ITEM 1. FINANCIAL STATEMENTS
HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(In thousands, except shares)
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
ASSETS
|
|
|
|
|
Cash on hand and in banks
|
|
$
|
95,878
|
|
|
$
|
92,704
|
|
Interest earning deposits
|
|
43,412
|
|
|
69,206
|
|
Cash and cash equivalents
|
|
139,290
|
|
|
161,910
|
|
Investment securities available for sale, at fair value
|
|
960,680
|
|
|
976,095
|
|
Loans held for sale
|
|
3,692
|
|
|
1,555
|
|
Loans receivable, net
|
|
3,718,283
|
|
|
3,654,160
|
|
Allowance for loan losses
|
|
(36,363
|
)
|
|
(35,042
|
)
|
Total loans receivable, net
|
|
3,681,920
|
|
|
3,619,118
|
|
Other real estate owned
|
|
1,224
|
|
|
1,983
|
|
Premises and equipment, net
|
|
84,296
|
|
|
81,100
|
|
Federal Home Loan Bank stock, at cost
|
|
10,005
|
|
|
6,076
|
|
Bank owned life insurance
|
|
94,417
|
|
|
93,612
|
|
Accrued interest receivable
|
|
15,401
|
|
|
15,403
|
|
Prepaid expenses and other assets
|
|
126,259
|
|
|
98,522
|
|
Other intangible assets, net
|
|
18,563
|
|
|
20,614
|
|
Goodwill
|
|
240,939
|
|
|
240,939
|
|
Total assets
|
|
$
|
5,376,686
|
|
|
$
|
5,316,927
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
Deposits
|
|
$
|
4,347,708
|
|
|
$
|
4,432,402
|
|
Federal Home Loan Bank advances
|
|
90,700
|
|
|
—
|
|
Junior subordinated debentures
|
|
20,448
|
|
|
20,302
|
|
Securities sold under agreement to repurchase
|
|
23,141
|
|
|
31,487
|
|
Accrued expenses and other liabilities
|
|
98,064
|
|
|
72,013
|
|
Total liabilities
|
|
4,580,061
|
|
|
4,556,204
|
|
Stockholders’ equity:
|
|
|
|
|
Preferred stock, no par value, 2,500,000 shares authorized; no shares issued and outstanding at June 30, 2019 and December 31, 2018
|
|
—
|
|
|
—
|
|
Common stock, no par value, 50,000,000 shares authorized; 36,882,771 and 36,874,055 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively
|
|
591,703
|
|
|
591,806
|
|
Retained earnings
|
|
195,168
|
|
|
176,372
|
|
Accumulated other comprehensive income (loss), net
|
|
9,754
|
|
|
(7,455
|
)
|
Total stockholders’ equity
|
|
796,625
|
|
|
760,723
|
|
Total liabilities and stockholders’ equity
|
|
$
|
5,376,686
|
|
|
$
|
5,316,927
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
INTEREST INCOME
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
48,107
|
|
|
$
|
41,141
|
|
|
$
|
94,806
|
|
|
$
|
79,300
|
|
Taxable interest on investment securities
|
|
5,933
|
|
|
4,068
|
|
|
11,756
|
|
|
7,597
|
|
Nontaxable interest on investment securities
|
|
893
|
|
|
1,220
|
|
|
1,843
|
|
|
2,561
|
|
Interest on other interest earning assets
|
|
283
|
|
|
240
|
|
|
618
|
|
|
458
|
|
Total interest income
|
|
55,216
|
|
|
46,669
|
|
|
109,023
|
|
|
89,916
|
|
INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
Deposits
|
|
4,017
|
|
|
2,195
|
|
|
7,620
|
|
|
4,155
|
|
Junior subordinated debentures
|
|
340
|
|
|
315
|
|
|
694
|
|
|
598
|
|
Other borrowings
|
|
323
|
|
|
418
|
|
|
385
|
|
|
585
|
|
Total interest expense
|
|
4,680
|
|
|
2,928
|
|
|
8,699
|
|
|
5,338
|
|
Net interest income
|
|
50,536
|
|
|
43,741
|
|
|
100,324
|
|
|
84,578
|
|
Provision for loan losses
|
|
1,367
|
|
|
1,750
|
|
|
2,287
|
|
|
2,902
|
|
Net interest income after provision for loan losses
|
|
49,169
|
|
|
41,991
|
|
|
98,037
|
|
|
81,676
|
|
NONINTEREST INCOME
|
|
|
|
|
|
|
|
|
Service charges and other fees
|
|
4,845
|
|
|
4,695
|
|
|
9,330
|
|
|
9,238
|
|
Gain on sale of investment securities, net
|
|
33
|
|
|
18
|
|
|
48
|
|
|
53
|
|
Gain on sale of loans, net
|
|
368
|
|
|
706
|
|
|
620
|
|
|
1,580
|
|
Interest rate swap fees
|
|
161
|
|
|
309
|
|
|
161
|
|
|
360
|
|
Other income
|
|
2,157
|
|
|
1,847
|
|
|
4,834
|
|
|
3,892
|
|
Total noninterest income
|
|
7,564
|
|
|
7,575
|
|
|
14,993
|
|
|
15,123
|
|
NONINTEREST EXPENSE
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
21,982
|
|
|
19,321
|
|
|
43,896
|
|
|
40,688
|
|
Occupancy and equipment
|
|
5,451
|
|
|
4,810
|
|
|
10,909
|
|
|
9,437
|
|
Data processing
|
|
2,109
|
|
|
2,507
|
|
|
4,282
|
|
|
5,112
|
|
Marketing
|
|
1,106
|
|
|
823
|
|
|
2,204
|
|
|
1,631
|
|
Professional services
|
|
1,305
|
|
|
3,529
|
|
|
2,478
|
|
|
6,366
|
|
State/municipal business and use taxes
|
|
809
|
|
|
716
|
|
|
1,607
|
|
|
1,404
|
|
Federal deposit insurance premium
|
|
426
|
|
|
375
|
|
|
711
|
|
|
730
|
|
Other real estate owned, net
|
|
289
|
|
|
—
|
|
|
375
|
|
|
—
|
|
Amortization of intangible assets
|
|
1,026
|
|
|
796
|
|
|
2,051
|
|
|
1,591
|
|
Other expense
|
|
3,044
|
|
|
2,829
|
|
|
5,559
|
|
|
5,494
|
|
Total noninterest expense
|
|
37,547
|
|
|
35,706
|
|
|
74,072
|
|
|
72,453
|
|
Income before income taxes
|
|
19,186
|
|
|
13,860
|
|
|
38,958
|
|
|
24,346
|
|
Income tax expense
|
|
3,202
|
|
|
2,003
|
|
|
6,422
|
|
|
3,402
|
|
Net income
|
|
$
|
15,984
|
|
|
$
|
11,857
|
|
|
$
|
32,536
|
|
|
$
|
20,944
|
|
Basic earnings per common share
|
|
$
|
0.43
|
|
|
$
|
0.35
|
|
|
$
|
0.88
|
|
|
$
|
0.62
|
|
Diluted earnings per common share
|
|
$
|
0.43
|
|
|
$
|
0.35
|
|
|
$
|
0.88
|
|
|
$
|
0.62
|
|
Dividends declared per common share
|
|
$
|
0.18
|
|
|
$
|
0.15
|
|
|
$
|
0.36
|
|
|
$
|
0.30
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net income
|
|
$
|
15,984
|
|
|
$
|
11,857
|
|
|
$
|
32,536
|
|
|
$
|
20,944
|
|
Change in fair value of investment securities available for sale, net of tax of $2,463, $(630), $4,608, and $(2,638), respectively
|
|
9,219
|
|
|
(2,358
|
)
|
|
17,247
|
|
|
(9,874
|
)
|
Reclassification adjustment for net gain from sale of investment securities available for sale included in income, net of tax of $(7), $(4), $(10), and $(12), respectively
|
|
(26
|
)
|
|
(14
|
)
|
|
(38
|
)
|
|
(41
|
)
|
Other comprehensive income (loss)
|
|
9,193
|
|
|
(2,372
|
)
|
|
17,209
|
|
|
(9,915
|
)
|
Comprehensive income
|
|
$
|
25,177
|
|
|
$
|
9,485
|
|
|
$
|
49,745
|
|
|
$
|
11,029
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
Number of
common
shares
|
|
Common
stock
|
|
Retained
earnings
|
|
Accumulated
other
comprehensive income, net
|
|
Total
stockholders’
equity
|
Balance at March 31, 2019
|
36,899
|
|
|
$
|
591,767
|
|
|
$
|
185,863
|
|
|
$
|
561
|
|
|
$
|
778,191
|
|
Restricted stock units vested, net of forfeitures of restricted stock awards
|
13
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exercise of stock options
|
1
|
|
|
20
|
|
|
—
|
|
|
—
|
|
|
20
|
|
Stock-based compensation expense
|
—
|
|
|
795
|
|
|
—
|
|
|
—
|
|
|
795
|
|
Common stock repurchased
|
(30
|
)
|
|
(879
|
)
|
|
—
|
|
|
—
|
|
|
(879
|
)
|
Net income
|
—
|
|
|
—
|
|
|
15,984
|
|
|
—
|
|
|
15,984
|
|
Other comprehensive income, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
9,193
|
|
|
9,193
|
|
Cash dividends declared on common stock ($0.18 per share)
|
—
|
|
|
—
|
|
|
(6,679
|
)
|
|
—
|
|
|
(6,679
|
)
|
Balance at June 30, 2019
|
36,883
|
|
|
$
|
591,703
|
|
|
$
|
195,168
|
|
|
$
|
9,754
|
|
|
$
|
796,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
Number of
common
shares
|
|
Common
stock
|
|
Retained
earnings
|
|
Accumulated
other
comprehensive (loss) income, net
|
|
Total
stockholders’
equity
|
Balance at December 31, 2018
|
36,874
|
|
|
$
|
591,806
|
|
|
$
|
176,372
|
|
|
$
|
(7,455
|
)
|
|
$
|
760,723
|
|
Restricted stock units vested, net of forfeitures of restricted stock awards
|
62
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exercise of stock options
|
3
|
|
|
42
|
|
|
—
|
|
|
—
|
|
|
42
|
|
Stock-based compensation expense
|
—
|
|
|
1,536
|
|
|
—
|
|
|
—
|
|
|
1,536
|
|
Common stock repurchased
|
(56
|
)
|
|
(1,681
|
)
|
|
—
|
|
|
—
|
|
|
(1,681
|
)
|
Net income
|
—
|
|
|
—
|
|
|
32,536
|
|
|
—
|
|
|
32,536
|
|
Other comprehensive income, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
17,209
|
|
|
17,209
|
|
Cash dividends declared on common stock ($0.36 per share)
|
—
|
|
|
—
|
|
|
(13,341
|
)
|
|
—
|
|
|
(13,341
|
)
|
Effects of implementation of accounting change related to operating leases
|
—
|
|
|
—
|
|
|
(399
|
)
|
|
—
|
|
|
(399
|
)
|
Balance at June 30, 2019
|
36,883
|
|
|
$
|
591,703
|
|
|
$
|
195,168
|
|
|
$
|
9,754
|
|
|
$
|
796,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
|
Number of
common
shares
|
|
Common
stock
|
|
Retained
earnings
|
|
Accumulated
other
comprehensive loss, net
|
|
Total
stockholders’
equity
|
Balance at March 31, 2018
|
34,018
|
|
|
$
|
490,566
|
|
|
$
|
153,076
|
|
|
$
|
(8,934
|
)
|
|
$
|
634,708
|
|
Restricted stock units vested, net of forfeitures of restricted stock awards
|
8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exercise of stock options
|
2
|
|
|
26
|
|
|
—
|
|
|
—
|
|
|
26
|
|
Stock-based compensation expense
|
—
|
|
|
684
|
|
|
—
|
|
|
—
|
|
|
684
|
|
Common stock repurchased
|
(7
|
)
|
|
(250
|
)
|
|
—
|
|
|
—
|
|
|
(250
|
)
|
Net income
|
—
|
|
|
—
|
|
|
11,857
|
|
|
—
|
|
|
11,857
|
|
Other comprehensive loss, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,372
|
)
|
|
(2,372
|
)
|
Cash dividends declared on common stock ($0.15 per share)
|
—
|
|
|
—
|
|
|
(5,130
|
)
|
|
—
|
|
|
(5,130
|
)
|
Balance at June 30, 2018
|
34,021
|
|
|
$
|
491,026
|
|
|
$
|
159,803
|
|
|
$
|
(11,306
|
)
|
|
$
|
639,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
|
Number of
common
shares
|
|
Common
stock
|
|
Retained
earnings
|
|
Accumulated
other
comprehensive loss, net
|
|
Total
stockholders’
equity
|
Balance at December 31, 2017
|
29,928
|
|
|
$
|
360,590
|
|
|
$
|
149,013
|
|
|
$
|
(1,298
|
)
|
|
$
|
508,305
|
|
Restricted stock units vested, net of forfeitures of restricted stock awards
|
30
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exercise of stock options
|
3
|
|
|
47
|
|
|
—
|
|
|
—
|
|
|
47
|
|
Stock-based compensation expense
|
—
|
|
|
1,307
|
|
|
—
|
|
|
—
|
|
|
1,307
|
|
Common stock repurchased
|
(52
|
)
|
|
(1,688
|
)
|
|
—
|
|
|
—
|
|
|
(1,688
|
)
|
Net income
|
—
|
|
|
—
|
|
|
20,944
|
|
|
—
|
|
|
20,944
|
|
Other comprehensive loss, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
(9,915
|
)
|
|
(9,915
|
)
|
Common stock issued in business combination
|
4,112
|
|
|
130,770
|
|
|
—
|
|
|
—
|
|
|
130,770
|
|
Cash dividends declared on common stock ($0.30 per share)
|
—
|
|
|
—
|
|
|
(10,247
|
)
|
|
—
|
|
|
(10,247
|
)
|
Effects of implementation of accounting change related to equity investments, net
|
—
|
|
|
—
|
|
|
93
|
|
|
(93
|
)
|
|
—
|
|
Balance at June 30, 2018
|
34,021
|
|
|
$
|
491,026
|
|
|
$
|
159,803
|
|
|
$
|
(11,306
|
)
|
|
$
|
639,523
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
Cash flows from operating activities:
|
|
|
|
|
Net income
|
|
$
|
32,536
|
|
|
$
|
20,944
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
Depreciation of premises and equipment, amortization of securities available for sale, and amortization of discount of junior subordinated debentures
|
|
4,255
|
|
|
5,140
|
|
Changes in net deferred loan costs, net of amortization
|
|
829
|
|
|
(254
|
)
|
Provision for loan losses
|
|
2,287
|
|
|
2,902
|
|
Net change in accrued interest receivable, prepaid expenses and other assets, and accrued expenses and other liabilities
|
|
(3,645
|
)
|
|
419
|
|
Stock-based compensation expense
|
|
1,536
|
|
|
1,307
|
|
Amortization of intangible assets
|
|
2,051
|
|
|
1,591
|
|
Origination of loans held for sale
|
|
(20,328
|
)
|
|
(40,048
|
)
|
Proceeds from sale of loans
|
|
18,811
|
|
|
39,962
|
|
Earnings on bank owned life insurance
|
|
(1,014
|
)
|
|
(666
|
)
|
Valuation adjustment on other real estate owned
|
|
51
|
|
|
—
|
|
Loss on sale of other real estate owned
|
|
279
|
|
|
—
|
|
Gain on sale of loans, net
|
|
(620
|
)
|
|
(1,580
|
)
|
Gain on sale of investment securities, net
|
|
(48
|
)
|
|
(53
|
)
|
Impairment of assets held for sale
|
|
—
|
|
|
75
|
|
Impairment of right of use asset
|
|
117
|
|
|
—
|
|
Gain on sale of premises and equipment, net
|
|
(10
|
)
|
|
—
|
|
Net cash provided by operating activities
|
|
37,087
|
|
|
29,739
|
|
Cash flows from investing activities:
|
|
|
|
|
Loans originated, net of principal payments
|
|
(65,972
|
)
|
|
(96,127
|
)
|
Maturities, calls and payments of investment securities available for sale
|
|
105,400
|
|
|
41,436
|
|
Purchase of investment securities available for sale
|
|
(104,324
|
)
|
|
(147,360
|
)
|
Proceeds from sales of investment securities available for sale
|
|
34,479
|
|
|
107,579
|
|
Purchase of premises and equipment
|
|
(6,374
|
)
|
|
(16,659
|
)
|
Proceeds from sales of other loans
|
|
54
|
|
|
4,532
|
|
Proceeds from sales of other real estate owned
|
|
429
|
|
|
—
|
|
Proceeds from redemption of Federal Home Loan Bank stock
|
|
12,684
|
|
|
22,138
|
|
Purchases of Federal Home Loan Bank stock
|
|
(16,613
|
)
|
|
(21,784
|
)
|
Proceeds from sales of premises and equipment
|
|
31
|
|
|
21
|
|
Capital contributions to low-income housing tax credit partnerships and new market tax credit partnerships, net
|
|
(2,242
|
)
|
|
(8,169
|
)
|
Net cash received from acquisitions
|
|
—
|
|
|
80,133
|
|
Net cash used in investing activities
|
|
(42,448
|
)
|
|
(34,260
|
)
|
Cash flows from financing activities:
|
|
|
|
|
Net (decrease) increase in deposits
|
|
(84,694
|
)
|
|
69,990
|
|
Federal Home Loan Bank advances
|
|
402,800
|
|
|
536,450
|
|
Repayments of Federal Home Loan Bank advances
|
|
(312,100
|
)
|
|
(553,450
|
)
|
Common stock cash dividends paid
|
|
(13,280
|
)
|
|
(10,247
|
)
|
Net decrease in securities sold under agreement to repurchase
|
|
(8,346
|
)
|
|
(9,653
|
)
|
Proceeds from exercise of stock options
|
|
42
|
|
|
47
|
|
Repurchase of common stock
|
|
(1,681
|
)
|
|
(1,688
|
)
|
Net cash (used in) provided by financing activities
|
|
(17,259
|
)
|
|
31,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
Net (decrease) increase in cash and cash equivalents
|
|
(22,620
|
)
|
|
26,928
|
|
Cash and cash equivalents at beginning of period
|
|
161,910
|
|
|
103,015
|
|
Cash and cash equivalents at end of period
|
|
$
|
139,290
|
|
|
$
|
129,943
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
Cash paid for interest
|
|
$
|
8,535
|
|
|
$
|
5,156
|
|
Cash paid for income taxes
|
|
5,545
|
|
|
2,724
|
|
|
|
|
|
|
Supplemental non-cash disclosures of cash flow information:
|
|
|
|
|
Transfers of loans receivable to other real estate owned
|
|
$
|
—
|
|
|
$
|
434
|
|
Transfers of properties held for sale recorded in premises and equipment, net to prepaid expenses and other assets
|
|
763
|
|
|
221
|
|
Transfer of BOLI to prepaid expenses and other assets
|
|
209
|
|
|
—
|
|
Business Combinations:
|
|
|
|
|
Common stock issued for business combinations
|
|
—
|
|
|
130,770
|
|
Assets acquired (liabilities assumed) in acquisitions:
|
|
|
|
|
Investment securities available for sale
|
|
—
|
|
|
80,353
|
|
Loans receivable
|
|
—
|
|
|
388,462
|
|
Premises and equipment
|
|
—
|
|
|
732
|
|
Federal Home Loan Bank stock
|
|
—
|
|
|
623
|
|
Accrued interest receivable
|
|
—
|
|
|
1,448
|
|
Bank owned life insurance
|
|
—
|
|
|
6,264
|
|
Prepaid expenses and other assets
|
|
—
|
|
|
1,354
|
|
Other intangible assets
|
|
—
|
|
|
11,270
|
|
Deposits
|
|
—
|
|
|
(505,885
|
)
|
Accrued expenses and other liabilities
|
|
—
|
|
|
(2,504
|
)
|
See accompanying Notes to Condensed Consolidated Financial Statements.
HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
|
(1)
|
Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements
|
(a) Description of Business
Heritage is a bank holding company that was incorporated in the State of Washington in August 1997. The Company is primarily engaged in the business of planning, directing and coordinating the business activities of its wholly-owned subsidiary, the Bank. The Bank is a Washington-chartered commercial bank and its deposits are insured by the FDIC. The Bank is headquartered in Olympia, Washington and conducts business from its
62
branch offices as of
June 30, 2019
located throughout Washington State and the greater Portland, Oregon area. The Bank’s business consists primarily of commercial lending and deposit relationships with small businesses and their owners in its market areas and attracting deposits from the general public. The Bank also makes real estate construction and land development loans, consumer loans and originates first mortgage loans on residential properties primarily located in its market areas.
Effective January 16, 2018, the Company completed the Puget Sound Merger and on July 2, 2018, the Company completed the Premier Merger. See Note (2) Business Combinations for additional information on the Premier and Puget Mergers.
(b) Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with GAAP for interim financial information and pursuant to the rules and regulations of the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. It is recommended that these unaudited Condensed Consolidated Financial Statements and accompanying Notes be read with the audited Consolidated Financial Statements and the accompanying Notes included in the
2018
Annual Form 10-K. In management's opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the
three and six months ended June 30, 2019
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2019
. In preparing the unaudited Condensed Consolidated Financial Statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Management believes that the judgments, estimates and assumptions used in the preparation of the financial statements are appropriate based on the facts and circumstances at the time. Actual results, however, could differ significantly from those estimates.
(c) Significant Accounting Policies
The significant accounting policies used in preparation of the Company's Condensed Consolidated Financial Statements are disclosed in the
2018
Annual Form 10-K. There have not been any material changes in the Company's significant accounting policies from those contained in the
2018
Annual Form 10-K, except for the accounting policy relating to operating leases adopted January 1, 2019, as discussed below.
Operating leases
During the normal course of business, the Company enters into agreements, and it determines if a particular agreement is a lease at inception. The Company's noncancelable operating lease agreements relate to certain banking offices, back-office operational facilities, office equipment, and sublease agreements. The agreements are recorded as ROU assets and liabilities within prepaid expenses and other assets and accrued expenses and other liabilities, respectively, in the Condensed Consolidated Statements of Financial Condition. Operating lease ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term, and represent the right to use an underlying asset for the lease term and the obligation to make lease payments arising from the lease. As the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease pre-payments made and excludes lease incentives. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
The Company elected an exclusion policy for ROU assets and liabilities for operating leases with a term of twelve months or less and a capitalization threshold policy for total contractual lease payments of
$25,000
or more. The Company does not account for any leases at a portfolio level.
(d) Recently Issued Accounting Pronouncements
FASB ASU 2016-02
,
Leases (Topic 842),
as amended by ASU 2017-13, 2018-01, 2018-10, ASU 2018-11, and ASU 2019-01 was originally issued in February 2016, to increase transparency and comparability of leases among organizations and to disclose key information about leasing arrangements. The ASU sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The Company adopted the ASU on January 1, 2019 and elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed us to carry forward the historical determination of contracts as leases, lease classification and not reassess initial direct costs for historical lease arrangements. The adoption of this ASU resulted in the recognition of operating lease ROU assets and liabilities of approximately
$29.2 million
and
$29.8 million
, respectively, in prepaid expenses and other assets and accrued expenses and other liabilities in the Condensed Consolidated Statements of Financial Condition. This change also resulted in a cumulative-effect adjustment to beginning retained earnings of
$399,000
, net of tax, under the modified retrospective approach. As a result of electing this transition method, prior periods have not been restated.
FASB ASU 2016-13
,
Financial Instruments: Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
, as amended by ASU 2018-19, ASU 2019-04 and ASU 2019-05, was originally issued in June 2016. Commonly referred to as CECL, this ASU requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. For public business entities, this ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years with early adoption permitted for fiscal years after December 15, 2018. The Company is anticipating adopting the Update on January 1, 2020. Upon adoption, the Company expects a change in the processes, internal controls and procedures to calculate the allowance for loan losses, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. The new guidance may result in an increase in the allowance for loan losses which will also reflect the new requirement to include the nonaccretable principal differences on PCI loans; however, the Company is still in the process of determining the magnitude of the increase and its impact on the Condensed Consolidated Financial Statements. In addition, the current accounting policy and procedures for other-than-temporary impairment on investment securities available for sale will be replaced with an allowance approach. During 2017, the Company's management created a CECL steering committee to develop and implement processes and procedures to ensure it is fully compliant with the amendments at the adoption date. During 2018, the CECL steering committee selected a vendor to assist the Company in the adoption, completed the implementation discovery sessions, and selected appropriate methodologies. During 2019, the CECL steering committee compiled historical loan data and is in the process of finalizing qualitative factors. The Company anticipates running parallel existing ALLL and CECL models using second quarter 2019 data.
FASB ASU 2017-04
,
Goodwill (Topic 350)
, was issued in January 2017 and eliminates Step 2 from the goodwill impairment test. The ASU is effective for annual periods or any interim goodwill impairment tests beginning after December 15, 2019 using a prospective transition method and early adoption is permitted. The Company does not expect the ASU will have a material impact on its Condensed Consolidated Financial Statements.
