NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2020, 2019 and 2018
(1)Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements
(a) Description of Business
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 headquartered in Olympia, Washington and conducts business from its 53 branch offices at February 26, 2021 located throughout Washington State and the greater Portland, Oregon area. The Bank’s business consists primarily of commercial lending and deposit relationships with small and medium-sized 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. The Bank's deposits are insured by the FDIC.
(b) Basis of Presentation
The accompanying audited Consolidated Financial Statements have been prepared in accordance with GAAP for annual financial information and pursuant to the rules and regulations of the SEC. To prepare the audited 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. Management believes that the judgments, estimates, and assumptions used in the preparation of the Consolidated Financial Statements are appropriate based on the facts and circumstances at the time. Actual results, however, could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to management's estimate of ACL on loans, management's estimate of ACL on unfunded commitments, management's evaluation of goodwill impairment and the fair value of financial instruments. It is reasonably possible that management's estimate of the ACL on loans of $70.2 million at December 31, 2020 as disclosed in Note (5) Allowance for Credit Losses on Loans, management's estimate of the ACL on unfunded commitments of $4.7 million as disclosed in Note (15) Commitments and Contingencies, management's conclusion that the fair value of the reporting unit more likely than not exceeds its carrying value at December 31, 2020 as disclosed in Note (8) Goodwill and Other Intangible Assets and the estimates of fair value of financial instruments as disclosed in Note (18) Fair Value Measurements could materially change. In particular, these estimates have been and will continue to be affected by the ongoing COVID-19 pandemic. The severity, magnitude and duration, as well as the economic consequences of the COVID-19 pandemic, are uncertain, rapidly changing and difficult to predict. As a result, our accounting estimates and assumptions may change over time in response to the COVID-19 pandemic.
The accompanying Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiary, the Bank. All significant intercompany balances and transactions among the Company and the Bank have been eliminated in consolidation.
Certain prior year amounts in the Consolidated Statements of Income have been reclassified to conform to the current year’s presentation. Reclassifications had no effect on the prior years' net income or stockholders’ equity.
(c) Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and due from banks and interest-bearing balances due substantially from the Federal Reserve Bank. Cash equivalents have a maturity of 90 days or less at the time of purchase.
Investment Securities
The Company identifies investments as held to maturity or available for sale at the time of acquisition. Securities are classified as held to maturity when the Company has the ability and positive intent to hold them to maturity. Securities classified as available for sale are available for future liquidity requirements and may be sold prior to maturity. As of December 31, 2020 and December 31, 2019, the Bank does not hold any securities classified as held to maturity.
Securities available for sale are carried at fair value. Interest income includes amortization of purchase premiums or accretion of purchase discounts using the interest method. Unrealized gains and losses on securities available for sale are excluded from earnings and are reported in other comprehensive income (loss), net. Realized gains and losses on sale of investment securities are computed on the specific identification method. Transfers of securities between the available for sale and held to maturity categories, if executed, are accounted for at fair value.
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.
ACL on Investment Securities Available for Sale
Management evaluates the need for an ACL on investment securities available for sale 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 a provision for credit loss against 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 unrealized decline in fair value that has not been recorded through an ACL on investment securities available for sale is recognized in other comprehensive income.
Changes in the ACL on investment securities available for sale are recorded as provision for credit losses expense. Losses are charged against the ACL 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.
Loans Held for Sale
Mortgage loans held for sale are carried at the lower of amortized cost or fair value. Any loan that management does not have the intent and ability to hold for the foreseeable future or until maturity or payoff is classified as held for sale at the time of origination, purchase, or securitization, or when such decision is made. Unrealized losses on loans held for sale are recorded as a valuation allowance and included in other expense on the Consolidated Statements of Income.
Loans Receivable
Loans receivable includes loans originated and indirect loans purchased by the Bank as well as loans acquired in business combinations that management has the intent and ability to hold for the foreseeable future or until maturity or payoff and is 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. Interest on loans is calculated using the simple interest method based on the daily balance of the principal amount outstanding and is credited to income as earned. Accrued interest receivable for loans receivable is reported within Accrued interest receivable on the Consolidated Statements of Financial Condition. The Company's policies for loans receivable generally do not differ by loan segments or classes unless specified in the following policies.
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 on loans is recorded through earnings as a provision for credit losses. 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 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 earnings as a provision for credit losses.
Delinquent Loans:
Loans are considered past due or delinquent when principal or interest payments are past due 30 days or more. Delinquent loans may remain on accrual status between 30 days and 89 days past due. The Credit Administration department is also involved in specifically reviewing larger loans that are delinquent more than 30 days past due.
The Bank did not designate loans with payment deferrals granted due to the COVID-19 pandemic as past due in accordance with the CARES Act and related regulatory guidance.
Nonaccrual and Charged-off Loans:
Loans for which the accrual of interest has been discontinued are designated as nonaccrual loans. The accrual of interest is generally discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in the process of collection. Loans are placed on nonaccrual at an earlier date if collection of the contractual principal or interest is doubtful. All interest accrued, but not collected, on loans deemed nonaccrual during the period is reversed against interest income in that period. The interest payments received on nonaccrual loans are generally accounted for on the cost-recovery method whereby
the interest payment is applied to the principal balances. Loans may be returned to accrual status when improvements in credit quality eliminate the doubt as to the full collectability of both interest and principal and a period of sustained performance has occurred.
Due to the short-term nature of the forbearance and other relief programs we were offering as a result of the COVID-19 pandemic, borrowers granted relief under these programs generally were not reported as nonaccrual during the deferral period.
Loans are generally charged off to their net realizable value if collection of the contractual principal or interest as scheduled in the loan agreement is doubtful. Consumer loans are typically charged off no later than 90 days past due.
Troubled Debt Restructures:
A TDR is a restructuring in which the Bank, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to a borrower that it would not otherwise consider. These concessions may include changes of the interest rate, extension of the maturity date, delay in the timing of the regular payment, or any other actions intended to minimize potential losses. The Bank does not generally forgive principal as part of a TDR, but in those situations where principal is forgiven, the entire amount of such principal forgiveness is immediately charged off to the extent not done so prior to the modification. The Bank also considers insignificant delays in payments when determining if a loan should be classified as a TDR.
A loan that has been placed on nonaccrual status that is subsequently restructured will usually remain on nonaccrual status until the borrower is able to demonstrate repayment performance in compliance with the restructured terms for a sustained period, typically for six months. A restructured loan may return to accrual status sooner based on other significant events or mitigating circumstances. A loan that has not been placed on nonaccrual status may be restructured and such loan may remain on accrual status after such restructuring. In these circumstances, the borrower has made payments before the restructuring and is expected to continue to perform after the restructuring. Generally, this type of restructuring involves a reduction in the loan interest rate and/or a change to interest-only payments for a period of time.
A TDR is considered defaulted if, during the 12-month period after the restructure, the loan has not performed in accordance to the restructured terms. Defaults generally include loans whose payments are 90 days or more past due and loans whose revised maturity date passed and no further modifications will be granted for that borrower.
Once a loan is classified as a TDR loan, it generally continues to be reported as such until it is paid off or charged off.
During 2020, the CARES Act and regulatory agencies provided guidance around the modification of loans as a result of the COVID-19 pandemic, and 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 and related regulatory guidance 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 if they are less than 30 days past due on the contractual payments as of December 31, 2019 under the CARES Act, which the Bank determined was the implementation date of its modification program under related regulatory guidance.
Unfunded Loan Commitments:
Unfunded loan commitments are generally related to the unused portion of the total commitment of a loan or providing credit facilities to clients of the Bank, including standby letters of credit. These financial instruments are not actively traded and represent off-balance sheet risk to the Bank in excess of the disbursed amounts recognized in the Consolidated Statements of Financial Condition.
Loan Fees and Costs
Direct loan origination fees and costs on originated loans and premiums and discounts on acquired loans, are referred to as "net deferred fees," are deferred and subsequently amortized or accreted as a yield adjustment over the expected life of the loan without prepayment considerations utilizing the interest method, except revolving loans, for which the straight-line method is used. The objective of the interest method is to calculate periodic interest income at a constant effective yield. When a loan is paid off prior to maturity, the remaining net deferred fees are immediately recognized into interest income. In the event loans are sold, the unamortized net deferred fees are recognized as a component of the gain or loss on the sale of loans. Fees related to lending activities, other than the origination or purchase of loans, are recognized as noninterest income during the period the related services are performed.
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 ACL on loans 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 ACL on loans. The Bank records the changes in the ACL on loans through earnings as a provision for credit losses on the Consolidated Statements of Income.
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 methodology, the Company has identified segments of loans with similar risk characteristics that align with their identified loan classes. Loans are determined to be collectively evaluated if they share similar risk characteristics in the segment, or individually evaluated if they do not share similar risk characteristics. Nonaccrual loans are not considered similar to other loans; therefore, they are evaluated for credit losses 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. For each loan segment collectively measured for allowance, the allowance is comprised of the baseline loss allowance, the macroeconomic allowance, and the qualitative allowance.
A performing TDR loan is evaluated for allowance on a collective basis with loans with similar risk characteristics. Nonaccrual TDR loans do not meet the similar characteristics criteria and are evaluated for allowance on an individual basis as described above except that the original interest rate is used to discount the expected cash flows, not the rate specified in the restructuring.
Baseline allowance begins with the baseline loss rates calculated using the Bank's average quarterly historical loss information for an economic cycle. 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, and are adjusted for balances guaranteed by governmental entities, such as SBA or USDA, resulting in 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 segment, which management believes is an accurate representation of future prepayment activity. Management reviews the adequacy of the prepayment assumption on a quarterly basis.
Macroeconomic allowance includes consideration of the forecasted direction of the economic and business environment and its likely impact on 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. Macroeconomic factor multipliers are determined through regression analysis and applied to loss rates for each portfolio segment. Each of the forecasted segment balances 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.
A 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 on each segment, both positive or negative, using the reasonable and supportable period, are added to the calculated baseline loss allowance. After the reasonable and supportable period, forecasted loss rates revert to historical baseline loss levels over the predetermined reversion period on a straight-lined basis.
The Bank also considers other qualitative risk factors to adjust the estimated ACL on loans calculated by the above mentioned model. The Bank has a bias for minimal factors unless internal or external factors outside those considered in its historical losses or macroeconomic forecast indicate otherwise. The Bank has established 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 evaluation of ACL on loans 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 estimated 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.
ACL 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 Bank. The Bank has determined that no allowance is necessary for the off-balance sheet portion of the credit card portfolio as it has the ability to unconditionally cancel the available lines of credit.
The allowance methodology for unfunded commitments is similar to the ACL on loans, but additionally includes considerations of the current utilization of the commitment and an estimate of the future utilization as determined appropriate by historical commitment utilization and the Bank's estimates of future utilization given current economic forecasts.
The ACL for unfunded commitments is recorded in Accrued expenses and other liabilities on the Consolidated Statements of Financial Condition and changes are recognized through earnings in the provision for credit losses on the Consolidated Statements of Income.
Mortgage Banking Operations
The Bank originates and sells certain residential real estate loans on a servicing-released basis. The Bank recognizes a gain or loss to the extent that the sale proceeds of the loan sold differs from the net book value at the time of sale. Income from residential real estate loans brokered to other lenders is recognized into income on date of loan closing.
Commitments to sell residential real estate loans are made primarily during the period between the taking of the loan application and the closing of the loan. The timing of making these sale commitments is dependent upon the timing of the borrower’s election to lock-in the mortgage interest rate and fees prior to loan closing. Most of these sale commitments are made on a best-efforts basis whereby the Bank is only obligated to sell the loan if the loan is approved and closed by the Bank. Commitments to fund residential real estate loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these loans are accounted for as free-standing derivatives. Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates between the date the interest on the loan was locked and the balance sheet date. The Company enters into forward commitments for the future delivery of residential real estate loans when interest rate locks are entered into, in order to hedge the interest rate risk resulting from its commitments to fund the loans. Changes in the fair values of these derivatives are included in other income.
Commercial Loan Sales, Servicing, and Commercial Servicing Asset
The Company, on a limited basis, sells the guaranteed portion of SBA and USDA loans, with servicing retained, for cash proceeds, and records a related servicing asset. The Company does not sell loans with servicing retained unless it retains a participating interest. A servicing asset is recorded at fair value upon sale, and the fair value is estimated by discounting estimated net future cash flows from servicing using discount rates that approximate current market rates and using estimated prepayment rates. Subsequent to initial recognition, all classes of servicing rights are carried at the lower of amortized cost or fair value, and are amortized in proportion to, and over the period of, the estimated net servicing income. The servicing asset is reported within Prepaid expenses and other assets on the Consolidated Statements of Financial Condition.
For purposes of evaluating and measuring impairment, the fair value of servicing rights is measured using a discounted estimated net future cash flow model as described above at least annually. Any impairment is measured as the amount by which the carrying value of servicing rights exceeds its fair value. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics including investor type, loan type, and maturity. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular stratum, a reduction of the allowance may be recorded as an increase to income. Changes in valuation allowances are reported within other noninterest income on the Consolidated Statements of Income. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayments speeds, default rates and losses.
In connection with the sales, the Bank typically makes representations and warranties about the underlying assets conforming to specified guidelines. If the underlying assets do not conform to the specifications, the Bank may have an obligation to repurchase the assets or indemnify the purchaser against any loss. The Bank believes the potential for material loss under these arrangements is remote at December 31, 2020, December 31, 2019 and December 31, 2018.
Servicing fee income, which is reported as other noninterest income on the Consolidated Statements of Income, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Late fees and ancillary fees related to loan servicing were not material for the years ended December 31, 2020, 2019, and 2018.
A premium over the adjusted carrying value is received upon the sale of the guaranteed portion of a SBA or USDA loan. The Bank's investment in a SBA or USDA loan is allocated among the sold and retained portions of the loan based on the relative fair value of each portion at the time of loan origination, adjusted for payments and other activities. Because the portion retained does not carry a SBA or USDA guarantee, part of the gain recognized on the sold portion of the loan is deferred and amortized as a yield enhancement on the retained portion in order to obtain a market equivalent yield. The balance of the deferred gain was immaterial at December 31, 2020, December 31, 2019 and December 31, 2018.
Other Real Estate Owned
Other real estate acquired by the Company in partial or full satisfaction of a loan obligation is classified as held for sale. When acquired, the property is recorded at the estimated fair value (less the costs to sell) at the date of acquisition, not to exceed net realizable value, and any resulting write-down is charged against the ACL on loans. Physical possession of residential real estate property collateralizing a consumer mortgage loan occurs when legal title is obtained upon completion of foreclosure, or when the borrower conveys all interest in the properly to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement.
After acquisition, all costs incurred in maintaining the property are expensed except for costs relating to the development and improvement of the property which are capitalized to the extent of the property’s net realizable value. If the estimated realizable value of the other real estate owned property declines after the acquisition date, the valuation adjustment is charged to other real estate owned expense, net on the Consolidated Statements of Income.
Premises and Equipment
Premises and equipment, including leasehold improvements, are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets or the lease period, whichever is shorter. The estimated useful lives used to compute depreciation and amortization for buildings and building
improvements, including lease improvements, is 15 to 39 years; and for furniture, fixtures and equipment is three to seven years. The Company reviews buildings, leasehold improvements and equipment for impairment whenever events or changes in the circumstances indicate that the undiscounted cash flows for the property are less than its carrying value. If identified, an impairment loss is recognized through a charge to earnings based on the fair value of the property.
Bank Owned Life Insurance
The Company's BOLI policies insure the lives of certain current or former Bank officers, and name the Bank as beneficiary. Noninterest income is generated tax-free (subject to certain limitations) from the increase in the policies' underlying investments made by the insurance company. The Company records BOLI at the amount that can be realized under the insurance contract at the statement of financial condition date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
ACL on Accrued Interest Receivable
Accrued interest receivable on investment securities available for sale is excluded from the estimate of credit losses on investment securities available for sale. No allowance has been established as interest accrued, but not received, is reversed timely in accordance with the policy for investment securities stated above.
Accrued interest receivable on loans receivable is excluded from the ACL on loans as interest accrued, but not received, is reversed timely in accordance with the policy for loans receivable stated above. Additional analysis was completed on ACL of accrued interest receivable during 2020 based on the significance of loan modifications in accordance with the CARES Act and regulatory guidance.
Other Intangible Assets
Other intangible assets represent CDI acquired in business combinations. The fair value of the CDI stemming from any given business combination is based on the present value of the expected cost savings attributable to the core deposit funding, relative to an alternative source of funding. The CDI is amortized over an estimated useful life which approximates the existing deposit relationships acquired on an accelerated method. The Company evaluates such identifiable intangibles for impairment annually, or more frequently if an indication of impairment exists.
Goodwill
The Company’s goodwill represents the excess of the purchase price over the fair value of net assets acquired in certain mergers and acquisitions. Goodwill is assigned to Heritage Bank and is evaluated for impairment at the Bank level (single reporting unit) on an annual basis, or more frequently if an indication of impairment exists between the annual tests. Factors to consider may include, among others: a significant change in legal factors or in the general business climate; significant change in the Company’s stock price and market capitalization; unanticipated competition; and an action or assessment by a regulator.
For the goodwill impairment assessment, the Company has the option to assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying value. If the Company opts to bypass the qualitative analysis or the qualitative analysis indicates that events or circumstances exist that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying value, the Company performs a quantitative analysis. The quantitative analysis requires the Company to make assumptions and judgments regarding the fair value of the reporting unit. If the implied fair value of goodwill is less than the recorded goodwill, an impairment charge would be recorded for the difference.
Income Taxes
The Company and the Bank file a United States consolidated federal income tax return and an Oregon State income tax return. Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates applicable to taxable income in the periods in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. A valuation allowance, if needed, reduces deferred tax assets to the amounts expected to be realized.
A tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
The Company’s policy is to recognize interest and penalties on unrecognized tax benefits in income tax expense in the Consolidated Statements of Income as the amounts are generally insignificant each year.
Operating Leases
The Company has only identified leases classified as operating leases which are recorded as ROU assets and ROU liabilities within prepaid expenses and other assets and accrued expenses and other liabilities, respectively, in the Consolidated Statements of Financial Condition. ROU assets represent the Company's right to use an underlying asset for the lease term and ROU liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and ROU liabilities are recognized at the lease agreement commencement date based on the present value of lease payments over the lease term. The lease term incorporates options to extend the lease when it is reasonably certain that the Company will
exercise that option. As the Company's leases typically do not provide an implicit rate; the Company uses its incremental borrowing rate based on the information available at the operating lease commencement date in determining the present value of lease payments. The operating lease ROU asset is further reduced by any lease pre-payments made and lease incentives. The leases may contain various provisions for increases in rental rates, based either on changes in the published Consumer Price Index or a predetermined escalation schedule, and such variable lease payments are recognized as lease expense as they are incurred. The majority of the Company's leases include variable lease payments such as real estate taxes, maintenance, insurance and other similar costs in addition to the base rent. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
The Company does not separate non-lease components from lease components and excludes operating leases with a term of twelve months or less from being capitalized as ROU assets and ROU liabilities. The Company follows a policy to capitalize lease agreements with total contractual lease payments of $25,000 or more. The Company does not account for any leases at a portfolio level.
Stock-Based Compensation
The Company maintains a number of stock-based incentive programs, which are discussed in more detail in Note (19) Stock-Based Compensation. Compensation cost is recognized for stock options, restricted stock awards and restricted stock units issued to employees and directors based on the fair value of these awards at the date of grant. Compensation cost is generally recognized over the requisite service period, generally defined as the vesting period, on a straight-line basis. Compensation cost for restricted stock units with market-based vesting is recognized over the service period to the extent the restricted stock units are expected to vest. Forfeitures are recognized as they occur.
