NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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(1)
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Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements
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(a) Description of Business
Heritage Financial Corporation 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, Heritage 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 March 31, 2020 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.
(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 2019 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 months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.
To prepare unaudited Condensed Consolidated Financial Statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. It is reasonably possible management's estimate of ACL on loans and the fair value of financial instruments could change from $47.5 million and the amounts disclosed in Note (13) Fair Value Measurements, respectively. The resulting change in these estimates would be material to the unaudited Condensed Consolidated Financial Statements.
Certain prior year amounts have been reclassified to conform to the current year’s presentation. Namely, loan receivable balances in the disclosures of Note (3) Loans Receivable and Note (4) Allowance for Credit Losses on Loans have been reclassified to conform to the current period presentation, which is net of deferred fees and costs. Reclassifications had no effect on the prior years' net income or stockholders’ equity.
(c) Significant Accounting Policies
The significant accounting policies used in preparation of the Company's Condensed Consolidated Financial Statements are disclosed in the 2019 Annual Form 10-K. Other than the adoption of new accounting standard discussed below, there have not been any material changes in the Company's significant accounting policies from those contained in the 2019 Annual Form 10-K.
Adoption of New Accounting Standard
On January 1, 2020, the Company adopted FASB ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the CECL methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans receivable. It also applies to off-balance sheet credit exposures such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments. In addition, the CECL Adoption made changes to the accounting for investment securities available for sale.
The Company adopted ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized cost and unfunded commitments. The Company elected not to measure an ACL on accrued interest receivable on loans receivable or accrued interest receivable on investment securities available for sale as Company policy is to reverse interest income for uncollectible accrued interest receivable balances in a timely manner.
Results for the reporting period beginning after January 1, 2020 are presented under ASU 2016-13, while prior period amounts were not restated and continue to be reported in accordance with previously applicable GAAP. The accounting policies for prior periods are included in the 2019 Form 10-K.
The accounting policies for all financial instruments impacted by the CECL adoption are as follows:
Investment Securities
A debt security is placed on nonaccrual status at the time any principal or payments become more than 90 days delinquent. Interest accrued, but not received for a security placed on nonaccrual, is reversed against interest income during the period that the debt security is placed on nonaccrual status.
Allowance for Credit Losses on Investment Securities
Management evaluates the need for an ACL on investment securities on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For investment securities available for sale in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before the recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For investment securities available for sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and adverse conditions specifically related to the security, among other factors. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL on investment securities available for sale is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any decline in fair value that has not been recorded through an ACL on investment securities for sale is recognized in other comprehensive income.
Changes in the ACL on investment securities available for sale are recorded as provision (reversal of provision) for credit losses expense. Losses are charged against the allowance when management believes the uncollectability of an investment security available for sale is confirmed or when either of the criteria regarding intent or requirement to sell is met.
Accrued interest receivable on investment securities available for sale is excluded from the estimate of credit losses as interest accrued, but not received, is reversed timely in accordance with the policy for investment securities above.
Loans Receivable
Loans receivable include loans originated and indirect loans purchased by the Bank as well as loans acquired in business combinations.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the outstanding principal balance, net of purchased premiums and discounts, unearned discounts, and net deferred loan origination fees and costs. Accrued interest receivable for loans receivable is reported in prepaid expenses and other assets on the Condensed Consolidated Statements of Financial Condition.
Purchased Loans:
Loans acquired in a business combination are designated as “purchased” loans. Upon adoption of ASU 2016-13, the Bank's PCI loans were transitioned to PCD loans. The Bank elected to account for the PCD loans individually, terminating the pools of loans that were previously accounted for under ASC 310-30.
Loans purchased after January 1, 2020 are recorded at their fair value at acquisition date net of an ACL on loans expected to be incurred over the life of the loan. The initial ACL on purchased loans is determined using the same methodology as originated loans. For non-PCD loans, the initial ACL is recorded to provision for credit losses expense. For PCD loans, the initial ACL is incorporated into the calculation of the fair value of net assets acquired on the merger date and the net of the PCD loan purchase price and the initial ACL becomes the initial amortized cost basis. The difference between the initial amortized cost basis and the par value of PCD loans is the noncredit discount or premium for PCD loans. The noncredit discount or premium for PCD loans and both the noncredit and credit discount or premium for non-PCD loans are accreted through the interest and fees on loans line item on the Condensed Consolidated Statements of Income over the life
of the loan using the effective interest method for non-revolving credits or the straight-line method, which approximates the effective interest method, for revolving credits. Any unrecognized discount or premium for a purchased loan that is subsequently repaid in full is recognized immediately into income. Subsequent changes to the ACL on loans for purchased loans are recorded through provision for credit losses expense.
Troubled Debt Restructures:
The CARES Act provided guidance around the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined by the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act if they are less than 30 days past due on their contractual payments at the time a modification program is implemented.
Allowance for Credit Losses on Loans
The ACL on loans is a valuation account that is deducted from the amortized cost of loans receivable to present the net amount expected to be collected. Loans are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged off. Subsequent recoveries, if any, are credited to the allowance. The Bank record the changes in the ACL through earnings, as a provision for credit losses on the Condensed Consolidated Statements of Income.
Accrued interest receivable on loans receivable is excluded from the estimate of credit losses. Instead, interest accrued, but not received, is reversed timely in accordance with the policy for loans receivable above.
Management has adopted a historic loss, open pool CECL methodology to calculate the ACL on loans. The same methodology is applied to all loans consistent with the guidance of the accounting standard which does not require undue complexity. Under this allowance approach, the Company has identified segments of loans with similar risk characteristics that align with its identified loan classes. Nonaccrual loans are not considered similar to other loans; therefore, they are evaluated for allowance on an individual basis. The allowance for individually evaluated loans is calculated using either the collateral value method, which considers the likely source of repayment as the value of the collateral, less estimated costs to sell, or the net present value method, which considers the contractual principal and interest terms and estimated cash flows available from the borrower to satisfy the debt. When the net present value method is used, management adjusts the effective interest rate used to discount expected cash flows to incorporate expected prepayments.
The ACL on a TDR loan is measured using the same method as all other loans, except that the original interest rate is used to discount the expected cash flows, not the rate specified in the restructuring. Nonperforming TDR loans, including defaulted TDR loans, are evaluated for allowance on an individual basis. A performing TDR loan is evaluated for allowance on a collective basis with loans with similar risk characteristics if a) it is classified as a risk rating of "Pass", b) it has paid a minimum of six months of principal and interest in accordance with the restructured terms and c) it has not been over 30 days delinquent in the most recent six month period. If all three criteria on a performing TDR loan are not met, the loan is evaluated for allowance on an individual basis as it is not deemed to have similar characteristics of other loans in the portfolio.
For each loan segment collectively measured, the baseline loss rates are calculated using the bank's average quarterly historical loss information. The Bank evaluates the historical period on a quarterly basis, with the assumption that economic cycles have historically lasted between 10 and 15 years. The baseline loss rates are applied to each loan's estimated cash flows over the life of the loan under the remaining life method to determine the baseline loss estimate for each loan. Estimated cash flows consider the principal and interest in accordance with the contractual term of the loan and estimated prepayments. Contractual cash flows are based on the amortized cost, as adjusted for balances guaranteed by governmental entities, such as SBA or USDA, or the unguaranteed amortized cost. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: 1) management has a reasonable expectation at the reporting date that a TDR will be executed with an individual borrower or 2) the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company. Prepayments are established for each segment based on rolling historical averages for the segments, which management believes is an accurate representation of future prepayment activity. Management reviews the adequacy of the prepayment period assumption on a quarterly basis.
The CECL methodology includes consideration of the forecasted direction of the economic and business environment and its likely impact to the estimated allowance as compared to the historical losses over the reasonable and supportable time frame. Economic forecast models for the current period are uploaded to the model, which targets 16 forecasted macroeconomic factors, such as unemployment rate, GDP, housing price index, commercial real estate price index, disposable income growth, mortgage rates, and certain rate indices. Each of the forecasted segments is impacted by a mix of these macroeconomic factors. Further, each of the macroeconomic factors is utilized differently by segment, including the application of lagged factors and various transformations such as percent change year over year.
The macroeconomic sensitive model is developed for each segment given the current and forecasted conditions, and a macroeconomic multiplier is calculated for each forecast period considering the forecasted losses as compared to the long-term average actual losses of the dataset. The impact of those macroeconomic factors to each segment, positive or negative, using the reasonable and supportable period, are added to the calculated baseline loss rate. After the reasonable and supportable period, the estimated credit losses are reverted back to historical baseline loss levels under a reversion period on a straight-lined, input reversion basis.
The Bank also considers other qualitative risk factors to adjust the estimated ACL calculated by the above mentioned model. The Bank will have a bias for minimal factors unless internal or external factors outside those considered in its historical losses or macroeconomic forecast indicate otherwise. The Bank will establish metrics to estimate the qualitative risk factor by segment based on the identified risk.
In general, management's estimate of the ACL on loans uses relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.
The allowance for loan losses evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. While management utilizes its best judgment and information available to recognize losses on loans, future additions to the allowance may be necessary based on further declines in local and national economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s ACL on loans. Such agencies may require the Bank to make adjustments to the allowance based on their judgments about information available to them at the time of their examinations. The Company believes the ACL on loans is appropriate given all of the above considerations.
Allowance for Credit Losses on Unfunded Commitments
The Bank estimates expected credit losses on unfunded, off-balance sheet commitments over the contractual period in which the Bank is exposed to credit risk from a contractual obligation to extend credit, unless the obligation is unconditionally cancellable by the Company. The Bank has determined that no allowance is necessary for its credit card portfolio as it has the ability to unconditionally cancel the available lines of credit.
The allowance methodology is similar to the ACL on loans, but additionally includes an estimate of the future utilization of the commitment as determined by historical commitment utilizations and the Bank's estimates of future utilizations given current economic forecasts. The credit risks associated with the unfunded commitments are consistent with the risks outlined for each loan class.
The allowance is recognized in accrued expenses and other liabilities on the Condensed Consolidated Statements of Financial Condition and is adjusted as a provision (reversal of provision) for credit losses on the Condensed Consolidated Statements of Income.
Provision for Credit Losses
The provision for credit losses as presented in the Company's Condensed Consolidated Statements of Income includes the provision for credit losses on loans and the provision for credit losses on unfunded commitments.
