Note 1 - Basis of
Financial Statement Presentation
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.
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
(SEC).
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 8 Borrowings and Subordinated
Debentures.
Certain information and footnote disclosures presented in the annual consolidated financial statements are not included in
the interim consolidated financial statements. Accordingly, the accompanying unaudited interim consolidated financial statements should be read in conjunction with the 2016 Annual Report on Form 10-K. In the opinion of management, the accompanying
interim consolidated financial statements contain all necessary adjustments of a normal recurring nature, to present fairly the consolidated financial position of the Company and the results of its operations for the interim periods presented.
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 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.
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Note 2 - Recent Accounting Pronouncements
Recent Accounting Standards Not Yet Effective
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09,
Revenue from Contracts with Customers (Topic 606),
which replaced almost all existing revenue recognition guidance in current 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 Accounting Standards Codification (ASC) Topic 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 Topic 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.
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 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
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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 Pacific Coast Bankers Bank (PCBB), Texas Independent Bank (TIB) and Federal Home Loan Bank (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 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 March 31, 2017, 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
|
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|
|
|
Distributions received from equity method investees
|
|
|
|
Beneficial interests in securitization transactions
|
|
|
|
Separately identifiable cash flows and application of the predominance principle
|
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 does not expect the adoption of this
ASU to have a material effect 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 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 2017-01,
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 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.
In March 2017, the FASB issued ASU 2017-08,
ReceivablesNonrefundable Fees and Other Costs (Topic 310): Premium Amortization on Purchased Callable Debt Securities,
which shortens the period of amortization of the premium on certain callable debt securities to the earliest call date.
ASU 2017-08 applies to securities that have explicit, non-contingent call features that are callable at fixed prices and on preset dates. Securities purchased at a discount and mortgage-backed securities in which early repayment is based on
prepayment of the underlying assets of the security are outside the scope of ASU 2017-08. For public business entities, the standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15,
2018. Early adoption is permitted, including adoption in an interim period, and applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company
does not expect the adoption of this ASU to have a material effect on its consolidated financial statements.
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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):
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Total Shareholders Equity
|
|
$
|
346,448
|
|
|
$
|
338,185
|
|
Less: Preferred stock
|
|
|
16,887
|
|
|
|
16,955
|
|
Less: Goodwill
|
|
|
64,603
|
|
|
|
64,603
|
|
Less: Core deposit and leasehold right intangibles, net
|
|
|
5,970
|
|
|
|
6,300
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity
|
|
$
|
258,988
|
|
|
$
|
250,327
|
|
|
|
|
|
|
|
|
|
|
Common shares issued and outstanding
|
|
|
17,834,183
|
|
|
|
17,759,006
|
|
Book value per common share
|
|
$
|
18.48
|
|
|
$
|
18.09
|
|
|
|
|
|
|
|
|
|
|
Tangible book value per common share
|
|
$
|
14.52
|
|
|
$
|
14.10
|
|
|
|
|
|
|
|
|
|
|
Note 4 - Computation of Earnings per Common Share
In calculating potential common shares used to determine diluted earnings per share, U.S. GAAP requires that assumed proceeds under the
treasury stock method to exclude the amount of excess tax benefits that would have been recognized in additional paid-in capital.
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):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net Income
|
|
$
|
7,783
|
|
|
$
|
6,584
|
|
Less: Preferred stock dividends and discount accretion
|
|
|
301
|
|
|
|
303
|
|
|
|
|
|
|
|
|
|
|
Net Income available to common shareholders
|
|
$
|
7,482
|
|
|
$
|
6,281
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding
|
|
|
17,532,104
|
|
|
|
17,041,427
|
|
Dilutive effect of potential common share issuances from stock options and restricted
stock
|
|
|
224,351
|
|
|
|
375,733
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding
|
|
|
17,756,455
|
|
|
|
17,417,160
|
|
|
|
|
|
|
|
|
|
|
Income per common share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.43
|
|
|
$
|
0.37
|
|
Diluted
|
|
$
|
0.42
|
|
|
$
|
0.36
|
|
Anti-dilutive shares not included in the calculation of diluted earnings per share
|
|
|
4,150
|
|
|
|
3,000
|
|
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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
|
|
|
|
|
March 31, 2017
|
|
Amortized
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Market
Value
|
|
Available-for-sale investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Govt Agency and Sponsored Agency - Note Securities
|
|
$
|
10,000
|
|
|
$
|
|
|
|
$
|
44
|
|
|
$
|
9,956
|
|
U.S. Govt Agency - SBA Securities
|
|
|
121,855
|
|
|
|
146
|
|
|
|
687
|
|
|
|
121,314
|
|
U.S. Govt Agency - GNMA Mortgage-Backed Securities
|
|
|
21,122
|
|
|
|
56
|
|
|
|
283
|
|
|
|
20,895
|
|
U.S. Govt Sponsored Agency - CMO & Mortgage-Backed Securities
|
|
|
250,344
|
|
|
|
75
|
|
|
|
3,902
|
|
|
|
246,517
|
|
Asset Backed Securities
|
|
|
6,913
|
|
|
|
4
|
|
|
|
142
|
|
|
|
6,775
|
|
U.S. Treasury Notes
|
|
|
64,089
|
|
|
|
|
|
|
|
147
|
|
|
|
63,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale
|
|
|
474,323
|
|
|
|
281
|
|
|
|
5,205
|
|
|
|
469,399
|
|
Held-to-maturity investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Securities
|
|
|
40,945
|
|
|
|
229
|
|
|
|
15
|
|
|
|
41,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held-to-maturity
|
|
|
40,945
|
|
|
|
229
|
|
|
|
15
|
|
|
|
41,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
$
|
515,268
|
|
|
$
|
510
|
|
|
$
|
5,220
|
|
|
$
|
510,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized
|
|
|
|
|
December 31, 2016
|
|
Amortized
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Market
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page
14
of
7
2
The Companys investment securities portfolio at March 31, 2017 consists of A-rated or
above investment-grade securities. At March 31, 2017 and December 31, 2016, securities with a market value of $219 million and $205 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 8 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
|
|
March 31, 2017
|
|
Fair
Value
|
|
|
Gross
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
Loss
|
|
Available-for-sale investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Govt Agency and Sponsored Agency Note Securities
|
|
$
|
9,956
|
|
|
$
|
44
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9,956
|
|
|
$
|
44
|
|
U.S. Govt. Agency SBA Securities
|
|
|
58,673
|
|
|
|
422
|
|
|
|
37,546
|
|
|
|
265
|
|
|
|
96,219
|
|
|
|
687
|
|
U.S. Govt. Agency GNMA Mortgage-Backed Securities
|
|
|
9,191
|
|
|
|
108
|
|
|
|
7,725
|
|
|
|
175
|
|
|
|
16,916
|
|
|
|
283
|
|
U.S. Govt. Sponsored Agency CMO & Mortgage-Backed Securities
|
|
|
217,719
|
|
|
|
3,821
|
|
|
|
7,689
|
|
|
|
81
|
|
|
|
225,408
|
|
|
|
3,902
|
|
Asset Backed Securities
|
|
|
|
|
|
|
|
|
|
|
4,782
|
|
|
|
142
|
|
|
|
4,782
|
|
|
|
142
|
|
U.S Treasury Notes
|
|
|
63,943
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
63,943
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale
|
|
$
|
359,482
|
|
|
$
|
4,542
|
|
|
$
|
57,742
|
|
|
$
|
663
|
|
|
$
|
417,224
|
|
|
$
|
5,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Securities
|
|
$
|
7,162
|
|
|
$
|
14
|
|
|
$
|
307
|
|
|
$
|
1
|
|
|
$
|
7,469
|
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held-to-maturity
|
|
$
|
7,162
|
|
|
$
|
14
|
|
|
$
|
307
|
|
|
$
|
1
|
|
|
$
|
7,469
|
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
< 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 and Sponsored Agency Note Securities
|
|
$
|
9,969
|
|
|
$
|
31
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9,969
|
|
|
$
|
31
|
|
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 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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-temporarily impaired at March 31, 2017 or December 31, 2016, and did not recognize any impairment charges in the
consolidated statements of income.
Page
15
of
7
2
The amortized cost, fair value and the weighted average yield of debt securities at
March 31, 2017, 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
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Maturities Schedule of Securities (Dollars in
thousands)
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Weighted
Average
Yield
|
|
Available-for-sale investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Due through one year
|
|
$
|
51,271
|
|
|
$
|
51,239
|
|
|
|
0.87
|
%
|
Due after one year through five years
|
|
|
37,098
|
|
|
|
36,794
|
|
|
|
1.02
|
%
|
Due after five years through ten years
|
|
|
64,322
|
|
|
|
63,545
|
|
|
|
1.79
|
%
|
Due after ten years
|
|
|
321,632
|
|
|
|
317,821
|
|
|
|
2.02
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale
|
|
$
|
474,323
|
|
|
$
|
469,399
|
|
|
|
1.78
|
%
|
Held-to-maturity investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Due through one year
|
|
$
|
2,148
|
|
|
$
|
2,149
|
|
|
|
1.08
|
%
|
Due after one year through five years
|
|
|
35,402
|
|
|
|
35,600
|
|
|
|
1.63
|
%
|
Due after five years through ten years
|
|
|
1,924
|
|
|
|
1,921
|
|
|
|
1.88
|
%
|
Due after ten years
|
|
|
1,471
|
|
|
|
1,489
|
|
|
|
3.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held-to-maturity
|
|
$
|
40,945
|
|
|
$
|
41,159
|
|
|
|
1.68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
$
|
515,269
|
|
|
$
|
510,558
|
|
|
|
1.77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average yields in the above table are based on effective rates of book balances at the end of the
period.
Investment in Federal Home Loan Bank (FHLB) Common Stock
The Companys investment in the common stock of the FHLB of San Francisco is carried at cost and was $9.1 million at March 31, 2017
and $9.1 million at December 31, 2016. 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 8 - Borrowings and Subordinated
Debentures for a detailed discussion regarding the Companys borrowings and the related requirements to hold FHLB common stock.
Page
16
of
7
2
Note 6 - Loans
The following table presents the composition of the Companys loan portfolio as of the dates indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
|
Principal
|
|
|
Net Unaccreted
Discounts,
Net Deferred
Fees
|
|
|
Total
|
|
Commercial and Industrial Loans:
|
|
$
|
486,646
|
|
|
$
|
(2,366
|
)
|
|
$
|
484,280
|
|
Loans Secured by Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner-Occupied Nonresidential Properties
|
|
|
439,730
|
|
|
|
(3,461
|
)
|
|
|
436,269
|
|
Other Nonresidential Properties
|
|
|
694,637
|
|
|
|
(5,622
|
)
|
|
|
689,015
|
|
Construction, Land Development and Other Land
|
|
|
193,613
|
|
|
|
(1,041
|
)
|
|
|
192,572
|
|
1-4 Family Residential Properties
|
|
|
119,853
|
|
|
|
(1,585
|
)
|
|
|
118,268
|
|
Multifamily Residential Properties
|
|
|
95,854
|
|
|
|
(371
|
)
|
|
|
95,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans Secured by Real Estate
|
|
|
1,543,687
|
|
|
|
(12,080
|
)
|
|
|
1,531,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Loans:
|
|
|
30,451
|
|
|
|
(200
|
)
|
|
|
30,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
$
|
2,060,784
|
|
|
$
|
(14,646
|
)
|
|
$
|
2,046,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Small Business Administration Loans
Included in the loan portfolio is $29 million in loans that were originated under the guidelines of the Small Business Administration
(SBA) program of which $5 million is guaranteed. The total portfolio of the SBA contractual loan balances serviced by the Company at March 31, 2017 was $102 million, of which $73 million has been sold.
At March 31, 2017, there were no loans classified as held for sale. At March 31, 2017, the balance of SBA 7a loans originated during
the quarter is $421 thousand, of which $316 thousand is guaranteed by the SBA. The Company does not currently plan on selling these loans, but it may choose to do so in the future.