The market price of the Company’s common stock at the date of grant is used to determine the fair value of the restricted stock awards and restricted stock units. The fair value of stock options granted is estimated based on the date of grant using the Black-Scholes-Merton option pricing model. Certain restricted stock unit grants are subject to performance-based vesting as well as other approved vesting conditions and cliff-vest based on those conditions, and the fair value is estimated using a Monte Carlo simulation pricing model. The assumptions used in the Black-Scholes-Merton option pricing model and the Monte Carlo simulation pricing model include the expected term based on the valuation date and the remaining contractual term of the award; the risk-free interest rate based on the U.S. Treasury curve at the valuation date of the award; the expected dividend yield based on expected dividends being payable to the holders; and the expected stock price volatility over the expected term based on the historical volatility over the equivalent historical term.
Low Income Housing Tax Credit Investments
The Company has two equity investments in LIHTC partnerships, which are indirect federal subsidies that finance low-income housing projects. As a limited liability investor in these partnerships, the Company receives tax benefits in the form of tax deductions from partnership operating losses and federal income tax credits. The federal income tax credits are earned over a 10-year period as a result of the investment properties meeting certain criteria and are subject to recapture for noncompliance with such criteria over a 15-year period. The Company accounts for the LIHTCs under the proportional amortization method and amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance on the Consolidated Statements of Income as a component of income tax expense. The Company reports the carrying value of the equity investments in the unconsolidated LIHTCs as Prepaid expenses and other assets on the Company’s Statements of Financial Condition.
The maximum exposure to loss in the LIHTCs is the amount of equity invested and credit extended by the Company. Loans to these entities are underwritten in substantially the same manner as are other loans and are secured. The Company has evaluated the variable interests held by the Company in each LIHTC investment and determined that the Company does not have controlling financial interests in such investments and is not the primary beneficiary.
New Market Tax Credit Investments
The Company has a total of $25.0 million of qualified equity investments into three certified development entities which are eligible to receive NMTC. The NMTC program provides federal tax incentives to investors to make investments in distressed communities and promotes economic improvements through the development of successful businesses in these communities. The NMTC is available to investors over a seven-year period and is subject to recapture if certain events occur during such period. The Company is required to fund 85% of a tranche by a predetermined deadline to claim the entire tax credit. The Company funded its tranche before the deadline.
The Company accounts for its NMTC on the equity method and reports the investment balance in Prepaid expenses and other assets on the Consolidated Statements of Financial Condition and the related investment income is recognized in Other income on the Consolidated Statements of Income.
Deferred Compensation Plans
The Company has a Deferred Compensation Plan and has entered into arrangements with certain executive officers. Under the Deferred Compensation Plan, participants are permitted to elect to defer compensation and the Company has the discretion to make additional contributions to the Deferred Compensation Plan on behalf of any participant based on a number of factors. Such discretionary contributions are generally approved by the Compensation Committee of the Company's Board of Directors. The notional account balances of participants under the Deferred Compensation Plan earn interest on an annual basis. The applicable interest rate is the Moody’s Seasoned Aaa Corporate Bond Yield as of January 1 of each year. Generally, a participant’s account is payable upon the earliest of the participant’s separation from service with the Company, the participant’s
death or disability, or a specified date that is elected by the participant in accordance with applicable rules of the Internal Revenue Code, as amended.
Additionally, in conjunction with the Premier Merger, the Company assumed a Salary Continuation Plan. The Salary Continuation Plan is an unfunded non-qualified deferred compensation plan for select former Premier Commercial executive officers, some of which are current Heritage officers. Under the Salary Continuation Plan, the Company will pay each participant, or their beneficiary, specified amounts over specified periods beginning with the individual's termination of service due to retirement subject to early termination provisions.
The Company’s obligation to make payments under the Deferred Compensation Plan and the Salary Continuation Plan is a general obligation of the Company and is to be paid from the Company’s general assets. As such, participants are general unsecured creditors of the Company with respect to their participation under both plans. The Company records a liability within Accrued expenses and other liabilities on the Consolidated Statements of Financial Condition and records Compensation and employee benefits expense on the Consolidated Statements of Income in a systematic and rational manner. Since the amounts earned under the Deferred Compensation Plan are generally based on the Company’s annual performance, the Company records deferred compensation expense each year for an amount calculated based on that year’s financial performance.
Earnings per Share
The two-class method is used in the calculation of basic and diluted earnings per common share. Basic earnings per common share is net income allocated to common shareholders divided by the weighted average number of common shares outstanding during the period. All outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are considered participating securities for this calculation. Dividends and undistributed earnings allocated to participating securities are excluded from net income allocated to common shareholders and participating securities are excluded from weighted average common shares outstanding. Diluted earnings per common share is calculated using the treasury stock method and includes the dilutive effect of additional potential common shares issuable under stock options. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of issuance of the financial statements.
Derivative Financial Instruments
The commitments to originate residential real estate loans held for sale and the related forward delivery contracts are considered derivatives.
The Company also utilizes interest rate swap derivative contracts to facilitate the needs of its commercial customers whereby it enters into an interest rate swap with a customer while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each swap transaction, the Company agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, the Company agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the Company’s customer to effectively convert a variable rate loan to a fixed rate and the Company recognizes immediate income based upon the difference in the bid/ask spread of the underlying transactions with its customers and the third-party. Because the Company acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact the Company’s results of operations. These interest rate swaps are not designated as hedging instruments.
The Company is exposed to credit-related losses in the event of nonperformance by the counterparty to these agreements. Credit risk of the financial contract is controlled through the credit approval, limits, and monitoring procedures and management does not expect the counterparties to fail their obligations.
Fee income related to interest rate swap derivative contract transactions is recorded in Interest rate swap fees on the Consolidated Statements of Income. The fair value of derivative positions outstanding is included in Prepaid expenses and other assets and Accrued expenses and other liabilities in the Consolidated Statements of Financial Condition. The gains and losses due to changes in fair value and all cash flows are included in Other income in the Consolidated Statements of Income, but typically net to zero based on the identical back-to-back interest rate swaps unless a credit valuation adjustment is recorded to appropriately reflect nonperformance risk in the fair value measurement. Various factors impact changes in the credit valuation adjustments over time, including changes in the risk ratings of the parties to the contracts, as well as changes in market rates and volatilities, which affect the total expected exposure of the derivative instruments.
Advertising Expenses
Advertising costs are expensed as incurred. Costs related to production of advertising are considered incurred when the advertising is first used.
Provision for Credit Losses
The provision for credit losses as presented in the Consolidated Statements of Income includes the provision for credit losses on loans, the provision for credit losses on unfunded commitments, the provision for credit losses on accrued interest receivable and the provision for credit losses on investment securities available for sale.
Operating Segments
While the Company’s chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis as operating results for all segments
are similar. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.
Revenue from Contracts with Customers
The Company's revenues are primarily composed of interest income on financial instruments, such as loans and investment securities. The Company's revenue derived from contracts with customers are generally presented in Service charges and other fees and Other income on the Consolidated Statement of Income, and includes the following:
•Service Charges on Deposit Accounts: The Company earns fees from its deposit customers from a variety of deposit products and services. Non-transaction based fees such as account maintenance fees and monthly statement fees are considered to be provided to the customer under a day-to-day contract with ongoing renewals. Revenues for these non-transaction fees are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Transaction-based fees such as non-sufficient fund charges, stop payment charges and wire fees are recognized at the time the transaction is executed as the contract duration does not extend beyond the service performed.
•Wealth Management: The Company earns fees from contracts with customers for fiduciary and brokerage activities. Revenues are generally recognized on a monthly basis and are generally based on a percentage of the customer’s assets under management or based on investment or insurance solutions that are implemented for the customer.
•Merchant Processing Services and Debit and Credit Card Fees: The Company earns fees from cardholder transactions conducted through third-party payment network providers which consist of (i) interchange fees earned from the payment network as a debit card issuer, (ii) referral fee income, and (iii) ongoing merchant fees earned for referring customers to the payment processing provider. These fees are recognized when the transaction occurs, but may settle on a daily or monthly basis.
(d) Recently Issued Accounting Pronouncements
FASB ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10), was issued in January 2016, to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. This Update contained several provisions, including but not limited to (1) requiring equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income; (2) simplifying the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (3) eliminating the requirement to disclose the method(s) and significant assumptions used to estimate fair value; and (4) requiring separate presentation of financial assets and liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements. The Update also changed certain financial statement disclosure requirements, including requiring disclosures of the fair value of financial instruments be made on the basis of exit price. The Company adopted this Update effective January 1, 2018 using the cumulative catch-up transition method. This change resulted in a cumulative adjustment of $93,000 from accumulated other comprehensive loss, net to retained earnings for the unrealized gain related to the Company's equity security. The Company's processes and procedures utilized to estimate the fair value of loans receivable and certificate of deposit accounts for disclosure requirements were additionally changed due to adoption of this Update. Previously, the Company valued these items using an entry price notion. This ASU emphasized that these instruments be measured using the exit price notion; accordingly, the Company refined its calculation as part of adopting this Update. Prior period information has not been updated to conform with the new guidance. See the Consolidated Statements of Stockholders' Equity and Note (18) Fair Value Measurements.
FASB ASU 2016-02, Leases (Topic 842), as amended by ASU 2017-13, 2018-01, 2018-10, 2018-11 and ASU 2018-11 and ASU 2019-01, was originally issued in February 2016, to increase transparency and comparability of leases among organizations and to disclose key information about leasing arrangements. The ASU sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The ASU requires lessees to apply a dual approach, classifying leases as either a finance or operating lease. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. All cash payments will be classified within operating activities in the statement of cash flows. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The ASU was effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted the ASU on January 1, 2019 and elected an exclusion accounting policy for lease assets and lease liabilities for leases with a term of twelve months or less. The adoption of this ASU resulted in the recognition of operating lease assets and liabilities of approximately $29.3 million and $30.2 million, respectively, in Prepaid expenses and other assets and Accrued expenses and other liabilities in the Consolidated Statements of Financial Condition. This change also resulted in a cumulative-effect adjustment to beginning retained earnings of $399,000, net of tax, under the modified retrospective approach.
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, and can be delayed under a provision of the CARES Act until the end of the official health emergency declaration. The Company
adopted ASU 2016-13 on January 1, 2020. The Significant Accounting Policies section above reflects the policies after adoption. The CECL 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 ACL on investment securities available for sale was recorded upon adoption.
Loan Receivable
ASU 2016-13 was applied prospectively and replaced the ALL with the ACL on loans on the Consolidated Statements of Financial Condition and replaced the related provision for loan losses with the provision for credit losses as presented on the Consolidated Statements of Income, net with the 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 on loans was determined for each PCI loan. The ACL on PCI loans was added to the loan's carrying amount to establish a PCD loan at its amortized cost basis. The difference between the outstanding principal balance and the amortized cost basis of the PCD loan is a noncredit premium or discount, which is 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 the previous ASC 310-10 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 an increase in the ACL on loans of $1.8 million 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.
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.
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 Consolidated Statements of Financial Condition and replaced the provision for unfunded commitments which was previously recorded in Other expense with the provision for credit losses as presented on the Consolidated Statements of Income, net with the 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.
Overall CECL Adoption 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 was effective for annual periods or any interim goodwill impairment tests beginning after December 15, 2019 using a prospective transition method and early adoption was permitted. The Company adopted the guidance on January 1, 2020. The Company has goodwill from prior business combinations and performs an annual impairment test during the quarter ended December 31, or more frequently if changes or circumstances occur that would more-likely-than-not reduce the fair value of the reporting unit below its carrying value. Although the Company cannot anticipate future goodwill impairment assessments, based on the most recent assessment prior to adoption, it is unlikely that an impairment amount would need to be calculated and, therefore, at adoption there was no impact from these amendments to the Company’s financial position and results of operations. In addition, the current accounting policies and processes were not changed, except for the elimination of the Step 2 analysis. For additional information regarding goodwill impairment testing, see Note (8) Goodwill and Other Intangible Assets.
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 were 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 (18) Fair Value Measurements.
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 ASU was effective immediately upon its release and did not have a material impact on the Consolidated Financial Statements.
FASB ASU 2020-04, Reference Rate Reform (Topic 848), as amended by ASU 2021-01, 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. ASU 2020-04 also provides numerous optional expedients for derivative accounting and is effective March 12, 2020 through December 31, 2022. An entity may elect to apply the ASU 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 ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. The Company’s swap related transactions are the majority of its LIBOR exposure. Effective January 25, 2021, the Company has agreed to adhere to the Interbank Offered Rate Fallbacks Protocol as published by the International Swaps and Derivatives Association, Inc. and recommended by the Alternative Reference Rates Committee. As of January 25, 2021, more than 12,000 entities across nearly 80 jurisdictions have adhered to this protocol which is expected to support a smooth transition from LIBOR to a replacement index. The Company further anticipates this ASU will simplify any modifications executed 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 net deferred fees. The Company does not expect this ASU to have a material impact on its business operations and the Consolidated Financial Statements.
FASB ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs, was issued in October 2020 and modifies the premium amortization of purchased callable debt securities on a prospective basis. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early application is not permitted. The Company does not expect the ASU will have a material impact on its Consolidated Financial Statements.
(2)Business Combinations
There were no acquisitions or mergers completed during the years ended December 31, 2020 and 2019. During the year ended December 31, 2018, the Company completed the acquisitions of Puget Sound Bancorp and Premier Commercial Bancorp.
Puget Sound Merger:
On July 26, 2017, the Company, along with the Bank, and Puget Sound Bancorp, Inc. and its wholly owned subsidiary bank, Puget Sound Bank, jointly announced the signing of a definitive agreement. The Puget Sound Merger was effective on January 16, 2018. As of the acquisition date, Puget Sound merged into Heritage and Puget Sound Bank merged into Heritage Bank.
Pursuant to the terms of the Puget Sound Merger, all outstanding Puget Sound restricted stock awards became immediately vested on the acquisition date of the Puget Sound Merger. Puget Sound shareholders received 1.1688 shares of Heritage common stock per share of Puget Sound stock. Heritage issued an aggregate of 4,112,258 shares of its common stock based on the January 12, 2018 closing price of Heritage Common stock of $31.80 for total fair value of common shares issued of $130.8 million and paid cash of $3,000 for fractional shares in the transaction for total consideration paid of $130.8 million. Total consideration included $851,000, representing 26,741 shares which were forfeited by the Puget Sound shareholders to pay their applicable taxes.
The Company incurred no acquisition-related costs for the year ended December 31, 2020 and $75,000 and $5.4 million for the years ended December 31, 2019 and 2018, respectively, for the Puget Sound Merger.
Premier Merger:
On March 24, 2018, the Company, along with the Bank, and Premier Commercial Bancorp and its wholly-owned subsidiary bank, Premier Community Bank, jointly announced the signing of a definitive agreement. The Premier Merger was effective on July 2, 2018. As of the acquisition date, Premier Commercial Bancorp merged into Heritage and Premier Community Bank merged into Heritage Bank.
Pursuant to the terms of the Premier Merger, Premier Commercial shareholders received 0.4863 shares of Heritage common stock per share of Premier Commercial common stock. Heritage issued an aggregate of 2,848,579 shares of its
common stock based on the closing date price per share of Heritage common stock on June 29, 2018 of $34.85 and paid cash of $2,000 for fractional shares in the transaction for total consideration paid of $99.3 million.
The Company incurred no acquisition-related costs for the year ended December 31, 2020 and $57,000, and $4.9 million for the years ended December 31, 2019 and 2018, respectively, for the Premier Merger.
Business Combination Accounting:
The Premier Merger and Puget Sound Merger resulted in $53.4 million and $68.5 million, respectively, of goodwill. This goodwill is not deductible for tax purposes.
The primary reason for the Premier and Puget Mergers was to create depth in the Company's geographic footprint consistent with its ongoing growth strategy, focused heavily on metro markets, and to achieve operational scale and realize efficiencies of a larger combined organization. The mergers constitute business acquisitions as defined by FASB ASC 805, Business Combinations. FASB ASC 805 establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired and the liabilities assumed. Heritage was considered the acquirer in these transactions. Accordingly, the preliminary estimates of fair values of Premier Commercial and Puget Sound assets, including the identifiable intangible assets, and the assumed liabilities, were measured and recorded as of the respective acquisition dates. Fair values on the acquisition dates are preliminary and represent management’s best estimates based on available information and facts and circumstances in existence on the acquisition date. Fair values are subject to refinement for up to one year after the closing date of the acquisitions as additional information regarding the closing date fair values becomes available. The Company finalized the purchase price allocation for both mergers as of December 31, 2018.
The fair value estimates of the assets acquired and liabilities assumed in the mergers were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premier Merger
|
|
Puget Sound Merger
|
|
(In thousands)
|
Assets
|
|
|
|
Cash and cash equivalents
|
$
|
22,534
|
|
|
$
|
25,889
|
|
Interest earning deposits
|
3,309
|
|
|
54,247
|
|
Investment securities available for sale
|
4,493
|
|
|
80,353
|
|
Loans receivable (1)
|
330,158
|
|
|
388,462
|
|
Other real estate owned
|
1,796
|
|
|
—
|
|
Premises and equipment, net
|
3,053
|
|
|
732
|
|
Federal Home Loan Bank stock, at cost
|
1,120
|
|
|
623
|
|
Bank owned life insurance
|
10,852
|
|
|
6,264
|
|
Accrued interest receivable
|
1,006
|
|
|
1,448
|
|
Prepaid expenses and other assets
|
1,603
|
|
|
1,354
|
|
Other intangible assets
|
7,075
|
|
|
11,270
|
|
Total assets acquired
|
$
|
386,999
|
|
|
$
|
570,642
|
|
Liabilities
|
|
|
|
Deposits
|
$
|
318,717
|
|
|
$
|
505,885
|
|
Federal Home Loan Bank advances
|
16,000
|
|
|
—
|
|
Securities sold under agreement to repurchase
|
462
|
|
|
—
|
|
Accrued expenses and other liabilities
|
5,935
|
|
|
2,504
|
|
Total liabilities acquired
|
$
|
341,114
|
|
|
$
|
508,389
|
|
|
|
|
|
Fair value of net assets acquired
|
$
|
45,885
|
|
|
$
|
62,253
|
|
(1) The outstanding loan balance acquired in the Premier Merger and Puget Sound Merger was $335.4 million and $392.7 million, respectively, at the acquisition date.
Goodwill represents the excess of the consideration transferred over the estimated fair value of the net assets acquired and liabilities assumed. A summary of the net assets purchased and the estimated fair value adjustments and resulting goodwill recognized from the mergers are presented in the following table:
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|
|
|
|
|
|
|
|
|
|
|
|
Premier Merger
|
|
Puget Sound Merger
|
|
(In thousands)
|
Consideration transferred
|
$
|
99,275
|
|
|
$
|
130,773
|
|
|
|
|
|
Cost basis of net assets on merger date
|
$
|
40,629
|
|
|
$
|
54,405
|
|
Fair value adjustments:
|
|
|
|
Investment securities
|
(135)
|
|
|
(348)
|
|
Total loans receivable, net
|
(111)
|
|
|
1,400
|
|
Other real estate owned
|
(1,017)
|
|
|
—
|
|
Premises and equipment
|
1,312
|
|
|
(121)
|
|
Other intangible assets
|
7,075
|
|
|
9,207
|
|
Prepaid expenses and other assets
|
(1,912)
|
|
|
(2,282)
|
|
Deposits
|
(310)
|
|
|
(62)
|
|
Accrued expenses and other liabilities
|
354
|
|
|
54
|
|
Fair value of net assets on merger date
|
$
|
45,885
|
|
|
$
|
62,253
|
|
|
|
|
|
Goodwill recognized from the mergers
|
$
|
53,390
|
|
|
$
|
68,520
|
|
The following table presents certain pro forma information, for illustrative purposes only, for the year ended December 31, 2018 as if both the Premier Merger and Puget Sound Merger had occurred on January 1, 2017. The estimated pro forma information combines the historical results of Premier Commercial and Puget Sound with the Company's consolidated historical results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the mergers occurred on January 1, 2017. In particular, the pro forma information does not consider any changes to the ACL on loans from recorded loans at fair value. Additionally, Heritage expected to achieve further operating savings and other business synergies, including interest income growth, as a result of the mergers which are not reflected in the pro forma amounts in the following table. As a result, actual amounts will differ from the pro forma information presented.
|
|
|
|
|
|
|
Pro Forma for the Year Ended December 31, 2018
|
|
(In thousands, except per share amounts)
|
Net interest income
|
$
|
194,989
|
|
Net income
|
69,515
|
|
Basic earnings per common share
|
1.88
|
|
Dilutive Earnings per common share
|
1.87
|
|
The Company believes that the historical Premier Commercial and Puget Sound operating results, individually or collectively, are not considered of enough significance to be meaningful to the Company’s results of operations.
