pub-10q_20200331.htm

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

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

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

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

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

As of April 30, 2020, the registrant had 18,787,970 shares of common stock $0.01 par value per share, outstanding. No preferred shares are issued or outstanding.

	March 31,			December 31,
(Dollars in thousands, except share amounts)	2020			2019
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	36,203		$	38,987
Interest-bearing deposits		120,176			171,955
Federal funds sold		1,248			1,039
Total cash and cash equivalents		157,627			211,981
Investment securities - available for sale, at fair value		577,000			405,995
Non-marketable equity securities		2,890			2,623
Loans held for sale		21,572			18,669
Loans:
Loans held for investment		1,642,516			1,680,918
Allowance for credit losses		(41,253	)		(31,426	)
Total loans held for investment, net		1,601,263			1,649,492
Premises and equipment, net		39,492			39,474
Goodwill		25,673			25,673
Bank-owned life insurance		27,184			27,037
Deferred income tax assets, net		8,003			9,716
Accrued interest receivable		8,464			7,904
Other intangibles		2,859			2,970
Other real estate owned		-			-
Other assets		4,985			4,800
Total assets	$	2,477,012		$	2,406,334
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing deposits	$	737,001		$	719,410
Interest bearing deposits		1,385,017			1,336,957
Total deposits		2,122,018			2,056,367
Short-term borrowings		-			-
Accrued interest payable		503			546
Other liabilities		14,354			17,059
Total liabilities		2,136,875			2,073,972

Shareholders’ equity:
Preferred shares, $0.01 par value: 3,000,000 shares authorized; no shares issued		-			-
Common shares, $0.01 par value: 30,000,000 shares authorized; 18,787,810
and 18,870,498 shares issued and outstanding as of March 31, 2020
and December 31, 2019, respectively		188			189
Additional paid-in capital		86,318			87,913
Retained earnings		244,325			242,878
Accumulated other comprehensive income		9,306			1,382
Total shareholders’ equity		340,137			332,362
Total liabilities and shareholders’ equity	$	2,477,012		$	2,406,334

	Three Months Ended
	March 31,
(Dollars in thousands, except share and per share amounts)	2020		2019
Interest income
Interest and fees on loans	$	25,925	$	26,980
Interest and dividends on investments		3,459		2,172
Total interest income		29,384		29,152
Interest expense		2,163		2,245
Net interest income		27,221		26,907
Provision for credit losses		650		1,550
Net interest income after provision for credit losses		26,571		25,357
Non-interest income
Mortgage banking		1,710		1,417
Card processing		707		615
Service charges on deposit accounts		780		657
Other		543		648
Total non-interest income		3,740		3,337
Non-interest expense
Salaries and employee benefits		10,844		9,886
Occupancy, equipment and depreciation		1,539		1,456
Data processing		1,136		1,045
Marketing and advertising		432		116
FDIC premiums		-		90
Other		2,210		2,323
Total non-interest expense		16,161		14,916
Income before income tax expense		14,150		13,778
Income tax expense		3,377		3,273
Net income	$	10,773	$	10,505
Earnings per common share:
Basic	$	0.57	$	0.56
Diluted	$	0.57	$	0.55
Weighted average common shares outstanding:
Basic		18,884,857		18,781,210
Diluted		19,038,127		18,989,565

													Accumulated
							Additional						Other
(Dollars in thousands, except share and per share	Common			Common			Paid-in			Retained			Comprehensive
amounts)	Shares			Stock			Capital			Earnings			Income (Loss)			Total
Balance as of January 1, 2019		18,728,823		$	187		$	86,308		$	207,779		$	(4,112	)	$	290,162
Net income		-			-			-			10,505			-			10,505
Other comprehensive income		-			-			-			-			2,143			2,143
Cash dividends ($0.11 per share)		-			-			-			(2,068	)		-			(2,068	)
Share-based compensation		-			-			191			-			-			191
Issuance of shares under stock incentive plans		68,457			1			393			-			-			394
Balance as of March 31, 2019		18,797,280		$	188		$	86,892		$	216,216		$	(1,969	)	$	301,327

Balance as of January 1, 2020		18,870,498		$	189		$	87,913		$	242,878		$	1,382		$	332,362
Net income		-			-			-			10,773			-			10,773
Other comprehensive income		-			-			-			-			7,924			7,924
Cash dividends ($0.14 per share)		-			-			-			(2,646	)		-			(2,646	)
Reclass related to ASC 326 adoption (CECL)		-			-			-			(6,680	)		-			(6,680	)
Shares repurchased		(120,906	)		(1	)		(2,139	)		-			-			(2,140	)
Share-based compensation		-			-			385			-			-			385
Issuance of shares under stock incentive plans		38,218			-			159			-			-			159
Balance as of March 31, 2020		18,787,810		$	188		$	86,318		$	244,325		$	9,306		$	340,137

	Three Months Ended
	March 31,
(Dollars in thousands)	2020			2019
Cash flows from operating activities:
Net income	$	10,773		$	10,505
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		650			1,550
Depreciation and amortization		876			974
Deferred income taxes		1,187			446
Net amortization of securities discounts and premiums		501			574
Increase in cash surrender value of bank-owned life insurance		(147	)		(148	)
Share-based compensation		385			191
Gain on sale of loans held for sale		(1,243	)		(942	)
Originations of loans held for sale		(53,046	)		(40,237	)
Proceeds from sale of loans held for sale		51,386			44,262
Net changes in:
Accrued interest receivable		(560	)		(311	)
Other assets		(865	)		4,423
Accrued interest payable		(43	)		38
Other liabilities		(2,538	)		(1,129	)
Net cash provided by operating activities		7,316			20,196
Cash flows from investing activities:
Net change in loans held for investment		39,573			1,141
Purchase of available for sale securities		(192,849	)		(10,260	)
Proceeds from maturities/sales of available for sale securities		31,910			10,475
Proceeds from maturities of held to maturity securities		-			1,370
Purchase of premises and equipment		(1,061	)		(2,154	)
Proceeds from sale of other real estate owned, net of improvements		-			2,183
Purchase of non-marketable equity securities		(267	)		(4,032	)
Proceeds from sale of non-marketable equity securities		-			3,960
Net cash (used in) provided by investing activities		(122,694	)		2,683
Cash flows from financing activities:
Net increase in deposits		65,651			74,270
Proceeds related to exercise of stock options		159			394
Net cash used in share repurchase program		(2,140	)		-
Cash dividends paid		(2,646	)		(2,068	)
Net cash provided by financing activities		61,024			72,596
Net change in cash and cash equivalents		(54,354	)		95,475
Cash and cash equivalents, beginning of period		211,981			48,547
Cash and cash equivalents, end of period	$	157,627		$	144,022
Supplemental disclosures of cash flow information:
Cash paid for interest	$	2,206		$	2,207
Income taxes paid	$	-		$	-
Supplemental disclosures of non-cash investing transactions:
Unrealized gains on securities available for sale	$	10,567		$	2,856
Transfer of HTM securities to AFS	$	-		$	64,648

Nature of operations and basis of consolidation — People’s Utah Bancorp, Inc. (“PUB” or the “Company”) is a Utah corporation headquartered in American Fork, Utah. The Company operates all business activities through its wholly-owned banking subsidiary, Altabank^TM (the “Bank”), which was organized in 1913. Altabank^TM is a Utah state-chartered bank. Altabank^TM operates under the jurisdiction of the Utah Department of Financial Institutions (“UDFI”), and its deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”). Altabank^TM is not a member of the Federal Reserve System; however, PUB is operated as a bank holding company under the Federal Bank Holding Company Act of 1956 and is the sole shareholder of Altabank^TM. Both PUB and Altabank^TM are subject to periodic examination by all of the applicable federal and state regulatory agencies and file periodic reports and other information with the agencies. The Company considers Altabank^TM to be its sole operating segment.

Altabank^TM is a community bank that provides highly personalized retail and commercial banking products and services to small-to-medium sized businesses and to individuals. Products and services are offered primarily through 26 retail branches located throughout Utah and southern Idaho. Altabank^TM offers a full range of short-term to long-term commercial, personal and mortgage loans. Commercial loans include both secured and unsecured loans for working capital (including inventory and accounts receivable), business expansion (including acquisition of real estate and improvements), and purchase of equipment and machinery. Consumer loans include secured and unsecured loans to finance automobiles, home improvements, education, and personal investments. Altabank^TM also offers mortgage loans secured by single family residences. Altabank^TM offers a full range of deposit services typically available in most financial institutions, including checking accounts, savings accounts, and time deposits. Altabank^TM solicits these accounts from individuals, businesses, associations and organizations, and governmental entities.

The accompanying unaudited interim consolidated financial statements include the accounts of the Company together with its subsidiary Bank. All intercompany transactions and balances have been eliminated. These unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (SEC). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Certain information and disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC and the accounting standards for interim financial statements.

Use of estimates — The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions. These estimates and assumptions 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 credit losses (“ACL”), the determination of the fair value of certain financial instruments, the valuation of real estate acquired through foreclosure, deferred income tax assets, and share-based compensation.

Reclassifications — Certain reclassifications have been made to the 2019 Consolidated Financial Statements and/or schedules to conform to the 2020 presentation. These reclassifications may have affected certain ratios for the prior periods. The effect of these reclassifications is considered immaterial.

Business combinations — Business combinations are accounted for using the acquisition method of accounting and, accordingly, assets acquired and liabilities assumed, both tangible and intangible, and consideration exchanged are recorded at fair value on the acquisition date. The excess purchase consideration over fair value of net assets acquired is recorded as goodwill. Expenses incurred in connection with a business combination are expensed as incurred. Changes in deferred tax asset valuation allowances related to acquired tax uncertainties are recognized in net income after the measurement period.

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

Cash and cash equivalents — Cash and cash equivalents consist of cash on hand, amounts due from banks, interest bearing deposits, and federal funds sold, all of which have original maturities of three months or less. The Company places its cash with high credit quality institutions. The amounts on deposit fluctuate and, at times, exceed the insured limit by the FDIC, which potentially subjects the Company to credit risk.

