NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2021, 2020 and 2019
(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, the Bank. The Bank is headquartered in Olympia, Washington and conducts business from its 49 branch offices 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 the ACL on investment securities, management's estimate of the ACL on loans, management's estimate of the ACL on unfunded commitments, management's evaluation of goodwill impairment and management's estimate of the fair value of financial instruments.
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 year's net income or stockholders’ equity.
(c) Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and in banks and interest earning deposits due substantially from the Federal Reserve Bank. Cash equivalents have a maturity of 90 days or less at the time of purchase.
Investment Securities
Investment securities for which the Bank has the positive intent and ability to hold to maturity are classified as held to maturity and are carried at amortized cost. Investment securities held primarily for the purpose of selling in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses included in income. Investment securities not classified as held to maturity or trading are classified as available for sale and are reported at fair value with unrealized gains and losses, net of income taxes, as a separate component of other comprehensive income. The Bank determines the appropriate classification of investment securities at the time of purchase and reassesses the classification at each reporting date. Any subsequent reassessment of classification and transfer of investment securities available for sale to held to maturity are completed at the amortized cost basis plus or minus the amount of any remaining unrealized holding gain or loss reported in AOCI of the individual investment securities available for sale. The unrealized holding gain or loss at the date of the transfer continues to be recognized in AOCI, but that gain or loss is amortized over the remaining life of the security using the interest method. When the Company acquires another entity, all investment securities are recorded at fair value and classified as available for sale at the acquisition date.
Realized gains and losses on sales of investment securities are recorded on the trade date in gain on sale of investment securities, net on the Consolidated Statements of Income and determined using the specific identification method. Premiums and discounts on investment securities available for sale and held to maturity are amortized or accreted into income using the interest method. An investment security available for sale or held to maturity is placed on nonaccrual status at the time any principal or payments become more than 90 days delinquent and classified as past due after 30 days of nonpayment. Interest accrued, but not received for an investment security classified as nonaccrual is reversed against interest income during the period that the investment 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.
Accrued interest receivable on investment securities available for sale is excluded from the estimate of expected credit losses. 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.
ACL on Investment Securities Held to Maturity
The Company measures expected credit losses on investment securities held to maturity on a pooled, collective basis by major investment security type with similar risk characteristics. A historical lifetime probability of default and severity of loss in the event of default is derived or obtained from external sources and adjusted for the expected effects of reasonable and supportable forecasts over the expected lives of the investment securities on those historical credit losses. Expected credit losses on investment securities in the held to maturity portfolio that do not share similar risk characteristics with any of the pools are individually measured based on net realizable value, or the difference between the discounted value of the expected future cash flows, based on the original effective interest rate, and the recorded amortized cost basis of the investment securities.
Accrued interest receivable on investment securities held to maturity is excluded from the estimate of expected credit losses. Changes in the ACL on investment securities held to maturity are recorded as provision for credit losses expense. Losses are charged against the ACL when management believes the uncollectability of an investment security held to maturity is confirmed.
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, 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, indirect loans purchased by the Bank and 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 and net deferred loan origination fees and costs. Interest on loans is calculated using the interest method based on the daily balance of the principal amount outstanding and is credited to interest 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.
Acquired Loans:
Acquired loans 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 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 generally remain on accrual status between 30 days and 89 days past due.
The Bank did not designate loans with payment deferrals granted due to the COVID-19 Pandemic as past due during their modification period 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. 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 to 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 were 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. The CA Act extended relief offered under the CARES Act through January 1, 2022 or 60 days after the end of the national emergency declared by the President, whichever is earlier. The Bank elected to apply the temporary relief under the applicable guidance to certain eligible short-term modifications and did not classify the modifications as TDRs for accounting or disclosure purposes. However, COVID Modifications whose payment deferral exceeded 180 days following the loans' initial modification were classified as TDRs based on the Bank's internal policy.
Deferred Loan Origination Fees and Costs
Direct loan origination fees and costs on originated loans and premiums and discounts on acquired loans 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. When a loan is paid off prior to maturity, the remaining net deferred balance is immediately recognized into interest income. In the event loans are sold, the unamortized net deferred balance is recognized as a component of the gain or loss on the sale of loans.
ACL 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 debited against the ACL on loans when management believes the uncollectibility of a loan balance is confirmed and 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. Under this methodology, loans are either collectively evaluated if they share similar risk characteristics, including performing TDR loans, or individually evaluated if they do not share similar risk characteristics, including nonaccrual loans.
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.
Nonaccrual TDR loans are individually evaluated for credit loss except the original interest rate is used to discount the expected cash flows, not the rate specified in the restructuring.
The allowance for collectively evaluated loans is comprised of the baseline loss allowance, the macroeconomic allowance and the qualitative allowance. The baseline loss 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.
The 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, gross domestic product, 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 segment of loans with similar risk characteristics. 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’s ACL model also includes adjustments for qualitative factors, where appropriate. Since historical information (such as historical net losses and economic cycles) may not always, by themselves, provide a sufficient basis for determining future expected credit losses, the Bank periodically considers the need for qualitative adjustments to the ACL. The Bank has a bias for minimal qualitative risk factors unless internal or external factors indicate otherwise. Qualitative adjustments may be related to and include, but not limited to, factors such as: (i) management’s assessment of economic forecasts used in the model and how those forecasts align with management’s overall evaluation of current and expected economic conditions, (ii) organization specific risks such as credit concentrations, collateral or industry specific risks, regulatory risks, and external factors that may ultimately impact credit quality, (iii) other limitations associated with factors such as underwriting changes, acquisition of new portfolios, changes in portfolio segmentation, and (iv) management’s overall assessment of the adequacy of the ACL, including an assessment of model data inputs used to determine the ACL. The Bank has established metrics to estimate the qualitative risk factors 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 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 on sale 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 fund residential real estate loans and commitments to subsequently sell residential real estate loans are made during the period between the taking of the loan application and the closing of the loan. The timing of making these commitments is dependent upon the timing of the borrower’s election to lock-in the mortgage interest rate and fees prior to loan closing. 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. These sale commitments are typically 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 to be sold into the secondary market and forward commitments for the future delivery of these loans are accounted for as free-standing derivatives, however, the fair values of these freestanding derivatives were not significant at December 31, 2021 or December 31, 2020.
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 which 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. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics including investor type, loan type and maturity and recognized through a valuation allowance for an individual stratum to the extent fair value is less than the carrying amount. If the Company later determines 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.
In connection with the loan sales, the Bank typically makes representations and warranties about the underlying loans conforming to specified guidelines. If the underlying loans do not conform to the specifications, the Bank may have an obligation to repurchase the loans or indemnify the purchaser against any loss. The Bank believes the potential for material loss under these arrangements was remote at December 31, 2021, December 31, 2020 and December 31, 2019.
Servicing fee income is recorded for fees earned for servicing loans and reported as other noninterest income on the Consolidated Statements of Income. 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 servicing fee income. Late fees and ancillary fees related to loan servicing were not material for the years ended December 31, 2021, 2020, and 2019.
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 an 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, 2021, December 31, 2020 and December 31, 2019.
Other Real Estate Owned
Other real estate owned 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 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, 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 premises and equipment, including leasehold improvements, 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 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 and loans receivable are excluded from their estimates of credit losses. Additionally, no allowance has been established for accrued interest receivable on investment securities and loans receivable as interest accrued, but not received, is reversed timely in accordance with the policies stated above.
Other Intangible Assets
Other intangible assets represent core deposit intangibles acquired in business combinations. The fair value of the core deposit intangible 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 core deposit intangibles are amortized on an accelerated basis following a pattern of the economic benefits of the core deposit intangible over an estimated useful life of the deposit relationships acquired. 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 the 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.
For the goodwill impairment assessment, the Company either assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not the fair value of the reporting unit is less than its carrying value and a quantitative test is needed or opts to bypass the qualitative analysis and performs a quantitative analysis only. 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. Operating leases 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 (17)
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 other loans and are secured. The Company has evaluated the variable interests held by the Company in each LIHTC investment and determined the Company does not have controlling financial interests in such investments and is not the primary beneficiary.
New Market Tax Credit Investments
Through May 2021, the Company held $25.0 million of qualified equity investments in three certified development entities 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 dissolved the NMTC investment during the year ended December 31, 2021 after 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. Prior to dissolution, the Company accounted for its NMTC on the equity method and reported the investment balance in prepaid expenses and other assets on the Consolidated Statements of Financial Condition and the related investment income was recognized in other income on the Consolidated Statements of Income.
Deferred Compensation Plans
The Company has a Deferred Compensation Plan and has entered into similar 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 Company's merger with Premier Commercial Bancorp in 2018, 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 Company 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 Company 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 for derivatives with the customer is controlled through the credit approval process, amount limits, and monitoring procedures and is concentrated within our primary market areas. Credit risk for derivatives with third-parties is concentrated among four well-known broker dealers.
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 and the provision for credit losses on investment securities.
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 or Adopted Accounting Pronouncements
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 ROU asset and liability for all leases with a term greater than 12 months regardless of their classification. All cash payments are 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 of leases with a term of twelve months or less. The adoption of this ASU resulted in the recognition of operating lease ROU 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 ASU 2020-02, was originally issued in June 2016. This ASU replaced the incurred loss methodology with an expected loss methodology, which is commonly referred to as the "CECL" methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans receivable. It also applies to off-balance sheet credit exposures such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments. In addition, CECL Adoption made changes to the accounting for credit losses on investment securities available for sale. 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 was 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 using the modified retrospective method for all financial assets measured at amortized cost, investment securities available for sale and unfunded commitments. At adoption, the Bank elected not to measure an ACL on accrued interest receivable on loans receivable or accrued interest receivable on investment securities available for sale as Bank policy is to reverse interest income for uncollectible accrued interest receivable balances in a timely manner. 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 only held investment securities available for sale, 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 replaced the allowance for loan losses 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, which now additionally includes the provision for credit losses on unfunded commitments discussed below.
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 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, which now additionally includes the provision for credit losses on loans discussed above. 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 2020-04, Reference Rate Reform (Topic 848), as amended by ASU 2021-01, was issued in March 2020 and provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this ASU are effective for all entities as of March 12, 2020 through December 31, 2022. The amendments are elective, apply to all entities, and provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The Bank’s interest rate swap-related transactions are the majority of the Company's LIBOR exposure. Effective January 25, 2021, the Company adhered 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. The Company does not expect this ASU to have a material impact on its business operations and the Condensed Consolidated Financial Statements.
