 

 

26,263

 

 

 

3,425

 

 

 

235,350

 

 

 

18,210

 

 

 

11,478

 

 

Total commercial real estate loans

 

 

261,905

 

 

 

261,031

 

 

 

290,876

 

 

 

813,812

 

 

 

177,719

 

 

 

374,188

 

 

Commercial and industrial

 

 

85,937

 

 

 

90,304

 

 

 

29,202

 

 

 

205,443

 

 

 

80,683

 

 

 

38,823

 

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and home equity

 

 

13,320

 

 

 

22,536

 

 

 

39,715

 

 

 

75,571

 

 

 

10,969

 

 

 

51,282

 

 

Consumer and other

 

 

6,444

 

 

 

7,233

 

 

 

1,385

 

 

 

15,062

 

 

 

8,151

 

 

 

467

 

 

Total consumer loans

 

 

19,764

 

 

 

29,769

 

 

 

41,100

 

 

 

90,633

 

 

 

19,120

 

 

 

51,749

 

 

Total gross loans held for investment

 

$

367,606

 

(1)

$

381,104

 

 

$

361,178

 

 

$

1,109,888

 

 

$

277,522

 

 

$

464,760

 

(1)

(1)

The sum of adjustable rate loans maturing after one year and total loans maturing within one year is $832 million or 75.0% of total loans at September 30, 2016.

Concentrations. As of September 30, 2016, in management’s judgment, a concentration of loans existed in real estate related loans. At that date, real estate related loans comprised 80.1% of total loans held for investment, of which commercial real estate represents 52.1%, 21.2% are construction and land development loans, and 6.8% are residential and home equity loans. We require collateral on real estate lending arrangements and typically maintain loan-to-value ratios of up to 80%, except for some residential construction loans of up to 95% loan-to-value provided the loan includes pre-approved long-term financing.  Although our concentration in commercial and industrial loans has decreased primarily from paydowns to 18.5% as of September 30, 2016 from 19.8% as of December 31, 2015, we have been changing our loan portfolio mix since 2011 resulting in an increase in our concentration of commercial and industrial loans from 15.1% as of December 31, 2011.

Non-Performing Assets. Loans are placed on non-accrual status when they become 90 days or more past due or at such earlier time as management determines timely recognition of interest to be in doubt. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, collection efforts, and the borrower’s financial condition, that the borrower will be unable to make payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received, or payment is considered certain. Loans may be returned to accrual status when all delinquent interest and principal amounts contractually due are brought current and future payments are reasonably assured.

 

32


 

The following table summarizes the loans for which the accrual of interest has been discontinued and loans more than 90 days past due and still accruing interest, including those non-accrual loans that are troubled-debt restructured loans, and OREO:

 

 

 

September 30,

 

 

December 31,

 

(Dollars in thousands)

 

2016

 

 

2015

 

Non-accrual loans, not troubled-debt restructured

 

 

 

 

 

 

 

 

Real estate term

 

$

2,483

 

 

$

2,961

 

Construction and land development

 

 

85

 

 

 

56

 

Commercial and industrial

 

 

605

 

 

 

1,176

 

Residential and home equity

 

 

152

 

 

 

631

 

Consumer and other

 

 

69

 

 

 

88

 

Total non-accrual, not troubled-debt restructured loans

 

 

3,394

 

 

 

4,912

 

Troubled-debt restructured loans non-accrual

 

 

 

 

 

 

 

 

Real estate term

 

 

824

 

 

 

1,153

 

Construction and land development

 

 

667

 

 

 

1,329

 

Commercial and industrial

 

 

17

 

 

 

21

 

Residential and home equity

 

 

 

 

 

 

Consumer and other

 

 

 

 

 

 

Total troubled-debt restructured, non-accrual loans

 

 

1,508

 

 

 

2,503

 

Total non-accrual loans (1)

 

 

4,902

 

 

 

7,415

 

Accruing loans past due 90 days or more

 

 

2

 

 

 

3

 

Total non-performing loans (NPL)

 

 

4,904

 

 

 

7,418

 

OREO

 

 

407

 

 

 

568

 

Total non-performing assets (NPA) (2)

 

$

5,311

 

 

$

7,986

 

Accruing troubled debt restructured loans

 

$

6,006

 

 

$

7,049

 

Non-accrual troubled debt restructured loans

 

 

1,508

 

 

 

2,503

 

Total troubled debt restructured loans

 

$

7,514

 

 

$

9,552

 

Selected ratios:

 

 

 

 

 

 

 

 

NPL to total loans

 

 

0.45

%

 

 

0.72

%

NPA to total assets

 

 

0.32

%

 

 

0.51

%

(1)

We estimate that approximately $272,000 and $453,000 of interest income would have been recognized on loans accounted for on a non-accrual basis for the nine months ended September 30, 2016 and the year ended December 31, 2015, respectively, had such loans performed pursuant to contractual terms.

