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Section 1: 10-Q (10-Q)

pub-10q_20190630.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended June 30, 2019

OR

  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)

Registrant’s telephone number, including area code: (801) 642-3998

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share

 

PUB

 

The Nasdaq Stock Market LLC

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 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  

 

As of July 31, 2019, the registrant had 18,827,247 shares of common stock $0.01 par value per share, outstanding. 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

 

 

 

 


 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS

 

 

 

June 30,

 

 

December 31,

 

(Dollars in thousands, except share data)

 

2019

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

38,121

 

 

$

39,471

 

Interest bearing deposits

 

 

64,064

 

 

 

7,456

 

Federal funds sold

 

 

90,281

 

 

 

1,620

 

Total cash and cash equivalents

 

 

192,466

 

 

 

48,547

 

Investment securities:

 

 

 

 

 

 

 

 

Available-for-sale, at fair value

 

 

334,762

 

 

 

280,964

 

Held-to-maturity, at historical cost

 

 

-

 

 

 

65,462

 

Total investment securities

 

 

334,762

 

 

 

346,426

 

Non-marketable equity securities

 

 

2,623

 

 

 

2,551

 

Loans held for sale

 

 

18,446

 

 

 

10,267

 

Loans:

 

 

 

 

 

 

 

 

Loans held for investment

 

 

1,672,584

 

 

 

1,678,902

 

Allowance for loan losses

 

 

(28,039

)

 

 

(25,245

)

Total loans held for investment, net

 

 

1,644,545

 

 

 

1,653,657

 

Premises and equipment, net

 

 

37,925

 

 

 

36,532

 

Goodwill

 

 

25,673

 

 

 

25,673

 

Bank-owned life insurance

 

 

26,734

 

 

 

26,433

 

Deferred income tax assets, net

 

 

9,178

 

 

 

11,514

 

Accrued interest receivable

 

 

8,642

 

 

 

8,282

 

Other intangibles

 

 

3,191

 

 

 

3,412

 

Other real estate owned

 

 

-

 

 

 

-

 

Other assets

 

 

7,680

 

 

 

11,000

 

Total assets

 

$

2,311,865

 

 

$

2,184,294

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Non-interest bearing deposits

 

$

707,135

 

 

$

642,594

 

Interest bearing deposits

 

 

1,274,771

 

 

 

1,234,461

 

Total deposits

 

 

1,981,906

 

 

 

1,877,055

 

Short-term borrowings

 

 

-

 

 

 

-

 

Accrued interest payable

 

 

546

 

 

 

483

 

Other liabilities

 

 

16,614

 

 

 

16,594

 

Total liabilities

 

 

1,999,066

 

 

 

1,894,132

 

 

 

 

 

 

 

 

 

 

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; 18,819,332

 

 

 

 

 

 

 

 

and 18,728,823 shares issued and outstanding as of June 30, 2019

 

 

 

 

 

 

 

 

and December 31, 2018, respectively

 

 

188

 

 

 

187

 

Additional paid-in capital

 

 

87,275

 

 

 

86,308

 

Retained earnings

 

 

224,950

 

 

 

207,779

 

Accumulated other comprehensive income/(loss)

 

 

386

 

 

 

(4,112

)

Total shareholders’ equity

 

 

312,799

 

 

 

290,162

 

Total liabilities and shareholders’ equity

 

$

2,311,865

 

 

$

2,184,294

 

 

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)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

27,628

 

 

$

27,073

 

 

$

54,608

 

 

$

52,856

 

Interest and dividends on investments

 

 

2,422

 

 

 

1,683

 

 

 

4,594

 

 

 

3,339

 

Total interest income

 

 

30,050

 

 

 

28,756

 

 

 

59,202

 

 

 

56,195

 

Interest expense

 

 

2,330

 

 

 

1,778

 

 

 

4,575

 

 

 

3,273

 

Net interest income

 

 

27,720

 

 

 

26,978

 

 

 

54,627

 

 

 

52,922

 

Provision for loan losses

 

 

2,150

 

 

 

1,475

 

 

 

3,700

 

 

 

3,525

 

Net interest income after provision for loan losses

 

 

25,570

 

 

 

25,503

 

 

 

50,927

 

 

 

49,397

 

Non-interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage banking

 

 

1,621

 

 

 

1,505

 

 

 

3,038

 

 

 

3,143

 

Card processing

 

 

814

 

 

 

799

 

 

 

1,429

 

 

 

1,522

 

Service charges on deposit accounts

 

 

705

 

 