(2)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.
During the three months ended September 30, 2021, the Company reassessed and transferred, at fair value, $244.8 million of U.S. government and agency securities from the available for sale classification to the held to maturity classification. The net unrealized after tax gain of $1.3 million remained in AOCI to be amortized over the remaining life of the securities, offsetting the related amortization of discount or premium on the transferred securities. No gains or losses were recognized at the time of the transfer.
There were no investment securities classified as trading at December 31, 2021 or December 31, 2020. There were no investment securities classified as held to maturity at December 31, 2020.
(a) Investment Securities by Classification Type and Maturity
The following tables present the amortized cost and fair value of investment securities at the dates indicated and the corresponding amounts of gross unrealized gains and losses, including the corresponding amounts of gross unrealized gains and losses on investment securities available for sale recognized in AOCI:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| (In thousands) |
Investment securities available for sale: | | | | | | | |
U.S. government and agency securities | $ | 21,494 | | | $ | 55 | | | $ | (176) | | | $ | 21,373 | |
Municipal securities | 213,158 | | | 8,908 | | | (854) | | | 221,212 | |
Residential CMO and MBS | 307,366 | | | 2,111 | | | (2,593) | | | 306,884 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| (In thousands) |
Commercial CMO and MBS | 313,169 | | | 3,891 | | | (1,199) | | | 315,861 | |
Corporate obligations | 2,007 | | | 7 | | | — | | | 2,014 | |
Other asset-backed securities | 26,638 | | | 369 | | | (16) | | | 26,991 | |
Total | $ | 883,832 | | | $ | 15,341 | | | $ | (4,838) | | | $ | 894,335 | |
| | | | | | | |
Investment securities held to maturity: | | | | | | | |
U.S. government and agency securities | $ | 141,011 | | | $ | 120 | | | $ | (1,768) | | | $ | 139,363 | |
| | | | | | | |
Residential CMO and MBS | 24,529 | | | — | | | (153) | | | 24,376 | |
Commercial CMO and MBS | 217,853 | | | — | | | (5,261) | | | 212,592 | |
| | | | | | | |
| | | | | | | |
Total | $ | 383,393 | | | $ | 120 | | | $ | (7,182) | | | $ | 376,331 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | | | Fair Value |
| (In thousands) |
Investment securities available for sale: | | | | | | | | | |
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 | |
The amortized cost and fair value of investment securities at December 31, 2021, 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.
| | | | | | | | | | | | | | | | | | | | | | | |
| Securities Available for Sale | | Securities Held to Maturity |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| (In thousands) |
Due in one year or less | $ | 7,009 | | | $ | 7,095 | | | $ | — | | | $ | — | |
Due after one year through five years | 28,441 | | | 29,608 | | | — | | | — | |
Due after five years through ten years | 71,319 | | | 74,089 | | | 68,210 | | | 68,014 | |
Due after ten years | 156,528 | | | 160,798 | | | 72,801 | | | 71,349 | |
| | | | | | | |
Total investment securities due at a single maturity date | 263,297 | | | 271,590 | | | 141,011 | | | 139,363 | |
Mortgage-backed securities (1) | 620,535 | | | 622,745 | | | 242,382 | | | 236,968 | |
Total | $ | 883,832 | | | $ | 894,335 | | | $ | 383,393 | | | $ | 376,331 | |
(1) Mortgage-backed securities, which have prepayment provisions, are not assigned to maturity categories due to fluctuations in their payment speed.
There were no holdings of investment 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, 2021 and December 31, 2020.
(b) Unrealized Losses on Investment Securities Available for Sale
The following tables show the gross unrealized losses and fair value of the Company’s investment securities available for sale for which an ACL on investment securities available for sale has not been recorded, aggregated by investment category
and length of time the individual securities have been in a continuous unrealized loss position at the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| 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 | $ | 14,828 | | | $ | (176) | | | $ | — | | | $ | — | | | $ | 14,828 | | | $ | (176) | |
Municipal securities | 29,774 | | | (619) | | | 9,351 | | | (235) | | | 39,125 | | | (854) | |
Residential CMO and MBS | 204,039 | | | (2,470) | | | 19,862 | | | (123) | | | 223,901 | | | (2,593) | |
Commercial CMO and MBS | 83,283 | | | (1,161) | | | 1,936 | | | (38) | | | 85,219 | | | (1,199) | |
| | | | | | | | | | | |
Other asset-backed securities | 2,763 | | | (9) | | | 1,118 | | | (7) | | | 3,881 | | | (16) | |
Total | $ | 334,687 | | | $ | (4,435) | | | $ | 32,267 | | | $ | (403) | | | $ | 366,954 | | | $ | (4,838) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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) | |
(c) ACL on Investment Securities
The Company evaluated investment securities available for sale as of December 31, 2021 and December 31, 2020 and determined that any declines in fair value were attributable to changes in interest rates relative to where these investments fall within the yield curve and individual characteristics. Management monitors published credit ratings for adverse changes for all rated investment securities and none of these securities had a below investment grade credit rating as of both December 31, 2021 and December 31, 2020. In addition, the Company does not intend to sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before the recovery of the amortized cost basis, which may be upon maturity. Therefore, no ACL on investment securities available for sale was recorded as of December 31, 2021 and December 31, 2020.
The Company also evaluated investment securities held to maturity for current expected credit losses. There were no investment securities held to maturity classified as nonaccrual or past due as of December 31, 2021 and all were issued by the U.S. government and its agencies and either explicitly or implicitly guaranteed by the U.S. government, highly rated by major credit rating agencies and have a long history of no credit losses. Accordingly, the Company did not measure expected credit losses on investment securities held to maturity since the historical credit loss information adjusted for current conditions and reasonable and supportable forecasts results in an expectation that nonpayment of the amortized cost basis is zero. Therefore, no ACL on investment securities held to maturity was recorded as of December 31, 2021.
(d) 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, 2021, December 31, 2020 and December 31, 2019:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
Gross realized gains | $ | 29 | | | $ | 1,537 | | | $ | 558 | |
Gross realized losses | — | | | (19) | | | (228) | |
Net realized gains | $ | 29 | | | $ | 1,518 | | | $ | 330 | |
(e) Pledged Securities
The following table summarizes the amortized cost and fair value of investment securities that are pledged as collateral for the following obligations at December 31, 2021 and December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| (In thousands) |
Washington and Oregon state public deposits | $ | 128,216 | | | $ | 130,217 | | | $ | 119,652 | | | $ | 124,228 | |
Federal Reserve Bank credit facility | 61,057 | | | 59,674 | | | — | | | — | |
Securities sold under agreement to repurchase | 59,887 | | | 59,655 | | | 38,630 | | | 39,945 | |
Other securities pledged | 56,419 | | | 55,633 | | | 29,665 | | | 30,717 | |
Total | $ | 305,579 | | | $ | 305,179 | | | $ | 187,947 | | | $ | 194,890 | |
(f) Accrued Interest Receivable
Accrued interest receivable excluded from the amortized cost on investment securities available for sale totaled $3.5 million and $3.6 million at December 31, 2021 and December 31, 2020, respectively. Accrued interest receivable excluded from the amortized cost on investment securities held to maturity totaled $1.1 million at December 31, 2021.
No amounts of accrued interest receivable on investment securities available for sale or held to maturity were reversed against interest income on investment securities available for sale during the years ended December 31, 2021, 2020, and 2019.
(3)Loans Receivable
The Bank 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 Bank's amortized cost of loans receivable as it was deemed insignificant.
(a) Loan Origination/Risk Management
The Bank 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.
The Bank 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 Bank 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, 2021 and December 31, 2020 consisted of the following portfolio segments and classes:
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| (In thousands) |
Commercial business: | | | |
Commercial and industrial | $ | 621,567 | | | $ | 733,098 | |
SBA PPP | 145,840 | | | 715,121 | |
Owner-occupied CRE | 931,150 | | | 856,684 | |
Non-owner occupied CRE | 1,493,099 | | | 1,410,303 | |
Total commercial business | 3,191,656 | | | 3,715,206 | |
Residential real estate | 164,582 | | | 122,756 | |
Real estate construction and land development: | | | |
Residential | 85,547 | | | 78,259 | |
Commercial and multifamily | 141,336 | | | 227,454 | |
Total real estate construction and land development | 226,883 | | | 305,713 | |
Consumer | 232,541 | | | 324,972 | |
Loans receivable | 3,815,662 | | | 4,468,647 | |
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| (In thousands) |
Allowance for credit losses on loans | (42,361) | | | (70,185) | |
Loans receivable, net | $ | 3,773,301 | | | $ | 4,398,462 | |
| | | |
Balances included in the amortized cost of loans receivable: | | | |
Unamortized net discount on acquired loans | $ | (3,938) | | | $ | (6,575) | |
Unamortized net deferred fee | $ | (7,952) | | | $ | (15,458) | |
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 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.
Owner-occupied and non-owner occupied CRE. The Bank originates CRE 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. CRE 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 CRE loans and non-owner occupied CRE loans. However, owner-occupied CRE 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 Bank’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 Bank sells a portion of originated residential real estate loans in the secondary market.
Real Estate Construction and Land Development:
The Bank 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 owner is the borrower. The Bank 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 Bank’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 Bank’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 Bank 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 Bank 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 overall credit risk for this segment. To further reduce the risk, trend reports are reviewed by management on a regular basis.
The Bank 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 Bank ceased indirect auto loan originations in March 2020.
(b) Concentrations of Credit
Most of the Bank’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. Additionally, our loan portfolio is concentrated in commercial loans, including commercial business loans and commercial and multifamily real estate construction and land development loans. Commercial loans are generally viewed as having more inherent risk of default than residential real estate loans or other consumer loans. Also, the commercial loan balance per borrower is typically larger than that for residential real estate loans and 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 Bank’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, (v) past due status and (vi) the general economic conditions of the United States of America, and specifically the states of Washington and Oregon. The Bank 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” 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. 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.
•Grade 9: This grade includes “Doubtful” loans in accordance with regulatory guidelines and the Bank 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 Bank 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.
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 and scheduled loan reviews. 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.
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 SM loan grade is transitory in that the Bank is waiting on additional information to determine the likelihood and extent of the potential loss. The likelihood of loss for SM graded loans, however, is greater than Watch graded loans because there has been measurable credit deterioration. Loans with a SS grade are generally accrual loans at risk of being classified as nonaccrual loans and includes all of our loans classified as nonaccrual. For Doubtful and Loss graded loans, the Bank is almost certain of the losses and the outstanding principal balances are generally charged off to the realizable value.