FASB ASU 2018-13
,
Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement,
was issued in August 2018 and modifies the disclosure requirements on fair value measurements in Topic 820. 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. The Company does not expect the ASU will have a material impact on its Condensed Consolidated Financial Statements.
|
|
(2)
|
Business Combinations
|
There were no acquisitions or mergers completed during the
three and six months ended June 30, 2019
.
Puget Sound Merger:
The Puget Sound Merger was effective on January 16, 2018. As of the acquisition date, Puget Sound merged into Heritage and Puget Sound Bank merged into Heritage Bank. The Puget Sound Merger resulted in
$68.5 million
of goodwill.
The Company incurred
no
acquisition-related costs for the Puget Sound Merger during the three months ended June 30, 2019 and
$75,000
during the six months ended June 30, 2019. The Company incurred acquisition-related costs of approximately
$551,000
and
$5.0 million
during the three and six months ended June 30, 2018, respectively, for the Puget Sound Merger.
Premier Merger:
The Premier Merger was effective on July 2, 2018. As of the acquisition date, Premier merged into Heritage and Premier Commercial Bank merged into Heritage Bank. The Premier Merger resulted in
$53.4 million
of goodwill.
The Company incurred
no
acquisition-related costs for the Premier Merger during the
three months ended June 30, 2019
and
$57,000
during the six months ended June 30, 2019. The Company incurred acquisition-related costs of approximately
$319,000
and
$636,000
during the three and six months ended June 30, 2018, respectively, for the Premier Merger.
The Company finalized the purchase price allocation for both mergers as of December 31, 2018.
|
|
(3)
|
Investment Securities
|
(a) Securities by Type and Maturity
The following tables present the amortized cost, gross unrealized gains, gross unrealized losses and fair values of investment securities available for sale at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
(In thousands)
|
U.S. Treasury and U.S. Government-sponsored agencies
|
$
|
92,103
|
|
|
$
|
774
|
|
|
$
|
—
|
|
|
$
|
92,877
|
|
Municipal securities
|
128,900
|
|
|
3,848
|
|
|
(7
|
)
|
|
132,741
|
|
Mortgage-backed securities and collateralized mortgage obligations
(1)
:
|
|
|
|
|
|
|
|
Residential
|
345,927
|
|
|
2,918
|
|
|
(1,163
|
)
|
|
347,682
|
|
Commercial
|
333,785
|
|
|
6,033
|
|
|
(740
|
)
|
|
339,078
|
|
Corporate obligations
|
23,852
|
|
|
312
|
|
|
(6
|
)
|
|
24,158
|
|
Other asset-backed securities
|
23,752
|
|
|
396
|
|
|
(4
|
)
|
|
24,144
|
|
Total
|
$
|
948,319
|
|
|
$
|
14,281
|
|
|
$
|
(1,920
|
)
|
|
$
|
960,680
|
|
|
|
(1)
|
Issued and guaranteed by U.S. Government-sponsored agencies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
(In thousands)
|
U.S. Treasury and U.S. Government-sponsored agencies
|
$
|
101,595
|
|
|
$
|
155
|
|
|
$
|
(147
|
)
|
|
$
|
101,603
|
|
Municipal securities
|
158,461
|
|
|
1,209
|
|
|
(806
|
)
|
|
158,864
|
|
Mortgage-backed securities and collateralized mortgage obligations
(1)
:
|
|
|
|
|
|
|
|
Residential
|
337,295
|
|
|
426
|
|
|
(6,119
|
)
|
|
331,602
|
|
Commercial
|
338,250
|
|
|
1,035
|
|
|
(5,524
|
)
|
|
333,761
|
|
Corporate obligations
|
25,662
|
|
|
36
|
|
|
(135
|
)
|
|
25,563
|
|
Other asset-backed securities
|
24,278
|
|
|
424
|
|
|
—
|
|
|
24,702
|
|
Total
|
$
|
985,541
|
|
|
$
|
3,285
|
|
|
$
|
(12,731
|
)
|
|
$
|
976,095
|
|
|
|
(1)
|
Issued and guaranteed by U.S. Government-sponsored agencies.
|
There were
no
securities classified as trading or held to maturity at
June 30, 2019
or
December 31, 2018
.
The amortized cost and fair value of investment securities available for sale at
June 30, 2019
, by contractual maturity, are set forth below. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
Fair Value
|
|
(In thousands)
|
Due in one year or less
|
$
|
33,196
|
|
|
$
|
33,253
|
|
Due after one year through five years
|
182,529
|
|
|
184,643
|
|
Due after five years through ten years
|
283,379
|
|
|
288,386
|
|
Due after ten years
|
449,215
|
|
|
454,398
|
|
Total
|
$
|
948,319
|
|
|
$
|
960,680
|
|
(b) Unrealized Losses and Other-Than-Temporary Impairments
The following tables show the gross unrealized losses and fair value of the Company's investment securities available for sale that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that the individual securities have been in continuous unrealized loss positions as of
June 30, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
Less than 12 Months
|
|
12 Months or Longer
|
|
Total
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
(In thousands)
|
Municipal securities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,029
|
|
|
$
|
(7
|
)
|
|
$
|
4,029
|
|
|
$
|
(7
|
)
|
Mortgage-backed securities and collateralized mortgage obligations
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
22,579
|
|
|
(148
|
)
|
|
106,539
|
|
|
(1,015
|
)
|
|
129,118
|
|
|
(1,163
|
)
|
Commercial
|
23,481
|
|
|
(175
|
)
|
|
61,766
|
|
|
(565
|
)
|
|
85,247
|
|
|
(740
|
)
|
Corporate obligations
|
—
|
|
|
—
|
|
|
1,994
|
|
|
(6
|
)
|
|
1,994
|
|
|
(6
|
)
|
Other asset-backed securities
|
—
|
|
|
—
|
|
|
1,786
|
|
|
(4
|
)
|
|
1,786
|
|
|
(4
|
)
|
Total
|
$
|
46,060
|
|
|
$
|
(323
|
)
|
|
$
|
176,114
|
|
|
$
|
(1,597
|
)
|
|
$
|
222,174
|
|
|
$
|
(1,920
|
)
|
|
|
(1)
|
Issued and guaranteed by U.S. Government-sponsored agencies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Less than 12 Months
|
|
12 Months or Longer
|
|
Total
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
(In thousands)
|
U.S. Treasury and U.S. Government-sponsored agencies
|
$
|
46,992
|
|
|
$
|
(58
|
)
|
|
$
|
7,350
|
|
|
$
|
(89
|
)
|
|
$
|
54,342
|
|
|
$
|
(147
|
)
|
Municipal securities
|
31,157
|
|
|
(159
|
)
|
|
38,792
|
|
|
(647
|
)
|
|
69,949
|
|
|
(806
|
)
|
Mortgage-backed securities and collateralized mortgage obligations
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
66,620
|
|
|
(247
|
)
|
|
193,726
|
|
|
(5,872
|
)
|
|
260,346
|
|
|
(6,119
|
)
|
Commercial
|
43,531
|
|
|
(272
|
)
|
|
190,585
|
|
|
(5,252
|
)
|
|
234,116
|
|
|
(5,524
|
)
|
Corporate obligations
|
13,736
|
|
|
(87
|
)
|
|
1,951
|
|
|
(48
|
)
|
|
15,687
|
|
|
(135
|
)
|
Total
|
$
|
202,036
|
|
|
$
|
(823
|
)
|
|
$
|
432,404
|
|
|
$
|
(11,908
|
)
|
|
$
|
634,440
|
|
|
$
|
(12,731
|
)
|
|
|
(1)
|
Issued and guaranteed by U.S. Government-sponsored agencies.
|
The Company has evaluated these investment securities available for sale as of
June 30, 2019
and
December 31, 2018
and has determined that the decline in their value is not other-than-temporary. The unrealized losses are primarily due to increases in market interest rates since purchase of the securities. The fair value of these securities is expected to recover as the securities approach their maturity date. None of the underlying issuers of the municipal securities and corporate obligations had credit ratings that were below investment grade levels at
June 30, 2019
or
December 31, 2018
. The Company has the ability and intent to hold the investments until recovery of the securities' amortized cost, which may be the maturity date of the securities.
For the
three and six months ended June 30, 2019
and
2018
, there were
no
other-than-temporary charges recorded to net income.
(c) Realized Gains and Losses
The following table presents the gross realized gains and losses on the sale of securities available for sale for the
three and six months ended June 30, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(In thousands)
|
Gross realized gains
|
$
|
187
|
|
|
$
|
18
|
|
|
$
|
276
|
|
|
$
|
122
|
|
Gross realized losses
|
(154
|
)
|
|
—
|
|
|
(228
|
)
|
|
(69
|
)
|
Net realized gains
|
$
|
33
|
|
|
$
|
18
|
|
|
$
|
48
|
|
|
$
|
53
|
|
(d) Pledged Securities
The following table summarizes the amortized cost and fair value of investment securities available for sale that are pledged as collateral for the following obligations at
June 30, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
|
(In thousands)
|
Washington and Oregon state public deposits
|
$
|
195,546
|
|
|
$
|
197,856
|
|
|
$
|
199,026
|
|
|
$
|
196,786
|
|
Securities sold under agreement to repurchase
|
36,335
|
|
|
36,612
|
|
|
48,173
|
|
|
47,407
|
|
Other securities pledged
|
15,175
|
|
|
15,490
|
|
|
20,778
|
|
|
20,482
|
|
Total
|
$
|
247,056
|
|
|
$
|
249,958
|
|
|
$
|
267,977
|
|
|
$
|
264,675
|
|
(a) Loan Origination/Risk Management
The Company originates loans in the ordinary course of business and has also acquired loans through mergers and acquisitions. Disclosures related to the Company's recorded investment in loans receivable generally exclude accrued interest receivable and net deferred fees or costs as they were deemed insignificant.
Loans acquired in a business combination are further classified as “purchased” loans. Loans purchased with evidence of credit deterioration since origination for which it is probable that not all contractually required payments will be collected are accounted for under FASB ASC 310-30, Receivables
—Loans and Debt Securities Acquired with Deteriorated Credit Quality
. These loans are identified as "PCI" loans. Loans purchased that are not accounted for under FASB ASC 310-30 are accounted for under FASB ASC 310-20,
Receivables—Nonrefundable Fees and Other Costs,
and are referred to as "non-PCI" loans. There were no PCI loans acquired in the Premier and Puget Mergers.
The Company categorizes loans in one of the
four
segments of the total loan portfolio: commercial business, one-to-four family residential, real estate construction and land development and consumer. Within these segments are classes of loans for which management monitors and assesses credit risk in the loan portfolios.
Loans receivable at
June 30, 2019
and
December 31, 2018
consisted of the following portfolio segments and classes:
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
(In thousands)
|
Commercial business:
|
|
|
|
Commercial and industrial
|
$
|
845,046
|
|
|
$
|
853,606
|
|
Owner-occupied commercial real estate
|
772,499
|
|
|
779,814
|
|
Non-owner occupied commercial real estate
|
1,333,047
|
|
|
1,304,463
|
|
Total commercial business
|
2,950,592
|
|
|
2,937,883
|
|
One-to-four family residential
|
117,425
|
|
|
101,763
|
|
Real estate construction and land development:
|
|
|
|
One-to-four family residential
|
111,319
|
|
|
102,730
|
|
Five or more family residential and commercial properties
|
143,341
|
|
|
112,730
|
|
Total real estate construction and land development
|
254,660
|
|
|
215,460
|
|
Consumer
|
392,926
|
|
|
395,545
|
|
Gross loans receivable
|
3,715,603
|
|
|
3,650,651
|
|
Net deferred loan costs
|
2,680
|
|
|
3,509
|
|
Loans receivable, net
|
3,718,283
|
|
|
3,654,160
|
|
Allowance for loan losses
|
(36,363
|
)
|
|
(35,042
|
)
|
Total loans receivable, net
|
$
|
3,681,920
|
|
|
$
|
3,619,118
|
|
(b) Concentrations of Credit
As of
June 30, 2019
, and
December 31, 2018
, there were
no
concentrations of loans related to any single industry in excess of
10%
of the Company’s total loans.
(c) Credit Quality Indicators
As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the risk grade of the loans, (ii) the level of classified loans, (iii) net charge-offs, (iv) nonperforming loans and (v) the general economic conditions of the United States of America, and specifically the states of Washington and Oregon. The Company utilizes a risk grading matrix to assign a risk grade to each loan on a scale of 1 to 10. Risk grades are aggregated to create the risk categories of "Pass" for grades 1 to 6, OAEM for grade 7, "Substandard" for grade 8, "Doubtful" for grade 9 and "Loss" for grade 10.
The following tables present the balance of loans receivable by credit quality indicator as of
June 30, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
Pass
|
|
OAEM
|
|
Substandard
|
|
Doubtful/Loss
|
|
Total
|
|
(In thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
761,961
|
|
|
$
|
28,344
|
|
|
$
|
54,741
|
|
|
$
|
—
|
|
|
$
|
845,046
|
|
Owner-occupied commercial real estate
|
731,749
|
|
|
25,870
|
|
|
14,880
|
|
|
—
|
|
|
772,499
|
|
Non-owner occupied commercial real estate
|
1,309,875
|
|
|
9,936
|
|
|
13,236
|
|
|
—
|
|
|
1,333,047
|
|
Total commercial business
|
2,803,585
|
|
|
64,150
|
|
|
82,857
|
|
|
—
|
|
|
2,950,592
|
|
One-to-four family residential
|
115,707
|
|
|
—
|
|
|
1,718
|
|
|
—
|
|
|
117,425
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
110,526
|
|
|
—
|
|
|
793
|
|
|
—
|
|
|
111,319
|
|
Five or more family residential and commercial properties
|
142,824
|
|
|
517
|
|
|
—
|
|
|
—
|
|
|
143,341
|
|
Total real estate construction and land development
|
253,350
|
|
|
517
|
|
|
793
|
|
|
—
|
|
|
254,660
|
|
Consumer
|
388,503
|
|
|
—
|
|
|
3,899
|
|
|
524
|
|
|
392,926
|
|
Gross loans receivable
|
$
|
3,561,145
|
|
|
$
|
64,667
|
|
|
$
|
89,267
|
|
|
$
|
524
|
|
|
$
|
3,715,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Pass
|
|
OAEM
|
|
Substandard
|
|
Doubtful/Loss
|
|
Total
|
|
(In thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
788,395
|
|
|
$
|
16,168
|
|
|
$
|
49,043
|
|
|
$
|
—
|
|
|
$
|
853,606
|
|
Owner-occupied commercial real estate
|
741,227
|
|
|
27,724
|
|
|
10,863
|
|
|
—
|
|
|
779,814
|
|
Non-owner occupied commercial real estate
|
1,283,077
|
|
|
9,438
|
|
|
11,948
|
|
|
—
|
|
|
1,304,463
|
|
Total commercial business
|
2,812,699
|
|
|
53,330
|
|
|
71,854
|
|
|
—
|
|
|
2,937,883
|
|
One-to-four family residential
|
100,401
|
|
|
—
|
|
|
1,362
|
|
|
—
|
|
|
101,763
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
101,519
|
|
|
258
|
|
|
953
|
|
|
—
|
|
|
102,730
|
|
Five or more family residential and commercial properties
|
112,678
|
|
|
52
|
|
|
—
|
|
|
—
|
|
|
112,730
|
|
Total real estate construction and land development
|
214,197
|
|
|
310
|
|
|
953
|
|
|
—
|
|
|
215,460
|
|
Consumer
|
390,808
|
|
|
—
|
|
|
4,213
|
|
|
524
|
|
|
395,545
|
|
Gross loans receivable
|
$
|
3,518,105
|
|
|
$
|
53,640
|
|
|
$
|
78,382
|
|
|
$
|
524
|
|
|
$
|
3,650,651
|
|
Potential problem loans are loans classified as OAEM or worse that are currently accruing interest and are not considered impaired, but which management is closely monitoring because the financial information of the borrower causes concern as to their ability to meet their loan repayment terms. Potential problem loans may include PCI loans as these loans continue to accrete loan discounts established at acquisition based on the guidance of FASB ASC 310-30. Potential problem loans as of
June 30, 2019
and
December 31, 2018
were
$114.1 million
and
$101.3 million
, respectively.
(d) Nonaccrual Loans
Nonaccrual loans, segregated by segments and classes of loans, were as follows as of
June 30, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
(In thousands)
|
Commercial business:
|
|
|
|
Commercial and industrial
|
$
|
11,133
|
|
|
$
|
6,639
|
|
Owner-occupied commercial real estate
|
4,725
|
|
|
4,212
|
|
Non-owner occupied commercial real estate
|
2,429
|
|
|
1,713
|
|
Total commercial business
|
18,287
|
|
|
12,564
|
|
One-to-four family residential
|
19
|
|
|
71
|
|
Real estate construction and land development:
|
|
|
|
One-to-four family residential
|
793
|
|
|
899
|
|
Total real estate construction and land development
|
793
|
|
|
899
|
|
Consumer
|
194
|
|
|
169
|
|
Nonaccrual loans
|
$
|
19,293
|
|
|
$
|
13,703
|
|
PCI loans are not included in the nonaccrual loan table above because these loans are accounted for under FASB ASC 310-30, which provides that accretable yield is calculated based on a loan's expected cash flow even if the loan is not performing under its contractual terms.
(e) Past due loans
The Company performs an aging analysis of past due loans using policies consistent with regulatory reporting requirements with categories of 30-89 days past due and 90 or more days past due. PCI loans are not included in the past due loans table below other than as a reconciling item.
The balances of past due loans, segregated by segments and classes of loans, as of
June 30, 2019
and
December 31, 2018
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
30-89 Days
|
|
90 Days or
Greater
|
|
Total Past
Due
|
|
Current
|
|
Total
|
|
(In thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
1,991
|
|
|
$
|
1,552
|
|
|
$
|
3,543
|
|
|
$
|
838,666
|
|
|
$
|
842,209
|
|
Owner-occupied commercial real estate
|
646
|
|
|
1,073
|
|
|
1,719
|
|
|
763,661
|
|
|
765,380
|
|
Non-owner occupied commercial real estate
|
286
|
|
|
1,843
|
|
|
2,129
|
|
|
1,324,516
|
|
|
1,326,645
|
|
Total commercial business
|
2,923
|
|
|
4,468
|
|
|
7,391
|
|
|
2,926,843
|
|
|
2,934,234
|
|
One-to-four family residential
|
475
|
|
|
—
|
|
|
475
|
|
|
113,733
|
|
|
114,208
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
—
|
|
|
—
|
|
|
—
|
|
|
110,993
|
|
|
110,993
|
|
Five or more family residential and commercial properties
|
258
|
|
|
—
|
|
|
258
|
|
|
142,929
|
|
|
143,187
|
|
Total real estate construction and land development
|
258
|
|
|
—
|
|
|
258
|
|
|
253,922
|
|
|
254,180
|
|
Consumer
|
1,563
|
|
|
—
|
|
|
1,563
|
|
|
389,066
|
|
|
390,629
|
|
Past due gross loans receivable, excluding PCI loans
|
5,219
|
|
|
4,468
|
|
|
9,687
|
|
|
3,683,564
|
|
|
3,693,251
|
|
PCI loans
|
647
|
|
|
18
|
|
|
665
|
|
|
21,687
|
|
|
22,352
|
|
Gross loans receivable
|
$
|
5,866
|
|
|
$
|
4,486
|
|
|
$
|
10,352
|
|
|
$
|
3,705,251
|
|
|
$
|
3,715,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
30-89 Days
|
|
90 Days or
Greater
|
|
Total Past
Due
|
|
Current
|
|
Total
|
|
(In thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
2,711
|
|
|
$
|
2,281
|
|
|
$
|
4,992
|
|
|
$
|
845,181
|
|
|
$
|
850,173
|
|
Owner-occupied commercial real estate
|
513
|
|
|
408
|
|
|
921
|
|
|
771,677
|
|
|
772,598
|
|
Non-owner occupied commercial real estate
|
3,412
|
|
|
1,103
|
|
|
4,515
|
|
|
1,292,888
|
|
|
1,297,403
|
|
Total commercial business
|
6,636
|
|
|
3,792
|
|
|
10,428
|
|
|
2,909,746
|
|
|
2,920,174
|
|
One-to-four family residential
|
227
|
|
|
—
|
|
|
227
|
|
|
98,221
|
|
|
98,448
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
665
|
|
|
234
|
|
|
899
|
|
|
101,451
|
|
|
102,350
|
|
Five or more family residential and commercial properties
|
—
|
|
|
—
|
|
|
—
|
|
|
112,688
|
|
|
112,688
|
|
Total real estate construction and land development
|
665
|
|
|
234
|
|
|
899
|
|
|
214,139
|
|
|
215,038
|
|
Consumer
|
2,559
|
|
|
—
|
|
|
2,559
|
|
|
389,525
|
|
|
392,084
|
|
Past due gross loans receivable, excluding PCI loans
|
10,087
|
|
|
4,026
|
|
|
14,113
|
|
|
3,611,631
|
|
|
3,625,744
|
|
PCI loans
|
2,271
|
|
|
550
|
|
|
2,821
|
|
|
22,086
|
|
|
24,907
|
|
Gross loans receivable
|
$
|
12,358
|
|
|
$
|
4,576
|
|
|
$
|
16,934
|
|
|
$
|
3,633,717
|
|
|
$
|
3,650,651
|
|
There were
no
loans 90 days or more past due that were still accruing interest as of
June 30, 2019
or
December 31, 2018
, excluding PCI loans.
(f) Impaired loans
Impaired loans include nonaccrual loans and performing TDR loans. The balances of impaired loans as of
June 30, 2019
and
December 31, 2018
are set forth in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
Recorded
Investment With
No Specific
Valuation
Allowance
|
|
Recorded
Investment With
Specific
Valuation
Allowance
|
|
Total
Recorded
Investment
|
|
Unpaid
Contractual
Principal
Balance
|
|
Related
Specific
Valuation
Allowance
|
|
(In thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
4,815
|
|
|
$
|
22,793
|
|
|
$
|
27,608
|
|
|
$
|
28,909
|
|
|
$
|
3,211
|
|
Owner-occupied commercial real estate
|
817
|
|
|
5,484
|
|
|
6,301
|
|
|
6,752
|
|
|
1,294
|
|
Non-owner occupied commercial real estate
|
5,132
|
|
|
4,543
|
|
|
9,675
|
|
|
9,753
|
|
|
629
|
|
Total commercial business
|
10,764
|
|
|
32,820
|
|
|
43,584
|
|
|
45,414
|
|
|
5,134
|
|
One-to-four family residential
|
—
|
|
|
224
|
|
|
224
|
|
|
231
|
|
|
57
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
560
|
|
|
233
|
|
|
793
|
|
|
878
|
|
|
28
|
|
Total real estate construction and land development
|
560
|
|
|
233
|
|
|
793
|
|
|
878
|
|
|
28
|
|
Consumer
|
—
|
|
|
617
|
|
|
617
|
|
|
628
|
|
|
154
|
|
Total
|
$
|
11,324
|
|
|
$
|
33,894
|
|
|
$
|
45,218
|
|
|
$
|
47,151
|
|
|
$
|
5,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Recorded
Investment With
No Specific
Valuation
Allowance
|
|
Recorded
Investment With
Specific
Valuation
Allowance
|
|
Total
Recorded
Investment
|
|
Unpaid
Contractual
Principal
Balance
|
|
Related
Specific
Valuation
Allowance
|
|
(In thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
2,523
|
|
|
$
|
20,119
|
|
|
$
|
22,642
|
|
|
$
|
24,176
|
|
|
$
|
2,607
|
|
Owner-occupied commercial real estate
|
816
|
|
|
5,000
|
|
|
5,816
|
|
|
6,150
|
|
|
1,142
|
|
Non-owner occupied commercial real estate
|
3,352
|
|
|
2,924
|
|
|
6,276
|
|
|
6,414
|
|
|
206
|
|
Total commercial business
|
6,691
|
|
|
28,043
|
|
|
34,734
|
|
|
36,740
|
|
|
3,955
|
|
One-to-four family residential
|
—
|
|
|
279
|
|
|
279
|
|
|
293
|
|
|
76
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
899
|
|
|
—
|
|
|
899
|
|
|
1,662
|
|
|
—
|
|
Total real estate construction and land development
|
899
|
|
|
—
|
|
|
899
|
|
|
1,662
|
|
|
—
|
|
Consumer
|
—
|
|
|
527
|
|
|
527
|
|
|
538
|
|
|
139
|
|
Total
|
$
|
7,590
|
|
|
$
|
28,849
|
|
|
$
|
36,439
|
|
|
$
|
39,233
|
|
|
$
|
4,170
|
|
The average recorded investment of impaired loans for the
three and six months ended June 30, 2019 and 2018
are set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(In thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
25,219
|
|
|
$
|
17,299
|
|
|
$
|
24,426
|
|
|
$
|
15,534
|
|
Owner-occupied commercial real estate
|
6,178
|
|
|
12,643
|
|
|
6,057
|
|
|
12,622
|
|
Non-owner occupied commercial real estate
|
8,221
|
|
|
10,426
|
|
|
7,506
|
|
|
10,366
|
|
Total commercial business
|
39,618
|
|
|
40,368
|
|
|
37,989
|
|
|
38,522
|
|
One-to-four family residential
|
249
|
|
|
293
|
|
|
259
|
|
|
295
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
One-to-four family residential
|
858
|
|
|
1,116
|
|
|
872
|
|
|
1,159
|
|
Five or more family residential and commercial properties
|
—
|
|
|
—
|
|
|
—
|
|
|
215
|
|
Total real estate construction and land development
|
858
|
|
|
1,116
|
|
|
872
|
|
|
1,374
|
|
Consumer
|
607
|
|
|
381
|
|
|
581
|
|
|
401
|
|
Total
|
$
|
41,332
|
|
|
$
|
42,158
|
|
|
$
|
39,701
|
|
|
$
|
40,592
|
|
For the
three and six months ended June 30, 2019 and 2018
,
no
interest income was recognized subsequent to a loan’s classification as nonaccrual. For the
three and six months ended June 30, 2019
, the Bank recorded
$397,000
and
$698,000
, respectively, of interest income related to performing TDR loans. For the
three and six months ended June 30, 2018
, the Bank recorded
$360,000
and
$686,000
, respectively, of interest income related to performing TDR loans.
