Altabancorp 10Q 2019 Q3 Quarterly report

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 September 30, 2019


☐	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 October 31, 2019, the registrant had 18,855,868 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	24
Item 3 – Quantitative and Qualitative Disclosures about Market Risk	42
Item 4 – Controls and Procedures	42
PART II. OTHER INFORMATION
Item 1 – Legal Proceedings	43
Item 1A – Risk Factors	43
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3 – Defaults upon Senior Securities	43
Item 4 – Mine Safety Disclosures	43
Item 5 – Other Information	43
Item 6 – Exhibits	44
Signatures	45

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
(Dollars in thousands, except share data)	2019			2018
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	45,196		$	39,471
Interest-bearing deposits		195,082			7,456
Federal funds sold		100,118			1,620
Total cash and cash equivalents		340,396			48,547
Investment securities:
Available for sale, at fair value		319,857			280,964
Held to maturity, at historical cost		-			65,462
Total investment securities		319,857			346,426
Non-marketable equity securities		2,623			2,551
Loans held for sale		19,554			10,267
Loans:
Loans held for investment		1,675,147			1,678,902
Allowance for loan losses		(30,471	)		(25,245	)
Total loans held for investment, net		1,644,676			1,653,657
Premises and equipment, net		37,958			36,532
Goodwill		25,673			25,673
Bank-owned life insurance		26,885			26,433
Deferred income tax assets, net		9,169			11,514
Accrued interest receivable		8,850			8,282
Other intangibles		3,080			3,412
Other real estate owned		-			-
Other assets		5,742			11,000
Total assets	$	2,444,463		$	2,184,294
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing deposits	$	777,041		$	642,594
Interest bearing deposits		1,324,671			1,234,461
Total deposits		2,101,712			1,877,055
Short-term borrowings		-			-
Accrued interest payable		571			483
Other liabilities		19,461			16,594
Total liabilities		2,121,744			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; 18,855,710
and 18,728,823 shares issued and outstanding as of September 30, 2019
and December 31, 2018, respectively		189			187
Additional paid-in capital		87,704			86,308
Retained earnings		233,634			207,779
Accumulated other comprehensive income/(loss)		1,192			(4,112	)
Total shareholders’ equity		322,719			290,162
Total liabilities and shareholders’ equity	$	2,444,463		$	2,184,294

See accompanying notes to the unaudited consolidated financial statements.

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)	2019		2018			2019		2018
Interest income
Interest and fees on loans	$	27,544	$	27,420		$	82,152	$	80,276
Interest and dividends on investments		2,937		1,679			7,531		5,018
Total interest income		30,481		29,099			89,683		85,294
Interest expense		2,290		1,917			6,865		5,190
Net interest income		28,191		27,182			82,818		80,104
Provision for loan losses		2,100		1,925			5,800		5,450
Net interest income after provision for loan losses		26,091		25,257			77,018		74,654
Non-interest income
Mortgage banking		2,116		1,668			5,154		4,811
Card processing		976		826			2,405		2,347
Service charges on deposit accounts		744		737			2,106		2,114
Net gain on sale of investment securities		-		-			-		336
Other		631		563			1,737		1,970
Total non-interest income		4,467		3,794			11,402		11,578
Non-interest expense
Salaries and employee benefits		10,410		9,885			29,822		30,504
Occupancy, equipment and depreciation		1,439		1,476			4,453		4,430
Data processing		879		890			2,861		2,823
Marketing and advertising		805		342			1,147		1,109
FDIC premiums		6		239			244		867
Acquisition-related costs		-		(118	)		-		232
Other		2,529		2,566			7,156		7,186
Total non-interest expense		16,068		15,280			45,683		47,151
Income before income tax expense		14,490		13,771			42,737		39,081
Income tax expense		3,355		3,288			10,108		9,127
Net income	$	11,135	$	10,483		$	32,629	$	29,954
Earnings per common share:
Basic	$	0.59	$	0.56		$	1.73	$	1.60
Diluted	$	0.59	$	0.55		$	1.72	$	1.58
Weighted average common shares outstanding:
Basic		18,840,381		18,713,410			18,809,334		18,664,339
Diluted		19,029,350		19,010,600			19,008,883		18,979,405

See accompanying notes to the unaudited consolidated financial statements.

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)	2019			2018			2019			2018
Net income	$	11,135		$	10,483		$	32,629		$	29,954
Other comprehensive income
Unrealized holding gains/(losses) on securities available for sale		1,075			(1,161	)		7,071			(4,948	)
Income tax (expense)/benefit		(269	)		290			(1,767	)		1,237


Unrealized holding gains/(losses) on securities available for sale, net of tax		806			(871	)		5,304			(3,711	)
Total comprehensive income	$	11,941		$	9,612		$	37,933		$	26,243

See accompanying notes to the unaudited consolidated financial statements.

PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

										Accumulated
					Additional					Other
	Common		Common		Paid-in		Retained			Comprehensive
(Dollars in thousands, except share and per share data)	Shares		Stock		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 loss		-		-		-		-			(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 loss		-		-		-		-			(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
Net income		-		-		-		10,483			-			10,483
Other comprehensive loss		-		-		-		-			(871	)		(871	)
Cash dividends ($0.11 per share)		-		-		-		(2,057	)		-			(2,057	)
Share-based compensation		-		-		313		-			-			313
Issuance of shares under stock incentive plans		35,613		-		165		-			-			165
Balance as of September 30, 2018		18,719,496	$	187	$	86,098	$	199,161		$	(5,814	)	$	279,632

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
Net income		-		-		-		11,135			-			11,135
Other comprehensive income		-		-		-		-			806			806
Cash dividends ($0.13 per share)		-		-		-		(2,451	)		-			(2,451	)
Share-based compensation		-		-		415		-			-			415
Issuance of shares under stock incentive plans		36,378		1		14		-			-			15
Balance as of September 30, 2019		18,855,710	$	189	$	87,704	$	233,634		$	1,192		$	322,719

See accompanying notes to the unaudited consolidated financial statements.

PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months Ended
	September 30,
(Dollars in thousands)	2019			2018
Cash flows from operating activities:
Net income	$	32,629		$	29,954
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		5,800			5,450
Depreciation and amortization		2,921			2,401
Deferred income taxes		577			(1,160	)
Net amortization of securities discounts and premiums		1,773			1,991
Increase in cash surrender value of bank-owned life insurance		(452	)		(460	)
Share-based compensation		796			683
Gain on sale of loans held for sale		(3,424	)		(3,099	)
Originations of loans held for sale		(170,832	)		(162,308	)
Proceeds from sale of loans held for sale		164,969			167,811
Net changes in:
Accrued interest receivable		(568	)		(1,172	)
Other assets		5,682			(2,546	)
Accrued interest payable		88			71
Other liabilities		698			7,739
Net cash provided by operating activities		40,657			45,355
Cash flows from investing activities:
Net change in loans held for investment		3,181			(93,643	)
Purchase of available for sale securities		(29,227	)		(30,832	)
Proceeds from maturities/sales of available for sale securities		59,724			32,504
Proceeds from maturities of held to maturity securities		1,370			6,930
Purchase of bank-owned life insurance		-			(2,250	)
Purchase of premises and equipment		(4,566	)		(9,442	)
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	)		(22,475	)
Proceeds from sale of non-marketable equity securities		3,960			21,950
Net cash provided by (used in) investing activities		32,707			(96,037	)
Cash flows from financing activities:
Net increase in deposits		224,657			57,300
Proceeds related to exercise of stock options		602			885
Net change in short-term borrowings		-			2,000
Cash dividends paid		(6,774	)		(5,597	)
Net cash provided by financing activities		218,485			54,588
Net change in cash and cash equivalents		291,849			3,906
Cash and cash equivalents, beginning of period		48,547			51,027
Cash and cash equivalents, end of period	$	340,396		$	54,933
Supplemental disclosures of cash flow information:
Cash paid for interest	$	6,777		$	5,119
Income taxes paid	$	9,740		$	11,032
Supplemental disclosures of non-cash investing transactions:
Reclassifications from loans to other real estate owned	$	-		$	2,985
Unrealized gains / (losses) on securities available for sale	$	7,071		$	(4,948	)
Measurement period adjustment to goodwill	$	-		$	(335	)
Transfer of HTM securities to AFS	$	64,648		$	-

See accompanying notes to the unaudited consolidated financial statements.

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 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 September 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 nine 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.

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. This 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 accounting for credit loss measurement on loans and debt securities. For loans and held to maturity debt securities, the ASU requires a current expected credit loss (“CECL”) measurement to estimate the allowance for credit losses (“ACL”) for the remaining estimated life of the financial asset (including off-balance sheet credit exposures) using historical experience, current conditions, and reasonable and supportable forecasts. The ASU eliminates the existing guidance for Purchased Credit Impaired (“PCI”) loans but requires an allowance for purchased financial assets with more than an insignificant deterioration since origination, otherwise known as purchase credit deteriorated (“PCD”) assets. In addition, the ASU modifies the other-than-temporary impairment model for available for sale debt securities to require an allowance for credit impairment instead of a direct write-down, which allows for reversal of credit impairments in future periods based on an improvement in credit. This ASU is effective for interim and annual reporting periods beginning after December 15, 2019.

On October 16, 2019, the FASB voted to delay the adoption of CECL by two years to January 2023 for private companies, not-for-profit companies, and certain small public companies that meet the definition of a smaller reporting company (“SRC”), as defined by the SEC. To meet the requirements of an SRC, an entity must be an issuer as defined by the SEC and have public float of less than $250 million, or public float of less than $700 million and annual revenues of less than $100 million. As of June 30, 2019, the Company’s public float was $466 million and annual revenues for 2018 were $130 million. The Company is not an SRC and will be required to adopt the ASU effective January 1, 2020.

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

The implementation process includes evaluation of technical accounting topics; developing, validating and implementing models and methodologies used to calculate CECL; updating ACL documentation; validating internal controls; and overall operational readiness for adoption of the ASU. The Company is currently running new models and processes in parallel with existing models and processes under current accounting guidance in advance of the January 1, 2020 effective date. These parallel runs will focus on technical functionality of the CECL calculation, operational execution of the end-to-end process, as well as disclosure requirements. The Company has established a project team and a steering committee to provide cross-functional governance over and make key decisions relating to the project plan and the parallel runs.

The Company intends to recognize an ACL for available for sale debt securities. The ACL on available for sale debt securities will be subject to a limitation based on the fair value of the debt securities. Based on the credit quality of existing debt securities, the Company does not expect the ACL for debt securities to be material.

The Company expects to use the weighted average remaining maturity (“WARM”) approach, adjusted for prepayments, to calculate CECL. As described in the FASB Staff Question and Answers, the Company intends to use a qualitative approach to adjust historical loss information for current conditions and for reasonable and supportable forecasts, and then immediately revert to historical credit losses. As noted in section ASU 320-20-30-9, “An entity shall not rely solely on past events to estimate expected credit losses. When an entity uses historical loss information, it shall consider the need to adjust historical information to reflect the extent to which management expects current conditions and reasonable and supportable forecasts to differ from the conditions that existed for the period over which historical information was evaluated. The adjustments to historical loss information may be qualitative in nature and should reflect changes related to relevant data (such as changes in unemployment rates, property values, commodity values, delinquency, or other factors that are associated with credit losses on the financial asset or in the group of financial assets).”

