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EX-32.2 - EX-32.2 - COBIZ FINANCIAL INCcobz-20170331ex3220128e6.htm
EX-32.1 - EX-32.1 - COBIZ FINANCIAL INCcobz-20170331ex3216f3c6d.htm
EX-31.2 - EX-31.2 - COBIZ FINANCIAL INCcobz-20170331ex312ebc036.htm
EX-31.1 - EX-31.1 - COBIZ FINANCIAL INCcobz-20170331ex3114d8b27.htm

 

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 March 31, 2017

 

 

    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transitions period from ______________ to ______________

 

 

 

 

 

 

 

Commission File Number   001-15955

 

 

 

 

 

CoBiz Financial Inc.

(Exact name of registrant as specified in its charter)

 

COLORADO

 

84-0826324

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

1401 Lawrence St., Ste. 1200 

 

 

Denver, CO

 

80202

(Address of principal executive offices)

 

(Zip Code) 

 

(303) 312-3400

(Registrant’s telephone number, including area code)

 

(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 check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

 

 

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

(do not check if a smaller reporting company)

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

 

 

Yes

No

 

 

There were 41,736,828 shares of the registrant’s Common Stock, $0.01 par value per share, outstanding at April 26, 2017.

 

 

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2 | Page

 


 

Part I.  Financial Information

Item 1.  Condensed Consolidated Financial Statements (unaudited)

 

CoBiz Financial Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (unaudited)

At March 31, 2017 and December 31, 2016

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

(in thousands, except share amounts)

 

2017

    

2016

 

Assets

 

 

 

 

 

 

 

Cash and due from banks

 

$

59,086

 

$

69,333

 

Interest-bearing deposits and federal funds sold

 

 

28,445

 

 

26,717

 

Total cash and cash equivalents

 

 

87,531

 

 

96,050

 

 

 

 

 

 

 

 

 

Investment securities available for sale (cost of $166,045 and $130,308, respectively)

 

 

170,541

 

 

132,981

 

Investment securities held to maturity (fair value of $386,695 and $363,178, respectively)

 

 

387,989

 

 

366,041

 

Other investments

 

 

13,576

 

 

11,365

 

Total investments

 

 

572,106

 

 

510,387

 

 

 

 

 

 

 

 

 

Loans - net of allowance for loan losses of $34,211 and $33,293, respectively

 

 

2,952,857

 

 

2,900,812

 

Intangible assets - net of amortization of $7,254 and $7,104, respectively

 

 

1,176

 

 

1,326

 

Bank-owned life insurance

 

 

54,024

 

 

53,674

 

Premises and equipment - net of depreciation of $38,725 and $38,269, respectively

 

 

10,817

 

 

11,019

 

Accrued interest receivable

 

 

12,091

 

 

12,223

 

Deferred income taxes, net

 

 

17,251

 

 

19,901

 

Other real estate owned - net of valuation allowance of $8,666 and $8,666, respectively

 

 

5,079

 

 

5,079

 

Other

 

 

18,410

 

 

19,842

 

TOTAL ASSETS

 

$

3,731,342

 

$

3,630,313

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Noninterest-bearing demand

 

$

1,273,305

 

$

1,282,463

 

Interest-bearing demand

 

 

704,659

 

 

714,062

 

Money market

 

 

910,089

 

 

861,856

 

Savings

 

 

20,192

 

 

19,561

 

Certificates of deposits

 

 

141,856

 

 

151,841

 

Total deposits

 

 

3,050,101

 

 

3,029,783

 

Securities sold under agreements to repurchase

 

 

59,825

 

 

27,639

 

Other short-term borrowings

 

 

155,000

 

 

106,230

 

Accrued interest and other liabilities

 

 

24,910

 

 

33,074

 

Subordinated notes payable - net of unamortized discount and issuance costs of $869 and $889, respectively

 

 

59,131

 

 

59,111

 

Junior subordinated debentures

 

 

72,166

 

 

72,166

 

TOTAL LIABILITIES

 

 

3,421,133

 

 

3,328,003

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

 

 

 

Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued and outstanding 

 

 

 -

 

 

 -

 

Common stock, $.01 par value; 100,000,000 shares authorized;    41,731,028 and 41,555,208 issued and outstanding, respectively

 

 

414

 

 

411

 