Investment securities — Investment securities are classified as held to maturity (“HTM”) when the Company has the positive intent and ability to hold the securities to maturity. Investment securities are classified as available for sale (“AFS”) when the Company has the intent of holding the security for an indefinite period of time, but not necessarily to maturity. The Company determines the appropriate classification at the time of purchase, and periodically thereafter. Investment securities classified as HTM are carried at amortized cost. Investment securities classified as AFS are reported at fair value. As the fair value of AFS securities changes, the changes are reported (net of tax, if applicable) in comprehensive income and as an element of accumulated other comprehensive income/loss (“AOCI”) in shareholder’s equity.

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are generally amortized on the level-yield method without anticipating prepayments, except for callable debt securities. Premiums on callable debt securities are amortized to the earliest call date. When AFS securities, specifically identified, are sold, the unrealized gain or loss is reclassified from AOCI to non-interest income.

A debt security is placed on nonaccrual status at the time any principal or interest payments become greater than 90 days delinquent. Delinquent interest accrued but not received for a security placed on nonaccrual is reversed against interest income. The Company did not have any accrued interest reversed against interest income for the three months ended March 31, 2020.

Allowance for credit losses – AFS securities—For AFS debt securities in an unrealized loss position, management assesses whether the Company intends to sell or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either criterion regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to the fair value through non-interest income. For AFS debt securities that do not meet the aforementioned criteria, management evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which the fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and any adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, which is limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in AOCI.

Changes in the allowance for credit losses are recorded as a Provision for Credit Losses (“PCL”). Losses are charged against the allowance when management believes the uncollectibility of an AFS security is confirmed or when either of the criterion regarding intent or requirement to sell is met.

Non-marketable equity securities — Non-marketable equity securities primarily consist of Federal Home Loan Bank (“FHLB”) stock. FHLB stock is restricted because such stock may only be sold to FHLB at its par value. Due to the restrictive terms, and the lack of a readily determinable market value, FHLB stock is carried at cost. The investments in FHLB stock are required investments related to the Bank’s borrowings from FHLB. FHLB obtains its funding primarily through issuance of consolidated obligations of the FHLB system. The U.S. government does not guarantee these obligations, and each of the regional FHLBs is jointly and severally liable for repayment of each other’s debt.

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

Loans held for sale —Single-family residential mortgage loans originated with the intent to be sold in the secondary market are considered held for sale. Loans with best effort delivery commitments are carried at the lower of aggregate cost or estimated fair value. Loans under mandatory delivery commitments are carried at fair value in order to match changes in the value of the loans with the value of the economic hedges on the loans. Fair values for loans held for sale are determined by comparing actual loan rates to current secondary market prices for similar loans. Net unrealized losses on loans held for sale that are carried at lower of cost or market are recognized through the valuation allowance by charges to income. Mortgage loans held for sale are generally sold with the mortgage servicing rights. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold. Substantially all of the residential mortgage loans originated are sold to larger financial institutions.

Loans held for investment — Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at amortized cost, net of the allowance for credit losses. Amortized cost includes the principal balance outstanding, net of purchase premiums and discounts, deferred loan fees and costs. Accrued interest is reported as a separate line item on the unaudited consolidated balance sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the effective interest method without anticipating prepayments.

Interest income on mortgage and commercial loans is discontinued and placed on nonaccrual status at the time the loan 90 days delinquent, unless the loan is well secured and in process of collection. Mortgage loans are charged off at 180 days past due, and commercial loan are charged-off to the extent principal or interest is deemed uncollectible. Consumer and credit card loans continue to accrue interest until they are charged-off no later than 120 days past due unless the loan is in the process of collection. Past-due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charge-off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Under the cash-basis method, interest income is recorded when the payment is received in cash. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Troubled debt restructurings (“TDR”)—A loan for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, is considered to be a TDR. TDRs are then evaluated to determine if the TDR loan has impairment using the same methodology used for other individually evaluated loans as described in the next section. With the recent COVID 19 pandemic, the number of loans that have been modified has significantly increased. To the extent that the borrower was not experiencing financial difficulties prior to the pandemic, such modifications have not been classified as TDRs.

Individually evaluated loans — The Company considers loans individually evaluated when, based on current information and events, it is probable the Company will be unable to collect all principal and interest payments due according to the contractual terms of the loan agreement. Such loans are generally classified as Substandard or Doubtful loans (see Note 3). Individually evaluated loans are measured 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, adjusted for selling costs, if the loan is collateral dependent. Changes in these values are recorded to the ACL through the PCL.

Factors considered by management in determining impairment include 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 individually evaluated . Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the 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.

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

Acquired loans – Loans acquired through purchase or through a business combination are recorded at their fair value at the acquisition date, including estimates of current expected credit losses. Some acquired loans have experienced more than insignificant credit deterioration since origination. Such loans are defined as Purchased Credit Deteriorated (“PCD”). The Company makes the determination if a loan is PCD by considering past due and/or nonaccrual status, prior designation of a troubled debt restructuring, or other factors that may suggest the Company will not be able to collect all contractual payments due. Subsequent to acquisition, the amount of expected credit losses as of the acquisition date is added to the purchase price of PCD loans with an offsetting entry to ACL. Any difference between the unpaid principal balance and the amortized cost basis of the PCD loan as of the acquisition date is the non-credit discount or premium. The non-credit discount recorded at acquisition is amortized or accreted into interest income over the remaining life of the PCD loan on an effective interest method. To the extent that management changes the Company’s estimate of expected credit losses on PCD loans, the ACL will be increased or decreased with a corresponding entry to PCL.

Some acquired loans may not have experienced more than insignificant credit deterioration since origination. Such loans are defined as Purchased non-Credit Deteriorated (“Non-PCD”) loans. Non-PCD loans are also recorded at fair value at the time of acquisition, including estimates of current expected credit losses. However, any current expected credit losses estimated as of the acquisition date are not added to the purchase price with an offsetting entry to ACL, but rather such estimate is included in the difference between the unpaid principal balance and the amortized cost basis of the Non-PCD loan. This credit and non-credit discount is amortized or accreted into interest income over the remaining life of the Non-PCD loan on an effective interest method. In addition, an allowance for credit losses is determined for Non-PCD loans using the same methodology as loans held for investment with an offset recorded to PCL.

An acquired loan previously classified by the seller as a TDR is no longer classified as such at the date of acquisition. Past due status is reported based on contractual payment status. Changes to the ACL for acquired loans are recorded through PCL after adoption.

Allowance for credit losses – Loans — Credit risk is inherent in the business of extending loans and leases to borrowers. Normally, this credit risk is addressed through a valuation allowance termed allowance for credit losses. The ACL represents management’s estimate of current expected credit losses (“CECL”) inherent in the loan portfolio at each balance sheet date. Netted against the outstanding loan balance, this ACL reduces the balance to the Company’s estimate of what will be collected from borrowers. The ACL is established through charges to current period earnings by recording a PCL. When losses become specifically identifiable and quantifiable, the loan balance is reduced through recording a charge-off against the ACL. Should payments be received on a charged-off loan, the payment is credited to the ACL as a recovery.

Management estimates the ACL using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience, either internal or peer information, provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made, using qualitative factors, when management expects current conditions and reasonable and supportable forecasts to differ from the conditions that existed for the period over which historical information was evaluated. Management must exercise significant judgment when evaluating the effect of qualitative factors on the amount of the ACL because data may not be reasonably available or directly applicable for management to determine the precise impact of a factor on the collectability of the loan portfolio as of the evaluation date.

Management considers qualitative or environmental factors that are likely to cause estimated credit losses associated with our existing portfolio to differ from historical loss experience, including but not limited to: i) changes in lending policies and procedures; ii) changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses; iii) changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments; iv) changes in the nature and volume of the portfolio and in the terms of loans; v) changes in the experience, ability, and depth of lending management and other relevant staff; iv) changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans; vi) changes in the quality of the institution’s loan review system; and vii) changes in the value of underlying collateral for collateral-dependent loans. The existence and effect of any concentrations of credit, and changes in the level of such concentrations. The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision, as more information becomes available.

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

The Company used the weighted average remaining maturity (or “WARM”) approach, adjusted for prepayments, to calculate CECL at March 31, 2020 and segmented its loan portfolio into seventeen loan segments based on similar risk characteristics. Management may change the approach used to calculated current expected credit losses or loan segments from time-to-time as the Company improves credit loss estimation techniques. The Company has elected to exclude accrued interest receivable and net deferred fees from its calculation of the ACL.

Off-balance sheet credit related financial instruments — In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded.

Allowance for credit losses on off-balance sheet credit exposures — The Company estimates expected credit losses on off-balance sheet credit exposures using the same CECL historical loss rates applied to loans held for investment over the contractual period in which the Company is exposed to credit risk through a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company, adjusted for funding factors. The allowance for credit losses on off-balance sheet credit exposures is reported in other liabilities on the unaudited consolidated balance sheets with an offset to other non-interest expense. The estimate of CECL includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over their estimate life.

Premises and equipment — Land is carried at cost. Premises and equipment are carried at cost, net of accumulated depreciation and amortization. Depreciation and amortization expense is computed using the straight-line method based on the estimated useful lives of the related assets below:

Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized.

Bank-owned life insurance (“BOLI”) — The Bank has purchased life insurance policies. These policies provide protection against the adverse financial effects that could result from the death of a key employee and provide tax-exempt income to offset expenses associated with the plans. It is the Bank’s intent to hold these policies as a long-term investment; however, there may be an income tax impact if the Bank chooses to surrender certain policies. Although the lives of individual current or former management-level employees are insured, the Bank is the owner and sole or partial beneficiary. BOLI is carried at the cash surrender value (“CSV”) of the underlying insurance contract. Changes in the CSV and any death benefits received in excess of the CSV are recognized as non-interest income.

Goodwill — Goodwill represents the excess of the purchase considerations paid over the fair value of the assets acquired, net of the fair values of liabilities assumed in a business combination and is not amortized but is reviewed annually, or more frequently as current circumstances and conditions warrant, for impairment. An assessment of qualitative factors is completed to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative analysis concludes that further analysis is required, then a quantitative impairment test would be completed. The quantitative goodwill impairment compares the reporting unit's estimated fair values, including goodwill, to its carrying amount. If the carrying amount exceeds its reporting unit’s fair value, then an impairment loss would be recognized as a charge to earnings but is limited by the amount of goodwill allocated to that reporting unit.