Page
17
of
7
2
Allowance for Loan Loss
The following table is a summary of the activity for the allowance for loan loss for the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Allowance for loan loss at beginning of period
|
|
$
|
19,374
|
|
|
$
|
15,682
|
|
Provision for loan losses
|
|
|
|
|
|
|
622
|
|
Net (charge-offs) recoveries:
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
|
|
|
|
|
|
Recoveries
|
|
|
231
|
|
|
|
241
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries
|
|
|
231
|
|
|
|
241
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan loss at end of period
|
|
$
|
19,605
|
|
|
$
|
16,545
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries to average loans
|
|
|
0.01
|
%
|
|
|
0.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Allowance for loan loss to total loans
|
|
|
0.96
|
%
|
|
|
0.94
|
%
|
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
|
|
Three Months Ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan loss Beginning balance
|
|
$
|
7,130
|
|
|
$
|
3,084
|
|
|
$
|
8,487
|
|
|
$
|
673
|
|
|
$
|
19,374
|
|
Provision for loan losses
|
|
|
(497
|
)
|
|
|
63
|
|
|
|
739
|
|
|
|
(305
|
)
|
|
|
|
|
Net (charge-offs) recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries
|
|
|
229
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries
|
|
|
229
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
6,862
|
|
|
$
|
3,147
|
|
|
$
|
9,228
|
|
|
$
|
368
|
|
|
$
|
19,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
and
Industrial
|
|
|
Construction,
Land
Development
and
Other Land
|
|
|
Commercial
and
Other
Real Estate
|
|
|
Other
|
|
|
Total
|
|
Three Months Ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan loss Beginning balance
|
|
$
|
5,924
|
|
|
$
|
2,076
|
|
|
$
|
6,821
|
|
|
$
|
861
|
|
|
$
|
15,682
|
|
Provision for loan losses
|
|
|
561
|
|
|
|
635
|
|
|
|
(448
|
)
|
|
|
(126
|
)
|
|
|
622
|
|
Net (charge-offs) recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries
|
|
|
240
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries
|
|
|
240
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
6,725
|
|
|
$
|
2,711
|
|
|
$
|
6,374
|
|
|
$
|
735
|
|
|
$
|
16,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page
18
of
7
2
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
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Collectively evaluated for impairment
|
|
|
6,862
|
|
|
|
3,147
|
|
|
|
9,228
|
|
|
|
368
|
|
|
|
19,605
|
|
Purchased credit impaired (loans acquired with deteriorated credit quality)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Allowance for Loan Loss
|
|
$
|
6,862
|
|
|
$
|
3,147
|
|
|
$
|
9,228
|
|
|
$
|
368
|
|
|
$
|
19,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
243
|
|
|
$
|
|
|
|
$
|
239
|
|
|
$
|
|
|
|
$
|
482
|
|
Collectively evaluated for impairment
|
|
|
483,758
|
|
|
|
192,572
|
|
|
|
1,337,572
|
|
|
|
30,251
|
|
|
|
2,044,153
|
|
Purchased credit impaired (loans acquired with deteriorated credit quality)
|
|
|
279
|
|
|
|
|
|
|
|
1,224
|
|
|
|
|
|
|
|
1,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans Receivable
|
|
$
|
484,280
|
|
|
$
|
192,572
|
|
|
$
|
1,339,035
|
|
|
$
|
30,251
|
|
|
$
|
2,046,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page
19
of
7
2
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. Individual loan risk
ratings are updated continuously or at 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.
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
and
Industrial
|
|
|
Construction,
Land
Development
and
Other Land
|
|
|
Commercial
and
Other
Real Estate
|
|
|
Other
|
|
|
Total
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
438,605
|
|
|
$
|
192,572
|
|
|
$
|
1,315,830
|
|
|
$
|
30,124
|
|
|
$
|
1,977,131
|
|
Special Mention
|
|
|
20,672
|
|
|
|
|
|
|
|
7,028
|
|
|
|
38
|
|
|
|
27,738
|
|
Substandard
|
|
|
25,003
|
|
|
|
|
|
|
|
16,177
|
|
|
|
89
|
|
|
|
41,269
|
|
Doubtful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
484,280
|
|
|
$
|
192,572
|
|
|
$
|
1,339,035
|
|
|
$
|
30,251
|
|
|
$
|
2,046,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
and
Industrial
|
|
|
Construction,
Land
Development
and
Other Land
|
|
|
Commercial
and
Other
Real Estate
|
|
|
Other
|
|
|
Total
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page
20
of
7
2
Aging Analysis of Past Due and Non-Accrual Loans
The following tables present an aging analysis of the recorded investment of past due loans and non-accrual loans as of the dates indicated
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
$
|
86
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
86
|
|
|
$
|
521
|
|
|
$
|
483,673
|
|
|
$
|
484,280
|
|
Construction, Land Development and Other Land
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
192,572
|
|
|
|
192,572
|
|
Commercial and Other Real Estate
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
209
|
|
|
|
239
|
|
|
|
1,338,587
|
|
|
|
1,339,035
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,251
|
|
|
|
30,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
295
|
|
|
$
|
0
|
|
|
$
|
|
|
|
$
|
295
|
|
|
$
|
760
|
|
|
$
|
2,045,083
|
|
|
$
|
2,046,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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.
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 of the loan 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 March 31, 2017 and December 31, 2016.
Page
21
of
7
2
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). This table excludes purchased credit impaired loans (loans acquired in acquisitions with
deteriorated credit quality) of $1.5 million and $1.7 million at March 31, 2017 and December 31, 2016, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
With no specific allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
$
|
243
|
|
|
$
|
639
|
|
|
$
|
|
|
|
$
|
378
|
|
|
$
|
1,383
|
|
|
$
|
|
|
Commercial and Other Real Estate
|
|
|
239
|
|
|
|
277
|
|
|
|
|
|
|
|
245
|
|
|
|
282
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
|
243
|
|
|
|
639
|
|
|
|
|
|
|
|
378
|
|
|
|
1,383
|
|
|
|
|
|
Commercial and Other Real Estate
|
|
|
239
|
|
|
|
277
|
|
|
|
|
|
|
|
245
|
|
|
|
282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
482
|
|
|
$
|
916
|
|
|
$
|
|
|
|
$
|
623
|
|
|
$
|
1,665
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
With no specific allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
$
|
245
|
|
|
$
|
|
|
|
$
|
256
|
|
|
$
|
|
|
Commercial and Other Real Estate
|
|
|
242
|
|
|
|
|
|
|
|
666
|
|
|
|
|
|
With a specific allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
|
245
|
|
|
|
|
|
|
|
256
|
|
|
|
|
|
Commercial and Other Real Estate
|
|
|
242
|
|
|
|
|
|
|
|
666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
487
|
|
|
$
|
|
|
|
$
|
922
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of additional information pertaining to impaired loans for the periods indicated
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Interest foregone on impaired loans
|
|
$
|
13
|
|
|
$
|
25
|
|
Cash collections applied to reduce principal balance
|
|
$
|
21
|
|
|
$
|
24
|
|
Interest income recognized on cash collections
|
|
$
|
|
|
|
$
|
|
|
Page
22
of
7
2
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 March 31, 2017 and March 31, 2016 (dollars in thousands). These tables include TDR loans that were purchased credit impaired (PCI). TDR
loans that are non-PCI loans are included in the Impaired Loans tables above. As of March 31, 2017, there were two PCI loans that are considered to be TDR loans with a recorded investment of $92 thousand and unpaid principal balances of $258
thousand.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the
Three Months Ended
March 31, 2017
|
|
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Interest
Income
Recognized
|
|
Commercial and Industrial
|
|
$
|
319
|
|
|
$
|
534
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
319
|
|
|
$
|
534
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the
Three Months Ended
March 31, 2016
|
|
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Interest
Income
Recognized
|
|
Commercial and Industrial
|
|
$
|
393
|
|
|
$
|
615
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
393
|
|
|
$
|
615
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no loans restructured during the three months ended March 31, 2017 or March 31, 2016.
There have been no defaulted restructured loans during the three months ended March 31, 2017 or March 31, 2016 for loans that
were restructured in the preceding 12-month periods.
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 March 31, 2017.
Page
23
of
7
2
Loans Acquired Through Acquisition
The following table reflects the accretable net discount for acquired loans for the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Balance, beginning of period
|
|
$
|
9,611
|
|
|
$
|
14,610
|
|
Accretion, included in interest income
|
|
|
(1,115
|
)
|
|
|
(1,133
|
)
|
Reclassifications to non-accretable yield
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
8,496
|
|
|
$
|
13,470
|
|
|
|
|
|
|
|
|
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Unpaid Principal
Balance
|
|
|
Carrying
Value
|
|
|
Unpaid Principal
Balance
|
|
|
Carrying
Value
|
|
Commercial and Industrial
|
|
$
|
594
|
|
|
$
|
279
|
|
|
$
|
622
|
|
|
$
|
299
|
|
Commercial and Other Real Estate
|
|
|
1,596
|
|
|
|
1,224
|
|
|
|
1,997
|
|
|
|
1,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,190
|
|
|
$
|
1,503
|
|
|
$
|
2,619
|
|
|
$
|
1,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table reflects the activities in the accretable net discount for PCI loans for the period
indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Balance, beginning of period
|
|
$
|
161
|
|
|
$
|
246
|
|
Accretion, included in interest income
|
|
|
(23
|
)
|
|
|
(20
|
)
|
Reclassifications from non-accretable yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
138
|
|
|
$
|
226
|
|
|
|
|
|
|
|
|
|
|
Page
24
of
7
2
Note 7 Qualified Affordable Housing Project Investments
The Companys investment in Qualified Affordable Housing Projects that generate Low Income Housing Tax Credits (LIHTC) was
$6.1 million at March 31, 2017 and $6.2 million at December 31, 2016. The funding liability for the LIHTC at March 31, 2017 and December 31, 2016 was $3.4 million. The amount of tax credits and other tax benefits recognized was
$560 thousand and $573 thousand for the three months ended March 31, 2017 and March 31, 2016, respectively. Further, the amount of amortization expense included in the provision for income taxes was $439 thousand and $448 thousand for the
three months ended March 31, 2017 and March 31, 2016, respectively.
Note 8 - 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 $50 million and $48 million were pledged to secure the Repos at March 31, 2017 and December 31, 2016, 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Date Issued
|
|
Amount
|
|
|
Interest Rate
|
|
|
Original
Term
|
|
|
Maturity Date
|
|
March 31, 2017
|
|
$
|
11,939
|
|
|
|
0.20% 0.25%
|
|
|
|
3 days
|
|
|
|
April 3, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,939
|
|
|
|
0.24%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB 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 $749 million, which represents approximately 25% of the Banks total assets, as reported by the Bank in its December 31, 2016 Federal Financial Institution Examination Council
(FFIEC) Call Report.
As of March 31, 2017, the Company had $1 billion of loan collateral pledged with the FHLB which
provides $688 million in borrowing capacity. The Company also has $16 million in investment securities pledged with the FHLB serving as collateral for an additional $14 million in borrowing capacity. In addition, the Company must maintain an
investment in the capital stock of the FHLB. Under the FHLB Act, the FHLB has a statutory lien on the FHLB capital stock that the Company owns and the FHLB capital stock serves as further collateral under the borrowing line.
The Company had no outstanding advances (borrowings) with the FHLB as of March 31, 2017 or December 31, 2016.
Page
25
of
7
2
Subordinated Debentures
The following table summarizes the terms of each issuance of subordinated debentures outstanding as of the dates indicated (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Series
|
|
Amount
(in thousands)
|
|
|
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
|
%
|
|
|
3.18
|
%
|
|
|
06/15/17
|
|
Trust II
|
|
|
3,093
|
|
|
|
12/23/05
|
|
|
|
03/15/36
|
|
|
|
3 month LIBOR + 1.75
|
%
|
|
|
2.88
|
%
|
|
|
06/15/17
|
|
Trust III
|
|
|
3,093
|
|
|
|
06/30/06
|
|
|
|
09/18/36
|
|
|
|
3 month LIBOR + 1.85
|
%
|
|
|
2.98
|
%
|
|
|
06/15/17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
12,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized fair value adjustment
|
|
|
(2,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
9,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Series
|
|
Amount
(in thousands)
|
|
|
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
|
|
|
|
09/18/36
|
|
|
|
3 month LIBOR + 1.85
|
%
|
|
|
2.81
|
%
|
|
|
03/15/17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
12,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized fair value adjustment
|
|
|
(2,516
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
9,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had an aggregate outstanding contractual balance of $12.4 million in subordinated debentures at
March 31, 2017. These 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 London Interbank Offered
Rate (LIBOR) plus a margin (see tables above). All three subordinated debentures had their interest rates reset in March 2017 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.
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.
Page
26
of
7
2
Note 9 - 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 Bank
At March 31, 2017, the Company has eleven interest rate swap agreements with customers and eleven offsetting interest-rate swaps with a
counterparty bank. The swap agreements are not designated as hedging instruments. The purpose 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. The interest rate swap derivatives acquired from
1
st
Enterprise Bank are subject to a master netting arrangement with one counterparty bank. None of the 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 March 31, 2017 and December 31,
2016, the total notional amount of the Companys swaps with the counterparty bank was $21 million and $24 million, respectively. The outstanding swaps have remaining maturities of up to 5 years as of March 31, 2017.
The following tables present the fair values of the asset and liability of the Companys derivative instruments acquired from 1
st
Enterprise Bank as of the dates and periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Interest rate swap contracts fair value
|
|
$
|
421
|
|
|
$
|
523
|
|
|
|
|
|
|
|
|
|
|
Balance sheet location
|
|
|
Accrued Interest
Receivable and Other
Assets
|
|
|
|
Accrued Interest
Receivable and Other
Assets
|
|
|
|
|
|
Liability Derivatives
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Interest rate swap contracts fair value
|
|
$
|
421
|
|
|
$
|
523
|
|
|
|
|
|
|
|
|
|
|
Balance sheet location
|
|
|
Accrued Interest
Payable and Other
Liabilities
|
|
|
|
Accrued Interest
Payable and Other
Liabilities
|
|
Page
27
of
7
2
Derivative Financial Instruments Acquired from PC Bancorp
At March 31, 2017, the Company also has fourteen pay-fixed, receive-variable, interest rate swaps with one counterparty bank that are
designed to convert fixed rate loans into variable rate loans.
