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Section 1: 10-Q (10-Q)

pub-10q_20180930.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 September 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

 

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 October 31, 2018 was 18,719,496. 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

23

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

43

Item 4 – Controls and Procedures

43

PART II. OTHER INFORMATION

 

Item 1 – Legal Proceedings

44

Item 1A – Risk Factors

44

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

44

Item 3 – Defaults upon Senior Securities

44

Item 4 – Mine Safety Disclosures

44

Item 5 – Other Information

44

Item 6 – Exhibits

45

Signatures

46

 

 

 

 


 

PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS

 

 

 

September 30,

 

 

December 31,

 

(Dollars in thousands, except share data)

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

27,231

 

 

$

36,235

 

Interest bearing deposits

 

 

23,005

 

 

 

13,158

 

Federal funds sold

 

 

4,697

 

 

 

1,634

 

Total cash and cash equivalents

 

 

54,933

 

 

 

51,027

 

Investment securities:

 

 

 

 

 

 

 

 

Available-for-sale, at fair value

 

 

255,021

 

 

 

263,056

 

Held-to-maturity, at historical cost

 

 

67,148

 

 

 

74,654

 

Total investment securities

 

 

322,169

 

 

 

337,710

 

Non-marketable equity securities

 

 

4,231

 

 

 

3,706

 

Loans held for sale

 

 

8,467

 

 

 

10,871

 

Loans:

 

 

 

 

 

 

 

 

Loans held for investment

 

 

1,718,403

 

 

 

1,627,444

 

Allowance for loan losses

 

 

(23,309

)

 

 

(18,303

)

Total loans held for investment, net

 

 

1,695,094

 

 

 

1,609,141

 

Premises and equipment, net

 

 

36,683

 

 

 

30,399

 

Goodwill

 

 

25,673

 

 

 

26,008

 

Bank-owned life insurance

 

 

26,276

 

 

 

23,566

 

Deferred income tax assets, net

 

 

11,224

 

 

 

8,827

 

Accrued interest receivable

 

 

8,766

 

 

 

7,594

 

Other intangibles

 

 

3,523

 

 

 

3,854

 

Other real estate owned

 

 

2,985

 

 

 

994

 

Other assets

 

 

12,829

 

 

 

9,832

 

Total assets

 

$

2,212,853

 

 

$

2,123,529

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Non-interest bearing deposits

 

$

677,379

 

 

$

641,124

 

Interest bearing deposits

 

 

1,194,553

 

 

 

1,173,508

 

Total deposits

 

 

1,871,932

 

 

 

1,814,632

 

Short-term borrowings

 

 

42,000

 

 

 

40,000

 

Accrued interest payable

 

 

424

 

 

 

353

 

Other liabilities

 

 

18,865

 

 

 

11,126

 

Total liabilities

 

 

1,933,221

 

 

 

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; 18,719,496

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

and December 31, 2017, respectively

 

 

187

 

 

 

185

 

Additional paid-in capital

 

 

86,098

 

 

 

84,532

 

Retained earnings

 

 

199,161

 

 

 

174,804

 

Accumulated other comprehensive loss

 

 

(5,814

)

 

 

(2,103

)

Total shareholders’ equity

 

 

279,632

 

 

 

257,418

 

Total liabilities and shareholders’ equity

 

$

2,212,853

 

 

$

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

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

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

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

27,420

 

 

$

18,843

 

 

$

80,276

 

 

$

53,610

 

Interest and dividends on investments

 

 

1,679

 

 

 

1,820

 

 

 

5,018

 

 

 

5,327

 

Total interest income

 

 

29,099

 

 

 

20,663

 

 

 

85,294

 

 

 

58,937

 

Interest expense

 

 

1,917

 

 

 

754

 

 

 

5,190

 

 

 

2,269

 

Net interest income

 

 

27,182

 

 

 

19,909

 

 

 

80,104

 

 

 

56,668

 

Provision for loan losses

 

 

1,925

 

 

 

900

 

 

 

5,450

 

 

 

2,000

 

Net interest income after provision for loan losses

 

 

25,257

 

 

 

19,009

 

 

 

74,654

 

 

 

54,668

 

Non-interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage banking

 

 

1,668

 

 

 

1,686

 

 

 

4,811

 

 

 

5,625

 

Card processing

 

 

826

 

 

 

704

 

 

 

2,347

 

 

 

1,991

 

Service charges on deposit accounts

 

 

737

 

 

 

636

 

 

 

2,114

 

 

 

1,750

 

Net gain (loss) on sale of investment securities

 

 

-

 

 

 

(486

)

 

 

336

 

 

 

(499

)

Other

 

 

563

 

 

 

500

 

 

 

1,970

 

 

 

1,602

 

Total non-interest income

 

 

3,794

 

 

 

3,040

 

 

 

11,578

 

 

 

10,469

 

Non-interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

9,885

 

 

 

8,813

 

 

 

30,504

 

 

 

24,542

 

Occupancy, equipment and depreciation

 

 

1,476

 

 

 

1,164

 

 

 

4,430

 

 

 

3,369

 

Data processing

 

 

890

 

 

 

650

 

 

 

2,823

 

 

 

1,986

 

Marketing and advertising

 

 

342

 

 

 

343

 

 

 

1,109

 

 

 

954

 

FDIC premiums

 

 

239

 

 

 

135

 

 

 

867

 

 

 

391

 

Acquisition-related costs

 

 

(118

)

 

 

484

 

 

 

232

 

 

 

660

 

Other

 

 

2,566

 

 

 

1,525

 

 

 

7,186

 

 

 

4,961

 

Total non-interest expense

 

 

15,280

 

 

 

13,114

 

 

 

47,151

 

 

 

36,863

 

Income before income tax expense

 

 

13,771

 

 

 

8,935

 

 

 

39,081

 

 

 

28,274

 

Income tax expense

 

 

3,288

 

 

 

2,697

 

 

 

9,127

 

 

 

9,021

 

Net income

 

$

10,483

 

 

$

6,238

 

 

$

29,954

 

 

$

19,253

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.56

 

 

$

0.35

 

 

$

1.60

 

 

$

1.07

 

Diluted

 

$

0.55

 

 

$

0.34

 

 

$

1.58

 

 

$

1.05

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

18,713,410

 

 

 

17,976,066

 

 

 

18,664,339

 

 

 

17,933,010

 

Diluted

 

 

19,010,600

 

 

 

18,396,664

 

 

 

18,979,405

 

 

 

18,355,136

 

 

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,

 

(Dollars in thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income

 

$

10,483

 

 

$

6,238

 

 

$

29,954

 

 

$

19,253

 

Other comprehensive income / (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(1,161

)

 

 

349

 

 

 

(4,948

)

 

 

787

 

Income tax benefit/(expense)

 

 

290

 

 

 

(133

)

 

 

1,237

 

 

 

(301

)

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

   net of tax

 

 

(871

)

 

 

216

 

 

 

(3,711

)

 

 

486

 

Total comprehensive income

 

$

9,612

 

 

$

6,454

 

 

$

26,243

 

 

$

19,739

 

 

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

 

 

-

 

 

 

-

 

 

 

-

 

 

 

19,253

 

 

 

486

 

 

 

19,739

 

Cash dividends ($0.25 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(4,483

)

 

 

-

 

 

 

(4,483

)

Share-based compensation

 

 

-

 

 

 

-

 

 

 

382

 

 

 

-

 

 

 

-

 

 

 

382

 

Exercise of stock options

 

 

203,113

 

 

 

2

 

 

 

1,268

 

 

 

-

 

 

 

-

 

 

 

1,270

 

Balance as of September 30, 2017

 

 

18,022,651

 

 

$

180

 

 

$

70,307

 

 

$

175,462

 

 

$

(524

)

 

$

245,425

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2018

 

 

18,511,797

 

 

$

185

 

 

$

84,532

 

 

$

174,804

 

 

$

(2,103

)

 

$

257,418

 

Comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

29,954

 

 

 

(3,711

)

 

 

26,243

 

Cash dividends ($0.30 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(5,597

)

 

 

-

 

 

 

(5,597

)

Share-based compensation

 

 

-

 

 

 

-

 

 

 

683

 

 

 

-

 

 

 

-

 

 

 

683

 

Exercise of stock options

 

 

207,699

 

 

 

2

 

 

 

883

 

 

 

-

 

 

 

-

 

 

 

885

 

Balance as of September 30, 2018

 

 

18,719,496

 

 

$

187

 

 

$

86,098

 

 

$

199,161

 

 

$

(5,814

)

 

$

279,632

 

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,

 

(Dollars in thousands)

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

29,954

 

 

$

19,253

 

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

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

5,450

 

 

 

2,000

 

Depreciation and amortization

 

 

2,401

 

 

 

1,926

 

Deferred income taxes

 

 

(1,160

)

 

 

(736

)

Net amortization of securities discounts and premiums

 

 

1,991

 

 

 

2,188

 

Increase in cash surrender value of bank-owned life insurance

 

 

(460

)

 

 

(382

)

Share-based compensation

 

 

683

 

 

 

382

 

Gain on sale of loans held for sale

 

 

(3,099

)

 

 

(4,061

)

Originations of loans held for sale

 

 

(162,308

)

 

 

(172,397

)

Proceeds from sale of loans held for sale

 

 

167,811

 

 

 

186,542

 

Net changes in:

 

 

 

 

 

 

 

 

Accrued interest receivable

 

 

(1,172

)

 

 

(629

)

Other assets

 

 

(2,546

)

 

 

(1,071

)

Accrued interest payable

 

 

71

 

 

 

(46

)

Other liabilities

 

 

7,739

 

 

 

3,612

 

Net cash provided by operating activities

 

 

45,355

 

 

 

36,581

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Net change in loans held for investment

 

 

(93,643

)

 

 

(97,227

)

Purchase of available-for-sale securities

 

 

(30,832

)

 

 

(24,599

)

Purchase of held-to-maturity securities

 

 

-

 

 

 

(12,198

)

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

 

 

32,504

 

 

 

132,578

 

Proceeds from maturities of held-to-maturity securities

 

 

6,930

 

 

 

9,323

 

Purchase of bank-owned life insurance

 

 

(2,250

)

 

 

-

 

Purchase of premises and equipment

 

 

(8,659

)

 

 

(6,137

)

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

 

 

438

 

 

 

270

 

Net change of non-marketable equity securities

 

 

(525

)

 

 

(132

)

Net cash (used in) provided by investing activities

 

 

(96,037

)

 

 

1,878

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net increase in deposits

 

 

57,300

 

 

 

103,107

 

Proceeds related to exercise of stock options

 

 

885

 

 

 

1,270

 

Net change in short-term borrowings

 

 

2,000

 

 

 

574

 

Cash dividends paid

 

 

(5,597

)

 

 

(4,483

)

Net cash provided by financing activities

 

 

54,588

 

 

 

100,468

 

Net change in cash and cash equivalents

 

 

3,906

 

 

 

138,927

 

Cash and cash equivalents, beginning of period

 

 

51,027

 

 

 

67,938

 

Cash and cash equivalents, end of period

 

$

54,933

 

 

$

206,865

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

5,119

 

 

$

2,315

 

Income taxes paid

 

$

11,032

 

 

$

10,724

 

Supplemental disclosures of non-cash investing transactions:

 

 

 

 

 

 

 

 

Reclassifications from loans to other real estate owned

 

$

2,985

 

 

$

425

 

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

 

$

(4,948

)

 

$

787

 

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 nine months ended September 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

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

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

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

10,483

 

 

$

6,238

 

 

$

29,954

 

 

$

19,253

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding

 

 

18,713,410

 

 

 

17,976,066

 

 

 

18,664,339

 

 

 

17,933,010

 

Incremental shares assumed for stock options and RSUs

 

 

297,190

 

 

 

420,598

 

 

 

315,066

 

 

 

422,126

 

Weighted-average number of dilutive shares outstanding

 

 

19,010,600

 

 

 

18,396,664

 

 

 

18,979,405

 

 

 

18,355,136

 

Basic earnings per common share

 

$

0.56

 

 

$

0.35

 

 

$

1.60

 

 

$

1.07

 

Diluted earnings per common share

 

$

0.55

 

 

$

0.34

 

 

$

1.58

 

 

$

1.05

 

 

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 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 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.

 

9


 

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 $1.8 million of expenses for the nine months ended September 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, $1.6 million of card processing related expenses for the nine months ended September 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 nine months ended September 30, 2018 and 2017:

 

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2018

 

 

September 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

 

$

2,347

 

 

$

4,177

 

 

$

(1,830

)

 

$

1,991

 

 

$

3,579

 

 

$

(1,588

)

Service charges on deposit accounts

 

 

2,114

 

 

 

2,114

 

 

 

-

 

 

 

1,750

 

 

 

1,750

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Card Processing

 

$

-

 

 

$

1,830

 

 

$

(1,830

)

 

$

-

 

 

$

1,588

 

 

$

(1,588

)

 

10


 

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)

 

Cost

 

 

Gains

 

 

Months

 

 

Longer

 

 

Value

 

As of September 30, 2018