Additional paid-in capital

 

 

199,039

 

 

197,758

 

Retained earnings

 

 

109,315

 

 

103,575

 

Accumulated other comprehensive income (AOCI), net of income tax of $879 and $348, respectively

 

 

1,441

 

 

566

 

TOTAL SHAREHOLDERS' EQUITY

 

 

310,209

 

 

302,310

 

TOTAL LIABILITIES AND EQUITY

 

$

3,731,342

 

$

3,630,313

 

 

See Notes to Condensed Consolidated Financial Statements

3 | Page

 


 

CoBiz Financial Inc. and Subsidiaries

Condensed Consolidated Statements of Income (unaudited)

For the three months ended March 31, 2017 and 2016

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

March 31, 

 

(in thousands, except per share amounts)

 

2017

 

2016

 

INTEREST INCOME:

 

 

 

 

 

 

 

Interest and fees on loans

 

$

29,391

 

$

27,682

 

Interest and dividends on investment securities:

 

 

 

 

 

 

 

Taxable securities

 

 

3,198

 

 

3,118

 

Nontaxable securities

 

 

288

 

 

179

 

Dividends on securities

 

 

148

 

 

173

 

Interest on federal funds sold and other

 

 

56

 

 

43

 

Total interest income

 

 

33,081

 

 

31,195

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

Interest on deposits

 

 

987

 

 

905

 

Interest on short-term borrowings and securities sold under agreements to repurchase

 

 

184

 

 

222

 

Interest on subordinated debentures and notes payable

 

 

1,832

 

 

1,839

 

Total interest expense

 

 

3,003

 

 

2,966

 

NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES

 

 

30,078

 

 

28,229

 

Provision for loan losses

 

 

607

 

 

370

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

 

 

29,471

 

 

27,859

 

NONINTEREST INCOME:

 

 

 

 

 

 

 

Service charges

 

 

1,745

 

 

1,485

 

Investment advisory income

 

 

1,531

 

 

1,450

 

Insurance income

 

 

3,122

 

 

3,050

 

Other income

 

 

1,930

 

 

1,703

 

Total noninterest income

 

 

8,328

 

 

7,688

 

NONINTEREST EXPENSE:

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

19,120

 

 

17,629

 

Occupancy expenses, premises and equipment

 

 

3,605

 

 

3,490

 

Amortization of intangibles

 

 

150

 

 

150

 

FDIC and other assessments

 

 

250

 

 

457

 

Other real estate owned and loan workout costs

 

 

89

 

 

156

 

Net (gain) loss on securities, other assets and other real estate owned

 

 

(345)

 

 

 3

 

Other expense

 

 

4,245

 

 

3,947

 

Total noninterest expense

 

 

27,114

 

 

25,832

 

INCOME BEFORE INCOME TAXES

 

 

10,685

 

 

9,715

 

Provision for income taxes

 

 

2,071

 

 

2,350

 

NET INCOME

 

$

8,614

 

$

7,365

 

 

 

 

 

 

 

 

 

EARNINGS PER COMMON SHARE:

 

 

 

 

 

 

 

Basic

 

$

0.21

 

$

0.18

 

Diluted

 

$

0.20

 

$

0.18

 

 

See Notes to Condensed Consolidated Financial Statements

4 | Page

 


 

CoBiz Financial Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (unaudited)

For the three months ended March 31, 2017 and 2016

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

March 31, 

 

(in thousands)

 

2017

 

2016

 

Net income

 

$

8,614

 

$

7,365

 

Other comprehensive income (loss) items:

 

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

 

Net unrealized gain (loss)

 

 

1,820

 

 

(999)

 

Reclassification to operations

 

 

 3

 

 

 3

 

 

 

 

1,823

 

 

(996)

 

Held to maturity securities:

 

 

 

 

 

 

 

Reclassification to operations

 

 

(454)

 

 

(428)

 

 

 

 

(454)

 

 

(428)

 

Cash flow hedges:

 

 

 

 

 

 

 

Net unrealized loss

 

 

(72)

 

 

(1,692)

 

Reclassification to operations

 

 

109

 

 

277

 

 

 

 

37

 

 

(1,415)

 

Total other comprehensive income (loss) items

 

$

1,406

 

$

(2,839)

 

 

 

 

 

 

 

 

 

Income tax provision:

 

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

 

Net unrealized gain (loss)

 

$

688

 

$

(380)

 

Reclassification to operations

 

 

 1

 

 

 1

 

 

 

 

689

 

 

(379)

 

Held to maturity securities:

 

 

 

 

 

 

 

Reclassification to operations

 

 

(173)

 

 

(162)

 

 

 

 

(173)

 

 

(162)

 

Cash flow hedges:

 

 

 

 

 

 

 

Net unrealized loss

 

 

(27)

 

 

(643)

 

Reclassification to operations

 

 

42

 

 

105

 

 

 

 

15

 

 

(538)

 

Total income tax provision (benefit)

 

$

531

 

$

(1,079)

 

Other comprehensive income (loss), net of tax

 

 

875

 

 

(1,760)

 

Comprehensive income

 

$

9,489

 

$

5,605

 

 

 

See Notes to Condensed Consolidated Financial Statements

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CoBiz Financial Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (unaudited)

For the three months ended March 31, 2017 and 2016

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

March 31, 

 

(in thousands)

     

2017

     

2016

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income

 

$

8,614

 

$

7,365

 

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

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

 

1,473

 

 

1,199

 

Provision for loan losses

 

 

607

 

 

370

 

Stock-based compensation

 

 

985

 

 

969

 

Deferred income taxes

 

 

2,104

 

 

4,091

 

Bank-owned life insurance

 

 

(349)

 

 

(357)

 

Net (gain) loss on securities, other assets and other real estate owned

 

 

(345)

 

 

 3

 

Other operating activities, net

 

 

(436)

 

 

1,000

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Other assets

 

 

1,358

 

 

(213)

 

Other liabilities

 

 

(6,199)

 

 

(7,184)

 

Net cash provided by operating activities

 

 

7,812

 

 

7,243

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Purchase of other investments

 

 

(4,440)

 

 

(5,559)

 

Proceeds from other investments

 

 

2,772

 

 

3,408

 

Purchase of investment securities available for sale

 

 

(53,336)

 

 

 -

 

Purchase of investment securities held to maturity

 

 

(41,319)

 

 

(797)

 

Maturity, call and principal payments on investment securities available for sale

 

 

17,500

 

 

4,412

 

Maturity, call and principal payments on investment securities held to maturity

 

 

16,920

 

 

13,039

 

Net proceeds from sale of loans, OREO and repossessed assets

 

 

 -

 

 

60

 

Loan originations and repayments, net

 

 

(52,738)

 

 

(21,365)

 

Purchase of premises and equipment

 

 

(1,046)

 

 

(1,034)

 

Other investing activities, net

 

 

657

 

 

 -

 

Net cash used in investing activities

 

 

(115,030)

 

 

(7,836)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Net increase in demand, money market and savings accounts

 

 

30,303

 

 

35,595

 

Net decrease in certificates of deposits

 

 

(9,985)

 

 

(2,943)

 

Net increase (decrease) in short-term borrowings

 

 

48,770

 

 

(25,473)

 

Net increase (decrease) in securities sold under agreements to repurchase

 

 

32,186

 

 

(8,318)

 

Proceeds from issuance of common stock

 

 

608

 

 

472

 

Taxes paid in net settlement of restricted stock

 

 

(1,105)

 

 

(855)

 

Dividends paid on common stock

 

 

(2,078)

 

 

(1,847)

 

Net cash provided by (used in) financing activities

 

 

98,699

 

 

(3,369)

 

 

 

 

 

 

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

 

(8,519)

 

 

(3,962)

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

96,050

 

 

67,312

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

87,531

 

$

63,350

 

 

See Notes to Condensed Consolidated Financial Statements

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CoBiz Financial Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

1. Nature of Operations and Significant Accounting Policies

 

The accompanying unaudited Condensed Consolidated Financial Statements of CoBiz Financial Inc. (Parent or Holding Company), and its wholly-owned subsidiaries:  CoBiz Bank (Bank); CoBiz Insurance, Inc.; and CoBiz IM, Inc. (CoBiz IM); all collectively referred to as the “Company”, “CoBiz”, “we”, “us”, or “our” conform to Generally Accepted Accounting Principles (GAAP) in the United States of America for interim financial information and prevailing practices within the banking industry. The operations of the Company are comprised predominantly of the Bank, which operates in its Colorado market areas under the name Colorado Business Bank (CBB) and in its Arizona market areas under the name Arizona Business Bank (ABB).