 

704

 

 

 

1,362

 

 

 

1,377

 

Net gain on sale of investment securities

 

 

-

 

 

 

333

 

 

 

-

 

 

 

335

 

Other

 

 

458

 

 

 

725

 

 

 

1,106

 

 

 

1,407

 

Total non-interest income

 

 

3,598

 

 

 

4,066

 

 

 

6,935

 

 

 

7,784

 

Non-interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

9,526

 

 

 

10,196

 

 

 

19,412

 

 

 

20,619

 

Occupancy, equipment and depreciation

 

 

1,558

 

 

 

1,411

 

 

 

3,014

 

 

 

2,954

 

Data processing

 

 

1,018

 

 

 

1,063

 

 

 

1,982

 

 

 

1,933

 

Marketing and advertising

 

 

226

 

 

 

321

 

 

 

342

 

 

 

767

 

FDIC premiums

 

 

148

 

 

 

299

 

 

 

238

 

 

 

628

 

Acquisition-related costs

 

 

-

 

 

 

1

 

 

 

-

 

 

 

350

 

Other

 

 

2,223

 

 

 

2,532

 

 

 

4,627

 

 

 

4,620

 

Total non-interest expense

 

 

14,699

 

 

 

15,823

 

 

 

29,615

 

 

 

31,871

 

Income before income tax expense

 

 

14,469

 

 

 

13,746

 

 

 

28,247

 

 

 

25,310

 

Income tax expense

 

 

3,480

 

 

 

3,279

 

 

 

6,753

 

 

 

5,839

 

Net income

 

$

10,989

 

 

$

10,467

 

 

$

21,494

 

 

$

19,471

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.58

 

 

$

0.56

 

 

$

1.14

 

 

$

1.04

 

Diluted

 

$

0.58

 

 

$

0.55

 

 

$

1.13

 

 

$

1.03

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

18,805,760

 

 

 

18,679,908

 

 

 

18,793,553

 

 

 

18,639,397

 

Diluted

 

 

19,007,297

 

 

 

18,989,176

 

 

 

18,998,480

 

 

 

18,963,549

 

 

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)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net income

 

$

10,989

 

 

$

10,467

 

 

$

21,494

 

 

$

19,471

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

3,140

 

 

 

(1,319

)

 

 

5,996

 

 

 

(3,787

)

Income tax (expense)/benefit

 

 

(785

)

 

 

330

 

 

 

(1,498

)

 

 

947

 

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

   net of tax

 

 

2,355

 

 

 

(989

)

 

 

4,498

 

 

 

(2,840

)

Total comprehensive income

 

$

13,344

 

 

$

9,478

 

 

$

25,992

 

 

$

16,631

 

 

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, 2018

 

 

18,511,797

 

 

$

185

 

 

$

84,532

 

 

$

174,804

 

 

$

(2,103

)

 

$

257,418

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9,004

 

 

 

-

 

 

 

9,004

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,851

)

 

 

(1,851

)

Cash dividends ($0.09 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,672

)

 

 

-

 

 

 

(1,672

)

Share-based compensation

 

 

-

 

 

 

-

 

 

 

216

 

 

 

-

 

 

 

-

 

 

 

216

 

Issuance of shares under stock incentive plans

 

 

162,435

 

 

 

2

 

 

 

682

 

 

 

-

 

 

 

-

 

 

 

684

 

Balance as of March 31, 2018

 

 

18,674,232

 

 

$

187

 

 

$

85,430

 

 

$

182,136

 

 

$

(3,954

)

 

$

263,799

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

10,467

 

 

 

-

 

 

 

10,467

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(989

)

 

 

(989

)

Cash dividends ($0.10 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,868

)

 

 

-

 

 

 

(1,868

)

Share-based compensation

 

 

-

 

 

 

-

 

 

 

154

 

 

 

-

 

 

 

-

 

 

 

154

 

Issuance of shares under stock incentive plans

 

 

9,651

 

 

 

-

 

 

 

36

 

 

 

-

 

 

 

-

 

 

 

36

 

Balance as of June 30, 2018

 

 

18,683,883

 

 

$

187

 

 

$

85,620

 

 

$

190,735

 

 

$

(4,943

)

 

$

271,599

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2019

 

 

18,728,823

 

 

$

187

 

 

$

86,308

 

 

$

207,779

 

 

$

(4,112

)

 

$

290,162

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

10,505

 

 

 

-

 

 

 

10,505

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,143

 

 

 

2,143

 

Cash dividends ($0.11 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,068

)