Other intangible assets — Other intangible assets consist primarily of core deposit intangibles (“CDI”), which are amounts recorded in business combinations or deposit purchase transactions related to the value of transaction-related deposits and the value of the client relationships associated with the deposits. Core deposit intangibles are amortized over the estimated useful life of such deposits. These assets are reviewed at least annually for events or circumstances that could affect their recoverability. These events could include loss of the underlying core deposits, increased competition or adverse changes in the economy. To the extent other identifiable intangible assets are deemed unrecoverable; impairment losses are recorded in other non-interest expense to reduce the carrying amount of the assets.

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

Mortgage and other servicing rights — Mortgage and other servicing rights are recognized as separate assets when rights are acquired through purchase of such rights or through the sale of loans. Generally, purchased servicing rights are capitalized at the cost to acquire the rights. For loans sold, the fair value of the servicing rights are estimated and capitalized. Fair value is based on market prices for comparable servicing rights contracts. Capitalized servicing rights are reported in other assets and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.

Other real estate owned — Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lower of the carrying amount of the foreclosed loan or the fair value of the foreclosed asset, less costs to sell, at the date of foreclosure. Subsequent to foreclosure, management periodically performs valuations and the assets are carried at the lower of carrying amount or fair value, less selling costs. Revenues and expenses from operations and changes in the valuation allowance are included in other real estate owned expense.

Transfers of financial assets — Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Income taxes — Deferred income tax assets and deferred income tax liabilities represent the tax effect of temporary differences between financial reporting and tax reporting measured at enacted tax rates in effect for the year in which the differences are expected to reverse. The Company recognizes only the impact of tax positions that, based on their technical merits, are more likely than not to be sustained upon an audit by the taxing authority.

Developing the provision for income taxes, including the effective tax rate and analysis of potential tax exposure items, if any, requires significant judgment and expertise in federal and state income tax laws, regulations and strategies, including the determination of deferred income tax assets and liabilities and any estimated valuation allowances deemed necessary to value deferred income tax assets. Judgments and tax strategies are subject to audit by various taxing authorities. While the Company believes it has no significant uncertain income tax positions in the consolidated financial statements, adverse determinations by these taxing authorities could have a material adverse effect on the consolidated financial positions, result of operations, or cash flows.

Share-based compensation plans — The fair value of incentive share-based awards is recorded as compensation expense over the vesting period of the award. Compensation expense for stock options is estimated at the date of grant using the Black-Scholes option-pricing model. Compensation expense for RSUs is based on the fair value of the Company’s common shares at the date of grant. RSU awards generally vest in thirds over three years from date of grant.

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

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

Comprehensive income — U.S. GAAP generally requires that recognized revenues, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, net of the related income tax effect, are reported as a separate component of the equity section of the consolidated balance sheets, such items, along with net income, are components of comprehensive income.

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

In December 2019, FASB issued ASU 2019-12, Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For public business entities, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption of the amendments is permitted, including adoption in any interim period for (1) public business entities for periods for which financial statements have not yet been issued and (2) all other entities for periods for which financial statements have not yet been made available for issuance. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption must adopt all the amendments in the same period. Adoption of ASU 2019-12 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

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

In August 2018, FASB issued ASU 2018-13, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The ASU removes, modifies and adds disclosure requirements in Topic 820. The following disclosure requirements were removed: 1) the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, 2) the policy for timing of transfers between levels, and 3) the valuation processes for Level 3 fair value measurements. This ASU modified disclosure requirements by requiring that the measurement uncertainty disclosure communicates information about the uncertainty in measurement as of the reporting date. The following disclosure requirements were added: 1) changes in unrealized gains and losses for the period included in other comprehensive income for the recurring Level 3 fair value measurements held at the end of the reporting period, and 2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Adoption of ASU 2018-13 did not have a material impact on the Company’s Consolidated Financial Statements.

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

In June 2016, the Financial Accounting Standard Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The ASU significantly changes the accounting for credit loss measurement on loans and debt securities. For loans and held-to-maturity debt securities, the ASU requires a current expected credit loss measurement to estimate the allowance for credit losses for the remaining estimated life of the financial asset (including off-balance sheet credit exposures) using historical experience, current conditions, and reasonable and supportable forecasts. The ASU eliminates the existing guidance for purchased credit impaired (“PCI”) loans but requires an allowance for purchased financial assets with more than an insignificant deterioration since origination, otherwise known as purchased credit deteriorated assets. In addition, the ASU modifies the other-than-temporary impairment model for available-for-sale debt securities to require an allowance for credit impairment instead of a direct write-down, which allows for reversal of credit impairments in future periods based on an improvement in credit. This ASU was effective for interim and annual reporting periods beginning after December 15, 2019.

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

On January 1, 2020, the Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2020, are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company adopted ASC 326 using the prospective transition approach for financial assets purchased through an acquisition or business combination. Loans that were previously classified as PCI and accounted for under ASC 310-30 were reclassified as PCD loans. In accordance with the new standard, management did not reassess whether PCI loans met the criteria of PCD loan as of the date of adoption. On January 1, 2020 the amortized cost basis for PCD loans was increased by $1.5 million to reflect the addition of credit discounts to ACL. The remaining noncredit discount will be accreted into interest income over the remaining life of the portfolio. For Non-PCD loans, the Company increased its ACL by $2.6 million using the same methodology used for loans held for investment. The remaining credit and noncredit discount will be accreted into interest income over the remaining life of the portfolio. The Company further increased its ACL by $5.4 million to reflect the change in accounting methodology for CECL.

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

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

Subsequent events — The Company has evaluated events occurring subsequent to March 31, 2020 for disclosure in the consolidated financial statements.

Amortized cost and estimated fair value of investment securities available for sale are summarized as follows:

					Gross Unrealized Losses
					Less			12
			Gross		Than			Months
	Amortized		Unrealized		12			or			Fair
(Dollars in thousands)	Cost		Gains		Months			Longer			Value
As of March 31, 2020
U.S. Government-sponsored securities	$	10,049	$	331	$	-		$	-		$	10,380
Municipal securities		53,076		592		(19	)		(1	)		53,648
Mortgage-backed securities		496,466		12,288		(28	)		(51	)		508,675
Corporate securities		5,000		-		(73	)		(630	)		4,297
	$	564,591	$	13,211	$	(120	)	$	(682	)	$	577,000
As of December 31, 2019
U.S. Government-sponsored securities	$	20,957	$	235	$	-		$	(2	)	$	21,190
Municipal securities		56,252		670		(1	)		(9	)		56,912
Mortgage-backed securities		321,944		2,188		(481	)		(543	)		323,108
Corporate securities		5,000		-		-			(215	)		4,785
	$	404,153	$	3,093	$	(482	)	$	(769	)	$	405,995

At March 31, 2020 and December 31, 2019, the gross unrealized losses and the fair value for securities available for sale and held to maturity were as follows:

	As of March 31, 2020
	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollars in thousands)	Value		Losses			Value		Losses			Value		Losses
Available for Sale
U.S. Government-sponsored securities	$	-	$	-		$	-	$	-		$	-	$	-
Municipal securities		6,146		(19	)		508		(1	)		6,654		(20	)
Mortgage-backed securities		2,053		(28	)		5,408		(51	)		7,461		(79	)
Corporate securities		1,927		(73	)		2,370		(630	)		4,297		(703	)
	$	10,126	$	(120	)	$	8,286	$	(682	)	$	18,412	$	(802	)

	As of December 31, 2019
	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollars in thousands)	Value		Losses			Value		Losses			Value		Losses
Available for Sale
U.S. Government-sponsored securities	$	-	$	-		$	5,998	$	(2	)	$	5,998	$	(2	)
Municipal securities		3,060		(1	)		1,338		(9	)		4,398		(10	)
Mortgage-backed securities		115,243		(481	)		70,383		(543	)		185,626		(1,024	)
Corporate securities		-		-			4,785		(215	)		4,785		(215	)
	$	118,303	$	(482	)	$	82,504	$	(769	)	$	200,807	$	(1,251	)
Held-to Maturity
Municipal securities	$	-	$	-		$	-	$	-		$	-	$	-

The Company monitors the credit quality of debt securities AFS through the use of credit rating from Nationally Recognized Statistical Ration Organizations (“NRSRO”) to assist in the determination of any current expected credit losses. At March 31, 2020, the Company had no allowance for credit losses on AFS securities. The following table summarizes the amortized cost of debt securities AFS at March 31, 2020, aggregated by credit quality indicator.

					Gross Unrealized Losses
					Less			12
			Gross		Than			Months
	Amortized		Unrealized		12			or			Fair
(Dollars in thousands)	Cost		Gains		Months			Longer			Value
As of March 31, 2020
U.S. Government-backed securities⁽¹⁾	$	506,515	$	12,619	$	(28	)	$	(51	)	$	519,055
Investment grade rating		47,617		475		(92	)		(631	)		47,369
Below investment grade		-		-		-			-			-
Unrated investment securities		10,459		117		-			-			10,576
	$	564,591	$	13,211	$	(120	)	$	(682	)	$	577,000
As of December 31, 2019
U.S. Government-backed securities⁽¹⁾	$	342,901	$	2,423	$	(481	)	$	(545	)	$	344,298
Investment grade rating		50,793		544		(1	)		(224	)		51,112
Below investment grade		-		-		-			-			-
Unrated investment securities		10,459		126		-			-			10,585
	$	404,153	$	3,093	$	(482	)	$	(769	)	$	405,995

The amortized cost and estimated fair value of investment securities that are available for sale and held to maturity at March 31, 2020, by contractual maturity, are as follows:

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

As of March 31, 2020, the Company held 44 available for sale investment securities with fair value less than amortized cost compared to 146 at December 31, 2019. In addition, the Company had no held to maturity securities at March 31, 2020, and December 31, 2019. 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.

The Company sold no available for sale securities during the three months ended March 31, 2020, and March 31, 2019. There were no available for sale securities in a nonaccrual status at March 31, 2020, or December 31, 2019.