(g) Troubled Debt Restructured Loans
The recorded investment balance and related allowance for loan losses of performing and nonaccrual TDR loans as of
June 30, 2019
and
December 31, 2018
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
Performing
TDRs
|
|
Nonaccrual
TDRs
|
|
Performing
TDRs
|
|
Nonaccrual
TDRs
|
|
(In thousands)
|
TDR loans
|
$
|
25,925
|
|
|
$
|
8,090
|
|
|
$
|
22,736
|
|
|
$
|
6,943
|
|
Allowance for loan losses on TDR loans
|
2,887
|
|
|
981
|
|
|
2,257
|
|
|
658
|
|
The unfunded commitment to borrowers related to TDR loans was
$1.7 million
and
$943,000
at
June 30, 2019
and
December 31, 2018
, respectively.
Loans that were modified as TDR loans during the
three and six months ended June 30, 2019 and 2018
are set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2019
|
|
2018
|
|
Number of
Contracts
(1)
|
|
Recorded Investment
(1)(2)
|
|
Number of
Contracts
(1)
|
|
Recorded Investment
(1)(2)
|
|
(Dollars in thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
Commercial and industrial
|
14
|
|
|
$
|
8,628
|
|
|
9
|
|
|
$
|
2,981
|
|
Owner-occupied commercial real estate
|
1
|
|
|
710
|
|
|
1
|
|
|
570
|
|
Non-owner occupied commercial real estate
|
2
|
|
|
3,554
|
|
|
—
|
|
|
—
|
|
Total commercial business
|
17
|
|
|
12,892
|
|
|
10
|
|
|
3,551
|
|
Consumer
|
3
|
|
|
53
|
|
|
3
|
|
|
33
|
|
Total loans modified as TDR loans
|
20
|
|
|
$
|
12,945
|
|
|
13
|
|
|
$
|
3,584
|
|
|
|
(1)
|
Number of contracts and outstanding principal balance represent loans which have balances as of period end as certain loans may have been paid-down or charged-off during the
three months ended June 30, 2019 and 2018
.
|
|
|
(2)
|
Includes subsequent payments after modifications and reflects the balance as of period end. As the Bank did not forgive any principal or interest balance as part of the loan modification, the Bank’s recorded investment in each loan at the date of modification (pre-modification) did not change as a result of the modification (post-modification), except when the modification was the initial advance on a one-to-four family residential real estate construction and land development loan under a master guidance line. There were no advances on these types of loans during the
three months ended June 30, 2019 and 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
Number of
Contracts
(1)
|
|
Recorded Investment
(1)(2)
|
|
Number of
Contracts
(1)
|
|
Recorded Investment
(1)(2)
|
|
(Dollars in thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
Commercial and industrial
|
20
|
|
|
$
|
18,066
|
|
|
17
|
|
|
$
|
6,193
|
|
Owner-occupied commercial real estate
|
3
|
|
|
1,628
|
|
|
1
|
|
|
570
|
|
Non-owner occupied commercial real estate
|
3
|
|
|
5,643
|
|
|
2
|
|
|
2,380
|
|
Total commercial business
|
26
|
|
|
25,337
|
|
|
20
|
|
|
9,143
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
One-to-four family residential
|
1
|
|
|
560
|
|
|
—
|
|
|
—
|
|
Total real estate construction and land development
|
1
|
|
|
560
|
|
|
—
|
|
|
—
|
|
Consumer
|
8
|
|
|
162
|
|
|
6
|
|
|
107
|
|
Total TDR loans
|
35
|
|
|
$
|
26,059
|
|
|
26
|
|
|
$
|
9,250
|
|
|
|
(1)
|
Number of contracts and outstanding principal balance represent loans which have balances as of period end as certain loans may have been paid-down or charged-off during the
six months ended June 30, 2019 and 2018
.
|
|
|
(2)
|
Includes subsequent payments after modifications and reflects the balance as of period end. As the Bank did not forgive any principal or interest balance as part of the loan modification, the Bank’s recorded investment in each loan at the date of modification (pre-modification) did not change as a result of the modification (post-modification), except when the modification was the initial advance on a one-to-four family residential real estate construction and land development loan under a master guidance line. There were no advances on these types of loans during the
six months ended June 30, 2019 and 2018
.
|
The tables above includes
12
and
20
loans, respectively, for the
three and six months ended June 30, 2019
and
10
and
23
loans, respectively, for the
three and six months ended June 30, 2018
that were previously reported as TDR loans. The Bank typically grants shorter extension periods to continually monitor these TDR loans despite the fact that the extended date might not be the date the Bank expects sufficient cash flow from these borrowers. The Bank does not consider these modifications a subsequent default of a TDR as new loan terms, specifically new maturity
dates, were granted. Of the remaining first-reported TDR loans, the concessions granted largely consisted of maturity extensions, interest rate modifications or a combination of both. The potential losses related to TDR loans are considered in the period the loan was first reported as a TDR loan and are adjusted, as necessary, in the current period based on more recent information. The related specific valuation allowance at
June 30, 2019
for loans that were modified as TDR loans during the
six months ended June 30, 2019
was
$3.1 million
.
Loans that were modified during the previous twelve months that subsequently defaulted during the
three and six months ended June 30, 2019 and 2018
are set forth in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2019
|
|
2018
|
|
Number of
Contracts
|
|
Recorded Investments
|
|
Number of
Contracts
|
|
Recorded Investments
|
|
(Dollars in thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
Commercial and industrial
|
6
|
|
|
$
|
1,278
|
|
|
4
|
|
|
$
|
2,725
|
|
Owner-occupied properties
|
1
|
|
|
399
|
|
|
—
|
|
|
—
|
|
Total commercial business
|
7
|
|
|
1,677
|
|
|
4
|
|
|
2,725
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
One-to-four family residential
|
1
|
|
|
560
|
|
|
—
|
|
|
—
|
|
Total real estate construction and land development
|
1
|
|
|
560
|
|
|
—
|
|
|
—
|
|
Total
|
8
|
|
|
$
|
2,237
|
|
|
4
|
|
|
$
|
2,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
Number of
Contracts
|
|
Recorded Investments
|
|
Number of
Contracts
|
|
Recorded Investments
|
|
(Dollars in thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
Commercial and industrial
|
6
|
|
|
$
|
1,278
|
|
|
5
|
|
|
$
|
3,006
|
|
Owner-occupied commercial real estate
|
2
|
|
|
1,109
|
|
|
—
|
|
|
—
|
|
Non-owner occupied commercial real estate
|
1
|
|
|
586
|
|
|
1
|
|
|
73
|
|
Total commercial business
|
9
|
|
|
2,973
|
|
|
6
|
|
|
3,079
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
One-to-four family residential
|
1
|
|
|
560
|
|
|
2
|
|
|
775
|
|
Total real estate construction and land development
|
1
|
|
|
560
|
|
|
2
|
|
|
775
|
|
Total
|
10
|
|
|
$
|
3,533
|
|
|
8
|
|
|
$
|
3,854
|
|
During the
three and six months ended June 30, 2019
,
eight
loans and
ten
loans, respectively, defaulted because each was past its modified maturity date, and the borrower has not subsequently repaid the credits.
One
loan defaulted during both the
three and six months ended June 30, 2019
. The Bank has chosen not to extend further the maturity date on these loans. The Bank had a specific valuation allowance of
$304,000
at
June 30, 2019
related to these TDR loans which defaulted during the
six months ended June 30, 2019
.
During the
three and six months ended June 30, 2018
,
two
and
six
loans, respectively, defaulted because each was past its modified maturity date, and the borrower has not subsequently repaid the credits. The Bank had chosen not to extend the maturities on these loans. In addition, during each of the
three and six months ended June 30, 2018
,
two
loans defaulted because the borrowers were more than 90 days delinquent on their scheduled loan payments. The Bank had no specific valuation allowance at
June 30, 2018
related to TDR loans which defaulted during the
six months ended June 30, 2018
.
(h) Purchased Credit Impaired Loans
The following table reflects the outstanding principal balance and recorded investment of the PCI loans at
June 30, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
Outstanding Principal
|
|
Recorded Investment
|
|
Outstanding Principal
|
|
Recorded Investment
|
|
(In thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
5,232
|
|
|
$
|
2,837
|
|
|
$
|
6,319
|
|
|
$
|
3,433
|
|
Owner-occupied commercial real estate
|
7,260
|
|
|
7,120
|
|
|
7,830
|
|
|
7,215
|
|
Non-owner occupied commercial real estate
|
8,019
|
|
|
6,402
|
|
|
8,685
|
|
|
7,059
|
|
Total commercial business
|
20,511
|
|
|
16,359
|
|
|
22,834
|
|
|
17,707
|
|
One-to-four family residential
|
3,056
|
|
|
3,217
|
|
|
3,169
|
|
|
3,315
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
One-to-four family residential
|
—
|
|
|
326
|
|
|
67
|
|
|
380
|
|
Five or more family residential and commercial properties
|
182
|
|
|
154
|
|
|
188
|
|
|
43
|
|
Total real estate construction and land development
|
182
|
|
|
480
|
|
|
255
|
|
|
423
|
|
Consumer
|
1,012
|
|
|
2,297
|
|
|
2,203
|
|
|
3,462
|
|
Gross PCI loans
|
$
|
24,761
|
|
|
$
|
22,353
|
|
|
$
|
28,461
|
|
|
$
|
24,907
|
|
On the acquisition dates, the amount by which the undiscounted expected cash flows of the PCI loans exceeded the estimated fair value of the loan is the “accretable yield.” The accretable yield is then measured at each financial reporting date and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the PCI loans.
The following table summarizes the accretable yield on the PCI loans for the
three and six months ended June 30, 2019 and 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(In thousands)
|
Balance at the beginning of the period
|
$
|
8,460
|
|
|
$
|
11,269
|
|
|
$
|
9,493
|
|
|
$
|
11,224
|
|
Accretion
|
(513
|
)
|
|
(587
|
)
|
|
(1,094
|
)
|
|
(1,368
|
)
|
Disposal and other
|
(198
|
)
|
|
(273
|
)
|
|
(650
|
)
|
|
(1,971
|
)
|
Reclassification from nonaccretable difference
|
823
|
|
|
(349
|
)
|
|
823
|
|
|
2,175
|
|
Balance at the end of the period
|
$
|
8,572
|
|
|
$
|
10,060
|
|
|
$
|
8,572
|
|
|
$
|
10,060
|
|
|
|
(5)
|
Allowance for Loan Losses
|
The allowance for loan losses is maintained at a level deemed appropriate by management to provide for probable incurred credit losses in the loan portfolio. The following tables detail the activity in the allowance for loan losses disaggregated by segment and class for the
three and six months ended June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Period
|
|
Charge-offs
|
|
Recoveries
|
|
Provision for Loan Losses
|
|
Balance at End of Period
|
|
(In thousands)
|
Three Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
11,755
|
|
|
$
|
(774
|
)
|
|
$
|
62
|
|
|
$
|
950
|
|
|
$
|
11,993
|
|
Owner-occupied commercial real estate
|
5,256
|
|
|
—
|
|
|
—
|
|
|
(190
|
)
|
|
5,066
|
|
Non-owner occupied commercial real estate
|
7,825
|
|
|
—
|
|
|
—
|
|
|
239
|
|
|
8,064
|
|
Total commercial business
|
24,836
|
|
|
(774
|
)
|
|
62
|
|
|
999
|
|
|
25,123
|
|
One-to-four family residential
|
1,247
|
|
|
(15
|
)
|
|
—
|
|
|
113
|
|
|
1,345
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
1,422
|
|
|
—
|
|
|
7
|
|
|
42
|
|
|
1,471
|
|
Five or more family residential and commercial properties
|
995
|
|
|
—
|
|
|
—
|
|
|
65
|
|
|
1,060
|
|
Total real estate construction and land development
|
2,417
|
|
|
—
|
|
|
7
|
|
|
107
|
|
|
2,531
|
|
Consumer
|
6,480
|
|
|
(566
|
)
|
|
130
|
|
|
496
|
|
|
6,540
|
|
Unallocated
|
1,172
|
|
|
—
|
|
|
—
|
|
|
(348
|
)
|
|
824
|
|
Total
|
$
|
36,152
|
|
|
$
|
(1,355
|
)
|
|
$
|
199
|
|
|
$
|
1,367
|
|
|
$
|
36,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Period
|
|
Charge-offs
|
|
Recoveries
|
|
Provision for Loan Losses
|
|
Balance at End of Period
|
|
(In thousands)
|
Six Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
11,343
|
|
|
$
|
(877
|
)
|
|
$
|
69
|
|
|
$
|
1,458
|
|
|
$
|
11,993
|
|
Owner-occupied commercial real estate
|
4,898
|
|
|
—
|
|
|
3
|
|
|
165
|
|
|
5,066
|
|
Non-owner occupied commercial real estate
|
7,470
|
|
|
—
|
|
|
149
|
|
|
445
|
|
|
8,064
|
|
Total commercial business
|
23,711
|
|
|
(877
|
)
|
|
221
|
|
|
2,068
|
|
|
25,123
|
|
One-to-four family residential
|
1,203
|
|
|
(30
|
)
|
|
—
|
|
|
172
|
|
|
1,345
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
1,240
|
|
|
—
|
|
|
625
|
|
|
(394
|
)
|
|
1,471
|
|
Five or more family residential and commercial properties
|
954
|
|
|
—
|
|
|
—
|
|
|
106
|
|
|
1,060
|
|
Total real estate construction and land development
|
2,194
|
|
|
—
|
|
|
625
|
|
|
(288
|
)
|
|
2,531
|
|
Consumer
|
6,581
|
|
|
(1,152
|
)
|
|
247
|
|
|
864
|
|
|
6,540
|
|
Unallocated
|
1,353
|
|
|
—
|
|
|
—
|
|
|
(529
|
)
|
|
824
|
|
Total
|
$
|
35,042
|
|
|
$
|
(2,059
|
)
|
|
$
|
1,093
|
|
|
$
|
2,287
|
|
|
$
|
36,363
|
|
The following table details the allowance for loan losses disaggregated on the basis of the Company's impairment method as of
June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Individually Evaluated for Impairment
|
|
Loans Collectively Evaluated for Impairment
|
|
PCI Loans
|
|
Total Allowance for Loan Losses
|
|
(In thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
3,211
|
|
|
$
|
8,094
|
|
|
$
|
688
|
|
|
$
|
11,993
|
|
Owner-occupied commercial real estate
|
1,294
|
|
|
3,180
|
|
|
592
|
|
|
5,066
|
|
Non-owner occupied commercial real estate
|
629
|
|
|
6,900
|
|
|
535
|
|
|
8,064
|
|
Total commercial business
|
5,134
|
|
|
18,174
|
|
|
1,815
|
|
|
25,123
|
|
One-to-four family residential
|
57
|
|
|
1,188
|
|
|
100
|
|
|
1,345
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
One-to-four family residential
|
28
|
|
|
1,259
|
|
|
184
|
|
|
1,471
|
|
Five or more family residential and commercial properties
|
—
|
|
|
982
|
|
|
78
|
|
|
1,060
|
|
Total real estate construction and land development
|
28
|
|
|
2,241
|
|
|
262
|
|
|
2,531
|
|
Consumer
|
154
|
|
|
5,988
|
|
|
398
|
|
|
6,540
|
|
Unallocated
|
—
|
|
|
824
|
|
|
—
|
|
|
824
|
|
Total
|
$
|
5,373
|
|
|
$
|
28,415
|
|
|
$
|
2,575
|
|
|
$
|
36,363
|
|
The following table details the recorded investment balance of the loan receivables disaggregated on the basis of the Company’s impairment method as of
June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Individually Evaluated for Impairment
|
|
Loans Collectively Evaluated for Impairment
|
|
PCI Loans
|
|
Total Gross Loans Receivable
|
|
(In thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
27,608
|
|
|
$
|
814,601
|
|
|
$
|
2,837
|
|
|
$
|
845,046
|
|
Owner-occupied commercial real estate
|
6,301
|
|
|
759,078
|
|
|
7,120
|
|
|
772,499
|
|
Non-owner occupied commercial real estate
|
9,675
|
|
|
1,316,970
|
|
|
6,402
|
|
|
1,333,047
|
|
Total commercial business
|
43,584
|
|
|
2,890,649
|
|
|
16,359
|
|
|
2,950,592
|
|
One-to-four family residential
|
224
|
|
|
113,984
|
|
|
3,217
|
|
|
117,425
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
One-to-four family residential
|
793
|
|
|
110,200
|
|
|
326
|
|
|
111,319
|
|
Five or more family residential and commercial properties
|
—
|
|
|
143,187
|
|
|
154
|
|
|
143,341
|
|
Total real estate construction and land development
|
793
|
|
|
253,387
|
|
|
480
|
|
|
254,660
|
|
Consumer
|
617
|
|
|
390,012
|
|
|
2,297
|
|
|
392,926
|
|
Total
|
$
|
45,218
|
|
|
$
|
3,648,032
|
|
|
$
|
22,353
|
|
|
$
|
3,715,603
|
|
The following tables detail activity in the allowance for loan losses disaggregated by segment and class for the
three and six months ended June 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Period
|
|
Charge-offs
|
|
Recoveries
|
|
Provision for Loan Losses
|
|
Balance at End of Period
|
|
(In thousands)
|
Three Months Ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
9,943
|
|
|
$
|
(541
|
)
|
|
$
|
65
|
|
|
$
|
721
|
|
|
$
|
10,188
|
|
Owner-occupied commercial real estate
|
5,040
|
|
|
(1
|
)
|
|
3
|
|
|
204
|
|
|
5,246
|
|
Non-owner occupied commercial real estate
|
7,589
|
|
|
—
|
|
|
—
|
|
|
137
|
|
|
7,726
|
|
Total commercial business
|
22,572
|
|
|
(542
|
)
|
|
68
|
|
|
1,062
|
|
|
23,160
|
|
One-to-four family residential
|
1,083
|
|
|
(15
|
)
|
|
—
|
|
|
53
|
|
|
1,121
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
941
|
|
|
—
|
|
|
2
|
|
|
73
|
|
|
1,016
|
|
Five or more family residential and commercial properties
|
1,115
|
|
|
—
|
|
|
—
|
|
|
(71
|
)
|
|
1,044
|
|
Total real estate construction and land development
|
2,056
|
|
|
—
|
|
|
2
|
|
|
2
|
|
|
2,060
|
|
Consumer
|
6,054
|
|
|
(694
|
)
|
|
142
|
|
|
803
|
|
|
6,305
|
|
Unallocated
|
1,496
|
|
|
—
|
|
|
—
|
|
|
(170
|
)
|
|
1,326
|
|
Total
|
$
|
33,261
|
|
|
$
|
(1,251
|
)
|
|
$
|
212
|
|
|
$
|
1,750
|
|
|
$
|
33,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Period
|
|
Charge-offs
|
|
Recoveries
|
|
Provision for Loan Losses
|
|
Balance at End of Period
|
|
(In thousands)
|
Six Months Ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
9,910
|
|
|
$
|
(622
|
)
|
|
$
|
564
|
|
|
$
|
336
|
|
|
$
|
10,188
|
|
Owner-occupied commercial real estate
|
3,992
|
|
|
(1
|
)
|
|
5
|
|
|
1,250
|
|
|
5,246
|
|
Non-owner occupied commercial real estate
|
8,097
|
|
|
—
|
|
|
—
|
|
|
(371
|
)
|
|
7,726
|
|
Total commercial business
|
21,999
|
|
|
(623
|
)
|
|
569
|
|
|
1,215
|
|
|
23,160
|
|
One-to-four family residential
|
1,056
|
|
|
(15
|
)
|
|
—
|
|
|
80
|
|
|
1,121
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
862
|
|
|
—
|
|
|
2
|
|
|
152
|
|
|
1,016
|
|
Five or more family residential and commercial properties
|
1,190
|
|
|
—
|
|
|
—
|
|
|
(146
|
)
|
|
1,044
|
|
Total real estate construction and land development
|
2,052
|
|
|
—
|
|
|
2
|
|
|
6
|
|
|
2,060
|
|
Consumer
|
6,081
|
|
|
(1,179
|
)
|
|
230
|
|
|
1,173
|
|
|
6,305
|
|
Unallocated
|
898
|
|
|
—
|
|
|
—
|
|
|
428
|
|
|
1,326
|
|
Total
|
$
|
32,086
|
|
|
$
|
(1,817
|
)
|
|
$
|
801
|
|
|
$
|
2,902
|
|
|
$
|
33,972
|
|
The following table details the allowance for loan losses disaggregated on the basis of the Company's impairment method as of
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Individually Evaluated for Impairment
|
|
Loans Collectively Evaluated for Impairment
|
|
PCI Loans
|
|
Total Allowance for Loan Losses
|
|
(In thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
2,607
|
|
|
$
|
7,913
|
|
|
$
|
823
|
|
|
$
|
11,343
|
|
Owner-occupied commercial real estate
|
1,142
|
|
|
3,063
|
|
|
693
|
|
|
4,898
|
|
Non-owner occupied commercial real estate
|
206
|
|
|
6,630
|
|
|
634
|
|
|
7,470
|
|
Total commercial business
|
3,955
|
|
|
17,606
|
|
|
2,150
|
|
|
23,711
|
|
One-to-four family residential
|
76
|
|
|
1,015
|
|
|
112
|
|
|
1,203
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
One-to-four family residential
|
—
|
|
|
1,040
|
|
|
200
|
|
|
1,240
|
|
Five or more family residential and commercial properties
|
—
|
|
|
875
|
|
|
79
|
|
|
954
|
|
Total real estate construction and land development
|
—
|
|
|
1,915
|
|
|
279
|
|
|
2,194
|
|
Consumer
|
139
|
|
|
5,965
|
|
|
477
|
|
|
6,581
|
|
Unallocated
|
—
|
|
|
1,353
|
|
|
—
|
|
|
1,353
|
|
Total
|
$
|
4,170
|
|
|
$
|
27,854
|
|
|
$
|
3,018
|
|
|
$
|
35,042
|
|
The following table details the recorded investment balance of the loan receivables disaggregated on the basis of the Company’s impairment method as of
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Individually Evaluated for Impairment
|
|
Loans Collectively Evaluated for Impairment
|
|
PCI Loans
|
|
Total Gross Loans Receivable
|
|
(In thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
22,642
|
|
|
$
|
827,531
|
|
|
$
|
3,433
|
|
|
$
|
853,606
|
|
Owner-occupied commercial real estate
|
5,816
|
|
|
766,783
|
|
|
7,215
|
|
|
779,814
|
|
Non-owner occupied commercial real estate
|
6,276
|
|
|
1,291,128
|
|
|
7,059
|
|
|
1,304,463
|
|
Total commercial business
|
34,734
|
|
|
2,885,442
|
|
|
17,707
|
|
|
2,937,883
|
|
One-to-four family residential
|
279
|
|
|
98,169
|
|
|
3,315
|
|
|
101,763
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
One-to-four family residential
|
899
|
|
|
101,451
|
|
|
380
|
|
|
102,730
|
|
Five or more family residential and commercial properties
|
—
|
|
|
112,687
|
|
|
43
|
|
|
112,730
|
|
Total real estate construction and land development
|
899
|
|
|
214,138
|
|
|
423
|
|
|
215,460
|
|
Consumer
|
527
|
|
|
391,556
|
|
|
3,462
|
|
|
395,545
|
|
Total
|
$
|
36,439
|
|
|
$
|
3,589,305
|
|
|
$
|
24,907
|
|
|
$
|
3,650,651
|
|
|
|
(6)
|
Other Real Estate Owned
|
Changes in other real estate owned during the
three and six months ended June 30, 2019
and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(In thousands)
|
Balance at the beginning of the period
|
$
|
1,904
|
|
|
$
|
—
|
|
|
$
|
1,983
|
|
|
$
|
—
|
|
Additions
|
—
|
|
|
434
|
|
|
—
|
|
|
434
|
|
Proceeds from dispositions
|
(350
|
)
|
|
—
|
|
|
(429
|
)
|
|
—
|
|
Loss on sales, net
|
(279
|
)
|
|
—
|
|
|
(279
|
)
|
|
—
|
|
Valuation adjustment
|
(51
|
)
|
|
—
|
|
|
(51
|
)
|
|
—
|
|
Balance at the end of the period
|
$
|
1,224
|
|
|
$
|
434
|
|
|
$
|
1,224
|
|
|
$
|
434
|
|
At
June 30, 2019
, the carrying amount of other real estate owned that was the result of foreclosure and obtaining physical possession of residential real estate properties was
$383,000
. At
June 30, 2019
, there were
no
consumer mortgage loans secured by residential real estate properties (included in the one-to-four family residential loans in Note (4) Loans Receivable) for which formal foreclosure proceedings were in process.
|
|
(7)
|
Goodwill and Other Intangible Assets
|
(a) Goodwill
The Company’s goodwill represents the excess of the purchase price over the fair value of net assets acquired in the Premier Merger on July 2, 2018; Puget Sound Merger on January 16, 2018; Washington Banking Company on May 1, 2014; Valley Community Bancshares on July 15, 2013; Western Washington Bancorp in 2006 and North Pacific Bank in 1998. The Company’s goodwill is assigned to the Bank and is evaluated for impairment at the Bank level (reporting unit).
