NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
Note 1 Summary of Significant Accounting Policies
CU Bancorp (the Company) is a bank holding company whose operating subsidiary is California United Bank. As a bank holding company, CU Bancorp is subject to regulation of the Federal Reserve
Board (FRB). The term Company, as used throughout this document, refers to the consolidated financial statements of CU Bancorp and California United Bank.
California United Bank (the Bank) is a full-service commercial business bank offering a broad range of banking products and
services including: deposit services, lending and cash management to small and medium-sized businesses, to non-profit organizations, to business principals and entrepreneurs, to the professional community, including attorneys, certified public
accountants, financial advisors, healthcare providers and investors. The Bank opened for business in 2005. Its headquarters office is located in Los Angeles, California. As a state chartered non-member bank, the Bank is subject to regulation by the
California Department of Business Oversight (DBO) and the Federal Deposit Insurance Corporation (FDIC). The deposits of the Bank are insured by the FDIC to the maximum amount allowed by law.
Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of the Company and the Bank. Significant intercompany items have been eliminated in consolidation. The accounting and reporting policies of the
Company conform to U.S. generally accepted accounting principles (GAAP) and pursuant to the rules and regulations of the Securities and Exchange Commission.
CU Bancorp is the common shareholder of Premier Commercial Statutory Trust I, Premier Commercial Statutory Trust II and Premier Commercial Statutory Trust III. These trusts were established for the sole
purpose of issuing trust preferred securities and do not meet the criteria for consolidation. For more detail, see Note 13 Borrowings and Subordinated Debentures.
Use of Estimates in the Preparation of Consolidated Financial Statements
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In addition, these accounting principles require the disclosure of contingent assets and liabilities as of the date of the consolidated
financial statements.
Estimates that are particularly susceptible to significant change relate to the determination of the
allowance for loan loss and various assets and liabilities measured at fair value on a recurring and nonrecurring basis. While management uses the most current available information to recognize losses on loans, future additions to the allowance for
loan loss may be necessary based on, among other factors, changes in local economic conditions.
Business Combinations
The Company has a number of fair value adjustments recorded within the consolidated financial
statements at December 31, 2016 that relate to the business combinations with California Oaks State Bank COSB, Premier Commercial Bancorp PC Bancorp and 1
st
Enterprise Bank 1
st
Enterprise on December 31, 2010, July 31, 2012 and November 30, 2014, respectively. These
fair value adjustments includes goodwill, fair value adjustments on loans, core deposit intangible assets, other intangible assets, fair value adjustments to acquired
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lease obligations, fair value adjustments to certificates of deposit and fair value adjustments on derivatives. The assets and liabilities acquired through acquisitions have been accounted for at
fair value as of the date of the acquisition. The goodwill that was recorded on the transactions represented the excess of the purchase price over the fair value of net assets acquired.
Business Segments
The Company is organized and operates as a single
reporting segment, principally engaged in commercial business banking. The Company conducts its lending and deposit operations through nine full service branch offices located in Los Angeles, Orange, Ventura and San Bernardino counties.
Cash and Cash Equivalents
Within the Consolidated Statements of Cash Flows, cash and cash equivalents include cash, due from banks and interest earning deposits in other financial institutions. Cash flows from loans, deposits,
securities sold under agreements to repurchase and certificates of deposit in other financial institutions are reported on a net basis.
Restricted Cash
Banking regulations require that all banks maintain a percentage of their deposits as reserves in cash or on deposit with the Federal
Reserve Bank. Reserve balances of $16 million and $14 million were required by the Federal Reserve Bank of San Francisco as of December 31, 2016 and 2015, respectively. As of December 31, 2016, the Bank was in compliance with all known
U.S. Federal Reserve Bank (Federal Reserve) reporting and reserve requirements. The Companys restricted cash is included in interest earning deposits in other financial institutions on the accompanying consolidated balance sheets.
Interest Earning Deposits in Other Financial Institutions
Interest earning deposits in other financial institutions represent short term interest earning deposits, which include money market
deposit accounts with other financial institutions, and interest earning deposits with the Federal Reserve. These deposits can generally provide the Company with immediate liquidity and generally can be liquidated the same day as is the case with
the Federal Reserve within seven days on money market deposit accounts with other financial institutions.
Certificates of Deposit in
Other Financial Institutions
The Companys investments in certificates of deposit issued by other financial
institutions are generally fully insured by the FDIC up to the applicable limit of $250 thousand and have an original maturity of up to 12 months. The current remaining maturities of the Companys certificates of deposit in other financial
institutions at December 31, 2016 range from 4 days to 12 months with a weighted average maturity of 6.2 months and a weighted average yield of 0.97%. At December 31, 2016 and 2015, the Company had $2.7 million of certificates of deposits
pledged as collateral for its interest rate swap agreements with one counterparty bank.
Concentrations and Credit Risk in Other
Financial Institutions
The Company maintains certain deposits in other financial institutions in amounts that exceed
federal deposit insurance coverage. At December 31, 2016, the amount of deposits in other financial institutions that the Company did not maintain with either the Federal Reserve Bank or the Federal Home Loan Bank and were not covered by FDIC
insurance was $38 million in non-interest bearing accounts, $70 million in interest bearing accounts, and $2.7 million in certificates of deposit in other financial institutions. Based on managements evaluation of the credit risk of
maintaining balances and transactions with these correspondent financial institutions, management does not believe that the Company is exposed to any significant credit risk on these balances.
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Investment Securities
The Company currently classifies its investment securities under the available-for-sale and held-to-maturity classifications. Under the available-for-sale classification, securities can be sold in
response to certain conditions, such as changes in interest rates, changes in the credit quality of the securities, when the credit quality of a security does not conform with current investment policy guidelines, fluctuations in deposit levels or
loan demand or a need to restructure the portfolio to better match the maturity or interest rate characteristics of liabilities with assets. Securities classified as available-for-sale are accounted for at their current fair value rather than
amortized cost. Unrealized gains or losses are excluded from net income and reported as a separate component of accumulated other comprehensive income (loss) included in shareholders equity. If the Company has the intent and the ability at the
time of purchase to hold certain securities until maturity, they are classified as held-to-maturity and are stated at amortized cost.
As of each reporting date, the Company evaluates the securities portfolio to determine if there has been an other-than-temporary impairment (OTTI) on each of the individual securities in the
investment securities portfolio. If it is probable that the Company will be unable to collect all amounts due according to the contractual terms of a debt security not impaired at acquisition, an OTTI shall be considered to have occurred. Once an
OTTI is considered to have occurred, the credit portion of the loss is required to be recognized in current earnings, while the non-credit portion of the loss is recorded as a separate component of shareholders equity.
In estimating whether an other-than-temporary impairment loss has occurred, management considers, among other things, (i) the length
of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, (iii) the current liquidity and volatility of the market for each of the individual security
categories, (iv) the current slope and shape of the Treasury yield curve, along with where the economy is in the current interest rate cycle, (v) the spread differential between the current spread and the long-term average spread for that
security category, (vi) the projected cash flows from the specific security type, (vii) any financial guarantee and financial condition of the guarantor and (viii) the intent and ability of the Company to retain its investment in the
issue for a period of time sufficient to allow for any anticipated recovery in fair value.
If its determined that an
OTTI exists on a debt security, the Company then determines if (a) it intends to sell the security or (b) it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of the conditions
is met, the Company will recognize the amount of the OTTI in earnings equal to the difference between the securitys fair value and its adjusted cost basis. If neither of the conditions is met, the Company determines (a) the amount of the
impairment related to credit loss and (b) the amount of the impairment due to all other factors. The difference between the present value of the cash flows expected to be collected and the amortized cost basis is the credit loss. The credit
loss is the portion of the other-than-temporary impairment that is recognized in earnings and is a reduction to the cost basis of the security. The portion of total impairment related to all other factors is included in other comprehensive income.
Significant judgment is required in this analysis that includes, but is not limited to assumptions regarding the collectability of principal and interest, future default rates, future prepayment speeds, the amount of current delinquencies that will
result in defaults and the amount of eventual recoveries expected on the underlying collateral.
Realized gains and losses on
sales of securities are recognized in earnings at the time of sale and are determined on a specific-identification basis. Purchase premiums and discounts are recognized in interest income using the interest method over the expected maturity term of
the securities. For mortgage-backed securities, the amortization or accretion is based on estimated average lives of the securities. The lives of these securities can fluctuate based on the amount of prepayments received on the underlying collateral
of the securities. The amount of prepayments varies from time to time based on the interest rate environment and the rate of turnover of mortgages. The Companys investment in the common stock of Pacific Coast Bankers Bank (PCBB)
and The Independent Bankers Bank (TIB) is carried at cost, evaluated for impairment and is included in other assets on the accompanying consolidated balance sheets.
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Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank of San Francisco (FHLB), the Bank is required to maintain an investment in capital
stock of the FHLB. The stock does not have a readily determinable fair value and as such is carried at cost and evaluated for impairment. The stocks value is determined by the ultimate recoverability of the par value rather than by recognizing
temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) the significance of the changes in (increases or declines) in the net assets of the FHLB as
compared to the capital stock amount and the length of time these changes (situation) has persisted, (b) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating
performance, (c) the impact of legislative and regulatory changes on the customer base of the FHLB and (d) the liquidity position of the FHLB.
The Companys investment in FHLB stock is included in other assets on the accompanying consolidated balance sheets.
Loans and Interest and Fees on Loans
The Company extends
commercial, Small Business Administration, commercial real estate, construction and personal loans to business principals and entrepreneurs, to small and medium-sized businesses, to non-profit organizations, to the professional community, including
attorneys, certified public accountants, financial advisors, healthcare providers, and to investors. Loans that the Company has the ability and intent to hold until maturity are stated at the their outstanding unpaid principal balances net of charge
offs, net of deferred loan fees and costs on originated loans, net of unearned discounts and unamortized premiums on acquired loans, and further reduced by the valuation allowance for loan losses. Nonrefundable loan fees and direct costs associated
with the origination of loans are deferred and recognized in interest income over the loan term using the level yield method. Further, discounts or premiums on acquired loans are accreted or amortized to interest income using the level yield method.
Interest on loans is accrued daily and credited to income based on the principal amount outstanding. Interest is calculated
using the terms of the loan according to the contractual note agreements. A small number of commercial real estate loans have been identified and designated as hedged items by the Company. For a detailed discussion of the accounting related to the
loans designated as hedged items, see Note 1 Summary of Significant Accounting Policies under Derivative Financial Instruments and Hedging Activity and Note 14 Derivative Financial Instruments.
Nonaccrual loans:
For all loan types, when a borrower discontinues making payments as contractually required by the note, the
Company must determine whether it is appropriate to continue to accrue interest. Generally, the Company places loans in a nonaccrual status and the accrual of interest on loans is discontinued when the loan has become delinquent by more than 90 days
or when management determines that the full repayment of principal and collection of interest is unlikely. The Company may decide to continue to accrue interest on certain loans more than 90 days delinquent, if the loan is well secured by collateral
and in the process of collection.
When a loan is placed on nonaccrual status or has been charged-off, all interest income
that has been accrued but not yet collected is reversed against interest income. Subsequent payments received from the customer are applied to principal and no further interest income is recognized until the principal has been paid in full or until
circumstances have changed such that payments are again consistently received as contractually required.
Impaired
loans:
A loan is identified as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the original loan agreement. Generally, these loans are rated substandard or worse. Most impaired
loans are classified as nonaccrual. However, there are some loans that are
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designated impaired due to doubt regarding collectability according to contractual terms, but are both fully secured by collateral and are current in their interest and principal payments. These
impaired loans that are not classified as nonaccrual continue to pay as agreed. Impaired loans are measured for allowance requirements based on the present value of expected future cash flows discounted at the loans effective interest rate or,
as a practical expedient, at the loans observable market price or the fair value of the collateral if the loan is collateral dependent. The amount of an impairment allowance, if any, and any subsequent changes are charged against the allowance
for loan loss. Factors that contribute to a performing loan being classified as impaired include payment status, collateral value, probability of collecting scheduled payments, delinquent taxes, and debts to other lenders that cannot be serviced out
of existing cash flow.
Troubled debt restructurings
: A loan is classified as a troubled debt restructuring when a
borrower experiences financial difficulties that lead to a restructuring of the loan, and the Company grants concessions to the borrower in the restructuring that it would not otherwise consider. The loan terms which have been modified or
restructured due to a borrowers financial difficulty may include a reduction in the stated interest rate, an extension of the maturity at an interest rate below current market interest rates, a reduction in the face amount of the debt
(principal forgiveness), a reduction in the accrued interest, or re-aging, extensions, deferrals, renewals, rewrites and other actions intended to minimize potential losses.
Troubled debt restructurings are considered impaired loans and are evaluated for impairment, with the appropriate allowance for loan loss.
In determining whether a debtor is experiencing financial difficulties, the Company considers if the debtor is in payment default or
would be in payment default in the foreseeable future without the modification, the debtor declared or is in the process of declaring bankruptcy, there is substantial doubt that the debtor will continue as a going concern, the debtors
entity-specific projected cash flows will not be sufficient to service its debt, or the debtor cannot obtain funds from sources other than the existing creditors at a market rate for debt with similar risk characteristics.
In determining whether the Company would grant a concession, the Company assesses, if it does not expect to collect all amounts due,
whether the current value of the collateral will satisfy the amounts owed, whether additional collateral or guarantees from the debtor will serve as adequate compensation for other terms of the restructuring, and whether the debtor otherwise has
access to funds at a market rate for debt with similar risk characteristics. Typical concessions include reductions to the stated interest rate, payment extensions, principal forgiveness and other actions.
A loan that is modified at a market rate of interest will not be classified as a troubled debt restructuring in the calendar year
subsequent to the restructuring if it is in compliance with the modified terms and the expectation exists for continued performance going forward. Payment performance prior and subsequent to the restructuring is taken into account in assessing
whether it is likely that the borrower can meet the new terms. This may result in the loan being returned to accrual at the time of restructuring, however the Company generally requires a period of sustained repayment for at least six months
for return to accrual status.
Purchased Credit Impaired Loans:
Loans acquired through acquisition are recorded at fair
value at acquisition date without a carryover of the related Allowance. Purchased Credit Impaired (PCI) loans are acquired loans with evidence of deterioration of credit quality since origination and it is probable, at the acquisition
date, that the Company will not be able to collect all contractually required amounts. When the timing and/or amounts of expected cash flows on such loans are not reasonably estimable, no interest is accreted and the loan is reported as a
non-accrual loan; otherwise, if the timing and amounts of expected cash flows for PCI loans are reasonably estimable, then interest is accreted and the loans are reported as accruing loans. The non-accretable difference represents the difference
between the undiscounted contractual cash flows and the undiscounted expected cash flows, and also reflects the estimated credit losses in the acquired loan portfolio at the acquisition date and can fluctuate due to changes in expected cash flows
during the life of the PCI loans. For
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non-PCI loans, loan fair value adjustments consist of an interest rate premium or discount on each individual loan and are amortized to loan interest income based on the effective yield method
over the remaining life of the loans. Subsequent decreases to the expected cash flows for both PCI and non-PCI loans will result in a provision for loan losses.
Loans Held for Sale and Servicing Assets
Loans held for sale are
loans originated by the Company and include the principal amount outstanding net of unearned income and the loans are carried at the lower of cost or fair value on an aggregate basis. A decline in the aggregate fair value of the loans below their
aggregate carrying amount is recognized through a charge to earnings in the period of such decline. Unearned income on these loans is taken into earnings when they are sold. At December 31, 2016 and 2015, the Company had no loans classified as
held for sale.
Gains or losses resulting from sales of loans are recognized at the date of settlement and are based on the
difference between the cash received and the carrying value of the related loans less transaction costs. A transfer of financial assets in which control is surrendered is accounted for as a sale to the extent that consideration other than beneficial
interests in the transferred assets is received in the exchange. Assets, liabilities, derivative financial instruments, or other retained interests issued or obtained through the sale of financial assets are measured at estimated fair value, if
practicable.
The most common retained interest related to loan sales is a servicing asset. Servicing assets are amortized in
proportion to and over the period of the estimated future net servicing income. The amortization of the servicing asset and the servicing income are included in non-interest income. The fair value of the servicing assets is estimated by discounting
the future cash flows using market-based discount rates and prepayment speeds. The Companys servicing asset is evaluated regularly for impairment. The servicing asset is stratified based on the original term to maturity and the year of
origination of the underlying loans for purposes of measuring impairment. If the fair value of the servicing asset is less than the amortized carrying value, the asset is considered to be impaired and an impairment charge will be taken against
earnings. The servicing asset is included in other assets on the consolidated balance sheets.
Allowance for Loan Loss
The allowance for loan loss (Allowance) is established by a provision for loan losses that is charged
against income, increased by charges to expense and decreased by charge-offs (net of recoveries). Loan charge-offs are charged against the Allowance when management believes the collectability of loan principal becomes unlikely. Subsequent
recoveries, if any, are credited to the Allowance.
The Allowance is an amount that management believes will be adequate to
absorb estimated charge-offs related to specifically identified loans, as well as probable loan charge-offs inherent in the balance of the loan portfolio, based on an evaluation of the collectability of existing loans and prior loss experience.
Management carefully monitors changing economic conditions, the concentrations of loan categories and collateral, the financial condition of the borrowers, the history of the loan portfolio, as well as historical peer group loan loss data to
determine the adequacy of the Allowance. The Allowance is based upon estimates, and actual charge-offs may vary from the estimates. No assurance can be given that adverse future economic conditions will not lead to delinquent loans, increases in the
provision for loan losses and/or charge-offs. These evaluations are inherently subjective, as they require estimates that are susceptible to significant revisions as conditions change. In addition, regulatory agencies, as an integral part of their
examination process, may require additions to the Allowance based on their judgment about information available at the time of their examinations. Management believes that the Allowance as of December 31, 2016 is adequate to absorb known and
probable losses inherent in the loan portfolio.
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The Allowance consists of specific and general components. The specific component relates to
loans that are categorized as impaired. For loans that are categorized as impaired, a specific allowance is established when the realizable value of the impaired loan is lower than the recorded investment of that loan. The general component covers
non-impaired loans and is based on the type of loan and historical charge-off experience adjusted for qualitative factors.
While the general allowance covers all non-impaired loans and is based on historical loss experience adjusted for the various qualitative
factors as discussed in Note 6 Loans, the change in the Allowance from one reporting period to the next may not directly correlate to the rate of change of nonperforming loans for the following reasons:
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A loan moving from the impaired performing status to an impaired non-performing status does not mandate an automatic increase in allowance. The
individual loan is evaluated for a specific allowance requirement when the loan moves to the impaired status, not when the loan moves to non-performing status. In addition, the impaired loan is reevaluated at each subsequent reporting period.
Impairment is measured based on the present value of the expected future cash flows discounted at the loans effective interest rate, except that as a practical expedient, the Company may measure impairment based on the loans observable
market price or the fair value of the collateral if the loan is collateral dependent.
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Not all impaired loans require a specific allowance. The payment performance of the borrower may require an impaired classification, but the collateral
evaluation may support adequate collateral coverage. For a number of impaired loans in which borrower performance is in question, the collateral coverage may be sufficient. In those instances, neither a general allowance nor a specific allowance is
assessed.
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Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives, which range from three
to seven years for furniture and fixtures. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the improvements or the remaining lease term, whichever is shorter. Expenditures for improvements or
major repairs are capitalized and those for ordinary repairs and maintenance are charged to operations as incurred.
Other Real Estate
Owned (OREO)
Real estate properties that are acquired through, or in lieu of, loan foreclosure are
initially recorded at fair value, less estimated costs to sell, at the date of foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of the cost
basis or fair value less estimated costs to sell. Gains and losses on the sale of OREOs and operating expenses of such assets are included in non-interest expense, and operating revenue of such assets is included in non-interest income.
Goodwill and Other Intangible Assets
Goodwill resulting from business combinations is generally determined as the excess of the fair value of the consideration transferred over the fair value of the identifiable net assets acquired and
liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination determined to have an indefinite useful life are not amortized, but tested for impairment at least annually, or more
frequently if events and circumstances exist that indicate that an impairment test should be performed. The Company has selected October 1
st
as the date to perform its annual impairment test. Intangible assets with definite useful lives are amortized over
their estimated useful lives. Goodwill is the only intangible asset with an indefinite life on the Companys consolidated balance sheets. There was no impairment as of December 31, 2016 or 2015.
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Core deposit intangible assets arising from business combinations are amortized using an
accelerated method over their estimated useful lives and are classified under core deposit and leasehold right intangibles on the Companys consolidated balance sheets.
Leasehold right intangibles is the present value of the excess of market rate lease payments over the contractual lease payments of an acquired lease. The leasehold intangible asset is amortized to
expense over the life of the lease and is classified under core deposit and leasehold right intangibles on the accompanying consolidated balance sheets.
Qualified Affordable Housing Project Investments
The Company has
made investments in qualified affordable housing projects that are defined within the industry and here as investments in Low Income Housing Tax Credits (LIHTC). The investment in LIHTC provides the Company with tax credits and tax
benefits which are designed to encourage investments in the construction and rehabilitation of low-income housing. The Companys investments are made to limited partnerships that manage or invest in qualified affordable housing projects
primarily to receive both tax credits and benefits in addition to CRA credits. The Company must meet certain conditions that a reporting entity must meet to be eligible to use a method other than the equity or cost method to account for qualified
affordable housing project investments. If the conditions are met, the Company is permitted to amortize the initial cost of the investment in proportion to the amount of the tax credits and tax benefits received and recognize the net investment
performance in the income statement as a component of income tax expense (benefit). The four conditions that must be met to utilize the proportional amortization method are: (a) it is probable that the tax credits allocable to the investor will
be available, (b) the investor does not have the ability to exercise significant influence over the operating and financial policies of the limited partnership, and substantially all of the projected benefits are from tax credits and tax
benefits, (c) the investors projected yield based solely on the cash flows from the tax credits and tax benefits is positive and (d) the investor is a limited partnership investor in the limited liability entity for both legal and
tax purposes, and the investor is limited to its capital investment. The Company believes that all the above conditions are met to qualify for proportional amortization. In addition, the Company is required to evaluate its investments in LIHTC for
impairment, when there are events or changes in circumstances indicating it is more likely than not that the carrying amount of the Companys investment would not be realized either through the receipt of tax credits and tax benefits or through
a sale. Management does not believe there is any impairment of its LIHTC investments at December 31, 2016. See Note 11 Investments in Qualified Affordable Housing Projects for details on the Companys investments in LIHTCs.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been
isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control
over the transferred assets through an agreement to repurchase them before their maturity.
Derivative Financial Instruments and Hedging
Activities
All derivative instruments (interest rate swap contracts) are recognized on the consolidated balance sheet
at their current fair value. Every derivative instrument (including certain derivative instruments embedded in other contracts) is required to be recorded in the balance sheet as either an asset or liability measured at its fair value. ASC Topic 815
requires that changes in the derivatives fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Accounting for qualifying hedges allows a derivatives gains and losses to offset related results
on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting.
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On the date a derivative contract is entered into by the Company, the Company will designate
the derivative contract as either a fair value hedge (i.e. a hedge of the fair value of a recognized asset or liability), a cash flow hedge (i.e. a hedge of the variability of cash flows to be received or paid related to a recognized asset or
liability), or a stand-alone derivative (i.e. and instrument with no hedging designation). For a derivative designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are
recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in the income statement when the hedged
item affects earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as other non-interest income. At inception and on an ongoing basis, the derivatives that are used in hedging
transactions are assessed for effectiveness as to how effective they are in offsetting changes in fair values or cash flows of hedged items.
