Altabancorp - FORM 10-Q

Attached files

file	filename
EX-32 - EX-32 - Altabancorp	pub-ex32_7.htm
EX-31.2 - EX-31.2 - Altabancorp	pub-ex312_8.htm
EX-31.1 - EX-31.1 - Altabancorp	pub-ex311_6.htm
EX-10.1 - EX-10.1 - Altabancorp	pub-ex101_59.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2017

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

For the transition period from to

Commission file number 001-37416

PEOPLE’S UTAH BANCORP

(Exact name of registrant as specified in its charter)

UTAH		87-0622021
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)
1 East Main Street, American Fork, Utah		84003
(Address of principal executive offices)		(Zip Code)

(801) 642-3998

Registrant’s telephone number, including area code

Not Applicable

(Former name, former address, and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes No ☐

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐		Accelerated filer	☒

Non-accelerated filer	☐	(Do not check if a smaller reporting company)	Smaller reporting company	☐

Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes No ☒

The number of shares of Registrant’s common stock outstanding on April 30, 2017 was 17,928,325. No preferred shares are issued or outstanding.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1 – Financial Statements
Unaudited Consolidated Balance Sheets	3
Unaudited Consolidated Statements of Income	4
Unaudited Consolidated Statements of Comprehensive Income	5
Unaudited Consolidated Statements of Changes in Shareholders’ Equity	6
Unaudited Consolidated Statements of Cash Flows	7
Notes to Unaudited Consolidated Financial Statements	8
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3 – Quantitative and Qualitative Disclosure about Market Risk	37
Item 4 – Controls and Procedures	37
PART II. OTHER INFORMATION
Item 1 – Legal Proceedings	37
Item 1A – Risk Factors	37
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3 – Defaults upon Senior Securities	37
Item 4 – Mine Safety Disclosures	37
Item 5 – Other Information	37
Item 6 – Exhibits	38
Signatures	39

PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
(Dollars in thousands, except share data)	2017			2016
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	25,773		$	26,524
Interest bearing deposits		62,171			37,958
Federal funds sold		2,884			3,456
Total cash and cash equivalents		90,828			67,938
Investment securities:
Available-for-sale, at fair value		334,249			335,609
Held-to-maturity, at historical cost		78,041			73,512
Total investment securities		412,290			409,121
Non-marketable equity securities		1,959			1,827
Loans held for sale		13,053			20,826
Loans:
Loans held for investment		1,152,030			1,119,877
Less allowance for loan losses		(16,644	)		(16,715	)
Total loans held for investment, net		1,135,386			1,103,162
Premises and equipment, net		22,701			21,926
Accrued interest receivable		5,779			5,557
Deferred income tax assets		9,731			9,799
Other real estate owned		245			245
Bank-owned life insurance		19,842			19,714
Other assets		5,834			5,866
Total assets	$	1,717,648		$	1,665,981
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing deposits	$	462,886		$	443,100
Interest bearing deposits		1,005,779			981,974
Total deposits		1,468,665			1,425,074
Short-term borrowings		3,372			3,199
Accrued interest payable		279			305
Other liabilities		11,087			8,886
Total liabilities		1,483,403			1,437,464
Commitments and contingencies
Shareholders’ equity:
Preferred shares, $0.01 par value: 3,000,000 shares authorized, no shares issued		—			—
Common shares, $0.01 par value: 30,000,000 shares authorized; 17,925,284
and 17,819,538 shares issued and outstanding as of March 31, 2017
and December 31, 2016, respectively		179			178
Additional paid-in capital		69,256			68,657
Retained earnings		165,782			160,692
Accumulated other comprehensive loss		(972	)		(1,010	)
Total shareholders’ equity		234,245			228,517
Total liabilities and shareholders’ equity	$	1,717,648		$	1,665,981

See accompanying notes to the unaudited consolidated financial statements.

PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended
	March 31,
(Dollars in thousands, except share and per share data)	2017		2016
Interest income
Interest and fees on loans	$	16,853	$	15,851
Interest and dividends on investments		1,705		1,603
Total interest income		18,558		17,454
Interest expense		766		754
Net interest income		17,792		16,700
Provision for loan losses		200		200
Net interest income after provision for loan losses		17,592		16,500
Non-interest income
Service charges on deposit accounts		536		513
Card processing		1,124		1,031
Mortgage banking		1,979		1,748
Other operating		486		471
Total non-interest income		4,125		3,763
Non-interest expense
Salaries and employee benefits		7,967		7,884
Occupancy, equipment and depreciation		1,117		988
Data processing		675		707
FDIC premiums		126		195
Card processing		529		590
Marketing and advertising		262		169
Other		1,780		1,602
Total non-interest expense		12,456		12,135
Income before income tax expense		9,261		8,128
Income tax expense		2,740		2,885
Net income	$	6,521	$	5,243
Earnings per common share:
Basic	$	0.36	$	0.30
Diluted	$	0.36	$	0.29
Weighted average common shares outstanding:
Basic		17,884,026		17,632,288
Diluted		18,316,331		18,124,392

See accompanying notes to the unaudited consolidated financial statements.

PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Three Months Ended
	March 31,
(in thousands)	2017			2016
Net income	$	6,521		$	5,243
Other comprehensive income
Unrealized holding gains on securities available-for-sale		63			2,228
Tax effect		(25	)		(851	)
Unrealized holding gains on securities available-for-sale, net of tax		38			1,377
Total comprehensive income	$	6,559		$	6,620

See accompanying notes to the unaudited consolidated financial statements.

PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

										Accumulated
					Additional					Other
	Common				Paid-in		Retained			Comprehensive
(Dollars in thousands, except share data)	Shares		Amount		Capital		Earnings			Income (Loss)			Total
Balance as of January 1, 2016		17,567,154	$	176	$	67,338	$	142,223		$	(329	)	$	209,408
Comprehensive income		-		-		-		5,243			1,377			6,620
Cash dividends ($0.07 per share)		-		-		-		(1,233	)		-			(1,233	)
Share-based compensation		-		-		127		-			-			127
Exercise of stock options		148,194		1		459		-			-			460
Balance as of March 31, 2016		17,715,348	$	177	$	67,924	$	146,233		$	1,048		$	215,382

Balance as of January 1, 2017		17,819,538	$	178	$	68,657	$	160,692		$	(1,010	)	$	228,517
Comprehensive income		-		-		-		6,521			38			6,559
Cash dividends ($0.08 per share)		-		-		-		(1,431	)		-			(1,431	)
Share-based compensation		-		-		109		-			-			109
Exercise of stock options		105,746		1		490		-			-			491
Balance as of March 31, 2017		17,925,284	$	179	$	69,256	$	165,782		$	(972	)	$	234,245

See accompanying notes to the unaudited consolidated financial statements.

PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended
	March 31,
(in thousands)	2017			2016
Cash flows from operating activities:
Net income	$	6,521		$	5,243
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		200			200
Depreciation and amortization		629			642
Net gain on sales of other real estate owned		—			28
Deferred income taxes		43			—
Net amortization of securities discounts and premiums		772			773
Increase in cash surrender value of bank owned life insurance		(128	)		(138	)
Share based compensation		109			127
Other		-			(2	)
Gain on sale of loans held for sale		(1,403	)		(1,255	)
Originations of loans held for sale		(59,690	)		(52,068	)
Proceeds from sale of loans held for sale		68,866			58,147
Net changes in:
Accrued interest receivable		(222	)		(59	)
Other assets		32			258
Accrued interest payable		(26	)		(5	)
Other liabilities		2,201			3,245
Net cash provided by operating activities		17,904			15,136
Cash flows from investing activities:
Net change in loans held for investment		(32,424	)		(22,442	)
Purchase of available-for-sale securities		(16,680	)		(2,000	)
Purchase of held-to-maturity securities		(6,195	)		—
Proceeds from maturities/sales of available-for-sale securities		17,508			22,701
Proceeds from maturities of held-to-maturity securities		1,489			1,459
Purchase of premises and equipment		(1,404	)		(561	)
Proceeds from sale of other real estate owned, net of improvements		—			133
Purchase of non-marketable equity securities		(132	)		—
Proceeds from sale of non-marketable equity securities		—			417
Net cash used in investing activities		(37,838	)		(293	)
Cash flows from financing activities:
Net increase in non-interest bearing deposits		19,786			(659	)
Net increase in interest bearing deposits		23,805			15,790
Proceeds related to exercise of stock options		491			460
Net change in short-term borrowings		173			(24,655	)
Cash dividends paid		(1,431	)		(1,233	)
Net cash provided by (used in) financing activities		42,824			(10,297	)
Net change in cash and cash equivalents		22,890			4,546
Cash and cash equivalents, beginning of period		67,938			42,349
Cash and cash equivalents, end of period	$	90,828		$	46,895
Supplemental disclosures of cash flow information:
Cash paid for interest	$	792		$	669
Income taxes paid	$	—		$	—
Supplemental disclosures of non-cash transactions:
Reclassifications from loans to other real estate owned	$	—		$	237
Unrealized gains on securities available-for-sale	$	63		$	2,228

See accompanying notes to the unaudited consolidated financial statements.

PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Basis of Presentation

People’s Utah Bancorp, Inc. (“PUB” or the “Company”) is a Utah corporation headquartered in American Fork, Utah. The Company’s subsidiary is People’s Intermountain Bank (“PIB” or the “Bank”), which includes two banking divisions doing business as (“dba”) Bank of American Fork (“BAF”) and Lewiston State Bank (“LSB”) and an equipment leasing division dba GrowthFunding Equipment Finance. BAF and LSB have over 100 years of history and will continue to do business as registered names of PIB.

The interim consolidated financial statements include the accounts of the Company together with its subsidiary Bank. All intercompany transactions and balances have been eliminated.

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial information. In the opinion of management, the interim statements reflect all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows of the Company on a consolidated basis and all such adjustments are of a normal recurring nature. These financial statements and the accompanying notes should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2016 which are included in the Company’s 2016 Form 10-K. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 or any other period.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of real estate acquired through foreclosure, deferred tax assets, and share-based compensation.

Earnings per share — Basic earnings per common share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares includes shares that may be issued by the Company for outstanding stock options determined using the treasury stock method and for all outstanding restricted stock units (“RSU”).

Earnings per common share have been computed based on the following:

	Three Months Ended
	March 31,
(in thousands, except share and per share data)	2017		2016
Numerator
Net income	$	6,521	$	5,243
Denominator
Weighted-average number of common shares outstanding		17,884,026		17,632,288
Incremental shares assumed for stock options and RSUs		432,305		492,104
Weighted-average number of dilutive shares outstanding		18,316,331		18,124,392
Basic earnings per common share	$	0.36	$	0.30
Diluted earnings per common share	$	0.36	$	0.29

PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 1 — Basis of Presentation – Continued

Reclassifications — Certain amounts in the prior period’s financial statements have been reclassified to conform to the current period’s presentation.

Impact of Recent Authoritative Accounting Guidance —The Accounting Standards Codification™ (“ASC”) is the Financial Accounting Standards Board’s (“FASB”) officially recognized source of authoritative GAAP applicable to all public and non-public non-governmental entities. Rules and interpretive releases of the SEC under the authority of the federal securities laws are also sources of authoritative GAAP for us as an SEC registrant. All other accounting literature is non-authoritative.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (“ASU 2016-09) addresses certain aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification of awards on the statement of cash flows. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016 and for interim periods within such periods. Early application is permitted. The Company implemented ASU 2016-09 during the annual reporting period of 2016.

Note 2 — Investment Securities

Amortized cost and approximate fair values of investment securities available-for-sale are summarized as follows:

					Gross Unrealized Losses
					Less			12
			Gross		Than			Months
	Amortized		Unrealized		12			or			Fair
(in thousands)	Cost		Gains		Months			Longer			Value
As of March 31, 2017
U.S. Government-sponsored securities	$	119,197	$	79	$	(657	)	$	(2	)	$	118,617
Municipal securities		20,749		377		(46	)		—			21,080
Mortgage-backed securities		185,876		670		(1,215	)		(522	)		184,809
Corporate securities		10,000		52		-			(309	)		9,743
	$	335,822	$	1,178	$	(1,918	)	$	(833	)	$	334,249
As of December 31, 2016
U.S. Government-sponsored securities	$	119,202	$	71	$	(669	)	$	(1	)	$	118,603
Municipal securities		25,176		401		(58	)		—			25,519
Mortgage-backed securities		182,867		679		(1,111	)		(614	)		181,821
Corporate securities		10,000		28		(32	)		(330	)		9,666
	$	337,245	$	1,179	$	(1,870	)	$	(945	)	$	335,609

Carrying amounts and estimated fair values of securities held-to-maturity are as follows:

					Gross Unrealized Losses
					Less			12
			Gross		Than			Months
	Amortized		Unrealized		12			or			Fair
(in thousands)	Cost		Gains		Months			Longer			Value
As of March 31, 2017
Municipal securities	$	78,041	$	204	$	(392	)	$	(22	)	$	77,831

As of December 31, 2016
Municipal securities	$	73,512	$	105	$	(579	)	$	(38	)	$	73,000

PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 2 — Investment Securities – continued

The amortized cost and estimated fair values of investment securities that are available-for-sale and held-to-maturity at March 31, 2017, by contractual maturity, are as follows:

	Available-for-sale				Held-to-maturity
	Amortized		Fair		Amortized		Fair
(in thousands)	Cost		Value		Cost		Value
Securities maturing in:
One year or less	$	19,862	$	19,905	$	9,339	$	9,343
After one year through five years		110,117		109,716		47,928		47,924
After five years through ten years		95,868		95,287		15,660		15,527
After ten years		109,975		109,341		5,114		5,037
	$	335,822	$	334,249	$	78,041	$	77,831

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

As of March 31, 2017 and December 31, 2016, the Company held 288 and 302 investment securities, respectively, with fair values less than amortized cost. Management evaluated these investment securities and determined that the decline in value is temporary and related to the change in market interest rates since purchase. The decline in value is not related to any company or industry specific event. The Company anticipates full recovery of the amortized cost with respect to these securities at maturity, or sooner in the event of a more favorable market interest rate environment.

Note 3 — Loans and Allowance for Loan Losses

Loans are summarized as follows:

	March 31,			December 31,
(in thousands)	2017			2016
Loans held for investment:
Commercial real estate loans:
Real estate term	$	618,196		$	582,029
Construction and land development		230,123			240,120
Total commercial real estate loans		848,319			822,149
Commercial and industrial loans		219,852			213,260
Consumer loans:
Residential and home equity		73,053			72,959
Consumer and other		14,827			15,678
Total consumer loans		87,880			88,637
Total gross loans		1,156,051			1,124,046
Less:
Net deferred loan fees		(4,021	)		(4,169	)
Total loans held for investment		1,152,030			1,119,877
Less: allowance for loan losses		(16,644	)		(16,715	)
Total loans held for investment, net	$	1,135,386		$	1,103,162

PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3 — Loans and Allowance for Loan Losses – Continued

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

	Three Months Ended March 31, 2017
	Real		Construction			Commercial			Residential			Consumer
	Estate		and Land			and			and			and
(in thousands)	Term		Development			Industrial			Home Equity			Other			Total
Balance at beginning of period	$	6,770	$	5,449		$	3,718		$	617		$	161		$	16,715
Additions: Provisions for loan losses		375		(845	)		624			112			(66	)		200
Deductions:
Gross loan charge-offs		—		—			(158	)		(338	)		(65	)		(561	)
Recoveries		4		79			38			138			31			290
Net loan charge-offs		4		79			(120	)		(200	)		(34	)		(271	)
Balance at end of period	$	7,149	$	4,683		$	4,222		$	529		$	61		$	16,644

	Three Months Ended March 31, 2016
	Real			Construction		Commercial			Residential			Consumer
	Estate			and Land		and			and			and
(in thousands)	Term			Development		Industrial			Home Equity			Other			Total
Balance at beginning of period	$	6,783		$	3,984	$	3,941		$	603		$	246		$	15,557
Additions: Provisions for loan losses		(95	)		344		15			(12	)		(52	)		200
Deductions:
Gross loan charge-offs		—			—		(72	)		—			(64	)		(136	)
Recoveries		4			16		37			4			41			102
Net loan charge-offs		4			16		(35	)		4			(23	)		(34	)
Balance at end of period	$	6,692		$	4,344	$	3,921		$	595		$	171		$	15,723

PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3 — Loans and Allowance for Loan Losses – Continued

Non-accrual loans are summarized as follows:

	March 31,		December 31,
(in thousands)	2017		2016
Non-accrual loans, not troubled debt restructured:
Real estate term	$	3,376	$	2,386
Construction and land development		304		378
Commercial and industrial		590		1,211
Residential and home equity		227		142
Consumer and other		10		14
Total non-accrual loans, not troubled debt restructured		4,507		4,131
Troubled debt restructured loans, non-accrual:
Real estate term		786		808
Construction and land development		390		396
Commercial and industrial		—		—
Residential and home equity		—		—
Consumer and other		—		—
Total troubled debt restructured loans, non-accrual		1,176		1,204
Total non-accrual loans	$	5,683	$	5,335