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
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Fair Value Hedges
|
|
|
|
|
|
|
|
|
Total interest rate contracts notional amount
|
|
$
|
17,392
|
|
|
$
|
17,642
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Interest rate swap contracts fair value
|
|
$
|
40
|
|
|
$
|
95
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Interest rate swap contracts fair value
|
|
|
467
|
|
|
|
589
|
|
|
|
|
|
|
|
|
|
|
Total interest rate contracts fair value
|
|
$
|
507
|
|
|
$
|
684
|
|
|
|
|
|
|
|
|
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Interest rate swap contracts loans
|
|
|
|
|
|
|
|
|
Increase in fair value of interest rate swap contracts
|
|
$
|
55
|
|
|
$
|
39
|
|
Payments on interest rate swap contracts on loans
|
|
|
(54
|
)
|
|
|
(61
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in other non-interest income
|
|
|
1
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Interest rate swap contracts loans
|
|
|
|
|
|
|
|
|
Increase in fair value of interest rate swap contracts
|
|
$
|
122
|
|
|
$
|
23
|
|
Increase (decrease) in fair value of hedged loans
|
|
|
(12
|
)
|
|
|
212
|
|
Payment on interest rate swap contracts on loans
|
|
|
(114
|
)
|
|
|
(230
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in interest income on loans
|
|
$
|
(4
|
)
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
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 March 31, 2017, the Company has pledged $1.7 million in investment securities, $2.7 million in certificates of deposit, for a total of $4.4 million, as collateral under the swap
agreements.
Page
28
of
7
2
Note 10 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 as permitted under accounting guidance. 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 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 /
Liabilities
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
|
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts fair value (See Note 9 Derivative Financial
Instruments)
|
|
$
|
421
|
|
|
$
|
|
|
|
$
|
421
|
|
|
$
|
421
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
421
|
|
|
$
|
|
|
|
$
|
421
|
|
|
$
|
421
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts fair value (See Note 9 Derivative Financial
Instruments)
|
|
$
|
928
|
|
|
$
|
|
|
|
$
|
928
|
|
|
$
|
928
|
|
|
$
|
4,451
|
|
|
$
|
3,523
|
|
Securities sold under agreements to repurchase (See Note 8 Borrowings and Subordinated
Debentures)
|
|
|
11,939
|
|
|
|
|
|
|
|
11,939
|
|
|
|
11,939
|
|
|
|
49,901
|
|
|
|
37,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,867
|
|
|
$
|
|
|
|
$
|
12,867
|
|
|
$
|
12,867
|
|
|
$
|
54,352
|
|
|
$
|
41,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page
29
of
7
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Amounts
Recognized
in the
Consolidated
Balance
Sheets
|
|
|
Gross
Amounts
Offset in the
Consolidated
Balance
Sheets
|
|
|
Net Amounts
of Assets /
Liabilities
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 9 Derivative Financial
Instruments)
|
|
$
|
523
|
|
|
$
|
|
|
|
$
|
523
|
|
|
$
|
523
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
523
|
|
|
$
|
|
|
|
$
|
523
|
|
|
$
|
523
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts fair value (See Note 9 Derivative Financial
Instruments)
|
|
$
|
1,207
|
|
|
$
|
|
|
|
$
|
1,207
|
|
|
$
|
1,207
|
|
|
$
|
4,555
|
|
|
$
|
3,348
|
|
Securities sold under agreements to repurchase (See Note 8 Borrowings and Subordinated
Debentures)
|
|
|
18,816
|
|
|
|
|
|
|
|
18,816
|
|
|
|
18,816
|
|
|
|
48,204
|
|
|
|
29,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,023
|
|
|
$
|
|
|
|
$
|
20,023
|
|
|
$
|
20,023
|
|
|
$
|
52,759
|
|
|
$
|
32,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 11 - 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 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. 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.
At March 31, 2017 future compensation expense related to unvested restricted stock grants are reflected in the table below (dollars in
thousands):
|
|
|
|
|
Future Restricted Stock Expense
|
|
|
|
Remainder of 2017
|
|
$
|
2,451
|
|
2018
|
|
|
1,596
|
|
2019
|
|
|
539
|
|
2020
|
|
|
171
|
|
Thereafter
|
|
|
22
|
|
|
|
|
|
|
Total
|
|
$
|
4,779
|
|
|
|
|
|
|
At March 31, 2017, the weighted-average period over which the total compensation cost related to unvested
restricted stock grants not yet recognized is 2.75 years.
Page
30
of
7
2
Stock Options
The following table summarizes the share option activity under the plans as of the date and for the period indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
Outstanding stock options at December 31, 2016
|
|
|
47,697
|
|
|
$
|
12.69
|
|
|
|
1.43
|
|
|
$
|
1,102
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(27,942
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding stock options at March 31, 2017
|
|
|
19,755
|
|
|
$
|
8.67
|
|
|
|
2.13
|
|
|
$
|
612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable options at March 31, 2017
|
|
|
19,755
|
|
|
$
|
8.67
|
|
|
|
2.13
|
|
|
$
|
612
|
|
Unvested options at March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised during the three months ended March 31, 2017 and 2016 was
$642 thousand and $2.9 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 period indicated:
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Weighted-Average
Grant-Date Fair Value
per Share
|
|
Restricted Stock:
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2016
|
|
|
282,082
|
|
|
$
|
21.98
|
|
Granted
|
|
|
65,615
|
|
|
|
38.04
|
|
Vested
|
|
|
(30,582
|
)
|
|
|
20.87
|
|
Forfeited
|
|
|
(5,084
|
)
|
|
|
21.59
|
|
|
|
|
|
|
|
|
|
|
Unvested at March 31, 2017
|
|
|
312,031
|
|
|
$
|
25.79
|
|
|
|
|
|
|
|
|
|
|
Restricted stock compensation expense was $773 thousand and $834 thousand for the three month period ended
March 31, 2017 and 2016, 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. 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 meet certain conditions as stipulated in the RSU agreement and are not included in the Companys shares issued and outstanding as of March 31, 2017.
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.
Page
31
of
7
2
Note 12 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.
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 2017, the Company issued 27,942 shares of stock from the exercise of stock options for
a total value of $435 thousand. The Company also issued 65,615 shares of restricted stock to the Companys directors and employees, 5,084 shares of unvested restricted stock were forfeited related to employee turnover and 13,296 shares that had
a value of $524 thousand were repurchased 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.
Preferred Stock
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 preferred 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 March 31, 2017
is $1.0 million. The net carrying value of the CU Bancorp Preferred Stock is $17 million ($16 million plus of $0.5 million net premium) as of March 31, 2017.
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.
Page
32
of
7
2
Accumulated Other Comprehensive Income (Loss)
The following table presents the changes in accumulated other comprehensive loss by component for the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
Consolidated
Statement of
Income Line
Item
for Reclassified
Items
|
|
|
2017
|
|
|
2016
|
|
|
Beginning balance, net of tax
|
|
$
|
(3,019
|
)
|
|
$
|
(816
|
)
|
|
|
Net unrealized gain arising during the period
|
|
|
426
|
|
|
|
1,328
|
|
|
|
Related tax effect
|
|
|
(179
|
)
|
|
|
(559
|
)
|
|
|
Reclassification of gain on investment securities available-for-sale to net income
|
|
|
(141
|
)
|
|
|
|
|
|
Gain on sale of securities, net
|
Related tax effect
|
|
|
59
|
|
|
|
|
|
|
Provision for
income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income
|
|
|
165
|
|
|
|
769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(2,854
|
)
|
|
$
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 13 - Commitments and Contingencies
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 losses. As of March 31, 2017, 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.
Financial Instruments with Off Balance Sheet Risk
Financial instruments with off balance sheet risk include commitments to extend credit of $986 million and $1 billion at March 31, 2017
and December 31, 2016, respectively. Included in the aforementioned commitments were standby letters of credit outstanding of $85 million at March 31, 2017 and December 31, 2016. The Company also has a reserve for estimated losses on
unfunded loan commitments of $886 thousand at March 31, 2017 and December 31, 2016. These balances are included in other liabilities on the consolidated balance sheets.
Note 14 - Fair Value Information
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. 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
|
Page
33
of
7
2
|
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 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.
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 March 31, 2017. 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. 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 independent third
party vendors that specialize 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 Offered Rate
(LIBOR) yield curve for accruing and the future Overnight Index Swap Rate (OIS) yield curve for discounting through the maturity date
Page
34
of
7
2
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 March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Govt Agency and Sponsored Agency Note Securities
|
|
$
|
9,956
|
|
|
$
|
|
|
|
$
|
9,956
|
|
|
|
|
|
U.S. Govt Agency SBA Securities
|
|
|
121,314
|
|
|
|
|
|
|
|
121,314
|
|
|
|
|
|
U.S. Govt Agency GNMA Mortgage-Backed Securities
|
|
|
20,895
|
|
|
|
|
|
|
|
20,895
|
|
|
|
|
|
U.S. Govt Sponsored Agency CMO & Mortgage-Backed Securities
|
|
|
246,517
|
|
|
|
|
|
|
|
246,517
|
|
|
|
|
|
Asset Backed Securities
|
|
|
6,775
|
|
|
|
|
|
|
|
6,775
|
|
|
|
|
|
U.S. Treasury Notes
|
|
|
63,942
|
|
|
|
63,942
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap Contracts
|
|
|
421
|
|
|
|
|
|
|
|
421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
469,820
|
|
|
$
|
63,942
|
|
|
$
|
405,878
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap Contracts
|
|
$
|
928
|
|
|
$
|
|
|
|
$
|
928
|
|
|
$
|
|
|
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
|
|
|
$
|
|
|
At March 31, 2017 and December 31, 2016, 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 March 31, 2017 or December 31, 2016.
Page
35
of
7
2
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.
Page
36
of
7
2
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 March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA Servicing Asset
|
|
$
|
876
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
876
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 31, 2017 or December 31, 2016.
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 March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rates
|
|
13%
|
SBA Servicing Asset
|
|
$
|
876
|
|
|
Discounted Cash Flow
|
|
Estimated Average
Remaining Life of
SBA
Portfolio
|
|
39 months
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page
37
of
7
2
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. 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 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 March 31, 2017, to the cash flows from the debentures, based on the actual interest rate the debentures were accruing at March 31, 2017. Because
all three of the debentures re-priced on March 15, 2017 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 March 31, 2017, 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.
Page
38
of
7
2
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 March 31, 2017 and December 31,
2016.
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)
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
51,168
|
|
|
$
|
51,168
|
|
|
$
|
51,168
|
|
|
$
|
|
|
|
$
|
|
|
Interest earning deposits in other financial institutions
|
|
|
313,609
|
|
|
|
313,609
|
|
|
|
313,609
|
|
|
|
|
|
|
|
|
|
Investment securities held-to-maturity
|
|
|
40,945
|
|
|
|
41,159
|
|
|
|
|
|
|
|
41,159
|
|
|
|
|
|
Loans, net
|
|
|
2,026,533
|
|
|
|
2,044,209
|
|
|
|
|
|
|
|
|
|
|
|
2,044,209
|
|
Bank owned life insurance
|
|
|
63,595
|
|
|
|
63,595
|
|
|
|
|
|
|
|
|
|
|
|
63,595
|
|
FHLB Stock
|
|
|
9,182
|
|
|
|
9,182
|
|
|
|
|
|
|
|
|
|
|
|
9,182
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
|
30,623
|
|
|
|
30,625
|
|
|
|
|
|
|
|
30,625
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
|
|
11,939
|
|
|
|
11,939
|
|
|
|
|
|
|
|
11,939
|
|
|
|
|
|
Subordinated debentures
|
|
|
9,896
|
|
|
|
12,372
|
|
|
|
|
|
|
|
12,372
|
|
|
|
|
|
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
|
|
|
|
|
|
Note 15 - Subsequent Events
On April 5, 2017, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with PacWest Bancorp
(PacWest), wherein CU Bancorp will merge with and into PacWest (the Merger), with PacWest surviving the Merger. Immediately following the Merger, CU Bancorps wholly-owned bank subsidiary, California United Bank, will
merge with and into PacWests wholly-owned bank subsidiary, Pacific Western Bank (the Bank Merger). Pacific Western Bank will be the surviving bank in the Bank Merger. The Merger Agreement was approved and adopted by the Board of
Directors of each of CU Bancorp and PacWest.
Management of the Company has evaluated events that have occurred subsequent to March 31,
2017 and have concluded there are no subsequent events that would require recognition in the accompanying consolidated financial statements.
Page
39
of
7
2
ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
See Cautionary Statement for Purposes of the Safe Harbor Provisions of the Private Securities
Litigation Reform Act of 1995 below relating to forward-looking statements included in this report.
