|
| | | | | | | | | | | | | | | | | | | |
| September 30, 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 | $ | 3,131 |
| | $ | 8,581 |
| | $ | 11,712 |
| | $ | 12,060 |
| | $ | 1,254 |
|
Owner-occupied commercial real estate | 1,082 |
| | 4,676 |
| | 5,758 |
| | 6,068 |
| | 767 |
|
Non-owner occupied commercial real estate | 4,749 |
| | 6,034 |
| | 10,783 |
| | 10,927 |
| | 895 |
|
Total commercial business | 8,962 |
| | 19,291 |
| | 28,253 |
| | 29,055 |
| | 2,916 |
|
One-to-four family residential | — |
| | 304 |
| | 304 |
| | 311 |
| | 96 |
|
Real estate construction and land development: | | | | | | | | | |
One-to-four family residential | 1,347 |
| | — |
| | 1,347 |
| | 2,305 |
| | — |
|
Five or more family residential and commercial properties | — |
| | 658 |
| | 658 |
| | 658 |
| | 39 |
|
Total real estate construction and land development | 1,347 |
| | 658 |
| | 2,005 |
| | 2,963 |
| | 39 |
|
Consumer | 160 |
| | 274 |
| | 434 |
| | 457 |
| | 60 |
|
Total | $ | 10,469 |
| | $ | 20,527 |
| | $ | 30,996 |
| | $ | 32,786 |
| | $ | 3,111 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| CRE | | Farmland | | Residential Real Estate | | | | Equipment | | Total |
| (Dollars in thousands) |
Commercial business: | | | | | | | | | | | |
Commercial and industrial | $ | 1,239 | | | $ | 1,977 | | | $ | 929 | | | | | $ | — | | | $ | 4,145 | |
Owner-occupied CRE | 189 | | | — | | | — | | | | | — | | | 189 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
|
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total | $ | 1,428 | | | $ | 1,977 | | | $ | 929 | | | | | $ | — | | | $ | 4,334 | |
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2016 |
| 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 | $ | 1,739 |
| | $ | 10,636 |
| | $ | 12,375 |
| | $ | 13,249 |
| | $ | 1,199 |
|
Owner-occupied commercial real estate | 1,150 |
| | 3,574 |
| | 4,724 |
| | 5,107 |
| | 511 |
|
Non-owner occupied commercial real estate | 4,905 |
| | 6,413 |
| | 11,318 |
| | 11,386 |
| | 797 |
|
Total commercial business | 7,794 |
| | 20,623 |
| | 28,417 |
| | 29,742 |
| | 2,507 |
|
One-to-four family residential | — |
| | 321 |
| | 321 |
| | 325 |
| | 97 |
|
Real estate construction and land development: | | | | | | | | | |
One-to-four family residential | 2,243 |
| | 828 |
| | 3,071 |
| | 3,755 |
| | 6 |
|
Five or more family residential and commercial properties | — |
| | 1,079 |
| | 1,079 |
| | 1,079 |
| | 60 |
|
Total real estate construction and land development | 2,243 |
| | 1,907 |
| | 4,150 |
| | 4,834 |
| | 66 |
|
Consumer | 48 |
| | 262 |
| | 310 |
| | 325 |
| | 64 |
|
Total | $ | 10,085 |
| | $ | 23,113 |
| | $ | 33,198 |
| | $ | 35,226 |
| | $ | 2,734 |
|
The Company had governmental guarantees of $3.9 million and $3.5 million relatedThere have been no significant changes to the impaired loan balances at September 30, 2017collateral securing loans individually evaluated for credit losses and December 31, 2016, respectively.
The average recorded investmentfor which repayment was expected to be provided substantially through the operation or sale of impaired loans for the three andcollateral during the nine months ended September 30, 2017 and 2016 are set forth2023, except changes due to additions or removals of loans in the following table.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In thousands) |
Commercial business: | | | | | | | |
Commercial and industrial | $ | 11,171 |
| | $ | 9,625 |
| | $ | 11,190 |
| | $ | 9,750 |
|
Owner-occupied commercial real estate | 5,289 |
| | 4,553 |
| | 5,049 |
| | 4,560 |
|
Non-owner occupied commercial real estate | 11,037 |
| | 12,107 |
| | 11,198 |
| | 12,232 |
|
Total commercial business | 27,497 |
| | 26,285 |
| | 27,437 |
| | 26,542 |
|
One-to-four family residential | 307 |
| | 265 |
| | 312 |
| | 267 |
|
Real estate construction and land development: | | | | | | | |
One-to-four family residential | 2,157 |
| | 3,177 |
| | 2,530 |
| | 3,253 |
|
Five or more family residential and commercial properties | 860 |
| | 1,619 |
| | 967 |
| | 1,746 |
|
Total real estate construction and land development | 3,017 |
| | 4,796 |
| | 3,497 |
| | 4,999 |
|
Consumer | 346 |
| | 885 |
| | 328 |
| | 907 |
|
Total | $ | 31,167 |
| | $ | 32,231 |
| | $ | 31,574 |
| | $ | 32,715 |
|
For the three and nine months ended September 30, 2017 and 2016, no interest income was recognized subsequent to a loan’s classification as nonaccrual. 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. For the
three and nine months ended September 30, 2016, the Bank recorded $156,000 and $501,000, respectively, of interest income related to performing TDR loans.this classification.
(g) Modification of Loans
In January 2023, the Company adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructured LoansRestructurings and Vintage Disclosures” (“ASU 2022-02”), which eliminated the accounting guidance for TDRs while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. This guidance was applied on a prospective basis.
A TDR loan is a restructuring in which the Bank, for economic or legal reasons relatedModifications of loans to a borrower’sborrowers experiencing financial difficulties, grants a concession to the borrower that it would not otherwise consider. TDRs 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 alsodifficulty may include interest rate reductions. Certain TDRs were additionally re-amortized over a longer periodreductions, principal or interest forgiveness, term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession 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.collateral.
The financial effectsfollowing table presents loan modifications by type 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 TDRs 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, 2017 and December 31, 2016 were as follows:
|
| | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Performing TDRs | | Nonaccrual TDRs | | Performing TDRs | | Nonaccrual TDRs |
| (In thousands) |
TDR loans | $ | 20,044 |
| | $ | 5,903 |
| | $ | 22,288 |
| | $ | 6,900 |
|
Allowance for loan losses on TDR loans | 2,136 |
| | 555 |
| | 1,965 |
| | 437 |
|
The unfunded commitment to borrowers related to TDRs was $160,000 and $249,000 at September 30, 2017 and December 31, 2016, respectively.
Loansamortized cost that were modified as TDRsa result of experiencing both financial difficulty and modified during the period indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, 2023 |
| | | Term Extension | | | | | | Term Extension & Int. Rate Reduction | | Total Modified Loans | | % of Modified Loans to Loans Receivable, net |
| | | | | | |
| | | (Dollars in thousands) |
Commercial business: |
Commercial and industrial | | | $ | 313 | | | | | | | $ | — | | | $ | 313 | | | 0.05 | % |
| | | | | | | | | | | | | |
Non-owner occupied CRE | | | — | | | | | | | 239 | | | 239 | | | 0.01 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Total | | | $ | 313 | | | | | | | $ | 239 | | | $ | 552 | | | 0.01 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Nine Months Ended September 30, 2023 |
| | | Term Extension | | | | | | Term Extension & Int. Rate Reduction | | Total Modified Loans | | % of Modified Loans to Loans Receivable, net |
| | | | | | |
| | | (Dollars in thousands) |
Commercial business: |
Commercial and industrial | | | $ | 6,516 | | | | | | | $ | — | | | $ | 6,516 | | | 0.94 | % |
| | | | | | | | | | | | | |
Non-owner occupied CRE | | | 2,716 | | | | | | | 239 | | | 2,955 | | | 0.17 | |
Total commercial business | | | 9,232 | | | | | | | 239 | | | 9,471 | | | 0.28 | |
| | | | | | | | | | | | | |
Real estate construction and land development: | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Commercial and multifamily | | | 3,452 | | | | | | | — | | | 3,452 | | | 1.11 | % |
| | | | | | | | | | | | | |
Consumer | | | 28 | | | | | | | 17 | | | 45 | | | 0.03 | % |
Total | | | $ | 12,712 | | | | | | | $ | 256 | | | $ | 12,968 | | | 0.30 | % |
The following tables present the financial effect of the loan modifications presented in the preceding table during the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended September 30, 2023 | | Nine Months Ended September 30, 2023 |
| | | | | Weighted Average % of Interest Rate Reductions | | Weighted Average Years of Term Extensions | | Weighted Average % of Interest Rate Reductions | | Weighted Average Years of Term Extensions |
Commercial business: | | | | | | | | | | | |
Commercial and industrial | | | | | — | % | | 1.82 | | — | % | | 0.58 |
Owner-occupied CRE | | | | | — | % | | | | — | % | | |
Non-owner occupied CRE | | | | | 3.00 | | | 2.00 | | 3.00 | | | 1.09 |
Total commercial business | | | | | 3.00 | | | 1.90 | | 3.00 | | | 0.74 |
| | | | | | | | | | | |
Real estate construction and land development: | | | | | | | | | | | |
| | | | | | | | | | | |
Commercial and multifamily | | | | | — | | | | | — | | | 0.42 |
| | | | | | | | | | | |
Consumer | | | | | — | | | | | 1.00 | | | 2.62 |
Total | | | | | 3.00 | % | | 1.90 | | 3.00 | % | | 0.66 |
There were no modified loans included in the tables above that were past due or on nonaccrual as of September 30, 2023.
There were no modified loans made during the three and nine months ended September 30, 20172023, that subsequently defaulted.
(h) Accrued interest receivable on loans receivable
Accrued interest receivable on loans receivable totaled $12.5 million and 2016 are set forth in the following tables:
|
| | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2017 | | 2016 |
| 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 | 4 |
| | $ | 1,353 |
| | 8 |
| | $ | 2,324 |
|
Owner-occupied commercial real estate | 2 |
| | 1,299 |
| | 2 |
| | 576 |
|
Non-owner occupied commercial real estate | 1 |
| | 655 |
| | 1 |
| | 818 |
|
Total commercial business | 7 |
| | 3,307 |
| | 11 |
| | 3,718 |
|
Real estate construction and land development: | | | | | | | |
One-to-four family residential | — |
| | — |
| | 5 |
| | 2,274 |
|
Five or more family residential and commercial properties | — |
| | — |
| | 1 |
| | 1,606 |
|
Total real estate construction and land development | — |
| | — |
| | 6 |
| | 3,880 |
|
Consumer | 4 |
| | 52 |
| | 2 |
| | 26 |
|
Total TDR loans | 11 |
| | $ | 3,359 |
| | 19 |
| | $ | 7,624 |
|
|
| | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
| 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 | 13 |
| | $ | 5,564 |
| | 15 |
| | $ | 2,915 |
|
Owner-occupied commercial real estate | 3 |
| | 1,351 |
| | 2 |
| | 576 |
|
Non-owner occupied commercial real estate | 2 |
| | 1,596 |
| | 1 |
| | 818 |
|
Total commercial business | 18 |
| | 8,511 |
| | 18 |
| | 4,309 |
|
Real estate construction and land development: | | | | | | | |
One-to-four family residential | 2 |
| | 1,038 |
| | 5 |
| | 2,274 |
|
Five or more family residential and commercial properties | — |
| | — |
| | 1 |
| | 1,606 |
|
Total real estate construction and land development | 2 |
| | 1,038 |
| | 6 |
| | 3,880 |
|
Consumer | 5 |
| | 60 |
| | 6 |
| | 70 |
|
Total TDR loans | 25 |
| | $ | 9,609 |
| | 30 |
| | $ | 8,259 |
|
| |
(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, 2017 and 2016. |
| |
(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). |
Of the 11 loans modified during the three months ended September 30, 2017, seven loans with a total outstanding principal balance of $2.1$11.3 million had no prior modifications. Of the 25 loans modified during the nine months
ended September 30, 2017, 15 loans with a total outstanding principal balance of $5.0 million had no prior modifications. Of the 19 loans modified during the three months ended September 30, 2016, eight loans with a total outstanding principal balance of $1.4 million had no prior modifications. Of the 30 loans modified during the nine months ended September 30, 2016, 15 loans with a total outstanding principal balance of $1.7 million had no prior modifications. The remaining loans included in the table above for the three and nine months ended September 30, 2017 and 2016 were previously reported as TDRs. The Bank typically grants shorter extension periods to continually monitor these TDRs despite the fact that the extended date might not be the date the Bank expects sufficient cash flow from these borrowers. The Company does not consider these modifications a subsequent default of a TDR as new loan terms, specifically new maturity dates, were granted. The potential losses related to these loans would have been considered in the period the loan was first reported as a TDR and are adjusted, as necessary, in the current period based on more recent information. The related specific valuation allowance at September 30, 2017 was $1.1 million for loans that were modified as TDRs during the nine months ended September 30, 2017.
There was one commercial and industrial loan totaling $234,000 at September 30, 2017 that was modified during the previous twelve months that subsequently defaulted during the three and nine months ended September 30, 2017 because the borrower was more than 90 days delinquent on their scheduled loan payments. There were no loans that were modified during the previous twelve months that subsequently defaulted during the three and nine months ended September 30, 2016.
(h) Purchased Credit Impaired Loans
The Company acquired loans and designated them as PCI loans, which are accounted for under FASB ASC 310-30, in the Washington Banking Merger on May 1, 2014 and in previously completed acquisitions, including the FDIC-assisted acquisitions of Cowlitz Bank ("Cowlitz") and Pierce Commercial Bank ("Pierce") on July 30, 2010 and November 8, 2010, respectively, and the acquisitions of Northwest Commercial Bank ("NCB") on January 9, 2013 and Valley Community Bancshares, Inc. ("Valley") on July 15, 2013.
The following table reflects the outstanding principal balance and recorded investment of the PCI loans at September 30, 20172023 and December 31, 2016:
|
| | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Outstanding Principal | | Recorded Investment | | Outstanding Principal | | Recorded Investment |
| (In thousands) |
Commercial business: | | | | | | | |
Commercial and industrial | $ | 9,220 |
| | $ | 5,001 |
| | $ | 13,067 |
| | $ | 9,317 |
|
Owner-occupied commercial real estate | 14,059 |
| | 12,492 |
| | 17,639 |
| | 15,973 |
|
Non-owner occupied commercial real estate | 15,026 |
| | 13,058 |
| | 25,037 |
| | 23,360 |
|
Total commercial business | 38,305 |
| | 30,551 |
| | 55,743 |
| | 48,650 |
|
One-to-four family residential | 4,426 |
| | 3,983 |
| | 5,120 |
| | 4,905 |
|
Real estate construction and land development: | | | | | | | |
One-to-four family residential | 2,928 |
| | 1,749 |
| | 2,958 |
| | 2,123 |
|
Five or more family residential and commercial properties | 2,392 |
| | 2,284 |
| | 2,614 |
| | 2,488 |
|
Total real estate construction and land development | 5,320 |
| | 4,033 |
| | 5,572 |
| | 4,611 |
|
Consumer | 3,998 |
| | 5,129 |
| | 5,296 |
| | 6,282 |
|
Gross PCI loans | $ | 52,049 |
| | $ | 43,696 |
| | $ | 71,731 |
| | $ | 64,448 |
|
On2022, respectively, and is excluded from the acquisition dates, the amount by which the undiscounted expected cash flowscalculation of the PCIACL on loans exceeded the estimated fair value of the loanas interest accrued, but not received, 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.reversed timely.
The following table summarizes the accretable yield on the PCI loans for the three and nine months ended September 30, 2017 and 2016.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (In thousands) |
Balance at the beginning of the period | | $ | 12,296 |
| | $ | 15,359 |
| | $ | 13,860 |
| | $ | 17,592 |
|
Accretion | | (796 | ) | | (1,178 | ) | | (2,725 | ) | | (3,900 | ) |
Disposal and other | | (1,287 | ) | | (491 | ) | | (2,430 | ) | | (2,921 | ) |
Change in accretable yield | | 939 |
| | 1,214 |
| | 2,447 |
| | 4,133 |
|
Balance at the end of the period | | $ | 11,152 |
| | $ | 14,904 |
| | $ | 11,152 |
| | $ | 14,904 |
|
| |
(4) | 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(i) Foreclosure proceedings 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, 2017:
|
| | | | | | | | | | | | | | | | | | | |
| Balance at Beginning of Period | | Charge-offs | | Recoveries | | Provision for Loan Losses | | Balance at End of Period |
| (In thousands) |
Three Months Ended September 30, 2017 | | | | | | | | | |
Commercial business: | | | | | | | | | |
Commercial and industrial | $ | 10,651 |
| | $ | (3 | ) | | $ | 4 |
| | $ | (772 | ) | | $ | 9,880 |
|
Owner-occupied commercial real estate | 4,154 |
| | (1,494 | ) | | 4 |
| | 1,397 |
| | 4,061 |
|
Non-owner occupied commercial real estate | 7,709 |
| | — |
| | — |
| | (415 | ) | | 7,294 |
|
Total commercial business | 22,514 |
| | (1,497 | ) | | 8 |
| | 210 |
| | 21,235 |
|
One-to-four family residential | 1,073 |
| | (15 | ) | | — |
| | (21 | ) | | 1,037 |
|
Real estate construction and land development: | | | | | | | | | |
One-to-four family residential | 821 |
| | (556 | ) | | 191 |
| | 337 |
| | 793 |
|
Five or more family residential and commercial properties | 1,666 |
| | — |
| | — |
| | (271 | ) | | 1,395 |
|
Total real estate construction and land development | 2,487 |
| | (556 | ) | | 191 |
| | 66 |
| | 2,188 |
|
Consumer | 5,710 |
| | (478 | ) | | 112 |
| | 453 |
| | 5,797 |
|
Unallocated | 967 |
| | — |
| | — |
| | 176 |
| | 1,143 |
|
Total | $ | 32,751 |
| | $ | (2,546 | ) | | $ | 311 |
| | $ | 884 |
| | $ | 31,400 |
|
| | | | | | | | | |
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 |
|
The following table details the allowance for loan losses disaggregated on the basis of the Company's impairment method as of September 30, 2017.
