UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20182019 or
¨☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 000-29480
HERITAGE FINANCIAL CORPORATIONCORPORATION
(Exact name of registrant as specified in its charter)
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| | | | |
| Washington | | 91-1857900 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | | |
| 201 Fifth Avenue SW, | Olympia | WA | | 98501 |
| (Address of principal executive offices) | | (Zip Code) |
(360) (360) 943-1500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|
| | |
| Title of each class | Trading symbol | Name of each exchange on which registered |
| Common stock, no par value | HFWA | NASDAQ |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesý☒ No ¨☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesý☒ No ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
| | | | |
| | Large accelerated filerý | ☒ | Accelerated filer ¨ | ☐ |
| | Non-accelerated filer ¨ | ☐ | Smaller reporting company ¨ | ☐ |
| | | | Emerging growth company ¨ | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No ý☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:
As of October 29, 201830, 2019 there were 36,873,12336,618,381 shares of the registrant's common stock, no par value per share, outstanding.
HERITAGE FINANCIAL CORPORATION
FORM 10-Q
September 30, 20182019
TABLE OF CONTENTS
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| PART I. | | |
| ITEM 1. | | |
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| | | NOTE 1. | | |
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| ITEM 2. | | |
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| ITEM 3. | | |
| ITEM 4. | | |
| Part II. | | |
| ITEM 1. | | |
| ITEM 1A. | | |
| ITEM 2. | | |
| ITEM 3. | | |
| ITEM 4. | | |
| ITEM 5. | | |
| ITEM 6. | | |
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Glossary of ContentsAcronyms, Abbreviations, and Terms
The acronyms, abbreviations, and terms listed below are used in various sections of the Form 10-Q, including “Item 1. Financial Statements” and “Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations".
As used throughout this report, the terms “we”, “our”, or “us” refer to Heritage Financial Corporation and its consolidated subsidiaries, unless the context otherwise requires.
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| | |
| 2018 Annual Form 10-K | | Company's Annual Report on Form 10-K for the year ended December 31, 2018 |
| ALL | | Allowance for Loan Losses |
| AOCI | | Accumulated Other Comprehensive Income (Loss) |
| ASC | | Accounting Standards Codification |
| ASU | | Accounting Standards Update |
| Bank | | Heritage Bank |
| Basel III | | A comprehensive capital framework and rules for U.S. banking organizations approved by the Federal Reserve Board and the FDIC in 2013 |
| BOLI | | Bank owned life insurance |
| CDI | | Core Deposit Intangible |
| CECL | | Current Expected Credit Loss Model |
| Company | | Heritage Financial Corporation |
| GAAP | | U.S. Generally Accepted Accounting Principles |
| Heritage | | Heritage Financial Corporation |
| FASB | | Financial Accounting Standards Board |
| FDIC | | Federal Deposit Insurance Corporation |
| Federal Reserve | | Board of Governors of the Federal Reserve System |
| Federal Reserve Bank | | Federal Reserve Bank of San Francisco |
| FHLB | | Federal Home Loan Bank of Des Moines |
| LIBOR | | London Interbank Offering Rate |
| OAEM | | Other Assets Especially Mentioned |
| PCI | | Purchased Credit Impaired; loans purchased with evidence of credit deterioration since origination for which it is probable that not all contractually required payments will be collected; accounted for under FASB ASC 310-30 |
| Premier Merger | | Merger with Premier Commercial Bancorp & Premier Community Bank completed July 2, 2018 |
| Puget Sound Merger | | Merger with Puget Sound Bancorp, Inc. & Puget Sound Bank completed January 16, 2018 |
| Premier and Puget Mergers | | Premier Merger and Puget Sound Mergers, collectively |
| ROU | | Right-of-Use |
| SBA | | Small Business Administration |
| SEC | | Securities and Exchange Commission |
| TDR | | Troubled Debt Restructured |
FORWARD LOOKING STATEMENTS:
This Quarterly Report on Form 10-Q ("Form 10-Q") may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements often include the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated, including: our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel from our recent mergers with Puget Sound Bancorp, Inc., and Premier Commercial Bancorp, into our operations and our ability to realize related revenue synergies and cost savings within expected time frames or at all, and any goodwill charges related thereto and costs or difficulties relating to integration matters, including but not limited toto: customer and employee retention, which might be greater than expected; the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be
effected by deterioration in the housing and commercial real estate markets, which may lead to increased losses and nonperforming assets in our loan portfolio, and may result in our allowance for loan losses no longer being adequate to cover actual losses, and require us to increase our allowance for loan losses; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; risks related to acquiring assets in or entering markets in which we have not previously operated and may not be familiar; fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas; results of examinations of us by the bank regulators, including the possibility that any such regulatory authority may, among other things, initiate an enforcement action against the Company or our bank subsidiary which could require us to increase our allowance for loan losses, write-down assets, change our regulatory capital position, affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements on us, any of which could affect our ability to continue our growth through mergers, acquisitions or similar transactions and adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including but not limited to, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and implementing regulations, changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules as a result of Basel III; our ability to control operating costs and expenses; increases in premiums for deposit insurance; the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risk associated with the loans on our Condensed Consolidated Statements of Financial Condition; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our growth strategies; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames or at all, and any goodwill charges related thereto and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, which might be greater than expected; increased competitive pressures among financial service companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board ("FASB"),FASB, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; and other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and other risks detailed from time to time in our filings with the Securities and Exchange Commission including our 2018 Annual Report on Form 10-K for the year ended December 31, 2017.10-K.
The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company. The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for future periods to differ materially from those expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect the Company’s operating results and stock price performance.
As used throughout this report, the terms “we”, “our”, “us”, or the “Company” refer to Heritage Financial Corporation and its consolidated subsidiaries, unless the context otherwise requires.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(In thousands, except shares)
| | | | | September 30, 2018 | | December 31, 2017 | | September 30, 2019 | | December 31, 2018 |
| ASSETS | | | | | | | | |
| Cash on hand and in banks | | $ | 120,833 |
|
| $ | 78,293 |
| | $ | 115,500 |
|
| $ | 92,704 |
|
| Interest earning deposits | | 49,310 |
|
| 24,722 |
| | 121,468 |
|
| 69,206 |
|
| Cash and cash equivalents | | 170,143 |
|
| 103,015 |
| | 236,968 |
|
| 161,910 |
|
| Investment securities available for sale, at fair value | | 920,737 |
|
| 810,530 |
| | 966,102 |
|
| 976,095 |
|
| Loans held for sale | | 1,882 |
| | 2,288 |
| | 5,211 |
| | 1,555 |
|
| Loans receivable, net | | 3,649,054 |
| | 2,849,071 |
| | 3,731,343 |
| | 3,654,160 |
|
| Allowance for loan losses | | (34,475 | ) | | (32,086 | ) | | (36,518 | ) | | (35,042 | ) |
| Total loans receivable, net | | 3,614,579 |
| | 2,816,985 |
| | 3,694,825 |
| | 3,619,118 |
|
| Other real estate owned | | 2,032 |
|
| — |
| | 841 |
|
| 1,983 |
|
| Premises and equipment, net | | 80,439 |
|
| 60,325 |
| | 86,563 |
|
| 81,100 |
|
| Federal Home Loan Bank stock, at cost | | 6,076 |
|
| 8,347 |
| | 6,377 |
|
| 6,076 |
|
| Bank owned life insurance | | 93,296 |
| | 75,091 |
| | 102,981 |
| | 93,612 |
|
| Accrued interest receivable | | 15,735 |
|
| 12,244 |
| | 14,722 |
|
| 15,403 |
|
| Prepaid expenses and other assets | | 108,730 |
|
| 99,328 |
| | 142,068 |
|
| 98,522 |
|
| Other intangible assets, net | | 21,728 |
|
| 6,088 |
| | 17,588 |
|
| 20,614 |
|
| Goodwill | | 240,837 |
|
| 119,029 |
| | 240,939 |
|
| 240,939 |
|
| Total assets | | $ | 5,276,214 |
|
| $ | 4,113,270 |
| | $ | 5,515,185 |
|
| $ | 5,316,927 |
|
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
| Deposits | | $ | 4,398,127 |
| | $ | 3,393,060 |
| | $ | 4,562,257 |
| | $ | 4,432,402 |
|
| Federal Home Loan Bank advances | | — |
| | 92,500 |
| |
| Junior subordinated debentures | | 20,229 |
| | 20,009 |
| | 20,522 |
| | 20,302 |
|
| Securities sold under agreement to repurchase | | 32,233 |
| | 31,821 |
| | 25,883 |
| | 31,487 |
|
| Accrued expenses and other liabilities | | 79,492 |
| | 67,575 |
| | 102,396 |
| | 72,013 |
|
| Total liabilities | | 4,530,081 |
| | 3,604,965 |
| | 4,711,058 |
| | 4,556,204 |
|
| Stockholders’ equity: | | | | | | | | |
| Preferred stock, no par value, 2,500,000 shares authorized; no shares issued and outstanding at September 30, 2018 and December 31, 2017 | | — |
| | — |
| |
| Common stock, no par value, 50,000,000 shares authorized; 36,873,123 and 29,927,746 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively | | 591,065 |
| | 360,590 |
| |
| Preferred stock, no par value, 2,500,000 shares authorized; no shares issued and outstanding at September 30, 2019 and December 31, 2018 | | | — |
| | — |
|
| Common stock, no par value, 50,000,000 shares authorized; 36,618,381 and 36,874,055 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively | | | 585,581 |
| | 591,806 |
|
| Retained earnings | | 169,758 |
| | 149,013 |
| | 206,021 |
| | 176,372 |
|
| Accumulated other comprehensive loss, net | | (14,690 | ) | | (1,298 | ) | |
| Accumulated other comprehensive income (loss), net | | | 12,525 |
| | (7,455 | ) |
| Total stockholders’ equity | | 746,133 |
| | 508,305 |
| | 804,127 |
| | 760,723 |
|
| Total liabilities and stockholders’ equity | | $ | 5,276,214 |
| | $ | 4,113,270 |
| | $ | 5,515,185 |
| | $ | 5,316,927 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share amounts)
| | | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended
September 30, |
| | | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
| INTEREST INCOME | | | | | | | | | | | | | | | | |
| Interest and fees on loans | | $ | 48,301 |
| | $ | 32,595 |
| | $ | 127,601 |
| | $ | 94,580 |
| | $ | 47,845 |
| | $ | 48,301 |
| | $ | 142,651 |
| | $ | 127,601 |
|
| Taxable interest on investment securities | | 4,662 |
| | 3,117 |
| | 12,259 |
| | 9,307 |
| | 5,704 |
| | 4,662 |
| | 17,460 |
| | 12,259 |
|
| Nontaxable interest on investment securities | | 1,085 |
| | 1,354 |
| | 3,646 |
| | 3,926 |
| | 798 |
| | 1,085 |
| | 2,641 |
| | 3,646 |
|
| Interest on other interest earning assets | | 528 |
| | 209 |
| | 988 |
| | 352 |
| | 537 |
| | 558 |
| | 1,155 |
| | 1,016 |
|
| Total interest income | | 54,576 |
| | 37,275 |
| | 144,494 |
| | 108,165 |
| | 54,884 |
| | 54,606 |
| | 163,907 |
| | 144,522 |
|
| INTEREST EXPENSE | | | | | | | | | | | | | | | | |
| Deposits | | 3,014 |
| | 1,628 |
| | 7,169 |
| | 4,301 |
| | 4,250 |
| | 3,014 |
| | 11,870 |
| | 7,169 |
|
| Junior subordinated debentures | | 330 |
| | 261 |
| | 928 |
| | 748 |
| | 332 |
| | 330 |
| | 1,026 |
| | 928 |
|
| Other borrowings | | 136 |
| | 444 |
| | 721 |
| | 908 |
| | 59 |
| | 136 |
| | 444 |
| | 721 |
|
| Total interest expense | | 3,480 |
| | 2,333 |
| | 8,818 |
| | 5,957 |
| | 4,641 |
| | 3,480 |
| | 13,340 |
| | 8,818 |
|
| Net interest income | | 51,096 |
| | 34,942 |
| | 135,676 |
| | 102,208 |
| | 50,243 |
| | 51,126 |
| | 150,567 |
| | 135,704 |
|
| Provision for loan losses | | 1,065 |
| | 884 |
| | 3,967 |
| | 2,882 |
| | 466 |
| | 1,065 |
| | 2,753 |
| | 3,967 |
|
| Net interest income after provision for loan losses | | 50,031 |
| | 34,058 |
| | 131,709 |
| | 99,326 |
| | 49,777 |
| | 50,061 |
| | 147,814 |
| | 131,737 |
|
| NONINTEREST INCOME | | | | | | | | | | | | | | | | |
| Service charges and other fees | | 4,824 |
| | 4,769 |
| | 14,062 |
| | 13,408 |
| | 4,779 |
| | 4,824 |
| | 14,109 |
| | 14,062 |
|
| Gain on sale of investment securities, net | | 82 |
| | 44 |
| | 135 |
| | 161 |
| | 281 |
| | 82 |
| | 329 |
| | 135 |
|
| Gain on sale of loans, net | | 706 |
| | 1,229 |
| | 2,286 |
| | 6,562 |
| | 993 |
| | 706 |
| | 1,613 |
| | 2,286 |
|
| Interest rate swap fees | | — |
| | 328 |
| | 360 |
| | 743 |
| | 152 |
| | — |
| | 313 |
| | 360 |
|
| Other income | | 2,468 |
| | 2,073 |
| | 6,358 |
| | 5,641 |
| | 2,253 |
| | 2,438 |
| | 7,087 |
| | 6,330 |
|
| Total noninterest income | | 8,080 |
| | 8,443 |
| | 23,201 |
| | 26,515 |
| | 8,458 |
| | 8,050 |
| | 23,451 |
| | 23,173 |
|
| NONINTEREST EXPENSE | | | | | | | | | | | | | | | | |
| Compensation and employee benefits | | 23,804 |
| | 15,823 |
| | 64,492 |
| | 48,119 |
| | 21,733 |
| | 23,804 |
| | 65,629 |
| | 64,492 |
|
| Occupancy and equipment | | 5,020 |
| | 3,979 |
| | 14,457 |
| | 11,607 |
| | 5,268 |
| | 5,020 |
| | 16,177 |
| | 14,457 |
|
| Data processing | | 2,343 |
| | 2,090 |
| | 7,455 |
| | 6,007 |
| | 2,333 |
| | 2,343 |
| | 6,615 |
| | 7,455 |
|
| Marketing | | 876 |
| | 933 |
| | 2,507 |
| | 2,545 |
| | 816 |
| | 876 |
| | 3,020 |
| | 2,507 |
|
| Professional services | | 2,119 |
| | 1,453 |
| | 8,485 |
| | 3,515 |
| | 1,434 |
| | 2,119 |
| | 3,912 |
| | 8,485 |
|
| State and local taxes | | 931 |
| | 640 |
| | 2,335 |
| | 1,828 |
| |
| State/municipal business and use taxes | | | 1,370 |
| | 795 |
| | 2,977 |
| | 2,199 |
|
| Federal deposit insurance premium | | 375 |
| | 433 |
| | 1,105 |
| | 1,090 |
| | 9 |
| | 375 |
| | 720 |
| | 1,105 |
|
| Other real estate owned, net | | 18 |
| | (88 | ) | | 18 |
| | (36 | ) | | (35 | ) | | 18 |
| | 340 |
| | 18 |
|
| Amortization of intangible assets | | 1,114 |
| | 319 |
| | 2,705 |
| | 966 |
| | 975 |
| | 1,114 |
| | 3,026 |
| | 2,705 |
|
| Other expense | | 2,997 |
| | 2,373 |
| | 8,491 |
| | 7,346 |
| | 2,816 |
| | 2,997 |
| | 8,375 |
| | 8,491 |
|
| Total noninterest expense | | 39,597 |
| | 27,955 |
| | 112,050 |
| | 82,987 |
| | 36,719 |
| | 39,461 |
| | 110,791 |
| | 111,914 |
|
| Income before income taxes | | 18,514 |
| | 14,546 |
| | 42,860 |
| | 42,854 |
| | 21,516 |
| | 18,650 |
| | 60,474 |
| | 42,996 |
|
| Income tax expense | | 3,010 |
| | 3,922 |
| | 6,412 |
| | 11,086 |
| | 3,621 |
| | 3,146 |
| | 10,043 |
| | 6,548 |
|
| Net income | | $ | 15,504 |
| | $ | 10,624 |
| | $ | 36,448 |
| | $ | 31,768 |
| | $ | 17,895 |
| | $ | 15,504 |
| | $ | 50,431 |
| | $ | 36,448 |
|
| Basic earnings per common share | | $ | 0.42 |
| | $ | 0.35 |
| | $ | 1.04 |
| | $ | 1.06 |
| | $ | 0.49 |
| | $ | 0.42 |
| | $ | 1.37 |
| | $ | 1.04 |
|
| Diluted earnings per common share | | $ | 0.42 |
| | $ | 0.35 |
| | $ | 1.04 |
| | $ | 1.06 |
| | $ | 0.48 |
| | $ | 0.42 |
| | $ | 1.36 |
| | $ | 1.04 |
|
| Dividends declared per common share | | $ | 0.15 |
| | $ | 0.13 |
| | $ | 0.45 |
| | $ | 0.38 |
| | $ | 0.19 |
| | $ | 0.15 |
| | $ | 0.55 |
| | $ | 0.45 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In thousands)
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2018 | | 2017 | | 2018 | | 2017 |
| Net income | | $ | 15,504 |
| | $ | 10,624 |
| | $ | 36,448 |
| | $ | 31,768 |
|
| Change in fair value of investment securities available for sale, net of tax of $(887), $157, $(3,525) and $2,442, respectively | | (3,319 | ) | | 289 |
| | (13,193 | ) | | 4,528 |
|
| Reclassification adjustment for net gain from sale of investment securities available for sale included in income, net of tax of $(17), $(16), $(29) and $(57), respectively | | (65 | ) | | (28 | ) | | (106 | ) | | (104 | ) |
| Other comprehensive (loss) income | | (3,384 | ) | | 261 |
| | (13,299 | ) | | 4,424 |
|
| Comprehensive income | | $ | 12,120 |
| | $ | 10,885 |
| | $ | 23,149 |
| | $ | 36,192 |
|
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended
September 30, |
| | | 2019 | | 2018 | | 2019 | | 2018 |
| Net income | | $ | 17,895 |
| | $ | 15,504 |
| | $ | 50,431 |
| | $ | 36,448 |
|
| Change in fair value of investment securities available for sale, net of tax of $799, $(887), $5,407, and $(3,525), respectively | | 2,993 |
| | (3,319 | ) | | 20,240 |
| | (13,193 | ) |
| Reclassification adjustment for net gain from sale of investment securities available for sale included in income, net of tax of $(59), $(17), $(69), and $(29), respectively | | (222 | ) | | (65 | ) | | (260 | ) | | (106 | ) |
| Other comprehensive income (loss) | | 2,771 |
| | (3,384 | ) | | 19,980 |
| | (13,299 | ) |
| Comprehensive income | | $ | 20,666 |
| | $ | 12,120 |
| | $ | 70,411 |
| | $ | 23,149 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
(In thousands, except per share amounts)
| | | | Number of common shares | | Common stock | | Retained earnings | | Accumulated other comprehensive income (loss), net | | Total stock- holders’ equity | Three Months Ended September 30, 2019 |
| Balance at December 31, 2016 | 29,955 |
| | $ | 359,060 |
| | $ | 125,309 |
| | $ | (2,606 | ) | | $ | 481,763 |
| |
| Restricted stock awards forfeited | (10 | ) | | — |
| | — |
| | — |
| | — |
| |
| | | Number of
common
shares | | Common
stock | | Retained
earnings | | Accumulated
other
comprehensive income, net | | Total
stockholders’
equity |
| Balance at June 30, 2019 | | 36,883 |
| | $ | 591,703 |
| | $ | 195,168 |
| | $ | 9,754 |
| | $ | 796,625 |
|
| Restricted stock units vested, net of forfeitures of restricted stock awards | | 1 |
| | — |
| | — |
| | — |
| | — |
|
| Exercise of stock options | 12 |
| | 159 |
| | — |
| | — |
| | 159 |
| 1 |
| | 2 |
| | — |
| | — |
| | 2 |
|
| Stock-based compensation expense | — |
| | 1,568 |
| | — |
| | — |
| | 1,568 |
| — |
| | 830 |
| | — |
| | — |
| | 830 |
|
| Common stock repurchased | (28 | ) | | (674 | ) | | — |
| | — |
| | (674 | ) | (267 | ) | | (6,954 | ) | | — |
| | — |
| | (6,954 | ) |
| Net income | — |
| | — |
| | 31,768 |
| | — |
| | 31,768 |
| — |
| | — |
| | 17,895 |
| | — |
| | 17,895 |
|
| Other comprehensive income, net of tax | — |
| | — |
| | — |
| | 4,424 |
| | 4,424 |
| — |
| | — |
| | — |
| | 2,771 |
| | 2,771 |
|
| Cash dividends declared on common stock ($0.38 per share) | — |
| | — |
| | (11,400 | ) | | — |
| | (11,400 | ) | |
| Balance at September 30, 2017 | 29,929 |
| | $ | 360,113 |
| | $ | 145,677 |
| | $ | 1,818 |
| | $ | 507,608 |
| |
| | | | | | | | | | | |
| Balance at December 31, 2017 | 29,928 |
| | $ | 360,590 |
| | $ | 149,013 |
| | $ | (1,298 | ) | | $ | 508,305 |
| |
| Restricted stock units vested, net of forfeitures of restricted stock awards | 29 |
| | — |
| | — |
| | — |
| | — |
| |
| Exercise of stock options | 9 |
| | 118 |
| | — |
| | — |
| | 118 |
| |
| Stock-based compensation expense | — |
| | 2,016 |
| | — |
| | — |
| | 2,016 |
| |
| Common stock repurchased | (53 | ) | | (1,702 | ) | | — |
| | — |
| | (1,702 | ) | |
| Net income | — |
| | — |
| | 36,448 |
| | — |
| | 36,448 |
| |
| Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | (13,299 | ) | | (13,299 | ) | |
| Common stock issued in business combinations | 6,960 |
| | 230,043 |
| | — |
| | — |
| | 230,043 |
| |
| Cash dividends declared on common stock ($0.45 per share) | — |
| | — |
| | (15,796 | ) | | — |
| | (15,796 | ) | |
| ASU 2016-01 implementation | — |
| | — |
| | 93 |
| | (93 | ) | | — |
| |
| Balance at September 30, 2018 | 36,873 |
| | $ | 591,065 |
| | $ | 169,758 |
| | $ | (14,690 | ) | | $ | 746,133 |
| |
| Cash dividends declared on common stock ($0.19 per share) | | — |
| | — |
| | (7,042 | ) | | — |
| | (7,042 | ) |
| Balance at September 30, 2019 | | 36,618 |
| | $ | 585,581 |
| | $ | 206,021 |
| | $ | 12,525 |
| | $ | 804,127 |
|
|
| | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2019 |
| | Number of common shares | | Common stock | | Retained earnings | | Accumulated other comprehensive (loss) income, net | | Total
stockholders’
equity |
| Balance at December 31, 2018 | 36,874 |
| | $ | 591,806 |
| | $ | 176,372 |
| | $ | (7,455 | ) | | $ | 760,723 |
|
| Effects of implementation of accounting change related to operating leases | — |
| | — |
| | (399 | ) | | — |
| | (399 | ) |
| Restricted stock units vested, net of forfeitures of restricted stock awards | 63 |
| | — |
| | — |
| | — |
| | — |
|
| Exercise of stock options | 4 |
| | 44 |
| | — |
| | — |
| | 44 |
|
| Stock-based compensation expense | — |
| | 2,366 |
| | — |
| | — |
| | 2,366 |
|
| Common stock repurchased | (323 | ) | | (8,635 | ) | | — |
| | — |
| | (8,635 | ) |
| Net income | — |
| | — |
| | 50,431 |
| | — |
| | 50,431 |
|
| Other comprehensive income, net of tax | — |
| | — |
| | — |
| | 19,980 |
| | 19,980 |
|
| Cash dividends declared on common stock ($0.55 per share) | — |
| | — |
| | (20,383 | ) | | — |
| | (20,383 | ) |
| Balance at September 30, 2019 | 36,618 |
| | $ | 585,581 |
| | $ | 206,021 |
| | $ | 12,525 |
| | $ | 804,127 |
|
|
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2018 |
| | Number of
common
shares | | Common
stock | | Retained
earnings | | Accumulated
other
comprehensive loss, net | | Total
stockholders’
equity |
| Balance at June 30, 2018 | 34,021 |
| | $ | 491,026 |
| | $ | 159,803 |
| | $ | (11,306 | ) | | $ | 639,523 |
|
| Forfeitures of restricted stock awards, net of restricted stock units vested | (1 | ) | | — |
| | — |
| | — |
| | — |
|
| Exercise of stock options | 6 |
| | 71 |
| | — |
| | — |
| | 71 |
|
| Stock-based compensation expense | — |
| | 709 |
| | — |
| | — |
| | 709 |
|
| Common stock repurchased | (1 | ) | | (14 | ) | | — |
| | — |
| | (14 | ) |
| Net income | — |
| | — |
| | 15,504 |
| | — |
| | 15,504 |
|
| Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | (3,384 | ) | | (3,384 | ) |
| Common stock issued in business combination | 2,848 |
| | 99,273 |
| | — |
| | — |
| | 99,273 |
|
| Cash dividends declared on common stock ($0.15 per share) | — |
| | — |
| | (5,549 | ) | | — |
| | (5,549 | ) |
| Balance at September 30, 2018 | 36,873 |
| | $ | 591,065 |
| | $ | 169,758 |
| | $ | (14,690 | ) | | $ | 746,133 |
|
|
| | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2018 |
| | Number of
common
shares | | Common
stock | | Retained
earnings | | Accumulated
other
comprehensive loss, net | | Total
stockholders’
equity |
| Balance at December 31, 2017 | 29,928 |
| | $ | 360,590 |
| | $ | 149,013 |
| | $ | (1,298 | ) | | $ | 508,305 |
|
| Effects of implementation of accounting change related to equity investments, net | — |
| | — |
| | 93 |
| | (93 | ) | | — |
|
| Restricted stock units vested, net of forfeitures of restricted stock awards | 29 |
| | — |
| | — |
| | — |
| | — |
|
| Exercise of stock options | 9 |
| | 118 |
| | — |
| | — |
| | 118 |
|
| Stock-based compensation expense | — |
| | 2,016 |
| | — |
| | — |
| | 2,016 |
|
| Common stock repurchased | (53 | ) | | (1,702 | ) | | — |
| | — |
| | (1,702 | ) |
| Net income | — |
| | — |
| | 36,448 |
| | — |
| | 36,448 |
|
| Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | (13,299 | ) | | (13,299 | ) |
| Common stock issued in business combination | 6,960 |
| | 230,043 |
| | — |
| | — |
| | 230,043 |
|
| Cash dividends declared on common stock ($0.45 per share) | — |
| | — |
| | (15,796 | ) | | — |
| | (15,796 | ) |
| Balance at September 30, 2018 | 36,873 |
| | $ | 591,065 |
| | $ | 169,758 |
| | $ | (14,690 | ) | | $ | 746,133 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
| | | | | Nine Months Ended September 30, | | Nine Months Ended
September 30, |
| | | 2018 | | 2017 | | 2019 | | 2018 |
| Cash flows from operating activities: | | | | | | | | |
| Net income | | $ | 36,448 |
| | $ | 31,768 |
| | $ | 50,431 |
| | $ | 36,448 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
| Depreciation of premises and equipment, amortization of securities available for sale, and amortization of discount of junior subordinated debentures | | 7,538 |
| | 8,117 |
| | 6,220 |
| | 7,538 |
|
| Changes in net deferred loan costs, net of amortization | | (38 | ) | | (656 | ) | | 1,122 |
| | (38 | ) |
| Provision for loan losses | | 3,967 |
| | 2,882 |
| | 2,753 |
| | 3,967 |
|
| Net change in accrued interest receivable, prepaid expenses and other assets, accrued expenses and other liabilities | | 4,231 |
| | 8,315 |
| |
| Net change in accrued interest receivable, prepaid expenses and other assets, and accrued expenses and other liabilities | | | 303 |
| | 4,231 |
|
| Stock-based compensation expense | | 2,016 |
| | 1,568 |
| | 2,366 |
| | 2,016 |
|
| Amortization of intangible assets | | 2,705 |
| | 966 |
| | 3,026 |
| | 2,705 |
|
| Origination of loans held for sale | | (60,994 | ) | | (82,767 | ) | |
| Proceeds from sale of loans | | 63,330 |
| | 91,576 |
| |
| Origination of mortgage loans held for sale | | | (45,852 | ) | | (60,994 | ) |
| Proceeds from sale of mortgage loans | | | 43,544 |
| | 63,330 |
|
| Earnings on bank owned life insurance | | (1,079 | ) | | (1,108 | ) | | (1,578 | ) | | (1,079 | ) |
| Gain on sale of other real estate owned | | — |
| | (111 | ) | |
| Valuation adjustment on other real estate owned | | | 51 |
| | — |
|
| Loss on sale of other real estate owned, net | | | 227 |
| | — |
|
| Gain on sale of loans, net | | (2,286 | ) | | (6,562 | ) | | (1,613 | ) | | (2,286 | ) |
| Gain on sale of investment securities, net | | (135 | ) | | (161 | ) | | (329 | ) | | (135 | ) |
| Gain on sale of assets held for sale | | (382 | ) | | (53 | ) | | — |
| | (382 | ) |
| Impairment of assets held for sale | | 75 |
| | — |
| | — |
| | 75 |
|
| Loss on sale or write-off of furniture, equipment and leasehold improvements | | 31 |
| | 12 |
| |
| Impairment of right of use asset | | | 117 |
| | — |
|
| (Gain) loss on sale of premises and equipment, net | | | (14 | ) | | 31 |
|
| Net cash provided by operating activities | | 55,427 |
| | 53,786 |
| | 60,774 |
| | 55,427 |
|
| Cash flows from investing activities: | | | | | | | | |
| Loans originated, net of principal payments | | (93,047 | ) | | (178,800 | ) | | (82,879 | ) | | (93,047 | ) |
| Maturities, calls and payments of investment securities available for sale | | 64,625 |
| | 75,800 |
| | 145,778 |
| | 64,625 |
|
| Purchase of investment securities available for sale | | (262,429 | ) | | (101,017 | ) | | (156,501 | ) | | (262,429 | ) |
| Proceeds from sales of investment securities available for sale | | | 43,872 |
| | 156,946 |
|
| Purchase of premises and equipment | | (21,468 | ) | | (2,221 | ) | | (10,526 | ) | | (21,468 | ) |
| Proceeds from sales of other loans | | 9,993 |
| | 24,142 |
| |
| Proceeds from sales of other real estate owned | | 198 |
| | 374 |
| |
| Proceeds from sales of investment securities available for sale | | 156,946 |
| | 21,850 |
| |
| Proceeds from sale of other loans | | | 3,562 |
| | 9,993 |
|
| Proceeds from sale of other real estate owned | | | 864 |
| | 198 |
|
| Proceeds from sale of assets held for sale | | 603 |
| | 265 |
| | — |
| | 603 |
|
| Proceeds from redemption of Federal Home Loan Bank stock | | 26,010 |
| | 21,788 |
| | 18,032 |
| | 26,010 |
|
| Purchases of Federal Home Loan Bank stock | | (21,996 | ) | | (23,567 | ) | | (18,333 | ) | | (21,996 | ) |
| Proceeds from sale of premises and equipment | | 26 |
| | — |
| |
| Capital contribution to low-income housing tax credit partnership | | (8,269 | ) | | (8,506 | ) | |
| Proceeds from sales of premises and equipment | | | 35 |
| | 26 |
|
| Purchase of bank owned life insurance | | | (8,000 | ) | | — |
|
| Capital contributions to low-income housing tax credit partnerships and new market tax credit partnerships, net | | | (16,992 | ) | | (8,269 | ) |
| Net cash received from acquisitions | | 105,974 |
| | — |
| | — |
| | 105,974 |
|
| Net cash used in investing activities | | (42,834 | ) | | (169,892 | ) | | (81,088 | ) | | (42,834 | ) |
| Cash flows from financing activities: | | | | | |
| Net increase in deposits | | 180,465 |
| | 91,170 |
| |
| Federal Home Loan Bank advances | | 541,450 |
| | 582,500 |
| |
| Repayments of Federal Home Loan Bank advances | | (649,950 | ) | | (544,700 | ) | |
| Common stock cash dividends paid | | (15,796 | ) | | (11,400 | ) | |
| Net (decrease)/increase in securities sold under agreement to repurchase | | (50 | ) | | 6,564 |
| |
| Proceeds from exercise of stock options | | 118 |
| | 159 |
| |
| Repurchase of common stock | | (1,702 | ) | | (674 | ) | |
| Net cash provided by financing activities | | 54,535 |
| | 123,619 |
| |
| | | | | Nine Months Ended September 30, | | Nine Months Ended
September 30, |
| | | 2018 | | 2017 | | 2019 | | 2018 |
| Cash flows from financing activities: | | | | | |
| Net increase in deposits | | | 129,855 |
| | 180,465 |
|
| Federal Home Loan Bank advances | | | 445,800 |
| | 541,450 |
|
| Repayment of Federal Home Loan Bank advances | | | (445,800 | ) | | (649,950 | ) |
| Common stock cash dividends paid | | | (20,288 | ) | | (15,796 | ) |
| Net decrease in securities sold under agreement to repurchase | | | (5,604 | ) | | (50 | ) |
| Proceeds from exercise of stock options | | | 44 |
| | 118 |
|
| Repurchase of common stock | | | (8,635 | ) | | (1,702 | ) |
| Net cash provided by financing activities | | | 95,372 |
| | 54,535 |
|
| Net increase in cash and cash equivalents | | 67,128 |
| | 7,513 |
| | 75,058 |
| | 67,128 |
|
| Cash and cash equivalents at beginning of period | | 103,015 |
| | 103,745 |
| | 161,910 |
| | 103,015 |
|
| Cash and cash equivalents at end of period | | $ | 170,143 |
| | $ | 111,258 |
| | $ | 236,968 |
| | $ | 170,143 |
|
| | | | | | | | | |
| Supplemental disclosures of cash flow information: | | | | | | | | |
| Cash paid for interest | | $ | 8,717 |
| | $ | 6,024 |
| | $ | 13,099 |
| | $ | 8,497 |
|
| Cash paid for income taxes | | 4,647 |
| | 1,500 |
| | 7,098 |
| | 4,647 |
|
| | | | | | | | | |
| Supplemental non-cash disclosures of cash flow information: | | | | | | | | |
| Transfers of loans receivable to other real estate owned | | $ | 434 |
| | $ | 32 |
| | $ | — |
| | $ | 434 |
|
| Transfers of properties held for sale recorded in premises and equipment, net to prepaid expenses and other assets | | 1,835 |
| | 2,687 |
| | 1,533 |
| | 1,835 |
|
| Investment in low income housing tax credit partnership and related funding commitment | | — |
| | 14,267 |
| | 15,254 |
| | — |
|
| Purchase of investment securities available for sale not settled | | 5,454 |
| | — |
| | — |
| | 5,454 |
|
| Transfer of bank owned life insurance to prepaid expenses and other assets | | | 209 |
| | — |
|
| Business Combinations: | | | | | | | | |
| Common stock issued for business combinations | | 230,043 |
| | — |
| | — |
| | 230,043 |
|
| Assets acquired (liabilities assumed) in acquisitions: | | | | | | | | |
| Investment securities available for sale | | 84,846 |
| | — |
| | — |
| | 84,846 |
|
| Loans receivable | | 718,547 |
| | — |
| | — |
| | 718,547 |
|
| Other real estate owned | | 1,796 |
| | — |
| | — |
| | 1,796 |
|
| Premises and equipment | | 3,785 |
| | — |
| | — |
| | 3,785 |
|
| Federal Home Loan Bank stock | | 1,743 |
| | — |
| | — |
| | 1,743 |
|
| Accrued interest receivable | | 2,454 |
| | — |
| | — |
| | 2,454 |
|
| Bank owned life insurance | | 17,116 |
| | — |
| | — |
| | 17,116 |
|
| Prepaid expenses and other assets | | 3,182 |
| | — |
| | — |
| | 3,182 |
|
| Other intangible assets | | 18,345 |
| | — |
| | — |
| | 18,345 |
|
| Goodwill | | 121,808 |
| | — |
| | — |
| | 121,808 |
|
| Deposits | | (824,602 | ) | | — |
| | — |
| | (824,602 | ) |
| Federal Home Loan Bank advances | | (16,000 | ) | | — |
| | — |
| | (16,000 | ) |
| Securities sold under agreement to repurchase | | (462 | ) | | — |
| | — |
| | (462 | ) |
| Accrued expenses and other liabilities | | (8,489 | ) | | — |
| | — |
| | (8,489 | ) |
See accompanying Notes to Condensed Consolidated Financial Statements.
HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
| |
| (1) | Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements |
(a) Description of Business
Heritage Financial Corporation ("Heritage" or the “Company”) is a bank holding company that was incorporated in the State of Washington in August 1997. The Company is primarily engaged in the business of planning, directing and coordinating the business activities of its wholly-owned subsidiary, Heritage Bank (the “Bank”).Bank. The Bank is a Washington-chartered commercial bank and its deposits are insured by the Federal Deposit Insurance Corporation ("FDIC").FDIC. The Bank is headquartered in Olympia, Washington and conducts business from its 6462 branch offices as of September 30, 20182019 located throughout Washington State and the greater Portland, Oregon area. The Bank’s business consists primarily of commercial lending and deposit relationships with small businesses and their owners in its market areas and attracting deposits from the general public. The Bank also makes real estate construction and land development loans, consumer loans and originates first mortgage loans on residential properties primarily located in its market areas.
Effective January 16, 2018, the Company completed the acquisition of Puget Sound Bancorp, Inc. (“Puget Sound”), the holding company for Puget Sound Bank, both of Bellevue, Washington (“Puget Sound Merger”)Merger and on July 2, 2018, the Company completed the acquisition of Premier Commercial Bancorp ("Premier Commercial"),Merger, collectively called the holding company for Premier Community Bank, both of Hillsboro, Oregon ("Premier Merger")."Premier and Puget Mergers." See Note (2) Business Combinations for additional information on the Puget Sound Merger and the Premier Merger (collectively the "Premier and Puget Mergers").Mergers.
(b) Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the accounting principles generally accepted in the United States (“U.S. GAAP”)GAAP for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC").SEC. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. It is recommended that these unaudited Condensed Consolidated Financial Statements and accompanying Notes be read with the audited Consolidated Financial Statements and the accompanying Notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017 (“20172018 Annual Form 10-K”).10-K. In management's opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 20182019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.2019. In preparing the unaudited Condensed Consolidated Financial Statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Management believes that the judgments, estimates and assumptions used in the preparation of the financial statements are appropriate based on the facts and circumstances at the time. Actual results, however, could differ significantly from those estimates.
(c) Significant Accounting Policies
The significant accounting policies used in preparation of the Company's Condensed Consolidated Financial Statements are disclosed in the 20172018 Annual Form 10-K. There have not been any material changes in the Company's significant accounting policies from those contained in the 20172018 Annual Form 10-K, except for the accounting policy relating to revenue from contracts with customersoperating leases adopted January 1, 2018,2019, as discussed below.
Revenue from Contracts with CustomersOperating leases
Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, (“ASC 606”), as amended, was adopted byDuring the Company on January 1, 2018. ASC 606 applies to all contracts with customers to provide goods or services in the ordinarynormal course of business, except for contracts that are specifically excluded from its scope.the Company enters into agreements, and at inception it determines if a particular agreement is a lease. The Company's revenuesnoncancelable operating lease agreements relate to certain banking offices, back-office operational facilities, office equipment, and sublease agreements. The agreements are primarily composed of interest income on financial instruments, suchrecorded as loansROU assets and investment securities, which are excluded fromliabilities within prepaid expenses and other assets and accrued expenses and other liabilities, respectively, in the scope of ASC 606. Descriptions of our revenue-generating activities that are within the scope ASC 606, which are presented in Service Charges and Other Fees and Other Income on the Company’s Condensed Consolidated StatementStatements of Income, are as follows:
Service Charges on Deposit Accounts: The Company earns fees from its deposit customers from a variety of deposit productsFinancial Condition. Operating lease ROU assets 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 feeslease liabilities are recognized at the timecommencement date based on the transactionpresent value of lease payments over the lease term, and represent the right to use an underlying asset for the lease term and the obligation to make lease payments arising from the lease. As the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease pre-payments made and excludes lease incentives. The Company's lease terms may include options to extend or terminate the lease when it is executed asreasonably certain that the contract duration does not extend beyond the service performed.
Wealth Management and Trust Services: The Company earns fees from contracts with customerswill exercise that option. Lease expense for fiduciary and brokerage activities. Revenues are generallylease payments is recognized on a monthlystraight-line basis and are generally based on a percentage ofover the customer’s assets under management or based on investment or insurance solutions that are implemented for the customer.lease term.
Merchant Processing Services and Debit and Credit Card Fees:
The Company earns fees from cardholder transactions conducted through third party payment network providers which consistelected an exclusion policy for ROU assets and liabilities for operating leases with a term of (i) interchange fees earned from the payment network astwelve months or less and a debit card issuer, (ii) referral fee income, and (iii) ongoing merchant fees earnedcapitalization threshold policy for referring customers to the payment processing provider. These fees are recognized when the transaction occurs, but may settle ontotal contractual lease payments of $25,000 or more. The Company does not account for any leases at a daily or monthly basis. portfolio level.
(d) Recently Issued Accounting Pronouncements
FASB ASU 2014-09, Revenue from Contracts with Customers, (as amended by FASB ASU 2015-14; FASB ASU 2016-08; FASB ASU 2016-10 and FASB ASU 2016-12), was issued in May 2014. Under this Accounting Standard Update ("ASU" or "Update"), the Financial Accounting Standards Board ("FASB") created a new Topic 606 which is in response to a joint initiative of FASB and the International Accounting Standards Board to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and international financial reporting standards that would:
Remove inconsistencies and weaknesses in revenue requirements.
Provide a more robust framework for addressing revenue issues.
Improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets.
Provide more useful information to users of financial statements through improved disclosure requirements.
Simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer.
The Company adopted the revenue recognition guidance, as amended, on January 1, 2018 using the modified retrospective approach. A significant amount of the Company’s revenues are derived from interest income on financial assets, which are excluded from the scope of the amended guidance. With respect to noninterest income and related disclosures, the Company has identified and evaluated the revenue streams and underlying revenue contracts within the scope of the guidance. The Company did not identify any significant changes in the timing of revenue recognition when considering the amended accounting guidance. The adoption of the Update did not have a material impact on the Company's Condensed Consolidated Financial Statements, but the adoption did change certain disclosure requirements as described in Significant Accounting Policies above.
FASB ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10), was issued in January 2016, to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. This Update contains several provisions, including but not limited to (1) requiring equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income; (2) simplifying the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (3) eliminating the requirement to disclose the method(s) and significant assumptions used to estimate fair value; and (4) requiring separate presentation of financial assets and liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements. The Update also changes certain financial statement disclosure requirements, including requiring disclosures of the fair value of financial instruments be made on the basis of exit price. The Company adopted this Update effective January 1, 2018 using the cumulative catch-up transition method. This change resulted in a cumulative adjustment of $93,000 from accumulated other comprehensive loss, net to retained earnings for the unrealized gain related to the Company's equity security. The Company's processes and procedures utilized to estimate the fair value of loans receivable and certificate of deposit accounts for disclosure
requirements were additionally changed due to adoption of this Update. Previously, the Company valued these items using an entry price notion. This ASU emphasized that these instruments be measured using the exit price notion; accordingly, the Company refined its calculation as part of adopting this Update. Prior period information has not been updated to conform with the new guidance. See the Condensed Consolidated Statements of Stockholders' Equity and Note (14) Fair Value Measurements.