Regulatory agencies provided guidance regarding credit risk ratings, delinquency reporting and nonaccrual status for loans adversely impacted by the COVID-19 Pandemic. The Bank has and will continue to exercise judgment in determining the risk rating for impacted borrowers and will not automatically adversely classify credits that have been affected by the COVID-19 Pandemic. The Bank did not designate loans with payment deferrals granted due to the COVID-19 Pandemic as past due because of the deferral. Due to the short-term nature of the forbearance and other relief programs the Bank was offering as a result of the COVID-19 Pandemic, borrowers granted relief under these programs were generally not reported as nonaccrual during the deferral period.
The following table presents the amortized cost of loans receivable by risk grade as of December 31, 2021 and December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | Revolving Loans | | Revolving Loans Converted to Term Loans (1) | | Loans Receivable |
| Term Loans Amortized Cost Basis by Origination Year | | | |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | | |
| (In thousands) |
Commercial business: |
Commercial and industrial |
Pass | $ | 95,960 | | | $ | 100,193 | | | $ | 94,657 | | | $ | 54,707 | | | $ | 28,558 | | | $ | 77,294 | | | $ | 127,651 | | | $ | 1,035 | | | $ | 580,055 | |
SM | 326 | | | 884 | | | 5,998 | | | 1,425 | | | 2,223 | | | 2,401 | | | 2,048 | | | 353 | | | 15,658 | |
SS | 1,443 | | | 1,287 | | | 5,912 | | | 2,809 | | | 2,526 | | | 6,907 | | | 4,402 | | | 568 | | | 25,854 | |
| | | | | | | | | | | | | | | | | |
Total | 97,729 | | | 102,364 | | | 106,567 | | | 58,941 | | | 33,307 | | | 86,602 | | | 134,101 | | | 1,956 | | | 621,567 | |
SBA PPP |
Pass | 139,253 | | | 6,587 | | | — | | | — | | | — | | | — | | | — | | | — | | | 145,840 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Owner-occupied CRE |
Pass | 182,742 | | | 90,609 | | | 188,380 | | | 73,714 | | | 66,039 | | | 273,518 | | | — | | | 72 | | | 875,074 | |
SM | 264 | | | — | | | 3,079 | | | 7,521 | | | 3,937 | | | 16,724 | | | — | | | — | | | 31,525 | |
SS | — | | | 1,332 | | | — | | | 3,787 | | | 3,014 | | | 16,418 | | | — | | | — | | | 24,551 | |
| | | | | | | | | | | | | | | | | |
Total | 183,006 | | | 91,941 | | | 191,459 | | | 85,022 | | | 72,990 | | | 306,660 | | | — | | | 72 | | | 931,150 | |
Non-owner occupied CRE |
Pass | 187,860 | | | 185,650 | | | 244,863 | | | 149,090 | | | 144,896 | | | 499,486 | | | — | | | — | | | 1,411,845 | |
SM | — | | | — | | | 5,674 | | | — | | | 15,482 | | | 2,400 | | | — | | | — | | | 23,556 | |
SS | — | | | — | | | — | | | 3,379 | | | — | | | 54,319 | | | — | | | — | | | 57,698 | |
| | | | | | | | | | | | | | | | | |
Total | 187,860 | | | 185,650 | | | 250,537 | | | 152,469 | | | 160,378 | | | 556,205 | | | — | | | — | | | 1,493,099 | |
Total commercial business |
Pass | 605,815 | | | 383,039 | | | 527,900 | | | 277,511 | | | 239,493 | | | 850,298 | | | 127,651 | | | 1,107 | | | 3,012,814 | |
SM | 590 | | | 884 | | | 14,751 | | | 8,946 | | | 21,642 | | | 21,525 | | | 2,048 | | | 353 | | | 70,739 | |
SS | 1,443 | | | 2,619 | | | 5,912 | | | 9,975 | | | 5,540 | | | 77,644 | | | 4,402 | | | 568 | | | 108,103 | |
| | | | | | | | | | | | | | | | | |
Total | 607,848 | | | 386,542 | | | 548,563 | | | 296,432 | | | 266,675 | | | 949,467 | | | 134,101 | | | 2,028 | | | 3,191,656 | |
Residential real estate |
Pass | 85,089 | | | 27,090 | | | 23,295 | | | 5,672 | | | 6,141 | | | 16,891 | | | — | | | — | | | 164,178 | |
| | | | | | | | | | | | | | | | | |
SS | — | | | — | | | — | | | — | | | — | | | 404 | | | — | | | — | | | 404 | |
| | | | | | | | | | | | | | | | | |
Total | 85,089 | | | 27,090 | | | 23,295 | | | 5,672 | | | 6,141 | | | 17,295 | | | — | | | — | | | 164,582 | |
Real estate construction and land development: |
Residential |
Pass | 44,892 | | | 23,728 | | | 12,266 | | | 2,921 | | | 389 | | | 1,351 | | | — | | | — | | | 85,547 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | Revolving Loans | | Revolving Loans Converted to Term Loans (1) | | Loans Receivable |
| Term Loans Amortized Cost Basis by Origination Year | | | |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | | |
Commercial and multifamily |
Pass | 56,448 | | | 41,616 | | | 34,117 | | | 5,794 | | | 710 | | | 1,379 | | | — | | | — | | | 140,064 | |
SM | — | | | — | | | 68 | | | — | | | — | | | 213 | | | — | | | — | | | 281 | |
SS | — | | | 571 | | | — | | | — | | | — | | | 420 | | | — | | | — | | | 991 | |
| | | | | | | | | | | | | | | | | |
Total | 56,448 | | | 42,187 | | | 34,185 | | | 5,794 | | | 710 | | | 2,012 | | | — | | | — | | | 141,336 | |
Total real estate construction and land development |
Pass | 101,340 | | | 65,344 | | | 46,383 | | | 8,715 | | | 1,099 | | | 2,730 | | | — | | | — | | | 225,611 | |
SM | — | | | — | | | 68 | | | — | | | — | | | 213 | | | — | | | — | | | 281 | |
SS | — | | | 571 | | | — | | | — | | | — | | | 420 | | | — | | | — | | | 991 | |
| | | | | | | | | | | | | | | | | |
Total | 101,340 | | | 65,915 | | | 46,451 | | | 8,715 | | | 1,099 | | | 3,363 | | | — | | | — | | | 226,883 | |
Consumer |
Pass | 1,286 | | | 15,737 | | | 46,041 | | | 29,819 | | | 15,068 | | | 13,026 | | | 108,492 | | | 120 | | | 229,589 | |
| | | | | | | | | | | | | | | | | |
SS | — | | | 181 | | | 657 | | | 476 | | | 542 | | | 1,043 | | | 36 | | | 17 | | | 2,952 | |
| | | | | | | | | | | | | | | | | |
Total | 1,286 | | | 15,918 | | | 46,698 | | | 30,295 | | | 15,610 | | | 14,069 | | | 108,528 | | | 137 | | | 232,541 | |
Loans receivable |
Pass | 793,530 | | | 491,210 | | | 643,619 | | | 321,717 | | | 261,801 | | | 882,945 | | | 236,143 | | | 1,227 | | | 3,632,192 | |
SM | 590 | | | 884 | | | 14,819 | | | 8,946 | | | 21,642 | | | 21,738 | | | 2,048 | | | 353 | | | 71,020 | |
SS | 1,443 | | | 3,371 | | | 6,569 | | | 10,451 | | | 6,082 | | | 79,511 | | | 4,438 | | | 585 | | | 112,450 | |
| | | | | | | | | | | | | | | | | |
Total | $ | 795,563 | | | $ | 495,465 | | | $ | 665,007 | | | $ | 341,114 | | | $ | 289,525 | | | $ | 984,194 | | | $ | 242,629 | | | $ | 2,165 | | | $ | 3,815,662 | |
(1) Represents the loans receivable balance at December 31, 2021 which was converted from a revolving loan to an amortizing loan during the year ended December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | Revolving Loans | | Revolving Loans Converted to Term Loans (1) | | Loans Receivable | | |
| Term Loans Amortized Cost Basis by Origination Year | | | | | |
| 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 | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
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 | | | |
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 the 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.
(d) Nonaccrual Loans
The following table presents the amortized cost of nonaccrual loans for the dates indicated:
| | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Nonaccrual without ACL | | Nonaccrual with ACL | | Total Nonaccrual |
| (In thousands) |
Commercial business: | | | | | |
Commercial and industrial | $ | 6,454 | | | $ | 3,827 | | | $ | 10,281 | |
Owner-occupied CRE | 3,036 | | | 5,138 | | | 8,174 | |
Non-owner occupied CRE | 1,273 | | | 3,379 | | | 4,652 | |
Total commercial business | 10,763 | | | 12,344 | | | 23,107 | |
Residential real estate | — | | | 47 | | | 47 | |
Real estate construction and land development: | | | | | |
| | | | | |
Commercial and multifamily | — | | | 571 | | | 571 | |
| | | | | |
Consumer | — | | | 29 | | | 29 | |
Total | $ | 10,763 | | | $ | 12,991 | | | $ | 23,754 | |
| | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | |
| Nonaccrual without ACL | | Nonaccrual with ACL | | Total Nonaccrual | | |
| (In thousands) |
Commercial business: | | | | | | | |
Commercial and industrial | $ | 22,039 | | | $ | 9,208 | | | $ | 31,247 | | | |
Owner-occupied CRE | 4,693 | | | 13,700 | | | 18,393 | | | |
Non-owner occupied CRE | 3,424 | | | 3,722 | | | 7,146 | | | |
Total commercial business | 30,156 | | | 26,630 | | | 56,786 | | | |
Residential real estate | 67 | | | 117 | | | 184 | | | |
Real estate construction and land development: | | | | | | | |
| | | | | | | |
Commercial and multifamily | 572 | | | 450 | | | 1,022 | | | |
| | | | | | | |
Consumer | 31 | | | 69 | | | 100 | | | |
Total | $ | 30,826 | | | $ | 27,266 | | | $ | 58,092 | | | |
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, 2021 | | December 31, 2020 |
| Interest Income Reversed | | Interest Income Recognized | | Interest Income Reversed | | Interest Income Recognized |
| (In thousands) |
Commercial business: | | | | | | | |
Commercial and industrial | $ | (10) | | | $ | 2,295 | | | $ | (95) | | | $ | 434 | |
Owner-occupied CRE | — | | | 117 | | | (238) | | | 89 | |
Non-owner occupied CRE | — | | | 601 | | | (208) | | | 67 | |
Total commercial business | (10) | | | 3,013 | | | (541) | | | 590 | |
Residential real estate | — | | | — | | | (2) | | | 2 | |
Real estate construction and land development: | | | | | | | |
Residential | — | | | 71 | | | — | | | — | |
Commercial and multifamily | — | | | — | | | (11) | | | — | |
Total real estate construction and land development | — | | | 71 | | | (11) | | | — | |
Consumer | (1) | | | 52 | | | (1) | | | 47 | |
Total | $ | (11) | | | $ | 3,136 | | | $ | (555) | | | $ | 639 | |
For the years ended December 31, 2021 and 2020, no interest income was recognized subsequent to a loan’s classification as nonaccrual, except as indicated in the tables above due to payment in full.