Troubled debt restructured loans are summarized as follows:

	March 31,		December 31,
(in thousands)	2017		2016
Accruing troubled debt restructured loans	$	4,926	$	5,572
Non-accrual troubled debt restructured loans		1,176		1,204
Total troubled debt restructured loans	$	6,102	$	6,776

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

PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3 — Loans and Allowance for Loan Losses – Continued

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

	March 31, 2017
			30-89 Days		90+ Days				Total		Total
(in thousands)	Current		Past Due		Past Due		Non-accrual		Past Due		Loans
Commercial real estate:
Real estate term	$	613,714	$	320	$	—	$	4,162	$	4,482	$	618,196
Construction and land development		229,041		388		—		694		1,082		230,123
Total commercial real estate		842,755		708		—		4,856		5,564		848,319
Commercial and industrial		217,984		1,278		—		590		1,868		219,852
Consumer:
Residential and home equity		72,562		264		—		227		491		73,053
Consumer and other		14,339		458		20		10		488		14,827
Total consumer		86,901		722		20		237		979		87,880
Total gross loans	$	1,147,640	$	2,708	$	20	$	5,683	$	8,411	$	1,156,051

	December 31, 2016
			30-89 Days		90+ Days				Total		Total
(in thousands)	Current		Past Due		Past Due		Non-accrual		Past Due		Loans
Commercial real estate:
Real estate term	$	577,134	$	1,701	$	—	$	3,194	$	4,895	$	582,029
Construction and land development		237,433		1,913		—		774		2,687		240,120
Total commercial real estate		814,567		3,614		—		3,968		7,582		822,149
Commercial and industrial		211,143		906		—		1,211		2,117		213,260
Consumer:
Residential and home equity		71,719		1,098		—		142		1,240		72,959
Consumer and other		15,168		474		22		14		510		15,678
Total consumer		86,887		1,572		22		156		1,750		88,637
Total gross loans	$	1,112,597	$	6,092	$	22	$	5,335	$	11,449	$	1,124,046

Credit Quality Indicators:

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

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

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

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

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

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

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

PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3 — Loans and Allowance for Loan Losses – Continued

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

	March 31, 2017
			Special		Substandard		Total		Total
(in thousands)	Pass		Mention		and Doubtful		Loans		Allowance
Commercial real estate:
Real estate term	$	601,787	$	9,592	$	6,817	$	618,196	$	7,149
Construction and land development		225,298		2,196		2,629		230,123		4,683
Total commercial real estate		827,085		11,788		9,446		848,319		11,832
Commercial and industrial		212,127		2,650		5,075		219,852		4,222
Consumer loans:
Residential and home equity		69,759		1,649		1,645		73,053		529
Consumer and other		14,669		-		158		14,827		61
Total consumer		84,428		1,649		1,803		87,880		590
Total	$	1,123,640	$	16,087	$	16,324	$	1,156,051	$	16,644

	December 31, 2016
			Special		Substandard		Total		Total
(in thousands)	Pass		Mention		and Doubtful		Loans		Allowance
Commercial real estate:
Real estate term	$	565,550	$	10,609	$	5,870	$	582,029	$	6,770
Construction and land development		234,359		2,222		3,539		240,120		5,449
Total commercial real estate		799,909		12,831		9,409		822,149		12,219
Commercial and industrial		205,933		2,266		5,061		213,260		3,718
Consumer loans:
Residential and home equity		69,287		1,869		1,803		72,959		617
Consumer and other		15,542		-		136		15,678		161
Total consumer		84,829		1,869		1,939		88,637		778
Total	$	1,090,671	$	16,966	$	16,409	$	1,124,046	$	16,715

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

	March 31, 2017
	Real		Construction		Commercial		Residential		Consumer
	Estate		and Land		and		and		and
(in thousands)	Term		Development		Industrial		Home Equity		Other		Total
Allowance for loan losses:
Individually evaluated for impairment	$	161	$	67	$	318	$	77	$	-	$	623
Collectively evaluated for impairment		6,988		4,616		3,904		452		61		16,021
Total	$	7,149	$	4,683	$	4,222	$	529	$	61	$	16,644
Outstanding loan balances:
Individually evaluated for impairment	$	6,031	$	1,896	$	2,857	$	1,048	$	-	$	11,832
Collectively evaluated for impairment		612,165		228,227		216,995		72,005		14,827		1,144,219
Total gross loans	$	618,196	$	230,123	$	219,852	$	73,053	$	14,827	$	1,156,051

PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3 — Loans and Allowance for Loan Losses – Continued

	December 31, 2016
	Real		Construction		Commercial		Residential		Consumer
	Estate		and Land		and		and		and
(in thousands)	Term		Development		Industrial		Home Equity		Other		Total
Allowance for loan losses:
Individually evaluated for impairment	$	189	$	67	$	323	$	75	$	—	$	654
Collectively evaluated for impairment		6,581		5,382		3,395		542		161		16,061
Total	$	6,770	$	5,449	$	3,718	$	617	$	161	$	16,715
Outstanding loan balances:
Individually evaluated for impairment	$	5,778	$	2,995	$	6,045	$	1,476	$	-	$	16,294
Collectively evaluated for impairment		576,251		237,125		207,215		71,483		15,678		1,107,752
Total gross loans	$	582,029	$	240,120	$	213,260	$	72,959	$	15,678	$	1,124,046

Information on impaired loans is summarized as follows:

	March 31, 2017
			Recorded Investment
	Unpaid						Total
	Principal		With No		With		Recorded		Related
(in thousands)	Balance		Allowance		Allowance		Investment		Allowance
Commercial real estate:
Real estate term	$	6,117	$	3,442	$	2,589	$	6,031	$	161
Construction and land development		2,850		1,692		204		1,896		67
Total commercial real estate		8,967		5,134		2,793		7,927		228
Commercial and industrial		3,649		1,297		1,560		2,857		318
Consumer loans:
Residential and home equity		1,048		641		407		1,048		77
Consumer and other		-		-		-		-		-
Total consumer		1,048		641		407		1,048		77
Total	$	13,664	$	7,072	$	4,760	$	11,832	$	623

	December 31, 2016
			Recorded Investment
	Unpaid						Total
	Principal		With No		With		Recorded		Related
(in thousands)	Balance		Allowance		Allowance		Investment		Allowance
Commercial real estate:
Real estate term	$	5,864	$	2,979	$	2,799	$	5,778	$	189
Construction and land development		3,949		2,790		205		2,995		67
Total commercial real estate		9,813		5,769		3,004		8,773		256
Commercial and industrial		6,937		4,458		1,587		6,045		323
Consumer loans:
Residential and home equity		1,476		1,071		405		1,476		75
Consumer and other		-		-		-		-		-
Total consumer		1,476		1,071		405		1,476		75
Total	$	18,226	$	11,298	$	4,996	$	16,294	$	654

PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3 — Loans and Allowance for Loan Losses – Concluded

The interest income recognized on impaired loans was as follows:

	Three Months Ended
	March 31, 2017				March 31, 2016
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(in thousands)	Investment		Recognition		Investment		Recognition
Commercial real estate:
Real estate term	$	5,904	$	30	$	9,796	$	79
Construction and land development		2,446		31		3,963		55
Total commercial real estate		8,350		61		13,759		134
Commercial and industrial		4,451		54		6,552		88
Consumer loans:
Residential and home equity		1,262		13		2,166		22
Consumer and other		-		-		15		-
Total consumer		1,262		13		2,181		22
Total	$	14,063	$	128	$	22,492	$	244

Loans and Deposits to affiliates — The Company has entered into loan transactions with certain directors, affiliated companies and executive committee members (“affiliates”). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. Total outstanding loans with affiliates were approximately $345,000 and $330,000 as of March 31, 2017 and December 31, 2016, respectively. Available lines of credit for loans and credit cards to affiliates were approximately $510,000 as of March 31, 2017. Deposits from affiliates were $8.3 million and $7.8 million as of March 31, 2017 and December 31, 2016, respectively.

Note 4 — Income Taxes

Income tax expense was $2.7 million and $2.9 million for the three months ended March 31, 2017 and 2016, respectively. The Company’s effective tax rate was 29.6% and 35.5% for the three months ended March 31, 2017 and 2016, respectively. The tax rate in 2017 is lower than 2016 due primarily to tax-deductible stock compensation expense and the reversal of a liability related to an unrecognized tax benefit totaling approximately $600,000 in taxable benefits.