The Company will discontinue hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting change in the fair value of the hedged item, the derivative
expires or is sold, is terminated, or management determines that designation of the derivative as a hedging instrument is no longer appropriate. When hedge accounting is discontinued, the Company will continue to carry the derivative on the balance
sheet at its fair value (if applicable), but will no longer adjust the hedged asset or liability for changes in fair value. The adjustments of the carrying amount of the hedged asset or liability will be accounted for in the same manner as other
components of the carrying amount of that asset or liability, and the adjustments are amortized to interest income over the remaining life of the hedged item upon the termination of hedge accounting.
Income Taxes
The
Company provides for current federal and state income taxes payable and for deferred taxes that result from differences between financial accounting rules and tax laws governing the timing of recognition of various income and expense items. The
Company recognizes deferred income tax assets and liabilities for the future tax effects of such temporary differences based on the difference between the financial statement and tax bases of the existing assets and liabilities using the statutory
rate expected in the years in which the differences are expected to reverse. The effect on deferred taxes of any enacted change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established
to the extent necessary to reduce the deferred tax asset to the level at which it is more likely than not that the tax assets or benefits will be realized. Realization of tax benefits for deductible temporary differences and loss
carryforwards depends on having sufficient taxable income of an appropriate character within the carryback and carryforward period and that current tax law will allow for the realization of those tax benefits.
The Company is required to account for uncertainty associated with the tax positions it has taken or expects to be taken on past, current
and future tax returns. Where there may be a degree of uncertainty as to the tax realization of an item, the Company may only record the tax effects (expense or benefits) from an uncertain tax position in the consolidated financial statements if,
based on its merits, the position is more likely than not to be sustained on audit by the taxing authorities. The Company does not believe that it has any material uncertain tax positions taken to date that are not more likely than not to be
realized. Interest and penalties related to uncertain tax positions are recorded as part of other operating expense.
Earnings per Share
(EPS)
Basic earnings per common share is computed by dividing net income available to common shareholders
by the weighted-average number of common shares outstanding for the period. Diluted EPS includes the dilutive effect of potential common stock using the treasury stock method only if the effect on earnings per share is dilutive. See Note 4
Computation of Earnings per Common Share.
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Recent Accounting Pronouncements
Accounting Standards Adopted in 2016
In March 2016, the FASB issued ASU 2016-09,
Compensation Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, to reduce the complexity of certain aspects
of the accounting for employee share-based payment transactions. As a result of this ASU, changes applicable to all entities include: 1) The threshold to qualify for equity classification would permit withholding up to the maximum individual
statutory tax rate in the applicable jurisdictions. Also, the ASU provides that cash paid by an employer when directly withholding shares for tax-withholding purposes would be classified as a financing activity on the statement of cash flows; 2) An
entity would be allowed to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur; 3) All excess tax benefits and tax deficiencies would be
recognized as income tax expense or benefit in the income statement. An entity also would recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. Further, excess tax benefits would not be
separated from other income tax cash flows and thus would be classified along with other cash flows as an operating activity. ASU 2016-09 is effective for public entities for interim and annual periods beginning after December 15, 2016. In the
third quarter of 2016, the Company elected the early adoption of this standard which requires the Company to reflect the adjustments resulting from the adoption effective January 1, 2016, the beginning of the annual period that includes the
interim period of adoption. See Note 4 Computation of Earnings Per Common Share, Note 16 Stock Options and Restricted Stock and Note 19, Income Taxes for impacts of the adoption. None of the provisions under ASU 2016-09 resulted in a
cumulative effect adjustment to retained earnings as of January 1, 2016, or retrospective application to prior years comparative consolidated financial statements.
Recent Accounting Standards Not Yet Effective
In May 2014, the FASB
issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606),
which replaced almost all existing revenue recognition guidance in current U.S. GAAP. However, the effects of the new revenue recognition guidance on the financial
statements of reporting entities in the financial institution industry will be somewhat limited because, for the most part, financial instruments and related contractual rights and obligations are excluded from its scope. As such, it is anticipated
that interest income recognition and measurement, the largest source of revenue for the Company, will not be impacted by ASC 606. However, the recognition and measurement of certain non-interest income items such as gain on sale of other real estate
owned and deposit-related fees, could be affected by ASC 606.
Under current U.S. GAAP, when full consideration is not
expected and financing is required by the buyer to purchase the property, there are very prescriptive requirements in determining when foreclosed real estate property sold by an institution should be derecognized and a gain or loss be recognized.
The new guidance that will be applied to these sales is more principles based. For example, as it pertains to the criteria for determining how a contract should be accounted for under the new guidance, judgment will need to be exercised in
evaluating if: (a) a commitment on the buyers part exists, (b) collection is probable in circumstances where the initial investment is minimal and (c) the buyer has obtained control of the asset, including the significant risks
and rewards of the ownership. If there is no commitment on the buyers part, collection is not probable or the buyer has not obtained control of the asset, then a gain cannot be recognized under the new guidance. The initial investment
requirement for the buyer along with the various methods for profit recognition are no longer applicable when the new guidance goes into effect. The Company will revise its current policy on the recognition and measurement of gain on sale of other
real estate owned to be consistent with the new guidance, but does not expect the new guidance to have a significant impact on the consolidated financial statements of the Company when adopted. Since the inception of the Company, the level of other
real estate owned has been very low and in almost all cases, full consideration was received at the time of sale and financing by the Company was not provided.
114
For deposit-related fees, considering the straightforward nature of the arrangements with
the Companys deposits customers, the Company does not expect the recognition and measurement outcomes of deposit-related fees to be significant differently under the new guidance compared to current U.S. GAAP.
ASU 2014-09 was to be effective for interim and annual periods beginning after December 15, 2016 and was to be applied on either a
modified retrospective or full retrospective basis. In August 2015, the FASB issued ASU 2015-14 which defers the original effective date for all entities by one year. Public business entities should apply the guidance in ASU 2015-14 to annual
reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including
interim reporting periods within that reporting period. The Company does not expect this ASU to have a material impact on the Companys consolidated financial statements when adopted on January 1, 2018.
In January 2016, the FASB issued ASU 2016-01,
Financial InstrumentsOverall: Recognition and Measurement of Financial Assets and
Financial Liabilities
. Changes to the current GAAP model primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. The
most far-reaching ramification of this ASU is the elimination of the available-for-sale classification for equity securities and the requirement to carry most equity securities at fair value through net income. In addition, the FASB clarified
guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The accounting for other financial instruments, such as loans, investments in debt
securities, and financial liabilities is largely unchanged. The classification and measurement guidance will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those
fiscal years. Entities can early adopt the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. Early adoption of these provisions
can be elected for all financial statements of fiscal years and interim periods that have not yet been issued or that have not yet been made available for issuance.
The Company does not have any equity securities in its available-for-sale portfolio, but only investments in the common stock of PCBB, TIB, and the FHLB, the Companys correspondent banks. Under the
current accounting policy, the Companys investments in these common stock are carried at cost because a readily determinable fair value does not exist for these investments. Under ASU 2016-01, investment in FHLB is specifically excluded from
the requirement that equity securities are to be measured at fair value with unrealized holding gains and losses reflected in net income. Furthermore, the ASU allows entities to make an irrevocable practicality exception whereby entities can make an
election, on a security-by-security basis, to account for equity securities that do not have readily determinable fair value at cost, with adjustments to fair value when an observable price change occurs or impairment is identified. As such, the
Company intends to continue to measure its investments in PCBB, TIB and FHLB common stock at cost upon adoption on January 1, 2018. The Company does not expect this ASU to have a material impact on the Companys consolidated financial
statements when adopted.
In February 2016, the FASB issued ASU 2016-02,
Leases
. The most significant change for
lessees is the requirement under the new guidance to recognize right-of-use assets and lease liabilities for all leases not considered short-term leases. By definition, a short-term lease is one in which: (a) the lease term is 12 months or less
and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect an accounting policy by class of underlying asset under which right-of-use assets and
lease liabilities are not recognized and lease payments are generally recognized as expense over the lease term on a straight-line basis. Furthermore, this change will result in lessees recognizing right-of-use assets and lease liabilities for most
leases currently accounted for as operating leases under the legacy lease accounting guidance. Examples of changes in the new guidance affecting both lessees and lessors include: (a) defining initial direct costs to only include those
incremental costs that would not have been incurred if the lease had not been entered into, (b) requiring related party leases to be accounted for based on their legally
115
enforceable terms and conditions, (c) eliminating the additional requirements that must be applied today to leases involving real estate and (d) revising the circumstances under which
the transfer contract in a sale-leaseback transaction should be accounted for as the sale of an asset by the seller-lessee and the purchase of an asset by the buyer-lessor. In addition, both lessees and lessors are subject to new disclosure
requirements. ASU 2016-02 is effective for public entities for interim and annual periods beginning after December 15, 2018.
As of December 31, 2016, the Company has 10 operating leases for 10 locations under contract with a term greater than 12 months with future lease payments totaling $11 million. At adoption date,
January 1, 2019, the Company will recognize a lease liability for the present value of future lease commitments and a right of use asset. The recognized right of use asset relating to operating leases will consist of the present value of future
lease commitments, unamortized initial direct costs, prepaid rent, and the related unamortized balance of lease incentives. The discount rate used to present value future lease payments will be the Companys incremental borrowing rate at the
time of adoption. The Company will take a modified retrospective transition approach with application in all comparative periods presented. The Company does not expect this ASU to have a material impact on the Companys consolidated financial
statements when adopted.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments Credit Losses (Topic
326)
, which introduces new guidance for the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It
also modifies the impairment model for available-for-sale (AFS) debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. Current expected credit losses
(CECL) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes loans, held-to-maturity debt securities, loan
commitments, financial guarantees, and net investments in leases, as well as reinsurance and trade receivables. Upon initial recognition of the exposure, the CECL model requires an entity to estimate the credit losses expected over the life of an
exposure (or pool of exposures). The estimate of expected credit losses (ECL) should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. Financial instruments with
similar risk characteristics should be grouped together when estimating ECL. ASU 2016-13 is effective for public entities for interim and annual periods beginning after December 15, 2019. Early application of the guidance will be permitted for
all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Upon adoption, the Company expects the level of ECL will likely be higher, however, the Company is still in the early stages
of developing an implementation plan and evaluating the magnitude of the increase and the impact of this ASU on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
(a consensus of the FASB Emerging Issues Task Force),
which addresses eight classification issues related to the statement of cash flows:
|
|
|
Debt prepayment of debt extinguishment costs
|
|
|
|
Settlement of zero-coupon bonds
|
|
|
|
Contingent consideration payments made after a business combination
|
|
|
|
Proceeds from the settlement of insurance claims
|
|
|
|
Proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies
|
|
|
|
Distributions received from equity method investees
|
|
|
|
Beneficial interests in securitization transactions
|
|
|
|
Separately identifiable cash flows and application of the predominance principle
|
116
ASU 2016-15 is effective for public business entities for fiscal years beginning after December 15,
2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash flows (Topic 230): Restricted Cash
(a consensus of the FASB
Emerging Issues Task Force). The new standard requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.
Entities will also be required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. ASU 2016-18 is effective for public business entities for financial statements issued for fiscal years beginning
after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of
Business
, which provides guidance on evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The new standard clarifies that when substantially all of the fair value of gross assets acquired
is concentrated in a single asset, or a group of similar assets, the asset acquired would not represent a business. The new ASU introduces this initial required screen, if met, eliminates the need for further assessment. For public business entities
with a calendar year end, the standard is effective in 2018. Early adoption is permitted, including adoption in an interim period. The amendments can be applied to transactions occurring before the guidance was issued, as long as the applicable
financial statements have not been issued. The Company does not expect the adoption of this ASU to have a material effect on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04,
IntangiblesGoodwill and Other {Topic
350):
Simplifying the Test
for
Goodwill Impairment
,
which simplifies the
accounting for goodwill impairment. ASU 2017-04 eliminates step two from the goodwill impairment test, which measures the amount of impairment loss, if any. Instead, an entity should recognize an impairment charge for the amount by which the
carrying amount exceeds the reporting units fair value. The loss recognized should not exceed the total amount of goodwill allocated to said reporting unit. For public business entities with a calendar year end, the standard is effective for
annual and any interim impairment tests for periods beginning after December 15, 2019. The Company does not expect the adoption of this ASU to have a material effect on its consolidated financial statements.
Note 2 Business Combinations
On November 30, 2014, the Company completed the merger with 1st Enterprise pursuant to the terms of the Agreement and Plan of Merger dated June 2, 2014, as amended (Merger
Agreement). 1st Enterprise was merged with and into the Bank, with the Bank continuing as the surviving entity in the merger. Pursuant to the terms and conditions set forth in the Merger Agreement, each outstanding share of 1st Enterprise
common stock (other than shares as to which the holder exercised dissenters rights) was converted into the right to receive 1.3450 of a share of CU Bancorp common stock, resulting in 5.2 million shares of CU Bancorp common stock issued.
The fair value of the 5.2 million common stock issued as part of the consideration paid ($103 million) was determined based on the closing market price ($19.60) of CU Bancorp common stock on November 30, 2014. The 16,400 shares of 1st
Enterprise Non-Cumulative Perpetual Preferred Stock, Series D were converted into the right to receive 16,400 shares of CU Bancorps Non-Cumulative Perpetual Preferred Stock, Series A (CU Bancorp Preferred Stock). The U.S.
Department of the Treasury is the sole holder of all outstanding shares of CU Bancorp Preferred Stock. As part of the Merger Agreement, CU Bancorp adopted the 1st Enterprise 2006 Stock Incentive Plan, as amended, as its own equity plan and all stock
options granted by 1st Enterprise thereunder are exercisable for CU Bancorp common stock on substantially the same terms but adjusted to reflect the exchange ratio set forth in the Merger Agreement. See Note 16 Stock Options and Restricted
Stock for more details. The merger was accounted for by the Company using the acquisition method of accounting. Accordingly, the assets and liabilities of 1st Enterprise were recorded at their respective fair values at acquisition date and
represents managements estimates based on available information as of the acquisition date.
117
The following table presents (unaudited) pro forma information for the
period indicated as though the 1
st
Enterprise merger had
been completed as of January 1, 2013. The 2014 pro forma net income excludes historical non-recurring merger expenses net of taxes, totaling approximately $3.2 million for the Company and
1
st
Enterprise (dollars in thousands, except per share
data).
|
|
|
|
|
|
|
Proforma
Year
ended
December 31,
2014
|
|
Net interest income after provision for loan losses
|
|
$
|
77,140
|
|
Net income
|
|
$
|
17,218
|
|
|
|
|
|
|
Preferred stock dividends and discount accretion
|
|
|
(1,234
|
)
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
15,984
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.94
|
|
The above proforma results are presented for illustrative purposes and are not
intended to represent or be indicative of the actual results of operations of the merged companies that would have been achieved had the acquisition occurred at January 1, 2014 for 1
st
Enterprise nor are they intended to represent or be indicative of future results of operations. The proforma results
do not include operating cost savings as a result of the acquisition. These proforma results require significant estimates and judgments particularly as it relates to valuation and accretion of income associated with acquired loans.
Note 3 Computation of Book Value and Tangible Book Value per Common Share
Book value per common share was calculated by dividing total shareholders equity less preferred stock, by the number of common
shares issued and outstanding. Tangible book value per common share was calculated by dividing tangible common equity, by the number of common shares issued and outstanding. The tables below present the computation of book value and tangible book
value per common share as of the dates indicated (dollars in thousands, except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Total Shareholders Equity
|
|
$
|
338,185
|
|
|
$
|
306,807
|
|
Less: Preferred stock
|
|
|
16,955
|
|
|
|
16,995
|
|
Less: Goodwill
|
|
|
64,603
|
|
|
|
64,603
|
|
Less: Core deposit and leasehold right intangibles
|
|
|
6,300
|
|
|
|
7,671
|
|
|
|
|
|
|
|
|
|
|
Tangible Shareholders Equity
|
|
$
|
250,327
|
|
|
$
|
217,538
|
|
|
|
|
|
|
|
|
|
|
Common shares issued and outstanding
|
|
|
17,759,006
|
|
|
|
17,175,389
|
|
Book value per common share
|
|
$
|
18.09
|
|
|
$
|
16.87
|
|
|
|
|
|
|
|
|
|
|
Tangible book value per common share
|
|
$
|
14.10
|
|
|
$
|
12.67
|
|
|
|
|
|
|
|
|
|
|
Note 4 Computation of Earnings per Common Share
On July 1, 2016, and effective January 1, 2016, the Company early adopted ASU 2016-09 which provides improvements to the
accounting for employee share-based payments. In calculating potential common shares used to determine diluted earnings per share, U.S. GAAP requires the Company to use the treasury stock method. ASU 2016-09 requires that assumed proceeds under the
treasury stock method be modified to exclude the amount of excess tax benefits that would have been recognized in additional paid-in capital.
118
Basic and diluted earnings per common share were determined by dividing net income available to common
shareholders by the applicable basic and diluted weighted average common shares outstanding. The following table shows weighted average basic common shares outstanding, potential dilutive shares related to stock options, unvested restricted stock,
and weighted average diluted shares for the periods indicated (dollars in thousands, except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net Income
|
|
$
|
27,457
|
|
|
$
|
21,236
|
|
|
$
|
8,908
|
|
Less: Preferred stock dividends and discount accretion
|
|
|
1,217
|
|
|
|
1,174
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income available to common shareholders
|
|
$
|
26,240
|
|
|
$
|
20,062
|
|
|
$
|
8,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding
|
|
|
17,252,046
|
|
|
|
16,543,787
|
|
|
|
11,393,445
|
|
Dilutive effect of potential common share issuances from stock options and restricted stock
|
|
|
298,819
|
|
|
|
439,434
|
|
|
|
274,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding
|
|
|
17,550,865
|
|
|
|
16,983,221
|
|
|
|
11,667,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.52
|
|
|
$
|
1.21
|
|
|
$
|
0.77
|
|
Diluted
|
|
$
|
1.50
|
|
|
$
|
1.18
|
|
|
$
|
0.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive shares not included in the calculation of diluted earnings per share
|
|
|
1,189
|
|
|
|
32,811
|
|
|
|
79,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5 Investment Securities
The investment securities portfolio has been classified into two categories: available-for-sale (AFS) and held-to-maturity (HTM).
The following tables present the amortized cost, gross unrealized gains and losses, and fair values of investment securities by major
category as of the dates indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized
|
|
|
|
|
December 31, 2016
|
|
Amortized
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
Available-for-sale investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Govt Agency and Sponsored Agency Note Securities
|
|
$
|
10,000
|
|
|
$
|
|
|
|
$
|
31
|
|
|
$
|
9,969
|
|
U.S. Govt Agency SBA Securities
|
|
|
123,224
|
|
|
|
365
|
|
|
|
739
|
|
|
|
122,850
|
|
U.S. Govt Agency GNMA Mortgage-Backed Securities
|
|
|
22,565
|
|
|
|
70
|
|
|
|
265
|
|
|
|
22,370
|
|
U.S. Govt Sponsored Agency CMO & Mortgage-Backed Securities
|
|
|
243,159
|
|
|
|
92
|
|
|
|
4,351
|
|
|
|
238,900
|
|
Asset Backed Securities
|
|
|
7,111
|
|
|
|
|
|
|
|
215
|
|
|
|
6,896
|
|
U.S. Treasury Notes
|
|
|
69,101
|
|
|
|
7
|
|
|
|
143
|
|
|
|
68,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale
|
|
|
475,160
|
|
|
|
534
|
|
|
|
5,744
|
|
|
|
469,950
|
|
Held-to-maturity investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Securities
|
|
|
42,027
|
|
|
|
69
|
|
|
|
159
|
|
|
|
41,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held-to-maturity
|
|
|
42,027
|
|
|
|
69
|
|
|
|
159
|
|
|
|
41,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
$
|
517,187
|
|
|
$
|
603
|
|
|
$
|
5,903
|
|
|
$
|
511,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized
|
|
|
|
|
December 31, 2015
|
|
Amortized
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
Available-for-sale investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Govt Agency and Sponsored Agency Note Securities
|
|
$
|
1,014
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,014
|
|
U.S. Govt Agency SBA Securities
|
|
|
93,674
|
|
|
|
399
|
|
|
|
583
|
|
|
|
93,490
|
|
U.S. Govt Agency GNMA Mortgage-Backed Securities
|
|
|
30,916
|
|
|
|
202
|
|
|
|
418
|
|
|
|
30,700
|
|
U.S. Govt Sponsored Agency CMO & Mortgage-Backed Securities
|
|
|
97,693
|
|
|
|
250
|
|
|
|
789
|
|
|
|
97,154
|
|
Corporate Securities
|
|
|
4,016
|
|
|
|
7
|
|
|
|
|
|
|
|
4,023
|
|
Municipal Securities
|
|
|
1,010
|
|
|
|
1
|
|
|
|
|
|
|
|
1,011
|
|
Asset Backed Securities
|
|
|
7,890
|
|
|
|
|
|
|
|
243
|
|
|
|
7,647
|
|
U.S. Treasury Notes
|
|
|
80,981
|
|
|
|
|
|
|
|
235
|
|
|
|
80,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale
|
|
|
317,194
|
|
|
|
859
|
|
|
|
2,268
|
|
|
|
315,785
|
|
Held-to-maturity investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Securities
|
|
|
42,036
|
|
|
|
335
|
|
|
|
32
|
|
|
|
42,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held-to-maturity
|
|
|
42,036
|
|
|
|
335
|
|
|
|
32
|
|
|
|
42,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
$
|
359,230
|
|
|
$
|
1,194
|
|
|
$
|
2,300
|
|
|
$
|
358,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys investment securities portfolio at December 31, 2016, consists of U.S. Treasury
Notes, U.S. Agency and U.S. Sponsored Agency issued AAA and AA rated investment-grade securities, asset backed securities, and municipal securities. At December 31, 2016 and December 31, 2015, securities with a market value of $205 million
and $197 million, respectively, were pledged as collateral for securities sold under agreements to repurchase, public deposits, outstanding standby letters of credit, bankruptcy deposits, and other purposes as required by various statutes and
agreements. See Note 9 Borrowings and Subordinated Debentures.