(3)Investment Securities
The Company’s investment policy is designed primarily to provide and maintain liquidity, generate a favorable return on assets without incurring undue interest rate and credit risk, and complement the Bank’s lending activities.
There were no securities classified as trading or held to maturity at December 31, 2020 or December 31, 2019.
(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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
(In thousands)
|
U.S. government and agency securities
|
$
|
44,713
|
|
|
$
|
947
|
|
|
$
|
—
|
|
|
$
|
45,660
|
|
Municipal securities
|
197,634
|
|
|
12,561
|
|
|
(227)
|
|
|
209,968
|
|
|
|
|
|
|
|
|
|
Residential CMO and MBS
|
196,956
|
|
|
5,125
|
|
|
(209)
|
|
|
201,872
|
|
Commercial CMO and MBS
|
290,638
|
|
|
13,198
|
|
|
(90)
|
|
|
303,746
|
|
Corporate obligations
|
10,971
|
|
|
125
|
|
|
—
|
|
|
11,096
|
|
Other asset-backed securities
|
29,283
|
|
|
565
|
|
|
(27)
|
|
|
29,821
|
|
Total
|
$
|
770,195
|
|
|
$
|
32,521
|
|
|
$
|
(553)
|
|
|
$
|
802,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
|
|
Fair
Value
|
|
(In thousands)
|
U.S. government and agency securities
|
$
|
104,709
|
|
|
$
|
598
|
|
|
$
|
(84)
|
|
|
|
|
$
|
105,223
|
|
Municipal securities
|
128,183
|
|
|
4,933
|
|
|
(102)
|
|
|
|
|
133,014
|
|
|
|
|
|
|
|
|
|
|
|
Residential CMO and MBS
|
336,929
|
|
|
3,184
|
|
|
(505)
|
|
|
|
|
339,608
|
|
Commercial CMO and MBS
|
322,169
|
|
|
5,575
|
|
|
(649)
|
|
|
|
|
327,095
|
|
Corporate obligations
|
23,893
|
|
|
316
|
|
|
(15)
|
|
|
|
|
24,194
|
|
Other asset-backed securities
|
23,277
|
|
|
54
|
|
|
(153)
|
|
|
|
|
23,178
|
|
Total
|
$
|
939,160
|
|
|
$
|
14,660
|
|
|
$
|
(1,508)
|
|
|
|
|
$
|
952,312
|
|
For the years ended December 31, 2020 and 2019, there was no provision for credit loss on investment securities available for sale recorded in the Consolidated Statements of Income. There was no ACL on investment securities available for sale at December 31, 2020 and December 31, 2019.
The amortized cost and fair value of investment securities available for sale at December 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
|
$
|
55,631
|
|
|
$
|
56,055
|
|
Due after one year through five years
|
138,458
|
|
|
145,562
|
|
Due after five years through ten years
|
209,381
|
|
|
220,191
|
|
Due after ten years
|
366,725
|
|
|
380,355
|
|
|
|
|
|
Total
|
$
|
770,195
|
|
|
$
|
802,163
|
|
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 December 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 aggregated by investment category and length of time that the individual securities have been in continuous unrealized loss positions as of December 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 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)
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
10,264
|
|
|
(227)
|
|
|
—
|
|
|
—
|
|
|
10,264
|
|
|
(227)
|
|
Residential CMO and MBS
|
—
|
|
|
—
|
|
|
25,293
|
|
|
(209)
|
|
|
25,293
|
|
|
(209)
|
|
Commercial CMO and MBS
|
11,404
|
|
|
(29)
|
|
|
7,499
|
|
|
(61)
|
|
|
18,903
|
|
|
(90)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other asset-backed securities
|
—
|
|
|
—
|
|
|
4,570
|
|
|
(27)
|
|
|
4,570
|
|
|
(27)
|
|
Total
|
$
|
21,668
|
|
|
$
|
(256)
|
|
|
$
|
37,362
|
|
|
$
|
(297)
|
|
|
$
|
59,030
|
|
|
$
|
(553)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. government and agency securities
|
$
|
45,999
|
|
|
$
|
(84)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
45,999
|
|
|
$
|
(84)
|
|
Municipal securities
|
13,761
|
|
|
(102)
|
|
|
—
|
|
|
—
|
|
|
13,761
|
|
|
(102)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential CMO and MBS
|
14,272
|
|
|
(66)
|
|
|
60,232
|
|
|
(439)
|
|
|
74,504
|
|
|
(505)
|
|
Commercial CMO and MBS
|
56,263
|
|
|
(177)
|
|
|
43,623
|
|
|
(472)
|
|
|
99,886
|
|
|
(649)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate obligations
|
998
|
|
|
(2)
|
|
|
1,987
|
|
|
(13)
|
|
|
2,985
|
|
|
(15)
|
|
Other asset-backed securities
|
14,383
|
|
|
(127)
|
|
|
1,609
|
|
|
(26)
|
|
|
15,992
|
|
|
(153)
|
|
Total
|
$
|
145,676
|
|
|
$
|
(558)
|
|
|
$
|
107,451
|
|
|
$
|
(950)
|
|
|
$
|
253,127
|
|
|
$
|
(1,508)
|
|
The Company has evaluated these investment securities available for sale as of December 31, 2020 and December 31, 2019 and determined that no ACL on investment securities available for sale is necessary. Unrealized losses on investment securities available for sale have not been recognized into earnings because the issuers of bonds are investment grade, 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 investment securities available for sale for the years ended December 31, 2020, December 31, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
(In thousands)
|
Gross realized gains
|
$
|
1,537
|
|
|
$
|
558
|
|
|
$
|
273
|
|
Gross realized losses
|
(19)
|
|
|
(228)
|
|
|
(136)
|
|
Net realized gains
|
$
|
1,518
|
|
|
$
|
330
|
|
|
$
|
137
|
|
(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 December 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
|
(In thousands)
|
Washington and Oregon state public deposits
|
$
|
119,652
|
|
|
$
|
124,228
|
|
|
$
|
187,700
|
|
|
$
|
190,773
|
|
|
|
|
|
|
|
|
|
Securities sold under agreement to repurchase
|
38,630
|
|
|
39,945
|
|
|
22,156
|
|
|
22,294
|
|
Other securities pledged
|
29,665
|
|
|
30,717
|
|
|
19,333
|
|
|
19,850
|
|
Total
|
$
|
187,947
|
|
|
$
|
194,890
|
|
|
$
|
229,189
|
|
|
$
|
232,917
|
|
(e) Accrued Interest Receivable
Accrued interest receivable, excluded from amortized cost on investment securities available for sale, totaled $3.6 million and $3.7 million at December 31, 2020 and December 31, 2019, respectively. No amounts of accrued interest receivable on investment securities available for sale were reversed against interest income on investment securities available for sale during the years ended December 31, 2020 and December 31, 2019.
(4)Loans Receivable
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 $15.8 million and $10.7 million at December 31, 2020 and December 31, 2019, respectively. No ACL on accrued interest receivable on loans was recorded at December 31, 2020 and December 31, 2019.
The Company adopted ASU 2016-13 effective January 1, 2020, which prospectively changed disclosure requirements for loans receivable and increased the beginning ACL on loans as discussed in Note (5) Allowance for Credit Losses on Loans.
(a) Loan Origination/Risk Management
The Company categorizes the individual loans in the total loan portfolio into four segments: commercial business; residential real estate; 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. The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and criticized loans. The Company also conducts internal loan reviews and validates the credit risk assessment on a periodic basis and presents the results of these reviews to management. The loan review process complements and reinforces the risk identification and assessment decisions made by loan officers and credit personnel.
The amortized cost of loans receivable, net of ACL on loans at December 31, 2020 and December 31, 2019 consisted of the following portfolio segments and classes:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
(In thousands)
|
Commercial business:
|
|
|
|
Commercial and industrial
|
$
|
733,098
|
|
|
$
|
852,220
|
|
SBA PPP
|
715,121
|
|
|
—
|
|
Owner-occupied CRE
|
856,684
|
|
|
805,234
|
|
Non-owner occupied CRE
|
1,410,303
|
|
|
1,288,779
|
|
Total commercial business
|
3,715,206
|
|
|
2,946,233
|
|
Residential real estate
|
122,756
|
|
|
131,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
(In thousands)
|
Real estate construction and land development:
|
|
|
|
Residential
|
78,259
|
|
|
104,296
|
|
Commercial and multifamily
|
227,454
|
|
|
170,350
|
|
Total real estate construction and land development
|
305,713
|
|
|
274,646
|
|
Consumer
|
324,972
|
|
|
415,340
|
|
Loans receivable
|
4,468,647
|
|
|
3,767,879
|
|
Allowance for credit losses on loans
|
(70,185)
|
|
|
(36,171)
|
|
Loans receivable, net
|
$
|
4,398,462
|
|
|
$
|
3,731,708
|
|
|
|
|
|
Balances included in amortized cost of Loans receivable:
|
|
|
|
Unamortized net discount on acquired loans
|
$
|
6,575
|
|
|
$
|
8,371
|
|
Unamortized net deferred (fee) cost
|
$
|
(15,458)
|
|
|
$
|
2,441
|
|
A discussion of the risk characteristics of each loan portfolio segment is as follows:
Commercial Business:
There are four significant classes of loans in the commercial business portfolio segment: commercial and industrial, SBA PPP, owner-occupied commercial real estate and non-owner occupied commercial real estate. The owner and non-owner occupied commercial real estate classes are both considered commercial real estate loans. As the commercial and industrial loans, SBA PPP loans and commercial real estate loans carry different risk characteristics, they are discussed separately below:
Commercial and industrial. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may include a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Commercial and industrial loans carry more risk than other loans because the borrowers’ cash flow is less predictable, and in the event of a default, the amount of loss is potentially greater and more difficult to quantify because the value of the collateral securing these loans may fluctuate, may be uncollectible, or may be obsolete or of limited use, among other things.
SBA PPP. The Bank began originating SBA PPP loans following the enactment of the CARES Act in April 2020. SBA PPP loans are fully guaranteed by the SBA, intended for businesses impacted by the COVID-19 pandemic and designed to provide near term relief to help small businesses sustain operations. These loans have either a two-year or five-year maturity date and earn interest at 1%. The Bank also earns a fee based on the size of the loan, which is recognized over the life of the loan. The balance of unamortized net deferred fees on SBA PPP loans was $15.4 million at December 31, 2020. The Bank expects that the great majority of SBA PPP borrowers will seek full or partial forgiveness of their loan obligations in accordance with the CARES Act.
Commercial real estate. The Company originates commercial real estate loans primarily within its primary market areas. These loans are subject to underwriting standards and processes similar to commercial and industrial loans in that these loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate properties. Commercial real estate lending typically involves higher loan principal amounts and payments on loans, and repayment is dependent on successful operation and management of the properties. The value of the real estate securing these loans can be adversely affected by conditions in the real estate market or the economy. There is some common risk characteristics with owner-occupied commercial real estate loans and non-owner occupied commercial real estate loans. However, owner-occupied commercial real estate loans are generally considered to have a slightly lower risk profile as we typically have the guarantee of the owner-occupant and can underwrite risk using the complete financial information on the entity that occupies the property.
Residential Real Estate:
The majority of the Company’s residential real estate loans are secured by one-to-four family residences located in its primary market areas. The Company’s underwriting standards require that residential real estate loans maintained in the portfolio generally are owner-occupied and do not exceed 80% of the lower of appraised value at origination or cost of the underlying collateral. Terms of maturity typically range from 15 to 30 years. The Company generally sells its originated residential real estate loans in the secondary market and retains a smaller portion in its loan portfolio.
Real Estate Construction and Land Development:
The Company originates construction loans for residential and for commercial and multifamily properties. The residential construction loans generally include construction of custom single-family homes whereby the home buyer is the
borrower. The Company also provides financing to builders for the construction of pre-sold residential homes and, in selected cases, to builders for the construction of speculative single-family residential property. Substantially all construction loans are short-term in nature and priced with variable rates of interest. Construction lending can involve a higher level of risk than other types of lending because funds are advanced partially based upon the value of the project, which is uncertain prior to the project’s completion. Because of the uncertainties inherent in estimating construction costs as well as the market value of a completed project and the effects of governmental regulation of real property, the Company’s estimates with regard to the total funds required to complete a project and the related loan-to-value ratio may vary from actual results. As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property or refinance the indebtedness. If the Company’s estimate of the value of a project at completion proves to be overstated, it may have inadequate security for repayment of the loan and may incur a loss if the borrower does not repay the loan. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being dependent upon successful completion of the construction project, market interest rate changes, government regulation of real property, general economic conditions and the availability of long-term financing.
Consumer:
The Company originates consumer loans and lines of credit that are both secured and unsecured. The underwriting process for these loans ensures a qualifying primary and secondary source of repayment. Underwriting standards for home equity loans are significantly influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage of 80%, collection remedies, the number of such loans a borrower can have at one time and documentation requirements. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed. The majority of consumer loans are for relatively small amounts disbursed among many individual borrowers which reduces the credit risk for this type of loan. To further reduce the risk, trend reports are reviewed by management on a regular basis.
The Company also purchased indirect consumer loans. These indirect consumer loans were secured by new and used automobile and recreational vehicles and were originated indirectly by established and well-known dealers located in our market areas. In addition, the indirect loans purchased were made to only prime borrowers. The Company ceased indirect auto loan originations in March 2020.
(b) Concentrations of Credit
Most of the Company’s lending activity occurs within its primary market areas which are concentrated along the I-5 corridor from Whatcom County to Clark County in Washington State and Multnomah County and Washington County in Oregon, as well as other contiguous markets and represents a geographic concentration. In addition, approximately 88.2% and 82.7% of our loan portfolio at December 31, 2020 and December 31, 2019, respectively, consisted of commercial-type loans, including commercial business loans and commercial and multifamily real estate construction and land development loans. Commercial-type loans are generally viewed as having more inherent risk of default than residential real estate loans or other consumer loans. Also, the commercial-type loan balance per borrower is typically larger than that for residential real estate loans and other consumer loans, implying higher potential losses on an individual loan basis.
(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 of its loans. Loans are graded on a scale of 1 to 10. A description of the general characteristics of the risk grades is as follows:
•Grades 1 to 5: These grades are considered “pass grade” ("Pass") and include loans with negligible to above average, but acceptable, risk. These borrowers generally have strong to acceptable capital levels and consistent earnings and debt service capacity. Loans with the higher grades within the “pass” category may include borrowers who are experiencing unusual operating difficulties, but have acceptable payment performance to date. Increased monitoring of financial information and/or collateral may be appropriate. Loans with this grade show no immediate loss exposure.
•Grade 6: This grade includes "Watch" loans and is considered a “pass grade.” The grade is intended to be utilized on a temporary basis for pass grade borrowers where a potentially significant risk-modifying action is anticipated in the near term.
•Grade 7: This grade includes "Special Mention" ("SM") loans and is intended to highlight loans deemed by management to have some elevated risks that deserve management's close attention. Loans with this grade show signs of deteriorating profits and capital and the borrower might not be strong enough to sustain a major setback. The borrower is typically higher than normally leveraged and outside support might be modest and likely illiquid. The loan is at risk of further credit decline unless active measures are taken to correct the situation.
•Grade 8: This grade includes “Substandard” ("SS") loans in accordance with regulatory guidelines, which the Company has determined have a high credit risk. These loans also have well-defined weaknesses and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. The borrower may have shown serious negative trends in financial ratios and performance. Such loans may be dependent upon collateral liquidation, a secondary source of repayment or an event outside of the normal course of business. Loans with this grade are placed on accrual or nonaccrual status based on the Company’s accrual policy.
•Grade 9: This grade includes “Doubtful” loans in accordance with regulatory guidelines and the Company has determined these loans to have excessive credit risk. Such loans are placed on nonaccrual status and may be dependent upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. Additionally, these loans generally have been partially charged off for the amount considered uncollectible.
•Grade 10: This grade includes “Loss” loans in accordance with regulatory guidelines and the Company has determined these loans have the highest risk of loss. Such loans are charged off or charged down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. “Loss” is not intended to imply that the loan or some portion of it will never be paid, nor does it in any way imply that there has been a forgiveness of debt.
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, results of annual term loan reviews performed by the Bank's credit department 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 loan grades relate to the likelihood of losses in that the higher the grade, the greater the loss potential. Loans with a pass grade may have some estimated inherent losses, but to a lesser extent than the other loan grades. The Special Mention loan grade is transitory in that the Company is waiting on additional information to determine the likelihood and extent of the potential loss. The likelihood of loss for Special Mention graded loans, however, is greater than Watch graded loans because there has been measurable credit deterioration. Loans with a Substandard grade are generally loans which the Company individually evaluates for an ACL on loans. For Doubtful and Loss graded loans, the Company is almost certain of the losses and the outstanding principal balances are generally charged off to the realizable value.
During the year ended December 31, 2020, the Bank did not automatically adversely classify credits that were affected by the COVID-19 pandemic or were granted a COVID Modification.