(e) Past due loans
The Bank 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, 2021 and December 31, 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| 30-89 Days | | 90 Days or Greater | | Total Past Due | | Current | | Loans Receivable |
| (In thousands) |
Commercial business: |
Commercial and industrial | $ | 1,858 | | | $ | 6,821 | | | $ | 8,679 | | | $ | 612,888 | | | $ | 621,567 | |
SBA PPP | 223 | | | 293 | | | 516 | | | 145,324 | | | 145,840 | |
Owner-occupied CRE | 2,397 | | | 112 | | | 2,509 | | | 928,641 | | | 931,150 | |
Non-owner occupied CRE | — | | | — | | | — | | | 1,493,099 | | | 1,493,099 | |
Total commercial business | 4,478 | | | 7,226 | | | 11,704 | | | 3,179,952 | | | 3,191,656 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| 30-89 Days | | 90 Days or Greater | | Total Past Due | | Current | | Loans Receivable |
| (In thousands) |
Residential real estate | 420 | | | 10 | | | 430 | | | 164,152 | | | 164,582 | |
Real estate construction and land development: |
Residential | 792 | | | — | | | 792 | | | 84,755 | | | 85,547 | |
Commercial and multifamily | 3,474 | | | 571 | | | 4,045 | | | 137,291 | | | 141,336 | |
Total real estate construction and land development | 4,266 | | | 571 | | | 4,837 | | | 222,046 | | | 226,883 | |
Consumer | 1,026 | | | — | | | 1,026 | | | 231,515 | | | 232,541 | |
Total | $ | 10,190 | | | $ | 7,807 | | | $ | 17,997 | | | $ | 3,797,665 | | | $ | 3,815,662 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
There was one SBA PPP loan 90 days or more past due that was still accruing interest as of December 31, 2021 with an amortized cost of $293,000. There were no loans 90 days or more past due that were still accruing interest as of December 31, 2020.
(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, 2021 and December 31, 2020 were as follows, with balances representing the amortized cost of the loan classified by the primary collateral category of each loan if multiple collateral sources secure the loan:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| CRE | | Farmland | | Residential Real Estate | | Other | | Total |
| (In thousands) |
Commercial business: |
Commercial and industrial | $ | 1,499 | | | $ | 4,362 | | | $ | 1,036 | | | $ | 245 | | | $ | 7,142 | |
Owner-occupied CRE | 3,035 | | | — | | | — | | | — | | | 3,035 | |
Non-owner occupied CRE | 1,273 | | | — | | | — | | | — | | | 1,273 | |
Total commercial business | 5,807 | | | 4,362 | | | 1,036 | | | 245 | | | 11,450 | |
| | | | | | | | | |
Real estate construction and land development: |
| | | | | | | | | |
Commercial and multifamily | 571 | | | — | | | — | | | — | | | 571 | |
| | | | | | | | | |
| | | | | | | | | |
Total | $ | 6,378 | | | $ | 4,362 | | | $ | 1,036 | | | $ | 245 | | | $ | 12,021 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| CRE | | Farmland | | Residential Real Estate | | | | Other | | Total |
| (In thousands) |
Commercial business: |
Commercial and industrial | $ | 1,893 | | | $ | 18,738 | | | $ | 584 | | | | | $ | 1,405 | | | $ | 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 | | | | | 1,405 | | | 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 | | | | | $ | 1,405 | | | $ | 31,406 | |
There have been no significant changes to the collateral securing loans individually evaluated 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, 2021, except changes due to additions or removals of loans in this classification.
(g) Troubled Debt Restructured Loans
Loans that were modified as TDR loans are set forth in the following tables for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Number of Contracts | | Amortized Cost (1) (2) | | Number of Contracts | | Amortized Cost (1) (2) | | Number of Contracts | | Amortized Cost (1) (2) |
| (Dollars in thousands) |
Commercial business: | | | | | | | | | | | |
Commercial and industrial | 31 | | | $ | 9,710 | | | 75 | | | $ | 36,118 | | | 44 | | | $ | 31,122 | |
Owner-occupied CRE | 7 | | | 16,565 | | | 14 | | | 19,326 | | | 4 | | | 1,695 | |
Non-owner occupied CRE | 4 | | | 17,640 | | | 9 | | | 25,728 | | | 4 | | | 2,208 | |
Total commercial business | 42 | | 43,915 | | | 98 | | | 81,172 | | | 52 | | | 35,025 | |
Residential real estate | 1 | | | 178 | | | 1 | | | 22 | | | — | | | — | |
Real estate construction and land development: |
Residential | — | | | — | | | 4 | | | 1,926 | | | 1 | | | 237 | |
Commercial and multifamily | 1 | | | 450 | | | 1 | | | 450 | | | — | | | — | |
Total real estate construction and land development | 1 | | | 450 | | | 5 | | | 2,376 | | | 1 | | | 237 | |
Consumer | 22 | | | 511 | | | 48 | | | 1,198 | | | 12 | | | 157 | |
Total | 66 | | | $ | 45,054 | | | 152 | | | $ | 84,768 | | | 65 | | | $ | 35,419 | |
(1)Number of contracts and amortized cost represent loans which have balances as of period end, net of subsequent payments after modifications. Certain TDR loans may have been paid-down or charged-off during the years ended December 31, 2021, 2020 and 2019.
(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 Bank had an ACL on loans of $3.1 million, $7.5 million and $1.0 million at December 31, 2021, December 31, 2020, and December 31, 2019, respectively, related to these TDR loans which were restructured during the year ended December 31, 2021, 2020 and 2019, respectively.
The unfunded commitment to borrowers related to TDR loans was $5.7 million and $2.6 million at December 31, 2021 and December 31, 2020, respectively.
The following tables present loans that were modified in a TDR and subsequently defaulted within twelve months from the modification date during the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| 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 | 6 | | | $ | 1,379 | | | 4 | | | $ | 2,136 | | | 13 | | | $ | 12,854 | |
Owner-occupied CRE | — | | | — | | | 2 | | | 1,369 | | | 3 | | | 1,142 | |
Non-owner occupied CRE | — | | | — | | | 2 | | | 1,811 | | | 1 | | | 52 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total | 6 | | | $ | 1,379 | | | 8 | | | $ | 5,316 | | | 17 | | | $ | 14,048 | |
(1)Number of contracts and amortized cost represent TDR loans which have balances as of period end, net of subsequent payments after modifications. Certain TDR loans may have been paid-down or charged-off during the years ended December 31, 2021, 2020 and 2019.
During the years ended December 31, 2021, 2020, and 2019, six, eight and 11 TDR loans defaulted because each was past its modified maturity date and the borrower had not subsequently repaid the credits. The Bank chose not to further extend the maturity date on these TDR loans. The remaining six TDR loans for the year ended December 31, 2019 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 $111,000, $229,000, and $88,000 at December 31, 2021, 2020, and 2019.
(h) 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, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
Balance outstanding at the beginning of year | $ | 7,694 | | | $ | 8,144 | | | $ | 8,367 | |
| | | | | |
Principal additions | — | | | 199 | | | — | |
| | | | | |
Principal reductions | (572) | | | (649) | | | (223) | |
Balance outstanding at the end of year | $ | 7,122 | | | $ | 7,694 | | | $ | 8,144 | |
The Company had $255,000 and $545,000 of unfunded commitments to related parties and all related party loans were performing in accordance with the underlying loan agreements as of December 31, 2021 and December 31, 2020.
(i) 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, 2021 and December 31, 2020, the balance of loans held for sale was $1.5 million and $4.9 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 during the periods indicated:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
| | | | | |
Originated (1) | $ | 190,734 | | | $ | 191,207 | | | $ | 150,030 | |
Sold | 89,899 | | | 137,580 | | | 68,238 | |
Gain on sale of loans, net (2) | 3,644 | | | 5,044 | | | 2,159 | |
(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.
(j) Commercial Loan Sales, Servicing, and Commercial Servicing Asset
Details of loans serviced for others are as follows:
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| (In thousands) |
Loans serviced for others with participating interest, gross loan balance | $ | 30,852 | | | $ | 32,131 | |
Loans serviced for others with participating interest, participation balance owned by Bank (1) | 7,088 | | | 7,842 | |
(1) Included in the balance of loans receivable on the Consolidated Statements of Financial Condition.
The Company recognized $320,000, $423,000 and $532,000 of servicing income for the years ended December 31, 2021, 2020 and 2019, respectively.
The Company's servicing asset at December 31, 2021 and December 31, 2020 was $343,000 and $583,000, respectively. There was no valuation allowance on the Company's servicing asset as of December 31, 2021 and December 31, 2020.
(k) Accrued interest receivable on loans receivable
Accrued interest receivable on loans receivable totaled $10.1 million and $15.8 million at December 31, 2021 and December 31, 2020, respectively. It is excluded from the calculation of the ACL on loans as interest accrued, but not received, is reversed timely.
(4)Allowance for Credit Losses on Loans
Effective January 1, 2020, the Bank adopted ASU 2016-13. CECL Adoption replaced the allowance for loan losses with the ACL on loans and replaced the related provision for loan losses with the provision for credit losses on loans.
The baseline loss rates used to calculate the ACL on loans at December 31, 2021 utilized the Bank's average quarterly historical loss information from December 31, 2012 through the balance sheet date. There were no changes to this assumption during the year ended December 31, 2021. The Bank believes the historic loss rates are viable inputs to the current CECL model 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 December 31, 2021 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, 2021.