|
| | | | | | | | | | | | | | | |
| Loans Individually Evaluated for Impairment | | Loans Collectively Evaluated for Impairment | | PCI Loans | | Total Allowance for Loan Losses |
| (In thousands) |
Commercial business: | | | | | | | |
Commercial and industrial | $ | 1,254 |
| | $ | 7,589 |
| | $ | 1,037 |
| | $ | 9,880 |
|
Owner-occupied commercial real estate | 767 |
| | 2,434 |
| | 860 |
| | 4,061 |
|
Non-owner occupied commercial real estate | 895 |
| | 5,389 |
| | 1,010 |
| | 7,294 |
|
Total commercial business | 2,916 |
| | 15,412 |
| | 2,907 |
| | 21,235 |
|
One-to-four family residential | 96 |
| | 740 |
| | 201 |
| | 1,037 |
|
Real estate construction and land development: | | | | | | | |
One-to-four family residential | — |
| | 568 |
| | 225 |
| | 793 |
|
Five or more family residential and commercial properties | 39 |
| | 1,259 |
| | 97 |
| | 1,395 |
|
Total real estate construction and land development | 39 |
| | 1,827 |
| | 322 |
| | 2,188 |
|
Consumer | 60 |
| | 4,991 |
| | 746 |
| | 5,797 |
|
Unallocated | — |
| | 1,143 |
| | — |
| | 1,143 |
|
Total | $ | 3,111 |
| | $ | 24,113 |
| | $ | 4,176 |
| | $ | 31,400 |
|
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, 2017:
|
| | | | | | | | | | | | | | | |
| Loans Individually Evaluated for Impairment | | Loans Collectively Evaluated for Impairment | | PCI Loans | | Total Gross Loans Receivable |
| (In thousands) |
Commercial business: | | | | | | | |
Commercial and industrial | $ | 11,712 |
| | $ | 648,869 |
| | $ | 5,001 |
| | $ | 665,582 |
|
Owner-occupied commercial real estate | 5,758 |
| | 583,988 |
| | 12,492 |
| | 602,238 |
|
Non-owner occupied commercial real estate | 10,783 |
| | 906,347 |
| | 13,058 |
| | 930,188 |
|
Total commercial business | 28,253 |
| | 2,139,204 |
| | 30,551 |
| | 2,198,008 |
|
One-to-four family residential | 304 |
| | 77,135 |
| | 3,983 |
| | 81,422 |
|
Real estate construction and land development: | | | | | | | |
One-to-four family residential | 1,347 |
| | 48,355 |
| | 1,749 |
| | 51,451 |
|
Five or more family residential and commercial properties | 658 |
| | 120,039 |
| | 2,284 |
| | 122,981 |
|
Total real estate construction and land development | 2,005 |
| | 168,394 |
| | 4,033 |
| | 174,432 |
|
Consumer | 434 |
| | 335,080 |
| | 5,129 |
| | 340,643 |
|
Total | $ | 30,996 |
| | $ | 2,719,813 |
| | $ | 43,696 |
| | $ | 2,794,505 |
|
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, 2016.
|
| | | | | | | | | | | | | | | | | | | |
| Balance at Beginning of Period | | Charge-offs | | Recoveries | | Provision for Loan Losses | | Balance at End of Period |
| (In thousands) |
Three Months Ended September 30, 2016 | | | | | | | | | |
Commercial business: | | | | | | | | | |
Commercial and industrial | $ | 9,970 |
| | $ | (240 | ) | | $ | 993 |
| | $ | 182 |
| | $ | 10,905 |
|
Owner-occupied commercial real estate | 3,578 |
| | (88 | ) | | — |
| | 222 |
| | 3,712 |
|
Non-owner occupied commercial real estate | 6,924 |
| | — |
| | — |
| | 303 |
| | 7,227 |
|
Total commercial business | 20,472 |
| | (328 | ) | | 993 |
| | 707 |
| | 21,844 |
|
One-to-four family residential | 950 |
| | — |
| | — |
| | 26 |
| | 976 |
|
Real estate construction and land development: | | | | | | | | | |
One-to-four family residential | 754 |
| | — |
| | — |
| | 96 |
| | 850 |
|
Five or more family residential and commercial properties | 1,277 |
| | — |
| | — |
| | 5 |
| | 1,282 |
|
Total real estate construction and land development | 2,031 |
| | — |
| | — |
| | 101 |
| | 2,132 |
|
Consumer | 4,816 |
| | (572 | ) | | 197 |
| | 665 |
| | 5,106 |
|
Unallocated | 157 |
| | — |
| | — |
| | (4 | ) | | 153 |
|
Total | $ | 28,426 |
| | $ | (900 | ) | | $ | 1,190 |
| | $ | 1,495 |
| | $ | 30,211 |
|
| | | | | | | | | |
Nine Months Ended September 30, 2016 | | | | | | | | | |
Commercial business: | | | | | | | | | |
Commercial and industrial | $ | 9,972 |
| | $ | (2,810 | ) | | $ | 1,352 |
| | $ | 2,391 |
| | $ | 10,905 |
|
Owner-occupied commercial real estate | 4,370 |
| | (538 | ) | | — |
| | (120 | ) | | 3,712 |
|
Non-owner occupied commercial real estate | 7,722 |
| | (350 | ) | | — |
| | (145 | ) | | 7,227 |
|
Total commercial business | 22,064 |
| | (3,698 | ) | | 1,352 |
| | 2,126 |
| | 21,844 |
|
One-to-four family residential | 1,157 |
| | — |
| | 2 |
| | (183 | ) | | 976 |
|
Real estate construction and land development: | | | | | | | | | |
One-to-four family residential | 1,058 |
| | (100 | ) | | 83 |
| | (191 | ) | | 850 |
|
Five or more family residential and commercial properties | 813 |
| | (54 | ) | | — |
| | 523 |
| | 1,282 |
|
Total real estate construction and land development | 1,871 |
| | (154 | ) | | 83 |
| | 332 |
| | 2,132 |
|
Consumer | 4,309 |
| | (1,370 | ) | | 496 |
| | 1,671 |
| | 5,106 |
|
Unallocated | 345 |
| | — |
| | — |
| | (192 | ) | | 153 |
|
Total | $ | 29,746 |
| | $ | (5,222 | ) | | $ | 1,933 |
| | $ | 3,754 |
| | $ | 30,211 |
|
The following table details the allowance for loan losses disaggregated on the basis of the Company's impairment method as of December 31, 2016.
|
| | | | | | | | | | | | | | | |
| Loans Individually Evaluated for Impairment | | Loans Collectively Evaluated for Impairment | | PCI Loans | | Total Allowance for Loan Losses |
| (In thousands) |
Commercial business: | | | | | | | |
Commercial and industrial | $ | 1,199 |
| | $ | 8,048 |
| | $ | 1,721 |
| | $ | 10,968 |
|
Owner-occupied commercial real estate | 511 |
| | 1,834 |
| | 1,316 |
| | 3,661 |
|
Non-owner occupied commercial real estate | 797 |
| | 5,142 |
| | 1,814 |
| | 7,753 |
|
Total commercial business | 2,507 |
| | 15,024 |
| | 4,851 |
| | 22,382 |
|
One-to-four family residential | 97 |
| | 643 |
| | 275 |
| | 1,015 |
|
Real estate construction and land development: | | | | | | | |
One-to-four family residential | 6 |
| | 538 |
| | 253 |
| | 797 |
|
Five or more family residential and commercial properties | 60 |
| | 1,168 |
| | 131 |
| | 1,359 |
|
Total real estate construction and land development | 66 |
| | 1,706 |
| | 384 |
| | 2,156 |
|
Consumer | 64 |
| | 3,912 |
| | 1,048 |
| | 5,024 |
|
Unallocated | — |
| | 506 |
| | — |
| | 506 |
|
Total | $ | 2,734 |
| | $ | 21,791 |
| | $ | 6,558 |
| | $ | 31,083 |
|
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, 2016:
|
| | | | | | | | | | | | | | | |
| Loans Individually Evaluated for Impairment | | Loans Collectively Evaluated for Impairment | | PCI Loans | | Total Gross Loans Receivable |
| (In thousands) |
Commercial business: | | | | | | | |
Commercial and industrial | $ | 12,375 |
| | $ | 616,081 |
| | $ | 9,317 |
| | $ | 637,773 |
|
Owner-occupied commercial real estate | 4,724 |
| | 537,338 |
| | 15,973 |
| | 558,035 |
|
Non-owner occupied commercial real estate | 11,318 |
| | 846,202 |
| | 23,360 |
| | 880,880 |
|
Total commercial business | 28,417 |
| | 1,999,621 |
| | 48,650 |
| | 2,076,688 |
|
One-to-four family residential | 321 |
| | 72,165 |
| | 4,905 |
| | 77,391 |
|
Real estate construction and land development: | | | | | | | |
One-to-four family residential | 3,071 |
| | 45,220 |
| | 2,123 |
| | 50,414 |
|
Five or more family residential and commercial properties | 1,079 |
| | 105,197 |
| | 2,488 |
| | 108,764 |
|
Total real estate construction and land development | 4,150 |
| | 150,417 |
| | 4,611 |
| | 159,178 |
|
Consumer | 310 |
| | 318,548 |
| | 6,282 |
| | 325,140 |
|
Total | $ | 33,198 |
|
| $ | 2,540,751 |
| | $ | 64,448 |
| | $ | 2,638,397 |
|
| |
(5) | Other Real Estate Owned |
Changes in other real estate owned during the three and nine months ended September 30, 2017 and 2016 were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In thousands) |
Balance at the beginning of the period | $ | 786 |
| | $ | 1,560 |
| | $ | 754 |
| | $ | 2,019 |
|
Additions | — |
| | 25 |
| | 32 |
| | 677 |
|
Proceeds from dispositions | (374 | ) | | (1,716 | ) | | (374 | ) | | (2,486 | ) |
Gain on sales, net | 111 |
| | 131 |
| | 111 |
| | 173 |
|
Valuation adjustment | — |
| | — |
| | — |
| | (383 | ) |
Balance at the end of the period | $ | 523 |
| | $ | — |
| | $ | 523 |
| | $ | — |
|
process
At September 30, 2017, the carrying amount of other real estate owned that was the result of foreclosure and obtaining physical possession of residential real estate properties was $523,000. At September 30, 2017, the recorded investment of2023, there were no consumer mortgage loans secured by residential real estate properties (included in the one-to-four family residential loan class in Note (3) Loans Receivable) for which formal foreclosure proceedings were in process process.
(4)Allowance for Credit Losses on Loans
The Company's methodology for determining the ACL on loans is based upon key assumptions, including the lookback periods, historic net charge-off factors, economic forecasts, reversion periods, prepayments and qualitative adjustments. The allowance is measured on a collective, or pool, basis when similar risk characteristics exist. Loans that do not share common risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation. For a description of the Company's ACL policy, see Note 1 - Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements included in Item 8. Financial Statements And Supplementary Data in our 2022 Annual Form 10-K.
GAAP requires the Company to develop reasonable and supportable forecasts of future conditions, and estimate how those forecasts are expected to impact a borrower’s ability to satisfy their obligation to the Company and the ultimate collectability of future cash flows over the life of a loan. The Company uses macroeconomic scenarios from an independent third party. These scenarios are based on past events, current conditions, the likelihood of future events occurring and include consideration of the forecasted direction of the economic and business environment and its likely impact on the estimated allowance as compared to the historical losses over the reasonable and supportable time frame. Economic forecast models for the current period are uploaded to the model, which targets certain forecasted macroeconomic factors, such as unemployment rate, gross domestic product, housing price index, commercial real estate price index, and certain rate and market indices. Macroeconomic factor multipliers are determined through regression analysis and applied to loss rates for each segment of loans with similar risk characteristics. Each of the forecasted segment balances is impacted by a mix of these macroeconomic factors. Further, each of the macroeconomic factors is utilized differently by segment, including the application of lagged factors and various transformations such as percent change year over year. A macroeconomic sensitive model is developed for each segment given the current and forecasted conditions and a macroeconomic multiplier is calculated for each forecast period considering the forecasted losses as compared to the long-term average actual losses of the dataset. The impact of those macroeconomic factors on each segment, both positive or negative, using the reasonable and supportable period, are added to the calculated baseline loss allowance. After the reasonable and supportable period, forecasted loss rates revert to historical baseline loss levels over the predetermined reversion period on a straight-lined basis.
At September 30, 2023, the Company upgraded the version of the model used to calculate the ACL for collectively evaluated loans. This new version includes changes to the macroeconomic variables used for each of the loan segments to either add or eliminate variables based upon regression testing and the relationship to expected results and the lookback period
was $657,000.changed to look back to 2000 as compared to 1991 to improve data relevance. The most significant changes to macroeconomic variables were in the commercial and industrial segment and commercial real estate segments. The commercial and industrial segment had previously used unemployment as a macroeconomic variable which was removed and replaced with a market index, rate index and real estate price index. The commercial real estate segments had previously used gross domestic product as a macroeconomic variable which was removed and replaced with a housing price index. The new version also added a segment for home equity lines of credit. The overall impact to the ACL for collectively evaluated loans due to this version change prior to applying qualitative adjustments was not considered to be material.
The Company recognizes that historical information used as the basis for determining future expected credit losses may not always, by itself, provide a sufficient basis for determining future expected credit losses. The Company, therefore, considers the need for qualitative adjustments to the ACL on a quarterly basis. Qualitative adjustments may be related to and include, but not be limited to, factors such as: (i) management’s assessment of economic forecasts used in the model and how those forecasts align with management’s overall evaluation of current and expected economic conditions, (ii) organization specific risks such as credit concentrations, collateral specific risks, regulatory risks, and external factors that may ultimately impact credit quality, (iii) potential model limitations such as limitations identified through back-testing, and other limitations associated with factors such as underwriting changes, acquisition of new portfolios and changes in portfolio segmentation, and (iv) management’s overall assessment of the adequacy of the ACL, including an assessment of model data inputs used to determine the ACL.
As of September 30, 2023, qualitative adjustments primarily relate to certain segments of the loan portfolio deemed by management to be of a higher-risk profile where management believes the quantitative component of the Company’s ACL model may not have fully captured the associated impact to the ACL. In addition, qualitative adjustments also relate to heightened uncertainty as to future macroeconomic conditions and the related impact on certain loan segments. Management reviews the need for an appropriate level of qualitative adjustments on a quarterly basis, and as such, the amount and allocation of qualitative adjustments may change in future periods.
During the nine months ended September 30, 2023, the ACL on loans increased $3.9 million to $46.9 million from $43.0 million at December 31, 2022 due primarily to a provision for credit losses on loans of $3.1 million driven by growth in loans receivable, net and secondarily due to net recoveries of $895,000 as a result of a $1.1 million recovery from the payoff of a nonaccrual loan.
The following tables detail the activity in the ACL on loans by segment and class for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2023 |
| Beginning Balance | | Charge-offs | | Recoveries | | (Reversal of) Provision for Credit Losses | | Ending Balance |
| (Dollars in thousands) |
Commercial business: | | | | | | | | | |
Commercial and industrial | $ | 13,288 | | | $ | (15) | | | $ | 1,253 | | | $ | (2,781) | | | $ | 11,745 | |
Owner-occupied CRE | 8,503 | | | — | | | — | | | 191 | | | 8,694 | |
Non-owner occupied CRE | 9,482 | | | — | | | — | | | 1,184 | | | 10,666 | |
Total commercial business | 31,273 | | | (15) | | | 1,253 | | | (1,406) | | | 31,105 | |
Residential real estate | 2,865 | | | — | | | — | | | 684 | | | 3,549 | |
Real estate construction and land development: |
Residential | 1,671 | | | — | | | — | | | (163) | | | 1,508 | |
Commercial and multifamily | 8,014 | | | — | | | — | | | 437 | | | 8,451 | |
Total real estate construction and land development | 9,685 | | | — | | | — | | | 274 | | | 9,959 | |
Consumer | 2,585 | | | (123) | | | 59 | | | (187) | | | 2,334 | |
Total | $ | 46,408 | | | $ | (138) | | | $ | 1,312 | | | $ | (635) | | | $ | 46,947 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2023 |
| Beginning Balance | | Charge-offs | | Recoveries | | Provision for (Reversal of) Credit Losses | | Ending Balance |
| (Dollars in thousands) |
Commercial business: | | | | | | | | | |
Commercial and industrial | $ | 13,962 | | | $ | (176) | | | $ | 1,342 | | | $ | (3,383) | | | $ | 11,745 | |
Owner-occupied CRE | 7,480 | | | — | | | — | | | 1,214 | | | 8,694 | |
Non-owner occupied CRE | 9,276 | | | — | | | — | | | 1,390 | | | 10,666 | |
Total commercial business | 30,718 | | | (176) | | | 1,342 | | | (779) | | | 31,105 | |
| |
(6) | Goodwill and Other Intangible Assets |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2023 |
| Beginning Balance | | Charge-offs | | Recoveries | | Provision for (Reversal of) Credit Losses | | Ending Balance |
| (Dollars in thousands) |
Residential real estate | 2,872 | | | — | | | — | | | 677 | | | 3,549 | |
Real estate construction and land development: |
Residential | 1,654 | | | — | | | — | | | (146) | | | 1,508 | |
Commercial and multifamily | 5,409 | | | — | | | — | | | 3,042 | | | 8,451 | |
Total real estate construction and land development | 7,063 | | | — | | | — | | | 2,896 | | | 9,959 | |
Consumer | 2,333 | | | (420) | | | 149 | | | 272 | | | 2,334 | |
Total | $ | 42,986 | | | $ | (596) | | | $ | 1,491 | | | $ | 3,066 | | | $ | 46,947 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 |
| Beginning Balance | | Charge-offs | | Recoveries | | (Reversal of) Provision for Credit Losses | | Ending Balance |
| (Dollars in thousands) |
Commercial business: | | | | | | | | | |
Commercial and industrial | $ | 14,033 | | | $ | — | | | $ | 455 | | | $ | 180 | | | $ | 14,668 | |
Owner-occupied CRE | 8,162 | | | — | | | — | | | (443) | | | 7,719 | |
Non-owner occupied CRE | 9,512 | | | — | | | — | | | 41 | | | 9,553 | |
Total commercial business | 31,707 | | | — | | | 455 | | | (222) | | | 31,940 | |
Residential real estate | 2,137 | | | — | | | — | | | 408 | | | 2,545 | |
Real estate construction and land development: |
Residential | 1,081 | | | — | | | 5 | | | 208 | | | 1,294 | |
Commercial and multifamily | 2,203 | | | — | | | 102 | | | 1,505 | | | 3,810 | |
Total real estate construction and land development | 3,284 | | | — | | | 107 | | | 1,713 | | | 5,104 | |
Consumer | 2,568 | | | (138) | | | 50 | | | 20 | | | 2,500 | |
Total | $ | 39,696 | | | $ | (138) | | | $ | 612 | | | $ | 1,919 | | | $ | 42,089 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2022 |
| Beginning Balance | | Charge-offs | | Recoveries | | (Reversal of) Provision for Credit Losses | | Ending Balance |
| (Dollars in thousands) |
Commercial business: | | | | | | | | | |
Commercial and industrial | $ | 17,777 | | | $ | (280) | | | $ | 876 | | | $ | (3,705) | | | $ | 14,668 | |
Owner-occupied CRE | 6,411 | | | (36) | | | — | | | 1,344 | | | 7,719 | |
Non-owner occupied CRE | 8,861 | | | — | | | — | | | 692 | | | 9,553 | |
Total commercial business | 33,049 | | | (316) | | | 876 | | | (1,669) | | | 31,940 | |
Residential real estate | 1,409 | | | (30) | | | 3 | | | 1,163 | | | 2,545 | |
Real estate construction and land development: |
Residential | 1,304 | | | — | | | 19 | | | (29) | | | 1,294 | |
Commercial and multifamily | 3,972 | | | — | | | 155 | | | (317) | | | 3,810 | |
Total real estate construction and land development | 5,276 | | | — | | | 174 | | | (346) | | | 5,104 | |
Consumer | 2,627 | | | (396) | | | 669 | | | (400) | | | 2,500 | |
Total | $ | 42,361 | | | $ | (742) | | | $ | 1,722 | | | $ | (1,252) | | | $ | 42,089 | |
The following table details the activity in the ACL on unfunded commitments during the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| (Dollars in thousands) |
Balance, beginning of period | $ | 1,777 | | | $ | 997 | | | $ | 1,744 | | | $ | 2,607 | |
(Reversal of) provision for credit losses on unfunded commitments | (243) | | | 26 | | | (210) | | | (1,584) | |
Balance, end of period | $ | 1,534 | | | $ | 1,023 | | | $ | 1,534 | | | $ | 1,023 | |
(5)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 Washington Banking Merger on May 1, 2014, and the acquisitions of Valley on July 15, 2013, Western Washington Bancorp in 2006 and North Pacific Bank in 1998. The Company’s goodwill is assigned to the Bank and is evaluated for impairment at the Bank level (reporting unit).