The following table presents the change in goodwill for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(In thousands)
|
Balance at the beginning of the period
|
$
|
240,939
|
|
|
$
|
187,549
|
|
|
$
|
240,939
|
|
|
$
|
119,029
|
|
Additions as a result of acquisitions
(1)
|
—
|
|
|
—
|
|
|
—
|
|
|
68,520
|
|
Balance at the end of the period
|
$
|
240,939
|
|
|
$
|
187,549
|
|
|
$
|
240,939
|
|
|
$
|
187,549
|
|
(1)
See Note (2) Business Combinations
The Company performed its annual goodwill impairment test during the fourth quarter of 2018 and determined based on its Step 1 analysis that the fair value of the reporting unit exceeded the carrying value, such that the Company's goodwill was not considered impaired. Changes in the economic environment, operations of the reporting unit or other adverse events could result in future impairment charges which could have a material impact on the Company’s operating results. No events or circumstances since the annual impairment test were noted that would indicate it was more likely than not a goodwill impairment exists.
(b) Other Intangible Assets
Other intangible assets represent CDI acquired in business combinations. The useful life of the CDI was estimated to be
ten years
for the acquisitions of Premier Commercial Bancorp, Puget Sound Bancorp, Washington Banking Company, and Valley Community Bancshares, and was estimated to be
five years
for the acquisition of Northwest Commercial Bank.
The following table presents the change in other intangible assets for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(In thousands)
|
Balance at the beginning of the period
|
$
|
19,589
|
|
|
$
|
16,563
|
|
|
$
|
20,614
|
|
|
$
|
6,088
|
|
Additions as a result of acquisitions
(1)
|
—
|
|
|
—
|
|
|
—
|
|
|
11,270
|
|
Amortization
|
(1,026
|
)
|
|
(796
|
)
|
|
(2,051
|
)
|
|
(1,591
|
)
|
Balance at the end of the period
|
$
|
18,563
|
|
|
$
|
15,767
|
|
|
$
|
18,563
|
|
|
$
|
15,767
|
|
(1)
See Note (2) Business Combinations
|
|
(8)
|
Junior Subordinated Debentures
|
As part of the acquisition of Washington Banking Company on May 1, 2014, the Company assumed trust preferred securities and junior subordinated debentures with a total fair value of
$18.9 million
at the merger date. At
June 30, 2019
and
December 31, 2018
, the balance of the junior subordinated debentures, net of unaccreted discount, was
$20.4 million
and
$20.3 million
, respectively.
The adjustable rate of the trust preferred securities at
June 30, 2019
was
3.88%
. The following table presents the weighted average rate of the junior subordinated debentures for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Weighted average rate
(1)
|
6.68
|
%
|
|
6.28
|
%
|
|
6.87
|
%
|
|
6.01
|
%
|
|
|
(1)
|
The weighted average rate includes the accretion of the discount established at the merger date which is amortized over the life of the trust preferred securities.
|
|
|
(9)
|
Securities Sold Under Agreement to Repurchase
|
The Company utilizes securities sold under agreement to repurchase with
one
-day maturities secured by pledged investment securities available for sale as a supplement to funding sources. For additional information on the total value of investment securities pledged for securities sold under agreement to repurchase see Note (3) Investment Securities.
The following table presents the Company's securities sold under agreement to repurchase obligations by class of collateral pledged at the dates indicated:
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
(In thousands)
|
U.S. Treasury and U.S. Government-sponsored agencies
|
$
|
4,952
|
|
|
$
|
4,878
|
|
Mortgage-backed securities and collateralized mortgage obligations:
(1)
|
|
|
|
Residential
|
5,536
|
|
|
9,335
|
|
Commercial
|
12,653
|
|
|
17,274
|
|
Total securities sold under agreement to repurchase
|
$
|
23,141
|
|
|
$
|
31,487
|
|
(1)
Issued and guaranteed by U.S. Government-sponsored agencies.
(a) FHLB
The FHLB functions as a member-owned cooperative providing credit for member financial institutions. At
June 30, 2019
, the Bank maintained a credit facility with the FHLB with available borrowing capacity of
$827.7 million
. At
June 30, 2019
the Bank had short-term FHLB advances outstanding of
$90.7 million
with maturity dates within 30 days. At
December 31, 2018
the Bank had
no
FHLB advances outstanding.
The following table sets forth the details of FHLB advances during the
three and six months ended June 30, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(In thousands)
|
FHLB Advances:
|
|
|
|
|
|
|
|
Average balance during the period
|
$
|
42,101
|
|
|
$
|
79,120
|
|
|
$
|
22,086
|
|
|
$
|
57,546
|
|
Maximum month-end balance during the period
|
$
|
90,700
|
|
|
$
|
154,500
|
|
|
$
|
90,700
|
|
|
$
|
154,500
|
|
Weighted average rate during the period
|
2.65
|
%
|
|
2.04
|
%
|
|
2.68
|
%
|
|
1.93
|
%
|
Advances from the FHLB are collateralized by a blanket pledge on FHLB stock owned by the Bank, deposits at the FHLB, certain one-to-four single family residential loans or other assets, investment securities which are obligations of or guaranteed by the United States, or other assets. In accordance with the pledge agreement, the Company must maintain unencumbered collateral in an amount equal to varying percentages ranging from
100%
to
160%
of outstanding advances depending on the type of collateral.
(b) Federal Funds Purchased
The Bank maintains advance lines with Wells Fargo Bank, US Bank, The Independent Bankers Bank and Pacific Coast Bankers’ Bank to purchase federal funds of up to
$90.0 million
as of
June 30, 2019
. The lines generally mature annually or are reviewed annually. As of
June 30, 2019
and
December 31, 2018
, there were
no
federal funds purchased.
(c) Credit Facilities
The Bank maintains a credit facility with the Federal Reserve Bank of San Francisco with available borrowing capacity of
$43.6 million
as of
June 30, 2019
. There were
no
borrowings outstanding as of
June 30, 2019
and
December 31, 2018
. Any advances on the credit facility would have to be first secured by the Bank's investment securities or loans receivable.
|
|
(11)
|
Derivative Financial Instruments
|
The Company has entered into certain interest rate swap contracts that are not designated as hedging instruments. The purpose of these derivative contracts is primarily to provide commercial business loan customers the ability to convert their loans from variable to fixed interest rates. Upon the origination of a derivative contract with a customer, the Company simultaneously enters into an offsetting derivative contract with a third party in order to offset its exposure on the variable and fixed rate components of the customer agreement. The Company recognizes immediate income based upon the difference in the bid/ask spread of the underlying transactions with its customers and the third party, which is recorded in interest rate swap fees on the Condensed Consolidated Statements of Income. Because the Company acts only as an intermediary for its customer, subsequent changes in the fair value of the underlying derivative contracts offset each other and do not significantly impact the Company’s results of operations.
The following table presents the notional amounts and estimated fair values of interest rate derivative contracts outstanding at
June 30, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
Notional Amounts
|
|
Estimated Fair Value
|
|
Notional Amounts
|
|
Estimated Fair Value
|
|
(In thousands)
|
Non-hedging interest rate derivatives
|
|
|
|
|
|
|
|
Interest rate swap asset
(1)
|
$
|
177,655
|
|
|
$
|
8,033
|
|
|
$
|
171,798
|
|
|
$
|
5,095
|
|
Interest rate swap liability
(1)
|
177,655
|
|
|
(8,033
|
)
|
|
171,798
|
|
|
(5,095
|
)
|
(1)
The estimated fair value of derivatives with customers was
$7,647
and
$(1,643)
as of
June 30, 2019
and
December 31, 2018
, respectively. The estimated fair value of derivatives with third parties was
$(7,647)
and
$1,643
as of
June 30, 2019
and
December 31, 2018
, respectively.
|
|
(12)
|
Stockholders’ Equity
|
(a) Earnings Per Common Share
The following table illustrates the reconciliation of weighted average shares used for earnings per common share computations for the
three and six months ended June 30, 2019 and 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(In thousands)
|
Net income:
|
|
|
|
|
|
|
|
Net income
|
$
|
15,984
|
|
|
$
|
11,857
|
|
|
$
|
32,536
|
|
|
$
|
20,944
|
|
Dividends and undistributed earnings allocated to participating securities
|
(48
|
)
|
|
(57
|
)
|
|
(100
|
)
|
|
(110
|
)
|
Net income allocated to common shareholders
|
$
|
15,936
|
|
|
$
|
11,800
|
|
|
$
|
32,436
|
|
|
$
|
20,834
|
|
Basic:
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
36,895,625
|
|
|
34,023,566
|
|
|
36,888,601
|
|
|
33,680,014
|
|
Restricted stock awards
|
(25,466
|
)
|
|
(88,905
|
)
|
|
(40,632
|
)
|
|
(107,897
|
)
|
Total basic weighted average common shares outstanding
|
36,870,159
|
|
|
33,934,661
|
|
|
36,847,969
|
|
|
33,572,117
|
|
Diluted:
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
36,870,159
|
|
|
33,934,661
|
|
|
36,847,969
|
|
|
33,572,117
|
|
Effect of potentially dilutive common shares
(1)
|
144,714
|
|
|
172,631
|
|
|
163,767
|
|
|
157,819
|
|
Total diluted weighted average common shares outstanding
|
37,014,873
|
|
|
34,107,292
|
|
|
37,011,736
|
|
|
33,729,936
|
|
|
|
(1)
|
Represents the effect of the assumed exercise of stock options and vesting of restricted stock awards and units.
|
Potential dilutive shares are excluded from the computation of earnings per share if their effect is anti-dilutive. Anti-dilution occurs when the exercise price of a stock option or the unrecognized compensation cost per share of a restricted stock award exceeds the market price of the Company’s stock. For the
three and six months ended June 30, 2019
, there were
89,507
and
61,333
anti-dilutive shares outstanding, respectively. There were
no
anti-dilutive shares outstanding for the
three and six months ended June 30, 2018
.
(b) Dividends
The timing and amount of cash dividends paid on the Company's common stock depends on the Company’s earnings, capital requirements, financial condition and other relevant factors. Dividends on common stock from the Company depend substantially upon receipt of dividends from the Bank, which is the Company’s predominant source of income.
The following table summarizes the dividend activity for the
six months ended June 30, 2019
and calendar year
2018
:
|
|
|
|
|
|
|
|
|
Declared
|
|
Cash Dividend per Share
|
|
Record Date
|
|
Paid Date
|
|
January 24, 2018
|
|
$0.15
|
|
February 7, 2018
|
|
February 21, 2018
|
|
April 25, 2018
|
|
$0.15
|
|
May 10, 2018
|
|
May 24, 2018
|
|
July 24, 2018
|
|
$0.15
|
|
August 9, 2018
|
|
August 23, 2018
|
|
October 24, 2018
|
|
$0.17
|
|
November 7, 2018
|
|
November 21, 2018
|
|
October 24, 2018
|
|
$0.10
|
|
November 7, 2018
|
|
November 21, 2018
|
*
|
January 23, 2019
|
|
$0.18
|
|
February 7, 2019
|
|
February 21, 2019
|
|
April 24, 2019
|
|
$0.18
|
|
May 8, 2019
|
|
May 22, 2019
|
|
* Denotes a special dividend.
The FDIC and the Washington State Department of Financial Institutions, Division of Banks have the authority under their supervisory powers to prohibit the payment of dividends by the Bank to the Company. Additionally, current guidance from the Board of Governors of the Federal Reserve System provides, among other things, that dividends per share on the Company’s common stock generally should not exceed earnings per share, measured over the previous four fiscal quarters. Current regulations allow the Company and the Bank to pay dividends on their common stock if the Company’s or the Bank’s regulatory capital would not be reduced below the statutory capital requirements set by the Board of Governors of the Federal Reserve System and the FDIC.
(c) Stock Repurchase Program
The Company has had various stock repurchase programs since March 1999. On October 23, 2014, the Company's Board of Directors authorized the repurchase of up to
5%
of the Company's outstanding common shares, or approximately
1,513,000
shares, under the eleventh stock repurchase plan. The number, timing and price of shares repurchased will depend on business and market conditions and other factors, including opportunities to deploy the Company's capital.
Since the inception of the eleventh plan, the Company has repurchased
607,966
shares at an average share price of
$17.33
, including
28,000
shares repurchased at an average share price of
$29.12
during both the
three and six months ended June 30, 2019
.
No
shares were repurchased under this plan during the
three and six months ended June 30, 2018
.
In addition to the stock repurchases under a plan, the Company repurchases shares to pay withholding taxes on the vesting of restricted stock awards and units. The following table provides total repurchased shares for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Repurchased shares to pay withholding taxes
(1)
|
2,175
|
|
|
7,394
|
|
|
28,029
|
|
|
52,820
|
|
Stock repurchase to pay withholding taxes average share price
|
$
|
29.31
|
|
|
$
|
33.84
|
|
|
$
|
30.88
|
|
|
$
|
31.96
|
|
(1)
During the
six months ended June 30, 2018
, the Company repurchased
26,741
shares related to the withholding taxes due on the accelerated vesting of the restricted stock units of Puget Sound which were converted to Heritage common stock shares with an average share price of
$31.80
under the terms of the Puget Sound Merger. See Note (2) Business Combinations.
|
|
(13)
|
Accumulated Other Comprehensive Income (Loss)
|
The changes in accumulated other comprehensive income (loss) (“AOCI”), all of which are due to changes in the fair value of available for sale securities and are net of tax, during the
three and six months ended June 30, 2019 and 2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(In thousands)
|
Balance of AOCI at the beginning of period
|
$
|
561
|
|
|
$
|
(8,934
|
)
|
|
$
|
(7,455
|
)
|
|
$
|
(1,298
|
)
|
Other comprehensive income (loss) before reclassification
|
9,219
|
|
|
(2,358
|
)
|
|
17,247
|
|
|
(9,874
|
)
|
Amounts reclassified from AOCI for gain on sale of investment securities included in net income
|
(26
|
)
|
|
(14
|
)
|
|
(38
|
)
|
|
(41
|
)
|
Net current period other comprehensive income (loss)
|
9,193
|
|
|
(2,372
|
)
|
|
17,209
|
|
|
(9,915
|
)
|
Effects of implementation of accounting change related to equity investments, net
|
—
|
|
|
—
|
|
|
—
|
|
|
(93
|
)
|
Balance of AOCI at the end of period
|
$
|
9,754
|
|
|
$
|
(11,306
|
)
|
|
$
|
9,754
|
|
|
$
|
(11,306
|
)
|
|
|
(14)
|
Fair Value Measurements
|
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1
: Valuations for assets and liabilities traded in active exchange markets, or interest in open-end mutual funds that allow the Company to sell its ownership interest back to the fund at net asset value on a daily basis. Valuations are obtained from readily available pricing sources for market transactions involving identical assets, liabilities, or funds.
Level 2
: Valuations for assets and liabilities traded in less active dealer or broker markets, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or valuations using methodologies with observable inputs.
Level 3
: Valuations for assets and liabilities that are derived from other valuation methodologies, such as option pricing models, discounted cash flow models and similar techniques using unobservable inputs, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
(a) Recurring and Nonrecurring Basis
The Company used the following methods and significant assumptions to measure the fair value of certain assets on a recurring and nonrecurring basis:
Investment Securities Available for Sale
:
The fair values of all investment securities are based upon the assumptions that market participants would use in pricing the security. If available, fair values of investment securities are determined by quoted market prices (Level 1). For investment securities where quoted market prices are not available, fair values are calculated based on market prices on similar securities (Level 2). For investment securities where quoted prices or market prices of similar securities are not available, fair values are calculated by using observable and unobservable inputs such as discounted cash flows or other market indicators (Level 3). Security valuations are obtained from third party pricing services for comparable assets or liabilities.
Impaired Loans
:
At the time a loan is considered impaired, its impairment is measured based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the observable market price, or the fair market value of the collateral (less costs to sell) if the loan is collateral-dependent. Impaired loans for which impairment is measured using the discounted cash flow approach are not considered to be measured at fair value because the loan’s effective interest rate is generally not a fair value input, and for the purposes of fair value disclosures, the fair value of these loans are measured commensurate with non-impaired loans. If the Company utilizes the fair market value of the collateral method, the fair value used to measure impairment is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value based on the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation and management’s expertise and knowledge of the client and client’s business (Level 3). Impaired loans are evaluated on a quarterly basis and impairment is adjusted accordingly.
Other Real Estate Owned
:
Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in Level 3 classification of the inputs for determining fair value.
Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers for commercial properties or certified residential appraisers for residential properties whose qualifications and licenses have been reviewed and verified by the Company. Once received, the Company reviews the assumptions and approaches utilized in the appraisal as well as the resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On a quarterly basis, the Company compares the actual selling price of collateral that has been liquidated to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value.
Derivative Financial Instruments:
The Company obtains broker or dealer quotes to value its interest rate derivative contracts, which use valuation models using observable market data as of the measurement date (Level 2).
The following tables summarize the balances of assets and liabilities measured at fair value on a recurring basis as of
June 30, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
(In thousands)
|
Assets
|
|
|
|
|
|
|
|
Investment securities available for sale:
|
|
|
|
|
|
|
|
U.S. Treasury and U.S. Government-sponsored agencies
|
$
|
92,877
|
|
|
$
|
16,059
|
|
|
$
|
76,818
|
|
|
$
|
—
|
|
Municipal securities
|
132,741
|
|
|
—
|
|
|
132,741
|
|
|
—
|
|
Mortgage-backed securities and collateralized mortgage obligations:
|
|
|
|
|
|
|
|
Residential
|
347,682
|
|
|
—
|
|
|
347,682
|
|
|
—
|
|
Commercial
|
339,078
|
|
|
—
|
|
|
339,078
|
|
|
—
|
|
Corporate obligations
|
24,158
|
|
|
—
|
|
|
24,158
|
|
|
—
|
|
Other asset-backed securities
|
24,144
|
|
|
—
|
|
|
24,144
|
|
|
—
|
|
Total investment securities available for sale
|
960,680
|
|
|
16,059
|
|
|
944,621
|
|
|
—
|
|
Equity Security
|
128
|
|
|
128
|
|
|
—
|
|
|
—
|
|
Derivative assets - interest rate swaps
|
8,033
|
|
|
—
|
|
|
8,033
|
|
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
Derivative liabilities - interest rate swaps
|
$
|
8,033
|
|
|
$
|
—
|
|
|
$
|
8,033
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
(In thousands)
|
Assets
|
|
|
|
|
|
|
|
Investment securities available for sale:
|
|
|
|
|
|
|
|
U.S. Treasury and U.S. Government-sponsored agencies
|
$
|
101,603
|
|
|
$
|
15,936
|
|
|
$
|
85,667
|
|
|
$
|
—
|
|
Municipal securities
|
158,864
|
|
|
—
|
|
|
158,864
|
|
|
—
|
|
Mortgage-backed securities and collateralized mortgage obligations:
|
|
|
|
|
|
|
|
Residential
|
331,602
|
|
|
—
|
|
|
331,602
|
|
|
—
|
|
Commercial
|
333,761
|
|
|
—
|
|
|
333,761
|
|
|
—
|
|
Corporate obligations
|
25,563
|
|
|
—
|
|
|
25,563
|
|
|
—
|
|
Other asset-backed securities
|
24,702
|
|
|
—
|
|
|
24,702
|
|
|
—
|
|
Total investment securities available for sale
|
976,095
|
|
|
15,936
|
|
|
960,159
|
|
|
—
|
|
Equity Security
|
114
|
|
|
114
|
|
|
—
|
|
|
—
|
|
Derivative assets - interest rate swaps
|
5,095
|
|
|
—
|
|
|
5,095
|
|
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
Derivative liabilities - interest rate swaps
|
$
|
5,095
|
|
|
$
|
—
|
|
|
$
|
5,095
|
|
|
$
|
—
|
|
There were
no
transfers between Level 1 and Level 2 during the
three and six months ended June 30, 2019 and 2018
.
Nonrecurring Basis
The Company may be required to measure certain financial assets and liabilities at fair value on a nonrecurring basis. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets.
The following tables below represent assets measured at fair value on a nonrecurring basis at
June 30, 2019
and
December 31, 2018
and the net losses recorded in earnings during
three and six months ended June 30, 2019 and 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis
(1)
|
|
Fair Value at June 30, 2019
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Net Losses
Recorded in
Earnings
During
the Three Months Ended June 30, 2019
|
|
Net Losses
Recorded in
Earnings
During
the Six Months Ended
June 30, 2019
|
|
(In thousands)
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
179
|
|
|
$
|
173
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
173
|
|
|
$
|
91
|
|
|
$
|
91
|
|
Total commercial business
|
179
|
|
|
173
|
|
|
—
|
|
|
—
|
|
|
173
|
|
|
91
|
|
|
91
|
|
Consumer
|
8
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
—
|
|
|
—
|
|
Total assets measured at fair value on a nonrecurring basis
|
$
|
187
|
|
|
$
|
180
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
180
|
|
|
$
|
91
|
|
|
$
|
91
|
|
|
|
(1)
|
Basis represents the unpaid principal balance of impaired loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis
(1)
|
|
Fair Value at December 31, 2018
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Net Losses
Recorded in
Earnings
During
the Three Months Ended June 30, 2018
|
|
Net Losses
Recorded in
Earnings
During
the Six Months Ended June 30, 2018
|
|
(In thousands)
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
117
|
|
|
$
|
107
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
107
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Non-owner occupied commercial real estate
|
1,378
|
|
|
1,102
|
|
|
—
|
|
|
—
|
|
|
1,102
|
|
|
—
|
|
|
—
|
|
Total commercial business
|
1,495
|
|
|
1,209
|
|
|
—
|
|
|
—
|
|
|
1,209
|
|
|
—
|
|
|
—
|
|
Consumer
|
9
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
—
|
|
|
—
|
|
Total assets measured at fair value on a nonrecurring basis
|
$
|
1,504
|
|
|
$
|
1,216
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,216
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
(1)
|
Basis represents the unpaid principal balance of impaired loans.
|
The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at
June 30, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
Fair
Value
|
|
Valuation
Technique(s)
|
|
Unobservable Input(s)
|
|
Range of Inputs; Weighted
Average
|
|
(Dollars in thousands)
|
Impaired loans
|
$
|
180
|
|
|
Market approach
|
|
Adjustment for differences between the comparable sales
|
|
17.0% - (16.0%); (3.0%)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Fair
Value
|
|
Valuation
Technique(s)
|
|
Unobservable Input(s)
|
|
Range of Inputs; Weighted
Average
|
|
(Dollars in thousands)
|
Impaired loans
|
$
|
1,216
|
|
|
Market approach
|
|
Adjustment for differences between the comparable sales
|
|
10.4% - (37.3%); (10.9%)
|
(b) Fair Value of Financial Instruments
Because broadly traded markets do not exist for most of the Company’s financial instruments, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. These determinations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. For all of these reasons, the aggregation of the fair value calculations presented herein do not represent, and should not be construed to represent, the underlying value of the Company.