The following table presents the amortized cost of loans receivable by risk grade as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loans
Amortized Cost Basis by Origination Year
|
|
Revolving Loans
|
|
Revolving Loans Converted to Term Loans (1)
|
|
Loans Receivable
|
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
Prior
|
|
|
|
|
(In thousands)
|
Commercial business:
|
Commercial and industrial
|
Pass
|
$
|
118,971
|
|
|
$
|
127,919
|
|
|
$
|
70,766
|
|
|
$
|
44,231
|
|
|
$
|
37,658
|
|
|
$
|
95,958
|
|
|
$
|
121,440
|
|
|
$
|
819
|
|
|
$
|
617,762
|
|
SM
|
14,430
|
|
|
9,162
|
|
|
10,878
|
|
|
4,171
|
|
|
5,700
|
|
|
3,579
|
|
|
11,790
|
|
|
814
|
|
|
60,524
|
|
SS
|
2,199
|
|
|
11,835
|
|
|
3,416
|
|
|
9,348
|
|
|
1,052
|
|
|
7,651
|
|
|
15,484
|
|
|
3,827
|
|
|
54,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
135,600
|
|
|
148,916
|
|
|
85,060
|
|
|
57,750
|
|
|
44,410
|
|
|
107,188
|
|
|
148,714
|
|
|
5,460
|
|
|
733,098
|
|
SBA PPP
|
Pass
|
715,121
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
715,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
715,121
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
715,121
|
|
Owner-occupied CRE
|
Pass
|
89,224
|
|
|
167,095
|
|
|
94,830
|
|
|
80,138
|
|
|
74,902
|
|
|
254,864
|
|
|
—
|
|
|
—
|
|
|
761,053
|
|
SM
|
6,146
|
|
|
4,540
|
|
|
16,386
|
|
|
11,231
|
|
|
5,464
|
|
|
12,105
|
|
|
—
|
|
|
—
|
|
|
55,872
|
|
SS
|
—
|
|
|
—
|
|
|
114
|
|
|
7,320
|
|
|
3,313
|
|
|
29,012
|
|
|
—
|
|
|
—
|
|
|
39,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
95,370
|
|
|
171,635
|
|
|
111,330
|
|
|
98,689
|
|
|
83,679
|
|
|
295,981
|
|
|
—
|
|
|
—
|
|
|
856,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loans
Amortized Cost Basis by Origination Year
|
|
Revolving Loans
|
|
Revolving Loans Converted to Term Loans (1)
|
|
Loans Receivable
|
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
Prior
|
|
|
|
|
(In thousands)
|
Non-owner occupied CRE
|
Pass
|
197,548
|
|
|
173,153
|
|
|
148,830
|
|
|
172,438
|
|
|
240,614
|
|
|
406,817
|
|
|
—
|
|
|
—
|
|
|
1,339,400
|
|
SM
|
—
|
|
|
1,979
|
|
|
357
|
|
|
2,448
|
|
|
6,210
|
|
|
3,539
|
|
|
—
|
|
|
—
|
|
|
14,533
|
|
SS
|
—
|
|
|
—
|
|
|
3,623
|
|
|
—
|
|
|
35,455
|
|
|
17,292
|
|
|
—
|
|
|
—
|
|
|
56,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
197,548
|
|
|
175,132
|
|
|
152,810
|
|
|
174,886
|
|
|
282,279
|
|
|
427,648
|
|
|
—
|
|
|
—
|
|
|
1,410,303
|
|
Total commercial business
|
Pass
|
1,120,864
|
|
|
468,167
|
|
|
314,426
|
|
|
296,807
|
|
|
353,174
|
|
|
757,639
|
|
|
121,440
|
|
|
819
|
|
|
3,433,336
|
|
SM
|
20,576
|
|
|
15,681
|
|
|
27,621
|
|
|
17,850
|
|
|
17,374
|
|
|
19,223
|
|
|
11,790
|
|
|
814
|
|
|
130,929
|
|
SS
|
2,199
|
|
|
11,835
|
|
|
7,153
|
|
|
16,668
|
|
|
39,820
|
|
|
53,955
|
|
|
15,484
|
|
|
3,827
|
|
|
150,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
1,143,639
|
|
|
495,683
|
|
|
349,200
|
|
|
331,325
|
|
|
410,368
|
|
|
830,817
|
|
|
148,714
|
|
|
5,460
|
|
|
3,715,206
|
|
Residential real estate
|
Pass
|
30,141
|
|
|
41,829
|
|
|
15,730
|
|
|
10,362
|
|
|
7,322
|
|
|
16,825
|
|
|
—
|
|
|
—
|
|
|
122,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SS
|
—
|
|
|
—
|
|
|
—
|
|
|
59
|
|
|
—
|
|
|
488
|
|
|
—
|
|
|
—
|
|
|
547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
30,141
|
|
|
41,829
|
|
|
15,730
|
|
|
10,421
|
|
|
7,322
|
|
|
17,313
|
|
|
—
|
|
|
—
|
|
|
122,756
|
|
Real estate construction and land development:
|
Residential
|
Pass
|
33,801
|
|
|
36,697
|
|
|
2,725
|
|
|
1,097
|
|
|
971
|
|
|
1,042
|
|
|
—
|
|
|
—
|
|
|
76,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SS
|
—
|
|
|
—
|
|
|
—
|
|
|
1,926
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
33,801
|
|
|
36,697
|
|
|
2,725
|
|
|
3,023
|
|
|
971
|
|
|
1,042
|
|
|
—
|
|
|
—
|
|
|
78,259
|
|
Commercial and multifamily
|
Pass
|
27,423
|
|
|
151,020
|
|
|
38,682
|
|
|
5,660
|
|
|
689
|
|
|
1,407
|
|
|
—
|
|
|
—
|
|
|
224,881
|
|
SM
|
67
|
|
|
1,011
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
29
|
|
|
—
|
|
|
—
|
|
|
1,107
|
|
SS
|
572
|
|
|
450
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
444
|
|
|
—
|
|
|
—
|
|
|
1,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
28,062
|
|
|
152,481
|
|
|
38,682
|
|
|
5,660
|
|
|
689
|
|
|
1,880
|
|
|
—
|
|
|
—
|
|
|
227,454
|
|
Total real estate construction and land development
|
Pass
|
61,224
|
|
|
187,717
|
|
|
41,407
|
|
|
6,757
|
|
|
1,660
|
|
|
2,449
|
|
|
—
|
|
|
—
|
|
|
301,214
|
|
SM
|
67
|
|
|
1,011
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
29
|
|
|
—
|
|
|
—
|
|
|
1,107
|
|
SS
|
572
|
|
|
450
|
|
|
—
|
|
|
1,926
|
|
|
—
|
|
|
444
|
|
|
—
|
|
|
—
|
|
|
3,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
61,863
|
|
|
189,178
|
|
|
41,407
|
|
|
8,683
|
|
|
1,660
|
|
|
2,922
|
|
|
—
|
|
|
—
|
|
|
305,713
|
|
Consumer
|
Pass
|
43,742
|
|
|
77,083
|
|
|
53,195
|
|
|
30,559
|
|
|
13,443
|
|
|
15,453
|
|
|
87,547
|
|
|
315
|
|
|
321,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SS
|
34
|
|
|
404
|
|
|
684
|
|
|
648
|
|
|
420
|
|
|
1,319
|
|
|
78
|
|
|
48
|
|
|
3,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
43,776
|
|
|
77,487
|
|
|
53,879
|
|
|
31,207
|
|
|
13,863
|
|
|
16,772
|
|
|
87,625
|
|
|
363
|
|
|
324,972
|
|
Loans receivable
|
Pass
|
1,255,971
|
|
|
774,796
|
|
|
424,758
|
|
|
344,485
|
|
|
375,599
|
|
|
792,366
|
|
|
208,987
|
|
|
1,134
|
|
|
4,178,096
|
|
SM
|
20,643
|
|
|
16,692
|
|
|
27,621
|
|
|
17,850
|
|
|
17,374
|
|
|
19,252
|
|
|
11,790
|
|
|
814
|
|
|
132,036
|
|
SS
|
2,805
|
|
|
12,689
|
|
|
7,837
|
|
|
19,301
|
|
|
40,240
|
|
|
56,206
|
|
|
15,562
|
|
|
3,875
|
|
|
158,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
1,279,419
|
|
|
$
|
804,177
|
|
|
$
|
460,216
|
|
|
$
|
381,636
|
|
|
$
|
433,213
|
|
|
$
|
867,824
|
|
|
$
|
236,339
|
|
|
$
|
5,823
|
|
|
$
|
4,468,647
|
|
(1) Represents loans receivable balance at December 31, 2020 which was converted from a revolving loan to an amortizing loan during the year ended December 31, 2020.
The following table presents the amortized cost of loans receivable by credit quality indicator as of December 31, 2019 in accordance with disclosure requirements prior to CECL Adoption:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 CRE
|
765,411
|
|
|
24,659
|
|
|
15,164
|
|
|
—
|
|
|
805,234
|
|
Non-owner occupied CRE
|
1,274,513
|
|
|
5,662
|
|
|
8,604
|
|
|
—
|
|
|
1,288,779
|
|
Total commercial business
|
2,811,483
|
|
|
46,661
|
|
|
88,089
|
|
|
—
|
|
|
2,946,233
|
|
Residential real estate
|
130,818
|
|
|
—
|
|
|
842
|
|
|
—
|
|
|
131,660
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
|
|
Residential
|
101,973
|
|
|
1,516
|
|
|
807
|
|
|
—
|
|
|
104,296
|
|
Commercial and multifamily
|
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
|
|
Loans receivable
|
$
|
3,625,083
|
|
|
$
|
48,859
|
|
|
$
|
93,413
|
|
|
$
|
524
|
|
|
$
|
3,767,879
|
|
Potential problem loans are risk rated "Special Mention" or worse that are not classified as a performing 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 December 31, 2020 and December 31, 2019 were $182.3 million and $87.8 million, respectively.
(d) Nonaccrual Loans
The following table presents the amortized cost of nonaccrual loans for the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31,
2019
|
|
Nonaccrual without ACL
|
|
Nonaccrual with ACL
|
|
Total Nonaccrual
|
|
Nonaccrual (1)
|
|
(In thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
22,039
|
|
|
$
|
9,208
|
|
|
$
|
31,247
|
|
|
$
|
33,544
|
|
Owner-occupied CRE
|
4,693
|
|
|
13,700
|
|
|
18,393
|
|
|
4,714
|
|
Non-owner occupied CRE
|
3,424
|
|
|
3,722
|
|
|
7,146
|
|
|
6,062
|
|
Total commercial business
|
30,156
|
|
|
26,630
|
|
|
56,786
|
|
|
44,320
|
|
Residential real estate
|
67
|
|
|
117
|
|
|
184
|
|
|
19
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and multifamily
|
572
|
|
|
450
|
|
|
1,022
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Consumer
|
31
|
|
|
69
|
|
|
100
|
|
|
186
|
|
Total
|
$
|
30,826
|
|
|
$
|
27,266
|
|
|
$
|
58,092
|
|
|
$
|
44,525
|
|
(1) Presentation of December 31, 2019 balances is in accordance with disclosure requirements prior to CECL Adoption.
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 periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Interest Income Reversed
|
|
Interest Income Recognized
|
|
Interest Income Reversed
|
|
Interest Income Recognized
|
|
(In thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
(95)
|
|
|
$
|
434
|
|
|
$
|
(552)
|
|
|
$
|
147
|
|
Owner-occupied CRE
|
(238)
|
|
|
89
|
|
|
—
|
|
|
228
|
|
Non-owner occupied CRE
|
(208)
|
|
|
67
|
|
|
(32)
|
|
|
181
|
|
Total commercial business
|
(541)
|
|
|
590
|
|
|
(584)
|
|
|
556
|
|
Residential real estate
|
(2)
|
|
|
2
|
|
|
—
|
|
|
—
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
Residential
|
—
|
|
|
—
|
|
|
(3)
|
|
|
33
|
|
Commercial and multifamily
|
(11)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total real estate construction and land development
|
(11)
|
|
|
—
|
|
|
(3)
|
|
|
33
|
|
Consumer
|
(1)
|
|
|
47
|
|
|
—
|
|
|
6
|
|
Total
|
$
|
(555)
|
|
|
$
|
639
|
|
|
$
|
(587)
|
|
|
$
|
595
|
|
For the years ended December 31, 2020 and 2019, no interest income was recognized subsequent to a loan’s classification as nonaccrual, except as indicated in the tables 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 December 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
30-89 Days
|
|
90 Days
or Greater
|
|
Total Past
Due
|
|
Current
|
|
Loans Receivable
|
|
(In thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
4,621
|
|
|
$
|
8,082
|
|
|
$
|
12,703
|
|
|
$
|
720,395
|
|
|
$
|
733,098
|
|
SBA PPP
|
—
|
|
|
—
|
|
|
—
|
|
|
715,121
|
|
|
715,121
|
|
Owner-occupied CRE
|
991
|
|
|
403
|
|
|
1,394
|
|
|
855,290
|
|
|
856,684
|
|
Non-owner occupied CRE
|
412
|
|
|
1,970
|
|
|
2,382
|
|
|
1,407,921
|
|
|
1,410,303
|
|
Total commercial business
|
6,024
|
|
|
10,455
|
|
|
16,479
|
|
|
3,698,727
|
|
|
3,715,206
|
|
Residential real estate
|
765
|
|
|
16
|
|
|
781
|
|
|
121,975
|
|
|
122,756
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
|
|
Residential
|
—
|
|
|
—
|
|
|
—
|
|
|
78,259
|
|
|
78,259
|
|
Commercial and multifamily
|
2,225
|
|
|
—
|
|
|
2,225
|
|
|
225,229
|
|
|
227,454
|
|
Total real estate construction and land development
|
2,225
|
|
|
—
|
|
|
2,225
|
|
|
303,488
|
|
|
305,713
|
|
Consumer
|
1,407
|
|
|
30
|
|
|
1,437
|
|
|
323,535
|
|
|
324,972
|
|
Total
|
$
|
10,421
|
|
|
$
|
10,501
|
|
|
$
|
20,922
|
|
|
$
|
4,447,725
|
|
|
$
|
4,468,647
|
|
The following table presents the amortized cost of past due loans as of December 31, 2019 in accordance with disclosure requirements prior to CECL Adoption:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
30-89 Days
|
|
90 Days or Greater
|
|
Total Past
Due
|
|
Current
|
|
Total
|
|
PCI Loans
|
|
Loans Receivable
|
|
(In thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
10,479
|
|
|
$
|
6,772
|
|
|
$
|
17,251
|
|
|
$
|
832,601
|
|
|
$
|
849,852
|
|
|
$
|
2,368
|
|
|
$
|
852,220
|
|
Owner-occupied CRE
|
607
|
|
|
806
|
|
|
1,413
|
|
|
798,907
|
|
|
800,320
|
|
|
4,914
|
|
|
805,234
|
|
Non-owner occupied CRE
|
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
|
|
Residential real estate
|
797
|
|
|
—
|
|
|
797
|
|
|
127,288
|
|
|
128,085
|
|
|
3,575
|
|
|
131,660
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
1,516
|
|
|
—
|
|
|
1,516
|
|
|
102,780
|
|
|
104,296
|
|
|
—
|
|
|
104,296
|
|
Commercial and multifamily
|
—
|
|
|
—
|
|
|
—
|
|
|
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 December 31, 2020 or December 31, 2019.
(f) Collateral-dependent Loans
The type of collateral securing loans individually evaluated for credit losses and for which the repayment was expected to be provided substantially through the operation or sale of the collateral as of December 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable(1)
|
|
CRE
|
|
Farmland
|
|
Residential Real Estate
|
|
Equipment or Accounts Receivable
|
|
Other
|
|
Total
|
|
(In thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
1,893
|
|
|
$
|
18,738
|
|
|
$
|
584
|
|
|
$
|
774
|
|
|
$
|
631
|
|
|
$
|
22,620
|
|
Owner-occupied CRE
|
4,693
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,693
|
|
Non-owner occupied CRE
|
3,424
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,424
|
|
Total commercial business
|
10,010
|
|
|
18,738
|
|
|
584
|
|
|
774
|
|
|
631
|
|
|
30,737
|
|
Residential real estate
|
—
|
|
|
—
|
|
|
67
|
|
|
—
|
|
|
—
|
|
|
67
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and multifamily
|
572
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
—
|
|
|
—
|
|
|
30
|
|
|
—
|
|
|
—
|
|
|
30
|
|
Total
|
$
|
10,582
|
|
|
$
|
18,738
|
|
|
$
|
681
|
|
|
$
|
774
|
|
|
$
|
631
|
|
|
$
|
31,406
|
|
(1) Balances represent the amortized cost of the loan. If multiple collateral sources secure the loan, the entire balance is presented in the primary collateral category, which generally represents the majority of the collateral balance.
There have been no significant changes to the collateral securing individually evaluated loans for credit losses and for which repayment was expected to be provided substantially through the operation or sale of the collateral during the year ended December 31, 2020, except changes due to payoffs and additions of loans to this classification.
Under the probable incurred loss methodology, including the ASC 310-30 methodology for PCI loans, comparative
disclosures of collateral-dependent loans as of December 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 is 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
|
|
Outstanding
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 CRE
|
3,921
|
|
|
2,415
|
|
|
6,336
|
|
|
6,764
|
|
|
426
|
|
Non-owner occupied CRE
|
5,309
|
|
|
1,015
|
|
|
6,324
|
|
|
6,458
|
|
|
146
|
|
Total commercial business
|
39,409
|
|
|
17,059
|
|
|
56,468
|
|
|
58,807
|
|
|
1,944
|
|
Residential real estate
|
—
|
|
|
215
|
|
|
215
|
|
|
223
|
|
|
56
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
|
|
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 year ended December 31, 2019 and 2018 are set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
(In thousands)
|
Commercial business:
|
|
|
|
Commercial and industrial
|
$
|
31,905
|
|
|
$
|
16,773
|
|
Owner-occupied CRE
|
6,008
|
|
|
11,313
|
|
Non-owner occupied CRE
|
7,751
|
|
|
9,463
|
|
Total commercial business
|
45,664
|
|
|
37,549
|
|
Residential real estate
|
242
|
|
|
290
|
|
Real estate construction and land development:
|
|
|
|
Residential
|
682
|
|
|
1,091
|
|
Commercial and multifamily
|
—
|
|
|
129
|
|
Total real estate construction and land development
|
682
|
|
|
1,220
|
|
Consumer
|
576
|
|
|
430
|
|
Total
|
$
|
47,164
|
|
|
$
|
39,489
|
|
(g) Troubled Debt Restructured Loans
The majority of the Bank’s TDR loans are a result of granting extensions of maturity on troubled credits which have already been adversely classified. The Bank grants such extensions to reassess the borrower’s financial status and to develop a plan for repayment. The second most prevalent concessions are certain modifications with extensions that also include interest rate reductions. Certain TDR loans were additionally re-amortized over a longer period of time. These modifications would all be considered a concession for a borrower that could not obtain similar financing terms from another source other than from the Bank.
The financial effects of each modification will vary based on the specific restructure. The Bank’s TDR loans are primarily fully amortizing term loans. If the interest rate is not adjusted and the modified terms are consistent with other similar credits being offered, the Bank may not experience any loss associated with the restructure. If, however, the restructure involves forbearance agreements or interest rate modifications, the Bank may not collect all the principal and interest based on the original contractual terms.
During the year ended December 31, 2020, the Company elected to apply the temporary relief under the CARES Act and related regulatory guidance to certain eligible short-term modifications and did not classify the modifications as TDRs for accounting or disclosure purposes. COVID Modifications whose payment deferral exceeded 180 days following the loans' initial modification were classified as TDR based on the Bank's internal policy.
The unfunded commitment to borrowers related to TDR loans was $2.6 million and $736,000 at December 31, 2020 and December 31, 2019, respectively.
For the years ended December 31, 2020, 2019 and 2018, the Bank recorded $1.8 million, $1.2 million, and $1.4 million respectively, of interest income related to performing TDR loans.
Loans that were modified as TDR loans are set forth in the following table for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
Number of
Contracts (2)
|
|
Amortized Cost (1) (2)
|
|
Number of
Contracts (2)
|
|
Amortized Cost (1) (2)
|
|
Number of
Contracts (2)
|
|
Amortized Cost (1) (2)
|
|
(Dollars in thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
75
|
|
$
|
36,118
|
|
|
44
|
|
$
|
31,122
|
|
|
31
|
|
$
|
16,132
|
|
Owner-occupied CRE
|
14
|
|
19,326
|
|
|
4
|
|
1,695
|
|
|
4
|
|
2,521
|
|
Non-owner occupied CRE
|
9
|
|
|
25,728
|
|
|
4
|
|
|
2,208
|
|
|
3
|
|
2,944
|
|
Total commercial business
|
98
|
|
81,172
|
|
|
52
|
|
35,025
|
|
|
38
|
|
21,597
|
|
Residential real estate
|
1
|
|
22
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
4
|
|
1,926
|
|
|
1
|
|
237
|
|
|
2
|
|
665
|
|
Commercial and multifamily
|
1
|
|
|
450
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total real estate construction and land development
|
5
|
|
|
2,376
|
|
|
1
|
|
|
237
|
|
|
2
|
|
|
665
|
|
Consumer
|
48
|
|
1,198
|
|
|
12
|
|
157
|
|
|
13
|
|
243
|
|
Total
|
152
|
|
$
|
84,768
|
|
|
65
|
|
$
|
35,419
|
|
|
53
|
|
$
|
22,505
|
|
(1)Number of contracts and amortized cost represent loans which have balances as of period end, net of subsequent payments after modifications. Certain modified loans may have been paid-down or charged-off during the years ended December 31, 2020, 2019 and 2018.
(2) 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 increase in TDR loans during the year ended December 31, 2020 was due primarily to the impacts of the COVID-19 pandemic and the Bank's policy to classify COVID Modifications where the payment deferral period exceeded 180-days as a TDR. For non-COVID modifications, the concessions granted largely consisted of maturity extensions. 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 to repay the debt. The Bank does not consider these modifications a subsequent default of a TDR as new loan terms, specifically new maturity dates, were granted. The Bank had a related ACL on loans that were modified as TDR loans of $7.5 million, $1.0 million, and $2.3 million at December 31, 2020, December 31, 2019 and December 31, 2018, respectively.