There were no additions to goodwill during the three and nine months ended September 30, 20172023 and 2016.2022. Additionally, management analyzes its goodwill on an annual basis on December 31 and between annual tests in certain circumstances such as material adverse changes in legal, business, regulatory and economic factors. An impairment loss is recorded to the extent the carrying amount of goodwill exceeds its implied fair value. The Company performed an annual impairment assessment as of December 31, 2022 and concluded that there was no impairment.
Due to a sustained decline in stock price during the three months ended June 30, 2023, the Company determined a triggering event occurred and consequently performed a quantitative assessment of goodwill as of May 31, 2023. We estimated the fair value of the reporting unit by weighting results from the market approach and the income approach. Significant assumptions inherent in the valuation methodologies for goodwill were employed and included, but were not limited to, prospective financial information, growth rates, terminal value, discount rates, and comparable multiples from publicly traded companies in our industry. Based on this quantitative test, we determined that the fair value of the reporting unit more likely than not exceeded the carrying value.
At September 30, 2017,2023, the Company’s step-one analysisCompany determined that no material adverse changes had occurred since the quantitative assessment was performed as of May 31, 2023 and concluded that the reporting unit’s fair value was greater than its carrying value and thereforethere continues to be no goodwill impairment charges were required, or recorded, for the three and nine months ended September 30, 2017. Similarly, no goodwill impairment charges were required, or recorded, for the three and nine months ended September 30, 2016. Even though there was no goodwill impairment at September 30, 2017, adverse events may impact the recoverability of goodwill and could result in a future impairment charge which could have a material impact on the Company’s operating results.goodwill.
(b) Other Intangible Assets
TheOther intangible assets represent core deposit intangible acquired in business combinations with estimated useful lives of ten years. There were no additions to other intangible assets represent the core deposit intangible ("CDI") acquired in business combinations. The useful life of the CDI related to the Washington Banking Merger, the acquisitions of Valley, NCB and Cowlitz were estimated to be ten, ten, five and nine years, respectively.
The following table presents the change in the other intangible assets for the periods indicated: |
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (In thousands) |
Balance at the beginning of the period | | $ | 6,727 |
| | $ | 8,091 |
| | $ | 7,374 |
| | $ | 8,789 |
|
Less: Amortization | | 319 |
| | 359 |
| | 966 |
| | 1,057 |
|
Balance at the end of the period | | $ | 6,408 |
| | $ | 7,732 |
| | $ | 6,408 |
| | $ | 7,732 |
|
(a) Federal Home Loan Bank Advances
The Federal Home Loan Bank ("FHLB") of Des Moines 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, 2017, the Bank maintained a credit facility with the FHLB of Des Moines for $662.4 million and had short-term FHLB advances outstanding of $117.4 million with maturity dates within 30 days. At December 31, 2016 there were FHLB advances outstanding of $79.6 million.
The following table sets forth the details of FHLB advances during the three and nine months ended September 30, 20172023 and 2016:2022.
(6)Derivative Financial Instruments
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (Dollars in thousands) |
Average balance during the period | $ | 111,293 |
| | $ | 5,618 |
| | $ | 106,553 |
| | $ | 11,608 |
|
Maximum month-end balance during the period | $ | 126,200 |
| | $ | 17,700 |
| | $ | 137,450 |
| | $ | 57,300 |
|
Weighted average rate during the period | 1.53 | % | | 0.57 | % | | 1.09 | % | | 0.54 | % |
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, principally investment securities which are obligations of or guaranteed by the United States or other assets. In accordance with the pledge agreement, the Company must maintain unencumbered collateral in an amount equal to varying percentages ranging from 100% to 160% of outstanding advances depending on the type of collateral.
(b) Federal Funds Purchased
The Bank maintains advance lines with Wells Fargo Bank, US Bank, The Independent Bankers Bank and Pacific Coast Bankers’ Bank to purchase federal funds of up to $90.0 million as of September 30, 2017. The lines generally mature annually or are reviewed annually. As of September 30, 2017 and December 31, 2016, there were no federal funds purchased.
(c) Credit facilities
The Bank maintains a credit facility with the Federal Reserve Bank of San Francisco for $50.6 million as of September 30, 2017, of which there were no borrowings outstanding as of September 30, 2017 or December 31, 2016. Any advances on the credit facility would have to be first secured by the Bank's investment securities or loans receivable.
| |
(8) | Junior Subordinated Debentures |
As part of the Washington Banking Merger, the Company assumed trust preferred securities and junior subordinated debentures with a total fair value of $18.9 million at the May 1, 2014 merger date.
Washington Banking Master Trust, a Delaware statutory business trust, was a wholly-owned subsidiary of Washington Banking created for the exclusive purposes of issuing and selling capital securities and utilizing sale proceeds to acquire junior subordinated debt issued by Washington Banking. During 2007, the Trust issued $25.0 million of trust preferred securities with a 30-year maturity, callable after the fifth year by 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 Washington Banking Merger date of May 1, 2014, the Company acquired the Trust, which retained the Washington Banking Master Trust name, and assumed the performance and observance of the covenants under the indenture related to the trust preferred securities.
The adjustable rate of the trust preferred securities at September 30, 2017 was 2.89%. The weighted average rate of the junior subordinated debentures was 5.20% and 5.05% for the three and nine months ended September 30, 2017, respectively, and 4.49% and 4.43% for the three and nine months ended September 30, 2016, respectively. The weighted average rate includes the accretion of the discount established at the merger date which is amortized over the life of the trust preferred securities.
The junior subordinated debentures are the sole assets of the Trust and payments under the junior subordinated debentures are the sole revenues of the Trust. At September 30, 2017 and December 31, 2016, the balance of the junior subordinated debentures, net of unaccreted discount, was $19.9 million and $19.7 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.
The Company utilizes repurchase agreements with one-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 required 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. For additional information on the total value of investment securities pledged for repurchase agreements see Note (2) Investment Securities.
The following table presents the Company's repurchase agreement obligations by class of collateral pledged:
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| (In thousands) |
U.S. Treasury and U.S. Government-sponsored agencies | $ | — |
| | $ | 2,944 |
|
Mortgage-backed securities and collateralized mortgage obligations(1): | | | |
Residential | 12,336 |
| | 5,191 |
|
Commercial | 16,332 |
| | 13,969 |
|
Total repurchase agreements | $ | 28,668 |
| | $ | 22,104 |
|
(1) Issued and guaranteed by U.S. Government-sponsored agencies.
| |
(10) | 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 providefacilitate the needs of its commercial business loan customers the ability to convert their loans from variable to fixedwhereby it enters into an interest rates. Upon the origination of a derivative contractrate swap with a customer while at the Company simultaneously enterssame time entering into an offsetting derivative contractinterest rate swap with another financial institution. The transaction allows the Company’s customer to effectively convert a third party in ordervariable rate loan to offset its exposure on the variable anda fixed rate components ofloan, or a fixed rate loan to a variable rate loan, and 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 inthird-party. These interest rate swap fees onswaps are not designated as hedging instruments.
The Company is exposed to interest rate risk as part of the Condensed Consolidated Statements of Income. Becausetransaction. However, the Company acts only as an intermediary for its customer subsequenttherefore changes in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact the Company’s results of operations.
Fee income related to interest rate swap derivative contract transactions is recorded in Interest rate swap fees on the unaudited Condensed Consolidated Statements of Income. The fair value of derivative positions outstanding is included in Prepaid expenses and other assets and Accrued expenses and other liabilities in the unaudited Condensed Consolidated Statements of Financial Condition. The gains and losses due to changes in fair value and all cash flows are included in Other income in the unaudited Condensed Consolidated Statements of Income, but typically net to zero based on the identical back-to-back interest rate swap derivative contracts unless a credit valuation adjustment is recorded to appropriately reflect nonperformance risk in the fair value measurement. Various factors impact changes in the credit valuation adjustments over time, including changes in the risk ratings of the parties to the contracts, as well as changes in market rates and volatilities, which affect the total expected exposure of the derivative instruments.
The following table presents the notional amounts and estimated fair values of interest rate derivative contracts outstanding at September 30, 2017 and December 31, 2016 are presented in the following table.dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| Notional Amounts | | Estimated Fair Value | | Notional Amounts | | Estimated Fair Value |
| (Dollars in thousands) |
Non-hedging interest rate derivatives | | | | | | | |
Interest rate swap asset (1) | $ | 289,978 | | | 33,840 | | | $ | 288,785 | | | $ | 30,107 | |
Interest rate swap liability (1) | 289,978 | | | (33,840) | | | 288,785 | | | (30,107) | |
|
| | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | Notional Amounts | | Estimated Fair Value | | Notional Amounts | | Estimated Fair Value |
| | (In thousands) |
Non-hedging interest rate derivatives | | | | | | | | |
Interest rate swaps with customer (1) | | $ | 134,295 |
| | $ | 74 |
| | $ | 102,709 |
| | $ | (1,099 | ) |
Interest rate swap with third party (1) | | 134,295 |
| | (74 | ) | | 102,709 |
| | 1,099 |
|
(1) The estimated fair value of the derivative included in prepaid and other assets on the Condensed Consolidated Statements of Financial Conditionderivatives with customers was $3.3$(33.7) million and $2.8$(30.1) million as of September 30, 20172023 and December 31, 2016,2022, respectively. The estimated fair value of the derivative included in accrued expenses and other liabilities on the Condensed Consolidated Statements of Financial Conditionderivatives with third-parties was $3.3$33.7 million and $2.8$30.1 million as of September 30, 20172023 and December 31, 2016,2022, respectively.
The Company is exposed to credit-related losses in the event of nonperformance by the counterparty to these agreements. Credit risk for derivatives with the customer is controlled through the credit approval process, amount limits, and monitoring procedures and is concentrated within our primary market areas. Credit risk for derivatives with third-parties is concentrated among four well-known broker dealers.
(a) Earnings Per Common Share
The following table illustrates the reconciliationcalculation of weighted average shares used for earnings per common share computations for the three and nine months ended September 30, 2017 and 2016:periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| (Dollars in thousands, except shares) |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Net income allocated to common shareholders | $ | 18,219 | | | $ | 20,990 | | | $ | 55,522 | | | $ | 59,331 | |
| | | | | | | |
Basic: | | | | | | | |
Weighted average common shares outstanding | 35,022,676 | | | 35,103,984 | | | 35,062,760 | | | 35,103,048 | |
| | | | | | | |
| | | | | | | |
Diluted: | | | | | | | |
Basic weighted average common shares outstanding | 35,022,676 | | | 35,103,984 | | | 35,062,760 | | | 35,103,048 | |
Effect of potentially dilutive common shares (1) | 92,489 | | | 364,906 | | | 242,696 | | | 335,624 | |
Total diluted weighted average common shares outstanding | 35,115,165 | | | 35,468,890 | | | 35,305,456 | | | 35,438,672 | |
Potentially dilutive shares that were excluded from the computation of diluted earnings per share because to do so would be anti-dilutive (2) | 312,539 | | | 3,026 | | | 163,860 | | | 13,662 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (Dollars in thousands) |
Net income: | | | | | | | |
Net income | $ | 10,624 |
| | $ | 11,039 |
| | $ | 31,768 |
| | $ | 29,025 |
|
Less: Dividends and undistributed earnings allocated to participating securities | (64 | ) | | (102 | ) | | (228 | ) | | (280 | ) |
Net income allocated to common shareholders | $ | 10,560 |
| | $ | 10,937 |
| | $ | 31,540 |
| | $ | 28,745 |
|
Basic: | | | | | | | |
Weighted average common shares outstanding | 29,929,721 |
| | 29,962,270 |
| | 29,940,276 |
| | 29,968,034 |
|
Less: Restricted stock awards | (146,425 | ) | | (277,495 | ) | | (192,186 | ) | | (292,832 | ) |
Total basic weighted average common shares outstanding | 29,783,296 |
| | 29,684,775 |
| | 29,748,090 |
| | 29,675,202 |
|
Diluted: | | | | | | | |
Basic weighted average common shares outstanding | 29,783,296 |
| | 29,684,775 |
| | 29,748,090 |
| | 29,675,202 |
|
Effect of potentially dilutive common shares (1) | 107,414 |
| | 11,031 |
| | 86,004 |
| | 12,543 |
|
Total diluted weighted average common shares outstanding | 29,890,710 |
| | 29,695,806 |
| | 29,834,094 |
| | 29,687,745 |
|
(1) Represents the effect of the vesting of restricted stock units.
| |
(1) | Represents the effect of the assumed exercise of stock options and vesting of restricted stock units. |
Potential dilutive shares are excluded from(2) Anti-dilution occurs when the computation of earningsunrecognized compensation cost per share if their effect is anti-dilutive. Forof a restricted stock unit exceeds the three and nine months ended September 30, 2017 and the three months ended September 30, 2016, there were no anti-dilutive shares outstanding related to options to acquire common stock. For the nine months ended September 30, 2016, anti-dilutive shares outstanding related to options to acquire common stock totaled 580 as the assumed proceeds from exercisemarket price tax benefits and future compensation were in excess of the market value.Company’s stock.
(b) Dividends
The timing and amount of cash dividends paid on the Company's common stock depends on the Company’s earnings, capital requirements, financial condition and other relevant factors. Dividends on common stock from the Company depend substantially upon receipt of dividends from the Bank, which is the Company’s predominant source of income.
The following table summarizes the dividend activity forduring the nine months ended September 30, 2017 2023and the calendar year 2016.
| | | | | | | | | | | | | | | | | | | | | | |
Declared | | Cash Dividend per Share | | Record Date | | Paid Date | | |
| | | | | | | | |
Declared | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
January 26, 2022 | | $0.21 | | February 9, 2022 | | February 23, 2022 | | |
April 20, 2022 | | $0.21 | | May 4, 2022 | | May 18, 2022 | | |
July 20, 2022 | | $0.21 | | August 3, 2022 | | August 17, 2022 | | |
October 19, 2022 | | $0.21 | | November 2, 2022 | | November 16, 2022 | | |
January 25, 2023 | | $0.22 | | February 8, 2023 | | February 22, 2023 | | |
| | | | | | | | | | | | | | | | | | | | | | |
Declared | | Cash Dividend per Share | | Record Date | | Paid Date | | |
January 27, 2016April 19, 2023 | | $0.110.22 | | February 10, 2016May 4, 2023 | | February 24, 2016May 18, 2023 | | |
April 20, 2016July 19, 2023 | | $0.120.22 | | May 5, 2016August 2, 2023 | | May 19, 2016August 16, 2023 | | |
July 20, 2016 | | $0.12 | | August 4, 2016 | | August 18, 2016 | |
October 26, 2016 | | $0.12 | | November 8, 2016 | | November 22, 2016 | |
October 26, 2016 | | $0.25 | | November 8, 2016 | | November 22, 2016 | * |
January 25, 2017 | | $0.12 | | February 9, 2017 | | February 23, 2017 | |
April 25, 2017 | | $0.13 | | May 10, 2017 | | May 24, 2017 | |
July 25, 2017 | | $0.13 | | August 10, 2017 | | August 24, 2017 | |
* 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 Board") 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 Board and the FDIC.
(c) Stock Repurchase Program
The Company has had various stock repurchase programs since March 1999. On October 23, 2014,March 12, 2020, the Company's Board of Directors authorized the repurchase of up to 5% of the Company's outstanding common shares, or approximately 1,513,0001,799,054 shares, under the eleventhtwelfth stock repurchase plan.plan with 307,790 shares remaining available for repurchase as of September 30, 2023. The number, timing and price of shares repurchased under the twelfth stock repurchase plan will depend on business and market conditions and other factors, including opportunities to deploy the Company's capital.
The following table provides total repurchased shares and average share prices under the repurchase plan for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | |
| 2023 | | 2022 | | 2023 | | 2022 | | Plan Total(1) |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Twelfth Stock Repurchase Plan | | | | | | | | | |
Repurchased shares | 148,119 | | | — | | | 330,424 | | | 100,090 | | | 1,491,264 | |
Stock repurchase average share price | $ | 17.08 | | | $ | — | | | $ | 18.82 | | | $ | 25.07 | | | $ | 22.80 | |
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | |
| 2017 | | 2016 | | 2017 | | 2016 | | Plan Total (1) |
Eleventh Plan | | | | | | | | | |
Repurchased shares | — |
| | 38,000 |
| | — |
| | 138,000 |
| | 579,996 |
|
Stock repurchase average share price | $ | — |
| | $ | 17.46 |
| | $ | — |
| | $ | 17.16 |
| | $ | 16.76 |
|
(1) Represents total shares repurchased and average price per share paid during the duration of the repurchase plan.