The following tables present the gross unrealized
losses and fair values of AFS and HTM investment securities that were in unrealized loss positions, summarized and classified according to the duration of the loss period as of the dates indicated (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
< 12
Continuous
Months
|
|
|
> 12 Continuous
Months
|
|
|
Total
|
|
December 31, 2016
|
|
Fair
Value
|
|
|
Gross
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
Loss
|
|
Available-for-sale investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Govt. Agency SBA Securities
|
|
$
|
54,302
|
|
|
$
|
451
|
|
|
$
|
39,322
|
|
|
$
|
288
|
|
|
$
|
93,624
|
|
|
$
|
739
|
|
U.S. Govt. Agency GNMA Mortgage-Backed Securities
|
|
|
6,652
|
|
|
|
98
|
|
|
|
8,264
|
|
|
|
167
|
|
|
|
14,916
|
|
|
|
265
|
|
U.S. Govt. Agency
|
|
|
9,969
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
9,969
|
|
|
|
31
|
|
U.S. Govt. Sponsored Agency CMO & Mortgage-Backed Securities
|
|
|
215,138
|
|
|
|
4,172
|
|
|
|
10,879
|
|
|
|
179
|
|
|
|
226,017
|
|
|
|
4,351
|
|
Asset Backed Securities
|
|
|
|
|
|
|
|
|
|
|
6,896
|
|
|
|
215
|
|
|
|
6,896
|
|
|
|
215
|
|
U.S. Treasury Notes
|
|
|
51,972
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
51,972
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale
|
|
$
|
338,033
|
|
|
$
|
4,895
|
|
|
$
|
65,361
|
|
|
$
|
849
|
|
|
$
|
403,394
|
|
|
$
|
5,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Securities
|
|
$
|
28,673
|
|
|
$
|
158
|
|
|
$
|
310
|
|
|
$
|
1
|
|
|
$
|
28,983
|
|
|
$
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held-to-maturity
|
|
$
|
28,673
|
|
|
$
|
158
|
|
|
$
|
310
|
|
|
$
|
1
|
|
|
$
|
28,983
|
|
|
$
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
< 12
Continuous
Months
|
|
|
> 12 Continuous
Months
|
|
|
Total
|
|
December 31, 2015
|
|
Fair
Value
|
|
|
Gross
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
Loss
|
|
Available-for-sale investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Govt. Agency SBA Securities
|
|
$
|
53,852
|
|
|
$
|
428
|
|
|
$
|
7,935
|
|
|
$
|
154
|
|
|
$
|
61,787
|
|
|
$
|
582
|
|
U.S. Govt. Agency GNMA Mortgage-Backed Securities
|
|
|
5,417
|
|
|
|
47
|
|
|
|
14,296
|
|
|
|
371
|
|
|
|
19,713
|
|
|
|
418
|
|
U.S. Govt. Sponsored Agency CMO & Mortgage-Backed Securities
|
|
|
67,475
|
|
|
|
564
|
|
|
|
10,024
|
|
|
|
225
|
|
|
|
77,499
|
|
|
|
789
|
|
Asset Backed Securities
|
|
|
2,928
|
|
|
|
54
|
|
|
|
4,719
|
|
|
|
190
|
|
|
|
7,647
|
|
|
|
244
|
|
U.S Treasury Notes
|
|
|
80,745
|
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
|
80,745
|
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale
|
|
$
|
210,417
|
|
|
$
|
1,328
|
|
|
$
|
36,974
|
|
|
$
|
940
|
|
|
$
|
247,391
|
|
|
$
|
2,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Securities
|
|
$
|
5,669
|
|
|
$
|
16
|
|
|
$
|
2,392
|
|
|
$
|
16
|
|
|
$
|
8,061
|
|
|
$
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held-to-maturity
|
|
$
|
5,669
|
|
|
$
|
16
|
|
|
$
|
2,392
|
|
|
$
|
16
|
|
|
$
|
8,061
|
|
|
$
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unrealized losses in each of the above categories are associated with the general fluctuation of
market interest rates and are not an indication of any deterioration in the credit quality of the security issuers. Further, the Company does not intend to sell these securities and is not more-likely-than-not to be required to sell the securities
before the recovery of its amortized cost basis. Accordingly, the Company had no securities that were classified as other-than-temporary impaired at December 31, 2016 or 2015, and did not recognize any impairment charges in the consolidated
statements of income.
The amortized cost, fair value and the weighted average yield of debt securities at December 31,
2016, are reflected in the table below (dollars in thousands). Maturity categories are determined as follows:
|
|
|
U.S. Govt. Agency, U.S. Treasury Notes and U.S. Govt. Sponsored Agency bonds and notes maturity date
|
|
|
|
U.S. Govt. Sponsored Agency CMO or Mortgage-Backed Securities, U.S. Govt. Agency GNMA Mortgage-Backed Securities, Asset Backed Securities and U.S. Gov.
Agency SBA Securities estimated cash flow taking into account estimated pre-payment speeds
|
|
|
|
Municipal Securities the earlier of the maturity date or the expected call date.
|
121
Although, U.S. Government Agency and U.S. Government Sponsored Agency Mortgage-Backed and
CMO securities have contractual maturities through 2048, the expected maturity will differ from the contractual maturities because borrowers or issuers may have the right to prepay such obligations without penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Maturities Schedule of Securities (Dollars in thousands)
|
|
Amortized
Cost
|
|
|
Fair Value
|
|
|
Weighted
Average
Yield
|
|
Available-for-sale investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Due through one year
|
|
$
|
126,167
|
|
|
$
|
125,375
|
|
|
|
1.13
|
%
|
Due after one year through five years
|
|
|
194,066
|
|
|
|
191,915
|
|
|
|
1.52
|
%
|
Due after five years through ten years
|
|
|
117,858
|
|
|
|
116,127
|
|
|
|
1.89
|
%
|
Due after ten years
|
|
|
37,069
|
|
|
|
36,533
|
|
|
|
2.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale
|
|
|
475,160
|
|
|
|
469,950
|
|
|
|
1.56
|
%
|
Held-to-maturity investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Due through one year
|
|
|
3,711
|
|
|
|
3,711
|
|
|
|
1.42
|
%
|
Due after one year through five years
|
|
|
35,336
|
|
|
|
35,254
|
|
|
|
1.63
|
%
|
Due after five years through ten years
|
|
|
2,980
|
|
|
|
2,972
|
|
|
|
2.71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held-to-maturity
|
|
|
42,027
|
|
|
|
41,937
|
|
|
|
1.69
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
$
|
517,187
|
|
|
$
|
511,887
|
|
|
|
1.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average yields in the above table are based on effective rates of book balances at the end
of the year. Yields are derived by dividing interest income, adjusted for amortization of premiums and accretion of discounts, by total amortized cost.
During the years ended December 31, 2016, 2015 and 2014 the Company recognized net gains and (losses) on sales of investment securities in the amount of $258 thousand, $112 thousand and $(47)
thousand, respectively. The Company had net proceeds from the sale of $6.9 million, $5.7 million and $25 million during the years ended December 31, 2016, 2015 and 2014, respectively.
Investment in Federal Home Loan Bank (FHLB) Common Stock
The
Companys investment in the common stock of the FHLB is carried at cost and was $9.1 million and $8.0 million as of December 31, 2016 and 2015, respectively. The investment in FHLB stock is included in accrued interest receivable and other
assets in the consolidated balance sheets and is periodically evaluated for impairment. Based on the capital adequacy of the FHLB and its overall financial condition, no impairment losses have been recorded. See Note 13 Borrowings and
Subordinated Debentures for a detailed discussion regarding the Companys borrowings and the requirements to purchase FHLB common stock.
The FHLB has declared and paid cash dividends in 2016, 2015 and 2014. The Company has received cash dividends from the FHLB of $1.1 million, $1.1 million, and $320 thousand for the years ending
December 31, 2016, 2015, and 2014, respectively, and they are included in Other non-interest income of the accompanying consolidated statements of income.
The FHLB has been classified as one of the Companys primary correspondent banks and is evaluated on a quarterly basis as part of the Companys evaluation of its correspondent banking
relationships under Federal Reserve Board Regulation F.
122
Interest Income on Investment Securities
The following table presents the composition of interest income on investment securities for the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Taxable interest
|
|
$
|
5,141
|
|
|
$
|
3,773
|
|
|
$
|
2,331
|
|
Non-taxable interest
|
|
|
652
|
|
|
|
745
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income on investment securities
|
|
$
|
5,793
|
|
|
$
|
4,518
|
|
|
$
|
2,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6 Loans
The following table presents the composition of the loan portfolio as of the dates indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Principal
|
|
|
Net Unaccreted
Discounts,
Net
Deferred
Fees
|
|
|
Total
|
|
Commercial and Industrial Loans:
|
|
$
|
505,374
|
|
|
$
|
(2,737
|
)
|
|
$
|
502,637
|
|
Loans Secured by Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner-Occupied Nonresidential Properties
|
|
|
455,120
|
|
|
|
(3,798
|
)
|
|
|
451,322
|
|
Other Nonresidential Properties
|
|
|
635,856
|
|
|
|
(5,693
|
)
|
|
|
630,163
|
|
Construction, Land Development and Other Land
|
|
|
195,215
|
|
|
|
(1,156
|
)
|
|
|
194,059
|
|
1-4 Family Residential Properties
|
|
|
129,261
|
|
|
|
(2,097
|
)
|
|
|
127,164
|
|
Multifamily Residential Properties
|
|
|
110,336
|
|
|
|
(478
|
)
|
|
|
109,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans Secured by Real Estate
|
|
|
1,525,788
|
|
|
|
(13,222
|
)
|
|
|
1,512,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Loans:
|
|
|
35,246
|
|
|
|
(223
|
)
|
|
|
35,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
$
|
2,066,408
|
|
|
$
|
(16,182
|
)
|
|
$
|
2,050,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Principal
|
|
|
Net Unaccreted
Discounts,
Net
Deferred
Fees
|
|
|
Total
|
|
Commercial and Industrial Loans:
|
|
$
|
543,192
|
|
|
$
|
(5,824
|
)
|
|
$
|
537,368
|
|
Loans Secured by Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner-Occupied Nonresidential Properties
|
|
|
412,772
|
|
|
|
(4,793
|
)
|
|
|
407,979
|
|
Other Nonresidential Properties
|
|
|
539,260
|
|
|
|
(6,092
|
)
|
|
|
533,168
|
|
Construction, Land Development and Other Land
|
|
|
126,626
|
|
|
|
(794
|
)
|
|
|
125,832
|
|
1-4 Family Residential Properties
|
|
|
117,400
|
|
|
|
(2,875
|
)
|
|
|
114,525
|
|
Multifamily Residential Properties
|
|
|
72,222
|
|
|
|
(1,043
|
)
|
|
|
71,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans Secured by Real Estate
|
|
|
1,268,280
|
|
|
|
(15,597
|
)
|
|
|
1,252,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Loans:
|
|
|
43,218
|
|
|
|
(106
|
)
|
|
|
43,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
$
|
1,854,690
|
|
|
$
|
(21,527
|
)
|
|
$
|
1,833,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans are made to commercial, non-profit organizations and consumers. Specific loan terms vary as to
interest rate, repayment, and collateral requirements based on the type of loan requested and the credit worthiness of the prospective borrower. Credit risk tends to be geographically concentrated in Southern California where a majority of the
Companys loan customers are located.
123
The Companys extensions of credit are governed by its credit policies which are
established to control the quality, structure and adherence to applicable laws. These policies are reviewed and approved by the Board of Directors on a regular basis.
Commercial and Industrial Loans
: Commercial credit is extended primarily to small/middle market businesses, professional enterprises and their owners for business purposes. Typical loan
types are working capital loans, loans for financing capital expenditures, asset acquisition loans and other business loans. Loans to closely held businesses will generally be guaranteed in full or in a meaningful amount by the businesses
major owners. Commercial loans are made based primarily on the historical and projected cash flow of the borrower and secondarily on the underlying non-real estate collateral provided by the borrower. The cash flows of borrowers, however, may
not behave as forecasted and collateral securing loans may fluctuate in value due to economic or individual performance factors. Minimum standards and underwriting guidelines have been established for all commercial loan types.
Commercial Real Estate Loans
: The Companys goal is to create and maintain a high quality portfolio of commercial real
estate loans with customers who meet the quality and relationship profitability objectives of the Company. These loans include owner-occupied nonresidential properties and other nonresidential properties. Owner-occupied nonresidential property loans
are subject to underwriting standards and processes similar to commercial and industrial loans. These loans are viewed primarily as cash flow loans and the repayment of these loans is largely dependent on the successful operation of the
business. Other nonresidential property loans are also subject to strict underwriting standards and processes. For these loans the Company looks at the underlying cash flows from these properties, which include: the debt service coverage, the
cash flow from the existing tenants in the property, the historical vacancy of the property, the financial strength of the tenants, and the type and duration of signed leases. Loan performance of commercial real estate loans may be adversely
affected by factors impacting the general economy or conditions specific to the real estate market such as geographic location and/or property type.
Construction and Land Development Loans
: The Company defines construction loans as loans where the loan proceeds are controlled by the Company and used for the improvement of real estate in
which the Company holds a deed of trust. Land development loans are loans on vacant land that may be developed by the owner of the property sometime in the future. Due to the inherent risk in this type of loan, they are subject to other
specific underwriting policy guidelines outlined in the Companys credit policies and are monitored closely.
Residential Loans
: The Company originates residential real estate loans as either home equity lines of credit or multifamily
apartment loans. Home equity lines of credit (HELOCs) are made to individuals and to business principals with whom the Company maintains, in most cases, either a business lending or deposit relationship. The underwriting
standards are typical of home equity products with loan to value and debt service considerations. Multifamily loans are underwritten based on the projected cash flows of the property with consideration of market conditions and values where the
property is located.
Other Loans
: The Company originates loans to individuals for personal expenditures and
investments that the Company maintains in most cases either a deposit or business relationship with. Also included in this category are loans to non-depository financial institutions, non-profit organizations and consumers.
Acquired loans:
Loans acquired in acquisitions are recorded at estimated fair value on their purchase date without a carryover of
the related allowance for loan loss. Loans acquired with deteriorated credit quality are loans that have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect
principal and interest payments according to the contractual terms of the original loan agreement. Evidence of credit quality deterioration as of the purchase date may include factors such as past due and non-accrual status. The difference
between undiscounted contractually required payments at acquisition and the undiscounted cash flows expected to be collected at acquisition is referred to as the non-accretable yield. Further, any excess of cash flows expected at acquisition
over the estimated fair value is referred to as the
124
accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. Subsequent
decreases to the expected cash flows will generally result in a provision for loan losses.
Restructured loans
: Loans
may be restructured in an effort to maximize collections. The Company may use various restructuring techniques, including, but not limited to, deferral of past due interest or principal, redeeming past due taxes, reduction of interest rates,
extending maturities and modification of amortization schedules. The Company does not typically forgive principal balances or past due interest prior to pay-off or surrender of the property.
Concentrations
The
Company makes commercial, construction, commercial real estate, and consumer home equity loans to customers primarily in Los Angeles, Riverside, Orange, San Bernardino and Ventura Counties. As an abundance of caution, the Company may require
commercial real estate collateral on a loan classified as a commercial loan. At December 31, 2016, loans secured by real estate collateral accounted for approximately 74% of the loan portfolio. Of these loans, 96% are secured by first trust
deed liens and 4% are secured by second trust deed liens. In addition, 30% are secured by owner-occupied non-residential properties. Loans secured by first trust deeds on commercial real estate generally have an initial loan to value ratio of not
more than 75%, except for SBA guaranteed loans which may exceed this level. The Companys policy for requiring collateral is to obtain collateral whenever it is available or desirable, depending upon the degree of risk in the proposed credit
transaction. In addition, 20% of total loans have been secured by a UCC filing on the business property of the borrower. Approximately 5% of loans are unsecured. The Companys loans are expected to be repaid from cash flows or from proceeds
from the sale of selected assets of the borrowers.
A substantial portion of the Companys customers ability to
honor their contracts is dependent on the economy in the area. The Companys goal is to continue to maintain a diversified loan portfolio which are well collateralized and supported by sufficient cash flows.
Small Business Administration Loans
As part of the acquisition of PC Bancorp, the Company acquired loans that were originated under the guidelines of the Small Business Administration (SBA) program. The total portfolio of the
SBA contractual loan balances being serviced by the Company at December 31, 2016 was $104 million, of which $75 million has been sold. Of the $29 million remaining on the Companys books at December 31, 2016, $24 million is not
guaranteed and $5 million is guaranteed by the SBA.
In 2016, $14 million of SBA loans with contractual loan balances of $19
million were sold. Of the $4.8 million remaining on the Companys books at December 31, 2016, $4.7 million is not guaranteed and $123 thousand is guaranteed.
Allowance for Loan Loss
The allowance for loan loss is established through
a provision for loan losses charged to expense, which represents managements best estimate of probable losses that exist within the loan portfolio. The Allowance, in the judgment of management, is necessary to reserve for estimated loan losses
and risks inherent in the loan portfolio. The Allowance consists of specific and general components. The specific component relates to loans that are categorized as impaired. For loans that are categorized as impaired, a specific allowance is
established when the realizable value of the impaired loan is lower than the carrying value of that loan. Impairment is measured based on the present value of the expected future cash flows discounted at the loans effective interest rate,
except that as a practical expedient, the Company may measure impairment based on the loans observable market price or the fair value of the collateral if the loan is collateral dependent. In addition, the impaired loan is reevaluated at each
subsequent reporting period.
125
The general component covers non-impaired loans and is based on the historical loan loss
experience of the portfolio loan segments for the past 20 quarters, however the Company considers the Uniform Bank Peer Group (UBPR) historical loss data to evaluate potential loss exposure for those loan segments where the Company had
no meaningful historical loss experience. The Allowance also includes an assessment of the following qualitative factors: the results of any internal and external loan reviews and any regulatory examination, loan charge-off experience, estimated
potential charge-off exposure on each classified loan, credit concentrations, changes in the value of collateral for collateral dependent loans, and any known impairment in the borrowers ability to repay. The Company also evaluates
environmental and other factors such as underwriting standards, staff experience, the nature and volume of loans and loan terms, business conditions, political and regulatory conditions, local and national economic trends. The quantitative portion
of the Allowance is adjusted for qualitative factors to account for model imprecision and to incorporate the range of probable outcomes inherent in the estimates used for the Allowance.
The Company conducts a critical evaluation of the credit quality of the loan portfolio and the adequacy of the Allowance on a quarterly
basis. The level of the Allowance reflects managements continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and
unidentified losses inherent in the current loan portfolio. Portions of the Allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in managements judgment, should be charged off. While
management utilizes its best judgment and information available, the ultimate adequacy of the Allowance is dependent upon a variety of factors beyond the Companys control, including among other things, the performance of the Companys
loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.
The following is a summary of activity for the allowance for loan loss for the dates and periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Allowance for loan loss at beginning of year
|
|
$
|
15,682
|
|
|
$
|
12,610
|
|
|
$
|
10,603
|
|
Provision for loan losses
|
|
|
3,264
|
|
|
|
5,080
|
|
|
|
2,239
|
|
Net (charge-offs) recoveries:
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
(895
|
)
|
|
|
(2,510
|
)
|
|
|
(692
|
)
|
Recoveries
|
|
|
1,323
|
|
|
|
502
|
|
|
|
460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries
|
|
|
428
|
|
|
|
(2,008
|
)
|
|
|
(232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan loss at end of year
|
|
$
|
19,374
|
|
|
$
|
15,682
|
|
|
$
|
12,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries to average loans
|
|
|
0.02
|
%
|
|
|
(0.12
|
)%
|
|
|
(0.02
|
)%
|
Allowance for loan loss to total loans
|
|
|
0.94
|
%
|
|
|
0.86
|
%
|
|
|
0.78
|
%
|
Allowance for loan loss to total loans accounted for at historical cost, which excludes loans and the related allowance for loans
acquired through acquisition
|
|
|
1.18
|
%
|
|
|
1.25
|
%
|
|
|
1.39
|
%
|
126
The following tables present, by portfolio segment, the changes in the allowance for loan
loss and the recorded investment in loans as of the dates and for the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
and
Industrial
|
|
|
Construction,
Land
Development
and
Other Land
|
|
|
Commercial
and
Other
Real
Estate
|
|
|
Other
|
|
|
Total
|
|
Year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan loss Beginning balance
|
|
$
|
5,924
|
|
|
$
|
2,076
|
|
|
$
|
6,821
|
|
|
$
|
861
|
|
|
$
|
15,682
|
|
Provision for loan losses
|
|
|
783
|
|
|
|
1,008
|
|
|
|
1,661
|
|
|
|
(188
|
)
|
|
|
3,264
|
|
Net (charge-offs) recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
(895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(895
|
)
|
Recoveries
|
|
|
1,318
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
1,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net recoveries
|
|
|
423
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
7,130
|
|
|
$
|
3,084
|
|
|
$
|
8,487
|
|
|
$
|
673
|
|
|
$
|
19,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
and
Industrial
|
|
|
Construction,
Land
Development
and
Other Land
|
|
|
Commercial
and
Other
Real
Estate
|
|
|
Other
|
|
|
Total
|
|
Year ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan loss Beginning balance
|
|
$
|
5,864
|
|
|
$
|
1,684
|
|
|
$
|
4,802
|
|
|
$
|
260
|
|
|
$
|
12,610
|
|
Provision for loan losses
|
|
|
1,781
|
|
|
|
392
|
|
|
|
2,306
|
|
|
|
601
|
|
|
|
5,080
|
|
Net (charge-offs) recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
(2,218
|
)
|
|
|
|
|
|
|
(292
|
)
|
|
|
|
|
|
|
(2,510
|
)
|
Recoveries
|
|
|
497
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net (charge-offs)
|
|
|
(1,721
|
)
|
|
|
|
|
|
|
(287
|
)
|
|
|
|
|
|
|
(2,008
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
5,924
|
|
|
$
|
2,076
|
|
|
$
|
6,821
|
|
|
$
|
861
|
|
|
$
|
15,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables present both the allowance for loan loss and the associated loan balance classified
by loan portfolio segment and by credit evaluation methodology (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
and
Industrial
|
|
|
Construction,
Land
Development
and
Other Land
|
|
|
Commercial
and
Other
Real
Estate
|
|
|
Other
|
|
|
Total
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Collectively evaluated for impairment
|
|
|
7,130
|
|
|
|
3,084
|
|
|
|
8,487
|
|
|
|
673
|
|
|
|
19,374
|
|
Purchased credit impaired (loans acquired with deteriorated credit quality)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Allowance for Loan Loss
|
|
$
|
7,130
|
|
|
$
|
3,084
|
|
|
$
|
8,487
|
|
|
$
|
673
|
|
|
$
|
19,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
378
|
|
|
$
|
|
|
|
$
|
245
|
|
|
$
|
|
|
|
$
|
623
|
|
Collectively evaluated for impairment
|
|
|
501,960
|
|
|
|
194,059
|
|
|
|
1,316,849
|
|
|
|
35,023
|
|
|
|
2,047,891
|
|
Purchased credit impaired (loans acquired with deteriorated credit quality)
|
|
|
299
|
|
|
|
|
|
|
|
1,413
|
|
|
|
|
|
|
|
1,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans Receivable
|
|
$
|
502,637
|
|
|
$
|
194,059
|
|
|
$
|
1,318,507
|
|
|
$
|
35,023
|
|
|
$
|
2,050,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
and
Industrial
|
|
|
Construction,
Land
Development
and
Other Land
|
|
|
Commercial
and
Other
Real
Estate
|
|
|
Other
|
|
|
Total
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Collectively evaluated for impairment
|
|
|
5,924
|
|
|
|
2,076
|
|
|
|
6,821
|
|
|
|
861
|
|
|
|
15,682
|
|
Purchased credit impaired (loans acquired with deteriorated credit quality)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Allowance for Loan Loss
|
|
$
|
5,924
|
|
|
$
|
2,076
|
|
|
$
|
6,821
|
|
|
$
|
861
|
|
|
$
|
15,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
558
|
|
|
$
|
|
|
|
$
|
649
|
|
|
$
|
|
|
|
$
|
1,207
|
|
Collectively evaluated for impairment
|
|
|
536,333
|
|
|
|
125,832
|
|
|
|
1,124,667
|
|
|
|
43,112
|
|
|
|
1,829,944
|
|
Purchased credit impaired (loans acquired with deteriorated credit quality)
|
|
|
477
|
|
|
|
|
|
|
|
1,535
|
|
|
|
|
|
|
|
2,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans Receivable
|
|
$
|
537,368
|
|
|
$
|
125,832
|
|
|
$
|
1,126,851
|
|
|
$
|
43,112
|
|
|
$
|
1,833,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Quality of Loans
The Company utilizes an internal loan classification system as a means of reporting problem and potential problem loans. Under the Companys loan risk rating system, loans are classified as
Pass, with problem and potential problem loans as Special Mention, Substandard, Doubtful and Loss. All loans are monitored and individual loan risk ratings are changed any time the
situation warrants. In addition, management regularly reviews problem loans to determine whether any loan requires a classification change, in accordance with the Companys policy and applicable regulations. The grading analysis estimates the
capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The internal loan classification risk grading system is based on experiences with similarly graded loans.