The following table presents loans that were modified in a troubled debt restructure and subsequently defaulted within twelve months from the modification date during the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
Number of
Contracts (1)
|
|
Amortized Cost (1)
|
|
Number of
Contracts (1)
|
|
Amortized Cost (1)
|
|
Number of
Contracts (1)
|
|
Amortized Cost (1)
|
|
(Dollars in thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
4
|
|
|
$
|
2,136
|
|
|
13
|
|
|
$
|
12,854
|
|
|
5
|
|
|
$
|
1,890
|
|
Owner-occupied CRE
|
2
|
|
|
1,369
|
|
|
3
|
|
|
1,142
|
|
|
1
|
|
|
65
|
|
Non-owner occupied CRE
|
2
|
|
|
1,811
|
|
|
1
|
|
|
52
|
|
|
—
|
|
|
—
|
|
Total commercial business
|
8
|
|
|
5,316
|
|
|
17
|
|
14,048
|
|
|
6
|
|
|
1955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
Number of
Contracts (1)
|
|
Amortized Cost (1)
|
|
Number of
Contracts (1)
|
|
Amortized Cost (1)
|
|
Number of
Contracts (1)
|
|
Amortized Cost (1)
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
8
|
|
$
|
5,316
|
|
|
17
|
|
$
|
14,048
|
|
|
8
|
|
|
$
|
2,620
|
|
(1)Number of contracts and amortized cost represent loans which have balances as of period end, net of subsequent payments after modifications. Certain modified loans may have been paid-down or charged-off during the years ended December 31, 2020, 2019 and 2018.
During the years ended December 31, 2020, 2019, and 2018, eight, 11 and seven TDR loans defaulted because each was past its modified maturity date and the borrower has not subsequently repaid the credits. The Bank chose not to extend further the maturity date on these loans. The remaining six and one TDR loan for the years ended December 31, 2019 and 2018, respectively, defaulted because the borrower was more than 90 days delinquent on their scheduled loan payments. The Bank had an ACL on loans for these TDR loans which defaulted during the related years of $229,000, $88,000, and $260,000 at December 31, 2020, 2019, and 2018.
(h) Purchased Credit Impaired Loans
Upon CECL Adoption, the Company transitioned PCI loans to PCD loans. The following table reflects the outstanding principal balance and amortized cost of PCI loans at December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Outstanding Principal
|
|
Amortized Cost
|
|
(In thousands)
|
Commercial business:
|
|
|
|
Commercial and industrial
|
$
|
4,439
|
|
|
$
|
2,368
|
|
Owner-occupied CRE
|
4,925
|
|
|
4,914
|
|
Non-owner occupied CRE
|
7,028
|
|
|
5,491
|
|
Total commercial business
|
16,392
|
|
|
12,773
|
|
Residential real estate
|
3,095
|
|
|
3,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
1,463
|
|
|
1,762
|
|
Total
|
$
|
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 was the “accretable yield.” The accretable yield was then measured at each financial reporting date and represented 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 during the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
(In thousands)
|
Balance at the beginning of the year
|
$
|
9,493
|
|
|
$
|
11,224
|
|
Accretion
|
(1,936)
|
|
|
(2,674)
|
|
Disposal and other
|
(1,600)
|
|
|
(2,871)
|
|
Reclassification from nonaccretable difference
|
884
|
|
|
3,814
|
|
Balance at the end of the year
|
$
|
6,841
|
|
|
$
|
9,493
|
|
(i) Related Party Loans
In the ordinary course of business, the Company has granted loans to certain directors, executive officers and their affiliates. Activity in related party loans during the periods indicated was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
(In thousands)
|
Balance outstanding at the beginning of year
|
$
|
8,144
|
|
|
$
|
8,367
|
|
|
$
|
8,460
|
|
|
|
|
|
|
|
Principal additions
|
199
|
|
|
—
|
|
|
211
|
|
|
|
|
|
|
|
Principal reductions
|
(649)
|
|
|
(223)
|
|
|
(304)
|
|
Balance outstanding at the end of year
|
$
|
7,694
|
|
|
$
|
8,144
|
|
|
$
|
8,367
|
|
All related party loans were performing in accordance with the underlying loan agreements as of December 31, 2020 and December 31, 2019. The Company had $545,000 and $557,000 of unfunded commitments to related parties as of December 31, 2020 and December 31, 2019, respectively. The Company did not have any borrowings from related parties at December 31, 2020 or December 31, 2019.
(j) Residential Real Estate Loan Sales
The Bank originates residential real estate loans; a portion of which are sold on the secondary market. The Bank does not retain servicing on loans sold in the secondary market. At December 31, 2020 and December 31, 2019, the balance of loans held for sale was $4.9 million and $5.5 million, respectively.
The following table presents information concerning the origination and sale of the Bank's residential real estate loans and the gains from their sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
(In thousands)
|
Residential real estate:
|
|
|
|
|
|
Originated (1)
|
$
|
191,207
|
|
|
$
|
150,030
|
|
|
$
|
121,998
|
|
Sold
|
137,580
|
|
|
68,238
|
|
|
76,834
|
|
Gain on sale of loans, net (2)
|
5,044
|
|
|
2,159
|
|
|
2,403
|
|
(1) Includes loans originated for sale in the secondary market or for the Bank's loan portfolio.
(2) Excludes net gains on sales of SBA and other loans.
The Bank may additionally make commitments to fund residential real estate loans (interest rate locks) to be sold into the secondary market. The contractual amounts of commitments to sell and fund residential real estate loans at December 31, 2020 and December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
(In thousands)
|
Commitments to sell residential real estate loans
|
$
|
18,127
|
|
|
$
|
8,815
|
|
Commitments to fund residential real estate loans (at interest rates approximating market rates) for portfolio or for sale:
|
|
|
|
Fixed rate
|
19,640
|
|
|
15,509
|
|
Variable or adjustable rate
|
98
|
|
|
3,111
|
|
Total commitments to fund residential real estate loans
|
$
|
19,738
|
|
|
$
|
18,620
|
|
The fair values of freestanding derivatives related to the commitments to fund residential real estate loans and sell at locked interest rates were not significant at December 31, 2020 or December 31, 2019.
(k) Commercial Loan Sales, Servicing, and Commercial Servicing Asset
Details of loans serviced for others are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
(In thousands)
|
Loans serviced for others with participating interest, gross loan balance
|
$
|
32,131
|
|
|
$
|
40,616
|
|
Loans serviced for others with participating interest, participation balance owned by Bank (1)
|
7,842
|
|
|
9,850
|
|
(1) Included in the balance of loans receivable on the Consolidated Statements of Financial Condition.
The Company recognized $423,000, $532,000 and $506,000 of servicing income for the years ended December 31, 2020, 2019 and 2018, respectively.
The Company's servicing asset at December 31, 2020 and December 31, 2019 was $583,000 and $361,000, respectively. The activity and balances for the year ended December 31, 2018 were not significant.
Fair value for the annual impairment analysis at December 31, 2020 was determined using a discount rate of 10.0% and prepayment speeds ranging from 12.5% to 18.6%. Fair value for the annual impairment analysis at December 31, 2019 was determined using discount rates ranging from 10.0% to 12.8% and prepayment speeds from 11.5% to 19.7%. There was no valuation allowance on the Company's servicing asset as of December 31, 2020, December 31, 2019 and December 31, 2018.
(5)Allowance for Credit Losses on Loans
Effective January 1, 2020, the Bank adopted ASU 2016-13. CECL Adoption replaced the ALL with the ACL on loans and replaced the related provision for loan losses with the provision for credit losses on loans.
The baseline loss rates used to calculate the ACL on loans at January 1, 2020 utilized the Bank's average quarterly historical loss information from December 31, 2007 through December 31, 2019. The baseline loss rate for the ACL at December 31, 2020 used historical losses beginning December 31, 2012 through the balance sheet date. The Bank updated the historical loss period during the year ended December 31, 2020 as it believed the economic cycle has ended with the onset of the COVID-19 recession. 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 relatively consistent.
Prepayments included in the CECL model at January 1, 2020 were based on the 48-month rolling historical averages for each segment, which management believes is an accurate representation of future prepayment activity. There were no changes to this assumption during the year ended December 31, 2020.
The reasonable and supportable period used in the CECL model as of January 1, 2020 was four quarters and was increased to five quarters for the model as of December 31, 2020 to include the additional impact of certain macroeconomic factors with lagged periods. Management believes that forecasts beyond this five quarter 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 the ACL as of January 1, 2020 and December 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.
The macroeconomic forecast used in the CECL model as of January 1, 2020 predicted continued economic expansion with steady GDP growth and low unemployment rates, among other factors. The onset of the COVID-19 pandemic resulted in the identification of an economic recession during the second quarter of 2020 as evidenced by certain economic forecasts signaling prolonged, profound, and pervasive contraction in economic activities due to the COVID-19 pandemic. The GDP contracted and unemployment rates increased, amount other factors, during the year ended December 31, 2020. The macroeconomic forecast used in the CECL model as of December 31, 2020 reflected a slow recovery from the COVID-19 recession, modeled to last through the end of 2021. The macroeconomic forecast as of December 31, 2020 considered the COVID-19 vaccine progress as well as anticipated government stimulus plans; however, uncertainty remained over the time necessary to return the economy to pre-pandemic levels.
The ACL on loans at December 31, 2020 does not include a reserve for SBA PPP loans as these loans are fully guaranteed by the SBA.
A summary of the changes in the ACL on loans during the years ended December 31, 2020, December 31, 2019 and December 31, 2018 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
(In thousands)
|
Balance at the beginning of the year
|
$
|
36,171
|
|
|
$
|
35,042
|
|
|
$
|
32,086
|
|
Impact of CECL Adoption
|
1,822
|
|
|
—
|
|
|
—
|
|
Balance at the beginning of the year, as adjusted
|
37,993
|
|
|
35,042
|
|
|
32,086
|
|
Charge-offs
|
(5,622)
|
|
|
(4,989)
|
|
|
(3,605)
|
|
Recoveries of loans previously charged-off
|
2,381
|
|
|
1,807
|
|
|
1,432
|
|
Provision for loan losses
|
35,433
|
|
|
4,311
|
|
|
5,129
|
|
Balance at the end of the year
|
$
|
70,185
|
|
|
$
|
36,171
|
|
|
$
|
35,042
|
|
The following table details the activity in the ACL on loans disaggregated by segment and class for the year ended December 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
|
|
|
$
|
(3,616)
|
|
|
$
|
1,513
|
|
|
$
|
21,722
|
|
|
$
|
30,010
|
|
SBA PPP
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Owner-occupied CRE
|
4,512
|
|
|
452
|
|
|
4,964
|
|
|
(135)
|
|
|
17
|
|
|
4,640
|
|
|
9,486
|
|
Non-owner occupied CRE
|
7,682
|
|
|
(2,039)
|
|
|
5,643
|
|
|
—
|
|
|
—
|
|
|
4,469
|
|
|
10,112
|
|
Total commercial business
|
23,933
|
|
|
(2,935)
|
|
|
20,998
|
|
|
(3,751)
|
|
|
1,530
|
|
|
30,831
|
|
|
49,608
|
|
Residential real estate
|
1,458
|
|
|
1,471
|
|
|
2,929
|
|
|
—
|
|
|
3
|
|
|
(1,341)
|
|
|
1,591
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
1,455
|
|
|
(571)
|
|
|
884
|
|
|
—
|
|
|
278
|
|
|
789
|
|
|
1,951
|
|
Commercial and multifamily
|
1,605
|
|
|
7,240
|
|
|
8,845
|
|
|
(417)
|
|
|
—
|
|
|
2,713
|
|
|
11,141
|
|
Total real estate construction and land development
|
3,060
|
|
|
6,669
|
|
|
9,729
|
|
|
(417)
|
|
|
278
|
|
|
3,502
|
|
|
13,092
|
|
Consumer
|
6,821
|
|
|
(2,484)
|
|
|
4,337
|
|
|
(1,454)
|
|
|
570
|
|
|
2,441
|
|
|
5,894
|
|
Unallocated
|
899
|
|
|
(899)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
36,171
|
|
|
$
|
1,822
|
|
|
$
|
37,993
|
|
|
$
|
(5,622)
|
|
|
$
|
2,381
|
|
|
$
|
35,433
|
|
|
$
|
70,185
|
|
The Bank recognized net charge-offs of $3.2 million during the year ended December 31, 2020 primarily due to a commercial and industrial charge-off of $1.7 million related to issues surrounding control of the underlying loan collateral. The Bank determined it appropriate to charge-off this entire loan relationship balance and pursue an aggressive collection strategy. Net charge-offs also included two commercial and industrial loan relationships totaling $447,000 as a result of impacts from the COVID-19 pandemic, a partial charge-off of one commercial and multifamily real estate construction and land development loan totaling $417,000 as a result of cost overruns and delays in construction and small dollar net charge-offs on a large volume of consumer loans of $884,000. Net charge-offs were offset partially by the full recovery of a commercial and industrial agricultural lending relationship of $963,000 during the year ended December 31, 2020, which was charged-off during the year ended December 31, 2019.
The provision for credit losses on loans of $35.4 million for the year ended December 31, 2020 was necessary to build the allowance to account for the current and forecasted economic conditions amidst the COVID-19 pandemic, including the credit losses estimated on collectively and individually evaluated loans.
The following table details the activity in the ALL disaggregated by segment and class for the year ended December 31, 2019 under the incurred loss methodology, including the ASC 310-30 methodology for PCI loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
Charge-offs
|
|
Recoveries
|
|
Provision for Loan Losses
|
|
Ending Balance
|
|
(In thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
11,343
|
|
|
$
|
(2,692)
|
|
|
$
|
166
|
|
|
$
|
2,922
|
|
|
$
|
11,739
|
|
Owner-occupied CRE
|
4,898
|
|
|
—
|
|
|
50
|
|
|
(436)
|
|
|
4,512
|
|
Non-owner occupied CRE
|
7,470
|
|
|
—
|
|
|
441
|
|
|
(229)
|
|
|
7,682
|
|
Total commercial business
|
23,711
|
|
|
(2,692)
|
|
|
657
|
|
|
2,257
|
|
|
23,933
|
|
Residential real estate
|
1,203
|
|
|
(60)
|
|
|
—
|
|
|
315
|
|
|
1,458
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
|
|
Residential
|
1,240
|
|
|
(133)
|
|
|
637
|
|
|
(289)
|
|
|
1,455
|
|
Commercial and multifamily
|
954
|
|
|
—
|
|
|
—
|
|
|
651
|
|
|
1,605
|
|
Total real estate construction and land development
|
2,194
|
|
|
(133)
|
|
|
637
|
|
|
362
|
|
|
3,060
|
|
Consumer
|
6,581
|
|
|
(2,104)
|
|
|
513
|
|
|
1,831
|
|
|
6,821
|
|
Unallocated
|
1,353
|
|
|
—
|
|
|
—
|
|
|
(454)
|
|
|
899
|
|
Total
|
$
|
35,042
|
|
|
$
|
(4,989)
|
|
|
$
|
1,807
|
|
|
$
|
4,311
|
|
|
$
|
36,171
|
|
The following table details the ALL 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 ALL
|
|
(In thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
1,372
|
|
|
$
|
9,772
|
|
|
$
|
595
|
|
|
$
|
11,739
|
|
Owner-occupied CRE
|
426
|
|
|
3,558
|
|
|
528
|
|
|
4,512
|
|
Non-owner occupied CRE
|
146
|
|
|
7,064
|
|
|
472
|
|
|
7,682
|
|
Total commercial business
|
1,944
|
|
|
20,394
|
|
|
1,595
|
|
|
23,933
|
|
Residential real estate
|
56
|
|
|
1,316
|
|
|
86
|
|
|
1,458
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
Residential
|
—
|
|
|
1,296
|
|
|
159
|
|
|
1,455
|
|
Commercial and multifamily
|
—
|
|
|
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
|
|
Loans Receivable
|
|
(In thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
43,808
|
|
|
$
|
806,044
|
|
|
$
|
2,368
|
|
|
$
|
852,220
|
|
Owner-occupied CRE
|
6,336
|
|
|
793,984
|
|
|
4,914
|
|
|
805,234
|
|
Non-owner occupied CRE
|
6,324
|
|
|
1,276,964
|
|
|
5,491
|
|
|
1,288,779
|
|
Total commercial business
|
56,468
|
|
|
2,876,992
|
|
|
12,773
|
|
|
2,946,233
|
|
Residential real estate
|
215
|
|
|
127,870
|
|
|
3,575
|
|
|
131,660
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
Residential
|
237
|
|
|
104,059
|
|
|
—
|
|
|
104,296
|
|
Commercial and multifamily
|
—
|
|
|
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
|
|
The following table details the activity in the ALL disaggregated by segment and class for the year ended December 31, 2018 under the incurred loss methodology, including the ASC 310-30 methodology for PCI loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Year
|
|
Charge-offs
|
|
Recoveries
|
|
Provision for Loan Losses
|
|
Balance at End of Year
|
|
(In thousands)
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
9,910
|
|
|
$
|
(1,250)
|
|
|
$
|
901
|
|
|
$
|
1,782
|
|
|
$
|
11,343
|
|
Owner-occupied CRE
|
3,992
|
|
|
(1)
|
|
|
7
|
|
|
900
|
|
|
4,898
|
|
Non-owner occupied CRE
|
8,097
|
|
|
(149)
|
|
|
—
|
|
|
(478)
|
|
|
7,470
|
|
Total commercial business
|
21,999
|
|
|
(1,400)
|
|
|
908
|
|
|
2,204
|
|
|
23,711
|
|
Residential real estate
|
1,056
|
|
|
(45)
|
|
|
—
|
|
|
192
|
|
|
1,203
|
|
Real estate construction and land development:
|
|
|
|
|
|
|
|
|
|
Residential
|
862
|
|
|
—
|
|
|
11
|
|
|
367
|
|
|
1,240
|
|
Commercial and multifamily
|
1,190
|
|
|
—
|
|
|
—
|
|
|
(236)
|
|
|
954
|
|
Total real estate construction and land development
|
2,052
|
|
|
—
|
|
|
11
|
|
|
131
|
|
|
2,194
|
|
Consumer
|
6,081
|
|
|
(2,160)
|
|
|
513
|
|
|
2,147
|
|
|
6,581
|
|
Unallocated
|
898
|
|
|
—
|
|
|
—
|
|
|
455
|
|
|
1,353
|
|
Total
|
$
|
32,086
|
|
|
$
|
(3,605)
|
|
|
$
|
1,432
|
|
|
$
|
5,129
|
|
|
$
|
35,042
|
|
(6)Other Real Estate Owned
Changes in other real estate owned during the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
(In thousands
|
Balance at the beginning of the year
|
$
|
841
|
|
|
$
|
1,983
|
|
|
$
|
—
|
|
Additions
|
270
|
|
|
—
|
|
|
434
|
|
Additions from acquisitions
|
—
|
|
|
—
|
|
|
1,796
|
|
Proceeds from dispositions
|
(1,290)
|
|
|
(864)
|
|
|
(198)
|
|
Gain (loss) on sale, net
|
179
|
|
|
(227)
|
|
|
—
|
|
Valuation adjustment
|
—
|
|
|
(51)
|
|
|
(49)
|
|
Balance at the end of the year
|
$
|
—
|
|
|
$
|
841
|
|
|
$
|
1,983
|
|
At December 31, 2020, there were no consumer mortgage loans secured by residential real estate properties (included in Loans receivable on the Consolidated Statements of Financial Position) for which formal foreclosure proceedings were in process.
(7)Premises and Equipment
A summary of premises and equipment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
(In thousands)
|
Land
|
$
|
21,599
|
|
|
$
|
22,003
|
|
Buildings and building improvements
|
71,653
|
|
|
72,810
|
|
Furniture, fixtures and equipment
|
26,341
|
|
|
26,354
|
|
Total premises and equipment
|
119,593
|
|
|
121,167
|
|
Less: Accumulated depreciation
|
34,141
|
|
|
33,279
|
|
Premises and equipment, net
|
$
|
85,452
|
|
|
$
|
87,888
|
|
Total depreciation expense on premises and equipment was $5.5 million, $4.7 million and $4.4 million for the years ended December 31, 2020, 2019 and 2018, respectively.
(8)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).