During the year ended December 31, 2019, the Company elected to make a one-time transfer of 140 securities from the held to maturity classification of $64.6 million to the available for sale classification, and recorded an unrecognized loss of $19,000, net of taxes, to other comprehensive income.

Non-performing assets as of March 31, 2020 and December 31, 2019 have not been reduced by U.S. government guarantees of $1.4 million and $859,000, respectively.

As of March 31, 2020, TDRs totaling $17.2 million met the criteria to be delisted for reporting purposes. The below tables summarize TDRs by year of occurrence and type of modification:

	March 31, 2020
	# of		$ of		# of Non-		$ of Non-		# of		$ of
	Accruing		Accruing		accrual		accrual		Total		Total
(Dollars in thousands)	TDR		TDR		TDR		TDR		TDR		TDR
TDRs that occurred during the period		1	$	113		-	$	-		1	$	113
2019		1		4,459		11		4,390		12		8,849
2018		-		-		4		1,316		4		1,316
2017		-		-		-		-		-		-
Thereafter		1		60		-		-		1		60
Total		3	$	4,632		15	$	5,706		18	$	10,338

	March 31, 2020
	# of		$ of		# of Non-		$ of Non-		# of		$ of
	Accruing		Accruing		accrual		accrual		Total		Total
(Dollars in thousands)	TDR		TDR		TDR		TDR		TDR		TDR
Interest rate reduction		1	$	60		-	$	-		1	$	60
Loan payment deferment		1		113		6		1,181		7		1,294
Loan re-amortization		1		4,459		4		1,316		5		5,775
Loan extension		-		-		5		3,209		5		3,209
Total		3	$	4,632		15	$	5,706		18	$	10,338

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

	Three Months Ended March 31, 2020
	Real		Construction		Commercial		Residential		Consumer
	Estate		and Land		and		and Home		and
(Dollars in thousands)	Term		Development		Industrial		Equity		Other		Total
TDRs that occurred during the period ^{(1) (2)}
Number of loans		1		-		-		-		-		1
Pre-modification balance	$	113	$	-	$	-	$	-	$	-	$	113
Post-modification balance	$	113	$	-	$	-	$	-	$	-	$	113

TDRs that subsequently defaulted
Number of loans		1		-		-		-		-		1
Recorded balance	$	113	$	-	$	-	$	-	$	-	$	113


	Three Months Ended March 31, 2019
	Real		Construction		Commercial		Residential		Consumer
	Estate		and Land		and		and Home		and
(Dollars in thousands)	Term		Development		Industrial		Equity		Other		Total
TDRs that occurred during the period ^{(1) (2)}
Number of loans		4		-		7		1		-		12
Pre-modification balance	$	4,256	$	-	$	2,391	$	18	$	-	$	6,665
Post-modification balance	$	4,256	$	-	$	2,391	$	18	$	-	$	6,665

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

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

	March 31, 2020

			30-89 Days		90+ Days		Non-		Total		Total
(Dollars in thousands)	Current		Past Due		Past Due		accrual		Past Due		Loans
Commercial real estate:
Real estate term	$	937,604	$	1,299	$	-	$	2,891	$	4,190	$	941,794
Construction and land development		266,102		2,098		-		60		2,158		268,260
Total commercial real estate		1,203,706		3,397		-		2,951		6,348		1,210,054
Commercial and industrial		264,822		1,060		-		3,324		4,384		269,206
Consumer:
Residential and home equity		153,369		537		-		302		839		154,208
Consumer and other		12,890		221		4		9		234		13,124
Total consumer		166,259		758		4		311		1,073		167,332
Total gross loans	$	1,634,787	$	5,215	$	4	$	6,586	$	11,805	$	1,646,592

	December 31, 2019
				30-89							Purchased
			Days		90+ Days		Non-		Total		Credit		Total
(Dollars in thousands)	Current		Past Due		Past Due		accrual		Past Due		Impaired		Loans
Commercial real estate:
Real estate term	$	942,370	$	534	$	-	$	4,809	$	5,343	$	360	$	948,073
Construction and land development		273,268		570		-		60		630		65		273,963
Total commercial real estate		1,215,638		1,104		-		4,869		5,973		425		1,222,036
Commercial and industrial		279,072		403		-		2,208		2,611		3,055		284,738
Consumer:
Residential and home equity		162,360		154		-		45		199		-		162,559
Consumer and other		15,727		298		3		8		309		-		16,036
Total consumer		178,087		452		3		53		508		-		178,595
Total gross loans	$	1,672,797	$	1,959	$	3	$	7,130	$	9,092	$	3,480	$	1,685,369

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

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

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

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

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

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

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

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

	March 31, 2020
			Special						Total		Total
(Dollars in thousands)	Pass		Mention		Substandard		Doubtful		Loans		ACL
Commercial real estate:
Real estate term	$	895,937	$	20,763	$	25,094	$	-	$	941,794	$	12,997
Construction and land development		250,303		10,634		7,323		-		268,260		13,677
Total commercial real estate		1,146,240		31,397		32,417		-		1,210,054		26,674
Commercial and industrial		245,189		5,956		17,863		198		269,206		11,468
Consumer loans:
Residential and home equity		150,837		-		3,296		75		154,208		2,553
Consumer and other		13,122		-		2		-		13,124		558
Total consumer		163,959		-		3,298		75		167,332		3,111
Total	$	1,555,388	$	37,353	$	53,578	$	273	$	1,646,592	$	41,253

	December 31, 2019
			Special						Total		Total
(Dollars in thousands)	Pass		Mention		Substandard		Doubtful		Loans		Allowance
Commercial real estate:
Real estate term	$	901,353	$	23,202	$	23,518	$	-	$	948,073	$	12,275
Construction and land development		259,245		10,182		4,536		-		273,963		6,990
Total commercial real estate		1,160,598		33,384		28,054		-		1,222,036		19,265
Commercial and industrial		259,035		6,629		19,074		-		284,738		10,892
Consumer loans:
Residential and home equity		158,364		204		3,991		-		162,559		1,118
Consumer and other		16,034		-		2		-		16,036		151
Total consumer		174,398		204		3,993		-		178,595		1,269
Total	$	1,594,031	$	40,217	$	51,121	$	-	$	1,685,369	$	31,426

The following table represents outstanding loan balances by credit quality indicators and vintage year by class of financing receivable as of March 31, 2020:

	March 31, 2020
	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans
(Dollars in thousands)	2020		2019		2018		2017		2016		Prior		Amortized Cost		Total
Loans held for investment:
Commercial real estate:
Real estate term
Risk rating
Pass	$	24,571	$	145,951	$	115,891	$	101,588	$	63,333	$	209,810	$	234,793	$	895,937
Special mention		-		2,686		3,450		-		-		9,243		5,384		20,763
Substandard		-		1,770		918		3,078		-		6,136		13,192		25,094
Doubtful		-		-		-		-		-		-		-		-
Total real estate term loans	$	24,571	$	150,407	$	120,259	$	104,666	$	63,333	$	225,189	$	253,369	$	941,794
Construction and land development
Risk rating
Pass	$	4,535	$	9,794	$	14,728	$	3,193	$	7,204	$	8,468	$	202,381	$	250,303
Special mention		-		-		-		-		-		-		10,634		10,634
Substandard		-		-		-		-		-		60		7,263		7,323
Doubtful		-		-		-		-		-		-		-		-
Total construction and land development loans	$	4,535	$	9,794	$	14,728	$	3,193	$	7,204	$	8,528	$	220,278	$	268,260
Total commercial real estate loans	$	29,106	$	160,201	$	134,987	$	107,859	$	70,537	$	233,717	$	473,647	$	1,210,054
Commercial and industrial
Risk rating
Pass	$	6,328	$	37,075	$	51,034	$	24,192	$	16,568	$	65,368	$	44,624	$	245,189
Special mention		-		1,968		1,327		273		531		471		1,386		5,956
Substandard		-		1,648		804		1,011		-		11,147		3,253		17,863
Doubtful		-		-		198		-		-		-		-		198
Total commercial and industrial loans	$	6,328	$	40,691	$	53,363	$	25,476	$	17,099	$	76,986	$	49,263	$	269,206
Consumer:
Residential real estate
Risk rating
Pass	$	6,126	$	32,602	$	27,144	$	21,813	$	14,999	$	38,784	$	9,369	$	150,837
Special mention		-		-		-		-		-		-		-		-
Substandard		-		-		177		24		781		2,314		-		3,296
Doubtful		-		-		-		-		-		75		-		75
Total residential real estate loans	$	6,126	$	32,602	$	27,321	$	21,837	$	15,780	$	41,173	$	9,369	$	154,208
Consumer and other
Risk rating
Pass	$	4,670	$	3,088	$	2,310	$	1,171	$	546	$	1,333	$	4	$	13,122
Special mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		1		1		-		2
Doubtful		-		-		-		-		-		-		-		-
Total consumer and other loans	$	4,670	$	3,088	$	2,310	$	1,171	$	547	$	1,334	$	4	$	13,124
Total consumer loans	$	10,796	$	35,690	$	29,631	$	23,008	$	16,327	$	42,507	$	9,373	$	167,332
Total gross loans	$	46,230	$	236,582	$	217,981	$	156,343	$	103,963	$	353,210	$	532,283	$	1,646,592

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

	December 31, 2019
	Real		Construction		Commercial		Residential		Consumer
	Estate		and Land		and		and Home		and
(Dollars in thousands)	Term		Development		Industrial		Equity		Other		Total
Allowance for credit losses:
Individually evaluated for impairment	$	825	$	1,305	$	4,901	$	401	$	-	$	7,432
Collectively evaluated for impairment		11,255		5,669		5,991		717		151		23,783
Purchased credit-impaired loans		195		16		-		-		-		211
Total	$	12,275	$	6,990	$	10,892	$	1,118	$	151	$	31,426
Outstanding loan balances:
Individually evaluated for impairment	$	18,305	$	4,474	$	14,467	$	3,701	$	-	$	40,947
Collectively evaluated for impairment		929,408		269,424		267,216		158,858		16,036		1,640,942
Purchased credit-impaired loans		360		65		3,055		-		-		3,480
Total gross loans	$	948,073	$	273,963	$	284,738	$	162,559	$	16,036	$	1,685,369