The reasonable and supportable period and subsequent reversion period used in the CECL model was five quarters and two quarters at December 31, 2021. There were no changes to these assumptions during the year ended December 31, 2021. Management believes forecasts beyond this seven 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 increases.
During the year ended December 31, 2021, the ACL on loans decreased $27.8 million, or 39.6%, due primarily to a reversal of provision for credit losses on loans of $27.3 million. The reversal of provision for credit losses was primarily driven by improvements in the economic forecast used in the CECL model at December 31, 2021 as compared to the forecast used in the CECL model at December 31, 2020.
The ACL on loans at December 31, 2021 and December 31, 2020 did 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, 2021, December 31, 2020 and December 31, 2019 is as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
Balance at the beginning of the year | $ | 70,185 | | | $ | 36,171 | | | $ | 35,042 | |
Impact of CECL Adoption | — | | | 1,822 | | | — | |
Balance at the beginning of the year, as adjusted | 70,185 | | | 37,993 | | | 35,042 | |
Charge-offs | (1,946) | | | (5,622) | | | (4,989) | |
Recoveries of loans previously charged-off | 1,420 | | | 2,381 | | | 1,807 | |
(Reversal of) provision for credit losses on loans | (27,298) | | | 35,433 | | | 4,311 | |
Balance at the end of the year | $ | 42,361 | | | $ | 70,185 | | | $ | 36,171 | |
The following tables detail the activity in the ACL on loans by segment and class for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| Beginning Balance | | | | | | Charge-offs | | Recoveries | | Reversal of Provision for Credit Losses | | Ending Balance |
| (In thousands) |
Commercial business: | | | | | | | | | | | | | |
Commercial and industrial | $ | 30,010 | | | | | | | $ | (917) | | | $ | 791 | | | $ | (12,107) | | | $ | 17,777 | |
| | | | | | | | | | | | | |
Owner-occupied CRE | 9,486 | | | | | | | (359) | | | 25 | | | (2,741) | | | 6,411 | |
Non-owner occupied CRE | 10,112 | | | | | | | — | | | — | | | (1,251) | | | 8,861 | |
Total commercial business | 49,608 | | | | | | | (1,276) | | | 816 | | | (16,099) | | | 33,049 | |
Residential real estate | 1,591 | | | | | | | — | | | — | | | (182) | | | 1,409 | |
Real estate construction and land development: |
Residential | 1,951 | | | | | | | — | | | 32 | | | (679) | | | 1,304 | |
Commercial and multifamily | 11,141 | | | | | | | (1) | | | — | | | (7,168) | | | 3,972 | |
Total real estate construction and land development | 13,092 | | | | | | | (1) | | | 32 | | | (7,847) | | | 5,276 | |
Consumer | 5,894 | | | | | | | (669) | | | 572 | | | (3,170) | | | 2,627 | |
Total | $ | 70,185 | | | | | | | $ | (1,946) | | | $ | 1,420 | | | $ | (27,298) | | | $ | 42,361 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| Beginning Balance | | Impact of CECL Adoption | | Beginning Balance, as Adjusted | | Charge-offs | | Recoveries | | Provision (Reversal of 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 | |
| | | | | | | | | | | | | |
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 following table details activity in the allowance for loan losses by segment and class for the period indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2019 |
| 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2019 |
| Beginning Balance | | Charge-offs | | Recoveries | | Provision for Loan Losses | | Ending Balance |
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 | |
(5)Other Real Estate Owned
Changes in other real estate owned during the periods indicated were as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
Balance at the beginning of the year | $ | — | | | $ | 841 | | | $ | 1,983 | |
Additions | — | | | 270 | | | — | |
| | | | | |
Proceeds from dispositions | — | | | (1,290) | | | (864) | |
Gain (loss) on sale, net | — | | | 179 | | | (227) | |
Valuation adjustment | — | | | — | | | (51) | |
Balance at the end of the year | $ | — | | | $ | — | | | $ | 841 | |
At December 31, 2021, 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.
(6)Premises and Equipment
A summary of premises and equipment is as follows:
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| (In thousands) |
Land | $ | 19,973 | | | $ | 21,599 | |
Buildings and building improvements | 65,550 | | | 71,653 | |
Furniture, fixtures and equipment | 23,815 | | | 26,341 | |
Total premises and equipment | 109,338 | | | 119,593 | |
Less: Accumulated depreciation | 29,968 | | | 34,141 | |
Premises and equipment, net | $ | 79,370 | | | $ | 85,452 | |
Total depreciation expense on premises and equipment was $5.3 million, $5.5 million and $4.7 million for the years ended December 31, 2021, 2020 and 2019, respectively.
(7)Goodwill and Other Intangible Assets
(a) Goodwill
The Company’s goodwill represents the excess of the purchase price over the fair value of net assets acquired in the following mergers: Premier Commercial Bancorp and Puget Sound Bancorp in 2018; Washington Banking Company in 2014; Valley Community Bancshares in 2013; Western Washington Bancorp in 2006 and North Pacific Bank in 1998. The Company’s goodwill is assigned to the Bank and is evaluated for impairment at the Bank level (reporting unit). There were no additions to goodwill during the years ended December 31, 2021, 2020, and 2019.
At December 31, 2021, the Company’s analysis concluded the fair value of the reporting unit exceeded the carrying value so the Company's goodwill was not considered impaired. Similarly, no goodwill impairment charges were recorded for the years ended December 31, 2020 and 2019. Even though there was no goodwill impairment at December 31, 2021, changes in
the economic environment, operations of the reporting unit or other adverse events could result in future impairment charges which could have a material impact on the Company’s operating results.
(b) Other Intangible Assets
Other intangible assets represent core deposit intangible acquired in business combinations with estimated useful lives of ten years. There were no additions to goodwill during the years ended December 31, 2021, 2020, and 2019 and the estimated aggregate amortization expense related to other intangible assets for future years as of December 31, 2021 is as follows, in thousands:
| | | | | |
| |
| |
2022 | $ | 2,750 | |
2023 | 2,435 | |
2024 | 1,640 | |
2025 | 1,173 | |
2026 | 1,006 | |
Thereafter | 973 | |
Total | $ | 9,977 | |
(8)Derivative Financial Instruments
The following table presents the notional amounts and estimated fair values of derivatives:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Notional Amounts | | Estimated Fair Value | | Notional Amounts | | Estimated Fair Value |
| (In thousands) |
Non-hedging interest rate derivatives: | | | | | | | |
Interest rate swap asset (1) | 322,726 | | | $ | 15,219 | | | $ | 308,126 | | | $ | 25,740 | |
Interest rate swap liability (1) | 322,726 | | | (15,286) | | | 308,126 | | | (26,162) | |
(1) The estimated fair value of derivatives with customers was $9.8 million and $25.4 million as of December 31, 2021 and December 31, 2020, respectively. The estimated fair value of derivatives with third-parties was $(9.8) million and $(25.9) million as of December 31, 2021 and December 31, 2020, respectively.
Generally, the gains and losses of the interest rate derivatives offset due to the back-to-back nature of the contracts. However, the settlement values of the Bank's net derivative assets with customers were increased by $355,000 and reduced by $422,000 as of December 31, 2021 and December 31, 2020, respectively, due to the recognition of a credit valuation adjustment. A credit valuation adjustment was not recorded on the Bank's net derivative assets as of December 31, 2019.
(9)Deposits
Deposits consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Amount | | Percent | | Amount | | Percent |
| (Dollars in thousands) |
Noninterest demand deposits | $ | 2,330,956 | | | 36.5 | % | | $ | 1,980,531 | | | 35.4 | % |
Interest bearing demand deposits | 1,946,605 | | | 30.5 | | | 1,716,123 | | | 30.7 | |
Money market accounts | 1,120,174 | | | 17.6 | | | 962,983 | | | 17.2 | |
Savings accounts | 640,763 | | | 10.0 | | | 538,819 | | | 9.6 | |
Total non-maturity deposits | 6,038,498 | | | 94.6 | | | 5,198,456 | | | 92.9 | |
Certificates of deposit | 342,839 | | | 5.4 | | | 399,534 | | | 7.1 | |
Total deposits | $ | 6,381,337 | | | 100.0 | % | | $ | 5,597,990 | | | 100.0 | % |
Deposit accounts overdrawn and reclassified to loans receivable were $216,000 and $187,000 as of December 31, 2021 and December 31, 2020. Accrued interest payable on deposits was $53,000 and $73,000 as of December 31, 2021 and December 31, 2020, 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, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
Interest bearing demand deposits | $ | 2,497 | | | $ | 3,234 | | | $ | 3,940 | |
Money market accounts | 1,485 | | | 2,830 | | | 2,754 | |
Savings accounts | 367 | | | 527 | | | 2,634 | |
Certificates of deposit | 1,811 | | | 5,674 | | | 7,021 | |
Total interest expense | $ | 6,160 | | | $ | 12,265 | | | $ | 16,349 | |
Scheduled maturities of certificates of deposit for future years as of December 31, 2021 are as follows, in thousands:
| | | | | |
| |
| |
2022 | $ | 290,497 | |
2023 | 32,608 | |
2024 | 9,072 | |
2025 | 4,531 | |
2026 | 6,131 | |
| |
Total | $ | 342,839 | |
Certificates of deposit issued in denominations equal to or in excess of $250,000 totaled $100.0 million and $123.1 million as of December 31, 2021 and December 31, 2020, respectively.
Deposits received from related parties as of December 31, 2021 and December 31, 2020 totaled $8.8 million and $6.3 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, 2021 and December 31, 2020, the balance of the junior subordinated debentures, net of unaccreted discount, was $21.2 million and $20.9 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, 2021 and December 31, 2020 was 1.77% and 1.80%, respectively. The weighted average rate of the junior subordinated debentures for the years ended December 31, 2021, 2020 and 2019 was 3.53%, 4.29% and 6.55%, 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. The Company 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. 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 (2) 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, 2021 | | December 31, 2020 |
| (In thousands) |
U.S. Treasury and U.S. Government-sponsored agencies | $ | 4,914 | | | $ | — | |
Residential CMO and MBS | 4,134 | | | 7,388 | |
Commercial CMO and MBS | 41,791 | | | 28,295 | |
Total | $ | 50,839 | | | $ | 35,683 | |
(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, 2021, the Bank maintained a credit facility with the FHLB with available borrowing capacity of $1.06 billion. At December 31, 2021 and December 31, 2020 the Bank had no FHLB advances outstanding.