FASB ASU 2016-02, Leases (Topic 842), as amended by ASU 2017-13, 2018-01, 2018-10, ASU 2018-11, and ASU 2018-11,2019-01 was originally issued in February 2016, to increase transparency and comparability of leases among organizations and to disclose key information about leasing arrangements. The UpdateASU sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The Update requires lessees to apply a dual approach, classifying leases as either a finance or operating lease. This classification will determine whetherCompany adopted the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. All cash payments will be classified within operating activities in the statement of cash flows. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Update is effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company anticipates adopting the UpdateASU on January 1, 2019. Upon2019 and elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed the Company to carry forward the historical determination of contracts as leases, to carry forward lease classifications, and to not reassess initial direct costs for historical lease arrangements. The adoption of this ASU resulted in the guidance, the Company expects to report increasedinitial recognition of operating lease ROU assets and increased liabilities on its Condensed Consolidated Statements of Financial Condition as a result of recognizing right-of-useapproximately $29.2 million and $29.8 million, respectively, in prepaid expenses and other assets and leaseaccrued expenses and other liabilities related to certain banking offices and certain equipment under noncancelable operating lease agreements, which currently are not reflected in itsthe Condensed Consolidated Statements of Financial Condition. During 2017, management developed its methodologyThis change also resulted in a cumulative-effect adjustment to estimatebeginning retained earnings of $399,000, net of tax, under the right-of use assets and lease liabilities. The Company anticipatesmodified retrospective approach. As a result of electing an exclusion accounting policy for lease assets and lease liabilities for leases with a term of twelve months or less. The Company was committed to $14.5 million of minimum lease payments under noncancelable operating lease agreements at September 30, 2018. The Company doesthis transition method, prior periods have not expect the adoption of this Update will have a significant impact to its Condensed Consolidated Financial Statements.been restated.
FASB ASU 2016-13, Financial Instruments: Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended by ASU 2018-19, ASU 2019-04 and ASU 2019-05, was originally issued in June 2016. Commonly referred to as the current expected credit loss model ("CECL"),CECL, this UpdateASU requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected on the financial asset. The measurement of expected credit losses is based on relevant information about past events including historical experience, current conditions and reasonable and supportable forecasts that affect the collectibility of the reported amount. The amendment affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables and any other financial asset not excluded from the scope that have the contractual right to receive cash. The Update replaces the incurred loss impairment methodology, which generally only considered past events and current conditions, with a methodology that reflects the expected credit losses and required consideration of a broader range of reasonable and supportable information to estimate all expected credit losses. The Update additionally addresses purchased assets and introduces the purchased financial asset with a more-than-insignificant amount of credit deterioration since origination ("PCD"). The accounting for these PCD assets is similar to the existing accounting guidance of FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, for PCI assets, except the subsequent improvements in estimated cash flows will be immediately recognized into income, similar to the immediate recognition of subsequent deteriorations in cash flows. Current guidance only allows for the prospective recognition of these cash flow improvements. Because the terminology has been changed to a "more-than-insignificant" amount of credit deterioration, the presumption is that more assets might qualify for this accounting under the Update than those under current guidance. For public business entities, the Updatethis ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years with early adoption permitted for fiscal years after December 15, 2018. An entity will apply the Update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. A prospective transition approach is required for debt securities. An entity that has previously applied the guidance of FASB ASC 310-30 will prospectively apply the guidance in this Update for PCD assets. A prospective transition approach should be used for PCD assets where upon adoption, the amortized cost basis should be adjusted to reflect the addition of the allowance for credit losses. The Company is anticipating adopting the Update on January 1, 2020. Upon adoption, the Company expects a change in the processes, internal controls and procedures to calculate the allowance for loan losses, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. In addition, the current accounting policy and procedures for other-than-temporary impairment on investment securities available for sale will be replaced with an allowance approach. The new guidance may result in an increase in the allowance for loan losses which will also reflect the new requirement to include the nonaccretable principal differences on PCI loans; however, the Company is still in the process of determining the
magnitude of the increase and its impact on the Condensed Consolidated Financial Statements. In addition, the current accounting policy and procedures for other-than-temporary impairment on investment securities available for sale will be replaced with an allowance approach. During 2017, the Company's management created a CECL steering committee which has begun developingto develop and implementingimplement processes and procedures to ensure it is fully compliant with the amendments at the adoption date. To date,In late 2017 the CECL steering committee has selected a vendor to assist the Company in the adoption and hasof a model, completed the implementation discovery sessions. The CECL steering committeesessions, and selected an appropriate methodology. During 2019, the Company compiled historical loan data and finalized data queries from the core system for current periods. Management is finalizing assumptions used in the process of selecting appropriate methodologiesmodel and refining key data to process through itsrunning and analyzing CECL models.ALLL outcomes. The Company anticipates running parallel models by second quarter 2019.providing an estimated ALLL under the CECL model in January 2020.
FASB ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, was issued in August 2016. The Update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. For public business entities, the guidance was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and must be applied using a retrospective transitional method to each period presented. The Company adopted this Update on January 1, 2018. The adoption did not have a significant impact on its Condensed Consolidated Financial Statements as cash proceeds received from the settlement of bank-owned life insurance policies and cash payments for premiums on bank-owned life insurance policies were previously classified as cash inflows and outflows, respectively, from investing activities in the Condensed Consolidated Statements of Cash Flows.
FASB ASU 2017-04, Goodwill (Topic 350), was issued in January 2017 and eliminates Step 2 from the goodwill impairment test. Under the amendments, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The loss recognized, however, should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The UpdateASU is effective for annual periods or any interim goodwill impairment tests beginning after December 15, 2019 using a prospective transition method and early adoption is permitted. The Company does not expect the UpdateASU will have a material impact on its Condensed Consolidated Financial Statements.
FASB ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities was issued in March 2017 and changes the accounting for certain purchased callable debt securities held at a premium to shorten the amortization period for the premium to the earliest call date rather than to the maturity date. Accounting for purchased callable debt securities held at a discount does not change. The discount would continue to amortize to the maturity date. The Update is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. The Company adopted this Update in January 2018. The adoption did not have a material impact on its Condensed Consolidated Financial Statements as the Company had been accounting for premiums as prescribed under this guidance.
FASB ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting was issued in May 2017 to provide clarity as to when to apply modification accounting when there is a change in the terms or conditions of a share-based payment award. According to this Update, an entity should account for the effects of a modification unless the fair value, vesting conditions and balance sheet classification of the award is the same after the modification as compared to the original award prior to the modification. The Update was effective for reporting periods beginning after December 15, 2017. The Company adopted the Update on January 1, 2018. The adoption did not have a material impact on its Condensed Consolidated Financial Statements because no share-based payment award was modified during the nine months ended September 30, 2018. The Company will apply this Update prospectively for any subsequent modifications of share-based payment awards.
FASB ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income was issued to address the income tax accounting treatment of the stranded tax effects within other comprehensive income due to the prohibition of backward tracing due to an income tax rate change that was initially recorded in other comprehensive income. This issue came about from the enactment of the Tax Cuts and Jobs Act on December 22, 2017 ("Tax Cuts and Jobs Act") that changed the Company’s income tax rate from 35% to 21%. The Update changed current accounting whereby an entity may elect to reclassify the stranded tax effect from accumulated other comprehensive income to retained earnings. The Update is effective for periods beginning after December 15, 2018 although early adoption is permitted. The Company early adopted ASU 2018-02 effective December 31, 2017 and elected a portfolio policy to reclassify the stranded tax effects of the change in the federal corporate tax rate of the net unrealized gains on our available-for-sale investment securities from accumulated other comprehensive loss, net to retained earnings.
FASB ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 was issued to provide guidance on the income tax accounting implications of the Tax Cuts
and Jobs Act, and allows for entities to report provisional amounts for specific income tax effects of the Tax Cuts and Jobs Act for which the accounting under ASC Topic 740 was not yet complete but a reasonable estimate could be determined. A measurement period of one-year is allowed to complete the accounting effects under ASC Topic 740 and revise any previous estimates reported. Any provisional amounts or subsequent adjustments included in an entity’s financial statements during the measurement period should be included in income from continuing operations as an adjustment to tax expense in the reporting period the amounts are determined. The Company adopted this Update with the provisional adjustments as reported in the Consolidated Financial Statements on Form 10-K as of December 31, 2017. As of September 30, 2018, the Company did not incur any adjustments to the provisional recognition.
FASB ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, was issued in August 2018 and modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in this UpdateASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company does not expect the UpdateASU will have a material impact on its Condensed Consolidated Financial Statements.
DuringThere were no acquisitions or mergers completed during the three and nine months ended September 30, 2018, the Company completed the acquisitions of 2019.
Puget Sound Bancorp and Premier Commercial Bancorp. There were no acquisitions completed during the nine months ended September 30, 2017.Merger:
Puget Sound:
On July 26, 2017, the Company, along with the Bank, and Puget Sound Bancorp, Inc. and its wholly owned subsidiary bank, Puget Sound Bank, jointly announced the signing of a definitive agreement. The Puget Sound Merger was effective on January 16, 2018. As of the acquisition date, Puget Sound merged into Heritage and Puget Sound Bank merged into Heritage Bank. The Puget Sound Merger resulted in $68.5 million of goodwill.
Pursuant to the terms of
The Company incurred 0 acquisition-related costs for the Puget Sound Merger all outstanding Puget Sound restricted stock awards became immediately vested onduring the acquisition datethree months ended September 30, 2019 and $75,000 during the nine months ended September 30, 2019. The Company incurred acquisition-related costs of the Puget Sound Merger$67,000 and Puget Sound shareholders received 1.1688 shares of Heritage common stock per share of Puget Sound stock. Heritage issued an aggregate of 4,112,258 shares of its common stock based on the January 12, 2018 closing price of Heritage Common stock of $31.80 for total fair value of common shares issued of $130.8$5.1 million and paid cash of $3,000 for fractional shares in the transaction for total consideration paid of $130.8 million. Total consideration includes $851,000 representing 26,741 shares which were forfeited by the Puget Sound shareholders to pay applicable taxes.
Duringduring the three and nine months ended September 30, 2018, the Company incurred acquisition-related costs of approximately $67,000 and $5.1 million, respectively, for the Puget Sound Merger. The Company incurred acquisition related costs of $387,000 for the three and nine months ended September 30, 2017 for the Puget Sound Merger.
Premier Commercial:Merger:
On March 24, 2018, the Company, along with the Bank, and Premier Commercial Bancorp and its wholly owned subsidiary bank, Premier Community Bank, jointly announced the signing of a definitive agreement. The Premier Merger was effective on July 2, 2018. As of the acquisition date, Premier Commercial Bancorp merged into Heritage and Premier CommercialCommunity Bank merged into Heritage Bank. The Premier Merger resulted in $53.4 million of goodwill.
Pursuant to the terms ofThe Company incurred 0 acquisition-related costs for the Premier Merger Premier Commercial shareholders received 0.4863 shares of Heritage common stock in exchange for each share of Premier Commercial common stock based on the closing date price per share of Heritage common stock on June 29, 2018 of $34.85. Heritage issued an aggregate of 2,848,579 shares of its common stock and paid cash of $2,000 for fractional shares in the transaction for total consideration paid of $99.3 million.
Duringduring the three months ended September 30, 2019 and $57,000 during the nine months ended September 30, 2018, the2019. The Company incurred acquisition-related costs of approximately $3.3 million and $4.0 million respectively, for the Premier Merger. The Company did not incur acquisition related costs forduring the three and nine months ended September 30, 20172018, respectively, for the Premier Merger.
Business Combination Accounting:
The Premier Merger and Puget Sound Merger resulted in $53.3 million and $68.5 million, respectively, of goodwill. This goodwill is not deductible for tax purposes.
The primary reason for the Premier and Puget Mergers was to create depth in the Company's geographic footprint consistent with its ongoing growth strategy, focused heavily on metro markets, and to achieve operational scale and realize efficiencies of a larger combined organization. The mergers constitute business acquisitions as
defined by FASB ASC 805, Business Combinations. FASB ASC 805 establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired and the liabilities assumed. Heritage was considered the acquirer in these transactions. Accordingly, the preliminary estimates of fair values of Premier Commercial and Puget Sound assets, including the identifiable intangible assets, and the assumed liabilities in the Premier Merger and Puget Sound Merger were measured and recorded as of July 2, 2018 and January 16, 2018, respectively. Fair values on the acquisition dates are preliminary and represent management’s best estimates based on available information and facts and circumstances in existence on the acquisition date. Fair values are subject to refinement for up to one year after the closing date of the acquisitions as additional information regarding the closing date fair values becomes available. The Company expects to finalizefinalized the purchase price allocation for both mergers by the endas of the fourth quarter of 2018 when the valuation of certain matters, including tax-related balances, is complete.December 31, 2018.
The preliminary fair value estimates of the assets acquired and liabilities assumed in the Premier and Puget Mergers were as follows:
|
| | | | | | | |
| | Premier Merger | | Puget Sound Merger |
| | (In thousands) |
| Assets | | | |
| Cash and cash equivalents | $ | 22,534 |
| | $ | 25,889 |
|
| Interest earning deposits | 3,309 |
| | 54,247 |
|
| Investment securities available for sale | 4,493 |
| | 80,353 |
|
| Loans receivable | 330,085 |
| | 388,462 |
|
| Other real estate owned | 1,796 |
| | — |
|
| Premises and equipment, net | 3,053 |
| | 732 |
|
| Federal Home Loan Bank stock, at cost | 1,120 |
| | 623 |
|
| Bank owned life insurance | 10,852 |
| | 6,264 |
|
| Accrued interest receivable | 1,006 |
| | 1,448 |
|
| Prepaid expenses and other assets | 1,828 |
| | 1,354 |
|
| Other intangible assets | 7,075 |
| | 11,270 |
|
| Total assets acquired | $ | 387,151 |
| | $ | 570,642 |
|
| Liabilities | | | |
| Deposits | $ | 318,717 |
| | $ | 505,885 |
|
| Federal Home Loan Bank advances | 16,000 |
| | — |
|
| Securities sold under agreement to repurchase | 462 |
| | — |
|
| Accrued expenses and other liabilities | 5,985 |
| | 2,504 |
|
| Total liabilities acquired | $ | 341,164 |
| | $ | 508,389 |
|
| | | | |
| Fair value of net assets acquired | $ | 45,987 |
| | $ | 62,253 |
|
A summary of the net assets purchased and the preliminary estimated fair value adjustments and resulting goodwill recognized from the Premier and Puget Sound Mergers are presented in the following tables. Goodwill represents the excess of the consideration transferred over the estimated fair value of the net assets acquired and liabilities assumed.
|
| | | | | | | |
| | Premier Merger | | Puget Sound Merger |
| | (In thousands) |
| Cost basis of net assets on merger date | $ | 40,579 |
| | $ | 54,405 |
|
| Consideration transferred | (99,275 | ) | | (130,773 | ) |
| Fair value adjustments: | | | |
| Investment securities | (135 | ) | | (348 | ) |
| Total loans receivable, net | (184 | ) | | 1,400 |
|
| Other real estate owned | (1,017 | ) | | — |
|
| Premises and equipment | 1,312 |
| | (121 | ) |
| Other intangible assets | 7,075 |
| | 9,207 |
|
| Prepaid expenses and other assets | (1,686 | ) | | (2,282 | ) |
| Deposits | (310 | ) | | (62 | ) |
| Accrued expenses and other liabilities | 353 |
| | 54 |
|
| Goodwill recognized from the mergers | $ | (53,288 | ) | | $ | (68,520 | ) |
The operating results of the Companytable presents certain pro forma information, for illustrative purposes only, for the three and nine months ended September 30, 2018 include the operating results produced by the net assets acquired inas if the Premier and Puget Mergers sincehad occurred on January 1, 2017. The estimated pro forma information combines the July 2, 2018historical results of Premier Commercial and Puget Sound with the Company's consolidated historical results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the Premier and Puget Mergers occurred on January 16, 2018 merger dates. The Company has considered1, 2017. In particular, the requirement of FASB ASC 805 relatedpro forma information does not consider any changes to the contributionprovision for loan losses resulting from recorded loans at fair value. Additionally, Heritage expected to achieve further operating savings and other business synergies, including interest income growth, as a result of the Premier and Puget Mergers to the Company’s results of operations. The table below presents only the significant results for the acquired businesses since the July 2, 2018 and January 16, 2018 merger dates:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Premier Merger (1) | | Puget Sound Merger(1) | | Total |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine
Months Ended | | Three Months Ended | | Nine
Months Ended |
| | September 30, 2018 |
| | (In thousands) |
Interest income: Interest and fees on loans(2) | $ | 5,422 |
| | $ | 5,422 |
| | $ | 5,959 |
| | $ | 16,606 |
| | $ | 11,381 |
| | $ | 22,028 |
|
Interest income: Interest and fees on investments (3) | 39 |
| | 39 |
| | — |
| | 59 |
| | 39 |
| | 98 |
|
| Interest income: Other interest earning assets | 115 |
| | 115 |
| | — |
| | 113 |
| | 115 |
| | 228 |
|
| Interest expense | (232 | ) | | (232 | ) | | (179 | ) | | (503 | ) | | (411 | ) | | (735 | ) |
| Provision for loan losses for loans | (150 | ) | | (150 | ) | | (350 | ) | | (900 | ) | | (500 | ) | | (1,050 | ) |
| Noninterest income | 44 |
| | 44 |
| | 110 |
| | 367 |
| | 154 |
| | 411 |
|
Noninterest expense (4) | (5,435 | ) | | (5,435 | ) | | (1,619 | ) | | (9,291 | ) | | (7,054 | ) | | (14,726 | ) |
| Net effect, pre-tax | $ | (197 | ) | | $ | (197 | ) | | $ | 3,921 |
| | $ | 6,451 |
| | $ | 3,724 |
| | $ | 6,254 |
|
(1) The Premier Merger was completed on July 2, 2018. The Puget Sound Merger was completed on January 16, 2018.
(2) Includes the accretion of the discount on the purchased loans of $1.9 million and $3.4 million during the three and nine months ended September 30, 2018, respectively.
(3) All securities acquiredwhich are not reflected in the Puget Sound Merger were sold with trade date of January 16, 2018 and settlement dates on or before February 14, 2018.
(4) Excludes certain compensation and employee benefits for management as it is impracticable to determine due to the integration of the operations for this merger. Also includes certain merger-related costs incurred by the Company.
The Company also considered the pro forma requirements of FASB ASC 805 and deemed it not necessary to provideamounts in the following table. As a result, actual amounts will differ from the pro forma financial statements as required under the standard as the Premier and Puget Mergers are individually and collectively not material to the Company. The Company believes that the historical Premier Commercial and Puget Sound operating results, individually or collectively, are not considered of enough significance to be meaningful to the Company’s results of operations.information presented.
|
| | | | | | | |
| | Three Months Ended September 30, 2018 | | Nine Months Ended September 30, 2018 |
| | (Dollars in thousands, except per share amounts) |
| Net interest income | $ | 49,942 |
| | $ | 143,740 |
|
| Net Income | 18,950 |
| | 50,225 |
|
| Basic earnings per share | $ | 0.51 |
| | $ | 1.36 |
|
| Dilutive earnings per share | $ | 0.51 |
| | $ | 1.35 |
|
As a result of the adoption of FASB ASU 2016-01 on January 1, 2018, equity investments (except for investments accounted for under the equity method of accounting) are now measured at fair value, with changes in fair value recognized in earnings. These investments were previously measured at fair value, with changes in fair value recognized in accumulated other comprehensive loss. Accordingly, these securities are no longer classified as investment securities available for sale and their presentation is not comparable to the presentation as of December 31, 2017. See Note (1) Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements, as well as the Equity Securities section discussed below.
Available for sale investment securities
(a) Securities by Type and Maturity
The following tables present the amortized cost, gross unrealized gains, gross unrealized losses and fair values of investment securities available for sale at the dates indicated were as follows:indicated:
|
| | | | | | | | | | | | | | | |
| | September 30, 2019 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| | (In thousands) |
| U.S. Treasury and U.S. Government-sponsored agencies | $ | 112,045 |
| | $ | 813 |
| | $ | (7 | ) | | $ | 112,851 |
|
| Municipal securities | 122,733 |
| | 4,582 |
| | — |
| | 127,315 |
|
Mortgage-backed securities and collateralized mortgage obligations(1): | | | | | | | |
| Residential | 343,909 |
| | 3,394 |
| | (626 | ) | | 346,677 |
|
| Commercial | 324,153 |
| | 7,621 |
| | (444 | ) | | 331,330 |
|
| Corporate obligations | 23,873 |
| | 309 |
| | (26 | ) | | 24,156 |
|
| Other asset-backed securities | 23,517 |
| | 280 |
| | (24 | ) | | 23,773 |
|
| Total | $ | 950,230 |
| | $ | 16,999 |
| | $ | (1,127 | ) | | $ | 966,102 |
|
|
| | | | | | | | | | | | | | | |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| | (In thousands) |
| September 30, 2018 | | | | | | | |
| U.S. Treasury and U.S. Government-sponsored agencies | $ | 84,252 |
| | $ | 51 |
| | $ | (505 | ) | | $ | 83,798 |
|
| Municipal securities | 164,641 |
| | 887 |
| | (1,456 | ) | | 164,072 |
|
Mortgage-backed securities and collateralized mortgage obligations(1): | | | | | | | |
| Residential | 321,145 |
| | 207 |
| | (9,436 | ) | | 311,916 |
|
| Commercial | 318,165 |
| | 162 |
| | (9,213 | ) | | 309,114 |
|
| Collateralized loan obligations | 967 |
| | — |
| | — |
| | 967 |
|
| Corporate obligations | 25,639 |
| | 137 |
| | (67 | ) | | 25,709 |
|
| Other asset-backed securities | 24,543 |
| | 618 |
| | — |
| | 25,161 |
|
| Total | $ | 939,352 |
| | $ | 2,062 |
| | $ | (20,677 | ) | | $ | 920,737 |
|
| | | | | | | | |
| December 31, 2017 | | | | | | | |
| U.S. Treasury and U.S. Government-sponsored agencies | $ | 13,460 |
| | $ | 6 |
| | $ | (24 | ) | | $ | 13,442 |
|
| Municipal securities | 247,358 |
| | 3,720 |
| | (1,063 | ) | | 250,015 |
|
Mortgage-backed securities and collateralized mortgage obligations(1): | | | | | | | |
| Residential | 282,724 |
| | 422 |
| | (2,935 | ) | | 280,211 |
|
| Commercial | 219,696 |
| | 444 |
| | (3,061 | ) | | 217,079 |
|
| Collateralized loan obligations | 4,561 |
| | 19 |
| | — |
| | 4,580 |
|
| Corporate obligations | 16,594 |
| | 220 |
| | (44 | ) | | 16,770 |
|
Other securities (2) | 27,781 |
| | 652 |
| | — |
| | 28,433 |
|
| Total | $ | 812,174 |
| | $ | 5,483 |
| | $ | (7,127 | ) | | $ | 810,530 |
|
| |
(1) | Issued and guaranteed by U.S. Government-sponsored agencies. |
|
| | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value |
| | (In thousands) |
| U.S. Treasury and U.S. Government-sponsored agencies | $ | 101,595 |
| | $ | 155 |
| | $ | (147 | ) | | $ | 101,603 |
|
| Municipal securities | 158,461 |
| | 1,209 |
| | (806 | ) | | 158,864 |
|
Mortgage-backed securities and collateralized mortgage obligations(1): | | | | | | | |
| Residential | 337,295 |
| | 426 |
| | (6,119 | ) | | 331,602 |
|
| Commercial | 338,250 |
| | 1,035 |
| | (5,524 | ) | | 333,761 |
|
| Corporate obligations | 25,662 |
| | 36 |
| | (135 | ) | | 25,563 |
|
| Other asset-backed securities | 24,278 |
| | 424 |
| | — |
| | 24,702 |
|
| Total | $ | 985,541 |
| | $ | 3,285 |
| | $ | (12,731 | ) | | $ | 976,095 |
|
| |
(2)(1)
| Primarily asset-backed securities.Issued and guaranteed by U.S. Government-sponsored agencies. |
There were no0 securities classified as trading or held to maturity at September 30, 20182019 or December 31, 20172018.
The amortized cost and fair value of investment securities available for sale at September 30, 2018,2019, by contractual maturity, are set forth below. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
|
| | | | | | | |
| | Amortized Cost | | Fair Value |
| | (In thousands) |
| Due in one year or less | $ | 37,675 |
| | $ | 37,742 |
|
| Due after one year through five years | 194,742 |
| | 197,144 |
|
| Due after five years through ten years | 275,903 |
| | 282,814 |
|
| Due after ten years | 441,910 |
| | 448,402 |
|
| Total | $ | 950,230 |
| | $ | 966,102 |
|
|
| | | | | | | |
| | Amortized Cost | | Fair Value |
| | (In thousands) |
| Due in one year or less | $ | 20,658 |
| | $ | 20,682 |
|
| Due after one year through five years | 185,956 |
| | 183,968 |
|
| Due after five years through ten years | 256,795 |
| | 249,376 |
|
| Due after ten years | 475,943 |
| | 466,711 |
|
| Total | $ | 939,352 |
| | $ | 920,737 |
|
(b) Unrealized Losses and Other-Than-Temporary Impairments
The following table showstables show the gross unrealized losses and fair value of the Company's investment securities available for sale that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that the individual securities have been in continuous unrealized loss positions as of September 30, 20182019 and December 31, 20172018:
| | | | Less than 12 Months | | 12 Months or Longer | | Total | September 30, 2019 |
| | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | Less than 12 Months | | 12 Months or Longer | | Total |
| | (In thousands) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| September 30, 2018 | | | | | | | | | | | | |
| | | (In thousands) |
| U.S. Treasury and U.S. Government-sponsored agencies | $ | 77,217 |
| | $ | (492 | ) | | $ | 530 |
| | $ | (13 | ) | | $ | 77,747 |
| | $ | (505 | ) | $ | 6,993 |
| | $ | (7 | ) | | $ | — |
| | $ | — |
| | $ | 6,993 |
| | $ | (7 | ) |
| Municipal securities | 61,743 |
| | (549 | ) | | 27,912 |
| | (907 | ) | | 89,655 |
| | (1,456 | ) | |
Mortgage-backed securities and collateralized mortgage obligations(1): | | | | | | | | | | | | | | | | | | | | | | |
| Residential | 139,277 |
| | (2,927 | ) | | 136,045 |
| | (6,509 | ) | | 275,322 |
| | (9,436 | ) | 46,175 |
| | (210 | ) | | 47,952 |
| | (416 | ) | | 94,127 |
| | (626 | ) |
| Commercial | 142,747 |
| | (2,242 | ) | | 139,847 |
| | (6,971 | ) | | 282,594 |
| | (9,213 | ) | 29,842 |
| | (72 | ) | | 46,210 |
| | (372 | ) | | 76,052 |
| | (444 | ) |
| Corporate obligations | 12,695 |
| | (44 | ) | | 1,977 |
| | (23 | ) | | 14,672 |
| | (67 | ) | — |
| | — |
| | 1,974 |
| | (26 | ) | | 1,974 |
| | (26 | ) |
| Other asset-backed securities | | 3,453 |
| | (11 | ) | | 1,704 |
| | (13 | ) | | 5,157 |
| | (24 | ) |
| Total | $ | 435,733 |
| | $ | (6,254 | ) | | $ | 306,311 |
| | $ | (14,423 | ) | | $ | 742,044 |
| | $ | (20,677 | ) | $ | 86,463 |
| | $ | (300 | ) | | $ | 97,840 |
| | $ | (827 | ) | | $ | 184,303 |
| | $ | (1,127 | ) |
| | | | | | | | | | | | | |
| December 31, 2017 | | | | | | | | | | | | |
| U.S. Treasury and U.S. Government-sponsored agencies | $ | 11,436 |
| | $ | (24 | ) | | $ | — |
| | $ | — |
| | $ | 11,436 |
| | $ | (24 | ) | |
| Municipal securities | 39,298 |
| | (384 | ) | | 26,509 |
| | (679 | ) | | 65,807 |
| | (1,063 | ) | |
Mortgage-backed securities and collateralized mortgage obligations(1): | | | | | | | | | | | | |
| Residential | 175,847 |
| | (1,296 | ) | | 66,380 |
| | (1,639 | ) | | 242,227 |
| | (2,935 | ) | |
| Commercial | 75,121 |
| | (700 | ) | | 90,822 |
| | (2,361 | ) | | 165,943 |
| | (3,061 | ) | |
| Corporate obligations | 3,472 |
| | (44 | ) | | — |
| | — |
| | 3,472 |
| | (44 | ) | |
| Total | $ | 305,174 |
| | $ | (2,448 | ) | | $ | 183,711 |
| | $ | (4,679 | ) | | $ | 488,885 |
| | $ | (7,127 | ) | |
| |
(1) | Issued and guaranteed by U.S. Government-sponsored agencies. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Less than 12 Months | | 12 Months or Longer | | Total |
| | Fair
Value | | Unrealized
Losses | | Fair
Value | | Unrealized
Losses | | Fair
Value | | Unrealized
Losses |
| | (In thousands) |
| U.S. Treasury and U.S. Government-sponsored agencies | $ | 46,992 |
| | $ | (58 | ) | | $ | 7,350 |
| | $ | (89 | ) | | $ | 54,342 |
| | $ | (147 | ) |
| Municipal securities | 31,157 |
| | (159 | ) | | 38,792 |
| | (647 | ) | | 69,949 |
| | (806 | ) |
Mortgage-backed securities and collateralized mortgage obligations(1): | | | | | | | | | | | |
| Residential | 66,620 |
| | (247 | ) | | 193,726 |
| | (5,872 | ) | | 260,346 |
| | (6,119 | ) |
| Commercial | 43,531 |
| | (272 | ) | | 190,585 |
| | (5,252 | ) | | 234,116 |
| | (5,524 | ) |
| Corporate obligations | 13,736 |
| | (87 | ) | | 1,951 |
| | (48 | ) | | 15,687 |
| | (135 | ) |
| Total | $ | 202,036 |
| | $ | (823 | ) | | $ | 432,404 |
| | $ | (11,908 | ) | | $ | 634,440 |
| | $ | (12,731 | ) |
| |
(1) | Issued and guaranteed by U.S. Government-sponsored agencies. |
(1) Issued and guaranteed by U.S. Government-sponsored agencies.
The Company has evaluated these investment securities available for sale as of September 30, 20182019 and December 31, 20172018 and has determined that the decline in their value is not other-than-temporary. The unrealized losses are primarily due to increases in market interest rates.rates since purchase of the securities. The fair value of these securities is expected to recover as the securities approach their maturity date. None of the underlying issuers of the municipal securities and corporate obligations had credit ratings that were below investment grade levels at September 30, 20182019 or December 31, 2017.2018. The Company has the ability and intent to hold the investments until recovery of the securities' amortized cost, which may be the maturity date of the securities.
For the three and nine months ended September 30, 20182019 and 2017,2018, there were no0 other-than-temporary charges recorded to net income.
(c) Realized Gains and Losses
The following table presents the gross realized gains and losses on the sale of securities available for sale for the three and nine months ended September 30, 20182019 and 2017.2018:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended
September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (In thousands) |
| Gross realized gains | $ | 281 |
| | $ | 145 |
| | $ | 557 |
| | $ | 267 |
|
| Gross realized losses | — |
| | (63 | ) | | (228 | ) | | (132 | ) |
| Net realized gains | $ | 281 |
| | $ | 82 |
| | $ | 329 |
| | $ | 135 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | (In thousands) |
| Gross realized gains | $ | 145 |
| | $ | 75 |
| | $ | 267 |
| | $ | 192 |
|
| Gross realized losses | (63 | ) | | (31 | ) | | (132 | ) | | (31 | ) |
| Net realized gains | $ | 82 |
| | $ | 44 |
| | $ | 135 |
| | $ | 161 |
|
(d) Pledged Securities
The following table summarizes the amortized cost and fair value of investment securities available for sale that are pledged as collateral for the following obligations at September 30, 20182019 and December 31, 20172018:
|
| | | | | | | | | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| | (In thousands) |
| Washington and Oregon state public deposits | $ | 188,219 |
| | $ | 191,336 |
| | $ | 199,026 |
| | $ | 196,786 |
|
| Securities sold under agreement to repurchase | 40,481 |
| | 40,830 |
| | 48,173 |
| | 47,407 |
|
| Other securities pledged | 20,559 |
| | 21,128 |
| | 20,778 |
| | 20,482 |
|
| Total | $ | 249,259 |
| | $ | 253,294 |
| | $ | 267,977 |
| | $ | 264,675 |
|
|
| | | | | | | | | | | | | | | |
| | September 30, 2018 | | December 31, 2017 |
| | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| | (In thousands) |
| Washington and Oregon state to secure public deposits | $ | 194,052 |
| | $ | 189,917 |
| | $ | 206,377 |
| | $ | 206,425 |
|
| Repurchase agreements | 46,097 |
| | 44,706 |
| | 48,750 |
| | 48,237 |
|
| Other securities pledged | 21,237 |
| | 20,571 |
| | 12,484 |
| | 12,498 |
|
| Total | $ | 261,386 |
| | $ | 255,194 |
| | $ | 267,611 |
| | $ | 267,160 |
|
Equity Securities
The Company holds an equity security with a readily determinable fair value of $132,000 and $146,000 as of September 30, 2018 and December 31, 2017, respectively. As a result of the adoption of FASB ASU 2016-01, this security is no longer classified as an investment security available for sale and has been reclassified to prepaid expenses and other assets on the Company's Condensed Consolidated Statements of Financial Condition as of September 30, 2018. As such, its presentation is not comparable to the presentation as of December 31, 2017. The Company recorded the tax-effected unrealized gain on the equity security through an adjustment to accumulated other comprehensive loss, net and retained earnings in the Condensed Consolidated Statement of Stockholders' Equity during the nine months ended September 30, 2018.
(a) Loan Origination/Risk Management
The Company originates loans in the ordinary course of business and has also acquired loans through mergers and acquisitions. Disclosures related to the Company's recorded investment in loans receivable generally exclude accrued interest receivable and net deferred fees or costs becauseas they arewere deemed insignificant.
Loans acquired in a business combination are further classified as “purchased” loans. Loans purchased with evidence of credit deterioration since origination for which it is probable that not all contractually required payments will be collected are accounted for under FASB ASC 310-30, Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality. These loans are identified as "PCI" loans. Loans purchased that are not accounted for under FASB ASC 310-30 are accounted for under FASB ASC 310-20, Receivables—Nonrefundable Fees and Other Costs, and are referred to as "non-PCI" loans.
(a) Loan Origination/Risk Management There were no PCI loans acquired in the Premier and Puget Mergers.
The Company categorizes loans in one of the four4 segments of the total loan portfolio: commercial business, one-to-four family residential, real estate construction and land development and consumer. Within these segments are classes of loans for which management monitors and assesses credit risk in the loan portfolios. The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and criticized loans. The Company also conducts internal loan reviews and validates the credit risk assessment on a periodic basis and presents the results of these reviews to management. The loan review process complements and reinforces the risk identification and assessment decisions made by loan officers and credit personnel, as well as the Company’s policies and procedures.
A discussion of the risk characteristics of each loan portfolio segment is as follows:
Commercial Business:
There are three significant classes of loans in the commercial business portfolio segment: commercial and industrial, owner-occupied commercial real estate and non-owner occupied commercial real estate. The owner and non-owner occupied commercial real estate classes are both considered commercial real estate loans. As the commercial and industrial loans carry different risk characteristics than the commercial real estate loans, they are discussed separately below.
Commercial and industrial. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may include a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Commercial and industrial loans carry more risk than other loans because the borrowers’ cash flow is less predictable, and in the event of a default, the amount of loss is potentially greater and more difficult to quantify because the value of the collateral securing these loans may fluctuate, may be uncollectible, or may be obsolete or of limited use, among other things.
Commercial real estate. The Company originates commercial real estate loans primarily within its primary market areas. These loans are subject to underwriting standards and processes similar to commercial and industrial loans in that these loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate properties. Commercial real estate lending typically involves higher loan principal amounts and payments on loans, and repayment is dependent on successful operation and management of the properties. The value of the real estate securing these loans can be adversely affected by conditions in the real estate market or the economy. There is little difference in risk between owner-occupied commercial real estate loans and non-owner occupied commercial real estate loans.
One-to-Four Family Residential:
The majority of the Company’s one-to-four family residential loans are secured by single-family residences located in its primary market areas. The Company’s underwriting standards require that single-family portfolio loans generally are owner-occupied and do not exceed 80% of the lower of appraised value at origination or cost of the underlying collateral. Terms of maturity typically range from 15 to 30 years. The Company sells most of its single-family loans in the secondary market and retains a smaller portion in its loan portfolio.
Real Estate Construction and Land Development:
The Company originates construction loans for one-to-four family residential and for five or more family residential and commercial properties. The one-to-four family residential construction loans generally include construction of custom homes whereby the home buyer is the borrower. The Company also provides financing to builders for the construction of pre-sold homes and, in selected cases, to builders for the construction of speculative residential property. Substantially all construction loans are short-term in nature and priced with variable rates of interest. Construction lending can involve a higher level of risk than other types of lending because funds are advanced partially based upon the value of the project, which is uncertain prior to the project’s completion. Because of the uncertainties inherent in estimating construction costs as well as the market value of a completed project and the effects of governmental regulation of real property, the Company’s estimates with regard to the total funds required to complete a project and the related loan-to-value ratio may vary from actual results. As a result, construction loans often
involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property or refinance the indebtedness. If the Company’s estimate of the value of a project at completion proves to be overstated, it may have inadequate security for repayment of the loan and may incur a loss if the borrower does not repay the loan. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being dependent upon successful completion of the construction project, interest rate changes, government regulation of real property, general economic conditions and the availability of long-term financing.
Consumer:
The Company originates consumer loans and lines of credit that are both secured and unsecured. The underwriting process for these loans ensures a qualifying primary and secondary source of repayment. Underwriting standards for home equity loans are significantly influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage of 80%, collection remedies, the number of such loans a borrower can have at one time and documentation requirements. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed. The majority of consumer loans are for relatively small amounts disbursed among many individual borrowers which reduces the credit risk for this type of loan. To further reduce the risk, trend reports are reviewed by management on a regular basis.
The Company also originates indirect consumer loans. These loans are for new and used automobile and recreational vehicles that are originated indirectly by selected dealers located in the Company's market areas. The Company has limited its purchase of indirect loans primarily to dealerships that are established and well-known in their market areas and to applicants that are not classified as sub-prime.
Loans receivable at September 30, 20182019 and December 31, 20172018 consisted of the following portfolio segments and classes:
|
| | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| | (In thousands) |
| Commercial business: | | | |
| Commercial and industrial | $ | 853,995 |
| | $ | 853,606 |
|
| Owner-occupied commercial real estate | 787,591 |
| | 779,814 |
|
| Non-owner occupied commercial real estate | 1,316,992 |
| | 1,304,463 |
|
| Total commercial business | 2,958,578 |
| | 2,937,883 |
|
| One-to-four family residential | 121,174 |
| | 101,763 |
|
| Real estate construction and land development: | | | |
| One-to-four family residential | 98,034 |
| | 102,730 |
|
| Five or more family residential and commercial properties | 147,686 |
| | 112,730 |
|
| Total real estate construction and land development | 245,720 |
| | 215,460 |
|
| Consumer | 403,485 |
| | 395,545 |
|
| Gross loans receivable | 3,728,957 |
| | 3,650,651 |
|
| Net deferred loan costs | 2,386 |
| | 3,509 |
|
| Loans receivable, net | 3,731,343 |
| | 3,654,160 |
|
| Allowance for loan losses | (36,518 | ) | | (35,042 | ) |
| Total loans receivable, net | $ | 3,694,825 |
| | $ | 3,619,118 |
|
|
| | | | | | | |
| | September 30, 2018 | | December 31, 2017 |
| | (In thousands) |
| Commercial business: | | | |
| Commercial and industrial | $ | 861,530 |
| | $ | 645,396 |
|
| Owner-occupied commercial real estate | 785,416 |
| | 622,150 |
|
| Non-owner occupied commercial real estate | 1,283,160 |
| | 986,594 |
|
| Total commercial business | 2,930,106 |
| | 2,254,140 |
|
| One-to-four family residential | 96,333 |
| | 86,997 |
|
| Real estate construction and land development: | | | |
| One-to-four family residential | 107,148 |
| | 51,985 |
|
| Five or more family residential and commercial properties | 120,787 |
| | 97,499 |
|
| Total real estate construction and land development | 227,935 |
| | 149,484 |
|
| Consumer | 391,283 |
| | 355,091 |
|
| Gross loans receivable | 3,645,657 |
| | 2,845,712 |
|
| Net deferred loan costs | 3,397 |
| | 3,359 |
|
| Loans receivable, net | 3,649,054 |
| | 2,849,071 |
|
| Allowance for loan losses | (34,475 | ) | | (32,086 | ) |
| Total loans receivable, net | $ | 3,614,579 |
| | $ | 2,816,985 |
|
(b) Concentrations of Credit
Most of the Company’s lending activity occurs within its primary market areas which are concentrated along the I-5 corridor from Whatcom County to Clark County in Washington State and Multnomah County in Oregon, as well as other contiguous markets. The majority of the Company’s loan portfolio consists of (in order of balances at September 30, 2018) non-owner occupied commercial real estate, commercial and industrial and owner-occupied commercial real estate. As of September 30, 20182019, and December 31, 2017,2018, there were no0 concentrations of loans related to any single industry in excess of 10% of the Company’s total loans.
(c) Credit Quality Indicators
As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the risk grade of the loans, (ii) the level of classified loans, (iii) net charge-offs, (iv) nonperforming loans and (v) the general economic conditions of the United States of America, and specifically the states of Washington and Oregon. The Company utilizes a risk grading matrix to assign a risk grade to each of its loans. Loans are gradedloan on a scale of 1 to 10. A description of the general characteristics ofRisk grades are aggregated to create the risk categories of "Pass" for grades is as follows:
Grades 1 to 5: These grades are considered “pass grade”6, OAEM for grade 7, "Substandard" for grade 8, "Doubtful" for grade 9 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"Loss" for grade show no immediate loss exposure.
Grade 6: This grade includes "Watch" loans and is considered a “pass grade”. The grade is intended to be utilized on a temporary basis for pass grade borrowers where a potentially significant risk-modifying action is anticipated in the near term.
Grade 7: This grade includes “Other Assets Especially Mentioned” (“OAEM”) loans in accordance with regulatory guidelines and is intended to highlight loans with elevated risks. 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 decline unless active measures are taken to correct the situation.
Grade 8: This grade includes “Substandard” loans in accordance with regulatory guidelines, which the Company has determined have a high credit risk. These loans also have well-defined weaknesses which make payment default or principal exposure likely, but not yet certain. The borrower may have shown serious negative trends in financial ratios and performance. Such loans may be dependent upon collateral liquidation, a secondary source of repayment or an event outside of the normal course of business. Loans with this grade can be placed on accrual or nonaccrual status based on the Company’s accrual policy.
Grade 9: This grade includes “Doubtful” loans in accordance with regulatory guidelines, and the Company has determined these loans to have excessive credit risk. Such loans are placed on nonaccrual status and may be dependent upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. Additionally, these loans generally have a specific valuation allowance or have been partially charged-off for the amount considered uncollectible.
Grade 10: This grade includes “Loss” loans in accordance with regulatory guidelines, and the Company has determined these loans have the highest risk of loss. Such loans are charged-off or charged-down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. “Loss” is not intended to imply that the loan or some portion of it will never be paid, nor does it in any way imply that there has been a forgiveness of debt.
Numerical loan grades for loans are established at the origination of the loan. Loan grades are reviewed on a quarterly basis, or more frequently if necessary, by the credit department. The Bank follows the FDIC’s Uniform Retail Credit Classification and Account Management Policy for subsequent classification in the event of payment delinquencies or default. Typically, an individual loan grade will not be changed from the prior period unless there is a specific indication of credit deterioration or improvement. Credit deterioration is evidenced by delinquency, direct communications with the borrower, or other borrower information that becomes known to management. Credit improvements are evidenced by known facts regarding the borrower or the collateral property.
The loan grades relate to the likelihood of losses in that the higher the grade, the greater the loss potential. Loans with a pass grade may have some estimated inherent losses, but to a lesser extent than the other loan grades. The OAEM loan grade is transitory in that the Company is waiting on additional information to determine the likelihood and extent of the potential loss. The likelihood of loss for OAEM graded loans, however, is greater than Watch graded loans because there has been measurable credit deterioration. Loans with a Substandard grade are generally loans for which the Company has individually analyzed for potential impairment. For Doubtful and Loss graded loans, the Company is almost certain of the losses, and the outstanding principal balances are generally charged-off to the realizable value.10.