The following tables present the carrying value amount of the Company’s financial instruments and their corresponding estimated fair values at
June 30, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
Carrying Value
|
|
Fair Value
|
|
Fair Value Measurements Using:
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
(In thousands)
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
139,290
|
|
|
$
|
139,290
|
|
|
$
|
139,290
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Investment securities available for sale
|
960,680
|
|
|
960,680
|
|
|
16,059
|
|
|
944,621
|
|
|
—
|
|
Federal Home Loan Bank stock
|
10,005
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Loans held for sale
|
3,692
|
|
|
3,803
|
|
|
—
|
|
|
—
|
|
|
3,803
|
|
Total loans receivable, net
|
3,681,920
|
|
|
3,742,461
|
|
|
—
|
|
|
—
|
|
|
3,742,461
|
|
Accrued interest receivable
|
15,401
|
|
|
15,401
|
|
|
62
|
|
|
3,697
|
|
|
11,642
|
|
Derivative assets - interest rate swaps
|
8,033
|
|
|
8,033
|
|
|
—
|
|
|
8,033
|
|
|
—
|
|
Equity security
|
128
|
|
|
128
|
|
|
128
|
|
|
—
|
|
|
—
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
Noninterest deposits, interest bearing demand deposits, money market accounts and savings accounts
|
$
|
3,843,940
|
|
|
$
|
3,843,940
|
|
|
$
|
3,843,940
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Certificate of deposit accounts
|
503,768
|
|
|
508,338
|
|
|
—
|
|
|
508,338
|
|
|
—
|
|
Federal Home Loan Bank advances
|
90,700
|
|
|
90,700
|
|
|
—
|
|
|
90,700
|
|
|
—
|
|
Securities sold under agreement to repurchase
|
23,141
|
|
|
23,141
|
|
|
23,141
|
|
|
—
|
|
|
—
|
|
Junior subordinated debentures
|
20,448
|
|
|
20,000
|
|
|
—
|
|
|
—
|
|
|
20,000
|
|
Accrued interest payable
|
209
|
|
|
209
|
|
|
78
|
|
|
91
|
|
|
40
|
|
Derivative liabilities - interest rate swaps
|
8,033
|
|
|
8,033
|
|
|
—
|
|
|
8,033
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Carrying Value
|
|
Fair Value
|
|
Fair Value Measurements Using:
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
(In thousands)
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
161,910
|
|
|
$
|
161,910
|
|
|
$
|
161,910
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Investment securities available for sale
|
976,095
|
|
|
976,095
|
|
|
15,936
|
|
|
960,159
|
|
|
—
|
|
Federal Home Loan Bank stock
|
6,076
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Loans held for sale
|
1,555
|
|
|
1,605
|
|
|
—
|
|
|
1,605
|
|
|
—
|
|
Loans receivable, net of allowance for loan losses
|
3,619,118
|
|
|
3,617,857
|
|
|
—
|
|
|
—
|
|
|
3,617,857
|
|
Accrued interest receivable
|
15,403
|
|
|
15,403
|
|
|
68
|
|
|
4,091
|
|
|
11,244
|
|
Derivative assets - interest rate swaps
|
5,095
|
|
|
5,095
|
|
|
—
|
|
|
5,095
|
|
|
—
|
|
Equity security
|
114
|
|
|
114
|
|
|
114
|
|
|
—
|
|
|
—
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
Noninterest deposits, interest bearing demand deposits, money market accounts and savings accounts
|
$
|
3,965,510
|
|
|
$
|
3,965,510
|
|
|
$
|
3,965,510
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Certificate of deposit accounts
|
466,892
|
|
|
470,222
|
|
|
—
|
|
|
470,222
|
|
|
—
|
|
Federal Home Loan Bank advances
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Securities sold under agreement to repurchase
|
31,487
|
|
|
31,487
|
|
|
31,487
|
|
|
—
|
|
|
—
|
|
Junior subordinated debentures
|
20,302
|
|
|
20,500
|
|
|
—
|
|
|
—
|
|
|
20,500
|
|
Accrued interest payable
|
191
|
|
|
191
|
|
|
63
|
|
|
81
|
|
|
47
|
|
Derivative liabilities - interest rate swaps
|
5,095
|
|
|
5,095
|
|
|
—
|
|
|
5,095
|
|
|
—
|
|
The Company is required to maintain an average reserve balance with the Federal Reserve Bank or maintain such reserve balance in the form of cash. The required reserve balance at
June 30, 2019
and
December 31, 2018
was
$14.2 million
and
$9.2 million
, respectively, and was met by holding cash and maintaining an average balance with the Federal Reserve Bank.
On January 1, 2019, the Company adopted ASU 2016-02,
Leases
, as further explained in Note (1) Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements.
As of
June 30, 2019
, the Company’s lease ROU assets and related lease liabilities were
$27.3 million
and
$28.6 million
, respectively. The Company does not have leases designated as finance leases.
The table below summarizes the net lease cost recognized during the periods presented:
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
Six Months Ended June 30, 2019
|
|
(In thousands)
|
Operating Lease Cost
|
$
|
1,209
|
|
|
$
|
2,452
|
|
Variable Lease Cost
|
174
|
|
|
392
|
|
Sublease Income
|
(61
|
)
|
|
(99
|
)
|
Total net lease cost
|
$
|
1,322
|
|
|
$
|
2,745
|
|
The tables below summarizes other information related to the Company's operating leases during the periods presented:
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
Six Months Ended June 30, 2019
|
|
(In thousands)
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash flows from operating leases
|
$
|
1,179
|
|
|
$
|
2,366
|
|
ROU assets obtained in exchange for lease liabilities, excluding adoption impact
|
$
|
—
|
|
|
$
|
335
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2019
|
Weighted average remaining lease term of operating leases in years
|
|
8.67
|
|
Weighted average discount rate of operating leases
|
|
3.33
|
%
|
The following table outlines lease payment obligations as outlined in the Company’s lease agreements for each of the next five years, as of
June 30, 2019
, and thereafter in addition to a reconcilement to the Company’s right of use liability at the date indicated:
|
|
|
|
|
|
Year Ending December 31,
|
|
(In thousands)
|
2019
|
$
|
2,421
|
|
2020
|
4,581
|
|
2021
|
4,155
|
|
2022
|
3,730
|
|
2023
|
3,738
|
|
Thereafter
|
14,220
|
|
Total lease payments
|
32,845
|
|
Implied interest
|
(4,271
|
)
|
Right of use liability
|
$
|
28,574
|
|
For comparative purposes as of December 31, 2018, the estimated future minimum annual rental commitments under noncancelable leases having an original or remaining term of more than one year as calculated prior to applying the modified retrospective method of ASU 2016-02 implementation are as follows:
|
|
|
|
|
|
Year Ending December 31,
|
|
(In thousands)
|
2019
|
$
|
4,766
|
|
2020
|
4,251
|
|
2021
|
2,477
|
|
2022
|
1,704
|
|
2023
|
1,568
|
|
Thereafter
|
1,788
|
|
|
$
|
16,554
|
|
As of
June 30, 2019
, the Company had not entered into any material leases that have not yet commenced.
|
|
ITEM 2.
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following discussion is intended to assist in understanding the financial condition and results of the Company as of and for the
three and six months ended June 30, 2019
. The information contained in this section should be read with the unaudited Condensed Consolidated Financial Statements and the accompanying Notes included herein, and the
December 31, 2018
audited Consolidated Financial Statements and the accompanying Notes included in our 2018 Annual Form 10-K.
Overview
Heritage Financial Corporation is a bank holding company which primarily engages in the business activities of our wholly-owned financial institution subsidiary, Heritage Bank. We provide financial services to our local communities with an ongoing strategic focus on our commercial banking relationships, market expansion and asset quality. At
June 30, 2019
, we had total assets of
$5.38 billion
, total liabilities of
$4.58 billion
and total stockholders’ equity of
$796.6 million
. The Company’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report relates primarily to the Bank’s operations.
Our business consists primarily of commercial lending and deposit relationships with small businesses and their owners in our market areas and attracting deposits from the general public. We also make real estate construction and land development loans and consumer loans. We additionally originate for sale or for investment purposes one-to-four family residential loans on residential properties located primarily in our markets.
Our core profitability depends primarily on our net interest income. Net interest income is the difference between interest income, which is the income that we earn on interest earning assets, comprised primarily of loans and investment securities, and interest expense, which is the amount we pay on our interest bearing liabilities, consisting primarily of deposits. Management strives to match the repricing 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. Like most financial institutions, our net interest income is affected significantly by general and local economic conditions, particularly changes in market interest rates, and by governmental policies and actions of regulatory agencies. Net interest income is additionally affected by changes on the volume and mix of interest earning assets, interest earned on these assets, the volume and mix of interest bearing liabilities and interest paid on these liabilities.
Our net income is affected by many factors, including the provision for loan losses. The provision for loan losses is dependent on changes in the loan portfolio and management’s assessment of the collectability of the loan portfolio as well as prevailing economic and market conditions. The allowance for loan losses reflects the amount that we believe is appropriate to provide for probable incurred credit losses in our loan portfolio.
Net income is also affected by noninterest income and noninterest expense. Noninterest income primarily consists of service charges and other fees and other income. Noninterest expense consists primarily of compensation and employee benefits, occupancy and equipment, data processing and professional services. Compensation and
employee benefits consist primarily of the salaries and wages paid to our employees, payroll taxes, expenses for retirement and other employee benefits. Occupancy and equipment expenses are the fixed and variable costs of buildings and equipment, and consist primarily of lease payments, depreciation charges, maintenance, and costs of utilities. Data processing consists primarily of processing and network services related to the Bank’s core operating system, including account processing systems, electronic payments processing of products and services, and internet and mobile banking channels.
Results of operations may also be affected significantly by general and local economic and competitive conditions, governmental policies and actions of regulatory authorities. Other income and other expenses are also impacted by growth of operations and growth in the number of loan and deposit accounts through acquisitions and core banking business growth.
Earnings Summary
Comparison of quarter ended
June 30, 2019
to the comparable quarter in the prior year.
Net income was
$16.0 million
, or
$0.43
per diluted common share, for the
three months ended June 30, 2019
compared to
$11.9 million
, or
$0.35
per diluted common share, for the
three months ended June 30, 2018
. Net income
increase
d
$4.1 million
, or
34.8%
, for the
three months ended June 30, 2019
compared to the three months ended
June 30, 2018
primarily due to an
increase
in net interest income of
$6.8 million
, or
15.5%
.
The increase in net interest income compared to the prior period in 2018 was primarily due to an increase in both the average balance and yield on total loans receivable, net as a result of the Premier Merger completed July 2, 2018 and secondarily by higher interest rates reflecting increases in the targeted federal funds rate during 2018.
Net interest income as a percentage of average interest earning assets (net interest margin)
increase
d
11
basis points to
4.33%
for the
three months ended June 30, 2019
compared to
4.22%
for the same period in
2018
. The increase in net interest margin was primarily due to increases in both the average balance and yield on loans and secondarily by increases in both the average balances and yields on investments, offset partially by increases in both the balance and cost of interest bearing deposits.
The efficiency ratio consists of noninterest expense divided by the sum of net interest income before provision for loan losses plus noninterest income. The Company’s efficiency ratio was
64.62%
for the
three months ended June 30, 2019
compared to
69.58%
for the
three months ended June 30, 2018
. The improvement in the efficiency ratio was primarily attributable to the
increase
net interest income as compared to the same quarter in 2018, as described above, in addition to lower acquisition-related expenses during the three months ended June 30, 2019.
Comparison of
six months ended June 30, 2019
to the comparable period in the prior year.
Net income was
$32.5 million
, or
$0.88
per diluted common share, for the
six months ended June 30, 2019
compared to
$20.9 million
, or
$0.62
per diluted common share, for the
six months ended June 30, 2018
. Net income
increase
d
$11.6 million
, or
55.3%
, for the
six months ended June 30, 2019
compared to the
six months ended June 30, 2018
primarily due to an
increase
in net interest income of
$15.7 million
, or
18.6%
. The increase in net interest income compared to the same period in 2018 was primarily due to an increase in both the average balance and yield of total loans receivable, net primarily as a result of the Premier and Puget Mergers completed during 2018 and secondarily by higher interest rates reflecting increases in targeted federal funds rate during 2018.
The net interest margin
increase
d
17
basis points to
4.34%
for the
six months ended June 30, 2019
compared to
4.17%
for the same period in
2018
. The increase in net interest margin was primarily due to increases in both the average balance and yield on loans and secondarily by increases in both the average balances and yields on investments, offset partially by increases in both the balance and cost of interest bearing deposits.
The Company’s efficiency ratio was
64.23%
for the
six months ended June 30, 2019
compared to
72.67%
for the
six months ended June 30, 2018
. The improvement in the efficiency ratio was primarily attributable to the
increase
net interest income as compared to the same period in 2018, as described above, in addition to lower acquisition-related expenses during the six months ended June 30, 2019.
Net Interest Income
One of the Company's key sources of earnings is net interest income. There are several factors that affect net interest income including, but not limited to, the volume, pricing, mix and maturity of interest earning assets and interest bearing liabilities; the volume of noninterest bearing deposits and other liabilities and stockholders' equity; the volume of noninterest earning assets; market interest rate fluctuations; and asset quality.
Comparison of quarter ended
June 30, 2019
to the comparable quarter in the prior year.
Net interest income
increase
d
$6.8 million
, or
15.5%
, to
$50.5 million
for the
three months ended June 30, 2019
compared to
$43.7 million
for the same period in
2018
. The following table provides relevant net interest income information for the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2019
|
|
2018
|
|
Average
Balance
|
|
Interest
Earned/
Paid
|
|
Average
Yield/
Rate
(1)
|
|
Average
Balance
|
|
Interest
Earned/
Paid
|
|
Average
Yield/
Rate
(1)
|
|
(Dollars in thousands)
|
Interest Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Total loans receivable, net
(2) (3)
|
$
|
3,654,475
|
|
|
$
|
48,107
|
|
|
5.28
|
%
|
|
$
|
3,266,092
|
|
|
$
|
41,141
|
|
|
5.05
|
%
|
Taxable securities
|
840,254
|
|
|
5,933
|
|
|
2.83
|
|
|
638,092
|
|
|
4,068
|
|
|
2.56
|
|
Nontaxable securities
(3)
|
139,278
|
|
|
893
|
|
|
2.57
|
|
|
201,104
|
|
|
1,220
|
|
|
2.43
|
|
Other interest earning assets
|
47,581
|
|
|
283
|
|
|
2.39
|
|
|
51,022
|
|
|
240
|
|
|
1.89
|
|
Total interest earning assets
|
4,681,588
|
|
|
55,216
|
|
|
4.73
|
%
|
|
4,156,310
|
|
|
46,669
|
|
|
4.50
|
%
|
Noninterest earning assets
|
669,217
|
|
|
|
|
|
|
570,409
|
|
|
|
|
|
Total assets
|
$
|
5,350,805
|
|
|
|
|
|
|
$
|
4,726,719
|
|
|
|
|
|
Interest Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
$
|
514,220
|
|
|
$
|
1,694
|
|
|
1.32
|
%
|
|
$
|
418,129
|
|
|
$
|
797
|
|
|
0.76
|
%
|
Savings accounts
|
500,135
|
|
|
707
|
|
|
0.57
|
|
|
512,832
|
|
|
487
|
|
|
0.38
|
|
Interest bearing demand and money market accounts
|
2,016,901
|
|
|
1,616
|
|
|
0.32
|
|
|
1,796,095
|
|
|
911
|
|
|
0.20
|
|
Total interest bearing deposits
|
3,031,256
|
|
|
4,017
|
|
|
0.53
|
|
|
2,727,056
|
|
|
2,195
|
|
|
0.32
|
|
FHLB advances and other borrowings
|
42,101
|
|
|
278
|
|
|
2.65
|
|
|
79,120
|
|
|
402
|
|
|
2.04
|
|
Securities sold under agreement to repurchase
|
29,265
|
|
|
45
|
|
|
0.62
|
|
|
27,935
|
|
|
16
|
|
|
0.23
|
|
Junior subordinated debentures
|
20,400
|
|
|
340
|
|
|
6.68
|
|
|
20,108
|
|
|
315
|
|
|
6.28
|
|
Total interest bearing liabilities
|
3,123,022
|
|
|
4,680
|
|
|
0.60
|
%
|
|
2,854,219
|
|
|
2,928
|
|
|
0.41
|
%
|
Demand and other noninterest bearing deposits
|
1,345,917
|
|
|
|
|
|
|
1,175,331
|
|
|
|
|
|
Other noninterest bearing liabilities
|
99,147
|
|
|
|
|
|
|
60,434
|
|
|
|
|
|
Stockholders’ equity
|
782,719
|
|
|
|
|
|
|
636,735
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
$
|
5,350,805
|
|
|
|
|
|
|
$
|
4,726,719
|
|
|
|
|
|
Net interest income
|
|
|
$
|
50,536
|
|
|
|
|
|
|
$
|
43,741
|
|
|
|
Net interest spread
|
|
|
|
|
4.13
|
%
|
|
|
|
|
|
4.09
|
%
|
Net interest margin
|
|
|
|
|
4.33
|
%
|
|
|
|
|
|
4.22
|
%
|
Average interest earning assets to average interest bearing liabilities
|
|
|
|
|
149.91
|
%
|
|
|
|
|
|
145.62
|
%
|
|
|
(2)
|
The average loan balances presented in the table are net of allowances for loan losses. Nonaccrual loans have been included in the table as loans carrying a zero yield.
|
|
|
(3)
|
Yields on tax-exempt securities and loans have not been stated on a tax-equivalent basis.
|
Interest Income
Total interest income
increase
d
$8.5 million
, or
18.3%
, to
$55.2 million
for the
three months ended June 30, 2019
compared to
$46.7 million
for the same period in
2018
. The balance of average interest earning assets
increase
d
$525.3 million
, or
12.6%
, to
$4.68 billion
for the
three months ended June 30, 2019
from
$4.16 billion
for the
three months ended June 30, 2018
and the yield on total interest earning assets
increase
d
23
basis points to
4.73%
for the
three months ended June 30, 2019
compared to
4.50%
for the
three months ended June 30, 2018
. The increase in the interest income was due primarily to increased interest income from interest and fees on loans and interest income and to a lesser extent, an increase in interest income on investment securities.
Interest income from interest and fees on loans
increase
d
$7.0 million
, or
16.9%
, to
$48.1 million
for the
three months ended June 30, 2019
from
$41.1 million
for the same period in
2018
primarily due to an
increase
in average
total loans receivable, net of
$388.4 million
, or
11.9%
, as a result of loan growth which was substantially due to the Premier Merger. Additionally, interest income from interest and fees on loans increased as the loan yield
increase
d
23
basis points to
5.28%
for the
three months ended June 30, 2019
from
5.05%
for the
three months ended June 30, 2018
. The
increase
in loan yield was due to a combination of higher contractual loan rates as a result of the increasing interest rate environment and an increase in loan yields from the loans acquired in the Premier Merger as compared to legacy Heritage loans, offset partially by a decrease in incremental accretion on purchased loans.
Incremental accretion income was
$1.4 million
and
$2.0 million
for the
three months ended June 30, 2019
and
2018
, respectively. The incremental accretion and the impact to loan yield will change during any quarter based on the volume of prepayments, but is expected to decrease over time as the balance of the purchased loans continues to decrease. The decrease for the three months ended June 30, 2019 compared to the same period in 2018 was substantially due to less accretion on loans acquired in the Puget Sound Merger.
The following table presents the loan yield and effects of the incremental accretion on purchased loans for the
three months ended June 30, 2019 and 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
|
(Dollars in thousands)
|
Loan yield (GAAP)
|
|
5.28
|
%
|
|
5.05
|
%
|
Exclude impact on loan yield from incremental accretion on purchased loans
(1)
|
|
0.16
|
|
|
0.24
|
|
Loan yield, excluding incremental accretion on purchased loans (non-GAAP)
(1)(2)
|
|
5.12
|
%
|
|
4.81
|
%
|
|
|
|
|
|
Incremental accretion on purchased loans
(1)
|
|
$
|
1,416
|
|
|
$
|
1,992
|
|
|
|
(1)
|
As of the date of completion of each merger and acquisition transaction, purchased loans were recorded at their estimated fair value, including our estimate of future expected cash flows until the ultimate resolution of these credits. The difference between the contractual loan balance and the fair value represents the purchased discount. The purchased discount is accreted into income over the estimated remaining life of the loan or pool of loans, based upon results of the quarterly cash flow re-estimation. The incremental accretion income represents the amount of income recorded on the purchased loans in excess of the contractual stated interest rate in the individual loan notes.
|
|
|
(2)
|
For additional information, see "Non-GAAP Financial Information."
|
Interest income on investment securities
increase
d
$1.5 million
, or
29.1%
, to
$6.8 million
during the
three months ended June 30, 2019
from
$5.3 million
during the
three months ended June 30, 2018
. The increase in interest on investment securities was primarily a result of a
$202.2 million
or
31.7%
increase
in the average balance of higher yielding taxable securities. A portion of this increase in the average balance of taxable securities was due to the decision to increase the percentage of taxable securities compared to nontaxable securities. The average balance of total investment securities increased by
$140.3 million
, or
16.7%
, to
$979.5 million
during the
three months ended June 30, 2019
from
$839.2 million
during the
three months ended June 30, 2018
. Additionally, interest income
increase
d as a result of an increase in the investment yields, reflecting the effect of the rise in interest rates on our adjustable rate investment securities and secondarily due to higher yields on new investment purchases for the
three months ended June 30, 2019
compared to the same period in
2018
. Yields on taxable securities
increase
d
27
basis points to
2.83%
for the
three months ended June 30, 2019
from
2.56%
for the same period in
2018
. Yields on nontaxable securities
increase
d
14
basis points to
2.57%
for the
three months ended June 30, 2019
from
2.43%
for the same period in
2018
. The Company actively managed its investment securities portfolio to improve performance in the changing rate environment over the past year.
Interest Expense
Total interest expense
increase
d
$1.8 million
, or
59.8%
, to
$4.7 million
for the
three months ended June 30, 2019
compared to
$2.9 million
for the same period in
2018
, primarily due to an increase in the cost as a result of the rise in market interest rates and secondarily due to an increase in the average balance substantially due to the Premier Merger. The average cost of interest bearing liabilities
increase
d
19
basis points to
0.60%
for the
three months ended June 30, 2019
from
0.41%
for the
three months ended June 30, 2018
. Total average interest bearing liabilities
increase
d
$268.8 million
, or
9.4%
, to
$3.12 billion
for the
three months ended June 30, 2019
from
$2.85 billion
for the
three months ended June 30, 2018
.
Interest expense on deposits increased $1.8 million, or 83.0%, to $4.0 million for the
three months ended June 30, 2019
compared to $2.2 million for the same period in 2018 due to a combination of an increase in market interest rates, competitive pressures and an increase in the average balance due primarily to the Premier Merger. The cost of interest bearing deposits
increase
d
21
basis points to
0.53%
for the
three months ended June 30, 2019
from
0.32%
for the same period in
2018
. The increased interest expense on deposits is primarily related to certificates of deposit and to a slightly lesser extent due to interest bearing demand and money market deposits. The cost of certificates of deposit
increase
d
56
basis points to
1.32%
for the
three months ended June 30, 2019
from
0.76%
for the same period in
2018
. The average balance of certificate of deposit accounts increased
$96.1 million
, or
23.0%
, to
$514.2 million
for the
three months ended June 30, 2019
compared to
$418.1 million
for the same period in
2018
. The cost of interest bearing demand and money market deposits
increase
d
12
basis points to
0.32%
for the
three months ended June 30, 2019
from
0.20%
for the same period in
2018
, and the average balance of interest bearing demand and money market deposits increased
$220.8 million
, or
12.3%
, to
$2.02 billion
at June 30, 2019 during the
three months ended June 30, 2019
compared to
$1.80 billion
during the same period in
2018
.
The Company was able to reduce the impact of the rising market interest rates by increasing the average balance of noninterest bearing deposits at a higher growth rate than the interest bearing deposits described above. The average balance of noninterest bearing deposits
increase
d by
$170.6 million
, or
14.5%
, to
$1.35 billion
for the
three months ended June 30, 2019
compared to
$1.18 billion
for the same period in
2018
due primarily to the Premier Merger. The total cost of deposits
increase
d
14
basis points to
0.37%
for the
three months ended June 30, 2019
compared to
0.23%
for the same period in
2018
.
Interest expense on FHLB advances and other borrowings
decrease
d by
$124,000
, or
30.8%
, to
$278,000
for the
three months ended June 30, 2019
compared to
$402,000
for the same period in
2018
due to a decrease in the average balance, partially offset by an increase in the cost. The average balance for FHLB advances and other borrowings
decrease
d by
$37.0 million
, or
46.8%
, to
$42.1 million
for the
three months ended June 30, 2019
compared to
$79.1 million
for the same period in
2018
due to a decline in the utilization of overnight FHLB advances reflecting the increase in the average deposit balances. The average rate of the FHLB advances and other borrowings
increase
d
61
basis points to
2.65%
for the
three months ended June 30, 2019
compared to
2.04%
for the same period in
2018
as a result of the increase in market rates.