Note 5 — Commitments and Contingencies

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

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

PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

	March 31,		December 31,
(in thousands)	2017		2016
Commitments to extend credit, including unsecured commitments of $11,143 and $11,230 as of March 31, 2017 and December 31, 2016, respectively	$	453,321	$	445,645
Stand-by letters of credit and bond commitments, including unsecured commitments of $823 and $660 as of March 31, 2017 and December 31, 2016, respectively		30,120		29,332
Unused credit card lines, all unsecured		26,000		25,803

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

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

Note 6 — Regulatory Capital Matters

The consolidated Tier 1 Leverage ratio increased from 13.71% at December 31, 2016 to 14.10% as of March 31, 2017. Federal Reserve Board Regulations require maintenance of certain minimum reserve balances based on certain average deposits which as of March 31, 2017 and December 31, 2016 were $4.1 million and $9.1 million, respectively. The Company’s Board of Directors may declare a cash or stock dividend out of retained earnings provided the regulatory minimum capital ratios are met. The Company plans to maintain capital ratios that meet the well-capitalized standards per the regulations and, therefore, plans to limit dividends to amounts that are appropriate to maintain those well-capitalized regulatory capital ratios.

Note 7 — Incentive Share-Based Plan and Other Employee Benefits

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

During the three months ended March 31, 2017, the Company granted options for the purchase of 100 common shares, which have a weighted average exercise price of $25.00 per share and a weighted average fair value as of the date of grant of $5.77 per share. Additionally, the Company granted 104 restricted stock units (“RSU”) at a weighted-average fair value of $25.00 per unit. The options and RSU’s generally vest over periods from one to three years. The Company recorded share-based compensation expense of $109,000 and $127,000 for the three months ended March 31, 2017 and 2016, respectively.

PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 8 — Fair Value

Fair value measurements — Fair value represents the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value, GAAP has established a hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs. This hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:

Level 1	Quoted prices in active markets for identical assets or liabilities.

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

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

The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation methodology:

Investment securities, available-for-sale — Where quoted prices are available in an active market, securities are classified within Level 1 of the hierarchy. Level 1 includes securities that have quoted prices in an active market for identical assets. If quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics or discounted cash flows, and accordingly, are classified as Level 2 or 3. The Company has categorized its available-for-sale investment securities as Level 1 or 2.

Impaired loans and other real estate owned — Fair value applies to loans and other real estate owned measured for impairment. Impaired loans are measured at the fair value of the loan’s collateral (if collateral dependent) or net present value of future cash flows (if not collateral dependent). Fair value of the loan’s collateral is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral. The Company has categorized its impaired loans and other real estate owned as Level 2.

Assets measured at fair value are summarized as follows:

(in thousands)	Level 1		Level 2		Level 3		Total
As of March 31, 2017
Fair valued on a recurring basis:
Investment securities available-for-sale	$	1,005	$	333,244	$	—	$	334,249
Fair valued on a non-recurring basis:
Impaired loans		—		4,137		—		4,137

As of December 31, 2016
Fair valued on a recurring basis:
Investment securities available-for-sale	$	1,008	$	334,601	$	—	$	335,609
Fair valued on a non-recurring basis:
Impaired loans		—		4,342		—		4,342

PEOPLE’S UTAH BANCORP AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 8 — Fair Value – Continued

Fair value of financial instruments — The following table summarizes carrying amounts, estimated fair values and assumptions used to estimate fair values of financial instruments:

	Carrying		Estimated
(in thousands)	Value		Fair Value
As of March 31, 2017
Financial Assets:
Net loans held for investment	$	1,135,386	$	1,134,848
Financial Liabilities:
Interest bearing deposits		1,005,779		1,006,034

As of December 31, 2016
Financial Assets:
Net loans held for investment	$	1,103,162	$	1,101,890
Financial Liabilities:
Interest bearing deposits		981,974		982,380

The above summary excludes financial assets and liabilities for which carrying value approximates fair value. For financial assets, these include cash and cash equivalents, held-to-maturity securities (see Note 2), loans held for sale, bank-owned life insurance, accrued interest receivable and FHLB stock. For financial liabilities, these include non-interest bearing deposits, short-term borrowings, and accrued interest payable. Also excluded from the summary are financial instruments recorded at fair value on a recurring basis, as previously described.

Fair values of off-balance sheet commitments such as lending commitments, standby letters of credit and guarantees are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of the fees as of March 31, 2017 and December 31, 2016 were insignificant.

The following methods and assumptions were used to estimate the fair value of financial instruments:

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

Interest bearing deposits — The fair value of interest bearing deposits is estimated by discounting the estimated future cash flows using the rates currently offered for deposits with similar remaining maturities.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in the above methodologies and assumptions could significantly affect the estimates. Further, certain financial instruments and all non-financial instruments are excluded from the applicable disclosure requirements. Therefore, the fair value amounts shown in the table do not, by themselves, represent the underlying value of the Company as a whole.

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

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

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10–Q may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views and are not historical facts. These statements can generally be identified by use of phrases such as “believe,” “expect,” “will,” “seek,” “should,” “anticipate,” “estimate,” “intend,” “plan,” “target,” “project,” “commit” or other words of similar import. Similarly, statements that describe our future financial condition, results of operations, objectives, strategies, plans, goals or future performance and business are also forward-looking statements. These forward-looking statements include but are not limited to, (i) our plans to open new branches in the first half of 2017 and to pursue potential acquisitions, and (ii) statements concerning future growth trends in our residential mortgage business. Statements that project future financial conditions, results of operations and shareholder value are not guarantees of performance and many of the factors that will determine these results and values are beyond our ability to control or predict. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. These are forward-looking statements and involve known and unknown risks, uncertainties and other factors, including, but not limited to, those described in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections in this report and our Annual Report on Form 10-K for the year ended December 31, 2016 (“Form 10-K”), and other parts of this report that could cause our actual results to differ materially from those anticipated in these forward-looking statements. The following is a non-exclusive list of factors which could cause our actual results to differ materially from our forward-looking statements in this prospectus:

•

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

•

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

•

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

•

higher defaults on our loan portfolio than we expect;

•

changes in management’s estimate of the adequacy of the allowance for loan losses;

•

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

•

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

•

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

•

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

•

technological changes;

•

regulatory or judicial proceedings; and

•

other factors and risks including those described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report and our Annual Report on Form 10-K for the year ended December 31, 2016.

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

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

Overview

We are a bank holding company, formed in 1998 and headquartered in American Fork, Utah, which is located on the I-15 corridor between the cities of Salt Lake City and Provo. We have three divisions in our wholly-owned subsidiary, People’s Intermountain Bank (“PIB” or the “Bank”). We have 18 banking locations operating through two banking divisions, dba, BAF and LSB, which began offering banking services in 1913 and 1905, respectively. Our third division is GrowthFunding Equipment Finance, an equipment leasing operation which originates direct equipment leasing products to businesses nationwide and to our banking customers. In the past we have acquired rental streams of payments from third-party leasing companies. We provide full-service retail banking in many of the leading population centers in the state of Utah, including a wide range of banking and related services to locally-owned businesses, professional firms, real estate developers, residential home builders, high net-worth individuals, investors and other customers. Our primary customers are small and medium-sized businesses that require highly personalized commercial banking products and services.

We believe our growth is a result of our ability to attract and retain high-quality associates, add branches in attractive markets and provide good customer service, as well as due to the expansion of our construction, land acquisition and development and commercial and industrial lending. The primary source of funding for our asset growth has been the generation of core deposits, which we accomplish through a combination of competitive pricing for local deposits coupled with expansion of our branch system. We expect to open new branches in the first half of 2017 in Preston, Idaho, and Bountiful, Utah.

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

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

Key Factors in Evaluating Our Financial Condition and Results of Operations

As a bank holding company, we focus on a number of key factors in evaluating our financial condition and results of operations including:

•

Return on average equity;

•

Return on average assets;

•

Asset quality;

•

Asset growth;

•

Capital and liquidity;

•

Net interest margin; and

•

Operating efficiency.