 

 

-

 

 

 

(2,068

)

Share-based compensation

 

 

-

 

 

 

-

 

 

 

191

 

 

 

-

 

 

 

-

 

 

 

191

 

Issuance of shares under stock incentive plans

 

 

68,457

 

 

 

1

 

 

 

393

 

 

 

-

 

 

 

-

 

 

 

394

 

Balance as of March 31, 2019

 

 

18,797,280

 

 

$

188

 

 

$

86,892

 

 

$

216,216

 

 

$

(1,969

)

 

$

301,327

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

10,989

 

 

 

-

 

 

 

10,989

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,355

 

 

 

2,355

 

Cash dividends ($0.12 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,255

)

 

 

-

 

 

 

(2,255

)

Share-based compensation

 

 

-

 

 

 

-

 

 

 

190

 

 

 

-

 

 

 

-

 

 

 

190

 

Issuance of shares under stock incentive plans

 

 

22,052

 

 

 

-

 

 

 

193

 

 

 

-

 

 

 

-

 

 

 

193

 

Balance as of June 30, 2019

 

 

18,819,332

 

 

$

188

 

 

$

87,275

 

 

$

224,950

 

 

$

386

 

 

$

312,799

 

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)

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

21,494

 

 

$

19,471

 

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

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

3,700

 

 

 

3,525

 

Depreciation and amortization

 

 

1,889

 

 

 

1,538

 

Deferred income taxes

 

 

837

 

 

 

(990

)

Net amortization of securities discounts and premiums

 

 

1,172

 

 

 

1,312

 

Increase in cash surrender value of bank-owned life insurance

 

 

(301

)

 

 

(304

)

Share-based compensation

 

 

381

 

 

 

370

 

Gain on sale of loans held for sale

 

 

(1,984

)

 

 

(2,047

)

Originations of loans held for sale

 

 

(99,270

)

 

 

(108,638

)

Proceeds from sale of loans held for sale

 

 

93,075

 

 

 

110,498

 

Net changes in:

 

 

 

 

 

 

 

 

Accrued interest receivable

 

 

(360

)

 

 

(64

)

Other assets

 

 

3,596

 

 

 

(4,611

)

Accrued interest payable

 

 

63

 

 

 

16

 

Other liabilities

 

 

(2,149

)

 

 

6,736

 

Net cash provided by operating activities

 

 

22,143

 

 

 

26,812

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Net change in loans held for investment

 

 

5,412

 

 

 

(63,290

)

Purchase of available-for-sale securities

 

 

(12,831

)

 

 

-

 

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

 

 

27,949

 

 

 

21,645

 

Proceeds from maturities of held-to-maturity securities

 

 

1,370

 

 

 

6,345

 

Purchase of bank-owned life insurance

 

 

-

 

 

 

(2,250

)

Purchase of premises and equipment

 

 

(3,464

)

 

 

(1,231

)

Proceeds from sale of assets

 

 

2,297

 

 

 

783

 

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

 

 

-

 

 

 

438

 

Purchase of non-marketable equity securities

 

 

(4,032

)

 

 

(14,975

)

Proceeds from sale of non-marketable equity securities

 

 

3,960

 

 

 

12,530

 

Net cash (used in) provided by investing activities

 

 

20,661

 

 

 

(40,005

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net increase in deposits

 

 

104,851

 

 

 

(32,692

)

Proceeds related to exercise of stock options

 

 

587

 

 

 

720

 

Net change in short-term borrowings

 

 

-

 

 

 

50,000

 

Cash dividends paid

 

 

(4,323

)

 

 

(3,540

)

Net cash provided by financing activities

 

 

101,115

 

 

 

14,488

 

Net change in cash and cash equivalents

 

 

143,919

 

 

 

1,295

 

Cash and cash equivalents, beginning of period

 

 

48,547

 

 

 

51,027

 

Cash and cash equivalents, end of period

 

$

192,466

 

 

$

52,322

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

4,512

 

 

$

3,257

 

Income taxes paid

 

$

6,510

 

 

$

6,869

 

Supplemental disclosures of non-cash investing transactions:

 

 

 

 

 

 

 

 

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

 

$

5,996

 

 

$

(3,787

)

Measurement period adjustment to goodwill

 

$

-

 

 

$

(335

)

Transfer of HTM securities to AFS

 

$

64,648

 

 

$

-

 

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 and Significant Accounting Policies

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.  The Company considers the Bank to be its sole operating segment.