The Company is currently in the process of evaluating the impact of CECL on its earnings, financial position, and regulatory capital amounts and ratios related to loans. The Company expects its ACL to increase upon adoption, because the ACL will be required to cover the full remaining expected life of the portfolio, rather than the incurred loss model under current U.S. GAAP. In addition, a portion of the increase will be due to PCI loans that will be reclassified as PCD loans with the credit related non-accretable discount increasing both ACL and loan balances, but not retained earnings. However, accretable discounts held on non-PCD loans are not allowed to be moved to ACL as part of the adoption of this ASU. The Company will be required to set aside additional ACL for non-PCD loans through retained earnings upon adoption. The Company will continue to hold accretable discounts that will be recorded to interest income over the remaining life of non-PCD loans as well as a similar amount in ACL.

The Company expects greater volatility in its earnings and those of other banks after adoption due to the nature and time horizon used to calculate CECL. In addition, the Company expects a potential negative impact to credit availability and reduced loan terms to borrowers as this ASU is adopted by financial institutions. Lastly, the Company expects a lack of effective comparability with financial performance to many of its peers as it adopts this ASU, due to delayed adoption for public companies with total assets similar in size to the Company.

The ultimate effect of CECL on the Company’s ACL will depend on the size and composition of the loan portfolio; the loan portfolio’s credit quality and economic conditions at the time of adoption; and any refinements to models, methodologies, and other key assumptions used.

At adoption, the Company will have a cumulative effect adjustment to retained earnings for the change in the ACL, which the Company expects to negatively impact regulatory capital amounts and ratios. An increase in the Company’s ACL will result in a decrease in regulatory capital amounts and ratios. Bank regulatory agencies have provided regulatory capital relief for an initial capital decrease from the adoption of this ASU by allowing a phased adoption over three years, on a straight-line basis, which the Company expects to utilize.

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.

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

Lessees will no longer be provided with a source of off-balance sheet financing. The Company adopted ASU No. 2016-02 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 with terms of twelve months or less). The Company has eight real property leases under non-cancelable operating leases, four of which are subject to this ASU that results 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. The Company has 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 September 30, 2019
U.S. Government-sponsored securities	$	32,957	$	248	$	-		$	(20	)	$	33,185
Municipal securities		64,905		554		(25	)		(18	)		65,416
Mortgage-backed securities		215,406		1,960		(59	)		(766	)		216,541
Corporate securities		5,000		-		-			(285	)		4,715
	$	318,268	$	2,762	$	(84	)	$	(1,089	)	$	319,857
As of December 31, 2018
U.S. Government-sponsored securities	$	48,954	$	-	$	-		$	(588	)	$	48,366
Municipal securities		10,274		59		(12	)		(53	)		10,268
Mortgage-backed securities		222,218		218		(156	)		(4,523	)		217,757
Corporate securities		5,000		-		(23	)		(404	)		4,573
	$	286,446	$	277	$	(191	)	$	(5,568	)	$	280,964

Amortized cost and estimated fair value of investment securities held to maturity are 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 December 31, 2018
Municipal securities	$	65,462	$	28	$	(39	)	$	(685	)	$	64,766

In August 2017, the FASB issued ASU no. 2017-12, Targeted Improvements to Accounting for Hedging Activities. The primary focus of the amendment is to simplify hedge accounting and make the results of hedge transactions in the financial statements easier to understand. An ancillary result of the amendment is that an entity may make a one-time transfer of certain securities from the held to maturity classification to the available for sale classification. The amendment is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. As allowed under this accounting pronouncement, the Company elected to make a one-time transfer of $64.6 million of held to maturity securities to the available for sale classification as of January 1, 2019, and recorded an unrecognized loss of $19,000, net of taxes, to other comprehensive income.

Note 2 — Investment Securities – continued

At September 30, 2019 and December 31, 2018, the gross unrealized losses and the fair value for securities available for sale and held to maturity were as follows:

	September 30, 2019
	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollars in thousands)	Value		Losses			Value		Losses			Value		Losses
Available for Sale
U.S. Government-sponsored securities	$	-	$	-		$	17,980	$	(20	)	$	17,980	$	(20	)
Municipal securities		10,838		(25	)		2,159		(18	)		12,997		(43	)
Mortgage-backed securities		20,976		(59	)		83,042		(766	)		104,018		(825	)
Corporate securities		-		-			4,715		(285	)		4,715		(285	)
	$	31,814	$	(84	)	$	107,896	$	(1,089	)	$	139,710	$	(1,173	)

	December 31, 2018
	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollars in thousands)	Value		Losses			Value		Losses			Value		Losses
Available for Sale
U.S. Government-sponsored securities	$	-	$	-		$	48,366	$	(588	)	$	48,366	$	(588	)
Municipal securities		1,701		(12	)		4,095		(53	)		5,796		(65	)
Mortgage-backed securities		35,155		(156	)		150,569		(4,523	)		185,724		(4,679	)
Corporate securities		1,977		(23	)		2,596		(404	)		4,573		(427	)
	$	38,833	$	(191	)	$	205,626	$	(5,568	)	$	244,459	$	(5,759	)
Held to Maturity
Municipal securities	$	9,163	$	(39	)	$	46,996	$	(685	)	$	56,159	$	(724	)

The amortized cost and estimated fair value of investment securities that are available for sale and held to maturity at September 30, 2019, by contractual maturity, are as follows:

	Available For Sale
	Amortized		Fair
(Dollars in thousands)	Cost		Value
Securities maturing in:
One year or less	$	32,270	$	32,285
After one year through five years		65,081		65,322
After five years through ten years		57,322		57,327
After ten years		163,595		164,923
	$	318,268	$	319,857

Actual maturities may differ from contractual maturities because issuers may have the right to call obligations with or without penalties and other securities may experience pre-payments.

As of September 30, 2019, the Company held 170 available for sale investment securities with fair value less than amortized cost compared to 201 at December 31, 2018. In addition, the Company had no held to maturity securities at September 30, 2019, and held 122 held to maturity securities with fair values less than amortized cost at December 31, 2018. Management evaluated these investment securities and determined that the decline in value is temporary and related to the change in market interest rates since purchase. The decline in value is not related to any company or industry specific event. The Company anticipates full recovery of the amortized cost with respect to these securities at maturity, or sooner, in the event of a more favorable market interest rate environment.

Note 2 — Investment Securities – continued

The Company sold no available for sale securities during the nine months ended September 30, 2019, compared to $500,000 during the nine months ended September 30, 2018, which resulted in a net gain of $336,000. There were no available for sale securities in a nonaccrual status at September 30, 2019 or December 31, 2018.

The Company had no held to maturity securities in a nonaccrual status at December 31, 2018.

Note 3 — Loans and Allowance for Loan Losses

Loans are summarized as follows:

	September 30,			December 31,
(Dollars in thousands)	2019			2018
Loans held for investment:
Commercial real estate loans:
Real estate term	$	945,999		$	891,131
Construction and land development		285,838			324,506
Total commercial real estate loans		1,231,837			1,215,637
Commercial and industrial loans		275,881			295,569
Consumer loans:
Residential and home equity		156,718			155,601
Consumer and other		14,974			16,621
Total consumer loans		171,692			172,222
Total gross loans		1,679,410			1,683,428
Net deferred loan fees		(4,263	)		(4,526	)
Total loans held for investment		1,675,147			1,678,902
Allowance for loan losses		(30,471	)		(25,245	)
Total loans held for investment, net	$	1,644,676		$	1,653,657

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

	Three Months Ended September 30, 2019
	Real		Construction			Commercial			Residential			Consumer
	Estate		and Land			and			and			and
(Dollars in thousands)	Term		Development			Industrial			Home Equity			Other			Total
Balance at beginning of period	$	10,472	$	7,387		$	9,237		$	772		$	171		$	28,039
Additions: Provisions/(reversals of) for loan losses		1,693		(451	)		928			(69	)		(1	)		2,100
Deductions:
Gross loan charge-offs		-		-			(350	)		-			(89	)		(439	)
Recoveries		-		253			462			2			54			771
Net loan (charge-offs) / recoveries		-		253			112			2			(35	)		332
Balance at end of period	$	12,165	$	7,189		$	10,277		$	705		$	135		$	30,471

	Three Months Ended September 30, 2018
	Real			Construction		Commercial			Residential		Consumer
	Estate			and Land		and			and		and
(Dollars in thousands)	Term			Development		Industrial			Home Equity		Other			Total
Balance at beginning of period	$	9,028		$	6,789	$	5,780		$	659	$	52		$	22,308
Additions: Provisions for loan losses		469			892		455			14		95			1,925
Deductions:
Gross loan charge-offs		(294	)		-		(945	)		-		(105	)		(1,344	)
Recoveries		46			6		312			2		54			420
Net loan (charge-offs) / recoveries		(248	)		6		(633	)		2		(51	)		(924	)
Balance at end of period	$	9,249		$	7,687	$	5,602		$	675	$	96		$	23,309

Note 3 — Loans and Allowance for Loan Losses – Continued

	Nine Months Ended September 30, 2019
	Real		Construction			Commercial			Residential			Consumer
	Estate		and Land			and			and			and
(Dollars in thousands)	Term		Development			Industrial			Home Equity			Other			Total
Balance at beginning of period	$	9,968	$	7,022		$	7,227		$	729		$	299		$	25,245
Additions: Provisions/(reversals of) for loan losses		2,173		(432	)		4,174			(39	)		(76	)		5,800
Deductions:
Gross loan charge-offs		-		(5	)		(1,933	)		(19	)		(263	)		(2,220	)
Recoveries		24		604			809			34			175			1,646
Net loan (charge-offs) / recoveries		24		599			(1,124	)		15			(88	)		(574	)
Balance at end of period	$	12,165	$	7,189		$	10,277		$	705		$	135		$	30,471

	Nine Months Ended September 30, 2018
	Real			Construction		Commercial			Residential			Consumer
	Estate			and Land		and			and			and
(Dollars in thousands)	Term			Development		Industrial			Home Equity			Other			Total
Balance at beginning of period	$	6,706		$	6,309	$	4,314		$	815		$	159		$	18,303
Additions: Provisions/(reversals of) for loan losses		2,779			1,301		1,522			(223	)		71			5,450
Deductions:
Gross loan charge-offs		(294	)		-		(1,235	)		-			(277	)		(1,806	)
Recoveries		58			77		1,001			83			143			1,362
Net loan (charge-offs) / recoveries		(236	)		77		(234	)		83			(134	)		(444	)
Balance at end of period	$	9,249		$	7,687	$	5,602		$	675		$	96		$	23,309

Non-accrual loans are summarized as follows:

	September 30,		December 31,
(Dollars in thousands)	2019		2018
Non-accrual loans, not troubled debt restructured:
Real estate term	$	174	$	309
Construction and land development		-		-
Commercial and industrial		851		347
Residential and home equity		47		-
Consumer and other		1		-
Total non-accrual loans, not troubled debt restructured		1,073		656
Troubled debt restructured loans, non-accrual:
Real estate term		1,328		1,449
Construction and land development		-		-
Commercial and industrial		104		150
Residential and home equity		-		-
Consumer and other		-		-
Total troubled debt restructured loans, non-accrual		1,432		1,599
Total non-accrual loans	$	2,505	$	2,255

As of September 30, 2019, and December 31, 2018, there were $1.7 million and $2.2 million, respectively, in Purchased Credit Impaired (“PCI”) loans that are not performing to the original contractual terms. Including these PCI loans, total non-accrual loans are $4.3 million and $4.5 million at September 30, 2019, and December 31, 2018, respectively.