The chart below shows these key financial measures:

	Year to Date
	March 31,			March 31,
(Dollars in thousands except per share amounts)	2017			2016
Net income	$	6,521		$	5,243
Basic earnings per share		0.36			0.30
Diluted earnings per share		0.36			0.29
Total assets		1,717,648			1,555,672
Total loans, net		1,148,439			1,067,546
Total deposits		1,468,665			1,324,316
Net interest margin		4.55	%		4.58	%
Efficiency ratio		56.83	%		59.30	%
Return on average assets		1.59	%		1.36	%
Return on average equity		11.39	%		9.88	%
Average equity to average assets		13.93	%		13.80	%
Non-performing assets to total assets		0.35	%		0.37	%
Liquidity ratio ⁽¹⁾		31.47	%		28.85	%
Dividend Payout Ratio (2)		21.96	%		23.54	%

(1)

The liquidity ratio is the sum of cash equivalents and investment securities, less investment securities pledged as collateral against short-term borrowings, all divided by total liabilities. Pledged investment securities were $36.4 million and $38.2 million at March 31, 2017 and 2016, respectively.

(2)

The dividend payout ratio is dividends paid divided by net income for the period.

Return on Average Equity. We measure the return to our shareholders through a return on average equity, or ROE, calculation. Our net income for the three months ended March 31, 2017 increased 24.4% to $6.5 million from $5.2 million for the comparable period in 2016. Net income for the three months ended March 31, 2017 increased primarily due to an increase in interest income due to loan growth, an increase in non-interest income, a decrease in income tax expense and offset by an increase in non-interest expenses. Basic earnings per share, or EPS, was $0.36 for the three months ended March 31, 2017 compared to $0.30 for the comparable period in 2016. Diluted EPS was $0.36 per share for the three months ended March 31, 2017 compared to $0.29 per share for the comparable period in 2016. ROE increased to 11.39% for the three months ended March 31, 2017 compared to 9.88% for the comparable period in 2016 due primarily from the 24.4% increase in net income.

Return on Average Assets. We measure asset utilization through a return on average assets, or ROA, calculation. For the three months ended March 31, 2017 our ROA increased to 1.59% compared to 1.36% for the three months ended March 31, 2016. The increase in ROA is a result of improved operating results as discussed throughout this Management’s Discussion & Analysis.

Asset Quality. Since the majority of our performing assets are loans, we measure asset quality in terms of non-performing assets as a percentage of total assets. This measurement is used in determining asset quality and its potential effect on future earnings. Due to improving asset quality, non-performing assets as a percentage of total assets were 0.35% as of March 31, 2017 compared to 0.37% as of March 31, 2016. Nonperforming assets are loans that are 90 days or more past due or have been placed on nonaccrual status, or are other real estate owned, or OREO.

Asset Growth. Revenue growth and EPS are directly related to earning assets growth. In descending order, our earning assets are loans, investments (including federal funds) and interest earning deposit balances. As of March 31, 2017 compared to March 31, 2016, total assets grew 10.4%, total net loans increased by 7.6% and investment securities increased by 9.1%. Loan growth in 2017 came primarily from the increased level of real estate, construction, acquisition and land development lending activities.

Capital and Liquidity. Maintaining appropriate capital and liquidity levels is imperative for us to continue our strong growth levels. We have been successful in maintaining capital levels well above the minimum regulatory requirements, which we believe has enabled our growth strategy. In 2015, we raised approximately $34.9 million in new capital from our IPO. We plan to utilize the additional capital for expansion purposes, both organic and through acquisition, and for general corporate purposes. Our average equity to average assets ratio as of March 31, 2017 was 13.93% compared to 13.80% as of March 31, 2016. We monitor liquidity levels to ensure we have adequate sources available to fund our loan growth and to accommodate daily operations. The key measure we use to monitor liquidity is our liquidity ratio which is calculated as cash and cash equivalents plus unpledged investment securities divided by total liabilities. Our liquidity ratio was 31.47% as of March 31, 2017, compared to 28.85% as of March 31, 2016.

Net Interest Margin. Net interest margin is a metric that allows us to gauge our loan pricing and funding cost relationship. For the three months ended March 31, 2017 and 2016, our net interest margin was 4.55% and 4.58%, respectively. The decline in net interest margin is attributable primarily to an increased competition on loan rates offset by slightly lower cost of interest-bearing liabilities.

Operating Efficiency. Operating efficiency is the measure of how much it costs us to generate each dollar of revenue. A lower percentage indicates a better operating efficiency. Our efficiency ratio is calculated as the sum of non-interest expense less merger related expenses, if applicable, divided by the sum of net interest income and non-interest income and was 56.83% for the three months ended March 31, 2017 as compared to 59.30% for the three months ended March 31, 2016. The improvement in the efficiency ratio is the result of operating efficiencies as discussed throughout this Managements’ Discussion & Analysis.

Results of Operations

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

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

	Three Months Ended
	March 31, 2017								March 31, 2016
				Interest		Average						`		Average
	Average			Income/		Yield/			Average			Income/		Yield/
(Dollars in thousands, except footnotes)	Balance			Expense		Rate			Balance			Expense		Rate
ASSETS
Interest earning deposits in other banks and federal funds sold	$	40,849		$	79		0.78	%	$	15,848		$	18		0.46	%
Securities: ⁽¹⁾
Taxable securities		314,779			1,201		1.55	%		291,626			1,139		1.57	%
Non-taxable securities⁽²⁾		92,164			649		2.86	%		95,418			682		2.87	%
Loans^{(3) (4)}		1,135,689			16,853		6.02	%		1,060,790			15,851		6.01	%
Non-marketable equity securities		1,831			3		0.66	%		2,737			2		0.29	%
Total interest earning assets		1,585,312		$	18,785		4.81	%		1,466,419		$	17,692		4.85	%
Allowance for loan losses		(16,769	)							(15,593	)
Non-interest earning assets		98,528								96,119
Total average assets	$	1,667,071							$	1,546,945
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest bearing deposits:
Demand and savings accounts	$	659,483		$	438		0.27	%	$	581,846		$	403		0.28	%
Money market accounts		174,456			105		0.24	%		147,289			94		0.26	%
Certificates of deposit, under $100,000		90,368			136		0.61	%		97,821			85		0.35	%
Certificates of deposit, $100,000 and over		65,943			86		0.53	%		75,862			135		0.72	%
Total interest bearing deposits		990,250			765		0.31	%		902,818			717		0.32	%
Short-term borrowings		3,233			1		0.13	%		31,363			37		0.47	%
Total interest bearing liabilities		993,483		$	766		0.31	%		934,181		$	754		0.32	%
Other non-interest bearing liabilities		441,319								399,321
Shareholders’ equity		232,269								213,443
Total average liabilities and shareholders’ equity	$	1,667,071							$	1,546,945
Net interest income (tax-equivalent)				$	18,019							$	16,938
Interest rate spread (tax-equivalent)							4.50	%							4.53	%
Net interest margin (tax-equivalent) ⁽⁵⁾							4.61	%							4.65	%

⁽¹⁾	Excludes average unrealized gains (losses) of ($1.7) million and $0.7 million for the three months ended March 31, 2017 and 2016, respectively, which are included in non-interest earning assets.

⁽²⁾	Calculated on a fully tax equivalent basis using an assumed tax rate of 35%, which includes federal tax benefits relating to income earned on municipal securities totaling $227,000 and $238,000 for the three months ended March 31, 2017 and 2016, respectively.

⁽³⁾	Loan interest income includes loan fees of $1.5 million and $1.3 million for the three months ended March 31, 2017 and 2016, respectively.

⁽⁴⁾	Average loans do not include average non-accrual loans of $5.5 million and $6.3 million for the three months ended March 31, 2017 and 2016, respectively, which are included in non-interest earning assets.

⁽⁵⁾	Net interest margin is computed by dividing net interest income (tax-equivalent) by average interest earning assets.

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

	Three Months Ended March 31,
	2017 vs. 2016
	Increase (Decrease) Due to:
(in thousands)	Volume			Rate			Net
Interest income:
Interest earning deposits in other banks and federal funds sold	$	42		$	19		$	61
Taxable securities		89			(27	)		62
Non-taxable securities ⁽¹⁾		(23	)		(10	)		(33	)
Loans		1,112			(110	)		1,002
Federal Home Loan Bank stock		(1	)		2			1
Total interest income (tax-equivalent)		1,219			(126	)		1,093
Interest expense:
Demand and savings accounts		52			(17	)		35
Money market accounts		17			(6	)		11
Certificates of deposit, under $100,000		(7	)		58			51
Certificates of deposit, $100,000 and over		(16	)		(33	)		(49	)
Short-term borrowings		(20	)		(16	)		(36	)
Total interest expense		26			(14	)		12
Net interest income (tax-equivalent)	$	1,193		$	(112	)	$	1,081

⁽¹⁾	Tax equivalent income calculated on a fully tax-equivalent basis using an assumed tax rate of 35%.