The following table presents the change in goodwill for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
(In thousands)
|
Balance at the beginning of the period
|
$
|
240,939
|
|
|
$
|
240,939
|
|
|
$
|
119,029
|
|
Additions as a result of acquisitions (1)
|
—
|
|
|
—
|
|
|
121,910
|
|
|
|
|
|
|
|
Balance at the end of the period
|
$
|
240,939
|
|
|
$
|
240,939
|
|
|
$
|
240,939
|
|
(1) See Note (2) Business Combinations
Due to the deteriorating financial market and economic conditions as a result of the COVID-19 pandemic, the Company determined a triggering event occurred prior to its annual assessment date and consequently engaged an independent third-party valuation specialist to assist management in performing a quantitative assessment of goodwill as of May 31, 2020. Based on the quantitative assessment, management estimated the fair value of the reporting unit by weighting results from the market approach and the income approach. Significant assumptions inherent in the valuation methodologies for goodwill were employed and included, but were not limited to, prospective financial information, growth rates, terminal value, discount rates, and comparable multiples from publicly traded companies in our industry. Based on this quantitative test, management determined that the fair value of the reporting unit more likely than not exceeded the carrying value.
The Company performed a qualitative assessment during its annual impairment test, and determined that it was more likely than not that the fair value of the reporting unit exceeded the carrying value, such that the Company's goodwill was not considered impaired at December 31, 2020. Similarly, no goodwill impairment charges were required, or recorded, for the years ended December 31, 2019 or 2018. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
(In thousands)
|
Balance at the beginning of the period
|
$
|
16,613
|
|
|
$
|
20,614
|
|
|
$
|
6,088
|
|
Additions as a result of acquisitions (1)
|
—
|
|
|
—
|
|
|
18,345
|
|
Amortization
|
(3,525)
|
|
|
(4,001)
|
|
|
(3,819)
|
|
Balance at the end of the period
|
$
|
13,088
|
|
|
$
|
16,613
|
|
|
$
|
20,614
|
|
(1) See Note (2) Business Combinations
The estimated aggregate amortization expense related to these intangible assets for future years is as follows:
|
|
|
|
|
|
|
Year Ending December 31,
|
|
(In thousands)
|
2021
|
$
|
3,111
|
|
2022
|
2,750
|
|
2023
|
2,435
|
|
2024
|
1,640
|
|
2025
|
1,173
|
|
Thereafter
|
1,979
|
|
Total
|
$
|
13,088
|
|
(9)Deposits
Deposits consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
(Dollars in thousands)
|
Noninterest demand deposits
|
$
|
1,980,531
|
|
|
35.4
|
%
|
|
$
|
1,446,502
|
|
|
31.6
|
%
|
Interest bearing demand deposits
|
1,716,123
|
|
|
30.7
|
|
|
1,348,817
|
|
|
29.4
|
|
Money market accounts
|
962,983
|
|
|
17.2
|
|
|
753,684
|
|
|
16.4
|
|
Savings accounts
|
538,819
|
|
|
9.6
|
|
|
509,095
|
|
|
11.2
|
|
Total non-maturity deposits
|
5,198,456
|
|
|
92.9
|
|
|
4,058,098
|
|
|
88.6
|
|
Certificates of deposit
|
399,534
|
|
|
7.1
|
|
|
524,578
|
|
|
11.4
|
|
Total deposits
|
$
|
5,597,990
|
|
|
100.0
|
%
|
|
$
|
4,582,676
|
|
|
100.0
|
%
|
Deposit accounts overdrawn and reclassified to Loans receivable were $187,000 and $425,000 as of December 31, 2020 and December 31, 2019. Accrued interest payable on deposits was $73,000 and $160,000 as of December 31, 2020 and December 31, 2019, respectively and is included in Accrued expenses and other liabilities in the Consolidated Statements of Financial Condition.
Interest expense, by category, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
(In thousands)
|
Interest bearing demand deposits
|
$
|
3,234
|
|
|
$
|
3,940
|
|
|
$
|
2,728
|
|
Money market accounts
|
2,830
|
|
|
2,754
|
|
|
1,654
|
|
Savings accounts
|
527
|
|
|
2,634
|
|
|
2,056
|
|
Certificates of deposit
|
5,674
|
|
|
7,021
|
|
|
3,959
|
|
Total interest expense
|
$
|
12,265
|
|
|
$
|
16,349
|
|
|
$
|
10,397
|
|
Scheduled maturities of certificates of deposit for future years are as follows:
|
|
|
|
|
|
|
Year Ending December 31,
|
|
(In thousands)
|
2021
|
$
|
325,686
|
|
2022
|
39,821
|
|
2023
|
21,822
|
|
2024
|
7,550
|
|
2025
|
4,625
|
|
Thereafter
|
30
|
|
Total
|
$
|
399,534
|
|
Certificates of deposit issued in denominations equal to or in excess of $250,000 totaled $123.1 million and $182.9 million as of December 31, 2020 and December 31, 2019, respectively.
Deposits received from related parties as of December 31, 2020 and December 31, 2019 totaled $6.3 million and $6.9 million, respectively.
(10)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 December 31, 2020 and December 31, 2019, the balance of the junior subordinated debentures, net of unaccreted discount, was $20.9 million and $20.6 million, respectively.
Washington Banking Master Trust, a Delaware statutory business trust, was a wholly owned subsidiary of the Washington Banking Company created for the exclusive purposes of issuing and selling capital securities and utilizing sale proceeds to acquire junior subordinated debentures issued by the Washington Banking Company. During 2007, the Trust issued $25.0 million of trust preferred securities with a 30-year maturity, callable after the fifth year. The trust preferred securities have a quarterly adjustable rate based upon the three-month LIBOR plus 1.56%. On the merger date, the Company acquired the Trust, which retained the Washington Banking Master Trust name, and assumed the performance and observance of the covenants under the indenture related to the trust preferred securities.
The adjustable rate of the trust preferred securities at December 31, 2020 and December 31, 2019 was 1.80% and 3.47%, respectively. The weighted average rate of the junior subordinated debentures for the years ended December 31, 2020, 2019 and 2018 was 4.29%, 6.55% and 6.27%, respectively. 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.
The junior subordinated debentures are the sole assets of the Trust and payments under the junior subordinated debentures are the sole revenues of the Trust. All of the common securities of the Trust are owned by the Company. Heritage has fully and unconditionally guaranteed the capital securities along with all obligations of the Trust under the trust agreements. For financial reporting purposes, the Company's investment in the Master Trust is accounted for under the equity method and is included in Prepaid expenses and other assets on the Consolidated Statements of Financial Condition. The junior subordinated debentures issued and guaranteed by the Company and held by the Master Trust are reflected as liabilities on the Consolidated Statements of Financial Condition.
(11)Securities Sold Under Agreement to Repurchase
The Company utilizes securities sold under agreement to repurchase with one day maturities as a supplement to funding sources. Securities sold under agreement to repurchase are secured by pledged investment securities available for sale. Under the securities sold under agreement to repurchase, the Company is required to maintain an aggregate market value of securities pledged greater than the balance of the securities sold under agreement to repurchase. The Company is required to pledge additional securities to cover any declines below the balance of the securities sold under agreement to repurchase. For additional information on the total value of investment securities pledged for securities sold under agreement to repurchase see Note (3) Investment Securities.
The following table presents the balance of the Company's securities sold under agreement to repurchase obligations by class of collateral pledged at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Residential CMO and MBS
|
$
|
7,388
|
|
|
$
|
8,452
|
|
Commercial CMO and MBS
|
28,295
|
|
|
11,717
|
|
Total
|
$
|
35,683
|
|
|
$
|
20,169
|
|
(12)Other Borrowings
(a) FHLB
The FHLB functions as a member-owned cooperative providing credit for member financial institutions. Advances are made pursuant to several different programs. Each credit program has its own interest rate and range of maturities. Limitations on the amount of advances are based on a percentage of the Bank's assets or on the FHLB’s assessment of the institution’s creditworthiness. At December 31, 2020, the Bank maintained a credit facility with the FHLB with available borrowing capacity of $991.7 million. At December 31, 2020 and December 31, 2019 the Bank had no FHLB advances outstanding.
The following table sets forth the details of FHLB advances during and as of the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or For the Year Ended
|
|
December 31, 2020
|
|
December 31, 2019
|
|
(In thousands)
|
Average balance during the year
|
$
|
1,466
|
|
|
$
|
11,899
|
|
Maximum month-end balance during the year
|
$
|
—
|
|
|
$
|
90,700
|
|
Weighted average rate during the year
|
0.55
|
%
|
|
2.57
|
%
|
Weighted average rate at the end of year
|
n/a
|
|
n/a
|
Advances from the FHLB are collateralized by a blanket pledge on FHLB stock owned by the Bank, deposits at the FHLB, certain commercial and residential real estate 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 $215.0 million as of December 31, 2020. The lines generally mature annually or are reviewed annually. As of December 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 $54.3 million as of December 31, 2020. There were no borrowings outstanding as of December 31, 2020 and December 31, 2019. Any advances on the credit facility would be secured by certain types of the Bank's loans receivable.
(d) PPPLF Facility
The Federal Reserve established the PPPLF under Section 13(3) of the Federal Reserve Act to bolster the effectiveness of the SBA's PPP. Under the PPPLF, the Bank had the option to pledge its SBA PPP loans as collateral at face value to obtain Federal Reserve Bank non-recourse loans. PPPLF advances were available to be obtained until December 31, 2020. As of and for the year ended December 31, 2020, although the Bank was approved to utilize the PPPLF, the Bank had not participated in it. See Note (25) Subsequent Events regarding the renewal of this facility subsequent to December 31, 2020.
(13)Leases
The Company's noncancelable operating lease agreements relate to certain banking offices, back-office operational facilities, office equipment, and sublease agreements. The majority of the leases contain renewal options and provisions for increases in rental rates based on an agreed upon index or predetermined escalation schedule. As of December 31, 2020 and December 31, 2019, the Company’s operating lease ROU asset was $18.0 million and $23.0 million, respectively, and the related operating lease ROU liability was $19.3 million and $24.2 million, respectively. The Company does not have any leases designated as finance leases.
The table below summarizes the net lease cost recognized during the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
(In thousands)
|
Operating lease cost
|
$
|
4,717
|
|
|
$
|
4,950
|
|
Short-term lease cost
|
49
|
|
|
95
|
|
Variable lease cost
|
967
|
|
|
781
|
|
Sublease income
|
(55)
|
|
|
(71)
|
|
Total net lease cost
|
$
|
5,678
|
|
|
$
|
5,755
|
|
Comparative disclosure of rental expense of leased premises and equipment calculated under ASC 840 methodology was $6.1 million for the year ended December 31, 2018 and is included in Occupancy and equipment expense on the Consolidated Statements of Income.
The tables below summarize other information related to the Company's operating leases during the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
(In thousands)
|
Operating cash used for amounts included in the measurement of lease liabilities
|
$
|
4,881
|
|
|
$
|
4,858
|
|
ROU assets obtained in exchange for lease liabilities, excluding adoption impact
|
1,265
|
|
|
1,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2020
|
|
December 31,
2019
|
Weighted average remaining lease term of operating leases, in years
|
7.2
|
|
8.1
|
Weighted average discount rate of operating leases
|
3.12
|
%
|
|
3.27
|
%
|
The following table outlines lease payment obligations as of December 31, 2020 as outlined in the Company’s lease agreements for each of the next five years and thereafter in addition to a reconciliation to the Company’s ROU liability at the date indicated:
|
|
|
|
|
|
|
Year Ending December 31,
|
|
(In thousands)
|
2021
|
$
|
3,547
|
|
2022
|
3,136
|
|
2023
|
3,105
|
|
2024
|
2,759
|
|
2025
|
2,508
|
|
Thereafter
|
6,611
|
|
Total lease payments
|
21,666
|
|
Implied interest
|
(2,391)
|
|
ROU liability
|
$
|
19,275
|
|
During the year ended December 31, 2019, the Company entered into a $7.7 million lease agreement to renew, restructure and add additional leased space at one of its branch locations commencing on January 1, 2021. The lease agreement is not included in the lease payment obligations table above. The new agreement replaced a lease included in the table above that terminated on December 31, 2020.
(14)Employee Benefit Plans
(a) 401(k) Plan
The Company provides its eligible employees with a 401(k) plan ("Plan"). The Company funds certain Plan costs as incurred.
The Plan includes the Company’s salary savings 401(k) plan for its employees. All employees hired may participate in the Plan the first of the month following employment or concurrent to their hire date if starting the first of the month. Participants may contribute a portion of their salary, which is matched by the Company at 50%, not to be greater than 3% of eligible compensation, up to Internal Revenue Service limits. All participants are 100% vested in all accounts at all times. Employer matching contributions for the years ended December 31, 2020, 2019 and 2018 were $1.7 million, $1.6 million and $1.4 million, respectively.
The Plan may make profit sharing and discretionary contributions which are completely discretionary. Participants are eligible for-profit sharing contributions upon credit of 1,000 hours of service during the plan year, the attainment of 18 years of age, and employment on the last day of the year. Employees are 100% vested in profit sharing contributions at all times. For the years ended December 31, 2020, 2019 and 2018, the Company made no employer profit sharing contributions.
(b) Employment Agreements
The Company has entered into contracts with certain senior officers that provide benefits under certain conditions following termination without cause or following a change in control of the Company.
(c) Deferred Compensation Plan
The Company has a Deferred Compensation Plan, which provides its directors and select executive officers with the opportunity to defer current compensation. Under the Deferred Compensation Plan, participants are permitted to elect to defer compensation and the Company has the discretion to make additional contributions on behalf of any participant based on a number of factors.
The following table presents a summary of the changes in the Deferred Compensation Plan during the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
(In thousands)
|
Balance outstanding at the beginning of the year
|
$
|
4,244
|
|
|
$
|
3,654
|
|
|
$
|
2,844
|
|
Employer contributions
|
207
|
|
|
443
|
|
|
713
|
|
Interest credited
|
128
|
|
|
147
|
|
|
97
|
|
Benefits Paid
|
(478)
|
|
|
—
|
|
|
—
|
|
Balance outstanding at the end of the year
|
$
|
4,101
|
|
|
$
|
4,244
|
|
|
$
|
3,654
|
|
(d) Split-Dollar Life Insurance Benefit Plan
In conjunction with the Washington Banking Merger, the Company assumed the split-dollar life insurance benefit plan previously maintained by Washington Banking. Life insurance policies are maintained for current or former officers of the Bank or former Washington Banking officers that are subject to split-dollar life insurance agreements, which continue after the participant's employment and retirement. All participants are fully vested in their split-dollar life insurance benefits. The accrued benefit liability for the split-dollar life insurance agreements represents the present value of the future death benefits payable to the participants' beneficiaries.
The split-dollar life insurance projected benefit obligation is included in Accrued expenses and other liabilities on the Consolidated Statements of Financial Condition. As of December 31, 2020 and December 31, 2019, the carrying value of the obligation was $165,000 and $200,000, respectively.
(e) Salary Continuation Plan
In conjunction with the Premier Merger in 2018, the Company assumed an unfunded deferred compensation plan for select former Premier Commercial executive officers, some of which are current Heritage officers. Under this salary continuation plan, the Company will pay each participant, or their beneficiary, specified benefits over specified periods beginning with the individual's termination of service due to retirement subject to early termination provisions. A liability is accrued for this obligation and is included in Accrued expenses and other liabilities on the Consolidated Statements of Financial Condition. The following table presents a summary of the changes in the salary continuation plan during the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
(In thousands)
|
Obligation, at the beginning of the year
|
$
|
4,334
|
|
|
$
|
4,600
|
|
|
$
|
—
|
|
Balance acquired in Premier Merger
|
—
|
|
|
—
|
|
|
4,718
|
|
Benefits paid
|
(460)
|
|
|
(554)
|
|
|
(529)
|
|
Expenses incurred
|
288
|
|
|
288
|
|
|
411
|
|
Obligation, at the end of the year
|
$
|
4,162
|
|
|
$
|
4,334
|
|
|
$
|
4,600
|
|
(15)Commitments and Contingencies
(a) Commitments to Extend Credit
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 Consolidated Financial Statements. The Bank 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 non-revolving. The Bank’s exposure to credit and market risk under commitments to extend credit is represented by the amount of these commitments.
The following table presents outstanding commitments to extend credit, including letters of credit, at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
(In thousands)
|
Commercial business:
|
|
|
|
Commercial and industrial
|
$
|
640,018
|
|
|
$
|
584,287
|
|
Owner-occupied CRE
|
3,488
|
|
|
17,193
|
|
Non-owner occupied CRE
|
18,396
|
|
|
35,573
|
|
Total commercial business
|
661,902
|
|
|
637,053
|
|
|
|
|
|
Real estate construction and land development:
|
|
|
|
Residential
|
52,453
|
|
|
75,066
|
|
Commercial and multifamily
|
127,821
|
|
|
230,343
|
|
Total real estate construction and land development
|
180,274
|
|
|
305,409
|
|
Consumer
|
263,249
|
|
|
269,898
|
|
Total outstanding commitments
|
$
|
1,105,425
|
|
|
$
|
1,212,360
|
|
Upon CECL adoption, 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 credit losses on future utilization over the entire contractual period.
The following table details the activity in the ACL on unfunded commitments during the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
(In thousands)
|
Balance, beginning of period
|
$
|
306
|
|
|
$
|
306
|
|
|
$
|
170
|
|
Impact of CECL Adoption
|
3,702
|
|
|
—
|
|
|
—
|
|
Adjusted balance, beginning of period
|
4,008
|
|
|
306
|
|
|
170
|
|
Provision for credit losses on unfunded commitments
|
673
|
|
|
—
|
|
|
136
|
|
Balance, end of period
|
$
|
4,681
|
|
|
$
|
306
|
|
|
$
|
306
|
|
(b) Variable Interests - Low Income Housing Tax Credit Investments
The carrying values of investments in unconsolidated LIHTCs were $96.4 million and $92.7 million as of December 31, 2020 and December 31, 2019, respectively. During the years ended December 31, 2020, 2019 and 2018 the Company recognized tax benefits of $7.5 million, $5.7 million and $2.4 million, respectively, and proportional amortization of $6.5 million, $5.0 million and $3.1 million, respectively.
Total unfunded contingent commitments related to the Company’s LIHTC investments totaled $53.8 million and $50.7 million at December 31, 2020 and December 31, 2019, respectively. The Company expects to fund LIHTC commitments of $37.9 million during the year ended December 31, 2021 and $9.7 million during the year ended December 31, 2022, with the remaining commitments of $6.2 million funded by December 31, 2034. There were no impairment losses on the Company’s LIHTC investments during the years ended December 31, 2020, 2019 or 2018.
(c) Variable Interests - New Market Tax Credit Investments
The equity method balance of the NMTC investment was $25.2 million and $25.4 million at December 31, 2020 and December 31, 2019, respectively. The Company recognized related investment income of $694,000, $701,000 and $708,000 during the years ended December 31, 2020, 2019 and 2018, respectively. Gross tax credits related to the Company's certified development entities totaling $9.8 million were utilized during the seven year period ending December 31, 2020. There were no impairment losses on the Company’s NMTC investments during the years ended December 31, 2020, 2019 or 2018.
(16)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 December 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 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)
|
308,126
|
|
|
$
|
25,740
|
|
|
$
|
221,436
|
|
|
$
|
8,318
|
|
Interest rate swap liability (1)
|
308,126
|
|
|
(26,162)
|
|
|
221,436
|
|
|
(8,318)
|
|
(1) The estimated fair value of derivatives with customers was $25.4 million and $8.1 million as of December 31, 2020 and December 31, 2019, respectively. The estimated fair value of derivatives with third-parties was $(25.9) million and $(8.1) million as of December 31, 2020 and December 31, 2019, respectively.
Generally, the gains and losses of the interest rate derivatives offset due to the back-to-back nature of the contracts. However, as of December 31, 2020, the settlement values of the Bank's net derivative assets decreased due to the recognition of a credit valuation adjustment of $422,000 during the year ended December 31, 2020. A credit valuation adjustment was not recorded on the Bank's net derivative assets as of December 31, 2019.
Credit risk for derivatives with customers is concentrated within our primary market areas which are concentrated along the I-5 corridor from Whatcom County to Clark County in Washington State and Multnomah County and Washington County in Oregon, as well as other contiguous markets and represents a geographic concentration. Credit risk for derivatives with third-parties is concentrated among four well-known broker dealers.