In addition to the stock repurchases disclosed in the table above,under a stock repurchase plan, the Company repurchasedrepurchases shares to pay withholding taxes on the vesting of restricted stock. During the three and nine months ended September 30, 2017, the Companystock units. The following table provides total shares repurchased 344 and 27,711 shares of common stock at an average price per share of $25.80 and $24.61 to pay withholding taxes on the vesting of restricted stock that vested during the respective periods. During the three and nine months ended September 30, 2016, the Company repurchased 5,276 and 29,206 shares of common stock at an average price per share of $18.64 and $17.77 to pay withholding taxes on the vesting of restricted stock that vested during the respective periods.periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Repurchased shares to pay withholding taxes | 335 | | | 100 | | | 31,567 | | | 26,280 | |
Stock repurchase to pay withholding taxes average share price | $ | 17.26 | | | $ | 26.94 | | | $ | 22.03 | | | $ | 25.40 | |
| |
(12) | Accumulated Other Comprehensive Income |
The changes in accumulated other comprehensive income (loss) (“AOCI”) by component, during the three and nine months ended September 30, 2017 and 2016 are as follows:
|
| | | | | | | | |
| | Three Months Ended September 30, 2017 (1) | | Nine Months Ended September 30, 2017 (1) |
| | (In thousands) |
Balance of AOCI at the beginning of period | | $ | 1,557 |
| | $ | (2,606 | ) |
Other comprehensive income before reclassification | | 289 |
| | 4,528 |
|
Amounts reclassified from AOCI for gain on sale of investment securities included in net income | | (28 | ) | | (104 | ) |
Net current period other comprehensive income | | 261 |
| | 4,424 |
|
Balance of AOCI at the end of period | | $ | 1,818 |
| | $ | 1,818 |
|
(8)Fair Value Measurements(1) All amounts are due to the changes in fair value of available for sale securities and are net of tax.
|
| | | | | | | | |
| | Three Months Ended September 30, 2016 (1) | | Nine Months Ended September 30, 2016 (1) |
| | (In thousands) |
Balance of AOCI at the beginning of period | | $ | 12,343 |
| | $ | 2,559 |
|
Other comprehensive income before reclassification | | (1,055 | ) | | 9,223 |
|
Amounts reclassified from AOCI for gain on sale of investment securities available for sale included in net income | | (224 | ) | | (718 | ) |
Net current period other comprehensive income | | (1,279 | ) | | 8,505 |
|
Balance of AOCI at the end of period | | $ | 11,064 |
| | $ | 11,064 |
|
(1) All amounts are due to the changes in fair value of available for sale securities and are net of tax.
| |
(13) | Stock-Based Compensation |
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. Restricted stock awards issued generally have a four-year cliff vesting or four-year ratable vesting schedule. Restricted stock units vest ratably over three years. Performance restricted stock units issued generally have a three-year cliff vesting schedule. Additionally, performance restricted stock unit grants may be subject to performance-based vesting as well as other approved vesting conditions. The Company issues new shares of common stock to satisfy share option exercises, restricted stock awards and restricted stock units.
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, performance units, performance shares or bonus shares) and cash incentive awards.
Under the Company's stock-based compensation plans, 1,073,146 shares remain available for future issuance as of September 30, 2017.
(a) Stock Option Awards
For the three and nine months ended September 30, 2017 and 2016, 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, 2017 was $156,000 and $159,000, respectively. The intrinsic value and cash proceeds from options exercised during the nine months ended September 30, 2016 was $99,000 and $401,000, respectively.
The following table summarizes the stock option activity for the nine months ended September 30, 2017 and 2016:
|
| | | | | | | | | | | | |
| Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (In years) | | Aggregate Intrinsic Value (In thousands) |
Outstanding at December 31, 2015 | 79,408 |
| | $ | 14.19 |
| | | | |
Exercised | (27,867 | ) | | 14.37 |
| | | | |
Forfeited or expired | (4,200 | ) | | 16.80 |
| | | | |
Outstanding at September 30, 2016 | 47,341 |
| | $ | 13.85 |
| | 2.80 | | $ | 194 |
|
| | | | | | | |
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 |
|
(b) Restricted Stock Awards
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. For the three and nine months ended September 30, 2016, the Company recognized compensation expense related to restricted stock awards of $494,000 and $1.4 million, respectively, and a related tax benefit of $173,000 and $479,000, respectively. As of September 30, 2017, the total unrecognized compensation expense related to non-vested restricted stock awards was $1.8 million and the related weighted average period over which the compensation expense is expected to be recognized is approximately 1.78 years. The vesting date fair value of the restricted stock awards that vested during the nine months ended September 30, 2017 and 2016 was $2.7 million and $2.0 million, respectively.
The following table summarizes the restricted stock award activity for the nine months ended September 30, 2017 and 2016:
|
| | | | | | |
| Shares | | Weighted-Average Grant Date Fair Value |
Nonvested at December 31, 2015 | 264,521 |
| | $ | 15.92 |
|
Granted | 119,939 |
| | 17.53 |
|
Vested | (111,357 | ) | | 15.62 |
|
Forfeited | (9,216 | ) | | 16.57 |
|
Nonvested at September 30, 2016 | 263,887 |
| | $ | 16.76 |
|
| | | |
Nonvested at December 31, 2016 | 261,296 |
| | $ | 16.80 |
|
Granted | — |
| | — |
|
Vested | (107,202 | ) | | 16.49 |
|
Forfeited | (10,418 | ) | | 16.80 |
|
Nonvested at September 30, 2017 | 143,676 |
| | $ | 17.02 |
|
(c) Restricted Stock Units
For the three and nine months ended September 30, 2017, the Company recognized compensation expense related to restricted stock units of $236,000 and $472,000, respectively, and a related tax benefit of $83,000 and $165,000, respectively. As of September 30, 2017, the total unrecognized compensation expense related to non-vested restricted stock units was $1.8 million and the related weighted average period over which the compensation expense is expected to be recognized is approximately 2.26 years.
The following table summarizes the restricted stock unit activity for the nine months ended September 30, 2017:
|
| | | | | | |
| Shares | | Weighted-Average Grant Date Fair Value |
Nonvested at December 31, 2016 | — |
| | $ | — |
|
Granted | 92,019 |
| | 25.29 |
|
Vested | — |
| | — |
|
Forfeited | (1,812 | ) | | 25.35 |
|
Nonvested at September 30, 2017 | 90,207 |
| | $ | 25.29 |
|
The following table summarizes the assumptions used in the Monte Carlo model for restricted stock unit grants with market-based conditions during the nine months ended September 30, 2017:
|
| | | | | | | | | | | | | | | |
Shares | | Expected Term in Years | | Weighted-Average Risk Free Interest Rate | | Expected Volatility | | Expected Dividend Yield | | Weighted-Average Fair Value |
6,089 | | 2.85 | | 1.40 | % | | 21.8 | % | | — | % | | $ | 24.39 |
|
| |
(14) | Fair Value Measurements |
Fair value is the exchange price that would be received forto sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants onat 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). SecurityInvestment security valuations are obtained from third partythird-party pricing servicesservices.
Collateral-Dependent Loans:
Collateral-dependent loans are identified 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 valuecalculation of the collateral 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-impairedACL on loans. If the Company utilizes the fair market value of the collateral method, theThe fair value used to measure impairmentcredit loss for this type of loan is commonly based on recent real estate appraisals.appraisals which are generally obtained at least every 18 months or earlier if there are changes to risk characteristics of the underlying loan. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available. The Bank also incorporates an estimate of cost to sell the collateral when the sale is probable. Such adjustments are usuallymay be 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 clientcustomer and client’scustomer’s business (Level 3). ImpairedIndividually evaluated loans are evaluatedanalyzed for credit loss on a quarterly basis for additional impairment and the ACL on loans is adjusted accordingly.
Other Real Estate Owned:
Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonlyas required 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.results.
Appraisals for bothon 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.Bank. Once received, the CompanyBank's internal appraisal department reviews and approves the assumptions and approaches utilized in the appraisal as well as the resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. 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 CompanyBank obtains broker or dealer quotes to value its interest rate derivative contracts, which use valuation models using observable market data as of the measurement date (Level 2), and incorporates credit valuation adjustments to reflect nonperformance risk in the measurement of fair value (Level 3). Although the Bank has determined that the majority of the inputs used to value its interest rate swap derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as borrower risk ratings, to evaluate the likelihood of default by itself and its counterparties. As of September 30, 2023 and December 31, 2022, the Bank assessed the significance of the impact of the credit valuation adjustment on the overall valuation of its interest rate swap derivatives and determined the credit valuation adjustment was not significant to the overall valuation of its interest rate swap derivatives. As a result, the Bank has classified its interest rate swap derivative valuations in Level 2 of the fair value hierarchy.
Recurring Basis
The following tables summarize the balances of assets and liabilities measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016.at the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 |
| Total | | Level 1 | | Level 2 | | Level 3 |
| (Dollars in thousands) |
Assets | | | | | | | |
Investment securities available for sale: | | | | | | | |
U.S. government and agency securities | $ | 20,424 | | | $ | — | | | $ | 20,424 | | | $ | — | |
Municipal securities | 106,805 | | | 5,137 | | | 101,668 | | | — | |
Residential CMO and MBS | 401,181 | | | — | | | 401,181 | | | — | |
Commercial CMO and MBS | 597,213 | | | — | | | 597,213 | | | — | |
Corporate obligations | 3,780 | | | — | | | 3,780 | | | — | |
Other asset-backed securities | 18,144 | | | — | | | 18,144 | | | — | |
Total investment securities available for sale | 1,147,547 | | | 5,137 | | | 1,142,410 | | | — | |
Equity security | 256 | | | 256 | | | — | | | — | |
Derivative assets - interest rate swaps | 33,840 | | | — | | | 33,840 | | | — | |
Liabilities | | | | | | | |
Derivative liabilities - interest rate swaps | $ | 33,840 | | | $ | — | | | $ | 33,840 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Total | | Level 1 | | Level 2 | | Level 3 |
| (Dollars in thousands) |
Assets | | | | | | | |
Investment securities available for sale: | | | | | | | |
U.S. government and agency securities | $ | 63,859 | | | $ | 19,779 | | | $ | 44,080 | | | $ | — | |
|
| | | | | | | | | | | | | | | |
| September 30, 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 | $ | 9,403 |
| | $ | — |
| | $ | 9,403 |
| | $ | — |
|
Municipal securities | 252,806 |
| | — |
| | 252,806 |
| | — |
|
Mortgage-backed securities and collateralized mortgage obligations: | | | | | | | |
Residential | 274,361 |
| | — |
| | 274,361 |
| | — |
|
Commercial | 213,283 |
| | — |
| | 213,283 |
| | — |
|
Collateralized loan obligations | 6,022 |
| | — |
| | 6,022 |
| | — |
|
Corporate obligations | 15,830 |
| | — |
| | 15,830 |
| | — |
|
Other securities | 28,355 |
| | 150 |
| | 28,205 |
| | — |
|
Total investment securities available for sale | 800,060 |
| | 150 |
| | 799,910 |
| | — |
|
Derivative assets - interest rate swaps | 3,308 |
| | — |
| | 3,308 |
| | — |
|
Liabilities | | | | | | | |
Derivative liabilities - interest rate swaps | $ | 3,308 |
| | $ | — |
| | $ | 3,308 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2016 |
| Total | | Level 1 | | Level 2 | | Level 3 |
| (In thousands) |
Assets | | | | | | | |
Investment securities available for sale: | | | | | | | |
U.S. Treasury and U.S. Government-sponsored agencies | $ | 1,569 |
| | $ | — |
| | $ | 1,569 |
| | $ | — |
|
Municipal securities | 237,256 |
| | — |
| | 237,256 |
| | — |
|
Mortgage-backed securities and collateralized mortgage obligations: | | | | | | | |
Residential | 309,176 |
| | — |
| | 309,176 |
| | — |
|
Commercial | 208,318 |
| | — |
| | 208,318 |
| | — |
|
Collateralized loan obligations | 10,478 |
| | — |
| | 10,478 |
| | — |
|
Corporate obligations | 16,706 |
| | — |
| | 16,706 |
| | — |
|
Other securities | 11,142 |
| | 123 |
| | 11,019 |
| | — |
|
Total investment securities available for sale | 794,645 |
| | 123 |
| | 794,522 |
| | — |
|
Derivative assets - interest rate swaps | 2,804 |
| | — |
| | 2,804 |
| | — |
|
Liabilities | | | | | | | |
Derivative liabilities - interest rate swaps | $ | 2,804 |
| | $ | — |
| | $ | 2,804 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Total | | Level 1 | | Level 2 | | Level 3 |
| (Dollars in thousands) |
Municipal securities | 153,026 | | | 5,399 | | | 147,627 | | | — | |
Residential CMO and MBS | 424,386 | | | — | | | 424,386 | | | — | |
Commercial CMO and MBS | 664,421 | | | — | | | 664,421 | | | — | |
Corporate obligations | 3,834 | | | — | | | 3,834 | | | — | |
Other asset-backed securities | 21,917 | | | — | | | 21,917 | | | — | |
Total investment securities available for sale | 1,331,443 | | | 25,178 | | | 1,306,265 | | | — | |
Equity security | 185 | | | 185 | | | — | | | — | |
Derivative assets - interest rate swaps | 30,107 | | | — | | | 30,107 | | | — | |
Liabilities | | | | | | | |
Derivative liabilities - interest rate swaps | $ | 30,107 | | | $ | — | | | $ | 30,107 | | | $ | — | |
There were no transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2017 and 2016.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, 2017 and December 31, 2016 and the net losses (gains) recorded in earnings during three and nine months ended September 30, 2017 and 2016.dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value at September 30, 2023 |
| Basis(1) | | Total | | Level 1 | | Level 2 | | Level 3 |
| (Dollars in thousands) |
Collateral-dependent loans: | | | | | | | | | |
Commercial business: | | | | | | | | | |
| | | | | | | | | |
Owner-occupied CRE | 613 | | | 178 | | | — | | | — | | | 178 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
|
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Total assets measured at fair value on a nonrecurring basis | $ | 613 | | | $ | 178 | | | $ | — | | | $ | — | | | $ | 178 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basis(1) | | Fair Value at September 30, 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: | | | | | | | | | | | | | |
Commercial business: | | | | | | | | | | | | | |
Commercial and industrial | $ | 172 |
| | $ | 163 |
| | $ | — |
| | $ | — |
| | $ | 163 |
| | $ | — |
| | $ | 7 |
|
Owner-occupied commercial real estate | 182 |
| | 179 |
| | — |
| | — |
| | 179 |
| | — |
| | 8 |
|
Total commercial business | 354 |
| | 342 |
| | — |
| | — |
| | 342 |
| | — |
| | 15 |
|
Total assets measured at fair value on a nonrecurring basis | $ | 354 |
| | $ | 342 |
| | $ | — |
| | $ | — |
| | $ | 342 |
| | $ | — |
| | $ | 15 |
|
| |
(1)
| Basis represents the unpaid principal balance of impaired loans. |
(1) Basis represents the outstanding principal balance of collateral-dependent loans.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value at December 31, 2022 |
| Basis(1) | | Total | | Level 1 | | Level 2 | | Level 3 |
| (Dollars in thousands) |
Collateral-dependent loans: | | | | | | | | | |
Commercial business: | | | | | | | | | |
| | | | | | | | | |
Owner-occupied CRE | $ | 613 | | | $ | 182 | | | $ | — | | | $ | — | | | $ | 182 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
|
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Total assets measured at fair value on a nonrecurring basis | $ | 613 | | | $ | 182 | | | $ | — | | | $ | — | | | $ | 182 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basis(1) | | Fair Value at December 31, 2016 | | | | |
| Total | | Level 1 | | Level 2 | | Level 3 | | Net Losses (Gains) Recorded in Earnings During the Three Months Ended September 30, 2016 | | Net Losses (Gains) Recorded in Earnings During the Nine Months Ended September 30, 2016 |
| (In thousands) |
Impaired loans: | | | | | | | | | | | | | |
Commercial business: | | | | | | | | | | | | | |
Commercial and industrial | $ | 205 |
| | $ | 200 |
| | $ | — |
| | $ | — |
| | $ | 200 |
| | $ | 24 |
| | $ | 25 |
|
Owner-occupied commercial real estate | 780 |
| | 603 |
| | — |
| | — |
| | 603 |
| | 23 |
| | (2 | ) |
Total commercial business | 985 |
| | 803 |
| | — |
| | — |
| | 803 |
| | 47 |
| | 23 |
|
Real estate construction and land development: | | | | | | | | | | | | | |
One-to-four family residential | 828 |
| | 822 |
| | — |
| | — |
| | 822 |
| | (13 | ) | | (26 | ) |
Total real estate construction and land development | 828 |
| | 822 |
| | — |
| | — |
| | 822 |
| | (13 | ) | | (26 | ) |
Consumer | 16 |
| | 9 |
| | — |
| | — |
| | 9 |
| | — |
| | — |
|
Total assets measured at fair value on a nonrecurring basis | $ | 1,829 |
| | $ | 1,634 |
| | $ | — |
| | $ | — |
| | $ | 1,634 |
| | $ | 34 |
| | $ | (3 | ) |
| |
(1)
| Basis represents the unpaid principal balance of impaired loans. |
(1) Basis represents the outstanding principal balance of collateral-dependent 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, 2017 and December 31, 2016.the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 |
| Fair Value | | Valuation Technique(s) | | Unobservable Input(s) | | Range of Inputs | | Weighted Average (1) |
| (Dollars in thousands) |
Collateral-dependent loans | $ | 178 | | | Market approach | | Adjustments to reflect current conditions and selling costs | | 16.7% - 16.7% | | 16.7% |
| | | | | | | | | |
(1) Weighted by net discount to net appraisal fair value
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Fair Value | | Valuation Technique(s) | | Unobservable Input(s) | | Range of Inputs | | Weighted Average (1) |
| (Dollars in thousands) |
Collateral-dependent loans | $ | 182 | | | Market approach | | Adjustments to reflect current conditions and selling costs | | 14.6% - 14.6% | | 14.6% |
| | | | | | | | | |
(1) Weighted by net discount to net appraisal fair value
|
| | | | | | | | | |
| September 30, 2017 |
| Fair Value | | Valuation Technique(s) | | Unobservable Input(s) | | Range of Inputs; Weighted Average |
| (Dollars in thousands) |
Impaired loans | $ | 342 |
| | Market approach | | Adjustment for differences between the comparable sales | | (23.8%) - 23.0%; (2.8%) |
|
| | | | | | | | | |
| December 31, 2016 |
| Fair Value | | Valuation Technique(s) | | Unobservable Input(s) | | Range of Inputs; Weighted Average |
| (Dollars in thousands) |
Impaired loans | $ | 1,634 |
| | Market approach | | Adjustment for differences between the comparable sales | | (23.8%) - 63.9%; 20.4% |
(b) Fair Value of Financial Instruments
Because broadlyBroadly traded markets do not exist for most of the Company’s financial instruments,instruments; therefore, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. These determinations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. For all of these reasons, the aggregation of the fair value calculations presented herein dodoes 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.indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 |
| Carrying Value | | Fair Value | | Fair Value Measurements Using: |
| | Level 1 | | Level 2 | | Level 3 |
| (Dollars in thousands) |
Financial Assets: | | | | | | | | | |
Cash and cash equivalents | $ | 220,503 | | | $ | 220,503 | | | $ | 220,503 | | | $ | — | | | $ | — | |