The following table provides amortized cost basis of collateral dependent loans as of March 31, 2020:

	March 31, 2020

	Real		Accounts
(Dollars in thousands)	Estate		Receivable		Equipment		Livestock		Auto		Total
Commercial real estate:
Real estate term	$	6,896	$	-	$	-	$	-	$	-	$	6,896
Construction and land development		1,399		-		-		-		-		1,399
Total commercial real estate		8,295		-		-		-		-		8,295
Commercial and industrial		-		3,289		3,698		197		76		7,260
Consumer:
Residential and home equity		803		-		-		-		-		803
Consumer and other		-		-		-		-		-		-
Total consumer		803		-		-		-		-		803
Total collateral dependent loans	$	9,098	$	3,289	$	3,698	$	197	$	76	$	16,358

	March 31, 2020
			Recorded Investment
	Unpaid						Total
	Principal		With No		With		Recorded		Related
(Dollars in thousands)	Balance		Allowance		Allowance		Investment		ACL
Commercial real estate:
Real estate term	$	8,791	$	6,125	$	1,122	$	7,247	$	1,003
Construction and land development		4,579		120		1,338		1,458		1,338
Total commercial real estate		13,370		6,245		2,460		8,705		2,341
Commercial and industrial		13,080		1,568		9,076		10,644		5,793
Consumer loans:
Residential and home equity		829		404		400		804		400
Consumer and other		-		-		-		-		-
Total consumer		829		404		400		804		400
Total	$	27,279	$	8,217	$	11,936	$	20,153	$	8,534

	December 31, 2019
			Recorded Investment
	Unpaid						Total
	Principal		With No		With		Recorded		Related
(Dollars in thousands)	Balance		Allowance		Allowance		Investment		ACL
Commercial real estate:
Real estate term	$	18,305	$	11,684	$	6,621	$	18,305	$	825
Construction and land development		4,474		121		4,353		4,474		1,305
Total commercial real estate		22,779		11,805		10,974		22,779		2,130
Commercial and industrial		14,467		2,591		11,876		14,467		4,901
Consumer loans:
Residential and home equity		3,701		3,194		507		3,701		401
Consumer and other		-		-		-		-		-
Total consumer		3,701		3,194		507		3,701		401
Total	$	40,947	$	17,590	$	23,357	$	40,947	$	7,432

Interest income recognized on the average recorded investment of individually evaluated loans was as follows:

Purchased credit-deteriorated loans and purchased non-credit-deteriorated loans. Prior to adoption of ASC 326, purchased loans, including loans acquired in business combinations, were recorded at their fair value at the acquisition date. Credit discounts were included in the determination of fair value; therefore, an allowance for loan and lease losses was not recorded at the acquisition date. Acquired loans were evaluated upon acquisition and classified as either PCI or purchased non-credit-impaired. PCI loans reflect credit deterioration since origination such that it is probable at acquisition that the Company will be unable to collect all contractually required payments. The outstanding contractual unpaid principal balance of PCI loans, excluding acquisition accounting adjustments, was $6.2 million at December 31, 2019. As of December 31, 2019, the non-accretable difference between the contractually required payments and cash flows expected to be collected were $2.8 million. The carrying balance of PCI loans was $3.5 million at December 31, 2019. On January 1, 2020, the Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company adopted ASC 326 using the prospective transition approach for financial assets purchased through an acquisition or business combination. Loans that were previously classified as PCI and accounted for under ASC 310-30 were reclassified as PCD loans. In accordance with the new standard, management did not reassess whether PCI loans met the criteria of PCD loan as of the date of adoption. On January 1, 2020, the amortized cost basis for PCD loans was increased by $1.5 million to reflect the addition of ACL. The remaining noncredit discount will continue to be accreted into interest income over the remaining life of the portfolio. The outstanding contractual unpaid principal balance of PCD loans was $2.9 million at March 31, 2020.

The following table presents the changes in the accretable yield for non-PCD loans for the three months ended March 31, 2020, and 2019:

Loans and Deposits to affiliates — The Company has entered into loan transactions with certain directors, affiliated companies and executive officers (“affiliates”). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. Total outstanding loans with affiliates were approximately $6.2 million and $5.4 million as of March 31, 2020, and December 31, 2019, respectively. Available lines of credit for loans and credit cards to affiliates were approximately $246,000 and $278,000 as of March 31, 2020, and December 31, 2019, respectively. Deposits from affiliates were $5.2 million and $4.5 million as of March 31, 2020 and December 31, 2019, respectively.

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.

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.

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

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

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

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

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

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

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

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

The following table presents estimated fair values of the Company’s financial instruments as of March 31, 2020 and December 31, 2019:

Income tax expense was $3.4 million and $3.3 million for the three months ended March 31, 2020 and 2019, respectively. The Company’s effective tax rate for the first quarter of 2020 was 23.9% compared with 23.8% in the first quarter of 2019. The tax rate in the first quarter of 2020 is higher than the same quarter in 2019 due primarily to the timing of tax benefits related to tax-deductible stock compensation expense.

The Company is subject to various regulatory capital requirements administered by its primary federal regulator, the FDIC. Failure to meet the minimum regulatory capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and its consolidated financial statements. Under the regulatory capital adequacy guidelines and regulatory framework for prompt corrective action, the Company must meet specific capital guidelines involving quantitative measures of the Company’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

As of March 31, 2020, the Company was categorized as well capitalized under the regulatory framework. To be categorized as well capitalized, an institution must maintain minimum common Tier 1 (“CET1”), Tier 1 risk-based capital, total risk-based capital, and Tier 1 to average assets (“Tier 1 Leverage”) capital ratios as disclosed in the table below.

	March 31, 2020
						Minimum Capital					Well Capitalized
	Actual					Requirement					Requirement
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Consolidated
CET1 Capital to Risk-Weighted Assets	$	302,364		17.36	%	$	78,385		4.50	%	$	113,223		6.50	%
Tier 1 Capital to Risk-Weighted Assets		302,364		17.36	%		104,514		6.00	%		139,351		8.00	%
Total Risk-Based Capital to Risk-Weighted Assets		324,399		18.62	%		139,351		8.00	%		174,189		10.00	%
Tier 1 Leverage		302,364		12.74	%		94,922		4.00	%	NA		NA

Altabank^TM
CET1 Capital to Risk-Weighted Assets	$	298,352		17.13	%	$	78,382		4.50	%	$	113,219		6.50	%
Tier 1 Capital to Risk-Weighted Assets		298,352		17.13	%		104,510		6.00	%		139,346		8.00	%
Total Risk-Based Capital to Risk-Weighted Assets		320,386		18.39	%		139,346		8.00	%		174,183		10.00	%
Tier 1 Leverage		298,352		12.57	%		94,919		4.00	%		118,649		5.00	%

	December 31, 2019
						Minimum Capital					Well Capitalized
	Actual					Requirement					Requirement
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Consolidated
CET1 Capital to Risk-Weighted Assets	$	302,291		17.18	%	$	79,193		4.50	%	$	114,390		6.50	%
Tier 1 Capital to Risk-Weighted Assets		302,291		17.18	%		105,590		6.00	%		140,787		8.00	%
Total Risk-Based Capital to Risk-Weighted Assets		324,415		18.43	%		140,787		8.00	%		175,984		10.00	%
Tier 1 Leverage		302,291		12.67	%		95,431		4.00	%	NA		NA

Altabank^TM
CET1 Capital to Risk-Weighted Assets	$	297,108		16.88	%	$	79,191		4.50	%	$	114,387		6.50	%
Tier 1 Capital to Risk-Weighted Assets		297,108		16.88	%		105,588		6.00	%		140,784		8.00	%
Total Risk-Based Capital to Risk-Weighted Assets		319,233		18.14	%		140,784		8.00	%		175,981		10.00	%
Tier 1 Leverage		297,108		12.45	%		95,429		4.00	%		119,286		5.00	%

Federal Reserve Board Regulations require maintenance of certain minimum reserve balances based on certain average deposits. On March 15, 2020, the Board of Governors of the Federal Reserve reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions. The Bank had a reserve requirement of $9.4 million as of December 31, 2019.

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, dividend amounts may be correspondingly limited.

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, 2020, the Company granted 55,187 restricted stock units (“RSU”) at a weighted-average fair value of $29.02 per unit. The RSUs generally vest over periods from one to three years. The Company recorded share-based compensation expense of $385,000 and $191,000 for the three months ended March 31, 2020 and 2019, respectively. Additionally, the Company did not grant any options for the purchase of common shares during the three months ended March 31, 2020, and 2019, respectively.

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

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

This Quarterly Report on Form 10–Q may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views and are not historical facts. These statements can generally be identified by use of phrases such as “believe,” “expect,” “will,” “seek,” “should,” “anticipate,” “estimate,” “intend,” “plan,” “target,” “project,” “commit” or other words of similar import. Similarly, statements that describe our future financial condition, results of operations, objectives, strategies, plans, goals or future performance and business are also forward-looking statements. Statements that project future financial conditions, results of operations and shareholder value are not guarantees of performance and many of the factors that will determine these results and values are beyond our ability to control or predict. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. These are forward-looking statements and involve known and unknown risks, uncertainties and other factors, including, but not limited to, those described in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections in this report and our Annual Report on Form 10-K for the year ended December 31, 2019 (“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 filing:

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, except as required by law.

People’s Utah Bancorp (“PUB” or the “Company”) is a Utah registered bank holding company organized in 1998. As a Utah registered bank holding company, PUB is subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System and by the Utah Department of Financial Institutions (“UDFI”). The Company operates all business activities through its wholly-owned banking subsidiary, Altabank^TM (the “Bank”) which was organized in 1913. The Bank is a Utah state-chartered bank subject to primary regulation, supervision and examination by the Federal Deposit Insurance Corporation (“FDIC”) and by the UDFI. The Company is seeking the required shareholder approval to change the name of People’s Utah Bancorp to Altabancorp^TM as part of the 2020 Annual Meeting, as well as requisite regulatory approvals. In addition, the Company has reserved with NASDAQ the ticker symbol, “ALTA” and intends to change the ticker symbol in conjunction with an approved name change of the holding company at June 30, 2020. The Company is in the process of seeking federal trademark approval for the operating bank and holding company name and accompanying logos.