(2)

Non-performing assets as of September 30, 2016 and December 31, 2015 have not been reduced by U.S. government guarantees of $16,000 and $437,000, respectively.  

Impaired Loans. Impaired loans are loans for which it is probable that we will be unable to collect all principal and interest payments due according to the contractual terms of the loan agreement. We measure impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral, if the loan is collateral-dependent.

In determining whether or not a loan is impaired, we consider payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. We determine the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all the circumstances surrounding the loan and borrower, including the length of delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Loans for which an insignificant shortfall in amount of payments is anticipated, but where we expect to collect all amounts due, are not considered impaired.

Troubled-debt Restructured Loans. A restructured loan is considered a troubled debt restructured loan, or TDR, if we, for economic or legal reasons related to the debtor’s financial difficulties, grant a concession in terms or a below-market interest rate to the debtor that we would not otherwise consider. We had TDR loans of $7.5 million and $9.6 million as of September 30, 2016 and December 31, 2015, respectively. Our TDR loans are considered impaired loans of which $1.5 million and $2.5 million as of September 30, 2016 and December 31, 2015, respectively, are designated as non-accrual.

 

33


 

Each restructured debt is separately negotiated with the borrower and includes terms and conditions that reflect the borrower’s prospective ability to service the debt as modified.

OREO Properties. OREO represents real property taken either through foreclosure or through a deed in lieu thereof from the borrower. All OREO properties are recorded by us at amounts equal to or less than the fair market value of the properties based on current independent appraisals reduced by estimated selling costs. The following table provides a summary of the changes in the OREO balance:

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(in thousands)

 

2016

 

 

2015

 

Balance, beginning of period

 

$

568

 

 

$

1,673

 

Additions

 

 

237

 

 

 

11

 

Write-downs

 

 

(53

)

 

 

 

Sales

 

 

(345

)

 

 

(1,065

)

Balance, end of period

 

$

407

 

 

$

619

 

 

 

Allowance for Loan Losses

We maintain an adequate allowance for loan losses, or ALLL, based on a comprehensive methodology that assesses the losses inherent in the loan portfolio. Our ALLL is based on a continuing review of loans which includes consideration of actual loss experience, changes in the size and character of the portfolio, identification of individual problem situations which may affect the borrower’s ability to repay, evaluations of the prevailing and anticipated economic conditions, and other qualitative factors. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

Our ALLL is increased by charges to income and decreased by charge-offs (net of recoveries). While we use available information to recognize losses on loans, changes in economic conditions may necessitate revision of the estimate in future years.

The ALLL consists of specific and general components. The specific component relates to loans determined to be impaired that are individually evaluated for impairment. For impaired loans individually evaluated, an allowance is established when the discounted cash flows, or the fair value of the collateral if the loans are collateral-dependent, of the impaired loan are lower than the carrying value of the loan. The general component covers all loans not individually evaluated for impairment and is based on historical loss experience adjusted for qualitative factors. Various qualitative factors are considered including changes to underwriting policies, loan concentrations, volume and mix of loans, size and complexity of individual credits, locations of credits and new market areas, changes in local and national economic conditions, and trends in past due, non-accrual and classified loan balances.