The average rate of the junior subordinated debentures, including the effects of accretion of the discount established as of the date of the merger with Washington Banking Company,
increase
d
40
basis points to
6.68%
for the
three months ended June 30, 2019
compared to
6.28%
for the same period in
2018
. The rate increase on the debentures was due to an increase in the average three-month LIBOR rate to 2.51% for the
three months ended June 30, 2019
from 2.34% for the same period in
2018
.
Net Interest Margin
Net interest margin
increase
d
11
basis points to
4.33%
for the
three months ended June 30, 2019
from
4.22%
for the same period in
2018
primarily due to the above mentioned changes in asset yields and costs of funds. The net interest spread
increase
d
four
basis points to
4.13%
for the
three months ended June 30, 2019
from
4.09%
for the same period in
2018
primarily due to the increase in yield earned on total interest earning assets.
Net interest margin is impacted by the incremental accretion on purchased loans. The following table presents the net interest margin and effects of the incremental accretion on purchased loans for the
three months ended June 30, 2019 and 2018
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
2019
|
|
2018
|
Net interest margin (GAAP)
|
|
4.33
|
%
|
|
4.22
|
%
|
Exclude impact on net interest margin from incremental accretion on purchased loans
(1)
|
|
0.12
|
|
|
0.19
|
|
Net interest margin, excluding incremental accretion on purchased loans (non-GAAP)
(1)(2)
|
|
4.21
|
%
|
|
4.03
|
%
|
|
|
(1)
|
As of the date of completion of each merger and acquisition transaction, purchased loans were recorded at their estimated fair value, including our estimate of future expected cash flows until the ultimate resolution of these credits. The difference between the contractual loan balance and the fair value represents the purchased discount. The purchased discount is accreted into income over the estimated remaining life of the loan or pool of loans, based upon results of the quarterly cash flow re-estimation. The incremental accretion income represents the amount of income recorded on the purchased loans in excess of the contractual stated interest rate in the individual loan notes.
|
|
|
(2)
|
For additional information, see "Non-GAAP Financial Information."
|
Comparison of
six months ended June 30, 2019
to the comparable period in the prior year
Net interest income
increase
d
$15.7 million
, or
18.6%
, to
$100.3 million
for the
six months ended June 30, 2019
compared to
$84.6 million
for the same period in
2018
. The following table provides relevant net interest income information for the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
Average
Balance
|
|
Interest
Earned/
Paid
|
|
Average
Yield/
Rate
(1)
|
|
Average
Balance
|
|
Interest
Earned/
Paid
|
|
Average
Yield/
Rate
(1)
|
|
(Dollars in thousands)
|
Interest Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Total loans receivable, net
(2) (3)
|
$
|
3,638,573
|
|
|
$
|
94,806
|
|
|
5.25
|
%
|
|
$
|
3,208,799
|
|
|
$
|
79,300
|
|
|
4.98
|
%
|
Taxable securities
|
830,671
|
|
|
11,756
|
|
|
2.85
|
|
|
614,488
|
|
|
7,597
|
|
|
2.49
|
|
Nontaxable securities
(3)
|
144,522
|
|
|
1,843
|
|
|
2.57
|
|
|
212,305
|
|
|
2,561
|
|
|
2.43
|
|
Other interest earning assets
|
51,747
|
|
|
618
|
|
|
2.41
|
|
|
52,302
|
|
|
458
|
|
|
1.77
|
|
Total interest earning assets
|
4,665,513
|
|
|
109,023
|
|
|
4.71
|
%
|
|
4,087,894
|
|
|
89,916
|
|
|
4.44
|
%
|
Noninterest earning assets
|
668,644
|
|
|
|
|
|
|
552,736
|
|
|
|
|
|
Total assets
|
$
|
5,334,157
|
|
|
|
|
|
|
$
|
4,640,630
|
|
|
|
|
|
Interest Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
$
|
508,220
|
|
|
$
|
3,133
|
|
|
1.24
|
%
|
|
$
|
420,834
|
|
|
$
|
1,557
|
|
|
0.75
|
%
|
Savings accounts
|
503,882
|
|
|
1,381
|
|
|
0.55
|
|
|
509,514
|
|
|
902
|
|
|
0.36
|
|
Interest bearing demand and money market accounts
|
2,033,878
|
|
|
3,106
|
|
|
0.31
|
|
|
1,771,084
|
|
|
1,696
|
|
|
0.19
|
|
Total interest bearing deposits
|
3,045,980
|
|
|
7,620
|
|
|
0.50
|
|
|
2,701,432
|
|
|
4,155
|
|
|
0.31
|
|
FHLB advances and other borrowings
|
22,086
|
|
|
294
|
|
|
2.68
|
|
|
57,546
|
|
|
552
|
|
|
1.93
|
|
Securities sold under agreement to repurchase
|
31,149
|
|
|
91
|
|
|
0.59
|
|
|
29,094
|
|
|
33
|
|
|
0.23
|
|
Junior subordinated debentures
|
20,364
|
|
|
694
|
|
|
6.87
|
|
|
20,071
|
|
|
598
|
|
|
6.01
|
|
Total interest bearing liabilities
|
3,119,579
|
|
|
8,699
|
|
|
0.56
|
%
|
|
2,808,143
|
|
|
5,338
|
|
|
0.38
|
%
|
Demand and other noninterest bearing deposits
|
1,339,108
|
|
|
|
|
|
|
1,144,479
|
|
|
|
|
|
Other noninterest bearing liabilities
|
100,840
|
|
|
|
|
|
|
62,094
|
|
|
|
|
|
Stockholders’ equity
|
774,630
|
|
|
|
|
|
|
625,914
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
$
|
5,334,157
|
|
|
|
|
|
|
$
|
4,640,630
|
|
|
|
|
|
Net interest income
|
|
|
$
|
100,324
|
|
|
|
|
|
|
$
|
84,578
|
|
|
|
Net interest spread
|
|
|
|
|
4.15
|
%
|
|
|
|
|
|
4.06
|
%
|
Net interest margin
|
|
|
|
|
4.34
|
%
|
|
|
|
|
|
4.17
|
%
|
Average interest earning assets to average interest bearing liabilities
|
|
|
|
|
149.56
|
%
|
|
|
|
|
|
145.57
|
%
|
|
|
(2)
|
The average loan balances presented in the table are net of allowances for loan losses. Nonaccrual loans have been included in the table as loans carrying a zero yield.
|
|
|
(3)
|
Yields on tax-exempt securities and loans have not been stated on a tax-equivalent basis.
|
Interest Income
Total interest income
increase
d
$19.1 million
, or
21.2%
, to
$109.0 million
for the
six months ended June 30, 2019
compared to
$89.9 million
for the same period in
2018
. The balance of average interest earning assets
increase
d
$577.6 million
, or
14.1%
, to
$4.67 billion
for the
six months ended June 30, 2019
from
$4.09 billion
for the
six months ended June 30, 2018
and the yield on total interest earning assets
increase
d
27
basis points to
4.71%
for the
six months ended June 30, 2019
compared to
4.44%
for the
six months ended June 30, 2018
. The increase in the interest
income was due primarily to increased interest income from interest and fees on loans and to a lesser extent, an increase in interest income on investment securities.
Interest income from interest and fees on loans
increase
d
$15.5 million
, or
19.6%
, to
$94.8 million
for the
six months ended June 30, 2019
from
$79.3 million
for the same period in
2018
due primarily to an
increase
in average loans receivable, net and an
increase
in loan yields. Average total loans receivable, net
increase
d
$429.8 million
, or
13.4%
, to
$3.64 billion
for the
six months ended June 30, 2019
compared to
$3.21 billion
for the
six months ended June 30, 2018
primarily as a result of the Premier Merger. Loan yields
increase
d
27
basis points to
5.25%
for the
six months ended June 30, 2019
from
4.98%
for the
six months ended June 30, 2018
. The
increase
in loan yield was due to a combination of higher contractual loan rates as a result of the increasing interest rate environment and an increase in loan yields from the loans acquired in the Premier Merger as compared to legacy Heritage loans, offset partially by a decrease in incremental accretion on purchased loans.
Incremental accretion income was
$2.8 million
and
$3.6 million
for the
six months ended June 30, 2019
and
2018
, respectively. The incremental accretion and the impact to loan yield will change during any period based on the volume of prepayments, but is expected to decrease over time as the balance of the purchased loans continues to decrease. The decrease for the six months ended June 30, 2019 compared to the same period in 2018 was substantially due to less accretion on loans acquired in the Puget Sound Merger.
The following table presents the loan yield and effects of the incremental accretion on purchased loans for the
six months ended June 30, 2019 and 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
|
(Dollars in thousands)
|
Loan yield (GAAP)
|
|
5.25
|
%
|
|
4.98
|
%
|
Exclude impact on loan yield from incremental accretion on purchased loans
(1)
|
|
0.15
|
|
|
0.23
|
|
Loan yield, excluding incremental accretion on purchased loans (non-GAAP)
(1)(2)
|
|
5.10
|
%
|
|
4.75
|
%
|
|
|
|
|
|
Incremental accretion on purchased loans
(1)
|
|
$
|
2,789
|
|
|
$
|
3,624
|
|
|
|
(1)
|
As of the date of completion of each merger and acquisition transaction, purchased loans were recorded at their estimated fair value, including our estimate of future expected cash flows until the ultimate resolution of these credits. The difference between the contractual loan balance and the fair value represents the purchased discount. The purchased discount is accreted into income over the estimated remaining life of the loan or pool of loans, based upon results of the quarterly cash flow re-estimation. The incremental accretion income represents the amount of income recorded on the purchased loans in excess of the contractual stated interest rate in the individual loan notes.
|
|
|
(2)
|
For additional information, see "Non-GAAP Financial Information."
|
Interest income on investment securities
increase
d
$3.4 million
, or
33.9%
, to
$13.6 million
during the
six months ended June 30, 2019
compared to
$10.2 million
for the
six months ended June 30, 2018
. The
increase
in interest income on investment securities was primarily a result of a result of a
$216.2 million
or
35.2%
increase
in the average balance of higher yielding taxable securities. A portion of this increase in the average balance of taxable securities was due to the decision to increase the percentage of taxable securities compared to nontaxable securities. The average balance of total investment securities
increase
d
$148.4 million
, or
17.9%
, to
$975.2 million
during the
six months ended June 30, 2019
from
$826.8 million
during the
six months ended June 30, 2018
. Additionally, interest income
increase
d as a result of an increase in the investment yields, reflecting the effect of the rise in interest rates on the adjustable rate investment securities and secondarily due to higher yields on new investment purchases during the
six months ended June 30, 2019
compared to the same period in
2018
. Yields on taxable securities
increase
d
36
basis points to
2.85%
for the
six months ended June 30, 2019
compared to
2.49%
for the same period in
2018
. Yields on nontaxable securities
increase
d
14
basis points to
2.57%
for the
six months ended June 30, 2019
from
2.43%
for the same period in
2018
. The Company has actively managed its investment securities portfolio to improve performance.
Interest Expense
Total interest expense
increase
d
$3.4 million
, or
63.0%
, to
$8.7 million
for the
six months ended June 30, 2019
compared to
$5.3 million
for the same period in
2018
. The average cost of interest bearing liabilities
increase
d
18
basis points to
0.56%
for the
six months ended June 30, 2019
from
0.38%
for the
six months ended June 30, 2018
as a result of the rise in market rates and an increase in the average balance. Total average interest bearing liabilities
increase
d
$311.4 million
, or
11.1%
, to
$3.12 billion
for the
six months ended June 30, 2019
from
$2.81 billion
for the
six months ended June 30, 2018
substantially due to the Premier Merger.
Interest expense on deposits increased $3.5 million, or 83.4%, to $7.6 million for the
six months ended June 30, 2019
compared to $4.2 million for the same period in 2018 due to a combination of an increase in market interest rates and competitive pressures and an increase in the average balance due primarily to the Premier Merger. The cost of interest bearing deposits
increase
d
19
basis points to
0.50%
for the
six months ended June 30, 2019
from
0.31%
for the same period in
2018
. The increase of interest expense on deposits is primarily related to the certificates of deposit and to a slightly lesser extent due to interest bearing demand and money market deposits accounts. The cost of certificates of deposit increased
49
basis points to
1.24%
for the
six months ended June 30, 2019
from
0.75%
for the same period in
2018
. The average balance of certificate of deposit accounts
increase
d
$87.4 million
, or
20.8%
, to
$508.2 million
for the
six months ended June 30, 2019
compared to
$420.8 million
for the same period in
2018
. The cost of interest bearing demand and money market deposits
increase
d
12
basis points to
0.31%
for the
six months ended June 30, 2019
from
0.19%
for the same period in
2018
, and the average balance of interest bearing demand and money market deposits
increase
d
$262.8 million
, or
14.8%
, to
$2.03 billion
during the
six months ended June 30, 2019
compared to
$1.77 billion
during the same period in
2018
.
The Company was able to reduce the impact of the rising market interest rates by increasing the average balance of noninterest bearing deposits at a higher growth rate than the interest bearing deposits described above. The average balance of noninterest bearing deposits
increase
d
$194.6 million
, or
17.0%
, to
$1.34 billion
for the six months ended June 30, 2019 compared to
$1.14 billion
for the same period in
2018
. The total cost of deposits
increase
d
13
basis points to
0.35%
for the six months ended June 30, 2019 compared to
0.22%
for the same period in
2018
.
Interest expense on FHLB advances and other borrowings
decrease
d
$258,000
, or
46.7%
, to
$294,000
for the
six months ended June 30, 2019
from
$552,000
for the
six months ended June 30, 2018
due to a decrease in the average balance, partially offset by an increase in the cost. The average balance for FHLB advances and other borrowings
decrease
d by
$35.5 million
, or
61.6%
, to
$22.1 million
for the
six months ended June 30, 2019
from
$57.5 million
for the same period in
2018
due to a decline in the utilization of overnight FHLB advances reflecting the increase in the average deposit balances. The average rate of the FHLB advances and other borrowings
increase
d
75
basis points to
2.68%
for the
six months ended June 30, 2019
compared to
1.93%
for the same period in
2018
as a result of the increase in market rates.
The average rate of the junior subordinated debentures, including the effects of accretion of the discount established as of the date of the merger with Washington Banking Company,
increase
d
86
basis points to
6.87%
for the
six months ended June 30, 2019
compared to
6.01%
for the same period in
2018
. The rate increase on the debentures was due to an increase in the average three-month LIBOR rates to 2.60% for the
six months ended June 30, 2019
from 2.13% for the same period in
2018
.
Net Interest Margin
Net interest margin
increase
d
17
basis points to
4.34%
for the
six months ended June 30, 2019
from
4.17%
for the same period in
2018
primarily due to the above mentioned changes in asset yields and costs of funds. The net interest spread
increase
d
nine
basis points to
4.15%
for the
six months ended June 30, 2019
from
4.06%
for the same period in
2018
primarily due to the increase in yield earned on total interest earning assets.
Net interest margin is impacted by the incremental accretion on purchased loans. The following table presents the net interest margin and effects of the incremental accretion on purchased loans for the
six months ended June 30, 2019 and 2018
:
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
Net interest margin (GAAP)
|
|
4.34
|
%
|
|
4.17
|
%
|
Exclude impact on net interest margin from incremental accretion on purchased loans
(1)
|
|
0.12
|
|
|
0.18
|
|
Net interest margin, excluding incremental accretion on purchased loans (non-GAAP)
(1)(2)
|
|
4.22
|
%
|
|
3.99
|
%
|
|
|
1)
|
As of the date of completion of each merger and acquisition transaction, purchased loans were recorded at their estimated fair value, including our estimate of future expected cash flows until the ultimate resolution of these credits. The difference between the contractual loan balance and the fair value represents the purchased discount. The purchased discount is accreted into income over the estimated remaining life of the loan or pool of loans, based upon results of the quarterly cash flow re-estimation. The incremental accretion income represents the amount of income recorded on the purchased loans in excess of the contractual stated interest rate in the individual loan notes.
|
|
|
(2)
|
For additional information, see "Non-GAAP Financial Information."
|
Provision for Loan Losses
Comparison of quarter ended
June 30, 2019
to the comparable quarter in the prior year.
The Bank has established a comprehensive methodology for determining its allowance for loan losses. The allowance for loan losses is increased by provisions for loan losses charged to expense, and is reduced by loans charged-off, net of loan recoveries or a recovery of previous provision. The amount of the provision expense recognized during the
three and six months ended June 30, 2019
and
2018
was calculated in accordance with the Bank's methodology. For additional information, see the section entitled "Analysis of Allowance for Loan Losses" below.
The provision for loan losses is dependent on the Bank’s ability to manage asset quality and control the level of net charge-offs through prudent underwriting standards. In addition, a decline in general economic conditions could increase future provisions for loan losses and have a material effect on the Company’s net income.
The provision for loan losses
decrease
d
$383,000
, or
21.9%
, to
$1.4 million
for the
three months ended June 30, 2019
from
$1.8 million
for the
three months ended June 30, 2018
primarily due to lower growth in loans receivable, net during the three months ended June 30, 2019 compared to the same period in 2018 in addition to continued relatively stable and strong credit quality metrics. Based on a thorough review of the loan portfolio, the Bank determined that the provision for loan losses for the
three months ended June 30, 2019
was appropriate as it was calculated in accordance with the Bank's methodology for determining the allowance for loan losses.
Comparison of
six months ended June 30, 2019
to the comparable period in the prior year.
The provision for loan losses
decrease
d
$615,000
, or
21.2%
, to
$2.3 million
for the
six months ended June 30, 2019
from
$2.9 million
for the
six months ended June 30, 2018
. The
decrease
in the provision for loan losses for the
six months ended June 30, 2019
from the same period in
2018
was primarily the result of lower loan growth in addition to the mix and volume of the loan portfolio during the
six months ended June 30, 2019
. Based on a thorough review of the loan portfolio, the Bank determined that the provision for loan losses for the
six months ended June 30, 2019
was appropriate as it was calculated in accordance with the Bank's methodology for determining the allowance for loan losses.
Noninterest Income
Comparison of quarter ended
June 30, 2019
to the comparable quarter in the prior year.
Total noninterest income remained constant at
$7.6 million
for the
three months ended June 30, 2019
and
2018
. The following table presents the change in the key components of noninterest income for the periods noted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
Percentage Change
|
|
(Dollars in thousands)
|
Service charges and other fees
|
$
|
4,845
|
|
|
$
|
4,695
|
|
|
$
|
150
|
|
|
3.2
|
%
|
Gain on sale of investment securities, net
|
33
|
|
|
18
|
|
|
15
|
|
|
83.3
|
|
Gain on sale of loans, net
|
368
|
|
|
706
|
|
|
(338
|
)
|
|
(47.9
|
)
|
Interest rate swap fees
|
161
|
|
|
309
|
|
|
(148
|
)
|
|
(47.9
|
)
|
Other income
|
2,157
|
|
|
1,847
|
|
|
310
|
|
|
16.8
|
|
Total noninterest income
|
$
|
7,564
|
|
|
$
|
7,575
|
|
|
$
|
(11
|
)
|
|
(0.1
|
)%
|
Gain on sale of loans, net
decrease
d
$338,000
, or
47.9%
, to
$368,000
for the
three months ended June 30, 2019
compared to
$706,000
for the same period in
2018
primarily due to lower mortgage origination volume. Mortgage loan originations decreased by $7.9 million, or 40.4%, to $11.7 million for the
three months ended June 30, 2019
from $19.7 million
for the
three months ended June 30, 2018
. Proceeds from mortgage loan sales decreased by $8.0 million, or 41.2%, to $11.4 million for the
three months ended June 30, 2019
from $19.3 million
for the
three months ended June 30, 2018
. The Company also recognized a decrease in the gain on sale of the guaranteed portion of SBA loans during the
three months ended June 30, 2019
compared to the same period in
2018
as it was more advantageous for the Company to portfolio these loans based on a lower gain environment. The detail of gain on sale of loans, net is included in the following schedule:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
Percentage Change
|
|
(Dollars in thousands)
|
Gain on sale of mortgage loans, net
|
$
|
368
|
|
|
$
|
572
|
|
|
$
|
(204
|
)
|
|
(35.7
|
)%
|
Gain on sale of guaranteed portion of SBA loans, net
|
—
|
|
|
134
|
|
|
(134
|
)
|
|
(100.0
|
)
|
Gain on sale of loans, net
|
$
|
368
|
|
|
$
|
706
|
|
|
$
|
(338
|
)
|
|
(47.9
|
)%
|
The decreases in gain on sale of loans, net was offset partially by an
increase
in other income of
$310,000
, or
16.8%
, to
$2.2 million
for the
three months ended June 30, 2019
compared to
$1.8 million
for the same period in
2018
due primarily to increases in recoveries of zero-balance purchased loan notes which were charged-off prior to the consummation of the related acquisition during the
three months ended June 30, 2019
. These recoveries were primarily from the merger with Washington Banking Company which was effective May 1, 2014.
Comparison of
six months ended June 30, 2019
to the comparable period in the prior year
Total noninterest income
decrease
d
$130,000
, or
0.9%
, to
$15.0 million
for the
six months ended June 30, 2019
compared to
$15.1 million
for the same period in
2018
. The following table presents the change in the key components of noninterest income for the periods noted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
Percentage Change
|
|
(Dollars in thousands)
|
Service charges and other fees
|
$
|
9,330
|
|
|
$
|
9,238
|
|
|
$
|
92
|
|
|
1.0
|
%
|
Gain on sale of investment securities, net
|
48
|
|
|
53
|
|
|
(5
|
)
|
|
(9.4
|
)
|
Gain on sale of loans, net
|
620
|
|
|
1,580
|
|
|
(960
|
)
|
|
(60.8
|
)
|
Interest rate swap fees
|
161
|
|
|
360
|
|
|
(199
|
)
|
|
(55.3
|
)
|
Other income
|
4,834
|
|
|
3,892
|
|
|
942
|
|
|
24.2
|
|
Total noninterest income
|
$
|
14,993
|
|
|
$
|
15,123
|
|
|
$
|
(130
|
)
|
|
(0.9
|
)%
|
Gain on sale of loans, net
decrease
d
$960,000
, or
60.8%
, to
$620,000
for the
six months ended June 30, 2019
compared to
$1.6 million
for the same period in
2018
primarily due to lower mortgage origination volume. Mortgage loan originations decreased by $19.7 million, or 49.2%, to $20.3 million for the
six months ended June 30, 2019
from $40.0 million
for the
six months ended June 30, 2018
. Proceeds from mortgage loan sales decreased by $21.2 million, or 52.9%, to $18.8 million for the
six months ended June 30, 2019
from $40.0 million
for the
six months ended June 30, 2018
. Additionally, the gain on sale of the guaranteed portion of SBA loans decreased during the
six months ended June 30, 2019
compared to the same period in
2018
as it was more advantageous for the Company to keep these loans in the portfolio during 2019 based on market rates. The following table presents gain on sale of loans, net for the periods noted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
Percentage Change
|
|
(Dollars in thousands)
|
Gain on sale of mortgage loans, net
|
$
|
620
|
|
|
$
|
1,224
|
|
|
$
|
(604
|
)
|
|
(49.3
|
)%
|
Gain on sale of guaranteed portion of SBA loans, net
|
—
|
|
|
356
|
|
|
(356
|
)
|
|
(100.0
|
)
|
Gain on sale of loans, net
|
$
|
620
|
|
|
$
|
1,580
|
|
|
$
|
(960
|
)
|
|
(60.8
|
)%
|
The decreases in noninterest income from the gain on sale of loans, net was offset partially by an
increase
in other income of
$942,000
, or
24.2%
, to
$4.8 million
for the
six months ended June 30, 2019
compared to
$3.9 million
for the same period in
2018
due primarily to increases in recoveries of zero-balance purchased loan notes which were charged-off prior to the consummation of the related acquisition during the
six months ended June 30, 2019
. These recoveries were also primarily from our merger with Washington Banking Company.
Noninterest Expense
Comparison of quarter ended
June 30, 2019
to the comparable quarter in the prior year.