(d) Recently Issued Accounting Pronouncements
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, ASU 2019-05, ASU 2019-10, ASU 2019-11, and 2020-02, was originally issued in June 2016. 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 adopted the Update on January 1, 2020 as discussed in the Significant Accounting Policies section above. The adoption had the following impacts:
Investment Securities
As of December 31, 2019, the Company had no historical charge-off or recovery history and did not have any investment securities available for sale outstanding at the adoption date for which an other-than-temporary impairment was previously recorded. At the adoption date of ASU 2016-13, the unrealized losses present in the portfolio of investment securities available for sale were primarily due to decreases in market interest rates on floating rate investment securities since the purchase of the securities and the fair value of these securities was expected to recover as the securities approach their maturity dates. The basis of management’s conclusion was that at December 31, 2019, 83.5% of the investment securities were issued by or guaranteed by the United States government or its agencies, 14.0% were issued and guaranteed by State and local governments and the remainder of the portfolio was invested in at least investment-grade securities. As a result of the analysis, no allowance for credit losses on investment securities available for sale was recorded upon adoption. See Note (2) Investment Securities for more information.
Loan Receivable
ASU 2016-13 was applied prospectively and replaced the allowance for loan losses with the ACL on loans on the Condensed Consolidated Statements of Financial Condition and replaced the related provision for loan losses with the provision for credit losses on loans as presented on the Condensed Consolidated Statements of Income, net of provision for credit losses on unfunded commitments.
The adoption was completed in a specific order beginning with the transition of PCI loans to PCD loans. The Bank elected to account for the PCD loans individually, terminating the pools of loans that were previously accounted for under ASC 310-30. First, an ACL was determined for each PCI loan. The ACL on PCI loans was added to the loans' carrying amount to establish a PCD loan at its amortized cost basis. The difference between the unpaid principal balance and the amortized cost basis of the PCD loan is a noncredit premium or discount, which will be amortized into interest income over the remaining life of the PCD loan. The PCI to PCD transition did not have an impact on beginning retained earnings; however, it did have the effect of reducing the existing allowance for PCI loans by $1.6 million under the CECL methodology as compared to ASC 310-30 methodology.
Following the PCI to PCD transition, the Bank recorded a pretax increase to the ACL on loans of $3.4 million to increase the reserve to the estimated credit losses at January 1, 2020 based on its CECL methodology as part of the cumulative-effect adjustment to beginning retained earnings. The pretax increase to the ACL on loans of $3.4 million and the reduction in ACL on loans due to the PCI to PCD transition of $1.6 million resulted in a $1.8 million increase in the ACL on loans at January 1, 2020. Upon adoption, the adjusted beginning balance of the ACL on loans as a percentage of loans receivable was 1.01% as compared to 0.96% at December 31, 2019 under the prior incurred loss methodology. At March 31, 2020, the ACL on loans as a percentage of loans receivable was 1.23%.
The PCI to PCD transition also resulted in a net discount of $4.3 million for PCD loans, or an increase in the net discount for PCD loans of $1.6 million. Following the transition, the total net discount for purchased loans increased to $10.0 million at January 1, 2020 compared to $8.4 million as of December 31, 2019. The total net discount for purchased loans was $9.0 million at March 31, 2020. The Company accretes the net discount or premium on purchased loans to interest and fees on loans using the effective interest method.
See Note (3) Loans Receivable and Note (4) Allowance for Credit Losses on Loans for more information.
Unfunded Commitments
ASU 2016-13 was applied prospectively and replaced the reserve for unfunded commitments with the ACL on unfunded commitments as included in accrued liabilities and other expenses on the Condensed Consolidated Statements of Financial Condition and replaced the provision for unfunded commitments with the provision for credit losses on unfunded commitments as presented on the Condensed Consolidated Statements of Income, net of provision for credit losses on loans. Upon adoption, the Bank recorded a pretax increase in the beginning ACL on unfunded commitments of $3.7 million. See Note (15) Commitments and Contingencies for more information.
Overall CECL Impact
The adoption of ASU 2016-13, including the above mentioned increase to the ACL on loans of $3.4 million and the increase to the ACL on unfunded commitments of $3.7 million, resulted in a pretax cumulative-effect adjustment of $7.1 million. The impact of this adjustment to beginning retained earnings on January 1, 2020 was $5.6 million, net of tax.
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 adopted the guidance on January 1, 2020. The adoption did not have a material impact on its Condensed Consolidated Financial Statements as of or for the three month ended March 31, 2020 as the Company's qualitative assessment indicated no goodwill impairment.
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 adopted the guidance on January 1, 2020. The adoption did not have a material impact to Note (13) Fair Value Measurements in its Condensed Consolidated Financial Statements.
FASB ASU 2020-03, Codification Improvements to Financial Instruments was issued in March 2020 and revised a wide variety of topics in the Codification with the intent to make the Codification easier to understand and apply by eliminating inconsistencies and providing clarifications. The Update was effective immediately upon its release and did not have a material impact on the Company's Condensed Consolidated Financial Statements.
FASB ASU 2020-04, Reference Rate Reform (Topic 848) was issued in March 2020 and provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered "minor" so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. The Update also provides numerous optional expedients for derivative accounting. The Update is effective March 12, 2020 through December 31, 2022. An entity may elect to apply the Update for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the Codification, the amendments in this Update must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. The Company anticipates this Update will simplify any modifications we execute between the selected start date (yet to be determined) and December 31, 2022 that are directly related to LIBOR transition by allowing prospective recognition of the continuation of the contract, rather than extinguishment of the old contract resulting in writing off unamortized fees/costs. The Company is evaluating the impacts of this Update and have not yet determined whether LIBOR transition and this Update will have material effects on our business operations and Condensed Consolidated Financial Statements.
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(2)
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Investment Securities
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(a) Securities by Type and Maturity
The following tables present the amortized cost and fair value of investment securities available for sale at the dates indicated and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
(In thousands)
|
U.S. Treasury and U.S. Government-sponsored agencies
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$
|
85,868
|
|
|
$
|
1,314
|
|
|
$
|
(120
|
)
|
|
$
|
87,062
|
|
Municipal securities
|
174,614
|
|
|
5,409
|
|
|
(415
|
)
|
|
179,608
|
|
Mortgage-backed securities and collateralized mortgage obligations:
|
|
|
|
|
|
|
|
Residential
|
313,710
|
|
|
9,204
|
|
|
(230
|
)
|
|
322,684
|
|
Commercial
|
316,683
|
|
|
10,348
|
|
|
(1,275
|
)
|
|
325,756
|
|
Corporate obligations
|
23,897
|
|
|
195
|
|
|
(260
|
)
|
|
23,832
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|
Other asset-backed securities (1)
|
23,056
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|
|
—
|
|
|
(906
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)
|
|
22,150
|
|
Total
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$
|
937,828
|
|
|
$
|
26,470
|
|
|
$
|
(3,206
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)
|
|
$
|
961,092
|
|
|
|
(1)
|
Issued and guaranteed by U.S. Government-sponsored agencies.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
(In thousands)
|
U.S. Treasury and U.S. Government-sponsored agencies
|
$
|
104,709
|
|
|
$
|
598
|
|
|
$
|
(84
|
)
|
|
$
|
105,223
|
|
Municipal securities
|
128,183
|
|
|
4,933
|
|
|
(102
|
)
|
|
133,014
|
|
Mortgage-backed securities and collateralized mortgage obligations:
|
|
|
|
|
|
|
|
Residential
|
336,929
|
|
|
3,184
|
|
|
(505
|
)
|
|
339,608
|
|
Commercial
|
322,169
|
|
|
5,575
|
|
|
(649
|
)
|
|
327,095
|
|
Corporate obligations
|
23,893
|
|
|
316
|
|
|
(15
|
)
|
|
24,194
|
|
Other asset-backed securities (1)
|
23,277
|
|
|
54
|
|
|
(153
|
)
|
|
23,178
|
|
Total
|
$
|
939,160
|
|
|
$
|
14,660
|
|
|
$
|
(1,508
|
)
|
|
$
|
952,312
|
|
|
|
(1)
|
Issued and guaranteed by U.S. Government-sponsored agencies.
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There were no securities classified as trading or held to maturity at March 31, 2020 or December 31, 2019.
For the three months ended March 31, 2020, there was no provision for credit loss on investment securities available for sale recorded to net income. There was no ACL on investment securities at March 31, 2020.
The amortized cost and fair value of investment securities available for sale at March 31, 2020, 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
|
$
|
33,547
|
|
|
$
|
33,806
|
|
Due after one year through five years
|
162,455
|
|
|
166,232
|
|
Due after five years through ten years
|
255,123
|
|
|
263,149
|
|
Due after ten years
|
486,703
|
|
|
497,905
|
|
Total
|
$
|
937,828
|
|
|
$
|
961,092
|
|
There were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity at March 31, 2020 and December 31, 2019.
(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, for which an ACL has not been recorded, aggregated by investment category and length of time that the individual securities have been in continuous unrealized loss positions as of March 31, 2020 and December 31, 2019:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
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
|
$
|
5,880
|
|
|
$
|
(120
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,880
|
|
|
$
|
(120
|
)
|
Municipal securities
|
27,434
|
|
|
(415
|
)
|
|
—
|
|
|
—
|
|
|
27,434
|
|
|
(415
|
)
|
Mortgage-backed securities and collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
2,045
|
|
|
(6
|
)
|
|
27,992
|
|
|
(224
|
)
|
|
30,037
|
|
|
(230
|
)
|
Commercial
|
32,562
|
|
|
(683
|
)
|
|
25,485
|
|
|
(592
|
)
|
|
58,047
|
|
|
(1,275
|
)
|
Corporate obligations
|
7,788
|
|
|
(240
|
)
|
|
1,980
|
|
|
(20
|
)
|
|
9,768
|
|
|
(260
|
)
|
Other asset-backed securities (1)
|
20,644
|
|
|
(848
|
)
|
|
1,506
|
|
|
(58
|
)
|
|
22,150
|
|
|
(906
|
)
|
Total
|
$
|
96,353
|
|
|
$
|
(2,312
|
)
|
|
$
|
56,963
|
|
|
$
|
(894
|
)
|
|
$
|
153,316
|
|
|
$
|
(3,206
|
)
|
|
|
(1)
|
Issued and guaranteed by U.S. Government-sponsored agencies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
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
|
$
|
45,999
|
|
|
$
|
(84
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
45,999
|
|
|
$
|
(84
|
)
|
Municipal securities
|
13,761
|
|
|
(102
|
)
|
|
—
|
|
|
—
|
|
|
13,761
|
|
|
(102
|
)
|
Mortgage-backed securities and collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
14,272
|
|
|
(66
|
)
|
|
60,232
|
|
|
(439
|
)
|
|
74,504
|
|
|
(505
|
)
|
Commercial
|
56,263
|
|
|
(177
|
)
|
|
43,623
|
|
|
(472
|
)
|
|
99,886
|
|
|
(649
|
)
|
Corporate obligations
|
998
|
|
|
(2
|
)
|
|
1,987
|
|
|
(13
|
)
|
|
2,985
|
|
|
(15
|
)
|
Other asset-backed securities (1)
|
14,383
|
|
|
(127
|
)
|
|
1,609
|
|
|
(26
|
)
|
|
15,992
|
|
|
(153
|
)
|
Total
|
$
|
145,676
|
|
|
$
|
(558
|
)
|
|
$
|
107,451
|
|
|
$
|
(950
|
)
|
|
$
|
253,127
|
|
|
$
|
(1,508
|
)
|
|
|
(1)
|
Issued and guaranteed by U.S. Government-sponsored agencies.
|
The Company has evaluated these investment securities available for sale as of March 31, 2020 and December 31, 2019 and determined that no ACL is necessary. Unrealized losses on investment securities have not been recognized into income because the issuers of bonds are investment grade (rated A- or higher), the securities carry governmental guarantees, management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the bonds and the fair value is expected to recover as the bonds approach maturity.