Altabank^TM is the largest community bank in Utah. Altabank^TM, a full-service bank, provides loans, deposit and cash management services to businesses and individuals through 26 branch locations from Preston, Idaho to St. George, Utah. Our clients have direct access to bankers and decision-makers who work with clients to understand their specific needs and offer customized financial solutions. Altabank^TM has been serving communities in Utah and southern Idaho for more than 100 years. Our loan growth historically has been the result of mergers and acquisitions as well as organic growth that we believe was generated by our seasoned relationship managers and supporting associates who provide outstanding service and quick responsiveness to our customers. The primary source of funding for our asset growth has been the generation of core deposits, which we raised from our existing branch system as well as through acquisitions.

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

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

On March 11, 2020, the World Health Organization declared COVID-19 to be a global pandemic. Local and national governments and regulatory authorities have systematically implemented remedial measures to try to slow and curb the spread of COVID-19, including business closures and operating restrictions, travel bans, and shelter in place, stay home, and similar directives and orders. In response to the COVID-19 pandemic and in adherence with state and local guidelines, we have implemented our business continuity plan and other measures and activities to protect our associates and, at the same time, to assist our clients and the communities of which we are a part, including remote working for the majority of our associates, increased mobile banking and electronic transaction options for clients, payment deferral assistance to commercial and consumer borrowers, and participation in the SBA’s Paycheck Protection Program for loans to qualifying small businesses.

As previously announced, the Company temporarily suspended its share repurchase program effective March 25, 2020. The Company made this decision, in part, to provide maximum flexibility to use its capital and liquidity to support new lending and to assist commercial and consumer borrowers with deferrals on existing loans during the pendency of the COVID-19 pandemic. The Company is well-capitalized and, as such, may determine to reinstate its share repurchase program in accordance with Board authorization and as executive management deems advisable, taking into account market conditions and other considerations.

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


	March 31,			December 31,			September 30,			March 31,
(Dollars in thousands, except share data)	2020			2019			2019			2019
Selected Balance Sheet Information:
Book value per share	$	18.10		$	17.61		$	17.12		$	16.03
Tangible book value per share	$	16.59		$	16.09		$	15.59		$	14.49
Non-performing loans to total loans		0.41	%		0.53	%		0.26	%		0.28	%
Non-performing assets to total assets		0.27	%		0.37	%		0.17	%		0.21	%
Allowance for credit losses to loans held for investment		2.51	%		1.87	%		1.82	%		1.55	%
Loans to Deposits		76.48	%		81.12	%		79.18	%		84.98	%

Asset Quality Data:
Non-performing loans	$	6,590		$	8,814		$	4,255		$	4,706
Non-performing assets	$	6,590		$	8,814		$	4,255		$	4,706

Capital Ratios:
Tier 1 leverage capital		12.74	%		12.67	%		12.64	%		12.70	%
Total risk-based capital		18.62	%		18.43	%		17.88	%		16.86	%
Average equity to average assets		13.82	%		13.63	%		13.66	%		13.55	%
Tangible common equity to tangible assets ⁽¹⁾		12.73	%		12.77	%		12.17	%		12.15	%

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

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

	Three Months Ended
	March 31, 2020								March 31, 2019
				Interest		Average						Interest		Average
	Average			Income/		Yield/			Average			Income/		Yield/
(Dollars in thousands, except footnotes)	Balance			Expense		Rate			Balance			Expense		Rate
ASSETS
Interest earning deposits in other banks and federal funds sold	$	105,623		$	316		1.20	%	$	38,921		$	219		2.28	%
Securities: ⁽¹⁾
Taxable securities		449,195			2,868		2.57	%		276,903			1,604		2.35	%
Non-taxable securities⁽²⁾		50,516			253		2.01	%		69,522			322		1.88	%
Total securities		499,711			3,121		2.51	%		346,425			1,926		2.26	%
Loans⁽³⁾
Real estate term		935,753			13,658		5.87	%		889,114			13,053		5.95	%
Construction and land development		277,720			5,024		7.28	%		315,810			6,231		8.00	%
Commercial and industrial		279,280			4,715		6.79	%		296,854			5,122		7.00	%
Residential and home equity		170,767			2,286		5.38	%		156,298			2,316		6.01	%
Consumer and other		15,108			242		6.44	%		16,781			258		6.24	%
Total loans		1,678,628			25,925		6.21	%		1,674,857			26,980		6.53	%

Non-marketable equity securities		2,638			22		3.33	%		2,947			27		3.74	%
Total interest earning assets		2,286,600			29,384		5.17	%		2,063,150			29,152		5.73	%
Allowance for credit losses		(42,136	)							(25,806	)
Non-interest earning assets		157,054								149,701
Total average assets	$	2,401,518							$	2,187,045

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits:
Demand and savings accounts	$	832,083		$	779		0.38	%	$	799,641		$	994		0.50	%
Money market accounts		351,828			811		0.93	%		249,535			604		0.98	%
Certificates of deposit less than or equal to $250,000		130,890			393		1.21	%		144,282			412		1.16	%
Certificates of deposit greater than $250,000		38,778			180		1.87	%		37,663			171		1.84	%
Total interest bearing deposits		1,353,579			2,163		0.64	%		1,231,121			2,181		0.72	%
Short-term borrowings		-			-		0.00	%		9,813			64		2.63	%
Total interest-bearing liabilities		1,353,579			2,163		0.64	%		1,240,934			2,245		0.73	%
Non-interest bearing deposits		700,072								635,031
Total funding		2,053,651			2,163		0.42	%		1,875,965			2,245		0.49	%
Other non-interest bearing liabilities		15,878								14,719
Shareholders’ equity		331,989								296,361
Total average liabilities and shareholders’ equity	$	2,401,518							$	2,187,045
Net interest income				$	27,221							$	26,907
Interest rate spread							4.53	%							5.00	%
Net interest margin							4.79	%							5.29	%

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,
	2020 vs. 2019
	Increase (Decrease) Due to:
(Dollars in thousands)	Volume			Rate			Net
Interest income:
Interest earning deposits in other banks and federal funds sold	$	237		$	(140	)	$	97
Taxable securities		1,086			178			1,264
Non-taxable securities		(94	)		25			(69	)
Total securities		992			203			1,195
Loans
Real estate term		681			(76	)		605
Construction and land development		(715	)		(492	)		(1,207	)
Commercial and industrial		(299	)		(108	)		(407	)
Residential and home equity		204			(234	)		(30	)
Consumer and other		(26	)		10			(16	)
Total Loans		(155	)		(900	)		(1,055	)

Non-marketable equity securities		(3	)		(2	)		(5	)
Total interest income		1,071			(839	)		232
Interest expense:
Demand and savings accounts		39			(254	)		(215	)
Money market accounts		237			(30	)		207
Certificates of deposit less than or equal to $250,000		(39	)		20			(19	)
Certificates of deposit greater than $250,000		5			4			9
Short-term borrowings		(32	)		(32	)		(64	)
Total interest expense		210			(292	)		(82	)
Net interest income	$	861		$	(547	)	$	314

For the three months ended March 31, 2020, net interest income increased $0.3 million, or 1.17%, to $27.2 million, compared with $26.9 million for the same period a year earlier. The increase is primarily the result of average interest earning assets increasing $223 million, or 10.83%, to $2.3 billion for the same comparable periods offset by net interest margins narrowing 50 basis points to 4.79% for the same comparable periods. The narrowing of net interest margins is primarily the result of the Federal Reserve reducing benchmark rates to almost zero and an increase in the average amount of lower yielding cash and investment securities held by the Company stemming from average core deposits increasing $122 million, or 9.95%, for the same respective periods. The percentage of average loans to total average interest earning assets decreased to 73.41% for the three months ended March 31, 2020 compared with 81.18% for the same period a year earlier.

Yields on interest earning assets declined 56 basis points to 5.17% for the three months ended March 31, 2020, compared with 5.73% for the same period a year earlier. The decline in yields on interest earning assets is primarily the result of the average amount of cash and investment securities held by the Company increasing $220 million, or 57.09%, to $605 million for the same comparable periods with the yield on cash and securities increasing 4 basis points to 2.25% for the same comparable periods. In addition, the yield on loans declined 32 basis points for the same comparable periods and average loans outstanding increased $3.8 million, or 0.23%, to $1.68 billion for the same comparable periods.

For the three months ended March 31, 2020, total cost of interest bearing liabilities decreased 9 basis points to 0.64%, compared with 0.73% for the same period a year earlier, and is the result of the cost of interest bearing deposits decreasing 8 basis points to 0.64% compared with 0.72% for the same period a year ago. For the three months ended March 31, 2020, the total cost of funds decreased 7 basis points to 0.42% compared with 0.49% for the same period a year ago.

For the three months ended March 31, 2020, acquisition accounting adjustments, including the accretion of loan discounts and fair value amortization on time deposits, added 16 basis points to net interest margin.

The Company expects its net interest income and net interest margins to be adversely impacted in future periods as a result of the Federal Reserve lowering benchmark rates to near zero. The amount of the impact is dependent upon the length in time that the Federal Reserve holds benchmark rates to near zero.

Net Income. Net income increased $0.3 million to $10.8 million for the three months ended March 31, 2020, compared with $10.5 million for the three months ended March 31, 2019. This was primarily attributable to an increase in net interest income of $0.3 million, an increase in non-interest income of $0.4 million, and a decrease in provision for credit losses of $0.9 million, offset by an increase in non-interest expense of $1.2 million.

Net Interest Income and Net Interest Margin. The increase in net interest income for the three months ended March 31, 2020, compared with the same quarter in 2019 was primarily the result of average interest earning assets increasing $223 million, or 10.83%, to $2.3 billion for the same comparable periods offset by net interest margins narrowing 50 basis points to 4.79% for the same comparable periods. The narrowing of net interest margins is primarily the result of the Federal Reserve reducing benchmark rates to almost zero and an increase in the average amount of lower yielding cash and investment securities held by the Company stemming from average core deposits increasing $122 million, or 9.95%, for the same respective periods. Interest expense in the three months ended March 31, 2020 decreased from the same period in 2019 due to a decrease in the cost of deposits of 9 basis points.