The following tables present the balance of the loans receivable by credit quality indicator as of September 30, 20182019 and December 31, 2017.2018:
| | | | September 30, 2018 | September 30, 2019 |
| | Pass | | OAEM | | Substandard | | Doubtful/Loss | | Total | Pass | | OAEM | | Substandard | | Doubtful/Loss | | Total |
| | (In thousands) | (In thousands) |
| Commercial business: | | | | | | | | | | | | | | | | | | |
| Commercial and industrial | $ | 797,284 |
| | $ | 15,793 |
| | $ | 48,453 |
| | $ | — |
| | $ | 861,530 |
| $ | 777,165 |
| | $ | 20,310 |
| | $ | 56,520 |
| | $ | — |
| | $ | 853,995 |
|
| Owner-occupied commercial real estate | 745,548 |
| | 21,260 |
| | 18,608 |
| | — |
| | 785,416 |
| 753,386 |
| | 20,498 |
| | 13,707 |
| | — |
| | 787,591 |
|
| Non-owner occupied commercial real estate | 1,256,115 |
| | 12,889 |
| | 14,156 |
| | — |
| | 1,283,160 |
| 1,293,780 |
| | 9,989 |
| | 13,223 |
| | — |
| | 1,316,992 |
|
| Total commercial business | 2,798,947 |
| | 49,942 |
| | 81,217 |
| | — |
| | 2,930,106 |
| 2,824,331 |
| | 50,797 |
| | 83,450 |
| | — |
| | 2,958,578 |
|
| One-to-four family residential | 95,023 |
| | — |
| | 1,310 |
| | — |
| | 96,333 |
| 119,914 |
| | — |
| | 1,260 |
| | — |
| | 121,174 |
|
| Real estate construction and land development: | | | | | | | | | | | | | | | | | | |
| One-to-four family residential | 105,703 |
| | 261 |
| | 1,184 |
| | — |
| | 107,148 |
| 96,300 |
| | — |
| | 1,734 |
| | — |
| | 98,034 |
|
| Five or more family residential and commercial properties | 120,733 |
| | 54 |
| | — |
| | — |
| | 120,787 |
| 147,177 |
| | 509 |
| | — |
| | — |
| | 147,686 |
|
| Total real estate construction and land development | 226,436 |
| | 315 |
| | 1,184 |
| | — |
| | 227,935 |
| 243,477 |
| | 509 |
| | 1,734 |
| | — |
| | 245,720 |
|
| Consumer | 386,566 |
| | — |
| | 4,193 |
| | 524 |
| | 391,283 |
| 399,203 |
| | — |
| | 3,758 |
| | 524 |
| | 403,485 |
|
| Gross loans receivable | $ | 3,506,972 |
| | $ | 50,257 |
| | $ | 87,904 |
| | $ | 524 |
| | $ | 3,645,657 |
| $ | 3,586,925 |
| | $ | 51,306 |
| | $ | 90,202 |
| | $ | 524 |
| | $ | 3,728,957 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Pass | | OAEM | | Substandard | | Doubtful/Loss | | Total |
| | (In thousands) |
| Commercial business: | | | | | | | | | |
| Commercial and industrial | $ | 788,395 |
| | $ | 16,168 |
| | $ | 49,043 |
| | $ | — |
| | $ | 853,606 |
|
| Owner-occupied commercial real estate | 741,227 |
| | 27,724 |
| | 10,863 |
| | — |
| | 779,814 |
|
| Non-owner occupied commercial real estate | 1,283,077 |
| | 9,438 |
| | 11,948 |
| | — |
| | 1,304,463 |
|
| Total commercial business | 2,812,699 |
| | 53,330 |
| | 71,854 |
| | — |
| | 2,937,883 |
|
| One-to-four family residential | 100,401 |
| | — |
| | 1,362 |
| | — |
| | 101,763 |
|
| Real estate construction and land development: | | | | | | | | | |
| One-to-four family residential | 101,519 |
| | 258 |
| | 953 |
| | — |
| | 102,730 |
|
| Five or more family residential and commercial properties | 112,678 |
| | 52 |
| | — |
| | — |
| | 112,730 |
|
| Total real estate construction and land development | 214,197 |
| | 310 |
| | 953 |
| | — |
| | 215,460 |
|
| Consumer | 390,808 |
| | — |
| | 4,213 |
| | 524 |
| | 395,545 |
|
| Gross loans receivable | $ | 3,518,105 |
| | $ | 53,640 |
| | $ | 78,382 |
| | $ | 524 |
| | $ | 3,650,651 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | Pass | | OAEM | | Substandard | | Doubtful/Loss | | Total |
| | (In thousands) |
| Commercial business: | | | | | | | | | |
| Commercial and industrial | $ | 597,697 |
| | $ | 19,536 |
| | $ | 28,163 |
| | $ | — |
| | $ | 645,396 |
|
| Owner-occupied commercial real estate | 595,455 |
| | 12,668 |
| | 14,027 |
| | — |
| | 622,150 |
|
| Non-owner occupied commercial real estate | 955,450 |
| | 10,494 |
| | 20,650 |
| | — |
| | 986,594 |
|
| Total commercial business | 2,148,602 |
| | 42,698 |
| | 62,840 |
| | — |
| | 2,254,140 |
|
| One-to-four family residential | 85,762 |
| | — |
| | 1,235 |
| | — |
| | 86,997 |
|
| Real estate construction and land development: | | | | | | | | | |
| One-to-four family residential | 49,925 |
| | 537 |
| | 1,523 |
| | — |
| | 51,985 |
|
| Five or more family residential and commercial properties | 96,404 |
| | 707 |
| | 388 |
| | — |
| | 97,499 |
|
| Total real estate construction and land development | 146,329 |
| | 1,244 |
| | 1,911 |
| | — |
| | 149,484 |
|
| Consumer | 349,590 |
| | — |
| | 4,976 |
| | 525 |
| | 355,091 |
|
| Gross loans receivable | $ | 2,730,283 |
| | $ | 43,942 |
| | $ | 70,962 |
| | $ | 525 |
| | $ | 2,845,712 |
|
Potential problem loans are loans classified as OAEM or worse that are currently accruing interest and are not considered impaired, but which management is closely monitoring because the financial information of the borrower causes concern as to their ability to meet their loan repayment terms. Potential problem loans may include PCI loans
as these loans continue to accrete loan discounts established at acquisition based on the guidance of FASB ASC 310-30. Potential problem loans as of September 30, 20182019 and December 31, 20172018 were $105.7$85.3 million and $83.5$101.3 million, respectively.
(d) Nonaccrual Loans
Nonaccrual loans, segregated by segments and classes of loans, were as follows as of September 30, 20182019 and December 31, 2017:2018:
|
| | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| | (In thousands) |
| Commercial business: | | | |
| Commercial and industrial | $ | 30,014 |
| | $ | 6,639 |
|
| Owner-occupied commercial real estate | 4,176 |
| | 4,212 |
|
| Non-owner occupied commercial real estate | 6,552 |
| | 1,713 |
|
| Total commercial business | 40,742 |
| | 12,564 |
|
| One-to-four family residential | 19 |
| | 71 |
|
| Real estate construction and land development: | | | |
| One-to-four family residential | 560 |
| | 899 |
|
| Consumer | 190 |
| | 169 |
|
| Nonaccrual loans | $ | 41,511 |
| | $ | 13,703 |
|
|
| | | | | | | |
| | September 30, 2018 | | December 31, 2017 |
| | (In thousands) |
| Commercial business: | | | |
| Commercial and industrial | $ | 5,918 |
| | $ | 3,110 |
|
| Owner-occupied commercial real estate | 5,565 |
| | 4,090 |
|
| Non-owner occupied commercial real estate | 2,004 |
| | 1,898 |
|
| Total commercial business | 13,487 |
| | 9,098 |
|
| One-to-four family residential | 74 |
| | 81 |
|
| Real estate construction and land development: | | | |
| One-to-four family residential | 1,076 |
| | 1,247 |
|
| Consumer | 143 |
| | 277 |
|
| Nonaccrual loans | $ | 14,780 |
| | $ | 10,703 |
|
PCI loans are not included in the nonaccrual loan table above because these loans are accounted for under FASB ASC 310-30, which provides that accretable yield is calculated based on a loan'sloan or pool's expected cash flow even if the loan or pool is not performing under its contractual terms.terms, except for non-pooled PCI loans which are no longer accreting loan discounts established at acquisition.
(e) Past due loans
The Company performs an aging analysis of past due loans using thepolicies consistent with regulatory reporting requirements with categories of 30-89 days past due and 90 or more days past due. This policy is consistent with regulatory reporting requirements.PCI loans are included in the past due loans table below solely to reconcile to total Gross Loans Receivable.
The balances of past due loans, segregated by segments and classes of loans, as of September 30, 20182019 and December 31, 20172018 were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | September 30, 2019 |
| | 30-89 Days | | 90 Days or Greater | | Total Past Due | | Current | | Total |
| | (In thousands) |
| Commercial business: | | | | | | | | | |
| Commercial and industrial | $ | 832 |
| | $ | 3,562 |
| | $ | 4,394 |
| | $ | 847,202 |
| | $ | 851,596 |
|
| Owner-occupied commercial real estate | 158 |
| | 757 |
| | 915 |
| | 779,880 |
| | 780,795 |
|
| Non-owner occupied commercial real estate | 2,971 |
| | 2,029 |
| | 5,000 |
| | 1,305,725 |
| | 1,310,725 |
|
| Total commercial business | 3,961 |
| | 6,348 |
| | 10,309 |
| | 2,932,807 |
| | 2,943,116 |
|
| One-to-four family residential | — |
| | — |
| | — |
| | 117,669 |
| | 117,669 |
|
| Real estate construction and land development: | | | | | | | | | |
| One-to-four family residential | — |
| | 560 |
| | 560 |
| | 97,474 |
| | 98,034 |
|
| Five or more family residential and commercial properties | — |
| | — |
| | — |
| | 147,686 |
| | 147,686 |
|
| Total real estate construction and land development | — |
| | 560 |
| | 560 |
| | 245,160 |
| | 245,720 |
|
| Consumer | 1,667 |
| | — |
| | 1,667 |
| | 399,717 |
| | 401,384 |
|
| Past due gross loans receivable, excluding PCI loans | 5,628 |
| | 6,908 |
| | 12,536 |
| | 3,695,353 |
| | 3,707,889 |
|
| PCI loans | 934 |
| | 155 |
| | 1,089 |
| | 19,979 |
| | 21,068 |
|
| Gross loans receivable | $ | 6,562 |
| | $ | 7,063 |
| | $ | 13,625 |
| | $ | 3,715,332 |
| | $ | 3,728,957 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | September 30, 2018 |
| | 30-89 Days | | 90 Days or Greater | | Total Past Due | | Current | | Total |
| | (In thousands) |
| Commercial business: | | | | | | | | | |
| Commercial and industrial | $ | 685 |
| | $ | 1,946 |
| | $ | 2,631 |
| | $ | 858,899 |
| | $ | 861,530 |
|
| Owner-occupied commercial real estate | 1,666 |
| | 1,385 |
| | 3,051 |
| | 782,365 |
| | 785,416 |
|
| Non-owner occupied commercial real estate | 1,985 |
| | 1,103 |
| | 3,088 |
| | 1,280,072 |
| | 1,283,160 |
|
| Total commercial business | 4,336 |
| | 4,434 |
| | 8,770 |
| | 2,921,336 |
| | 2,930,106 |
|
| One-to-four family residential | — |
| | — |
| | — |
| | 96,333 |
| | 96,333 |
|
| Real estate construction and land development: | | | | | | | | | |
| One-to-four family residential | — |
| | 309 |
| | 309 |
| | 106,839 |
| | 107,148 |
|
| Five or more family residential and commercial properties | — |
| | — |
| | — |
| | 120,787 |
| | 120,787 |
|
| Total real estate construction and land development | — |
| | 309 |
| | 309 |
| | 227,626 |
| | 227,935 |
|
| Consumer | 1,445 |
| | — |
| | 1,445 |
| | 389,838 |
| | 391,283 |
|
| Gross loans receivable | $ | 5,781 |
| | $ | 4,743 |
| | $ | 10,524 |
| | $ | 3,635,133 |
| | $ | 3,645,657 |
|
25 |
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | 30-89 Days | | 90 Days or Greater | | Total Past Due | | Current | | Total |
| | (In thousands) |
| Commercial business: | | | | | | | | | |
| Commercial and industrial | $ | 2,711 |
| | $ | 2,281 |
| | $ | 4,992 |
| | $ | 845,181 |
| | $ | 850,173 |
|
| Owner-occupied commercial real estate | 513 |
| | 408 |
| | 921 |
| | 771,677 |
| | 772,598 |
|
| Non-owner occupied commercial real estate | 3,412 |
| | 1,103 |
| | 4,515 |
| | 1,292,888 |
| | 1,297,403 |
|
| Total commercial business | 6,636 |
| | 3,792 |
| | 10,428 |
| | 2,909,746 |
| | 2,920,174 |
|
| One-to-four family residential | 227 |
| | — |
| | 227 |
| | 98,221 |
| | 98,448 |
|
| Real estate construction and land development: | | | | | | | | | |
| One-to-four family residential | 665 |
| | 234 |
| | 899 |
| | 101,451 |
| | 102,350 |
|
| Five or more family residential and commercial properties | — |
| | — |
| | — |
| | 112,688 |
| | 112,688 |
|
| Total real estate construction and land development | 665 |
| | 234 |
| | 899 |
| | 214,139 |
| | 215,038 |
|
| Consumer | 2,559 |
| | — |
| | 2,559 |
| | 389,525 |
| | 392,084 |
|
| Past due gross loans receivable, excluding PCI loans | 10,087 |
| | 4,026 |
| | 14,113 |
| | 3,611,631 |
| | 3,625,744 |
|
| PCI loans | 2,271 |
| | 550 |
| | 2,821 |
| | 22,086 |
| | 24,907 |
|
| Gross loans receivable | $ | 12,358 |
| | $ | 4,576 |
| | $ | 16,934 |
| | $ | 3,633,717 |
| | $ | 3,650,651 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | 30-89 Days | | 90 Days or Greater | | Total Past Due | | Current | | Total |
| | (In thousands) |
| Commercial business: | | | | | | | | | |
| Commercial and industrial | $ | 2,993 |
| | $ | 1,172 |
| | $ | 4,165 |
| | $ | 641,231 |
| | $ | 645,396 |
|
| Owner-occupied commercial real estate | 1,277 |
| | 1,225 |
| | 2,502 |
| | 619,648 |
| | 622,150 |
|
| Non-owner occupied commercial real estate | 870 |
| | 3,314 |
| | 4,184 |
| | 982,410 |
| | 986,594 |
|
| Total commercial business | 5,140 |
| | 5,711 |
| | 10,851 |
| | 2,243,289 |
| | 2,254,140 |
|
| One-to-four family residential | 513 |
| | — |
| | 513 |
| | 86,484 |
| | 86,997 |
|
| Real estate construction and land development: | | | | | | | | | |
| One-to-four family residential | 84 |
| | 1,331 |
| | 1,415 |
| | 50,570 |
| | 51,985 |
|
| Five or more family residential and commercial properties | 40 |
| | — |
| | 40 |
| | 97,459 |
| | 97,499 |
|
| Total real estate construction and land development | 124 |
| | 1,331 |
| | 1,455 |
| | 148,029 |
| | 149,484 |
|
| Consumer | 1,939 |
| | 687 |
| | 2,626 |
| | 352,465 |
| | 355,091 |
|
| Gross loans receivable | $ | 7,716 |
| | $ | 7,729 |
| | $ | 15,445 |
| | $ | 2,830,267 |
| | $ | 2,845,712 |
|
There were no0 loans 90 days or more past due that were still accruing interest as of September 30, 20182019 or December 31, 2017,2018, excluding PCI loans.
(f) Impaired loans
Impaired loans include nonaccrual loans, performing TDR loans, and performing troubled debt restructured ("TDR") loans.other loans with a specific valuation allowance. The balances of impaired loans as of September 30, 20182019 and December 31, 20172018 are set forth in the following tables.tables:
| | | | September 30, 2018 | September 30, 2019 |
| | Recorded Investment With No Specific Valuation Allowance | | Recorded Investment With Specific Valuation Allowance | | Total Recorded Investment | | Unpaid Contractual Principal Balance | | Related Specific Valuation Allowance | Recorded Investment With No Specific Valuation Allowance | | Recorded Investment With Specific Valuation Allowance | | Total Recorded Investment | | Unpaid Contractual Principal Balance | | Related Specific Valuation Allowance |
| | (In thousands) | (In thousands) |
| Commercial business: | | | | | | | | | | | | | | | | | | |
| Commercial and industrial | $ | 2,409 |
| | $ | 11,821 |
| | $ | 14,230 |
| | $ | 14,738 |
| | $ | 1,711 |
| $ | 26,099 |
| | $ | 16,338 |
| | $ | 42,437 |
| | $ | 43,845 |
| | $ | 1,879 |
|
| Owner-occupied commercial real estate | 1,566 |
| | 11,315 |
| | 12,881 |
| | 12,907 |
| | 1,825 |
| 3,031 |
| | 2,503 |
| | 5,534 |
| | 5,925 |
| | 453 |
|
| Non-owner occupied commercial real estate | 4,484 |
| | 5,863 |
| | 10,347 |
| | 10,483 |
| | 739 |
| 5,394 |
| | 4,518 |
| | 9,912 |
| | 9,997 |
| | 316 |
|
| Total commercial business | 8,459 |
| | 28,999 |
| | 37,458 |
| | 38,128 |
| | 4,275 |
| 34,524 |
| | 23,359 |
| | 57,883 |
| | 59,767 |
| | 2,648 |
|
| One-to-four family residential | — |
| | 285 |
| | 285 |
| | 297 |
| | 80 |
| — |
| | 220 |
| | 220 |
| | 227 |
| | 57 |
|
| Real estate construction and land development: | | | | | | | | | | | | | | | | | | |
| One-to-four family residential | 767 |
| | 309 |
| | 1,076 |
| | 1,838 |
| | 6 |
| 560 |
| | — |
| | 560 |
| | 638 |
| | — |
|
| Total real estate construction and land development | 767 |
| | 309 |
| | 1,076 |
| | 1,838 |
| | 6 |
| |
| Consumer | — |
| | 410 |
| | 410 |
| | 398 |
| | 113 |
| — |
| | 575 |
| | 575 |
| | 589 |
| | 148 |
|
| Total | $ | 9,226 |
| | $ | 30,003 |
| | $ | 39,229 |
| | $ | 40,661 |
| | $ | 4,474 |
| $ | 35,084 |
| | $ | 24,154 |
| | $ | 59,238 |
| | $ | 61,221 |
| | $ | 2,853 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Recorded Investment With No Specific Valuation Allowance | | Recorded Investment With Specific Valuation Allowance | | Total Recorded Investment | | Unpaid Contractual Principal Balance | | Related Specific Valuation Allowance |
| | (In thousands) |
| Commercial business: | | | | | | | | | |
| Commercial and industrial | $ | 2,523 |
| | $ | 20,119 |
| | $ | 22,642 |
| | $ | 24,176 |
| | $ | 2,607 |
|
| Owner-occupied commercial real estate | 816 |
| | 5,000 |
| | 5,816 |
| | 6,150 |
| | 1,142 |
|
| Non-owner occupied commercial real estate | 3,352 |
| | 2,924 |
| | 6,276 |
| | 6,414 |
| | 206 |
|
| Total commercial business | 6,691 |
| | 28,043 |
| | 34,734 |
| | 36,740 |
| | 3,955 |
|
| One-to-four family residential | — |
| | 279 |
| | 279 |
| | 293 |
| | 76 |
|
| Real estate construction and land development: | | | | | | | | | |
| One-to-four family residential | 899 |
| | — |
| | 899 |
| | 1,662 |
| | — |
|
| Consumer | — |
| | 527 |
| | 527 |
| | 538 |
| | 139 |
|
| Total | $ | 7,590 |
| | $ | 28,849 |
| | $ | 36,439 |
| | $ | 39,233 |
| | $ | 4,170 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | Recorded Investment With No Specific Valuation Allowance | | Recorded Investment With Specific Valuation Allowance | | Total Recorded Investment | | Unpaid Contractual Principal Balance | | Related Specific Valuation Allowance |
| | (In thousands) |
| Commercial business: | | | | | | | | | |
| Commercial and industrial | $ | 2,127 |
| | $ | 9,872 |
| | $ | 11,999 |
| | $ | 12,489 |
| | $ | 1,326 |
|
| Owner-occupied commercial real estate | 2,452 |
| | 4,356 |
| | 6,808 |
| | 7,054 |
| | 621 |
|
| Non-owner occupied commercial real estate | 4,722 |
| | 11,297 |
| | 16,019 |
| | 16,172 |
| | 1,222 |
|
| Total commercial business | 9,301 |
| | 25,525 |
| | 34,826 |
| | 35,715 |
| | 3,169 |
|
| One-to-four family residential | — |
| | 299 |
| | 299 |
| | 308 |
| | 93 |
|
| Real estate construction and land development: | | | | | | | | | |
| One-to-four family residential | 938 |
| | 309 |
| | 1,247 |
| | 2,200 |
| | 2 |
|
| Five or more family residential and commercial properties | — |
| | 645 |
| | 645 |
| | 645 |
| | 37 |
|
| Total real estate construction and land development | 938 |
| | 954 |
| | 1,892 |
| | 2,845 |
| | 39 |
|
| Consumer | 160 |
| | 282 |
| | 442 |
| | 466 |
| | 54 |
|
| Total | $ | 10,399 |
| | $ | 27,060 |
| | $ | 37,459 |
| | $ | 39,334 |
| | $ | 3,355 |
|
The average recorded investment of impaired loans for the three and nine months ended September 30, 20182019 and 20172018 are set forth in the following table.table:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended
September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (In thousands) |
| Commercial business: | | | | | | | |
| Commercial and industrial | $ | 35,022 |
| | $ | 16,252 |
| | $ | 28,929 |
| | $ | 15,258 |
|
| Owner-occupied commercial real estate | 5,918 |
| | 12,533 |
| | 5,927 |
| | 12,687 |
|
| Non-owner occupied commercial real estate | 9,793 |
| | 10,265 |
| | 8,108 |
| | 10,311 |
|
| Total commercial business | 50,733 |
| | 39,050 |
| | 42,964 |
| | 38,256 |
|
| One-to-four family residential | 222 |
| | 288 |
| | 249 |
| | 292 |
|
| Real estate construction and land development: | | | | | | | |
| One-to-four family residential | 676 |
| | 1,080 |
| | 794 |
| | 1,139 |
|
| Five or more family residential and commercial properties | — |
| | — |
| | — |
| | 161 |
|
| Total real estate construction and land development | 676 |
| | 1,080 |
| | 794 |
| | 1,300 |
|
| Consumer | 596 |
| | 396 |
| | 579 |
| | 403 |
|
| Total | $ | 52,227 |
| | $ | 40,814 |
| | $ | 44,586 |
| | $ | 40,251 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | (In thousands) |
| Commercial business: | | | | | | | |
| Commercial and industrial | $ | 16,252 |
| | $ | 11,171 |
| | $ | 15,258 |
| | $ | 11,190 |
|
| Owner-occupied commercial real estate | 12,533 |
| | 5,289 |
| | 12,687 |
| | 5,049 |
|
| Non-owner occupied commercial real estate | 10,265 |
| | 11,037 |
| | 10,311 |
| | 11,198 |
|
| Total commercial business | 39,050 |
| | 27,497 |
| | 38,256 |
| | 27,437 |
|
| One-to-four family residential | 288 |
| | 307 |
| | 292 |
| | 312 |
|
| Real estate construction and land development: | | | | | | | |
| One-to-four family residential | 1,080 |
| | 2,157 |
| | 1,139 |
| | 2,530 |
|
| Five or more family residential and commercial properties | — |
| | 860 |
| | 161 |
| | 967 |
|
| Total real estate construction and land development | 1,080 |
| | 3,017 |
| | 1,300 |
| | 3,497 |
|
| Consumer | 396 |
| | 346 |
| | 403 |
| | 328 |
|
| Total | $ | 40,814 |
| | $ | 31,167 |
| | $ | 40,251 |
| | $ | 31,574 |
|
For the three and nine months ended September 30, 2019 and 2018, and 2017, no0 interest income was recognized subsequent to a loan’s classification as nonaccrual. For the three and nine months ended September 30, 2019, the Bank recorded $282,000 and $980,000, respectively, of interest income related to performing TDR loans. For the three and nine months ended September 30, 2018, the Bank recorded $361,000 and $1.0 million, respectively, of interest income related to performing TDR loans. For the three and nine months ended September 30, 2017, the Bank recorded $366,000 and $1.0 million, respectively, of interest income related to performing TDR loans.
(g) Troubled Debt Restructured Loans
A TDR loan is a restructuring in which the Bank, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. TDR loans are considered impaired and are separately measured for impairment under FASB ASC 310-10-35, whether on accrual ("performing") or nonaccrual ("nonperforming") status. The Company has more stringent definitions of concessions and impairment measures for PCI loans as these loans have known credit deterioration and are generally accreting income at a lower discounted rate as compared to the contractual note rate based on the guidance of FASB ASC 310-30.
The majority of the Bank’s TDR loans are a result of granting extensions of maturity on troubled credits which have already been adversely classified. The Bank grants such extensions to reassess the borrower’s financial status and to develop a plan for repayment. The second most prevalent concessions are certain modifications with extensions that also include interest rate reductions. Certain TDR loans were additionally re-amortized over a longer period of time. These modifications would all be considered a concession for a borrower that could not obtain similar financing terms from another source other than from the Bank.
The financial effects of each modification will vary based on the specific restructure. For the majority of the Bank’s TDR loans, the loans were interest-only with a balloon payment at maturity. If the interest rate is not adjusted and the modified terms are consistent with other similar credits being offered, the Bank may not experience any loss associated with the restructure. If, however, the restructure involves forbearance agreements or interest rate modifications, the Bank may not collect all the principal and interest based on the original contractual terms. The Bank estimates the necessary allowance for loan losses on TDR loans using the same guidance as used for other impaired loans.
The recorded investment balance and related allowance for loan losses of performing and nonaccrual TDR loans as of September 30, 20182019 and December 31, 20172018 were as follows:
|
| | | | | | | | | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| | Performing TDR loans | | Nonaccrual TDR loans | | Performing TDR loans | | Nonaccrual TDR loans |
| | (In thousands) |
| TDR loans | $ | 19,416 |
| | $ | 17,529 |
| | $ | 22,736 |
| | $ | 6,943 |
|
| Allowance for loan losses on TDR loans | 1,850 |
| | 494 |
| | 2,257 |
| | 658 |
|
|
| | | | | | | | | | | | | | | |
| | September 30, 2018 | | December 31, 2017 |
| | Performing TDRs | | Nonaccrual TDRs | | Performing TDRs | | Nonaccrual
TDRs |
| | (In thousands) |
| TDR loans | $ | 24,449 |
| | $ | 6,461 |
| | $ | 26,757 |
| | $ | 5,193 |
|
| Allowance for loan losses on TDR loans | 2,237 |
| | 713 |
| | 2,635 |
| | 379 |
|
The unfunded commitment to borrowers related to TDR loans was $1.3$2.0 million and $1.2 million$943,000 at September 30, 20182019 and December 31, 2017,2018, respectively.
Loans that were modified as TDR loans during the three and nine months ended September 30, 20182019 and 20172018 are set forth in the following table:tables:
| | | | Three Months Ended September 30, | Three Months Ended September 30, |
| | 2018 | | 2017 | 2019 | | 2018 |
| | Number of Contracts (1) | | Outstanding
Principal Balance
(1)(2) | | Number of Contracts (1) | | Outstanding Principal Balance (1)(2) | Number of
Contracts | | Recorded Investment(1) | | Number of
Contracts | | Recorded Investment(1) |
| | (Dollars in thousands) | (Dollars in thousands) |
| Commercial business: | | | | | | | | | | | | | | |
| Commercial and industrial | 11 |
| | $ | 2,352 |
| | 4 |
| | $ | 1,353 |
| 15 |
| | $ | 5,266 |
| | 11 |
| | $ | 2,352 |
|
| Owner-occupied commercial real estate | 2 |
| | 1,081 |
| | 2 |
| | 1,299 |
| 2 |
| | 1,214 |
| | 2 |
| | 1,081 |
|
| Non-owner occupied commercial real estate | 2 |
| | 2,776 |
| | 1 |
| | 655 |
| 3 |
| | 2,597 |
| | 2 |
| | 2,776 |
|
| Total commercial business | 15 |
| | 6,209 |
| | 7 |
| | 3,307 |
| 20 |
| | 9,077 |
| | 15 |
| | 6,209 |
|
| Consumer | 1 |
| | 25 |
| | 4 |
| | 52 |
| 3 |
| | 26 |
| | 1 |
| | 25 |
|
| Total loans modified as TDR loans | 16 |
| | $ | 6,234 |
| | 11 |
| | $ | 3,359 |
| 23 |
| | $ | 9,103 |
| | 16 |
| | $ | 6,234 |
|
28 |
| | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2019 | | 2018 |
| | Number of
Contracts(2) | | Recorded Investment(1,2) | | Number of Contracts(2) | | Recorded Investment(1,2) |
| | (Dollars in thousands) |
| Commercial business: | | | | | | | |
| Commercial and industrial | 33 |
| | $ | 22,414 |
| | 22 |
| | $ | 4,445 |
|
| Owner-occupied commercial real estate | 3 |
| | 1,612 |
| | 3 |
| | 1,639 |
|
| Non-owner occupied commercial real estate | 4 |
| | 5,568 |
| | 3 |
| | 2,976 |
|
| Total commercial business | 40 |
| | 29,594 |
| | 28 |
| | 9,060 |
|
| Real estate construction and land development: | | | | | | | |
| One-to-four family residential | 1 |
| | 560 |
| | 2 |
| | 767 |
|
| Consumer | 10 |
| | 155 |
| | 8 |
| | 133 |
|
| Total TDR loans | 51 |
| | $ | 30,309 |
| | 38 |
| | $ | 9,960 |
|
|
| | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2018 | | 2017 |
| | Number of Contracts (1) | | Outstanding
Principal Balance
(1)(2) | | Number of Contracts (1) | | Outstanding Principal Balance (1)(2) |
| | (Dollars in thousands) |
| Commercial business: | | | | | | | |
| Commercial and industrial | 22 |
| | $ | 4,445 |
| | 13 |
| | $ | 5,564 |
|
| Owner-occupied commercial real estate | 3 |
| | 1,639 |
| | 3 |
| | 1,351 |
|
| Non-owner occupied commercial real estate | 3 |
| | 2,976 |
| | 2 |
| | 1,596 |
|
| Total commercial business | 28 |
| | 9,060 |
| | 18 |
| | 8,511 |
|
| Real estate construction and land development: | | | | | | | |
| One-to-four family residential | 2 |
| | 767 |
| | 2 |
| | 1,038 |
|
| Total real estate construction and land development | 2 |
| | 767 |
| | 2 |
| | 1,038 |
|
| Consumer | 8 |
| | 133 |
| | 5 |
| | 60 |
|
| Total TDR loans | 38 |
| | $ | 9,960 |
| | 25 |
| | $ | 9,609 |
|
| |
(1) | Number of contracts and outstanding principal balance represent loans which have balances as of period end as certain loans may have been paid-down or charged-off during the three and nine months ended September 30, 2018 and 2017. |
| |
(2)
| Includes subsequent payments after modifications and reflects the balance as of period end. As the Bank did not forgive any principal or interest balance as part of the loan modification, the Bank’s recorded investment in each loan at the date of modification (pre-modification) did not change as a result of the modification (post-modification), except when the modification was the initial advance on a one-to-four family residential real estate construction and land development loan under a master guidance line. There were no advances on these types of loans during the three and nine months ended September 30, 20182019 and 2017.2018. |
| |
(2) | Number of contracts and outstanding principal balance represent loans which have balances as of period end as certain loans may have been paid-down or charged-off during the nine months ended September 30, 2019 and 2018. |
The related specific valuation allowance attables above include 7and 17loans, respectively, for the three and nine months ended September 30, 20182019 and 9 and 15 loans, respectively, for loans that were modified as TDR loans during the three and nine months ended September 30, 2018 was $1.0 million. Certain loans included in the tables above may have beenthat were previously reported as TDR loans. The Bank typically grants shorter extension periods to continually monitor these TDR loans despite the fact that the extended date might not be the date the Bank expects sufficient cash flow from these borrowers. The Bank does not consider these modifications a subsequent default of a TDR as new loan terms, specifically new maturity dates, were granted. Of the remaining first-reported TDR loans, the concessions granted largely consisted of maturity extensions, interest rate modifications or a combination of both. The potential losses related to theseTDR loans would have beenare considered in the period the loan was first reported as a TDR loan and are adjusted, as necessary, in the current period based on more recent information. The related specific valuation allowance at September 30, 2019 for loans that were modified as TDR loans during the nine months ended September 30, 2019 was $1.8 million.
Loans that were modified during the previous twelve months that subsequently defaulted during the three and nine months ended September 30, 20182019 and 20172018 are set forth in the following table:tables:
| | | | Three Months Ended September 30, | Three Months Ended September 30, |
| | 2018 | | 2017 | 2019 | | 2018 |
| | Number of Contracts | | Outstanding Principal Balance | | Number of
Contracts | | Outstanding
Principal
Balance | Number of Contracts | | Recorded Investments | | Number of
Contracts | | Recorded Investments |
| | (Dollars in thousands) | (Dollars in thousands) |
| Commercial business: | | | | | | | | | | | | | | |
| Commercial and industrial | 2 |
| | $ | 1,742 |
| | 1 |
| | $ | 234 |
| 4 |
| | $ | 2,056 |
| | 2 |
| | $ | 1,742 |
|
| Non-owner occupied commercial real estate | | 1 |
| | 2,971 |
| | — |
| | — |
|
| Total commercial business | 2 |
| | 1,742 |
| | 1 |
| | 234 |
| 5 |
| | 5,027 |
| | 2 |
| | 1,742 |
|
| Total | 2 |
| | $ | 1,742 |
| | 1 |
| | $ | 234 |
| 5 |
| | $ | 5,027 |
| | 2 |
| | $ | 1,742 |
|
29 |
| | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2019 | | 2018 |
| | Number of Contracts(1) | | Recorded Investments(1) | | Number of
Contracts(1) | | Recorded Investments(1) |
| | (Dollars in thousands) |
| Commercial business: | | | | | | | |
| Commercial and industrial | 9 |
| | $ | 3,230 |
| | 3 |
| | $ | 2,020 |
|
| Owner-occupied commercial real estate | 2 |
| | 1,101 |
| | 1 |
| | 69 |
|
| Non-owner occupied commercial real estate | 2 |
| | 3,541 |
| | — |
| | — |
|
| Total commercial business | 13 |
| | 7,872 |
| | 4 |
| | 2,089 |
|
| Real estate construction and land development: | | | | | | | |
| One-to-four family residential | 1 |
| | 560 |
| | 2 |
| | 767 |
|
| Total | 14 |
| | $ | 8,432 |
| | 6 |
| | $ | 2,856 |
|
| |
(1) | Number of contracts and outstanding principal balance represent loans which have balances as of period end as certain loans may have been paid-down or charged-off during the nine months ended September 30, 2019 and 2018. |
|
| | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2018 | | 2017 |
| | Number of Contracts | | Outstanding Principal Balance | | Number of
Contracts | | Outstanding
Principal
Balance |
| | (Dollars in thousands) |
| Commercial business: | | | | | | | |
| Commercial and industrial | 7 |
| | $ | 2,020 |
| | 1 |
| | $ | 234 |
|
| Owner-occupied commercial real estate | 1 |
| | 69 |
| | — |
| | — |
|
| Non-owner occupied commercial real estate | — |
| | — |
| | — |
| | — |
|
| Total commercial business | 8 |
| | 2,089 |
| | 1 |
| | 234 |
|
| Real estate construction and land development: | | | | | | | |
| One-to-four family residential | 2 |
| | 767 |
| | — |
| | — |
|
| Total real estate construction and land development | 2 |
| | 767 |
| | — |
| | — |
|
| Total | 10 |
| | $ | 2,856 |
| | 1 |
| | $ | 234 |
|
During the three and nine months ended September 30, 2018, one owner-occupied commercial real estate2019, 3 and 12 TDR loan and two commercial and industrial TDR loans, with a total outstanding balance of $69,000 and $1.7 million, respectively, defaulted because each was past its modified maturity date, and the borrower has not subsequently repaid the credits. The Bank has chosen not to extend further extend the maturity date on these loans. In addition, during both the three and nine months ended September 30, 2018, one commercial and industrial2019, 2 TDR loan and two construction TDR loans with total outstanding balances of $279,000 and $767,000, respectively, defaulted because the borrowers were more than 90 days delinquent on their scheduled loan payments. Also, four commercial and industrial TDR loans defaulted and subsequently repaid their credits during nine months ended September 30, 2018. The Bank had a $320,000 specific valuation allowance of $412,000 at September 30, 20182019 related to these TDR loans which defaulted during the nine months ended September 30, 2018. 2019.
During both the three and nine months ended September 30, 2017,2018, 2 and 3 TDR loans, respectively, defaulted because each was past its modified maturity date, and the one commercial and industrialborrower has not subsequently repaid the credits. The Bank had chosen not to extend the maturities on these loans. In addition, during the nine months ended September 30, 2018, 3 TDR loanloans defaulted because the borrower wasborrowers were more than 90 days delinquent on histheir scheduled loan payment.payments. The Bank had a specific valuation allowance of $320,000 at September 30, 2018 related to TDR loans which defaulted during the nine months ended September 30, 2018.
(h) Purchased Credit Impaired Loans
The Company acquired certain loans and designated them, as appropriate, as PCI loans, which are accounted for under FASB ASC 310-30. No loans acquired in the Premier and Puget Mergers were considered PCI.
The following table reflects the outstanding principal balance and recorded investment of the PCI loans at September 30, 20182019 and December 31, 2017:2018:
| | | | September 30, 2018 | | December 31, 2017 | September 30, 2019 | | December 31, 2018 |
| | Outstanding Principal | | Recorded Investment | | Outstanding Principal | | Recorded Investment | Outstanding Principal | | Recorded Investment | | Outstanding Principal | | Recorded Investment |
| | (In thousands) | (In thousands) |
| Commercial business: | | | | | | | | | | | | | | |
| Commercial and industrial | $ | 7,182 |
| | $ | 3,758 |
| | $ | 8,818 |
| | $ | 2,912 |
| $ | 4,541 |
| | $ | 2,399 |
| | $ | 6,319 |
| | $ | 3,433 |
|
| Owner-occupied commercial real estate | 9,277 |
| | 8,258 |
| | 12,230 |
| | 11,515 |
| 6,879 |
| | 6,796 |
| | 7,830 |
| | 7,215 |
|
| Non-owner occupied commercial real estate | 9,051 |
| | 8,020 |
| | 14,295 |
| | 13,342 |
| 7,887 |
| | 6,267 |
| | 8,685 |
| | 7,059 |
|
| Total commercial business | 25,510 |
| | 20,036 |
| | 35,343 |
| | 27,769 |
| 19,307 |
| | 15,462 |
| | 22,834 |
| | 17,707 |
|
| One-to-four family residential | 3,279 |
| | 3,416 |
| | 4,120 |
| | 5,255 |
| 3,011 |
| | 3,505 |
| | 3,169 |
| | 3,315 |
|
| Real estate construction and land development: | | | | | | | | | | | | | | |
| One-to-four family residential | 87 |
| | 387 |
| | 841 |
| | 89 |
| — |
| | — |
| | 67 |
| | 380 |
|
| Five or more family residential and commercial properties | 1,787 |
| | 1,268 |
| | 2,361 |
| | 2,035 |
| — |
| | — |
| | 188 |
| | 43 |
|
| Total real estate construction and land development | 1,874 |
| | 1,655 |
| | 3,202 |
| | 2,124 |
| — |
| | — |
| | 255 |
| | 423 |
|
| Consumer | 2,500 |
| | 3,746 |
| | 3,974 |
| | 5,455 |
| 825 |
| | 2,101 |
| | 2,203 |
| | 3,462 |
|
| Gross PCI loans | $ | 33,163 |
| | $ | 28,853 |
| | $ | 46,639 |
| | $ | 40,603 |
| $ | 23,143 |
| | $ | 21,068 |
| | $ | 28,461 |
| | $ | 24,907 |
|
On the acquisition dates, the amount by which the undiscounted expected cash flows of the PCI loans exceeded the estimated fair value of the loan is the “accretable yield.” The accretable yield is then measured at each financial reporting date and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the PCI loans.