 

Organization — The Bank is a commercial banking institution with seven locations in the Denver metropolitan area; one in Boulder; one near Vail; one in Colorado Springs; one in Fort Collins; and four in the Phoenix metropolitan area.  As a state chartered bank, deposits are insured by the Bank Insurance Fund of the Federal Deposit Insurance Corporation (the FDIC) and the Bank is subject to supervision, regulation and examination by the Federal Reserve System (Federal Reserve), Colorado Division of Banking and the FDIC. Pursuant to such regulations, the Bank is subject to special restrictions, supervisory requirements and potential enforcement actions. CoBiz Insurance, Inc. provides commercial and personal property and casualty (P&C) insurance brokerage, risk management consulting services to small and medium-sized businesses and individuals and provides employee benefits consulting, insurance brokerage and related administrative support to employers.  CoBiz IM provides wealth planning and investment management to institutions and individuals through its SEC-registered investment advisor subsidiary, CoBiz Wealth, LLC.

 

The following is a summary of certain of the Company’s significant accounting and reporting policies.

 

Basis of Presentation —  The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information,  the instructions to Form 10-Q and, where applicable, prevailing practices within the financial services industry.  The December 31, 2016 condensed consolidated balance sheet has been derived from the audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2016.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

 

In the opinion of management, all adjustments (consisting only of normally recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three months ended March 31, 2017, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2017.  In preparing its financial statements, the Company is required to make estimates and assumptions that affect the reported amount 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 reporting period.  Actual results could differ significantly from those estimates.

 

These Condensed Consolidated Financial Statements and notes thereto should be read in conjunction with, and are qualified in their entirety by, the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the U.S. Securities and Exchange Commission (SEC). 

 

The Condensed Consolidated Financial Statements include entities in which the Parent has a controlling financial interest.  These entities include: the Bank; CoBiz Insurance, Inc.; and CoBiz IM. Intercompany balances and transactions are eliminated in consolidation.  The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity (VIE).

 

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The voting interest model is used when the equity investment is sufficient to absorb the expected losses and the equity investment has all of the characteristics of a controlling financial interest. Under the voting interest model, the party with the controlling voting interest consolidates the legal entity.  The VIE model is used when any of the following conditions exist: the equity investment at risk is not sufficient to finance the entity’s activities without additional subordinated financial support; the holders of the equity investment do not have a controlling voting interest; or the holders of the equity investment are not obligated to absorb the expected losses or residual returns of the legal entity. An enterprise is considered to have a controlling financial interest of a VIE if it has both the power to direct the activities that most significantly impact economic performance and the obligation to absorb losses, or receive benefits, that are significant to the VIE. An enterprise that has a controlling financial interest is considered the primary beneficiary and must consolidate the VIE.  The Company was not the primary beneficiary of a VIE at March 31, 2017 or December 31, 2016.

 

Certain reclassifications have been made to prior years’ Condensed Consolidated Financial Statements and related notes to conform to the current year presentation.

 

Cash and Cash Equivalents — The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents include amounts that the Company is required to maintain at the Federal Reserve Bank of Kansas City to meet certain regulatory reserve balance requirements.  The following table shows supplemental disclosures of certain cash and noncash items:

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

March 31, 

 

(in thousands)

    

2017

    

2016

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest

 

$

2,210

 

$

2,252

 

Income taxes

 

 

1,339

 

 

2,724

 

 

 

 

 

 

 

 

 

Other noncash activities:

 

 

 

 

 

 

 

Loans transferred to held for sale

 

$

 -

 

$

60

 

 

Investments — The Company classifies its investment securities as held to maturity, available for sale or trading, according to management’s intent.  Investment security transactions are recorded on a trade date basis.  At March 31, 2017 and December 31, 2016, the Company had no trading securities.

 

Available for sale securities consist of bonds, notes and debentures (including corporate debt and trust preferred securities (TPS)) not classified as held to maturity securities and are reported at fair value as determined by quoted market prices. Unrealized holding gains and losses, net of tax, are reported as a net amount in AOCI until realized.

 

Investment securities held to maturity consist of residential mortgage-backed securities (MBS), bonds, notes and debentures for which the Company has the positive intent and ability to hold to maturity and are reported at cost, adjusted for amortization or accretion of premiums and discounts.

 

Premiums and discounts, adjusted for prepayments as applicable, are recognized in interest income.  Other than temporary declines in the fair value of individual investment securities held to maturity and available for sale are charged against earnings. Gains and losses on disposal of investment securities are determined using the specific-identification method.

 

Other-than-temporary-impairment (OTTI) on debt securities is separated between the amount that is credit related (credit loss component) and the amount due to all other factors.  The credit loss component is recognized in earnings and is the difference between a security’s amortized cost basis and the discounted present value of expected future cash flows. The amount due to all other factors is recognized in other comprehensive income (OCI).

 

Bank Stocks — Federal Home Loan Bank of Topeka (FHLB), Federal Reserve Bank and other correspondent bank stocks are accounted for under the cost method.

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Loans Held for Investment— Loans that the Company has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balance adjusted for any charge-offs, the allowance for loan losses, deferred fees and costs on originated loans, and unamortized premiums or discounts on purchased loans. Interest is accrued and credited to income daily based on the principal balance outstanding. The accrual of interest income is generally discontinued when a loan becomes 90 days past due as to principal and interest. When a loan is designated as nonaccrual, the current period’s accrued interest receivable is charged against current earnings while any portions relating to prior periods are charged against the allowance for loan losses. Interest payments received on nonaccrual loans are generally applied to the principal balance of the loan. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured and there has been demonstrated performance in accordance with contractual terms.  The Company may elect to continue the accrual of interest when the loan is in the process of collection and the realizable value of collateral is sufficient to cover the principal balance and accrued interest.

 

Loans Held for Sale — Loans held for sale include loans the Company has demonstrated its ability and intent to sell.  Loans held for sale are primarily nonperforming loans.  Loans held for sale are carried at the lower of cost or fair value and are evaluated on a loan-by-loan basis.

 

Impaired Loans — Impaired loans, with the exception of groups of smaller-balance homogenous loans that are collectively evaluated for impairment, are defined as loans for which, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays of less than 90 days and monthly payment shortfalls of less than 10% of the contractual payment on a consumer loan generally are not classified as impaired if the Company ultimately expects to recover its full investment. The Company determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the 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. Impairment is measured on a loan-by-loan basis by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. Loans that are deemed to be impaired are evaluated in accordance with Accounting Standards Codification (ASC) Topic 310-10-35, Receivables – Subsequent Measurement (ASC 310) and ASC Topic 450-20, Loss Contingencies (ASC 450).

 

Included in impaired loans are troubled debt restructurings.  A troubled debt restructuring is a formal restructure of a loan where the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower. The concessions may be granted in various forms, including but not limited to reduction in the stated interest rate, reduction in the loan balance or accrued interest, or extension of the maturity date.  Troubled debt restructurings are evaluated in accordance with ASC Topic 310-40, Troubled Debt Restructurings by Creditors. Interest payments on impaired loans are typically applied to principal unless collectability of principal is reasonably assured. Loans that have been modified in a formal restructuring are typically returned to accrual status when there has been a sustained period of performance (generally six months) under the modified terms, the borrower has shown the ability and willingness to repay and the Company expects to collect all amounts due under the modified terms.

 

Loan Origination Fees and Costs — Loan fees and certain costs of originating loans are deferred and the net amount is amortized over the contractual life of the related loans in accordance with ASC Topic 310-20, Nonrefundable Fees and Other Costs.

 

Allowance for Loan Losses — The allowance for loan losses (ALL) is established as losses are estimated to have occurred through a provision for loan losses charged against earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

 

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The ALL is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as new information becomes available.

 

Allowance for Credit Losses — The allowance for credit losses is established as losses are estimated to have occurred through a provision for credit losses charged to earnings. The allowance for credit losses represents management’s recognition of a separate reserve for off-balance sheet loan commitments and letters of credit. While the allowance for loan losses is recorded as a contra-asset to the loan portfolio on the Condensed Consolidated Balance Sheets, the allowance for credit losses is recorded under the caption “Accrued interest and other liabilities”. Although the allowances are presented separately on the balance sheets, any losses incurred from credit losses would be reported as a charge-off in the allowance for loan losses, as any loss would be recorded after the off-balance sheet commitment had been funded.