Investment securities available for sale | 1,147,547 | | | 1,147,547 | | | 5,137 | | | 1,142,410 | | | — | |
Investment securities held to maturity | 746,845 | | | 636,257 | | | — | | | 636,257 | | | — | |
Loans held for sale | 263 | | | 268 | | | — | | | 268 | | | — | |
Loans receivable, net | 4,219,911 | | | 4,072,296 | | | — | | | — | | | 4,072,296 | |
Accrued interest receivable | 18,794 | | | 18,794 | | | 271 | | | 6,001 | | | 12,522 | |
Derivative assets - interest rate swaps | 33,840 | | | 33,840 | | | — | | | 33,840 | | | — | |
Equity security | 256 | | | 256 | | | 256 | | | — | | | — | |
Financial Liabilities: | | | | | | | | | |
Non-maturity deposits | $ | 5,006,581 | | | $ | 5,006,581 | | | $ | 5,006,581 | | | $ | — | | | $ | — | |
Certificates of deposit | 628,606 | | | 637,048 | | | — | | | 637,048 | | | — | |
Borrowings | 450,000 | | | 447,952 | | | — | | | 447,952 | | | — | |
Securities sold under agreement to repurchase | 23,158 | | | 23,158 | | | 23,158 | | | — | | | — | |
Junior subordinated debentures | 21,692 | | | 19,750 | | | — | | | — | | | 19,750 | |
Accrued interest payable | 8,922 | | | 8,922 | | | 65 | | | 8,782 | | | 75 | |
Derivative liabilities - interest rate swaps | 33,840 | | | 33,840 | | | — | | | 33,840 | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Carrying Value | | Fair Value | | Fair Value Measurements Using: |
| | Level 1 | | Level 2 | | Level 3 |
| (Dollars in thousands) |
Financial Assets: | | | | | | | | | |
Cash and cash equivalents | $ | 103,590 | | | $ | 103,590 | | | $ | 103,590 | | | $ | — | | | $ | — | |
Investment securities available for sale | 1,331,443 | | | 1,331,443 | | | 25,178 | | | 1,306,265 | | | — | |
Investment securities held to maturity | 766,396 | | | 673,434 | | | — | | | 673,434 | | | — | |
| | | | | | | | | |
Loans receivable, net | 4,007,872 | | | 3,841,821 | | | — | | | — | | | 3,841,821 | |
Accrued interest receivable | 18,547 | | | 18,547 | | | 349 | | | 6,892 | | | 11,306 | |
Derivative assets - interest rate swaps | 30,107 | | | 30,107 | | | — | | | 30,107 | | | — | |
Equity security | 185 | | | 185 | | | 185 | | | — | | | — | |
Financial Liabilities: | | | | | | | | | |
Non-maturity deposits | $ | 5,617,267 | | | $ | 5,617,267 | | | $ | 5,617,267 | | | $ | — | | | $ | — | |
Certificates of deposit | 307,573 | | | 308,325 | | | — | | | 308,325 | | | — | |
| | | | | | | | | |
Securities sold under agreement to repurchase | 46,597 | | | 46,597 | | | 46,597 | | | — | | | — | |
Junior subordinated debentures | 21,473 | | | 20,000 | | | — | | | — | | | 20,000 | |
|
| | | | | | | | | | | | | | | | | | | |
| September 30, 2017 |
| Carrying Value |
| Fair Value |
| Fair Value Measurements Using: |
|
| Level 1 |
| Level 2 |
| Level 3 |
| (In thousands) |
Financial Assets: | | | | | | | | | |
Cash and cash equivalents | $ | 111,258 |
| | $ | 111,258 |
| | $ | 111,258 |
| | $ | — |
| | $ | — |
|
Investment securities available for sale | 800,060 |
| | 800,060 |
| | 150 |
| | 799,910 |
| | — |
|
Federal Home Loan Bank stock | 9,343 |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
|
Loans held for sale | 5,368 |
| | 5,553 |
| | — |
| | 5,553 |
| | — |
|
Total loans receivable, net | 2,766,113 |
| | 2,772,338 |
| | — |
| | — |
| | 2,772,338 |
|
Accrued interest receivable | 12,295 |
| | 12,295 |
| | 3 |
| | 3,770 |
| | 8,522 |
|
Derivative assets - interest rate swaps | 3,308 |
| | 3,308 |
| | — |
|
| 3,308 |
| | — |
|
Financial Liabilities: | | | | | | | | | |
Noninterest deposits, interest bearing demand deposits, money market accounts and savings accounts | 2,925,637 |
| | 2,925,637 |
| | 2,925,637 |
| | — |
| | — |
|
Certificate of deposit accounts | 395,181 |
| | 394,164 |
| | — |
| | 394,164 |
| | — |
|
Federal Home Loan Bank advances | 117,400 |
| | 117,400 |
| | — |
| | 117,400 |
| | — |
|
Securities sold under agreement to repurchase | 28,668 |
| | 28,668 |
| | 28,668 |
| | — |
| | — |
|
Junior subordinated debentures | 19,936 |
| | 15,250 |
| | — |
| | — |
| | 15,250 |
|
Accrued interest payable | 148 |
| | 148 |
| | 42 |
| | 73 |
| | 33 |
|
Derivative liabilities - interest rate swaps | 3,308 |
| | 3,308 |
| | — |
| | 3,308 |
| | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Carrying Value | | Fair Value | | Fair Value Measurements Using: |
| | Level 1 | | Level 2 | | Level 3 |
| (Dollars in thousands) |
Accrued interest payable | 143 | | | 143 | | | 57 | | | 13 | | | 73 | |
Derivative liabilities - interest rate swaps | 30,107 | | | 30,107 | | | — | | | 30,107 | | | — | |
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2016 |
| Carrying Value | | Fair Value | | Fair Value Measurements Using: |
| | Level 1 | | Level 2 | | Level 3 |
| (In thousands) |
Financial Assets: | | | | | | | | | |
Cash and cash equivalents | $ | 103,745 |
| | $ | 103,745 |
| | $ | 103,745 |
| | $ | — |
| | $ | — |
|
Investment securities available for sale | 794,645 |
| | 794,645 |
| | 123 |
| | 794,522 |
| | — |
|
Federal Home Loan Bank stock | 7,564 |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
|
Loans held for sale | 11,662 |
| | 11,988 |
| | — |
| | 11,988 |
| | — |
|
Loans receivable, net of allowance for loan losses | 2,609,666 |
| | 2,675,811 |
| | — |
| | — |
| | 2,675,811 |
|
Accrued interest receivable | 10,925 |
| | 10,925 |
| | 3 |
| | 3,472 |
| | 7,450 |
|
Derivative assets - interest rate swaps | 2,804 |
| | 2,804 |
| | — |
| | 2,804 |
| | — |
|
Financial Liabilities: | | | | | | | | | |
Noninterest deposits, interest bearing demand deposits, money market accounts and savings accounts | $ | 2,872,247 |
| | $ | 2,872,247 |
| | $ | 2,872,247 |
| | $ | — |
| | $ | — |
|
Certificate of deposit accounts | 357,401 |
| | 357,536 |
| | — |
| | 357,536 |
| | — |
|
Federal Home Loan Bank advances | 79,600 |
| | 79,600 |
| | — |
| | 79,600 |
| | — |
|
Securities sold under agreement to repurchase | 22,104 |
| | 22,104 |
| | 22,104 |
| | — |
| | — |
|
Junior subordinated debentures | 19,717 |
| | 15,000 |
| | — |
| | — |
| | 15,000 |
|
Accrued interest payable | 215 |
| | 215 |
| | 44 |
| | 142 |
| | 29 |
|
Derivative liabilities - interest rate swaps | 2,804 |
| | 2,804 |
| | — |
| | 2,804 |
| | — |
|
(9)Cash RestrictionThe methodsBank had no cash restrictions at September 30, 2023 and assumptions, not previously presented, used to estimate fair value are described as follows:December 31, 2022.
Cash
(10)Commitments and Cash Equivalents:Contingencies
The fair valueIn the ordinary course of financial instruments that are short-term or reprice frequently and that have little or no risk are considered to have a fair value equal to carrying value (Level 1).
Federal Home Loanbusiness, the Bank Stock:
FHLB stock is not publicly traded; thus, it is not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.
Loans Held for Sale:
The fair value of loans held for sale is estimated based upon binding contracts or quotes from third party investors for similar loans. (Level 2).
Loans Receivable:
Except for certain impaired loans discussed previously, fair value is based on discounted cash flows using current market rates applied to the estimated life (Level 3). While these methodologies are permitted under U.S. GAAP, they are not based on the exit price concept of the fair value required under FASB ASC 820-10, Fair Value Measurements and Disclosures, and generally produce a higher value.
Accrued Interest Receivable/Payable:
The fair value of accrued interest receivable/payable balances approximates the carrying value. The fair value measurements are commensurate with the asset or liability from which the accrued interest is generated (Level 1, Level 2 and Level 3).
Deposits:
For deposits with no contractual maturity, the fair value is assumed to equal the carrying value (Level 1). The fair value of certificate of deposit accounts is based on discounted cash flows using the difference between the deposit rate and the rates offered by the Company for deposits of similar remaining maturities (Level 2).
Federal Home Loan Bank advances:
The fair value of FHLB advances is estimated based on discounting the future cash flows using the market rate currently offered (Level 2).
Securities Sold Under Agreement to Repurchase:
Securities sold under agreement to repurchase are short-term in nature and they reprice on a daily basis. Fair value financial instruments that are short-term or reprice frequently and that have little or no risk are considered to have a fair value equal to carrying value (Level 1).
Junior Subordinated Debentures:
The fair value is estimated using discounted cash flow analysis based on current rates for similarmay enter into various types of debt, which many be unobservable, and considering recent trading activity of similar instruments in markets which can be inactive (Level 3).
Off-Balance Sheet Financial Instruments:
The majority of ourtransactions that include commitments to extend credit standbythat are not included in its unaudited Condensed Consolidated Financial Statements. The Bank applies the same credit standards to these commitments as it uses in all its lending activities and has included these commitments in its lending risk evaluations. The majority of the commitments presented below are variable rate. Loan commitments can be either revolving or non-revolving. The Bank’s exposure to credit and market risk under commitments to extend credit is represented by the amount of these commitments.
The following table presents outstanding commitments to extend credit, including letters of credit, and commitments to sell mortgage loans carry current market interest rates if converted to loans. As such, no premium or discount was ascribed to these commitments (Level 1). They are excluded fromat the preceding tables.dates indicated: | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| (Dollars in thousands) |
Commercial business: | | | |
Commercial and industrial | $ | 536,785 | | | $ | 548,438 | |
Owner-occupied CRE | 9,477 | | | 3,083 | |
Non-owner occupied CRE | 32,680 | | | 13,396 | |
Total commercial business | 578,942 | | | 564,917 | |
| | | |
Real estate construction and land development: | | | |
Residential | 49,008 | | | 43,460 | |
Commercial and multifamily | 345,464 | | | 348,956 | |
Total real estate construction and land development | 394,472 | | | 392,416 | |
Consumer | 336,206 | | | 323,016 | |
Total outstanding commitments | $ | 1,309,620 | | | $ | 1,280,349 | |
| |
(15) | Commitments and Contingencies |
In June 2016, the Company received preliminary findings from the Washington State Department of Revenue ("DOR") regarding its business and occupation ("B&O") tax audit on the B&O tax returns of Whidbey Island Bank for the years 2010-2014. The state B&O tax is a gross receipts tax and is calculated on the gross income from activities. It is measured on the value of products, gross proceeds of sale, or gross income of the business. A substantial portion of the preliminary findings related to the receipt of FDIC shared-loss payments from the FDIC to Washington Banking Company in connection with its acquisitions of City Bank in April 2010 and North County Bank in September 2010. In their preliminary findings, the DOR is considering those payments as taxable for B&O tax purposes. The total amount of this preliminary finding, along with calculated back interest, is approximately $1.6 million. Management is in discussions with the DOR as to whether these payments should be taxable for B&O tax purposes. Given the uncertainty of the outcome of these discussions, management's estimates of the Company's ultimate liability, if any, involve significant judgment and are based on currently available information and an assessment of the validity of facts and calculations assumed by the DOR. Management does not believe a material loss is probable at this time and there are significant factual and legal issues to be resolved. Management believes that it is reasonably possible that future changes to the Company's estimates of loss and the ultimate amount paid for resolution of this B&O audit could impact the Company's results of operations in future periods. Any such losses would be reported as a noninterest expense in the Company's Consolidated Statement of Income.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On July 26, 2017 the Company announced the execution of a definitive agreement with Puget Sound under which Heritage will acquire Puget Sound in an all-stock transaction valued at approximately $126.1 million based on the closing price of Heritage common stock of $27.15 on July 26, 2017. Puget Sound is a business bank headquartered in Bellevue, Washington with one branch location. Under the terms of the agreement, Puget Sound shareholders will receive 1.320 shares of Heritage common stock for each share of Puget Sound common stock, subject to potential adjustment. The value of the consideration will fluctuate until closing based on the value of Heritage's stock price and may be adjusted by a cap and collar in certain circumstances. The definitive agreement has been unanimously approved by the boards of directors of both Heritage and Puget Sound. The merger is subject to regulatory approvals, approval by Puget Sound shareholders and certain other customary closing conditions and is expected to close in the first quarter of 2018.
| |
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 operations of the Company as of and for the three and nine months ended September 30, 2017.2023. The information contained in this section should be read together with the unaudited Condensed Consolidated Financial Statements and the accompanying Notes included herein, the Cautionary Note Regarding Forward-Looking Statements included herein and the December 31, 20162022 audited Consolidated Financial Statements, and the accompanying Notes included in our 2022 Annual Report on Form 10-K for the year ended December 31, 2016.10-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, 2017, we had total assets of $4.05 billion and total stockholders’ equity of $507.6 million. The Company’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report relates primarily to the Bank’s operations.
Our business consists primarily of commercial lending and deposit relationships with small to medium sized 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 real estate loans on residentialsingle family 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.deposits and borrowings. Management strives to matchmanages the repricing characteristics of the Company's 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 significantly affected significantly by general and local economic conditions, particularly changes in market interest rates including most recently significant changes as a result of inflation, and by governmental policies and actions of regulatory agencies. Net interest income is additionally affected by changes onin 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.credit losses on loans. The provision for loancredit losses on loans 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 lossesManagement believes that the ACL on loans reflects the amount that we believe is appropriate to provide for probable incurredcurrent expected credit losses in our loan portfolio.portfolio based on our methodology.
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)card revenue and other income. Noninterest expense consists primarily of compensation and employee benefits, occupancy and equipment, data processing and data processing.professional services. Compensation and employee benefits consist primarily of the salaries and wages paid to our employees, payroll taxes, expenses for retirement and other employee benefits. Occupancy and equipment expenses are the fixed and variable costs of buildings and equipment, and consist primarily of lease payments,expenses, 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 the account processing systems,system, electronic payments processing of products and services, and internet and mobile banking channels.channels and software-as-a-service providers. Professional services consist primarily of third-party service providers such as auditors, consultants and lawyers.
Results of operations may also be significantly affected significantly by general and local economic and competitive conditions, changes in accounting, tax, and regulatory rules, governmental policies and actions of regulatory authorities. Otherauthorities, including changes resulting from inflation and the governmental actions taken to address this issue. Net income and other expenses areis also impacted by growth of operations through organic growth or acquisitions. See also "Cautionary Note Regarding Forward-Looking Statements."
Recent Developments
Since March 2022, inflationary pressures have resulted in higher costs for consumers and businesses. To address inflation, the Federal Open Market Committee (“FOMC”) has taken steps to tighten monetary policy through a cumulative 525 basis point increase to the federal funds rate from March 2022 through September 30, 2023. Management notes that the rapid intervals of rate increases by the Federal Reserve and flattening or inversion of the yield curve, have boosted expectations of the US entering a recession within the next 12 months. Should these ongoing economic pressures persist, we anticipate it could have an impact on the following:
•Loan growth and interest income - If economic activity begins to wane, it may have an impact on our borrowers, the businesses they operate, and their financial condition. Our borrowers may have less demand for credit needed to invest in and expand their businesses, as well as less demand for real estate loans. Such factors would place pressure on the level of interest-earning assets, which may negatively impact our interest income.
•Credit quality - Should there be a decline in economic activity, the markets we serve could experience increases in unemployment, declines in consumer confidence, and a reluctance on the part of businesses to invest in and expand their operations, among other things. Such factors may result in weakened economic conditions, place strain on our borrowers, and ultimately impact the credit quality of our loan portfolio. We expect this could result in increases in the numberlevel of past due, nonaccrual, and classified loans, as well as higher net charge-offs. While economic conditions have generally been favorable thus far, notwithstanding higher levels of inflation, there can be no assurance favorable economic conditions will continue. As such, should we experience future deterioration in the credit quality of our loan portfolio, it may contribute to the need for additional provisions for credit losses.
•ACL - The Company is required to record credit losses on certain financial assets in accordance with the CECL model stipulated under ASC 326, which is highly dependent upon expectations of future economic conditions and requires management judgment. Should expectations of future economic conditions deteriorate, the Company may be required to record additional provisions for credit losses.
•Impairment charges - If economic conditions deteriorate, it could adversely impact the Company’s operating results and the value of certain of our assets. As a result, the Company may be required to write-down the value of certain assets such as goodwill, intangible assets, or deferred tax assets when there is evidence to suggest their value has become impaired or will not be realizable at a future date.
•AOCI - Unrealized gains and losses on AFS investment securities are recognized in stockholders’ equity as accumulated other comprehensive income (loss). If economic conditions deteriorate, and/or if the interest rates continue to increase, the valuation of the Company’s AFS investment securities could be negatively impacted, which may lead to increases in other comprehensive loss, decreases to the Company’s stockholders’ equity.
•Deposits and deposit costs - Given the significant rate increases by the FOMC, it is likely that deposit costs will continue to increase and it may become more challenging for the Company to retain and attract deposit relationships.
•Liquidity - Consistent with our prudent, proactive approach to liquidity management, we may take certain actions to further enhance our liquidity, including but not limited to, increasing our FHLB borrowings, and increasing our brokered deposits.