Note 3 — Loans and Allowance for Loan Losses – Continued

Troubled debt restructured (“TDR”) loans are summarized as follows:

	September 30,		December 31,
(Dollars in thousands)	2019		2018
Accruing troubled debt restructured loans	$	25,452	$	5,912
Non-accrual troubled debt restructured loans		1,432		1,599
Total troubled debt restructured loans	$	26,884	$	7,511

There were no PCI TDR non-performing loans as of September 30, 2019 and December 31, 2018.

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

The following tables present TDRs that occurred during the periods presented and the TDRs for which the payment default occurred within twelve months of the restructure date. A default on a TDR results in a transfer to nonaccrual status, a charge-off or a combination of both.

	Nine Months Ended September 30, 2019
	Real		Construction		Commercial		Residential		Consumer
	Estate		and Land		and		and		and
(Dollars in thousands)	Term		Development		Industrial		Home Equity		Other		Total
TDRs that occurred during the period ^{(1) (2)}
Number of loans		7		1		28		3		-		39
Pre-modification balance	$	5,297	$	4,075	$	11,376	$	1,409	$	-	$	22,157
Post-modification balance	$	5,297	$	4,075	$	11,376	$	1,409	$	-	$	22,157

TDRs that subsequently defaulted
Number of loans		-		-		1		-		-		1
Recorded balance	$	-	$	-	$	18	$	-	$	-	$	18


	Nine Months Ended September 30, 2018
	Real		Construction		Commercial		Residential		Consumer
	Estate		and Land		and		and Home		and
(Dollars in thousands)	Term		Development		Industrial		Equity		Other		Total
TDRs that occurred during the period ^{(1) (2)}
Number of loans		2		-		3		-		-		5
Pre-modification balance	$	1,592	$	-	$	211	$	-	$	-	$	1,803
Post-modification balance	$	1,592	$	-	$	211	$	-	$	-	$	1,803

TDRs that subsequently defaulted
Number of loans		2		-		3		-		-		5
Recorded balance	$	1,449	$	-	$	150	$	-	$	-	$	1,599

⁽¹⁾	Since most loans were already considered classified and/or on non-accrual status prior to restructuring, the modifications did not have a material effect on the Company’s determination of the allowance for loan losses.

⁽²⁾	Generally, these modifications do not fit into one separate type, such as rate, term, amount, interest-only or payment, but instead are a combination of multiple types of modifications; therefore, they are disclosed in aggregate.

Note 3 — Loans and Allowance for Loan Losses – Continued

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

	September 30, 2019
											Purchased
			30-89 Days		90+ Days		Non-		Total		Credit		Total
(Dollars in thousands)	Current		Past Due		Past Due		accrual		Past Due		Impaired		Loans
Commercial real estate:
Real estate term	$	938,901	$	4,705	$	-	$	1,502	$	6,207	$	891	$	945,999
Construction and land development		285,297		436		-		-		436		105		285,838
Total commercial real estate		1,224,198		5,141		-		1,502		6,643		996		1,231,837
Commercial and industrial		268,884		2,354		-		955		3,309		3,688		275,881
Consumer:
Residential and home equity		156,499		172		-		47		219		-		156,718
Consumer and other		14,579		387		7		1		395		-		14,974
Total consumer		171,078		559		7		48		614		-		171,692
Total gross loans	$	1,664,160	$	8,054	$	7	$	2,505	$	10,566	$	4,684	$	1,679,410

	December 31, 2018
											Purchased
			30-89 Days		90+ Days		Non-		Total		Credit		Total
(Dollars in thousands)	Current		Past Due		Past Due		accrual		Past Due		Impaired		Loans
Commercial real estate:
Real estate term	$	886,974	$	1,467	$	-	$	1,758	$	3,225	$	932	$	891,131
Construction and land development		321,389		2,833		-		-		2,833		284		324,506
Total commercial real estate		1,208,363		4,300		-		1,758		6,058		1,216		1,215,637
Commercial and industrial		288,328		3,225		-		497		3,722		3,519		295,569
Consumer:
Residential and home equity		154,368		1,233		-		-		1,233		-		155,601
Consumer and other		16,180		424		17		-		441		-		16,621
Total consumer		170,548		1,657		17		-		1,674		-		172,222
Total gross loans	$	1,667,239	$	9,182	$	17	$	2,255	$	11,454	$	4,735	$	1,683,428

Credit Quality Indicators:

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

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

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

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

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

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

Note 3 — Loans and Allowance for Loan Losses – Continued

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

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

	September 30, 2019
			Special						Total		Total
(Dollars in thousands)	Pass		Mention		Substandard		Doubtful		Loans		Allowance
Commercial real estate:
Real estate term	$	899,387	$	27,399	$	19,213	$	-	$	945,999	$	12,165
Construction and land development		281,454		-		4,384		-		285,838		7,189
Total commercial real estate		1,180,841		27,399		23,597		-		1,231,837		19,354
Commercial and industrial		252,336		4,014		19,531		-		275,881		10,277
Consumer loans:
Residential and home equity		152,147		547		4,024		-		156,718		705
Consumer and other		14,958		14		2		-		14,974		135
Total consumer		167,105		561		4,026		-		171,692		840
Total	$	1,600,282	$	31,974	$	47,154	$	-	$	1,679,410	$	30,471

	December 31, 2018
			Special						Total		Total
(Dollars in thousands)	Pass		Mention		Substandard		Doubtful		Loans		Allowance
Commercial real estate:
Real estate term	$	865,472	$	14,339	$	11,320	$	-	$	891,131	$	9,968
Construction and land development		322,625		1,332		549		-		324,506		7,022
Total commercial real estate		1,188,097		15,671		11,869		-		1,215,637		16,990
Commercial and industrial		271,825		10,138		13,606		-		295,569		7,227
Consumer loans:
Residential and home equity		150,590		620		4,391		-		155,601		729
Consumer and other		16,574		29		18		-		16,621		299
Total consumer		167,164		649		4,409		-		172,222		1,028
Total	$	1,627,086	$	26,458	$	29,884	$	-	$	1,683,428	$	25,245

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

	September 30, 2019
	Real		Construction		Commercial		Residential		Consumer
	Estate		and Land		and		and		and
(Dollars in thousands)	Term		Development		Industrial		Home Equity		Other		Total
Allowance for loan losses:
Individually evaluated for impairment	$	376	$	1,264	$	4,641	$	3	$	-	$	6,284
Collectively evaluated for impairment		11,306		5,908		5,636		702		135		23,687
Purchased credit-impaired loans		483		17		-		-		-		500
Total	$	12,165	$	7,189	$	10,277	$	705	$	135	$	30,471
Outstanding loan balances:
Individually evaluated for impairment	$	16,247	$	4,274	$	13,523	$	3,732	$	-	$	37,776
Collectively evaluated for impairment		928,861		281,459		258,670		152,986		14,974		1,636,950
Purchased credit-impaired loans		891		105		3,688		-		-		4,684
Total gross loans	$	945,999	$	285,838	$	275,881	$	156,718	$	14,974	$	1,679,410

Note 3 — Loans and Allowance for Loan Losses – Continued

	December 31, 2018
	Real		Construction		Commercial		Residential		Consumer
	Estate		and Land		and		and		and
(Dollars in thousands)	Term		Development		Industrial		Home Equity		Other		Total
Allowance for loan losses:
Individually evaluated for impairment	$	324	$	-	$	1,781	$	55	$	-	$	2,160
Collectively evaluated for impairment		9,644		7,022		5,446		674		299		23,085
Purchased credit-impaired loans		-		-		-		-		-		-
Total	$	9,968	$	7,022	$	7,227	$	729	$	299	$	25,245
Outstanding loan balances:
Individually evaluated for impairment	$	9,689	$	268	$	9,581	$	4,095	$	-	$	23,633
Collectively evaluated for impairment		880,510		323,954		282,469		151,506		16,621		1,655,060
Purchased credit-impaired loans		932		284		3,519		-		-		4,735
Total gross loans	$	891,131	$	324,506	$	295,569	$	155,601	$	16,621	$	1,683,428

Information on impaired loans, excluding PCI loans, is summarized as follows:

	September 30, 2019
			Recorded Investment
	Unpaid						Total
	Principal		With No		With		Recorded		Related
(Dollars in thousands)	Balance		Allowance		Allowance		Investment		Allowance
Commercial real estate:
Real estate term	$	16,246	$	13,844	$	2,403	$	16,247	$	376
Construction and land development		4,274		61		4,213		4,274		1,264
Total commercial real estate		20,520		13,905		6,616		20,521		1,640
Commercial and industrial		13,555		2,222		11,301		13,523		4,641
Consumer loans:
Residential and home equity		3,732		2,921		811		3,732		3
Consumer and other		-		-		-		-		-
Total consumer		3,732		2,921		811		3,732		3
Total	$	37,807	$	19,048	$	18,728	$	37,776	$	6,284

	December 31, 2018
			Recorded Investment
	Unpaid						Total
	Principal		With No		With		Recorded		Related
(Dollars in thousands)	Balance		Allowance		Allowance		Investment		Allowance
Commercial real estate:
Real estate term	$	9,689	$	3,823	$	5,866	$	9,689	$	324
Construction and land development		997		268		-		268		-
Total commercial real estate		10,686		4,091		5,866		9,957		324
Commercial and industrial		10,113		5,494		4,087		9,581		1,781
Consumer loans:
Residential and home equity		4,095		3,046		1,049		4,095		55
Consumer and other		-		-		-		-		-
Total consumer		4,095		3,046		1,049		4,095		55
Total	$	24,894	$	12,631	$	11,002	$	23,633	$	2,160

Note 3 — Loans and Allowance for Loan Losses – Continued

Interest income recognized on the average recorded investment of impaired loans, excluding PCI loans, was as follows:

	Three Months Ended
	September 30, 2019				September 30, 2018
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(Dollars in thousands)	Investment		Recognition		Investment		Recognition
Commercial real estate:
Real estate term	$	16,707	$	233	$	10,127	$	111
Construction and land development		5,174		103		1,043		16
Total commercial real estate		21,881		336		11,170		127
Commercial and industrial		14,319		253		10,049		140
Consumer loans:
Residential and home equity		3,837		55		2,728		33
Consumer and other		-		-		-		-
Total consumer		3,837		55		2,728		33
Total	$	40,037	$	644	$	23,947	$	300

	Nine Months Ended
	September 30, 2019				September 30, 2018
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(Dollars in thousands)	Investment		Recognition		Investment		Recognition
Commercial real estate:
Real estate term	$	13,585	$	538	$	8,366	$	257
Construction and land development		3,431		191		1,716		90
Total commercial real estate		17,016		729		10,082		347
Commercial and industrial		11,990		578		7,198		268
Consumer loans:
Residential and home equity		3,371		146		2,175		76
Consumer and other		-		-		-		-
Total consumer		3,371		146		2,175		76
Total	$	32,377	$	1,453	$	19,455	$	691

Purchased credit-impaired loans and purchased non-credit-impaired loans. Purchased loans, including loans acquired in business combinations, are recorded at their fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore, an allowance for loan and lease losses is not recorded at the acquisition date. Acquired loans are evaluated upon acquisition and classified as either purchased credit-impaired (PCI) or purchased non-credit-impaired. PCI loans reflect credit deterioration since origination such that it is probable at acquisition that the Company will be unable to collect all contractually required payments. The outstanding contractual unpaid principal balance of PCI loans, excluding acquisition accounting adjustments, was $7.5 million at September 30, 2019 and $7.7 million at December 31, 2018. The carrying balance of PCI loans was $4.7 million at September 30, 2019 and $4.7 million at December 31, 2018.