(17)Stockholders’ Equity
(a) Earnings Per Common Share
The following table illustrates the calculation of weighted average shares used for earnings per common share computations at December 31, 2020, December 31, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
(In thousands, except shares)
|
Net income:
|
|
|
|
|
|
Net income
|
$
|
46,570
|
|
|
$
|
67,557
|
|
|
$
|
53,057
|
|
Dividends and undistributed earnings allocated to participating securities (1)
|
(7)
|
|
|
(57)
|
|
|
(223)
|
|
Net income allocated to common shareholders
|
$
|
46,563
|
|
|
$
|
67,500
|
|
|
$
|
52,834
|
|
Basic:
|
|
|
|
|
|
Weighted average common shares outstanding
|
36,018,627
|
|
|
36,789,244
|
|
|
35,281,408
|
|
Restricted stock awards
|
(4,182)
|
|
|
(31,014)
|
|
|
(87,405)
|
|
Total basic weighted average common shares outstanding
|
36,014,445
|
|
|
36,758,230
|
|
|
35,194,003
|
|
Diluted:
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
36,014,445
|
|
|
36,758,230
|
|
|
35,194,003
|
|
Effect of potentially dilutive common shares (2)
|
155,621
|
|
|
227,536
|
|
|
177,587
|
|
Total diluted weighted average common shares outstanding
|
36,170,066
|
|
|
36,985,766
|
|
|
35,371,590
|
|
(1) Represents dividends paid and undistributed earnings allocated to unvested 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 years ended December 31, 2020 and December 31, 2019, there were 137,093 and 1,501 anti-dilutive shares outstanding, respectively. For the year ended December 31, 2018, there were no anti-dilutive shares outstanding.
(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 during the most recent three year period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declared
|
|
Cash Dividend per Share
|
|
Record Date
|
|
Paid Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 24, 2018
|
|
$0.15
|
|
February 7, 2018
|
|
February 21, 2018
|
|
|
April 25, 2018
|
|
$0.15
|
|
May 10, 2018
|
|
May 24, 2018
|
|
|
July 24, 2018
|
|
$0.15
|
|
August 9, 2018
|
|
August 23, 2018
|
|
|
October 24, 2018
|
|
$0.17
|
|
November 7, 2018
|
|
November 21, 2018
|
|
|
October 24, 2018
|
|
$0.10
|
|
November 7, 2018
|
|
November 21, 2018
|
|
*
|
January 23, 2019
|
|
$0.18
|
|
February 7, 2019
|
|
February 21, 2019
|
|
|
April 24, 2019
|
|
$0.18
|
|
May 8, 2019
|
|
May 22, 2019
|
|
|
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
|
|
|
April 29, 2020
|
|
$0.20
|
|
May 13, 2020
|
|
May 27, 2020
|
|
|
July 22, 2020
|
|
$0.20
|
|
August 5, 2020
|
|
August 19, 2020
|
|
|
October 21, 2020
|
|
$0.20
|
|
November 4, 2020
|
|
November 18, 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 October 23, 2014. the Company's Board of Directors authorized the repurchase of up to 5% of the Company's outstanding common shares, or approximately 1,513,000 shares, under the eleventh stock repurchase plan. As of March 2020, all shares had been repurchased under this plan. On March 12, 2020 the Company's Board of Directors additionally 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 year ended December 31, 2020, the Company repurchased 639,922 shares under the eleventh stock repurchase plan at a weighted average price per share of $23.95 and repurchased 155,778 shares under the twelfth stock repurchase plan at a weighted average share price of $20.34, which is a total of 795,700 shares under both plans at a weighted average share price of $23.25.
During the year ended December 31, 2019, the Company repurchased 292,712 shares under the eleventh stock repurchase plan with a weighted average price per share of $26.50. No shares were repurchased under the eleventh stock repurchase plan during the year ended December 31, 2018.
In addition to the stock repurchases under a stock repurchase plan, the Company repurchases shares to pay withholding taxes on the vesting of restricted stock awards and units. The following table provides total shares repurchased to pay withholding taxes during the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Repurchased shares to pay withholding taxes (1)
|
28,887
|
|
|
28,479
|
|
|
53,256
|
|
Stock repurchase to pay withholding taxes average share price
|
$
|
21.57
|
|
|
$
|
30.83
|
|
|
$
|
31.99
|
|
(1) During the year ended December 31, 2018, the Company repurchased 26,741 shares related to the withholding taxes due on the accelerated vesting of the restricted stock units of Puget Sound which were converted to Heritage common stock shares with an average share price of $31.80 under the terms of the Puget Sound Merger. See Note (2) Business Combinations.
(d) Issuance of Common Stock
In conjunction with the Premier Merger effective on July 2, 2018 and the Puget Sound Merger effective on January 16, 2018, Heritage issued 2,848,579 and 4,112,258 shares, respectively, of the Company's common stock at the merger date share price of $34.85 and $31.80, respectively, for a fair value of $99.3 million and $130.8 million, respectively.
In addition, common stock was issued during the years ended December 31, 2020, 2019 and 2018 related to the exercise of stock options and issuance of restricted stock awards as further described in Note (19) Stock-Based Compensation.
(18)Fair Value Measurements
Fair value is the price that would be received to sell 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 at 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.
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 customer and customer’s business (Level 3). Individually evaluated loans are analyzed for credit loss on a quarterly basis and the ACL on loans is adjusted as required based on the results.
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 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), and incorporates credit valuation adjustments to reflect nonperformance risk in the measurement of fair value (Level 3). Although the Bank has determined that the majority of the inputs used to value its interest rate swap derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as borrower risk ratings, to evaluate the likelihood of default by itself and its counterparties. As of December 31, 2020, the Bank assessed the significance of the impact of the credit valuation adjustment on the overall valuation of its interest rate swap derivatives and determined that the credit valuation adjustment was not significant to the overall valuation of its interest rate swap derivatives. As a result, the Bank has classified its interest rate swap derivative valuations in Level 2 of the fair value hierarchy. The Bank did not recognize a credit valuation adjustment in the valuation of its interest rate swap derivatives as of December 31, 2019; therefore, the interest rate swap derivatives are also classified in Level 2 of the fair value hierarchy for the comparative period end.
Branches held for sale:
Branches held for sale are recorded at fair value less costs to sell when transferred from Premises and equipment, net to Prepaid expenses and other assets on the Consolidated Statements of Financial Condition with any valuation adjustment recorded within Other noninterest expense on the Consolidated Statements of Income. The fair value of branches held for sale is determined based on a real estate appraisal or broker price opinion. Adjustments are routinely made in the appraisal and broker price opinion process by independent appraisers and commercial real estate brokers, respectively, 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.
Recurring Basis
The following tables summarize the balances of assets and liabilities measured at fair value on a recurring basis at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
(In thousands)
|
Assets
|
|
|
|
|
|
|
|
Investment securities available for sale:
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
$
|
45,660
|
|
|
$
|
—
|
|
|
$
|
45,660
|
|
|
$
|
—
|
|
Municipal securities
|
209,968
|
|
|
—
|
|
|
209,968
|
|
|
—
|
|
Residential CMO and MBS
|
201,872
|
|
|
—
|
|
|
201,872
|
|
|
—
|
|
Commercial CMO and MBS
|
303,746
|
|
|
—
|
|
|
303,746
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Corporate obligations
|
11,096
|
|
|
—
|
|
|
11,096
|
|
|
—
|
|
Other asset-backed securities
|
29,821
|
|
|
|
|
29,821
|
|
|
—
|
|
Total investment securities available for sale
|
802,163
|
|
|
—
|
|
|
802,163
|
|
|
—
|
|
Equity security
|
131
|
|
|
131
|
|
|
—
|
|
|
—
|
|
Derivative assets - interest rate swaps
|
25,740
|
|
|
—
|
|
|
25,740
|
|
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
Derivative liabilities - interest rate swaps
|
$
|
26,162
|
|
|
$
|
—
|
|
|
$
|
26,162
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
(In thousands)
|
Assets
|
|
|
|
|
|
|
|
Investment securities available for sale:
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
$
|
105,223
|
|
|
$
|
—
|
|
|
$
|
105,223
|
|
|
$
|
—
|
|
Municipal securities
|
133,014
|
|
|
—
|
|
|
133,014
|
|
|
—
|
|
Residential CMO and MBS
|
339,608
|
|
|
—
|
|
|
339,608
|
|
|
—
|
|
Commercial CMO and MBS
|
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 the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis(1)
|
|
Fair Value at December 31, 2020
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
(In thousands)
|
Collateral-dependent loans:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
1,305
|
|
|
$
|
1,289
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other assets:
|
|
|
|
|
|
|
|
|
|
|
|
Branch held for sale (2)
|
1,330
|
|
|
1,330
|
|
|
—
|
|
|
—
|
|
|
1,330
|
|
|
|
Total assets measured at fair value on a nonrecurring basis
|
$
|
2,635
|
|
|
$
|
2,619
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,619
|
|
|
|
(1)Basis represents the outstanding principal balance of collateral-dependent loans and the carrying value of the branch held for sale.
(2) In October 2020, one branch was reclassified as held for sale in accordance with ASC 360-10. As part of the transfer, the branch was written down to its net realizable value at that time.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis(1)
|
|
Fair Value at December 31, 2019
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
(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 outstanding principal balance of impaired loans.
The following table represents the net realized losses (gains) recorded in earnings resulting from nonrecurring fair value adjustments during the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
(In thousands)
|
Collateral-dependent loans:
|
|
|
|
|
|
Commercial business:
|
|
|
|
|
|
Commercial and industrial
|
$
|
8
|
|
|
$
|
78
|
|
|
$
|
10
|
|
|
|
|
|
|
|
Non-owner occupied CRE
|
—
|
|
|
—
|
|
|
150
|
|
Total commercial business
|
8
|
|
|
78
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
—
|
|
|
—
|
|
|
8
|
|
|
|
|
|
|
|
Prepaid expenses and other assets:
|
|
|
|
|
|
Branch held for sale
|
$
|
630
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Net losses recorded in earnings resulting from nonrecurring fair value adjustments
|
$
|
638
|
|
|
$
|
78
|
|
|
$
|
168
|
|
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 the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Fair
Value
|
|
Valuation
Technique(s)
|
|
Unobservable Input(s)
|
|
Range of Inputs; Weighted
Average
|
|
(Dollars in thousands)
|
Collateral-dependent loans
|
$
|
1,289
|
|
|
Market approach
|
|
Adjustment for differences between the comparable sales
|
|
0.6% - (40.1%); (24.1%)
|
Branch held for sale
|
1,330
|
|
|
Market approach
|
|
Adjustment for differences between the comparable sales
|
|
140.7% - (40.3%); 33.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
Broadly traded markets do not exist for most of the Company’s financial instruments; therefore, 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 the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Carrying
Value
|
|
Fair Value
|
|
Fair Value Measurements Using:
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
(In thousands)
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
743,322
|
|
|
$
|
743,322
|
|
|
$
|
743,322
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Carrying
Value
|
|
Fair Value
|
|
Fair Value Measurements Using:
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Investment securities available for sale
|
802,163
|
|
|
802,163
|
|
|
—
|
|
|
802,163
|
|
|
—
|
|
Loans held for sale
|
4,932
|
|
|
5,156
|
|
|
—
|
|
|
—
|
|
|
5,156
|
|
Loans receivable, net
|
4,398,462
|
|
|
4,556,862
|
|
|
—
|
|
|
—
|
|
|
4,556,862
|
|
Accrued interest receivable
|
19,418
|
|
|
19,418
|
|
|
2
|
|
|
3,648
|
|
|
15,768
|
|
Bank owned life insurance
|
107,580
|
|
|
107,580
|
|
|
107,580
|
|
|
—
|
|
|
—
|
|
Derivative assets - interest rate swaps
|
25,740
|
|
|
25,740
|
|
|
—
|
|
|
25,740
|
|
|
—
|
|
Equity security
|
131
|
|
|
131
|
|
|
131
|
|
|
—
|
|
|
—
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
Noninterest deposits, interest bearing demand deposits, money market accounts and savings accounts
|
$
|
5,198,456
|
|
|
$
|
5,198,456
|
|
|
$
|
5,198,456
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Certificates of deposit
|
399,534
|
|
|
402,071
|
|
|
—
|
|
|
402,701
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreement to repurchase
|
35,683
|
|
|
35,683
|
|
|
35,683
|
|
|
—
|
|
|
—
|
|
Junior subordinated debentures
|
20,887
|
|
|
18,500
|
|
|
—
|
|
|
—
|
|
|
18,500
|
|
Accrued interest payable
|
94
|
|
|
94
|
|
|
42
|
|
|
33
|
|
|
19
|
|
Derivative liabilities - interest rate swaps
|
26,162
|
|
|
26,162
|
|
|
—
|
|
|
26,162
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Bank owned life insurance
|
103,616
|
|
|
103,616
|
|
|
103,616
|
|
|
|
|
|
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
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Certificates of deposit
|
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
|
|
|
—
|
|
(19)Stock-Based Compensation
On July 24, 2014, the Company's shareholders approved the Equity Plan that provides for the issuance of 1,500,000 shares of the Company's common stock in the form of various types of stock-based compensation. The Company issues new shares of common stock to satisfy share option exercises and restricted stock award vests. As of December 31, 2020, shares remaining available for future issuance under the Equity Plan totaled 646,503.
(a) Stock Option Awards
Stock options generally vested ratably over three years and expired five years after they become exercisable or vested ratably over four years and expired ten years from date of grant. For the years ended December 31, 2020, 2019 and 2018, the Company did not recognize any compensation expense or related tax benefit related to stock options as all of the compensation expense related to the outstanding stock options had been previously recognized. The intrinsic value from options exercised during the years ended December 31, 2020, 2019 and 2018 was $61,000, $60,000 and $202,000, respectively. The cash proceeds from options exercised during the years ended December 31, 2020, 2019 and 2018 were $122,000, $58,000 and $132,000, respectively.
The following table summarizes the stock option activity during the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average Exercise Price
|
Outstanding at December 31, 2017
|
23,231
|
|
|
$
|
14.21
|
|
Exercised
|
(9,842)
|
|
|
13.45
|
|
Forfeited or expired
|
(831)
|
|
|
14.77
|
|
Outstanding at December 31, 2018
|
12,558
|
|
|
14.77
|
|
Exercised
|
(3,901)
|
|
|
14.77
|
|
|
|
|
|
Outstanding at December 31, 2019
|
8,657
|
|
|
14.77
|
|
Exercised
|
(8,248)
|
|
|
14.77
|
|
Forfeited or expired
|
(409)
|
|
|
14.77
|
|
Outstanding, vested and expected to vest and exercisable at December 31, 2020
|
—
|
|
|
$
|
—
|
|
(b) Restricted Stock Awards
Restricted stock awards granted generally had a four-year cliff vesting or four-year ratable vesting schedule. For the years ended December 31, 2020, 2019 and 2018, the Company recognized compensation expense related to restricted stock awards of $76,000, $440,000 and $907,000, respectively, and a related tax benefit of $17,000, $93,000 and $191,000, respectively. The vesting date fair value of restricted stock awards that vested during the years ended December 31, 2020, 2019 and 2018 was $442,000, $1.3 million and $2.2 million, respectively.
The following table summarizes the restricted stock award activity for the periods indicated
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average Grant Date Fair Value
|
Nonvested at December 31, 2017
|
137,399
|
|
|
$
|
17.00
|
|
|
|
|
|
Vested
|
(67,877)
|
|
|
16.74
|
|
Forfeited
|
(3,489)
|
|
|
16.92
|
|
Nonvested at December 31, 2018
|
66,033
|
|
|
17.28
|
|
|
|
|
|
Vested
|
(43,148)
|
|
|
17.07
|
|
Forfeited
|
(2,178)
|
|
|
18.32
|
|
Nonvested at December 31, 2019
|
20,707
|
|
|
17.59
|
|
|
|
|
|
Vested
|
(20,707)
|
|
|
17.59
|
|
|
|
|
|
Nonvested at December 31, 2020
|
—
|
|
|
$
|
—
|
|
(c) Restricted Stock Units
Restricted stock units generally vest ratably over three years and are subject to service conditions in accordance with each award agreement.
A category of restricted stock units called performance-based restricted stock units have a three-year cliff vesting schedule, participate in dividends and are additionally subject to performance-based vesting. The number of shares actually delivered pursuant to each performance-based restricted stock unit award agreement depends on the performance of the Company's Total Shareholder Return and Return on Average Assets over the performance period in relation to the performance of the common stock of a predetermined peer group. The conditions of the grants allow for an actual payout ranging between no payout and 150% of target. The payout level is calculated based on actual performance achieved during the performance period compared to a defined peer group. The fair value of each performance-based restricted stock unit was determined using a Monte Carlo simulation and will be recognized over the vesting period. The Monte-Carlo simulation model uses the same input assumptions as the Black-Scholes model; however, it also further incorporates into the fair value
determination the possibility that the market condition may not be satisfied. Compensation costs related to these awards are recognized regardless of whether the market condition is satisfied, provided that the requisite service has been provided.
The Company used the following assumptions to estimate the fair value of performance-based restricted share units granted for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Shares issued
|
15,200
|
|
|
14,396
|
|
|
11,099
|
|
Expected Term in Years
|
2.8
|
|
2.8
|
|
2.8
|
Weighted-Average Risk Free Interest Rate
|
1.14
|
%
|
|
2.47
|
%
|
|
2.39
|
%
|
Weighted Average Fair Value
|
23.50
|
|
|
30.06
|
|
|
27.69
|
|
Correlation coefficient
|
ABA NASDAQ Community Bank Index
|
|
ABA NASDAQ Community Bank Index
|
|
ABA NASDAQ Community Bank Index
|
Range of peer company volatilities
|
18.1%-107.6%
|
|
19.9%-75.4%
|
|
19.0%-51.4%
|
Range of peer company correlation coefficients
|
16.1%-90.2%
|
|
34.5%-90.7%
|
|
28.2%-94.3%
|
Heritage volatility
|
23.2
|
%
|
|
23.9
|
%
|
|
22.3
|
%
|
Heritage correlation coefficient
|
80.5
|
%
|
|
79.9
|
%
|
|
76.4
|
%
|
Expected volatilities in the model were estimated using a historical period consistent with the performance period of approximately three years. The risk-free interest rate was based on the United States Treasury rate for a term commensurate with the expected life of the grant.
For the years ended December 31, 2020, 2019 and 2018, the Company recognized compensation expense related to restricted stock units of $3.5 million, $2.8 million, and $1.8 million respectively, and a related tax benefit of $757,000, $589,000, and $387,000, respectively. As of December 31, 2020, the total unrecognized compensation expense related to non-vested restricted stock units was $5.2 million and the related weighted-average period over which the compensation expense is expected to be recognized is approximately 2.3 years. The vesting date fair value of the restricted stock units that vested during the year ended December 31, 2020, 2019 and 2018 was $2.4 million, $2.0 million and $1.0 million respectively.
The following table summarizes the unit activity for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Units
|
|
Weighted-Average Grant Date Fair Value
|
Nonvested at December 31, 2017
|
90,544
|
|
|
$
|
25.31
|
|
Granted
|
125,633
|
|
|
30.62
|
|
Vested
|
(32,375)
|
|
|
25.44
|
|
Forfeited
|
(4,617)
|
|
|
27.82
|
|
Nonvested at December 31, 2018
|
179,185
|
|
|
28.94
|
|
Granted
|
126,598
|
|
|
31.89
|
|
Vested
|
(64,173)
|
|
|
29.25
|
|
Forfeited
|
(8,070)
|
|
|
30.25
|
|
Nonvested at December 31, 2019
|
233,540
|
|
|
30.41
|
|
Granted
|
200,972
|
|
|
23.61
|
|
Vested
|
(109,853)
|
|
|
29.21
|
|
Forfeited
|
(8,543)
|
|
|
28.07
|
|
Nonvested at December 31, 2020
|
316,116
|
|
|
$
|
26.57
|
|
(20)Cash Restrictions
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 December 31, 2020 and a required balance of $17.1 million at December 31, 2019 was met by holding cash and maintaining an average balance with the Federal Reserve Bank.