Advances from the FHLB may be collateralized by FHLB stock owned by the Bank, deposits at the FHLB, certain commercial and residential real estate loans, investment securities 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 five correspondent banks to purchase federal funds totaling $215.0 million as of December 31, 2021. The lines generally mature annually or are reviewed annually. As of December 31, 2021 and December 31, 2020, 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 $57.0 million as of December 31, 2021. There were no borrowings outstanding as of December 31, 2021 and December 31, 2020. Any advances on the credit facility would be secured by either investment securities or certain types of the Bank's loans receivable.
(d) Related Party Borrowings
The Company did not have any borrowings from related parties as of December 31, 2021 or 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, 2021 and December 31, 2020, the Company’s operating lease ROU asset was $27.6 million and $18.0 million, respectively, and the related operating lease ROU liability was $28.8 million and $19.3 million, respectively. The Company does not have any leases designated as finance leases.
On December 30, 2021, the Company sold its Olympia, Washington headquarters campus for total proceeds of $5.4 million resulting in a net gain of $2.7 million. Contemporaneously with the closing of the sale, the Company entered into two leases pursuant to which the Company leased back the first and second floors of the main building for an initial annual rent of $227,000, subject to annual escalations of 3% over the lease terms. The leases are being accounted for as operating leases and have initial lease terms of ten and five years for the first and second floor, respectively, and both leases additionally provide the Company with two five-year options to extend. The new operating leases were incorporated into the required disclosures below.
The table below summarizes the information about our leases during the periods or at period end presented:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 |
| (In thousands) |
Operating lease cost | $ | 4,758 | | | $ | 4,717 | |
Short-term lease cost | 49 | | | 49 | |
Variable lease cost | 947 | | | 967 | |
| | | | | | | | | | | |
Sublease income | (24) | | | (55) | |
Total net lease cost during the period | $ | 5,730 | | | $ | 5,678 | |
| | | |
Operating cash used for amounts included in the measurement of lease liabilities during the period | $ | 5,004 | | | $ | 4,881 | |
ROU assets obtained in exchange for lease liabilities during the period | 13,966 | | | 1,265 | |
| | | |
Weighted average remaining lease term of operating leases, in years, at period end | 7.1 | | 7.2 |
Weighted average discount rate of operating leases, at period end | 2.32 | % | | 3.12 | % |
The following table presents the lease payment obligations as of December 31, 2021 as outlined in the Company’s lease agreements for each of the next five years and thereafter, in thousands:
| | | | | |
| |
| |
2022 | $ | 4,750 | |
2023 | 4,844 | |
2024 | 4,614 | |
2025 | 4,480 | |
2026 | 3,930 | |
Thereafter | 8,703 | |
Total lease payments | 31,321 | |
Implied interest | (2,480) | |
ROU liability | $ | 28,841 | |
(14)Employee Benefit Plans
(a) 401(k) Plan
The Company provides its eligible employees with a Plan, including funding certain Plan costs as incurred. All employees may participate in the Plan commencing with the first of the month following the start of 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, 2021, 2020 and 2019 were $1.7 million, $1.7 million and $1.6 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, 2021, 2020 and 2019, 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. The following table presents a summary of the changes in the Deferred Compensation Plan during the periods indicated:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
Balance outstanding at the beginning of the year | $ | 4,101 | | | $ | 4,244 | | | $ | 3,654 | |
Employer contributions | 634 | | | 207 | | | 443 | |
Interest credited | 78 | | | 128 | | | 147 | |
Benefits Paid | (959) | | | (478) | | | — | |
Balance outstanding at the end of the year | $ | 3,854 | | | $ | 4,101 | | | $ | 4,244 | |
(d) Salary Continuation Plan
In conjunction with the Company's merger with Premier Commercial Bancorp in 2018, the Company assumed an unfunded deferred compensation plan for select former Premier Commercial executive officers, some of which are current
Company officers. The following table presents a summary of the changes in the salary continuation plan during the periods indicated:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
Obligation, at the beginning of the year | $ | 4,162 | | | $ | 4,334 | | | $ | 4,600 | |
| | | | | |
Benefits paid | (536) | | | (460) | | | (554) | |
Expenses incurred | 209 | | | 288 | | | 288 | |
Obligation, at the end of the year | $ | 3,835 | | | $ | 4,162 | | | $ | 4,334 | |
(15)Stockholders’ Equity
(a) Earnings Per Common Share
The following table illustrates the calculation of weighted average shares used for earnings per common share computations for the periods indicated:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands, except shares) |
Net income: | | | | | |
Net income | $ | 98,035 | | | $ | 46,570 | | | $ | 67,557 | |
Dividends and undistributed earnings allocated to participating securities (1) | — | | | (7) | | | (57) | |
Net income allocated to common shareholders | $ | 98,035 | | | $ | 46,563 | | | $ | 67,500 | |
Basic: | | | | | |
Weighted average common shares outstanding | 35,677,851 | | | 36,018,627 | | | 36,789,244 | |
Restricted stock awards | — | | | (4,182) | | | (31,014) | |
Total basic weighted average common shares outstanding | 35,677,851 | | | 36,014,445 | | | 36,758,230 | |
Diluted: | | | | | |
Basic weighted average common shares outstanding | 35,677,851 | | | 36,014,445 | | | 36,758,230 | |
Effect of potentially dilutive common shares (2) | 295,535 | | | 155,621 | | | 227,536 | |
Total diluted weighted average common shares outstanding | 35,973,386 | | | 36,170,066 | | | 36,985,766 | |
Potentially dilutive shares that were excluded from the computation of diluted earnings per share because to do so would be anti-dilutive (3) | 7,043 | | | 137,093 | | | 1,501 | |
(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.
(3) Anti-dilution occurs when the exercise price of a stock option or the unrecognized compensation cost per share of a restricted stock award or unit exceeds the market price of the Company’s stock.
(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 | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
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 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
January 27, 2021 | | $0.20 | | February 10, 2021 | | February 24, 2021 | | |
April 21, 2021 | | $0.20 | | May 5, 2021 | | May 19, 2021 | | |
July 21, 2021 | | $0.20 | | August 4, 2021 | | August 18, 2021 | | |
October 20, 2021 | | $0.21 | | November 3, 2021 | | November 17, 2021 | | |
| | | | | | | | |
| | | | | | | | |
* 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 1,512,600 shares, under the eleventh stock repurchase plan. On March 12, 2020, the Company's board of directors authorized the repurchase of up to 5% of the Company's outstanding common shares, or 1,799,054 shares, under the twelfth stock repurchase plan after all shares under the eleventh stock repurchase plan had been repurchased. The number, timing and price of shares repurchased under the twelfth stock repurchase plan will depend on business and market conditions and other factors, including opportunities to deploy the Company's capital.
The following table provides total repurchased shares and average share prices under the applicable plans for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2021 | | 2020 | | 2019 | | Plan Total(1) |
Eleventh Stock Repurchase Plan | | | | | | | |
Repurchased shares | — | | | 639,922 | | | 292,712 | | | 1,512,600 | |
Stock repurchase average share price | $ | — | | | $ | 23.95 | | | $ | 26.50 | | | $ | 21.69 | |
| | | | | | | |
Twelfth Stock Repurchase Plan | | | | | | | |
Repurchased shares | 904,972 | | | 155,778 | | | — | | | 1,060,750 | |
Stock repurchase average share price | $ | 24.43 | | | $ | 20.34 | | | $ | — | | | $ | 23.83 | |
(1)Represents shares repurchased and average price per share paid during the duration of each plan.
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, |
| 2021 | | 2020 | | 2019 |
Repurchased shares to pay withholding taxes | 26,869 | | | 28,887 | | | 28,479 | |
Stock repurchase to pay withholding taxes average share price | $ | 29.10 | | | $ | 21.57 | | | $ | 30.83 | |
(d) Issuance of Common Stock
Common stock was issued during the years ended December 31, 2020 and 2019 related to the exercise of stock options as further described in Note (17) Stock-Based Compensation.
(16)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:
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). Investment security valuations are obtained from third-party pricing services.
Collateral-Dependent Loans:
Collateral-dependent loans are identified for 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. The Bank also incorporates an estimate of cost to sell the collateral when the sale is probable. Such adjustments may be significant and 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.
Appraisals on collateral-dependent loans 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 Bank. Once received, the Bank's internal appraisal department reviews and approves 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.
Derivative Financial Instruments:
The Bank 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, 2021 and 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 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.
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. Additionally, the fair value of branches held for sale can be adjusted based on executed agreements of sale to be completed at a future date.
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, 2021 |
| Total | | Level 1 | | Level 2 | | Level 3 |
| (In thousands) |
Assets | | | | | | | |
Investment securities available for sale: | | | | | | | |
U.S. government and agency securities | $ | 21,373 | | | $ | — | | | $ | 21,373 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Total | | Level 1 | | Level 2 | | Level 3 |
| (In thousands) |
Municipal securities | 221,212 | | | — | | | 221,212 | | | — | |
Residential CMO and MBS | 306,884 | | | — | | | 306,884 | | | — | |
Commercial CMO and MBS | 315,861 | | | — | | | 315,861 | | | — | |
| | | | | | | |
Corporate obligations | 2,014 | | | — | | | 2,014 | | | — | |
Other asset-backed securities | 26,991 | | | | | 26,991 | | | — | |
Total investment securities available for sale | 894,335 | | | — | | | 894,335 | | | — | |
Equity security | 240 | | | 240 | | | — | | | — | |
Derivative assets - interest rate swaps | 15,219 | | | — | | | 15,219 | | | — | |
Liabilities | | | | | | | |
Derivative liabilities - interest rate swaps | $ | 15,286 | | | $ | — | | | $ | 15,286 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 | | | $ | — | |
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, 2021 | | |
| Total | | Level 1 | | Level 2 | | Level 3 | | |
| (In thousands) |
Collateral-dependent loans: | | | | | | | | | | | |
Commercial business: | | | | | | | | | | | |
Commercial and industrial | $ | 1,911 | | | $ | 1,049 | | | $ | — | | | $ | — | | | $ | 1,049 | | | |
Owner-occupied CRE | 613 | | | 189 | | | — | | | — | | | 189 | | | |
| | | | | | | | | | | |
Total commercial business | 2,524 | | | 1,238 | | | — | | | — | | | 1,238 | | | |
| | | | | | | | | | | |
Real estate construction and land development: | | |
| | | | | | | | | | | |
Commercial and multifamily | 991 | | | 534 | | | — | | | — | | | 534 | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total | 3,515 | | | 1,772 | | | — | | | — | | | 1,772 | | | |
Prepaid expenses and other assets: | | | | | | | | | | | |
Branch held for sale (2) | 698 | | | 698 | | | — | | | — | | | 698 | | | |
Total assets measured at fair value on a nonrecurring basis | $ | 4,213 | | | $ | 2,470 | | | $ | — | | | $ | — | | | $ | 2,470 | | | |
(1)Basis represents the outstanding principal balance of collateral-dependent loans and the carrying value of the branch held for sale.