The Companys internally assigned grades are as follows:
|
|
|
Pass loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral. There
are several different levels of Pass rated credits, including Watch which is considered a transitory grade for pass rated loans that require greater monitoring. Loans not meeting the criteria of special mention, substandard, doubtful or
loss that have been analyzed individually as part of the above described process are considered to be pass-rated loans.
|
|
|
|
Special Mention loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected. Special Mention
loans do not currently expose the Company to sufficient risk to warrant classification as a Substandard, Doubtful or Loss classification, but possess weaknesses that deserve managements close attention.
|
|
|
|
Substandard loans that have a well-defined weakness based on objective evidence and can be characterized by the distinct possibility that the
Company will sustain some loss if the deficiencies are not corrected.
|
|
|
|
Doubtful loans classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the
weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
|
|
|
|
Loss loans classified as a loss are considered uncollectible, or of such value that continuance as an asset is not warranted.
|
128
The following tables present the risk category of loans by class of loans based on the most
recent internal loan classification as of the dates indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Commercial
and
Industrial
|
|
|
Construction,
Land
Development
and Other
Land
|
|
|
Commercial
and
Other
Real
Estate
|
|
|
Other
|
|
|
Total
|
|
Pass
|
|
$
|
456,885
|
|
|
$
|
194,059
|
|
|
$
|
1,288,154
|
|
|
$
|
32,128
|
|
|
$
|
1,971,226
|
|
Special Mention
|
|
|
12,774
|
|
|
|
|
|
|
|
7,557
|
|
|
|
|
|
|
|
20,331
|
|
Substandard
|
|
|
32,978
|
|
|
|
|
|
|
|
22,796
|
|
|
|
2,895
|
|
|
|
58,669
|
|
Doubtful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
502,637
|
|
|
$
|
194,059
|
|
|
$
|
1,318,507
|
|
|
$
|
35,023
|
|
|
$
|
2,050,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Commercial
and
Industrial
|
|
|
Construction,
Land
Development
and Other
Land
|
|
|
Commercial
and
Other
Real
Estate
|
|
|
Other
|
|
|
Total
|
|
Pass
|
|
$
|
503,006
|
|
|
$
|
125,832
|
|
|
$
|
1,101,548
|
|
|
$
|
40,132
|
|
|
$
|
1,770,518
|
|
Special Mention
|
|
|
16,041
|
|
|
|
|
|
|
|
6,494
|
|
|
|
43
|
|
|
|
22,578
|
|
Substandard
|
|
|
18,321
|
|
|
|
|
|
|
|
18,809
|
|
|
|
2,937
|
|
|
|
40,067
|
|
Doubtful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
537,368
|
|
|
$
|
125,832
|
|
|
$
|
1,126,851
|
|
|
$
|
43,112
|
|
|
$
|
1,833,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Age Analysis of Past Due and Non-Accrual Loans
The following tables present an aging analysis of the recorded investment in past due and non-accrual loans as of the dates indicated
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
31-60
Days
Past Due
|
|
|
61-90
Days
Past Due
|
|
|
Greater
than
90 Days
Past Due
and
Accruing
|
|
|
Total
Past Due
and
Accruing
|
|
|
Total
Non-
Accrual
|
|
|
Current
|
|
|
Total Loans
|
|
Commercial and Industrial
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
675
|
|
|
$
|
501,962
|
|
|
$
|
502,637
|
|
Construction, Land Development and Other Land
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
194,059
|
|
|
|
194,059
|
|
Commercial and Other Real Estate
|
|
|
212
|
|
|
|
|
|
|
|
|
|
|
|
212
|
|
|
|
447
|
|
|
|
1,317,848
|
|
|
|
1,318,507
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,023
|
|
|
|
35,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
212
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
212
|
|
|
$
|
1,122
|
|
|
$
|
2,048,892
|
|
|
$
|
2,050,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
31-60
Days
Past Due
|
|
|
61-90
Days
Past Due
|
|
|
Greater
than
90 Days
Past Due
and
Accruing
|
|
|
Total
Past Due
and
Accruing
|
|
|
Total
Non-
Accrual
|
|
|
Current
|
|
|
Total Loans
|
|
Commercial and Industrial
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,032
|
|
|
$
|
536,336
|
|
|
$
|
537,368
|
|
Construction, Land Development and Other Land
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,832
|
|
|
|
125,832
|
|
Commercial and Other Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,019
|
|
|
|
1,125,832
|
|
|
|
1,126,851
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,112
|
|
|
|
43,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,051
|
|
|
$
|
1,831,112
|
|
|
$
|
1,833,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129
Included in the non-accrual column above are purchased credit impaired loans of $499
thousand and $844 thousand as of December 31, 2016 and 2015, respectively. Included in the current column are purchased credit impaired loans that have been returned to accrual status of $1.2 million and $1.2 million as of December 31,
2016 and 2015, respectively.
Impaired Loans
Impaired loans are evaluated by comparing the present value of the expected future cash flows discounted at the loans effective interest rate, or if the loan is collateral dependent, the fair value
of the collateral less costs to sell, with the recorded investment of a loan.
A valuation allowance is established for an
impaired loan when the fair value of the loan is less than the recorded investment. In certain cases, portions of impaired loans are charged-off to the fair value instead of establishing a valuation allowance and are included, when applicable, in
the table below as impaired loans with no specific allowance recorded. The valuation allowance disclosed below is included in the allowance for loan loss reported in the consolidated balance sheets as of December 31, 2016 and
December 31, 2015.
The following tables present, by loan portfolio segment, the recorded investment and unpaid principal
balances for impaired loans with the associated allowance amount, if applicable for the dates and periods indicated (dollars in thousands). These tables exclude purchased credit impaired loans (loans acquired in acquisitions with deteriorated credit
quality) of $1.7 million and $2.0 million at December 31, 2016 and 2015, respectively.
Year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
With no specific allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
$
|
378
|
|
|
$
|
1,383
|
|
|
$
|
|
|
|
$
|
401
|
|
|
$
|
|
|
Commercial and Other Real Estate
|
|
|
245
|
|
|
|
282
|
|
|
|
|
|
|
|
252
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Other Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
|
378
|
|
|
|
1,383
|
|
|
|
|
|
|
|
401
|
|
|
|
|
|
Commercial and Other Real Estate
|
|
|
245
|
|
|
|
282
|
|
|
|
|
|
|
|
252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
623
|
|
|
$
|
1,665
|
|
|
$
|
|
|
|
$
|
653
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
With no specific allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
$
|
558
|
|
|
$
|
1,027
|
|
|
$
|
|
|
|
$
|
672
|
|
|
$
|
|
|
Commercial and Other Real Estate
|
|
|
649
|
|
|
|
692
|
|
|
|
|
|
|
|
70
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Other Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
|
558
|
|
|
|
1,027
|
|
|
|
|
|
|
|
672
|
|
|
|
|
|
Commercial and Other Real Estate
|
|
|
649
|
|
|
|
692
|
|
|
|
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,207
|
|
|
$
|
1,719
|
|
|
$
|
|
|
|
$
|
742
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130
The following is a summary of additional information pertaining to impaired loans for the
periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Average recorded investment in impaired loans
|
|
$
|
653
|
|
|
$
|
742
|
|
|
$
|
4,991
|
|
Interest foregone on impaired loans
|
|
$
|
89
|
|
|
$
|
265
|
|
|
|
421
|
|
Cash collections applied to reduce principal balance
|
|
$
|
351
|
|
|
$
|
1,118
|
|
|
|
3,014
|
|
Interest income recognized on cash collections
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Troubled Debt Restructuring
The Companys loan portfolio contains certain loans that have been modified in a Troubled Debt Restructuring (TDR), where economic concessions have been granted to borrowers experiencing
financial difficulties. Loans are restructured in an effort to maximize collections. Economic concessions can include: reductions to the stated interest rate, payment extensions, principal forgiveness or other actions.
The modification process includes evaluation of impairment based on the present value of expected future cash flows, discounted at the
effective interest rate of the original loan agreement, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the loan collateral. In these cases, management uses the current fair value of the
collateral, less selling costs, to evaluate the loan for impairment. If management determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs and unamortized premium or discount)
impairment is recognized through a specific allowance or a charge-off.
The following tables include the recorded investment
and unpaid principal balances for troubled debt restructured loans at December 31, 2016, December 31, 2015 and December 31, 2014 (dollars in thousands). These tables include TDR loans that were purchased credit impaired
(PCI). TDR loans that are non-PCI loans are included in Impaired Loans disclosures. As of December 31, 2016, there were two PCI loans that are considered to be TDR loans with a recorded investment of $105 thousand and unpaid
principal balances of $273 thousand.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Interest
Income
Recognized
|
|
Commercial and Industrial
|
|
$
|
408
|
|
|
$
|
1,174
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
408
|
|
|
$
|
1,174
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2015
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Interest
Income
Recognized
|
|
Commercial and Industrial
|
|
$
|
627
|
|
|
$
|
1,363
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
627
|
|
|
$
|
1,363
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2014
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Interest
Income
Recognized
|
|
Commercial and Industrial
|
|
$
|
530
|
|
|
$
|
719
|
|
|
$
|
|
|
Commercial and Other Real Estate
|
|
|
114
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
644
|
|
|
$
|
834
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131
The following tables show the pre- and post-modification recorded investment in TDR loans by
loan segment that have occurred during the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016
|
|
Number
of Loans
|
|
|
Pre-Modification
Recorded
Investment
|
|
|
Post-
Modification
Recorded
Investment
|
|
Extended Maturity Date and Deferred Principal and Interest Payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
|
1
|
|
|
$
|
650
|
|
|
$
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1
|
|
|
$
|
650
|
|
|
$
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2015
|
|
Number
of Loans
|
|
|
Pre-Modification
Recorded
Investment
|
|
|
Post-
Modification
Recorded
Investment
|
|
Reduced Interest Rate and Lengthened Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
|
3
|
|
|
$
|
1,335
|
|
|
$
|
208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3
|
|
|
$
|
1,335
|
|
|
$
|
208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2014
|
|
Number
of Loans
|
|
|
Pre-Modification
Recorded
Investment
|
|
|
Post-
Modification
Recorded
Investment
|
|
Reduced Interest Rate and Lengthened Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
|
1
|
|
|
$
|
224
|
|
|
$
|
224
|
|
Commercial and Other Real Estate
|
|
|
1
|
|
|
|
114
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2
|
|
|
$
|
338
|
|
|
$
|
338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans are restructured in an effort to maximize collections. Impairment analyses are performed on the
Companys troubled debt restructured loans in conjunction with the normal allowance for loan loss process. The Companys troubled debt restructured loans are analyzed to ensure adequate cash flow or collateral supports the outstanding loan
balance.
There were no commitments to lend additional funds to borrowers whose terms have been modified in troubled debt
restructurings at December 31, 2016 or 2015.
There have been no payment defaults in the year ended December 31,
2016 subsequent to modification on troubled debt restructured loans that have been modified within the last twelve months.
Loans Acquired
Through Acquisition
The following table reflects the accretable net discount for loans acquired through acquisition, for
the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Balance, beginning of year
|
|
$
|
14,610
|
|
|
$
|
21,402
|
|
Accretion, included in interest income
|
|
|
(4,967
|
)
|
|
|
(6,274
|
)
|
Additions, due to acquisition
|
|
|
|
|
|
|
|
|
Reclassifications to non-accretable yield
|
|
|
(32
|
)
|
|
|
(518
|
)
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
9,611
|
|
|
$
|
14,610
|
|
|
|
|
|
|
|
|
|
|
132
The above table reflects the fair value adjustment on the loans acquired from mergers that
will be amortized to loan interest income based on the effective yield method over the remaining life of the loans. These amounts do not include the fair value adjustments on the purchased credit impaired loans acquired from mergers.
Purchased Credit Impaired Loans
PCI loans are acquired loans with evidence of deterioration of credit quality since origination and it is probable at the acquisition date, that the Company will not be able to collect all contractually
required amounts.
When the timing and/or amounts of expected cash flows on such loans are not reasonably estimable, no
interest is accreted and the loan is reported as a non-accrual loan; otherwise, if the timing and amounts of expected cash flows for PCI loans are reasonably estimable, then interest is accreted and the loans are reported as accruing loans.
The non-accretable difference represents the difference between the undiscounted contractual cash flows and the undiscounted
expected cash flows, and also reflects the estimated credit losses in the acquired loan portfolio at the acquisition date and can fluctuate due to changes in expected cash flows during the life of the PCI loans.
The following table reflects the outstanding balance and related carrying value of PCI loans as of the dates indicated (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
Unpaid
Principal
Balance
|
|
|
Carrying
Value
|
|
|
Unpaid
Principal
Balance
|
|
|
Carrying
Value
|
|
Commercial and Industrial
|
|
$
|
622
|
|
|
$
|
299
|
|
|
$
|
2,331
|
|
|
$
|
477
|
|
Commercial and Other Real Estate
|
|
|
1,997
|
|
|
|
1,413
|
|
|
|
2,250
|
|
|
|
1,535
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,619
|
|
|
$
|
1,712
|
|
|
$
|
4,642
|
|
|
$
|
2,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There is no related allowance for credit losses with the PCI loans as of December 31, 2016 and 2015
included in the tables above.
The following table reflects the activities in the accretable net discount for PCI loans for
the period indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
2016
|
|
|
Year Ended
December 31,
2015
|
|
Balance, beginning of year
|
|
$
|
246
|
|
|
$
|
324
|
|
Accretion, included in interest income
|
|
|
(85
|
)
|
|
|
(78
|
)
|
Reclassifications from non-accretable yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
161
|
|
|
$
|
246
|
|
|
|
|
|
|
|
|
|
|
133
Note 7 Premises and Equipment and Lease Commitments
Premises and equipment are stated at cost less accumulated depreciation and amortization. The following major classifications of premises
and equipment are summarized as follows as of the dates indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
|
2015
|
|
Furniture and equipment
|
|
$
|
8,032
|
|
|
$
|
8,345
|
|
Leasehold improvements
|
|
|
7,382
|
|
|
|
7,260
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
15,414
|
|
|
|
15,605
|
|
Less: Accumulated depreciation and amortization
|
|
|
(11,230
|
)
|
|
|
(10,466
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,184
|
|
|
$
|
5,139
|
|
|
|
|
|
|
|
|
|
|
The following is a schedule of future minimum lease payments for operating leases for office and branch
space based upon obligations at December 31, 2016 (dollars in thousands):
|
|
|
|
|
Year
|
|
Amount
|
|
2017
|
|
$
|
3,322
|
|
2018
|
|
|
2,493
|
|
2019
|
|
|
2,345
|
|
2020
|
|
|
2,208
|
|
2021
|
|
|
1,903
|
|
Thereafter
|
|
|
2,215
|
|
|
|
|
|
|
Total
|
|
$
|
14,486
|
|
|
|
|
|
|
Total rental expense on facilities for the years ended December 31, 2016, 2015 and 2014 was $3.3
million, $3.1 million, and $2.2 million, respectively.
Note 8 Goodwill, Core Deposit and Leasehold Right Intangibles
Goodwill
The following table presents changes in the carrying value of goodwill for the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
2016
|
|
|
2015
|
|
Balance, beginning of year
|
|
$
|
64,603
|
|
|
$
|
63,950
|
|
Measurement-period adjustment
|
|
|
|
|
|
|
653
|
|
Goodwill acquired during the year
|
|
|
|
|
|
|
|
|
Impairment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
64,603
|
|
|
$
|
64,603
|
|
|
|
|
|
|
|
|
|
|
Accumulated impairment losses at end of year
|
|
$
|
|
|
|
$
|
|
|
For the year ended December 31, 2015, the Company early adopted ASU 2015-16,
Simplifying the
Accounting for Measurement-Period Adjustment,
which eliminates the requirement to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is consummated.
Measurement-period adjustments are calculated as if they were known at the acquisition date, but are recognized in the reporting period in which they are determined. Prior period information is not revised. In
134
November 2015, the Company recorded a measurement-period adjustment and increased goodwill by $653 thousand due to an additional write-down of $1.1 million taken when the Company finalized the
fair value estimate of a loan relationship acquired in the 1
st
Enterprise merger. The 1
st
Enterprise merger closed on November 30, 2014. There would not be a significant impact on the consolidated statements of income for the years ended December 31, 2014 and 2015, had such
measurement-period adjustment been recognized at the acquisition date, as such loan relationship had been on non-accrual status since early 2015.
The Companys goodwill was evaluated for impairment during the fourth quarter of 2016, with no impairment loss recognition considered necessary.
Core Deposit Intangibles (CDI)
The weighted average amortization period remaining for our core deposit intangibles is 5.2 years. The estimated aggregate amortization expense related to these intangible assets for each of the next five
years is $1.1 million, $936 thousand, and $692 thousand, $628 thousand and $571 thousand. The Companys core deposit intangibles were evaluated for impairment at December 31, 2016, taking into consideration the actual deposit runoff of
acquired deposits to the level of deposit runoff expected at the date of merger. Based on the Companys evaluation, no impairment has taken place on the core deposit intangibles. The following table presents the changes in the gross amounts of
core deposit intangibles and the related accumulated amortization for the dates and periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Gross amount of CDI:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
9,246
|
|
|
$
|
9,246
|
|
|
$
|
2,103
|
|
Additions due to acquisitions
|
|
|
|
|
|
|
|
|
|
|
7,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
9,246
|
|
|
|
9,246
|
|
|
|
9,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
(2,736
|
)
|
|
|
(1,056
|
)
|
|
|
(665
|
)
|
Amortization
|
|
|
(1,280
|
)
|
|
|
(1,680
|
)
|
|
|
(391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
(4,016
|
)
|
|
|
(2,736
|
)
|
|
|
(1,056
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net CDI, end of year
|
|
$
|
5,230
|
|
|
$
|
6,510
|
|
|
$
|
8,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold Right Intangibles
Leasehold right intangible is the present value of the excess of market rate lease payments over the contractual lease payments of an acquired lease. The recorded value of the Companys leasehold
right intangibles at December 31, 2016 and 2015 was $1.1 million and $1.2 million, respectively.
The amortization of the leasehold right intangibles is recorded within the consolidated income statement under
occupancy expense. The net amortization of the leasehold right intangible assets and liabilities resulted in income of $205 thousand, income of $62 thousand, and expense of $142 thousand for the years ended December 31, 2016, 2015 and 2014,
respectively. During 2015, the Company recorded a $41 thousand adjustment to the fair value of a lease that was acquired in the 1
st
Enterprise merger due to a change in the sublease rate assumption since the acquisition date. The adjustment was an
expense to merger cost.
Note 9 Bank Owned Life Insurance
At December 31, 2016 and 2015 the Company had $51 million and $50 million, respectively of Bank-Owned Life Insurance
(BOLI). The Company recorded non-interest income associated with the BOLI policies
135
of $1.3 million, $1.3 million, and $660 thousand for the years ending December 31, 2016, 2015 and 2014, respectively. The increase in the Companys balance to $51 million in 2016 was
due to an increase of $1.3 million in the cash surrender value of the policies during 2016.
BOLI involves the purchasing of
life insurance by the Company on a selected group of employees where the Company is the owner and beneficiary of the policies. BOLI is recorded as an asset at its cash surrender value. Increases in the cash surrender value of these policies, as well
as a portion of the insurance proceeds received, are recorded in noninterest income and are not subject to income tax, as long as they are held for the life of the covered parties. At December 31, 2016, the $51 million was allocated
between eight individual insurance companies, with balances ranging from approximately 1% to 37% of the Companys outstanding BOLI balances. On an annual basis, the Company reviews the financial stability and ratings of all the individual
insurance companies to ensure they are adequately capitalized, and that there is minimal risk to the BOLI assets.
Note 10
Investment in California Organized Investment Network (COIN)
The Company has historically made investments
with Community Development Financial Institutions (CDFI) as defined and recognized by the United States Department of Treasury and by the California Organized Investment Network (COIN) within the California Department of
Insurance. These investments were certified by the California Department of Insurance and qualified for State of California income tax credits. The Company has previously utilized all the investments tax credits generated in the previous years. With
regards to the Companys previous investments with CDFI, if the Company were to redeem this deposit prior to its contractual and stated maturity date, the Company would lose the benefit of the tax credit taken in prior years. The investment, to
qualify for this specific tax credit, must be for a minimum term of sixty months. In addition, the tax credit is required to be applied during the year in which the investments were made. These deposits are not insured by the FDIC, and are included
in other assets on the consolidated balance sheet of the Company. The Companys intentions are to hold these investments to their contractual maturity dates. These investments were also made to meet CRA investment goals. The Companys
investments in COIN were $1.4 million and $1.1 million at December 31, 2016 and 2015, respectively.