 

34


 

The following table sets forth the activity in our allowance for loan losses for the periods indicated:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

(Dollars in thousands)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

16,152

 

 

$

15,655

 

 

$

15,557

 

 

$

15,151

 

Loans charged off:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate term

 

 

 

 

 

(1

)

 

 

 

 

 

(2

)

Construction and land development

 

 

 

 

 

(151

)

 

 

 

 

 

(396

)

Commercial and industrial

 

 

(558

)

 

 

(201

)

 

 

(630

)

 

 

(235

)

Residential and home equity

 

 

 

 

 

 

 

 

 

 

 

 

Consumer and other

 

 

(57

)

 

 

(53

)

 

 

(177

)

 

 

(174

)

Total

 

 

(615

)

 

 

(406

)

 

 

(807

)

 

 

(807

)

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate term

 

 

3

 

 

 

5

 

 

 

12

 

 

 

74

 

Construction and land development

 

 

148

 

 

 

2

 

 

 

194

 

 

 

38

 

Commercial and industrial

 

 

81

 

 

 

31

 

 

 

189

 

 

 

147

 

Residential and home equity

 

 

8

 

 

 

16

 

 

 

89

 

 

 

63

 

Consumer and other

 

 

79

 

 

 

24

 

 

 

197

 

 

 

61

 

Total

 

 

319

 

 

 

78

 

 

 

681

 

 

 

383

 

Net loan recoveries (charge offs)

 

 

(296

)

 

 

(328

)

 

 

(126

)

 

 

(424

)

Provision for loan losses

 

 

325

 

 

 

200

 

 

 

750

 

 

 

800

 

Ending balance

 

$

16,181

 

 

$

15,527

 

 

$

16,181

 

 

$

15,527

 

Gross loans including loans held for sale

 

$

1,125,066

 

 

$

1,006,895

 

 

$

1,125,066

 

 

$

1,006,895

 

Average loans

 

 

1,106,695

 

 

 

991,198

 

 

 

1,088,091

 

 

 

972,541

 

Non-performing loans

 

 

4,904

 

 

 

9,383

 

 

 

4,904

 

 

 

9,383

 

Selected ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net charge-offs (recoveries) to average loans

 

 

0.11

%

 

 

0.13

%

 

 

0.02

%

 

 

0.06

%

Provision for loan losses to average loans

 

 

0.12

%

 

 

0.08

%

 

 

0.09

%

 

 

0.11

%

Allowance for loan losses to loans outstanding at end of period

 

 

1.44

%

 

 

1.54

%

 

 

1.44

%

 

 

1.54

%

The decrease in ALLL as a percentage of total loans from 2015 to 2016 is attributable to overall improvement in the credit quality of the underlying loan portfolio.

Our construction and land development portfolio reflects some borrower concentration risk, and also carries the enhanced risks encountered with construction loans generally. We also finance contractors on a speculative basis. Construction and land development loans are generally more risky than permanent mortgage loans because they are dependent upon the borrower’s ability to generate cash to service the loan, and the value of the collateral depends on project completion when market conditions may have changed.

Our commercial real estate loans are a mixture of new and seasoned properties, retail, office, warehouse, and some industrial properties. Loans on properties are usually underwritten at a loan to value ratio of up to 75% with a minimum debt coverage ratio of 1.25 times.

Our loan portfolio does not include any significant concentrations in oil and gas related businesses.  

We allocate our allowance for loan losses by assigning general percentages to our major loan categories (construction and land development, commercial real estate term, residential real estate, C&I and consumer), assigning specific percentages to each category of loans graded in accordance with the guidelines established by our regulatory agencies, and making specific allocations to impaired loans when factors are present requiring a greater reserve than would be required using the assigned risk rating allocation, which is typically based on a review of appraisals or other collateral analysis.

 

35


 

The following table indicates management’s allocation of the ALLL and the percent of loans in each category to total loans as of each of the following dates:

 

 

 

September 30,

 

 

December 31,

 

(in thousands)

 

2016

 

 

2015

 

Commercial real estate loans:

 

 

 

 

 

 

 

 

Real estate term

 

$

6,446

 

 

$

6,783

 

Construction and land development

 

 

5,286

 

 

 

3,984

 

Total commercial real estate loans

 

 

11,732

 

 

 

10,767

 

Commercial and industrial

 

 

3,702

 

 

 

3,941

 

Consumer loans:

 

 

 

 

 

 

 

 

Residential and home equity

 

 

612

 

 

 

603

 

Consumer and other

 

 

135

 

 

 

246

 

Total consumer loans

 

 

747

 

 

 

849

 

Total

 

$

16,181

 

 

$

15,557

 

 

 

 

September 30,

 

 

December 31,

 

(Percentage of total loans held for investment)

 

2016

 

 

2015

 

Commercial real estate loans:

 

 

 

 

 

 