(2) In December 2021, one branch was written down to its net realizable value concurrent with the signing of an agreement for sale at a future date.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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.
The following table represents the net (loss) gain recorded in earnings as a result of nonrecurring fair value adjustments recorded during the periods indicated:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
Collateral-dependent loans: | | | | | |
Commercial business: | | | | | |
Commercial and industrial | $ | (691) | | | $ | (8) | | | $ | (78) | |
Owner-occupied CRE | (359) | | | — | | | — | |
| | | | | |
Total commercial business | (1,050) | | | (8) | | | (78) | |
| | | | | |
Real estate construction and land development: | | | | | |
| | | | | |
Commercial and multifamily | (38) | | | — | | | — | |
Prepaid expenses and other assets: | | | | | |
Branch held for sale | (145) | | | $ | (630) | | | $ | — | |
Net loss from nonrecurring fair value adjustments | $ | (1,233) | | | $ | (638) | | | $ | (78) | |
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, 2021 |
| Fair Value | | Valuation Technique(s) | | Unobservable Input(s) | | Range of Inputs; Weighted Average |
| (Dollars in thousands) |
Collateral-dependent loans | $ | 1,772 | | | Market approach | | Adjustment for differences between the comparable sales | | 35.0% - (11.0%); 13.8% |
Branch held for sale | $ | 698 | | | Market approach | | Sale agreement | | Not applicable |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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% |
(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, 2021 |
| Carrying Value | | Fair Value | | Fair Value Measurements Using: |
| Level 1 | | Level 2 | | Level 3 |
| (In thousands) |
Financial Assets: | | | | | | | | | |
Cash and cash equivalents | $ | 1,723,292 | | | $ | 1,723,292 | | | $ | 1,723,292 | | | $ | — | | | $ | — | |
Investment securities available for sale | 894,335 | | | 894,335 | | | — | | | 894,335 | | | — | |
Investment securities held to maturity | 383,393 | | | 376,331 | | | — | | | 376,331 | | | — | |
Loans held for sale | 1,476 | | | 1,527 | | | — | | | 1,527 | | | — | |
Loans receivable, net | 3,773,301 | | | 3,849,602 | | | — | | | — | | | 3,849,602 | |
Accrued interest receivable | 14,657 | | | 14,657 | | | 14 | | | 4,582 | | | 10,061 | |
| | | | | | | | | |
Derivative assets - interest rate swaps | 15,219 | | | 15,219 | | | — | | | 15,219 | | | — | |
Equity security | 240 | | | 240 | | | 240 | | | — | | | — | |
Financial Liabilities: | | | | | | | | | |
Non-maturity deposits | $ | 6,038,498 | | | $ | 6,038,498 | | | $ | 6,038,498 | | | $ | — | | | $ | — | |
Certificates of deposit | 342,839 | | | 344,025 | | | — | | | 344,025 | | | — | |
| | | | | | | | | |
Securities sold under agreement to repurchase | 50,839 | | | 50,839 | | | 50,839 | | | — | | | — | |
Junior subordinated debentures | 21,180 | | | 18,750 | | | — | | | — | | | 18,750 | |
Accrued interest payable | 73 | | | 73 | | | 33 | | | 19 | | | 21 | |
Derivative liabilities - interest rate swaps | 15,286 | | | 15,286 | | | — | | | 15,286 | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | | | $ | — | | | $ | — | |
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 | |
| | | | | | | | | |
Derivative assets - interest rate swaps | 25,740 | | | 25,740 | | | — | | | 25,740 | | | — | |
Equity security | 131 | | | 131 | | | 131 | | | — | | | — | |
Financial Liabilities: | | | | | | | | | |
Non-maturity deposits | $ | 5,198,456 | | | $ | 5,198,456 | | | $ | 5,198,456 | | | $ | — | | | $ | — | |
Certificates of deposit | 399,534 | | | 402,701 | | | — | | | 402,701 | | | — | |
| | | | | | | | | |
Securities sold under agreement to repurchase | 35,683 | | | 35,683 | | | 35,683 | | | — | | | — | |
Junior subordinated debentures | 20,887 | | | 18,500 | | | — | | | — | | | 18,500 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Carrying Value | | Fair Value | | Fair Value Measurements Using: |
| | Level 1 | | Level 2 | | Level 3 |
| (In thousands) |
Accrued interest payable | 94 | | | 94 | | | 42 | | | 33 | | | 19 | |
Derivative liabilities - interest rate swaps | 26,162 | | | 26,162 | | | — | | | 26,162 | | | — | |
(17)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. As of December 31, 2021, shares remaining available for future issuance under the Equity Plan totaled 522,228.
(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. All outstanding stock options were exercised during the year ended December 31, 2020. The intrinsic value from options exercised during the years ended December 31, 2020 and 2019 was $61,000 and $60,000, respectively. The cash proceeds from options exercised during the years ended December 31, 2020 and 2019 were $122,000 and $58,000, respectively.
The following table summarizes the stock option activity during the periods indicated:
| | | | | | | | | | | |
| Shares | | Weighted-Average Exercise Price |
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 at December 31, 2020 | — | | | $ | — | |
| | | |
| | | |
| | | |
(b) Restricted Stock Awards
Restricted stock awards generally had a four-year cliff vesting or four-year ratable vesting schedule. The remaining restricted stock awards vested during the year ended December 31, 2020. For the years ended December 31, 2020 and 2019, the Company recognized compensation expense related to restricted stock awards of $76,000 and $440,000, respectively, and a related tax benefit of $17,000 and $93,000, respectively. The vesting date fair value of restricted stock awards that vested during the years ended December 31, 2020 and 2019 was $442,000 and $1.3 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, 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.
Performance-based restricted stock units have a three-year cliff vesting schedule, participate in dividends and are additionally subject to performance-based vesting. 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 the percentile level of the market condition, which is the ratio of the Company's total shareholder return and the ratio of the Company's return on average assets over the performance period in relation to the performance of these metrics of a predetermined peer group. The fair value of each performance-based
restricted stock unit, inclusive of the market condition, 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 the market condition may not be satisfied. Compensation costs related to these awards are recognized regardless of whether the market condition is satisfied, provided 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, |
| 2021 | | 2020 | | 2019 |
Shares issued | 14,347 | | | 15,200 | | | 14,396 | |
Expected Term in Years | 2.9 | | 2.8 | | 2.8 |
Weighted-Average Risk Free Interest Rate | 0.3 | % | | 1.1 | % | | 2.5 | % |
Weighted Average Fair Value | 24.49 | | | 23.50 | | | 30.06 | |
Correlation coefficient | ABA NASDAQ Community Bank Index | | ABA NASDAQ Community Bank Index | | ABA NASDAQ Community Bank Index |
Range of peer company volatilities | 31.4%-136.4% | | 18.1%-107.6% | | 19.9%-75.4% |
Range of peer company correlation coefficients | 34.1%-94.8% | | 16.1%-90.2% | | 34.5%-90.7% |
Company volatility | 40.2 | % | | 23.2 | % | | 23.9 | % |
Company correlation coefficient | 90.1 | % | | 80.5 | % | | 79.9 | % |
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, 2021, 2020 and 2019, the Company recognized compensation expense related to restricted stock units of $3.7 million, $3.5 million, and $2.8 million respectively, and a related tax benefit of $802,000, $757,000, and $589,000, respectively. As of December 31, 2021, the total unrecognized compensation expense related to non-vested restricted stock units was $5.0 million and the related weighted-average period over which the compensation expense is expected to be recognized is approximately 2.0 years. The vesting date fair value of the restricted stock units that vested during the year ended December 31, 2021, 2020 and 2019 was $3.6 million, $2.4 million and $2.0 million, respectively.
The following table summarizes the unit activity for the periods indicated:
| | | | | | | | | | | |
| Units | | Weighted-Average Grant Date Fair Value |
Nonvested at December 31, 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 | |
Granted | 147,944 | | | 25.70 | |
Vested | (125,377) | | | 26.84 | |
Forfeited | (23,669) | | | 27.20 | |
Nonvested at December 31, 2021 | 315,014 | | | $ | 26.01 | |
(18)Cash Restriction
The Bank had restricted cash included in interest earning deposits of $9.8 million and $25.9 million as of December 31, 2021 and December 31, 2020, respectively, relating to collateral required on interest rate swaps from third-parties as discussed in Note (8) Derivative Financial Instruments. The Bank does not have a collateral requirement with customers.