136
Note 11 Qualified Affordable Housing Project Investments
The following table presents the Companys original investment in the LIHTC projects, the current recorded investment balance, and
the unfunded liability balance of each investment at December 31, 2016, 2015 and 2014. In addition, the table reflects the tax credits and tax benefits recorded by the Company during 2016, 2015 and 2014, the amortization of the investment and
the net impact to the Companys income tax provision for 2016, 2015 and 2014. The Companys recorded investment balance in the LIHTC projects and the related unfunded liability balance are included in other assets and other liabilities on
the accompanying consolidated balance sheets, respectively. Also see Note 19 Income Tax, for the impact of these investments on the Companys effective tax rate (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified Affordable Housing Projects at
December 31, 2016
|
|
Original
Investment
Value
|
|
|
Current
Recorded
Investment
|
|
|
Unfunded
Liability
Obligation
|
|
|
Tax Credits
and Benefits (1)
|
|
|
Amortization of
Investments
(2)
|
|
|
Net Income
Tax Benefit
|
|
Enterprise Green Communities West II LP
|
|
$
|
1,000
|
|
|
$
|
513
|
|
|
$
|
22
|
|
|
$
|
131
|
|
|
$
|
90
|
|
|
$
|
41
|
|
Enterprise Housing Partners Calgreen II Fund LP
|
|
|
2,050
|
|
|
|
1,214
|
|
|
|
165
|
|
|
|
218
|
|
|
|
212
|
|
|
|
6
|
|
Enterprise Housing Partners XXIV LP
|
|
|
2,000
|
|
|
|
1,513
|
|
|
|
391
|
|
|
|
212
|
|
|
|
167
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments in Qualified Affordable Housing Projects
|
|
$
|
5,050
|
|
|
$
|
3,240
|
|
|
$
|
578
|
|
|
$
|
561
|
|
|
$
|
469
|
|
|
$
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified Affordable Housing Projects at
December 31, 2015
|
|
Original
Investment
Value
|
|
|
Current
Recorded
Investment
|
|
|
Unfunded
Liability
Obligation
|
|
|
Tax Credits
and Benefits (1)
|
|
|
Amortization of
Investments
(2)
|
|
|
Net Income
Tax Benefit
|
|
Enterprise Green Communities West II LP
|
|
$
|
1,000
|
|
|
$
|
604
|
|
|
$
|
69
|
|
|
$
|
136
|
|
|
$
|
92
|
|
|
$
|
44
|
|
Enterprise Housing Partners Calgreen II Fund LP
|
|
|
2,050
|
|
|
|
1,426
|
|
|
|
165
|
|
|
|
198
|
|
|
|
164
|
|
|
|
34
|
|
Enterprise Housing Partners XXIV LP
|
|
|
2,000
|
|
|
|
1,680
|
|
|
|
806
|
|
|
|
209
|
|
|
|
180
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments in Qualified Affordable Housing Projects
|
|
$
|
5,050
|
|
|
$
|
3,710
|
|
|
$
|
1,040
|
|
|
$
|
543
|
|
|
$
|
436
|
|
|
$
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified Affordable Housing Projects at
December 31, 2014
|
|
Original
Investment
Value
|
|
|
Current
Recorded
Investment
|
|
|
Unfunded
Liability
Obligation
|
|
|
Tax Credits
and Benefits (1)
|
|
|
Amortization of
Investments (2)
|
|
|
Net Income
Tax Benefit
|
|
Enterprise Green Communities West II LP
|
|
$
|
1,000
|
|
|
$
|
704
|
|
|
$
|
162
|
|
|
$
|
127
|
|
|
$
|
84
|
|
|
$
|
43
|
|
Enterprise Housing Partners Calgreen II Fund LP
|
|
|
2,050
|
|
|
|
1,588
|
|
|
|
635
|
|
|
|
229
|
|
|
|
174
|
|
|
|
55
|
|
Enterprise Housing Partners XXIV LP
|
|
|
2,000
|
|
|
|
1,849
|
|
|
|
1,685
|
|
|
|
160
|
|
|
|
112
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments in Qualified Affordable Housing Projects
|
|
$
|
5,050
|
|
|
$
|
4,141
|
|
|
$
|
2,482
|
|
|
$
|
516
|
|
|
$
|
370
|
|
|
$
|
146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The amounts reflected in this column represent both the tax credits, as well as the tax benefits generated by the Qualified Affordable Housing Projects operating loss
for the year.
|
(2)
|
This amount reduces the tax credits and benefits generated by the Qualified Affordable Housing Projects
|
137
The following table reflects the anticipated net income tax benefit that is expected to be
recognized by the Company over the next five years (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified Affordable Housing Projects
|
|
Enterprise
Green
Communities
West
II LP
|
|
|
Enterprise
Housing
Partners
Calgreen II
Fund LP
|
|
|
Enterprise
Housing
Partners XXIV
LP
|
|
|
Total
Net Income
Tax
Benefit
|
|
Anticipated net income tax benefit less amortization of investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
$
|
43
|
|
|
$
|
40
|
|
|
$
|
38
|
|
|
$
|
121
|
|
2018
|
|
|
43
|
|
|
|
40
|
|
|
|
37
|
|
|
|
120
|
|
2019
|
|
$
|
43
|
|
|
$
|
40
|
|
|
$
|
37
|
|
|
$
|
120
|
|
2020
|
|
|
40
|
|
|
|
40
|
|
|
|
37
|
|
|
|
117
|
|
2021 and thereafter
|
|
|
72
|
|
|
|
134
|
|
|
|
169
|
|
|
|
375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total anticipated net income tax benefit in Qualified Affordable Housing Projects
|
|
$
|
241
|
|
|
$
|
294
|
|
|
$
|
318
|
|
|
$
|
853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 12 Deposits
The Company had CDARS
®
and ICS
®
deposits that are classified as brokered deposits for
regulatory purposes. At December 31, 2016, the Company no longer had any reciprocal CDARS
®
deposits, and therefore there were no CDARS
®
deposits classified as brokered deposits. These reciprocal
CDARS
®
and ICS
®
deposits are the only brokered deposits utilized by the
Company, and the Company considers these deposits to be core in nature.
At December 31, 2016, $28 million
out of total time deposits of $29 million mature within one year.
At December 31, 2016 and 2015, the Company had
certificates of deposit with balances $250 thousand or more of $19 million and $18 million, respectively.
The following table
shows the maturity of the Companys time deposits of $250 thousand or more at December 31, 2016 (dollars in thousands):
|
|
|
|
|
Maturity of Time Deposits of $250,000 or
More
|
|
Three months or less
|
|
$
|
12,359
|
|
Over three through six months
|
|
|
2,034
|
|
Over six through twelve months
|
|
|
4,757
|
|
Over twelve months
|
|
|
269
|
|
|
|
|
|
|
Total
|
|
$
|
19,419
|
|
|
|
|
|
|
ICS
®
Reciprocal
Non-Interest Bearing Demand Deposits
During 2013 the Company began participating as a member of the
Insured Cash Sweep
®
(ICS
®
) deposit program. Through ICS
®
, the Company may accept non-interest bearing deposits in excess of the FDIC insured maximum from a depositor and place the deposits through the ICS
®
network into other member banks in increments of less than the FDIC insured maximum in order to provide the depositor full FDIC insurance coverage. The Company receives
an equal dollar amount of deposits from other ICS
®
member banks in exchange for the deposits the Company places into the ICS
®
network. These deposits are recorded on the Companys balance sheet as ICS
®
reciprocal deposits. At December 31, 2016 and 2015, the ICS
®
reciprocal deposits totaled $7.5 million and $9.3 million, respectively.
138
CDARS
®
Reciprocal Time Deposits
The Company participates and is a member of the Certificate of Deposit Account Registry Service (CDARS
®
) deposit product program. Through CDARS
®
, the Company may accept deposits in excess of the FDIC insured maximum from a depositor and place the deposits through a network to other CDARS
®
member banks in increments of less than the FDIC insured maximum to provide the depositor full FDIC insurance
coverage. Where the Company receives an equal dollar amount of deposits from other CDARS
®
member banks in
exchange for the deposits the Company places into the network, the Company records these as CDARS
®
reciprocal
deposits. At December 31, 2016, the Company does not have any CDARS
®
reciprocal deposits on its
consolidated balance sheet because all of these deposits matured during 2016. At December 31, 2015, the
CDARS
®
reciprocal deposits totaled $29 million. Currently, the Company only offers the CDARS
®
One-Way Sell product, which is not a liability to the Company and therefore is not recorded on the consolidated
balance sheet.
Note 13 Borrowings and Subordinated Debentures
Securities Sold Under Agreements to Repurchase
The Company enters into
certain transactions, the legal form of which are sales of securities under agreements to repurchase (Repos) at a later date at a set price. Securities sold under agreements to repurchase generally mature within 1 day to 180 days from
the issue date and are routinely renewed.
As discussed in Note 5 Investment Securities, the Company has pledged
certain investments as collateral for these agreements. Securities with a fair value of $48 million and $47 million were pledged to secure the Repos at December 31, 2016 and December 31, 2015, respectively.
The tables below describe the terms and maturity of the Companys securities sold under agreements to repurchase as of the dates
indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Date Issued
|
|
Amount
|
|
|
Interest Rate
|
|
|
Original
Term
|
|
|
Maturity Date
|
|
December 31, 2016
|
|
$
|
18,816
|
|
|
|
0.2% 0.25%
|
|
|
|
4 days
|
|
|
|
January 4, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,816
|
|
|
|
0.25%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Date Issued
|
|
Amount
|
|
|
Interest Rate
|
|
|
Original
Term
|
|
|
Maturity Date
|
|
December 31, 2015
|
|
$
|
14,360
|
|
|
|
0.08% 0.25%
|
|
|
|
4 days
|
|
|
|
January 4, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,360
|
|
|
|
0.19%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below describes additional details regarding the Companys securities sold under
agreements to repurchase for the dates and periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Balance
|
|
|
Average
Balance
|
|
|
Weighted
Average
Rate
|
|
|
Balance
|
|
|
Average
Balance
|
|
|
Weighted
Average
Rate
|
|
Securities sold under agreements to repurchase
|
|
$
|
18,816
|
|
|
$
|
22,739
|
|
|
|
0.23
|
%
|
|
$
|
14,360
|
|
|
$
|
13,966
|
|
|
|
0.22
|
%
|
The maximum amount securities sold under agreements to repurchase outstanding at any month-end was $26
million and $17 million in 2016 and 2015, respectively.
139
Federal Home Loan Bank Borrowings
The Company maintains a secured credit facility with the FHLB, allowing the Company to borrow on an overnight and term basis. The
Companys credit facility with the FHLB is $723 million, which represents approximately 25% of the Banks total assets, as reported by the Bank in its September 30, 2016 Federal Financial Institution Examination Council (FFIEC) Call
Report. The Company had no outstanding advances (borrowings) with the FHLB as of December 31, 2016 or 2015, except for the annual testing of the borrowing lines.
As of December 31, 2016, the Company had $990 million of loan collateral pledged with the FHLB which provides $658 million in borrowing capacity. The Company has $16 million in investment securities
pledged with the FHLB to further support this credit facility. In addition, the Company is required to purchase FHLB common stock to support its FHLB advances. At December 31, 2016 and 2015, the Company had $9.1 million and $8.0 million of FHLB
common stock, respectively. The current value of the FHLB common stock of $9.1 million would support FHLB advances up to $340 million. To reach a total borrowing capacity of $674 million collateralized by the current level of pledged loans and
securities would require additional purchases of FHLB stock. Further, pledging additional loans and/or securities will increase borrowing capacity up to 25% of the Banks total assets, however, additional FHLB stock would have to be purchased.
Interest on FHLB advances is generally paid monthly, quarterly or semi-annually depending on the terms of the advance, with
principal and any accrued interest due at maturity.
The FHLB has historically repurchased a portion to all of its excess
capital from each bank where the level of capital is in excess of that banks current average borrowings above a certain minimum. The FHLBs program whereby the FHLB analyzes each member banks capital requirement and returns each
banks excess capital above a certain minimum not needed for current borrowings. The FHLB did not repurchase any of the Companys investment in FHLB capital stock during 2016 or 2015.
The FHLB has paid or declared dividends on its capital stock for all four quarters of the years ending December 31, 2016, 2015 and
2014.
Subordinated Debentures
The following table summarizes the terms of each issuance of subordinated debentures outstanding as of December 31, 2016 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
|
|
Amount
|
|
|
Issuance
Date
|
|
|
Maturity
Date
|
|
|
Rate Index
|
|
|
Current
Rate
|
|
|
Next Reset
Date
|
|
Trust I
|
|
$
|
6,186
|
|
|
|
12/10/04
|
|
|
|
03/15/35
|
|
|
|
3 month LIBOR+2.05
|
%
|
|
|
3.01
|
%
|
|
|
03/15/17
|
|
Trust II
|
|
|
3,093
|
|
|
|
12/23/05
|
|
|
|
03/15/36
|
|
|
|
3 month LIBOR+1.75
|
%
|
|
|
2.71
|
%
|
|
|
03/15/17
|
|
Trust III
|
|
|
3,093
|
|
|
|
06/30/06
|
|
|
|
09/15/36
|
|
|
|
3 month LIBOR+1.85
|
%
|
|
|
2.81
|
%
|
|
|
03/15/17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
12,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized fair value adjustment
|
|
|
2,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
9,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140
The following table summarizes the terms of each issuance of subordinated debentures
outstanding as of December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
|
|
Amount
|
|
|
Issuance
Date
|
|
|
Maturity
Date
|
|
|
Rate Index
|
|
|
Current
Rate
|
|
|
Next
Reset
Date
|
|
Trust I
|
|
$
|
6,186
|
|
|
|
12/10/04
|
|
|
|
03/15/35
|
|
|
|
3 month LIBOR+2.05
|
%
|
|
|
2.56
|
%
|
|
|
03/15/16
|
|
Trust II
|
|
|
3,093
|
|
|
|
12/23/05
|
|
|
|
03/15/36
|
|
|
|
3 month LIBOR+1.75
|
%
|
|
|
2.26
|
%
|
|
|
03/15/16
|
|
Trust III
|
|
|
3,093
|
|
|
|
06/30/06
|
|
|
|
09/15/36
|
|
|
|
3 month LIBOR+1.85
|
%
|
|
|
2.36
|
%
|
|
|
03/15/16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
12,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized fair value adjustment
|
|
|
2,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
9,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The subordinated debentures were acquired as part of the PC Bancorp merger and were issued to trusts
originally established by PC Bancorp, which in turn issued trust preferred securities. These subordinated debentures were issued in three separate series. Each issuance had a maturity of 30 years from their approximate date of issue. All three
subordinated debentures are variable rate instruments that reprice quarterly based on the three month LIBOR plus a margin (see tables above). All three subordinated debentures had their interest rates reset in December 2016 at the current three
month LIBOR plus their index, and will continue to reprice quarterly through their maturity date. All three subordinated debentures are currently callable at par with no prepayment penalties.
The original fair value adjustment related to the subordinated debentures was $3.3 million. The Company recorded $159 thousand, $159
thousand, and $159 thousand in amortization expense related to the fair value adjustment in 2016, 2015, and 2014, respectively. At December 31, 2016 the Company is estimating a remaining life of approximately 20 years on the subordinated
debentures and is amortizing the fair value adjustment based on this estimated average remaining life. The Company is projecting annual amortization expense of approximately $159 thousand related to the fair value adjustment on the subordinated
debentures.
Interest payments made by the Company on subordinated debentures are considered dividend payments under FRB
regulations. Notification to the FRB is required prior to the Company declaring and paying a dividend during any period in which the Companys quarterly net earnings are insufficient to fund the dividend amount. This notification requirement is
included in regulatory guidance regarding safety and soundness surrounding capital and includes other non-financial measures such as asset quality, financial condition, capital adequacy, liquidity, future earnings projections, capital planning and
credit concentrations. Should the FRB object to the dividend payments, the Company would be precluded from paying interest on the subordinated debentures after giving notice within 15 days before the payment date. Payments would not commence until
approval is received or the Company no longer needs to provide notice under applicable guidance. The Company has the right, assuming no default has occurred, to defer payments of interest on the subordinated debentures at any time for a period not
to exceed 20 consecutive quarters. The Company has not deferred any interest payments.
Note 14 Derivative Financial Instruments
The Company is exposed to certain risks relating to its ongoing business operations and utilizes interest rate swap
agreements (swaps) as part of its asset/liability management strategy to help manage its interest rate risk position. The Company has two counterparty banks.
Derivative Financial Instruments Acquired from 1
st
Enterprise
At December 31, 2016, the Company has eleven interest rate swap agreements with customers and
eleven offsetting interest-rate swaps with a counterparty bank that were acquired as a result of the merger with
1
st
Enterprise on November 30, 2014. The swap
agreements are not designated as hedging instruments. The purpose
141
of entering into offsetting derivatives not designated as a hedging instrument is to provide the Company a variable-rate loan receivable and provide the customer the financial effects of a
fixed-rate loan without creating significant interest rate risk in the Companys earnings.
The
structure of the swaps is as follows: The Company enters into a swap with its customers to allow them to convert variable rate loans to fixed rate loans, and at the same time, the Company enters into a swap with the counterparty bank to allow the
Company to pass on the interest-rate risk associated with fixed rate loans. The net effect of the transaction allows the Company to receive interest on the loan from the customer at a variable rate based on LIBOR plus a spread. The changes in the
fair value of the swaps primarily offset each other and therefore should not have a significant impact on the Companys results of operations. Our interest rate swap derivatives acquired from 1
st
Enterprise are subject to a master netting arrangement with one
counterparty bank. None of our derivative assets and liabilities are offset in the balance sheet.
The
Company believes the risk of loss associated with counterparty borrowers relating to interest rate swaps is mitigated as the loans with swaps are underwritten to take into account potential additional exposure, although there can be no assurances in
this regard since the performance of the swaps is subject to market and counterparty risk. At December 31, 2016 and 2015, the total notional amount of the Companys swaps acquired from 1
st
Enterprise was $24 million and $28 million, respectively. The
outstanding swaps have remaining maturities of up to 7 years as of December 31, 2016.
The following
tables presents the fair values of the asset and liability of the Companys derivative instruments acquired from
1
st
Enterprise as of the dates and periods indicated
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Interest rate swap contracts fair value
|
|
|
$523
|
|
|
|
$881
|
|
|
|
|
|
|
|
|
|
|
Balance sheet location
|
|
|
Accrued Interest
Receivable and Other
Assets
|
|
|
|
Accrued Interest
Receivable and Other
Assets
|
|
The following table presents the fair values of the liability of the Companys
derivative instruments acquired from 1
st
Enterprise as of
the dates indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Interest rate swap contracts fair value
|
|
|
$523
|
|
|
|
$881
|
|
|
|
|
|
|
|
|
|
|
Balance sheet location
|
|
|
Accrued Interest
Payable and Other
Liabilities
|
|
|
|
Accrued Interest
Payable and Other
Liabilities
|
|
Derivative Financial Instruments Acquired from PC Bancorp
At December 31, 2016, the Company also has fourteen pay-fixed, receive-variable, interest rate contracts that are designed to convert
fixed rate loans into variable rate loans. The Company acquired these interest rate swap contracts on July 31, 2012 as a result of the merger with PC Bancorp. Out of the fourteen interest rate swap contracts at December 31, 2016, twelve
are designated as hedging instruments and hedge accounting is applied. All of the interest rate swap contracts acquired from PC Bancorp are with the same counterparty bank. The outstanding swaps have remaining maturities of up to 5 years as of
December 31, 2016.
142
The following table presents the notional amount and the fair values of the asset and
liability of the Companys derivative instruments acquired from PC Bancorp as of the dates indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Fair Value Hedges
|
|
|
|
|
|
|
|
|
Total interest rate contracts notional amount
|
|
$
|
17,642
|
|
|
$
|
25,938
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Interest rate swap contracts fair value
|
|
$
|
95
|
|
|
$
|
313
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Interest rate swap contracts fair value
|
|
|
589
|
|
|
|
1,351
|
|
|
|
|
|
|
|
|
|
|
Total interest rate contracts fair value
|
|
$
|
684
|
|
|
$
|
1,664
|
|
|
|
|
|
|
|
|
|
|
Balance sheet location
|
|
|
Accrued Interest Payable
and Other Liabilities
|
|
|
|
Accrued Interest Payable
and Other Liabilities
|
|
The Effect of Derivative Instruments on the Consolidated Statements of Income
The following table summarizes the effect of derivative financial instruments on the consolidated statements of income for the periods
indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in fair value of interest rate swap contracts
|
|
$
|
218
|
|
|
$
|
206
|
|
|
$
|
219
|
|
Payments on interest rate swap contracts on loans
|
|
|
(240
|
)
|
|
|
(263
|
)
|
|
|
(273
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in other non-interest income
|
|
$
|
(22
|
)
|
|
$
|
(57
|
)
|
|
$
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in fair value of interest rate swap contracts
|
|
$
|
762
|
|
|
$
|
926
|
|
|
$
|
927
|
|
Increase (decrease) in fair value of hedged loans
|
|
|
41
|
|
|
|
133
|
|
|
|
315
|
|
Payments on interest rate swap contracts on loans
|
|
|
(821
|
)
|
|
|
(1,089
|
)
|
|
|
(1,256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in interest income on loans
|
|
$
|
(18
|
)
|
|
$
|
(30
|
)
|
|
$
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under all of the Companys interest rate swap contracts, the Company is required to pledge and
maintain collateral for the credit support under these agreements. At December 31, 2016, the Company has pledged $1.8 million in investment securities and $2.7 million in certificates of deposit, for a total of $4.5 million, as collateral under
the swap agreements.
Note 15 Balance Sheet Offsetting
Assets and liabilities relating to certain financial instruments, including derivatives, and securities sold under repurchase agreements (Repos), may be eligible for offset in the consolidated
balance sheets. The Companys interest rate swap derivatives are subject to a master bilateral netting and offsetting arrangement under specific conditions as defined within a master agreement governing all interest rate swap contracts that the
Company and the counterparty banks have entered into. In addition, the master agreement under which the interest rate contracts have been written require the pledging of assets by the Company based on certain risk thresholds. The Company has pledged
a certificate of deposit and investment securities as collateral under the
143
swap agreements. The pledged collateral under the swap agreements are reported in the Companys consolidated balance sheets, unless the Company defaults under the master agreement. The
Company currently does not net or offset the interest rate swap contracts in its consolidated balance sheets, as reflected within the table below.
The Companys securities sold under repurchase agreements represent transactions the Company has entered into with several deposit customers. These transactions represent the sale of securities on an
overnight or on a term basis to our deposit customers under an agreement to repurchase the securities from the customers the next business day or at maturity. There is an individual contract for each customer with only one transaction per customer.
There is no master agreement that provides for the netting arrangement or the offsetting of these individual transactions or for the netting of collateral positions. The Company does not net or offset the Repos in its consolidated balance sheets as
reflected within the table below.
The table below presents the Companys financial instruments that may be eligible for
offsetting which include securities sold under agreements to repurchase that have no enforceable master netting arrangement and derivative securities that could be offset in the consolidated financial statements due to an enforceable master netting
arrangement (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Amounts
Recognized
in the
Consolidated
Balance
Sheets
|
|
|
Gross
Amounts
Offset in the
Consolidated
Balance
Sheets
|
|
|
Net Amounts
of Assets
Presented
in the
Consolidated
Balance
Sheets
|
|
|
Gross Amounts
Not Offset
in the
Consolidated Balance Sheets
|
|
|
Net Amount
(Collateral
over liability
balance
required to
be
pledged)
|
|
|
|
|
|
|
Financial
Instruments
|
|
|
Collateral
Pledged
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts fair value (see Note 14 Derivative Financial Instruments)
|
|
$
|
523
|
|
|
$
|
|
|
|
$
|
523
|
|
|
$
|
523
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
523
|
|
|
$
|
|
|
|
$
|
523
|
|
|
$
|
523
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts fair value (see Note 14 Derivative Financial Instruments)
|
|
$
|
1,207
|
|
|
$
|
|
|
|
$
|
1,207
|
|
|
$
|
1,207
|
|
|
$
|
4,555
|
|
|
$
|
3,348
|
|
Securities sold under agreements to repurchase
|
|
|
18,816
|
|
|
|
|
|
|
|
18,816
|
|
|
|
18,816
|
|
|
|
48,204
|
|
|
|
29,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,023
|
|
|
$
|
|
|
|
$
|
20,023
|
|
|
$
|
20,023
|
|
|
$
|
52,759
|
|
|
$
|
32,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Amounts
Recognized
in the
Consolidated
Balance
Sheets
|
|
|
Gross
Amounts
Offset in the
Consolidated
Balance
Sheets
|
|
|
Net
Amounts of
Assets
Presented
in the
Consolidated
Balance
Sheets
|
|
|
Gross Amounts
Not Offset in
the
Consolidated Balance Sheets
|
|
|
Net Amount
(Collateral
over liability
balance
required to
be
pledged)
|
|
|
|
|
|
|
Financial
Instruments
|
|
|
Collateral
Pledged
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts fair value (see Note 14 Derivative Financial Instruments)
|
|
$
|
881
|
|
|
$
|
|
|
|
$
|
881
|
|
|
$
|
881
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
881
|
|
|
$
|
|
|
|
$
|
881
|
|
|
$
|
881
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts fair value (see Note 14 Derivative Financial Instruments)
|
|
$
|
2,545
|
|
|
$
|
|
|
|
$
|
2,545
|
|
|
$
|
2,545
|
|
|
$
|
4,759
|
|
|
$
|
2,214
|
|
Securities sold under agreements to repurchase
|
|
|
14,360
|
|
|
|
|
|
|
|
14,360
|
|
|
|
14,360
|
|
|
|
46,596
|
|
|
|
32,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,905
|
|
|
$
|
|
|
|
$
|
16,905
|
|
|
$
|
16,905
|
|
|
$
|
51,355
|
|
|
$
|
34,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 16 Stock Options and Restricted Stock
Equity Compensation Plans
The Companys 2007 Equity and Incentive
Plan (Equity Plan) was adopted by the Company in 2007 and replaced two prior equity compensation plans. The Equity Plan provides for significant flexibility in determining the types and terms of awards that may be made to participants.