The following table presents the changes in the accretable yield for purchased loans for the nine months ended September 30, 2019, and 2018:

	Nine Months Ended
	September 30,
(Dollars in thousands)	2019			2018
Balance, beginning of period	$	5,884		$	8,536
Accretion to interest income		(1,418	)		(2,165	)
Reclassification from non-accretable difference		96			189
Balance, end of period	$	4,562		$	6,560

Note 3 — Loans and Allowance for Loan Losses – Continued

As of September 30, 2019 and December 31, 2018, the non-accretable difference between the contractually required payments and cash flows expected to be collected were $2.8 million and $2.9 million, respectively.

Loans and Deposits to affiliates — The Company has entered into loan transactions with certain directors, affiliated companies and executive officers (“affiliates”). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. Total outstanding loans with affiliates were approximately $3.3 million and $5.6 million as of September 30, 2019, and December 31, 2018, respectively. Available lines of credit for loans and credit cards to affiliates were approximately $274,000 and $951,000 as of September 30, 2019, and December 31, 2018, respectively. Deposits from affiliates were $2.9 million and $8.8 million as of September 30, 2019 and December 31, 2018, respectively.

Note 4 — Commitments and Contingencies

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

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

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

	September 30,		December 31,
(Dollars in thousands)	2019		2018
Commitments to extend credit, including unsecured commitments of $15,893 and $16,304 as of September 30, 2019 and December 31, 2018, respectively	$	585,871	$	577,612
Stand-by letters of credit and bond commitments, including unsecured commitments of $576 and $730 as of September 30, 2019 and December 31, 2018, respectively		23,975		22,979
Unused credit card lines, all unsecured		25,353		24,885

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

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

Note 5 — Fair Value

The Company measures and discloses certain assets and liabilities at fair value. The standard requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. These two types of inputs create the following fair value hierarchy:

•

Level 1 – Quoted prices in active markets for identical instruments.

•

Level 2 – Observable inputs other than Level 1 including quoted prices in active markets for similar instruments, quoted prices in less active markets for identical or similar instruments, or other observable inputs that can be corroborated by observable market data.

•

Level 3 – Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize at a future date. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. In addition, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates that must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.

The following methods were used to estimate the fair value of each class of financial instruments:

Securities: The estimated fair values of investment securities are priced using current active market quotes, if available, which are considered Level 1 measurements. For most of the portfolio, matrix pricing based on the securities’ relationship to other benchmark quoted prices is used to establish the fair value. These measurements are considered Level 2. Level 3 measurements were determined using discounted cash flow analyses based on the net present value of each security’s projected cash flows using observable market data for similar securities.

Non-marketable securities: The fair value is based upon the redemption value of the stock, which equates to its carrying value.

Loans held for sale: The carrying value of these items is a reasonable estimate of their fair value.

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

Deposits: The carrying amount of deposits with no stated maturity, such as savings and checking accounts, is a reasonable estimate of their fair value. The market value of certificates of deposit is based upon the discounted value of contractual cash flows. The discount rate is determined using the rates currently offered on comparable instruments.

Note 5 — Fair Value - Continued

The following table presents estimated fair values of the Company’s financial instruments as of September 30, 2019 and December 31, 2018:

			September 30, 2019				December 31, 2018
			Carrying		Estimated		Carrying		Estimated
(Dollars in thousands)	Level		Value		Fair Value		Value		Fair Value
Financial Assets:
Cash and cash equivalents		1	$	340,396	$	340,396	$	48,547	$	48,547
Investment securities available for sale		2		309,031		309,031		280,964		280,964
Investment securities available for sale		3		10,826		10,826		-		-
Investment securities held to maturity		2		-		-		50,905		50,364
Investment securities held to maturity		3		-		-		14,557		14,402
Non-marketable securities		2		2,623		2,623		2,551		2,551
Loans held for sale		2		19,554		19,554		10,267		10,267
Loans held for investment		3		1,644,676		1,636,124		1,653,657		1,637,617

Financial Liabilities:
Total deposits		2	$	2,101,712	$	1,889,887	$	1,877,055	$	1,675,992

Assets measured on a recurring and non-recurring basis are as follows:

(Dollars in thousands)	Level 1		Level 2		Level 3		Total
As of September 30, 2019
Fair valued on a recurring basis:
Investment securities available for sale	$	-	$	309,031	$	10,826	$	319,857
Fair valued on a non-recurring basis:
Impaired loans		-		-		17,604		17,604

As of December 31, 2018
Fair valued on a recurring basis:
Investment securities available for sale	$	-	$	280,964	$	-	$	280,964
Fair valued on a non-recurring basis:
Impaired loans		-		-		7,304		7,304

Note 6 — Income Taxes

Income tax expense was $3.4 million and $3.3 million for the three months ended September 30, 2019 and 2018, respectively. The Company’s effective tax rate for the third quarter of 2019 was 23.2% compared with 23.9% in the third quarter of 2018. The tax rate in the third quarter of 2019 is lower than the same quarter in 2018 due primarily to the timing of tax benefits related to tax-deductible stock compensation expense.

Income tax expense was $10.1 million and $9.1 million for the nine months ended September 30, 2019 and 2018, respectively. The Company’s effective tax rate for the nine months ended September 30, 2019 was 23.7% compared with 23.4% in the same period a year ago. The tax rate in the nine months ended September 30, 2019 is higher than the same period a year ago due primarily to the timing of tax benefits related to tax-deductible stock compensation expense.

Note 7 — Regulatory Capital Matters

The consolidated Tier 1 Leverage ratio increased to 12.64% as of September 30, 2019 from 12.27% at December 31, 2018. Federal Reserve Board Regulations require maintenance of certain minimum reserve balances based on certain average deposits, which, as of September 30, 2019 and December 31, 2018, were $10.7 million and $2.2 million, respectively. The Company’s Board of Directors may declare a cash or stock dividend out of retained earnings provided the regulatory minimum capital ratios are met. The Company plans to maintain capital ratios that meet the well-capitalized standards per the regulations and, therefore, plans to limit dividends to amounts that are appropriate to maintain those well-capitalized regulatory capital ratios.

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

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

During the nine months ended September 30, 2019, the Company granted 39,401 restricted stock units (“RSU”) at a weighted-average fair value of $29.97 per unit. Additionally, the Company granted options for the purchase of 545 common shares, which have a weighted average exercise price of $27.53 and a weighted average fair value as of the date of grant of $3.61 per share. The options and RSU’s generally vest over periods from one to three years. The Company recorded share-based compensation expense of $796,000 and $683,000 for the nine months ended September 30, 2019 and 2018, respectively.

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

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

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10–Q may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views and are not historical facts. These statements can generally be identified by use of phrases such as “believe,” “expect,” “will,” “seek,” “should,” “anticipate,” “estimate,” “intend,” “plan,” “target,” “project,” “commit” or other words of similar import. Similarly, statements that describe our future financial condition, results of operations, objectives, strategies, plans, goals or future performance and business are also forward-looking statements. Statements that project future financial conditions, results of operations and shareholder value are not guarantees of performance and many of the factors that will determine these results and values are beyond our ability to control or predict. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. These are forward-looking statements and involve known and unknown risks, uncertainties and other factors, including, but not limited to, those described in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections in this report and our Annual Report on Form 10-K for the year ended December 31, 2018 (“Form 10-K”), and other parts of this report that could cause our actual results to differ materially from those anticipated in these forward-looking statements. The following is a non-exclusive list of factors which could cause our actual results to differ materially from our forward-looking statements in this prospectus:

•

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

•

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

•

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

•

higher defaults on our loan portfolio than we expect;

•

changes in management’s estimate of the adequacy of the allowance for loan losses or the adoption of ASU 2016-13;

•

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

•

ability to raise liquidity, either with deposits or other funding sources, to support our growth in assets;

•

risks associated with the integration of current and future acquisitions.

•

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

•

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

•

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

•

risks associated with cyber security.

•

technological changes;

•

regulatory or judicial proceedings; and

•

other factors and risks including those described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report and our Annual Report on Form 10-K for the year ended December 31, 2018.

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

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

Overview

People’s Utah Bancorp (“PUB”) is the holding company for People’s Intermountain Bank. People’s Intermountain Bank (“Bank” or “PIB”) is a full-service community bank providing loans, deposit and cash management services to individuals and businesses. People’s Intermountain Bank has 26 branch locations in 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. We provide banking services to small to medium sized businesses and to individuals in our primary markets including Utah, Salt Lake, Davis, Cache, and Washington Counties. Our business customers are involved in a variety of industries, including residential and commercial construction and development, manufacturing, distribution and other services. We also provide a broad range of banking services and products to individuals, including residential mortgage lending, personal checking and savings accounts and other consumer banking products, including electronic banking. The Bank has been serving communities in Utah and southern Idaho for more than 100 years.

Our loan growth is the result of mergers and acquisitions as well as organic growth that we believe was generated by our seasoned relationship managers and supporting associates who provide outstanding service and quick responsiveness to our customers. The primary source of funding for our asset growth has been the generation of core deposits, which we raised from our existing branch system as well as through acquisitions.

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

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

Mergers & Acquisitions

Utah Branches from Banner Bank — On October 6, 2017, we completed our acquisition of $257 million in loans and seven Utah branch locations with $160 million in low-cost core deposits from Banner Corporation’s subsidiary Banner Bank. The Bank paid a deposit premium of $13.8 million based on average deposits at closing. The seven branch locations in Utah include Salt Lake City, Provo, South Jordan, Woods Cross, Orem, Salem, and Springville. The Woods Cross and Orem branches were consolidated into our existing Bank of American Fork Bountiful and Orem branches, respectively. We are operating these acquired branches under the name of Bank of American Fork, a division of PIB.