The following table summarizes the accretable yield on the PCI loans for the three and nine months ended September 30, 20182019 and 2017.2018:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended
September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (In thousands) |
| Balance at the beginning of the period | $ | 8,572 |
| | $ | 10,060 |
| | $ | 9,493 |
| | $ | 11,224 |
|
| Accretion | (423 | ) | | (644 | ) | | (1,517 | ) | | (2,011 | ) |
| Disposal and other | (94 | ) | | (164 | ) | | (744 | ) | | (2,136 | ) |
| Reclassification from nonaccretable difference | — |
| | 1,198 |
| | 823 |
| | 3,373 |
|
| Balance at the end of the period | $ | 8,055 |
| | $ | 10,450 |
| | $ | 8,055 |
| | $ | 10,450 |
|
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2018 | | 2017 | | 2018 | | 2017 |
| | | (In thousands) |
| Balance at the beginning of the period | | $ | 10,060 |
| | $ | 12,296 |
| | $ | 11,224 |
| | $ | 13,860 |
|
| Accretion | | (644 | ) | | (796 | ) | | (2,011 | ) | | (2,725 | ) |
| Disposal and other | | (164 | ) | | (1,287 | ) | | (2,136 | ) | | (2,430 | ) |
| Change in accretable yield | | 1,198 |
| | 939 |
| | 3,373 |
| | 2,447 |
|
| Balance at the end of the period | | $ | 10,450 |
| | $ | 11,152 |
| | $ | 10,450 |
| | $ | 11,152 |
|
| |
| (5) | Allowance for Loan Losses |
The allowance for loan losses is maintained at a level deemed appropriate by management to provide for probable incurred credit losses in the loan portfolio. The following tables detail the activity in the allowance for loan losses disaggregated by segment and class for the three and nine months ended September 30, 2018:2019:
| | | | Balance at Beginning of Period | | Charge-offs | | Recoveries | | Provision for Loan Losses | | Balance at End of Period | Three Months Ended September 30, 2019 |
| | (In thousands) | Balance at Beginning of Period | | Charge-offs | | Recoveries | | Provision for Loan Losses | | Balance at End of Period |
| Three Months Ended September 30, 2018 | | | | | | | | | | |
| | | (In thousands) |
| Commercial business: | | | | | | | | | | | | | | | | | | |
| Commercial and industrial | $ | 10,188 |
| | $ | (151 | ) | | $ | 119 |
| | $ | 122 |
| | $ | 10,278 |
| $ | 11,993 |
| | $ | (306 | ) | | $ | 43 |
| | $ | 449 |
| | $ | 12,179 |
|
| Owner-occupied commercial real estate | 5,246 |
| | — |
| | 2 |
| | 181 |
| | 5,429 |
| 5,066 |
| | — |
| | 46 |
| | (656 | ) | | 4,456 |
|
| Non-owner occupied commercial real estate | 7,726 |
| | (149 | ) | | — |
| | 71 |
| | 7,648 |
| 8,064 |
| | — |
| | 292 |
| | (525 | ) | | 7,831 |
|
| Total commercial business | 23,160 |
| | (300 | ) | | 121 |
| | 374 |
| | 23,355 |
| 25,123 |
| | (306 | ) | | 381 |
| | (732 | ) | | 24,466 |
|
| One-to-four family residential | 1,121 |
| | (15 | ) | | — |
| | 50 |
| | 1,156 |
| 1,345 |
| | (15 | ) | | — |
| | 81 |
| | 1,411 |
|
| Real estate construction and land development: | | | | | | | | | | | | | | | | | | |
| One-to-four family residential | 1,016 |
| | — |
| | 3 |
| | 156 |
| | 1,175 |
| 1,471 |
| | — |
| | 3 |
| | (133 | ) | | 1,341 |
|
| Five or more family residential and commercial properties | 1,044 |
| | — |
| | — |
| | (15 | ) | | 1,029 |
| 1,060 |
| | — |
| | — |
| | 229 |
| | 1,289 |
|
| Total real estate construction and land development | 2,060 |
| | — |
| | 3 |
| | 141 |
| | 2,204 |
| 2,531 |
| | — |
| | 3 |
| | 96 |
| | 2,630 |
|
| Consumer | 6,305 |
| | (530 | ) | | 159 |
| | 474 |
| | 6,408 |
| 6,540 |
| | (501 | ) | | 127 |
| | 621 |
| | 6,787 |
|
| Unallocated | 1,326 |
| | — |
| | — |
| | 26 |
| | 1,352 |
| 824 |
| | — |
| | — |
| | 400 |
| | 1,224 |
|
| Total | $ | 33,972 |
| | $ | (845 | ) | | $ | 283 |
| | $ | 1,065 |
| | $ | 34,475 |
| $ | 36,363 |
| | $ | (822 | ) | | $ | 511 |
| | $ | 466 |
| | $ | 36,518 |
|
| | | | | | | | | | | |
| Nine Months Ended September 30, 2018 | | | | | | | | | | |
| Commercial business: | | | | | | | | | | |
| Commercial and industrial | $ | 9,910 |
| | $ | (773 | ) | | $ | 683 |
| | $ | 458 |
| | $ | 10,278 |
| |
| Owner-occupied commercial real estate | 3,992 |
| | (1 | ) | | 7 |
| | 1,431 |
| | 5,429 |
| |
| Non-owner occupied commercial real estate | 8,097 |
| | (149 | ) | | — |
| | (300 | ) | | 7,648 |
| |
| Total commercial business | 21,999 |
| | (923 | ) | | 690 |
| | 1,589 |
| | 23,355 |
| |
| One-to-four family residential | 1,056 |
| | (30 | ) | | — |
| | 130 |
| | 1,156 |
| |
| Real estate construction and land development: | | | | | | | | | | |
| One-to-four family residential | 862 |
| | — |
| | 5 |
| | 308 |
| | 1,175 |
| |
| Five or more family residential and commercial properties | 1,190 |
| | — |
| | — |
| | (161 | ) | | 1,029 |
| |
| Total real estate construction and land development | 2,052 |
| | — |
| | 5 |
| | 147 |
| | 2,204 |
| |
| Consumer | 6,081 |
| | (1,709 | ) | | 389 |
| | 1,647 |
| | 6,408 |
| |
| Unallocated | 898 |
| | — |
| | — |
| | 454 |
| | 1,352 |
| |
| Total | $ | 32,086 |
| | $ | (2,662 | ) | | $ | 1,084 |
| | $ | 3,967 |
| | $ | 34,475 |
| |
|
| | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2019 |
| | Balance at Beginning of Period | | Charge-offs | | Recoveries | | Provision for Loan Losses | | Balance at End of Period |
| | (In thousands) |
| Commercial business: | | | | | | | | | |
| Commercial and industrial | $ | 11,343 |
| | $ | (1,183 | ) | | $ | 112 |
| | $ | 1,907 |
| | $ | 12,179 |
|
| Owner-occupied commercial real estate | 4,898 |
| | — |
| | 49 |
| | (491 | ) | | 4,456 |
|
| Non-owner occupied commercial real estate | 7,470 |
| | — |
| | 441 |
| | (80 | ) | | 7,831 |
|
| Total commercial business | 23,711 |
| | (1,183 | ) | | 602 |
| | 1,336 |
| | 24,466 |
|
| One-to-four family residential | 1,203 |
| | (45 | ) | | — |
| | 253 |
| | 1,411 |
|
| Real estate construction and land development: | | | | | | | | | |
| One-to-four family residential | 1,240 |
| | — |
| | 628 |
| | (527 | ) | | 1,341 |
|
| Five or more family residential and commercial properties | 954 |
| | — |
| | — |
| | 335 |
| | 1,289 |
|
| Total real estate construction and land development | 2,194 |
| | — |
| | 628 |
| | (192 | ) | | 2,630 |
|
| Consumer | 6,581 |
| | (1,653 | ) | | 374 |
| | 1,485 |
| | 6,787 |
|
| Unallocated | 1,353 |
| | — |
| | — |
| | (129 | ) | | 1,224 |
|
| Total | $ | 35,042 |
| | $ | (2,881 | ) | | $ | 1,604 |
| | $ | 2,753 |
| | $ | 36,518 |
|
The following table details the allowance for loan losses disaggregated on the basis of the Company's impairment method as of September 30, 2018.2019:
|
| | | | | | | | | | | | | | | |
| | Loans Individually Evaluated for Impairment | | Loans Collectively Evaluated for Impairment | | PCI Loans(1) | | Total Allowance for Loan Losses |
| | (In thousands) |
| Commercial business: | | | | | | | |
| Commercial and industrial | $ | 1,879 |
| | $ | 9,666 |
| | $ | 634 |
| | $ | 12,179 |
|
| Owner-occupied commercial real estate | 453 |
| | 3,447 |
| | 556 |
| | 4,456 |
|
| Non-owner occupied commercial real estate | 316 |
| | 7,015 |
| | 500 |
| | 7,831 |
|
| Total commercial business | 2,648 |
| | 20,128 |
| | 1,690 |
| | 24,466 |
|
| One-to-four family residential | 57 |
| | 1,260 |
| | 94 |
| | 1,411 |
|
| Real estate construction and land development: | | | | | | | |
| One-to-four family residential | — |
| | 1,172 |
| | 169 |
| | 1,341 |
|
| Five or more family residential and commercial properties | — |
| | 1,211 |
| | 78 |
| | 1,289 |
|
| Total real estate construction and land development | — |
| | 2,383 |
| | 247 |
| | 2,630 |
|
| Consumer | 148 |
| | 6,269 |
| | 370 |
| | 6,787 |
|
| Unallocated | — |
| | 1,224 |
| | — |
| | 1,224 |
|
| Total | $ | 2,853 |
| | $ | 31,264 |
| | $ | 2,401 |
| | $ | 36,518 |
|
| |
(1) | Includes non-pooled PCI loans that are evaluated for individual impairment. |
|
| | | | | | | | | | | | | | | |
| | Loans Individually Evaluated for Impairment | | Loans Collectively Evaluated for Impairment | | PCI Loans | | Total Allowance for Loan Losses |
| | (In thousands) |
| Commercial business: | | | | | | | |
| Commercial and industrial | $ | 1,711 |
| | $ | 7,674 |
| | $ | 893 |
| | $ | 10,278 |
|
| Owner-occupied commercial real estate | 1,825 |
| | 2,871 |
| | 733 |
| | 5,429 |
|
| Non-owner occupied commercial real estate | 739 |
| | 6,236 |
| | 673 |
| | 7,648 |
|
| Total commercial business | 4,275 |
| | 16,781 |
| | 2,299 |
| | 23,355 |
|
| One-to-four family residential | 80 |
| | 946 |
| | 130 |
| | 1,156 |
|
| Real estate construction and land development: | | | | | | | |
| One-to-four family residential | 6 |
| | 947 |
| | 222 |
| | 1,175 |
|
| Five or more family residential and commercial properties | — |
| | 950 |
| | 79 |
| | 1,029 |
|
| Total real estate construction and land development | 6 |
| | 1,897 |
| | 301 |
| | 2,204 |
|
| Consumer | 113 |
| | 5,729 |
| | 566 |
| | 6,408 |
|
| Unallocated | — |
| | 1,352 |
| | — |
| | 1,352 |
|
| Total | $ | 4,474 |
| | $ | 26,705 |
| | $ | 3,296 |
| | $ | 34,475 |
|
The following table details the recorded investment balance of the loan receivables disaggregated on the basis of the Company’s impairment method as of September 30, 2018:2019:
|
| | | | | | | | | | | | | | | |
| | Loans Individually Evaluated for Impairment | | Loans Collectively Evaluated for Impairment | | PCI Loans(1) | | Total Gross Loans Receivable |
| | (In thousands) |
| Commercial business: | | | | | | | |
| Commercial and industrial | $ | 42,437 |
| | $ | 809,159 |
| | $ | 2,399 |
| | $ | 853,995 |
|
| Owner-occupied commercial real estate | 5,534 |
| | 775,261 |
| | 6,796 |
| | 787,591 |
|
| Non-owner occupied commercial real estate | 9,912 |
| | 1,300,813 |
| | 6,267 |
| | 1,316,992 |
|
| Total commercial business | 57,883 |
| | 2,885,233 |
| | 15,462 |
| | 2,958,578 |
|
| One-to-four family residential | 220 |
| | 117,449 |
| | 3,505 |
| | 121,174 |
|
| Real estate construction and land development: | | | | | | | |
| One-to-four family residential | 560 |
| | 97,474 |
| | — |
| | 98,034 |
|
| Five or more family residential and commercial properties | — |
| | 147,686 |
| | — |
| | 147,686 |
|
| Total real estate construction and land development | 560 |
| | 245,160 |
| | — |
| | 245,720 |
|
| Consumer | 575 |
| | 400,809 |
| | 2,101 |
| | 403,485 |
|
| Total | $ | 59,238 |
| | $ | 3,648,651 |
| | $ | 21,068 |
| | $ | 3,728,957 |
|
|
| | | | | | | | | | | | | | | |
| | Loans Individually Evaluated for Impairment | | Loans Collectively Evaluated for Impairment | | PCI Loans | | Total Gross Loans Receivable |
| | (In thousands) |
| Commercial business: | | | | | | | |
| Commercial and industrial | $ | 14,230 |
| | $ | 843,542 |
| | $ | 3,758 |
| | $ | 861,530 |
|
| Owner-occupied commercial real estate | 12,881 |
| | 764,277 |
| | 8,258 |
| | 785,416 |
|
| Non-owner occupied commercial real estate | 10,347 |
| | 1,264,793 |
| | 8,020 |
| | 1,283,160 |
|
| Total commercial business | 37,458 |
| | 2,872,612 |
| | 20,036 |
| | 2,930,106 |
|
| One-to-four family residential | 285 |
| | 92,632 |
| | 3,416 |
| | 96,333 |
|
| Real estate construction and land development: | | | | | | | |
| One-to-four family residential | 1,076 |
| | 105,685 |
| | 387 |
| | 107,148 |
|
| Five or more family residential and commercial properties | — |
| | 119,519 |
| | 1,268 |
| | 120,787 |
|
| Total real estate construction and land development | 1,076 |
| | 225,204 |
| | 1,655 |
| | 227,935 |
|
| Consumer | 410 |
| | 387,127 |
| | 3,746 |
| | 391,283 |
|
| Total | $ | 39,229 |
| | $ | 3,577,575 |
| | $ | 28,853 |
| | $ | 3,645,657 |
|
| |
(1) | Includes non-pooled PCI loans that are evaluated for individual impairment. |
The following tables detail activity in the allowance for loan losses disaggregated by segment and class for the three and nine months ended September 30, 2017.2018:
| | | | Balance at Beginning of Period | | Charge-offs | | Recoveries | | Provision for Loan Losses | | Balance at End of Period | Three Months Ended September 30, 2018 |
| | (In thousands) | Balance at Beginning of Period | | Charge-offs | | Recoveries | | Provision for Loan Losses | | Balance at End of Period |
| Three Months Ended September 30, 2017 | | | | | | | | | | |
| | | (In thousands) |
| Commercial business: | | | | | | | | | | | | | | | | | | |
| Commercial and industrial | $ | 10,651 |
| | $ | (3 | ) | | $ | 4 |
| | $ | (772 | ) | | $ | 9,880 |
| $ | 10,188 |
| | $ | (151 | ) | | $ | 119 |
| | $ | 122 |
| | $ | 10,278 |
|
| Owner-occupied commercial real estate | 4,154 |
| | (1,494 | ) | | 4 |
| | 1,397 |
| | 4,061 |
| 5,246 |
| | — |
| | 2 |
| | 181 |
| | 5,429 |
|
| Non-owner occupied commercial real estate | 7,709 |
| | — |
| | — |
| | (415 | ) | | 7,294 |
| 7,726 |
| | (149 | ) | | — |
| | 71 |
| | 7,648 |
|
| Total commercial business | 22,514 |
| | (1,497 | ) | | 8 |
| | 210 |
| | 21,235 |
| 23,160 |
| | (300 | ) | | 121 |
| | 374 |
| | 23,355 |
|
| One-to-four family residential | 1,073 |
| | (15 | ) | | — |
| | (21 | ) | | 1,037 |
| 1,121 |
| | (15 | ) | | — |
| | 50 |
| | 1,156 |
|
| Real estate construction and land development: | | | | | | | | | | | | | | | | | | |
| One-to-four family residential | 821 |
| | (556 | ) | | 191 |
| | 337 |
| | 793 |
| 1,016 |
| | — |
| | 3 |
| | 156 |
| | 1,175 |
|
| Five or more family residential and commercial properties | 1,666 |
| | — |
| | — |
| | (271 | ) | | 1,395 |
| 1,044 |
| | — |
| | — |
| | (15 | ) | | 1,029 |
|
| Total real estate construction and land development | 2,487 |
| | (556 | ) | | 191 |
| | 66 |
| | 2,188 |
| 2,060 |
| | — |
| | 3 |
| | 141 |
| | 2,204 |
|
| Consumer | 5,710 |
| | (478 | ) | | 112 |
| | 453 |
| | 5,797 |
| 6,305 |
| | (530 | ) | | 159 |
| | 474 |
| | 6,408 |
|
| Unallocated | 967 |
| | — |
| | — |
| | 176 |
| | 1,143 |
| 1,326 |
| | — |
| | — |
| | 26 |
| | 1,352 |
|
| Total | $ | 32,751 |
| | $ | (2,546 | ) | | $ | 311 |
| | $ | 884 |
| | $ | 31,400 |
| $ | 33,972 |
| | $ | (845 | ) | | $ | 283 |
| | $ | 1,065 |
| | $ | 34,475 |
|
| | | | | | | | | | | |
| Nine Months Ended September 30, 2017 | | | | | | | | | | |
| Commercial business: | | | | | | | | | | |
| Commercial and industrial | $ | 10,968 |
| | $ | (361 | ) | | $ | 679 |
| | $ | (1,406 | ) | | $ | 9,880 |
| |
| Owner-occupied commercial real estate | 3,661 |
| | (1,579 | ) | | 155 |
| | 1,824 |
| | 4,061 |
| |
| Non-owner occupied commercial real estate | 7,753 |
| | — |
| | — |
| | (459 | ) | | 7,294 |
| |
| Total commercial business | 22,382 |
| | (1,940 | ) | | 834 |
| | (41 | ) | | 21,235 |
| |
| One-to-four family residential | 1,015 |
| | (15 | ) | | 1 |
| | 36 |
| | 1,037 |
| |
| Real estate construction and land development: | | | | | | | | | | |
| One-to-four family residential | 797 |
| | (556 | ) | | 201 |
| | 351 |
| | 793 |
| |
| Five or more family residential and commercial properties | 1,359 |
| | — |
| | — |
| | 36 |
| | 1,395 |
| |
| Total real estate construction and land development | 2,156 |
| | (556 | ) | | 201 |
| | 387 |
| | 2,188 |
| |
| Consumer | 5,024 |
| | (1,419 | ) | | 329 |
| | 1,863 |
| | 5,797 |
| |
| Unallocated | 506 |
| | — |
| | — |
| | 637 |
| | 1,143 |
| |
| Total | $ | 31,083 |
| | $ | (3,930 | ) | | $ | 1,365 |
| | $ | 2,882 |
| | $ | 31,400 |
| |
|
| | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2018 |
| | Balance at Beginning of Period | | Charge-offs | | Recoveries | | Provision for Loan Losses | | Balance at End of Period |
| | (In thousands) |
| Commercial business: | | | | | | | | | |
| Commercial and industrial | $ | 9,910 |
| | $ | (773 | ) | | $ | 683 |
| | $ | 458 |
| | $ | 10,278 |
|
| Owner-occupied commercial real estate | 3,992 |
| | (1 | ) | | 7 |
| | 1,431 |
| | 5,429 |
|
| Non-owner occupied commercial real estate | 8,097 |
| | (149 | ) | | — |
| | (300 | ) | | 7,648 |
|
| Total commercial business | 21,999 |
| | (923 | ) | | 690 |
| | 1,589 |
| | 23,355 |
|
| One-to-four family residential | 1,056 |
| | (30 | ) | | — |
| | 130 |
| | 1,156 |
|
| Real estate construction and land development: | | | | | | | | | |
| One-to-four family residential | 862 |
| | — |
| | 5 |
| | 308 |
| | 1,175 |
|
| Five or more family residential and commercial properties | 1,190 |
| | — |
| | — |
| | (161 | ) | | 1,029 |
|
| Total real estate construction and land development | 2,052 |
| | — |
| | 5 |
| | 147 |
| | 2,204 |
|
| Consumer | 6,081 |
| | (1,709 | ) | | 389 |
| | 1,647 |
| | 6,408 |
|
| Unallocated | 898 |
| | — |
| | — |
| | 454 |
| | 1,352 |
|
| Total | $ | 32,086 |
| | $ | (2,662 | ) | | $ | 1,084 |
| | $ | 3,967 |
| | $ | 34,475 |
|
The following table details the allowance for loan losses disaggregated on the basis of the Company's impairment method as of December 31, 2017.2018:
|
| | | | | | | | | | | | | | | |
| | Loans Individually Evaluated for Impairment | | Loans Collectively Evaluated for Impairment | | PCI Loans | | Total Allowance for Loan Losses |
| | (In thousands) |
| Commercial business: | | | | | | | |
| Commercial and industrial | $ | 2,607 |
| | $ | 7,913 |
| | $ | 823 |
| | $ | 11,343 |
|
| Owner-occupied commercial real estate | 1,142 |
| | 3,063 |
| | 693 |
| | 4,898 |
|
| Non-owner occupied commercial real estate | 206 |
| | 6,630 |
| | 634 |
| | 7,470 |
|
| Total commercial business | 3,955 |
| | 17,606 |
| | 2,150 |
| | 23,711 |
|
| One-to-four family residential | 76 |
| | 1,015 |
| | 112 |
| | 1,203 |
|
| Real estate construction and land development: | | | | | | | |
| One-to-four family residential | — |
| | 1,040 |
| | 200 |
| | 1,240 |
|
| Five or more family residential and commercial properties | — |
| | 875 |
| | 79 |
| | 954 |
|
| Total real estate construction and land development | — |
| | 1,915 |
| | 279 |
| | 2,194 |
|
| Consumer | 139 |
| | 5,965 |
| | 477 |
| | 6,581 |
|
| Unallocated | — |
| | 1,353 |
| | — |
| | 1,353 |
|
| Total | $ | 4,170 |
| | $ | 27,854 |
| | $ | 3,018 |
| | $ | 35,042 |
|
|
| | | | | | | | | | | | | | | |
| | Loans Individually Evaluated for Impairment | | Loans Collectively Evaluated for Impairment | | PCI Loans | | Total Allowance for Loan Losses |
| | (In thousands) |
| Commercial business: | | | | | | | |
| Commercial and industrial | $ | 1,326 |
| | $ | 7,558 |
| | $ | 1,026 |
| | $ | 9,910 |
|
| Owner-occupied commercial real estate | 621 |
| | 2,557 |
| | 814 |
| | 3,992 |
|
| Non-owner occupied commercial real estate | 1,222 |
| | 5,919 |
| | 956 |
| | 8,097 |
|
| Total commercial business | 3,169 |
| | 16,034 |
| | 2,796 |
| | 21,999 |
|
| One-to-four family residential | 93 |
| | 798 |
| | 165 |
| | 1,056 |
|
| Real estate construction and land development: | | | | | | | |
| One-to-four family residential | 2 |
| | 635 |
| | 225 |
| | 862 |
|
| Five or more family residential and commercial properties | 37 |
| | 1,064 |
| | 89 |
| | 1,190 |
|
| Total real estate construction and land development | 39 |
| | 1,699 |
| | 314 |
| | 2,052 |
|
| Consumer | 54 |
| | 5,303 |
| | 724 |
| | 6,081 |
|
| Unallocated | — |
| | 898 |
| | — |
| | 898 |
|
| Total | $ | 3,355 |
| | $ | 24,732 |
| | $ | 3,999 |
| | $ | 32,086 |
|
The following table details the recorded investment balance of the loan receivables disaggregated on the basis of the Company’s impairment method as of December 31, 2017:2018:
|
| | | | | | | | | | | | | | | |
| | Loans Individually Evaluated for Impairment | | Loans Collectively Evaluated for Impairment | | PCI Loans | | Total Gross Loans Receivable |
| | (In thousands) |
| Commercial business: | | | | | | | |
| Commercial and industrial | $ | 22,642 |
| | $ | 827,531 |
| | $ | 3,433 |
| | $ | 853,606 |
|
| Owner-occupied commercial real estate | 5,816 |
| | 766,783 |
| | 7,215 |
| | 779,814 |
|
| Non-owner occupied commercial real estate | 6,276 |
| | 1,291,128 |
| | 7,059 |
| | 1,304,463 |
|
| Total commercial business | 34,734 |
| | 2,885,442 |
| | 17,707 |
| | 2,937,883 |
|
| One-to-four family residential | 279 |
| | 98,169 |
| | 3,315 |
| | 101,763 |
|
| Real estate construction and land development: | | | | | | | |
| One-to-four family residential | 899 |
| | 101,451 |
| | 380 |
| | 102,730 |
|
| Five or more family residential and commercial properties | — |
| | 112,687 |
| | 43 |
| | 112,730 |
|
| Total real estate construction and land development | 899 |
| | 214,138 |
| | 423 |
| | 215,460 |
|
| Consumer | 527 |
| | 391,556 |
| | 3,462 |
| | 395,545 |
|
| Total | $ | 36,439 |
|
| $ | 3,589,305 |
| | $ | 24,907 |
| | $ | 3,650,651 |
|
|
| | | | | | | | | | | | | | | |
| | Loans Individually Evaluated for Impairment | | Loans Collectively Evaluated for Impairment | | PCI Loans | | Total Gross Loans Receivable |
| | (In thousands) |
| Commercial business: | | | | | | | |
| Commercial and industrial | $ | 11,999 |
| | $ | 630,485 |
| | $ | 2,912 |
| | $ | 645,396 |
|
| Owner-occupied commercial real estate | 6,808 |
| | 603,827 |
| | 11,515 |
| | 622,150 |
|
| Non-owner occupied commercial real estate | 16,019 |
| | 957,233 |
| | 13,342 |
| | 986,594 |
|
| Total commercial business | 34,826 |
| | 2,191,545 |
| | 27,769 |
| | 2,254,140 |
|
| One-to-four family residential | 299 |
| | 81,443 |
| | 5,255 |
| | 86,997 |
|
| Real estate construction and land development: | | | | | | | |
| One-to-four family residential | 1,247 |
| | 50,649 |
| | 89 |
| | 51,985 |
|
| Five or more family residential and commercial properties | 645 |
| | 94,819 |
| | 2,035 |
| | 97,499 |
|
| Total real estate construction and land development | 1,892 |
| | 145,468 |
| | 2,124 |
| | 149,484 |
|
| Consumer | 442 |
| | 349,194 |
| | 5,455 |
| | 355,091 |
|
| Total | $ | 37,459 |
|
| $ | 2,767,650 |
| | $ | 40,603 |
| | $ | 2,845,712 |
|
| |
| (6) | Other Real Estate Owned |
Changes in other real estate owned during the three and nine months ended September 30, 20182019 and 20172018 were as follows:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (In thousands) |
| Balance at the beginning of the period | $ | 1,224 |
| | $ | 434 |
| | $ | 1,983 |
| | $ | — |
|
| Additions | — |
| | — |
| | — |
| | 434 |
|
| Additions from acquisitions | — |
| | 1,796 |
| | — |
| | 1,796 |
|
| Proceeds from dispositions | (435 | ) | | (198 | ) | | (864 | ) | | (198 | ) |
| Gain (loss) on sales, net | 52 |
| | — |
| | (227 | ) | | — |
|
| Valuation adjustment | — |
| | — |
| | (51 | ) | | — |
|
| Balance at the end of the period | $ | 841 |
| | $ | 2,032 |
| | $ | 841 |
| | $ | 2,032 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | (In thousands) |
| Balance at the beginning of the period | $ | 434 |
| | $ | 786 |
| | $ | — |
| | $ | 754 |
|
| Additions | — |
| | — |
| | 434 |
| | 32 |
|
| Additions from acquisitions | 1,796 |
| | — |
| | 1,796 |
| | — |
|
| Proceeds from dispositions | (198 | ) | | (374 | ) | | (198 | ) | | (374 | ) |
| Gain on sales, net | — |
| | 111 |
| | — |
| | 111 |
|
| Balance at the end of the period | $ | 2,032 |
| | $ | 523 |
| | $ | 2,032 |
| | $ | 523 |
|
At September 30, 2018, the carrying amount of2019, there was 0 other real estate owned that was the result of foreclosure and obtaining physical possession of residential real estate properties was $434,000.properties. At September 30, 2018, the recorded investment of2019, there were 0 consumer mortgage loans secured by residential real estate properties (included in the one-to-four family residential loans in Note (4) Loans Receivable) for which formal foreclosure proceedings were in process was $258,000.process.
| |
| (7) | Goodwill and Other Intangible Assets |
(a) Goodwill
The Company’s goodwill represents the excess of the purchase price over the fair value of net assets acquired in the recentfollowing mergers and acquisitions: Premier MergerCommercial Bancorp on July 2, 2018 and2018; Puget Sound MergerBancorp on January 16, 2018 and the historical acquisitions of2018; Washington Banking Company on May 1, 2014; Valley Community Bancshares on July 15, 2013; Western Washington Bancorp in 2006 and North Pacific Bank in 1998. The Company’s goodwill is assigned to the Bank and is evaluated for impairment at the Bank level (reporting unit).
The following table presents the change in goodwill for the periods indicated:
| | | | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended September 30, | | Nine Months Ended
September 30, |
| | | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
| | | (In thousands) | (In thousands) |
| Balance at the beginning of the period | | $ | 187,549 |
| | $ | 119,029 |
| | $ | 119,029 |
| | $ | 119,029 |
| $ | 240,939 |
| | $ | 187,549 |
| | $ | 240,939 |
| | $ | 119,029 |
|
Additions as a result of acquisitions (1) | | 53,288 |
| | — |
| | 121,808 |
| | — |
| — |
| | 53,288 |
| | — |
| | 121,808 |
|
| Balance at the end of the period | | $ | 240,837 |
| | $ | 119,029 |
| | $ | 240,837 |
| | $ | 119,029 |
| $ | 240,939 |
| | $ | 240,837 |
| | $ | 240,939 |
| | $ | 240,837 |
|
(1) See Note (2) Business Combinations
The Company performed its annual goodwill impairment test during the fourth quarter of 20172018 and determined based on its Step 1 analysis that the fair value of the reporting unit exceeded the carrying value, such that the Company's goodwill was not considered impaired. Changes in the economic environment, operations of the reporting unit or other adverse events could result in future impairment charges which could have a material impact on the Company’s operating results. No events or circumstances since the annual impairment test were noted that would indicate it was more likely than not a goodwill impairment existed during the nine months ended September 30, 2019.
(b) Other Intangible Assets
The otherOther intangible assets represent the core deposit intangible ("CDI")CDI acquired in business combinations. The useful life of the CDI relatedwas estimated to be ten years for the acquisitions of Premier Commercial Bancorp, Puget Sound Bancorp, Washington Banking Company, and Valley Community Bancshares, and Northwest Commercial Bank werewas estimated to be ten, ten, ten, ten, and five years respectively.
Northwest Commercial Bank.
The following table presents the change in other intangible assets for the periods indicated:
| | | | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended September 30, | | Nine Months Ended
September 30, |
| | | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
| | | (In thousands) | (In thousands) |
| Balance at the beginning of the period | | $ | 15,767 |
| | $ | 6,727 |
| | $ | 6,088 |
| | $ | 7,374 |
| $ | 18,563 |
| | $ | 15,767 |
| | $ | 20,614 |
| | $ | 6,088 |
|
Additions as a result of acquisitions (1) | | 7,075 |
| | — |
| | 18,345 |
| | — |
| — |
| | 7,075 |
| | — |
| | 18,345 |
|
| Amortization | | (1,114 | ) | | (319 | ) | | (2,705 | ) | | (966 | ) | (975 | ) | | (1,114 | ) | | (3,026 | ) | | (2,705 | ) |
| Balance at the end of the period | | $ | 21,728 |
| | $ | 6,408 |
| | $ | 21,728 |
| | $ | 6,408 |
| $ | 17,588 |
| | $ | 21,728 |
| | $ | 17,588 |
| | $ | 21,728 |
|
(1) See Note (2) Business Combinations
| |
| (8) | Junior Subordinated Debentures |
As part of the acquisition of Washington Banking Company on May 1, 2014, the Company assumed trust preferred securities and junior subordinated debentures with a total fair value of $18.9 million at the merger date.
Washington Banking Master Trust, a Delaware statutory business trust, was a wholly-owned subsidiary At September 30, 2019 and December 31, 2018, the balance 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 $25.0net of unaccreted discount, was $20.5 million of trust preferred securities with a 30-year maturity, callable after the fifth year by the Washington Banking. The trust preferred securities have a quarterly adjustable rate based upon the three-month London Interbank Offered Rate (“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.$20.3 million, respectively.
The adjustable rate of the trust preferred securities at September 30, 20182019 was 3.96%3.65%. The following table presents the weighted average rate of the junior subordinated debentures was as follows for the indicated periods:periods indicated:
|
| | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2018 | | 2017 | | 2018 | | 2017 |
Weighted average rate (1) | | 6.49 | % | | 5.20 | % | | 6.17 | % | | 5.05 | % |
|
| | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended
September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Weighted average rate (1) | 6.43 | % | | 6.49 | % | | 6.72 | % | | 6.17 | % |
| |
(1) | The weighted average rate includes the accretion of the discount established at the merger date which is amortized over the life of the trust preferred securities. |
(1) The weighted average rate includes the accretion of the discount established at the merger date which is amortized over the life of the trust preferred securities.
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. At September 30, 2018 and December 31, 2017, the balance of the junior subordinated debentures, net of unaccreted discount, was $20.2 million and $20.0 million, respectively. All of the common securities of the Trust are owned by the Company. Heritage has fully and unconditionally guaranteed the capital securities along with all obligations of the Trust under the trust agreements. For financial reporting purposes, the Company's investment in the Master Trust is accounted for under the equity method and is included in prepaid expenses and other assets on the Company's Condensed 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 Company's Condensed Consolidated Statements of Financial Condition.
| |
| (9) | Securities Sold Under Agreement to Repurchase Agreements |
The Company utilizes securities sold under agreement to repurchase agreements with one-dayone day maturities as a supplement to funding sources. Repurchase agreements are secured by pledged investment securities available for sale. Under the repurchase agreements, the Company is requiredsale as a supplement to maintain an aggregate market value of securities pledged greater than the balance of the repurchase agreements. The Company is required to pledge additional securities to cover any declines below the balance of the repurchase agreements.funding sources. For additional information on the total value of investment securities pledged for securities sold under agreement to repurchase agreements see Note (3) Investment Securities.
The following table presents the Company's securities sold under agreement to repurchase agreement obligations by class of collateral pledged:pledged at the dates indicated:
| | | | September 30, 2018 | | December 31, 2017 | September 30, 2019 | | December 31, 2018 |
| | (In thousands) | (In thousands) |
| U.S. Treasury and U.S. Government-sponsored agencies | $ | 4,890 |
| | $ | — |
| $ | 6,912 |
| | $ | 4,878 |
|
Mortgage-backed securities and collateralized mortgage obligations(1): | | | | |
Mortgage-backed securities and collateralized mortgage obligations: (1) | | | | |
| Residential | 9,971 |
| | 11,239 |
| 10,254 |
| | 9,335 |
|
| Commercial | 17,372 |
| | 20,582 |
| 8,717 |
| | 17,274 |
|
| Total repurchase agreements | $ | 32,233 |
| | $ | 31,821 |
| |
| Total securities sold under agreement to repurchase | | $ | 25,883 |
| | $ | 31,487 |
|
(1) Issued and guaranteed by U.S. Government-sponsored agencies.
(a) FHLB
The Federal Home Loan Bank ("FHLB") of Des MoinesFHLB 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 September 30, 2018,2019, the Bank maintained a credit facility with the FHLB of Des Moines with available borrowing capacity of $826.8$930.6 million. TheAt September 30, 2019 and December 31, 2018 the Bank had no0 FHLB advances outstanding at September 30, 2018. At December 31, 2017 there were FHLB advances outstanding of $92.5 million.outstanding.
The following table sets forth the details of FHLB advances during the three and nine months ended September 30, 20182019 and 2017:2018:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended
September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (In thousands) |
| FHLB Advances: | | | | | | | |
| Average balance during the period | $ | 3,755 |
| | $ | 20,892 |
| | $ | 15,909 |
| | $ | 45,194 |
|
| Maximum month-end balance during the period | $ | — |
| | $ | 50,500 |
| | $ | 90,700 |
| | $ | 154,500 |
|
| Weighted average rate during the period | 1.16 | % | | 2.22 | % | | 2.56 | % | | 1.98 | % |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | (In thousands) |
| FHLB Advances: | | | | | | | |
| Average balance during the period | $ | 20,892 |
| | $ | 111,293 |
| | $ | 45,193 |
| | $ | 106,553 |
|
| Maximum month-end balance during the period | $ | 50,500 |
| | $ | 126,200 |
| | $ | 154,500 |
| | $ | 137,450 |
|
| Weighted average rate during the period | 2.22 | % | | 1.53 | % | | 1.98 | % | | 1.09 | % |
Advances from the FHLB are collateralized by a blanket pledge on FHLB stock owned by the Bank, deposits at the FHLB, certain one-to-four single family residential loans or other assets, investment securities which are obligations of or guaranteed by the United States, or other assets. In accordance with the pledge agreement, the Company must maintain unencumbered collateral in an amount equal to varying percentages ranging from 100% to 160% of outstanding advances depending on the type of collateral.
(b) Federal Funds Purchased
The Bank maintains advance lines with Wells Fargo Bank, US Bank, The Independent Bankers Bank, ("TIB") and Pacific Coast Bankers’ Bank and JP Morgan Chase to purchase federal funds of up to $90.0$140.0 million as of September 30, 2018.2019. The lines generally mature annually or are reviewed annually. As of September 30, 20182019 and December 31, 2017,2018, there were no0 federal funds purchased.
(c) Credit Facilities
The Bank maintains a credit facility with the Federal Reserve Bank of San Francisco ("Federal Reserve Bank") with available borrowing capacity of $45.2$40.4 million as of September 30, 2018.2019. There were no0 borrowings outstanding
as of September 30, 2018 or2019 and December 31, 2017.2018. Any advances on the credit facility would have to be first secured by the Bank's investment securities or loans receivable.
| |
| (11) | Derivative Financial Instruments |
The Company has entered into certain interest rate swap contracts that are not designated as hedging instruments. The purpose of these derivative contracts is primarily to provide commercial business loan customers the ability to convert their loans from variable to fixed interest rates. Upon the origination of a derivative contract with a customer, the Company simultaneously enters into an offsetting derivative contract with a third party in order to offset its exposure on the variable and fixed rate components of the customer agreement. The Company recognizes immediate income based upon the difference in the bid/ask spread of the underlying transactions with its customers and the third party, which is recorded in interest rate swap fees on the Condensed Consolidated Statements of Income. Because the Company acts only as an intermediary for its customer, subsequent changes in the fair value of the underlying derivative contracts offset each other and do not significantly impact the Company’s results of operations.
The following table presents the notional amounts and estimated fair values of interest rate derivative contracts outstanding at September 30, 20182019 and December 31, 2017 are presented in the following table.2018:
|
| | | | | | | | | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| | Notional Amounts | | Estimated Fair Value | | Notional Amounts | | Estimated Fair Value |
| | (In thousands) |
| Non-hedging interest rate derivatives | | | | | | | |
Interest rate swap asset (1) | $ | 181,360 |
| | $ | 12,026 |
| | $ | 171,798 |
| | $ | 5,095 |
|
Interest rate swap liability (1) | 181,360 |
| | (12,026 | ) | | 171,798 |
| | (5,095 | ) |
|
| | | | | | | | | | | | | | | | |
| | | September 30, 2018 | | December 31, 2017 |
| | | Notional Amounts | | Estimated Fair Value | | Notional Amounts | | Estimated Fair Value |
| | | (In thousands) |
| Non-hedging interest rate derivatives | | | | | | | | |
Interest rate swaps with customer (1) | | $ | 162,275 |
| | $ | (7,050 | ) | | $ | 146,537 |
| | $ | (882 | ) |
Interest rate swap with third party (1) | | 162,275 |
| | 7,050 |
| | 146,537 |
| | 882 |
|
(1) The estimated fair value of the derivative included in prepaidderivatives with customers was $12,026 and other assets on the Condensed Consolidated Statements of Financial Condition was $7.7 million and $3.4 million$(1,643) as of September 30, 20182019 and December 31, 2017,2018, respectively. The estimated fair value of the derivative included in accrued expensesderivatives with third parties was $(12,026) and other liabilities on the Condensed Consolidated Statements of Financial Condition was $7.7 million and $3.4 million$1,643 as of September 30, 20182019 and December 31, 2017,2018, respectively.
(a) Earnings Per Common Share
The following table illustrates the reconciliation of weighted average shares used for earnings per common share computations for the three and nine months ended September 30, 20182019 and 2017:2018:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended
September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (In thousands) |
| Net income: | | | | | | | |
| Net income | $ | 17,895 |
| | $ | 15,504 |
| | $ | 50,431 |
| | $ | 36,448 |
|
| Dividends and undistributed earnings allocated to participating securities | (10 | ) | | (48 | ) | | (48 | ) | | (252 | ) |
| Net income allocated to common shareholders | $ | 17,885 |
| | $ | 15,456 |
| | $ | 50,383 |
| | $ | 36,196 |
|
| Basic: | | | | | | | |
| Weighted average common shares outstanding | 36,764,810 |
| | 36,839,615 |
| | 36,846,884 |
| | 34,744,788 |
|
| Restricted stock awards | (21,948 | ) | | (67,669 | ) | | (34,336 | ) | | (94,340 | ) |
| Total basic weighted average common shares outstanding | 36,742,862 |
| | 36,771,946 |
| | 36,812,548 |
| | 34,650,448 |
|
| Diluted: | | | | | | | |
| Basic weighted average common shares outstanding | 36,742,862 |
| | 36,771,946 |
| | 36,812,548 |
| | 34,650,448 |
|
Effect of potentially dilutive common shares (1) | 133,686 |
| | 191,298 |
| | 160,476 |
| | 170,154 |
|
| Total diluted weighted average common shares outstanding | 36,876,548 |
| | 36,963,244 |
| | 36,973,024 |
| | 34,820,602 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | (Dollars in thousands) |
| Net income: | | | | | | | |
| Net income | $ | 15,504 |
| | $ | 10,624 |
| | $ | 36,448 |
| | $ | 31,768 |
|
| Less: Dividends and undistributed earnings allocated to participating securities | (48 | ) | | (64 | ) | | (252 | ) | | (228 | ) |
| Net income allocated to common shareholders | $ | 15,456 |
| | $ | 10,560 |
| | $ | 36,196 |
| | $ | 31,540 |
|
| Basic: | | | | | | | |
| Weighted average common shares outstanding | 36,839,615 |
| | 29,929,721 |
| | 34,744,788 |
| | 29,940,276 |
|
| Less: Restricted stock awards | (67,669 | ) | | (146,425 | ) | | (94,340 | ) | | (192,186 | ) |
| Total basic weighted average common shares outstanding | 36,771,946 |
| | 29,783,296 |
| | 34,650,448 |
| | 29,748,090 |
|
| Diluted: | | | | | | | |
| Basic weighted average common shares outstanding | 36,771,946 |
| | 29,783,296 |
| | 34,650,448 |
| | 29,748,090 |
|
Effect of potentially dilutive common shares (1) | 191,298 |
| | 107,414 |
| | 170,154 |
| | 86,004 |
|
| Total diluted weighted average common shares outstanding | 36,963,244 |
| | 29,890,710 |
| | 34,820,602 |
| | 29,834,094 |
|
| |
(1) | Represents the effect of the assumed exercise of stock options and vesting of restricted stock awards and units. |
Potential dilutive shares are excluded from the computation of earnings per share if their effect is anti-dilutive. Anti-dilution occurs when the exercise price of a stock option or the unrecognized compensation cost per share of a restricted stock award exceeds the market price of the Company’s stock. For the three and nine months ended September 30, 2018 and 2017,2019, there were no108,501 and 70,372 anti-dilutive shares outstanding, related to options to acquire common stock.respectively. There were 0 anti-dilutive shares outstanding for the three and nine months ended September 30, 2018.
(b) Dividends
The timing and amount of cash dividends paid on the Company's common stock depends on the Company’s earnings, capital requirements, financial condition and other relevant factors. Dividends on common stock from the Company depend substantially upon receipt of dividends from the Bank, which is the Company’s predominant source of income.
The following table summarizes the dividend activity for the nine months ended September 30, 20182019 and calendar year 2017.2018:
|
| | | | | | | |
| Declared | | Cash Dividend per Share | | Record Date | | Paid Date | |
January 25, 201724, 2018 | | $0.120.15 | | February 9, 20177, 2018 | | February 23, 201721, 2018 | |
April 25, 20172018 | | $0.130.15 | | May 10, 20172018 | | May 24, 20172018 | |
July 25, 201724, 2018 | | $0.130.15 | | August 10, 20179, 2018 | | August 24, 201723, 2018 | |
October 25, 201724, 2018 | | $0.130.17 | | November 8, 20177, 2018 | | November 22, 201721, 2018 | |
October 25, 201724, 2018 | | $0.10 | | November 8, 20177, 2018 | | November 22, 201721, 2018 | * |
January 24, 201823, 2019 | | $0.150.18 | | February 7, 20182019 | | February 21, 20182019 | |
April 25, 201824, 2019 | | $0.150.18 | | May 10, 20188, 2019 | | May 24, 201822, 2019 | |
July 24, 20182019 | | $0.150.19 | | August 9, 20188, 2019 | | August 23, 201822, 2019 | |
* Denotes a special dividend.
The FDIC and the Washington State Department of Financial Institutions, Division of Banks have the authority under their supervisory powers to prohibit the payment of dividends by the Bank to the Company. Additionally, current guidance from the Board of Governors of the Federal Reserve System ("Federal Reserve") provides, among other things, that dividends per share on the Company’s common stock generally should not exceed earnings per share, measured over the previous four fiscal quarters. Current regulations allow the Company and the Bank to pay dividends on their common stock if the Company’s or the Bank’s regulatory capital would not be reduced below the statutory capital requirements set by the Federal Reserve and the FDIC.
(c) Stock Repurchase Program
The Company has had various stock repurchase programs since March 1999. On October 23, 2014, the Company's Board of Directors authorized the repurchase of up to 5% of the Company's outstanding common shares, or approximately 1,513,000 shares, under the eleventh stock repurchase plan. The number, timing and price of shares repurchased will depend on business and market conditions and other factors, including opportunities to deploy the Company's capital.
Since the inception of the eleventh plan, the Company has repurchased 579,996872,678 shares at an average share pricesprice of $16.67. No$20.03, including 264,712 and 292,712 shares repurchased at an average share price of $26.23 and $26.50 during the three and nine months ended September 30, 2019, respectively. NaN shares were repurchased under this plan during the three and nine months ended September 30, 2018 and 2017.2018.
In addition to the stock repurchases under a plan, the Company repurchases shares to pay withholding taxes on the vesting of restricted stock awards and units. The following table provides total repurchased shares for the periods indicated:
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended September 30, | | Nine Months Ended
September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Repurchased shares to pay withholding taxes (1) | 368 |
| | 344 |
| | 53,188 |
| | 27,711 |
| 405 |
| | 368 |
| | 28,434 |
| | 53,188 |
|
| Stock repurchase to pay withholding taxes average share price | $ | 36.34 |
| | $ | 25.80 |
| | $ | 31.99 |
| | $ | 24.61 |
| $ | 27.67 |
| | $ | 36.34 |
| | $ | 30.83 |
| | $ | 31.99 |
|
(1) During the nine months ended September 30, 2018, the Company repurchased 26,741 shares related to the withholding taxes due on the accelerated vesting of the restricted stock units of Puget Sound which were converted to Heritage common stock shares with an average share price of $31.80 under the terms of the merger.Puget Sound Merger. See Note (2) Business Combinations. There were no shares repurchased as a result of the accelerated vesting of the restricted stock awards of Premier.