The Equity Plan was revised and approved by the Companys shareholders in 2011 and adopted by the Company as part of the Bank holding company reorganization. This plan is designed to promote the interest of the Company in aiding the Company to
attract and retain employees, officers and non-employee directors who are expected to contribute to the future success of the organization. The Equity Plan is intended to provide participants with incentives to maximize their efforts on behalf of
the Company through stock-based awards that provide an opportunity for stock ownership. This plan provides the Company with a flexible equity incentive compensation program, which allows the Company to grant stock options, restricted stock,
restricted stock award units and performance units. Certain options and share awards provide for accelerated vesting, if there is a change in control, as defined in the Equity Plan.
The Equity Plan was amended and restated in 2014 to (i) permit the grant of performance-based awards that are not subject to the
deduction limitations of Section 162(m) of the Internal Revenue Code, including both equity compensation awards and cash bonus payments, (ii) prohibit the repricing of previously granted options; (iii) eliminate a provision of the
Equity Plan that provides for an automatic annual increase in the shares of common stock available for awards under the Equity Plan; and (iv) extend the term of the plan to July 31, 2024.
Pursuant to the merger with 1
st
Enterprise as discussed in Note 2 above, CU Bancorp adopted the 1
st
Enterprise 2006 Stock Incentive Plan, as amended (2006 Stock
Incentive Plan), as its own equity plan and all stock options granted by 1
st
Enterprise thereunder were fully vested and exercisable and were converted to CU Bancorp stock options on substantially the same terms but adjusted to reflect the exchange ratio set forth in the Merger
Agreement and applicable Internal Revenue Code provisions and related regulations. No new equity
145
awards will be granted under the 2006 Stock Incentive Plan. A total of 802,766 converted 1
st
Enterprise stock options were adopted into CU Bancorp stock options under the Equity Plan with a fair value of $9.6
million and an intrinsic value of $11 million at the merger date.
Under the Equity Plan, there are a total of 1,490,547
shares authorized. A total of 1,129,892 shares have been issued out of the plan, with 80,916 of these issued shares subsequently cancelled and returned back into the plan, leaving 441,571 available to be issued.
All non-qualified and incentive stock options granted under the current Equity Plan and the earlier 2005 equity compensation plans, have
been issued with the exercise prices of the stock options equal to the fair market value of the underlying shares at the date of grant.
The Equity Plan and the original 2005 equity compensation plans provided for the issuance of non-qualified and incentive stock options. These plans provided that each option must have an exercise price
not less than the fair market value of the stock at the date of grant and terms to expiration not to exceed ten years. All options granted under the plans require continuous service and have been issued with vesting increments of between 20% through
50% per year. All stock options issued under the original 2005 equity compensation plans that have not expired remain outstanding with no changes in their vesting, maturity date or rights.
At December 31, 2016, future compensation expense related to unvested restricted stock grants aggregated to the amounts reflected in
the table below (dollars in thousands):
|
|
|
|
|
Future Stock Based Compensation Expense
|
|
Restricted
Stock
|
|
2017
|
|
$
|
2,081
|
|
2018
|
|
|
762
|
|
2019
|
|
|
220
|
|
2020
|
|
|
43
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,106
|
|
|
|
|
|
|
At December 31, 2016, the weighted-average period over which the total compensation cost related to
unvested restricted stock grants not yet recognized is 2.5 years. There was no future compensation expense related to stock options as of December 31, 2016. All stock options outstanding at December 31, 2016 are vested.
The estimated fair value of both incentive stock options and non-qualified stock options granted in prior years, have been calculated
using the Black-Scholes option pricing model. There have been no incentive stock options and no non-qualified stock options issued in 2014, 2015 or 2016. The following is the listing of the input variables and the assumptions utilized by the Company
for each parameter used in the Black-Scholes option pricing model in prior years:
Risk-free Rate
The risk-free
rate for periods within the contractual life of the option have been based on the U.S. Treasury rate that matures on the expected assigned life of the option at the date of the grant.
Expected Life of Options
The expected life of options have either been calculated using a formula from the Securities and
Exchange Commission SEC for companies that do not have sufficient historical data to calculate the expected life, or from the estimated life of options granted by the Company. The formula from the SEC calculation of expected life is
specifically based on the following: the expected life of the option is equal to the average of the contractual life and the vesting period of each option.
Expected Volatility
Beginning in 2009, the expected volatility has been based on the historical volatility for the Companys shares.
146
Dividend Yield
The dividend yield has been based on historical experience and
expected future changes on dividend payouts. The Company has not declared or paid dividends on its common stock in the past and does not expect to declare or pay dividends on its common stock within the foreseeable future.
Stock Options
There were no stock options granted by the Company in 2014, 2015 or 2016.
The following table summarizes the stock option activity under the plans for the year ended December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
|
|
Aggregate
Intrinsic
Value
(in
thousands)
|
|
Outstanding stock options at December 31, 2015
|
|
|
557,471
|
|
|
$
|
10.57
|
|
|
|
0.8
|
|
|
$
|
8,248
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(505,274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(4,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding stock options at December 31, 2016
|
|
|
47,697
|
|
|
$
|
12.69
|
|
|
|
1.43
|
|
|
$
|
1,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable options at December 31, 2016
|
|
|
47,697
|
|
|
$
|
12.69
|
|
|
|
1.43
|
|
|
$
|
1,102
|
|
Unvested options at December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised during the years ended December 31, 2016, 2015, and
2014 was $6.8 million, $6.5 million, and $2.1 million, respectively.
Restricted Stock
The weighted-average grant-date fair value per share in the table below is calculated by taking the total aggregate cost of the restricted
shares issued divided by the number of shares of restricted stock issued. The aggregate cost of the restricted stock was calculated by multiplying the number of shares granted at each of the grant dates by the closing stock price of the
Companys common stock on the date of the grant. The following table summarizes the restricted stock activity under the Equity Plan for the year ended December 31, 2016 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
|
Weighted-Average
Grant-Date Fair
Value per
Share
|
|
Restricted Stock:
|
|
|
|
|
|
|
|
|
Unvested, at December 31, 2015
|
|
|
311,458
|
|
|
$
|
19.29
|
|
Granted
|
|
|
142,309
|
|
|
|
23.80
|
|
Vested
|
|
|
(160,310
|
)
|
|
|
18.93
|
|
Cancelled and forfeited
|
|
|
(11,375
|
)
|
|
|
20.88
|
|
|
|
|
|
|
|
|
|
|
Unvested, at December 31, 2016
|
|
|
282,082
|
|
|
$
|
21.98
|
|
|
|
|
|
|
|
|
|
|
Restricted stock compensation expense was $3.6 million, $2.7 million, and $1.7 million for the period
ended December 31, 2016, 2015, and 2014, respectively. Restricted stock awards reflected in the table above are valued at the closing stock price on the date of grant and are expensed to stock based compensation expense over the period for
which the related service is performed. The weighted-average grant-date fair value per share for
147
restricted stock granted for 2016, 2015, and 2014 was $23.80, $21.51, and $19.39, respectively. The total fair value of shares vested during the year for 2016, 2015, and 2014 is $4.3 million,
$2.7 million, and $2.3 million, respectively. In 2015, the Company granted 40 thousand shares of Restricted Stock Unit (RSU) under the Equity Plan to one of its executive officers. Such grant is reflected in the table above. The
shares of common stock underlying the 40 thousand shares of RSU will not be issued until the RSUs vest and are not included in the Companys shares outstanding as of December 31, 2016. The RSUs are valued at the closing stock price on
the date of grant and are expensed to stock based compensation expense over the period for which the related service is performed.
Excess Tax Benefits
On July 1, 2016, and effective January 1, 2016, the Company early adopted ASU 2016-09 which provides improvements to the accounting for employee share-based payments. As a result of this new
standard, excess tax benefits from exercise or vesting of share-based awards are included as a reduction in provision for income tax expense in the period in which the exercise or vesting occurs. The following table presents excess tax benefits
recognized, by award type (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
|
|
Number of Awards
Exercised or Vested
|
|
|
Related Excess Tax
Benefits
|
|
Stock Options
|
|
|
505,274
|
|
|
$
|
914
|
|
Restricted Stock
|
|
|
160,310
|
|
|
|
523
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
665,584
|
|
|
$
|
1,437
|
|
|
|
|
|
|
|
|
|
|
Note 17 Supplemental Executive Retirement Plan and Other Deferred Compensation Plans
The Company adopted a non-qualified supplemental executive retirement plan (SERP) for certain executives of the Company
effective October 1, 2012. In addition, the Company acquired several SERP plans from the 2012 PC Bancorp acquisition. These SERP plans provide the designated executives with retirement benefits. Pre-retirement survivor benefits are provided for
designated beneficiaries of participants who do not survive until retirement in an amount equal to the lump sum actuarial equivalent of the participants accrued benefit under the SERP. The SERP is considered an unfunded plan for tax and ERISA
purposes. All obligations arising under the SERP are payable from the general assets of the Company. At December 31, 2016 and 2015, the SERP plan had accrued liabilities of $4.9 million and $3.3 million, respectively.
As a result of its acquisition of 1
st
Enterprise in 2014, the Company acquired a deferred compensation plan. This deferred compensation plan was established
in which eligible employees can elect to defer a percentage of salary of bonuses to be paid after terminating employment with the Company. Payments can be made in lump sum or equal installments for as long as 10 years. A deferral account is
established for each participant and the account will earn interest quarterly based on the Companys established crediting rate. Participants are immediately 100% vested for the amount of their deferral account. For the years ended
December 31, 2016, 2015 and 2014, the Company recognized deferred compensation expense of $1.0 million, $947 thousand and $705 thousand under this plan, respectively.
The Company acquired, as a result of its acquisition of PC Bancorp, a Supplemental Employee Salary Continuation Plan, a Deferred Director Fee Plan, and a Split Dollar Employee Insurance Plan for certain
executive officers and one Director of PC Bancorp. At December 31, 2016, the accrued liability of the PC Bancorp Supplemental Employee Salary Plan was $1.0 million, and the accrued liability of the Deferred Director Fee Plan was $251
thousand, and the accrued liability of the Split Dollar Employee Insurance Plan was $1.2 million. At December 31, 2015, the accrued liability of the PC Bancorp Supplemental Employee Salary Plan was $1.1 million, and the accrued liability of the
Deferred Director Fee Plan was $282 thousand, and the accrued
148
liability of the Split Dollar Employee Insurance Plan was $1.2 million. The Company recorded a total of $69 thousand, $68 thousand, and $72 thousand of expense for all plans acquired from PC
Bancorp for the years ended December 31, 2016, 2015 and 2014.
Note 18 Defined Contribution Plan 401(k)
The Company has a 401(k) defined contribution plan for the benefit of its employees. The California United Bank 401(k) Profit Sharing Plan
(the 401(k) Plan) allows eligible employees to contribute a portion of their income to a trust for investment on a pre-tax basis until retirement. Participants are 100% vested in their own deferrals. The dollar amount an individual
employee may contribute is subject to regulatory limits.
In 2014 and 2015, the Company matched $0.50 on the dollar for every
dollar the employee contributed to the plan, up to a maximum of 3% of the employees eligible compensation subject to an IRS limitation. In 2016, the Company matched $0.50 on the dollar for every dollar the employee contributed to the plan, up
to a maximum of 2.5% of the employees eligible compensation subject to an IRS limitation.
The Companys expense
relating to the contributions made to the 401(k) plan for the benefit of its employees was $548 thousand, $642 thousand and $418 thousand for the years ended December 31, 2016, 2015, and 2014, respectively.
Note 19 Income Taxes
The Company provides for current federal and state income taxes payable and for deferred taxes that result from differences between financial accounting rules and tax laws governing the timing of
recognition of various income and expense items. The Company recognizes deferred income tax assets and liabilities for the future tax effects of such temporary differences based on the difference between the financial statement and tax bases of the
existing assets and liabilities using the statutory rate expected in the years in which the differences are expected to reverse. The effect on deferred taxes of any enacted change in tax rates is recognized in income in the period that includes the
enactment date. The future realization of any of the Companys deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback
or carryforward periods available under the tax law. Based on historical and future expected taxable earnings and available tax strategies, the Company concluded that it is more likely than not that all the benefit of the deferred tax assets will be
realized, with the exception of the deferred tax assets related to certain capital loss carryforward from separate reporting years that are subject to limitation.
The tax effects from an uncertain tax position are recognized in the financial statements only if, based on its merits, the position is more likely than not to be sustained on audit by the taxing
authorities. The Company believes that there are no material uncertain tax positions at December 31, 2016, 2015, and 2014. Interest and penalties related to uncertain tax positions, if any, are recorded as part of other operating expense.
Income tax expense consists of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Current provision
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
10,921
|
|
|
$
|
9,265
|
|
|
$
|
4,517
|
|
State
|
|
|
3,653
|
|
|
|
2,923
|
|
|
|
1,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current provision
|
|
|
14,574
|
|
|
|
12,188
|
|
|
|
5,700
|
|
Deferred provision
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
923
|
|
|
|
291
|
|
|
|
382
|
|
State
|
|
|
456
|
|
|
|
389
|
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred provision
|
|
|
1,379
|
|
|
|
680
|
|
|
|
732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current and deferred provision
|
|
$
|
15,953
|
|
|
$
|
12,868
|
|
|
$
|
6,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149
The following is a summary of the components of the net deferred tax assets recognized in
the consolidated balance sheets as of the dates indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred Tax Assets
|
|
|
|
|
|
|
|
|
Federal tax operating loss carryforward
|
|
$
|
60
|
|
|
$
|
64
|
|
State tax operating loss carryforward
|
|
|
165
|
|
|
|
170
|
|
Allowance for loan loss
|
|
|
9,293
|
|
|
|
7,473
|
|
Purchase accounting and loan fair value adjustments
|
|
|
3,820
|
|
|
|
7,024
|
|
Accruals and other liabilities
|
|
|
929
|
|
|
|
958
|
|
Stock compensation and deferred compensation costs
|
|
|
4,618
|
|
|
|
5,732
|
|
Net unrealized loss on securities available-for-sale
|
|
|
2,190
|
|
|
|
593
|
|
Start up, organizational and other costs
|
|
|
244
|
|
|
|
332
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
21,319
|
|
|
|
22,346
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities
|
|
|
|
|
|
|
|
|
State tax liability
|
|
|
(64
|
)
|
|
|
(441
|
)
|
Unamortized fair value on subordinated debentures
|
|
|
(1,153
|
)
|
|
|
(1,230
|
)
|
Core deposit intangibles
|
|
|
(2,397
|
)
|
|
|
(2,984
|
)
|
Prepaid expense and other
|
|
|
(518
|
)
|
|
|
(652
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(4,132
|
)
|
|
|
(5,307
|
)
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(6
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
$
|
17,181
|
|
|
$
|
17,033
|
|
|
|
|
|
|
|
|
|
|
The Companys deferred tax assets and deferred tax liabilities include balances
associated with the acquisition of 1
st
Enterprise in 2014,
PC Bancorp in 2012 and COSB in 2010, which are non-taxable business combinations. These balances represent temporary differences for which deferred tax assets and liabilities are recognized because the financial statement carrying amounts of the
acquired assets and assumed liabilities generally are their respective fair values at the date of the acquisition, whereas the tax basis equals the acquirees former tax basis (carryover tax basis).
In addition, the Company has a state tax capital loss carryforward acquired from the PC Bancorp acquisition of $54 thousand at
December 31, 2016 and at December 31, 2015. The capital loss carryforward expired in 2016.
The Company has a $1.2
million state net operating loss carryforward at CU Bancorp that arose from CU Bancorps 2012 separately filed tax return. The ability to utilize this net operating loss is dependent upon allocation of sufficient consolidated income to CU
Bancorp in the future based on a three-factor formula. In assessing the need for a valuation allowance against these losses, the Company carefully weighed both positive and negative evidence currently available. Based upon the evidence, the Company
concluded it is more likely than not that these net operating losses will be realized before the expiration in 2032.
The
Company also has a $172 thousand capital loss carryforward that was generated in 2014. The Company concluded it is more likely than not that this capital loss carryforward will be realized before the expiration in 2019.
The Companys investments in Qualified Affordable Housing Projects generated low income housing tax credits and benefits net of
investment amortization of $92 thousand and $107 thousand in 2016 and 2015, respectively. See Note 11- Investments in Qualified Affordable Housing Projects for a discussion on the investments.
150
On July 1, 2016, and effective January 1, 2016, the Company early adopted ASU
2016-09 which provides improvements to the accounting for employee share-based payments. As a result of this new standard, excess tax benefits from exercise or vesting of share-based awards are included as a reduction in provision for income tax
expense in the period in which the exercise or vesting occurs. See Note 16, Stock Options and Restricted Stock under Excess Tax Benefits for additional information.
The following table presents a reconciliation of the statutory income tax rate to the consolidated effective income tax rate for each of
the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
Federal income tax expense at statutory rate
|
|
$
|
15,193
|
|
|
|
35.00
|
%
|
|
$
|
11,937
|
|
|
|
35.00
|
%
|
|
$
|
5,369
|
|
|
|
35.00
|
%
|
State franchise taxes, net of federal benefit, excluding LIHTC investments
|
|
|
2,743
|
|
|
|
6.32
|
|
|
|
2,236
|
|
|
|
6.55
|
|
|
|
1,209
|
|
|
|
7.88
|
|
Release of state valuation allowance on use of net operating loss
|
|
|
|
|
|
|
|
|
|
|
(29
|
)
|
|
|
(0.09
|
)
|
|
|
(68
|
)
|
|
|
(0.44
|
)
|
Meals and entertainment, dues and other non-deductible items
|
|
|
142
|
|
|
|
0.33
|
|
|
|
132
|
|
|
|
0.39
|
|
|
|
75
|
|
|
|
0.49
|
|
Cash surrender life insurance
|
|
|
(456
|
)
|
|
|
(1.05
|
)
|
|
|
(453
|
)
|
|
|
(1.33
|
)
|
|
|
(231
|
)
|
|
|
(1.51
|
)
|
Stock compensation expense
|
|
|
(68
|
)
|
|
|
(0.16
|
)
|
|
|
(100
|
)
|
|
|
(0.29
|
)
|
|
|
(53
|
)
|
|
|
(0.35
|
)
|
Excess tax benefit from stock transactions
|
|
|
(1,196
|
)
|
|
|
(2.75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIHTC investments
|
|
|
(111
|
)
|
|
|
(0.25
|
)
|
|
|
(141
|
)
|
|
|
(0.41
|
)
|
|
|
(119
|
)
|
|
|
(0.77
|
)
|
Merger costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
515
|
|
|
|
3.36
|
|
Tax Exempt Income
|
|
|
(290
|
)
|
|
|
(0.67
|
)
|
|
|
(314
|
)
|
|
|
(0.92
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
(4
|
)
|
|
|
(0.01
|
)
|
|
|
(400
|
)
|
|
|
(1.17
|
)
|
|
|
(265
|
)
|
|
|
(1.73
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,953
|
|
|
|
36.76
|
%
|
|
$
|
12,868
|
|
|
|
37.73
|
%
|
|
$
|
6,432
|
|
|
|
41.93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys federal income tax returns for the years ended December 31, 2013 through 2015 are
open for examination by federal taxing authorities and the Companys state income tax returns for the years ended December 2012 through 2015 are open for examination by state taxing authorities.
During 2016, the Company concluded an examination by the California Franchise Tax Board of the Enterprise Zone net interest deduction
that the Company included in its California 2011 and 2012 tax returns. The California Franchise Tax Board has issued a closing letter with no material adjustments that impact the consolidated financial statements.
The Company has not been notified of any other pending tax examinations by taxing authorities.
Note 20 Shareholders Equity
Common Stock
Holders of shares of the Companys common stock are entitled to one vote for each share held of record on all matters voted upon by
shareholders. Furthermore, the holders of the Companys common stock have no preemptive rights to subscribe for new issue securities, and shares of the Companys common stock are not subject to redemption, conversion, or sinking fund
provisions.
With respect to the payment of dividends, after the preferential dividends upon all other classes and series of
stock entitled thereto have been paid or declared and set apart for payment, then the holders of the Companys common stock are entitled to such dividends as may be declared by the Companys board of directors out of funds legally
available under the laws of the State of California. Refer to Note 22Regulatory Matters for further discussion on restrictions on dividends.
151
Upon the Companys liquidation or dissolution, the assets legally available for
distribution to holders of the Companys shares of common stock, after payment of all the Companys obligations and payment of any liquidation preference of all other classes and series of stock entitled thereto, including the
Companys preferred stock, are distributable ratably among the holders of the Companys common stock.
During 2016,
the Company issued 505,274 shares of stock from the exercise of employee stock options for a total value of $5.2 million. The Company also issued 142,309 shares of restricted stock to the Companys directors and employees, cancelled 11,375
shares of unvested restricted stock related to employee turnover and cancelled 52,591 shares of restricted stock that had a value of $1.4 million when employees elected to pay their tax obligation via the repurchase of the stock by the Company. The
Equity Plan, as amended, allows employees to make an election to have a portion of their restricted stock that became vested during the year repurchased by the Company to provide funds to pay the employees tax obligation related to the vesting
of the stock. See Note 16 Stock Options and Restricted Stock under Equity Compensation Plans for a more detailed analysis related to the issuances of these shares.
Preferred Stock
As discussed in Note 2,
Business Combinations, the Company completed the merger with 1
st
Enterprise on November 30, 2014. As part of the Merger Agreement, 16,400 shares of preferred stock issued by 1
st
Enterprise as part of the Small Business Lending Fund (SBLF) program of the United States Department of the Treasury
was converted into 16,400 CU Bancorp shares with substantially identical terms. CU Bancorp Preferred Stock has a liquidation preference amount of $1 thousand per share, designated as the Companys Non-Cumulative Perpetual Preferred Stock,
Series A. The U.S. Department of the Treasury is the sole holder of all outstanding shares of CU Bancorp Preferred Stock. The CU Bancorp Preferred Stock had an estimated life of four years and the fair value was $16 million at the merger date,
resulting in a net discount of $479 thousand. The life-to-date accretion on the net discount as of December 31, 2016 is $1.0 million.