The following is
managements discussion and analysis of the major factors that influenced the results of the operations and financial condition of CU Bancorp, (the Company) for the current period. This analysis should be read in conjunction with
the audited financial statements and accompanying notes included in the Companys 2016 Annual Report on Form
10-K
and with the unaudited financial statements and notes as set forth in this report.
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
In addition to the historical information, this Quarterly Report on Form
10-Q
(this
Report) includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the
Exchange Act). Those sections of the Securities Act and the Exchange Act provide a safe harbor for forward-looking statements to encourage companies to provide prospective information about their financial performance so long
as they provide meaningful, cautionary statements identifying important factors that could cause actual results to differ significantly from projected results.
The Companys forward-looking statements include descriptions of managements plans or objectives for future operations, products or
services, and forecasts of the Companys revenues, earnings or other measures of economic performance. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management and on the
information available to management at the time that this report was prepared and can be identified by the fact that they do not relate strictly to historical or current facts. They often include the words believe, expect,
intend, estimate, approximate, anticipate, project, assume, plan, predict, likely, or variations of these words as well as words of similar
meaning, or future or conditional verbs such as will, would, should, could, or may.
We make forward-looking statements as set forth above and regarding projected sources of funds, the pending merger between the Company and
PacWest Bancorp, dividends, adequacy of our allowance for loan loss and provision for loan loss, our loan portfolio and subsequent charge-offs. Forward-looking statements involve substantial risks and uncertainties, many of which are difficult to
predict and are generally beyond our control. There are many factors that could cause actual results to differ materially from those contemplated by these forward-looking statements. Risks and uncertainties that could cause our financial performance
to differ materially from our goals, plans, expectations and projections expressed in forward-looking statements include those set forth in our filings with the SEC, Item 1A of our Annual Report on Form
10-K,
and the following:
|
|
|
Current and future economic and market conditions in the United States generally or in the communities we serve, including the effects of declines in property values, high unemployment rates and overall slowdowns in
economic growth.
|
|
|
|
The effects of trade, monetary and fiscal policies and laws.
|
|
|
|
Possible losses of businesses and population in the Los Angeles, Orange, Ventura, San Bernardino or Riverside Counties.
|
|
|
|
Loss of customer checking and money-market account deposits as customers pursue other higher-yield investments.
|
|
|
|
Possible changes in consumer and business spending and saving habits and the related effect on our ability to increase assets and to attract deposits.
|
|
|
|
Competitive market pricing factors.
|
|
|
|
Deterioration in economic conditions that could result in increased loan losses.
|
|
|
|
Risks associated with concentrations, including but not limited to concentration in real estate related loans and concentrations in deposits.
|
|
|
|
Loss of significant customers.
|
|
|
|
A continued low interest rate environment or interest rate volatility.
|
|
|
|
Possible changes in the creditworthiness of customers and the possible impairment of the collectability of loans.
|
|
|
|
Changes in the speed of loan prepayments, loan origination and sale volumes, loan loss provisions, charge offs or actual loan losses.
|
|
|
|
Compression of our net interest margin.
|
Page
40
of
7
2
|
|
|
Stability of funding sources and continued availability of borrowings.
|
|
|
|
Changes in legal or regulatory requirements.
|
|
|
|
The inability of our risk management controls to prevent or detect all errors or fraudulent acts.
|
|
|
|
Inability of our framework to manage risks associated with our business, including but not limited to operational risk, regulatory risk, cyber risk, liquidity risk, customer risk and credit risk, to mitigate all risk or
loss to us.
|
|
|
|
Our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, denial of service attacks, hacking, account
takeover, ransomware and identity theft.
|
|
|
|
The effects of
man-made
and natural disasters, including, but not limited to earthquakes, floods, droughts, brush fires, tornadoes and hurricanes.
|
|
|
|
Our ability to recruit and retain key management and staff.
|
|
|
|
The ability to complete the proposed merger between the Company and PacWest Bancorp, including obtaining regulatory approvals and approval by the shareholders of the Company, or any future transaction, successfully
integrating such acquired entities, or achieving expected beneficial synergies and/or operating efficiencies, in each case within expected time-frames or at all.
|
|
|
|
Significant decline in the market value of the Company that could result in an impairment of goodwill.
|
|
|
|
Changes in PacWest Bancorps stock price before completion of the merger, including as a result of the financial performance of PacWest Bancorp before closing.
|
|
|
|
Regulatory limits on the Banks ability to pay dividends to the Company.
|
|
|
|
The uncertainty of obtaining regulatory approval for various merger and acquisition opportunities.
|
|
|
|
New accounting pronouncements.
|
|
|
|
The impact of federal and state laws and regulations on the Companys business operations and competitiveness.
|
|
|
|
Our ability to comply with applicable capital and liquidity requirements (including the finalized Basel III capital standards), including our ability to generate capital internally or raise capital on favorable terms.
|
|
|
|
The effects of any damage to our reputation resulting from developments related to any of the items identified above.
|
For a more detailed discussion of some of these risks and uncertainties, see the Companys Annual Report on
Form 10-K
for the year ended December 31, 2016 and particularly, Item 1A, titled Risk Factors.
Forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to
reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events and specifically disclaims any obligation to revise or update such forward looking statements for
any reason, except as may be required by applicable law.
You should consider any forward looking statements in light of this explanation, and we caution you about relying on forward-looking statements.
Page
41
of
7
2
OVERVIEW
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 in Los Angeles, Orange, Ventura, San Bernardino and Riverside counties, to
non-profit
organizations, to business principals and entrepreneurs, and to the professional community, including attorneys, certified public accountants, financial advisors, healthcare providers and investors.
The Bank opened for business in 2005, with its current headquarters office 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, (the 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.
Total assets increased $149 million or 5% from December 31, 2016 to $3.1 billion mainly due to deposit growth of
$147 million and net income of $7.8 million. During the three months ended March 31, 2017, the Company had $33 million of net organic loan production. Pay downs in the acquired loan portfolios were approximately $37 million
during the same quarter. Loans secured by real estate grew $19 million in the first quarter of 2017, compared to the prior quarter, with all of the growth coming in other nonresidential properties. At March 31, 2017, commercial and
industrial loans, and owner-occupied real estate loans combined were $921 million or 45% of total loans, compared to $954 million or 47% of total loans at December 31, 2016.
Funding the Companys asset growth for the three months ended March 31, 2017 were increases in
non-interest
bearing demand deposits of $86 million, interest bearing transaction accounts of $14 million, and money market and savings deposits of $47 million. At both March 31, 2017 and
December 31, 2016,
non-interest
bearing deposits represented 54% of total deposits. Tangible book value per common share was $14.52, $14.10 and $13.05 at March 31, 2017, December 31, 2016 and
March 31, 2016, respectively.
Recent Development
On April 5, 2017, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with PacWest Bancorp
(PacWest), wherein CU Bancorp will merge with and into PacWest (the Merger), with PacWest surviving the Merger. Immediately following the Merger, CU Bancorps wholly-owned bank subsidiary, California United Bank, will
merge with and into PacWests wholly-owned bank subsidiary, Pacific Western Bank (the Bank Merger). Pacific Western Bank will be the surviving bank in the Bank Merger. The Merger Agreement was approved and adopted by the Board of
Directors of each of CU Bancorp and PacWest. Under terms of the agreement, CU Bancorp shareholders will receive 0.5308 shares of PacWest common stock and $12.00 in cash for each share of CU Bancorp.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which
have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts
of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions, and
other subjective assessments. We have identified several accounting policies that, due to judgments, estimates, and assumptions inherent in those policies, are essential to an understanding of our consolidated financial statements. These policies
relate to the accounting for business combinations, evaluation of goodwill for impairment, methodologies that determine our allowance for loan loss, the valuation of impaired loans, the classification and valuation of investment securities,
accounting for derivatives financial instruments and hedging activities, and accounting for income taxes.
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Our critical accounting policies are described in greater detail in our 2016 Annual Report on
Form
10-K,
Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies and Estimates. We believe that our most critical
accounting policies upon which our financial condition depends, and which involve the most complex or subjective decisions or assessment, are as follows:
Business Combinations
The Company has a number of fair value adjustments recorded within the consolidated financial statements that at March 31, 2017 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 include fair value adjustments on loans, core deposit intangible
assets, other intangible assets, fair value adjustments to acquired lease obligations, 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. Goodwill is not amortized and is reviewed for impairment on October 1st of each year. If an
event occurs or circumstances change that result in the Companys fair value declining below its book value, the Company would perform an impairment analysis at that time.
Based on the Companys 2016 goodwill impairment analysis, no impairment to goodwill has occurred. The Company is a sole reporting unit
for evaluation of goodwill.
The core deposit intangibles on
non-maturing
deposits, which
represent the intangible value of depositor relationships resulting from deposit liabilities assumed through acquisitions, are being amortized over the projected useful lives of the deposits. The weighted average remaining life of the core deposit
intangible is estimated at approximately 5 years at March 31, 2017. Core deposit intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
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
non-PCI
loans, loan fair value adjustments consist of an interest rate premium or discount and a credit component 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.
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 March 31, 2017 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:
|
|
|
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.
|
|
|
|
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, a specific allowance is not assessed.
|
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 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
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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.
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.
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. an
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
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45
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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.
Page
46
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72
RESULTS OF OPERATIONS
Key Performance Measures
The following
table presents key performance measures for the periods indicated and the dollar and percentage changes between the periods (dollars in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
Amounts
|
|
|
Increase
(Decrease)
|
|
|
|
2017
|
|
|
2016
|
|
|
$
|
|
|
%
|
|
Net Income Available to Common Shareholders
|
|
$
|
7,482
|
|
|
$
|
6,281
|
|
|
$
|
1,201
|
|
|
|
19.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.43
|
|
|
$
|
0.37
|
|
|
$
|
0.06
|
|
|
|
16.22
|
%
|
Diluted
|
|
$
|
0.42
|
|
|
$
|
0.36
|
|
|
$
|
0.06
|
|
|
|
16.67
|
%
|
Return on average assets (1)
|
|
|
0.97
|
%
|
|
|
0.93
|
%
|
|
|
0.04
|
%
|
|
|
4.30
|
%
|
Return on average tangible common equity (2)
|
|
|
11.87
|
%
|
|
|
11.29
|
%
|
|
|
0.58
|
%
|
|
|
5.14
|
%
|
Net interest margin (3)
|
|
|
3.67
|
%
|
|
|
3.77
|
%
|
|
|
(0.10
|
)%
|
|
|
(2.65
|
)%
|
Efficiency ratio (4)
|
|
|
57.79
|
%
|
|
|
57.75
|
%
|
|
|
0.04
|
%
|
|
|
0.07
|
%
|
(1)
|
Return on average assets is calculated by dividing net income available to common shareholders by the average assets for the period.
|
(2)
|
Return on average tangible common equity is calculated by dividing the Companys net income available to common shareholders by average tangible common equity for the period. See the tables for return on average
tangible common equity calculation and reconciliation to average common equity.
|
(3)
|
Net interest margin represents net interest income as a percent of interest earning assets.
|
(4)
|
Efficiency ratio represents
non-interest
expense as a percent of net interest income plus
non-interest
income, excluding gain on sale of
securities, net.
|
Non-GAAP
Financial Measure - Average Tangible Common Equity (TCE) Calculation
and Reconciliation to Total Average Shareholders Equity
The Company utilizes the term TCE, a
non-GAAP
financial measure. The Companys management believes TCE is useful because it is a measure utilized by both regulators and market analysts in evaluating the Companys financial condition and
capital strength. TCE represents common shareholders equity less goodwill and certain intangible assets. Return on Average Tangible Common Equity represents annualized net income available to common shareholders as a percent of average
tangible common equity. A calculation of the Companys Return on Average Tangible Common Equity is provided in the table below for the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Average Tangible Common Equity Calculation
|
|
|
|
|
|
|
|
|
Total average shareholders equity
|
|
$
|
343,217
|
|
|
$
|
313,014
|
|
Less: Average serial preferred stock
|
|
|
16,930
|
|
|
|
17,088
|
|
Less: Average goodwill
|
|
|
64,603
|
|
|
|
64,603
|
|
Less: Average core deposit and leasehold right intangibles
|
|
|
6,132
|
|
|
|
7,515
|
|
|
|
|
|
|
|
|
|
|
Average Tangible Common Equity
|
|
$
|
255,552
|
|
|
$
|
223,808
|
|
|
|
|
|
|
|
|
|
|
Annualized Net Income Available to Common Shareholders
|
|
$
|
30,344
|
|
|
$
|
25,262
|
|
Return on Average Tangible Common Equity
|
|
|
11.87
|
%
|
|
|
11.29
|
%
|
Page
47
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72
Operations Performance Summary
Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016
Net income available to common shareholders for the three months ended March 31, 2017 was $7.5 million, or $0.42 per diluted share,
compared to $6.3 million, or $0.36 per diluted share for the three months ended March 31, 2016. Net income increased 18% over prior year and earnings per share increased 17% over prior year. The $1.2 million increase, or 19%, was
primarily due to a $3.3 million increase in net interest income after provision for loan losses, offset by a $1.5 million increase in
non-interest
expense and a $645 thousand increase in
provision for income tax expense. The increase in net interest income after provision for loan losses was mainly driven by strong organic loan growth. The increase in income tax expense is directionally consistent with the increase in profitability
while the effective tax rates are comparable for both periods.
Non-interest
income had a modest increase of $15 thousand or 0.5% and
non-interest
expense had an
increase of $1.5 million, or 9.9%. Salaries and other benefits expense increased $969 thousand, or 10.4%, as the Companys active full-time equivalent employees grew to 294 at March 31, 2017, an increase of 21 from March 31,
2016.
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48
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72
Average Balances, Interest Income and Expense, Yields and Rates
Three Months Ended March 31, 2017 and 2016
The following tables present the Companys average balance sheets, together with the total dollar amounts of interest income and interest
expense and the weighted average interest yield/rate for the periods presented. All average balances are daily average balances (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Yield/Rate (5)
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Yield/Rate (5)
|
|
Interest Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1)
|
|
$
|
2,043,693
|
|
|
$
|
24,432
|
|
|
|
4.85
|
%
|
|
$
|
1,849,201
|
|
|
$
|
22,578
|
|
|
|
4.91
|
%
|
Investment securities (2)
|
|
|
518,303
|
|
|
|
2,041
|
|
|
|
1.58
|
%
|
|
|
352,929
|
|
|
|
1,232
|
|
|
|
1.40
|
%
|
Deposits in other financial institutions
|
|
|
334,660
|
|
|
|
710
|
|
|
|
0.85
|
%
|
|
|
301,402
|
|
|
|
439
|
|
|
|
0.58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets
|
|
|
2,896,656
|
|
|
|
27,183
|
|
|
|
3.81
|
%
|
|
|
2,503,532
|
|
|
|
24,249
|
|
|
|
3.90
|
%
|
Non-interest
earning assets
|
|
|
218,536
|
|
|
|
|
|
|
|
|
|
|
|
214,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
3,115,192
|
|
|
|
|
|
|
|
|
|
|
$
|
2,718,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing transaction accounts
|
|
$
|
339,230
|
|
|
$
|
157
|
|
|
|
0.19
|
%
|
|
$
|
270,796
|
|
|
$
|
99
|
|
|
|
0.15
|
%
|
Money market and savings deposits
|
|
|
878,035
|
|
|
|
670
|
|
|
|
0.31
|
%
|
|
|
726,681
|
|
|
|
511
|
|
|
|
0.28
|
%
|
Certificates of deposit
|
|
|
29,626
|
|
|
|
26
|
|
|
|
0.36
|
%
|
|
|
55,920
|
|
|
|
33
|
|
|
|
0.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
1,246,891
|
|
|
|
853
|
|
|
|
0.28
|
%
|
|
|
1,053,397
|
|
|
|
643
|
|
|
|
0.25
|
%
|
Securities sold under agreements to repurchase
|
|
|
15,017
|
|
|
|
9
|
|
|
|
0.24
|
%
|
|
|
20,540
|
|
|
|
11
|
|
|
|
0.22
|
%
|
Subordinated debentures
|
|
|
9,877
|
|
|
|
130
|
|
|
|
5.26
|
%
|
|
|
9,719
|
|
|
|
117
|
|
|
|
4.76
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
|
24,894
|
|
|
|
139
|
|
|
|
2.26
|
%
|
|
|
30,259
|
|
|
|
128
|
|
|
|
1.70
|
%
|
Total interest bearing liabilities
|
|
|
1,271,785
|
|
|
|
992
|
|
|
|
0.32
|
%
|
|
|
1,083,656
|
|
|
|
771
|
|
|
|
0.29
|
%
|
Non-interest
bearing demand deposits
|
|
|
1,480,366
|
|
|
|
|
|
|
|
|
|
|
|
1,305,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funding sources
|
|
|
2,752,151
|
|
|
|
|
|
|
|
|
|
|
|
2,388,674
|
|
|
|
|
|
|
|
|
|
Non-interest
bearing liabilities
|
|
|
19,824
|
|
|
|
|
|
|
|
|
|
|
|
16,425
|
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
343,217
|
|
|
|
|
|
|
|
|
|
|
|
313,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
3,115,192
|
|
|
|
|
|
|
|
|
|
|
$
|
2,718,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess of interest earning assets over funding sources
|
|
$
|
144,505
|
|
|
|
|
|
|
|
|
|
|
$
|
114,858
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
26,191
|
|
|
|
|
|
|
|
|
|
|
$
|
23,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (3)
|
|
|
|
|
|
|
|
|
|
|
3.67
|
%
|
|
|
|
|
|
|
|
|
|
|
3.77
|
%
|
Core net interest margin (4)
|
|
|
|
|
|
|
|
|
|
|
3.53
|
%
|
|
|
|
|
|
|
|
|
|
|
3.67
|
%
|
(1)
|
Average balances of loans are calculated net of deferred loan fees and fair value discounts, but would include
non-accrual
loans which have a zero yield.
|
(2)
|
Average balances of investment securities
available-for-sale
are presented on an amortized cost basis and thus do not include the
unrealized market gain or loss on the securities.
|
(3)
|
Net interest margin is computed by dividing net interest income by average total interest earning assets.
|
(4)
|
Core net interest margin is computed by dividing annualized net interest income, excluding accelerated accretion of fair value discounts earned on early loan payoffs of acquired loans and interest recovered or reversed
on
non-accrual
loans or other significant items based on managements judgement, by average total interest-earning assets. See the reconciliation table for core net interest margin.
|
Page
49
of
7
2
Net Changes in Average Balances, Composition, Yields and Rates
Three Months Ended March 31, 2017 and 2016
The following tables set forth the composition of average interest earning assets and average interest bearing liabilities by category and by
the percentage of each category to the total for the periods indicated, including the change in average balance, composition, and yield/rate between these respective periods (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Increase (Decrease)
|
|
|
|
Average
Balance
|
|
|
% of
Total
|
|
|
Average
Yield/
Rate (5)
|
|
|
Average
Balance
|
|
|
% of
Total
|
|
|
Average
Yield/
Rate (5)
|
|
|
Average
Balance
|
|
|
% of
Total
|
|
|
Average
Yield/
Rate (5)
|
|
Interest Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1)
|
|
$
|
2,043,693
|
|
|
|
70.6
|
%
|
|
|
4.85
|
%
|
|
$
|
1,849,201
|
|
|
|
73.9
|
%
|
|
|
4.91
|
%
|
|
$
|
194,492
|
|
|
|
(3.3
|
)%
|
|
|
(0.06
|
)%
|
Investment securities (2)
|
|
|
518,303
|
|
|
|
17.9
|
%
|
|
|
1.58
|
%
|
|
|
352,929
|
|
|
|
14.1
|
%
|
|
|
1.40
|
%
|
|
|
165,374
|
|
|
|
3.8
|
%
|
|
|
0.18
|
%
|
Deposits in other financial institutions
|
|
|
334,660
|
|
|
|
11.5
|
%
|
|
|
0.85
|
%
|
|
|
301,402
|
|
|
|
12.0
|
%
|
|
|
0.58
|
%
|
|
|
33,258
|
|
|
|
(0.5
|
)%
|
|
|
0.27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets
|
|
$
|
2,896,656
|
|
|
|
100
|
%
|
|
|
3.81
|
%
|
|
$
|
2,503,532
|
|
|
|
100.0
|
%
|
|
|
3.90
|
%
|
|
$
|
393,124
|
|
|
|
|
|
|
|
(0.09
|
)%
|
Interest Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
bearing demand deposits
|
|
$
|
1,480,366
|
|
|
|
53.8
|
%
|
|
|
|
|
|
$
|
1,305,018
|
|
|
|
54.6
|
%
|
|
|
|
|
|
$
|
175,348
|
|
|
|
(0.8
|
)%
|
|
|
|
|
Interest bearing transaction accounts
|
|
|
339,230
|
|
|
|
12.3
|
%
|
|
|
0.19
|
%
|
|
|
270,796
|
|
|
|
11.4
|
%
|
|
|
0.15
|
%
|
|
|
68,434
|
|
|
|
0.9
|
%
|
|
|
0.04
|
%
|
Money market and savings deposits
|
|
|
878,035
|
|
|
|
31.9
|
%
|
|
|
0.31
|
%
|
|
|
726,681
|
|
|
|
30.4
|
%
|
|
|
0.28
|
%
|
|
|
151,354
|
|
|
|
1.5
|
%
|
|
|
0.03
|
%
|
Certificates of deposit
|
|
|
29,626
|
|
|
|
1.1
|
%
|
|
|
0.36
|
%
|
|
|
55,920
|
|
|
|
2.3
|
%
|
|
|
0.24
|
%
|
|
|
(26,294
|
)
|
|
|
(1.2
|
)%
|
|
|
0.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
2,727,257
|
|
|
|
99.1
|
%
|
|
|
0.13
|
%
|
|
|
2,358,415
|
|
|
|
98.7
|
%
|
|
|
0.11
|
%
|
|
|
368,842
|
|
|
|
0.4
|
%
|
|
|
0.02
|
%
|
Securities sold under agreements to repurchase
|
|
|
15,017
|
|
|
|
0.5
|
%
|
|
|
0.24
|
%
|
|
|
20,540
|
|
|
|
0.9
|
%
|
|
|
0.22
|
%
|
|
|
(5,523
|
)
|
|
|
(0.4
|
)%
|
|
|
0.02
|
%
|
Subordinated debentures
|
|
|
9,877
|
|
|
|
0.4
|
%
|
|
|
5.26
|
%
|
|
|
9,719
|
|
|
|
0.4
|
%
|
|
|
4.76
|
%
|
|
|
158
|
|
|
|
|
%
|
|
|
0.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
|
24,894
|
|
|
|
0.9
|
%
|
|
|
2.26
|
%
|
|
|
30,259
|
|
|
|
1.3
|
%
|
|
|
1.70
|
%
|
|
|
(5,365
|
)
|
|
|
(0.4
|
)%
|
|
|
0.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funding sources
|
|
$
|
2,752,151
|
|
|
|
100
|
%
|
|
|
0.15
|
%
|
|
$
|
2,388,674
|
|
|
|
100
|
%
|
|
|
0.13
|
%
|
|
$
|
363,477
|
|
|
|
|
|
|
|
0.02
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess of interest earning assets over funding sources
|
|
$
|
144,505
|
|
|
|
|
|
|
|
|
|
|
$
|
114,858
|
|
|
|
|
|
|
|
|
|
|
$
|
29,647
|
|
|
|
|
|
|
|
|
|
Net interest margin (3)
|
|
|
|
|
|
|
|
|
|
|
3.67
|
%
|
|
|
|
|
|
|
|
|
|
|
3.77
|
%
|
|
|
|
|
|
|
|
|
|
|
(0.10
|
)%
|
Core net interest margin (4)
|
|
|
|
|
|
|
|
|
|
|
3.53
|
%
|
|
|
|
|
|
|
|
|
|
|
3.67
|
%
|
|
|
|
|
|
|
|
|
|
|
(0.14
|
)%
|
(1)
|
Average balances of loans are calculated net of deferred loan fees and fair value discounts, but would include
non-accrual
loans which have a zero yield.
|
(2)
|
Average balances of investment securities
available-for-sale
are presented on an amortized cost basis and thus do not include the
unrealized market gain or loss on the securities.
|
(3)
|
Net interest margin is computed by dividing net interest income by average total interest earning assets.
|
(4)
|
Core net interest margin is computed by dividing annualized net interest income, excluding accelerated accretion of fair value discounts earned on early loan payoffs of acquired loans and interest recovered or reversed
on
non-accrual
loans or other significant items based on managements judgement, by average total interest-earning assets. See the reconciliation table for core net interest margin.
|
Page
50
of
7
2
Volume and Rate Variance Analysis of Net Interest Income
Three Months Ended March 31, 2017 and 2016
The following table presents the dollar amount of changes in interest income and interest expense due to changes in average balances of
interest earning assets and interest bearing liabilities and changes in interest rates. For each category of interest earning assets and interest bearing liabilities, information is provided on changes attributable to: (i) changes in volume
(i.e. changes in average balance multiplied by prior period rate) and (ii) changes in rate (i.e. changes in rate multiplied by prior period average balance). For purposes of this table, changes attributable to both rate and volume which cannot
be segregated have been allocated proportionately based on the absolute dollar amounts of the changes due to volume and rate (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
2017 vs. 2016
|
|
|
|
Increase (Decrease)
Due To
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
2,130
|
|
|
$
|
(276
|
)
|
|
$
|
1,854
|
|
Investment securities
|
|
|
576
|
|
|
|
233
|
|
|
|
809
|
|
Deposits in other financial institutions
|
|
|
50
|
|
|
|
221
|
|
|
|
271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
2,756
|
|
|
|
178
|
|
|
|
2,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing transaction accounts
|
|
|
25
|
|
|
|
33
|
|
|
|
58
|
|
Money market and savings deposits
|
|
|
98
|
|
|
|
61
|
|
|
|
159
|
|
Certificates of deposit
|
|
|
(17
|
)
|
|
|
10
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
106
|
|
|
|
104
|
|
|
|
210
|
|
Securities sold under agreements to repurchase
|
|
|
(3
|
)
|
|
|
1
|
|
|
|
(2
|
)
|
Subordinated debentures, net
|
|
|
1
|
|
|
|
12
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
|
(2
|
)
|
|
|
13
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
104
|
|
|
|
117
|
|
|
|
221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
$
|
2,652
|
|
|
$
|
61
|
|
|
$
|
2,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page
51
of
7
2
Non-GAAP
Financial Measure - Reconciliation of Core Net Interest
Income and Core Net Interest Margin to Net Interest Income and Net Interest Margin
The following table represents a reconciliation of
GAAP net interest margin to core net interest margin (a
non-GAAP
financial measure) used by the Company. The table presents the information for the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net Interest Income
|
|
$
|
26,191
|
|
|
$
|
23,478
|
|
Less:
|
|
|
|
|
|
|
|
|
Other income recognition due to early payoffs
|
|
|
306
|
|
|
|
123
|
|
Accelerated accretion of fair value adjustment on early loan payoffs of acquired loans
|
|
|
688
|
|
|
|
528
|
|
|
|
|
|
|
|
|
|
|
Core Net Interest Income
|
|
$
|
25,197
|
|
|
$
|
22,827
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
3.67
|
%
|
|
|
3.77
|
%
|
Core net interest margin
|
|
|
3.53
|
%
|
|
|
3.67
|
%
|
Composition of Net Deferred Loan Fees and Net Fair Value Discounts
The following table reflects the composition of the net deferred loan fees, costs and fair value discounts at March 31, 2017 and
December 31, 2016 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Accretable loan discount
|
|
$
|
8,634
|
|
|
$
|
9,772
|
|
Non-Accretable loan discount
|
|
|
347
|
|
|
|
390
|
|
|
|
|
|
|
|
|
|
|
Remaining loan discount on acquired loans
|
|
|
8,981
|
|
|
|
10,162
|
|
Net deferred loan fees on organic loans
|
|
|
5,629
|
|
|
|
5,830
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,610
|
|
|
$
|
15,992
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016
Net interest margin decreased 10 basis points to 3.67% for the three months ended March 31, 2017, compared to 3.77% for the three months
ended March 31, 2016. The decrease in net interest margin is primarily due to average loans being a lower percentage of interest-earning assets for the quarter ended March 31, 2017 than for the same quarter a year ago, due to strong growth
in average deposits in the first quarter of 2017. For the quarter ended March 31, 2017, the Company recorded $688 thousand in discounts earned on early loan payoffs of acquired loans and other associated payoff benefits of
$306 thousand, which had a positive impact on the net interest margin of 14 basis points. For the quarter ended March 31, 2016, the Company recorded $528 thousand in discounts earned on early loan payoffs of acquired loans and other
associated payoff benefits of $123 thousand, which had a positive impact on the net interest margin of 11 basis points. Despite a prime rate increase in December 2016, the average rate on paid off loans is higher than the rate on new loans.
Page
52
of
72
Provision for Loan Losses
Provision for loan losses for the three months ended March 31, 2017 was zero compared to $622 thousand for the three months ended
March 31, 2016. The Company had $33 million of net organic loan growth for the quarter ended March 31, 2017, compared to $90 million for the same quarter a year ago. The Company also had less substandard loans at March 31,
2017. Net recoveries for the three months ended March 31, 2017 were $231 thousand, compared to net recoveries of $241 thousand in 2016.
Non-Interest
Income
The following table lists the major components of the Companys
non-interest
income for the
periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
Increase
(Decrease)
|
|
|
|
2017
|
|
|
2016
|
|
|
$
|
|
|
%
|
|
Gain on sale of securities, net
|
|
$
|
141
|
|
|
|
|
|
|
$
|
141
|
|
|
|
100
|
%
|
Gain on sale of SBA loans, net
|
|
|
202
|
|
|
|
554
|
|
|
|
(352
|
)
|
|
|
(63.5
|
)%
|
Deposit account service charge income
|
|
|
1,161
|
|
|
|
1,189
|
|
|
|
(28
|
)
|
|
|
(2.4
|
)%
|
Letters of credit income
|
|
|
286
|
|
|
|
270
|
|
|
|
16
|
|
|
|
5.9
|
%
|
Interchange fees
|
|
|
147
|
|
|
|
113
|
|
|
|
34
|
|
|
|
30.1
|
%
|
Dividend income in equity securities
|
|
|
213
|
|
|
|
151
|
|
|
|
62
|
|
|
|
41.1
|
%
|
BOLI income
|
|
|
379
|
|
|
|
323
|
|
|
|
56
|
|
|
|
17.3
|
%
|
Other
non-interest
income
|
|
|
306
|
|
|
|
220
|
|
|
|
86
|
|
|
|
39.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Non-Interest
Income
|
|
$
|
2,835
|
|
|
$
|
2,820
|
|
|
$
|
15
|
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016
Non-interest
income increased $15 thousand or 0.5% to $2.84 million for the three months
ended March 31, 2017 compared to $2.82 million for the three months ended March 31, 2016. The Companys gain on sale of SBA loans as of March 31, 2017 was $202 thousand, compared to $554 thousand as of
March 31, 2016; the gain was lower due to the average loan size being smaller. Decrease of $352 thousand in gain on sale of SBA loans as of March 31, 2017 was offset by increases of $62 thousand in stock dividends and
$56 thousand in income from Bank owned life insurance, compared to the same period in 2016. The Bank purchased additional BOLI in February of 2017. Additionally, the Company realized a $141 thousand gain on sale of securities as of
March 31, 2017 whereas as the Company had no comparable gain on sale of securities as of March 31, 2016.
Page
53
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7
2
Non-Interest
Expense
The following table lists the major components of the Companys
non-interest
expense for the
periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
Increase
(Decrease)
|
|
|
|
2017
|
|
|
2016
|
|
|
$
|
|
|
%
|
|
Salaries and employee benefits
|
|
$
|
10,288
|
|
|
$
|
9,319
|
|
|
$
|
969
|
|
|
|
10.4
|
%
|
Stock based compensation expense
|
|
|
773
|
|
|
|
834
|
|
|
|
(61
|
)
|
|
|
(7.3
|
)%
|
Occupancy
|
|
|
1,489
|
|
|
|
1,436
|
|
|
|
53
|
|
|
|
3.7
|
%
|
Data processing
|
|
|
656
|
|
|
|
618
|
|
|
|
38
|
|
|
|
6.1
|
%
|
Legal and professional
|
|
|
1,009
|
|
|
|
475
|
|
|
|
534
|
|
|
|
112.4
|
%
|
FDIC deposit assessment
|
|
|
446
|
|
|
|
350
|
|
|
|
96
|
|
|
|
27.4
|
%
|
OREO loss and expenses
|
|
|
|
|
|
|
79
|
|
|
|
(79
|
)
|
|
|
(100
|
)%
|
Office services expenses
|
|
|
380
|
|
|
|
403
|
|
|
|
(23
|
)
|
|
|
(5.7
|
)%
|
Core deposit intangible amortization
|
|
|
284
|
|
|
|
321
|
|
|
|
(37
|
)
|
|
|
(11.5
|
)%
|
Other operating expenses
|
|
|
1,368
|
|
|
|
1,352
|
|
|
|
16
|
|
|
|
1.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Non-Interest
Expense
|
|
$
|
16,693
|
|
|
$
|
15,187
|
|
|
$
|
1,506
|
|
|
|
9.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016
Non-interest
expense increased by $1.5 million or 9.9% to $16.7 million for the three months
ended March 31, 2017 compared to $15.2 million for the three months ended March 31, 2016. The increase was largely related to the increases in salaries and employee benefits and legal and professional fees. The increase in salaries
and other benefits expense is attributable to the increase in the Companys active full-time equivalent employees, which grew to 294 at March 31, 2017, an increase of 21 from March 31, 2016, of which 13 were BSA related and 6 were in
deposit support services. Legal and professional fee expense increased by $534 as compared to the quarter ended March 31, 2016, primarily related to the impending merger and nonrecurring consulting costs associated with the BSA Consent Order.
Page
54
of
7
2
Income Taxes
The Companys effective tax rate is impacted by BOLI income and interest income from tax exempt securities and loans which are excluded
from taxable income, and 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 effective tax rate for the three
months ended March 31, 2017 was 36.9% compared to 37.2% for the three months ended March 31, 2016. The tax rate will have more volatility, depending on the volume of vestings and exercises as well as the associated excess tax benefits
generated. The amount of excess tax benefits were $424 thousand and $297 thousand for the periods ended March 31, 2017 and 2016, respectively. Without the excess tax benefits in the quarter ended March 31, 2017, the effective tax rate would have
been 40%. In addition, the Company has invested in Qualified Affordable Housing Projects LIHTC that generate tax credits and benefits for the Company.
The Company operates in the Federal and California jurisdictions and the blended statutory tax rate for Federal and California income taxes is
42.05%.
Page
55
of
7
2
FINANCIAL CONDITION
Balance Sheet Analysis
Total assets
increased $149 million during the three months ended March 31, 2017, to $3.1 billion due to an increase of $147 million in deposits. Loans were flat from the end of the prior year as the net organic loan production during the
period of $33 million was offset by $37 million of payoffs/paydowns in the acquired loan portfolios from the COSB, PC Bancorp acquisitions and the 1
st
Enterprise merger.
Funding the asset growth for the Company for the first three months of 2017 was the growth in deposits of $147 million and net income of
$7.8 million. Further, the deposit growth of $147 million is the result of an $86 million increase in
non-interest
bearing deposits, a $14 million increase in interest bearing transaction
deposits and a $47 million increase in money market and savings deposits.
Non-interest
bearing deposits represented 54% of total deposits at both March 31, 2017, and December 31, 2016.
Lending
The following table presents the
composition of the loan portfolio at the dates indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
|
Amount
|
|
|
% of Total
|
|
|
Amount
|
|
|
% of Total
|
|
Commercial and Industrial Loans:
|
|
$
|
484,280
|
|
|
|
24
|
%
|
|
$
|
502,637
|
|
|
|
25
|
%
|
Loans Secured by Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner-Occupied Nonresidential Properties
|
|
|
436,269
|
|
|
|
21
|
%
|
|
|
451,322
|
|
|
|
22
|
%
|
Other Nonresidential Properties
|
|
|
689,015
|
|
|
|
34
|
%
|
|
|
630,163
|
|
|
|
31
|
%
|
Construction, Land Development and Other Land
|
|
|
192,572
|
|
|
|
9
|
%
|
|
|
194,059
|
|
|
|
9
|
%
|
1-4
Family Residential Properties
|
|
|
118,268
|
|
|
|
6
|
%
|
|
|
127,164
|
|
|
|
6
|
%
|
Multifamily Residential Properties
|
|
|
95,483
|
|
|
|
5
|
%
|
|
|
109,858
|
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans Secured by Real Estate
|
|
|
1,531,607
|
|
|
|
75
|
%
|
|
|
1,512,566
|
|
|
|
73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Loans:
|
|
|
30,251
|
|
|
|
1
|
%
|
|
|
35,023
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
$
|
2,046,138
|
|
|
|
100
|
%
|
|
$
|
2,050,226
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page
56
of
7
2
The following table is a breakout of the Companys gross loans stratified by the industry concentration of
the borrower by their respective NAICS code at the dates indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
|
Amount
|
|
|
% of Total
|
|
|
Amount
|
|
|
% of Total
|
|
Real Estate
|
|
$
|
1,139,458
|
|
|
|
56
|
%
|
|
$
|
1,096,377
|
|
|
|
53
|
%
|
Manufacturing
|
|
|
166,127
|
|
|
|
8
|
%
|
|
|
180,217
|
|
|
|
9
|
%
|
Construction
|
|
|
123,241
|
|
|
|
6
|
%
|
|
|
140,270
|
|
|
|
7
|
%
|
Hotel/Lodging
|
|
|
129,912
|
|
|
|
6
|
%
|
|
|
120,760
|
|
|
|
6
|
%
|
Wholesale
|
|
|
117,165
|
|
|
|
6
|
%
|
|
|
117,444
|
|
|
|
6
|
%
|
Finance
|
|
|
71,093
|
|
|
|
3
|
%
|
|
|
83,061
|
|
|
|
4
|
%
|
Professional Services
|
|
|
51,763
|
|
|
|
3
|
%
|
|
|
58,766
|
|
|
|
3
|
%
|
Other Services
|
|
|
45,660
|
|
|
|
2
|
%
|
|
|
50,425
|
|
|
|
2
|
%
|
Healthcare
|
|
|
45,092
|
|
|
|
2
|
%
|
|
|
46,184
|
|
|
|
2
|
%
|
Information
|
|
|
34,441
|
|
|
|
2
|
%
|
|
|
32,014
|
|
|
|
2
|
%
|
Retail
|
|
|
28,840
|
|
|
|
1
|
%
|
|
|
28,938
|
|
|
|
1
|
%
|
Restaurant/Food Service
|
|
|
24,149
|
|
|
|
1
|
%
|
|
|
24,118
|
|
|
|
1
|
%
|
Transportation
|
|
|
20,500
|
|
|
|
1
|
%
|
|
|
19,857
|
|
|
|
1
|
%
|
Administrative Services
|
|
|
14,966
|
|
|
|
1
|
%
|
|
|
17,090
|
|
|
|
1
|
%
|
Entertainment
|
|
|
11,747
|
|
|
|
1
|
%
|
|
|
13,569
|
|
|
|
1
|
%
|
Education
|
|
|
11,474
|
|
|
|
1
|
%
|
|
|
10,370
|
|
|
|
1
|
%
|
Management
|
|
|
5,490
|
|
|
|
|
%
|
|
|
6,455
|
|
|
|
|
%
|
Other
|
|
|
5,020
|
|
|
|
|
%
|
|
|
4,311
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
$
|
2,046,139
|
|
|
|
100
|
%
|
|
$
|
2,050,226
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys loan origination and lending activities continue to be focused primarily on direct contact
with its borrowers through the Companys relationship managers and/or executive officers. We continue to establish new relationships and expand our current business. Total loans were $2.0 billion at March 31, 2017, a decrease of
$4 million or 0.20%, from $2.1 billion at December 31, 2016. An overall trend was a higher level of paid off loans this quarter especially in commercial and industrial loans of which some were due to the sale of the business. During
the first quarter of 2017, the Company had $33 million of net organic loan production, which was offset by approximately $37 million in loan payoffs/paydowns from the acquired loan portfolios during the same period. Loans secured by real
estate grew $19 million in the first quarter of 2017, compared to the prior quarter, with all of the growth coming in other nonresidential properties. This increase was offset by a decrease of $18 million in commercial and industrial
loans. The yields on new loans originated during the first quarter of 2017 have averaged 4.17%.
The Companys total commercial line
of credit commitments and related disbursed funds decreased by $21 million and $16 million from December 31, 2016, respectively, resulting in a utilization rate of 40% at March 31, 2017, the same as the end of the previous
quarter. Due to the dynamic nature of commercial and industrial lending, actual credit utilization may experience ebbs and flows.
Commercial and industrial loans and owner-occupied real estate loans combined were $921 million or 45% of total loans at March 31,
2017, compared to $954 million or 47% at December 31, 2016. Of the total commercial and industrial loans, 18% and 19% was unsecured at March 31, 2017 and December 31, 2016, respectively.
Other
non-residential
loans increased by $59 million from the end of the prior year, the largest
of which included one new hotel loan located in Fresno for $9 million and four new loans for a total of $25 million on diverse types of
non-residential
facilities located in Los Angeles County and
Orange County with the highest loan to value of 65%. The Company originates other
non-residential
loans with well-structured terms and guarantees, primarily collateralized by commercial buildings.
The Company had 53 commercial banking relationship managers and 8 commercial real estate relationship managers at March 31, 2017. This
compares to 57 commercial banking relationship managers and 9 commercial real estate relationship managers at December 31, 2016 as the Bank experienced some retirements in 2017.
The Company provides commercial loans, including working capital and equipment financing, real estate loans, including residential and
construction and consumer loans, generally to business principals, entrepreneurs and professionals. The Company currently does not offer residential mortgages to consumers other than home equity lines of credit. In addition,
Page
57
of
7
2
we have not made any loans to finance leveraged buyouts. The Companys real estate construction loans are primarily short-term loans made to finance the construction of
1-4
single family and multifamily residential properties. On occasion, the Company originates loans to finance the construction of single family residences to established developers and owner-occupiers. The
Companys construction lending is to known relationships, doing projects the builder/developer has experience with, and the majority are with recourse and are rarely speculative in nature. The Companys credit approval process includes an
examination of the collateral, cash flow and debt service coverage of the loan, as well as the financial condition and credit references of the borrower and guarantors, where applicable. The Companys senior management is actively involved in
its lending activities, collateral valuation and review process. The Company obtains independent third party appraisals of loans secured by real property as required by applicable federal law and regulations. There is also a Board of Directors Loan
Committee (BODLC) comprised of senior management and outside directors that monitors the loan portfolio on at least a quarterly basis.
The Company believes that it manages credit risk closely in its loan portfolio and uses a variety of policy and procedure guidelines and
analytical tools to achieve its asset quality objectives.
We do not have any concentrations in our loan portfolio except for the level of
loans that are secured by real estate and the level of loans to the real estate industry as presented in the tables above. Although the Banks real estate concentration this quarter ending March 31, 2017 exceeds 300% of total risk based
capital, the Company has maintained its relationship based approach to lending which has resulted in nominal
charge-off
experience in the real estate portfolio since the Companys inception. Management
plans to continue originating the same quality real estate loans that are currently included in its loan portfolio.
Page
58
of
7
2
Allowance for Loan Loss
The Allowance increased by $231 thousand, to $20 million during the quarter ended March 31, 2017, due to net recoveries of
$231 thousand. The Allowance as a percentage of total loans was 0.96% at March 31, 2017 and 0.94% at December 31, 2016. The Allowance as a percentage of loans (excluding loan balances and the related Allowance on loans acquired
through acquisition) was 1.17% and 1.18%, respectively, at March 31, 2017 and December 31, 2016. During the first quarter of 2017, net organic loan production was $33 million offset by $37 million of payoffs/paydowns in the
acquired loan portfolios.
The Companys management considered the following factors in evaluating the allowance for loan loss at
March 31, 2017:
|
|
|
During the three months ended March 31, 2017 there were no loan charge-offs and loan recoveries of $231 thousand.
|
|
|
|
There were eight
non-accrual
loans totaling $760 thousand with no specific allowance required at March 31, 2017, with none individually exceeded $300 thousand
|
|
|
|
Reduced level of substandard loans from December 31, 2016
|
|
|
|
The overall growth and composition of the loan portfolio
|
|
|
|
Changes to the overall economic conditions within the markets in which the Company makes loans
|
|
|
|
Concentrations within the loan portfolio
|
|
|
|
The remaining fair value adjustments on loans acquired through acquisition
|
Management has
considered various material elements of potential risk within the loan portfolio, including classified credits, pools of loans with similar characteristics, economic factors, trends in the loan portfolio and changes in the Companys lending
policies, procedures and underwriting criteria. In addition, management recognized the potential for unforeseen events to occur when evaluating the qualitative factors in all categories of its analysis.
The Company analyzes historical net charge-offs in various loan portfolio segments when evaluating the allowance. For loan segments without a
meaningful historical loss experience, the analysis is adjusted to consider regulatory peer group loss experience in those loan segments. The loss analysis is then adjusted for qualitative factors that may have an impact on loss experience in the
particular loan segments.
The Allowance and the reserve for unfunded loan commitments are significant estimates that can and do change
based on managements process in analyzing the loan portfolio and on managements assumptions about specific borrowers and applicable economic and environmental conditions, among other factors. In considering all of the above factors,
management believes that the Allowance at March 31, 2017 is adequate. Although the Company maintains its Allowance at a level which it considers adequate to provide for probable loan losses, there can be no assurance that such losses will not
exceed the estimated amounts, thereby adversely affecting future results of operations.
The following table is a summary of the activity
for the Allowance as of the dates and for the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Allowance for loan loss at beginning of period
|
|
$
|
19,374
|
|
|
$
|
15,682
|
|
Provision for loan losses
|
|
|
|
|
|
|
622
|
|
Net (charge-offs) recoveries:
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
|
|
|
|
|
|
Recoveries
|
|
|
231
|
|
|
|
241
|
|
|
|
|
|
|
|
|
|
|
Net recoveries
|
|
|
231
|
|
|
|
241
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan loss at end of period
|
|
$
|
19,605
|
|
|
$
|
16,545
|
|
|
|
|
|
|
|
|
|
|
Net recoveries to average loans
|
|
|
0.01
|
%
|
|
|
0.01
|
%
|
Page
59
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7
2
The following is a summary of our asset quality data and key ratios at the dates indicated
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Loans originated by the Bank on
non-accrual
|
|
$
|
|
|
|
$
|
|
|
Loans acquired through acquisition on
non-accrual
|
|
|
760
|
|
|
|
1,122
|
|
|
|
|
|
|
|
|
|
|
Total
non-accrual
loans
|
|
|
760
|
|
|
|
1,122
|
|
Other Real Estate Owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-performing
assets
|
|
$
|
760
|
|
|
$
|
1,122
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs (recoveries) year to date
|
|
$
|
(231
|
)
|
|
$
|
(428
|
)
|
Non-accrual
loans to total loans
|
|
|
0.04
|
%
|
|
|
0.05
|
%
|
Total
non-performing
assets to total assets
|
|
|
0.02
|
%
|
|
|
0.04
|
%
|
Allowance for loan losses to total loans
|
|
|
0.96
|
%
|
|
|
0.94
|
%
|
Allowance for loan losses to total loans accounted at historical cost, which excludes loans
acquired by acquisition
|
|
|
1.17
|
%
|
|
|
1.18
|
%
|
Allowance for loan losses to
non-accrual
loans accounted
at historical cost, which excludes
non-accrual
loans acquired by acquisition and related allowance
|
|
|
|
|
|
|
|
|
Allowance for loan losses to total
non-accrual
loans
|
|
|
2580
|
%
|
|
|
1726
|
%
|
Deposits
The following table presents the balance of each major category of deposits at the dates indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
|
Amount
|
|
|
% of Total
|
|
|
Amount
|
|
|
% of Total
|
|
Non-interest
bearing demand deposits
|
|
$
|
1,485,730
|
|
|
|
54
|
%
|
|
$
|
1,400,097
|
|
|
|
54
|
%
|
Interest bearing transaction accounts
|
|
|
346,279
|
|
|
|
13
|
%
|
|
|
332,702
|
|
|
|
13
|
%
|
Money market and savings deposits
|
|
|
892,143
|
|
|
|
32
|
%
|
|
|
845,110
|
|
|
|
32
|
%
|
Certificates of deposit
|
|
|
30,623
|
|
|
|
1
|
%
|
|
|
29,480
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
2,754,775
|
|
|
|
100
|
%
|
|
$
|
2,607,389
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits increased $147 million to $2.8 billion at March 31, 2017, primarily due to an
$86 million increase in
non-interest
bearing demand deposits, a $47 million increase in money market and savings deposits, a $14 million increase in interest bearing transaction accounts.
Certificates of deposit remained stable. The strong growth in deposits during this period came primarily from existing relationships. We believe some of the increase in total deposits during the first quarter of 2017 is likely related to customers
accumulating cash in anticipation of federal and state income tax payments, as well as county property taxes in California. The average size of non-interest bearing and money market accounts continued to grow in the first quarter of 2017.
Non-interest
bearing deposits represented 54% of total deposits at March 31, 2017 and December 31, 2016.
Management believes one of the strengths of the Company continues to be its core deposit franchise with a cost of deposits of 0.13% for the
three months ended March 31, 2017. The Company only realized a small increase in its costs despite three increases in the prime rate since December 2015.
Page
60
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7
2
LIQUIDITY
The following table provides a summary of the Banks primary and secondary liquidity levels at the dates indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
|
Amount
|
|
|
Amount
|
|
Primary
Liquidity-On
Balance Sheet:
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
51,168
|
|
|
$
|
41,281
|
|
Interest earning deposits in other financial institutions
|
|
|
313,610
|
|
|
|
167,789
|
|
Investment securities
available-for-sale
|
|
|
469,399
|
|
|
|
469,950
|
|
Less: pledged cash and due from banks
|
|
|
|
|
|
|
|
|
Less: pledged investment securities
|
|
|
(219,210
|
)
|
|
|
(204,855
|
)
|
|
|
|
|
|
|
|
|
|
Total primary liquidity
|
|
$
|
614,967
|
|
|
$
|
474,165
|
|
|
|
|
|
|
|
|
|
|
Ratio of primary liquidity to total deposits
|
|
|
22.32
|
%
|
|
|
18.19
|
%
|
Additional Liquidity Not Included In Primary Liquidity:
|
|
|
|
|
|
|
|
|
Certificates of deposit in other financial institutions
|
|
$
|
48,795
|
|
|
$
|
51,245
|
|
Less: Certificate of deposits pledged
|
|
|
(2,731
|
)
|
|
|
(2,731
|
)
|
|
|
|
|
|
|
|
|
|
Total additional liquidity
|
|
$
|
46,064
|
|
|
$
|
48,514
|
|
|
|
|
|
|
|
|
|
|
Secondary
Liquidity-Off
Balance Sheet:
|
|
|
|
|
|
|
|
|
Available Borrowing Capacity:
|
|
|
|
|
|
|
|
|
Total secured borrowing capacity with FHLB
|
|
$
|
688,055
|
|
|
$
|
657,955
|
|
Fed Funds borrowing lines
|
|
|
72,000
|
|
|
|
72,000
|
|
Secured credit line with the FRBSF
|
|
|
24,703
|
|
|
|
25,489
|
|
|
|
|
|
|
|
|
|
|
Total secondary liquidity
|
|
$
|
784,758
|
|
|
$
|
755,444
|
|
|
|
|
|
|
|
|
|
|
The Companys primary overnight liquidity consisted of cash and due from banks and interest earning
deposits at financial institutions. The amount of funds maintained directly with the Federal Reserve included in interest earning deposits in other financial institutions was $225 million and $90 million, at March 31, 2017 and
December 31, 2016, respectively. The next source of liquidity is the money market accounts at other banks. Furthermore, the Company has collateralized borrowings and unsecured borrowing facilities. In addition, the Company has $46 million
in unpledged certificates of deposits in other financial institutions where the average maturity is approximately 6 months that could be utilized over time to supplement the liquidity needs of the Company.