(d) Issuance of Common Stock
In conjunction with the Premier Merger effective on July 2, 2018 and the Puget Sound Merger effective on January 16, 2018, Heritage issued 2,848,579 and 4,112,258 shares, respectively, of the Company's common stock at the merger date share price of $34.85 and $31.80, respectively, for a fair value of $99.3 million and $130.8 million, respectively.
| |
| (13) | Accumulated Other Comprehensive Income (Loss) Income |
The changes in accumulated other comprehensive income (loss) income (“AOCI”), all of which are due to changes in the fair value of available for sale securities and are net of tax, forduring the periods provided.three and nine months ended September 30, 2019 and 2018 are as follows:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended
September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (In thousands) |
| Balance of AOCI at the beginning of period | $ | 9,754 |
| | $ | (11,306 | ) | | $ | (7,455 | ) | | $ | (1,298 | ) |
| Other comprehensive income (loss) before reclassification | 2,993 |
| | (3,319 | ) | | 20,240 |
| | (13,193 | ) |
| Amounts reclassified from AOCI for gain on sale of investment securities included in net income | (222 | ) | | (65 | ) | | (260 | ) | | (106 | ) |
| Net current period other comprehensive income (loss) | 2,771 |
| | (3,384 | ) | | 19,980 |
| | (13,299 | ) |
| Effects of implementation of accounting change related to equity investments, net | — |
| | — |
| | — |
| | (93 | ) |
| Balance of AOCI at the end of period | $ | 12,525 |
| | $ | (14,690 | ) | | $ | 12,525 |
| | $ | (14,690 | ) |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | (In thousands) |
| Balance of AOCI at the beginning of period | $ | (11,306 | ) | | $ | 1,557 |
| | $ | (1,298 | ) | | $ | (2,606 | ) |
| Other comprehensive (loss) income before reclassification | (3,319 | ) | | 289 |
| | (13,193 | ) | | 4,528 |
|
| Amounts reclassified from AOCI for gain on sale of investment securities included in net income | (65 | ) | | (28 | ) | | (106 | ) | | (104 | ) |
| Net current period other comprehensive (loss) income | (3,384 | ) | | 261 |
| | (13,299 | ) | | 4,424 |
|
| ASU 2016-01 implementation | — |
| | — |
| | (93 | ) | | — |
|
| Balance of AOCI at the end of period | $ | (14,690 | ) | | $ | 1,818 |
| | $ | (14,690 | ) | | $ | 1,818 |
|
| |
| (14) | Fair Value Measurements |
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1: Valuations for assets and liabilities traded in active exchange markets, or interest in open-end mutual funds that allow the Company to sell its ownership interest back to the fund at net asset value on a daily basis. Valuations are obtained from readily available pricing sources for market transactions involving identical assets, liabilities, or funds.
Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or valuations using methodologies with observable inputs.
Level 3: Valuations for assets and liabilities that are derived from other valuation methodologies, such as option pricing models, discounted cash flow models and similar techniques using unobservable inputs, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
(a) Recurring and Nonrecurring Basis
The Company used the following methods and significant assumptions to measure the fair value of certain assets on a recurring and nonrecurring basis:
Investment Securities Available for Sale:
The fair values of all investment securities are based upon the assumptions that market participants would use in pricing the security. If available, fair values of investment securities are determined by quoted market prices (Level 1). For investment securities where quoted market prices are not available, fair values are calculated based on market prices on similar securities (Level 2). For investment securities where quoted prices or market prices of similar securities are not available, fair values are calculated by using observable and unobservable inputs such as discounted cash flows or other market indicators (Level 3). Security valuations are obtained from third party pricing services for comparable assets or liabilities.
Impaired Loans:
At the time a loan is considered impaired, its impairment is measured based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the observable market price, or the fair market value of the collateral (less costs to sell) if the loan is collateral-dependent. Impaired loans for which impairment is measured using the discounted cash flow approach are not considered to be measured at fair value because the loan’s effective interest rate is generally not a fair value input, and for the purposes of fair value disclosures, the fair value of these loans are measured commensurate with non-impaired loans. If the Company utilizes the fair market value of the collateral method, the fair value used to measure impairment is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value based on the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation and management’s expertise and knowledge of the client and client’s business (Level 3). Impaired loans are evaluated on a quarterly basis and impairment and is adjusted accordingly.
Other Real Estate Owned:
Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in Level 3 classification of the inputs for determining fair value.
Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers for commercial properties or certified residential appraisers for residential properties whose qualifications and licenses have been reviewed and verified by the Company. Once received, the Company reviews the assumptions and approaches utilized in the appraisal as well as the resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On a quarterly basis, the Company compares the actual selling price of collateral that has been liquidated to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value.
Derivative Financial Instruments:
The Company obtains broker or dealer quotes to value its interest rate derivative contracts, which use valuation models using observable market data as of the measurement date (Level 2).
The following tables summarize the balances of assets and liabilities measured at fair value on a recurring basis as of September 30, 20182019 and December 31, 2017.2018:
| | | | September 30, 2018 | September 30, 2019 |
| | Total | | Level 1 | | Level 2 | | Level 3 | Total | | Level 1 | | Level 2 | | Level 3 |
| | (In thousands) | (In thousands) |
| Assets | | | | | | | | | | | | | | |
| Investment securities available for sale: | | | | | | | | | | | | | | |
| U.S. Treasury and U.S. Government-sponsored agencies | $ | 83,798 |
| | $ | 15,879 |
| | $ | 67,919 |
| | $ | — |
| $ | 112,851 |
| | $ | 16,090 |
| | $ | 96,761 |
| | $ | — |
|
| Municipal securities | 164,072 |
| | — |
| | 164,072 |
| | — |
| 127,315 |
| | — |
| | 127,315 |
| | — |
|
| Mortgage-backed securities and collateralized mortgage obligations: | | | | | | | | | | | | | | |
| Residential | 311,916 |
| | — |
| | 311,916 |
| | — |
| 346,677 |
| | — |
| | 346,677 |
| | — |
|
| Commercial | 309,114 |
| | — |
| | 309,114 |
| | — |
| 331,330 |
| | — |
| | 331,330 |
| | — |
|
| Collateralized loan obligations | 967 |
| | — |
| | 967 |
| | — |
| |
| Corporate obligations | 25,709 |
| | — |
| | 25,709 |
| | — |
| 24,156 |
| | — |
| | 24,156 |
| | — |
|
| Other asset-backed securities | 25,161 |
| | — |
| | 25,161 |
| | — |
| 23,773 |
| | — |
| | 23,773 |
| | — |
|
| Total investment securities available for sale | 920,737 |
| | 15,879 |
| | 904,858 |
| | — |
| 966,102 |
| | 16,090 |
| | 950,012 |
| | — |
|
| Equity Security | | 147 |
| | 147 |
| | — |
| | — |
|
| Derivative assets - interest rate swaps | 7,659 |
| | — |
| | 7,659 |
| | — |
| 12,026 |
| | — |
| | 12,026 |
| | — |
|
| Liabilities | | | | | | | | | | | | | | |
| Derivative liabilities - interest rate swaps | $ | 7,659 |
| | $ | — |
| | $ | 7,659 |
| | $ | — |
| $ | 12,026 |
| | $ | — |
| | $ | 12,026 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Total | | Level 1 | | Level 2 | | Level 3 |
| | (In thousands) |
| Assets | | | | | | | |
| Investment securities available for sale: | | | | | | | |
| U.S. Treasury and U.S. Government-sponsored agencies | $ | 101,603 |
| | $ | 15,936 |
| | $ | 85,667 |
| | $ | — |
|
| Municipal securities | 158,864 |
| | — |
| | 158,864 |
| | — |
|
| Mortgage-backed securities and collateralized mortgage obligations: | | | | | | | |
| Residential | 331,602 |
| | — |
| | 331,602 |
| | — |
|
| Commercial | 333,761 |
| | — |
| | 333,761 |
| | — |
|
| Corporate obligations | 25,563 |
| | — |
| | 25,563 |
| | — |
|
| Other asset-backed securities | 24,702 |
| | — |
| | 24,702 |
| | — |
|
| Total investment securities available for sale | 976,095 |
| | 15,936 |
| | 960,159 |
| | — |
|
| Equity Security | 114 |
| | 114 |
| | — |
| | — |
|
| Derivative assets - interest rate swaps | 5,095 |
| | — |
| | 5,095 |
| | — |
|
| Liabilities | | | | | | | |
| Derivative liabilities - interest rate swaps | $ | 5,095 |
| | $ | — |
| | $ | 5,095 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | Total | | Level 1 | | Level 2 | | Level 3 |
| | (In thousands) |
| Assets | | | | | | | |
| Investment securities available for sale: | | | | | | | |
| U.S. Treasury and U.S. Government-sponsored agencies | $ | 13,442 |
| | $ | — |
| | $ | 13,442 |
| | $ | — |
|
| Municipal securities | 250,015 |
| | — |
| | 250,015 |
| | — |
|
| Mortgage-backed securities and collateralized mortgage obligations: | | | | | | | |
| Residential | 280,211 |
| | — |
| | 280,211 |
| | — |
|
| Commercial | 217,079 |
| | — |
| | 217,079 |
| | — |
|
| Collateralized loan obligations | 4,580 |
| | — |
| | 4,580 |
| | — |
|
| Corporate obligations | 16,770 |
| | — |
| | 16,770 |
| | — |
|
| Other securities | 28,433 |
| | 146 |
| | 28,287 |
| | — |
|
| Total investment securities available for sale | 810,530 |
| | 146 |
| | 810,384 |
| | — |
|
| Derivative assets - interest rate swaps | 3,418 |
| | — |
| | 3,418 |
| | — |
|
| Liabilities | | | | | | | |
| Derivative liabilities - interest rate swaps | $ | 3,418 |
| | $ | — |
| | $ | 3,418 |
| | $ | — |
|
There were no0 transfers between Level 1 and Level 2 during the three and nine months ended September 30, 20182019 and 2017.2018.
Nonrecurring Basis
The Company may be required to measure certain financial assets and liabilities at fair value on a nonrecurring basis. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets.
The following tables below represent assets measured at fair value on a nonrecurring basis at September 30, 20182019 and December 31, 20172018 and the net losses recorded in earnings during three and nine months ended September 30, 20182019 and 2017.2018:
| | | | Basis(1) | | Fair Value at September 30, 2018 | | | | | Basis(1) | | Fair Value at September 30, 2019 | | | | |
| | Total | | Level 1 | | Level 2 | | Level 3 | | Net Losses (Gains) Recorded in Earnings During the Three Months Ended September 30, 2018 | | Net Losses (Gains) Recorded in Earnings During the Nine Months Ended September 30, 2018 | Total | | Level 1 | | Level 2 | | Level 3 | | Net Losses
Recorded in
Earnings
During the
Three Months Ended September 30, 2019 | | Net Losses
Recorded in
Earnings
During the
Nine Months Ended September 30, 2019 |
| | (In thousands) | (In thousands) |
| Impaired loans: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial business: | | | | | | | | | | | | | | |
| Commercial and industrial | $ | 224 |
| | $ | 187 |
| | $ | — |
| | $ | — |
| | $ | 187 |
| | $ | 36 |
| | $ | 36 |
| $ | 2,503 |
| | $ | 1,872 |
| | $ | — |
| | $ | — |
| | $ | 1,872 |
| | $ | 48 |
| | $ | 134 |
|
| Real estate construction and land development: | | | | | | | | | | | | | | |
| One-to-four family residential | 976 |
| | 303 |
| | — |
| | — |
| | 303 |
| | 1 |
| | 4 |
| |
| Total assets measured at fair value on a nonrecurring basis | $ | 1,200 |
| | $ | 490 |
| | $ | — |
| | $ | — |
| | $ | 490 |
| | $ | 37 |
| | $ | 40 |
| $ | 2,503 |
| | $ | 1,872 |
| | $ | — |
| | $ | — |
| | $ | 1,872 |
| | $ | 48 |
| | $ | 134 |
|
| |
(1) | Basis represents the unpaid principal balance of impaired loans. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Basis(1) | | Fair Value at December 31, 2018 | | | | |
| | Total | | Level 1 | | Level 2 | | Level 3 | | Net Losses Recorded in Earnings During the Three Months Ended September 30, 2018 | | Net Losses Recorded in Earnings During the Six Months Ended September 30, 2018 |
| | (In thousands) |
| Impaired loans: | | | | | | | | | | | | | |
| Commercial business: | | | | | | | | | | | | | |
| Commercial and industrial | $ | 117 |
| | $ | 107 |
| | $ | — |
| | $ | — |
| | $ | 107 |
| | $ | 11 |
| | $ | 11 |
|
| Non-owner occupied commercial real estate | 1,378 |
| | 1,102 |
| | — |
| | — |
| | 1,102 |
| | 149 |
| | 149 |
|
| Total commercial business | 1,495 |
| | 1,209 |
| | — |
| | — |
| | 1,209 |
| | 160 |
| | 160 |
|
| Consumer | 9 |
| | 7 |
| | — |
| | — |
| | 7 |
| | — |
| | — |
|
| Total assets measured at fair value on a nonrecurring basis | $ | 1,504 |
| | $ | 1,216 |
| | $ | — |
| | $ | — |
| | $ | 1,216 |
| | $ | 160 |
| | $ | 160 |
|
| |
(1) | Basis represents the unpaid principal balance of impaired loans. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Basis(1) | | Fair Value at December 31, 2017 | | | | |
| | Total | | Level 1 | | Level 2 | | Level 3 | | Net Losses Recorded in Earnings During the Three Months Ended September 30, 2017 | | Net Losses (Gains) Recorded in Earnings During the Nine Months Ended September 30, 2017 |
| | (In thousands) |
| Impaired loans: | | | | | | | | | | | | | |
| Real estate construction and land development: | | | | | | | | | | | | | |
| One-to-four family residential | $ | 976 |
| | $ | 307 |
| | $ | — |
| | $ | — |
| | $ | 307 |
| | $ | — |
| | $ | — |
|
| Total assets measured at fair value on a nonrecurring basis | $ | 976 |
| | $ | 307 |
| | $ | — |
| | $ | — |
| | $ | 307 |
| | $ | — |
| | $ | — |
|
| |
(1)
| Basis represents the unpaid principal balance of impaired loans. |
The following table presentstables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at September 30, 20182019 and December 31, 2017.2018:
|
| | | | | | | | | |
| | September 30, 2018 |
| | Fair Value | | Valuation Technique(s) | | Unobservable Input(s) | | Range of Inputs; Weighted Average |
| | (Dollars in thousands) |
| Impaired loans | $ | 490 |
| | Market approach | | Adjustment for differences between the comparable sales | | (91.2%) - (14.4)%; (25.5%) |
|
| | | | | | | | | |
| | September 30, 2019 |
| | Fair Value | | Valuation Technique(s) | | Unobservable Input(s) | | Range of Inputs; Weighted Average |
| | (Dollars in thousands) |
| Impaired loans | $ | 1,872 |
| | Market approach | | Adjustment for differences between the comparable sales | | 240.9% - (16.0%); 62.4% |
|
| | | | | | | | | |
| | December 31, 2018 |
| | Fair Value | | Valuation Technique(s) | | Unobservable Input(s) | | Range of Inputs; Weighted Average |
| | (Dollars in thousands) |
| Impaired loans | $ | 1,216 |
| | Market approach | | Adjustment for differences between the comparable sales | | 10.4% - (37.3%); (10.9%) |
|
| | | | | | | | | |
| | December 31, 2017 |
| | Fair Value | | Valuation Technique(s) | | Unobservable Input(s) | | Range of Inputs; Weighted Average |
| | (Dollars in thousands) |
| Impaired loans | $ | 307 |
| | Market approach | | Adjustment for differences between the comparable sales | | (91.5%) - (14.4%); (44.0%) |
(b) Fair Value of Financial Instruments
Because broadly traded markets do not exist for most of the Company’s financial instruments, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. These determinations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. For all of these reasons, the aggregation of the fair value calculations presented herein do not represent, and should not be construed to represent, the underlying value of the Company.
The following tables below present the carrying value amount of the Company’s financial instruments and their corresponding estimated fair values at the dates indicated.September 30, 2019 and December 31, 2018:
| | | | September 30, 2018 | September 30, 2019 |
| | Carrying Value |
| Fair Value |
| Fair Value Measurements Using: | Carrying Value |
| Fair Value |
| Fair Value Measurements Using: |
| |
| Level 1 |
| Level 2 |
| Level 3 |
| Level 1 |
| Level 2 |
| Level 3 |
| | (In thousands) | (In thousands) |
| Financial Assets: | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 170,143 |
| | $ | 170,143 |
| | $ | 170,143 |
| | $ | — |
| | $ | — |
| $ | 236,968 |
| | $ | 236,968 |
| | $ | 236,968 |
| | $ | — |
| | $ | — |
|
| Investment securities available for sale | 920,737 |
| | 920,737 |
| | 15,879 |
| | 904,858 |
| | — |
| 966,102 |
| | 966,102 |
| | 16,090 |
| | 950,012 |
| | — |
|
| Federal Home Loan Bank stock | 6,076 |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
| 6,377 |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
|
| Loans held for sale | 1,882 |
| | 1,937 |
| | — |
| | 1,937 |
| | — |
| 5,211 |
| | 5,375 |
| | — |
| | — |
| | 5,375 |
|
| Total loans receivable, net | 3,614,579 |
| | 3,604,468 |
| | — |
| | — |
| | 3,604,468 |
| 3,694,825 |
| | 3,758,359 |
| | — |
| | — |
| | 3,758,359 |
|
| Accrued interest receivable | 15,735 |
| | 15,735 |
| | 13 |
| | 3,992 |
| | 11,730 |
| 14,722 |
| | 14,722 |
| | 104 |
| | 3,650 |
| | 10,968 |
|
| Derivative assets - interest rate swaps | 7,659 |
| | 7,659 |
| | — |
|
| 7,659 |
| | — |
| 12,026 |
| | 12,026 |
| | — |
|
| 12,026 |
| | — |
|
| Equity security | 132 |
| | 132 |
| | 132 |
| | — |
| | — |
| 147 |
| | 147 |
| | 147 |
| | — |
| | — |
|
| Financial Liabilities: | | | | | | | | | | | | | | | | | | |
| Noninterest deposits, interest bearing demand deposits, money market accounts and savings accounts | $ | 3,894,524 |
| | $ | 3,894,524 |
| | $ | 3,894,524 |
| | $ | — |
| | $ | — |
| $ | 4,037,947 |
| | $ | 4,037,947 |
| | $ | 4,037,947 |
| | $ | — |
| | $ | — |
|
| Certificate of deposit accounts | 503,603 |
| | 506,405 |
| | — |
| | 506,405 |
| | — |
| 524,310 |
| | 529,925 |
| | — |
| | 529,925 |
| | — |
|
| Securities sold under agreement to repurchase | 32,233 |
| | 32,233 |
| | 32,233 |
| | — |
| | — |
| 25,883 |
| | 25,883 |
| | 25,883 |
| | — |
| | — |
|
| Junior subordinated debentures | 20,229 |
| | 20,000 |
| | — |
| | — |
| | 20,000 |
| 20,522 |
| | 19,750 |
| | — |
| | — |
| | 19,750 |
|
| Accrued interest payable | 263 |
| | 263 |
| | 64 |
| | 160 |
| | 39 |
| 212 |
| | 212 |
| | 96 |
| | 76 |
| | 40 |
|
| Derivative liabilities - interest rate swaps | 7,659 |
| | 7,659 |
| | — |
| | 7,659 |
| | — |
| 12,026 |
| | 12,026 |
| | — |
| | 12,026 |
| | — |
|
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Carrying Value | | Fair Value | | Fair Value Measurements Using: |
| | | Level 1 | | Level 2 | | Level 3 |
| | (In thousands) |
| Financial Assets: | | | | | | | | | |
| Cash and cash equivalents | $ | 161,910 |
| | $ | 161,910 |
| | $ | 161,910 |
| | $ | — |
| | $ | — |
|
| Investment securities available for sale | 976,095 |
| | 976,095 |
| | 15,936 |
| | 960,159 |
| | — |
|
| Federal Home Loan Bank stock | 6,076 |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
|
| Loans held for sale | 1,555 |
| | 1,605 |
| | — |
| | 1,605 |
| | — |
|
| Loans receivable, net of allowance for loan losses | 3,619,118 |
| | 3,614,348 |
| | — |
| | — |
| | 3,614,348 |
|
| Accrued interest receivable | 15,403 |
| | 15,403 |
| | 68 |
| | 4,091 |
| | 11,244 |
|
| Derivative assets - interest rate swaps | 5,095 |
| | 5,095 |
| | — |
| | 5,095 |
| | — |
|
| Equity security | 114 |
| | 114 |
| | 114 |
| | — |
| | — |
|
| Financial Liabilities: | | | | | | | | | |
| Noninterest deposits, interest bearing demand deposits, money market accounts and savings accounts | $ | 3,965,510 |
| | $ | 3,965,510 |
| | $ | 3,965,510 |
| | $ | — |
| | $ | — |
|
| Certificate of deposit accounts | 466,892 |
| | 470,222 |
| | — |
| | 470,222 |
| | — |
|
| Securities sold under agreement to repurchase | 31,487 |
| | 31,487 |
| | 31,487 |
| | — |
| | — |
|
| Junior subordinated debentures | 20,302 |
| | 20,500 |
| | — |
| | — |
| | 20,500 |
|
| Accrued interest payable | 191 |
| | 191 |
| | 63 |
| | 81 |
| | 47 |
|
| Derivative liabilities - interest rate swaps | 5,095 |
| | 5,095 |
| | — |
| | 5,095 |
| | — |
|
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | Carrying Value | | Fair Value | | Fair Value Measurements Using: |
| | | Level 1 | | Level 2 | | Level 3 |
| | (In thousands) |
| Financial Assets: | | | | | | | | | |
| Cash and cash equivalents | $ | 103,015 |
| | $ | 103,015 |
| | $ | 103,015 |
| | $ | — |
| | $ | — |
|
| Investment securities available for sale | 810,530 |
| | 810,530 |
| | 146 |
| | 810,384 |
| | — |
|
| Federal Home Loan Bank stock | 8,347 |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
|
| Loans held for sale | 2,288 |
| | 2,364 |
| | — |
| | 2,364 |
| | — |
|
| Loans receivable, net of allowance for loan losses | 2,816,985 |
| | 2,810,401 |
| | — |
| | — |
| | 2,810,401 |
|
| Accrued interest receivable | 12,244 |
| | 12,244 |
| | 23 |
| | 3,772 |
| | 8,449 |
|
| Derivative assets - interest rate swaps | 3,418 |
| | 3,418 |
| | — |
| | 3,418 |
| | — |
|
| Financial Liabilities: | | | | | | | | | |
| Noninterest deposits, interest bearing demand deposits, money market accounts and savings accounts | $ | 2,994,662 |
| | $ | 2,994,662 |
| | $ | 2,994,662 |
| | $ | — |
| | $ | — |
|
| Certificate of deposit accounts | 398,398 |
| | 397,039 |
| | — |
| | 397,039 |
| | — |
|
| Federal Home Loan Bank advances | 92,500 |
| | 92,500 |
| | — |
| | 92,500 |
| | — |
|
| Securities sold under agreement to repurchase | 31,821 |
| | 31,821 |
| | 31,821 |
| | — |
| | — |
|
| Junior subordinated debentures | 20,009 |
| | 18,500 |
| | — |
| | — |
| | 18,500 |
|
| Accrued interest payable | 162 |
| | 162 |
| | 45 |
| | 79 |
| | 38 |
|
| Derivative liabilities - interest rate swaps | 3,418 |
| | 3,418 |
| | — |
| | 3,418 |
| | — |
|
| |
| (15) | Stock-Based Compensation |
On July 24, 2014, the Company's shareholders approved the Heritage Financial Corporation 2014 Omnibus Equity Plan (the "Plan") that provides for the issuance of 1,500,000 shares of the Company's common stock in the form of stock options, stock appreciation rights, stock awards (which includes restricted stock units, restricted stock awards, performance units, performance shares or bonus shares) and cash incentive awards. The Company issues new shares of common stock to satisfy share option exercises and restricted stock awards. As of September 30, 2018, 955,539 shares remain for future issuance under the Plan.
(a) Stock Option Awards
Stock options generally vest ratably over three years and expire five years after they become exercisable or vest ratably over four years and expire ten years from date of grant. For the three and nine months ended September 30, 2018 and 2017, the Company did not recognize any compensation expense or related tax benefit related to stock options as all of the compensation expense related to the outstanding stock options had been previously recognized. The intrinsic value and cash proceeds from options exercised during the nine months ended September 30, 2018 was $184,000 and $118,000, respectively. The intrinsic value and cash proceeds from options exercised during the nine months ended September 30, 2017 was $156,000 and $159,000, respectively.
The following table summarizes the stock option activity for the nine months ended September 30, 2018 and 2017:
|
| | | | | | | | | | | | |
| | Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (In years) | | Aggregate Intrinsic Value (In thousands) |
| Outstanding at December 31, 2016 | 37,495 |
| | $ | 13.77 |
| | | | |
| Exercised | (12,304 | ) | | 12.92 |
| | | | |
| Forfeited or expired | (1,308 | ) | | 13.53 |
| | | | |
| Outstanding, vested and expected to vest and exercisable at September 30, 2017 | 23,883 |
| | $ | 14.23 |
| | 2.45 | | $ | 365 |
|
| | | | | | | | |
| Outstanding at December 31, 2017 | 23,231 |
| | $ | 14.21 |
| | | | |
| Exercised | (8,842 | ) | | 13.30 |
| | | | |
| Forfeited or expired | (831 | ) | | 14.77 |
| | | | |
| Outstanding, vested and expected to vest and exercisable at September 30, 2018 | 13,558 |
| | $ | 14.77 |
| | 1.64 | | $ | 276 |
|
(b) Restricted Stock Awards
Restricted stock awards granted generally have a four-year cliff vesting or four-year ratable vesting schedule. For the three and nine months ended September 30, 2018, the Company recognized compensation expense related to restricted stock awards of $186,000 and $718,000, respectively, and a related tax benefit of $39,000 and $151,000, respectively. For the three and nine months ended September 30, 2017, the Company recognized compensation expense related to restricted stock awards of $292,000 and $1.1 million, respectively, and a related tax benefit of $102,000 and $384,000, respectively. As of September 30, 2018, the total unrecognized compensation expense related to non-vested restricted stock awards was $745,000 and the related weighted average period over which the compensation expense is expected to be recognized is approximately 1.15 years. The vesting date fair value of the restricted stock awards that vested during the nine months ended September 30, 2018 and 2017 was $2.2 million and $2.7 million, respectively.
The following table summarizes the restricted stock award activity for the nine months ended September 30, 2018 and 2017:
|
| | | | | | |
| | Shares | | Weighted-Average Grant Date Fair Value |
| Nonvested at December 31, 2016 | 261,296 |
| | $ | 16.80 |
|
| Vested | (107,202 | ) | | 16.49 |
|
| Forfeited | (10,418 | ) | | 16.80 |
|
| Nonvested at September 30, 2017 | 143,676 |
| | $ | 17.02 |
|
| | | | |
| Nonvested at December 31, 2017 | 137,399 |
| | $ | 17.00 |
|
| Vested | (67,602 | ) | | 16.70 |
|
| Forfeited | (3,489 | ) | | 16.92 |
|
| Nonvested at September 30, 2018 | 66,308 |
| | $ | 17.31 |
|
(c) Restricted Stock Units
During 2017, the Company began issuing stock-settled restricted stock unit awards ("RSU") and performance-based stock-settled restricted stock unit awards ("PRSU"), collectively called "units". RSUs granted vest ratably over three years. PRSUs granted generally have a three-year cliff vesting schedule. Additionally, PRSU grants may be subject to performance-based vesting as well as other approved vesting conditions. The number of shares of actually delivered pursuant to the PRSUs depends on the performance of the Company's Total Shareholder Return and Return on Average Assets over the performance period in relation to the performance of the common stock of a predetermined
peer group. The conditions of the grants allow for an actual payout ranging between no payout and 150% of target. The payout level is calculated based on actual performance achieved during the performance period compared to a defined peer group. The fair value of such PRSUs was determined using a Monte Carlo simulation and will be recognized over the subsequent three years. The Monte-Carlo simulation model uses the same input assumptions as the Black-Scholes model; however, it also further incorporates into the fair value determination the possibility that the market condition may not be satisfied. Compensation costs related to these awards are recognized regardless of whether the market condition is satisfied, provided that the requisite service has been provided.
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. The Company used the following assumptions to estimate the fair value of PRSUs granted during February 2018 and 2017:
|
| | | | | |
| | Grant year |
| | 2018 | | 2017 |
| Shares issued | 5,550 |
| | 6,089 |
|
| Expected Term in Years | 2.84 |
| | 2.85 |
|
| Weighted-Average Risk Free Interest Rate | 2.39 | % | | 1.40 | % |
| Expected Dividend Yield | — | % | | — | % |
| Weighted-Average Fair Value | 27.69 |
| | 24.39 |
|
| Correlation coefficient | ABA NASDAQ Community Bank Index | | ABA NASDAQ Community Bank Index |
| Range of peer company volatilities | 18.99% - 51.42% |
| | 17.8% - 63.1% |
|
| Range of peer company correlation coefficients | 28.16% - 94.29% |
| | 8.24% - 89.79% |
|
| Heritage volatility | 22.3 | % | | 21.8 | % |
| Heritage correlation coefficient | 76.44 | % | | 75.93 | % |
For the three and nine months ended September 30, 2018, the Company recognized compensation expense related to the units of $523,000 and $1.3 million, respectively, and a related tax benefit of $110,000 and $274,000, respectively. For the three and nine months ended September 30, 2017, the Company recognized compensation expense related the units of $236,000 and $472,000, respectively, and a related tax benefit of $83,000 and $165,000, respectively. As of September 30, 2018, the total unrecognized compensation expense related to non-vested units was $4.0 million and the related weighted average period over which the compensation expense is expected to be recognized is approximately 2.43 years. The vesting date fair value of the units that vested during the nine months ended September 30, 2018 was $1.0 million. There were no units that vested during the nine months ended September 30, 2017.
The following table summarizes the unit activity for the nine months ended September 30, 2018 and 2017:
|
| | | | | | |
| | Shares | | Weighted-Average Grant Date Fair Value |
| Nonvested at December 31, 2016 | — |
| | $ | — |
|
| Granted | 92,019 |
| | 25.29 |
|
| Forfeited | (1,812 | ) | | 25.35 |
|
| Nonvested at September 30, 2017 | 90,207 |
| | $ | 25.29 |
|
| | | | |
| Nonvested at December 31, 2017 | 90,544 |
| | $ | 25.31 |
|
| Granted | 125,376 |
| | 30.62 |
|
| Vested | (32,375 | ) | | 25.44 |
|
| Forfeited | (4,617 | ) | | 27.82 |
|
| Nonvested at September 30, 2018 | 178,928 |
| | $ | 28.94 |
|
The Company is required to maintain an average reserve balance with the Federal Reserve Bank or maintain such reserve balance in the form of cash. The required reserve balance at September 30, 20182019 and December 31, 20172018 was $22.6$16.2 million and $60,000,$9.2 million, respectively, and was met by holding cash and maintaining an average balance with the Federal Reserve Bank.
On January 1, 2019, the Company adopted ASU 2016-02, Leases, as further explained in Note (1) Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements.
As of September 30, 2019, the Company’s lease ROU assets and related lease liabilities were $26.6 million and $27.9 million, respectively. The Company does not have leases designated as finance leases.
The table below summarizes the net lease cost recognized during the periods presented:
|
| | | | | | | |
| | Three Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 |
| | (In thousands) |
| Operating Lease Cost | $ | 1,231 |
| | $ | 3,718 |
|
| Variable Lease Cost | 193 |
| | 588 |
|
| Sublease Income | (24 | ) | | (47 | ) |
| Total net lease cost | $ | 1,400 |
| | $ | 4,259 |
|
The tables below summarize other information related to the Company's operating leases during the periods presented:
|
| | | | | | | |
| | Three Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 |
| | (In thousands) |
| Cash paid for amounts included in the measurement of lease liabilities | $ | 1,220 |
| | $ | 3,621 |
|
| ROU assets obtained in exchange for lease liabilities, excluding adoption impact | $ | 363 |
| | $ | 703 |
|
|
| | | | |
| | September 30,
2019 |
| Weighted average remaining lease term of operating leases, in years | | 8.13 |
|
| Weighted average discount rate of operating leases | | 3.31 | % |
The following table outlines lease payment obligations as outlined in the Company’s lease agreements for each of the next five years, as of September 30, 2019, and thereafter in addition to a reconcilement to the Company’s right of use liability at the date indicated:
|
| | | |
| | Year Ending December 31, |
| | (In thousands) |
| 2019 | $ | 1,224 |
|
| 2020 | 4,652 |
|
| 2021 | 4,228 |
|
| 2022 | 3,806 |
|
| 2023 | 3,816 |
|
| Thereafter | 14,279 |
|
| Total lease payments | 32,005 |
|
| Implied interest | (4,082 | ) |
| Right of use liability | $ | 27,923 |
|
For comparative purposes as of December 31, 2018, the estimated future minimum annual rental commitments under noncancelable leases having an original or remaining term of more than one year as calculated prior to applying the modified retrospective method of ASU 2016-02 implementation are as follows:
|
| | | |
| | Year Ending December 31, |
| | (In thousands) |
| 2019 | $ | 4,766 |
|
| 2020 | 4,251 |
|
| 2021 | 2,477 |
|
| 2022 | 1,704 |
|
| 2023 | 1,568 |
|
| Thereafter | 1,788 |
|
| | $ | 16,554 |
|
As of September 30, 2019, the Company had not entered into any material leases that have not yet commenced.
| |
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion is intended to assist in understanding the financial condition and results of the Company as of and for the three and nine months ended September 30, 2018.2019. The information contained in this section should be read with the unaudited Condensed Consolidated Financial Statements and the accompanying Notes included herein, and the December 31, 20172018 audited Consolidated Financial Statements and the accompanying Notes included in our 2018 Annual Report on Form 10-K for the year ended December 31, 2017.10-K.
Overview
Heritage Financial Corporation is a bank holding company which primarily engages in the business activities of our wholly-owned financial institution subsidiary, Heritage Bank. We provide financial services to our local communities with an ongoing strategic focus on our commercial banking relationships, market expansion and asset quality. At September 30, 2018,2019, we had total assets of $5.28$5.52 billion, total liabilities of $4.71 billion and total stockholders’ equity of $746.1$804.1 million. The Company’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report relates primarily to the Bank’s operations.
Our business consists primarily of commercial lending and deposit relationships with small businesses and their owners in our market areas and attracting deposits from the general public. We also make real estate construction and land development loans and consumer loans. We additionally originate for sale or for investment purposes one-to-four family residential loans on residential properties located primarily in our markets.
Our core profitability depends primarily on our net interest income. Net interest income is the difference between interest income, which is the income that we earn on interest earning assets, comprised primarily of loans and investment securities, and interest expense, which is the amount we pay on our interest bearing liabilities, consisting primarily of deposits. Management strives to match the repricing characteristics of the interest earning assets and interest bearing liabilities to protect net interest income from changes in market interest rates and changes in the shape of the yield curve. Like most financial institutions, our net interest income is affected significantly by general and local economic conditions, particularly changes in market interest rates, and by governmental policies and actions of regulatory agencies. Net interest income is additionally affected by changes on the volume and mix of interest earning assets, interest earned on these assets, the volume and mix of interest bearing liabilities and interest paid on these liabilities.
Our net income is affected by many factors, including the provision for loan losses. The provision for loan losses is dependent on changes in the loan portfolio and management’s assessment of the collectability of the loan portfolio as well as prevailing economic and market conditions. The allowance for loan losses reflects the amount that we believe is appropriate to provide for probable incurred credit losses in our loan portfolio.
Net income is also affected by noninterest income and noninterest expense. Noninterest income primarily consists of service charges and other fees gain on sale of loans (net) and other income. Noninterest expense consists primarily of compensation and employee benefits, occupancy and equipment, data processing and professional services and data processing.services. Compensation and
employee benefits consist primarily of the salaries and wages paid to our employees, payroll taxes, expenses for retirement and other employee benefits. Occupancy and equipment expenses are the fixed and variable costs of buildings and equipment, and consist primarily of lease payments, depreciation charges, maintenance, and costs of utilities. Data processing consists primarily of processing and network services related to the Bank’s core operating system, including account processing systems, electronic payments processing of products and services, and internet and mobile banking channels.
Results of operations may also be affected significantly by general and local economic and competitive conditions, governmental policies and actions of regulatory authorities. Other income and other expenses are also impacted by growth of operations and growth in the number of loan and deposit accounts through acquisitions and core banking business growth.
Earnings Summary
Comparison of quarter ended September 30, 20182019 to the comparable quarter in the prior year.
Net income was $17.9 million, or $0.48 per diluted common share, for the three months ended September 30, 2019 compared to $15.5 million, or $0.42 per diluted common share, for the three months ended September 30, 2018 compared to $10.6 million, or $0.35 per diluted common share, for the three months ended September 30, 2017.2018. Net income increased $4.9$2.4 million, or 45.9%15.4%, for the three months ended September 30, 20182019 compared to the three months ended September 30, 20172018 primarily due to an increasea decrease in the noninterest expense as a result of a decrease in acquisition-related costs of $3.4 million, or 100.0%, for the three months ended September 30, 2019 compared to the three months ended September 30, 2018. The impact of the decrease in noninterest expense was offset partially by a decrease in net interest income of $16.2 million,$883,000, or 46.2%, offset partially by anincrease in noninterest expense of $11.6 million, or 41.6%1.7%. The increasesdecrease in net interest income and noninterest expense werecompared to the prior period in 2018 was primarily due to a decrease in the loan yield, primarily as a result of lower incremental accretion on purchased loans, and an increase in the Premiercost of total interest bearing deposits, offset partially by a higher average balance and Puget Mergers with effective dates of January 16 and July 2, 2018.yield on taxable security investments.
Net interest income as a percentage of average interest earning assets, (netor net interest margin) increased 55margin, decreased 20 basis points to 4.41%4.21% for the three months ended September 30, 20182019 compared to 3.86%4.41% for the same period in 2017.2018. The increasedecrease in net interest margin was due primarily due to increasesdecreases in both the average loan balanceyields and loan yield and secondarily in increases in both average balances and yields on investments, offset partially by an increase in the cost of total interest bearing liabilities.deposits.
The efficiency ratio consists of noninterest expense divided by the sum of net interest income before provision for loan losses plus noninterest income. The Company’s efficiency ratio was 66.91%62.55% for the three months ended September 30, 20182019 compared to 64.43%66.68% for the three months ended September 30, 2017.2018. The changeimprovement in the efficiency ratio was primarily attributable to the increasedecrease in noninterest expense as a result of the Premier and Puget Mergers, including increases in compensation and employee benefits expense due to additional employees, occupancy and equipment expense primarily due to additional rent expense, and data processing expense due to an increase in transactional accounts and balances. Noninterest expense also increased $795,000 during the three months ended September 30, 2018 compared to the same period in 2017 due to amortization of intangible assets acquired in the Premier and Puget Mergers.acquisition-related expenses previously mentioned.
Comparison of nine months ended September 30, 20182019 to the comparable period in the prior year.
Net income was $50.4 million, or $1.36 per diluted common share, for the nine months ended September 30, 2019 compared to $36.4 million, or $1.04 per diluted common share, for the nine months ended September 30, 2018 compared to $31.8 million, or $1.06 per diluted common share, for the nine months ended September 30, 2017.2018. Net income increased $4.7$14.0 million, or 14.7%38.4%, for the nine months ended September 30, 20182019 compared to the nine months ended September 30, 20172018 primarily due to an increase in net interest income of $33.5$14.9 million, or 32.7%, partially offset by an increase in noninterest expense of $29.1 million or 35.0%11.0%. The increasesincrease in net interest income and noninterest expense during the nine months ended September 30, 2018 compared to the same period in 2017 were2018 was primarily due to an increase the average loan balance, as a result of the Premier and Puget Mergers.Mergers completed during 2018, and an increase in loan yield primarily due to a higher targeted federal funds rate during the first half of 2019.
The net interest margin increased 37three basis points to 4.26%4.29% for the nine months ended September 30, 20182019 compared to 3.89%4.26% for the same period in 2017.2018. The increase in net interest margin was primarily due to increases in both the average loan balance and loan yield and secondarily due to increases in both the balances and yields on investments,interest earning assets and the ratio of average interest earning assets to average interest bearing liabilities, offset partially by an increaseincreases in the cost of total interest bearing liabilities.
The Company’s efficiency ratio was 70.53%63.67% for the nine months ended September 30, 20182019 compared to 64.47%70.44% for the nine months ended September 30, 2017.2018. The changeimprovement in the efficiency ratio for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 was primarily attributable to additional noninterest expense as a resultdecrease in acquisition-related expenses of the Premier and Puget Mergers, including increases in compensation and employee benefits expense due to additional employees, occupancy and equipment expense primarily due to additional rent expense, and data processing expense due to an increase in transactional accounts and balances. Noninterest expense also increased $1.7$9.0 million, or 98.6%, during the nine months ended September 30, 2018 compared to the same period in 2017 due to the amortization of intangible assets acquired in the Premier and Puget Mergers.2019.
Net Interest Income
One of the Company's key sources of earnings is net interest income. There are several factors that affect net interest income including, but not limited to, the volume, pricing, mix and maturity of interest earning assets and interest bearing liabilities; the volume of noninterest bearing deposits and other liabilities and stockholders' equity; the volume of noninterest earning assets; market interest rate fluctuations; and asset quality.
Comparison of quarter ended September 30, 20182019 to the comparable quarter in the prior year.