Dividends on the Companys Series A Preferred Stock are payable quarterly in arrears if authorized and declared by the Companys board of directors out of legally available funds, on a
non-cumulative basis, on the $1 thousand per share liquidation preference amount. Dividends are payable on January 1, April 1, July 1 and October 1 of each year. The current coupon dividend rate was adjusted to 9% on
March 1, 2016 through perpetuity. However, the dividend yield through November 30, 2018 approximates 7% as a result of business combination accounting. Dividends on the Series A Preferred Stock are non-cumulative. There is no sinking fund
with respect to dividends on the Series A Preferred Stock. So long as the Companys Series A Preferred Stock remains outstanding, the Company may declare and pay dividends on the common stock only if full dividends on all outstanding shares of
Series A Preferred Stock for the most recently completed dividend period have been or are contemporaneously declared and paid. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, holders
of the Series A Preferred Stock will be entitled to receive for each share of Series A Preferred Stock, out of the Companys assets or proceeds available for distribution to the Companys shareholders, subject to any rights of the
Companys creditors, before any distribution of assets or proceeds is made to or set aside for the holders of the common stock, payment of an amount equal to the sum of (i) the $1 thousand liquidation preference amount per share and
(ii) the amount of any accrued and unpaid dividends on the Series A Preferred Stock. To the extent the assets or proceeds available for distribution to shareholders are not sufficient to fully pay the liquidation payments owing to the holders
of the Series A Preferred Stock and the holders of any other class or series of the stock ranking equally with the Series A Preferred Stock, the holders of the Series A Preferred Stock and such the Companys stock will share ratably in the
distribution. Holders of the Series A Preferred Stock have no right to exchange or convert their shares into common stock or any other securities and do not have voting rights.
152
Accumulated Other Comprehensive Income (Loss)
The following table presents the changes in accumulated other comprehensive income (loss) by component for the periods indicated (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
Ended
December 31,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Statement of
Income Line Item
for Reclassified
Items
|
|
Beginning balance, net of tax
|
|
$
|
(816
|
)
|
|
$
|
190
|
|
|
$
|
(205
|
)
|
|
|
|
|
Net unrealized gain (loss) arising during the period
|
|
|
(3,543
|
)
|
|
|
(1,624
|
)
|
|
|
628
|
|
|
|
|
|
Related tax effect
|
|
|
1,490
|
|
|
|
683
|
|
|
|
(260
|
)
|
|
|
|
|
Reclassification of (gain) loss on investment securities available-for-sale to net income
|
|
|
(258
|
)
|
|
|
(112
|
)
|
|
|
47
|
|
|
|
Gain on sale of
securities, net
|
|
Related tax effect
|
|
|
108
|
|
|
|
47
|
|
|
|
(20
|
)
|
|
|
Provision for
income tax
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss)
|
|
|
(2,203
|
)
|
|
|
(1,006
|
)
|
|
|
395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(3,019
|
)
|
|
$
|
(816
|
)
|
|
$
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 21 Commitments and Contingencies
Financial Instruments with Off Balance Sheet Risk
In the normal course of
business, the Company is a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit. To varying degrees, these instruments involve elements of credit and interest rate risk in
excess of the amount recognized in the balance sheet. The Companys exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit is represented by the contractual amount
of those instruments.
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. Some of the Companys commitments are expected to expire without being drawn upon, with
the total commitment amounts not necessarily representing future cash funding requirements. The Company evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company
upon extension of credit is based on managements credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, income-producing commercial properties, residential
properties and properties under construction.
Financial instruments with off balance sheet risk include commitments to extend
credit of $1 billion and $806 million at December 31, 2016 and 2015, respectively. Included in the aforementioned commitments were standby letters of credit outstanding of $85 million and $73 million at December 31, 2016 and 2015,
respectively. As of December 31, 2016 and 2015, the Company had established a reserve for estimated losses on unfunded loan commitments of $886 thousand and $608 thousand, respectively. These balances are included in other liabilities on the
balance sheet.
Litigation
From time to time the Company is a party to claims and legal proceedings arising in the ordinary course of business. The Company accrues for any probable loss contingencies that are estimable and
discloses any material
153
losses. As of December 31, 2016, there were no legal proceedings against the Company the outcome of which are expected to have a material adverse impact on the Companys financial
position, results of operations or cash flows, as a whole.
Note 22 Regulatory Matters
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by federal and
state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly discretionary actions by regulators that, if undertaken, could have a direct material effect on the Companys financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital requirements that involve quantitative measures of the Companys assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The Companys capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
The Company currently includes in Tier 1 capital an amount of subordinated debentures equal to no more than 25% of the sum of
all core capital elements, which is generally defined as shareholders equity less goodwill, core deposit intangibles and a portion of the SBA servicing assets. On July 2, 2013, the Board of Governors of the Federal Reserve System
(Federal Reserve) approved a final rule (the Final Rule) that revises the current capital rules for U.S. banking organizations including the capital rules for the Company. The FDIC adopted the rule as an interim final
rule on July 9, 2013. The Final Rule implements the regulatory capital reforms recommended by the Basel Committee. The Final Rule permanently grandfathers non-qualifying capital instruments, such as trust preferred securities and
cumulative perpetual preferred stock issued before May 19, 2010, for inclusion in the Tier 1 Risk-based capital of banking organizations with total consolidated assets less than $15 billion as of December 31, 2009, such as the Company. As
a result, the Companys trust preferred securities will continue to be included in Tier 1 Risk-Based Capital. The Company also currently includes in its Tier 1 capital an amount of Non-Cumulative Perpetual Preferred Stock, Series A issued under
the SBLF program. The U.S. Department of the Treasury is the sole holder of all outstanding shares of CU Bancorp Preferred Stock. Under the Final Rule, the CU Bancorp Preferred Stock will continue to be included in Tier 1 risk-based capital.
At December 31, 2016, the respective capital ratios of the Company and the Bank exceeded the minimum percentage
requirements to be deemed well-capitalized for Prompt Corrective Action (PCA) purpose and the Basel III minimum capital ratios with buffer (effective January 1, 2016) under the current capital guidelines. The following
tables present the regulatory capital ratios requirements and the actual capitalization levels of the Company and the Bank as of the dates indicated (dollars in thousands):
CU Bancorp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
|
Well
Capitalized
|
|
|
Basel III
Minimum with
Buffer
|
|
|
|
Amount
|
|
|
Amount
|
|
|
(greater than or equal to)
|
|
Regulatory Capital Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage ratio
|
|
|
9.72
|
%
|
|
|
9.67
|
%
|
|
|
5.0
|
%
|
|
|
NA
|
|
Common Equity Tier 1 ratio
|
|
|
9.61
|
%
|
|
|
9.61
|
%
|
|
|
6.5
|
%
|
|
|
5.125
|
%
|
Total Tier 1 risk-based capital ratio
|
|
|
10.68
|
%
|
|
|
10.85
|
%
|
|
|
8.0
|
%
|
|
|
6.625
|
%
|
Total risk-based capital ratio
|
|
|
11.44
|
%
|
|
|
11.54
|
%
|
|
|
10.0
|
%
|
|
|
8.625
|
%
|
|
|
|
|
|
Regulatory Capital Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1
|
|
$
|
257,105
|
|
|
$
|
223,977
|
|
|
|
|
|
|
|
|
|
Total Tier 1 capital
|
|
|
285,843
|
|
|
|
252,681
|
|
|
|
|
|
|
|
|
|
Total risk-based capital
|
|
|
306,103
|
|
|
|
268,971
|
|
|
|
|
|
|
|
|
|
Average total assets*
|
|
|
2,940,790
|
|
|
|
2,611,774
|
|
|
|
|
|
|
|
|
|
Risk-weighted assets
|
|
|
2,675,987
|
|
|
|
2,329,770
|
|
|
|
|
|
|
|
|
|
154
California United Bank:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
|
Well
Capitalized
|
|
|
Basel III
Minimum with
Buffer
|
|
|
|
Amount
|
|
|
Amount
|
|
|
(greater than or equal to)
|
|
Regulatory Capital Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage ratio
|
|
|
9.35
|
%
|
|
|
9.34
|
%
|
|
|
5.0
|
%
|
|
|
NA
|
%
|
Common Equity Tier 1 ratio
|
|
|
10.28
|
%
|
|
|
10.47
|
%
|
|
|
6.5
|
%
|
|
|
5.125
|
%
|
Total Tier 1 risk-based capital ratio
|
|
|
10.28
|
%
|
|
|
10.47
|
%
|
|
|
8.0
|
%
|
|
|
6.625
|
%
|
Total risk-based capital ratio
|
|
|
11.04
|
%
|
|
|
11.17
|
%
|
|
|
10.0
|
%
|
|
|
8.625
|
%
|
|
|
|
|
|
Regulatory Capital Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1
|
|
$
|
275,151
|
|
|
$
|
243,989
|
|
|
|
|
|
|
|
|
|
Tier 1 capital
|
|
|
275,151
|
|
|
|
243,989
|
|
|
|
|
|
|
|
|
|
Total risk-based capital
|
|
|
295,411
|
|
|
|
260,279
|
|
|
|
|
|
|
|
|
|
Average total assets *
|
|
|
2,941,253
|
|
|
|
2,612,206
|
|
|
|
|
|
|
|
|
|
Risk-weighted assets
|
|
|
2,677,030
|
|
|
|
2,329,798
|
|
|
|
|
|
|
|
|
|
*
|
Represents the average total assets for the leverage ratio
|
Restrictions on Dividends
As discussed in Note 2,
Business Combinations, the Company completed the merger with 1
st
Enterprise on November 30, 2014. As part of the Merger Agreement, 16,400 shares of preferred stock issued by 1
st
Enterprise as part of the SBLF program of the United States Department of Treasury was converted into substantially
16,400 identical shares with identical terms. In December 2016, the Board approved a quarterly dividend payment on the preferred shares of $369 thousand to the United States Department of the Treasury.
Payment of stock or cash dividends in the future will depend upon earnings, liquidity, financial condition and other factors deemed
relevant by our Board of Directors. Notification to the FRB is required prior to declaring and paying a dividend to shareholders that exceeds earnings for the period for which the dividend is being paid. This notification requirement is included in
regulatory guidance regarding safety and soundness surrounding capital and includes other non-financial measures such as asset quality, financial condition, capital adequacy, liquidity, future earnings projections, capital planning and credit
concentrations. Should the FRB object to dividend payments, the Company would be precluded from declaring and paying dividends until approval is received or the Company no longer needs to provide notice under applicable guidance.
California law also limits the Companys ability to pay dividends. A corporation may make a distribution/dividend from retained
earnings to the extent that the retained earnings exceed (a) the amount of the distribution plus (b) the amount if any, of dividends in arrears on shares with preferential dividend rights. Alternatively, a corporation may make a
distribution/dividend, if, immediately after the distribution, the value of its assets equals or exceeds the sum of (a) its total liabilities plus (b) the liquidation preference of any shares which have a preference upon dissolution over
the rights of shareholders receiving the distribution/dividend.
The Bank is subject to certain restrictions on the amount of
dividends that may be declared without regulatory approval. Such dividends shall not exceed the lesser of the Banks retained earnings or net income for its last three fiscal years less any distributions to shareholders made during such period.
In addition, the Bank may not pay dividends that would result in its capital being reduced below the minimum requirements shown above for capital adequacy purposes.
155
Consent Order
On September 23, 2016, California United Bank (the Bank), the wholly owned subsidiary of CU Bancorp (the Company) entered into a Stipulation to the Issuance of a Consent Order
with its bank regulatory agencies, the Federal Deposit Insurance Corporation (FDIC) and the California Department of Business Oversight (CDBO), consenting to the issuance of a consent order (the Consent Order)
relating to weaknesses in the Banks Bank Secrecy Act and Anti-Money Laundering (collectively BSA) compliance program. In consenting to the issuance of the Consent Order, the Bank did not admit or deny any charges of unsafe or
unsound banking practices related to the BSA compliance program.
Under the terms of the Consent Order the Bank and/or its
Board of Directors is required to take certain actions which include, but are not limited to: a) Increasing Board supervision of the BSA compliance program; b) Notification to the regulatory agencies prior to appointment of a new BSA Officer or the
executive to whom the BSA Officer reports; c) Formulation of a written action plan describing the actions to be taken to correct BSA/AML related deficiencies, a revised, written BSA/AML compliance program and review and enhancement of the
Banks BSA risk assessment; d) Performance of a review of BSA staffing needs; e) Enhancement of internal controls to ensure full compliance with the BSA; f) Establishment of an independent testing program for compliance with the BSA rules and
regulations; and g) Obtaining regulatory agency consent for expansionary activities such as new branches, offices, delivery channels, products and services.
The Consent Order resulted in additional BSA compliance expenses for the Bank and the Company. It may also have the effect of limiting or delaying the Banks and the Companys ability to obtain
regulatory approval for certain expansionary activities, to the extent desired by the Company. The Consent Order does not otherwise impact the Banks business activities outside of BSA. The Consent Order does not require the Bank to pay any
civil money penalty or require additional capital. The Consent Order will remain in effect and be enforceable until it is modified, terminated, suspended or set aside by the FDIC and the CBDO. Management and the Board have expressed their full
intention to comply with all parts of the Consent Order at the earliest possible date.
Note 23 Fair Value Measurements
Fair Value Hierarchy
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction
between market participants at the measurement date. In accordance with ASC Topic 825, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities
are traded and the reliability of the assumptions used to determine fair value. These levels are as follows:
|
|
|
Level 1 Observable unadjusted quoted market prices in active markets for identical assets and liabilities that the reporting entity has the
ability to access at the measurement date.
|
|
|
|
Level 2 Significant other observable market based inputs, other than Level 1 prices such as quoted prices for similar assets or liabilities or
unobservable inputs that are corroborated by market data. This includes quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data, either directly or indirectly. This would
include those financial instruments that are valued using models or other valuation methodologies where substantially all of the assumptions are observable in the marketplace, can be derived from observable market data or are supported by observable
levels at which transactions are executed in the marketplace.
|
|
|
|
Level 3 Significant unobservable inputs that reflect a reporting entitys evaluation about the assumptions that market participants would
use in pricing an asset or liability. Assets measured utilizing level 3 are for positions that are not traded in active markets or are subject to transfer
|
156
|
restrictions, and or where valuations are adjusted to reflect illiquidity and or non-transferability. These assumptions are not corroborated by market data. This is comprised of financial
instruments whose fair value is estimated based on internally developed models or methodologies utilizing significant inputs that are generally less readily observable from objective sources. Management uses a combination of reviews of the
underlying financial statements, appraisals and managements judgment regarding credit quality to determine the value of the financial asset or liability.
|
A financial instruments level within the fair value hierarchy is based on the lowest level of input that is significant to the fair
value measurement. Management maximizes the use of observable inputs and attempts to minimize the use of unobservable inputs when determining fair value measurements.
ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities that are measured and reported at fair value on a recurring basis and on a non-recurring
basis. Securities available-for-sale and interest rate swaps are recorded at fair value on a recurring basis. Additionally, certain assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain
circumstances, for example, when there is evidence of impairment. These include assets that are measured at the lower of cost or fair value, such as other real estate owned, SBA servicing asset and impaired loans that are collateral dependent.
The estimated fair value amounts have been determined by the Company using available market information and appropriate
valuation methodologies. However, considerable judgment is required to develop the estimates of fair value. Accordingly, the estimates presented below are not necessarily indicative of the amounts the Company could have realized in a current market
exchange as of December 31, 2016. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Recurring Fair Value Measurements
The valuation methodologies for
estimating the fair value of financial assets and financial liabilities measured and reported at fair value on a recurring basis are discussed below.
Investment Securities Available-for-Sale
: The fair value of investment securities available-for-sale are primarily based on price indications provided by nationally recognized,
independent pricing sources utilized by the Companys bond accounting system provider, Vining Sparks. The fair value of investment securities may be determined by obtaining quoted prices for identical assets in active markets at measurement
date (Level 1 financial assets). The Companys investments in U.S. Treasury Notes are Level 1 financial assets. For the Companys investments in U.S. Agency and U.S. Sponsored Agency issued debt securities (callable and non-callable
notes), mortgage backed securities guaranteed by those agencies, collateralized mortgage obligations issued by those agencies and corporate bond securities, the fair value may be determined by obtaining quoted market prices for similar assets in
active markets at measurement date (Level 2 financial assets), or if quoted market prices are not available, the pricing sources may determine fair value by matrix pricing. Matrix pricing is a mathematical technique widely used in the securities
industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities relationship to other benchmark quoted securities which are observable market inputs (Level 2
financial assets). The pricing sources may also determine the fair value of certain debt securities by using an option adjusted spread model with observable inputs such as the treasury yield curve and other interest rate assumptions. Other
observable inputs utilized in these alternative valuation techniques or models when quoted prices are not available include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers and reference
data. In cases where significant credit valuation adjustments are incorporated into the estimation of fair value, reported amounts are classified as Level 3 financial assets.
Interest Rate Swap Contracts
: The fair value of the interest rate swap contracts are provided by an independent third party vendors that specializes in interest rate risk management
and fair value analysis using a model that utilizes current market data to estimate cash flows of the interest rate swaps utilizing the future London Interbank
157
Offered Rate (LIBOR) yield curve for accruing and the future Overnight Index Swap Rate (OIS) yield curve for discounting through the maturity date of the interest rate
swap contract. The future LIBOR yield curve is the primary input in the valuation of the interest rate swap contracts. Both the LIBOR and OIS yield curves are readily observable in the marketplace. Accordingly, the interest rate swap contracts are
classified within Level 2 of the fair value hierarchy.
The following table presents the financial assets and financial
liabilities measured at fair value on a recurring basis as of the dates indicated, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Financial Assets December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Govt Agency and Sponsored Agency Note Securities
|
|
$
|
9,969
|
|
|
$
|
|
|
|
$
|
9,969
|
|
|
|
|
|
U.S. Govt Agency SBA Securities
|
|
|
122,850
|
|
|
|
|
|
|
|
122,850
|
|
|
|
|
|
U.S. Govt Agency GNMA Mortgage-Backed Securities
|
|
|
22,370
|
|
|
|
|
|
|
|
22,370
|
|
|
|
|
|
U.S. Govt Sponsored Agency CMO & Mortgage-Backed Securities
|
|
|
238,900
|
|
|
|
|
|
|
|
238,900
|
|
|
|
|
|
Asset Backed Securities
|
|
|
6,896
|
|
|
|
|
|
|
|
6,896
|
|
|
|
|
|
U.S. Treasury Notes
|
|
|
68,965
|
|
|
|
68,965
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap Contracts
|
|
|
523
|
|
|
|
|
|
|
|
523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
470,473
|
|
|
|
68,965
|
|
|
|
401,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap Contracts
|
|
$
|
1,207
|
|
|
$
|
|
|
|
$
|
1,207
|
|
|
$
|
|
|
|
|
|
|
|
Financial Assets December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Govt Agency and Sponsored Agency Note Securities
|
|
$
|
1,014
|
|
|
$
|
|
|
|
$
|
1,014
|
|
|
|
|
|
U.S. Govt Agency SBA Securities
|
|
|
93,490
|
|
|
|
|
|
|
|
93,490
|
|
|
|
|
|
U.S. Govt Agency GNMA Mortgage-Backed Securities
|
|
|
30,700
|
|
|
|
|
|
|
|
30,700
|
|
|
|
|
|
U.S. Govt Sponsored Agency CMO & Mortgage-Backed Securities
|
|
|
97,154
|
|
|
|
|
|
|
|
97,154
|
|
|
|
|
|
Corporate Securities
|
|
|
4,023
|
|
|
|
|
|
|
|
4,023
|
|
|
|
|
|
Municipal Securities
|
|
|
1,011
|
|
|
|
|
|
|
|
1,011
|
|
|
|
|
|
Asset Backed Securities
|
|
|
7,647
|
|
|
|
|
|
|
|
7,647
|
|
|
|
|
|
U.S. Treasury Notes
|
|
|
80,746
|
|
|
|
80,746
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap Contracts
|
|
|
881
|
|
|
|
|
|
|
|
881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
316,666
|
|
|
|
80,746
|
|
|
|
235,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap Contracts
|
|
$
|
2,545
|
|
|
$
|
|
|
|
$
|
2,545
|
|
|
$
|
|
|
At December 31, 2016 and 2015, the Company had no financial assets or liabilities that were measured
at fair value on a recurring basis that required the use of significant unobservable inputs (Level 3). Furthermore, there were no transfers of assets either between Level 1 and Level 2 nor in or out of Level 3 of the fair value hierarchy for assets
measured on a recurring basis for the periods ended December 31, 2016 and 2015.
158
Nonrecurring Fair Value Measurements
The valuation methodologies for estimating the fair value of certain assets measured and reported at fair value on a nonrecurring basis
are discussed below.
Other Real Estate Owned
: The fair value of other real estate owned is generally based on real
estate appraisals (unless more current market information is available) less estimated costs to sell. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.
Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant. The inputs utilized in determining the fair value
of other real estate owned are unobservable and accordingly, these financial assets are classified within Level 3 of the fair value hierarchy.
SBA Servicing Asset
: The SBA servicing asset is amortized over the estimated life of the loans based on an effective yield approach.
In addition, the Companys servicing asset is evaluated regularly for impairment by discounting the estimated future cash flows using market-based discount rates and prepayment speeds. The discount rate was based on the current U.S. Treasury
yield curve, plus a spread for marketplace risk associated with these assets. Prepayment speeds were determined based on the historical prepayments of the Companys SBA loans. The prepayment speeds determine the timing of the cash flows. If the
calculated present value of the servicing asset declines below the Companys current carrying value, the servicing asset is written down to its present value. Based on the Companys methodology in its valuation of the SBA servicing asset,
the current carrying value is estimated to approximate the fair value. The inputs utilized in determining the fair value of SBA servicing asset are unobservable and accordingly, these financial assets are classified within Level 3 of the fair value
hierarchy.
Impaired Loans
: The fair value of impaired loans is determined based on an evaluation at the time the loan is
originally identified as impaired, and periodically thereafter, at the lower of cost or fair value. Fair value on impaired loans is measured based on the value of the collateral securing these loans, less costs to sell, if the loan is collateral
dependent, or based on the discounted cash flows for non-collateral dependent loans. Collateral on collateral dependent loans may be real estate and/or business assets including equipment, inventory and/or accounts receivable and is determined based
on appraisals performed by qualified licensed appraisers hired by the Company. Appraised and reported values may be discounted based on managements historical knowledge, changes in market conditions from the time of valuation, and/or
managements expertise and knowledge of the client and clients business. Such discounts are typically significant and unobservable. For unsecured loans, the estimated future discounted cash flows of the business or borrower, are used in
evaluating the fair value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above. The inputs utilized in determining the fair value of
impaired loans are unobservable and accordingly, these financial assets are classified within Level 3 of the fair value hierarchy.