The Companys long term source of funding has come from the liability side of the balance sheet and has historically been through the
growth in
non-interest
bearing and interest bearing core deposits from new and existing customers. Additional sources of funds from the Companys asset side of the balance sheet include payments of
principal and interest on loans and investment securities. While maturities and scheduled principal amortization on loans are a reasonably predictable source of funds, deposit flows and loan prepayments are greatly influenced by the level of
interest rates, economic conditions and competition.
As an additional source of liquidity, the Company maintains credit facilities in the
form of Fed Funds Borrowing Lines of $72 million with its primary correspondent banks for the purchase of overnight Federal funds. The lines are subject to availability of funds and have restrictions as to the number of days used, consecutively
and in total during a month, $5 million of these credit facilities require the pledging of investment securities.
The Company has
established a secured credit facility with the FHLB of San Francisco which allows the Bank to borrow up to 25% of the Banks total assets, which equates to a credit line of approximately $749 million at March 31, 2017. The Company
currently has no outstanding borrowings with the FHLB. As of March 31, 2017, the Company had $1 billion of loan collateral pledged with the FHLB. This level of loan collateral would provide the Company with $688 million in borrowing
capacity. The Company also had $16 million in securities pledged with the FHLB serving as collateral for an additional $14 million in borrowing capacity. Any amount of borrowings in excess of $702 million, up to the Companys
Page
61
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7
2
borrowing capacity of $749 million, would require the Company to pledge additional collateral. In addition, the Company must maintain a certain investment in the common stock of the FHLB.
The Companys investment in the common stock of the FHLB is $9 million at March 31, 2017. This level of capital would allow the Company to borrow up to $340 million of the $749 million. Any advances from the FHLB in excess
of the $340 million would require additional purchases of FHLB common stock.
The Company maintains a secured credit facility with
the Federal Reserve Bank of San Francisco (FRBSF) which is collateralized by investment securities pledged with the FRBSF. At March 31, 2017, the Companys available borrowing capacity was $25 million.
The Company maintains investments in short term certificates of deposit with other financial institutions, with an average remaining maturity
of approximately 6 months, with various balances maturing monthly. The Company had balances of $49 million and $51 million at March 31, 2017 and December 31, 2016, respectively. At March 31, 2017, $2.7 million of the
Companys certificates of deposit with other financial institutions were pledged as collateral as credit support for the interest rate swap contracts and are not available as a source of liquidity.
The Companys commitments to extend credit
(off-balance
sheet liquidity risk) are agreements to
lend funds to customers as long as there are no covenant violations as established in the loan agreement. The total commitment amounts do not necessarily represent future cash requirements. Financial instruments with
off-balance
sheet risk for the Company include both undisbursed loan commitments, as well as undisbursed letters of credit. The Companys exposure to extend credit was $986 million and
$1 billion at March 31, 2017 and December 31, 2016, respectively.
The holding company liquidity on a stand-alone basis was
$8.9 million and $9.7 million, in cash on deposit at the Bank, at March 31, 2017 and December 31, 2016, respectively. Management believes this amount of cash is currently sufficient to fund the holding companys cash flow
needs over at least the next twelve to twenty-four months.
Page
62
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7
2
DIVIDENDS
To date, the Company has not paid any cash dividends on its common stock. 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 the shareholder made during such period). In addition, the Bank may not pay dividends that would result in its
capital being reduced below the minimum requirements for capital adequacy purposes.
The Company completed the merger with 1st Enterprise
on November 30, 2014. As part of the Merger Agreement, 16,400 shares of preferred stock issued by 1st 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 preferred 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.
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. The Company may from time to time evaluate if a partial or full payment to redeem the Preferred Stock is appropriate in capital management. 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.
As of March 31, 2017, both CU Bancorp the holding company and the Bank had positive retained earnings and positive net income
that would allow either of them to declare and pay a dividend as of March 31, 2017. However, neither the holding company nor the Bank has plans to declare and pay a cash dividend on the common stock at the current time.
The Company has a program to repurchase a portion of an employees outstanding restricted stock upon the vesting of this restricted
stock, but only in amounts necessary to cover the employee tax withholding obligations at the option of the restricted stockholder (employee). This program was designed to provide the Banks employees with the financial ability to cover their
tax liability obligation associated with the vesting of their restricted stock at the date of vesting. These transactions under the State of California Corporations Code are defined as distributions to shareholders.
Page
63
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7
2
REGULATORY MATTERS
Capital Resources
The Companys
objective is to maintain a level of capital that will support sustained asset and loan growth, provide for anticipated credit risks, and ensure that regulatory guidelines and industry standards are met. The Company and the Bank are subject to
certain minimum capital adequacy and minimum well capitalized category guidelines adopted by the FRB and the FDIC. These guidelines relate primarily to the Tier 1 leverage ratio, the Common Equity Tier 1 Ratio (CET1), the Tier 1
risk-based capital ratio, and the Total risk-based capital ratio.
On October 26, 2015, the Company filed a Form
S-3
registration statement for offerings up to $100 million of certain types of securities. If drawn on, proceeds from the offering could be used for general corporate purposes. The registration statement
represents capital resources available to the Company as the registration statement is deemed to be effective by the Securities Exchange Commission (SEC) and will be available for three years.
At March 31, 2017, 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 the phase-in 2017 buffer 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
Well
Capitalized
|
|
|
Basel III
Minimum with
Buffer
|
|
|
|
Amount
|
|
|
Amount
|
|
|
(greater than or equal to)
|
|
Regulatory Capital Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage ratio
|
|
|
9.63
|
%
|
|
|
9.72
|
%
|
|
|
5.0
|
%
|
|
|
NA
|
|
Common Equity Tier 1 ratio
|
|
|
9.86
|
%
|
|
|
9.61
|
%
|
|
|
6.5
|
%
|
|
|
5.75
|
%
|
Total Tier 1 risk-based capital ratio
|
|
|
10.94
|
%
|
|
|
10.68
|
%
|
|
|
8.0
|
%
|
|
|
7.25
|
%
|
Total risk-based capital ratio
|
|
|
11.70
|
%
|
|
|
11.44
|
%
|
|
|
10.0
|
%
|
|
|
9.25
|
%
|
Regulatory Capital Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1
|
|
$
|
264,608
|
|
|
$
|
257,105
|
|
|
|
|
|
|
|
|
|
Total Tier 1 capital
|
|
|
293,364
|
|
|
|
285,843
|
|
|
|
|
|
|
|
|
|
Total risk-based capital
|
|
|
313,855
|
|
|
|
306,103
|
|
|
|
|
|
|
|
|
|
Average total assets
*
|
|
|
3,047,385
|
|
|
|
2,940,790
|
|
|
|
|
|
|
|
|
|
Risk-weighted assets
|
|
|
2,682,389
|
|
|
|
2,675,987
|
|
|
|
|
|
|
|
|
|
*
|
Represents the average total assets for calculation of the leverage ratio
|
California United Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
Well
Capitalized
|
|
|
Basel III
Minimum with
Buffer
|
|
|
|
Amount
|
|
|
Amount
|
|
|
(greater than or equal to)
|
|
Regulatory Capital Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage ratio
|
|
|
9.30
|
%
|
|
|
9.35
|
%
|
|
|
5.0
|
%
|
|
|
NA
|
|
Common Equity Tier 1 ratio
|
|
|
10.53
|
%
|
|
|
10.28
|
%
|
|
|
6.5
|
%
|
|
|
5.75
|
%
|
Total Tier 1 risk-based capital ratio
|
|
|
10.53
|
%
|
|
|
10.28
|
%
|
|
|
8.0
|
%
|
|
|
7.25
|
%
|
Total risk-based capital ratio
|
|
|
11.30
|
%
|
|
|
11.04
|
%
|
|
|
10.0
|
%
|
|
|
9.25
|
%
|
Regulatory Capital Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1
|
|
$
|
283,381
|
|
|
$
|
275,151
|
|
|
|
|
|
|
|
|
|
Tier 1 capital
|
|
|
283,381
|
|
|
|
275,151
|
|
|
|
|
|
|
|
|
|
Total risk-based capital
|
|
|
303,872
|
|
|
|
295,411
|
|
|
|
|
|
|
|
|
|
Average total assets
*
|
|
|
3,048,063
|
|
|
|
2,941,253
|
|
|
|
|
|
|
|
|
|
Risk-weighted assets
|
|
|
2,690,240
|
|
|
|
2,677,030
|
|
|
|
|
|
|
|
|
|
*
|
Represents the average total assets for calculation of the leverage ratio
|
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In July 2013, the federal bank regulatory agencies adopted final regulations which revised their
risk-based and leverage capital requirements for banking organizations to meet requirements of Dodd-Frank and to implement international agreements reached by the Basel Committee on Banking Supervision intended to improve both the quality and
quantity of banking organizations capital (Basel III). Dodd-Frank required the Federal Reserve to apply consolidated capital requirements to depository institution holding companies that are no less stringent than those currently
applied to depository institutions.
The following are among the requirements that were
phased-in
beginning January 1, 2015 under the new capital rules:
|
|
|
an increase in the minimum Tier 1 capital ratio from 4.00% to 6.00% of risk-weighted assets;
|
|
|
|
a new category and a required 4.50% of risk-weighted assets ratio is established for CET1 as a subset of Tier 1 capital limited to common equity;
|
|
|
|
a minimum
non-risk-based
leverage ratio is set at 4.00%;
|
|
|
|
changes in the permitted composition of Tier 1 capital to exclude trust preferred securities (however, trust preferred securities issued prior to May 19, 2010 by a bank holding company with less than
$15 billion in assets, such as CU Bancorp, continues to be included in Tier 1 capital, subject to a limit of 25% of Tier 1 capital elements; see further discussion below), mortgage servicing rights and certain deferred tax assets and include
unrealized gains and losses on
available-for-sale
debt and equity securities;
|
|
|
|
the risk-weights of certain assets for purposes of calculating the risk-based capital ratios are changed for high volatility commercial real estate acquisition, development and construction loans, certain past due
non-residential
mortgage loans and certain mortgage-backed and other securities exposures;
|
|
|
|
an additional countercyclical capital buffer is required for larger and more complex institutions; and
|
|
|
|
a new additional capital conservation buffer of 2.5% of risk weighted assets over the period from 2016 to 2019 must be met to avoid limitations on the ability of the Company and the Bank to pay dividends, repurchase
shares or pay discretionary bonuses.
|
Including the capital conservation buffer of 2.5%, the new final capital rule resulted
in the following minimum ratios: (i) a Tier 1 capital ratio of 8.5%, (ii) a common equity Tier 1 capital ratio of 7.0%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement
phase-in
began in January 2016 at 0.625% of risk-weighted assets and will increase each year by 0.625% until fully implemented in January 2019. While the final capital rule sets higher regulatory capital standards
for the Company and the Bank, bank regulators may also continue their past policies of expecting banks to maintain additional capital beyond the new minimum requirements. The implementation of the final capital rules or more stringent requirements
to maintain higher levels of capital or to maintain higher levels of liquid assets could adversely impact the Companys net income and return on equity, restrict the ability to pay dividends or executive bonuses and require the raising of
additional capital.
Under Dodd Frank, trust preferred securities are excluded from Tier 1 capital, unless such securities were issued
prior to May 19, 2010 by a bank holding company with less than $15 billion in assets. CU Bancorp assumed approximately $12.4 million of junior subordinated debt securities issued to various business trust subsidiaries of Premier
Commercial Bancorp and funded through the issuance of approximately $12.0 million of floating rate capital trust preferred securities. These junior subordinated debt securities were issued prior to May 19, 2010. Because CU Bancorp has less
than $15 billion in assets, the trust preferred securities that CU Bancorp assumed from Premier Commercial Bancorp continues to be included in Tier 1 capital, subject to a limit of 25% of Tier 1 capital elements.
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 continues to be included in
Tier 1 Risk-Based Capital because
non-cumulative
perpetual preferred stock remained classified as Tier 1 capital following the enactment of Dodd Frank.
Dodd-Frank Wall Street Reform and Consumer Protection Act
For a discussion regarding the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, see the Companys
December 31, 2016 Form 10K, Part I, Item 1 Business Supervision and Regulation Legislation and Regulatory Developments Dodd Frank Wall Street Reform and Consumer Protection Act.
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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 continue their efforts to comply with all parts of the Consent Order.
Number of
Employees
The number of active full-time equivalent employees increased from 288 at December 31, 2016 to 294 at March 31,
2017.
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