Yields on interest earning assets declined 56 basis points to 5.17% for the three months ended March 31, 2020 compared with 5.73% for the same period a year earlier. The decline in yields on interest earning assets is primarily the result of the average amount of cash and investment securities held by the Company increasing $220 million, or 57.09%, to $605 million for the same comparable periods with the yield on cash and securities increasing 4 basis points to 2.25% for the same comparable periods. In addition, the yield on loans declined 32 basis points for the same comparable periods and average loans outstanding increased $3.8 million, or 0.23%, to $1.68 billion for the same comparable periods.

For the three months ended March 31, 2020, total cost of interest bearing liabilities decreased 9 basis points to 0.64% compared with 0.73% for the same period a year earlier, and is the result of the cost of interest bearing deposits decreasing 8 basis points to 0.64% compared with 0.72% for the same period a year ago. For the three months ended March 31, 2020, the total cost of funds decreased 7 basis points to 0.42% compared with 0.49% for the same period a year ago.

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

For the three months ended March 31, 2020, provision for credit losses was $0.7 million compared with $1.6 million for the same period a year earlier. For the three months ended March 31, 2020, the Company incurred net charge-offs of $0.3 million compared with net charge-offs of $0.9 million for the same period a year ago. The decrease in provision for credit losses in the three months ended March 31, 2020 is due primarily to a decrease in charge-offs and no loan growth quarter-over-quarter.

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

For the three months ended March 31, 2020, noninterest income was $3.7 million compared with $3.3 million the same period a year ago. The increase was primarily due to a $0.3 million increase in mortgage banking income resulting from higher loan volume of refinanced mortgages, which is primarily from a lower interest rate environment for the same comparable periods.

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

For the three months ended March 31, 2020, noninterest expense was $16.2 million compared with $14.9 million for the same period a year earlier. For the three months ended March 31, 2020, the Company’s efficiency ratio was 52.20% compared with 49.32% for the same period a year ago.

The increase in noninterest expense for the three months ended March 31, 2020 was primarily the result of higher salaries and employee benefits resulting from higher incentive payments, and higher marketing and advertising costs associated with the rollout of the Company’s new brand. These higher amounts were partially offset by lower FDIC premiums due to the application of small bank assessment credits.

Income Tax Expense. For the three months ended March 31, 2020, income tax expense was $3.4 million compared with $3.3 million for the same period a year earlier. For the three months ended March 31, 2020, the effective tax rate was 23.87% compared with 23.76% for the same period a year ago.

Total assets were $2.48 billion at March 31, 2020, a 2.9% increase compared with December 31, 2019. Total loans held for investment were $1.64 billion at March 31, 2020, a decrease of 2.3% from December 31, 2019. Total deposits were $2.12 billion at March 31, 2020, an increase of 3.2% compared with December 31, 2019.

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

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

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

										Rate Structure for
										Loans Maturing Over
	Maturity									One Year
				One
	One			through		After
	Year			Five		Five						Adjustable
(Dollars in thousands)	or Less			Years		Years		Total		Fixed Rate		Rate
Loans held for investment:
Commercial real estate loans:
Real estate term	$	44,564		$	215,121	$	682,109	$	941,794	$	140,111	$	757,119
Construction and land development		225,577			22,015		20,668		268,260		10,051		32,632
Total commercial real estate loans		270,141			237,136		702,777		1,210,054		150,162		789,751
Commercial and industrial loans		119,175			119,769		30,262		269,206		84,866		65,165
Consumer loans:
Residential and home equity		15,730			27,512		110,966		154,208		12,336		126,142
Consumer and other		5,480			5,590		2,054		13,124		7,302		342
Total consumer loans		21,210			33,102		113,020		167,332		19,638		126,484
Total gross loans held for investment	$	410,526	⁽¹⁾	$	390,007	$	846,059	$	1,646,592	$	254,666	$	981,400	⁽¹⁾

Concentrations. As of March 31, 2020, in management’s judgment, a concentration of loans existed in real estate related loans. At that date, real estate related loans comprised 82.9% of total loans held for investment, of which 57.2% are real estate term loans, 16.3% are construction and land development loans, and 9.4% are residential and home equity loans. We require collateral on real estate lending arrangements and typically maintain loan-to-value ratios of up to 85%, except for some residential construction loans of up to 95% loan-to-value provided the loan includes pre-approved long-term financing and some commercial real estate loans of up to 75% with a minimum debt coverage ratio of 1.25 times. Our concentration in commercial and industrial loans has decreased to 16.3% at March 31, 2020 from 16.9% at December 31, 2019.

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

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

Individually evaluated Loans. Individually evaluated 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 individually evaluated, 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 individually evaluated. 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 individually evaluated.

Troubled-debt Restructured Loans. A restructured loan is considered a troubled debt restructuring, or TDR, if we, for economic or legal reasons related to the debtor’s financial difficulties, grant a concession in terms or a below-market interest rate to the debtor that we would not otherwise consider. TDRs were $10.3 million and $28.4 million at March 31, 2020 and December 31, 2019, respectively. Our TDRs are considered individually evaluated loans of which $5.7 million and $3.1 million were designated as non-accrual at March 31, 2020, and December 31, 2019, respectively.

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

The Bank implemented borrower relief programs to assist commercial and consumer clients impacted by the COVID-19 pandemic. The Bank offered full deferral of loan payments to qualifying commercial clients of up to six months with a subsequent re-amortization of payments after the deferral period. Commercial clients who qualified for payment deferrals complied with contractual terms of their loan; and provided support regarding the affect the COVID-19 pandemic had on the results of their operations. The Bank provided loan deferrals to approximately 400 commercial clients with outstanding balances totaling approximately $340 million, with average monthly loan payments of approximately $7,500, average period deferred of approximately 5 months, and totaled deferred payments of approximately $16 million as of the end of April 30, 2020. The Bank offered full deferral of loan payments to consumer clients directly impacted by the COVID-19 pandemic of up to 90 days. The Bank provided loan deferrals to approximately 80 consumer clients with balances totaling approximately $1.0 million as of April 30, 2020.

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:

We maintain an adequate allowance for credit losses, or ACL, based on a comprehensive methodology that determine our current expected credit losses (“CECL”) for investment securities available for sale, loans held for investment, and off balance sheet commitments.

Management estimates the ACL using relevant available information, from internal and external sources, relating to past event, current conditions, and reasonable and supportable forecasts. Historical credit loss experience, either internal or peer information, provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made, using qualitative factors, when management expects current conditions and reasonable and supportable forecasts to differ from the conditions that existed for the period over which historical information was evaluated. Management must exercise significant judgment when evaluating the effect of qualitative factors on the amount of the ACL because data may not be reasonably available or directly applicable for management to determine the precise impact of a factor on the collectability of the loan portfolio as of the evaluation date.

Management considers qualitative or environmental factors that are likely to cause estimated credit losses associated with our existing portfolio to differ from historical loss experience, including but not limited to changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses. Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments. Changes in the nature and volume of the portfolio and in the terms of loans. Changes in the experience, ability, and depth of lending management and other relevant staff. Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans. Changes in the quality of the institution’s loan review system. Changes in the value of underlying collateral for collateral-dependent loans. The existence and effect of any concentrations of credit, and changes in the level of such concentrations. The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision, as more information becomes available.

The Company used the weighted average remaining maturity (or “WARM”) approach, adjusted for prepayments, to calculate CECL at March 31, 2020 and segmented its loan portfolio into seventeen loan segments based on similar risk characteristics. Management may change the approach used to calculated current expected credit losses or loan segments from time-to-time as we improved credit loss estimation techniques. The Company has elected to exclude accrued interest receivable and net deferred fees from its calculation of ACL.

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

The ACL to loans held for investment was 2.51% at March 31, 2020, compared with 1.55% at March 31, 2019. The allowance for credit losses is also adjusted based on changes to the underlying loan portfolio, changes to our historical loss rates, and adjustments to qualitative ACL factors due to changes in current conditions.

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

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

Investment securities were $577.0 million at March 31, 2020 and $406.0 million at December 31, 2019. As of March 31, 2020, our portfolio of investment securities was comprised of available for sale securities. At March 31, 2020, we held no investment securities from any issuer which totaled over 10% of our shareholders’ equity.

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:

						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	$	10,049		2.21	%	$	-		0.00	%	$	-		0.00	%	$	-		0.00	%	$	10,049		2.21	%
Municipal securities		18,104		2.15	%		18,142		1.91	%		16,830		2.20	%		-		0.00	%		53,076		2.08	%
Mortgage-backed securities		-		0.00	%		14,725		1.52	%		32,296		1.97	%		449,445		2.62	%		496,466		2.54	%
Other securities		-		0.00	%		2,000		2.79	%		3,000		1.55	%		-		0.00	%		5,000		2.05	%
Total investment securities	$	28,153		2.17	%	$	34,867		1.79	%	$	52,126		2.02	%	$	449,445		2.62	%	$	564,591		2.49	%

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.

Total deposits were $2.12 billion at March 31, 2020 and $2.06 billion at December 31, 2019. The increase in total deposits is attributed primarily to organic growth. Non-interest bearing demand deposits were $737.0 million, or 34.7% of total deposits at March 31, 2020 compared with $719.4 million, or 35.0% of total deposits at December 31, 2019. Interest bearing deposits are comprised of interest bearing DDA accounts, money market accounts, regular savings accounts, certificates of deposit of $250,000 or less, and certificates of deposit of more than $250,000.

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

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

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

Shareholders’ equity totaled $340.1 million at March 31, 2020, an increase of $7.8 million, or 2.34%, since December 31, 2019. The increase in shareholders’ equity for the three months ended March 31, 2020 was primarily due to an increase of $7.9 million in accumulated other comprehensive income, and net income of $10.8 million for the period less dividends paid of $2.6 million, the impact to capital of adopting ASC 326 of $6.7 million and shares repurchased of $2.1 million.

Dividends of $0.14 per share were declared during the three months ended March 31, 2020 representing 24.6% of the net income for the same period. We announced a quarterly dividend of $0.14 per share on April 22, 2020, payable on May 11, 2020 for shareholders’ of record on May 4, 2020. Future cash dividends will depend on a variety of factors, including net income, capital, asset quality, general economic conditions, and regulatory considerations.