(19)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 consisted of the following for the periods indicated:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
Current tax expense | $ | 20,896 | | | $ | 15,186 | | | $ | 12,504 | |
Deferred tax expense (benefit) | 1,576 | | | (8,576) | | | 984 | |
| | | | | |
Income tax expense | $ | 22,472 | | | $ | 6,610 | | | $ | 13,488 | |
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 18.6% for the year ended December 31, 2021 compared to an effective tax rate of 12.4% and 16.6% for the years ended December 31, 2020 and 2019, respectively. The increase in the effective tax rate during the year ended December 31, 2021 was due primarily to the change in income before income taxes earned between the periods, including an increase in annual pre-tax income for the year ended December 31, 2021 which decreased the impact of favorable permanent tax items such as tax-exempt investments, investments in bank owned life insurance and low-income housing tax credits. The following table presents the reconciliation of income taxes computed at the Federal statutory income tax rate of 21% to the actual effective rate for the periods indicated:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
Income tax expense at Federal statutory rate | $ | 25,307 | | | $ | 11,168 | | | $ | 17,020 | |
State tax, net of Federal tax benefit | 960 | | | 359 | | | 357 | |
Tax-exempt instruments | (1,929) | | | (1,785) | | | (1,745) | |
| | | | | |
Federal tax credits and other benefits (1) | (1,630) | | | (1,928) | | | (1,961) | |
Effects of BOLI | (474) | | | (827) | | | (368) | |
| | | | | |
| | | | | |
| | | | | |
Tax benefit of CARES Act carryback | — | | | (967) | | | — | |
Other, net | 238 | | | 590 | | | 185 | |
Income tax expense | $ | 22,472 | | | $ | 6,610 | | | $ | 13,488 | |
(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 ended 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, 2021 | | December 31, 2020 |
| (In thousands) |
Deferred tax assets: | | | |
Allowance for credit losses | $ | 9,756 | | | $ | 15,883 | |
Accrued compensation | 3,480 | | | 2,988 | |
Stock compensation | 689 | | | 642 | |
| | | |
| | | |
| | | |
| | | |
Market discount on purchased loans | 944 | | | 1,062 | |
Foregone interest on nonaccrual loans | 967 | | | 1,456 | |
Net operating loss carryforward acquired | 186 | | | 207 | |
| | | |
| | | |
ROU lease liability | 6,257 | | | 4,161 | |
Other deferred tax assets | 1,156 | | | 160 | |
Total deferred tax assets | 23,435 | | | 26,559 | |
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| (In thousands) |
Deferred tax liabilities: | | | |
Deferred loan fees, net | (1,838) | | | (2,643) | |
Premises and equipment | (2,436) | | | (2,680) | |
FHLB stock | (572) | | | (569) | |
| | | |
| | | |
Goodwill and other intangible assets | (1,659) | | | (2,186) | |
New market tax credit | — | | | (2,048) | |
Junior subordinated debentures | (991) | | | (1,050) | |
ROU lease asset | (5,995) | | | (3,879) | |
Net unrealized gains on investment securities | (2,537) | | | (6,805) | |
Other deferred tax liabilities | (181) | | | (264) | |
Total deferred tax liabilities | (16,209) | | | (22,124) | |
Deferred tax asset, net | $ | 7,226 | | | $ | 4,435 | |
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, 2021, 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, 2021 and December 31, 2020, the Company had a net operating loss carryforward of $888,000 and $986,000, respectively, and do not expire. The Company is limited to the amount of the net operating loss carryforward that it can deduct each year under Section 382 of the Internal Revenue Code. Due to sufficient earnings history and other positive evidence, management has not recorded a valuation allowance on the net operating loss carryforward as of December 31, 2021 and December 31, 2020.
As of December 31, 2021 and December 31, 2020, 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, 2021 and December 31, 2020 and recognized during the years ended December 31, 2021, 2020 and 2019 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, 2021, 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, an estimated deferred tax liability of $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 Bank 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, 2021, 2020, 2019 and 2018.
(20)Commitments and Contingencies
(a) Commitments to Extend Credit
In the ordinary course of business, the Bank 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, 2021 | | December 31, 2020 |
| (In thousands) |
Commercial business: | | | |
Commercial and industrial | $ | 570,156 | | | $ | 640,018 | |
Owner-occupied CRE | 2,252 | | | 3,488 | |
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| (In thousands) |
Non-owner occupied CRE | 7,487 | | | 18,396 | |
Total commercial business | 579,895 | | | 661,902 | |
| | | |
Real estate construction and land development: | | | |
Residential | 51,838 | | | 52,453 | |
Commercial and multifamily | 209,217 | | | 127,821 | |
Total real estate construction and land development | 261,055 | | | 180,274 | |
Consumer | 285,010 | | | 263,249 | |
Total outstanding commitments | $ | 1,125,960 | | | $ | 1,105,425 | |
The following table details the activity in the ACL on unfunded commitments during the periods indicated:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
Balance, beginning of period | $ | 4,681 | | | $ | 306 | | | $ | 306 | |
Impact of CECL Adoption | — | | | 3,702 | | | — | |
Adjusted balance, beginning of period | 4,681 | | | 4,008 | | | 306 | |
(Reversal of) provision for credit losses on unfunded commitments | (2,074) | | | 673 | | | — | |
Balance, end of period | $ | 2,607 | | | $ | 4,681 | | | $ | 306 | |
(b) Variable Interests - Low Income Housing Tax Credit Investments
The carrying values of investments in unconsolidated LIHTCs were $116.3 million and $96.4 million as of December 31, 2021 and December 31, 2020, respectively. During the years ended December 31, 2021, 2020 and 2019 the Company recognized tax benefits of $11.4 million, $7.5 million and $5.7 million, respectively, and proportional amortization of $9.7 million, $6.5 million and $5.0 million, respectively.
Total unfunded contingent commitments related to the Company’s LIHTC investments totaled $41.5 million and $53.8 million at December 31, 2021 and December 31, 2020, respectively. The Company expects to fund LIHTC commitments of $10.6 million during the year ended December 31, 2022 and $23.6 million during the year ended December 31, 2023, with the remaining commitments of $7.3 million funded by December 31, 2035. There were no impairment losses on the Company’s LIHTC investments during the years ended December 31, 2021, 2020 or 2019.
(c) Variable Interests - New Market Tax Credit Investments
The Company dissolved the NMTC investment during the year ended December 31, 2021 after 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. The equity method balance of the NMTC investment was $25.2 million at December 31, 2020. The Company recognized related investment income of $247,000, $694,000 and $701,000 during the years ended December 31, 2021, 2020 and 2019, respectively.
(21)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. The 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, 2021, the Company and the Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 2021 and December 31, 2020, 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, 2021: | | | | | | | | | | | |
The Company consolidated | | | | | | | | | | | |
Common equity Tier 1 capital to risk-weighted assets | $ | 200,525 | | | 4.5 | % | | N/A | | N/A | | $ | 600,390 | | | 13.5 | % |
Tier 1 leverage capital to average assets | 285,791 | | | 4.0 | | | N/A | | N/A | | 621,570 | | | 8.7 | |
Tier 1 capital to risk-weighted assets | 267,367 | | | 6.0 | | | N/A | | N/A | | 621,570 | | | 13.9 | |
Total capital to risk-weighted assets | 356,489 | | | 8.0 | | | N/A | | N/A | | 660,209 | | | 14.8 | |
Heritage Bank | | | | | | | | | | | |
Common equity Tier 1 capital to risk-weighted assets | 200,408 | | | 4.5 | | | $ | 289,478 | | | 6.5 | % | | 615,820 | | | 13.8 | |
Tier 1 leverage capital to average assets | 285,657 | | | 4.0 | | | 357,071 | | | 5.0 | | | 615,820 | | | 8.6 | |
Tier 1 capital to risk-weighted assets | 267,210 | | | 6.0 | | | 356,280 | | | 8.0 | | | 615,820 | | | 13.8 | |
Total capital to risk-weighted assets | 356,280 | | | 8.0 | | | 445,350 | | | 10.0 | | | 654,459 | | | 14.7 | |
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, 2021 and December 31, 2020, the capital measures reflect the revised CECL capital transition provisions adopted by the Federal Reserve and the FDIC that allowed 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 starting January 1, 2022 until December 31, 2024.
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, 2021, the capital conservation buffer was 6.8% and 6.7% for the Company and the Bank, respectively.
(22)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, 2021 | | December 31, 2020 |
| (In thousands) |
ASSETS | | | |
Cash and cash equivalents | $ | 3,513 | | | $ | 9,736 | |
Investment in subsidiary bank | 869,862 | | | 828,426 | |
Other assets | 2,608 | | | 4,469 | |
Total assets | $ | 875,983 | | | $ | 842,631 | |
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Junior subordinated debentures | $ | 21,180 | | | $ | 20,887 | |
Other liabilities | 371 | | | 1,305 | |
Total stockholders’ equity | 854,432 | | | 820,439 | |
Total liabilities and stockholders’ equity | $ | 875,983 | | | $ | 842,631 | |
HERITAGE FINANCIAL CORPORATION
(PARENT COMPANY ONLY)
Condensed Statements of Income
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
INTEREST INCOME: | | | | | |
Interest on interest earning deposits | $ | 30 | | | $ | 16 | | | $ | 57 | |
| | | | | |
INTEREST EXPENSE: | | | | | |
Junior subordinated debentures | 742 | | | 890 | | | 1,339 | |
| | | | | |
Net interest expense | (712) | | | (874) | | | (1,282) | |
NONINTEREST INCOME: | | | | | |
Dividends from subsidiary bank | 46,000 | | | 39,000 | | | 47,000 | |
Equity in undistributed income of subsidiary bank | 57,058 | | | 12,685 | | | 25,186 | |
Other income | 117 | | | 5 | | | 39 | |
Total noninterest income | 103,175 | | | 51,690 | | | 72,225 | |
NONINTEREST EXPENSE: | | | | | |
Professional services | 394 | | | 495 | | | 517 | |
Other expense | 5,430 | | | 5,172 | | | 4,395 | |
Total noninterest expense | 5,824 | | | 5,667 | | | 4,912 | |
Income before income taxes | 96,639 | | | 45,149 | | | 66,031 | |
Income tax benefit | (1,396) | | | (1,421) | | | (1,526) | |
Net income | $ | 98,035 | | | $ | 46,570 | | | $ | 67,557 | |
HERITAGE FINANCIAL CORPORATION
(PARENT COMPANY ONLY)
Condensed Statements of Cash Flows
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
Cash flows from operating activities: | | | | | |
Net income | $ | 98,035 | | | $ | 46,570 | | | $ | 67,557 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Equity in undistributed income of subsidiary bank | (57,058) | | | (12,685) | | | (25,186) | |
| | | | | |
Stock-based compensation expense | 3,666 | | | 3,559 | | | 3,231 | |
| | | | | |
Net change in other assets and other liabilities | 960 | | | (1,333) | | | 763 | |
Net cash provided by operating activities | 45,603 | | | 36,111 | | | 46,365 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Cash flows from financing activities: | | | | | |
Common stock cash dividends paid | (28,937) | | | (28,859) | | | (30,908) | |
Proceeds from exercise of stock options | — | | | 122 | | | 58 | |
| | | | | |
Repurchase of common stock | (22,889) | | | (19,119) | | | (8,636) | |
Net cash used in financing activities | (51,826) | | | (47,856) | | | (39,486) | |
Net (decrease) increase in cash and cash equivalents | (6,223) | | | (11,745) | | | 6,879 | |
Cash and cash equivalents at the beginning of year | 9,736 | | | 21,481 | | | 14,602 | |
Cash and cash equivalents at the end of year | $ | 3,513 | | | $ | 9,736 | | | $ | 21,481 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |