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Section 1: 10-Q (10-Q)

pub-10q_20180630.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 June 30, 2018

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

For the transition period from                 to                

Commission file number 001-37416

 

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, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected 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 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 July 31, 2018 was 18,705,736. 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

24

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

45

Item 4 – Controls and Procedures

45

PART II. OTHER INFORMATION

 

Item 1 – Legal Proceedings

46

Item 1A – Risk Factors

46

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

46

Item 3 – Defaults upon Senior Securities

46

Item 4 – Mine Safety Disclosures

46

Item 5 – Other Information

46

Item 6 – Exhibits

47

Signatures

48

 

 

 

 


 

PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS

 

 

 

June 30,

 

 

December 31,

 

(Dollars in thousands, except share data)

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

33,484

 

 

$

36,235

 

Interest bearing deposits

 

 

17,930

 

 

 

13,158

 

Federal funds sold

 

 

908

 

 

 

1,634

 

Total cash and cash equivalents

 

 

52,322

 

 

 

51,027

 

Investment securities:

 

 

 

 

 

 

 

 

Available-for-sale, at fair value

 

 

236,699

 

 

 

263,056

 

Held-to-maturity, at historical cost

 

 

67,922

 

 

 

74,654

 

Total investment securities

 

 

304,621

 

 

 

337,710

 

Non-marketable equity securities

 

 

6,151

 

 

 

3,706

 

Loans held for sale

 

 

11,058

 

 

 

10,871

 

Loans:

 

 

 

 

 

 

 

 

Loans held for investment

 

 

1,691,959

 

 

 

1,627,444

 

Allowance for loan losses

 

 

(22,308

)

 

 

(18,303

)

Total loans held for investment, net

 

 

1,669,651

 

 

 

1,609,141

 

Premises and equipment, net

 

 

29,335

 

 

 

30,399

 

Goodwill

 

 

25,673

 

 

 

26,008

 

Bank-owned life insurance

 

 

26,120

 

 

 

23,566

 

Deferred income tax assets

 

 

10,764

 

 

 

8,827

 

Accrued interest receivable

 

 

7,658

 

 

 

7,594

 

Other intangibles

 

 

3,633

 

 

 

3,854

 

Other real estate owned

 

 

-

 

 

 

994

 

Other assets

 

 

14,784

 

 

 

9,832

 

Total assets

 

$

2,161,770

 

 

$

2,123,529

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Non-interest bearing deposits

 

$

646,574

 

 

$

641,124

 

Interest bearing deposits

 

 

1,135,366

 

 

 

1,173,508

 

Total deposits

 

 

1,781,940

 

 

 

1,814,632

 

Short-term borrowings

 

 

90,000

 

 

 

40,000

 

Accrued interest payable

 

 

369

 

 

 

353

 

Other liabilities

 

 

17,862

 

 

 

11,126

 

Total liabilities

 

 

1,890,171

 

 

 

1,866,111

 

 

 

 

 

 

 

 

 

 

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; 18,683,883

 

 

 

 

 

 

 

 

and 18,511,797 shares issued and outstanding as of June 30, 2018

 

 

 

 

 

 

 

 

and December 31, 2017, respectively

 

 

187

 

 

 

185

 

Additional paid-in capital

 

 

85,620

 

 

 

84,532

 

Retained earnings

 

 

190,735

 

 

 

174,804

 

Accumulated other comprehensive loss

 

 

(4,943

)

 

 

(2,103

)

Total shareholders’ equity

 

 

271,599

 

 

 

257,418

 

Total liabilities and shareholders’ equity

 

$

2,161,770

 

 

$

2,123,529

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

3


 

PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

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

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

27,073

 

 

$

17,923

 

 

$

52,856

 

 

$

34,767

 

Interest and dividends on investments

 

 

1,683

 

 

 

1,802

 

 

 

3,339

 

 

 

3,507

 

Total interest income

 

 

28,756

 

 

 

19,725

 

 

 

56,195

 

 

 

38,274

 

Interest expense

 

 

1,778

 

 

 

749

 

 

 

3,273

 

 

 

1,515

 

Net interest income

 

 

26,978

 

 

 

18,976

 

 

 

52,922

 

 

 

36,759

 

Provision for loan losses

 

 

1,475

 

 

 

900

 

 

 

3,525

 

 

 

1,100

 

Net interest income after provision for loan losses

 

 

25,503

 

 

 

18,076

 

 

 

49,397

 

 

 

35,659

 

Non-interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage banking

 

 

1,505

 

 

 

1,960

 

 

 

3,143

 

 

 

3,939

 

Card processing

 

 

799

 

 

 

692

 

 

 

1,522

 

 

 

1,287

 

Service charges on deposit accounts

 

 

704

 

 

 

578

 

 

 

1,377

 

 

 

1,114

 

Net gain (loss) on sale of investment securities

 

 

333

 

 

 

1

 

 

 

335

 

 

 

(10

)

Other operating

 

 

725

 

 

 

606

 

 

 

1,407

 

 

 

1,099

 

Total non-interest income

 

 

4,066

 

 

 

3,837

 

 

 

7,784

 

 

 

7,429

 

Non-interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

10,196

 

 

 

7,762

 

 

 

20,619

 

 

 

15,729

 

Occupancy, equipment and depreciation

 

 

1,411

 

 

 

1,088

 

 

 

2,954

 

 

 

2,205

 

Data processing

 

 

1,063

 

 

 

661

 

 

 

1,933

 

 

 

1,336

 

Marketing and advertising

 

 

321

 

 

 

349

 

 

 

767

 

 

 

611

 

FDIC premiums

 

 

299

 

 

 

130

 

 

 

628

 

 

 

256

 

Acquisition-related costs

 

 

1

 

 

 

175

 

 

 

350

 

 

 

175

 

Other

 

 

2,532

 

 

 

1,670

 

 

 

4,620

 

 

 

3,437

 

Total non-interest expense

 

 

15,823

 

 

 

11,835

 

 

 

31,871

 

 

 

23,749

 

Income before income tax expense

 

 

13,746

 

 

 

10,078

 

 

 

25,310

 

 

 

19,339

 

Income tax expense

 

 

3,279

 

 

 

3,584

 

 

 

5,839

 

 

 

6,324

 

Net income

 

$

10,467

 

 

$

6,494

 

 

$

19,471

 

 

$

13,015

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.56

 

 

$

0.36

 

 

$

1.04

 

 

$

0.73

 

Diluted

 

$

0.55

 

 

$

0.35

 

 

$

1.03

 

 

$

0.71

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

18,679,908

 

 

 

17,937,926

 

 

 

18,639,397

 

 

 

17,911,125

 

Diluted

 

 

18,989,176

 

 

 

18,351,531

 

 

 

18,963,549

 

 

 

18,334,028

 

 

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

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(Dollars in thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income

 

$

10,467

 

 

$

6,494

 

 

$

19,471

 

 

$

13,015

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding (losses)/gains on securities available-for-sale

 

 

(1,319

)

 

 

375

 

 

 

(3,787

)

 

 

438

 

Income tax benefit/(expense)

 

 

330

 

 

 

(143

)

 

 

947

 

 

 

(168

)

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

 

 

(989

)

 

 

232

 

 

 

(2,840

)

 

 

270

 

Total comprehensive income

 

$

9,478

 

 

$

6,726

 

 

$

16,631

 

 

$

13,285

 

 

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 and per share data)

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Income (Loss)

 

 

Total

 

Balance as of January 1, 2017

 

 

17,819,538

 

 

$

178

 

 

$

68,657

 

 

$

160,692

 

 

$

(1,010

)

 

$

228,517

 

Comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

13,015

 

 

 

270

 

 

 

13,285

 

Cash dividends ($0.16 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,867

)

 

 

-

 

 

 

(2,867

)

Share-based compensation

 

 

-

 

 

 

-

 

 

 

218

 

 

 

-

 

 

 

-

 

 

 

218

 

Exercise of stock options

 

 

128,809

 

 

 

1

 

 

 

748

 

 

 

-

 

 

 

-

 

 

 

749

 

Balance as of June 30, 2017

 

 

17,948,347

 

 

$

179

 

 

$

69,623

 

 

$

170,840

 

 

$

(740

)

 

$

239,902

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2018

 

 

18,511,797

 

 

$

185

 

 

$

84,532

 

 

$

174,804

 

 

$

(2,103

)

 

$

257,418

 

Comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

19,471

 

 

 

(2,840

)

 

 

16,631

 

Cash dividends ($0.19 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,540

)

 

 

-

 

 

 

(3,540

)

Share-based compensation

 

 

-

 

 

 

-

 

 

 

370

 

 

 

-

 

 

 

-

 

 

 

370

 

Exercise of stock options

 

 

172,086

 

 

 

2

 

 

 

718

 

 

 

-

 

 

 

-

 

 

 

720

 

Balance as of June 30, 2018

 

 

18,683,883

 

 

$

187

 

 

$

85,620

 

 

$

190,735

 

 

$

(4,943

)

 

$

271,599

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

6


 

PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Six Months Ended

 

 

 

June 30,

 

(Dollars in thousands)

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

19,471

 

 

$

13,015

 

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

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

3,525

 

 

 

1,100

 

Depreciation and amortization

 

 

1,538

 

 

 

1,267

 

Deferred income taxes

 

 

(990

)

 

 

(214

)

Net amortization of securities discounts and premiums

 

 

1,312

 

 

 

1,501

 

Increase in cash surrender value of bank owned life insurance

 

 

(304

)

 

 

(256

)

Share-based compensation

 

 

370

 

 

 

218

 

Gain on sale of loans held for sale

 

 

(2,047

)

 

 

(2,838

)

Originations of loans held for sale

 

 

(108,638

)

 

 

(115,621

)

Proceeds from sale of loans held for sale

 

 

110,498

 

 

 

131,630

 

Net changes in:

 

 

 

 

 

 

 

 

Accrued interest receivable

 

 

(64

)

 

 

(59

)

Other assets

 

 

(4,611

)

 

 

517

 

Accrued interest payable

 

 

16

 

 

 

(36

)

Other liabilities

 

 

6,736

 

 

 

4,964

 

Net cash provided by operating activities

 

 

26,812

 

 

 

35,188

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Net change in loans held for investment

 

 

(63,290

)

 

 

(82,558

)

Purchase of available-for-sale securities

 

 

-

 

 

 

(24,599

)

Purchase of held-to-maturity securities

 

 

-

 

 

 

(12,198

)

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

 

 

21,645

 

 

 

34,350

 

Proceeds from maturities of held-to-maturity securities

 

 

6,345

 

 

 

7,939

 

Purchase of bank-owned life insurance

 

 

(2,250

)

 

 

-

 

Purchase of premises and equipment

 

 

(448

)

 

 

(2,758

)

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

 

 

438

 

 

 

302

 

Net change of non-marketable equity securities

 

 

(2,445

)

 

 

(132

)

Net cash used in investing activities

 

 

(40,005

)

 

 

(79,654

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net (decrease) increase in deposits

 

 

(32,692

)

 

 

35,978

 

Proceeds related to exercise of stock options

 

 

720

 

 

 

749

 

Net change in short-term borrowings

 

 

50,000

 

 

 

103

 

Cash dividends paid

 

 

(3,540

)

 

 

(2,867

)

Net cash provided by financing activities

 

 

14,488

 

 

 

33,963

 

Net change in cash and cash equivalents

 

 

1,295

 

 

 

(10,503

)

Cash and cash equivalents, beginning of period

 

 

51,027

 

 

 

67,938

 

Cash and cash equivalents, end of period

 

$

52,322

 

 

$

57,435

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

3,257

 

 

$

1,551

 

Income taxes paid

 

$

6,869

 

 

$

6,217

 

Supplemental disclosures of non-cash investing transactions:

 

 

 

 

 

 

 

 

Reclassifications from loans to other real estate owned

 

$

-

 

 

$

468

 

Unrealized gains / (losses) on securities available-for-sale

 

$

(3,787

)

 

$

438

 

Measurement period adjustment to goodwill

 

$

(335

)

 

$

-

 

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

Nature of Operations and basis of consolidation — People’s Utah Bancorp, Inc. (“PUB” or the “Company”) is a Utah corporation headquartered in American Fork, Utah. The Company operates all business activities through its wholly-owned banking subsidiary, People’s Intermountain Bank (“PIB” or the “Bank”), which was organized in 1913.  The Bank is a Utah State chartered bank.  The Bank operates under the jurisdiction of the Utah Department of Financial Institutions, and its deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is not a member of the Federal Reserve System; however, PUB is operated as a bank holding company under the Federal Bank Holding Company Act of 1956 and is the sole shareholder of the Bank. Both PUB and the Bank are subject to periodic examination by applicable federal and state regulatory agencies and file periodic reports and other information with the agencies.

PIB is a community bank that provides highly personalized retail and commercial banking products and services to small and medium sized businesses and individuals.  Products and services are offered primarily through 26 retail branches located throughout Utah and southern Idaho. PIB has three banking divisions, Bank of American Fork, Lewiston State Bank, and People’s Town & Country Bank; a leasing division, GrowthFunding Equipment Finance; and a mortgage division, People’s Intermountain Bank Mortgage. The Bank offers a full range of short-term to long-term commercial, personal and mortgage loans. Commercial loans include both secured and unsecured loans for working capital (including inventory and accounts receivable), business expansion (including acquisition of real estate and improvements), and purchase of equipment and machinery. Consumer loans include secured and unsecured loans to finance automobiles, home improvements, education, and personal investments. The Bank also offers mortgage loans secured by personal residences. The Bank offers a full range of deposit services typically available in most financial institutions, including checking accounts, savings accounts, and time deposits. The Bank solicits these accounts from individuals, businesses, associations and organizations, and governmental entities.

The interim condensed 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 condensed 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, 2017, which are included in the Company’s 2017 Form 10-K.  Operating results for the three months and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018, 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 include 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”).

8


 

Note 1 — Basis of Presentation – Continued

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

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

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

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

10,467

 

 

$

6,494

 

 

$

19,471

 

 

$

13,015

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding

 

 

18,679,908

 

 

 

17,937,926

 

 

 

18,639,397

 

 

 

17,911,125

 

Incremental shares assumed for stock options and RSUs

 

 

309,268

 

 

 

413,605

 

 

 

324,152

 

 

 

422,903

 

Weighted-average number of dilutive shares outstanding

 

 

18,989,176

 

 

 

18,351,531

 

 

 

18,963,549

 

 

 

18,334,028

 

Basic earnings per common share

 

$

0.56

 

 

$

0.36

 

 

$

1.04

 

 

$

0.73

 

Diluted earnings per common share

 

$

0.55

 

 

$

0.35

 

 

$

1.03

 

 

$

0.71

 

 

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 Accounting Standards Codification™ (“ASC”) is the Financial Accounting Standards Board’s (“FASB”) officially recognized source of authoritative GAAP applicable to all public and non-public non-governmental entities.  Periodically, the FASB will issue Accounting Standard Updates (“ASU”) to its ASC.  Rules and interpretive releases of the SEC under the authority of the federal securities laws are also sources of authoritative GAAP for us as an SEC registrant. All other accounting literature is non-authoritative.

 

In February 2018, the FASB issued ASU 2018-02, Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.  This ASU gives businesses the option of reclassifying to retained earnings the so-called “stranded tax effects” left in accumulated other comprehensive income (“AOCI”) because of the reduction to the corporate income tax rate.  The amendments are effective for all organizations for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years.  Early adoption is permitted.  The FASB said that businesses and organizations should apply the amendments either in the period of adoption or retrospectively to each period in which the effect of the change in the tax rate is recognized.  The Company early adopted this ASU on December 31, 2017.

 

In March 2017, FASB issued ASU 2017-08, "Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities." The ASU requires entities to amortize the premium on certain purchased callable debt securities to the earliest call date, which more closely aligns the amortization period of premiums and discounts to expectations incorporated in the market prices. Entities will no longer recognize a loss in earnings upon the debtor's exercise of a call on a purchased debt security held at a premium. The ASU does not require any accounting change for debt securities held at a discount; therefore the discount will continue to be amortized as an adjustment of yield over the contractual life of the investment. This ASU is effective for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted for all entities. The adoption of ASU No. 2017-08 is not expected to have a material impact on the Company's Consolidated Financial Statements.

 

In January 2017, FASB issued ASU 2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." The ASU removes the requirement to compare the implied fair value of goodwill with its carrying value as required in Step 2 of the goodwill impairment test. Under the ASU, registrants would perform their goodwill impairment test and recognize an impairment charge for any amount the carrying value exceeds the reporting unit's fair value, but limited by the amount of goodwill allocated to that reporting unit. This ASU is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted for all entities after January 1, 2017. The Company early adopted this ASU on December 31, 2017 and adoption did not have a material effect on the Company's Consolidated Financial Statements.

 

In January 2017, FASB issued ASU 2017-03, "Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323)." The ASU amends the Codification for SEC staff announcements made at recent Emerging Issues Task Force (EITF) meetings. The SEC guidance that specifically relates to our Consolidated Financial Statements was from the September 2016 meeting, where the SEC staff expressed their expectations about the extent of disclosures registrants should make about the effects of the new FASB guidance as well as any amendments issued prior to adoption, on revenue (ASU 2014-09), leases (ASU 2016-02) and credit losses on financial instruments (ASU 2016-13) in accordance with SAB Topic 11.M. Registrants are required to disclose the effect that recently issued accounting standards will have on their financial statements when adopted in a future period. In cases where a registrant cannot reasonably estimate the impact of the adoption, then additional qualitative disclosures should be considered. The ASU incorporates these SEC staff views into ASC 250 and adds references to that guidance in the transition paragraphs of each of the three new standards. The Company has adopted the amendments in this ASU and appropriate disclosures have been included in this Note for each recently issued accounting standard.

9


 

Note 1 — Basis of Presentation – Continued

In December 2016, FASB issued ASU No. 2016-19, "Technical Corrections and Improvements" and ASU 2016-20, "Technical Corrections and Improvements to Topic 606: Revenue from Contracts with Customers." On November 10, 2010, FASB added a standing project that will facilitate the FASB Accounting Standards Codification ("Codification”) updates for technical corrections, clarifications, and improvements. These amendments are referred to as Technical Corrections and Improvements. Maintenance updates include non-substantive corrections to the Codification, such as editorial corrections, various link-related changes, and changes to source fragment information. These updates contain amendments that will affect a wide variety of Topics in the Codification. The amendments in these ASUs will apply to all reporting entities within the scope of the affected accounting guidance and generally fall into one of four categories: amendments related to differences between original guidance and the Codification, guidance clarification and reference corrections, simplification, and minor improvements. In summary, the amendments represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice. Transition guidance varies based on the amendments in the ASUs. The amendments that require transition guidance are effective for fiscal years and interim reporting periods after December 15, 2016. Early adoption is permitted including adoption in an interim period. All other amendments are effective upon the issuance of these ASUs. Neither ASU 2016-19 nor ASU 2016-20 had a material impact on the Company's Consolidated Financial Statements.

 

In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments." The ASU amends the guidance on the classification of certain cash receipts and payments in the statement of cash flows and is intended to reduce the diversity in practice. This ASU is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted for all entities beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of ASU 2016-15 on January 1, 2018 did not have a material impact on the Company’s Consolidated Financial Statements.

 

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." The ASU significantly changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments from an incurred loss model to an expected loss model. This ASU is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted for all entities beginning after December 15, 2018, including interim periods within those fiscal years. The Company is in the process of identifying required changes to the loan loss estimation models and processes and evaluating the impact of this new guidance. Once adopted, we expect our allowance for loan losses to increase, however, until our evaluation is complete the magnitude of the increase will be unknown.

 

In February 2016, the FASB issued ASU 2016-02, "Leases (ASC 842)." The guidance in this ASU requires most leases to be recognized on the balance sheet as a right-of-use asset and a lease liability. It will be critical to identify leases embedded in a contract to avoid misstating the lessee’s balance sheet. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. This ASU is effective for interim and annual periods beginning after December 15, 2018. We are currently evaluating the impact of this guidance on our Consolidated Financial Statements and the timing of adoption. The Company will compile an inventory of all leased assets to determine the impact of ASU 2016-02 on its financial condition and results of operations. Once adopted, we expect to report higher assets and liabilities on our Consolidated Balance Sheets as a result of including right-of-use assets and lease liabilities related to certain banking offices and certain equipment under noncancelable operating lease agreements, which currently are not reflected in our Consolidated Balance Sheets. We do not expect the guidance to have a material impact on the Consolidated Statements of Income or the Consolidated Statements of Changes in Shareholders’ Equity.

 

In January 2016, the FASB issued ASU 2016-01, "Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." The ASU amends the guidance in GAAP on the classification and measurement of financial instruments. The ASU includes the following changes: i) equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (ii) requires the use of exit price notion when measuring the fair value of financial instruments for disclosure purposes; (iii) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e. securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; (iv) allows an equity investment that does not have readily determinable fair values, to be measured at cost minus impairment (if any), plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (v) eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, and requires a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e. securities or loans and receivables) on the balance sheet or in the accompanying notes to the financial statements; and (vii) clarifies that a valuation allowance on a deferred tax asset related to available-for-sale securities should be evaluated in combination with the organization’s other deferred tax assets. This ASU is effective for interim and annual periods beginning after December 15, 2017. The Company adopted ASU No. 2016-01 effective January 1, 2018, and the adoption did not have a material impact on the Company's Consolidated Financial Statements.

10


 

Note 1 — Basis of Presentation – Continued

In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606)”, which defers the effective date of Accounting Standard Update ASU No. 2014-09 one year. ASU No. 2014-09 created Topic 606 and supersedes Topic 605, Revenue Recognition. The core principle of Topic 606 is that an entity recognizes 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. In general, the new guidance requires companies to use more judgment and make more estimates than under current guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides clarifying guidance in certain narrow areas and adds some practical expedients, but does not change the core revenue recognition principle in Topic 606. ASU No. 2015-14 is effective for interim and annual periods beginning after December 15, 2017. For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application.  The Company adopted this standard on January 1, 2018 using the full retrospective method.  

A significant amount of the Company’s revenues are derived from net interest income on financial assets and liabilities, which are excluded from the scope of the amended guidance.  Revenue streams reported as deposit fees and other service charges. which include transaction based deposit fees, and interchange fees on credit and debit cards, are within the scope of Topic 606.  The Company completed its assessment of revenue streams and associated incremental costs of contracts affected by the standard.  The Company’s adoption of this standard did not change the timing or the amount of revenue recognized in prior periods, however the presentation of certain costs associated with card processing will now be offset against card processing revenue in non-interest income.  The change in presentation resulted in $1.2 million of expenses for the six months ended June 30, 2018 being netted against card processing income and reported in non-interest income instead of as payment and card processing expenses in non-interest expense. In addition, to conform to the current period presentation, $1.0 million of card processing related expenses for the six months ended June 30, 2017, were reclassified from payment and card processing expense in non-interest expense to being netted against card processing revenue in non-interest income. The Company elected to apply the practical expedient and therefore does not disclose information about remaining performance obligations that have an original expected term of one year or less and allows the Company to expense costs related to obtaining a contract as incurred when the amortization period would have been one year or less.  

The following table presents the impact of adopting of the new revenue standard on our Statements of Income for the six months ended June 30, 2018 and 2017:

 

 

 

Six Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2018

 

 

June 30, 2017

 

 

 

 

 

 

 

Balance without

 

 

 

 

 

 

 

 

 

 

Balance without

 

 

 

 

 

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

 

As Reported

 

 

Adoption of ASC 606

 

 

Effect of Change

 

 

As Reported

 

 

Adoption of ASC 606

 

 

Effect of Change

 

Non-interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Card Processing

 

$

1,522

 

 

$

2,749

 

 

$

(1,227

)

 

$

1,287

 

 

$

2,332

 

 

$

(1,045

)

Service charges on deposit accounts

 

 

1,377

 

 

 

1,377

 

 

 

-

 

 

 

1,114

 

 

 

1,114

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Card Processing

 

$

-

 

 

$

1,227

 

 

$

(1,227

)

 

$

-

 

 

$

1,045

 

 

$

(1,045

)

 

11


 

Note 2 — Investment Securities

Amortized cost and estimated fair value of investment securities available-for-sale are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

Gross Unrealized Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less

 

 

12

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

Than

 

 

Months

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

12

 

 

or

 

 

Fair

 

(Dollars in thousands)