Net interest income increased $16.2 million,decreased $883,000, or 46.2%1.7%, to $51.1$50.2 million for the three months ended September 30, 20182019 compared to $34.9$51.1 million for the same period in 2017. The increase in net interest income was primarily due to an increase in average interest earning assets, which increased substantially as a result of the Premier and Puget Mergers. Net interest income also increased due to increases in yields on interest earning assets primarily due to higher market interest rates reflecting increases in the target federal funds rate. The increase in net interest income was offset partially by an increase in the cost of total interest bearing liabilities primarily as a result of rising interest rates.2018. The following table provides relevant net interest income information for the dates indicated.indicated:
| | | | Three Months Ended September 30, | Three Months Ended September 30, |
| | 2018 | | 2017 | 2019 | | 2018 |
| | Average Balance | | Interest Earned/ Paid | | Average Yield/ Rate (1) | | Average Balance | | Interest Earned/ Paid | | Average
Yield/
Rate (1) | Average
Balance | | Interest
Earned/
Paid | | Average
Yield/
Rate (1) | | Average
Balance | | Interest
Earned/
Paid | | Average
Yield/
Rate (1) |
| | (Dollars in thousands) | (Dollars in thousands) |
| Interest Earning Assets: | | | | | | | | | | | | | | | | | | | | | | |
Total loans receivable, net (2) (3) | $ | 3,618,031 |
| | $ | 48,301 |
| | 5.30 | % | | $ | 2,737,535 |
| | $ | 32,595 |
| | 4.72 | % | $ | 3,677,405 |
| | $ | 47,845 |
| | 5.16 | % | | $ | 3,618,031 |
| | $ | 48,301 |
| | 5.30 | % |
| Taxable securities | 707,597 |
| | 4,662 |
| | 2.61 |
| | 562,256 |
| | 3,117 |
| | 2.20 |
| 823,498 |
| | 5,704 |
| | 2.75 |
| | 707,597 |
| | 4,662 |
| | 2.61 |
|
Nontaxable securities (3) | 176,322 |
| | 1,085 |
| | 2.44 |
| | 229,683 |
| | 1,354 |
| | 2.34 |
| 129,061 |
| | 798 |
| | 2.45 |
| | 176,322 |
| | 1,085 |
| | 2.44 |
|
| Other interest earning assets | 94,784 |
| | 528 |
| | 2.21 |
| | 63,544 |
| | 209 |
| | 1.30 |
| 106,740 |
| | 537 |
| | 2.00 |
| | 94,784 |
| | 558 |
| | 2.34 |
|
| Total interest earning assets | 4,596,734 |
| | 54,576 |
| | 4.71 | % | | 3,593,018 |
| | 37,275 |
| | 4.12 | % | 4,736,704 |
| | 54,884 |
| | 4.60 | % | | 4,596,734 |
| | 54,606 |
| | 4.71 | % |
| Noninterest earning assets | 681,831 |
| | | | | | 427,199 |
| | | | | 679,687 |
| | | | | | 681,831 |
| | | | |
| Total assets | $ | 5,278,565 |
| | | | | | $ | 4,020,217 |
| | | | | $ | 5,416,391 |
| | | | | | $ | 5,278,565 |
| | | | |
| Interest Bearing Liabilities: | | | | | | | | | | | | | | | | | | | | | | |
| Certificates of deposit | $ | 512,547 |
| | $ | 1,184 |
| | 0.92 | % | | $ | 394,345 |
| | $ | 633 |
| | 0.64 | % | $ | 508,092 |
| | $ | 1,861 |
| | 1.45 | % | | $ | 512,547 |
| | $ | 1,184 |
| | 0.92 | % |
| Savings accounts | 518,937 |
| | 541 |
| | 0.41 |
| | 494,990 |
| | 360 |
| | 0.29 |
| 507,533 |
| | 680 |
| | 0.53 |
| | 518,937 |
| | 541 |
| | 0.41 |
|
| Interest bearing demand and money market accounts | 2,044,236 |
| | 1,289 |
| | 0.25 |
| | 1,499,335 |
| | 635 |
| | 0.17 |
| 2,040,926 |
| | 1,709 |
| | 0.33 |
| | 2,044,236 |
| | 1,289 |
| | 0.25 |
|
| Total interest bearing deposits | 3,075,720 |
| | 3,014 |
| | 0.39 |
| | 2,388,670 |
| | 1,628 |
| | 0.27 |
| 3,056,551 |
| | 4,250 |
| | 0.55 |
| | 3,075,720 |
| | 3,014 |
| | 0.39 |
|
| Junior subordinated debentures | | 20,474 |
| | 332 |
| | 6.43 |
| | 20,181 |
| | 330 |
| | 6.49 |
|
| Securities sold under agreement to repurchase | | 29,258 |
| | 48 |
| | 0.65 |
| | 33,394 |
| | 19 |
| | 0.23 |
|
| FHLB advances and other borrowings | 20,892 |
| | 117 |
| | 2.22 |
| | 111,293 |
| | 428 |
| | 1.53 |
| 3,755 |
| | 11 |
| | 1.16 |
| | 20,892 |
| | 117 |
| | 2.22 |
|
| Securities sold under agreement to repurchase | 33,394 |
| | 19 |
| | 0.23 |
| | 28,999 |
| | 16 |
| | 0.22 |
| |
| Junior subordinated debentures | 20,181 |
| | 330 |
| | 6.49 |
| | 19,897 |
| | 261 |
| | 5.20 |
| |
| Total interest bearing liabilities | 3,150,187 |
| | 3,480 |
| | 0.44 | % | | 2,548,859 |
| | 2,333 |
| | 0.36 | % | 3,110,038 |
| | 4,641 |
| | 0.59 | % | | 3,150,187 |
| | 3,480 |
| | 0.44 | % |
| Demand and other noninterest bearing deposits | 1,314,203 |
| | | | | | 916,074 |
| | | | | 1,416,336 |
| | | | | | 1,314,203 |
| | | | |
| Other noninterest bearing liabilities | 69,786 |
| | | | | | 50,022 |
| | | | | 88,624 |
| | | | | | 69,786 |
| | | | |
| Stockholders’ equity | 744,389 |
| | | | | | 505,262 |
| | | | | 801,393 |
| | | | | | 744,389 |
| | | | |
| Total liabilities and stockholders’ equity | $ | 5,278,565 |
| | | | | | $ | 4,020,217 |
| | | | | $ | 5,416,391 |
| | | | | | $ | 5,278,565 |
| | | | |
| Net interest income |
| | $ | 51,096 |
| | | | | | $ | 34,942 |
| | |
| | $ | 50,243 |
| | | | | | $ | 51,126 |
| | |
| Net interest spread | | | | | 4.27 | % | | | | | | 3.76 | % | | | | | 4.01 | % | | | | | | 4.27 | % |
| Net interest margin | | | | | 4.41 | % | | | | | | 3.86 | % | | | | | 4.21 | % | | | | | | 4.41 | % |
| Average interest earning assets to average interest bearing liabilities | | | | | 145.92 | % | | | | | | 140.97 | % | | | | | 152.30 | % | | | | | | 145.92 | % |
| |
(1)(1) Annualized (2) The average loan balances presented in the table are net of allowances for loan losses. Nonaccrual loans have been included in the table as loans carrying a zero yield. (3) Yields on tax-exempt securities and loans have not been stated on a tax-equivalent basis. | Annualized |
| |
(2)
| The average loan balances presented in the table are net of allowances for loan losses. Nonaccrual loans have been included in the table as loans carrying a zero yield. |
| |
(3)
| Yields on tax-exempt securities and loans have not been stated on a tax-equivalent basis. |
Interest Income
Total interest income increased $17.3 million,$278,000, or 46.4%0.5%, to $54.6$54.9 million for the three months ended September 30, 20182019 compared to $37.3$54.6 million for the same period in 2017.2018. The balance of average interest earning assets increased $1.00$140.0 million, or 3.0%, to $4.74 billion or 27.9%, tofor the three months ended September 30, 2019 from $4.60 billion for the three months ended September 30, 2018 from $3.59 billion for the three months ended September 30, 2017 and the yield on total interest earning assets increased 59decreased 11 basis points to 4.60% for the three months ended September 30, 2019 compared to 4.71% for the three months ended September 30, 2018 compared to 4.12% for the three months ended September 30, 2017.2018. The increase in thetotal interest income was primarily due to an increase in the balance of average interest earning assets, offset partially by a decrease in the loan yield, primarily to interest income from interest and feesas a result of lower incremental accretion on loans and interest income on investment securities.purchased loans.
Interest income from interest and fees on loans increased $15.7 million,decreased $456,000, or 48.2%0.9%, to $48.3$47.8 million for the three months ended September 30, 20182019 from $32.6$48.3 million for the same period in 20172018 due primarily due to an increasea decrease in average total loans receivable, net of $880.5 million, or 32.2%, as a result of loan growth which was substantially due to the Premier and Puget Mergers. Additionally, interest income from interest and fees on loans increased as the loan yield increased 58of 14 basis points to 5.16% for the three months ended September 30, 2019 from 5.30% for the three months ended September 30, 2018 from 4.72% for2018. The decrease in loan yield was primarily due to a 17 basis points decrease in incremental accretion on purchased loans and secondarily due to a five basis point impact on the reversal of loan interest income related to one agricultural business relationship of $20.0 million which was transferred to nonaccrual status during the quarter ended September 30, 2019. The decrease in loan yield was offset partially by an increase in the average balance of loans receivable of $59.4 million, or 1.6%, to $3.68 billion during the three months ended September 30, 2017. The increase in loan yield was due to a combination of higher contractual loan rates as a result of the increasing interest rate environment, an increase in loan yields from the loans acquired in the Premier and Puget Mergers as2019 compared to legacy Heritage loans, and an increase in incremental accretion on purchased loans substantially due to loans acquired in$3.62 billion during the Premier and Puget Mergers.three months ended September 30, 2018.
Incremental accretion income was $2.6$1.1 million and $1.0$2.6 million for the three months ended September 30, 2019 and 2018, and 2017, respectively. The increase in the incremental accretion during the three months ended September 30, 2018 was primarily due to accretion of loans acquired in the Premier and Puget Mergers. The incremental accretion and the impact to loan yield will change during any quarter based on the volume of prepayments, but is expected to decrease over time as the balance of the purchased loans continues to decrease. The decrease for the three months ended September 30, 2019 compared to the same period in 2018 was substantially due to less accretion on loans acquired in the Premier and Puget Mergers.
The following table presents the loan yield and effects of the incremental accretion on purchased loans for the three months ended September 30, 20182019 and 2017:2018:
|
| | | | | | | | |
| | | Three Months Ended September 30, |
| | | 2018 | | 2017 |
| | | (Dollars in thousands) |
Loan yield, excluding incremental accretion on purchased loans (1) | | 5.01 | % | | 4.57 | % |
Impact on loan yield from incremental accretion on purchased loans (1) | | 0.29 |
| | 0.15 |
|
| Loan yield | | 5.30 | % | | 4.72 | % |
| | | | | |
Incremental accretion on purchased loans (1) | | $ | 2,637 |
| | $ | 1,036 |
|
|
| | | | | | | | |
| | | Three Months Ended September 30, |
| | | 2019 | | 2018 |
| | | (Dollars in thousands) |
| Loan yield (GAAP) | | 5.16 | % | | 5.30 | % |
Exclude impact on loan yield from incremental accretion on purchased loans (1) | | 0.12 |
| | 0.29 |
|
Loan yield, excluding incremental accretion on purchased loans (non-GAAP) (1)(2) | | 5.04 | % | | 5.01 | % |
| | | | | |
Incremental accretion on purchased loans (1) | | $ | 1,090 |
| | $ | 2,637 |
|
| |
(1) | As of the datesdate of the completion of each of the merger and acquisition transactions,transaction, purchased loans were recorded at their estimated fair value, including our estimate of future expected cash flows until the ultimate resolution of these credits. The difference between the contractual loan balance and the fair value represents the purchased discount. The purchased discount is modifiedaccreted into income over the estimated remaining life of the loan or pool of loans, based upon results of the quarterly as a result of cash flow re-estimation. The incremental accretion income represents the amount of income recorded on the purchased loans in excess of the contractual stated interest rate in the individual loan notes. |
| |
(2) | For additional information, see "Non-GAAP Financial Information." |
Interest income on investment securities increased $1.3 million,$755,000, or 28.5%13.1%, to $6.5 millionduring the three months ended September 30, 2019 from $5.7 million during the three months ended September 30, 2018, from $4.5primarily as a result of the increase in average balance of total investment securities which increased by $68.6 million, or 7.8%, to $952.6 millionduring the three months ended September 30, 2017. The increase in interest on investment securities was primarily a result of an increase in the average balance of investment securities of $92.0 million, or 11.6%, to2019 from $883.9 millionduring the three months ended September 30, 2018 from $791.92018. The increase in investment securities included a $115.9 million, duringor 16.4%, increase in the three months ended September 30, 2017.average balance of taxable securities and a $47.3 million, or 26.8%, decrease in the average balance of tax exempt securities as the Company actively managed portfolio performance in the changing interest rate environment. Additionally, interest income on taxable investment securities increased as a result an increase in the investment yields, reflectingdue to the effect of the rise inhigher yielding interest rates on our adjustable ratenew purchases of investment securities and secondarily due to higher yields on new investment purchases for the three months ended September 30, 20182019 compared to the same period in 2017.2018. Yields on taxable securities increased 4114 basis points to 2.61%2.75% for the three months ended September 30, 20182019 from 2.20%2.61% for the same period in 2017.2018. Yields on nontaxable securities increased 10one basis points to 2.44%2.45% for the three months ended September 30, 20182019 from 2.34%2.44% for the same period in 2017. The Company has actively managed its investment securities portfolio to improve performance in the increasing rate environment.
Interest income on other interest earning assets increased $319,000, or 152.6%, due to a combination of an increase in interest earning deposits as the Bank held more funds in interest earning accounts at the Federal Reserve Bank compared to the same period in 2017 and an increase in the yields reflecting the rise in interest rates. Average2018.
otherTotal interest earning assetsexpense increased $31.2$1.2 million, or 49.2%33.4%, to $94.8$4.6 million for the three months ended September 30, 20182019 compared to $63.5 million for the three months ended September 30, 2017.
Interest Expense
Total interest expense increased $1.1 million, or 49.2%, to $3.5 million for the three months ended September 30, 2018 compared to $2.3 million for the same period in 2017. The average2018, due to an increase in the cost of interest bearing liabilities increased eight basis points to 0.44% for the three months ended September 30, 2018 from 0.36% for the three months ended September 30, 2017 as a result of the rise in market interest rates. TotalThe average cost of interest bearing liabilities increased $601.315 basis points to 0.59% for the three months ended September 30, 2019 from 0.44% for the three months ended September 30, 2018. The increase in interest expense was offset partially by the decrease in the average balance of interest bearing liabilities of $40.1 million, or 23.6%1.3%, to $3.11 billion for the three months ended September 30, 2019 from $3.15 billion for the three months ended September 30, 2018 from $2.55 billion2018.
Interest expense on total interest bearing deposits increased $1.2 million, or 41.0%, to $4.3 million for the three months ended September 30, 2017 substantially2019 compared to $3.0 million for the same period in 2018 due primarily to the Premieran increase in market interest rates and Puget Mergers.
competitive pressures in a challenging rate environment. The cost of total interest bearing deposits increased 1216 basis points to 0.39%0.55% for the three months ended September 30, 20182019 from 0.27%0.39% for the same period in 2017 due to a combination of an2018. The increase in market interest rates and an increase in the average balance due primarily to the Premier and Puget Mergers. The cost ofexpense on total interest bearing deposits is primarily duerelated to thecertificates of deposit and interest bearing demand and money market deposits anddeposits. The cost of certificates of deposits. The average balance of interest bearing demand and money market depositsdeposit increased $544.9 million, or 36.3%,53 basis points to $2.04 billion during1.45% for the three months ended September 30, 2018 compared to $1.50 billion during2019 from 0.92% for the same period in 2017,2018, and the average balance of certificates of deposit accounts decreased $4.5 million, or 0.9%, to $508.1 million for the three months ended September 30, 2019 compared to $512.5 million for the same period in 2018. The cost of interest bearing demand and money market deposits increased eight basis points to 0.25%0.33% for the three months ended September 30, 20182019 from 0.17%0.25% for the same period in 2017. The2018, and the average balance of certificate of deposit accounts increased $118.2interest bearing demand and money market deposits decreased $3.3 million, or 30.0%0.2%, to $512.5 million for$2.04 billion during both the three months ended September 30, 2018 compared to $394.3 million for the2019 and same period in 2017. The cost of certificates of deposit increased 28 basis points to 0.92% for the three months ended September 30, 2018 from 0.64% for the same period in 2017.2018.
The Company was able to reduce the impact of the rising market interest rates by increasing the average balance of demand and other noninterest bearing deposits at a higher growth rate than the total interest bearing deposits described above. The average balance of demand and other noninterest bearing deposits increased by $398.1$102.1 million, or 43.5%7.8%, to $1.31$1.42 billion for the three months ended September 30, 20182019 compared to $916.0 million$1.31 billion for the same period in 2017.2018. The total cost of total deposits increased seven11 basis points to 0.27%0.38% for the three months ended September 30, 20182019 compared to 0.20%0.27% for the same period in 2017.2018.
Interest expense on FHLB advances and other borrowings decreased $311,000,by $106,000, or 72.7%90.6%, to $117,000$11,000 for the three months ended September 30, 2018 from $428,0002019 compared to $117,000 for the same period in 20172018 due to thea decrease in the average balance of FHLB advances during the quarter. The average balance for FHLB advances and other borrowings decreased $90.4$17.1 million, or 81.2%82.0%, to $20.9$3.8 million for the three months ended September 30, 2018 from $111.32019 compared to $20.9 million for the same period in 2017.2018. The Company was able to usefund loan growth from the increase in noninterest bearing deposits.
The average rate of the deposit balances to repayjunior subordinated debentures, including the FHLB advanceseffects of accretion of the discount established as of September 30, 2018. The average costthe date of FHLB advances and other borrowings increase of 69the merger with Washington Banking Company, decreased six basis points to 2.22% 6.43%for the three months ended September 30, 2018 2019compared to 1.53%6.49% for the same period in 20172018. The rate decrease on the debentures was due to increasesa decrease in market rates.
the average three-month LIBOR rate to 2.20% for the three months ended September 30, 2019 from 2.34% for the same period in 2018.
Net Interest Margin
Net interest margin increased 55decreased 20 basis points to 4.21% for the three months ended September 30, 2018 to2019 from 4.41% from 3.86% for the same period in 20172018 primarily due to the above mentioned changes in asset yields and costs of funds. The net interest spread increased 51decreased 26 basis points to 4.01% for the three months ended September 30, 2018 to2019 from 4.27% from 3.76% for the same period in 20172018 primarily due to the increase in yield earned onthe cost of total interest earning assets.bearing liabilities.
Net interest margin is impacted by the incremental accretion on purchased loans. The following table presents the net interest margin and effects of the incremental accretion on purchased loans for the three months ended September 30, 20182019 and 2017:2018:
|
| | | | | | |
| | | Three Months Ended September 30, |
| | | 2018 | | 2017 |
Net interest margin, excluding incremental accretion on purchased loans (1) | | 4.18 | % | | 3.75 | % |
Impact on net interest margin from incremental accretion on purchased loans (1) | | 0.23 |
| | 0.11 |
|
| Net interest margin | | 4.41 | % | | 3.86 | % |
|
| | | | | | |
| | | Three Months Ended September 30, |
| | | 2019 | | 2018 |
| Net interest margin (GAAP) | | 4.21 | % | | 4.41 | % |
Exclude impact on net interest margin from incremental accretion on purchased loans (1) | | 0.09 |
| | 0.23 |
|
Net interest margin, excluding incremental accretion on purchased loans (non-GAAP)(1)(2) | | 4.12 | % | | 4.18 | % |
| |
(1) | As of the datesdate of the completion of each of the merger and acquisition transactions,transaction, purchased loans were recorded at their estimated fair value, including our estimate of future expected cash flows until the ultimate resolution of these credits. The difference between the contractual loan balance and the fair value represents the purchased discount. The purchased discount is modifiedaccreted into income over the estimated remaining life of the loan or pool of loans, based upon results of the quarterly as a result of cash flow re-estimation. The incremental accretion income represents the amount of income recorded on the purchased loans in excess of the contractual stated interest rate in the individual loan notes. |
| |
(2) | For additional information, see "Non-GAAP Financial Information." |
Comparison of nine months ended September 30, 20182019 to the comparable period in the prior year
Net interest income increased $33.5$14.9 million, or 32.7%11.0%, to $135.7$150.6 million for the nine months ended September 30, 20182019 compared to $102.2$135.7 million for the same period in 2017.2018. The following table provides relevant net interest income information for the dates indicated.indicated:
| | | | Nine Months Ended September 30, | Nine Months Ended
September 30, |
| | 2018 | | 2017 | 2019 | | 2018 |
| | Average Balance | | Interest Earned/ Paid | | Average Yield/ Rate (1) | | Average Balance | | Interest Earned/ Paid | | Average
Yield/
Rate (1) | Average Balance | | Interest Earned/ Paid | | Average Yield/ Rate (1) | | Average Balance | | Interest Earned/ Paid | | Average
Yield/
Rate (1) |
| | (Dollars in thousands) | (Dollars in thousands) |
| Interest Earning Assets: | | | | | | | | | | | | | | | | | | | | | | |
| Total loans receivable, net (2) (3) | $ | 3,346,709 |
| | $ | 127,601 |
| | 5.10 | % | | $ | 2,676,153 |
| | $ | 94,580 |
| | 4.73 | % | $ | 3,651,659 |
| | $ | 142,651 |
| | 5.22 | % | | $ | 3,346,709 |
| | $ | 127,601 |
| | 5.10 | % |
| Taxable securities | 645,866 |
| | 12,259 |
| | 2.54 |
| | 565,528 |
| | 9,307 |
| | 2.20 |
| 828,254 |
| | 17,460 |
| | 2.82 |
| | 645,866 |
| | 12,259 |
| | 2.54 |
|
| Nontaxable securities (3) | 200,179 |
| | 3,646 |
| | 2.44 |
| | 225,583 |
| | 3,926 |
| | 2.33 |
| 139,312 |
| | 2,641 |
| | 2.53 |
| | 200,179 |
| | 3,646 |
| | 2.44 |
|
| Other interest earning assets | 66,619 |
| | 988 |
| | 1.98 |
| | 42,225 |
| | 352 |
| | 1.11 |
| 70,280 |
| | 1,155 |
| | 2.20 |
| | 66,619 |
| | 1,016 |
| | 2.04 |
|
| Total interest earning assets | 4,259,373 |
| | 144,494 |
| | 4.54 | % | | 3,509,489 |
| | 108,165 |
| | 4.12 | % | 4,689,505 |
| | 163,907 |
| | 4.67 | % | | 4,259,373 |
| | 144,522 |
| | 4.54 | % |
| Noninterest earning assets | 596,239 |
| | | | | | 427,661 |
| | | | | 672,365 |
| | | | | | 596,239 |
| | | | |
| Total assets | $ | 4,855,612 |
| | | | | | $ | 3,937,150 |
| | | | | $ | 5,361,870 |
| | | | | | $ | 4,855,612 |
| | | | |
| Interest Bearing Liabilities: | | | | | | | | | | | | | | | | | | | | | | |
| Certificates of deposit | $ | 451,741 |
| | $ | 2,741 |
| | 0.81 | % | | $ | 369,724 |
| | $ | 1,527 |
| | 0.55 | % | $ | 508,177 |
| | $ | 4,994 |
| | 1.31 | % | | $ | 451,741 |
| | $ | 2,741 |
| | 0.81 | % |
| Savings accounts | 512,689 |
| | 1,443 |
| | 0.38 |
| | 499,353 |
| | 940 |
| | 0.25 |
| 505,112 |
| | 2,061 |
| | 0.55 |
| | 512,689 |
| | 1,444 |
| | 0.38 |
|
| Interest bearing demand and money market accounts | 1,863,135 |
| | 2,985 |
| | 0.21 |
| | 1,489,149 |
| | 1,834 |
| | 0.16 |
| 2,036,253 |
| | 4,815 |
| | 0.32 |
| | 1,863,135 |
| | 2,984 |
| | 0.21 |
|
| Total interest bearing deposits | 2,827,565 |
| | 7,169 |
| | 0.34 |
| | 2,358,226 |
| | 4,301 |
| | 0.24 |
| 3,049,542 |
| | 11,870 |
| | 0.52 |
| | 2,827,565 |
| | 7,169 |
| | 0.34 |
|
| Junior subordinated debentures | | 20,401 |
| | 1,026 |
| | 6.72 |
| | 20,108 |
| | 928 |
| | 6.17 |
|
| Securities sold under agreement to repurchase | | 30,512 |
| | 139 |
| | 0.61 |
| | 30,543 |
| | 52 |
| | 0.23 |
|
| FHLB advances and other borrowings | 45,194 |
| | 669 |
| | 1.98 |
| | 106,556 |
| | 870 |
| | 1.09 |
| 15,909 |
| | 305 |
| | 2.56 |
| | 45,194 |
| | 669 |
| | 1.98 |
|
| Securities sold under agreement to repurchase | 30,543 |
| | 52 |
| | 0.23 |
| | 23,660 |
| | 38 |
| | 0.21 |
| |
| Junior subordinated debentures | 20,108 |
| | 928 |
| | 6.17 |
| | 19,823 |
| | 748 |
| | 5.05 |
| |
| Total interest bearing liabilities | 2,923,410 |
| | 8,818 |
| | 0.40 | % | | 2,508,265 |
| | 5,957 |
| | 0.32 | % | 3,116,364 |
| | 13,340 |
| | 0.57 | % | | 2,923,410 |
| | 8,818 |
| | 0.40 | % |
| Demand and other noninterest bearing deposits | 1,201,676 |
| | | | | | 885,467 |
| | | | | 1,365,134 |
| | | | | | 1,201,676 |
| | | | |
| Other noninterest bearing liabilities | 64,686 |
| | | | | | 47,283 |
| | | | | 96,723 |
| | | | | | 64,686 |
| | | | |
| Stockholders’ equity | 665,840 |
| | | | | | 496,135 |
| | | | | 783,649 |
| | | | | | 665,840 |
| | | | |
| Total liabilities and stockholders’ equity | $ | 4,855,612 |
| | | | | | $ | 3,937,150 |
| | | | | $ | 5,361,870 |
| | | | | | $ | 4,855,612 |
| | | | |
| Net interest income | | | $ | 135,676 |
| | | | | | $ | 102,208 |
| | | | | $ | 150,567 |
| | | | | | $ | 135,704 |
| | |
| Net interest spread | | | | | 4.14 | % | | | | | | 3.80 | % | | | | | 4.10 | % | | | | | | 4.14 | % |
| Net interest margin | | | | | 4.26 | % | | | | | | 3.89 | % | | | | | 4.29 | % | | | | | | 4.26 | % |
| Average interest earning assets to average interest bearing liabilities | | | | | 145.70 | % | | | | | | 139.92 | % | | | | | 150.48 | % | | | | | | 145.70 | % |
| |
(2) | The average loan balances presented in the table are net of allowances for loan losses. Nonaccrual loans have been included in the table as loans carrying a zero yield. |
| |
(3) | Yields on tax-exempt securities and loans have not been stated on a tax-equivalent basis. |
Interest Income
Total interest income increased $36.3$19.4 million, or 33.6%13.4%, to $144.5$163.9 million for the nine months ended September 30, 20182019 compared to $108.2$144.5 million for the same period in 2017.2018 due primarily to an increase in average balance of total loans receivable and taxable securities and to a lesser extent the increase in yields due to the higher rate environment for the nine months ended September 30, 2019 compared to the same period in 2018. The balance of average interest earning assets increased $749.9$430.1 million, or 21.4%10.1%, to $4.69 billion for the nine months ended
September 30, 2019 from $4.26 billion for the nine months ended September 30, 2018 from $3.51 billion for the nine months ended September 30, 2017 and the yield on total interest earning assets increased 4213 basis points to 4.67% for the nine months ended September 30, 2019 compared to 4.54% for the nine months ended September 30, 2018 compared to 4.12% for the nine months ended September 30, 2017. The increase in the interest income was due primarily to interest income from interest and fees on loans and interest income on investment securities.2018.
Interest income from interest and fees on loans increased $33.0$15.1 million, or 34.9%11.8%, to $127.6$142.7 million for the nine months ended September 30, 20182019 from $94.6$127.6 million for the same period in 20172018 due primarily to an increase in the average loans receivable, net and an increase in loan yields. Averagebalance of total loans receivable, net increased $670.6of $305.0 million, or 25.1%9.1%, to $3.65 billion for the nine months ended September 30, 2019 compared to $3.35 billion for the nine months ended September 30, 2018 comparedprimarily as a result of the Premier Merger. Loan yields increased 12 basis points to $2.68 billion5.22% for the nine months ended September 30, 2017 primarily as a result of the Premier and Puget Mergers. Loan yields increased 37 basis points to2019 from 5.10% for the nine months ended September 30, 2018 from 4.73% for the nine months ended September 30, 20172018. The increase in loan yield was due to a combination of higher contractual loan rates as a result of the increasinghigher interest rate environment an increaseduring the nine months ended September 30, 2019 compared to the same period in loan yields from the loans acquired in the Premier and Puget Mergers as compared to
legacy Heritage loans, and an increase2018, offset partially by a decrease in incremental accretion on purchased loans substantially due to loans acquired in the Premier and Puget Mergers.loans.
Incremental accretion income was $6.3$3.9 million and $3.7$6.3 million for the nine months ended September 30, 2019 and 2018, and 2017, respectively. The increase in the incremental accretion was primarily due to the accretion of the loans acquired in the Premier and Puget Sound Mergers. The incremental accretion and the impact to loan yield will change during any quarterperiod based on the volume of prepayments, but is expected to decrease over time as the balance of the purchased loans continues to decrease. The decrease for the nine months ended September 30, 2019 compared to the same period in 2018 was substantially due to less accretion on loans acquired in the Premier and Puget Mergers.
The following table presents the loan yield and effects of the incremental accretion on purchased loans for the nine months ended September 30, 20182019 and 2017:2018:
|
| | | | | | | | |
| | | Nine Months Ended September 30, |
| | | 2018 | | 2017 |
| | | (Dollars in thousands) |
Loan yield, excluding incremental accretion on purchased loans (1) | | 4.85 | % | | 4.55 | % |
Impact on loan yield from incremental accretion on purchased loans (1) | | 0.25 |
| | 0.18 |
|
| Loan yield | | 5.10 | % | | 4.73 | % |
| | | | | |
Incremental accretion on purchased loans (1) | | $ | 6,261 |
| | $ | 3,687 |
|
|
| | | | | | | | |
| | | Nine Months Ended
September 30, |
| | | 2019 | | 2018 |
| | | (Dollars in thousands) |
| Loan yield (GAAP) | | 5.22 | % | | 5.10 | % |
Exclude impact on loan yield from incremental accretion on purchased loans (1) | | 0.14 |
| | 0.25 |
|
Loan yield, excluding incremental accretion on purchased loans (non-GAAP) (1)(2) | | 5.08 | % | | 4.85 | % |
| | | | | |
Incremental accretion on purchased loans (1) | | $ | 3,879 |
| | $ | 6,261 |
|
| |
(1) | As of the datesdate of the completion of each of the merger and acquisition transactions,transaction, purchased loans were recorded at their estimated fair value, including our estimate of future expected cash flows until the ultimate resolution of these credits. The difference between the contractual loan balance and the fair value represents the purchased discount. The purchased discount is modifiedaccreted into income over the estimated remaining life of the loan or pool of loans, based upon results of the quarterly as a result of cash flow re-estimation. The incremental accretion income represents the amount of income recorded on the purchased loans in excess of the contractual stated interest rate in the individual loan notes. |
| |
(2) | For additional information, see "Non-GAAP Financial Information." |
Interest income on investment securities increased $2.7$4.2 million, or 20.2%26.4%, to $15.9$20.1 million during the nine months ended September 30, 20182019 compared to $13.2$15.9 million for the nine months ended September 30, 2017. The2018 primarily as a result of the increase in interest income on investment securities was the resultaverage balance of a combination of an increase in investment yields for$121.5 million, or 14.4%, to $967.6 million during the nine months ended September 30, 2018 compared to the same period in 2017 and an increase in the average balance of investment securities during the period. Yields on taxable securities increased 34 basis points to 2.54% for the nine months ended September 30, 2018 compared to 2.20% for the same period in 2017. Yields on nontaxable securities increased 11 basis points to 2.44% for the nine months ended September 30, 20182019 from 2.33% for the same period in 2017. The average balance of investment securities increased $54.9 million, or 6.9%, to $846.0 million during the nine months ended September 30, 2018 from $791.12018. The increase in interest income on investment securities included an increase in the average balance of taxable securities of $182.4 million, or 28.2%, and a decrease in the average balance of tax exempt securities of $60.9 million, or 30.4%, as the Company actively managed portfolio performance in the changing rate environment. Additionally, interest income increased as a result of an increase in the investment yields, reflecting the effect of the higher interest rates and higher yields on new investment purchases during the nine months ended September 30, 2017. The Company reduced the balance of its tax exempt securities during the three months ended September 30, 20182019 compared to the same period in 2017 as the tax effected yield was not as beneficial given the decrease in the federal corporate tax rate in 2018. The Company has actively managed its investmentYields on taxable securities portfolioincreased 28 basis points to improve performance in the increasing rate environment.
Income on other interest earning assets increased $636,000, or 180.7%, to $988,000 during2.82% for the nine months ended September 30, 20182019 compared to $352,000 during2.54% for the same period in 2017 due2018. Yields on nontaxable securities increased nine basis points to a combination of an increase2.53% for the nine months ended September 30, 2019 from 2.44% for the same period in the average balances and an increase in market2018.
Interest Expense
Total interest rates. Average other interest earning assetsexpense increased $24.4$4.5 million, or 57.8%51.3%, to $66.6$13.3 million for the nine months ended September 30, 20182019 compared to $42.2$8.8 million for the same period in 2018 primarily as a result of competitive pressures and the rise in market interest rates. The cost of total interest bearing liabilities increased 17 basis points to 0.57% for the nine months ended September 30, 2017. The increase was due primarily to an increase in interest earning deposits, as the Bank held more funds in interest earning accounts at the Federal Reserve Bank of San Francisco compared to the same period in 2017. The yield on other interest earning assets increased 87 basis points to 1.98% during the nine months ended September 30, 2018 compared to 1.11% during the same period in 2017, reflecting a rise in market rates.
Interest Expense
Total interest expense increased $2.9 million, or 48.0%, to $8.8 million for the nine months ended September 30, 2018 compared to $6.0 million for the same period in 2017. The cost of interest bearing liabilities increased eight basis points to2019 from 0.40% for the nine months ended September 30, 2018 from 0.32%2018. The average balance of total interest bearing liabilities increased $193.0 million, or 6.6%, to $3.12 billion for the nine months ended September 30, 2017. The increase in costs was primarily a result of increases in market rates. Total average interest bearing liabilities increased by $415.1 million, or 16.6%, to2019 from $2.92 billion for the nine months ended September 30, 2018 from $2.51 billion2018.
Interest expense on total interest bearing deposits increased $4.7 million, or 65.6%, to $11.9 million for the nine months ended September 30, 2017 primarily as a result of the Premier and Puget Mergers.
The cost of interest bearing deposits increased 10 basis points2019compared to 0.34% for the nine months ended September 30, 2018 from 0.24%$7.2 million for the same period in 20172018 due to a combination of an increase in market interest rates and competitive pressures and an increase in the average balance due primarily to the Premier and Puget Mergers.Merger. The cost of total interest bearing deposits increased 18 basis points to 0.52% for the nine months ended September 30, 2019 from 0.34% for the same period in 2018. The increase in interest expense on total interest bearing deposits is primarily duerelated to thecertificates of deposit and interest bearing demand and money market deposits andaccounts. The cost of certificates of deposits.deposit increased 50 basis points to 1.31% for the nine months ended September 30, 2019 from 0.81% for the same period in 2018. The average balance of certificates of deposit increased $56.4 million, or 12.5%, to $508.2 million for the nine months ended September 30, 2019 compared to $451.7 million for the same period in 2018. The cost of interest bearing demand and money market deposits increased 11 basis points to 0.32% for the nine months ended September 30, 2019 from 0.21% for the same period in 2018, and the average balance of interest bearing demand and money market deposits increased $374.0$173.1 million, or 25.1%9.3%, to $1.86$2.04 billion during the nine months ended September 30, 20182019 compared to $1.49$1.86 billion during the same period in 2017, and the cost of interest bearing demand and money market deposits increased five basis points to 0.21% for the nine months ended September 30, 2018 from 0.16% for the same period in 2017. The average balance of certificate of deposit accounts increased $82.0 million, or 22.2%, to $451.7 million for the nine months ended September 30, 2018 compared to $369.7 million for the same period in 2017. The cost of certificates of deposit increased 26 basis points to 0.81% for the nine months ended September 30, 2018 from 0.55% for the same period in 2017.2018.
The Company was able to reduce the impact of the rising market interest rates by increasing the average balance of demand and other noninterest bearing deposits at a higher growth rate than the noninteresttotal interest bearing deposits described above. The average balance of demand and other noninterest bearing deposits increased by $316.2$163.5 million, or 35.7%13.6%, during the nine months ended September 30, 2018 to $1.20$1.37 billion compared to $885.5 million for the same period in 2017. The cost of all deposit accounts increased to 0.24% for the nine months ended September 30, 20182019 compared to 0.18%$1.20 billion for the same period in 2018. The cost of total deposits increased 12 basis points to 0.36% for the nine months ended September 30, 2017.2019 compared to 0.24% for the same period in 2018.
Interest expense on FHLB advances and other borrowings decreased $201,000,$364,000, or 23.1%54.4%, to $305,000 for the nine months ended September 30, 2019 from $669,000 for the nine months ended September 30, 2018 from $870,000 for the nine months ended September 30, 2017 due to a decrease in the average balance, partially offset by an increase in the cost. The average balance for FHLB advances and other borrowings decreased $61.4by $29.3 million, or 64.8%, to $45.2$15.9 million for the nine months ended September 30, 20182019 from $106.6$45.2 million for the same period in 20172018 due to a decline in the utilization of overnight FHLB advances reflecting the increase in the average deposit balances. The average rate of the FHLB advances and other borrowings increased 8958 basis points to 1.98%2.56% for the nine months ended September 30, 20182019 compared to 1.09%1.98% for the same period in 20172018 as a result of the increase in market rates.
The average rate of the junior subordinated debentures, including the effects of accretion of the discount established as of the date of the merger with Washington Banking Company, increased 11255 basis points to 6.17%6.72% for the nine months ended September 30, 20182019 compared to 5.05%6.17% for the same period in 2017.2018. The rate increase on the debentures was due to an increase in the average three-month LIBOR raterates to 2.40% at2.46% for the nine months ended September 30, 20182019 from 1.33% on September 30, 2017.
2.20% for the same period in 2018.
Net Interest Margin
Net interest margin increased three basis points to 4.29% for the nine months ended September 30, 2018 increased 37 basis points to2019 from 4.26% from 3.89% for the same period in 20172018 primarily due to the above mentioned changes in asset yields and costs of funds in addition to an increase in incremental accretion on purchased loans as a result of the Premier and Puget Mergers.funds. The net interest spread decreased four basis points to 4.10% for the nine months ended September 30, 2018 increased 34 basis points to2019 from 4.14% from 3.80% for the same period in 20172018 primarily due to the increase in yield oncost of total interest earning assets.bearing liabilities.
Net interest margin is impacted by the incremental accretion on purchased loans. The following table presents the net interest margin and effects of the incremental accretion on purchased loans for the nine months ended September 30, 20182019 and 2017:2018:
|
| | | | | | |
| | | Nine Months Ended September 30, |
| | | 2018 | | 2017 |
Net interest margin, excluding incremental accretion on purchased loans (1) | | 4.06 | % | | 3.75 | % |
Impact on net interest margin from incremental accretion on purchased loans (1) | | 0.20 |
| | 0.14 |
|
| Net interest margin | | 4.26 | % | | 3.89 | % |
|
| | | | | | |
| | | Nine Months Ended
September 30, |
| | | 2019 | | 2018 |
| Net interest margin (GAAP) | | 4.29 | % | | 4.26 | % |
Exclude impact on net interest margin from incremental accretion on purchased loans (1) | | 0.11 |
| | 0.20 |
|
Net interest margin, excluding incremental accretion on purchased loans (non-GAAP) (1)(2) | | 4.18 | % | | 4.06 | % |
| |
(1) | As of the datesdate of the completion of each of the merger and acquisition transactions,transaction, purchased loans were recorded at their estimated fair value, including our estimate of future expected cash flows until the ultimate resolution of these credits. The difference between the contractual loan balance and the fair value represents the purchased discount. The purchased discount is modifiedaccreted into income over the estimated remaining life of the loan or pool of loans, based upon results of the quarterly as a result of cash flow re-estimation. The incremental accretion income represents the amount of income recorded on the purchased loans in excess of the contractual stated interest rate in the individual loan notes. |
| |
(2) | For additional information, see "Non-GAAP Financial Information." |
Provision for Loan Losses
Comparison of quarter ended September 30, 2019 to the comparable quarter in the prior year.
The Bank has established a comprehensive methodology for determining its allowance for loan losses. The allowance for loan losses is increased by provisions for loan losses charged to expense, and is reduced by loans charged-off, net of loan recoveries or a recovery of previous provision. The amount of the provision expense recognized during the three and nine months ended September 30, 20182019 and 20172018 was calculated in accordance with the Bank's methodology. For additional information, see the section entitled "Analysis of Allowance for Loan Losses" below.
The provision for loan losses is dependent on the Bank’s ability to manage asset quality and control the level of net charge-offs through prudent underwriting standards. In addition, a decline in general economic conditions could increase future provisions for loan losses and have a material effect on the Company’s net income.
Comparison of quarter ended September 30, 2018 to the comparable quarter in the prior year.
The provision for loan losses increased $181,000,decreased $599,000, or 20.5%56.2%, to $466,000 for the three months ended September 30, 2019 from $1.1 millionfor the three months ended September 30, 2018 from $884,000for the three months ended September 30, 2017. The increase indue primarily to the provision for loan losses for the three months ended September 30, 2018 from the same period in 2017 was primarily the result of increases in total loan balancesexpense necessary as a result of mergers.the Premier Merger during the quarter ended September 30, 2018. Based on a thorough review of the loan portfolio, the Bank determined that the provision for loan losses for the three months ended September 30, 20182019 was appropriate as it was calculated in accordance with the Bank's methodology for determining the allowance for loan losses.
Comparison of nine months ended September 30, 20182019 to the comparable period in the prior yearyear.
The provision for loan losses increased $1.1decreased $1.2 million, or 37.6%30.6%, to $2.8 million for the nine months ended September 30, 2019 from $4.0 million for the nine months ended September 30, 2018 from $2.9 million forprimarily as the nine months ended September 30, 2017. The increase inresult of lower loan growth, higher provision expense necessary as a result of the provision for loan losses forPremier and Puget Mergers during the nine months ended September 30, 2018, fromand the same period in 2017 was primarily the resultmix and volume of the same changes mentioned above for the increaseloan portfolio during the threenine months ended September 30, 2018.2019. Based on a thorough review of the loan portfolio, the Bank determined that the provision for loan losses for the nine months ended September 30, 20182019 was appropriate as it was calculated in accordance with the Bank's methodology for determining the allowance for loan losses.
Noninterest Income
Comparison of quarter ended September 30, 20182019 to the comparable quarter in the prior year.
Total noninterest income decreased $363,000,increased $408,000, or 4.3%5.1%, to $8.1$8.5 million for the three months ended September 30, 2018 compared to $8.42019 from $8.1 million for the same period in 2017.2018. The following table presents the change in the key components of noninterest income for the periods noted.noted:
| | | | Three Months Ended September 30, | | | | | Three Months Ended
September 30, | | | | |
| | 2018 | | 2017 | | Change | | Percentage Change | 2019 | | 2018 | | Change | | Percentage Change |
| | (Dollars in thousands) | (Dollars in thousands) |
| Service charges and other fees | $ | 4,824 |
| | $ | 4,769 |
| | $ | 55 |
| | 1.2 | % | $ | 4,779 |
| | $ | 4,824 |
| | $ | (45 | ) | | (0.9 | )% |
| Gain on sale of investment securities, net | 82 |
| | 44 |
| | 38 |
| | 86.4 |
| 281 |
| | 82 |
| | 199 |
| | 242.7 |
|
| Gain on sale of loans, net | 706 |
| | 1,229 |
| | (523 | ) | | (42.6 | ) | 993 |
| | 706 |
| | 287 |
| | 40.7 |
|
| Interest rate swap fees | — |
| | 328 |
| | (328 | ) | | (100.0 | ) | 152 |
| | — |
| | 152 |
| | 100.0 |
|
| Other income | 2,468 |
| | 2,073 |
| | 395 |
| | 19.1 |
| 2,253 |
| | 2,438 |
| | (185 | ) | | (7.6 | ) |
| Total noninterest income | $ | 8,080 |
| | $ | 8,443 |
| | $ | (363 | ) | | (4.3 | )% | $ | 8,458 |
| | $ | 8,050 |
| | $ | 408 |
| | 5.1 | % |
Gain on sale of loans, net and interest rate swap fees decreased based on a decline in volume of U.S. Small Business Administration ("SBA") loan sales and new swap contracts, respectively, duringincreased $287,000, or 40.7%, to $993,000 for the three months ended September 30, 20182019 compared to $706,000 for the same period in 2017. These declines are attributed2018 due primarily to the increasingBank resuming sales of the guaranteed portion of SBA loans based on favorable market rates.conditions. The detail of gain on sale of loans, net is included in the following schedule.
schedule:
| | | | Three Months Ended September 30, | | | | | Three Months Ended
September 30, | | | | |
| | 2018 | | 2017 | | Change | | Percentage Change | 2019 | | 2018 | | Change | | Percentage Change |
| | (Dollars in thousands) | (Dollars in thousands) |
| Gain on sale of mortgage loans, net | $ | 706 |
| | $ | 875 |
| | $ | (169 | ) | | (19.3 | )% | $ | 728 |
| | $ | 706 |
| | $ | 22 |
| | 3.1 | % |
| Gain on sale of guaranteed portion of SBA loans, net | — |
| | 354 |
| | (354 | ) | | (100.0 | ) | 265 |
| | — |
| | 265 |
| | 100.0 |
|
| Gain on sale of loans, net | $ | 706 |
| | $ | 1,229 |
| | $ | (523 | ) | | (42.6 | )% | $ | 993 |
| | $ | 706 |
| | $ | 287 |
| | 40.7 | % |
These decreases in noninterest income were offset partially by an increase in other income of $395,000, or 19.1%In addition to $2.5 million for the three months ended September 30, 2018 compared to $2.1 million for the same period in 2017, due primarily to a gain on sale of a branch held for saleloans, net, total noninterest income increased due to higher volume of $382,000 recognizedsales of investment securities executed during the three months ended September 30, 2019 compared to the same period in 2018.