 

 

Real estate term

 

 

52.1

%

 

 

54.9

%

Construction and land development

 

 

21.2

%

 

 

17.1

%

Total commercial real estate loans

 

 

73.3

%

 

 

72.0

%

Commercial and industrial

 

 

18.5

%

 

 

19.8

%

Consumer loans:

 

 

 

 

 

 

 

 

Residential and home equity

 

 

6.8

%

 

 

6.8

%

Consumer and other

 

 

1.4

%

 

 

1.4

%

Total consumer loans

 

 

8.2

%

 

 

8.2

%

Total

 

 

100.0

%

 

 

100.0

%

 

 

Investments

The carrying value of our investment securities totaled $387.6 million as of September 30, 2016 and $398.6 million as of December 31, 2015. Our portfolio of investment securities is comprised of both available-for-sale securities and securities that we intend to hold to maturity. As of September 30, 2016, we held no investment securities from any issuer which totaled over 10% of our shareholders’ equity.

The carrying value of our portfolio of investment securities was as follows:

 

 

 

September 30,

 

 

December 31,

 

(in thousands)

 

2016

 

 

2015

 

Available for sale securities:

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

117,262

 

 

$

103,990

 

Municipal securities

 

 

29,199

 

 

 

37,730

 

Mortgage-backed securities

 

 

170,059

 

 

 

181,386

 

Corporate securities

 

 

9,576

 

 

 

9,630

 

Total

 

 

326,096

 

 

 

332,736

 

Held to maturity securities:

 

 

 

 

 

 

 

 

Municipal securities

 

 

59,239

 

 

 

63,650

 

Other securities

 

 

2,232

 

 

 

2,232

 

Total

 

 

61,471

 

 

 

65,882

 

Total investment securities

 

$

387,567

 

 

$

398,618

 

 

36


 

The following table shows the amortized cost for maturities of investment securities and the weighted average yields of such securities, including the benefit of tax-exempt securities:

Investment securities maturities as of September 30, 2016:

 

 

 

 

 

 

 

 

 

 

After One but

 

 

After Five but

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Within One Year

 

 

within Five Years

 

 

within Ten Years

 

 

After Ten Years

 

 

Total

 

(Dollars in thousands)

 

Amount

 

 

Yield

 

 

Amount

 

 

Yield

 

 

Amount

 

 

Yield

 

 

Amount

 

 

Yield

 

 

Amount

 

 

Yield

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

11,292

 

 

 

0.85

%

 

$

105,949

 

 

 

1.08

%

 

$

-

 

 

 

0.00

%

 

$

-

 

 

 

0.00

%

 

$

117,241

 

 

 

1.06

%

Municipal securities

 

 

9,763

 

 

 

3.76

%

 

 

12,079

 

 

 

4.28

%

 

 

5,651

 

 

 

3.50

%

 

 

986

 

 

 

3.64

%

 

 

28,479

 

 

 

3.92

%

Mortgage-backed securities

 

 

-

 

 

 

0.00

%

 

 

2,758

 

 

 

1.57

%

 

 

61,708

 

 

 

1.49

%

 

 

104,317

 

 

 

1.82

%

 

 

168,783

 

 

 

1.70

%

Other securities

 

 

-

 

 

 

0.00

%

 

 

3,000

 

 

 

1.71

%

 

 

4,000

 

 

 

1.79

%

 

 

3,000

 

 

 

4.00

%

 

 

10,000

 

 

 

2.43

%

Total

 

 

21,055

 

 

 

2.20

%

 

 

123,786

 

 

 

1.42

%

 

 

71,359

 

 

 

1.67

%

 

 

108,303

 

 

 

1.90

%

 

 

324,503

 

 

 

1.68

%

Held to maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal securities

 

 

8,535

 

 

 

2.29

%

 

 

39,850

 

 

 

2.29

%

 

 

10,854

 

 

 

2.78

%

 

 

-

 

 

 

0.00

%

 

 

59,239

 

 

 

2.38

%

Other securities

 

 

2,232

 

 

 

1.04

%

 

 

-

 

 

 

0.00

%

 

 

-

 

 

 

0.00

%

 

 

-

 

 

 

0.00

%

 

 

2,232

 

 

 

1.04

%

Total

 

 

10,767

 

 

 

2.03

%

 

 

39,850

 

 

 

2.29

%

 

 

10,854

 

 

 

2.78

%

 

 

-

 

 

 

0.00

%

 

 

61,471

 

 

 

2.33

%

Total investment securities

 

$

31,822

 

 

 

2.14

%

 

$

163,636

 

 

 

1.63

%

 

$

82,213

 

 

 

1.81

%

 

$

108,303

 

 

 

1.90

%

 

$

385,974

 

 

 

1.79

%

Expected maturities may differ from contractual maturities because issuers may have the right to call obligations with or without penalties.