Net interest income (tax-equivalent) increased $1.1 million for the three months ended March 31, 2017 compared to the same period in 2016. The increase in interest income was primarily driven by increased organic loan volumes offset by lower average rates on loans and investment securities. Additionally, interest expense also increased for the three months ended March 31, 2017 compared to the same period in 2016 due principally to lower deposit interest rates.

Financial Overview for the Three Months Ended March 31, 2017 and 2016

	Three Months Ended
	March 31,		March 31,
(in thousands)	2017		2016		$ Change			% Change
Interest income	$	18,558	$	17,454	$	1,104			6.3	%
Interest expense		766		754		12			1.6	%
Net interest income		17,792		16,700		1,092			6.5	%
Provision for loan losses		200		200		-			0.0	%
Net interest income after provision for loan losses		17,592		16,500		1,092			6.6	%
Non-interest income		4,125		3,763		362			9.6	%
Non-interest expense		12,456		12,135		321			2.6	%
Income before income tax expense		9,261		8,128		1,133			13.9	%
Income tax expense		2,740		2,885		(145	)		-5.0	%
Net income	$	6,521	$	5,243	$	1,278			24.4	%

Net Income. Our net income grew by $1.3 million or 24.4% to $6.5 million for the quarter ended March 31, 2017 as compared to $5.2 million for the same quarter in 2016. This was attributable principally to an increase in net interest income of $1.1 million, higher non-interest income of $362,000, lower income tax expense of $145,000, and offset by an increase of $321,000 in non-interest expenses.

Net Interest Income and Net Interest Margin. The increase in net interest income for the quarter ended March 31, 2017 compared to the same quarter in 2016 was primarily driven by interest earned on a higher average loan volume attributable to organic growth. The increase in interest income from higher loan volumes was offset by a decrease from lower yields on investment securities. Interest expense in the quarter ended March 31, 2017 increased from the same period in 2016 due to higher volume in average deposits. Construction and land development loans (“C & D loans”) are our highest yielding assets within our earning asset mix and represents 19.9% of gross loans as of March 31, 2017. If C & D loan activity declines as a percentage of earning asset mix in future quarters, the net interest margin could decline from current levels.

The tax-equivalent yield on our average interest earning assets was 4.81% for the quarter ended March 31, 2017 compared to 4.85% for the comparable quarter in 2016. The cost of funding our earning assets declined in the quarter ended March 31, 2017 to 0.31% from 0.32% in the comparable quarter in 2016 because of lower rates paid on deposits and accretion of fair value adjustments to certificates of deposit.

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

The provision for loan losses for each of the quarters ended March 31, 2017 and 2016 was $200,000, respectively. We have experienced net charge-offs of $271,000 in the current quarter compared to $34,000 in the comparable quarter in 2016. The provision for loan losses in both periods were primarily due to the impact of the charge-offs and relative increases in loan balances.

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

	Three Months Ended
	March 31,		March 31,
(in thousands)	2017		2016		$ Change		% Change
Service charges on deposit accounts	$	536	$	513	$	23		4.5	%
Card processing		1,124		1,031		93		9.0	%
Mortgage banking		1,979		1,748		231		13.2	%
Other operating		486		471		15		3.2	%
Total non-interest income	$	4,125	$	3,763	$	362		9.6	%

The increase in total non-interest income during the quarter ended March 31, 2017 compared to the same quarter in 2016 was primarily influenced by higher mortgage banking income from higher mortgage volumes and card processing income.

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

	Three Months Ended
	March 31,		March 31,
(in thousands)	2017		2016		$ Change			% Change
Salaries and employee benefits	$	7,967	$	7,884	$	83			1.1	%
Occupancy, equipment and depreciation		1,117		988		129			13.1	%
Data processing		675		707		(32	)		-4.5	%
FDIC premiums		126		195		(69	)		-35.4	%
Card processing		529		590		(61	)		-10.3	%
Marketing and advertising		262		169		93			55.0	%
Other		1,780		1,602		178			11.1	%
Total non-interest expense	$	12,456	$	12,135	$	321			2.6	%

Non-interest expense for the first quarter of 2017 increased $321,000 compared to the comparable period in 2016, primarily due to higher salaries and benefits of $83,000 and various other expenses of $178,000, including expenses related primarily to higher occupancy, marketing and other costs, and offset by lower data processing and lower rates on FDIC premiums. The increase in salaries and benefits is primarily due to annual salary increases, higher variable compensation costs, higher payroll tax and medical benefits to support our balance sheet and income growth, offset by higher deferred loan costs.

Income Tax Expense. We recorded an income tax expense of $2.7 million for the first quarter ended March 31, 2017 compared to $2.9 million for the same period in 2016. The effective tax rate for the first quarter of 2017 was 29.6% compared to 35.5% in the corresponding first quarter of 2016. The tax rate in 2017 is lower than 2016 due primarily to tax-deductible stock compensation expense and the reversal of a liability related to an unrecognized tax benefit totaling approximately $600,000 in taxable benefits.

Financial Condition

Our total assets as of March 31, 2017 were $1.72 billion, a 3.1% increase compared to December 31, 2016. Our total loans held for investment as of March 31, 2017 were $1.15 billion, an increase of 2.9% from December 31, 2016. Total deposits as of March 31, 2017 were $1.47 billion, an increase of 3.1% compared to December 31, 2016.

Loans

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

	March 31,			December 31,
(Dollars in thousands)	2017			2016
Loans held for sale	$	13,053		$	20,826
Loans held for investment:
Commercial real estate loans:
Real estate term		618,196			582,029
Construction and land development		230,123			240,120
Total commercial real estate loans		848,319			822,149
Commercial and industrial		219,852			213,260
Consumer loans:
Residential and home equity		73,053			72,959
Consumer and other		14,827			15,678
Total consumer loans		87,880			88,637
Total gross loans		1,156,051			1,124,046
Net deferred loan fees		(4,021	)		(4,169	)
Allowance for loan losses		(16,644	)		(16,715	)
Loans held for investment, net		1,135,386			1,103,162
Total loans, net	$	1,148,439		$	1,123,988

	March 31,			December 31,
(Percentage of total loans held for investment)	2017			2016
Loans held for investment:
Commercial real estate loans:
Real estate term		53.5	%		51.7	%
Construction and land development		19.9	%		21.4	%
Total commercial real estate loans		73.4	%		73.1	%
Commercial and industrial		19.0	%		19.0	%
Consumer loans:
Residential and home equity		6.3	%		6.5	%
Consumer and other		1.3	%		1.4	%
Total consumer loans		7.6	%		7.9	%
Total loans held for investment		100.0	%		100.0	%

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

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

Contractual maturities as of March 31, 2017 are as follows:

										Rate Structure for
										Loans Maturing Over
	Maturity									One Year
				One
	One			through		After
	Year			Five		Five						Adjustable
(in thousands)	or Less			Years		Years		Total		Fixed Rate		Rate
Loans held for investment:
Commercial real estate loans:
Real estate term	$	70,498		$	235,513	$	312,185	$	618,196	$	129,013	$	418,685
Construction and land development		182,500			43,982		3,641		230,123		24,695		22,928
Total commercial real estate loans		252,998			279,495		315,826		848,319		153,708		441,613
Commercial and industrial		87,538			101,527		30,787		219,852		92,106		40,208
Consumer loans:
Residential and home equity		12,667			18,904		41,482		73,053		11,153		49,233
Consumer and other		6,225			7,096		1,506		14,827		8,082		520
Total consumer loans		18,892			26,000		42,988		87,880		19,235		49,753
Total gross loans held for investment	$	359,428	⁽¹⁾	$	407,022	$	389,601	$	1,156,051	$	265,049	$	531,574	⁽¹⁾

⁽¹⁾	The sum of adjustable rate loans maturing after one year and total loans maturing within one year is $891 million or 77.1% of total loans at March 31, 2017.

Concentrations. As of March 31, 2017, in management’s judgment, a concentration of loans existed in real estate related loans. At that date, real estate related loans comprised 79.7% of total loans held for investment, of which commercial real estate represents 53.5%, 19.9% are construction and land development loans, and 6.3% are residential and home equity loans. We require collateral on real estate lending arrangements and typically maintain loan-to-value ratios of up to 80%, except for some residential construction loans of up to 95% loan-to-value provided the loan includes pre-approved long-term financing. Our concentration in commercial and industrial loans has stayed steady at 19.0% as of March 31, 2017 and December 31, 2016. We have had an added focus on diversifying our loan portfolio mix since 2011 resulting in an increase in our concentration of commercial and industrial loans from 15.1% as of December 31, 2011.