Comparison of nine months ended September 30, 20182019 to the comparable period in the prior year
Total noninterest income decreased $3.3 million,increased $278,000, or 12.5%1.2%, to $23.2$23.5 million for the nine months ended September 30, 20182019 compared to $26.5$23.2 million for the same period in 2017.2018. The following table presents the change in the key components of noninterest income for the periods noted.noted:
| | | | Nine Months Ended September 30, | | | | | Nine Months Ended
September 30, | | | | |
| | 2018 | | 2017 | | Change | | Percentage Change | 2019 | | 2018 | | Change | | Percentage Change |
| | (Dollars in thousands) | (Dollars in thousands) |
| Service charges and other fees | $ | 14,062 |
| | $ | 13,408 |
| | $ | 654 |
| | 4.9 | % | $ | 14,109 |
| | $ | 14,062 |
| | $ | 47 |
| | 0.3 | % |
| Gain on sale of investment securities, net | 135 |
| | 161 |
| | (26 | ) | | (16.1 | ) | 329 |
| | 135 |
| | 194 |
| | 143.7 |
|
| Gain on sale of loans, net | 2,286 |
| | 6,562 |
| | (4,276 | ) | | (65.2 | ) | 1,613 |
| | 2,286 |
| | (673 | ) | | (29.4 | ) |
| Interest rate swap fees | 360 |
| | 743 |
| | (383 | ) | | (51.5 | ) | 313 |
| | 360 |
| | (47 | ) | | (13.1 | ) |
| Other income | 6,358 |
| | 5,641 |
| | 717 |
| | 12.7 |
| 7,087 |
| | 6,330 |
| | 757 |
| | 12.0 |
|
| Total noninterest income | $ | 23,201 |
| | $ | 26,515 |
| | $ | (3,314 | ) | | (12.5 | )% | $ | 23,451 |
| | $ | 23,173 |
| | $ | 278 |
| | 1.2 | % |
Gain on sale of loans, net decreased $4.3 million,Other income increased $757,000, or 65.2%12.0%, to $2.3$7.1 million for the nine months ended September 30, 20182019 compared to $6.6$6.3 million for the same period in 2017,2018 due primarily to higher BOLI income, fees earned from Wealth Management and Trust Services, and recoveries of zero-balance purchased loan notes which were charged-off prior to the gain on saleconsummation of a purchased credit impaired loan of $3.0 million recognizedthe related acquisition during the nine months ended September 30, 2017. Gain on sale of mortgage and SBA loans also decreased during2019, primarily from our merger with Washington Banking Company. In addition, the nine months ended September 30, 2018 compared to the same period in 2017 primarily due to less activity. Proceeds from sale of mortgage loans and the guaranteed portion of SBA loans decreased $33.4 million, or 31.3% to $73.3 million for the nine months ended September 30, 2018 from $106.7 million for the same period in 2017. The detail of gain on sale of loans, net is included in the following schedule.
|
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | |
| | 2018 | | 2017 | | Change | | Percentage Change |
| | (Dollars in thousands) |
| Gain on sale of mortgage loans, net | $ | 1,930 |
| | $ | 2,515 |
| | $ | (585 | ) | | (23.3 | )% |
| Gain on sale of guaranteed portion of SBA loans, net | 356 |
| | 1,049 |
| | (693 | ) | | (66.1 | ) |
| Gain on sale of other loans, net | — |
| | 2,998 |
| | (2,998 | ) | | (100.0 | ) |
| Gain on sale of loans, net | $ | 2,286 |
| | $ | 6,562 |
| | $ | (4,276 | ) | | (65.2 | )% |
The decrease in gain on sale of loans, net was offset partially by an increase in other income of $717,000, or 12.7% to $6.4 million for the nine months ended September 30, 2018 compared to $5.6 million for the same period in 2017, due primarily toBank recognized a gain on sale of a branch held for sale of $382,000 recognized during the threenine months ended September 30, 2018.
Gain on sale of investment securities, net increased $194,000, or 143.7%, to $329,000 for the nine months ended September 30, 2019 from $135,000 during the same in 2018 and andue to a higher volume of sales of investment securities available for sale executed during the nine months ended September 30, 2019 compared to the same period in 2018.
The increase in merchant VISAnoninterest income was offset partially by a decrease in gain on sale of $198,000 primarily dueloans, net of $673,000, or 29.4%, to an increase in customer account activity and a favorable contract renewal with the existing vendor.
Service charges and other fees also increased $654,000, or 4.9% to $14.1$1.6 million for the nine months ended September 30, 20182019 compared to $13.4$2.3 million for the same period in 2017,2018 primarily due primarily to an increase in deposit balanceslower mortgage origination volume. Mortgage loan originations decreased by $15.1 million, or 24.8%, to $45.9 million for the nine months ended September 30, 2019 from acquisition and organic growth and changes in fee structures$61.0 millionfor the nine months ended September 30, 2018. The following table presents gain on deposit accounts, including a business deposit consolidation process completed during second quarter 2017.sale of loans, net for the periods noted:
|
| | | | | | | | | | | | | | |
| | Nine Months Ended
September 30, | | |
| | 2019 | | 2018 | | Change | | Percentage Change |
| | (Dollars in thousands) |
| Gain on sale of mortgage loans, net | $ | 1,348 |
| | $ | 1,930 |
| | $ | (582 | ) | | (30.2 | )% |
| Gain on sale of guaranteed portion of SBA loans, net | 265 |
| | 356 |
| | (91 | ) | | (25.6 | ) |
| Gain on sale of loans, net | $ | 1,613 |
| | $ | 2,286 |
| | $ | (673 | ) | | (29.4 | )% |
Noninterest Expense
Comparison of quarter ended September 30, 20182019 to the comparable quarter in the prior year.
Noninterest expense increased $11.6decreased $2.7 million, or 41.6%6.9%, to $39.6$36.7 million during the three months ended September 30, 2019 from $39.5 million during the three months ended September 30, 2018 compareddue primarily to $28.0 million foracquisition-related expenses incurred during the three months ended September 30, 2017.2018. While there were no acquisition-related expenses incurred during the three months ended September 30, 2019, acquisition-related expenses incurred as a result of the Premier and Puget Mergers were $3.4 millionduring the three months ended September 30, 2018, including compensation and employee benefits expense of $1.9 million and professional services expense of $1.1 million. The following table presents changes in the key components of noninterest expense for the periods noted.noted:
| | | | Three Months Ended September 30, | | | | | Three Months Ended September 30, | | | | |
| | 2018 | | 2017 | | Change | | Percentage Change | 2019 | | 2018 | | Change | | Percentage Change |
| | (Dollars in thousands) | (Dollars in thousands) |
| Compensation and employee benefits | $ | 23,804 |
| | $ | 15,823 |
| | $ | 7,981 |
| | 50.4 | % | $ | 21,733 |
| | $ | 23,804 |
| | $ | (2,071 | ) | | (8.7 | )% |
| Occupancy and equipment | 5,020 |
| | 3,979 |
| | 1,041 |
| | 26.2 |
| 5,268 |
| | 5,020 |
| | 248 |
| | 4.9 |
|
| Data processing | 2,343 |
| | 2,090 |
| | 253 |
| | 12.1 |
| 2,333 |
| | 2,343 |
| | (10 | ) | | (0.4 | ) |
| Marketing | 876 |
| | 933 |
| | (57 | ) | | (6.1 | ) | 816 |
| | 876 |
| | (60 | ) | | (6.8 | ) |
| Professional services | 2,119 |
| | 1,453 |
| | 666 |
| | 45.8 |
| 1,434 |
| | 2,119 |
| | (685 | ) | | (32.3 | ) |
| State and local taxes | 931 |
| | 640 |
| | 291 |
| | 45.5 |
| |
| State/municipal business and use tax | | 1,370 |
| | 795 |
| | 575 |
| | 72.3 |
|
| Federal deposit insurance premium | 375 |
| | 433 |
| | (58 | ) | | (13.4 | ) | 9 |
| | 375 |
| | (366 | ) | | (97.6 | ) |
| Other real estate owned, net | 18 |
| | (88 | ) | | 106 |
| | (120.5 | ) | (35 | ) | | 18 |
| | (53 | ) | | (294.4 | ) |
| Amortization of intangible assets | 1,114 |
| | 319 |
| | 795 |
| | 249.2 |
| 975 |
| | 1,114 |
| | (139 | ) | | (12.5 | ) |
| Other expense | 2,997 |
| | 2,373 |
| | 624 |
| | 26.3 |
| 2,816 |
| | 2,997 |
| | (181 | ) | | (6.0 | ) |
| Total noninterest expense | $ | 39,597 |
| | $ | 27,955 |
| | $ | 11,642 |
| | 41.6 | % | $ | 36,719 |
| | $ | 39,461 |
| | $ | (2,742 | ) | | (6.9 | )% |
The Company has
Acquisition-related expenses incurred significant non-recurring acquisition costs inas a result of the Premier and Puget Mergers. The following table presents these expenses by key component in the following table.
|
| | | | | | | |
| | Three Months Ended September 30, |
| | 2018 | | 2017 |
| | (Dollars in thousands) |
| Compensation and employee benefits | $ | 1,907 |
| | $ | — |
|
| Occupancy and equipment | 7 |
| | — |
|
| Data processing | 370 |
| | — |
|
| Marketing | 1 |
| | — |
|
| Professional services | 1,081 |
| | 384 |
|
| Other expense | 36 |
| | 3 |
|
| Total acquisition costs | $ | 3,402 |
| | $ | 387 |
|
Compensation and employee benefits increased $8.0 million, or 50.4%, to $23.8 millionMergers during the three months ended September 30, 2018 from $15.8 millionare included in the following components of noninterest expense:
|
| | | |
| | Three Months Ended September 30, 2018 |
| | (Dollars in thousands) |
| Compensation and employee benefits | $ | 1,907 |
|
| Occupancy and equipment | 7 |
|
| Data processing | 370 |
|
| Marketing | 1 |
|
| Professional services | 1,081 |
|
| Other expense | 36 |
|
| Total acquisition costs | $ | 3,402 |
|
Without the impact of acquisition-related costs, the increase in noninterest expense during the three months ended September 30, 20172019 compared to the same period in 2018 was due to an increase in state/municipal business and use taxes expense as a result of an assessment in the amount of $537,000 from a Washington State Department of Revenue Business and Occupation audit and in professional service expense of $171,000 due to consulting fees related to the implementation efforts for the pending Current Expected Credit Losses accounting standard. The increase in noninterest expense was partially offset by a decrease in federal deposit insurance premium expense as a result of a small bank credit awarded by the FDIC that was recognized during the three months ended September 30, 2019. The Bank has $883,000 in small bank credits on future assessments remaining as of September 30, 2019, which may be recognized in future periods when allowed for by the FDIC upon insurance fund levels being met.
The ratio of noninterest expense to average total assets (annualized) was 2.69%for the three months ended September 30, 2019 compared to 2.97% for the three months ended September 30, 2018. The decrease was primarily due to the decrease in acquisition-related expenses during the three months ended September 30, 2019.
Comparison of nine months ended September 30, 2019 to the comparable period in the prior year
Noninterest expense decreased $1.1 million, or 1.0%, to $110.8 million during the nine months ended September 30, 2019 compared to $111.9 million for the nine months ended September 30, 2018. The following table presents changes in the key components of noninterest expense for the periods noted:
|
| | | | | | | | | | | | | | |
| | Nine Months Ended
September 30, | | | | |
| | 2019 | | 2018 | | Change | | Percentage Change |
| | (Dollars in thousands) |
| Compensation and employee benefits | $ | 65,629 |
| | $ | 64,492 |
| | $ | 1,137 |
| | 1.8 | % |
| Occupancy and equipment | 16,177 |
| | 14,457 |
| | 1,720 |
| | 11.9 |
|
| Data processing | 6,615 |
| | 7,455 |
| | (840 | ) | | (11.3 | ) |
| Marketing | 3,020 |
| | 2,507 |
| | 513 |
| | 20.5 |
|
| Professional services | 3,912 |
| | 8,485 |
| | (4,573 | ) | | (53.9 | ) |
| State/municipal business and use tax | 2,977 |
| | 2,199 |
| | 778 |
| | 35.4 |
|
| Federal deposit insurance premium | 720 |
| | 1,105 |
| | (385 | ) | | (34.8 | ) |
| Other real estate owned, net | 340 |
| | 18 |
| | 322 |
| | 1,788.9 |
|
| Amortization of intangible assets | 3,026 |
| | 2,705 |
| | 321 |
| | 11.9 |
|
| Other expense | 8,375 |
| | 8,491 |
| | (116 | ) | | (1.4 | ) |
| Total noninterest expense | $ | 110,791 |
| | $ | 111,914 |
| | $ | (1,123 | ) | | (1.0 | )% |
Acquisition-related expenses incurred as a result of the Premier and Puget Mergers during the nine months ended September 30, 2019 and 2018 are included in the following components of noninterest expense:
|
| | | | | | | |
| | Nine Months Ended
September 30, |
| | 2019 | | 2018 |
| | (Dollars in thousands) |
| Compensation and employee benefits | $ | 76 |
| | $ | 4,798 |
|
| Occupancy and equipment | — |
| | 44 |
|
| Data processing | 55 |
| | 1,147 |
|
| Marketing | — |
| | 6 |
|
| Professional services | 1 |
| | 3,016 |
|
| Other expense | — |
| | 79 |
|
| Total acquisition costs | $ | 132 |
| | $ | 9,090 |
|
Compensation and employee benefits increased $1.1 million, or 1.8%, to $65.6 million during the nine months ended September 30, 2019 from $64.5 million during the nine months ended September 30, 2018 and increased $5.9 million, or 9.8%, after adjusting for acquisition-related expenses. The increases are primarily as a result of additional employees primarily due toacquired in the Premier Merger, the expansion of the commercial banking team in greater Portland, Oregon in January 2019, and Puget Mergers.standard salary increases. The average full time equivalent employees increased to 878 for the threenine months ended September 30, 2019 compared to 831 for the same period in 2018.
Occupancy and equipment increased $1.7 million, or 11.9%, to $16.2 million during the nine months ended September 30, 2019 from $14.5 million during the nine months ended September 30, 2018 compared to 747 for the same period in 2017, including employees acquired in the Premier Merger. Compensation and employee benefits additionally increased due to standard salary increases and acquisition-related payments related primarily to the Premier Merger of $1.9 million during the three months ended September 30, 2018.
Occupancy and equipment increased $1.0 million, or 26.2%, to $5.0 million during the three months ended September 30, 2018 from $4.0 million during the three months ended September 30, 2017 due substantially to branch expansion, including additional leased space in the Seattle and Bellevue, Washington and in Portland and other Oregon markets. The Bellevue expansion included the lease
acquired from the Puget Sound Merger and additional space leased subsequent to the merger. The Oregon expansion included five leases acquired in the Premier Merger.
Amortization of intangible assetsMarketing increased $795,000,$513,000, or 249.2%20.5%, to $1.1$3.0 million during the three months ended September 30, 2018 from $319,000 during the three months ended September 30, 2017 primarily a result of additional amortization related to acquired core deposit intangibles from the Premier and Puget Mergers of $836,000 during the three months ended September 30, 2018.
Professional services increased $666,000, or 45.8%, to $2.1 million during the three months ended September 30, 2018 from $1.5 million during the three months ended September 30, 2017 as a result of merger activities including legal and conversion consulting costs.
The ratio of noninterest expense to average total assets (annualized) was 2.98% for the three months ended September 30, 2018 compared to 2.76% for the three months ended September 30, 2017. The increase was primarily a result of increased expenses as a result of the Premier and Puget Mergers.
Comparison of nine months ended September 30, 2018 to the comparable period in the prior year
Noninterest expense increased $29.1 million, or 35.0%, to $112.12019 from $2.5 million during the nine months ended September 30, 2018 comparedprimarily due to $83.0 million for the nine months ended September 30, 2017. The following table presents changes in the key componentstiming of noninterest expense for the periods noted.various marketing campaigns.
|
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | | |
| | 2018 | | 2017 | | Change | | Percentage Change |
| | (Dollars in thousands) |
| Compensation and employee benefits | $ | 64,492 |
| | $ | 48,119 |
| | $ | 16,373 |
| | 34.0 | % |
| Occupancy and equipment | 14,457 |
| | 11,607 |
| | 2,850 |
| | 24.6 |
|
| Data processing | 7,455 |
| | 6,007 |
| | 1,448 |
| | 24.1 |
|
| Marketing | 2,507 |
| | 2,545 |
| | (38 | ) | | (1.5 | ) |
| Professional services | 8,485 |
| | 3,515 |
| | 4,970 |
| | 141.4 |
|
| State and local taxes | 2,335 |
| | 1,828 |
| | 507 |
| | 27.7 |
|
| Federal deposit insurance premium | 1,105 |
| | 1,090 |
| | 15 |
| | 1.4 |
|
| Other real estate owned, net | 18 |
| | (36 | ) | | 54 |
| | (150.0 | ) |
| Amortization of intangible assets | 2,705 |
| | 966 |
| | 1,739 |
| | 180.0 |
|
| Other expense | 8,491 |
| | 7,346 |
| | 1,145 |
| | 15.6 |
|
| Total noninterest expense | $ | 112,050 |
| | $ | 82,987 |
| | $ | 29,063 |
| | 35.0 | % |
The Company has incurred significant non-recurring acquisition costs in the Premier and Puget Mergers. The following table presents these expenses by key component in the following table.
|
| | | | | | | |
| | Nine Months Ended September 30, |
| | 2018 | | 2017 |
| | (Dollars in thousands) |
| Compensation and employee benefits | $ | 4,798 |
| | $ | — |
|
| Occupancy and equipment | 44 |
| | — |
|
| Data processing | 1,147 |
| | — |
|
| Marketing | 6 |
| | — |
|
| Professional services | 3,016 |
| | 384 |
|
| Other expense | 79 |
| | 3 |
|
| Total acquisition costs | $ | 9,090 |
| | $ | 387 |
|
Compensation and employee benefits increased $16.4Professional services decreased $4.6 million, or 34.0%53.9%, to $64.5$3.9 million during the nine months ended September 30, 20182019 from $48.1 million during the nine months ended September 30, 2017. The increase in the nine months ended September 30, 2018 compared to 2017 was primarily as a result of additional employees, primarily due to the Premier and Puget Mergers, including increases in senior level staffing. The average full time equivalent employees increased to 831 for the nine months ended September 30, 2018 compared to 754 for the same
period in 2017, including employees acquired in the Premier and Puget Mergers. Compensation and employee benefits additionally increased due to increases in standard salary and acquisition-related payments related to the Premier and Puget Mergers of $4.8 million during the nine months ended September 30, 2018.
Professional services increased $5.0 million, or 141.4%, to $8.5 million during the nine months ended September 30, 2018 from $3.5 million during the nine months ended September 30, 2017 primarily due to an increase of $2.6 milliona decrease in professional services acquisition costs. The increase was additionally the result ofacquisition-related expenses and the buy-out of a third partythird-party contract in the amount of $1.7 million during the nine months ended September 30, 2018. The Company expects the accumulated savings in future professional services expenses to fully offset the cost of the buy-out by the end of 2019.
OccupancyState/municipal business and equipmentuse tax expense increased $2.9 million, or 24.6%,and federal deposit insurance premium expense decreased primarily due to $14.5 million during the ninereasons stated above in the discussion for the three months ended September 30, 2018 from $11.6 million during2019 to the nine months ended September 30, 2017 due substantially to branch expansioncomparable quarter in the Seattle, Bellevue, Portland and other Oregon markets. The Bellevue expansion included the lease acquired from the Puget Sound Merger and additional space leased subsequent to the merger. The Oregon expansion included five leases acquired in the Premier Merger.
Amortization of intangible assets increased $1.7 million, or 180.0%, to $2.7 million during the nine months ended September 30, 2018 from $966,000 during the nine months ended September 30, 2017 primarily a result of additional amortization related to acquired core deposit intangibles from the Premier and Puget Mergers of $1.9 million during the nine months ended September 30, 2018.
Data processing increased $1.4 million, or 24.1%, to $7.5 million during the nine months ended September 30, 2018 from $6.0 million during the nine months ended September 30, 2017 primarily due to acquisition costs. The increase in the nine months ended September 30, 2018 compared to 2017 was additionally due to higher transactional activity as a result of the Premier and Puget Mergers and organic growth in loans and deposits.prior year.
The ratio of noninterest expense to average total assets (annualized) was 3.09%2.76% for the nine months ended September 30, 2018,2019, compared to 2.82%3.08% for the nine months ended September 30, 2017.2018. The increasedecrease was primarily a result of increasedlower acquisition-related expenses including acquisition related costs asduring the nine months ended September 30, 2019 and the buy-out of a result of the Premier and Puget Mergersthird-party contract during the nine months ended September 30, 2018.
Income Tax Expense
Comparison of quarter ended September 30, 20182019 to the comparable quarter in the prior year.
Income tax expense decreased $912,000,increased $475,000, or 23.3%15.1%, to $3.0$3.6 million for the three months ended September 30, 20182019 from $3.9$3.1 million for the three months ended September 30, 2017.2018. The effective tax rate was 16.3%16.8% for the three months ended September 30, 20182019 compared to 27.0%16.9% for the same period in 2017.2018.
Comparison of nine months ended September 30, 2019 to the comparable period in the prior year.
Income tax expense increased $3.5 million, or 53.4%, to $10.0 million for the nine months ended September 30, 2019 from $6.5 million for the nine months ended September 30, 2018. The decreaseeffective tax rate was 16.6% for the nine months ended September 30, 2019 compared to 15.2% for the same period in 2018. The increase in the income tax expense and effective tax rate during the nine months ended September 30, 20182019 was primarily due to a decrease
in tax-exempt securities, the impact of stock-based compensation activity, an increased Oregon presence, and higher pre-tax income.
Non-GAAP Financial Information
This report contains certain financial information determined by methods other than in accordance with accounting principles generally accepted in the Tax CutsUnited States of America. These measures include net interest income, interest and Jobs Actenactedfees on loans, and loan yield and net interest margin excluding the effect of the incremental accretion on purchased loans acquired through mergers. Our management uses these non-GAAP measures, together with the related GAAP measures, in December 2017, which loweredits analysis of our performance and in making business decisions. Management also uses these measures for peer comparisons. Management believes that presenting loan yield and net interest margin excluding the corporateeffect of the acquisition accounting discount accretion on loans acquired through mergers is useful in assessing the impact of acquisition accounting on loan yield and net interest margin, as the effect of loan discount accretion is expected to decrease as the acquired loans mature or roll off our balance sheet. These disclosures should not be viewed as substitutes for the results determined to be in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.
Reconciliations of the GAAP and non-GAAP financial measures on net interest income, tax rate to 21% from 35%.
Comparison ofinterest and fees on loans, loan yield and net interest margin are presented below for the three and nine months ended September 30, 2018 to the comparable period in the prior year
Income tax expense decreased $4.7 million, or 42.2%, to $6.4 million for the nine months ended September 30, 2018 from $11.1 million for the nine months ended September 30, 2017. The effective tax rate was 15.0% for the nine months ended September 30, 2018 compared to 25.9% for the same period in 2017. The decrease in the income tax expense2019 and effective tax rate during the nine months ended September 30, 2018 was primarily due to the impact of the Tax Cuts and Jobs Act, offset partially by an increase in certain non-deductible acquisition costs.
2018:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended
September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (Dollars in thousands) |
| Net interest income and interest and fees on loans: | | | | |
| Net interest income (GAAP) | $ | 50,243 |
| | $ | 51,126 |
| | $ | 150,567 |
| | $ | 135,704 |
|
| Exclude incremental accretion on purchased loans | (1,090 | ) | | (2,637 | ) | | (3,879 | ) | | (6,261 | ) |
| Adjusted net interest income (non-GAAP) | $ | 49,153 |
| | $ | 48,489 |
| | $ | 146,688 |
| | $ | 129,443 |
|
| | | | | | | | |
| Average total interest earning assets, net | $ | 4,736,704 |
| | $ | 4,596,734 |
| | $ | 4,689,505 |
| | $ | 4,259,373 |
|
| Net interest margin, annualized (GAAP) | 4.21 | % | | 4.41 | % | | 4.29 | % | | 4.26 | % |
| Net interest margin, excluding incremental accretion on purchased loans, annualized (non-GAAP) | 4.12 | % | | 4.18 | % | | 4.18 | % | | 4.06 | % |
| | | | | | | | |
| Interest and fees on loans (GAAP) | $ | 47,845 |
| | $ | 48,301 |
| | $ | 142,651 |
| | $ | 127,601 |
|
| Exclude incremental accretion on purchased loans | (1,090 | ) | | (2,637 | ) | | (3,879 | ) | | (6,261 | ) |
| Adjusted interest and fees on loans (non-GAAP) | $ | 46,755 |
| | $ | 45,664 |
| | $ | 138,772 |
| | $ | 121,340 |
|
| | | | | | | | |
| Average total loans receivable, net | $ | 3,677,405 |
| | $ | 3,618,031 |
| | $ | 3,651,659 |
| | $ | 3,346,709 |
|
| Loan yield, annualized (GAAP) | 5.16 | % | | 5.30 | % | | 5.22 | % | | 5.10 | % |
| Loan yield, excluding incremental accretion on purchased loans, annualized (non-GAAP) | 5.04 | % | | 5.01 | % | | 5.08 | % | | 4.85 | % |
Financial Condition Overview
The table below provides a comparison of the changes in the Company's financial condition from December 31, 20172018 to September 30, 2018, and the results of the Puget Sound Merger effective January 16, 2018 and the Premier Merger effective July 2, 2018:2019:
| | | | | September 30, 2018 | | December 31, 2017 | | Change | | % Change | | Fair Value of Premier and Puget Mergers at Respective Merger Dates | | September 30, 2019 | | December 31, 2018 | | Change | | % Change |
| | | (Dollars in thousands) | | | | (Dollars in thousands) |
| Assets | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 170,143 |
| | $ | 103,015 |
| | $ | 67,128 |
| | 65.2 | % | | $ | 105,974 |
| | $ | 236,968 |
| | $ | 161,910 |
| | $ | 75,058 |
| | 46.4 | % |
| Investment securities available for sale, at fair value | | 920,737 |
| | 810,530 |
| | 110,207 |
| | 13.6 |
| | 84,846 |
| | 966,102 |
| | 976,095 |
| | (9,993 | ) | | (1.0 | ) |
| Loans held for sale | | 1,882 |
| | 2,288 |
| | (406 | ) | | (17.7 | ) | | — |
| | 5,211 |
| | 1,555 |
| | 3,656 |
| | 235.1 |
|
| Total loans receivable, net | | 3,614,579 |
| | 2,816,985 |
| | 797,594 |
| | 28.3 |
| | 718,547 |
| | 3,694,825 |
| | 3,619,118 |
| | 75,707 |
| | 2.1 |
|
| Other real estate owned | | 2,032 |
| | — |
| | 2,032 |
| | N/A |
| | 1,796 |
| | 841 |
| | 1,983 |
| | (1,142 | ) | | (57.6 | ) |
| Premises and equipment, net | | 80,439 |
| | 60,325 |
| | 20,114 |
| | 33.3 |
| | 3,785 |
| | 86,563 |
| | 81,100 |
| | 5,463 |
| | 6.7 |
|
| Federal Home Loan Bank stock, at cost | | 6,076 |
| | 8,347 |
| | (2,271 | ) | | (27.2 | ) | | 1,743 |
| | 6,377 |
| | 6,076 |
| | 301 |
| | 5.0 |
|
| Bank owned life insurance | | 93,296 |
| | 75,091 |
| | 18,205 |
| | 24.2 |
| | 17,116 |
| | 102,981 |
| | 93,612 |
| | 9,369 |
| | 10.0 |
|
| Accrued interest receivable | | 15,735 |
| | 12,244 |
| | 3,491 |
| | 28.5 |
| | 2,454 |
| | 14,722 |
| | 15,403 |
| | (681 | ) | | (4.4 | ) |
| Prepaid expenses and other assets | | 108,730 |
| | 99,328 |
| | 9,402 |
| | 9.5 |
| | 3,182 |
| | 142,068 |
| | 98,522 |
| | 43,546 |
| | 44.2 |
|
| Other intangible assets, net | | 21,728 |
| | 6,088 |
| | 15,640 |
| | 256.9 |
| | 18,345 |
| | 17,588 |
| | 20,614 |
| | (3,026 | ) | | (14.7 | ) |
| Goodwill | | 240,837 |
| | 119,029 |
| | 121,808 |
| | 102.3 |
| | 121,808 |
| | 240,939 |
| | 240,939 |
| | — |
| | — |
|
| Total assets | | $ | 5,276,214 |
| | $ | 4,113,270 |
| | $ | 1,162,944 |
| | 28.3 | % | | $ | 1,079,596 |
| | $ | 5,515,185 |
| | $ | 5,316,927 |
| | $ | 198,258 |
| | 3.7 | % |
| | | | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | | | |
| Deposits | | $ | 4,398,127 |
| | $ | 3,393,060 |
| | $ | 1,005,067 |
| | 29.6 | % | | $ | 824,602 |
| | $ | 4,562,257 |
| | $ | 4,432,402 |
| | $ | 129,855 |
| | 2.9 | % |
| Federal Home Loan Bank advances | | — |
| | 92,500 |
| | (92,500 | ) | | (100.0 | ) | | 16,000 |
| |
| Junior subordinated debentures | | 20,229 |
| | 20,009 |
| | 220 |
| | 1.1 |
| | — |
| | 20,522 |
| | 20,302 |
| | 220 |
| | 1.1 |
|
| Securities sold under agreement to repurchase | | 32,233 |
| | 31,821 |
| | 412 |
| | 1.3 |
| | 462 |
| | 25,883 |
| | 31,487 |
| | (5,604 | ) | | (17.8 | ) |
| Accrued expenses and other liabilities | | 79,492 |
| | 67,575 |
| | 11,917 |
| | 17.6 |
| | 8,489 |
| | 102,396 |
| | 72,013 |
| | 30,383 |
| | 42.2 |
|
| Total liabilities | | 4,530,081 |
| | 3,604,965 |
| | 925,116 |
| | 25.7 |
| | 849,553 |
| | 4,711,058 |
| | 4,556,204 |
| | 154,854 |
| | 3.4 |
|
| Stockholders' equity | | | | | | | | | | | | | | | | | | |
| Common stock | | 591,065 |
| | 360,590 |
| | 230,475 |
| | 63.9 |
| | 230,043 |
| | 585,581 |
| | 591,806 |
| | (6,225 | ) | | (1.1 | ) |
| Retained earnings | | 169,758 |
| | 149,013 |
| | 20,745 |
| | 13.9 |
| | — |
| | 206,021 |
| | 176,372 |
| | 29,649 |
| | 16.8 |
|
| Accumulated other comprehensive loss, net | | (14,690 | ) | | (1,298 | ) | | (13,392 | ) | | 1,031.7 |
| | — |
| |
| Accumulated other comprehensive gain (loss), net | | | 12,525 |
| | (7,455 | ) | | 19,980 |
| | (268.0 | ) |
| Total stockholders' equity | | 746,133 |
| | 508,305 |
| | 237,828 |
| | 46.8 |
| | 230,043 |
| | 804,127 |
| | 760,723 |
| | 43,404 |
| | 5.7 |
|
| Total liabilities and stockholders' equity | | $ | 5,276,214 |
| | $ | 4,113,270 |
| | $ | 1,162,944 |
| | 28.3 | % | | $ | 1,079,596 |
| | $ | 5,515,185 |
| | $ | 5,316,927 |
| | $ | 198,258 |
| | 3.7 | % |
Total assets increased $1.16 billion,$198.3 million, or 28.3%3.7%, to $5.28$5.52 billion as of September 30, 20182019 compared to $4.11$5.32 billion as of December 31, 2017. The Premier and Puget Mergers resulted in an increase of total assets, including goodwill, of $1.08 billion at their respective merger dates.
2018.
Total loans receivable, net, excluding loans acquired in the Premier and Puget Mergers increased $79.0$75.7 million, or 3.8% annualized,2.1%, to $3.69 billion at September 30, 2019 compared to $3.62 billion as of December 31, 2018 due primarily to an increase in total real estate construction and land development loans of $30.3 million, total commercial business loans of $20.7 million and one-to-four family residential loans of $19.4 million.
Prepaid and other assets increased $43.5 million, or 44.2%, to $142.1 million at September 30, 2019 compared to $98.5 million as of December 31, 2018 due primarily to the ROU lease asset of $26.6 million that was recorded during the nine months ended September 30, 2018.2019 due to the implementation of ASU 2016-02 and an increase in our investment in Low Income Housing Tax Credit of $11.6 million.
Investment securitiesTotal deposits increased $110.2$129.9 million, or 13.6%2.9%, to $920.7$4.56 billion at September 30, 2019 from $4.43 billion at December 31, 2018 due primarily to an increase in total non-maturity deposits of $72.4 million, or 1.8%. Noninterest demand deposits increased $67.2 million, or 4.9%, to $1.43 billion at September 30, 2019 from $1.36 billion at December 31, 2018. Certificate of deposit accounts increased $57.4 million, or 12.3%, to $524.3 million at
September 30, 2019 from $466.9 million at December 31, 2018. Non-maturity deposits as a percentage of total deposits decreased slightly to 88.5% as of September 30, 2019 from 89.5% at December 31, 2018.
Accrued expenses and other liabilities increased $30.4 million, or 42.2%, to $102.4 million at September 30, 2018 from $810.52019 compared to $72.0 million atas of December 31, 20172018 due primarily as a resultto the lease ROU obligation of investment purchases, offset partially by maturities, calls and payments of investment securities. The investment securities acquired in the Puget Sound Merger were sold shortly after the merger.
Deposits, excluding the Premier and Puget Mergers, increased $180.5$27.9 million or 7.1% annualized,that was recorded during the nine months ended September 30, 2018. Brokered deposits increased $18.6 million, or 46.9%, to $58.1 million at September 30, 2018 compared to $39.6 million at December 31, 2017. Total non-maturity deposits increased to 88.5% of total deposits at September 30, 2018 from 88.3% at December 31, 2017 and certificates of deposit decreased to 11.5% of total deposits at September 30, 2018 from 11.7% at December 31, 2017.
The Company had no Federal Home Loan Bank advances at September 30, 2018, a $92.5 million decrease from December 31, 2017. The Company was able to repay the higher cost of funding2019 based on the increase in the deposit balances primarily as a resultimplementation of the Premier and Puget Mergers.ASU 2016-02.
Total stockholders’ equity increased $237.8 million, or 46.8%, to $746.1 million as of September 30, 2018 from $508.3 million at December 31, 2017. The Company’s stockholders' equity position was 14.1% of total assets as of September 30, 2018 and 12.4% as of December 31, 2017. Changes in stockholders' equity during the nine months ended September 30, 2018 were as follows:
|
| | | |
| | Nine Months Ended |
| | September 30, 2018 |
| | (In thousands) |
| Balance, beginning of period | $ | 508,305 |
|
| Common stock issued in the Premier and Puget Mergers | 230,043 |
|
| Net income | 36,448 |
|
| Dividends declared | (15,796 | ) |
| Accumulated other comprehensive loss | (13,299 | ) |
| Other | 432 |
|
| Balance, end of period | $ | 746,133 |
|
Lending Activities
The Bank is a full service commercial bank, which originates a wide variety of loans with a focus on commercial business loans. Total loans receivable, net of allowance for loan losses, increased $797.6$75.7 million, or 28.3%2.1%, to $3.61$3.69 billion at September 30, 20182019 from $2.82$3.62 billion at December 31, 2017. The increase in loans receivable was primarily due to the Premier and Puget Mergers. At the merger dates, the Bank acquired fair value of commercial and industrial loans of $271.8 million, non-owner occupied commercial real estate loans of $185.0 million, and owner-occupied commercial real estate loans of $183.6 million.
2018.
The following table provides information about our loan portfolio by type of loan at the dates indicated and the change between these dates. These balances are prior to deduction for the allowance for loan losses.
| | | | September 30, 2018 | | December 31, 2017 | | | September 30, 2019 | | December 31, 2018 | | |
| | Balance | | % of Total (3) | | Balance | | % of Total (3) | | Change | | %of Balance Change | Balance (1) | | % of Total (2) | | Balance (1) | | % of Total (2) | | Change | | %of Balance Change |
| | (Dollars in thousands) | (Dollars in thousands) |
| Commercial business: | | | | | | | | | | | | | | | | | | | | | | |
| Commercial and industrial | $ | 861,530 |
| | 23.6 | % | | $ | 645,396 |
| | 22.7 | % | | $ | 216,134 |
| | 33.5 | % | $ | 853,995 |
| | 22.9 | % | | $ | 853,606 |
| | 23.4 | % | | $ | 389 |
| | — | % |
| Owner-occupied commercial real estate | 785,416 |
| | 21.5 |
| | 622,150 |
| | 21.8 |
| | 163,266 |
| | 26.2 |
| 787,591 |
| | 21.1 |
| | 779,814 |
| | 21.3 |
| | 7,777 |
| | 1.0 |
|
| Non-owner occupied commercial real estate | 1,283,160 |
| | 35.2 |
| | 986,594 |
| | 34.6 |
| | 296,566 |
| | 30.1 |
| 1,316,992 |
| | 35.3 |
| | 1,304,463 |
| | 35.7 |
| | 12,529 |
| | 1.0 |
|
| Total commercial business | 2,930,106 |
| | 80.3 |
| | 2,254,140 |
| | 79.1 |
| | 675,966 |
| | 30.0 |
| 2,958,578 |
| | 79.3 |
| | 2,937,883 |
| | 80.4 |
| | 20,695 |
| | 0.7 |
|
One-to-four family residential (1)(3) | 96,333 |
| | 2.7 |
| | 86,997 |
| | 3.1 |
| | 9,336 |
| | 10.7 |
| 121,174 |
| | 3.2 |
| | 101,763 |
| | 2.8 |
| | 19,411 |
| | 19.1 |
|
| Real estate construction and land development: | | | | | | |
| | | | | | | | | | |
| | | | |
| One-to-four family residential | 107,148 |
| | 2.9 |
| | 51,985 |
| | 1.8 |
| | 55,163 |
| | 106.1 |
| 98,034 |
| | 2.6 |
| | 102,730 |
| | 2.8 |
| | (4,696 | ) | | (4.6 | ) |
| Five or more family residential and commercial properties | 120,787 |
| | 3.3 |
| | 97,499 |
| | 3.4 |
| | 23,288 |
| | 23.9 |
| 147,686 |
| | 4.0 |
| | 112,730 |
| | 3.1 |
| | 34,956 |
| | 31.0 |
|
Total real estate construction and land development (2) | 227,935 |
| | 6.2 |
| | 149,484 |
| | 5.2 |
| | 78,451 |
| | 52.5 |
| 245,720 |
| | 6.6 |
| | 215,460 |
| | 5.9 |
| | 30,260 |
| | 14.0 |
|
| Consumer | 391,283 |
| | 10.7 |
| | 355,091 |
| | 12.5 |
| | 36,192 |
| | 10.2 |
| 403,485 |
| | 10.8 |
| | 395,545 |
| | 10.8 |
| | 7,940 |
| | 2.0 |
|
| Gross loans receivable | 3,645,657 |
| | 99.9 |
| | 2,845,712 |
| | 99.9 |
| | 799,945 |
| | 28.1 |
| 3,728,957 |
| | 99.9 |
| | 3,650,651 |
| | 99.9 |
| | 78,306 |
| | 2.1 |
|
| Net deferred loan costs | 3,397 |
| | 0.1 |
| | 3,359 |
| | 0.1 |
| | 38 |
| | 1.1 |
| 2,386 |
| | 0.1 |
| | 3,509 |
| | 0.1 |
| | (1,123 | ) | | (32.0 | ) |
| Loans receivable, net | $ | 3,649,054 |
| | 100.0 | % | | $ | 2,849,071 |
| | 100.0 | % | | $ | 799,983 |
| | 28.1 | % | $ | 3,731,343 |
| | 100.0 | % | | $ | 3,654,160 |
| | 100.0 | % | | $ | 77,183 |
| | 2.1 | % |
(1) Excludes loans held for sale of $1.9 million, and $2.3 million as of September 30, 2018 and December 31, 2017, respectively.
(2) Balances do not include undisbursed loan commitments.
(3)(2) Percent of loans receivable, net.
(3) Excludes loans held for sale of $5.2 million and $1.6 million as of September 30, 2019 and December 31, 2018, respectively.
Nonperforming Assets and Credit Quality Metrics
The following table provides information about our nonaccrual loans, other real estate owned and performing TDR loans for the indicated dates.dates:
| | | | September 30, 2018 | | December 31, 2017 | September 30, 2019 | | December 31, 2018 |
| | (Dollars in thousands) | (Dollars in thousands) |
| Nonaccrual loans: | | | | | | |
| Commercial business | $ | 13,487 |
| | $ | 9,098 |
| $ | 40,742 |
| | $ | 12,564 |
|
| One-to-four family residential | 74 |
| | 81 |
| 19 |
| | 71 |
|
| Real estate construction and land development | 1,076 |
| | 1,247 |
| 560 |
| | 899 |
|
| Consumer | 143 |
| | 277 |
| 190 |
| | 169 |
|
Total nonaccrual loans (1) | 14,780 |
| | 10,703 |
| 41,511 |
| | 13,703 |
|
| Other real estate owned | 2,032 |
| | — |
| 841 |
| | 1,983 |
|
| Total nonperforming assets | $ | 16,812 |
| | $ | 10,703 |
| $ | 42,352 |
| | $ | 15,686 |
|
| | | | | | | |
| Allowance for loan losses | $ | 34,475 |
| | $ | 32,086 |
| $ | 36,518 |
| | $ | 35,042 |
|
| Nonperforming loans to loans receivable, net | 0.41 | % | | 0.38 | % | 1.11 | % | | 0.37 | % |
| Allowance for loan losses to loans receivable, net | 0.94 | % | | 1.13 | % | 0.98 | % | | 0.96 | % |
| Allowance for loan losses to nonperforming loans | 233.25 | % | | 299.79 | % | 87.97 | % | | 255.73 | % |
| Nonperforming assets to total assets | 0.32 | % | | 0.26 | % | 0.77 | % | | 0.30 | % |
| | | | | | | |
| Performing TDR loans: | | | | | | |
| Commercial business | $ | 23,970 |
| | $ | 25,729 |
| $ | 18,831 |
| | $ | 22,170 |
|
| One-to-four family residential | 211 |
| | 218 |
| 200 |
| | 208 |
|
| Real estate construction and land development | — |
| | 645 |
| |
| Consumer | 268 |
| | 165 |
| 385 |
| | 358 |
|
| Total performing TDR loans | $ | 24,449 |
| | $ | 26,757 |
| $ | 19,416 |
| | $ | 22,736 |
|
| Accruing loans past due 90 days or more | $ | — |
| | $ | — |
| $ | — |
| | $ | — |
|
| Potential problem loans | 105,742 |
| | 83,543 |
| 85,339 |
| | 101,349 |
|
| |
(1) | At September 30, 20182019 and December 31, 2017, $6.52018, $17.5 million and $5.2$6.9 million of nonaccrual loans were considered nonperforming TDR loans, respectively. |
Nonaccrual Loans. Nonaccrual loans increased $4.1$27.8 million to $14.8$41.5 million, or 0.41%1.11% of loans receivable, net, at September 30, 20182019 from $10.7$13.7 million, or 0.38%0.37% of loans receivable, net, at December 31, 2017.2018. The increase was due primarily to two agricultural loan relationships and two commercial business relationships that were transferred to nonaccrual status during the nine months ended September 30, 2018 totaling $1.7 million and $1.9 million, respectively, at September 30, 2018. One of the agricultural relationships is well-secured and the Company did not record a related allowance for loan losses and the other agricultural relationship is partially guaranteed by the SBA and the Company recorded an allowance for loan losses of $76,000 at September 30, 2018 related to the unguaranteed portionaddition of the loan. We recorded an allowance for loan lossesseven commercial lending relationships totaling $31.0 million which showed increased signs of $564,000 for the two commercialcash flow deterioration, including three agricultural business relationships at September 30, 2018.of $23.9 million, of which $5.6 million which was previously classified as a TDR loan.
The following table reflects the changes in nonaccrual loans during the nine months ended September 30, 2019 and 2018:
| | | | Nine Months Ended | Nine Months Ended
September 30, |
| | September 30, 2018 | 2019 | | 2018 |
| | (In thousands) | (In thousands) |
| Nonaccrual loans | | | | |
| Balance, beginning of period | $ | 10,703 |
| $ | 13,703 |
| | $ | 10,703 |
|
| Addition of previously classified pass graded loans | 5,373 |
| 3,858 |
| | 5,373 |
|
| Addition of previously classified potential problem loans | 4,336 |
| 21,998 |
| | 4,336 |
|
| Addition of acquired loans | 130 |
| — |
| | 130 |
|
| Addition of previously classified TDR loans | | 7,051 |
| | — |
|
| Net principal payments | | (4,400 | ) | | (5,038 | ) |
| Charge-offs | (724 | ) | (699 | ) | | (724 | ) |
| Net principal payments | (5,038 | ) | |
| Balance, end of period | $ | 14,780 |
| $ | 41,511 |
| | $ | 14,780 |
|
At September 30, 2018,2019, nonaccrual loans of $8.9$6.1 million had related allowance for loan losses of $2.2 million$932,000 and nonaccrual loans of $5.9$35.4 million had no related allowance for loan losses. At December 31, 20172018, nonaccrual loans of $3.8$9.5 million had related allowance for loan losses of $720,000$1.9 million and nonaccrual loans of $6.9$4.2 million had no allowance for loan losses.