We evaluate securities for other-than-temporary impairment at least on an annual basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Deposits

Total deposits were $1.41 billion as of September 30, 2016 and $1.31 billion as of December 31, 2015. The increase in total deposits is attributed primarily to our growth in existing markets and entering into new markets. Non-interest bearing demand deposits were $464.6 million, or 32.9% of total deposits as of September 30, 2016 compared to 31.2% as of December 31, 2015. Interest bearing deposits are comprised of money market accounts, regular savings accounts, certificates of deposit of under $100,000 and certificates of deposit of $100,000 or more.

The following table shows the average amount and average rate paid on the categories of deposits for each of the periods presented:

 

 

 

Year to Date

 

 

Year Ended

 

 

 

September 30, 2016

 

 

December 31, 2015

 

 

 

Average

 

 

Average

 

 

Average

 

 

Average

 

(Dollars in thousands)

 

Balance

 

 

Rate

 

 

Balance

 

 

Rate

 

Non-interest bearing deposits

 

$

414,922

 

 

 

0.00

%

 

$

379,468

 

 

 

0.00

%

Interest bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing demand and savings

 

 

595,333

 

 

 

0.28

%

 

 

557,917

 

 

 

0.28

%

Money market

 

 

146,035

 

 

 

0.24

%

 

 

143,766

 

 

 

0.23

%

Certificates of deposit under $100,000

 

 

96,057

 

 

 

0.33

%

 

 

105,780

 

 

 

0.41

%

Certificates of deposit $100,000 and over

 

 

74,889

 

 

 

0.67

%

 

 

82,653

 

 

 

0.78

%

Total interest bearing deposits

 

 

912,314

 

 

 

0.31

%

 

 

890,116

 

 

 

0.33

%

Total

 

$

1,327,236

 

 

 

 

 

 

$

1,269,584

 

 

 

 

 

 

37


 

Additionally, the following table shows the maturities of CDs of $100,000 or more:

 

 

 

September 30,

 

(in thousands)

 

2016

 

Due in three months or less

 

$

10,586

 

Due in over three months through six months

 

 

11,034

 

Due in over six months through twelve months

 

 

17,114

 

Due in over twelve months

 

 

39,276

 

Total

 

$

78,010

 

Deposits are gathered from individuals, partnerships and corporations in our market areas. The interest rates paid are competitively priced for each particular deposit product and structured to meet our funding requirements. We will continue to manage interest expense through deposit pricing.

Shareholders’ Equity

As of September 30, 2016, our shareholders’ equity totaled $225.2 million, an increase of $15.7 million or 7.5% since December 31, 2015. The increase in shareholders’ equity for the nine month period ended September 30, 2016 was primarily due to net income of $17.1 million for the period less dividends declared of $3.7 million, and the increase of $1.3 million in accumulated other comprehensive income.

We began paying quarterly dividends in 2015 with the dividend being declared after the end of each quarter. Dividends of  $0.21 per share were declared during the nine months ended September 30, 2016 representing 21.8% of the net income for the same period. Future cash dividends will depend on a variety of factors, including net income, capital, asset quality, general economic conditions and regulatory considerations.

Capital Resources

Since January 2015, we have been subject to new risk-based capital adequacy guidelines related to the adoption of U.S. Basel III Capital Rules which impose higher risk-based capital and leverage requirements than those previously in place. Specifically, the rules impose, among other requirements, new minimum capital requirements including a Tier 1 leverage capital ratio of 4.0%, a new common equity Tier 1 risk-based capital ratio of 4.5%, a Tier 1 risk-based capital ratio of 6% and a total risk-based capital ratio of 8%. Since we only have common equity, our common equity Tier 1 risk-based capital ratio and our Tier 1 risk-based capital ratio are the same. Therefore, we only disclose our Tier 1 risk-based capital ratio since it has a higher required ratio for minimum and well-capitalized banks.