Noninterest expense
increase
d
$1.8 million
, or
5.2%
, to
$37.5 million
during the
three months ended June 30, 2019
from
$35.7 million
during the
three months ended June 30, 2018
. There were
no
acquisition-related expenses incurred during the
three months ended June 30, 2019
. Acquisition-related expenses incurred as a result of the Premier and Puget Mergers were
$880,000
during the
three months ended June 30, 2018
of which $425,000 and $337,000 were due to data processing expense and professional services expense, respectively. The following table presents changes in the key components of noninterest expense for the periods noted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
Percentage Change
|
|
(Dollars in thousands)
|
Compensation and employee benefits
|
$
|
21,982
|
|
|
$
|
19,321
|
|
|
$
|
2,661
|
|
|
13.8
|
%
|
Occupancy and equipment
|
5,451
|
|
|
4,810
|
|
|
641
|
|
|
13.3
|
|
Data processing
|
2,109
|
|
|
2,507
|
|
|
(398
|
)
|
|
(15.9
|
)
|
Marketing
|
1,106
|
|
|
823
|
|
|
283
|
|
|
34.4
|
|
Professional services
|
1,305
|
|
|
3,529
|
|
|
(2,224
|
)
|
|
(63.0
|
)
|
State and local taxes
|
809
|
|
|
716
|
|
|
93
|
|
|
13.0
|
|
Federal deposit insurance premium
|
426
|
|
|
375
|
|
|
51
|
|
|
13.6
|
|
Other real estate owned, net
|
289
|
|
|
—
|
|
|
289
|
|
|
100.0
|
|
Amortization of intangible assets
|
1,026
|
|
|
796
|
|
|
230
|
|
|
28.9
|
|
Other expense
|
3,044
|
|
|
2,829
|
|
|
215
|
|
|
7.6
|
|
Total noninterest expense
|
$
|
37,547
|
|
|
$
|
35,706
|
|
|
$
|
1,841
|
|
|
5.2
|
%
|
Acquisition-related expenses incurred as a result of the Premier and Puget Mergers during the
three months ended June 30, 2019
and 2018 are included in the following components of noninterest expense:
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2019
|
|
2018
|
|
(Dollars in thousands)
|
Compensation and employee benefits
|
$
|
—
|
|
|
$
|
67
|
|
Occupancy and equipment
|
—
|
|
|
28
|
|
Data processing
|
—
|
|
|
425
|
|
Marketing
|
—
|
|
|
5
|
|
Professional services
|
—
|
|
|
337
|
|
Other expense
|
—
|
|
|
18
|
|
Total acquisition costs
|
$
|
—
|
|
|
$
|
880
|
|
Compensation and employee benefits
increase
d
$2.7 million
, or
13.8%
, to
$22.0 million
during the
three months ended June 30, 2019
from
$19.3 million
during the
three months ended June 30, 2018
primarily as a result of additional employees acquired in the Premier Merger and the expansion of the commercial banking team in greater Portland, Oregon. The average full time equivalent employees increased to
880
for the
three months ended June 30, 2019
compared to
819
for the same period in
2018
.
Occupancy and equipment
increase
d
$641,000
, or
13.3%
, to
$5.5 million
during the
three months ended June 30, 2019
from
$4.8 million
during the
three months ended June 30, 2018
primarily due to five leases acquired in the Premier Merger.
Professional services
decrease
d
$2.2 million
, or
63.0%
, to
$1.3 million
during the
three months ended June 30, 2019
from
$3.5 million
during the
three months ended June 30, 2018
primarily due to the buy-out of a third-party contract in the amount of $1.7 million during the
three months ended June 30, 2018
and due to no acquisition-related expenses during the
three months ended June 30, 2019
. The third-party contract related to the Company’s deposit product realignment and after assessment, the Company determined that it was advantageous to buy-out the contract
prior to the system conversions relating to the Premier Merger. The Company expects the accumulated savings in future professional services expenses to fully offset the cost of the buy-out by the end of 2019.
The ratio of noninterest expense to average total assets (annualized) was
2.81%
for the
three months ended June 30, 2019
compared to
3.03%
for the
three months ended June 30, 2018
. The decrease was primarily due to the buy-out of a third party contract during the
three months ended June 30, 2018
and the absence of acquisition-related expenses during the
three months ended June 30, 2019
.
Comparison of
six months ended June 30, 2019
to the comparable period in the prior year
Noninterest expense
increase
d
$1.6 million
, or
2.2%
, to
$74.1 million
during the
six months ended June 30, 2019
compared to
$72.5 million
for the
six months ended June 30, 2018
. The following table presents changes in the key components of noninterest expense for the periods noted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
Percentage Change
|
|
(Dollars in thousands)
|
Compensation and employee benefits
|
$
|
43,896
|
|
|
$
|
40,688
|
|
|
$
|
3,208
|
|
|
7.9
|
%
|
Occupancy and equipment
|
10,909
|
|
|
9,437
|
|
|
1,472
|
|
|
15.6
|
|
Data processing
|
4,282
|
|
|
5,112
|
|
|
(830
|
)
|
|
(16.2
|
)
|
Marketing
|
2,204
|
|
|
1,631
|
|
|
573
|
|
|
35.1
|
|
Professional services
|
2,478
|
|
|
6,366
|
|
|
(3,888
|
)
|
|
(61.1
|
)
|
State and local taxes
|
1,607
|
|
|
1,404
|
|
|
203
|
|
|
14.5
|
|
Federal deposit insurance premium
|
711
|
|
|
730
|
|
|
(19
|
)
|
|
(2.6
|
)
|
Other real estate owned, net
|
375
|
|
|
—
|
|
|
375
|
|
|
100.0
|
|
Amortization of intangible assets
|
2,051
|
|
|
1,591
|
|
|
460
|
|
|
28.9
|
|
Other expense
|
5,559
|
|
|
5,494
|
|
|
65
|
|
|
1.2
|
|
Total noninterest expense
|
$
|
74,072
|
|
|
$
|
72,453
|
|
|
$
|
1,619
|
|
|
2.2
|
%
|
Acquisition-related expenses incurred as a result of the Premier and Puget Mergers during the
six months ended June 30, 2019
and 2018 are included in the following components of noninterest expense:
|
|
|
|
|
|
|
|
|
|
Six Months ended June 30,
|
|
2019
|
|
2018
|
|
(Dollars in thousands)
|
Compensation and employee benefits
|
$
|
76
|
|
|
$
|
2,891
|
|
Occupancy and equipment
|
—
|
|
|
37
|
|
Data processing
|
55
|
|
|
777
|
|
Marketing
|
—
|
|
|
5
|
|
Professional services
|
1
|
|
|
1,935
|
|
Other expense
|
—
|
|
|
43
|
|
Total acquisition costs
|
$
|
132
|
|
|
$
|
5,688
|
|
Compensation and employee benefits
increase
d
$3.2 million
, or
7.9%
, to
$43.9 million
during the
six months ended June 30, 2019
from
$40.7 million
during the
six months ended June 30, 2018
primarily as a result of additional employees acquired in the Premier Merger, the expansion of the commercial banking team in greater Portland, Oregon and standard salary increases The average full time equivalent employees increased to 879 for the
six months ended June 30, 2019
compared to 808 for the same period in
2018
.
Occupancy and equipment
increase
d
$1.5 million
, or
15.6%
, to
$10.9 million
during the
six months ended June 30, 2019
from
$9.4 million
during the
six months ended June 30, 2018
due substantially to branch expansion, including additional leased space in Seattle and Bellevue, Washington and in Portland and other Oregon markets. The Bellevue expansion included the lease acquired from the Puget Sound Merger and additional space leased subsequent to the merger. The Oregon expansion included five leases acquired in the Premier Merger.
Marketing
increase
d
$573,000
, or
35.1%
, to
$2.2 million
during the
six months ended June 30, 2019
from
$1.6 million
during the
six months ended June 30, 2018
primarily due to timing of various marketing campaigns.
Professional services
decrease
d
$3.9 million
, or
61.1%
, to
$2.5 million
during the
six months ended June 30, 2019
from
$6.4 million
during the
six months ended June 30, 2018
primarily due to the buy-out of a third-party contract in the amount of $1.7 million discussed above for the
three months ended June 30, 2019
and due to lower acquisition related expenses during the
six months ended June 30, 2019
.
The ratio of noninterest expense to average total assets (annualized) was
2.80%
for the
six months ended June 30, 2019
, compared to
3.15%
for the
six months ended June 30, 2018
. The decrease was primarily a result of the buy-out of a third-party contract during the
six months ended June 30, 2018
and lower acquisition related expenses during the
six months ended June 30, 2019
.
Income Tax Expense
Comparison of quarter ended
June 30, 2019
to the comparable quarter in the prior year.
Income tax expense
increase
d
$1.2 million
, or
59.9%
, to
$3.2 million
for the
three months ended June 30, 2019
from
$2.0 million
for the
three months ended June 30, 2018
. The effective tax rate was
16.7%
for the
three months ended June 30, 2019
compared to
14.5%
for the same period in
2018
. The
increase
in the income tax expense and effective tax rate during the
three months ended June 30, 2019
was primarily due to a decrease in tax-exempt securities, the impact of stock-based compensation activity, an increased Oregon presence, and higher pre-tax income.
Comparison of
six months ended June 30, 2019
to the comparable period in the prior year.
Income tax expense
increase
d
$3.0 million
, or
88.8%
, to
$6.4 million
for the
six months ended June 30, 2019
from
$3.4 million
for the
six months ended June 30, 2018
. The effective tax rate was
16.5%
for the
six months ended June 30, 2019
compared to
14.0%
for the same period in
2018
. The
increase
in the income tax expense and effective tax rate during the
six months ended June 30, 2019
was primarily due to those described above for the
three months ended June 30, 2019
.
Non-GAAP Financial Information
This report contains certain financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America. These measures include net interest income, interest and fees on loans, and loan yield and net interest margin excluding the effect of the incremental accretion on purchased loans acquired through mergers. Our management uses these non-GAAP measures, together with the related GAAP measures, in its analysis of our performance and in making business decisions. Management also uses these measures for peer comparisons. Management believes that presenting loan yield and net interest margin excluding the effect of the acquisition accounting discount accretion on loans acquired through mergers is useful in assessing the impact of acquisition accounting on loan yield and net interest margin, as the effect of loan discount accretion is expected to decrease as the acquired loans mature or roll off our balance sheet. These disclosures should not be viewed as substitutes for the results determined to be in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.
Reconciliations of the GAAP and non-GAAP financial measures on net interest income, interest and fees on loans, loan yield and net interest margin are presented below for the
three and six months ended June 30, 2019 and 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(Dollars in thousands)
|
Net interest income and interest and fees on loans:
|
|
|
|
|
Net interest income (GAAP)
|
$
|
50,536
|
|
|
$
|
43,741
|
|
|
$
|
100,324
|
|
|
$
|
84,578
|
|
Exclude incremental accretion on purchased loans
|
1,416
|
|
|
1,992
|
|
|
2,789
|
|
|
3,624
|
|
Adjusted net interest income (non-GAAP)
|
$
|
49,120
|
|
|
$
|
41,749
|
|
|
$
|
97,535
|
|
|
$
|
80,954
|
|
|
|
|
|
|
|
|
|
Average total interest earning assets, net
|
$
|
4,681,588
|
|
|
$
|
4,156,310
|
|
|
$
|
4,665,513
|
|
|
$
|
4,087,894
|
|
Net interest margin, annualized (GAAP)
|
4.33
|
%
|
|
4.22
|
%
|
|
4.34
|
%
|
|
4.17
|
%
|
Net interest margin, excluding incremental accretion on purchased loans, annualized (non-GAAP)
|
4.21
|
%
|
|
4.03
|
%
|
|
4.22
|
%
|
|
3.99
|
%
|
|
|
|
|
|
|
|
|
Interest and fees on loans (GAAP)
|
$
|
48,107
|
|
|
$
|
41,141
|
|
|
$
|
94,806
|
|
|
$
|
79,300
|
|
Exclude incremental accretion on purchased loans
|
1,416
|
|
|
1,992
|
|
|
2,789
|
|
|
3,624
|
|
Adjusted interest and fees on loans (non-GAAP)
|
$
|
46,691
|
|
|
$
|
39,149
|
|
|
$
|
92,017
|
|
|
$
|
75,676
|
|
|
|
|
|
|
|
|
|
Average total loans receivable, net
|
$
|
3,654,475
|
|
|
$
|
3,266,092
|
|
|
$
|
3,638,573
|
|
|
$
|
3,208,799
|
|
Loan yield, annualized (GAAP)
|
5.28
|
%
|
|
5.05
|
%
|
|
5.25
|
%
|
|
4.98
|
%
|
Loan yield, excluding incremental accretion on purchased loans, annualized (non-GAAP)
|
5.12
|
%
|
|
4.81
|
%
|
|
5.10
|
%
|
|
4.75
|
%
|
Financial Condition Overview
The table below provides a comparison of the changes in the Company's financial condition from
December 31, 2018
to
June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
139,290
|
|
|
$
|
161,910
|
|
|
$
|
(22,620
|
)
|
|
(14.0
|
)%
|
Investment securities available for sale, at fair value
|
|
960,680
|
|
|
976,095
|
|
|
(15,415
|
)
|
|
(1.6
|
)
|
Loans held for sale
|
|
3,692
|
|
|
1,555
|
|
|
2,137
|
|
|
137.4
|
|
Total loans receivable, net
|
|
3,681,920
|
|
|
3,619,118
|
|
|
62,802
|
|
|
1.7
|
|
Other real estate owned
|
|
1,224
|
|
|
1,983
|
|
|
(759
|
)
|
|
(38.3
|
)
|
Premises and equipment, net
|
|
84,296
|
|
|
81,100
|
|
|
3,196
|
|
|
3.9
|
|
Federal Home Loan Bank stock, at cost
|
|
10,005
|
|
|
6,076
|
|
|
3,929
|
|
|
64.7
|
|
Bank owned life insurance
|
|
94,417
|
|
|
93,612
|
|
|
805
|
|
|
0.9
|
|
Accrued interest receivable
|
|
15,401
|
|
|
15,403
|
|
|
(2
|
)
|
|
—
|
|
Prepaid expenses and other assets
|
|
126,259
|
|
|
98,522
|
|
|
27,737
|
|
|
28.2
|
|
Other intangible assets, net
|
|
18,563
|
|
|
20,614
|
|
|
(2,051
|
)
|
|
(9.9
|
)
|
Goodwill
|
|
240,939
|
|
|
240,939
|
|
|
—
|
|
|
—
|
|
Total assets
|
|
$
|
5,376,686
|
|
|
$
|
5,316,927
|
|
|
$
|
59,759
|
|
|
1.1
|
%
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
4,347,708
|
|
|
$
|
4,432,402
|
|
|
$
|
(84,694
|
)
|
|
(1.9
|
)%
|
Federal Home Loan Bank advances
|
|
90,700
|
|
|
—
|
|
|
90,700
|
|
|
100.0
|
|
Junior subordinated debentures
|
|
20,448
|
|
|
20,302
|
|
|
146
|
|
|
0.7
|
|
Securities sold under agreement to repurchase
|
|
23,141
|
|
|
31,487
|
|
|
(8,346
|
)
|
|
(26.5
|
)
|
Accrued expenses and other liabilities
|
|
98,064
|
|
|
72,013
|
|
|
26,051
|
|
|
36.2
|
|
Total liabilities
|
|
4,580,061
|
|
|
4,556,204
|
|
|
23,857
|
|
|
0.5
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Common stock
|
|
591,703
|
|
|
591,806
|
|
|
(103
|
)
|
|
—
|
|
Retained earnings
|
|
195,168
|
|
|
176,372
|
|
|
18,796
|
|
|
10.7
|
|
Accumulated other comprehensive gain (loss), net
|
|
9,754
|
|
|
(7,455
|
)
|
|
17,209
|
|
|
(230.8
|
)
|
Total stockholders' equity
|
|
796,625
|
|
|
760,723
|
|
|
35,902
|
|
|
4.7
|
|
Total liabilities and stockholders' equity
|
|
$
|
5,376,686
|
|
|
$
|
5,316,927
|
|
|
$
|
59,759
|
|
|
1.1
|
%
|
Total assets
increase
d
$59.8 million
, or
1.1%
, to
$5.38 billion
as of
June 30, 2019
compared to
$5.32 billion
as of
December 31, 2018
.
Total loans receivable, net,
increase
d
$62.8 million
, or
1.7%
, to
$3.68 billion
at June 30, 2019 compared to
$3.62 billion
as of
December 31, 2018
due primarily to an increase in total real estate construction and land development loans of
$39.2 million
, one-to-four family residential loans of
$15.7 million
, and total commercial business loans of
$12.7 million
.
Prepaid and other assets
increase
d
$27.7 million
, or
28.2%
, to
$126.3 million
at June 30, 2019 compared to
$98.5 million
as of
December 31, 2018
due primarily to the ROU lease asset of $27.3 million that was recorded during the six months ended June 30, 2019 due to the implementation of ASU 2016-02.
Investment securities available for sale
decrease
d
$15.4 million
, or
1.6%
, to
$960.7 million
at
June 30, 2019
from
$976.1 million
at
December 31, 2018
primarily as a result of maturities, calls, principal payments and sales of investment securities, offset partially by a new purchases and a decrease in net unrealized losses due to a decrease in interest rates during the
six months ended June 30, 2019
that positively impacted the fair value of our bond portfolio.
Total deposits
decrease
d
$84.7 million
or
1.9%
during the
six months ended June 30, 2019
. The
decrease
was due primarily to non-maturity deposits declining
$121.6 million
, or
3.1%
, to
$3.84 billion
, offset partially by an increase in certificate of deposit accounts of 36.9 million, or 7.9%. Non-maturity deposits as a percentage of total deposits
decrease
d to
88.4%
as of
June 30, 2019
from
89.5%
at
December 31, 2018
.
FHLB advances totaled
$90.7 million
at
June 30, 2019
to fund growth and to offset the decrease in total deposits, discussed above. There were no FHLB advances outstanding at
December 31, 2018
.
Accrued expenses and other liabilities
increase
d
$26.1 million
, or
36.2%
, to
$98.1 million
at
June 30, 2019
compared to
$72.0 million
as of
December 31, 2018
due primarily to the lease ROU obligation of
$28.6 million
that was recorded during the six months ended June 30, 2019 based on the implementation of ASU 2016-02.
Lending Activities
The Bank is a full service commercial bank, which originates a wide variety of loans with a focus on commercial business loans. Total loans receivable, net of allowance for loan losses,
increase
d
$62.8 million
, or
1.7%
, to
$3.68 billion
at
June 30, 2019
from
$3.62 billion
at
December 31, 2018
.
The following table provides information about our loan portfolio by type of loan at the dates indicated and the change between these dates. These balances are prior to deduction for the allowance for loan losses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
|
|
Balance
(1)
|
|
% of Total
(2)
|
|
Balance
(1)
|
|
% of Total
(2)
|
|
Change
|
|
%of Balance Change
|
|
(Dollars in thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
845,046
|
|
|
22.7
|
%
|
|
$
|
853,606
|
|
|
23.4
|
%
|
|
$
|
(8,560
|
)
|
|
(1.0
|
)%
|
Owner-occupied commercial real estate
|
772,499
|
|
|
20.8
|
|
|
779,814
|
|
|
21.3
|
|
|
(7,315
|
)
|
|
(0.9
|
)
|
Non-owner occupied commercial real estate
|
1,333,047
|
|
|
35.8
|
|
|
1,304,463
|
|
|
35.7
|
|
|
28,584
|
|
|
2.2
|
|
Total commercial business
|
2,950,592
|
|
|
79.3
|
|
|
2,937,883
|
|
|
80.4
|
|
|
12,709
|
|
|
0.4
|
|
One-to-four family residential
(3)
|
117,425
|
|
|
3.2
|
|
|
101,763
|
|
|
2.8
|
|
|
15,662
|
|
|
15.4
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
111,319
|
|
|
3.0
|
|
|
102,730
|
|
|
2.8
|
|
|
8,589
|
|
|
8.4
|
|
Five or more family residential and commercial properties
|
143,341
|
|
|
3.8
|
|
|
112,730
|
|
|
3.1
|
|
|
30,611
|
|
|
27.2
|
|
Total real estate construction and land development
(3)
|
254,660
|
|
|
6.8
|
|
|
215,460
|
|
|
5.9
|
|
|
39,200
|
|
|
18.2
|
|
Consumer
|
392,926
|
|
|
10.6
|
|
|
395,545
|
|
|
10.8
|
|
|
(2,619
|
)
|
|
(0.7
|
)
|
Gross loans receivable
|
3,715,603
|
|
|
99.9
|
|
|
3,650,651
|
|
|
99.9
|
|
|
64,952
|
|
|
1.8
|
|
Net deferred loan costs
|
2,680
|
|
|
0.1
|
|
|
3,509
|
|
|
0.1
|
|
|
(829
|
)
|
|
(23.6
|
)
|
Loans receivable, net
|
$
|
3,718,283
|
|
|
100.0
|
%
|
|
$
|
3,654,160
|
|
|
100.0
|
%
|
|
$
|
64,123
|
|
|
1.8
|
%
|
(1)
Balances do not include undisbursed loan commitments.
(2)
Percent of loans receivable, net.
(3)
Excludes loans held for sale of
$3.7 million
and
$1.6 million
as of
June 30, 2019
and December 31,
2018
, respectively.
Nonperforming Assets and Credit Quality Metrics
The following table provides information about our nonaccrual loans, other real estate owned and performing TDR loans for the indicated dates:
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
(Dollars in thousands)
|
Nonaccrual loans:
|
|
|
|
Commercial business
|
$
|
18,287
|
|
|
$
|
12,564
|
|
One-to-four family residential
|
19
|
|
|
71
|
|
Real estate construction and land development
|
793
|
|
|
899
|
|
Consumer
|
194
|
|
|
169
|
|
Total nonaccrual loans
(1)
|
19,293
|
|
|
13,703
|
|
Other real estate owned
|
1,224
|
|
|
1,983
|
|
Total nonperforming assets
|
$
|
20,517
|
|
|
$
|
15,686
|
|
|
|
|
|
Allowance for loan losses
|
$
|
36,363
|
|
|
$
|
35,042
|
|
Nonperforming loans to loans receivable, net
|
0.52
|
%
|
|
0.37
|
%
|
Allowance for loan losses to loans receivable, net
|
0.98
|
%
|
|
0.96
|
%
|
Allowance for loan losses to nonperforming loans
|
188.48
|
%
|
|
255.73
|
%
|
Nonperforming assets to total assets
|
0.38
|
%
|
|
0.30
|
%
|
|
|
|
|
Performing TDR loans:
|
|
|
|
Commercial business
|
$
|
25,298
|
|
|
$
|
22,170
|
|
One-to-four family residential
|
204
|
|
|
208
|
|
Consumer
|
423
|
|
|
358
|
|
Total performing TDR loans
|
$
|
25,925
|
|
|
$
|
22,736
|
|
Accruing loans past due 90 days or more
|
$
|
—
|
|
|
$
|
—
|
|
Potential problem loans
|
114,095
|
|
|
101,349
|
|
|
|
(1)
|
At
June 30, 2019
and
December 31, 2018
,
$8.1 million
and
$6.9 million
of nonaccrual loans were considered TDR loans, respectively.
|
Nonaccrual Loans
. Nonaccrual loans
increase
d
$5.6 million
to
$19.3 million
, or
0.52%
of loans receivable, net, at
June 30, 2019
from
$13.7 million
, or
0.37%
of loans receivable, net, at
December 31, 2018
. The increase was primarily related to the addition of five commercial lending relationships totaling $8.7 million which showed increased signs of cash flow deterioration, including two agricultural business relationships of $3.9 million. Management has allocated a specific reserve of $937,000 at
June 30, 2019
for these five lending relationships.
The following table reflects the changes in nonaccrual loans during the
six months ended June 30, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
(In thousands)
|
Nonaccrual loans
|
|
|
|
Balance, beginning of period
|
$
|
13,703
|
|
|
$
|
10,703
|
|
Addition of previously classified pass graded loans
|
3,583
|
|
|
4,196
|
|
Addition of previously classified potential problem loans
|
6,353
|
|
|
3,691
|
|
Net principal payments
|
(3,946
|
)
|
|
(438
|
)
|
Charge-offs
|
(400
|
)
|
|
(1,629
|
)
|
Balance, end of period
|
$
|
19,293
|
|
|
$
|
16,523
|
|
At
June 30, 2019
, nonaccrual loans of
$11.3 million
had related allowance for loan losses of
$2.5 million
and nonaccrual loans of
$8.0 million
had no related allowance for loan losses. At
December 31, 2018
, nonaccrual loans of
$9.5 million
had related allowance for loan losses of
$1.9 million
and nonaccrual loans of
$4.2 million
had no allowance for loan losses.
At
June 30, 2019
, nonperforming TDR loans, included in the nonaccrual loan table above, were
$8.1 million
and had a related allowance for loan losses of
$981,000
. At
December 31, 2018
, nonperforming TDR loans were
$6.9 million
and had a related allowance for loan losses of
$658,000
.
Nonperforming Assets
. Nonperforming assets consist of nonaccrual loans and other real estate owned. Nonperforming assets
increase
d
$4.8 million
to
$20.5 million
, or
0.38%
of total assets, at
June 30, 2019
from
$15.7 million
, or
0.30%
of total assets, at
December 31, 2018
due to the
increase
in nonaccrual loans, discussed above, offset partially by a
decrease
in other real estate owned of
759,000
, or
38.3%
to
$1.2 million
at
June 30, 2019
from
$2.0 million
at
December 31, 2018
as a result of a disposition of properties during the
six months ended June 30, 2019
.
Troubled Debt Restructured Loans
. TDR loans are considered impaired and are separately measured for impairment whether on accrual or nonaccrual status. The performing TDR loans are not considered nonperforming assets as they continue to accrue interest despite being considered impaired due to the restructured status. Performing TDR loans
increase
d
$3.2 million
, or
14.0%
, to
$25.9 million
at
June 30, 2019
from
$22.7 million
at
December 31, 2018
. The
increase
was due primarily to extending maturities on three commercial lending relationships totaling $5.5 million which showed signs of cash flow deterioration, offset partially by net principal payments.