Town & Country Bank — On November 13, 2017, we completed the merger of Town & Country Bank located in St. George, Utah, including the acquisition of $117 million in loans and the assumption of $124 million in deposits. We consolidated our existing St. George branch and Town & Country’s branch into one branch. Under the terms of the merger, each outstanding Town & Country common share converted into the right to receive 0.2917 PUB common shares and $4.23 per common share in cash, including $2.0 million of cash held in escrow that is subject to indemnification claims. Town & Country shareholders also received an additional cash distribution of $1.68 per common share in cash. A total of 466,546 PUB common shares were issued in this transaction. We operate this branch under the name of People’s Town & Country Bank, a division of PIB.

Selected Financial Information

You should read the selected financial information data set forth below in conjunction with our historical consolidated financial statements and related notes.


	September 30,			June 30,			December 31,			September 30,
(Dollars in thousands, except share data)	2019			2019			2018			2018
Selected Balance Sheet Information:
Book value per share	$	17.12		$	16.62		$	15.49		$	14.94
Tangible book value per share	$	15.59		$	15.09		$	13.94		$	13.38
Non-performing loans to total loans		0.26	%		0.31	%		0.27	%		0.34	%
Non-performing assets to total assets		0.17	%		0.22	%		0.21	%		0.40	%
Allowance for loan losses to loans held for investment		1.82	%		1.68	%		1.50	%		1.36	%
Loans to Deposits		79.18	%		83.91	%		88.65	%		91.01	%

Asset Quality Data:
Non-performing loans	$	4,255		$	5,104		$	4,499		$	5,830
Non-performing assets	$	4,255		$	5,104		$	4,499		$	8,815

Capital Ratios:
Tier 1 leverage capital		12.64	%		12.78	%		12.27	%		11.90	%
Total risk-based capital		17.88	%		17.24	%		16.36	%		15.46	%
Average equity to average assets		13.66	%		13.69	%		13.04	%		12.76	%
Tangible common equity to tangible assets ⁽¹⁾		12.17	%		12.44	%		12.11	%		11.47	%

	Three Months Ended									Nine Months Ended
	September 30,			June 30,			September 30,			September 30,			September 30,
	2019			2019			2018			2019			2018
Selected Financial Information:
Basic earnings per share	$	0.59		$	0.58		$	0.56		$	1.73		$	1.60
Diluted earnings per share	$	0.59		$	0.58		$	0.55		$	1.72		$	1.58
Net interest margin ⁽²⁾		5.03	%		5.24	%		5.25	%		5.18	%		5.24	%
Efficiency ratio		49.20	%		46.93	%		49.33	%		48.49	%		51.43	%
Non-interest income to average assets		0.76	%		0.64	%		0.69	%		0.67	%		0.71	%
Non-interest expense to average assets		2.72	%		2.63	%		2.78	%		2.70	%		2.91	%
Return on average assets		1.88	%		1.96	%		1.91	%		1.93	%		1.85	%
Return on average equity		13.79	%		14.33	%		14.97	%		14.16	%		14.85	%
Net charge-offs / (recoveries)	$	(332	)	$	34		$	924		$	574		$	444
Annualized net charge-offs / (recoveries) to average loans		-0.08	%		0.01	%		0.21	%		0.05	%		0.03	%

⁽¹⁾

Represents the sum of total shareholders’ equity less intangible assets all divided by the sum of total assets less intangible assets. Intangible assets were $28.8 million, $28.9 million, $29.1 million and $29.2 million at September 30, 2019, June 30, 2019, December 31, 2018, and September 30, 2018, respectively.

⁽²⁾	Net interest margin is defined as net interest income divided by average earning assets.

Results of Operations

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

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

	Three Months Ended
	September 30, 2019								September 30, 2018
				Interest		Average						Interest			Average
	Average			Income/		Yield/			Average			Income/		��	Yield/
(Dollars in thousands, except footnotes)	Balance			Expense		Rate			Balance			Expense			Rate
ASSETS
Interest-earning deposits in other banks and federal funds sold	$	216,450		$	1,161		2.13	%	$	12,426		$	57			1.84	%
Securities: ⁽¹⁾
Taxable securities		259,870			1,459		2.23	%		243,754			1,180			1.92	%
Non-taxable securities⁽²⁾		61,692			295		1.90	%		74,857			348			1.84	%
Total securities		321,562			1,754		2.16	%		318,611			1,528			1.90	%
Loans⁽³⁾
Real estate term		909,671			13,881		6.05	%		899,715			13,043			5.75	%
Construction and land development		299,907			6,020		7.96	%		376,142			7,329			7.73	%
Commercial and industrial		281,845			4,791		6.74	%		315,534			5,268			6.62	%
Residential and home equity		174,104			2,513		5.73	%		107,436			1,508			5.57	%
Consumer and other		17,715			339		7.61	%		19,876			272			5.42	%
Total loans		1,683,242			27,544		6.49	%		1,718,703			27,420			6.33	%

Non-marketable equity securities		2,623			22		3.32	%		4,521			94			8.25	%
Total interest earning assets		2,223,877			30,481		5.44	%		2,054,261			29,099			5.62	%
Allowance for loan losses		(28,283	)							(22,469	)
Non-interest earning assets		149,270								146,665
Total average assets	$	2,344,864							$	2,178,457

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits:
Demand and savings accounts	$	805,587		$	882		0.43	%	$	746,957		$	699			0.37	%
Money market accounts		309,311			759		0.97	%		237,450			445			0.74	%
Certificates of deposit less than or equal to $250,000		138,757			459		1.31	%		146,944			356			0.96	%
Certificates of deposit greater than $250,000		39,094			190		1.93	%		35,161			137			1.55	%
Total interest bearing deposits		1,292,749			2,290		0.70	%		1,166,512			1,637			0.56	%
Short-term borrowings		-			-		0.00	%		49,427			280			2.25	%
Total interest-bearing liabilities		1,292,749			2,290		0.70	%		1,215,939			1,917			0.63	%
Non-interest bearing deposits		713,750								667,896
Total funding		2,006,499			2,290		0.45	%		1,883,835			1,917			0.40	%
Other non-interest bearing liabilities		18,086								16,735
Shareholders’ equity		320,279								277,887
Total average liabilities and shareholders’ equity	$	2,344,864							$	2,178,457
Net interest income				$	28,191							$	27,182
Interest rate spread							4.73	%								4.99	%
Net interest margin							5.03	%								5.25	%

⁽¹⁾	Excludes average unrealized gains (losses) of $1.2 million and $(6.6) million for the three months ended September 30, 2019 and 2018, respectively.

⁽²⁾	Does not include tax effect on tax-exempt investment security income of $98,000 and $116,000 for the three months ended September 30, 2019 and 2018, respectively.

⁽³⁾	Loan interest income includes loan fees of $1.8 million and $1.8 million for the three months ended September 30, 2019 and 2018, respectively.

	Nine Months Ended
	September 30, 2019								September 30, 2018
				Interest		Average						Interest		Average
	Average			Income/		Yield/			Average			Income/		Yield/
(Dollars in thousands, except footnotes)	Balance			Expense		Rate			Balance			Expense		Rate
ASSETS
Interest-earning deposits in other banks and federal funds sold	$	115,594		$	1,891		2.19	%	$	13,802		$	166		1.61	%
Securities: ⁽¹⁾
Taxable securities		271,193			4,635		2.29	%		245,957			3,587		1.95	%
Non-taxable securities⁽²⁾		65,851			929		1.89	%		79,080			1,098		1.86	%
Total securities		337,044			5,564		2.21	%		325,037			4,685		1.93	%
Loans⁽³⁾
Real estate term		900,408			40,375		6.00	%		886,275			38,066		5.74	%
Construction and land development		309,651			18,555		8.01	%		370,602			21,507		7.76	%
Commercial and industrial		291,008			15,124		6.95	%		315,736			15,640		6.62	%
Residential and home equity		163,966			7,200		5.87	%		106,523			4,224		5.30	%
Consumer and other		16,848			898		7.13	%		19,225			839		5.83	%
Total loans		1,681,881			82,152		6.53	%		1,698,361			80,276		6.32	%

Non-marketable equity securities		2,730			76		3.71	%		6,095			167		3.67	%
Total interest earning assets		2,137,249			89,683		5.61	%		2,043,295			85,294		5.58	%
Allowance for loan losses		(26,708	)							(20,766	)
Non-interest earning assets		149,197								144,195
Total average assets	$	2,259,738							$	2,166,724

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits:
Demand and savings accounts	$	806,552		$	2,910		0.48	%	$	732,912		$	1,642		0.30	%
Money market accounts		278,057			2,040		0.98	%		223,193			778		0.47	%
Certificates of deposit less than or equal to $250,000		141,205			1,308		1.24	%		153,312			1,029		0.90	%
Certificates of deposit greater than $250,000		38,459			544		1.89	%		35,821			391		1.46	%
Total interest bearing deposits		1,264,273			6,802		0.72	%		1,145,238			3,840		0.45	%
Short-term borrowings		3,235			63		2.63	%		92,570			1,350		1.95	%
Total interest-bearing liabilities		1,267,508			6,865		0.72	%		1,237,808			5,190		0.56	%
Non-interest bearing deposits	��	667,268								646,419
Total funding		1,934,776			6,865		0.47	%		1,884,227			5,190		0.37	%
Other non-interest bearing liabilities		16,818								12,883
Shareholders’ equity		308,144								269,614
Total average liabilities and shareholders’ equity	$	2,259,738							$	2,166,724
Net interest income				$	82,818							$	80,104
Interest rate spread							4.89	%							5.02	%
Net interest margin							5.18	%							5.24	%

⁽¹⁾	Excludes average unrealized losses of $2.2 million and $5.7 million for the nine months ended September 30, 2019 and 2018, respectively.

⁽²⁾	Does not include tax effect on tax-exempt investment security income of $310,000 and $366,000 for the nine months ended September 30, 2019 and 2018, respectively.

⁽³⁾	Loan interest income includes loan fees of $4.9 million and $5.1 million for the nine months ended September 30, 2019 and 2018, respectively.