Further, recent developments and events in the financial services industry, including the failures of two large U.S. banks in the span of three days during March 2023 and another failure in early May 2023, created industry-wide concerns related to liquidity, deposit outflows, uninsured deposit concentrations and eroding consumer confidence in the banking system. These events have occurred against the backdrop of a rapidly rising interest rate environment which, among other things, has resulted in unrealized losses in longer duration securities and loans held by banks and more competition for bank deposits. While many factors played a role in the ultimate failures, these institutions had significant industry/demographic concentrations within their deposit bases and high ratios of uninsured deposits. Lack of diversity within a deposit base may increase the risk of events or trends that could prompt a larger-scale demand for deposits outflow. Further, concerns over a financial institution's ability to protect deposit balances in excess of the federally insured limit may increase the risk of a deposit run.
Heritage’s business, overall financial condition and depositor profiles differ substantially from the banking institutions that are the focus of the recent bank failures. We consider our deposit base to be seasoned, stable and well-diversified, and we do not have any significant industry concentrations among our non-insured deposits. At September 30, 2023, our average deposit account size, calculated by dividing period-end deposits by the population of accounts with balances, was approximately $52,000. The recent industry events and developments have not had a material impact on our financial condition, operations, customer base, liquidity capital position or risk profile, nor have they required us to make any significant changes to our interest rate risk and asset/liability management policies following a review by our Asset Liability Committee. Nevertheless, in response to these recent developments, we have (1) reviewed our contingent liquidity funding plan, including validating procedures and reviewing execution risks in the event of a sudden critical liquidity event, (2) enhanced communication with our customers by holding a bank-wide training session to provide client-facing personnel with information on FDIC insurance, alternative product offerings, and data demonstrating the financial strength of the Bank, and (3) enhanced our monitoring of deposit flows and liquidity including monitoring of (i) deposits by segment, region and location, (ii) liquidity levels and (iii) transaction volumes to better enable us to detect any potential material changes in our financial condition.
Notwithstanding the above, the continued effects of recent industry events and developments could materially and adversely impact our business or financial condition, including through acquisitionspotential liquidity pressures, reduced net interest margins, and corepotential increased credit losses. Moreover, these recent events and developments have, and could continue to, adversely impact the market price and volatility of Heritage’s securities. These recent events may also result in changes to laws or regulations governing banks and bank holding companies or result in the impositions of restrictions through supervisory or enforcement activities, including higher capital requirements, which could have a material impact on our business. The cost of resolving the recent failures may prompt the FDIC to increase its premiums above the recently increased levels or to issue additional special assessments. We are generally unable to control the amount of premiums or special assessments that our banking business growth.subsidiary may be required to pay for FDIC insurance.
The Company continues to focus on serving its customers and communities, maintaining the well-being of its employees, and executing its strategic initiatives. The Company continues to monitor the economic environment and makes changes as appropriate.
Earnings Summary
Results of Operations
Net Income Overview
Comparison of the quarter ended September 30, 20172023 to the comparable quarter in the prior year
Net income was $10.6decreased $2.8 million, or $0.3513.2%, to $18.2 million, or $0.51 per diluted common share, for the three months ended September 30, 20172023, compared to $11.0$21.0 million, or $0.37$0.59 per diluted common share, for the same period in 2022.
The decrease in net income was due primarily to a decrease in net interest income of $3.7 million, a decrease in noninterest income of $1.2 millionand an increase in noninterest expense of $1.8 million.
The decrease in net income was partially offset by a $2.8 million decrease in provision for credit losses, reflect a $878,000 reversal of provision for credit losses for the three months ended September 30, 2016. The $415,000, or 3.8% decrease in net income for the three months ended September 30, 20172023 compared to the three months ended September 30, 2016 was primarily the result of a $1.5$1.9 million or 14.9% decrease in noninterest
income and a $1.1 million, or 4.2% increase in noninterest expense, partially offset by a $1.4 million, or 4.1%, increase in net interest income and a $611,000, or 40.9%, decrease in provision for loan losses.
Net interest income as a percentage of average interest earning assets (net interest margin) decreased 10 basis points to 3.85% for the three months ended September 30, 2017 compared to 3.95%credit losses for the same period in 2016.2022.
The efficiency ratio consists of noninterest expense divided by the sum of net interest income before provision for loan losses plus noninterest income. The Company’s efficiency ratio was 64.4% for the three months ended September 30, 2017 compared to 61.7% for the three months ended September 30, 2016 and the change was attributable to the decrease in noninterest income and the increase in noninterest expense.
Comparison of the nine months ended September 30, 20172023 to the comparable period in the prior yearyear.
Net income was $31.8decreased $3.8 million, or 6.4%, to $55.5 million, or $1.06$1.57 per diluted common share, for the nine months ended September 30, 20172023 compared to $29.0to $59.3 million, or $0.97$1.67 per diluted common share, for the same period in 2022. The decrease wasdue primarily to an increase in noninterest expense of $13.3 million and a $5.7 million increase in the provision for credit losses reflecting a $2.9 million provision for credit losses for the nine months ended September 30, 2016.2023, compared to a $2.8 million reversal of provision for credit losses for the same period in 2022. The $2.7 million, or 9.5% increasedecrease in net income for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 was primarily the result of a $3.0 million, or 12.7%increase in noninterest income and a $2.9 million, or 2.9%,partially offset by an increase in net interest income partially offset by a $3.3of $15.0 million, or 4.2% increase in noninterest expense.9.6%.
The net interest margin decreased 11 basis points to 3.89% for the nine months ended September 30, 2017 compared to 4.00% for the same period in 2016.
The Company’s efficiency ratio improved to 64.5% for the nine months ended September 30, 2017 from 64.8% for the nine months ended September 30, 2016. The improvement in the efficiency ratio for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 was primarily attributable to the increases in noninterest income and net interest income.
Net Interest Income and Margin Overview
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 earning assets, noninterest bearing demand deposits, and other noninterest bearing liabilities and stockholders' equity; the volume of noninterest earning assets; market interest rate fluctuations; and asset quality.
Market rates impact the results of the Company's net interest income, including the significant increases in the federal funds target rate by the Federal Reserve in response to inflation during 2023 and 2022. The following table provides the federal funds target rate history and changes from each period since December 31, 2021:
| | | | | | | | | | | | | | |
Change Date | | Rate (%) | | Rate Change (%) |
December 31, 2021 | | 0.00% - 0.25% | | N/A |
March 17, 2022 | | 0.25% - 0.50% | | 0.25 | % |
May 5, 2022 | | 0.75% - 1.00% | | 0.50 | % |
June 16, 2022 | | 1.50% - 1.75% | | 0.75 | % |
July 28, 2022 | | 2.25% - 2.50% | | 0.75 | % |
September 22, 2022 | | 3.00% - 3.25% | | 0.75 | % |
November 3, 2022 | | 3.75% - 4.00% | | 0.75 | % |
December 15, 2022 | | 4.25% - 4.50% | | 0.50 | % |
February 2, 2023 | | 4.50% - 4.75% | | 0.25 | % |
March 23, 2023 | | 4.75% - 5.00% | | 0.25 | % |
May 4, 2023 | | 5.00% - 5.25% | | 0.25 | % |
July 27, 2023 | | 5.25% - 5.50% | | 0.25 | % |
Comparison of the quarter ended September 30, 20172023 to the comparable quarter in the prior year
Net interest income increased $1.4 million, or 4.1%, to $35.0 million for the three months ended September 30, 2017 compared to $33.6 million for the same period in 2016. The following table provides relevant net interest income information for the dates indicated.periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | | | |
| 2023 | | 2022 | | Change |
| Average Balance(1) | | Interest Earned/ Paid | | Average Yield/ Rate(1) | | Average Balance(1) | | Interest Earned/ Paid | | Average Yield/ Rate | | Average Balance(1) | | Interest Earned/ Paid | | Average Yield/ Rate |
| (Dollars in thousands) |
Interest Earning Assets: | | | | | | | | | | | | | | | | | |
Loans receivable, net (2)(3) | $ | 4,201,554 | | | $ | 56,119 | | | 5.30 | % | | $ | 3,859,839 | | | $ | 43,847 | | | 4.51 | % | | $ | 341,715 | | | $ | 12,272 | | | 0.79 | % |
Taxable securities | 1,931,649 | | | 14,590 | | | 3.00 | | | 1,868,900 | | | 12,362 | | | 2.62 | | | 62,749 | | | 2,228 | | | 0.38 | |
Nontaxable securities (3) | 60,654 | | | 448 | | | 2.93 | | | 133,022 | | | 892 | | | 2.66 | | | (72,368) | | | (444) | | | 0.27 | |
Interest earning deposits | 169,186 | | | 2,310 | | | 5.42 | | | 730,600 | | | 4,009 | | | 2.18 | | | (561,414) | | | (1,699) | | | 3.24 | |
Total interest earning assets | 6,363,043 | | | 73,467 | | | 4.58 | % | | 6,592,361 | | | 61,110 | | | 3.68 | % | | (229,318) | | | 12,357 | | | 0.90 | % |
Noninterest earning assets | 849,689 | | | | | | | 775,375 | | | | | | | 74,314 | | | | | |
Total assets | $ | 7,212,732 | | | | | | | $ | 7,367,736 | | | | | | | $ | (155,004) | | | | | |
Interest Bearing Liabilities: | | | | | | | | | | | | | | | | | |
Certificates of Deposit | $ | 553,015 | | | $ | 4,585 | | | 3.29 | % | | $ | 297,786 | | | $ | 290 | | | 0.39 | % | | $ | 255,229 | | | $ | 4,295 | | | 2.90 | % |
Savings accounts | 523,882 | | | 172 | | | 0.13 | | | 654,697 | | | 99 | | | 0.06 | | | (130,815) | | | 73 | | | 0.07 | |
Interest bearing demand and money market accounts | 2,764,251 | | | 7,120 | | | 1.02 | | | 3,065,007 | | | 1,089 | | | 0.14 | | | (300,756) | | | 6,031 | | | 0.88 | |
Total interest bearing deposits | 3,841,148 | | | 11,877 | | | 1.23 | | | 4,017,490 | | | 1,478 | | | 0.15 | | | (176,342) | | | 10,399 | | | 1.08 | |
Junior subordinated debentures | 21,649 | | | 540 | | | 9.90 | | | 21,356 | | | 312 | | | 5.80 | | | 293 | | | 228 | | | 4.10 | |
Securities sold under agreement to repurchase | 31,729 | | | 38 | | | 0.48 | | | 42,959 | | | 34 | | | 0.31 | | | (11,230) | | | 4 | | | 0.17 | |
Borrowings | 451,032 | | | 5,394 | | | 4.74 | | | — | | | — | | | — | | | 451,032 | | | 5,394 | | | 4.74 | |
Total interest bearing liabilities | 4,345,558 | | | 17,849 | | | 1.63 | % | | 4,081,805 | | | 1,824 | | | 0.18 | % | | 263,753 | | | 16,025 | | | 1.45 | % |
Noninterest bearing demand deposits | 1,859,374 | | | | | | | 2,356,688 | | | | | | | (497,314) | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | | | |
| 2023 | | 2022 | | Change |
| Average Balance(1) | | Interest Earned/ Paid | | Average Yield/ Rate(1) | | Average Balance(1) | | Interest Earned/ Paid | | Average Yield/ Rate | | Average Balance(1) | | Interest Earned/ Paid | | Average Yield/ Rate |
| (Dollars in thousands) |
Other noninterest bearing liabilities | 186,306 | | | | | | | 118,191 | | | | | | | 68,115 | | | | | |
Stockholders’ equity | 821,494 | | | | | | | 811,052 | | | | | | | 10,442 | | | | | |
Total liabilities and stock-holders’ equity | $ | 7,212,732 | | | | | | | $ | 7,367,736 | | | | | | | $ | (155,004) | | | | | |
Net interest income and spread | | | $ | 55,618 | | | 2.95 | % | | | | $ | 59,286 | | | 3.50 | % | | | | $ | (3,668) | | | (0.55) | % |
Net interest margin | | | | | 3.47 | % | | | | | | 3.57 | % | | | | | | (0.10) | % |
(1) Average balances are calculated using daily balances. Average yield/rate is annualized. |
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2017 | | 2016 |
| Average Balance | | Interest Earned/ Paid | | Average Yield/ Rate (1) | | Average Balance | | Interest Earned/ Paid | | Average Yield/ Rate (1) |
| (Dollars in thousands) |
Interest Earning Assets: | | | | | | | | | | | |
Total loans receivable, net (2) (3) | $ | 2,737,535 |
| | $ | 32,595 |
| | 4.72 | % | | $ | 2,526,150 |
| | $ | 30,915 |
| | 4.87 | % |
Taxable securities | 562,256 |
| | 3,117 |
| | 2.20 |
| | 588,749 |
| | 2,888 |
| | 1.95 |
|
Nontaxable securities (3) | 229,683 |
| | 1,354 |
| | 2.34 |
| | 225,994 |
| | 1,235 |
| | 2.17 |
|
Other interest earning assets | 72,643 |
| | 258 |
| | 1.41 |
| | 42,934 |
| | 76 |
| | 0.70 |
|
Total interest earning assets | 3,602,117 |
| | 37,324 |
| | 4.11 | % | | 3,383,827 |
| | 35,114 |
| | 4.13 | % |
Noninterest earning assets | 418,100 |
| | | | | | 408,634 |
| | | | |
Total assets | $ | 4,020,217 |
| | | | | | $ | 3,792,461 |
| | | | |
Interest Bearing Liabilities: | | | | | | | | | | | |
Certificates of deposit | $ | 394,345 |
| | $ | 633 |
| | 0.64 | % | | $ | 378,407 |
| | $ | 468 |
| | 0.49 | % |
Savings accounts | 494,990 |
| | 360 |
| | 0.29 |
| | 507,523 |
| | 214 |
| | 0.17 |
|
Interest bearing demand and money market accounts | 1,499,335 |
| | 635 |
| | 0.17 |
| | 1,480,220 |
| | 587 |
| | 0.16 |
|
Total interest bearing deposits | 2,388,670 |
| | 1,628 |
| | 0.27 |
| | 2,366,150 |
| | 1,269 |
| | 0.21 |
|
FHLB advances and other borrowings | 111,293 |
| | 428 |
| | 1.53 |
| | 5,618 |
| | 8 |
| | 0.57 |
|
Securities sold under agreement to repurchase | 28,999 |
| | 16 |
| | 0.22 |
| | 18,861 |
| | 10 |
| | 0.21 |
|
Junior subordinated debentures | 19,897 |
| | 261 |
| | 5.20 |
| | 19,602 |
| | 221 |
| | 4.49 |
|
Total interest bearing liabilities | 2,548,859 |
| | 2,333 |
| | 0.36 | % | | 2,410,231 |
| | 1,508 |
| | 0.25 | % |
Demand and other noninterest bearing deposits | 916,074 |
| | | | | | 844,468 |
| | | | |
Other noninterest bearing liabilities | 50,022 |
| | | | | | 44,378 |
| | | | |
Stockholders’ equity | 505,262 |
| | | | | | 493,384 |
| | | | |
Total liabilities and stockholders’ equity | $ | 4,020,217 |
| | | | | | $ | 3,792,461 |
| | | | |
Net interest income |
| | $ | 34,991 |
| | | | | | $ | 33,606 |
| | |
Net interest spread | | | | | 3.75 | % | | | | | | 3.88 | % |
Net interest margin | | | | | 3.85 | % | | | | | | 3.95 | % |
Average interest earning assets to average interest bearing liabilities | | | | | 141.32 | % | | | | | | 140.39 | % |
(2) Average loans receivable, net includes loans held for sale and loans classified as nonaccrual, which carry a zero yield. Interest earned on loans receivable, net includes the amortization of net deferred loan fees of $940,000 and $857,000 for the three months ended September 30, 2023 and 2022, respectively.
| |
(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(3) Yields on tax-exempt loans and securities have not been stated on a tax-equivalent basis.
TotalThe following table provides the changes in net interest income increased $2.2for the three months ended September 30, 2023 compared to the same period in 2022 due to changes in average asset and liability balances (volume), changes in average yields/rates (rate) and changes attributable to the combined effect of volume and rates allocated proportionately to the absolute value of changes due to volume and changes due to rates:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Increase (Decrease) Due to Changes In: | | |
| Volume | | Yield/Rate | | Total | | % Change | | | | | | |
| (Dollars in thousands) | | |
Interest Earning Assets: | | | | | | | | | | | | | |
Loans receivable, net | $ | 4,110 | | | $ | 8,162 | | | $ | 12,272 | | | 28.0 | % | | | | | | |
Taxable securities | 426 | | | 1,802 | | | 2,228 | | | 18.0 | | | | | | | |
Nontaxable securities | (527) | | | 83 | | | (444) | | | (49.8) | | | | | | | |
Interest earning deposits | (4,643) | | | 2,944 | | | (1,699) | | | (42.4) | | | | | | | |
Total interest income | $ | (634) | | | $ | 12,991 | | | $ | 12,357 | | | 20.2 | % | | | | | | |
Interest Bearing Liabilities: | | | | | | | | | | | | | |
Certificates of deposit | $ | 441 | | | $ | 3,854 | | | $ | 4,295 | | | 1,481.0 | % | | | | | | |
Savings accounts | (23) | | | 96 | | | 73 | | | 73.7 | | | | | | | |
Interest bearing demand and money market accounts | (117) | | | 6,148 | | | 6,031 | | | 553.8 | | | | | | | |
Total interest bearing deposits | 301 | | | 10,098 | | | 10,399 | | | 703.6 | | | | | | | |
Junior subordinated debentures | 4 | | | 224 | | | 228 | | | 73.1 | | | | | | | |
Securities sold under agreement to repurchase | (11) | | | 15 | | | 4 | | | 11.8 | | | | | | | |
Borrowings | 5,394 | | | — | | | 5,394 | | | 100.0 | | | | | | | |
Total interest expense | $ | 5,688 | | | $ | 10,337 | | | $ | 16,025 | | | 878.6 | % | | | | | | |
Net interest income | $ | (6,322) | | | $ | 2,654 | | | $ | (3,668) | | | (6.2) | % | | | | | | |
Net interest income decreased $3.7 million, or 6.3%6.2%, to $37.3$55.6 million for the three months ended September 30, 20172023 as compared to $35.1$59.3 million for the same period in 2016. The balance2022 due primarily to a $16.0 million increase in total interest expense offset partially by a $12.4 million increase in total interest income.
Total interest expense increased to $17.8 million during the three months ended September 30, 2023 compared to $1.8 million for the same period in 2022 due primarily to a 108 basis point increase in the cost of average interest earning assets increased $218.3 million, or 6.5%,bearing deposits to $3.60 billion1.23% for the three months ended September 30, 2017 from $3.38 billion2023, as compared to 0.15% for the same period in 2022 due to competitive rate pressures and the addition of interest expense on borrowings during the three months ended September 30, 2016 and the average yield on total interest earning assets decreased two basis points to 4.11% for the three months ended September 30, 20172023 as compared to 4.13% forno interest expense on borrowings during the three months ended September 30, 2016.same period in 2022.