(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 months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
(In thousands)
|
Gross realized gains
|
$
|
1,028
|
|
|
$
|
89
|
|
Gross realized losses
|
(14
|
)
|
|
(74
|
)
|
Net realized gains
|
$
|
1,014
|
|
|
$
|
15
|
|
(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 March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
|
(In thousands)
|
Washington and Oregon state public deposits
|
$
|
179,570
|
|
|
$
|
184,231
|
|
|
$
|
187,700
|
|
|
$
|
190,773
|
|
Securities sold under agreement to repurchase
|
26,420
|
|
|
26,473
|
|
|
22,156
|
|
|
22,294
|
|
Other securities pledged
|
21,164
|
|
|
22,214
|
|
|
19,333
|
|
|
19,850
|
|
Total
|
$
|
227,154
|
|
|
$
|
232,918
|
|
|
$
|
229,189
|
|
|
$
|
232,917
|
|
(e) Accrued Interest Receivable
Accrued interest receivable excluded from amortized cost on investment securities available for sale totaled $3.9 million and $3.7 million at March 31, 2020 and December 31, 2019, respectively. No amounts of accrued interest receivable were reversed against interest income on investment securities during the three months ended March 31, 2020 or 2019.
(a) Loan Origination/Risk Management
The Company originates loans in the ordinary course of business and has also acquired loans through mergers and acquisitions. Accrued interest receivable was excluded from disclosures presenting the Company's amortized cost of loans receivable as it was deemed insignificant. Accrued interest receivable on loans totaled $11.1 million and $10.7 million at March 31, 2020 and December 31, 2019, respectively.
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. A detailed description of the portfolio segments and classes is contained in the 2019 Annual Form 10-K.
The Company adopted ASU 2016-13 effective January 1, 2020, which increased the beginning ACL on loans as discussed in Note (4) Allowance for Credit Losses on Loans.
The amortized cost of loans receivable, net of ACL at March 31, 2020 and December 31, 2019 consisted of the following portfolio segments and classes:
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
(In thousands)
|
Commercial business:
|
|
|
|
Commercial and industrial
|
$
|
889,685
|
|
|
$
|
852,220
|
|
Owner-occupied commercial real estate
|
805,636
|
|
|
805,234
|
|
Non-owner occupied commercial real estate
|
1,312,308
|
|
|
1,288,779
|
|
Total commercial business
|
3,007,629
|
|
|
2,946,233
|
|
One-to-four family residential
|
136,782
|
|
|
131,660
|
|
Real estate construction and land development:
|
|
|
|
One-to-four family residential
|
98,730
|
|
|
104,296
|
|
Five or more family residential and commercial properties
|
188,304
|
|
|
170,350
|
|
Total real estate construction and land development
|
287,034
|
|
|
274,646
|
|
Consumer
|
420,931
|
|
|
415,340
|
|
Loans receivable
|
3,852,376
|
|
|
3,767,879
|
|
Allowance for credit losses on loans
|
(47,540
|
)
|
|
(36,171
|
)
|
Loans receivable, net
|
$
|
3,804,836
|
|
|
$
|
3,731,708
|
|
(b) Concentrations of Credit
As of March 31, 2020, and December 31, 2019, 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 numerical scale of 1 to 10. Risk grades are aggregated to create the risk categories of "Pass" for grades 1 to 6, "Special Mention" ("SM") for grade 7, "Substandard" ("SS") for grade 8, "Doubtful" for grade 9 and "Loss" for grade 10. Descriptions of the general characteristics of the risk grades, including qualitative information on how the risk grades relate to the risk of loss, are contained in the 2019 Annual Form 10-K.
Numerical loan grades for loans are established at the origination of the loan. Changes to loan grades are considered at the time new information about the performance of a loan becomes available, including the receipt of updated financial information from the borrower, and scheduled loan reviews performed by the Bank’s internal Loan Review department. For consumer loans, the Bank follows the FDIC’s Uniform Retail Credit Classification and Account Management Policy for subsequent classification in the event of payment delinquencies or default. Typically, an individual loan grade will not be changed from the prior period unless there is a specific indication of credit deterioration or improvement. Credit deterioration is evidenced by delinquency, direct communications with the borrower, or other borrower information that becomes known to management. Credit improvements are evidenced by known facts regarding the borrower or the collateral property.
The following table presents the amortized cost of loans receivable by risk grade as of March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loans
Amortized Cost Basis by Origination Year
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
Prior
|
|
Revolving Loans
|
|
Revolving Loans Converted to Term Loans (1)
|
|
Loans Receivable
|
|
(In thousands)
|
As of March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
$
|
24,236
|
|
|
$
|
159,463
|
|
|
$
|
91,045
|
|
|
$
|
68,613
|
|
|
$
|
52,123
|
|
|
$
|
132,283
|
|
|
$
|
271,477
|
|
|
$
|
710
|
|
|
$
|
799,950
|
|
SM
|
2,291
|
|
|
3,479
|
|
|
3,495
|
|
|
436
|
|
|
1,787
|
|
|
1,805
|
|
|
22,187
|
|
|
42
|
|
|
35,522
|
|
SS
|
106
|
|
|
9,482
|
|
|
4,758
|
|
|
8,578
|
|
|
2,427
|
|
|
13,712
|
|
|
14,807
|
|
|
343
|
|
|
54,213
|
|
Total
|
26,633
|
|
|
172,424
|
|
|
99,298
|
|
|
77,627
|
|
|
56,337
|
|
|
147,800
|
|
|
308,471
|
|
|
1,095
|
|
|
889,685
|
|
Owner-occupied properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
21,643
|
|
|
144,743
|
|
|
100,332
|
|
|
98,228
|
|
|
85,554
|
|
|
314,552
|
|
|
—
|
|
|
1,056
|
|
|
766,108
|
|
SM
|
107
|
|
|
—
|
|
|
—
|
|
|
2,073
|
|
|
1,897
|
|
|
13,268
|
|
|
—
|
|
|
—
|
|
|
17,345
|
|
SS
|
—
|
|
|
—
|
|
|
117
|
|
|
4,731
|
|
|
2,010
|
|
|
15,325
|
|
|
—
|
|
|
—
|
|
|
22,183
|
|
Total
|
21,750
|
|
|
144,743
|
|
|
100,449
|
|
|
105,032
|
|
|
89,461
|
|
|
343,145
|
|
|
—
|
|
|
1,056
|
|
|
805,636
|
|
Non-owner-occupied properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
33,205
|
|
|
157,063
|
|
|
154,514
|
|
|
203,143
|
|
|
282,734
|
|
|
466,239
|
|
|
—
|
|
|
—
|
|
|
1,296,898
|
|
SM
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,216
|
|
|
2,846
|
|
|
—
|
|
|
—
|
|
|
9,062
|
|
SS
|
—
|
|
|
—
|
|
|
67
|
|
|
—
|
|
|
—
|
|
|
6,281
|
|
|
—
|
|
|
—
|
|
|
6,348
|
|
Total
|
33,205
|
|
|
157,063
|
|
|
154,581
|
|
|
203,143
|
|
|
288,950
|
|
|
475,366
|
|
|
—
|
|
|
—
|
|
|
1,312,308
|
|
Total commercial business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loans
Amortized Cost Basis by Origination Year
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
Prior
|
|
Revolving Loans
|
|
Revolving Loans Converted to Term Loans (1)
|
|
Loans Receivable
|
|
(In thousands)
|
Pass
|
79,084
|
|
|
461,269
|
|
|
345,891
|
|
|
369,984
|
|
|
420,411
|
|
|
913,074
|
|
|
271,477
|
|
|
1,766
|
|
|
2,862,956
|
|
SM
|
2,398
|
|
|
3,479
|
|
|
3,495
|
|
|
2,509
|
|
|
9,900
|
|
|
17,919
|
|
|
22,187
|
|
|
42
|
|
|
61,929
|
|
SS
|
106
|
|
|
9,482
|
|
|
4,942
|
|
|
13,309
|
|
|
4,437
|
|
|
35,318
|
|
|
14,807
|
|
|
343
|
|
|
82,744
|
|
Total
|
81,588
|
|
|
474,230
|
|
|
354,328
|
|
|
385,802
|
|
|
434,748
|
|
|
966,311
|
|
|
308,471
|
|
|
2,151
|
|
|
3,007,629
|
|
One-to-four family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
9,097
|
|
|
47,795
|
|
|
22,506
|
|
|
17,566
|
|
|
11,664
|
|
|
27,371
|
|
|
—
|
|
|
—
|
|
|
135,999
|
|
SS
|
—
|
|
|
—
|
|
|
—
|
|
|
63
|
|
|
124
|
|
|
596
|
|
|
—
|
|
|
—
|
|
|
783
|
|
Total
|
9,097
|
|
|
47,795
|
|
|
22,506
|
|
|
17,629
|
|
|
11,788
|
|
|
27,967
|
|
|
—
|
|
|
—
|
|
|
136,782
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
8,102
|
|
|
73,501
|
|
|
10,405
|
|
|
2,433
|
|
|
971
|
|
|
1,802
|
|
|
—
|
|
|
—
|
|
|
97,214
|
|
SS
|
—
|
|
|
—
|
|
|
—
|
|
|
1,516
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,516
|
|
Total
|
8,102
|
|
|
73,501
|
|
|
10,405
|
|
|
3,949
|
|
|
971
|
|
|
1,802
|
|
|
—
|
|
|
—
|
|
|
98,730
|
|
Five or more family residential and commercial properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
13,994
|
|
|
97,928
|
|
|
65,440
|
|
|
6,978
|
|
|
880
|
|
|
2,592
|
|
|
—
|
|
|
—
|
|
|
187,812
|
|
SM
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
39
|
|
|
—
|
|
|
—
|
|
|
39
|
|
SS
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
453
|
|
|
—
|
|
|
—
|
|
|
453
|
|
Total
|
13,994
|
|
|
97,928
|
|
|
65,440
|
|
|
6,978
|
|
|
880
|
|
|
3,084
|
|
|
—
|
|
|
—
|
|
|
188,304
|
|