 

Bank-Owned Life Insurance (BOLI) – The Bank has invested in BOLI policies to fund certain future employee benefit costs.  The policies are recorded at net realizable value.  Changes in the amount that could be realized, including death benefits in excess of the carrying amount, are recorded in the Condensed Consolidated Statements of Income as “Other income”.

 

Derivative Instruments — Derivative financial instruments are accounted for at fair value. The Company utilizes interest rate swaps to hedge a portion of its exposure to interest rate changes. These instruments are accounted for as cash flow hedges, as defined by ASC Topic 815, Derivatives and Hedging (ASC 815). The Company also uses interest rate swaps to hedge against adverse changes in fair value on fixed-rate loans.  These instruments are accounted for as fair value hedges in accordance with ASC 815.  The net cash flows from the cash flow and fair value hedges are classified in operating activities within the Condensed Consolidated Statements of Cash Flows with the hedged items.  The Company also offers an interest-rate hedge program that includes various derivative products, including swaps, to customers of the Bank. The fair value amounts recognized for derivative instruments and the fair value amounts recognized for the right to reclaim or obligation to return cash collateral are not offset when represented under a master netting arrangement.  The Company also uses foreign currency forward contracts (FX forwards) giving it the right to sell underlying currencies at specified future dates and predetermined prices in order to mitigate foreign exchange risk associated with long positions.  FX forwards are carried at fair value with changes in value recognized in current earnings as the contracts are not designated as hedging instruments. 

 

Fair Value Measurements — The Company measures financial assets, financial liabilities, nonfinancial assets and nonfinancial liabilities pursuant to ASC Topic 820, Fair Value Measurement and Disclosures (ASC 820).  ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.

2.  Recent Accounting Pronouncements 

 

In May 2014, the Financial Accounting Standard Board (FASB) issued Accounting Standard Update (ASU) 2014-9 (ASU 2014-09), Revenue from Contracts with Customers. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The guidance also specifies the accounting for some costs to obtain or fulfill a contract with a customer, as well as enhanced disclosure requirements. In August 2015, the FASB issued ASU 2015-14 which deferred the effective date of ASU 2014-09 to fiscal years, and interim reporting periods within those fiscal years, beginning after December 15, 2017. In March 2016, the FASB issued ASU 2016-08 which clarified the revenue recognition implementation guidance on principal versus agent considerations and is effective during the same period as ASU 2014-09. In April 2016, the FASB issued ASU 2016-10 which clarified the revenue recognition guidance regarding the identification of performance obligations and the licensing implementation and is effective during the same period as ASU 2014-09. In May 2016, the FASB issued ASU 2016-12 which narrowly amended the revenue recognition guidance regarding collectability, noncash consideration, presentation of sales tax and transition. ASU 2016-12 is effective during the same period as ASU 2014-09. The Company is currently evaluating the effects of these ASUs on its financial

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statements and disclosures, if any.  The Company expects these ASUs to have more of an impact on the Fee-Based Lines segment than Commercial Banking segment, which generates the majority of the Company’s revenue.  The Company has conducted its initial assessment and is currently evaluating contracts to assess and quantify accounting methodology changes resulting from the adoption of ASU 2014-09.  Revenue from the Fee-Based Lines segment includes property and casualty brokerage income, employee benefit brokerage income and investment advisory income which totaled $18.3 million in 2016.  While the timing of revenue recognition from these sources may change, the Company does not expect a material impact to its financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02 is intended to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about lease arrangements.  For public business entities, this ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2018.  The Company is currently evaluating the effects of ASU 2016-02 on its financial statements and disclosures by reviewing all existing lease arrangements.  Preliminarily, the Company expects the primary impact of ASU 2016-02 will relate to its office locations, the majority of which are designated as operating leases.  The Company has future operating lease obligations for its locations of $33.4 million that are being evaluated as potential lease assets and liabilities, as defined in ASU 2016-02.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13).  The objective of ASU 2016-13 is to provide financial statement users with decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit.  ASU 2016-13 includes provisions that require financial assets measured at amortized cost (such as loans and held to maturity (HTM) debt securities) to be presented at the net amount expected to be collected.  This will be accomplished through recognition of an estimate of all current expected credit losses.  The estimate will include forecasted information for the timeframe that an entity is able to develop reasonable and supportable forecasts.  This is a change from the current practice of recognizing incurred losses based on the probable initial recognition threshold under current GAAP.  In addition, credit losses on available for sale (AFS) debt securities will be recorded through an allowance for credit losses rather than as a write-down.  Under ASU 2016-13, an entity will be able to record reversals of credit losses in current period income when the estimate of credit losses declines, whereas current GAAP prohibits reflecting those improvements in current period earnings.