InterestTotal interest income from interest and fees on loans increased $1.7 million, or 5.4%, to $32.6$73.5 million for the three months ended September 30, 2017 from $30.92023, compared to $61.1 million for the same period in 20162022 primarily due to an increase in average loans receivable of $211.4 million, or 8.4%, as a result of loan growth, offset partially by a 1590 basis point decrease inincrease to the average loan yield on interest earning assets to 4.72%4.58% for the three months ended September 30, 2017 from 4.87%2023, as compared to 3.68% for the same period in 2022 due to an increase in market interest rates.
Net interest margin decreased ten basis points to 3.47% for the three months ended September 30, 2016. The decrease in average loan yield was due primarily to a decrease in incremental accretion income on purchased loans and secondarily to a decrease in contractual note rates.
The following table presents the average loan yield and effects of the incremental accretion on purchased loans for the three months ended September 30, 2017 and 2016:
|
| | | | | | | | |
| | Three Months Ended September 30, |
| | 2017 | | 2016 |
| | (Dollars in thousands) |
Average loan yield, excluding incremental accretion on purchased loans (1) | | 4.57 | % | | 4.63 | % |
Impact on average loan yield from incremental accretion on purchased loans (1) | | 0.15 | % | | 0.24 | % |
Average loan yield | | 4.72 | % | | 4.87 | % |
| | | | |
Incremental accretion on purchased loans (1) | | $ | 1,036 |
| | $ | 1,530 |
|
| |
(1)
| As of the dates of the completion of each of the merger and acquisition transactions, 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 modified 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. |
Incremental accretion income was $1.0 million and $1.5 million for the three months ended September 30, 2017 and 2016, respectively. The decrease in the incremental accretion was primarily a result of a continued decline in the purchased loan balances and a decrease in the prepayments of purchased loans during the three months ended September 30, 20172023 compared to the same period in 2016. The incremental accretion is expected to continue to decrease as the balance of the purchased loans continues to decrease.
Total interest income increased primarily due to the increase in interest and fees on loans discussed above and secondarily due to a $348,000, or 8.4%, increase in interest income on investment securities to $4.5 million during the three months ended September 30, 2017 from $4.1 million for the three months ended September 30, 2016. The increase in income on investment securities was a result of an increase in average investment yields for the three months ended September 30, 2017 compared to the same period in 2016, offset partially by a decrease in the average balance of investment securities. Average yields on taxable securities increased 25 basis points to 2.20% for the three months ended September 30, 2017 from 1.95%3.57% for the same period in 2016. Average yields on nontaxable securities increased 17 basis points to 2.34% for the three months ended September 30, 2017 from 2.17% for the same period in 2016. The average balance of investment securities decreased $22.8 million, or 2.8%, to $791.9 million during the three months ended September 30, 2017 from $814.7 million during the three months ended September 30, 2016. The Company has actively managed its investment securities portfolio to mitigate declining trends in loan yields.2022.
Average other interest earning assets increased $29.7 million, or 69.2%, to $72.6 million for the three months ended September 30, 2017 compared to $42.9 million for the three months ended September 30, 2016. 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 the prior year.
Interest Expense
Total interest expense increased $825,000, or 54.7%, to $2.3 million for the three months ended September 30, 2017 compared to $1.5 million for the same period in 2016. The average cost of interest bearing liabilities increased 11 basis points to 0.36% for the three months ended September 30, 2017 from 0.25% for the three months ended September 30, 2016 as a result of increases in market rates. Total average interest bearing liabilities increased by $138.6 million, or 5.8%, to $2.55 billion for the three months ended September 30, 2017 from $2.41 billion for the three months ended September 30, 2016.
The average cost of interest bearing deposits increased six basis points to 0.27% for the three months ended September 30, 2017 from 0.21% for the same period in 2016 primarily as a result of increases in both the average balance and cost of certificates of deposit and an increase in the average cost of savings accounts.
Interest expense on certificates of deposit increased $165,000, or 35.3%, to $633,000 during the three months ended September 30, 2017 from $468,000 for the same period in 2016 due to increases in the average balance and the cost of the certificates of deposits accounts. The average balance of certificates of deposits increased $15.9 million, or 4.2%, to $394.3 million, for the three months ended September 30, 2017 from $378.4 million for the same period in 2016. The cost of certificates of deposits increased 15 basis points to 0.64% for the three months ended September 30, 2017 from 0.49% for the same period in 2016.
Interest expense on savings accounts increased $146,000, or 68.2%, to $360,000 during the three months ended September 30, 2017 from $214,000 for the same period in 2016 due primarily to the 12 basis point increase of the cost of the savings accounts to 0.29% for the three months ended September 30, 2017 from 0.17% for the same period in 2016.
Interest expense on FHLB advances and other borrowings increased $420,000, or 52.5%, to $428,000 for the three months ended September 30, 2018 from $8,000 for the same period in 2016 due to a combination of an increase in both average balances and cost of funds. The average balance for FHLB advances and other borrowings increased $105.7 million, or 1,881.0%, to $111.3 million for the three months ended September 30, 2017 from $5.6 million for the same period in 2016, due primarily to fund loan growth. The average rate of the FHLB advances for the three months ended September 30, 2017 was 1.53%, an increase of 96 basis points from 0.57% for the same period in 2016, due primarily to continued increases in short-term borrowing rates over the last year.
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, for the three months ended September 30, 2017 was 5.20%, an increase of 71 basis points from 4.49% for the same period in 2016. The rate increase on the debentures was due to an increase in the three-month LIBOR rate to 1.33% at September 30, 2017 from 0.85% on September 30, 2016.
Net Interest Margin
Net interest margin for the three months ended September 30, 2017 decreased ten basis points to 3.85% from 3.95% for the same period in 2016 primarily due to the decline in the incremental accretion on purchased loans, as discussed below. The net interest spread for the three months ended September 30, 2017 decreased 13 basis points to 3.75% from 3.88% for the same period in 2016. The decrease was primarily due to the above mentioned increases in the cost of funds of interest 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, 2017 and 2016:
|
| | | | | | |
| | Three Months Ended September 30, |
| | 2017 | | 2016 |
Net interest margin, excluding incremental accretion on purchased loans (1) | | 3.74 | % | | 3.77 | % |
Impact on net interest margin from incremental accretion on purchased loans (1) | | 0.11 |
| | 0.18 |
|
Net interest margin | | 3.85 | % | | 3.95 | % |
| |
(1)
| As of the dates of the completion of each of the merger and acquisition transactions, 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 modified 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. |
Comparison of nine months ended September 30, 20172023 to the comparable period in the prior year
Net interest income increased $2.9 million, or 2.9%, to $102.3 million for the nine months ended September 30, 2017 compared to $99.5 million for the same period in 2016. The following table provides relevant net interest income information for the dates indicated.periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | | | | | |
| 2023 | | 2022 | | Change |
| Average Balance(1) | | Interest Earned/ Paid | | Average Yield/ Rate(1) | | Average Balance(1) | | Interest Earned/ Paid | | Average Yield/ Rate | | Average Balance(1) | | Interest Earned/ Paid | | Average Yield/ Rate |
| (Dollars in thousands) |
Interest Earning Assets: | | | | | | | | | | | | | | | | | |
Loans receivable, net (2)(3) | $ | 4,129,429 | | | $ | 160,192 | | | 5.19 | % | | $ | 3,815,387 | | | $ | 125,762 | | | 4.41 | % | | $ | 314,042 | | | $ | 34,430 | | | 0.78 | % |
Taxable securities | 1,975,818 | | | 44,021 | | | 2.98 | | | 1,532,450 | | | 25,972 | | | 2.27 | | | 443,368 | | | 18,049 | | | 0.71 | |
Nontaxable securities (3) | 71,702 | | | 1,554 | | | 2.90 | | | 138,904 | | | 2,645 | | | 2.55 | | | (67,202) | | | (1,091) | | | 0.35 | |
Interest earning deposits | 114,753 | | | 4,436 | | | 5.17 | | | 1,146,183 | | | 7,057 | | | 0.82 | | | (1,031,430) | | | (2,621) | | | 4.35 | |
Total interest earning assets | 6,291,702 | | | 210,203 | | | 4.47 | % | | 6,632,924 | | | 161,436 | | | 3.25 | % | | (341,222) | | | 48,767 | | | 1.22 | % |
Noninterest earning assets | 848,035 | | | | | | | 762,877 | | | | | | | 85,158 | | | | | |
Total assets | $ | 7,139,737 | | | | | | | $ | 7,395,801 | | | | | | | $ | (256,064) | | | | | |
Interest Bearing Liabilities: | | | | | | | | | | | | | | | | | |
Certificates of Deposit | $ | 442,301 | | | $ | 8,292 | | | 2.51 | % | | $ | 318,547 | | | $ | 952 | | | 0.40 | % | | $ | 123,754 | | | $ | 7,340 | | | 2.11 | % |
Savings accounts | 558,467 | | | 471 | | | 0.11 | | | 651,292 | | | 274 | | | 0.06 | | | (92,825) | | | 197 | | | 0.05 | |
Interest bearing demand and money market accounts | 2,791,695 | | | 16,249 | | | 0.78 | | | 3,066,229 | | | 3,089 | | | 0.13 | | | (274,534) | | | 13,160 | | | 0.65 | |
Total interest bearing deposits | 3,792,463 | | | 25,012 | | | 0.88 | | | 4,036,068 | | | 4,315 | | | 0.14 | | | (243,605) | | | 20,697 | | | 0.74 | |
Junior subordinated debentures | 21,576 | | | 1,521 | | | 9.43 | | | 21,286 | | | 745 | | | 4.68 | | | 290 | | | 776 | | | 4.75 | |
Securities sold under agreement to repurchase | 38,187 | | | 148 | | | 0.52 | | | 47,057 | | | 98 | | | 0.28 | | | (8,870) | | | 50 | | | 0.24 | |
Borrowings | 339,296 | | | 12,238 | | | 4.82 | | | — | | | — | | | — | % | | 339,296 | | | 12,238 | | | 4.82 | |
Total interest bearing liabilities | 4,191,522 | | | 38,919 | | | 1.24 | % | | 4,104,411 | | | 5,158 | | | 0.17 | % | | 87,111 | | | 33,761 | | | 1.07 | % |
Noninterest bearing demand deposits | 1,942,134 | | | | | | | 2,355,285 | | | | | | | (413,151) | | | | | |
Other noninterest bearing liabilities | 186,469 | | | | | | | 113,534 | | | | | | | 72,935 | | | | | |
Stockholders’ equity | 819,612 | | | | | | | 822,571 | | | | | | | (2,959) | | | | | |
Total liabilities and stock-holders’ equity | $ | 7,139,737 | | | | | | | $ | 7,395,801 | | | | | | | $ | (256,064) | | | | | |
Net interest income and spread | | | $ | 171,284 | | | 3.23 | % | | | | $ | 156,278 | | | 3.08 | % | | | | $ | 15,006 | | | 0.15 | % |
Net interest margin | | | | | 3.64 | % | | | | | | 3.15 | % | | | | | | 0.49 | % |
(1) Average balances are calculated using daily balances. Average yield/rate is annualized.
51
|
| | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
| Average Balance | | Interest Earned/ Paid | | Average Yield/ Rate (1) | | Average Balance | | Interest Earned/ Paid | | Average Yield/ Rate (1) |
| (Dollars in thousands) |
Interest Earning Assets: | | | | | | | | | | | |
Total loans receivable, net (2) (3) | $ | 2,676,153 |
| | $ | 94,580 |
| | 4.73 | % | | $ | 2,461,856 |
| | $ | 91,595 |
| | 4.97 | % |
Taxable securities | 565,528 |
| | 9,307 |
| | 2.20 |
| | 594,301 |
| | 8,522 |
| | 1.92 |
|
Nontaxable securities (3) | 225,583 |
| | 3,926 |
| | 2.33 |
| | 220,038 |
| | 3,599 |
| | 2.18 |
|
Other interest earning assets | 51,049 |
| | 461 |
| | 1.21 |
| | 47,829 |
| | 225 |
| | 0.63 |
|
Total interest earning assets | 3,518,313 |
| | 108,274 |
| | 4.11 | % | | 3,324,024 |
| | 103,941 |
| | 4.18 | % |
Noninterest earning assets | 418,837 |
| | | | | | 391,342 |
| | | | |
Total assets | $ | 3,937,150 |
| | | | | | $ | 3,715,366 |
| | | | |
Interest Bearing Liabilities: | | | | | | | | | | | |
Certificates of deposit | $ | 369,724 |
| | $ | 1,527 |
| | 0.55 | % | | $ | 397,070 |
| | $ | 1,496 |
| | 0.50 | % |
Savings accounts | 499,353 |
| | 940 |
| | 0.25 |
| | 478,762 |
| | 540 |
| | 0.15 |
|
Interest bearing demand and money market accounts | 1,489,149 |
| | 1,834 |
| | 0.16 |
| | 1,457,399 |
| | 1,729 |
| | 0.16 |
|
Total interest bearing deposits | 2,358,226 |
| | 4,301 |
| | 0.24 |
| | 2,333,231 |
| | 3,765 |
| | 0.22 |
|
FHLB advances and other borrowings | 106,556 |
| | 870 |
| | 1.09 |
| | 11,608 |
| | 47 |
| | 0.54 |
|
Securities sold under agreement to repurchase | 23,660 |
| | 38 |
| | 0.21 |
| | 20,031 |
| | 31 |
| | 0.21 |
|
Junior subordinated debentures | 19,823 |
| | 748 |
| | 5.05 |
| | 19,527 |
| | 647 |
| | 4.43 |
|
Total interest bearing liabilities | 2,508,265 |
| | 5,957 |
| | 0.32 | % | | 2,384,397 |
| | 4,490 |
| | 0.25 | % |
Demand and other noninterest bearing deposits | 885,467 |
| | | | | | 811,043 |
| | | | |
Other noninterest bearing liabilities | 47,283 |
| | | | | | 35,266 |
| | | | |
Stockholders’ equity | 496,135 |
| | | | | | 484,660 |
| | | | |
Total liabilities and stockholders’ equity | $ | 3,937,150 |
| | | | | | $ | 3,715,366 |
| | | | |
Net interest income | | | $ | 102,317 |
| | | | | | $ | 99,451 |
| | |
Net interest spread | | | | | 3.79 | % | | | | | | 3.93 | % |
Net interest margin | | | | | 3.89 | % | | | | | | 4.00 | % |
Average interest earning assets to average interest bearing liabilities | | | | | 140.27 | % | | | | | | 139.41 | % |
| |
(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 $4.3net deferred loan fees of $2.4 million or 4.2%, to $108.3and $6.7 million for the nine months ended September 30, 2017 compared to $103.9 million for2023 and 2022, respectively.
(3) Yields on tax-exempt loans and securities have not been stated on a tax-equivalent basis.
The following table provides the same periodchanges in 2016. The balance of averagenet interest earning assets increased $194.3 million, or 5.8%, to $3.52 billionincome for the nine months ended September 30, 2017 from $3.32 billion for the nine months ended September 30, 2016 and the yield on total interest earning assets decreased seven basis points to 4.11% for the nine months ended September 30, 20172023 compared to 4.18% for the nine months ended September 30, 2016.same period in 2022 due to changes in average asset and liability balances (volume), changes in average yields/rates (rate) and changes attributable to the combined effect of volume and rates allocated proportionately to the absolute value of changes due to volume and changes due to rates:
Interest | | | | | | | | | | | | | | | | | | | | | | | |
| Increase (Decrease) Due to Changes In: |
| Volume | | Yield/Rate | | Total | | % Change |
| (Dollars in thousands) |
Interest Earning Assets: | | | | | | | |
Loans receivable, net | $ | 10,932 | | | $ | 23,498 | | | $ | 34,430 | | | 27.4 | % |
Taxable securities | 8,646 | | | 9,403 | | | 18,049 | | | 69.5 | |
Nontaxable securities | (1,417) | | | 326 | | | (1,091) | | | (41.2) | |
Interest earning deposits | (11,234) | | | 8,613 | | | (2,621) | | | (37.1) | |
Total interest income | $ | 6,927 | | | $ | 41,840 | | | $ | 48,767 | | | 30.2 | % |
Interest Bearing Liabilities: | | | | | | | |
Certificates of deposit | $ | 504 | | | $ | 6,836 | | | $ | 7,340 | | | 771.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Increase (Decrease) Due to Changes In: |
| Volume | | Yield/Rate | | Total | | % Change |
| (Dollars in thousands) |
Savings accounts | (44) | | | 241 | | | 197 | | | 71.9 | |
Interest bearing demand and money market accounts | (301) | | | 13,461 | | | 13,160 | | | 426.0 | |
Total interest bearing deposits | 159 | | | 20,538 | | | 20,697 | | | 479.7 | |
Junior subordinated debentures | 10 | | | 766 | | | 776 | | | 104.2 | |
Securities sold under agreement to repurchase | (21) | | | 71 | | | 50 | | | 51.0 | |
Borrowings | 12,238 | | | — | | | 12,238 | | | 100.0 | |
Total interest expense | $ | 12,386 | | | $ | 21,375 | | | $ | 33,761 | | | 654.5 | % |
Net interest income | $ | (5,459) | | | $ | 20,465 | | | $ | 15,006 | | | 9.6 | % |
Net interest income from interest and fees on loans increased $3.0$15.0 million, or 3.3%9.6%, to $94.6$171.3 million for the nine months ended September 30, 2017 from $91.62023 as compared to $156.3 million for the same period in 20162022 due primarily to an increase in average loans receivable,total interest income offset partially by a decreasean increase in average loan yields. Average loans receivabletotal interest expense.
Total interest income increased $214.3$48.8 million, or 8.7%30.2%, to $2.68 billion for the nine months ended September 30, 2017 compared to $2.46 billion for the nine months ended September 30, 2016. Average loan yields decreased 24 basis points to 4.73% for the nine months ended September 30, 2017 from 4.97% for the nine months ended September 30, 2016 due mostly to a decrease in incremental accretion income.