Total real estate and land development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
22,096
|
|
|
171,429
|
|
|
75,845
|
|
|
9,411
|
|
|
1,851
|
|
|
4,394
|
|
|
—
|
|
|
—
|
|
|
285,026
|
|
SM
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
39
|
|
|
—
|
|
|
—
|
|
|
39
|
|
SS
|
—
|
|
|
—
|
|
|
—
|
|
|
1,516
|
|
|
—
|
|
|
453
|
|
|
—
|
|
|
—
|
|
|
1,969
|
|
Total
|
22,096
|
|
|
171,429
|
|
|
75,845
|
|
|
10,927
|
|
|
1,851
|
|
|
4,886
|
|
|
—
|
|
|
—
|
|
|
287,034
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
27,777
|
|
|
102,909
|
|
|
74,043
|
|
|
45,472
|
|
|
22,957
|
|
|
27,370
|
|
|
116,302
|
|
|
87
|
|
|
416,917
|
|
SM
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
SS
|
—
|
|
|
87
|
|
|
492
|
|
|
489
|
|
|
554
|
|
|
1,624
|
|
|
766
|
|
|
2
|
|
|
4,014
|
|
Total
|
27,777
|
|
|
102,996
|
|
|
74,535
|
|
|
45,961
|
|
|
23,511
|
|
|
28,994
|
|
|
117,068
|
|
|
89
|
|
|
420,931
|
|
Loans receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
138,054
|
|
|
783,402
|
|
|
518,285
|
|
|
442,433
|
|
|
456,883
|
|
|
972,209
|
|
|
387,779
|
|
|
1,853
|
|
|
3,700,898
|
|
SM
|
2,398
|
|
|
3,479
|
|
|
3,495
|
|
|
2,509
|
|
|
9,900
|
|
|
17,958
|
|
|
22,187
|
|
|
42
|
|
|
61,968
|
|
SS
|
106
|
|
|
9,569
|
|
|
5,434
|
|
|
15,377
|
|
|
5,115
|
|
|
37,991
|
|
|
15,573
|
|
|
345
|
|
|
89,510
|
|
Total
|
$
|
140,558
|
|
|
$
|
796,450
|
|
|
$
|
527,214
|
|
|
$
|
460,319
|
|
|
$
|
471,898
|
|
|
$
|
1,028,158
|
|
|
$
|
425,539
|
|
|
$
|
2,240
|
|
|
$
|
3,852,376
|
|
(1) Represents loans receivable balance at March 31, 2020 which was converted from a revolving loan to an amortizing loan during the three months ended March 31, 2020.
The following table presents the amortized cost of loans receivable by credit quality indicator as of December 31, 2019 in accordance with pre-CECL disclosure requirements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Pass
|
|
Special Mention
|
|
Substandard
|
|
Doubtful/Loss
|
|
Total
|
|
(In thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
771,559
|
|
|
$
|
16,340
|
|
|
$
|
64,321
|
|
|
$
|
—
|
|
|
$
|
852,220
|
|
Owner-occupied commercial real estate
|
765,411
|
|
|
24,659
|
|
|
15,164
|
|
|
—
|
|
|
805,234
|
|
Non-owner occupied commercial real estate
|
1,274,513
|
|
|
5,662
|
|
|
8,604
|
|
|
—
|
|
|
1,288,779
|
|
Total commercial business
|
2,811,483
|
|
|
46,661
|
|
|
88,089
|
|
|
—
|
|
|
2,946,233
|
|
One-to-four family residential
|
130,818
|
|
|
—
|
|
|
842
|
|
|
—
|
|
|
131,660
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
101,973
|
|
|
1,516
|
|
|
807
|
|
|
—
|
|
|
104,296
|
|
Five or more family residential and commercial properties
|
169,668
|
|
|
682
|
|
|
—
|
|
|
—
|
|
|
170,350
|
|
Total real estate construction and land development
|
271,641
|
|
|
2,198
|
|
|
807
|
|
|
—
|
|
|
274,646
|
|
Consumer
|
411,141
|
|
|
—
|
|
|
3,675
|
|
|
524
|
|
|
415,340
|
|
Gross loans receivable
|
$
|
3,625,083
|
|
|
$
|
48,859
|
|
|
$
|
93,413
|
|
|
$
|
524
|
|
|
$
|
3,767,879
|
|
Potential problem loans are loans classified as Special Mention or worse that are not classified as a TDR or nonaccrual loan and are not individually evaluated for credit loss, 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 as of March 31, 2020 and December 31, 2019 were $102.2 million and $87.8 million, respectively.
(d) Nonaccrual Loans
The following table presents the amortized cost of nonaccrual loans for the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Nonaccrual with No ACL
|
|
Nonaccrual with ACL
|
|
Total Nonaccrual (1)
|
|
Nonaccrual (2)
|
|
(In thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
24,068
|
|
|
$
|
2,019
|
|
|
$
|
26,087
|
|
|
$
|
33,544
|
|
Owner-occupied commercial real estate
|
3,103
|
|
|
888
|
|
|
3,991
|
|
|
4,714
|
|
Non-owner occupied commercial real estate
|
3,830
|
|
|
—
|
|
|
3,830
|
|
|
6,062
|
|
Total commercial business
|
31,001
|
|
|
2,907
|
|
|
33,908
|
|
|
44,320
|
|
One-to-four family residential
|
19
|
|
|
144
|
|
|
163
|
|
|
19
|
|
Consumer
|
—
|
|
|
92
|
|
|
92
|
|
|
186
|
|
Total
|
$
|
31,020
|
|
|
$
|
3,143
|
|
|
$
|
34,163
|
|
|
$
|
44,525
|
|
(1) At March 31, 2020, nonaccrual loans includes $2.5 million of PCD loans, of which $565,000 were classified as nonaccrual congruent with CECL adoption. Prior to the adoption of CECL, nonaccrual loans excluded pooled PCI loans as the Company recognized interest income on each pool of PCI loans as each of the pools was performing.
(2) Presentation of December 31, 2019 balances is in accordance with pre-CECL disclosure requirements.
The following table presents the reversal of interest income on loans due to the write-off of accrued interest receivable upon the initial classification of loans as nonaccrual loans and the interest income recognized due to payment in full of previously classified nonaccrual loans during the following period:
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2020
|
|
Interest Income Reversed
|
|
Interest Income Recognized
|
|
(In thousands)
|
Commercial business:
|
|
|
|
Commercial and industrial
|
$
|
(16
|
)
|
|
$
|
219
|
|
Owner-occupied commercial real estate
|
—
|
|
|
46
|
|
Non-owner occupied commercial real estate
|
—
|
|
|
45
|
|
Total commercial business
|
(16
|
)
|
|
310
|
|
Consumer
|
—
|
|
|
10
|
|
Total
|
$
|
(16
|
)
|
|
$
|
320
|
|
For the three months ended March 31, 2020 and 2019, no interest income was recognized subsequent to a loan’s classification as nonaccrual, except as indicated in the table above.
(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. The amortized cost of past due loans as of March 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
30-89 Days
|
|
90 Days or
Greater
|
|
Total Past
Due
|
|
Current
|
|
Total
|
|
(In thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
2,632
|
|
|
$
|
6,589
|
|
|
$
|
9,221
|
|
|
$
|
880,464
|
|
|
$
|
889,685
|
|
Owner-occupied commercial real estate
|
353
|
|
|
490
|
|
|
843
|
|
|
804,793
|
|
|
805,636
|
|
Non-owner occupied commercial real estate
|
1,620
|
|
|
—
|
|
|
1,620
|
|
|
1,310,688
|
|
|
1,312,308
|
|
Total commercial business
|
4,605
|
|
|
7,079
|
|
|
11,684
|
|
|
2,995,945
|
|
|
3,007,629
|
|
One-to-four family residential
|
447
|
|
|
19
|
|
|
466
|
|
|
136,316
|
|
|
136,782
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
—
|
|
|
—
|
|
|
—
|
|
|
98,730
|
|
|
98,730
|
|
Five or more family residential and commercial properties
|
—
|
|
|
—
|
|
|
—
|
|
|
188,304
|
|
|
188,304
|
|
Total real estate construction and land development
|
—
|
|
|
—
|
|
|
—
|
|
|
287,034
|
|
|
287,034
|
|
Consumer
|
1,963
|
|
|
—
|
|
|
1,963
|
|
|
418,968
|
|
|
420,931
|
|
Total
|
$
|
7,015
|
|
|
$
|
7,098
|
|
|
$
|
14,113
|
|
|
$
|
3,838,263
|
|
|
$
|
3,852,376
|
|
The following table presents the amortized cost of past due loans as of December 31, 2019 in accordance with pre-CECL disclosure requirements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
30-89 Days
|
|
90 Days or
Greater
|
|
Total Past
Due
|
|
Current
|
|
Total
|
|
PCI Loans
|
|
Loan Receivable
|
|
(In thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
10,479
|
|
|
$
|
6,772
|
|
|
$
|
17,251
|
|
|
$
|
832,601
|
|
|
$
|
849,852
|
|
|
$
|
2,368
|
|
|
$
|
852,220
|
|
Owner-occupied commercial real estate
|
607
|
|
|
806
|
|
|
1,413
|
|
|
798,907
|
|
|
800,320
|
|
|
4,914
|
|
|
805,234
|
|
Non-owner occupied commercial real estate
|
554
|
|
|
1,843
|
|
|
2,397
|
|
|
1,280,891
|
|
|
1,283,288
|
|
|
5,491
|
|
|
1,288,779
|
|
Total commercial business
|
11,640
|
|
|
9,421
|
|
|
21,061
|
|
|
2,912,399
|
|
|
2,933,460
|
|
|
12,773
|
|
|
2,946,233
|
|
One-to-four family residential
|
797
|
|
|
—
|
|
|
797
|
|
|
127,288
|
|
|
128,085
|
|
|
3,575
|
|
|
131,660
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
1,516
|
|
|
—
|
|
|
1,516
|
|
|
102,780
|
|
|
104,296
|
|
|
—
|
|
|
104,296
|
|
Five or more family residential and commercial properties
|
—
|
|
|
—
|
|
|
—
|
|
|
170,350
|
|
|
170,350
|
|
|
—
|
|
|
170,350
|
|
Total real estate construction and land development
|
1,516
|
|
|
—
|
|
|
1,516
|
|
|
273,130
|
|
|
274,646
|
|
|
—
|
|
|
274,646
|
|
Consumer
|
2,071
|
|
|
—
|
|
|
2,071
|
|
|
411,507
|
|
|
413,578
|
|
|
1,762
|
|
|
415,340
|
|
Total
|
$
|
16,024
|
|
|
$
|
9,421
|
|
|
$
|
25,445
|
|
|
$
|
3,724,324
|
|
|
$
|
3,749,769
|
|
|
$
|
18,110
|
|
|
$
|
3,767,879
|
|
There were no loans 90 days or more past due that were still accruing interest as of March 31, 2020 or December 31, 2019.