159
The following table presents the balances of assets measured at fair value on a
non-recurring basis by level within the fair value hierarchy as of the dates indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Carrying
Amount
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
Financial Assets December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral dependent impaired loans with specific valuation allowance and/or partial charge-offs (non-purchased credit impaired
loans)
|
|
$
|
73
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
73
|
|
SBA Servicing Asset
|
|
|
940
|
|
|
|
|
|
|
|
|
|
|
|
940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,013
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Carrying
Amount
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
Financial Assets December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral dependent impaired loans with specific valuation allowance and/or partial charge-offs (non-purchased credit impaired
loans)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
SBA Servicing Asset
|
|
|
1,147
|
|
|
|
|
|
|
|
|
|
|
|
1,147
|
|
Other real estate owned
|
|
|
325
|
|
|
|
|
|
|
|
|
|
|
|
325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,472
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no transfers of assets either between Level 1 and Level 2 nor in or out of Level 3 of the fair
value hierarchy for assets measured on a non-recurring basis for the periods ended December 31, 2016 and 2015.
The
following table presents losses related to nonrecurring fair value measurements. The losses related to assets held on the balance sheet at each respective period end (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral dependent impaired loans with specific valuation allowance and/or partial charge-offs (non-purchased credit impaired
loans)
|
|
$
|
508
|
|
|
$
|
|
|
|
$
|
222
|
|
SBA Servicing Asset
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
|
|
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
508
|
|
|
$
|
133
|
|
|
$
|
222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160
The following table presents the significant unobservable inputs used in the fair value
measurements for Level 3 assets measured at fair value on a non-recurring basis as of the dates indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
|
Valuation
Methodology
|
|
|
Unobservable
Valuation Inputs
|
|
|
Unobservable
Valuation
Input Values
|
|
|
|
|
|
|
Financial Assets December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral dependent impaired loans with specific valuation allowance and/or partial charge-off
|
|
$
|
73
|
|
|
|
Credit loss
estimate of aged
accounts receivable
collateral
|
|
|
|
Credit loss factors
on aging of
accounts receivable
collateral
|
|
|
|
20%
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rates
|
|
|
|
13%
|
|
SBA Servicing Asset
|
|
|
940
|
|
|
|
Discounted Cash
Flow
|
|
|
|
Estimated Average
Remaining Life of
SBA Portfolio
|
|
|
|
39 months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rates
|
|
|
|
12%
|
|
SBA Servicing Asset
|
|
|
1,147
|
|
|
|
Discounted Cash
Flow
|
|
|
|
Estimated Average
Remaining Life of
SBA Portfolio
|
|
|
|
61 months
|
|
Other real estate owned
|
|
|
325
|
|
|
|
Broker opinion of
value
|
|
|
|
Sales approach
Estimated
selling
costs
|
|
|
|
6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Financial Instruments
The following are the valuation methodologies utilized for estimating the fair value of certain financial instruments presented in the tables below.
Cash and due from banks
:
The carrying amount is assumed to be the fair value because of the liquidity of these instruments.
Interest earning deposits in other financial institutions
:
The carrying amount is assumed to be the fair value given the
short-term
nature of these deposits.
Investment Securities Held-to-Maturity:
The
fair value of investment securities held-to-maturity are based on price indications provided by nationally recognized, independent pricing sources utilized by the Companys bond accounting system provider, Vining Sparks. The Companys
held-to-maturity portfolio consists of municipal securities only. The fair value of the municipal securities are calculated using proprietary pricing models or matrices with inputs such as market information (MSRB reported trade data, bids, offers,
new issue data) and benchmark curves (Treasury, Swap, Libor and AAA municipal yield curve). These inputs are observable and as such, municipal securities are classified within the Level 2 fair value hierarchy.
Loans
: The fair value for loans is estimated by discounting the expected future cash flows using current interest rates at which
similar loans would be made to borrowers with similar credit ratings for the same remaining maturities, adjusted for the allowance for loan loss. Loans are segregated by type such as commercial and industrial, commercial real estate, construction
and other loans with similar credit characteristics and are further segmented into fixed and variable interest rate loan categories. Expected future cash flows are projected based on
161
contractual cash flows, adjusted for estimated prepayments. The inputs utilized in determining the fair value of loans are unobservable and accordingly, these financial assets are classified
within Level 3 of the fair value hierarchy.
Bank owned life insurance
: The carrying amount of bank owned life insurance
represents the total cash surrender value of each policy, which approximates fair value.
FHLB Stock
: FHLB stock has no
trading market, and is required as part of membership and is redeemable at par. FHLB is recorded at cost, which approximates fair value.
Non-Maturing Deposits
: The fair values for non-maturing deposits (deposits with no contractual termination date), which include
non-interest bearing demand deposits, interest bearing transaction accounts, money market deposits and savings accounts are equal to their carrying amounts, which represent the amounts payable on demand. Because the carrying value and fair
value are by definition identical, and accordingly non-maturity deposits are classified within Level 1 of the fair value hierarchy, these balances are not listed in the following tables.
Maturing Deposits
: The fair values of fixed maturity certificates of deposit (time deposits) are estimated using a discounted cash flow calculation that applies current market deposit
interest rates to the Companys current certificates of deposit interest rates for similar term certificates. The inputs utilized in determining the fair value of maturing deposits are observable and accordingly, these financial liabilities are
classified within Level 2 of the fair value hierarchy.
Securities Sold under Agreements to Repurchase
(Repos)
: The fair value of securities sold under agreements to repurchase is estimated based on the discounted value of future cash flows expected to be paid on the deposits. The carrying amounts of Repos with maturities of
90 days or less approximate their fair values. The fair value of Repos with maturities greater than 90 days is estimated based on the discounted value of the contractual future cash flows. The inputs utilized in determining the fair value of
securities sold under agreements to repurchase are observable and accordingly, these financial liabilities are classified within Level 2 of the fair value hierarchy.
Subordinated Debentures
: The fair value of the three variable rate subordinated debentures (debentures) is estimated using a discounted cash flow calculation that applies
the three month LIBOR plus the margin index at December 31, 2016, to the cash flows from the debentures, based on the actual interest rate the debentures were accruing at December 31, 2016. Because all three of the debentures re-priced on
December 15, 2016 based on the current three month LIBOR index rate plus the index margin at that date, and with relatively little to no change in the three month LIBOR index rate from the re-pricing date through December 31, 2016, the
current face value of the debentures and their calculated fair value are approximately equal. The inputs utilized in determining the fair value of subordinated debentures are observable and accordingly, these financial liabilities are classified
within Level 2 of the fair value hierarchy.
Fair Value of Commitments
:
Loan commitments that are priced on an
index plus a margin to a market rate of interest are reported at the carrying value of the loan commitment. Loan commitments on which the committed fixed interest rate is less than the current market rate were insignificant at December 31, 2016
and 2015.
162
The table below presents the carrying amounts and fair values of certain financial
instruments based on their fair value hierarchy indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
|
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
41,281
|
|
|
$
|
41,281
|
|
|
$
|
41,281
|
|
|
$
|
|
|
|
$
|
|
|
Interest earning deposits in other financial institutions
|
|
|
167,789
|
|
|
|
167,789
|
|
|
|
167,789
|
|
|
|
|
|
|
|
|
|
Investment securities held-to-maturity
|
|
|
42,027
|
|
|
|
41,937
|
|
|
|
|
|
|
|
41,937
|
|
|
|
|
|
Loans, net
|
|
|
2,030,852
|
|
|
|
2,054,701
|
|
|
|
|
|
|
|
|
|
|
|
2,054,701
|
|
Bank owned life insurance
|
|
|
51,216
|
|
|
|
51,216
|
|
|
|
|
|
|
|
|
|
|
|
51,216
|
|
FHLB Stock
|
|
|
9,182
|
|
|
|
9,182
|
|
|
|
|
|
|
|
|
|
|
|
9,182
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
|
29,480
|
|
|
|
29,480
|
|
|
|
|
|
|
|
29,480
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
|
|
18,816
|
|
|
|
18,816
|
|
|
|
|
|
|
|
18,816
|
|
|
|
|
|
Subordinated debentures
|
|
|
9,856
|
|
|
|
12,372
|
|
|
|
|
|
|
|
12,372
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
50,960
|
|
|
$
|
50,960
|
|
|
$
|
50,960
|
|
|
$
|
|
|
|
$
|
|
|
Interest earning deposits in other financial institutions
|
|
|
171,103
|
|
|
|
171,103
|
|
|
|
171,103
|
|
|
|
|
|
|
|
|
|
Investment securities held-to-maturity
|
|
|
42,036
|
|
|
|
42,339
|
|
|
|
|
|
|
|
42,339
|
|
|
|
|
|
Loans, net
|
|
|
1,817,481
|
|
|
|
1,851,220
|
|
|
|
|
|
|
|
|
|
|
|
1,851,220
|
|
Bank owned life insurance
|
|
|
49,912
|
|
|
|
49,912
|
|
|
|
|
|
|
|
|
|
|
|
49,912
|
|
FHLB Stock
|
|
|
8,014
|
|
|
|
8,014
|
|
|
|
|
|
|
|
|
|
|
|
8,014
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
|
58,502
|
|
|
|
58,502
|
|
|
|
|
|
|
|
58,502
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
|
|
14,360
|
|
|
|
14,360
|
|
|
|
|
|
|
|
14,360
|
|
|
|
|
|
Subordinated debentures
|
|
|
9,697
|
|
|
|
12,372
|
|
|
|
|
|
|
|
12,372
|
|
|
|
|
|
Note 24 Reclassification
Certain amounts in the prior years consolidated financial statements and related disclosures were reclassified to conform to the current year presentation with no effect on previously reported net
income or shareholders equity.
163
Note 25 Summary Quarterly Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 Quarters Ended
|
|
|
2015 Quarters Ended
|
|
(Dollars in thousands, except per share data)
|
|
Dec.
31
|
|
|
Sept.
30
|
|
|
June
30
|
|
|
Mar.
31
|
|
|
Dec.
31
|
|
|
Sept.
30
|
|
|
June
30
|
|
|
Mar.
31
|
|
Interest income
|
|
$
|
26,151
|
|
|
$
|
25,855
|
|
|
$
|
24,997
|
|
|
$
|
24,249
|
|
|
$
|
23,807
|
|
|
$
|
23,106
|
|
|
$
|
21,941
|
|
|
$
|
21,288
|
|
Interest expense
|
|
|
820
|
|
|
|
807
|
|
|
|
748
|
|
|
|
771
|
|
|
|
705
|
|
|
|
704
|
|
|
|
668
|
|
|
|
646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
25,331
|
|
|
|
25,048
|
|
|
|
24,249
|
|
|
|
23,478
|
|
|
|
23,102
|
|
|
|
22,402
|
|
|
|
21,273
|
|
|
|
20,642
|
|
Provision for loan losses
|
|
|
882
|
|
|
|
697
|
|
|
|
1,063
|
|
|
|
622
|
|
|
|
2,249
|
|
|
|
705
|
|
|
|
683
|
|
|
|
1,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
24,449
|
|
|
|
24,351
|
|
|
|
23,186
|
|
|
|
22,856
|
|
|
|
20,853
|
|
|
|
21,697
|
|
|
|
20,590
|
|
|
|
19,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income
|
|
|
3,159
|
|
|
|
3,058
|
|
|
|
2,975
|
|
|
|
2,820
|
|
|
|
3,039
|
|
|
|
2,988
|
|
|
|
3,095
|
|
|
|
2,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense
|
|
|
16,401
|
|
|
|
16,767
|
|
|
|
15,089
|
|
|
|
15,187
|
|
|
|
15,073
|
|
|
|
15,067
|
|
|
|
14,912
|
|
|
|
14,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before provision for income tax expense
|
|
|
11,207
|
|
|
|
10,642
|
|
|
|
11,072
|
|
|
|
10,489
|
|
|
|
8,819
|
|
|
|
9,618
|
|
|
|
8,773
|
|
|
|
6,894
|
|
Provision for income tax expense
|
|
|
4,037
|
|
|
|
4,059
|
|
|
|
3,952
|
|
|
|
3,905
|
|
|
|
3,312
|
|
|
|
3,355
|
|
|
|
3,506
|
|
|
|
2,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
7,170
|
|
|
$
|
6,583
|
|
|
$
|
7,120
|
|
|
$
|
6,584
|
|
|
$
|
5,507
|
|
|
$
|
6,263
|
|
|
$
|
5,267
|
|
|
$
|
4,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends and discount accretion or premium amortization
|
|
$
|
303
|
|
|
$
|
304
|
|
|
$
|
307
|
|
|
$
|
303
|
|
|
$
|
297
|
|
|
$
|
293
|
|
|
$
|
312
|
|
|
$
|
272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Available to Common Shareholders
|
|
$
|
6,867
|
|
|
$
|
6,279
|
|
|
$
|
6,813
|
|
|
$
|
6,281
|
|
|
$
|
5,210
|
|
|
$
|
5,970
|
|
|
$
|
4,955
|
|
|
$
|
3,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share
|
|
$
|
0.39
|
|
|
$
|
0.36
|
|
|
$
|
0.40
|
|
|
$
|
0.37
|
|
|
$
|
0.31
|
|
|
$
|
0.36
|
|
|
$
|
0.30
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share
|
|
$
|
0.39
|
|
|
$
|
0.36
|
|
|
$
|
0.39
|
|
|
$
|
0.36
|
|
|
$
|
0.30
|
|
|
$
|
0.35
|
|
|
$
|
0.29
|
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
164
Note 26 Condensed Financial Information of Parent Company
The following tables present the parent company only condensed balance sheets and the related statements of income and condensed
statements of cash flows for the dates and periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
Parent Company Only Condensed Balance Sheets
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
9,715
|
|
|
$
|
6,756
|
|
Loans
|
|
|
148
|
|
|
|
882
|
|
Investment in subsidiary
|
|
|
339,683
|
|
|
|
310,263
|
|
Accrued interest receivable and other assets
|
|
|
463
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
350,009
|
|
|
$
|
317,905
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Subordinated debentures
|
|
$
|
9,856
|
|
|
$
|
9,697
|
|
Accrued interest payable and other liabilities
|
|
|
1,968
|
|
|
|
1,401
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
11,824
|
|
|
|
11,098
|
|
SHAREHOLDERS EQUITY
|
|
|
338,185
|
|
|
|
306,807
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
350,009
|
|
|
$
|
317,905
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent Company Only Condensed Statements of Income
|
|
Years Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Interest Income
|
|
$
|
59
|
|
|
$
|
71
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
487
|
|
|
|
438
|
|
Operating Expenses
|
|
|
649
|
|
|
|
676
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
1,136
|
|
|
|
1,114
|
|
|
|
|
|
|
|
|
|
|
Loss Before Income Tax Benefit and Equity in Undistributed Earnings of Subsidiary
|
|
|
(1,077
|
)
|
|
|
(1,043
|
)
|
Income tax benefit
|
|
|
478
|
|
|
|
466
|
|
Loss Before Equity in Undistributed Earnings of Subsidiary
|
|
|
(599
|
)
|
|
|
(577
|
)
|
|
|
|
|
|
|
|
|
|
Equity in undistributed earnings of subsidiary
|
|
|
28,056
|
|
|
|
21,813
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
27,457
|
|
|
$
|
21,236
|
|
|
|
|
|
|
|
|
|
|
165
|
|
|
|
|
|
|
|
|
Parent Company Only Condensed Statements of Cash Flows
|
|
Years Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income:
|
|
$
|
27,457
|
|
|
$
|
21,236
|
|
Adjustments to reconcile net income to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Equity in undistributed earnings of subsidiary
|
|
|
(28,056
|
)
|
|
|
(21,813
|
)
|
Net accretion of discounts/premiums
|
|
|
(10
|
)
|
|
|
(19
|
)
|
Accretion of subordinated debenture discount
|
|
|
159
|
|
|
|
159
|
|
Increase in accrued interest receivable and other assets
|
|
|
(536
|
)
|
|
|
(27
|
)
|
Increase (decrease) in accrued interest payable and other liabilities
|
|
|
644
|
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(342
|
)
|
|
|
(548
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital contribution made to subsidiary
|
|
|
|
|
|
|
(1,000
|
)
|
Net decrease in loans
|
|
|
744
|
|
|
|
547
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
744
|
|
|
|
(453
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net proceeds from exercise of stock options
|
|
|
5,185
|
|
|
|
4,299
|
|
Restricted stock repurchase
|
|
|
(1,371
|
)
|
|
|
(971
|
)
|
Dividends paid on preferred stock
|
|
|
(1,257
|
)
|
|
|
(183
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
2,557
|
|
|
|
3,145
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
2,959
|
|
|
|
2,144
|
|
Cash, beginning of year
|
|
|
6,756
|
|
|
|
4,612
|
|
|
|
|
|
|
|
|
|
|
Cash, end of year
|
|
$
|
9,715
|
|
|
$
|
6,756
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
328
|
|
|
$
|
277
|
|
|
|
|
|
|
|
|
|
|
Note 27 Related Party Transactions
During 2016 and 2015, there were no existing transactions that are out of the ordinary course of business between CU Bancorp and its affiliates, including executive officers, directors, principal
shareholders (beneficial owners of 5% or more of our Common Stock), or the immediate family or associates of any of the foregoing persons, or trust for the benefit of employees such as a 401(k) trust.
Some of CU Bancorps directors and executive officers, as well as the companies with which such directors and executive officers are
associated, are customers of, and have had banking transactions with California United Bank in the ordinary course of business. All such transactions are on substantially the same terms, including interest and collateral as those prevailing for
comparable transactions with others. At the present time, California United Bank has one lending relationship with its directors and officers or entities associated with any of its directors or officers. California United Bank also engages in
deposit transactions with its executive officers and directors, and their immediate family or corporations of which the directors or officers may own a controlling interest, or also serve as directors or officers. These transactions are expected to
take place on substantially the same terms, including interest, as those prevailing for comparable transactions with others.
166
PART IV
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(b) Index to Exhibits
|
|
|
Exhibit
Number
|
|
Description
|
|
|
2.1
|
|
Agreement and Plan of Merger by and Among CU Bancorp and California United Bank and 1
st
Enterprise Bank Dated as of June 2, 2014
1
|
|
|
2.2
|
|
Amendment No. 1 to Agreement and Plan of
Merger
2
|
|
|
2.3
|
|
Amendment No. 2 to Agreement and Plan of
Merger
3
|
|
|
3.1
|
|
Articles of Incorporation of CU
Bancorp
4
|
|
|
3.2
|
|
Certificate of Determination of Non-Cumulative Perpetual Preferred Stock, Series A of CU Bancorp
5
|
|
|
4.1
|
|
Specimen form of Certificate for CU Bancorp Common Stock
6
|
|
|
4.2
|
|
Assignment & Assumption
Agreement
7
|
|
|
10.1*
|
|
2014 CU Bancorp Executive Performance Incentive Plan Amendment # 1 April 24, 2014
8
|
|
|
10.2*
|
|
Separation and Consulting
Agreement
9
|
|
|
10.3*
|
|
CU Bancorp 2007 Equity and Incentive Plan as Amended and Restated July 31, 2014, as Amended as of December 29, 2015
10
|
|
|
10.4*
|
|
CU Bancorp 2007 Equity and Incentive Plan as Amended and Restated July 31, 2014, as Amended as of December 15, 2016
|
|
|
10.5*
|
|
1
st
Enterprise Bank 2006 Stock Incentive Plan as Amended and Restated March 18, 2009
11
|
|
|
10.6*
|
|
Amendment of the 1
st
Enterprise Bank 2006 Stock Incentive Plan, July 31,
2014
12
|
|
|
10.7*
|
|
California United Bank 2005 Stock Option
Plan
13
|
|
|
10.8*
|
|
CU Bancorp 2012 Change in Control Severance
Plan
14
|
|
|
10.9*
|
|
Amendment to CU Bancorp 2012 Change in Control Severance Plan December 15, 2016
|
|
|
10.10*
|
|
Executive Salary Continuation Plan / Agreement and Schedule of Participants and Benefits
15
|
|
|
10.11*
|
|
2014 California United Bank Executive Performance Cash Incentive Plan
16
|
|
|
10.12
|
|
Form of Director / Officer Indemnification Agreement and Schedule of Agreements
17
|
|
|
10.13*
|
|
Amendment to CU Bancorp 2012 Change in Control Severance Plan March 14, 2017.
|
|
|
12.1
|
|
Ratio of Earnings to Fixed Charges
|
|
|
14.1
|
|
CU Bancorp Principles of Business Conduct & Ethics
|
|
|
14.2
|
|
CU Bancorp Code of Ethics Financial
Officers
18
|
|
|
21.1
|
|
Subsidiaries of the Registrant
19
|
|
|
23.1
|
|
Consent of Independent Registered Public Accounting Firm
|
|
|
24.1
|
|
Power of Attorney (see signature page hereto)
|
|
|
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
|
|
|
32.1
|
|
Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002
|
|
|
101.INS
|
|
XBRL Instance Document
|
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document
|
|
|
101.CAL
|
|
XBRL Taxonomy Calculation Linkbase Document
|
|
|
101.DEF
101.LAB
|
|
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
|
|
|
101.PRE
|
|
XBRL Taxonomy Presentation Linkbase Document
|
167
*
|
Refers to management contracts or compensatory plans or arrangements
|
|
Attached hereto
|
1
|
Incorporated by reference from Exhibit 2.1 to CU Bancorp Registration Statement on Form S-4 as filed on August 20, 2014.
|
2
|
Incorporated by reference from Exhibit 2.1 to CU Bancorp Registration Statement on Form S-4 as filed on August 20, 2014.
|
3
|
Incorporated by reference from Exhibit 2.2 to CU Bancorp Current Report on Form 8-K filed November 17, 2014.
|
4
|
Incorporated by reference from Exhibit 3.1 to CU Bancorp Registration Statement on Form S-4 as filed on April 13, 2012.
|
5
|
Incorporated by reference from Exhibit 3.3 to CU Bancorp Current Report on Form 8-K filed November 24, 2014.
|
6
|
Incorporated by reference from Exhibit 4.1 to CU Bancorp Registration Statement on Form S-4 as filed on April 13, 2012.
|
7
|
Incorporated by reference from Exhibit 4.2 to CU Bancorp Annual Report on Form 10-K filed March 13, 2015.
|
8
|
Incorporated by reference from Exhibit 10.1 to CU Bancorp Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2014.
|
9
|
Incorporated by reference from Exhibit 10.5 to CU Bancorp Registration Statement on Form S-4 as filed on August 20, 2014.
|
10
|
Incorporated by reference from Exhibit 10.4 to CU Bancorp Annual Report on Form 10-K filed March 14, 2016.
|
11
|
Incorporated by reference from Exhibit 10.5 to CU Bancorp Annual Report on Form 10-K filed March 13, 2015.
|
12
|
Incorporated by reference from Exhibit 10.6 to CU Bancorp Annual Report on Form 10-K filed March 13, 2015.
|
13
|
Incorporated by reference from Exhibit 10.1 to CU Bancorp Registration Statement on Form S-4 as filed on April 13, 2012.
|
14
|
Incorporated by reference from Exhibit 10.3 to CU Bancorp Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2013.
|
15
|
Incorporated by reference from Exhibit 10.4 to CU Bancorp Annual Report on Form 10-K filed March 13, 2014.
|
16
|
Incorporated by reference from Exhibit 10.6 to CU Bancorp Annual Report on Form 10-K filed March 13, 2014.
|
17
|
Incorporated by reference from Exhibit 10.7 to CU Bancorp Annual Report on Form 10-K filed March 13, 2014.
|
18
|
Incorporated by reference from Exhibit 23.1 to CU Bancorp Annual Report on Form 10-K filed March 14, 2016.
|
19
|
Incorporated by reference from Exhibit 21.1 to CU Bancorp Registration Statement on Form S-4 as filed on August 20, 2014.
|
168