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

	Three Months Ended September 30,									Nine Months Ended September 30,
	2019 vs. 2018									2019 vs. 2018
	Increase (Decrease) Due to:									Increase (Decrease) Due to:
(Dollars in thousands)	Volume			Rate			Net			Volume			Rate		Net
Interest income:
Interest earning deposits in other banks and federal funds sold	$	1,093		$	11		$	1,104		$	1,645		$	80	$	1,725
Taxable securities		82			197			279			391			657		1,048
Non-taxable securities		(63	)		10			(53	)		(186	)		17		(169	)
Total securities		19			207			226			205			674		879
Loans
Real estate term		146			692			838			614			1,695		2,309
Construction and land development		(1,524	)		215			(1,309	)		(3,633	)		681		(2,952	)
Commercial and industrial		(571	)		94			(477	)		(1,262	)		746		(516	)
Residential and home equity		961			44			1,005			2,482			494		2,976
Consumer and other		(33	)		100			67			(112	)		171		59
Total Loans		(1,021	)		1,145			124			(1,911	)		3,787		1,876

Non-marketable equity securities		(30	)		(42	)		(72	)		(93	)		2		(91	)
Total interest income		61			1,321			1,382			(154	)		4,543		4,389
Interest expense:
Demand and savings accounts		58			125			183			179			1,089		1,268
Money market accounts		155			159			314			230			1,032		1,262
Certificates of deposit less than or equal to $250,000		(21	)		124			103			(86	)		365		279
Certificates of deposit greater than $250,000		17			36			53			30			123		153
Short-term borrowings		(140	)		(140	)		(280	)		(1,636	)		349		(1,287	)
Total interest expense		69			304			373			(1,283	)		2,958		1,675
Net interest income	$	(8	)	$	1,017		$	1,009		$	1,129		$	1,585	$	2,714

For the third quarter of 2019, net interest income grew 3.7%, or $1.0 million, to $28.2 million compared with $27.2 million for the same period a year earlier. The increase is primarily the result of average interest earning assets growing 8.3%, or $170 million, while yields on interest earning assets declined 18 basis points to 5.44% for the same period a year ago. Lower yields on interest earning assets were primarily the result of $207 million, or 62.5%, increase in the average amount of lower yielding cash and investment securities held by the Company stemming from average core deposits increasing $172 million, or 9.4%, for the same respective period. Yield on total loans increased 16 basis points to 6.49% for the third quarter of 2019 compared with the same period a year ago, while average loans declined $35.5 million, or 2.1%, for the same comparable period. The percentage of loans to total interest earning assets decreased to 75.7% for the third quarter of 2019 compared with 83.7% for the third quarter of 2018.

For the third quarter of 2019, total cost of interest-bearing liabilities increased 7 basis points to 0.70% compared with the same period a year ago and is the result of the cost of interest bearing deposits increasing 14 basis points to 0.70% for the same comparable period. The Company had no short-term borrowing for the third quarter of 2019, compared with $49.4 million of average short-term borrowings in the third quarter of 2018.

Acquisition accounting adjustments, including the accretion of loan discounts and amortization of core deposit intangibles, added 10 basis points to the net interest margin for the third quarter of 2019.

Net interest income increased $2.7 million to $82.8 million for the nine months ended September 30, 2019, compared with $80.1 million for the same period of 2018. The increase is primarily the result of average interest earning assets growing 4.6%, or $94.0 million, and yields on interest earning assets increasing 3 basis points to 5.61% for the same comparable periods. Higher yields on interest earning assets were primarily the result of yields on loans increasing 21 basis points to 6.53% for the same comparable periods, offset by the percentage of average loans to average total interest earning assets declining to 78.7% for the third quarter of 2019, compared with 83.1% for the third quarter of 2018.

For the nine months ended September 30, 2019, total cost of interest bearing liabilities increased 16 basis points to 0.72%, compared with the same period a year ago, and is the result of the cost of interest bearing deposits increasing 27 basis points to 0.72% for the same comparable periods. Short-term borrowing declined $89.3 million, or 96.5%, to $3.2 million with the borrowing rate increasing 68 basis points to 2.63% for the nine months ended September 30, 2019, compared with the same period a year earlier. The Company expects a slight decrease in the cost of interest-bearing deposits resulting from rate reductions by the Federal Reserve.

Acquisition accounting adjustments, including the accretion of loan discounts and amortization of core deposit intangibles, added 9 basis points to the net interest margin for the nine months ended September 30, 2019.

Financial Overview for the Three Months Ended September 30, 2019 and 2018

	Three Months Ended
	September 30,		September 30,		$ Better /			% Better /
(Dollars in thousands)	2019		2018		(Worse)			(Worse)
Interest income	$	30,481	$	29,099	$	1,382			4.7	%
Interest expense		2,290		1,917		(373	)		-19.5	%
Net interest income		28,191		27,182		1,009			3.7	%
Provision for loan losses		2,100		1,925		(175	)		-9.1	%
Net interest income after provision for loan losses		26,091		25,257		834			3.3	%
Non-interest income		4,467		3,794		673			17.7	%
Non-interest expense		16,068		15,280		(788	)		-5.2	%
Income before income tax expense		14,490		13,771		719			5.2	%
Income tax expense		3,355		3,288		(67	)		-2.0	%
Net income	$	11,135	$	10,483	$	652			6.2	%

Net Income. Net income increased $0.7 million to $11.1 million for the three months ended September 30, 2019, compared with $10.5 million for the three months ended September 30, 2018. This was primarily attributable to an increase in net interest income of $1.0 million, and an increase in non-interest income of $0.7 million, offset by an increase in non-interest expense of $0.8 million, and an increase in provision for loan losses of $0.2 million.

Net Interest Income and Net Interest Margin. The increase in net interest income for the three months ended September 30, 2019, compared with the same quarter in 2018 was primarily the result of average interest earning assets growing 8.3%, or $170 million, and yields on interest earning assets decreasing 18 basis points to 5.44% for the same comparable periods. Interest expense in the three months ended September 30, 2019 increased from the same period in 2018 due to an increase in average interest bearing deposits, combined with an increase in the cost of deposits of 14 basis points.

The yield on our average interest earning assets was 5.44% for the three months ended September 30, 2019, compared with 5.62% for the same period of 2018. The cost of total funding increased in the three months ended September 30, 2019 to 0.45% from 0.40% in the comparable quarter in 2018.

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

For the three months ended September 30, 2019, provision for loan losses was $2.1 million compared with $1.9 million for the same period a year earlier. The increase in provision for loan losses in the three months ended September 30, 2019 is due primarily to $1.0 million in specific reserves, with the remainder the result of increased general reserves. For the three months ended September 30, 2019, the Company incurred net recoveries of $0.3 million, compared with net charge-offs of $0.9 million for the same period a year ago.

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

	Three Months Ended
	September 30,		September 30,		$ Better /		% Better /
(Dollars in thousands)	2019		2018		(Worse)		(Worse)
Mortgage banking	$	2,116	$	1,668	$	448		26.9	%
Card processing		976		826		150		18.2	%
Service charges on deposit accounts		744		737		7		0.9	%
Net gain on sale of investment securities		-		-		-		0.0	%
Other		631		563		68		12.1	%
Total non-interest income	$	4,467	$	3,794	$	673		17.7	%

For the three months ended September 30, 2019, noninterest income was $4.5 million compared with $3.8 million the same period a year ago. The increase was primarily the result of mortgage banking income increasing $0.4 million from higher loan sales in the third quarter of 2019 compared with the same period a year ago, due to a significant increase in refinance volumes as overall interest rates declined, and $0.2 million increase in card processing income.

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

	Three Months Ended
	September 30,		September 30,			$ Better /			% Better /
(Dollars in thousands)	2019		2018			(Worse)			(Worse)
Salaries and employee benefits	$	10,410	$	9,885		$	(525	)		-5.3	%
Occupancy, equipment and depreciation		1,439		1,476			37			2.5	%
Data processing		879		890			11			1.2	%
Marketing and advertising		805		342			(463	)		-135.4	%
FDIC premiums		6		239			233			97.5	%
Acquisition-related costs		-		(118	)		(118	)		-100.0	%
Other		2,529		2,566			37			1.4	%
Total non-interest expense	$	16,068	$	15,280		$	(788	)		-5.2	%

For the three months ended September 30, 2019, noninterest expense was $16.1 million compared with $15.3 million for the same period a year earlier and is primarily the result of $0.5 million increase in salaries and employee benefits, $0.5 million in higher marketing and advertising expenses associated with the rebranding of the Company. The Company expects higher marketing and advertising expense related to the rollout of a new branding strategy both in the fourth quarter of 2019 and into 2020. Higher salaries and employee benefits, and marketing and advertising were offset by lower FDIC premiums as the Company applied its small bank FDIC assessment credits to its overall premium assessment. For the three months ended September 30, 2019, the Company’s efficiency ratio was 49.20% compared with 49.33% for the same period a year ago.

Income Tax Expense. For the three months ended September 30, 2019, income tax expense was $3.4 million compared with $3.3 million for the same period a year earlier. For the three months ended September 30, 2019, the effective tax rate was 23.2% compared with 23.9% for the same period a year ago. The tax rate in the third quarter of 2019 is lower than the same quarter in 2018 due primarily to greater tax benefits related to tax-deductible stock compensation expense in 2019.

Financial Overview for the Nine Months Ended September 30, 2019 and 2018

	Nine Months Ended
	September 30,		September 30,		$ Better /			% Better /
(Dollars in thousands)	2019		2018		(Worse)			(Worse)
Interest income	$	89,683	$	85,294	$	4,389			5.1	%
Interest expense		6,865		5,190		(1,675	)		-32.3	%
Net interest income		82,818		80,104		2,714			3.4	%
Provision for loan losses		5,800		5,450		(350	)		-6.4	%
Net interest income after provision for loan losses		77,018		74,654		2,364			3.2	%
Non-interest income		11,402		11,578		(176	)		-1.5	%
Non-interest expense		45,683		47,151		1,468			3.1	%
Income before income tax expense		42,737		39,081		3,656			9.4	%
Income tax expense		10,108		9,127		(981	)		-10.7	%
Net income	$	32,629	$	29,954	$	2,675			8.9	%

Net Income. Net income increased $2.7 million to $32.6 million for the nine months ended September 30, 2019, compared with $30.0 million for the nine months ended September 30, 2018. This was primarily attributable to an increase in net interest income of $2.7 million, and a decrease in non-interest expense of $1.5 million, offset by an increase in income tax expense of $1.0 million, a decrease in non-interest income of $0.2 million, and an increase in provision for loan losses of $0.4 million.

Net Interest Income and Net Interest Margin. The increase in net interest income for the nine months ended September 30, 2019, compared with the same quarter in 2018 was primarily the result of average interest earning assets growing 4.6%, or $94.0 million, and yields on interest earning assets increasing 3 basis points to 5.61% for the same comparable periods. Interest expense in the nine months ended September 30, 2019 increased from the same period in 2018 due to an increase in average interest bearing deposits, combined with an increase in the cost of deposits of 27 basis points.

The yield on our average interest earning assets was 5.61% for the nine months ended September 30, 2019 compared with 5.58% for the same period of 2018. The cost of total funding increased in the nine months ended September 30, 2019 to 0.47% from 0.37% in the comparable period in 2018.

For the nine months ended September 30, 2019, provision for loan losses was $5.8 million compared with $5.5 million for the same period a year earlier. The increase in provision for loan losses in the nine months ended September 30, 2019 is due primarily to $4.6 million increase in specific reserves, with the remainder the result of increased general reserves. For the nine months ended September 30, 2019, the Company incurred net charge-offs of $0.6 million, compared with $0.4 million for the same period a year ago.