The following table sets forth our capital ratios.

 

 

Basel III

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Regulatory

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Requirements -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Well Capitalized

 

PUB

 

 

(Greater than or

 

Actual as of

 

Actual as of

 

Actual as of

 

 

Equal to Stated

 

September 30,

 

December 31,

 

September 30,

 

 

Percentage)

 

2016

 

2015

 

2015

Tier 1 leverage capital ratio

 

             NA

 

 

 

 

13.93

%

 

 

 

13.42

%

 

 

 

13.71

%

 

Tier 1 risk-based capital

 

 

8.00

%

 

 

 

18.77

%

 

 

 

17.76

%

 

 

 

18.30

%

 

Total risk-based capital

 

 

10.00

%

 

 

 

20.04

%

 

 

 

19.02

%

 

 

 

19.56

%

 

PUB and the Bank were well-capitalized as of September 30, 2016, December 31, 2015 and September 30, 2015 for federal regulatory purposes.

 

 

 

38


 

Off-Balance Sheet Arrangements

The following table sets forth our off-balance sheet lending commitments as of September 30, 2016:

 

 

 

 

 

 

 

Amount of Commitment Expiration Per Period

 

 

 

Total

 

 

 

 

 

 

One to

 

 

Three to

 

 

After

 

 

 

Amounts

 

 

Less than

 

 

Three

 

 

Five

 

 

Five

 

Other Commitments (in thousands)

 

Committed

 

 

One Year

 

 

Years

 

 

Years

 

 

Years

 

Commitments to extend credit

 

$

481,566

 

 

$

340,438

 

 

$

84,431

 

 

$

9,365

 

 

$

47,332

 

Standby letters of credit

 

 

33,322

 

 

 

33,322

 

 

 

-

 

 

 

-

 

 

 

-

 

Credit cards

 

 

26,488

 

 

 

26,488

 

 

 

-

 

 

 

-

 

 

 

-

 

Total

 

$

541,376

 

 

$

400,248

 

 

$

84,431

 

 

$

9,365

 

 

$

47,332

 

Contractual Obligations

The following table sets forth our significant contractual obligations as of September 30, 2016:

 

 

 

 

 

 

 

Payments Due by Period

 

 

 

 

 

 

 

 

 

 

 

One to

 

 

Three to

 

 

After

 

 

 

 

 

 

 

Less than

 

 

Three

 

 

Five

 

 

Five

 

Contractual Obligations (in thousands)

 

Total

 

 

One Year

 

 

Years

 

 

Years

 

 

Years

 

Time certificates of deposit

 

$

163,679

 

 

$

89,606

 

 

$

48,105

 

 

$

22,058

 

 

$

3,910

 

Deposits without stated maturity

 

 

1,248,160

 

 

 

1,248,160

 

 

 

-

 

 

 

-

 

 

 

-

 

Short-term borrowings

 

 

3,188

 

 

 

3,188

 

 

 

-

 

 

 

-

 

 

 

-

 

Total

 

$

1,415,027

 

 

$

1,340,954

 

 

$

48,105

 

 

$

22,058

 

 

$

3,910

 

          We have a $1.2 million commitment related to a contract to build a new branch in Preston, Idaho which we expect to have completed by the second quarter of 2017.

Liquidity

The ability to have readily available funds sufficient to repay fully maturing liabilities is of primary importance to depositors, creditors and regulators. Our liquidity, represented by cash borrowing lines, federal funds and available-for-sale securities, is a result of our operating, investing and financing activities and related cash flows. In order to ensure funds are available at all times, we devote resources to projecting on a monthly basis the amount of funds that will be required and we maintain relationships with a diversified customer base so funds are accessible. Liquidity requirements can also be met through short-term borrowings or the disposition of short-term assets. We have borrowing lines at a correspondent bank totaling $25.0 million. We also have a current borrowing line with the FHLB, totaling $319.3 million as of September 30, 2016, which are secured by various real estate loans pledged as collateral totaling $481.9 million.  Additionally, we have a borrowing line with the Federal Reserve Bank of $24.2 million which is secured by $24.6 million of investment securities.