   

ASU 2016-13 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2019, and early adoption is permitted for fiscal years, including interim periods, beginning after December 15, 2018.  ASU 2016-13 will be applied through a cumulative effect adjustment to retained earnings (modified-retrospective approach), except for debt securities for which an other-than-temporary impairment had been recognized before the effective date.  A prospective transition approach is required for these debt securities.  The Company is currently evaluating the effects of ASU 2016-13 on its financial statements and disclosures, and expects ASU 2016-13 to add complexity and costs to its current credit loss evaluation process.

 

In February 2017, the FASB issued ASU 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) (ASU 2017-05). ASU 2017-05 is intended to clarify that Subtopic 610-20 applies to the derecognition of nonfinancial assets and in substance nonfinancial assets unless other specific guidance applies.  ASU 2017-05 also adds guidance for partial sales of nonfinancial assets and eliminates rules specifically addressing sales of real estate.  For public business entities, this ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017.  The Company is currently evaluating the effects of ASU 2017-05 on its financial statements and disclosures.

 

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20) (ASU 2017-08).  ASU 2017-08 amends the amortization period for certain purchased callable debt securities held at a premium.  Prior to the issuance of this guidance, premiums were amortized as an adjustment of yield over the contractual life of the instrument.  ASU 2017-08 requires premiums on purchased callable debt securities that have explicit, noncontingent call features that are callable at fixed prices to be amortized to the earliest call date.  There are no accounting changes for securities held at a discount.  This ASU is effective for annual periods and interim periods within those annual periods beginning

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after December 15, 2018, and early adoption is permitted.  ASU 2017-08 will be applied through a cumulative effect adjustment through retained earnings (modified-retrospective approach).  The Company is currently evaluating the effects of ASU 2017-08 on its financial statements and disclosures.

 

3.  Earnings per Common Share and Dividends Declared per Common Share

 

Earnings per common share is calculated based on the two-class method prescribed in ASC 260, Earnings per Share.  The two-class method is an allocation of undistributed earnings to common stock and securities that participate in dividends with common stock.  The Company’s restricted stock awards are considered participating securities since the recipients receive non-forfeitable dividends on unvested awards.  The impact of participating securities is included in basic earnings per common share for the three months ended March 31, 2017 and 2016.  Income allocated to common shares and weighted average shares outstanding used in the calculation of basic and diluted earnings per common share are as follows:

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

March 31, 

 

(in thousands, except share and per share amounts)

 

2017

  

2016

 

Net income available to common shareholders

 

$

8,614

 

$

7,365

 

Dividends and undistributed earnings allocated to participating securities

 

 

(93)

 

 

(88)

 

Earnings allocated to common shares (1)

 

$

8,521

 

$

7,277

 

 

 

 

 

 

 

 

 

Weighted average common shares - issued

 

 

41,606,755

 

 

41,181,211

 

Average unvested restricted share awards

 

 

(445,315)

 

 

(490,931)

 

Weighted average common shares outstanding - basic

 

 

41,161,440

 

 

40,690,280

 

Effect of dilutive stock options and awards outstanding

 

 

423,147

 

 

138,612

 

Weighted average common shares outstanding - diluted

 

 

41,584,587

 

 

40,828,892

 

Weighted average antidilutive securities outstanding (2)

 

 

10,544

 

 

209,792

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

Basic

 

$

0.21

 

$

0.18

 

Diluted

 

$

0.20

 

$

0.18

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

0.050

 

$

0.045

 

 


(1)

Earnings allocated to common shareholders for basic earnings per common share under the two-class method may differ from earnings allocated for diluted earnings per common share when use of the treasury method results in greater dilution than the two-class method.

(2)

Antidilutive shares excluded from the diluted earnings per common share computation.