(f) Collateral-dependent Loans
The types of collateral securing loans individually evaluated for ACL on loans, and for which the repayment was expected to be provided substantially through the operation or sale of the collateral as of March 31, 2020, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable(1) at March 31, 2020
|
|
Commercial
Real Estate
|
|
Farmland
|
|
Single Family Residence
|
|
Equipment or Accounts Receivable
|
|
Other
|
|
Total
|
|
(In thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
2,063
|
|
|
$
|
19,350
|
|
|
$
|
1,445
|
|
|
$
|
2,232
|
|
|
$
|
311
|
|
|
$
|
25,401
|
|
Owner-occupied commercial real estate
|
3,106
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,106
|
|
Non-owner occupied commercial real estate
|
5,794
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,794
|
|
Total commercial business
|
10,963
|
|
|
19,350
|
|
|
1,445
|
|
|
2,232
|
|
|
311
|
|
|
34,301
|
|
One-to-four family residential
|
—
|
|
|
—
|
|
|
19
|
|
|
—
|
|
|
—
|
|
|
19
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
—
|
|
|
—
|
|
|
1,516
|
|
|
—
|
|
|
—
|
|
|
1,516
|
|
Total
|
$
|
10,963
|
|
|
$
|
19,350
|
|
|
$
|
2,980
|
|
|
$
|
2,232
|
|
|
$
|
311
|
|
|
$
|
35,836
|
|
(1) Balances represent the amortized cost of loans receivable at date indicated. If multiple collateral secured the loan, the entire loan receivable balance is presented in the primary collateral category, which generally represents the majority of the collateral balance.
Under the incurred loss methodology, including the ASC 310-30 methodology for PCI loans, comparative disclosures of collateral-dependent loans as of December 31, 2019 and for the three months ended March 31, 2019 are similar to the disclosures for impaired loans. Impaired loans include nonaccrual loans, performing TDR loans, and other loans with a specific valuation allowance, excluding PCI loans. The amortized cost of impaired loans as of December 31, 2019 are set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Amortized Cost With
No Specific
Valuation
Allowance
|
|
Amortized Cost With
Specific
Valuation
Allowance
|
|
Total
Amortized Cost
|
|
Unpaid
Contractual
Principal
Balance
|
|
Related
Specific
Valuation
Allowance
|
|
(In thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
30,179
|
|
|
$
|
13,629
|
|
|
$
|
43,808
|
|
|
$
|
45,585
|
|
|
$
|
1,372
|
|
Owner-occupied commercial real estate
|
3,921
|
|
|
2,415
|
|
|
6,336
|
|
|
6,764
|
|
|
426
|
|
Non-owner occupied commercial real estate
|
5,309
|
|
|
1,015
|
|
|
6,324
|
|
|
6,458
|
|
|
146
|
|
Total commercial business
|
39,409
|
|
|
17,059
|
|
|
56,468
|
|
|
58,807
|
|
|
1,944
|
|
One-to-four family residential
|
—
|
|
|
215
|
|
|
215
|
|
|
223
|
|
|
56
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
237
|
|
|
—
|
|
|
237
|
|
|
237
|
|
|
—
|
|
Consumer
|
—
|
|
|
561
|
|
|
561
|
|
|
570
|
|
|
143
|
|
Total
|
$
|
39,646
|
|
|
$
|
17,835
|
|
|
$
|
57,481
|
|
|
$
|
59,837
|
|
|
$
|
2,143
|
|
The average amortized cost of impaired loans for the three months ended March 31, 2019 are set forth in the following table:
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
(In thousands)
|
Commercial business:
|
|
Commercial and industrial
|
$
|
22,639
|
|
Owner-occupied commercial real estate
|
5,935
|
|
Non-owner occupied commercial real estate
|
6,619
|
|
Total commercial business
|
35,193
|
|
One-to-four family residential
|
277
|
|
Real estate construction and land development:
|
|
One-to-four family residential
|
911
|
|
Consumer
|
562
|
|
Total
|
$
|
36,943
|
|
(g) Troubled Debt Restructured Loans
The amortized cost and related ACL on loans of performing and nonaccrual TDR loans as of March 31, 2020 and December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Performing
TDR loans
|
|
Nonaccrual
TDR loans
|
|
Performing
TDR loans
|
|
Nonaccrual
TDR loans
|
|
(In thousands)
|
TDR loans
|
$
|
19,309
|
|
|
$
|
19,980
|
|
|
$
|
14,469
|
|
|
$
|
26,338
|
|
ACL on TDR loans
|
1,519
|
|
|
223
|
|
|
1,259
|
|
|
218
|
|
The unfunded commitment to borrowers related to TDR loans was $3.0 million and $736,000 at March 31, 2020 and December 31, 2019, respectively.
Loans that were modified as TDR loans during the three months ended March 31, 2020 and 2019 are set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
Number of
Contracts
|
|
Amortized Cost (1)
|
|
Number of
Contracts
|
|
Amortized Cost (1)
|
|
(Dollars in thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
Commercial and industrial
|
14
|
|
$
|
4,950
|
|
|
9
|
|
$
|
10,100
|
|
Owner-occupied commercial real estate
|
4
|
|
2,183
|
|
|
2
|
|
934
|
|
Non-owner occupied commercial real estate
|
3
|
|
2,210
|
|
|
1
|
|
2,112
|
|
Total commercial business
|
21
|
|
9,343
|
|
|
12
|
|
13,146
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
One-to-four family residential
|
4
|
|
1,516
|
|
|
2
|
|
665
|
|
Consumer
|
5
|
|
93
|
|
|
6
|
|
122
|
|
Total
|
30
|
|
$
|
10,952
|
|
|
20
|
|
$
|
13,933
|
|
|
|
(1)
|
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 modifications, the Bank’s amortized cost in each loan at the date of modification (pre-modification) did not change as a result of the modification (post-modification).
|
The tables above includes 11 loans for both the three months ended March 31, 2020 and 2019 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 ACL at March 31, 2020 for loans that were modified as TDR loans during the three months ended March 31, 2020 was $768,000.
Loans that were modified during the previous twelve months that subsequently defaulted during the three months ended March 31, 2020 and 2019 are set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
Number of
Contracts
|
|
Amortized Cost
|
|
Number of
Contracts
|
|
Amortized Cost
|
|
(Dollars in thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
Commercial and industrial
|
2
|
|
|
$
|
1,873
|
|
|
1
|
|
|
$
|
829
|
|
Owner-occupied properties
|
—
|
|
|
—
|
|
|
1
|
|
|
717
|
|
Non-owner occupied commercial real estate
|
3
|
|
|
590
|
|
|
1
|
|
|
601
|
|
Total
|
5
|
|
|
$
|
2,463
|
|
|
3
|
|
|
$
|
2,147
|
|
During the three months ended March 31, 2020 and 2019, all of these loans defaulted because each was past its modified maturity date and the borrower has not subsequently repaid the credits. The Bank has chosen not to extend further the maturity date on these loans. The Bank had ACL of $334,000 at March 31, 2020 related to these TDR loans which defaulted during the three months ended March 31, 2020.
For the three months ended March 31, 2020 and 2019, the Bank recorded $608,000 and $301,000, respectively, of interest income related to performing TDR loans.
(h) Purchased Credit Impaired Loans
Upon adoption of CECL, the Company transitioned PCI loans to PCD loans. The following table reflects the outstanding principal balance and recorded investment of PCI loans at December 31, 2019:
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Outstanding Principal
|
|
Recorded Investment
|
|
(In thousands)
|
Commercial business:
|
|
|
|
Commercial and industrial
|
$
|
4,439
|
|
|
$
|
2,368
|
|
Owner-occupied commercial real estate
|
4,925
|
|
|
4,914
|
|
Non-owner occupied commercial real estate
|
7,028
|
|
|
5,491
|
|
Total commercial business
|
16,392
|
|
|
12,773
|
|
One-to-four family residential
|
3,095
|
|
|
3,575
|
|
Consumer
|
1,463
|
|
|
1,762
|
|
Gross PCI loans
|
$
|
20,950
|
|
|
$
|
18,110
|
|
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 months ended March 31, 2019:
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
(In thousands)
|
Balance at the beginning of the period
|
$
|
9,493
|
|
Accretion
|
(581
|
)
|
Disposal and other
|
(452
|
)
|
Balance at the end of the period
|
$
|
8,460
|
|
|
|
(4)
|
Allowance for Credit Losses on Loans
|
Effective January 1, 2020, the Bank adopted ASU 2016-13. The adoption replaced the allowance for loan losses with the ACL on loans and replaced the related provision for loan losses with the provision for credit losses on loans.
For the ACL on loans at January 1, 2020 and March 31, 2020, the baseline loss rates were calculated using the bank's average quarterly historical loss information from December 31, 2007 through the respective balance sheet date. The Bank has chosen to anchor the 2008-2009 periods to allow for a complete economic cycle to have occurred in its historical loss period. The Bank evaluates the historical period and the need to release the anchor periods on a quarterly basis, with the assumption that economic cycles have historically lasted between 10 and 15 years. The Bank believes the historic loss rates are viable inputs to the current expected credit loss methodology as the Bank's lending practice and business has remained relatively stable throughout the periods. While the Bank's assets have grown, the credit culture has stayed consistent.