The Company had restricted cash included in Interest earning deposits on the Consolidated Statements of Financial Condition of $34.2 million and $15.8 million as of December 31, 2020 and December 31, 2019, respectively, relating to collateral required on interest rate swaps from third-parties as discussed in Note (16) Derivative Financial Instruments. The Company does not have a collateral requirement with customers.
(21)Income Taxes
Income tax expense is substantially due to Federal income taxes as the provision for the state of Oregon income taxes is insignificant and the state of Washington does not charge an income tax in lieu of a business and occupation tax. Income tax expense for the years ended December 31, 2020, 2019 and 2018 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
(In thousands)
|
Current tax expense
|
$
|
15,186
|
|
|
$
|
12,504
|
|
|
$
|
9,866
|
|
Deferred tax expense
|
(8,576)
|
|
|
984
|
|
|
1,372
|
|
|
|
|
|
|
|
Income tax expense
|
$
|
6,610
|
|
|
$
|
13,488
|
|
|
$
|
11,238
|
|
The CARES Act, among other things, permitted net operating loss carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allowed net operating loss carrybacks incurred in 2018, 2019 and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. During the year ended December 31, 2020, the Company recorded a tax benefit from net operating loss carryback related to prior acquisitions of $967,000.
The effective tax rate was 12.4% for the year ended December 31, 2020 compared to an effective tax rate of 16.6% and 17.5% for the years ended December 31, 2019 and 2018, respectively. The decrease in the effective tax rate during the year ended December 31, 2020 was due primarily to the tax benefit of the recognized net operating loss carryback mentioned above. A reconciliation of the Company's effective income tax rate with the Federal statutory income tax rate of 21% for the years ended December 31, 2020, 2019 and 2018 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
(In thousands)
|
Income tax expense at Federal statutory rate
|
$
|
11,168
|
|
|
$
|
17,020
|
|
|
$
|
13,710
|
|
Tax-exempt instruments
|
(1,785)
|
|
|
(1,745)
|
|
|
(1,879)
|
|
Non-deductible acquisition costs
|
—
|
|
|
—
|
|
|
336
|
|
Federal tax credits and other benefits (1)
|
(1,928)
|
|
|
(1,961)
|
|
|
(515)
|
|
Effects of BOLI
|
(827)
|
|
|
(368)
|
|
|
(330)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit of CARES Act carryback
|
(967)
|
|
|
—
|
|
|
—
|
|
Other, net
|
949
|
|
|
542
|
|
|
(84)
|
|
Income tax expense
|
$
|
6,610
|
|
|
$
|
13,488
|
|
|
$
|
11,238
|
|
(1) Federal tax credits are provided for under the NMTC and LIHTC programs as described in Note (1) Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements. Gross tax credits related to the Company's NMTC totaling $9.8 million were utilized during the seven year period ending December 31, 2020.
The following table presents major components of the deferred income tax asset (liability) resulting from differences between financial reporting and tax basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
(In thousands)
|
Deferred tax assets:
|
|
|
|
Allowance for credit losses
|
$
|
15,883
|
|
|
$
|
7,389
|
|
Accrued compensation
|
2,988
|
|
|
3,058
|
|
Stock compensation
|
642
|
|
|
904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market discount on purchased loans
|
1,062
|
|
|
621
|
|
Foregone interest on nonaccrual loans
|
1,456
|
|
|
914
|
|
Net operating loss carryforward acquired
|
207
|
|
|
228
|
|
|
|
|
|
|
|
|
|
ROU lease liability
|
4,161
|
|
|
5,227
|
|
Other deferred tax assets
|
160
|
|
|
134
|
|
Total deferred tax assets
|
26,559
|
|
|
18,475
|
|
Deferred tax liabilities:
|
|
|
|
Deferred loan fees, net
|
(2,643)
|
|
|
(3,328)
|
|
Premises and equipment
|
(2,680)
|
|
|
(2,510)
|
|
FHLB stock
|
(569)
|
|
|
(569)
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangible assets
|
(2,186)
|
|
|
(2,807)
|
|
New market tax credit
|
(2,048)
|
|
|
(1,781)
|
|
Junior subordinated debentures
|
(1,050)
|
|
|
(1,113)
|
|
Other deferred tax liabilities
|
(264)
|
|
|
(239)
|
|
ROU lease asset
|
(3,879)
|
|
|
(4,956)
|
|
Net unrealized gains on investment securities
|
(6,805)
|
|
|
(2,753)
|
|
Total deferred tax liabilities
|
(22,124)
|
|
|
(20,056)
|
|
Deferred tax asset (liability), net
|
$
|
4,435
|
|
|
$
|
(1,581)
|
|
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. A valuation allowance is required to be recognized for the portion of the deferred tax asset that will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. As of December 31, 2020, based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management expects to realize the benefits of these deductible differences.
At December 31, 2020 and December 31, 2019, the Company had a net operating loss carryforward of $986,000 and $1.1 million, respectively, that will begin to expire in 2024. The Company is limited to the amount of the net operating loss carryforward that it can deduct each year under Section 382. Due to sufficient earnings history and other positive evidence, management has not recorded a valuation allowance as of December 31, 2020 and December 31, 2019.
As of December 31, 2020 and December 31, 2019, the Company had an insignificant amount of unrecognized tax benefits, none of which would materially affect its effective tax rate if recognized. The Company does not anticipate that the amount of unrecognized tax benefits will significantly increase or decrease in the next 12 months. The amount of interest and penalties accrued as of December 31, 2020 and December 31, 2019 and recognized during the years ended December 31, 2020, 2019 and 2018 were immaterial.
The Company has qualified under provisions of the Internal Revenue Code to compute income taxes after deductions of additions to the bad debt reserves when it was registered as a Savings Bank. At December 31, 2020, the Company had a taxable temporary difference of approximately $2.8 million that arose before 1988 (base-year amount). In accordance with FASB ASC 740, a deferred tax liability of an estimated $588,000 has not been recognized for the temporary difference. Management does not expect this temporary difference to reverse in the foreseeable future.
The Company and its subsidiary file a United States consolidated federal income tax return and an Oregon State income tax return, and the tax years subject to examination by the Internal Revenue Service are the years ended December 31, 2020, 2019, 2018 and 2017.
(22)Regulatory Capital Requirements
The Company is a bank holding company under the supervision of the Federal Reserve Bank. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as
amended, and the regulations of the Federal Reserve. Heritage Bank is a federally insured institution and thereby is subject to the capital requirements established by the FDIC. The Federal Reserve capital requirements generally parallel the FDIC requirements. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Consolidated Financial Statements and operations. Management believes as of December 31, 2020, the Company and the Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 2020 and December 31, 2019, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's categories.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
Requirements
|
|
Well-
Capitalized
Requirements
|
|
Actual
|
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
|
(Dollars in thousands)
|
As of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
The Company consolidated
|
|
|
|
|
|
|
|
|
|
|
|
Common equity Tier 1 capital to risk-weighted assets
|
$
|
203,314
|
|
|
4.5
|
%
|
|
N/A
|
|
N/A
|
|
$
|
555,644
|
|
|
12.3
|
%
|
Tier 1 leverage capital to average assets
|
256,216
|
|
|
4.0
|
|
|
N/A
|
|
N/A
|
|
576,531
|
|
|
9.0
|
|
Tier 1 capital to risk-weighted assets
|
271,086
|
|
|
6.0
|
|
|
N/A
|
|
N/A
|
|
576,531
|
|
|
12.8
|
|
Total capital to risk-weighted assets
|
361,448
|
|
|
8.0
|
|
|
N/A
|
|
N/A
|
|
633,061
|
|
|
14.0
|
|
Heritage Bank
|
|
|
|
|
|
|
|
|
|
|
|
Common equity Tier 1 capital to risk-weighted assets
|
203,112
|
|
|
4.5
|
|
|
$
|
293,383
|
|
|
6.5
|
%
|
|
563,630
|
|
|
12.5
|
|
Tier 1 leverage capital to average assets
|
256,051
|
|
|
4.0
|
|
|
320,064
|
|
|
5.0
|
|
|
563,630
|
|
|
8.8
|
|
Tier 1 capital to risk-weighted assets
|
270,815
|
|
|
6.0
|
|
|
361,087
|
|
|
8.0
|
|
|
563,630
|
|
|
12.5
|
|
Total capital to risk-weighted assets
|
361,087
|
|
|
8.0
|
|
|
451,359
|
|
|
10.0
|
|
|
620,124
|
|
|
13.7
|
|
As of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
The Company consolidated
|
|
|
|
|
|
|
|
|
|
|
|
Common equity Tier 1 capital to risk-weighted assets
|
$
|
211,110
|
|
|
4.5
|
%
|
|
N/A
|
|
N/A
|
|
$
|
541,154
|
|
|
11.5
|
%
|
Tier 1 leverage capital to average assets
|
212,578
|
|
|
4.0
|
|
|
N/A
|
|
N/A
|
|
561,749
|
|
|
10.6
|
|
Tier 1 capital to risk-weighted assets
|
281,479
|
|
|
6.0
|
|
|
N/A
|
|
N/A
|
|
561,749
|
|
|
12.0
|
|
Total capital to risk-weighted assets
|
375,306
|
|
|
8.0
|
|
|
N/A
|
|
N/A
|
|
598,226
|
|
|
12.8
|
|
Heritage Bank
|
|
|
|
|
|
|
|
|
|
|
|
Common equity Tier 1 capital to risk-weighted assets
|
211,017
|
|
|
4.5
|
|
|
$
|
304,803
|
|
|
6.5
|
%
|
|
538,560
|
|
|
11.5
|
|
Tier 1 leverage capital to average assets
|
211,187
|
|
|
4.0
|
|
|
263,984
|
|
|
5.0
|
|
|
538,560
|
|
|
10.2
|
|
Tier 1 capital to risk-weighted assets
|
281,356
|
|
|
6.0
|
|
|
375,142
|
|
|
8.0
|
|
|
538,560
|
|
|
11.5
|
|
Total capital to risk-weighted assets
|
375,142
|
|
|
8.0
|
|
|
468,927
|
|
|
10.0
|
|
|
575,037
|
|
|
12.3
|
|
As of December 31, 2020, the capital measures reflect the revised CECL capital transition provisions adopted by the Federal Reserve and the FDIC, that allows us the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period.
Under applicable capital requirements both the Company and the Bank are required to have a common equity Tier 1 capital ratio of 4.5%, a Tier 1 leverage ratio of 4.0%, a Tier 1 risk-based ratio of 6.0% and a total risk-based ratio of 8.0%. Both the Company and the Bank are also required to maintain a capital conservation buffer consisting of common equity Tier 1 capital above 2.5% of minimum risk based capital ratios to avoid restrictions on certain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers. At December 31, 2020, the capital conservation buffer was 6.0% and 5.7% for the Company and the Bank, respectively.
(23)Heritage Financial Corporation (Parent Company Only)
Following are the condensed financial statements of the Parent Company.
HERITAGE FINANCIAL CORPORATION
(PARENT COMPANY ONLY)
Condensed Statements of Financial Condition
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
(In thousands)
|
ASSETS
|
|
|
|
Cash and cash equivalents
|
$
|
9,736
|
|
|
$
|
21,481
|
|
Investment in subsidiary bank
|
828,426
|
|
|
806,717
|
|
Other assets
|
4,469
|
|
|
2,281
|
|
Total assets
|
$
|
842,631
|
|
|
$
|
830,479
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
Junior subordinated debentures
|
$
|
20,887
|
|
|
$
|
20,595
|
|
Other liabilities
|
1,305
|
|
|
573
|
|
Total stockholders’ equity
|
820,439
|
|
|
809,311
|
|
Total liabilities and stockholders’ equity
|
$
|
842,631
|
|
|
$
|
830,479
|
|
HERITAGE FINANCIAL CORPORATION
(PARENT COMPANY ONLY)
Condensed Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
(In thousands)
|
INTEREST INCOME:
|
|
|
|
|
|
Interest on interest earning deposits
|
$
|
16
|
|
|
$
|
57
|
|
|
$
|
7
|
|
Total interest income
|
16
|
|
|
57
|
|
|
7
|
|
INTEREST EXPENSE:
|
|
|
|
|
|
Junior subordinated debentures
|
890
|
|
|
1,339
|
|
|
1,263
|
|
Total interest expense
|
890
|
|
|
1,339
|
|
|
1,263
|
|
Net interest expense
|
(874)
|
|
|
(1,282)
|
|
|
(1,256)
|
|
NONINTEREST INCOME:
|
|
|
|
|
|
Dividends from subsidiary bank
|
39,000
|
|
|
47,000
|
|
|
30,000
|
|
Equity in undistributed income of subsidiary bank
|
12,685
|
|
|
25,186
|
|
|
29,258
|
|
Other income
|
5
|
|
|
39
|
|
|
22
|
|
Total noninterest income
|
51,690
|
|
|
72,225
|
|
|
59,280
|
|
NONINTEREST EXPENSE:
|
|
|
|
|
|
Professional services
|
495
|
|
|
517
|
|
|
3,063
|
|
Other expense
|
5,172
|
|
|
4,395
|
|
|
3,833
|
|
Total noninterest expense
|
5,667
|
|
|
4,912
|
|
|
6,896
|
|
Income before income taxes
|
45,149
|
|
|
66,031
|
|
|
51,128
|
|
Income tax benefit
|
(1,421)
|
|
|
(1,526)
|
|
|
(1,929)
|
|
Net income
|
$
|
46,570
|
|
|
$
|
67,557
|
|
|
$
|
53,057
|
|
HERITAGE FINANCIAL CORPORATION
(PARENT COMPANY ONLY)
Condensed Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
(In thousands)
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
$
|
46,570
|
|
|
$
|
67,557
|
|
|
$
|
53,057
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Equity in undistributed income of subsidiary bank
|
(12,685)
|
|
|
(25,186)
|
|
|
(29,258)
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
3,559
|
|
|
3,231
|
|
|
2,744
|
|
|
|
|
|
|
|
Net change in other assets and other liabilities
|
(1,333)
|
|
|
763
|
|
|
1,735
|
|
Net cash provided by operating activities
|
36,111
|
|
|
46,365
|
|
|
28,278
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Net cash received from acquisitions
|
—
|
|
|
—
|
|
|
1,782
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
—
|
|
|
—
|
|
|
1,782
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Common stock cash dividends paid
|
(28,859)
|
|
|
(30,908)
|
|
|
(25,791)
|
|
Proceeds from exercise of stock options
|
122
|
|
|
58
|
|
|
133
|
|
|
|
|
|
|
|
Repurchase of common stock
|
(19,119)
|
|
|
(8,636)
|
|
|
(1,704)
|
|
Net cash used in financing activities
|
(47,856)
|
|
|
(39,486)
|
|
|
(27,362)
|
|
Net (decrease) increase in cash and cash equivalents
|
(11,745)
|
|
|
6,879
|
|
|
2,698
|
|
Cash and cash equivalents at the beginning of year
|
21,481
|
|
|
14,602
|
|
|
11,904
|
|
Cash and cash equivalents at the end of year
|
$
|
9,736
|
|
|
$
|
21,481
|
|
|
$
|
14,602
|
|
|
|
|
|
|
|
Supplemental non-cash disclosures of cash flow information:
|
|
|
|
|
|
Common stock issued for business combinations
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
230,043
|
|
Capital contribution of net assets acquired in business combinations to Bank
|
—
|
|
|
—
|
|
|
228,261
|
|
(24)Selected Quarterly Financial Data (Unaudited)
Results of operations on a quarterly basis were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2020
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
(Dollars in thousands, except per share amounts)
|
Interest income
|
$
|
53,086
|
|
|
$
|
53,994
|
|
|
$
|
52,563
|
|
|
$
|
54,677
|
|
Interest expense
|
4,535
|
|
|
3,681
|
|
|
2,885
|
|
|
2,222
|
|
Net interest income
|
48,551
|
|
|
50,313
|
|
|
49,678
|
|
|
52,455
|
|
Provision for credit losses
|
7,946
|
|
|
28,563
|
|
|
2,730
|
|
|
(3,133)
|
|
Net interest income after provision for credit losses
|
40,605
|
|
|
21,750
|
|
|
46,948
|
|
|
55,588
|
|
Noninterest income
|
9,486
|
|
|
8,248
|
|
|
8,210
|
|
|
11,285
|
|
Noninterest expense
|
37,260
|
|
|
37,073
|
|
|
36,045
|
|
|
38,562
|
|
Income (loss) before income taxes
|
12,831
|
|
|
(7,075)
|
|
|
19,113
|
|
|
28,311
|
|
Income tax expense (benefit)
|
640
|
|
|
(936)
|
|
|
2,477
|
|
|
4,429
|
|
Net income (loss)
|
$
|
12,191
|
|
|
$
|
(6,139)
|
|
|
$
|
16,636
|
|
|
$
|
23,882
|
|
Basic earnings per common share
|
$
|
0.34
|
|
|
$
|
(0.17)
|
|
|
$
|
0.46
|
|
|
$
|
0.66
|
|
Diluted earnings per common share
|
0.34
|
|
|
(0.17)
|
|
|
0.46
|
|
|
0.66
|
|
Cash dividends declared on common stock
|
0.20
|
|
|
0.20
|
|
|
0.20
|
|
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
(Dollars in thousands, except per share amounts)
|
Interest income
|
$
|
53,807
|
|
|
$
|
55,216
|
|
|
$
|
54,884
|
|
|
$
|
53,943
|
|
Interest expense
|
4,019
|
|
|
4,680
|
|
|
4,641
|
|
|
4,828
|
|
Net interest income
|
49,788
|
|
|
50,536
|
|
|
50,243
|
|
|
49,115
|
|
Provision for credit losses
|
920
|
|
|
1,367
|
|
|
466
|
|
|
1,558
|
|
Net interest income after provision for credit losses
|
48,868
|
|
|
49,169
|
|
|
49,777
|
|
|
47,557
|
|
Noninterest income
|
7,429
|
|
|
7,564
|
|
|
8,458
|
|
|
9,011
|
|
Noninterest expense
|
36,525
|
|
|
37,547
|
|
|
36,719
|
|
|
35,997
|
|
Income before income taxes
|
19,772
|
|
|
19,186
|
|
|
21,516
|
|
|
20,571
|
|
Income tax expense
|
3,220
|
|
|
3,202
|
|
|
3,621
|
|
|
3,445
|
|
Net income
|
$
|
16,552
|
|
|
$
|
15,984
|
|
|
$
|
17,895
|
|
|
$
|
17,126
|
|
Basic earnings per common share
|
$
|
0.45
|
|
|
$
|
0.43
|
|
|
$
|
0.49
|
|
|
$
|
0.47
|
|
Diluted earnings per common share
|
0.45
|
|
|
0.43
|
|
|
0.48
|
|
|
0.47
|
|
Cash dividends declared on common stock
|
0.18
|
|
|
0.18
|
|
|
0.19
|
|
|
0.29
|
|
(25)Subsequent Events (Unaudited)
The CA Act was enacted into law on December 27, 2020. In accordance with the provisions, the Bank began originating the second round of SBA PPP loans to existing and new customers effective January 11, 2021. As of February 19, 2021, the Bank has funded 1,724 loans totaling $297.1 million. The average loan balance for funded SBA PPP loans under the CA Act was $172,000. The Bank earns 1% interest on these loans as well as a fee to cover processing costs.
Liquidity for the originations of these SBA PPP loans was provided from cash reserves. The Company was additionally approved to participate in the Federal Reserve's Paycheck Protection Program Liquidity Facility as a backup funding source effective January 20, 2021. The Paycheck Protection Program Liquidity Facility expires on March 31, 2021. The Company does not expect to participate in the facility.
Additionally, subsequent to year end through February 19, 2021, the Bank received principal and interest forgiveness payments from the SBA of $124.5 million, which represented approximately 13.9% of total originated first round SBA PPP loans and 17.4% of the outstanding balance of SBA PPP loans at December 31, 2020.