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%.

PUB and Altabank^TM met the requirements to be defined as a “well-capitalized” institution at March 31, 2020, December 31, 2019 and March 31, 2019 for federal regulatory purposes.

The following table sets forth our off-balance sheet lending commitments as of March 31, 2020:

The following table sets forth our significant contractual obligations as of March 31, 2020:

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 $956.1 million at March 31, 2020, which is secured by various real estate loans pledged as collateral totaling $742.7 million and investment securities of $472.8 million. Additionally, we have a borrowing line with the Federal Reserve Bank of $23.9 million, which is secured by $24.3 million of investment securities.

We believe our liquid assets are adequate to meet our cash flow needs for loan funding and deposit cash withdrawal for the next 60 to 90 days. At March 31, 2020, we had approximately $237.2 million in net liquid assets comprised of $157.6 million in cash and cash equivalents, including interest bearing deposits of $120.2 million and federal funds sold of $1.2 million, $577.0 million in available for sale investment securities and $21.6 million in loans held for sale, less $519.0 million of available for sale securities pledged as collateral for short-term borrowings.

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

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

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

Our primary investing activities are the origination of real estate, commercial and consumer loans and purchases and sales of investment securities. At March 31, 2020, we had outstanding loan commitments of $622.6 million, credit card commitments of $26.3 million and outstanding letters of credit of $23.8 million. We anticipate that we will have sufficient funds available to meet current loan commitments.

Net cash provided by financing activities for the three months ended March 31, 2020 was $61.0 million, principally from an increase in deposit balances, offset by dividends paid to shareholders during the period and share repurchases.

The Company’s assessment of market risk at March 31, 2020 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, 2019 filed with the SEC.

The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as required by Exchange Act Rules 240.13a-15(b) and 15d-14(a)) at March 31, 2020. 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.

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended March 31, 2020, to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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.

Our Annual Report on Form 10-K for the year ended December 31, 2019 (Form 10-K 2019) identifies various market, credit, and operations risk factors that could affect our results of operations. For example, we explained therein that the Company’s “profitability depends on interest rates generally, and we may be adversely affected by changes in market interest rates.” Form 10-K 2019 at 29. Specifically, “[i]n response to market concerns arising from the spread of COVID-19, among other domestic and global events, interest rates in the U.S. have recently declined” and “interest rates may decrease further as a result of such events, which could adversely affect our financial condition and earnings.” Form 10-K 2019 at 29. As conditions and circumstances related to COVID-19, including its declaration as a global pandemic by the World Health Organization on March 11, 2020, are continuing to evolve, the Company provides the following supplement to the risk factors identified in its Form 10-K 2019:

The COVID-19 pandemic has significantly adversely impacted the global and national economies since its onset in late 2019. This pandemic is expected to continue to adversely impact the global economy, though the scope, extent, and duration of such impact is presently not known or quantifiable. The future direct and indirect qualitative and quantitative impacts of the COVID-19 pandemic on the Company’s business, operations, and financial condition remain uncertain. As the COVID-19 pandemic persists and global and national economies continue to decline, the effects on the Company’s business and operations could include, without limitation: (i) increased margin compression as lower interest rates persist; (ii) increased noninterest expenses; (iii) increased credit losses and net charge-offs; (iv) deterioration of asset and collateral values due to declining financial condition of consumer and commercial borrowers; and (v) decreased demand for financial products and services.

National government and regulatory authorities have taken steps to try to stimulate the economy and counteract the effects of the COVID-19 pandemic, including the passage of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which included the implementation of the SBA’s Paycheck Protection Program (PPP), providing loans to eligible small businesses to fund payroll and other qualifying expenses. The Board of Governors of the Federal Reserve System (Federal Reserve) has also taken economic stimuli steps by lowering the federal funds rate and the interest rate on the Federal Reserve’s discount window; issuing clarifying guidance on loan modifications due to COVID-19-related non-payment, and implementing and expanding the scope and access of its Main Street Lending Program and its Paycheck Protection Program Liquidity Facility for SBA-qualified lenders. The impact of these prophylactic measures is not yet known.

The Company continues to monitor the COVID-19 pandemic situation closely. The scope and duration of the COVID-19 pandemic is not yet known and, as such, its potential adverse impact on the Company’s business, results of operations, and financial results is highly uncertain. As recession-like economic conditions persist in global, national, and local economies, however, the COVID-19 pandemic could have a long-term negative effect on the Company’s business, results of operations, and financial condition.

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 11, 2020.

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)

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	32
Item 3 – Quantitative and Qualitative Disclosures about Market Risk	47
Item 4 – Controls and Procedures	47
PART II. OTHER INFORMATION
Item 1 – Legal Proceedings	48
Item 1A – Risk Factors	48
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3 – Defaults upon Senior Securities	49
Item 4 – Mine Safety Disclosures	49
Item 5 – Other Information	49
Item 6 – Exhibits	50
Signatures	51


Building and building improvements		15 to 40 years
Leasehold improvements		3 to 15 years
Furniture and equipment		3 to 15 years
Computers, software and equipment		3 to 5 years

	Three Months Ended
	March 31,
(Dollars in thousands)	2020			2019
Balance, beginning of period	$	4,247		$	5,884
Accretion to interest income		(898	)		(528	)
Reclassification from non-accretable difference		402			95
Balance, end of period	$	3,751		$	5,451

	March 31,		December 31,
(Dollars in thousands)	2020		2019
Commitments to extend credit, including unsecured commitments of $14,394 and $32,995 as of March 31, 2020 and December 31, 2019, respectively	$	622,596	$	632,577
Stand-by letters of credit and bond commitments, including unsecured commitments of $403 and $555 as of March 31, 2020 and December 31, 2019, respectively		23,760		23,860
Unused credit card lines, all unsecured		26,344		26,121


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


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

Large accelerated filer	☐	Accelerated filer	☒

Non-accelerated filer	☐	Smaller reporting company	☐

Emerging growth company	☒

	January 1, 2020
(Dollars in thousands)	Reported Under ASC 326		Reported Pre Adoption		Impact of ASC 326 Adoption
Assets:
Loans held for investment:
Commercial real estate loans:
Real estate term	$	12,683	$	12,275	$	408
Construction and land development		13,393		6,990		6,403
Total commercial real estate		26,076		19,265		6,811
Commercial and industrial		11,541		10,892		649
Consumer loans:
Residential and home equity		2,635		1,118		1,517
Consumer and other		640		151		489
Total consumer		3,275		1,269		2,006
Total allowance for credit losses on loans	$	40,892	$	31,426	$	9,466

Liabilities and shareholders’ equity:
Reserve for off-balance sheet obligations		1,669		880		789

Shareholders’ equity		325,682		332,362		(6,680	)

			March 31, 2020				December 31, 2019
			Carrying		Estimated		Carrying		Estimated
(Dollars in thousands)	Level		Value		Fair Value		Value		Fair Value
Financial Assets:
Cash and cash equivalents		1	$	157,627	$	157,627	$	211,981	$	211,981
Investment securities available for sale		2		566,424		566,424		395,410		395,410
Investment securities available for sale		3		10,576		10,576		10,585		10,585
Non-marketable securities		2		2,890		2,890		2,623		2,623
Loans held for sale		2		21,572		21,572		18,669		18,669
Loans held for investment		3		1,601,263		1,591,543		1,649,492		1,639,480

Financial Liabilities:
Total deposits		2	$	2,122,018	$	1,957,754	$	2,056,367	$	1,851,954

(Dollars in thousands)	Level 1		Level 2		Level 3		Total
As of March 31, 2020
Fair valued on a recurring basis:
Investment securities available for sale	$	-	$	566,424	$	10,576	$	577,000
Fair valued on a non-recurring basis:
Individually evaluated loans		-		-		470		470

As of December 31, 2019
Fair valued on a recurring basis:
Investment securities available for sale	$	-	$	395,410	$	10,585	$	405,995
Fair valued on a non-recurring basis:
Individually evaluated loans		-		-		17,497		17,497

	March 31,			December 31,
(Percentage of total gross loans)	2020			2019
Loans held for investment:
Commercial real estate loans:
Real estate term		57.2	%		56.2	%
Construction and land development		16.3	%		16.3	%
Total commercial real estate loans		73.5	%		72.5	%
Commercial and industrial loans		16.3	%		16.9	%
Consumer loans:
Residential and home equity		9.4	%		9.6	%
Consumer and other		0.8	%		1.0	%
Total consumer loans		10.2	%		10.6	%
Total loans held for investment		100.0	%		100.0	%

	Basel III
	Regulatory
	Requirements -
	Well Capitalized
	(Greater than or			PUB
	Equal to Stated			March 31,			December 31,			March 31,
	Percentage)			2020			2019			2019
Common equity tier 1 capital		6.50	%		17.36	%		17.18	%		15.60	%
Tier 1 risk-based capital		8.00	%		17.36	%		17.18	%		15.60	%
Total risk-based capital		10.00	%		18.62	%		18.43	%		16.86	%
Tier 1 leverage capital ratio		5.00	%		12.74	%		12.67	%		12.70	%

			Payments Due by Period
	Total				One to		Three to		After
	Amounts		Less than		Three		Five		Five
Other Commitments (Dollars in thousands)	Committed		One Year		Years		Years		Years
Commitments to extend credit	$	622,596	$	435,447	$	81,137	$	21,283	$	84,729
Standby letters of credit		23,760		23,760		-		-		-
Credit cards		26,344		26,344		-		-		-
Total	$	672,700	$	485,551	$	81,137	$	21,283	$	84,729

Exhibit Number		Description

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

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

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

101		The following financial information from People’s Utah Bancorp Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 is formatted in XBRL: (i) the Unaudited Consolidated Balance Sheets, (ii) the Unaudited Consolidated Statements of Income, (iii) the Unaudited Consolidated Statements of Comprehensive Income, (iv) the Unaudited Consolidated Statements of Changes in Stockholders’ Equity (v) the Unaudited Consolidated Statements of Cash Flows, and (vi) the Notes to Unaudited Consolidated Financial Statements