We believe our liquid assets are adequate to meet our cash flow needs for loan funding and deposit cash withdrawal for the next 60 to 90 days. As of September 30, 2016, we had approximately $399.4 million in net liquid assets comprised of $98.0 million in cash and cash equivalents, including interest bearing deposits of $67.9 million and federal funds sold of $0.3 million, $326.1 million in available-for-sale securities and $15.2 million in loans held for sale, less $39.9 million pledged as collateral for short-term borrowings. We monitor liquidity measured by a liquidity ratio defined as cash and cash equivalents plus unpledged investment securities divided by total liabilities. Our liquidity ratio was 31.19% as of September 30, 2016 compared to 29.91% as of December 31, 2015.

On a long-term basis, our liquidity will be met by changing the relative distribution of our asset portfolios by reducing our investment or loan volumes, or selling or encumbering assets. Further, we will increase liquidity by soliciting higher levels of deposit accounts through promotional activities and/or borrowing from our correspondent banks as well as the FHLB. At the current time, our long-term liquidity needs primarily relate to funds required to support loan originations and commitments and deposit withdrawals. All of these needs can currently be met by cash flows from investment payments and maturities, and investment sales if the need arises.

Our liquidity is comprised of three primary classifications: cash flows from or used in operating activities; cash flows from or used in investing activities; and cash flows from or used in financing activities.

 

39


 

Net cash provided by or used in operating activities has consisted primarily of net income adjusted for certain non-cash income and expense items such as the loan loss provision, investment and other amortization and depreciation.

Our primary investing activities are the origination of real estate, commercial and consumer loans and purchases and sales of investment securities. As of September 30, 2016 we had outstanding loan commitments of $481.6 million, credit card commitments of $26.5 million and outstanding letters of credit of $33.3 million. We anticipate that we will have sufficient funds available to meet current loan commitments.

Net cash provided from financing activities for the nine months ended September 30, 2016 was $75.6 million, principally from increases in deposit balances, net of approximately $25 million in outstanding borrowings during the period.  

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company’s assessment of market risk as of September 30, 2016 indicates there have been no material changes in the quantitative and qualitative disclosures from those in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as required by Exchange Act Rules 240.13a-15(b) and 15d-14(a)) as of September 30, 2016. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s current disclosure controls and procedures are effective and timely, providing them with material information relating to the Company required to be disclosed in the reports the Company files or submits under the Exchange Act.

Changes in Internal Controls

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the third quarter 2016, to which this report relates that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

 

 

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The Company is involved in various claims, legal actions and complaints which arise in the ordinary course of business. In the Company’s opinion, all such matters are adequately covered by insurance, are without merit or are of such kind, or involve such amounts, that unfavorable disposition would not have a material adverse effect on the financial condition or results of operations of the Company.

Item 1A. Risk Factors

There have been no material changes in our assessment of our risk factors from those set forth in our Annual Report on Form 10-K for the year ended December 31, 2015.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Use of Proceeds from Initial Public Offering – On June 11, 2015 the SEC declared effective our registration statement on Form S-1 (Registration No. 333-203518) registering common shares of the Company. On June 16, 2015, the Company completed the initial public offering of 2,657,000 common shares. Additionally, 218,000 common shares were sold by certain selling shareholders. The Company received net proceeds of $34.9 million from the offering, after deducting the underwriting discounts and offering expenses. The Company did not receive any proceeds from the sale of shares by the selling shareholders.

 

There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the SEC on June 11, 2015 pursuant to Rule 424(b).

 

40


 

Item 3. Defaults upon Senior Securities

Not Applicable

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None

 

Item 6. Exhibits

 

 

Exhibit
Number

 

 

Description

31.1

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002

 

 

 

32

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002

 

 

 

101

 

The following financial information from People’s Utah Bancorp Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 is formatted in XBRL: (i) the Unaudited Condensed Consolidated Statements of Financial Condition, (ii) the Unaudited Condensed Consolidated Statements of Operations, (iii) the Unaudited Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income, (iv) the Unaudited Condensed Consolidated Statements of Cash Flows, and (v) the Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

 

41


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on November 10, 2016

 

PEOPLE’S UTAH BANCORP

 

 

 

/s/ Richard T. Beard

Richard T. Beard

President and Chief Executive Officer

(Principal Executive Officer)

 

 

 

/s/ Wolfgang T.N. Muelleck

Wolfgang T.N. Muelleck

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

 

 

 

 

42