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

	Nine Months Ended
	September 30,		September 30,		$ Better /			% Better /
(Dollars in thousands)	2019		2018		(Worse)			(Worse)
Mortgage banking	$	5,154	$	4,811	$	343			7.1	%
Card processing		2,405		2,347		58			2.5	%
Service charges on deposit accounts		2,106		2,114		(8	)		-0.4	%
Net gain on sale of investment securities		-		336		(336	)		-100.0	%
Other		1,737		1,970		(233	)		-11.8	%
Total non-interest income	$	11,402	$	11,578	$	(176	)		-1.5	%

For the nine months ended September 30, 2019, non-interest income was $11.4 million compared with $11.6 million the same period a year ago. The decrease was primarily due to a one-time gain on sale of securities of $0.3 million in the nine months ended September 30, 2018, a decrease of $0.2 million in other non-interest income, offset by an increase in mortgage banking income of $0.3 million and an increase in card processing income of $0.1 million.

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

	Nine Months Ended
	September 30,		September 30,		$ Better /			% Better /
(Dollars in thousands)	2019		2018		(Worse)			(Worse)
Salaries and employee benefits	$	29,822	$	30,504	$	682			2.2	%
Occupancy, equipment and depreciation		4,453		4,430		(23	)		-0.5	%
Data processing		2,861		2,823		(38	)		-1.3	%
Marketing and advertising		1,147		1,109		(38	)		-3.4	%
FDIC premiums		244		867		623			71.9	%
Acquisition-related costs		-		232		232			100.0	%
Other		7,156		7,186		30			0.4	%
Total non-interest expense	$	45,683	$	47,151	$	1,468			3.1	%

For the nine months ended September 30, 2019, noninterest expense was $45.7 million compared with $47.2 million for the same period a year earlier. The decrease is primarily the result of $0.7 million in lower salaries and employee benefits, $0.6 million in lower FDIC premiums, and $0.2 million in acquisition-related costs attributed to 2018. For the nine months ended September 30, 2019, the Company’s efficiency ratio was 48.49% compared with 51.43% for the same period a year ago.

Income Tax Expense. For the nine months ended September 30, 2019, income tax expense was $10.1 million compared with $9.1 million for the same period a year earlier. For the nine months ended September 30, 2019, the effective tax rate was 23.7% compared with 23.4% for the same period a year ago. The tax rate for the nine months ended September 30, 2019 is higher than the same period in 2018 due primarily to the timing of tax benefits related to tax-deductible stock compensation expense.

Financial Condition

Total assets were $2.44 billion at September 30, 2019, an 11.9% increase compared with December 31, 2018. Total loans held for investment were $1.68 billion at September 30, 2019, a slight decrease of 0.2% from December 31, 2018. Total deposits were $2.10 billion at September 30, 2019, an increase of 12.0% compared with December 31, 2018.

Loans

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

	September 30,			December 31,
(Dollars in thousands)	2019			2018
Loans held for sale	$	19,554		$	10,267

Loans held for investment:
Commercial real estate loans:
Real estate term	$	945,999		$	891,131
Construction and land development		285,838			324,506
Total commercial real estate loans		1,231,837			1,215,637
Commercial and industrial loans		275,881			295,569
Consumer loans:
Residential and home equity		156,718			155,601
Consumer and other		14,974			16,621
Total consumer loans		171,692			172,222
Total gross loans		1,679,410			1,683,428
Net deferred loan fees		(4,263	)		(4,526	)
Total loans held for investment		1,675,147			1,678,902
Allowance for loan losses		(30,471	)		(25,245	)
Total loans held for investment, net	$	1,644,676		$	1,653,657


	September 30,			December 31,
(Percentage of total gross loans)	2019			2018
Loans held for investment:
Commercial real estate loans:
Real estate term		56.3	%		52.9	%
Construction and land development		17.0	%		19.3	%
Total commercial real estate loans		73.3	%		72.2	%
Commercial and industrial loans		16.5	%		17.6	%
Consumer loans:
Residential and home equity		9.3	%		9.2	%
Consumer and other		0.9	%		1.0	%
Total consumer loans		10.2	%		10.2	%
Total loans held for investment		100.0	%		100.0	%

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

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

Contractual maturities at September 30, 2019 were as follows:

										Rate Structure for
										Loans Maturing Over
	Maturity									One Year
				One
	One			through		After
	Year			Five		Five						Adjustable
(Dollars in thousands)	or Less			Years		Years		Total		Fixed Rate		Rate
Loans held for investment:
Commercial real estate loans:
Real estate term	$	73,306		$	213,235	$	659,458	$	945,999	$	93,838	$	778,855
Construction and land development		225,638			41,355		18,845		285,838		14,890		45,310
Total commercial real estate loans		298,944			254,590		678,303		1,231,837		108,728		824,165
Commercial and industrial loans		117,311			124,509		34,061		275,881		85,652		72,918
Consumer loans:
Residential and home equity		10,898			32,309		113,511		156,718		13,108		132,712
Consumer and other		6,642			6,089		2,243		14,974		7,958		374
Total consumer loans		17,540			38,398		115,754		171,692		21,066		133,086
Total gross loans held for investment	$	433,795	⁽¹⁾	$	417,497	$	828,118	$	1,679,410	$	215,446	$	1,030,169	⁽¹⁾

⁽¹⁾	The sum of adjustable rate loans maturing after one year and total loans maturing within one year is $1.5 billion or 87.2% of total gross loans held for investment at September 30, 2019.

Concentrations. As of September 30, 2019, in management’s judgment, a concentration of loans existed in real estate related loans. At that date, real estate related loans comprised 82.6% of total loans held for investment, of which 56.3% are real estate term loans, 17.0% are construction and land development loans, and 9.3% are residential and home equity loans. We require collateral on real estate lending arrangements and typically maintain loan-to-value ratios of up to 85%, except for some residential construction loans of up to 95% loan-to-value provided the loan includes pre-approved long-term financing and some commercial real estate loans of up to 75% with a minimum debt coverage ratio of 1.25 times. Our concentration in commercial and industrial loans has decreased to 16.5% at September 30, 2019 from 17.6% at December 31, 2018.

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

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

	September 30,		December 31,
(Dollars in thousands)	2019		2018
Non-accrual loans, not troubled-debt restructured
Real estate term	$	174	$	309
Construction and land development		-		-
Commercial and industrial		851		347
Residential and home equity		47		-
Consumer and other		1		-
Total non-accrual, not troubled-debt restructured loans		1,073		656
Troubled-debt restructured loans non-accrual
Real estate term		1,328		1,449
Construction and land development		-		-
Commercial and industrial		104		150
Residential and home equity		-		-
Consumer and other		-		-
Total troubled-debt restructured, non-accrual loans		1,432		1,599
Total non-accrual loans⁽¹⁾		2,505		2,255
Accruing loans past due 90 days or more		7		17
Total non-performing loans (NPL)		2,512		2,272

OREO		-		-
Total non-performing assets (NPA)⁽²⁾	$	2,512	$	2,272
Accruing troubled debt restructured loans	$	25,452	$	5,912
Non-accrual troubled debt restructured loans		1,432		1,599
Total troubled debt restructured loans	$	26,884	$	7,511

⁽¹⁾	We estimate that approximately $134,000 and $256,000 of interest income would have been recognized on loans accounted for on a non-accrual basis for the nine months ended September 30, 2019 and the year ended December 31, 2018, respectively, had such loans performed pursuant to contractual terms.

⁽²⁾	Non-performing assets as of September 30, 2019 and December 31, 2018 have not been reduced by U.S. government guarantees of $525,000 and $406,000, respectively.

As of September 30, 2019 and December 31, 2018, there are $1.7 million and $2.2 million, respectively, in PCI loans that are not performing to the original contractual terms. Including these PCI loans, total non-accrual loans are $4.3 million and $4.5 million at September 30, 2019, and December 31, 2018, respectively.

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

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

Troubled-debt Restructured Loans. A restructured loan is considered a troubled debt restructuring, or TDR, if we, for economic or legal reasons related to the debtor’s financial difficulties, grant a concession in terms or a below-market interest rate to the debtor that we would not otherwise consider. TDRs were $26.9 million and $7.5 million at September 30, 2019 and December 31, 2018, respectively. Our TDRs are considered impaired loans of which $1.4 million and $1.6 million were designated as non-accrual at September 30, 2019, and December 31, 2018, respectively.

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

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

	Nine Months Ended
	September 30,		September 30,
(Dollars in thousands)	2019		2018
Balance, beginning of period	$	-	$	994
Additions		-		2,985
Write-downs		-		-
Sales		-		(994	)
Balance, end of period	$	-	$	2,985

Allowance for Loan Losses

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

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

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

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

	Three Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
(Dollars in thousands)	2019			2018			2019			2018
Allowance for loan losses:
Beginning balance	$	28,039		$	22,308		$	25,245		$	18,303
Loans charged off:
Real estate term		-			(294	)		-			(294	)
Construction and land development		-			-			(5	)		-
Commercial and industrial		(350	)		(945	)		(1,933	)		(1,235	)
Residential and home equity		-			-			(19	)		-
Consumer and other		(89	)		(105	)		(263	)		(277	)
Total charge-offs		(439	)		(1,344	)		(2,220	)		(1,806	)
Recoveries:
Real estate term		-			46			24			58
Construction and land development		253			6			604			77
Commercial and industrial		462			312			809			1,001
Residential and home equity		2			2			34			83
Consumer and other		54			54			175			143
Total recoveries		771			420			1,646			1,362
Net loan charge-offs/(recoveries)		332			(924	)		(574	)		(444	)
Provision for loan losses		2,100			1,925			5,800			5,450
Ending balance	$	30,471		$	23,309		$	30,471		$	23,309
Loans held for investment	$	1,675,147		$	1,718,403		$	1,675,147		$	1,718,403
Average loans		1,683,242			1,718,703			1,681,881			1,698,361
Selected ratios:
Net loan charge-offs / (recoveries) to average loans		-0.08	%		0.21	%		0.05	%		0.03	%
Provision for loan losses to average loans		0.49	%		0.44	%		0.46	%		0.43	%
Allowance for loan losses to loans held for investment		1.82	%		1.36	%		1.82	%		1.36	%

The allowance for loan losses to loans held for investment was 1.82% at September 30, 2019, compared with 1.36% at September 30, 2018. In accordance with acquisition accounting, loans acquired from the Utah branches of Banner Bank and from Town & Country Bank were recorded at their estimated fair value, which resulted in a net discount to the loans’ contractual amounts, a portion of which reflects a discount for possible credit losses. Credit discounts are included in the determination of fair value, and as a result, no allowance for loan and lease losses is recorded for acquired loans at the acquisition date. The discount recorded on the acquired loans is not reflected in the allowance for loan losses or related allowance coverage ratios. Remaining credit discounts on acquired loans were $6.4 million at September 30, 2019. The allowance for loan losses is also adjusted based on changes to the underlying loan portfolio, changes to our historical loss rates, and adjustments to qualitative ALLL factors due to changes in current conditions.