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4.  Investments

 

The amortized cost and estimated fair values of investment securities are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At March 31, 2017

 

At December 31, 2016

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

 

Amortized

 

unrealized

 

unrealized

 

Fair

 

Amortized

 

unrealized

 

unrealized

 

Fair

 

(in thousands)

  

cost

  

gains

  

losses

  

value

  

cost

  

gains

  

losses

  

value

 

Available for sale securities (AFS):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trust preferred securities

 

$

36,502

 

$

3,078

 

$

255

 

$

39,325

 

$

36,450

 

$

1,707

 

$

533

 

$

37,624

 

Corporate debt securities

 

 

126,282

 

 

1,654

 

 

26

 

 

127,910

 

 

90,593

 

 

1,505

 

 

21

 

 

92,077

 

Municipal securities

 

 

3,261

 

 

49

 

 

 4

 

 

3,306

 

 

3,265

 

 

33

 

 

18

 

 

3,280

 

Total AFS

 

$

166,045

 

$

4,781

 

$

285

 

$

170,541

 

$

130,308

 

$

3,245

 

$

572

 

$

132,981

 

Held to maturity securities (HTM):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

342,013

 

$

266

 

$

1,844

 

$

340,435

 

$

319,978

 

$

186

 

$

2,531

 

$

317,633

 

Trust preferred securities

 

 

10,645

 

 

807

 

 

277

 

 

11,175

 

 

10,620

 

 

522

 

 

267

 

 

10,875

 

Municipal securities

 

 

35,331

 

 

74

 

 

320

 

 

35,085

 

 

35,443

 

 

10

 

 

783

 

 

34,670

 

Total HTM

 

$

387,989

 

$

1,147

 

$

2,441

 

$

386,695

 

$

366,041

 

$

718

 

$

3,581

 

$

363,178

 

 

The amortized cost and estimated fair value of investments in debt securities at March 31, 2017, by contractual maturity are shown below.  Expected maturities can differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale

 

Held to maturity

 

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

(in thousands)

 

cost

  

value

  

cost

  

value

 

Due in one year or less

 

$

23,491

 

$

23,652

 

$

872

 

$

871

 

Due after one year through five years

 

 

87,151

 

 

88,212

 

 

23,403

 

 

23,397

 

Due after five years through ten years

 

 

24,624

 

 

25,470

 

 

2,564

 

 

2,586

 

Due after ten years

 

 

30,779

 

 

33,207

 

 

19,137

 

 

19,406

 

Mortgage-backed securities

 

 

 -

 

 

 -

 

 

342,013

 

 

340,435

 

 

 

$

166,045

 

$

170,541

 

$

387,989

 

$

386,695

 

 

The Company uses investment securities to collateralize public deposits.  Investment securities with an approximate fair value of $136.9 million and $143.6 million were pledged to secure public deposits of $102.7 million and $95.8 million at March 31, 2017 and December 31, 2016, respectively. 

 

Changes in interest rates and market liquidity may cause adverse fluctuations in the market price of securities resulting in temporary unrealized losses.  In reviewing the realizable value of its securities in a loss position, the Company considered the following factors: (1) the length of time and extent to which the market had been less than cost; (2) the financial condition and near-term prospects of the issuer; (3) investment downgrades by rating agencies; and (4) whether it is more likely than not that the Company will have to sell the security before a recovery in value.  When it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the security, and the fair value of the investment security is less than its amortized cost, an other-than-temporary impairment is recognized in earnings. 

 

For debt securities that are considered other-than temporarily impaired and that the Company does not intend to sell and will not be required to sell prior to recovery of the amortized cost basis, an OTTI is recognized.  OTTI is separated into the amount that is credit related (credit loss component) and the amount due to all other factors.  The credit loss component is recognized in earnings and is the difference between a security’s amortized cost basis and the discounted present value of expected future cash flows.  The amount due to all other factors is recognized in other comprehensive income. The Company did not have any credit impaired securities at March 31, 2017 and December 31, 2016.

 

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There were 140 and 165 securities in the tables below at March 31, 2017 and December 31, 2016, respectively, in an unrealized loss position.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

 

 

Less than 12 months

 

12 months or greater

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

(in thousands)

 

value

    

loss

    

value

  

loss

    

value

    

loss

 

AFS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trust preferred securities

 

$

7,671

 

$

255

 

$