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

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

	March 31,			December 31,
(Dollars in thousands)	2017			2016
Non-accrual loans, not troubled-debt restructured
Real estate term	$	3,376		$	2,386
Construction and land development		304			378
Commercial and industrial		590			1,211
Residential and home equity		227			142
Consumer and other		10			14
Total non-accrual, not troubled-debt restructured loans		4,507			4,131
Troubled-debt restructured loans non-accrual
Real estate term		786			808
Construction and land development		390			396
Commercial and industrial		—			—
Residential and home equity		—			—
Consumer and other		—			—
Total troubled-debt restructured, non-accrual loans		1,176			1,204
Total non-accrual loans⁽¹⁾		5,683			5,335
Accruing loans past due 90 days or more		20			22
Total non-performing loans (NPL)		5,703			5,357
OREO		245			245
Total non-performing assets (NPA)⁽²⁾	$	5,948		$	5,602
Accruing troubled debt restructured loans	$	4,926		$	5,572
Non-accrual troubled debt restructured loans		1,176			1,204
Total troubled debt restructured loans	$	6,102		$	6,776
Selected ratios:
NPL to total loans		0.50	%		0.49	%
NPA to total assets		0.35	%		0.34	%

⁽¹⁾	We estimate that approximately $79,000 and $298,000 of interest income would have been recognized on loans accounted for on a non-accrual basis for the three months ended March 31, 2017 and the year ended December 31, 2016, respectively, had such loans performed pursuant to contractual terms.

⁽²⁾	Non-performing assets as of December 31, 2016 have not been reduced by U.S. government guarantees of $16,000. There were no U.S. Government guarantees on non-performing assets as of March 31, 2017.

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

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

Troubled-debt Restructured Loans. A restructured loan is considered a troubled debt restructured loan, or TDR, if we, for economic or legal reasons related to the debtor’s financial difficulties, grant a concession in terms or a below-market interest rate to the debtor that we would not otherwise consider. We had TDR loans of $6.1 million and $6.8 million as of March 31, 2017 and December 31, 2016, respectively. Our TDR loans are considered impaired loans of which $1.18 million and $1.20 million as of March 31, 2017 and December 31, 2016, respectively, are designated as non-accrual.

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

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

	Three Months Ended
	March 31,		March 31,
(in thousands)	2017		2016
Balance, beginning of period	$	245	$	568
Additions		-		237
Write-downs		-		(53	)
Sales		-		(108	)
Balance, end of period	$	245	$	644

Allowance for Loan Losses

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

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

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

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

	Three Months Ended
	March 31,			March 31,
(Dollars in thousands)	2017			2016
Allowance for loan losses:
Beginning balance	$	16,715		$	15,557
Loans charged off:
Real estate term		—			—
Construction and land development		—			—
Commercial and industrial		(158	)		(72	)
Residential and home equity		(338	)		—
Consumer and other		(65	)		(64	)
Total		(561	)		(136	)
Recoveries:
Real estate term		4			4
Construction and land development		79			16
Commercial and industrial		38			37
Residential and home equity		138			4
Consumer and other		31			41
Total		290			102
Net charge-offs		(271	)		(34	)
Provision for loan losses		200			200
Ending balance	$	16,644		$	15,723
Gross loans including loans held for sale	$	1,169,104		$	1,087,119
Average loans		1,135,689			1,060,790
Non-performing loans		5,703			5,187
Selected ratios:
Net charge-offs to average loans		0.10	%		0.01	%
Provision for loan losses to average loans		0.07	%		0.08	%
Allowance for loan losses to loans outstanding at end of period		1.42	%		1.45	%

The decrease in ALLL as a percentage of total loans from 2016 to 2017 is attributable to overall improvement in the credit quality of the underlying loan portfolio, changes to our historical loss rates from updates to our 5-year lookback period, and adjustments to qualitative ALLL factors that impact applied loss rates.

Our construction and land development portfolio reflects some borrower concentration risk, and also carries the enhanced risks encountered with construction loans generally. We also finance contractors on a speculative basis. Construction and land development loans are generally more risky than permanent mortgage loans because they are dependent upon the borrower’s ability to generate cash to service the loan, and the value of the collateral depends on project completion when market conditions may have changed.

Our commercial real estate loans are a mixture of new and seasoned properties, retail, office, warehouse, and some industrial properties. Loans on properties are usually underwritten at a loan to value ratio of up to 75% with a minimum debt coverage ratio of 1.25 times.

Our loan portfolio does not include any significant concentrations in oil and gas related businesses.

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

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

	March 31,		December 31,
(in thousands)	2017		2016
Commercial real estate loans:
Real estate term	$	7,149	$	6,770
Construction and land development		4,683		5,449
Total commercial real estate loans		11,832		12,219
Commercial and industrial		4,222		3,718
Consumer loans:
Residential and home equity		529		617
Consumer and other		61		161
Total consumer loans		590		778
Total	$	16,644	$	16,715

	March 31,			December 31,
(Percentage of total loans held for investment)	2017			2016
Commercial real estate loans:
Real estate term		53.5	%		51.7	%
Construction and land development		19.9	%		21.4	%
Total commercial real estate loans		73.4	%		73.1	%
Commercial and industrial		19.0	%		19.0	%
Consumer loans:
Residential and home equity		6.3	%		6.5	%
Consumer and other		1.3	%		1.4	%
Total consumer loans		7.6	%		7.9	%
Total		100.0	%		100.0	%

Investments

The carrying value of our investment securities totaled $412.3 million as of March 31, 2017 and $409.1 million as of December 31, 2016. Our portfolio of investment securities is comprised of both available-for-sale securities and securities that we intend to hold to maturity. As of March 31, 2017, we held no investment securities from any issuer which totaled over 10% of our shareholders’ equity.

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

	March 31,		December 31,
(in thousands)	2017		2016
Available-for-sale securities:
U.S. Government agencies	$	118,617	$	118,603
Municipal securities		21,080		25,519
Mortgage-backed securities		184,809		181,821
Corporate securities		9,743		9,666
Total		334,249		335,609
Held-to-maturity securities:
Municipal securities		78,041		73,512
Total investment securities	$	412,290	$	409,121

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

Investment securities maturities as of March 31, 2017:

						After One but					After Five but
	Within One Year					within Five Years					within Ten Years					After Ten Years					Total
(Dollars in thousands)	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Available-for-sale securities:
U.S. Government agencies	$	12,273		0.97	%	$	97,080		1.16	%	$	9,844		2.37	%	$	-		0.00	%	$	119,197		1.24	%
Municipal securities		7,587		3.74	%		8,016		4.62	%		4,439		3.21	%		707		3.70	%		20,749		3.96	%
Mortgage-backed securities		2		6.44	%		2,021		1.24	%		77,585		1.63	%		106,268		1.85	%		185,876		1.81	%
Other securities		-		0.00	%		3,000		2.04	%		4,000		2.08	%		3,000		4.00	%		10,000		2.64	%
Total		19,862		2.03	%		110,117		1.44	%		95,868		1.80	%		109,975		1.92	%		335,822		1.77	%
Held-to-maturity securities:
Municipal securities		9,339		2.14	%		47,928		2.31	%		15,660		2.91	%		5,114		3.55	%		78,041		2.49	%
Total investment securities	$	29,201		2.07	%	$	158,045		1.70	%	$	111,528		1.95	%	$	115,089		1.99	%	$	413,863		1.90	%

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

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

Deposits

Total deposits were $1.47 billion as of March 31, 2017 and $1.43 billion as of December 31, 2016. The increase in total deposits is attributed primarily to our growth in existing markets and entering into new markets. Non-interest bearing demand deposits were $462.9 million, or 31.5% of total deposits as of March 31, 2017 compared to 31.1% as of December 31, 2016. Interest bearing deposits are comprised of interest bearing DDA accounts, money market accounts, regular savings accounts, certificates of deposit of under $100,000 and certificates of deposit of $100,000 or more.