Prepayments included in the methodology were based on the 48-month rolling historical averages for each segment, which management believes is an accurate representation of future prepayment activity. Management's allowance estimates at January 1, 2020 and March 31, 2020 used a four quarter reasonable and supportable period, as forecasts beyond this time period tend to diverge in economic assumptions and may be less comparable to actual future events. As the length of the reasonable and supportable period increases, the degree of judgment involved in estimating the allowance will likely increase. The Bank used a two quarter reversion period in calculating its allowance
as of January 1, 2020 and March 31, 2020 as it believes the historical loss information is relevant to the expected credit losses and recognizes the declining precision and increasing uncertainty of estimating credit losses in those periods beyond which it can make reasonable and supportable forecasts. Risk characteristics by segment considered in the CECL methodology are the same as those disclosed in the 2019 Annual Form 10-K.
The following table details the activity in the ACL on loans disaggregated by segment and class for the three months ended March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
Beginning Balance
|
|
Impact of CECL Adoption
|
|
Beginning Balance, as Adjusted
|
|
Charge-offs
|
|
Recoveries
|
|
Provision for Credit Losses
|
|
Ending Balance
|
|
(In thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
11,739
|
|
|
$
|
(1,348
|
)
|
|
$
|
10,391
|
|
|
$
|
(1,087
|
)
|
|
$
|
1,057
|
|
|
$
|
3,539
|
|
|
$
|
13,900
|
|
Owner-occupied commercial real estate
|
4,512
|
|
|
452
|
|
|
4,964
|
|
|
(135
|
)
|
|
12
|
|
|
1,375
|
|
|
6,216
|
|
Non-owner occupied commercial real estate
|
7,682
|
|
|
(2,039
|
)
|
|
5,643
|
|
|
—
|
|
|
—
|
|
|
2,107
|
|
|
7,750
|
|
Total commercial business
|
23,933
|
|
|
(2,935
|
)
|
|
20,998
|
|
|
(1,222
|
)
|
|
1,069
|
|
|
7,021
|
|
|
27,866
|
|
One-to-four family residential
|
1,458
|
|
|
1,471
|
|
|
2,929
|
|
|
—
|
|
|
3
|
|
|
94
|
|
|
3,026
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
1,455
|
|
|
(571
|
)
|
|
884
|
|
|
—
|
|
|
14
|
|
|
(34
|
)
|
|
864
|
|
Five or more family residential and commercial properties
|
1,605
|
|
|
7,240
|
|
|
8,845
|
|
|
—
|
|
|
—
|
|
|
2,599
|
|
|
11,444
|
|
Total real estate construction and land development
|
3,060
|
|
|
6,669
|
|
|
9,729
|
|
|
—
|
|
|
14
|
|
|
2,565
|
|
|
12,308
|
|
Consumer
|
6,821
|
|
|
(2,484
|
)
|
|
4,337
|
|
|
(375
|
)
|
|
94
|
|
|
284
|
|
|
4,340
|
|
Unallocated
|
899
|
|
|
(899
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
36,171
|
|
|
$
|
1,822
|
|
|
$
|
37,993
|
|
|
$
|
(1,597
|
)
|
|
$
|
1,180
|
|
|
$
|
9,964
|
|
|
$
|
47,540
|
|
The Bank recognized net charge-offs of $417,000 during the quarter ended March 31, 2020. Net charge-offs include the charge-off of one commercial and industrial relationship of $373,000 and a large volume of small-dollar amount consumer loans, offset by the full recovery of an agricultural lending relationship charge-off of $963,000 which was recorded during the three months ended December 31, 2019.
During the three months ended March 31, 2020, the Bank recorded a provision for credit losses on loans of $10.0 million, an increase of 26.2% from the adjusted beginning balance. Of the provision for credit loses on loans, approximately $6.9 million was due to the Company's economic forecast under the CECL methodology, which included a decline in economic conditions due to the COVID-19 pandemic. The economic model utilized as of March 31, 2020 is forecasting profound, but not permanent, reductions in activity, with widespread cuts in discretionary and social spending, severe disruptions to supply chains, and a major interruption in travel activity. The model predicts a so-called "v-shaped" recession, with unemployment rate peaking at 6% and Real GDP contracting 0.2% in 2020. These projections are compared to predicted unemployment rate of 3.7% and Real GDP growth of 1.7% prior to the onset of the pandemic. While the negative impact is projected to occur immediately, the model is projecting the downturn to be short-term with a strong recovery toward the end of 2020.
The provision for credit losses on loans also includes qualitative factors related to the industries in the loan portfolio that the Company believes may suffer the most losses as a result of the COVID-19 pandemic, such as restaurants, hotels, dentists, religious organizations, and recreational and entertainment centers.
Approximately $3.1 million of the provision for credit losses on loans was due to an increase in the amortized cost balance, including the change in the mix of loans in the portfolio, and other changes such as term modifications or credit quality changes.
The following table details activity in the allowance for loan losses disaggregated by segment and class for the three months ended March 31, 2019 under the incurred loss methodology, including the ASC 310-30 methodology for PCI loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
Beginning Balance
|
|
Charge-offs
|
|
Recoveries
|
|
Provision for Loan Losses
|
|
Ending Balance
|
|
(In thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
11,343
|
|
|
$
|
(103
|
)
|
|
$
|
7
|
|
|
$
|
508
|
|
|
$
|
11,755
|
|
Owner-occupied commercial real estate
|
4,898
|
|
|
—
|
|
|
3
|
|
|
355
|
|
|
5,256
|
|
Non-owner occupied commercial real estate
|
7,470
|
|
|
—
|
|
|
149
|
|
|
206
|
|
|
7,825
|
|
Total commercial business
|
23,711
|
|
|
(103
|
)
|
|
159
|
|
|
1,069
|
|
|
24,836
|
|
One-to-four family residential
|
1,203
|
|
|
(15
|
)
|
|
—
|
|
|
59
|
|
|
1,247
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
1,240
|
|
|
—
|
|
|
618
|
|
|
(436
|
)
|
|
1,422
|
|
Five or more family residential and commercial properties
|
954
|
|
|
—
|
|
|
—
|
|
|
41
|
|
|
995
|
|
Total real estate construction and land development
|
2,194
|
|
|
—
|
|
|
618
|
|
|
(395
|
)
|
|
2,417
|
|
Consumer
|
6,581
|
|
|
(586
|
)
|
|
117
|
|
|
368
|
|
|
6,480
|
|
Unallocated
|
1,353
|
|
|
—
|
|
|
—
|
|
|
(181
|
)
|
|
1,172
|
|
Total
|
$
|
35,042
|
|
|
$
|
(704
|
)
|
|
$
|
894
|
|
|
$
|
920
|
|
|
$
|
36,152
|
|
The following table details the allowance for loan losses disaggregated on the basis of the Company's impairment method as of December 31, 2019 under the incurred loss methodology, including the ASC 310-30 methodology for PCI loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Individually Evaluated for Impairment
|
|
Loans Collectively Evaluated for Impairment
|
|
PCI Loans
|
|
Total Allowance for Loan Losses
|
|
(In thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
1,372
|
|
|
$
|
9,772
|
|
|
$
|
595
|
|
|
$
|
11,739
|
|
Owner-occupied commercial real estate
|
426
|
|
|
3,558
|
|
|
528
|
|
|
4,512
|
|
Non-owner occupied commercial real estate
|
146
|
|
|
7,064
|
|
|
472
|
|
|
7,682
|
|
Total commercial business
|
1,944
|
|
|
20,394
|
|
|
1,595
|
|
|
23,933
|
|
One-to-four family residential
|
56
|
|
|
1,316
|
|
|
86
|
|
|
1,458
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
One-to-four family residential
|
—
|
|
|
1,296
|
|
|
159
|
|
|
1,455
|
|
Five or more family residential and commercial properties
|
—
|
|
|
1,527
|
|
|
78
|
|
|
1,605
|
|
Total real estate construction and land development
|
—
|
|
|
2,823
|
|
|
237
|
|
|
3,060
|
|
Consumer
|
143
|
|
|
6,327
|
|
|
351
|
|
|
6,821
|
|
Unallocated
|
—
|
|
|
899
|
|
|
—
|
|
|
899
|
|
Total
|
$
|
2,143
|
|
|
$
|
31,759
|
|
|
$
|
2,269
|
|
|
$
|
36,171
|
|
The following table details the amortized cost of the loan receivables disaggregated on the basis of the Company’s impairment method as of December 31, 2019 under the incurred loss methodology, including the ASC 310-30 methodology for PCI loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Individually Evaluated for Impairment
|
|
Loans Collectively Evaluated for Impairment
|
|
PCI Loans
|
|
Total Gross Loans Receivable
|
|
(In thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
43,808
|
|
|
$
|
806,044
|
|
|
$
|
2,368
|
|
|
$
|
852,220
|
|
Owner-occupied commercial real estate
|
6,336
|
|
|
793,984
|
|
|
4,914
|
|
|
805,234
|
|
Non-owner occupied commercial real estate
|
6,324
|
|
|
1,276,964
|
|
|
5,491
|
|
|
1,288,779
|
|
Total commercial business
|
56,468
|
|
|
2,876,992
|
|
|
12,773
|
|
|
2,946,233
|
|
One-to-four family residential
|
215
|
|
|
127,870
|
|
|
3,575
|
|
|
131,660
|
|
Real estate construction and land development:
|
—
|
|
|
|
|
—
|
|
|
—
|
|
One-to-four family residential
|
237
|
|
|
104,059
|
|
|
—
|
|
|
104,296
|
|
Five or more family residential and commercial properties
|
—
|
|
|
170,350
|
|
|
—
|
|
|
170,350
|
|
Total real estate construction and land development
|
237
|
|
|
274,409
|
|
|
—
|
|
|
274,646
|
|
Consumer
|
561
|
|
|
413,017
|
|
|
1,762
|
|
|
415,340
|
|
Total
|
$
|
57,481
|
|
|
$
|
3,692,288
|
|
|
$
|
18,110
|
|
|
$
|
3,767,879
|
|
|
|
(5)
|
Other Real Estate Owned
|
Changes in other real estate owned during the three months ended March 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2020
|
|
2019
|
|
(In thousands)
|
Balance at the beginning of the period
|
$
|
841
|
|
|
$
|
1,983
|
|
Additions
|
270
|
|
|
—
|
|
Proceeds from dispositions
|
(266
|
)
|
|
(79
|
)
|
Loss on sales, net
|
(4
|
)
|
|
—
|
|
Balance at the end of the period
|
$
|
841
|
|
|
$
|
1,904
|
|
At March 31, 2020, there was no other real estate owned that was the result of foreclosure and obtaining physical possession of residential real estate properties. At March 31, 2020, there were no consumer mortgage loans secured by residential real estate properties (included in the one-to-four family residential loans in Note (3) Loans Receivable) for which formal foreclosure proceedings were in process.
|
|
(6)
|
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 following mergers: Premier Commercial Bancorp on July 2, 2018; Puget Sound Bancorp 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).