Our construction and land development portfolio reflects borrower concentration risk, and also carries the enhanced risks encountered with construction loans generally. Construction and land development loans are generally more risky than permanent mortgage loans because they are dependent upon the borrower’s ability to generate cash to service the loan, and the value of the collateral depends on project completion when market conditions may have changed. Our commercial real estate loans are a mixture of new and seasoned properties, retail, office, warehouse, and some industrial properties. Loans on properties are usually underwritten at a loan to value ratio of up to 75% with a minimum debt coverage ratio of 1.25 times.

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

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

	September 30,		December 31,
(Dollars in thousands)	2019		2018
Commercial real estate loans:
Real estate term	$	12,165	$	9,968
Construction and land development		7,189		7,022
Total commercial real estate loans		19,354		16,990
Commercial and industrial loans		10,277		7,227
Consumer loans:
Residential and home equity		705		729
Consumer and other		135		299
Total consumer loans		840		1,028
Total	$	30,471	$	25,245

Investments

Investment securities were $319.9 million at September 30, 2019 and $346.4 million at December 31, 2018. As of September 30, 2019, our portfolio of investment securities was comprised of available for sale securities. During the nine months ended September 30, 2019, we transferred the held to maturity securities to available for sale. At September 30, 2019, we held no investment securities from any issuer which totaled over 10% of our shareholders’ equity.

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

	September 30,		December 31,
(Dollars in thousands)	2019		2018
Available for sale securities: (Fair Value)
U.S. Government agencies	$	33,185	$	48,366
Municipal securities		65,416		10,268
Mortgage-backed securities		216,541		217,757
Corporate securities		4,715		4,573
Total		319,857		280,964
Held to maturity securities: (Amortized Cost)
Municipal securities		-		65,462
Total investment securities	$	319,857	$	346,426

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

Investment securities maturities as of September 30, 2019:

						After One but					After Five but
	Within One Year					within Five Years					within Ten Years					After Ten Years					Total
(Dollars in thousands)	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Available for sale securities:
U.S. Government agencies	$	13,000		1.29	%	$	19,957		2.22	%	$	-		0.00	%	$	-		0.00	%	$	32,957		1.85	%
Municipal securities		19,270		1.96	%		25,197		1.91	%		18,290		2.09	%		2,148		2.62	%		64,905		2.00	%
Mortgage-backed securities		-		0.00	%		17,927		1.51	%		36,032		1.99	%		161,447		2.57	%		215,406		2.38	%
Other securities		-		0.00	%		2,000		3.27	%		3,000		1.76	%		-		0.00	%		5,000		2.36	%
Total		32,270		1.69	%		65,081		1.94	%		57,322		2.01	%		163,595		2.57	%		318,268		2.25	%
Held to maturity securities:
Municipal securities		-		0.00	%		-		0.00	%		-		0.00	%		-		0.00	%		-		0.00	%
Total investment securities	$	32,270		1.69	%	$	65,081		1.94	%	$	57,322		2.01	%	$	163,595		2.57	%	$	318,268		2.25	%

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

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

Deposits

Total deposits were $2.10 billion at September 30, 2019 and $1.88 billion at December 31, 2018. The increase in total deposits is attributed primarily to organic growth as well as through acquisitions. Non-interest bearing demand deposits were $777.0 million, or 37.0% of total deposits at September 30, 2019 compared with $642.6 million, or 34.2% of total deposits at December 31, 2018. Interest bearing deposits are comprised of interest bearing DDA accounts, money market accounts, regular savings accounts, certificates of deposit of $250,000 or less, and certificates of deposit of more than $250,000.

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

	Nine Months Ended					Nine Months Ended
	September 30, 2019					September 30, 2018
	Average		Average			Average		Average
(Dollars in thousands)	Balance		Rate			Balance		Rate
Non-interest bearing deposits	$	667,268		0.00	%	$	646,419		0.00	%
Interest bearing deposits:
Interest bearing demand and savings		806,552		0.48	%		732,912		0.30	%
Money market		278,057		0.98	%		223,193		0.47	%
Certificates of deposit less than or equal to $250,000		141,205		1.24	%		153,312		0.90	%
Certificates of deposit greater than $250,000		38,459		1.89	%		35,821		1.46	%
Total interest bearing deposits		1,264,273		0.72	%		1,145,238		0.45	%
Total	$	1,931,541		0.47	%	$	1,791,657		0.29	%

Additionally, the following table shows the maturities of CDs of $250,000 or more:

	September 30,
(Dollars in thousands)	2019
Due in three months or less	$	8,425
Due in over three months through six months		4,118
Due in over six months through twelve months		6,680
Due in over twelve months		19,708
Total	$	38,931

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

Shareholders’ Equity

Shareholders’ equity totaled $322.7 million at September 30, 2019, an increase of $32.6 million or 11.2% since December 31, 2018. The increase in shareholders’ equity for the nine months ended September 30, 2019 was primarily due to an increase of $1.4 million in additional paid in capital from exercises of stock options, share-based compensation, and net income of $32.6 million for the period less dividends paid of $6.8 million.

Dividends of $0.36 per share were declared during the nine months ended September 30, 2019 representing 20.8% of the net income for the same period. We announced a quarterly dividend of $0.13 per share on October 23, 2019, payable on November 12, 2019 for shareholders’ of record on November 4, 2019. Future cash dividends will depend on a variety of factors, including net income, capital, asset quality, general economic conditions, and regulatory considerations.

Capital Resources

We are subject to risk-based capital adequacy guidelines related to the adoption of U.S. Basel III Capital Rules. Specifically, the rules impose, among other requirements, new minimum capital requirements including a Tier 1 leverage capital ratio of 4.0%, a common equity Tier 1 risk-based capital ratio of 4.5%, a Tier 1 risk-based capital ratio of 6% and a total risk-based capital ratio of 8%.

The following table sets forth our capital ratios:

	Basel III
	Regulatory
	Requirements -
	Well Capitalized
	(Greater than or			PUB
	Equal to Stated			September 30,			December 31,			September 30,
	Percentage)			2019			2018			2018
Common equity tier 1 capital		6.50	%		16.63	%		15.11	%		14.21	%
Tier 1 risk-based capital		8.00	%		16.63	%		15.11	%		14.21	%
Total risk-based capital		10.00	%		17.88	%		16.36	%		15.46	%
Tier 1 leverage capital ratio		5.00	%		12.64	%		12.27	%		11.90	%

PUB and PIB met the requirements to be defined as a “well-capitalized” institution at September 30, 2019, December 31, 2018 and September 30, 2018 for federal regulatory purposes.

Off-Balance Sheet Arrangements

The following table sets forth our off-balance sheet lending commitments as of September 30, 2019:

			Payments Due by Period
	Total				One to		Three to		After
	Amounts		Less than		Three		Five		Five
Other Commitments (Dollars in thousands)	Committed		One Year		Years		Years		Years
Commitments to extend credit	$	585,871	$	401,131	$	75,758	$	19,122	$	89,860
Standby letters of credit		23,975		23,975		-		-		-
Credit cards		25,353		25,353		-		-		-
Total	$	635,199	$	450,459	$	75,758	$	19,122	$	89,860

Contractual Obligations

The following table sets forth our significant contractual obligations as of September 30, 2019:

			Payments Due by Period
					One to		Three to		After
			Less than		Three		Five		Five
Contractual Obligations (Dollars in thousands)	Total		One Year		Years		Years		Years
Time certificates of deposit	$	176,657	$	97,988	$	41,779	$	35,785	$	1,105
Deposits without stated maturity		1,925,055		1,925,055		-		-		-
Short-term borrowings		-		-		-		-		-
Total	$	2,101,712	$	2,023,043	$	41,779	$	35,785	$	1,105

Liquidity

The ability to have readily available funds sufficient to repay fully maturing liabilities is of primary importance to depositors, creditors and regulators. Our liquidity, represented by cash borrowing lines, federal funds and available for sale securities, is a result of our operating, investing and financing activities and related cash flows. In order to ensure funds are available at all times, we devote resources to projecting, on a monthly basis, the amount of funds that will be required, and we maintain relationships with a diversified customer base so funds are accessible. Liquidity requirements can also be met through short-term borrowings or the disposition of short-term assets. We have borrowing lines at a correspondent bank totaling $25.0 million. We also have a current borrowing line with the FHLB, totaling $666.7 million at September 30, 2019, which is secured by various real estate loans pledged as collateral totaling $715.4 million and investment securities of $192.1 million. Additionally, we have a borrowing line with the Federal Reserve Bank of $23.7 million, which is secured by $23.8 million of investment securities.

We believe our liquid assets are adequate to meet our cash flow needs for loan funding and deposit cash withdrawal for the next 60 to 90 days. At September 30, 2019, we had approximately $446.5 million in net liquid assets comprised of $340.4 million in cash and cash equivalents, including interest bearing deposits of $195.1 million and federal funds sold of $100.1 million, $319.9 million in available for sale investment securities and $19.6 million in loans held for sale, less $233.3 million of available for sale securities pledged as collateral for short-term borrowings.

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

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

Net cash provided by or used in operating activities has consisted primarily of net income adjusted for certain non-cash income and expense items such as the loan loss provision, depreciation and amortization, amortization of investment discount and premiums, share based compensation, changes in the value of bank owned life insurance and other gains and losses.

Our primary investing activities are the origination of real estate, commercial and consumer loans and purchases and sales of investment securities. At September 30, 2019, we had outstanding loan commitments of $585.9 million, credit card commitments of $25.4 million and outstanding letters of credit of $24.0 million. We anticipate that we will have sufficient funds available to meet current loan commitments.

Net cash provided by financing activities for the nine months ended September 30, 2019 was $218.5 million, principally from an increase in deposit balances, offset by dividends paid to shareholders during the period.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company’s assessment of market risk at September 30, 2019 indicates there have been no material changes in the quantitative and qualitative disclosures from those in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as required by Exchange Act Rules 240.13a-15(b) and 15d-14(a)) at September 30, 2019. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s current disclosure controls and procedures are effective and timely, providing them with material information relating to the Company required to be disclosed in the reports the Company files or submits under the Exchange Act.

Changes in Internal Controls

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended September 30, 2019, to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes in our assessment of our risk factors from those set forth in our Annual Report on Form 10-K for the year ended December 31, 2018.

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

Not Applicable

Item 3. Defaults upon Senior Securities

Not Applicable

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None

Item 6. Exhibits

Exhibit Number		Description

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

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

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

101		The following financial information from People’s Utah Bancorp Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 is formatted in XBRL: (i) the Unaudited Consolidated Balance Sheets, (ii) the Unaudited Consolidated Statements of Income, (iii) the Unaudited Consolidated Statements of Comprehensive Income, (iv) the Unaudited Consolidated Statements of Changes in Stockholders’ Equity (v) the Unaudited Consolidated Statements of Cash Flows, and (vi) the Notes to Unaudited Consolidated Financial Statements

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on November 8, 2019.

PEOPLE’S UTAH BANCORP

/s/ Len E. Williams

Len E. Williams

President and Chief Executive Officer

(Principal Executive Officer)

/s/ Mark K. Olson

Mark K. Olson

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

Positive
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Altabancorp (ALTA) 10-Q2019 Q3 Quarterly report

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