At September 30, 2018,2019, nonperforming TDR loans, included in the nonaccrual loan table above, were $6.5$17.5 million and had a related allowance for loan losses of $713,000.$494,000, including $13.7 million of nonperforming TDR loans with no related allowance for loan losses. At December 31, 2017,2018, nonperforming TDR loans were $5.2$6.9 million and had a related allowance for loan losses of $379,000.$658,000.
Nonperforming Assets. Nonperforming assets consist of nonaccrual loans and other real estate owned. Nonperforming assets increased $6.1$26.7 million to $16.8$42.4 million, or 0.32%0.77% of total assets, at September 30, 20182019 from $10.7$15.7 million, or 0.26%0.30% of total assets, at December 31, 20172018 due to primarily to the increase in nonaccrual loans, discussed above. Nonperforming assets additionally increased due to the additions ofabove, offset partially by a decrease in other real estate owned primarilyof $1.1 million, or 57.6%, to $841,000 at September 30, 2019 from $2.0 million at December 31, 2018 as a result of other real estate owned acquired ina disposition of properties during the Premier Merger. There was no other real estate owned at December 31, 2017.nine months ended September 30, 2019.
Troubled Debt Restructured Loans. TDR loans are considered impaired and are separately measured for impairment whether on accrual or nonaccrual status. The performing TDR loans are not considered nonperforming assets as they continue to accrue interest despite being considered impaired due to the restructured status. Performing TDR loans decreased $2.3$3.3 million, or 8.6%14.6%, to $24.4$19.4 million at September 30, 20182019 from $26.8$22.7 million at December 31, 2017.2018. The decrease was due primarily to net principal payments and the transfer to nonaccrual status, including the one agricultural business relationship of $5.6 million previously discussed. The decrease was partially offset by the addition of TDR loans as a result of extending maturities on four commercial lending relationships totaling $8.1 million, including $5.1 million related to agricultural borrowers, which showed signs of cash flow deterioration.
The following table reflects the changes in performing TDR loans during the nine months ended September 30, 2019 and 2018:
| | | | Nine Months Ended | Nine Months Ended
September 30, |
| | September 30, 2018 | 2019 | | 2018 |
| | (In thousands) | (In thousands) |
| Performing TDR loans | | | | |
| Balance, beginning of period | $ | 26,757 |
| $ | 22,736 |
| | $ | 26,757 |
|
| Addition of previously classified pass graded loans | 1,909 |
| 2,633 |
| | 1,909 |
|
| Addition of previously classified potential problem loans | 907 |
| 8,341 |
| | 907 |
|
| Transfers of loans to nonaccrual status | | (7,051 | ) | | — |
|
| Charge-offs | | (20 | ) | | — |
|
| Net principal payments | (5,124 | ) | (7,223 | ) | | (5,124 | ) |
| Balance, end of period | $ | 24,449 |
| $ | 19,416 |
| | $ | 24,449 |
|
The related allowance for loan losses on performing TDR loans was $2.2$1.9 million as of September 30, 20182019 and $2.6$2.3 million as of December 31, 2017.2018.
Potential Problem Loans. Potential problem loans increased $22.2decreased $16.0 million, or 26.6%15.8%, to $105.7$85.3 million at September 30, 2018 from $83.52019 compared to $101.3 million at December 31, 2017.2018. The increasedecrease was due primarily attributed to the transfer of loans to nonaccrual and TDR status, including $11.3 million related to the one agricultural business relationship previously discussed. Included in the net principal payments are loans paid in full of $13.1 million and the significant pay down of four commercial lines of credit totaling $6.3 million. Offsetting these decreases in potential problem loans was the addition of an agricultural lending relationship totaling $15.7$46.2 million at September 30, 2018 andof previously classified pass graded loans. The risk rating downgrade of these relationships will enhance the additionCompany's monitoring of potential problem loans acquired in the Premier and Puget Mergers with a total outstanding balance of $10.1 million and $4.5 million, respectively.
these credits.
The following table reflects the changes in potential problem loans during the nine months ended September 30, 2018 (in thousands):2019 and 2018:
| | | | Nine Months Ended | Nine Months Ended
September 30, |
| | September 30, 2018 | 2019 | | 2018 |
| | (In thousands) | |
| Potential problem loans | | |
| Balance, beginning of period | $ | 83,543 |
| $ | 101,349 |
| | $ | 83,543 |
|
| Addition of previously classified pass graded loans | 48,915 |
| 46,243 |
| | 48,915 |
|
| Acquired in Premier and Puget Mergers | 14,630 |
| — |
| | 14,630 |
|
| Upgrades to pass graded loan status | | (8,816 | ) | | (15,273 | ) |
| Net principal payments | (20,530 | ) | (22,588 | ) | | (20,530 | ) |
| Upgrades to pass graded loan status | (15,273 | ) | |
| Transfers of loan to nonaccrual or troubled debt restructured status | (5,243 | ) | |
| Transfers of loans to nonaccrual and TDR status | | (30,339 | ) | | (5,243 | ) |
| Charge-offs | (300 | ) | (510 | ) | | (300 | ) |
| Balance, end of period | $ | 105,742 |
| $ | 85,339 |
| | $ | 105,742 |
|
Analysis of Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses charged against earnings. The balance of the allowance for loan losses is maintained at the amount management believes will be appropriate to absorb probable incurred credit losses in the loan portfolio at the balance sheet date. The allowance for loan losses is determined by applying estimated loss factors to the credit exposure from outstanding loans.
We assess the estimated credit losses inherent in our loan portfolio by considering a number of elements including:
historical loss experience in the loan portfolio;
impact of environmental factors, including:
| |
| ◦ | levels of and trends in delinquencies, classified and impaired loans; |
| |
| ◦ | levels of and trends in charge-offs and recoveries; |
| |
| ◦ | trends in volume and terms of loans; |
| |
| ◦ | effects of changes in risk selection and underwriting standards, and other changes in lending policies, procedures and practices; |
| |
| ◦ | experience, ability, and depth of lending management and other relevant staff; |
| |
| ◦ | national and local economic trends and conditions; |
| |
| ◦ | other external factors such as competition, legal and regulatory; |
| |
| ◦ | effects of changes in credit concentrations; and |
We calculate an appropriate allowance for loan losses for the loans in our loan portfolio by applying historical loss factors for homogeneous classes of the portfolio, adjusted for changes to the above-noted environmental factors. We may record specific provisions for impaired loans, including loans on nonaccrual status, and TDR loans and other loans with a specific valuation allowance, after a careful analysis of each loan’s credit and collateral factors. Our analysis of an appropriate allowance for loan losses combines the provisions made for our non-impaired loans and the specific provisions made for each impaired loan.
The allowance for loan losses on loans designated as non-PCI loans is similar to the methodology described above except that for non-PCI loans, the remaining unaccreted discounts resulting from the fair value adjustments recorded at the time the loans were purchased are additionally factored into the allowance methodology.
For the PCI loans, the acquisition date fair value incorporated our estimate of future expected cash flows until the ultimate resolution of these credits. To the extent actual or projected cash flows are less than previously estimated, additional provisions for loan losses on the PCI loan portfolio will be recognized immediately into earnings. To the extent actual or projected cash flows are more than previously estimated, the increase in cash flows is recognized immediately as a recapture of provision for loan losses up to the previously recognized provision for that loan or pool of loans, if any, and then prospectively recognized in interest income as a yield adjustment. Non-pooled nonaccrual or performing TDR PCI loans may become classified as impaired if the loans are no longer accreting loan discounts established at acquisition based on the guidance of FASB ASC 310-30.
While we believe we use the best information available to determine the allowance for loan losses, our results of operations could be significantly affected if circumstances differ substantially from the assumptions used in determining the allowance. A decline in national and local economic conditions, or other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Company’s financial condition and
results of operations. In addition, the determination of the amount of the allowance for loan losses is subject to review by bank regulators, as part of their routine examination process, which may result in the establishment of an additional allowance for loan losses based upon their judgment of information available to them at the time of their examination.
The following table provides information regarding changes in our allowance for loan losses at and for the three and nine months ended September 30, 20182019 and 2017:2018:
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended September 30, | | Nine Months Ended
September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
| | (Dollars in thousands) | (Dollars in thousands) |
| Allowance for loan losses on loans at the beginning of the period | $ | 33,972 |
| | $ | 32,751 |
| | $ | 32,086 |
| | $ | 31,083 |
| $ | 36,363 |
| | $ | 33,972 |
| | $ | 35,042 |
| | $ | 32,086 |
|
| Provision for loan losses | 1,065 |
| | 884 |
| | 3,967 |
| | 2,882 |
| 466 |
| | 1,065 |
| | 2,753 |
| | 3,967 |
|
| Charge-offs: | | | | | | | | | | | | | | |
| Commercial business | (300 | ) | | (1,497 | ) | | (923 | ) | | (1,940 | ) | (306 | ) | | (300 | ) | | (1,183 | ) | | (923 | ) |
| One-to-four family residential | (15 | ) | | (15 | ) | | (30 | ) | | (15 | ) | (15 | ) | | (15 | ) | | (45 | ) | | (30 | ) |
| Real estate construction and land development | — |
| | (556 | ) | | — |
| | (556 | ) | — |
| | — |
| | — |
| | — |
|
| Consumer | (530 | ) | | (478 | ) | | (1,709 | ) | | (1,419 | ) | (501 | ) | | (530 | ) | | (1,653 | ) | | (1,709 | ) |
| Total charge-offs | (845 | ) | | (2,546 | ) | | (2,662 | ) | | (3,930 | ) | (822 | ) | | (845 | ) | | (2,881 | ) | | (2,662 | ) |
| Recoveries: | | | | | | | | | | | | | | |
| Commercial business | 121 |
| | 8 |
| | 690 |
| | 834 |
| 381 |
| | 121 |
| | 602 |
| | 690 |
|
| One-to-four family residential | — |
| | — |
| | — |
| | 1 |
| — |
| | — |
| | — |
| | — |
|
| Real estate construction and land development | 3 |
| | 191 |
| | 5 |
| | 201 |
| 3 |
| | 3 |
| | 628 |
| | 5 |
|
| Consumer | 159 |
| | 112 |
| | 389 |
| | 329 |
| 127 |
| | 159 |
| | 374 |
| | 389 |
|
| Total recoveries | 283 |
| | 311 |
| | 1,084 |
| | 1,365 |
| 511 |
| | 283 |
| | 1,604 |
| | 1,084 |
|
| Net (charge-offs) recoveries | (562 | ) | | (2,235 | ) | | (1,578 | ) | | (2,565 | ) | |
| Net charge-offs | | (311 | ) | | (562 | ) | | (1,277 | ) | | (1,578 | ) |
| Allowance for loan losses at the end of the period | $ | 34,475 |
| | $ | 31,400 |
| | $ | 34,475 |
| | $ | 31,400 |
| $ | 36,518 |
| | $ | 34,475 |
| | $ | 36,518 |
| | $ | 34,475 |
|
| | | | | | | | | | | | | | | |
| Allowance for loan losses to loans receivable, net | 0.94 | % | | 1.12 | % | | 0.94 | % | | 1.12 | % | 0.98 | % | | 0.94 | % | | 0.98 | % | | 0.94 | % |
| Net charge-offs on loans to average loans, annualized | 0.06 | % | | 0.32 | % | | 0.06 | % | | 0.13 | % | |
| Net recoveries on loans to average loans, annualized | | 0.03 | % | | 0.06 | % | | 0.05 | % | | 0.06 | % |
| | | | | | | | | | | | | | | |
Loans receivable, net at the end of the period (1) | $ | 3,649,054 |
| | $ | 2,797,513 |
| | $ | 3,649,054 |
| | $ | 2,797,513 |
| $ | 3,731,343 |
| | $ | 3,649,054 |
| | $ | 3,731,343 |
| | $ | 3,649,054 |
|
Average loans receivable during the period (1) | 3,618,031 |
| | 2,737,535 |
| | 3,346,709 |
| | 2,676,153 |
| 3,677,405 |
| | 3,618,031 |
| | 3,651,659 |
| | 3,346,709 |
|
(1) Excludes loans held for sale.
The allowance for loan losses increased $2.4$1.5 million, or 7.4%4.2%, to $34.5$36.5 million at September 30, 20182019 from $32.1$35.0 millionat December 31, 2017.2018. The increase was the result of provision for loan losses of $4.0$2.8 million recognized during the nine months ended September 30, 2018,2019, offset partially by net charge-offs of $1.6$1.3 million recorded during the same period. The allowance for loan losses to loans receivable, net decreasedincreased to 0.94%0.98% at September 30, 20182019 from 1.13%0.96% at December 31, 2017 primarily as a result of an increase in loans from the Premier and Puget Merger with no related allowance for loan losses in accordance with GAAP.2018. Included in the carrying value of loans are net fair value discounts on loans purchased in mergers and acquisitions which may reduce the need for an allowance for loan losses on these loans because they are carried at an amount below the outstanding principal balance. As these fair value discounts are accreted, thereby increasing the loan balance, the Company may record an allowance for loan loss, which has the net impact of increasing the allowance for loan losses to loans receivable, net. The remaining net fair value discount on purchased loans including the related fair value discount acquired in the Premier and Puget Mergers, was $13.4$9.1 million at September 30, 20182019 compared to $10.1$11.8 million at December 31, 2017.2018.
The Company recorded charge-offs of $2.7$2.9 million during the nine months ended September 30, 20182019 due primarily as a resultto charge-offs of four commercial lending relationships totaling $995,000, including one agricultural business relationship charge-off of $342,000, and small dollar charge-offs on a large volume of small dollar consumer loans. The largest charge-offs recognized during the nine months ended September 30, 2018 related to two agricultural relationships and one commercial relationship in the amount of $724,000. The Company recorded recoveries of $1.1$1.6 million during the nine months ended September 30, 20182019 primarily due to the recovery of a one-to-four family residential construction loan of $602,000 as a result of a bankruptcy resolution, a recovery of $292,000 from a previously charged off non-owner occupied commercial real estate loan and small recoveries on a large volume of small dollar consumer loans.
As of September 30, 2018,2019, the Bank identified $14.8$41.5 million of nonperformingnonaccrual loans, and $24.4$19.4 million of performing TDR loans, and $699,000 of other loans with a specific valuation allowance for a total of $39.2$59.2 million of impaired loans. Of these impaired loans, $9.2$35.1 million had no allowances for loan losses as their estimated collateral value or
discounted expected cash flow is equal to or exceeds their carrying costs. The remaining $30.0$24.2 million of impaired loans had related allowances for loan losses totaling $4.5$2.9 million. As of December 31, 2017,2018, the Bank identified $10.7$13.7 million of nonperformingnonaccrual loans and $26.8$22.7 million of performing TDR loans for a total of $37.5$36.4 million of impaired loans. Of these impaired loans, $10.4$7.6 million had no allowances for loan losses. The remaining $27.1$28.8 million of impaired loans had related allowances for loan losses totaling $3.4$4.2 million.
The following table outlines the allowance for loan losses and related loan balances on loans at September 30, 20182019 and December 31, 2017:2018:
| | | | September 30, 2018 | | December 31, 2017 | September 30, 2019 | | December 31, 2018 |
| | (Dollars in thousands) | (Dollars in thousands) |
| General Valuation Allowance: | | | | | | |
| Allowance for loan losses | $ | 26,705 |
| | $ | 24,732 |
| $ | 31,264 |
| | $ | 27,854 |
|
| Gross loans, excluding PCI and impaired loans | $ | 3,577,575 |
| | $ | 2,767,650 |
| $ | 3,648,651 |
| | $ | 3,589,305 |
|
| Percentage | 0.75 | % | | 0.89 | % | 0.86 | % | | 0.78 | % |
| | | | | | | |
| PCI Allowance: | | | | | | |
| Allowance for loan losses | $ | 3,296 |
| | $ | 3,999 |
| $ | 2,401 |
| | $ | 3,018 |
|
| Gross PCI loans | $ | 28,853 |
| | $ | 40,603 |
| $ | 21,068 |
| | $ | 24,907 |
|
| Percentage | 11.42 | % | | 9.85 | % | 11.40 | % | | 12.12 | % |
| | | | | | | |
| Specific Valuation Allowance: | | | | | | |
| Allowance for loan losses | $ | 4,474 |
| | $ | 3,355 |
| $ | 2,853 |
| | $ | 4,170 |
|
| Gross impaired loans | $ | 39,229 |
| | $ | 37,459 |
| $ | 59,238 |
| | $ | 36,439 |
|
| Percentage | 11.40 | % | | 8.96 | % | 4.82 | % | | 11.44 | % |
| | | | | | | |
| Total Allowance for Loan Losses: | | | | | | |
| Allowance for loan losses | $ | 34,475 |
| | $ | 32,086 |
| $ | 36,518 |
| | $ | 35,042 |
|
| Gross loans receivable | $ | 3,645,657 |
| | $ | 2,845,712 |
| $ | 3,728,957 |
| | $ | 3,650,651 |
|
| Percentage | 0.95 | % | | 1.13 | % | 0.98 | % | | 0.96 | % |
Based on the Bank's established comprehensive methodology, management deemed the allowance for loan losses of $34.5$36.5 million at September 30, 2018 (0.94%(0.98% of loans receivable, net and 233.25%87.97% of nonperforming loans) at September 30, 2019 appropriate to provide for probable incurred credit losses based on an evaluation of known and inherent risks in the loan portfolio at that date. This compares to an allowance for loan losses at December 31, 2017 of $32.1$35.0 million (1.13%(0.96% of loans receivable, net and 299.79%255.73% of nonperforming loans). at December 31, 2018.
While we believe we use the best information available to determine the allowance for loan losses, our results of operations could be significantly affected if circumstances differ substantially from the assumptions used in determining the allowance. A decline in national and local economic conditions, or other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Company’s financial condition and results of operations. In addition, the determination of the amount of the allowance for loan losses is subject to review by bank regulators, as part of their routine examination process, which may result in the establishment of an additional allowance for loan losses based upon their judgment of information available to them at the time of their examination. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is appropriate or that increased provisions will not be necessary should the quality of the loans deteriorate. Any material increase in the allowance for loan losses would adversely affect the Company’s financial condition and results of operations.
Deposits and Other Borrowings
Total deposits increased $1.01 billion,$129.9 million, or 29.6%2.9%, to $4.40$4.56 billion at September 30, 20182019 from $3.39$4.43 billion at December 31, 2017 due primarily to the deposits acquired in the Premier and Puget Mergers of $824.6 million at the respective merger dates.2018. Non-maturity deposits as a percentage of total deposits increaseddecreased to 88.5% at September 30, 20182019 from 88.3%89.5% at December 31, 20172018 and the percentage of certificates of deposit to total deposits decreasedincreased to 11.5% at September 30, 20182019 from 11.7%10.5% at December 31, 2017 primarily as a result of the mix of deposits acquired from the Premier and Puget Mergers.2018.
The following table summarizes the Company's deposits as of September 30, 20182019 and December 31, 2017:2018:
| | | | September 30, 2018 | | December 31, 2017 | | | | | September 30, 2019 | | December 31, 2018 | | | | |
| | Balance | | % of Total | | Balance | | % of Total | | Change | | %of Balance Change | Balance | | % of Total | | Balance | | % of Total | | Change | | % of Balance Change |
| | (Dollars in thousands) | | | (Dollars in thousands) |
| Noninterest demand deposits | $ | 1,311,825 |
| | 29.8 | % | | $ | 944,791 |
| | 27.8 | % | | $ | 367,034 |
| | 38.8 | % | $ | 1,429,435 |
| | 31.3 | % | | $ | 1,362,268 |
| | 30.7 | % | | $ | 67,167 |
| | 4.9 | % |
| Interest bearing demand deposits | 1,294,105 |
| | 29.4 |
| | 1,051,752 |
| | 31.1 |
| | 242,353 |
| | 23.0 |
| 1,324,177 |
| | 29.0 |
| | 1,317,513 |
| | 29.7 |
| | 6,664 |
| | 0.5 |
|
| Money market accounts | 768,998 |
| | 17.5 |
| | 499,618 |
| | 14.7 |
| | 269,380 |
| | 53.9 |
| 776,107 |
| | 17.0 |
| | 765,316 |
| | 17.3 |
| | 10,791 |
| | 1.4 |
|
| Savings accounts | 519,596 |
| | 11.8 |
| | 498,501 |
| | 14.7 |
| | 21,095 |
| | 4.2 |
| 508,228 |
| | 11.2 |
| | 520,413 |
| | 11.8 |
| | (12,185 | ) | | (2.3 | ) |
| Total non-maturity deposits | 3,894,524 |
| | 88.5 |
| | 2,994,662 |
| | 88.3 |
| | 899,862 |
| | 30.0 |
| 4,037,947 |
| | 88.5 |
| | 3,965,510 |
| | 89.5 |
| | 72,437 |
| | 1.8 |
|
| Certificate of deposit accounts | 503,603 |
| | 11.5 |
| | 398,398 |
| | 11.7 |
| | 105,205 |
| | 26.4 |
| |
| Certificates of deposit | | 524,310 |
| | 11.5 |
| | 466,892 |
| | 10.5 |
| | 57,418 |
| | 12.3 |
|
| Total deposits | $ | 4,398,127 |
| | 100.0 | % | | $ | 3,393,060 |
| | 100.0 | % | | $ | 1,005,067 |
| | 29.6 |
| $ | 4,562,257 |
| | 100.0 | % | | $ | 4,432,402 |
| | 100.0 | % | | $ | 129,855 |
| | 2.9 |
|
Borrowings may be used on a short-term basis to compensate for reductions in other sources of funds (such as deposit inflows at less than projected levels). Borrowings may also be used on a longer-term basis to support expanded lending activities and match the maturity of repricing intervals of assets. The Bank is utilizingalso utilizes securities sold under agreement to repurchase as a supplement to its funding sources. Our securities sold under agreement to repurchase agreements are secured by available for sale investment securities. At September 30, 2018,2019, the Bank had securities sold under agreement to repurchase of $32.2$25.9 million, an increasea decrease of $412,000,$5.6 million, or 1.3%17.8%, from $31.8$31.5 million at December 31, 2017.2018. The increasedecrease was the result of customer activity during the period and to a lesser extent securities sold under agreement to repurchase acquired in the Premier Merger.period.
The Company also has junior subordinated debentures with a par value of $25.0 million which pay quarterly interest based on three-month LIBOR plus 1.56%. The debentures mature in 2037. The balance of the junior subordinated debentures was $20.2$20.5 million at September 30, 2018,2019, which reflects the fair value of the junior subordinated debentures established during the Washington Banking Merger, adjusted for the accretion of discount from purchase accounting fair value adjustment.
At September 30, 2018,2019, the Bank maintained credit facilities with the FHLB of Des Moines for $826.8$930.6 million and credit facilities with the Federal Reserve Bank for $45.2$40.4 million. The Company had no FHLB advances outstanding at September 30, 20182019 and $92.5 million at December 31, 2017.2018. The average cost of the FHLB advances during the nine months ended September 30, 2019 and 2018 was2.56% and 2017 was1.98% and 1.09%, respectively. The Bank also maintains lines of credit with fourfive correspondent banks to purchase federal funds totaling $90.0$140.0 million as of September 30, 2018.2019. There were no federal funds purchased as of September 30, 20182019 or December 31, 2017.2018.
Liquidity and Cash Flows
Our primary sources of funds are customer and local government deposits, loan principal and interest payments, loan sales and interest earned on and proceeds from sales and maturities of investment securities. These funds, together with retained earnings, equity, and other borrowed funds, are used to make loans, acquire investment securities and other assets, and fund continuing operations. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and loan prepayments are greatly influenced by the level of interest rates, economic conditions and competition.
Heritage Bank: The principal objective of the Bank’s liquidity management program is to maintain the ability to meet day-to-day cash flow requirements of its customers who either wish to withdraw funds or to draw upon credit facilities to meet their cash needs. The Bank monitors the sources and uses of funds on a daily basis to maintain an acceptable liquidity position. In addition to liquidity from core deposits and the repayment and maturities of loans, the Bank can utilize established credit facilities and lines with correspondent banks or sale of investment securities.
Heritage Financial Corporation: The Company is a separate legal entity from the Bank and must provide for its own liquidity. Substantially all of the Company’s revenues are obtained from dividends declared and paid by the Bank. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to the Company. However, management believes that such restrictions will not have an adverse impact on the ability of the Company to meets its ongoing cash obligations. At September 30, 2018,2019, the Company (on an unconsolidated basis) had cash and cash equivalents of $14.5$10.6 million.
We are required to maintain an adequate level of liquidity to ensure the availability of sufficient funds to fund loan originations and deposit withdrawals, satisfy other financial commitments and fund operations. We generally
maintain sufficient cash and short-term investments to meet short-term liquidity needs. At September 30, 2018,2019, cash and cash equivalents totaled $170.1$237.0 million, or 3.2%4.3% of total assets. The fair value of investment securities available for sale totaled $920.7$966.1 million at September 30, 2018,2019, of which $255.2$253.3 million were pledged to secure public deposits or borrowing arrangements. The fair value of investment securities available for sale that were not pledged totaled $665.5$712.8 million, or 12.6%,12.9% of total assets, at September 30, 2018.2019. The fair value of investment securities available for sale with contractual maturities of one year or less were $20.7$37.7 million, or 0.4%,0.7% of total assets, at September 30, 2018.2019.
Consolidated Cash Flows: As disclosed in the Condensed Consolidated Statements of Cash Flows, net cash provided by operating activities was $55.4$60.8 million for the nine months ended September 30, 2018,2019, and primarily consisted of net income of $36.4$50.4 million. During the nine months ended September 30, 2018,2019, net cash used inby investing activities was $42.8$81.1 million, which consisted primarily of net loan originations of $93.0 million, net purchases of investment securities for sale of $40.9 million, and purchases of premises and equipment of $21.5 million, offset partially by net cash received from acquisitions of $106.0$82.9 million. Net cash provided by financing activities was $54.5$95.4 million for the nine months ended September 30, 2018,2019 and primarily consisted of a net increase in deposits of $180.5$129.9 million, partially offset by dividends paid of $20.3 million and repurchases of common stock of $8.6 million during the period, partially offset by net FHLB repayments of $108.5 million and dividends paid of $15.8 millionperiod.
Capital and Capital Requirements
Stockholders’ equity was $804.1 million at September 30, 2018 was $746.1 million2019 compared to $508.3$760.7 million at December 31, 2017.2018. The Company’s stockholders' equity to assets ratio was 14.6% as of September 30, 2019 and 14.3% as of December 31, 2018. The following table reflects the changes to stockholders' equity during the three and nine months ended September 30, 2018 is as follows:2019 and 2018:
| | | | Nine Months Ended | Three Months Ended September 30, | | Nine Months Ended
September 30, |
| | September 30, 2018 | 2019 | | 2018 | | 2019 | | 2018 |
| | (In Thousands) | (In Thousands) |
| Balance, beginning of period | $ | 508,305 |
| $ | 796,625 |
| | $ | 639,523 |
| | $ | 760,723 |
| | $ | 508,305 |
|
| Common stock issued in the Premier and Puget Mergers | 230,043 |
| — |
| | 99,273 |
| | — |
| | 230,043 |
|
| Net income | 36,448 |
| 17,895 |
| | 15,504 |
| | 50,431 |
| | 36,448 |
|
| Dividends declared | (15,796 | ) | (7,042 | ) | | (5,549 | ) | | (20,383 | ) | | (15,796 | ) |
| Accumulated other comprehensive loss | (13,299 | ) | |
| Other comprehensive income (loss), net of tax | | 2,771 |
| | (3,384 | ) | | 19,980 |
| | (13,299 | ) |
| Effects of implementation of accounting change related to operating leases | | — |
| | — |
| | (399 | ) | | — |
|
| Repurchase of common stock | | (6,954 | ) | | (14 | ) | | (8,635 | ) | | (1,702 | ) |
| Other | 432 |
| 832 |
| | 780 |
| | 2,410 |
| | 2,134 |
|
| Balance, end of period | $ | 746,133 |
| $ | 804,127 |
| | $ | 746,133 |
| | $ | 804,127 |
| | $ | 746,133 |
|
During the quarter ended September 30, 2019, the Company repurchased 264,712 shares of its common stock at an average price per share of $26.23, or $6.9 million in total, under its current stock repurchase plan. As of September 30, 2019, there were 639,922 shares available for repurchase under the current stock repurchase plan.
The Company has historically paid cash dividends to its common shareholders. Payments of future cash dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our business, operating results and financial condition, capital requirements, current and anticipated cash needs, plans for expansion, any legal or contractual limitation on our ability to pay dividends and other relevant factors. Dividends on common stock from the Company depend substantially upon receipt of dividends from the Bank, which is the Company’s predominant source of income. On October 24, 2018,23, 2019, the Company’s Board of Directors declared a regular dividend of $0.17$0.19 per common share and a special dividend in the amount of $0.10 per common share which are both payable on November 21, 2018 2019to shareholders of record on November 7, 2018.2019.
The Company is a bank holding company under the supervision of the Federal Reserve Bank. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. Heritage Bank is a federally insured institution and thereby is subject to the capital requirements established by the FDIC. The Federal Reserve capital requirements generally parallel the FDIC requirements. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements and operations. Management believes as of September 30, 2018,2019, the Company and the Bank meet all capital adequacy requirements to which they are subject.
As of September 30, 20182019 and December 31, 2017,2018, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's categories.
The following table represents the minimum required ratios of the Company and the Bank and the actual capital ratios at the periods indicated:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Minimum Requirements | | Well-Capitalized Requirements | | Actual |
| | | (Dollars in thousands) |
| As of September 30, 2018: | | | | | | | | | | | | |
| The Company consolidated | | | | | | | | | | | | |
| Common equity Tier 1 capital to risk-weighted assets | | $ | 198,182 |
| | 4.5 | % | | N/A |
| | N/A |
| | $ | 501,520 |
| | 11.4 | % |
| Tier 1 leverage capital to average assets | | 200,197 |
| | 4.0 |
| | N/A |
| | N/A |
| | 521,749 |
| | 10.4 |
|
| Tier 1 capital to risk-weighted assets | | 264,243 |
| | 6.0 |
| | N/A |
| | N/A |
| | 521,749 |
| | 11.8 |
|
| Total capital to risk-weighted assets | | 352,324 |
| | 8.0 |
| | N/A |
| | N/A |
| | 556,530 |
| | 12.6 |
|
| Heritage Bank | | | | | | | | | | | | |
| Common equity Tier 1 capital to risk-weighted assets | | 197,997 |
| | 4.5 |
| | $ | 285,996 |
| | 6.5 | % | | 504,538 |
| | 11.5 |
|
| Tier 1 leverage capital to average assets | | 201,185 |
| | 4.0 |
| | 251,481 |
| | 5.0 |
| | 504,538 |
| | 10.0 |
|
| Tier 1 capital to risk-weighted assets | | 263,996 |
| | 6.0 |
| | 351,995 |
| | 8.0 |
| | 504,538 |
| | 11.5 |
|
| Total capital to risk-weighted assets | | 351,995 |
| | 8.0 |
| | 439,993 |
| | 10.0 |
| | 539,319 |
| | 12.3 |
|
| | | | | | | | | | | | | |
| As of December 31, 2017: | | | | | | | | | | | | |
| The Company consolidated | | | | | | | | | | | | |
| Common equity Tier 1 capital to risk-weighted assets | | $ | 154,522 |
| | 4.5 | % | | N/A |
| | N/A |
| | $ | 386,689 |
| | 11.3 | % |
| Tier 1 leverage capital to average assets | | 159,494 |
| | 4.0 |
| | N/A |
| | N/A |
| | 406,687 |
| | 10.2 |
|
| Tier 1 capital to risk-weighted assets | | 206,029 |
| | 6.0 |
| | N/A |
| | N/A |
| | 406,687 |
| | 11.8 |
|
| Total capital to risk-weighted assets | | 274,706 |
| | 8.0 |
| | N/A |
| | N/A |
| | 439,044 |
| | 12.8 |
|
| Heritage Bank | | | | | | | | | | | | |
| Common equity Tier 1 capital to risk-weighted assets | | 154,400 |
| | 4.5 |
| | $ | 223,023 |
| | 6.5 | % | | 391,092 |
| | 11.4 |
|
| Tier 1 leverage capital to average assets | | 159,300 |
| | 4.0 |
| | 199,125 |
| | 5.0 |
| | 391,092 |
| | 9.8 |
|
| Tier 1 capital to risk-weighted assets | | 205,867 |
| | 6.0 |
| | 274,490 |
| | 8.0 |
| | 391,092 |
| | 11.4 |
|
| Total capital to risk-weighted assets | | 274,490 |
| | 8.0 |
| | 343,112 |
| | 10.0 |
| | 423,348 |
| | 12.3 |
|
Effective January 1, 2015 (with some changes transitioned into full effectiveness over two to four years), the Company became subject to new capital adequacy requirements approved by the Federal Reserve and the FDIC that implement the revised standards of the Basel Committee on Banking Supervision, commonly called Basel III, and address relevant provisions of the Dodd-Frank Act. |
| | | | | | | | | | | | | | | | | | | | | |
| | | Minimum Requirements | | Well-Capitalized Requirements | | Actual |
| | | (Dollars in thousands) |
| As of September 30, 2019: | | | | | | | | | | | | |
| The Company consolidated | | | | | | | | | | | | |
| Common equity Tier 1 capital to risk-weighted assets | | $ | 208,039 |
| | 4.5 | % | | N/A |
| | N/A |
| | $ | 537,068 |
| | 11.6 | % |
| Tier 1 leverage capital to average assets | | 207,052 |
| | 4.0 |
| | N/A |
| | N/A |
| | 557,590 |
| | 10.8 |
|
| Tier 1 capital to risk-weighted assets | | 277,385 |
| | 6.0 |
| | N/A |
| | N/A |
| | 557,590 |
| | 12.1 |
|
| Total capital to risk-weighted assets | | 369,846 |
| | 8.0 |
| | N/A |
| | N/A |
| | 594,414 |
| | 12.9 |
|
| Heritage Bank | | | | | | | | | | | | |
| Common equity Tier 1 capital to risk-weighted assets | | 207,773 |
| | 4.5 |
| | $ | 300,116 |
| | 6.5 | % | | 543,455 |
| | 11.8 |
|
| Tier 1 leverage capital to average assets | | 205,730 |
| | 4.0 |
| | 257,162 |
| | 5.0 |
| | 543,455 |
| | 10.6 |
|
| Tier 1 capital to risk-weighted assets | | 277,030 |
| | 6.0 |
| | 369,374 |
| | 8.0 |
| | 543,455 |
| | 11.8 |
|
| Total capital to risk-weighted assets | | 369,374 |
| | 8.0 |
| | 461,717 |
| | 10.0 |
| | 580,279 |
| | 12.6 |
|
| | | | | | | | | | | | | |
| As of December 31, 2018: | | | | | | | | | | | | |
| The Company consolidated | | | | | | | | | | | | |
| Common equity Tier 1 capital to risk-weighted assets | | $ | 197,189 |
| | 4.5 | % | | N/A |
| | N/A |
| | $ | 510,618 |
| | 11.7 | % |
| Tier 1 leverage capital to average assets | | 201,920 |
| | 4.0 |
| | N/A |
| | N/A |
| | 530,920 |
| | 10.5 |
|
| Tier 1 capital to risk-weighted assets | | 262,918 |
| | 6.0 |
| | N/A |
| | N/A |
| | 530,920 |
| | 12.1 |
|
| Total capital to risk-weighted assets | | 350,558 |
| | 8.0 |
| | N/A |
| | N/A |
| | 566,268 |
| | 12.9 |
|
| Heritage Bank | | | | | | | | | | | | |
| Common equity Tier 1 capital to risk-weighted assets | | 197,004 |
| | 4.5 |
| | $ | 284,561 |
| | 6.5 | % | | 513,993 |
| | 11.7 |
|
| Tier 1 leverage capital to average assets | | 203,339 |
| | 4.0 |
| | 254,174 |
| | 5.0 |
| | 513,993 |
| | 10.1 |
|
| Tier 1 capital to risk-weighted assets | | 262,671 |
| | 6.0 |
| | 350,229 |
| | 8.0 |
| | 513,993 |
| | 11.7 |
|
| Total capital to risk-weighted assets | | 350,229 |
| | 8.0 |
| | 437,786 |
| | 10.0 |
| | 549,341 |
| | 12.5 |
|
Under the newapplicable capital requirements both the Company and the Bank are required to have a common equity Tier 1 capital ratio of 4.5%. In addition, both the Company and the Bank are required to have, 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 establishmaintain a “conservation buffer”, consisting of common equity Tier 1 capital of more than 2.5% above the minimum risk-based capital ratios. The capital conservation buffer is designedabove 2.5% to ensure that banks build up capital buffers outside periods of stress which can be drawn down as losses are incurred. An institution that does not meet the conservation buffer will be subject toavoid restrictions on certain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers. The capital conservation buffer requirement began to be phased-in on January 1, 2016 when more than 0.625% of risk-weighted assets was required, and increases by 0.625% on each subsequent January 1, until it is fully phased-in on January 1, 2019. Certain calculations under the rules will
also have phase-in periods. At September 30, 2018,2019, the capital conservation buffer was 4.64%4.9% and 4.26%4.6% for the Company and the Bank, respectively.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate risk through our lending and deposit gathering activities. Our results of operations are highly dependent upon our ability to manage interest rate risk. We consider interest rate risk to be a significant market risk that could have a material effect on our financial condition and results of operations. Interest rate risk is measured and assessed on a quarterly basis. In our opinion, there has not been a material change in our interest rate risk exposure since the information disclosed in our 2018 Annual Report on Form 10-K for the year ended December 31, 2017.10-K.
Neither we, nor the Bank, maintain a trading account for any class of financial instrument, nor do we, or the Bank, engage in hedging activities or purchase high risk derivative instruments. Moreover, neither we, nor the Bank, are subject to foreign currency exchange rate risk or commodity price risk.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
An evaluation of the Company’s disclosure controls and procedure (as defined in Section 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934 (the “Act”)) was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and the Company’s Disclosure Committee as of the end of the period covered by this quarterly report. In designing and evaluating the Company’s disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based on their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of September 30, 20182019 are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
(b) Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) that occurred during the quarter ended September 30, 2018,2019, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company does not expect that its internal control over financial reporting will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We, and our Bank, are not a party to any material pending legal proceedings other than ordinary routine litigation incidental to the business of the Bank.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors set forth in Part I. Item 1A of the Company’s 2018 Annual Report on Form 10-K for the year ended December 31, 2017.10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) Repurchase Plans
The Company has had various stock repurchase programs since March 1999. On October 23, 2014, the Company's Board of Directors authorized the repurchase of up to 5% of the Company's outstanding common shares, or approximately 1,513,000 shares, under the eleventh stock repurchase plan. At September 30, 2019 and December 31, 2018, there were approximately 639,922 and 932,634 shares remaining to be purchased under the eleventh stock repurchase plan. The number, timing and price of shares repurchased will depend on business and market conditions and other factors, including opportunities to deploy the Company's capital.
Since the inception of the eleventh plan, the Company has repurchased 579,996872,678 shares at an average share pricesprice of $16.67.$20.03, including 264,712 and 292,712 shares repurchased at an average share price of $26.23 and $26.50 during the three and nine months ended September 30, 2019, respectively. No shares were repurchased under this plan during the three and nine months ended September 30, 2018 and 2017.2018.
In addition to the stock repurchases under a plan, the Company repurchases shares to pay withholding taxes on the vesting of restricted stock awards and units. The following table provides total repurchased shares for the periods indicated:
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended September 30, | | Nine Months Ended
September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Repurchased shares to pay withholding taxes (1) | 368 |
| | 344 |
| | 53,188 |
| | 27,711 |
| 405 |
| | 368 |
| | 28,434 |
| | 53,188 |
|
| Stock repurchase to pay withholding taxes average share price | $ | 36.34 |
| | $ | 25.80 |
| | $ | 31.99 |
| | $ | 24.61 |
| $ | 27.67 |
| | $ | 36.34 |
| | $ | 30.83 |
| | $ | 31.99 |
|
(1) During the nine months ended September 30, 2018, the Company repurchased 26,741 of the shares repurchased related to the withholding taxes due on the accelerated vesting of the restricted stock units of Puget Sound which were converted to Heritage common stock shares with an average share price of $31.80 under the terms of the merger agreement.
The following table sets forth information about the Company’s purchases of its outstanding common stock during the quarter ended September 30, 2018.2019:
|
| | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased(1) | | Average Price Paid Per Share(1) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
| July 1, 2018— July 31, 2018 | | — |
| | $ | — |
| | 7,893,389 |
| | 935,034 |
|
| August 1, 2018— August 31, 2018 | | — |
| | — |
| | 7,893,389 |
| | 935,034 |
|
| September 1, 2018— September 30, 2018 | | 368 |
| | 36.64 |
| | 7,893,389 |
| | 935,034 |
|
| Total | | 368 |
| | $ | 36.64 |
| |
|
| |
|
|
|
| | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased(1) | | Average Price Paid Per Share(1) | | Cumulative Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
| July 1, 2019— July 31, 2019 | | — |
| | $ | — |
| | 7,921,389 |
| | 904,634 |
|
| August 1, 2019— August 31, 2019 | | 232,012 |
| | 26.31 |
| | 8,153,401 |
| | 672,622 |
|
| September 1, 2019— September 30, 2019 | | 33,105 |
| | 25.66 |
| | 8,153,401 |
| | 639,922 |
|
| Total | | 265,117 |
| | $ | 26.23 |
| |
|
| |
|
|
(1) All of Of the common shares repurchased by the Company between July 1, 20182019 and September 30, 20182019, 405 represented the cancellation of stock to pay withholding taxes on vested restricted stock awards or units.
(2) Represents cumulative life-to-date shares repurchased.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
| | | | | | | Incorporated by Reference | | | Incorporated by Reference |
| Exhibit No. | Exhibit No. | | Description of Exhibit | | Form | | Exhibit | | Filing Date/Period End Date | | Description of Exhibit | | Form | | Exhibit | | Filing Date/Period End Date |
| | | | |
| 2.5 |
| | | | 8-K | | 2.1 | | 7/27/2017 | | | | 8-K | | 2.1 | | 7/27/2017 |
| | | | |
| 2.6 |
| | | | 8-K | | 2.1 | | 3/9/2018 | | | | 8-K | | 2.1 | | 3/9/2018 |
| 10.15 | | | | |
| | | |
| 10.16 | | | | |
| | | |
| 10.22 | | | | |
| | | |
| 10.23 | | | | |
| | | |
| 10.24 | | | | |
| | | |
| 10.27 | | | | |
| | | |
| 10.33 | | | | |
| | | |
| 10.35 | | | | |
| | | |
| 10.36 | | | | |
| | | |
| 10.37 | | | | |
| | | | |
| 31.1 |
| | | | | | |
| | | | |
| 31.2 |
| | | | | | |
| | | | |
| 32.1 |
| | | | | | |
| | | | |
| 101.INS |
| | XBRL Instance Document (1) | | | XBRL Instance Document (1) | |
| | | | |
| 101.SCH |
| | XBRL Taxonomy Extension Schema Document (1) | | | XBRL Taxonomy Extension Schema Document (1) | |
| | | | |
| 101.CAL |
| | XBRL Taxonomy Extension Calculation Linkbase Document (1) | | | XBRL Taxonomy Extension Calculation Linkbase Document (1) | |
| | | | |
| 101.DEF |
| | XBRL Taxonomy Extension Definition Linkbase Document (1) | | | XBRL Taxonomy Extension Definition Linkbase Document (1) | |
| | | | |
| 101.LAB |
| | XBRL Taxonomy Extension Label Linkbase Document (1) | | | XBRL Taxonomy Extension Label Linkbase Document (1) | |
| | | | |
| 101.PRE |
| | XBRL Taxonomy Extension Presentation Linkbase Document (1) | | | XBRL Taxonomy Extension Presentation Linkbase Document (1) | |
(1) Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | |
| | | HERITAGE FINANCIAL CORPORATION |
| | | |
| Date: | | |
November 6, 20185, 2019 | | /S/ BRIAN L. VANCEJEFFREY J. DEUEL |
| | | Brian L. VanceJeffrey J. Deuel |
| | | President and Chief Executive Officer |
| | | |
| Date: | | |
November 6, 20185, 2019 | | /S/ DONALD J. HINSON |
| | | Donald J. Hinson |
| | | Executive Vice President and Chief Financial Officer |