PIB is a community bank that provides highly personalized retail and commercial banking products and services to small and medium sized businesses and to individuals.  Products and services are offered primarily through 26 retail branch locations throughout Utah and southern Idaho. PIB has three banking divisions, Bank of American Fork, Lewiston State Bank, and People’s Town & Country Bank; 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, 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 accompanying unaudited interim consolidated financial statements include the accounts of the Company together with its subsidiary Bank. All intercompany transactions and balances have been eliminated.

These unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (SEC). In preparing these financial statements, the Company has evaluated events and transactions subsequent to June 30, 2019, for potential recognition or disclosure. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Certain information and disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC and the accounting standards for interim financial statements. Certain reclassifications have been made to the 2018 Consolidated Financial Statements and/or schedules to conform to the 2019 presentation. These reclassifications may have affected certain ratios for the prior periods. The effect of these reclassifications is considered immaterial.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements. Various elements of the Company’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, management has identified several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are significant to an understanding of the Company’s financial statements. These policies relate to (i) the methodology for the recognition of interest income, (ii) determination of the provision and allowance for loan losses, (iii) the valuation of financial assets and liabilities recorded at fair value, including other-than-temporary impairment (OTTI) losses, (iv) the valuation of intangibles, such as goodwill, core deposit intangibles (CDI) and mortgage servicing rights, (v) the valuation of real estate held for sale, (vi) the valuation of assets and liabilities acquired in business combinations and subsequent recognition of related income and expense, and (vii) the valuation or recognition of deferred tax assets and liabilities. These policies and judgments, estimates and assumptions are described in greater detail in subsequent notes to the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations (Critical Accounting Policies) in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC (2018 Form 10-K).  There have been no significant changes in our application of these accounting policies during the first six months of 2019, except as described later in Note 1.

The information included in this Form 10-Q should be read in conjunction with our 2018 Form 10-K.  Interim results are not necessarily indicative of results for a full year or any other interim period.

8


 

Note 1 — Basis of Presentation and Significant Accounting Policies – Continued

 

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”).

 

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 August 2018, FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this ASU broaden the scope of ASC Subtopic 350-40 to include costs incurred to implement a hosting arrangement that is a service contract. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The costs are capitalized or expensed depending on the nature of the costs and the project stage during which they are incurred, consistent with the accounting for costs for internal-use software. The amendments in this ASU result in consistent capitalization of implementation costs of a hosting arrangement that is a service contract and implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU. This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Adoption of ASU 2018-15 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

 

In August 2018, FASB issued ASU 2018-13, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The ASU removes, modifies and adds disclosure requirements in Topic 820. The following disclosure requirements were removed: (1) the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; and (3) the valuation processes for Level 3 fair value measurements. This ASU modified the disclosure requirements to require that the measurement uncertainty disclosure communicates information about the uncertainty in measurement as of the reporting date. The following disclosure requirements were added: (1) changes in unrealized gains and losses for the period included in other comprehensive income for the recurring Level 3 fair value measurements held at the end of the reporting period; and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this ASU are effective for all entities for fiscal years; and interim periods within those fiscal years, beginning after December 15, 2019. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. Adoption of ASU 2018-13 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 is not known.

 

In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this ASU require lessees to recognize the following for all leases (with the exception of short-term) at the commencement date: a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The amendments in this ASU leave lessor accounting largely unchanged, although certain targeted improvements were made to align lessor accounting with the lessee accounting model. This ASU simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities.

 

9


 

Note 1 — Basis of Presentation and Significant Accounting Policies – Continued

 

Lessees will no longer be provided with a source of off-balance sheet financing. ASU No. 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018, and entities are required to use a modified retrospective approach for leases. The Company adopted the new guidance effective January 1, 2019. The Company elected the transition option provided in ASU No. 2018-11 and applied the modified retrospective approach. The Company also elected certain relief options for practical expedients: the option to not separate lease and non-lease components and instead to account for them as a single lease component; and the option to not recognize right-of-use assets and lease liabilities that arise from short-term leases (i.e. leases terms of twelve months or less). The Company has eight real property leases under non-cancelable operating leases, three of which will be subject to this ASU that will result in the recognition of right-of-use assets and lease liabilities. All of the Company’s equipment is owned or on short-term leases. The Company compiled a complete inventory of arrangements containing leases and analyzed the lease data necessary to meet the new requirements. In connection with the adoption of this ASU, as of January 1, 2019, the Company recorded a $2.2 million right of use asset and a $2.2 million lease liability on its Consolidated Balance Sheets.

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 June 30, 2019