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

	Year to Date					Year Ended
	March 31, 2017					December 31, 2016
	Average		Average			Average		Average
(Dollars in thousands)	Balance		Rate			Balance		Rate
Non-interest bearing deposits	$	431,360		0.00	%	$	426,487		0.00	%
Interest bearing deposits:
Interest bearing demand and savings		659,483		0.27	%		607,714		0.28	%
Money market		174,456		0.24	%		150,028		0.24	%
Certificates of deposit under $100,000		90,368		0.61	%		94,689		0.32	%
Certificates of deposit $100,000 and over		65,943		0.53	%		73,860		0.66	%
Total interest bearing deposits		990,250		0.31	%		926,291		0.31	%
Total	$	1,421,610				$	1,352,778

Additionally, the following table shows the maturities of CDs of $100,000 or more:

	March 31,
(in thousands)	2017
Due in three months or less	$	16,613
Due in over three months through six months		6,618
Due in over six months through twelve months		15,952
Due in over twelve months		32,503
Total	$	71,686

Deposits are gathered from individuals, partnerships and corporations in our market areas. The interest rates paid are competitively priced for each particular deposit product and structured to meet our funding requirements. We will continue to manage interest expense through deposit pricing. Short-term interest rates have increased since the fourth quarter of 2016 and we would expect that cost of funds and deposits will increase in future quarters.

Shareholders’ Equity

As of March 31, 2017, our shareholders’ equity totaled $234.2 million, an increase of $5.7 million or 2.8% since December 31, 2016. The increase in shareholders’ equity for the three month period ended March 31, 2017 was primarily due to an increase of $0.6 million in additional paid in capital from exercises of stock options and net income of $6.5 million for the period less dividends paid of $1.4 million.

Dividends of $0.08 per share were declared during the three months ended March 31, 2017 representing 22.0% of the net income for the same period. Future cash dividends will depend on a variety of factors, including net income, capital, asset quality, general economic conditions and regulatory considerations.

Capital Resources

We are subject to risk-based capital adequacy guidelines related to the adoption of U.S. Basel III Capital Rules. Specifically, the rules impose, among other requirements, new minimum capital requirements including a Tier 1 leverage capital ratio of 4.0%, a common equity Tier 1 risk-based capital ratio of 4.5%, a Tier 1 risk-based capital ratio of 6% and a total risk-based capital ratio of 8%. Since we only have common equity, our common equity Tier 1 risk-based capital ratio and our Tier 1 risk-based capital ratio are the same. Therefore, we only disclose our Tier 1 risk-based capital ratio since it has a higher required ratio for minimum and well-capitalized banks.

The following table sets forth our capital ratios.

	Basel III
	Regulatory
	Requirements -
	Well Capitalized			PUB
	(Greater than or			Actual as of			Actual as of			Actual as of
	Equal to Stated			March 31,			December 31,			March 31,
	Percentage)			2017			2016			2016
Tier 1 leverage capital ratio	NA				14.10	%		13.71	%		13.85	%
Tier 1 risk-based capital		8.00	%		18.84	%		18.93	%		17.81	%
Total risk-based capital		10.00	%		20.11	%		20.19	%		19.08	%

PUB and the Bank were well-capitalized as of March 31, 2017, December 31, 2016 and March 31, 2016 for federal regulatory purposes.

Off-Balance Sheet Arrangements

The following table sets forth our off-balance sheet lending commitments as of March 31, 2017:

			Amount of Commitment Expiration Per Period
	Total				One to		Three to		After
	Amounts		Less than		Three		Five		Five
Other Commitments (in thousands)	Committed		One Year		Years		Years		Years
Commitments to extend credit	$	453,321	$	326,008	$	68,228	$	5,615	$	53,470
Standby letters of credit		30,120		30,120		-		-		-
Credit cards		26,000		26,000		-		-		-
Total	$	509,441	$	382,128	$	68,228	$	5,615	$	53,470

Contractual Obligations

The following table sets forth our significant contractual obligations as of March 31, 2017:

			Payments Due by Period
					One to		Three to		After
			Less than		Three		Five		Five
Contractual Obligations (in thousands)	Total		One Year		Years		Years		Years
Time certificates of deposit	$	153,654	$	88,723	$	42,194	$	16,819	$	5,918
Deposits without stated maturity		1,315,011		1,315,011		-		-		-
Short-term borrowings		3,372		3,372		-		-		-
Total	$	1,472,037	$	1,407,106	$	42,194	$	16,819	$	5,918

We have contracts to build new branches in Preston, Idaho and Bountiful, Utah. We expect to have both branches completed and opened by the first half of 2017. Estimated combined construction costs remaining for these two new branches are expected to be approximately $0.7 million.

Liquidity

The ability to have readily available funds sufficient to repay fully maturing liabilities is of primary importance to depositors, creditors and regulators. Our liquidity, represented by cash borrowing lines, federal funds and available-for-sale securities, is a result of our operating, investing and financing activities and related cash flows. In order to ensure funds are available at all times, we devote resources to projecting on a monthly basis the amount of funds that will be required and we maintain relationships with a diversified customer base so funds are accessible. Liquidity requirements can also be met through short-term borrowings or the disposition of short-term assets. We have borrowing lines at a correspondent bank totaling $25.0 million. We also have a current borrowing line with the FHLB, totaling $314.3 million as of March 31, 2017, which are secured by various real estate loans pledged as collateral totaling $473.9 million. Additionally, we have a borrowing line with the Federal Reserve Bank of $22.3 million which is secured by $23.0 million of investment securities.

We believe our liquid assets are adequate to meet our cash flow needs for loan funding and deposit cash withdrawal for the next 60 to 90 days. As of March 31, 2017, we had approximately $401.8 million in net liquid assets comprised of $90.8 million in cash and cash equivalents, including interest bearing deposits of $62.2 million and federal funds sold of $2.9 million, $334.2 million in available-for-sale securities and $13.1 million in loans held for sale, less $36.3 million of available-for-sale securities pledged as collateral for short-term borrowings. We monitor liquidity measured by a liquidity ratio defined as cash and cash equivalents plus unpledged investment securities divided by total liabilities. Our liquidity ratio was 31.47% as of March 31, 2017 compared to 30.58% as of December 31, 2016.

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

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

Net cash provided by or used in operating activities has consisted primarily of net income adjusted for certain non-cash income and expense items such as the loan loss provision, investment and other amortization and depreciation.

Our primary investing activities are the origination of real estate, commercial and consumer loans and purchases and sales of investment securities. As of March 31, 2017 we had outstanding loan commitments of $453.3 million, credit card commitments of $26.0 million and outstanding letters of credit of $30.1 million. We anticipate that we will have sufficient funds available to meet current loan commitments.

Net cash provided from financing activities for the three months ended March 31, 2017 was $42.8 million, principally from increases in deposit balances offset by dividends paid to shareholders during the period.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company’s assessment of market risk as of March 31, 2017 indicates there have been no material changes in the quantitative and qualitative disclosures from those in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as required by Exchange Act Rules 240.13a-15(b) and 15d-14(a)) as of March 31, 2017. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s current disclosure controls and procedures are effective and timely, providing them with material information relating to the Company required to be disclosed in the reports the Company files or submits under the Exchange Act.

Changes in Internal Controls

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the first quarter 2017, to which this report relates that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes in our assessment of our risk factors from those set forth in our Annual Report on Form 10-K for the year ended December 31, 2016.

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

Use of Proceeds from Initial Public Offering – On June 11, 2015 the SEC declared effective our registration statement on Form S-1 (Registration No. 333-203518) registering common shares of the Company. On June 16, 2015, the Company completed the initial public offering of 2,657,000 common shares. Additionally, 218,000 common shares were sold by certain selling shareholders. The Company received net proceeds of $34.9 million from the offering, after deducting the underwriting discounts and offering expenses. The Company did not receive any proceeds from the sale of shares by the selling shareholders.

There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the SEC on June 11, 2015 pursuant to Rule 424(b).

Item 3. Defaults upon Senior Securities

Not Applicable

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None

Item 6. Exhibits

Exhibit Number		Description
10.1 31.1		Employment Agreement between the Company and Len D. Williams Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002

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

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

101		The following financial information from People’s Utah Bancorp Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 is formatted in XBRL: (i) the Unaudited Condensed Consolidated Statements of Financial Condition, (ii) the Unaudited Condensed Consolidated Statements of Operations, (iii) the Unaudited Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income, (iv) the Unaudited Condensed Consolidated Statements of Cash Flows, and (v) the Notes to Unaudited Condensed Consolidated Financial Statements

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on May 9, 2017

PEOPLE’S UTAH BANCORP

/s/ Richard T. Beard

Richard T. Beard

President and Chief Executive Officer

(Principal Executive Officer)

/s/ Wolfgang T.N. Muelleck

Wolfgang T.N. Muelleck

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

Altabancorp - FORM 10-Q - May 9, 2017

Attached files

Altabancorp Reports