The following table reflects the changes in performing TDR loans during the
six months ended June 30, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
(In thousands)
|
Performing TDR loans
|
|
|
|
Balance, beginning of period
|
$
|
22,736
|
|
|
$
|
26,757
|
|
Addition of previously classified pass graded loans
|
2,633
|
|
|
1,236
|
|
Addition of previously classified potential problem loans
|
4,667
|
|
|
551
|
|
Charge-offs
|
(10
|
)
|
|
—
|
|
Net principal payments
|
(4,101
|
)
|
|
(2,587
|
)
|
Balance, end of period
|
$
|
25,925
|
|
|
$
|
25,957
|
|
The related allowance for loan losses on performing TDR loans was
$2.9 million
as of
June 30, 2019
and
$2.3 million
as of
December 31, 2018
.
Potential Problem Loans
. Potential problem loans
increase
d
$12.7 million
, or
12.6%
, to
$114.1 million
at
June 30, 2019
compared to
$101.3 million
at
December 31, 2018
. The
increase
was primarily attributed to eight commercial lending relationships totaling $30.3 million that experienced cash flow deterioration as a result of customer-specific events. Of the eight downgraded relationships, six totaling $23.2 million at June 30, 2019 were downgraded
to OAEM while two relationships totaling $7.2 million were downgraded to Substandard. The risk rating downgrade of these relationships will enhance the Company's monitoring of these credits. The increase to potential problem loans was offset partially by net principal payments, including loans paid in full of $9.8 million, and the significant pay down of two commercial lines of credit totaling $3.2 million.
The following table reflects the changes in potential problem loans during the
six months ended June 30, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
|
Potential problem loans
|
|
Balance, beginning of period
|
$
|
101,349
|
|
|
$
|
83,543
|
|
Addition of previously classified pass graded loans
|
40,677
|
|
|
44,955
|
|
Upgrades to pass graded loan status
|
(2,858
|
)
|
|
(9,043
|
)
|
Net principal payments
|
(13,626
|
)
|
|
(4,242
|
)
|
Transfers of loans to nonaccrual and TDR status
|
(11,020
|
)
|
|
(257
|
)
|
Charge-offs
|
(427
|
)
|
|
(13,465
|
)
|
Balance, end of period
|
$
|
114,095
|
|
|
$
|
101,491
|
|
Analysis of Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses charged against earnings. The balance of the allowance for loan losses is maintained at the amount management believes will be appropriate to absorb probable incurred credit losses in the loan portfolio at the balance sheet date. The allowance for loan losses is determined by applying estimated loss factors to the credit exposure from outstanding loans.
We assess the estimated credit losses inherent in our loan portfolio by considering a number of elements including:
|
|
•
|
historical loss experience in the loan portfolio;
|
|
|
•
|
impact of environmental factors, including:
|
|
|
◦
|
levels of and trends in delinquencies, classified and impaired loans;
|
|
|
◦
|
levels of and trends in charge-offs and recoveries;
|
|
|
◦
|
trends in volume and terms of loans;
|
|
|
◦
|
effects of changes in risk selection and underwriting standards, and other changes in lending policies, procedures and practices;
|
|
|
◦
|
experience, ability, and depth of lending management and other relevant staff;
|
|
|
◦
|
national and local economic trends and conditions;
|
|
|
◦
|
other external factors such as competition, legal and regulatory;
|
|
|
◦
|
effects of changes in credit concentrations; and
|
We calculate an appropriate allowance for loan losses for the loans in our loan portfolio by applying historical loss factors for homogeneous classes of the portfolio, adjusted for changes to the above-noted environmental factors. We may record specific provisions for impaired loans, including loans on nonaccrual status and TDR loans, after a careful analysis of each loan’s credit and collateral factors. Our analysis of an appropriate allowance for loan losses combines the provisions made for our non-impaired loans and the specific provisions made for each impaired loan.
The allowance for loan losses on loans designated as non-PCI loans is similar to the methodology described above except that for non-PCI loans, the remaining unaccreted discounts resulting from the fair value adjustments recorded at the time the loans were purchased are additionally factored into the allowance methodology.
For the PCI loans, the acquisition date fair value incorporated our estimate of future expected cash flows until the ultimate resolution of these credits. To the extent actual or projected cash flows are less than previously estimated, additional provisions for loan losses on the PCI loan portfolio will be recognized immediately into earnings. To the extent actual or projected cash flows are more than previously estimated, the increase in cash flows is recognized immediately as a recapture of provision for loan losses up to the previously recognized provision for that loan or pool of loans, if any, and then prospectively recognized in interest income as a yield adjustment.
While we believe we use the best information available to determine the allowance for loan losses, our results of operations could be significantly affected if circumstances differ substantially from the assumptions used in determining the allowance. A decline in national and local economic conditions, or other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Company’s financial condition and results of operations. In addition, the determination of the amount of the allowance for loan losses is subject to review by bank regulators, as part of their routine examination process, which may result in the establishment of an additional allowance for loan losses based upon their judgment of information available to them at the time of their examination.
The following table provides information regarding changes in our allowance for loan losses at and for the
three and six months ended June 30, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(Dollars in thousands)
|
Allowance for loan losses on loans at the beginning of the period
|
$
|
36,152
|
|
|
$
|
33,261
|
|
|
$
|
35,042
|
|
|
$
|
32,086
|
|
Provision for loan losses
|
1,367
|
|
|
1,750
|
|
|
2,287
|
|
|
2,902
|
|
Charge-offs:
|
|
|
|
|
|
|
|
Commercial business
|
(774
|
)
|
|
(542
|
)
|
|
(877
|
)
|
|
(623
|
)
|
One-to-four family residential
|
(15
|
)
|
|
(15
|
)
|
|
(30
|
)
|
|
(15
|
)
|
Consumer
|
(566
|
)
|
|
(694
|
)
|
|
(1,152
|
)
|
|
(1,179
|
)
|
Total charge-offs
|
(1,355
|
)
|
|
(1,251
|
)
|
|
(2,059
|
)
|
|
(1,817
|
)
|
Recoveries:
|
|
|
|
|
|
|
|
Commercial business
|
62
|
|
|
68
|
|
|
221
|
|
|
569
|
|
Real estate construction and land development
|
7
|
|
|
2
|
|
|
625
|
|
|
2
|
|
Consumer
|
130
|
|
|
142
|
|
|
247
|
|
|
230
|
|
Total recoveries
|
199
|
|
|
212
|
|
|
1,093
|
|
|
801
|
|
Net charge-offs
|
(1,156
|
)
|
|
(1,039
|
)
|
|
(966
|
)
|
|
(1,016
|
)
|
Allowance for loan losses at the end of the period
|
$
|
36,363
|
|
|
$
|
33,972
|
|
|
$
|
36,363
|
|
|
$
|
33,972
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to loans receivable, net
|
0.98
|
%
|
|
1.02
|
%
|
|
0.98
|
%
|
|
1.02
|
%
|
Net recoveries on loans to average loans, annualized
|
0.13
|
%
|
|
0.13
|
%
|
|
0.05
|
%
|
|
0.06
|
%
|
|
|
|
|
|
|
|
|
Loans receivable, net at the end of the period
(1)
|
$
|
3,718,283
|
|
|
$
|
3,328,288
|
|
|
$
|
3,718,283
|
|
|
$
|
3,328,288
|
|
Average loans receivable during the period
(1)
|
3,654,475
|
|
|
3,266,092
|
|
|
3,638,573
|
|
|
3,208,799
|
|
(1)
Excludes loans held for sale.
The allowance for loan losses
increase
d
$1.3 million
, or
3.8%
, to
$36.4 million
at
June 30, 2019
from
$35.0 million
at
December 31, 2018
. The
increase
was the result of provision for loan losses of
$2.3 million
recognized during the
six months ended June 30, 2019
, offset partially by net charge-offs of
$966,000
recorded during the same period. The allowance for loan losses to loans receivable, net
increase
d to
0.98%
at
June 30, 2019
from
0.96%
at
December 31, 2018
. Included in the carrying value of loans are net fair value discounts on loans purchased in mergers and acquisitions which may reduce the need for an allowance for loan losses on these loans because they are carried at an amount below the outstanding principal balance. As these fair value discounts are accreted, increasing the loan balance, the Company may record an allowance for loan loss, which has the net impact of increasing the allowance for loan losses to loans receivable, net. The remaining net fair value discount on purchased loans was $10.0 million at
June 30, 2019
compared to $11.8 million at December 31, 2018.
The Company recorded charge-offs of
$2.1 million
during the
six months ended June 30, 2019
due primarily to charge-offs of three commercial lending relationships totaling $632,000, including one agricultural business relationship charge-off of $278,000, and small dollar charge-offs on a large volume of consumer loans. The Company recorded recoveries of
$1.1 million
during the
six months ended June 30, 2019
primarily due to the recovery of a one-to-four family residential construction loan of $602,000 as a result of a bankruptcy resolution and small recoveries on a large volume of small dollar consumer loans.
As of
June 30, 2019
, the Bank identified
$19.3 million
of nonaccrual loans and
$25.9 million
of performing TDR loans for a total of
$45.2 million
of impaired loans. Of these impaired loans,
$11.3 million
had no allowances for loan losses as their estimated collateral value or discounted expected cash flow is equal to or exceeds their carrying costs. The remaining
$33.9 million
of impaired loans had related allowances for loan losses totaling
$5.4 million
. As of
December 31, 2018
, the Bank identified
$13.7 million
of nonaccrual loans and
$22.7 million
of performing TDR loans for a total of
$36.4 million
of impaired loans. Of these impaired loans,
$7.6 million
had no allowances for loan losses. The remaining
$28.8 million
of impaired loans had related allowances for loan losses totaling
$4.2 million
.
The following table outlines the allowance for loan losses and related loan balances on loans at
June 30, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
(Dollars in thousands)
|
General Valuation Allowance:
|
|
|
|
Allowance for loan losses
|
$
|
28,415
|
|
|
$
|
27,854
|
|
Gross loans, excluding PCI and impaired loans
|
$
|
3,648,032
|
|
|
$
|
3,589,305
|
|
Percentage
|
0.78
|
%
|
|
0.78
|
%
|
|
|
|
|
PCI Allowance:
|
|
|
|
Allowance for loan losses
|
$
|
2,575
|
|
|
$
|
3,018
|
|
Gross PCI loans
|
$
|
22,353
|
|
|
$
|
24,907
|
|
Percentage
|
11.52
|
%
|
|
12.12
|
%
|
|
|
|
|
Specific Valuation Allowance:
|
|
|
|
Allowance for loan losses
|
$
|
5,373
|
|
|
$
|
4,170
|
|
Gross impaired loans
|
$
|
45,218
|
|
|
$
|
36,439
|
|
Percentage
|
11.88
|
%
|
|
11.44
|
%
|
|
|
|
|
Total Allowance for Loan Losses:
|
|
|
|
Allowance for loan losses
|
$
|
36,363
|
|
|
$
|
35,042
|
|
Gross loans receivable
|
$
|
3,715,603
|
|
|
$
|
3,650,651
|
|
Percentage
|
0.98
|
%
|
|
0.96
|
%
|
Based on the Bank's established comprehensive methodology, management deemed the allowance for loan losses of
$36.4 million
(
0.98%
of loans receivable, net and
188.48%
of nonperforming loans) at
June 30, 2019
appropriate to provide for probable incurred credit losses based on an evaluation of known and inherent risks in the loan portfolio at that date. This compares to an allowance for loan losses of
$35.0 million
(
0.96%
of loans receivable, net and
255.73%
of nonperforming loans) at
December 31, 2018
.
While we believe we use the best information available to determine the allowance for loan losses, our results of operations could be significantly affected if circumstances differ substantially from the assumptions used in determining the allowance. A decline in national and local economic conditions, or other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Company’s financial condition and results of operations. In addition, the determination of the amount of the allowance for loan losses is subject to review by bank regulators, as part of their routine examination process, which may result in the establishment of an additional allowance for loan losses based upon their judgment of information available to them at the time of their examination. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is appropriate or that increased provisions will not be necessary should the quality of the loans deteriorate. Any material increase in the allowance for loan losses would adversely affect the Company’s financial condition and results of operations.
Deposits and Other Borrowings
Total deposits
decrease
d
$84.7 million
, or
1.9%
, to
$4.35 billion
at
June 30, 2019
from
$4.43 billion
at
December 31, 2018
. Non-maturity deposits as a percentage of total deposits
decrease
d to
88.4%
at
June 30, 2019
from
89.5%
at
December 31, 2018
and the percentage of certificates of deposit to total deposits
increase
d to
11.6%
at
June 30, 2019
from
10.5%
at
December 31, 2018
.
The following table summarizes the Company's deposits as of
June 30, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
|
|
|
|
Balance
|
|
% of Total
|
|
Balance
|
|
% of Total
|
|
Change
|
|
% of Balance Change
|
|
(Dollars in thousands)
|
Noninterest demand deposits
|
$
|
1,320,743
|
|
|
30.3
|
%
|
|
$
|
1,362,268
|
|
|
30.7
|
%
|
|
$
|
(41,525
|
)
|
|
(3.0
|
)%
|
Interest bearing demand deposits
|
1,263,843
|
|
|
29.1
|
|
|
1,317,513
|
|
|
29.7
|
|
|
(53,670
|
)
|
|
(4.1
|
)
|
Money market accounts
|
757,156
|
|
|
17.4
|
|
|
765,316
|
|
|
17.3
|
|
|
(8,160
|
)
|
|
(1.1
|
)
|
Savings accounts
|
502,198
|
|
|
11.6
|
|
|
520,413
|
|
|
11.8
|
|
|
(18,215
|
)
|
|
(3.5
|
)
|
Total non-maturity deposits
|
3,843,940
|
|
|
88.4
|
|
|
3,965,510
|
|
|
89.5
|
|
|
(121,570
|
)
|
|
(3.1
|
)
|
Certificate of deposit
|
503,768
|
|
|
11.6
|
|
|
466,892
|
|
|
10.5
|
|
|
36,876
|
|
|
7.9
|
|
Total deposits
|
$
|
4,347,708
|
|
|
100.0
|
%
|
|
$
|
4,432,402
|
|
|
100.0
|
%
|
|
$
|
(84,694
|
)
|
|
(1.9
|
)
|
Borrowings may be used on a short-term basis to compensate for reductions in other sources of funds (such as deposit inflows at less than projected levels). Borrowings may also be used on a longer-term basis to support expanded lending activities and match the maturity of repricing intervals of assets. The Bank also utilizes securities sold under agreement to repurchase as a supplement to its funding sources. Our securities sold under agreement to repurchase are secured by available for sale investment securities. At
June 30, 2019
, the Bank had securities sold under agreement to repurchase of
$23.1 million
, a
decrease
of
$8.3 million
, or
26.5%
, from
$31.5 million
at
December 31, 2018
. The
decrease
was the result of customer activity during the period.
The Company also has junior subordinated debentures with a par value of
$25.0 million
which pay quarterly interest based on three-month LIBOR plus 1.56%. The debentures mature in 2037. The balance of the junior subordinated debentures was
$20.4 million
at
June 30, 2019
, which reflects the fair value of the junior subordinated debentures established during the Washington Banking Merger, adjusted for the accretion of discount from purchase accounting fair value adjustment.
At
June 30, 2019
, the Bank maintained credit facilities with the FHLB of Des Moines for
$827.7 million
and credit facilities with the Federal Reserve Bank for
$43.6 million
. The Company had
$90.7 million
of FHLB advances outstanding at
June 30, 2019
. There were no FHLB advances outstanding at December 31, 2018. The average cost of the FHLB advances during the
six months ended June 30, 2019
and
2018
was
2.68%
and
1.93%
, respectively. The Bank also maintains lines of credit with four correspondent banks to purchase federal funds totaling
$90.0 million
as of
June 30, 2019
. There were no federal funds purchased as of
June 30, 2019
or
December 31, 2018
.
Liquidity and Cash Flows
Our primary sources of funds are customer and local government deposits, loan principal and interest payments, and interest earned on and proceeds from sales and maturities of investment securities. These funds, together with retained earnings, equity, and other borrowed funds, are used to make loans, acquire investment securities and other assets, and fund continuing operations. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and loan prepayments are greatly influenced by the level of interest rates, economic conditions and competition.
Heritage Bank:
The principal objective of the Bank’s liquidity management program is to maintain the ability to meet day-to-day cash flow requirements of its customers who either wish to withdraw funds or to draw upon credit facilities to meet their cash needs. The Bank monitors the sources and uses of funds on a daily basis to maintain an acceptable liquidity position. In addition to liquidity from core deposits and the repayment and maturities of loans, the Bank can utilize established credit facilities and lines with correspondent banks or sale of investment securities.
Heritage Financial Corporation:
The Company is a separate legal entity from the Bank and must provide for its own liquidity. Substantially all of the Company’s revenues are obtained from dividends declared and paid by the Bank. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to the Company. However, management believes that such restrictions will not have an adverse impact on the ability of the Company to meets its ongoing cash obligations. At
June 30, 2019
, the Company (on an unconsolidated basis) had cash and cash equivalents of $13.6 million.
We are required to maintain an adequate level of liquidity to ensure the availability of sufficient funds to fund loan originations and deposit withdrawals, satisfy other financial commitments and fund operations. We generally maintain sufficient cash and short-term investments to meet short-term liquidity needs. At
June 30, 2019
, cash and cash equivalents totaled
$139.3 million
, or
2.6%
of total assets. The fair value of investment securities available for sale totaled
$960.7 million
at
June 30, 2019
, of which
$250.0 million
were pledged to secure public deposits or borrowing arrangements. The fair value of investment securities available for sale that were not pledged totaled
$710.7 million
, or
13.2%
of total assets, at
June 30, 2019
. The fair value of investment securities available for sale with maturities of one year or less were
$33.3 million
, or
0.6%
of total assets, at
June 30, 2019
.
Consolidated Cash Flows:
As disclosed in the Condensed Consolidated Statements of Cash Flows, net cash provided by operating activities was
$37.1 million
for the
six months ended June 30, 2019
, and primarily consisted of net income of
$32.5 million
. During the
six months ended June 30, 2019
, net cash used by investing activities was
$42.4 million
, which consisted primarily of net loan originations of
$66.0 million
and purchases of premises and equipment of
$6.4 million
, offset partially by cash provided from sales of securities available-for-sale of
$34.5 million
. Net cash used by financing activities was
$17.3 million
for the
six months ended June 30, 2019
, and primarily consisted of net decrease in deposits of
$84.7 million
and dividends paid of
$13.3 million
during the period, partially offset by net FHLB advances of
$90.7 million
.
Capital and Capital Requirements
Stockholders’ equity was
$796.6 million
at
June 30, 2019
compared to
$760.7 million
at
December 31, 2018
. The Company’s stockholders' equity to assets ratio was
14.8%
as of
June 30, 2019
and
14.3%
as of
December 31, 2018
. The following table reflects the changes to stockholders' equity during the
three and six months ended June 30, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(In Thousands)
|
Balance, beginning of period
|
$
|
778,191
|
|
|
$
|
634,708
|
|
|
$
|
760,723
|
|
|
$
|
508,305
|
|
Common stock issued in the Premier and Puget Mergers
|
—
|
|
|
—
|
|
|
—
|
|
|
130,770
|
|
Net income
|
15,984
|
|
|
11,857
|
|
|
32,536
|
|
|
20,944
|
|
Dividends declared
|
(6,679
|
)
|
|
(5,130
|
)
|
|
(13,341
|
)
|
|
(10,247
|
)
|
Other comprehensive income (loss)
|
9,193
|
|
|
(2,372
|
)
|
|
17,209
|
|
|
(9,915
|
)
|
Effects of implementation of accounting change related to operating leases
|
—
|
|
|
—
|
|
|
(399
|
)
|
|
—
|
|
Other
|
(64
|
)
|
|
460
|
|
|
(103
|
)
|
|
(334
|
)
|
Balance, end of period
|
$
|
796,625
|
|
|
$
|
639,523
|
|
|
$
|
796,625
|
|
|
$
|
639,523
|
|
The Company has historically paid cash dividends to its common shareholders. Payments of future cash dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our business, operating results and financial condition, capital requirements, current and anticipated cash needs, plans for expansion, any legal or contractual limitation on our ability to pay dividends and other relevant factors. Dividends on common stock from the Company depend substantially upon receipt of dividends from the Bank, which is the Company’s predominant source of income. On
July 24, 2019
, the Company’s Board of Directors declared a regular dividend of
$0.19
per common share which is payable on
August 22, 2019
to shareholders of record on
August 8, 2019
.
The Company is a bank holding company under the supervision of the Federal Reserve Bank. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. Heritage Bank is a federally insured institution and thereby is subject to the capital requirements established by the FDIC. The Federal Reserve capital requirements generally parallel the FDIC requirements. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements and operations. Management believes as of
June 30, 2019
, the Company and the Bank meet all capital adequacy requirements to which they are subject.
As of
June 30, 2019
and
December 31, 2018
, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events
since that notification that management believes have changed the Bank's categories. The following table represents the minimum required ratios of the Company and the Bank and the actual capital ratios at the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Requirements
|
|
Well-Capitalized Requirements
|
|
Actual
|
|
|
(Dollars in thousands)
|
As of June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity Tier 1 capital to risk-weighted assets
|
|
$
|
203,156
|
|
|
4.5
|
%
|
|
N/A
|
|
|
N/A
|
|
|
$
|
531,362
|
|
|
11.8
|
%
|
Tier 1 leverage capital to average assets
|
|
203,834
|
|
|
4.0
|
|
|
N/A
|
|
|
N/A
|
|
|
551,810
|
|
|
10.8
|
|
Tier 1 capital to risk-weighted assets
|
|
270,875
|
|
|
6.0
|
|
|
N/A
|
|
|
N/A
|
|
|
551,810
|
|
|
12.2
|
|
Total capital to risk-weighted assets
|
|
361,166
|
|
|
8.0
|
|
|
N/A
|
|
|
N/A
|
|
|
588,479
|
|
|
13.0
|
|
Heritage Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity Tier 1 capital to risk-weighted assets
|
|
202,919
|
|
|
4.5
|
|
|
$
|
293,105
|
|
|
6.5
|
%
|
|
535,423
|
|
|
11.9
|
|
Tier 1 leverage capital to average assets
|
|
203,643
|
|
|
4.0
|
|
|
254,554
|
|
|
5.0
|
|
|
535,423
|
|
|
10.5
|
|
Tier 1 capital to risk-weighted assets
|
|
270,558
|
|
|
6.0
|
|
|
360,744
|
|
|
8.0
|
|
|
535,423
|
|
|
11.9
|
|
Total capital to risk-weighted assets
|
|
360,744
|
|
|
8.0
|
|
|
450,930
|
|
|
10.0
|
|
|
572,092
|
|
|
12.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity Tier 1 capital to risk-weighted assets
|
|
$
|
197,189
|
|
|
4.5
|
%
|
|
N/A
|
|
|
N/A
|
|
|
$
|
510,618
|
|
|
11.7
|
%
|
Tier 1 leverage capital to average assets
|
|
201,920
|
|
|
4.0
|
|
|
N/A
|
|
|
N/A
|
|
|
530,920
|
|
|
10.5
|
|
Tier 1 capital to risk-weighted assets
|
|
262,918
|
|
|
6.0
|
|
|
N/A
|
|
|
N/A
|
|
|
530,920
|
|
|
12.1
|
|
Total capital to risk-weighted assets
|
|
350,558
|
|
|
8.0
|
|
|
N/A
|
|
|
N/A
|
|
|
566,268
|
|
|
12.9
|
|
Heritage Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity Tier 1 capital to risk-weighted assets
|
|
197,004
|
|
|
4.5
|
|
|
$
|
284,561
|
|
|
6.5
|
%
|
|
513,993
|
|
|
11.7
|
|
Tier 1 leverage capital to average assets
|
|
203,339
|
|
|
4.0
|
|
|
254,174
|
|
|
5.0
|
|
|
513,993
|
|
|
10.1
|
|
Tier 1 capital to risk-weighted assets
|
|
262,671
|
|
|
6.0
|
|
|
350,229
|
|
|
8.0
|
|
|
513,993
|
|
|
11.7
|
|
Total capital to risk-weighted assets
|
|
350,229
|
|
|
8.0
|
|
|
437,786
|
|
|
10.0
|
|
|
549,341
|
|
|
12.5
|
|
Under applicable capital requirements both the Company and the Bank are required to have a common equity Tier 1 capital ratio of 4.5%, a Tier 1 leverage ratio of 4.0%, a Tier 1 risk-based ratio of 6.0% and a total risk-based ratio of 8.0%. Both the Company and the Bank are also required to maintain a capital conservation buffer above 2.5% to avoid restrictions on certain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers. At
June 30, 2019
, the capital conservation buffer was
5.0%
and
4.7%
for the Company and the Bank, respectively.