There were no additions to goodwill during the three months ended March 31, 2020 and 2019.
The Company performed its annual goodwill impairment test during the fourth quarter of 2019 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. Due to the current market conditions as a result of the COVID-19 pandemic,
the Company performed a qualitative assessment of goodwill as of March 31, 2020 and determined that the fair value of the reporting unit more likely than not exceeded the carrying value at March 31, 2020. 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 adverse impact on the Company’s operating results.
(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.
The following table presents the change in other intangible assets for the periods indicated:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
(In thousands)
|
Balance at the beginning of the period
|
$
|
16,613
|
|
|
$
|
20,614
|
|
Amortization
|
(903
|
)
|
|
(1,025
|
)
|
Balance at the end of the period
|
$
|
15,710
|
|
|
$
|
19,589
|
|
|
|
(7)
|
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 March 31, 2020 and December 31, 2019, the balance of the junior subordinated debentures, net of unaccreted discount, was $20.7 million and $20.6 million, respectively.
The adjustable rate of the trust preferred securities at March 31, 2020 was 3.01%. The following table presents the weighted average rate of the junior subordinated debentures for the periods indicated:
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Weighted average rate (1)
|
5.56
|
%
|
|
7.06
|
%
|
|
|
(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.
|
|
|
(8)
|
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 (2) 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:
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
(In thousands)
|
Mortgage-backed securities and collateralized mortgage obligations (1):
|
|
|
|
Residential
|
$
|
2,621
|
|
|
$
|
8,452
|
|
Commercial
|
9,171
|
|
|
11,717
|
|
Securities sold under agreement to repurchase
|
$
|
11,792
|
|
|
$
|
20,169
|
|
(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 March 31, 2020, the Bank maintained a credit facility with the FHLB with available borrowing capacity of $898.5 million. At March 31, 2020 and December 31, 2019 the Bank had no FHLB advances outstanding.
The following table sets forth the details of FHLB advances during the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
(In thousands)
|
FHLB Advances:
|
|
|
|
Average balance during the period
|
$
|
989
|
|
|
$
|
1,849
|
|
Maximum month-end balance during the period
|
$
|
—
|
|
|
$
|
25,000
|
|
Weighted average rate during the period
|
0.41
|
%
|
|
3.29
|
%
|
Advances from the FHLB are collateralized by a blanket pledge on FHLB stock owned by the Bank, deposits at the FHLB, certain commercial real estate and one-to-four single family residential loans, 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, Pacific Coast Bankers’ Bank and JP Morgan Chase to purchase federal funds of up to $140.0 million as of March 31, 2020. The lines generally mature annually or are reviewed annually. As of March 31, 2020 and December 31, 2019, there were no federal funds purchased.
(c) Credit Facilities
The Bank maintains a credit facility with the Federal Reserve Bank with available borrowing capacity of $74.0 million as of March 31, 2020. There were no borrowings outstanding as of March 31, 2020 and December 31, 2019. Any advances on the credit facility would have to be first secured by the Bank's investment securities or loans receivable.
|
|
(10)
|
Derivative Financial Instruments
|
The Company has entered into certain interest rate swap contracts that are not designated as hedging instruments. The following table presents the notional amounts and estimated fair values of interest rate derivative contracts outstanding at March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Notional Amounts
|
|
Estimated Fair Value
|
|
Notional Amounts
|
|
Estimated Fair Value
|
|
(In thousands)
|
Non-hedging interest rate derivatives
|
|
|
|
|
|
|
|
Interest rate swap asset (1)
|
$
|
233,014
|
|
|
$
|
28,075
|
|
|
$
|
221,436
|
|
|
$
|
8,318
|
|
Interest rate swap liability (1)
|
223,014
|
|
|
(28,075
|
)
|
|
221,436
|
|
|
(8,318
|
)
|
(1) The estimated fair value of derivatives with customers was $49,000 and $8.1 million as of March 31, 2020 and December 31, 2019, respectively. The estimated fair value of derivatives with third parties was $(49,000) and $(8.1) million as of March 31, 2020 and December 31, 2019, respectively.
|
|
(11)
|
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 months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
(In thousands)
|
Net income:
|
|
|
|
Net income
|
$
|
12,191
|
|
|
$
|
16,552
|
|
Dividends and undistributed earnings allocated to participating securities (1)
|
(6
|
)
|
|
(27
|
)
|
Net income allocated to common shareholders
|
$
|
12,185
|
|
|
$
|
16,525
|
|
Basic:
|
|
|
|
Weighted average common shares outstanding
|
36,357,812
|
|
|
36,881,499
|
|
Restricted stock awards
|
(15,722
|
)
|
|
(55,967
|
)
|
Total basic weighted average common shares outstanding
|
36,342,090
|
|
|
36,825,532
|
|
Diluted:
|
|
|
|
Basic weighted average common shares outstanding
|
36,342,090
|
|
|
36,825,532
|
|
Effect of potentially dilutive common shares (2)
|
254,551
|
|
|
185,108
|
|
Total diluted weighted average common shares outstanding
|
36,596,641
|
|
|
37,010,640
|
|
|
|
(1)
|
Represents dividends paid and undistributed earnings allocated to nonvested restricted stock awards.
|
|
|
(2)
|
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 months ended March 31, 2020 and 2019, there were 21,475 and 31,557 anti-dilutive shares outstanding, respectively.
(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 three months ended March 31, 2020 and calendar year 2019:
|
|
|
|
|
|
|
|
|
|
Declared
|
|
Cash Dividend per Share
|
|
Record Date
|
|
Paid Date
|
|
|
January 23, 2019
|
|
$0.18
|
|
February 7, 2019
|
|
February 21, 2019
|
|
|
April 24, 2019
|
|
$0.18
|
|
May 8, 2019
|
|
May 22, 2019
|
|
|
July 24, 2019
|
|
$0.19
|
|
August 8, 2019
|
|
August 22, 2019
|
|
|
October 23, 2019
|
|
$0.19
|
|
November 7, 2019
|
|
November 21, 2019
|
|
|
October 23, 2019
|
|
$0.10
|
|
November 7, 2019
|
|
November 21, 2019
|
|
*
|
January 22, 2020
|
|
$0.20
|
|
February 6, 2020
|
|
February 20, 2020
|
|
|
* 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 Federal Reserve 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 Federal Reserve and the FDIC.
(c) Stock Repurchase Program
The Company has had various stock repurchase programs since March 1999. On March 12, 2020 the Company's Board of Directors authorized the repurchase of up to 5% of the Company's outstanding common shares, or 1,799,054 shares, under the twelfth 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.
During the quarter ended March 31, 2020, the Company repurchased the remaining 639,922 shares available under the eleventh stock repurchase plan at a weighted average price per share of $23.95. No shares were repurchased under this plan during the three months ended March 31, 2019. The Company has repurchased 155,778 shares at a weighted average share price per share of $20.34 during the three months ended March 31, 2020. The Company halted its buybacks in March 2020, and will not resume repurchase activity until management is confident it can understand the economic impacts of the COVID-19 pandemic on the Company's long-term capital position.
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 March 31,
|
|
2020
|
|
2019
|
Repurchased shares to pay withholding taxes
|
25,882
|
|
|
25,854
|
|
Stock repurchase to pay withholding taxes average share price
|
$
|
21.79
|
|
|
$
|
31.01
|
|
|
|
(12)
|
Accumulated Other Comprehensive Income
|
The changes in 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 months ended March 31, 2020 and 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
(In thousands)
|
Balance of AOCI at the beginning of period
|
$
|
10,378
|
|
|
$
|
(7,455
|
)
|
Other comprehensive income before reclassification
|
8,707
|
|
|
8,028
|
|
Amounts reclassified from AOCI for gain on sale of investment securities included in net income
|
(793
|
)
|
|
(12
|
)
|
Net current period other comprehensive income
|
7,914
|
|
|
8,016
|
|
Balance of AOCI at the end of period
|
$
|
18,292
|
|
|
$
|
561
|
|
|
|
(13)
|
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.
Collateral-dependent Loans:
Collateral-dependent loans are identified as part of the calculation of the ACL on loans. The fair value used to measure credit loss for this type of loan is commonly based on recent real estate appraisals which are generally obtained at least every 18 months or earlier if there are changes to risk characteristics of the underlying loan. 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). Individually evaluated loans are evaluated on a quarterly basis and their ACL on loans 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 which are generally obtained at least every 18 months or earlier. 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 March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
(In thousands)
|
Assets
|
|
|
|
|
|
|
|
Investment securities available for sale:
|
|
|
|
|
|
|
|
U.S. Treasury and U.S. Government-sponsored agencies
|
$
|
87,062
|
|
|
$
|
—
|
|
|
$
|
87,062
|
|
|
$
|
—
|
|
Municipal securities
|
179,608
|
|
|
850
|
|
|
178,758
|
|
|
—
|
|
Mortgage-backed securities and collateralized mortgage obligations:
|
|
|
|
|
|
|
|
Residential
|
322,684
|
|
|
—
|
|
|
322,684
|
|
|
—
|
|
Commercial
|
325,756
|
|
|
—
|
|
|
325,756
|
|
|
—
|
|
Corporate obligations
|
23,832
|
|
|
—
|
|
|
23,832
|
|
|
—
|
|
Other asset-backed securities
|
22,150
|
|
|
—
|
|
|
22,150
|
|
|
—
|
|
Total investment securities available for sale
|
961,092
|
|
|
850
|
|
|
960,242
|
|
|
—
|
|
Equity security
|
96
|
|
|
96
|
|
|
—
|
|
|
—
|
|
Derivative assets - interest rate swaps
|
28,075
|
|
|
—
|
|
|
28,075
|
|
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
Derivative liabilities - interest rate swaps
|
$
|
28,075
|
|
|
$
|
—
|
|
|
$
|
28,075
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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
|
$
|
105,223
|
|
|
$
|
—
|
|
|
$
|
105,223
|
|
|
$
|
—
|
|
Municipal securities
|
133,014
|
|
|
—
|
|
|
133,014
|
|
|
—
|
|
Mortgage-backed securities and collateralized mortgage obligations:
|
|
|
|
|
|
|
|
Residential
|
339,608
|
|
|
—
|
|
|
339,608
|
|
|
—
|
|
Commercial
|
327,095
|
|
|
—
|
|
|
327,095
|
|
|
—
|
|
Corporate obligations
|
24,194
|
|
|
—
|
|
|
24,194
|
|
|
—
|
|
Other asset-backed securities
|
23,178
|
|
|
—
|
|
|
23,178
|
|
|
—
|
|
Total investment securities available for sale
|
952,312
|
|
|
—
|
|
|
952,312
|
|
|
—
|
|
Equity Security
|
148
|
|
|
148
|
|
|
—
|
|
|
—
|
|
Derivative assets - interest rate swaps
|
8,318
|
|
|
—
|
|
|
8,318
|
|
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
Derivative liabilities - interest rate swaps
|
$
|
8,318
|
|
|
$
|
—
|
|
|
$
|
8,318
|
|
|
$
|
—
|
|
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 March 31, 2020 and December 31, 2019 and the net losses recorded in earnings during three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis(1)
|
|
Fair Value at March 31, 2020
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Net Losses
Recorded in
Earnings
During the
Three Months Ended March 31, 2020
|
|
(In thousands)
|
Collateral-dependent loans:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
374
|
|
|
$
|
335
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
335
|
|
|
$
|
5
|
|
Total assets measured at fair value on a nonrecurring basis
|
$
|
374
|
|
|
$
|
335
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
335
|
|
|
$
|
5
|
|
|
|
(1)
|
Basis represents the unpaid principal balance of impaired loans. Excludes loans whose fair value was determined to be $0.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis(1)
|
|
Fair Value at December 31, 2019
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Net Losses
Recorded in
Earnings
During
the Three Months Ended March 31, 2019
|
|
(In thousands)
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
4,111
|
|
|
$
|
3,380
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,380
|
|
|
$
|
—
|
|
Total assets measured at fair value on a nonrecurring basis
|
$
|
4,111
|
|
|
$
|
3,380
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,380
|
|
|
$
|
—
|
|
|
|
(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 March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
Fair
Value
|
|
Valuation
Technique(s)
|
|
Unobservable Input(s)
|
|
Range of Inputs; Weighted
Average
|
|
(Dollars in thousands)
|
Collateral-dependent loans
|
$
|
335
|
|
|
Market approach
|
|
Adjustment for differences between the comparable sales
|
|
N/A (1)
|
|
|
(1)
|
Quantitative disclosures are not provided for collateral-dependent impaired loans because there were no adjustments made to the appraisal or stated values during the current period.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Fair
Value
|
|
Valuation
Technique(s)
|
|
Unobservable Input(s)
|
|
Range of Inputs; Weighted
Average
|
|
(Dollars in thousands)
|
Impaired loans
|
$
|
3,380
|
|
|
Market approach
|
|
Adjustment for differences between the comparable sales
|
|
173.5% - (18.5%); 36.8%
|
(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 March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
Carrying Value
|
|
Fair Value
|
|
Fair Value Measurements Using:
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
(In thousands)
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
162,913
|
|
|
$
|
—
|
|
|
$
|
162,913
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Investment securities available for sale
|
961,092
|
|
|
961,092
|
|
|
850
|
|
|
960,242
|
|
|
—
|
|
Loans held for sale
|
3,808
|
|
|
3,935
|
|
|
—
|
|
|
—
|
|
|
3,935
|
|
Loans receivable, net
|
3,804,836
|
|
|
3,851,281
|
|
|
—
|
|
|
—
|
|
|
3,851,281
|
|
Accrued interest receivable
|
14,940
|
|
|
14,940
|
|
|
1
|
|
|
3,851
|
|
|
11,088
|
|
Derivative assets - interest rate swaps
|
28,075
|
|
|
28,075
|
|
|
—
|
|
|
28,075
|
|
|
—
|
|
Equity security
|
96
|
|
|
96
|
|
|
96
|
|
|
—
|
|
|
—
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
Noninterest deposits, interest bearing demand deposits, money market accounts and savings accounts
|
$
|
4,091,959
|
|
|
$
|
4,091,959
|
|
|
$
|
4,091,959
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Certificate of deposit accounts
|
525,989
|
|
|
530,580
|
|
|
—
|
|
|
530,580
|
|
|
—
|
|
Securities sold under agreement to repurchase
|
11,792
|
|
|
11,792
|
|
|
11,792
|
|
|
—
|
|
|
—
|
|
Junior subordinated debentures
|
20,668
|
|
|
17,750
|
|
|
—
|
|
|
—
|
|
|
17,750
|
|
Accrued interest payable
|
154
|
|
|
154
|
|
|
69
|
|
|
59
|
|
|
26
|
|
Derivative liabilities - interest rate swaps
|
28,075
|
|
|
28,075
|
|
|
—
|
|
|
28,075
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Carrying Value
|
|
Fair Value
|
|
Fair Value Measurements Using:
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
(In thousands)
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
228,568
|
|
|
$
|
228,568
|
|
|
$
|
228,568
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Investment securities available for sale
|
952,312
|
|
|
952,312
|
|
|
—
|
|
|
952,312
|
|
|
—
|
|
Loans held for sale
|
5,533
|
|
|
5,704
|
|
|
—
|
|
|
—
|
|
|
5,704
|
|
Loans receivable, net
|
3,731,708
|
|
|
3,791,557
|
|
|
—
|
|
|
—
|
|
|
3,791,557
|
|
Accrued interest receivable
|
14,446
|
|
|
14,446
|
|
|
79
|
|
|
3,668
|
|
|
10,699
|
|
Derivative assets - interest rate swaps
|
8,318
|
|
|
8,318
|
|
|
—
|
|
|
8,318
|
|
|
—
|
|
Equity security
|
148
|
|
|
148
|
|
|
148
|
|
|
—
|
|
|
—
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
Noninterest deposits, interest bearing demand deposits, money market accounts and savings accounts
|
$
|
4,058,098
|
|
|
$
|
4,058,098
|
|
|
$
|
4,058,098
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Certificate of deposit accounts
|
524,578
|
|
|
529,679
|
|
|
—
|
|
|
529,679
|
|
|
—
|
|
Securities sold under agreement to repurchase
|
20,169
|
|
|
20,169
|
|
|
20,169
|
|
|
—
|
|
|
—
|
|
Junior subordinated debentures
|
20,595
|
|
|
20,000
|
|
|
—
|
|
|
—
|
|
|
20,000
|
|
Accrued interest payable
|
199
|
|
|
199
|
|
|
95
|
|
|
64
|
|
|
40
|
|
Derivative liabilities - interest rate swaps
|
8,318
|
|
|
8,318
|
|
|
—
|
|
|
8,318
|
|
|
—
|
|
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. Effective March 24, 2020 the Federal Reserve lowered the reserve ratios on transaction accounts maintained at a depository institution to zero percent. There was no required reserve balance at March 31, 2020 and a required balance of $17.1 million at December 31, 2019 which was met by holding cash and maintaining an average balance with the Federal Reserve Bank.
|
|
(15)
|
Commitments and Contingencies
|
In the ordinary course of business, the Company may enter into various types of transactions that include commitments to extend credit that are not included in its Condensed Consolidated Financial Statements. The Company applies the same credit standards to these commitments as it uses in all its lending activities and has included these commitments in its lending risk evaluations. The majority of the commitments presented below are variable rate. Loan commitments can be either revolving or nonrevolving. The Company’s exposure to credit and market risk under commitments to extend credit is represented by the amount of these commitments.
Upon adoption of ASU 2016-13, as described in Note (1) Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements, the Company recorded an increase in the beginning ACL on unfunded commitments of $3.7 million, representing the change in methodology from an estimate of incurred losses at the balance sheet date, with an estimated probability of funding, to an estimate of losses on future utilization over the entire contractual period.
The following table presents outstanding commitments to extend credit, including letters of credit, at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
|
(In thousands)
|
Commercial business:
|
|
|
|
|
Commercial and industrial
|
|
$
|
557,050
|
|
|
$
|
584,287
|
|
Owner-occupied commercial real estate
|
|
13,665
|
|
|
17,193
|
|
Non-owner occupied commercial real estate
|
|
30,132
|
|
|
35,573
|
|
Total commercial business
|
|
600,847
|
|
|
637,053
|
|
Real estate construction and land development:
|
|
|
|
|
One-to-four family residential
|
|
65,740
|
|
|
75,066
|
|
Five or more family residential and commercial properties
|
|
201,003
|
|
|
230,343
|
|
Total real estate construction and land development
|
|
266,743
|
|
|
305,409
|
|
Consumer
|
|
256,312
|
|
|
269,898
|
|
Total outstanding commitments
|
|
$
|
1,123,902
|
|
|
$
|
1,212,360
|
|
The following table details the activity in the ACL on unfunded commitments during the three months ended March 31, 2020:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
2020
|
|
March 31,
2019
|
|
(In thousands)
|
Balance, beginning of period
|
$
|
306
|
|
|
$
|
306
|
|
Impact of CECL adoption
|
3,702
|
|
|
—
|
|
Adjusted balance, beginning of period
|
4,008
|
|
|
306
|
|
Reversal of provision for credit losses on unfunded commitments
|
(2,018
|
)
|
|
—
|
|
Balance, end of period
|
$
|
1,990
|
|
|
$
|
306
|
|
The effective tax rate was 5.0% and 16.3% for the three months ended March 31, 2020 and 2019, respectively. The decrease in the effective tax rate was due to lower pre-tax income during the three months ended March 31, 2020, reflective of increasing tax-exempt investments, and a provision in the CARES Act, which permitted the Company to recognize a benefit from net operating losses related to prior acquisitions of $1.0 million during the quarter ended March 31, 2020.
The Company began originating loans under the SBA's Paycheck Protection Program on April 6, 2020, including loans to independent contractors, sole proprietors and partnerships as allowed under the guidance from the U.S. Treasury and SBA that was issued April 14, 2020.
As of May 3, 2020, the Bank has funded 3,386 loans totaling $785.0 million and has received SBA approval on an additional 784 loans totaling $86.1 million. The average loan balance for funded and approved PPP loans was $216,000. The Bank earns 1% interest on these loans as well as a fee to cover processing costs.
Liquidity for the originations was initially provided from cash reserves. As fund are used and withdrawn by borrowers for operating expenses, the Bank expects to transition the entire funded balance to the Federal Reserve's Paycheck Protection Program Liquidity Facility.