The following table presents the average loan yield and effects of the incremental accretion on purchased loans for the nine months ended September 30, 2017 and 2016:
|
| | | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
| | (Dollars in thousands) |
Average loan yield, excluding incremental accretion on purchased loans (1) | | 4.55 | % | | 4.66 | % |
Impact on average loan yield from incremental accretion on purchased loans (1) | | 0.18 | % | | 0.31 | % |
Average loan yield | | 4.73 | % | | 4.97 | % |
| | | | |
Incremental accretion on purchased loans (1) | | $ | 3,687 |
| | $ | 5,669 |
|
| |
(1)
| As of the dates of the completion of each of the merger and acquisition transactions, 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 modified 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. |
Incremental accretion income was $3.7 million and $5.7$210.2 million for the nine months ended September 30, 2017 and 2016, respectively.2023, compared to $161.4 million for the same period in 2022. The decrease inincrease was the incremental accretion was primarily a result of a continued decline in122 basis point increase on the purchased loan balances and a decrease in the prepayments of purchased loans duringyield on interest earning assets to 4.47% for the nine months ended September 30, 20172023, as compared to 3.25% for the same period in 2016. The incremental accretion is expected2022, due to continue to decreasean increase in market interest rates as well as change in the balancemix of the purchased loans continues to decrease.total interest earning assets into higher yielding assets.
Total interest incomeexpense increased primarily due to the increase in interest and fees on loans discussed above and secondarily due to a $1.1$33.8 million, or 9.2%654.5%, increase in interest income on investment securities to $13.2$38.9 million during the nine months ended September 30, 2017 from $12.12023 compared to $5.2 million for the same period in 2022 due primarily to a 74 basis point increase in cost of interest bearing deposits to 0.88% for the nine months ended September 30, 2016. The increase2023, as compared to 0.14% for the same period in 2022, due to competitive rate pressures as well as the addition of interest incomeexpense on investment securities wasborrowings during the result of an increasenine months ended September 30, 2023 as compared to no interest expense on borrowings during the same period in average investment yields2022.
Net interest margin increased 49 basis points to 3.64% for the nine months ended September 30, 20172023 compared to the same period in 2016, offset partially by a decrease in the average balance of investment securities. Average yields on taxable securities increased 28 basis points to 2.20% for the nine months ended September 30, 2017 from 1.92%3.15% for the same period in 2016. Average yields on nontaxable securities increased 15 basis points to 2.33% for the nine months ended September 30, 2017 from 2.18% for the same period in 2016. The average balance of investment securities decreased $23.2 million, or 2.9%, to $791.1 million during the nine months ended September 30, 2017 from $814.3 million during the nine months ended September 30, 2016. The Company has actively managed its investment securities portfolio to mitigate declining, but recently improving, loan yields.2022.
Average other interest earning assets increased $3.2 million, or 6.7%, to $51.0 million for the nine months ended September 30, 2017 compared to $47.8 million for the nine months ended September 30, 2016. 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 2016.
Interest Expense
Total interest expense increased $1.5 million, or 32.7%, to $6.0 million for the nine months ended September 30, 2017 compared to $4.5 million for the same period in 2016. The average cost of interest bearing liabilities increased seven basis points to 0.32% for the nine months ended September 30, 2017 from 0.25% for the nine months ended September 30, 2016. Total average interest bearing liabilities increased by $123.9 million, or 5.2%, to $2.51 billion for the nine months ended September 30, 2017 from $2.38 billion for the nine months ended September 30, 2016.
The average cost of interest bearing deposits increased two basis points to 0.24% for the nine months ended September 30, 2017 from 0.22% for the same period in 2016 due primarily to the changes in savings accounts.
Interest expense on savings accounts increased $400,000, or 74.1%, to $940,000 for the nine months ended September 30, 2017 from $540,000 for the same period in 2016 due to increases in both the average balance and cost of the savings accounts. The average balance of savings accounts increased $20.6 million, or 4.3%, to $499.4 million for the nine months ended September 30, 2017 from $478.8 million for the same period in 2016. The cost of savings accounts increased ten basis points to 0.25% for the nine months ended September 30, 2017 from 0.15% for the same period in 2016.
Interest expense of certificates of deposit accounts increased only $31,000, or 2.1%, to $1.5 million for the nine months ended September 30, 2017. The average balance of certificates of deposit decreased $27.3 million, or
6.9%, to $369.7 million for the nine months ended September 30, 2017 compared to $397.1 million for the nine months ended September 30, 2016 while the cost of certificates of deposits increased to 0.55% for the nine months ended September 30, 2017 from 0.50% for the same period in 2016.
Interest expense on FHLB advances and other borrowings increased $823,000 to $870,000 for the nine months ended September 30, 2017 from $47,000 for the nine months ended September 30, 2016 due to a combination of an increase in average balances and an increase in the cost of funds. The average balance for FHLB advances and other borrowings increased $94.9 million to $106.6 million for the nine months ended September 30, 2017 from $11.6 million for the same period in 2016, due primarily to fund loan growth. The average rate of the FHLB advances and other borrowings for the nine months ended September 30, 2017 was 1.09%, an increase of 55 basis points from 0.54% for the same period in 2016.
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, for the nine months ended September 30, 2017 was 5.05%, an increase of 62 basis points from 4.43% for the same period in 2016. The rate increase on the debentures was due to an increase in the three-month LIBOR rate to 1.33% at September 30, 2017 from 0.85% on September 30, 2016.
Net Interest Margin
Net interest margin for the nine months ended September 30, 2017 decreased 11 basis points to 3.89% from 4.00% for the same period in 2016 primarily due to the decline in the incremental accretion on purchased loans, as discussed below. The net interest spread for the nine months ended September 30, 2017 decreased 14 basis points to 3.79% from 3.93% for the same period in 2016. This decrease was primarily due to the above mentioned decrease in average yields on total interest earning assets and increase in the average cost of funds of total interest 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, 2017 and 2016:
|
| | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
Net interest margin, excluding incremental accretion on purchased loans (1) | | 3.75 | % | | 3.77 | % |
Impact on net interest margin from incremental accretion on purchased loans (1) | | 0.14 |
| | 0.23 |
|
Net interest margin | | 3.89 | % | | 4.00 | % |
| |
(1)
| As of the dates of the completion of each of the merger and acquisition transactions, 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 modified 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. |
Provision for LoanCredit Losses Overview
The Bank has established a comprehensive methodologyaggregate of the provision for determining its allowancecredit losses on loans and the provision for loancredit losses on unfunded commitments is presented on the unaudited Condensed Consolidated Statements of Income as the (reversal of) provision for credit losses. The allowance for loan lossesACL on unfunded commitments 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. For additional information, see the section entitled "Analysis of Allowance for Loan Losses" below.
The provision for loan losses is dependentincluded on the Bank’s ability to manage asset qualityunaudited Condensed Consolidated Statements of Financial Condition within accrued expenses 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.other liabilities.
Comparison of the quarter ended September 30, 20172023 to the comparable quarter in the prior year
The following table presents the (reversal of) provision for credit losses for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change |
| 2023 | | 2022 | | $ | | % |
| (Dollars in thousands) |
(Reversal of) provision for credit losses on loans | $ | (635) | | | $ | 1,919 | | | $ | (2,554) | | | 133.1 | % |
(Reversal of) provision for credit losses on unfunded commitments | (243) | | | 26 | | | (269) | | | 1034.6 | |
(Reversal of) provision for credit losses | $ | (878) | | | $ | 1,945 | | | $ | (2,823) | | | 145.1 | % |
The provision for loancredit losses decreased $611,000, or 40.9%on loans reflects the amount required to $884,000maintain the ACL on loans at an appropriate level based upon management’s evaluation of the adequacy of collective and individual loss reserves. The reversal of provision for credit losses on loans was $635,000 during the three months ended September 30, 2017 from $1.52023 due primarily to net recoveries of $1.2 million primarily due to the payoff of a nonaccrual loan. Future assessments of the expected credit losses will not only be impacted by changes in the composition of and amount of loans and to the reasonable and supportable forecast, but will also include an updated assessment of qualitative factors, as well as consideration of any required changes in the reasonable and supportable forecast reversion period. The reversal of provision for credit losses on unfunded commitments recognized during the three months ended September 30, 2016. 2023 was due primarily to an increase in loan utilization rates in commercial and industrial loans which reduced the unfunded exposure.
The decrease in the$1.9 million provision for loancredit losses foron loans recognized during the three months ended September 30, 2017 from2022 was due primarily to growth in loans receivable offset partially by a reduction to the same period in 2016 was primarily the result of a change in the composition of the loan portfolio, changes in certain environmental factors and improvements in certain historical loss factors. BasedACL on a thorough review of the loan portfolio, the Bank determined that the provisionloans individually evaluated for
losses.
loan losses for the three months ended September 30, 2017 was appropriate as it was calculated in accordance with the Bank's methodology for determining the allowance for loan losses.
Comparison of the nine months ended September 30, 20172023 to the comparable period in the prior year
The following table presents the provision for loan(reversal of) credit losses decreased $872,000, or 23.2% for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Change |
| 2023 | | 2022 | | $ | | % |
| (Dollars in thousands) |
Provision for (reversal of) credit losses on loans | $ | 3,066 | | | $ | (1,252) | | | $ | 4,318 | | | (344.9) | % |
Reversal of provision for credit losses on unfunded commitments | (210) | | | (1,584) | | | 1,374 | | | (86.7) | |
Provision for (reversal of) credit losses | $ | 2,856 | | | $ | (2,836) | | | $ | 5,692 | | | (200.7) | % |
The $3.1 million provision for credit losses on loans during the nine months ended September 30, 2023was due primarily to $2.9 millionan increase in loans receivable as well as a change in mix of loans offset partially by net recoveries of 895,000. The $210,000 reversal of provision for credit losses on unfunded commitments recorded during the nine months ended September 30, 2017 from $3.82023 was due primarily to an increase in loan utilization rates in commercial and industrial loans which reduced the unfunded exposure.
The $1.3 million reversal of provision for credit losses on loans recognized during the nine months ended September 30, 2022was due primarily to a reduction of loans individually evaluated for losses and their related ACL. The $1.6 million reversal of provision for credit losses on unfunded commitments recognized during the nine months ended September 30, 2016. The decrease in the provision for2022 was due primarily to higher loan losses for the nine months ended September 30, 2017 from the same period in 2016 was primarily the result of a change in the volume and mix of loans, changes in certain environmental factors and improvements in certain historical loss factors. 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, 2017 was appropriate as it was calculated in accordance with the Bank's methodology for determining the allowance for loan losses.utilization rates.
Noninterest Income Overview
Comparison of quarter ended September 30, 2017 to the comparable quarter in the prior year
Total noninterest income decreased $1.5 million, or 14.9%, to $8.4 million for the three months ended September 30, 2017 compared2023 to $9.9 million for the samecomparable period in 2016. the prior year
The following table presents the change in the key components of noninterest income for the periods noted.indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change |
| 2023 | | 2022 | | $ | | % |
| (Dollars in thousands) |
Service charges and other fees | $ | 2,856 | | | $ | 2,688 | | | $ | 168 | | | 6.3 | % |
Card revenue | 2,273 | | | 2,365 | | | (92) | | | (3.9) | |
Loss on sale of investment securities, net | (1,940) | | | — | | | (1,940) | | | 100.0 | |
Gain on sale of loans, net | 157 | | | 133 | | | 24 | | | 18.0 | |
Interest rate swap fees | 62 | | | 78 | | | (16) | | | (20.5) | |
Bank owned life insurance income | 734 | | | 723 | | | 11 | | | 1.5 | |
Gain on sale of other assets, net | — | | | 265 | | | (265) | | | (100.0) | |
Other income | 2,129 | | | 1,201 | | | 928 | | | 77.3 | |
Total noninterest income | $ | 6,271 | | | $ | 7,453 | | | $ | (1,182) | | | (15.9) | % |
|
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | |
| 2017 | | 2016 | | Change | | Percentage Change |
| (Dollars in thousands) |
Service charges and other fees | $ | 4,769 |
| | $ | 3,630 |
| | $ | 1,139 |
| | 31.4 | % |
Gain on sale of investment securities, net | 44 |
| | 345 |
| | (301 | ) | | (87.2 | ) |
Gain on sale of loans, net | 1,229 |
| | 3,435 |
| | (2,206 | ) | | (64.2 | ) |
Interest rate swap fees | 328 |
| | 742 |
| | (414 | ) | | (55.8 | ) |
Other income | 2,024 |
| | 1,715 |
| | 309 |
| | 18.0 |
|
Total noninterest income | $ | 8,394 |
| | $ | 9,867 |
| | $ | (1,473 | ) | | (14.9 | )% |
Gain on the sale of loans, netNoninterest income decreased $2.2$1.2 million, or 64.2% to $1.2 million for the three months ended September 30, 2017 compared to $3.4 million the same period in 2016, due primarily to a $2.1 million gain on sale of a previously classified purchased credit impaired loan recognized in 2016. The detail of gain on sale of loans, net is included in the following schedule.
|
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | | |
| 2017 | | 2016 | | Change | | Percentage Change |
| (Dollars in thousands) |
Mortgage loans | $ | 875 |
| | $ | 1,087 |
| | $ | (212 | ) | | (19.5 | )% |
SBA loans | 354 |
| | 285 |
| | 69 |
| | 24.2 |
|
Other loans | — |
| | 2,063 |
| | (2,063 | ) | | (100.0 | ) |
Total gain on sale of loans, net | $ | 1,229 |
| | $ | 3,435 |
| | $ | (2,206 | ) | | (64.2 | )% |
Interest rate swap fees decreased $414,000, or 55.8% to $328,000 for the three months ended September 30, 2017 compared to $742,000 the same period in 2016, due primarily to a decrease in the number of swaps executed15.9%, during the three months ended September 30, 20172023 compared to the three months ended September 30, 2016.
The decrease in noninterest income was partially offset by an increase in service charges and other fees of $1.1 million, or 31.4% to $4.8 million for the three months ended September 30, 2017 compared to $3.6 million for the same period in 2016,2022 due primarily to a consumer deposit account consolidation process completed at$1.9 million loss on sale of investment securities available for sale partially offset by a $610,000 gain on sale of the end of 2016Ellensburg branch and a business deposit consolidation process completed during second quarter 2017 and the related changesdeposits included in fee structures, as well as increases in deposit balances.other income.
Comparison of nine months ended September 30, 20172023 to the comparable period in the prior year
Total noninterest income increased $3.0 million, or 12.7%, to $26.4 million for the nine months ended September 30, 2017 compared to $23.4 million for the same period in 2016. The following table presents the change in the key components of noninterest income for the periods noted.indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Change |
| 2023 | | 2022 | | $ | | % |
| (Dollars in thousands) |
Service charges and other fees | $ | 8,162 | | | $ | 7,739 | | | $ | 423 | | | 5.5 | % |
Card revenue | 6,396 | | | 6,774 | | | (378) | | | (5.6) | |
Loss on sale of investment securities, net | (2,226) | | | — | | | (2,226) | | | (100.0) | |
Gain on sale of loans, net | 307 | | | 593 | | | (286) | | | (48.2) | |
| | | | | | | | | | | | Nine Months Ended September 30, | | Change |
| Nine Months Ended September 30, | | | | | | 2023 | | 2022 | | $ | | % |
| 2017 | | 2016 | | Change | | Percentage Change | | (Dollars in thousands) |
| (Dollars in thousands) | |
Service charges and other fees | $ | 13,408 |
| | $ | 10,462 |
| | $ | 2,946 |
| | 28.2 | % | |
Gain on sale of investment securities, net | 161 |
| | 1,106 |
| | (945 | ) | | (85.4 | ) | |
Gain on sale of loans, net | 6,562 |
| | 5,406 |
| | 1,156 |
| | 21.4 |
| |
Interest rate swap fees | 743 |
| | 1,105 |
| | (362 | ) | | (32.8 | ) | Interest rate swap fees | 230 | | | 383 | | | (153) | | | (39.9) | |
Bank owned life insurance income | | Bank owned life insurance income | 2,280 | | | 3,182 | | | (902) | | | (28.3) | |
Gain on sale of other assets, net | | Gain on sale of other assets, net | 2 | | | 469 | | | (467) | | | (99.6) | |
Other income | 5,532 |
| | 5,354 |
| | 178 |
| | 3.3 |
| Other income | 6,659 | | | 3,867 | | | 2,792 | | | 72.2 | |
Total noninterest income | $ | 26,406 |
| | $ | 23,433 |
| | $ | 2,973 |
| | 12.7 | % | Total noninterest income | $ | 21,810 | | | $ | 23,007 | | | $ | (1,197) | | | (5.2) | % |
Service charges and other fees increased $2.9Noninterest income decreased $1.2 million, or 28.2% to $13.4 million for5.2%, during the nine months ended September 30, 20172023 compared to $10.5 million for the same period in 2016, due primarily to a consumer deposit account consolidation process completed at the end of 2016 and a business deposit consolidation process completed during second quarter 2017 and the related changes in fee structures, as well as increases in deposit balances.
Gain2022. A loss on sale of loans, net increased $1.2investment securities of $2.2 million or 21.4% to $6.6 million forwas recognized during the nine months ended September 30, 2017 compared to $5.42023 as a result of the sale of $67.9 million of investment securities available for the same period in 2016,sale. Other income increased due primarily to a $935,000 increase inone-time $1.6 million gain on sale of other loans. During eachVisa Inc. Class B common stock recognized and a $610,000 gain on sale of the Ellensburg branch and related deposits during the nine months ended September 30, 2017 and 2016, the2023. Bank sold one loan previously classified as purchased credit impaired. In addition, gain on sale of SBA loans increased $272,000owned life insurance income decreased due primarily to an increase in proceeds from sale of SBA loans of $7.8a $1.0 million or 90.9%, to $16.4 million fordeath benefit recognized during the nine months ended September 30, 2017 compared to $8.6 million for the same period in 2016. The detail of gain on sale of loans, net is included in the following schedule.2022.
|
| | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2017 | | 2016 | | Change | | Percentage Change |
| (Dollars in thousands) |
Mortgage loans | $ | 2,515 |
| | $ | 2,566 |
| | $ | (51 | ) | | (2.0 | )% |
SBA loans | 1,049 |
| | 777 |
| | 272 |
| | 35.0 |
|
Other loans | 2,998 |
| | 2,063 |
| | 935 |
| | 45.3 |
|
Total gain on sale of loans, net | $ | 6,562 |
| | $ | 5,406 |
| | $ | 1,156 |
| | 21.4 | % |
The increase in noninterest income was partially offset by a decrease in gain on sale of investment securities, net of $945,000, or 85.4%, to $161,000 for the nine months ended September 30, 2017 from $1.1 million for the nine months ended September 30, 2016. The decrease was primarily the result of fewer sales as the Bank actively managed its investment portfolio. The proceeds from sale of investment securities was $21.9 million for the nine months ended September 30, 2017 compared to $94.4 million for the same period in 2016.
Noninterest Expense Overview
Comparison of quarter ended September 30, 2017 to the comparable quarter in the prior year
Noninterest expense increased $1.1 million, or 4.2%, to $28.0 million during the three months ended September 30, 2017 compared2023 to $26.8 million for the three months ended September 30, 2016. comparable period in the prior year
The following table presents changes in the key components of noninterest expense for the periods noted.indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change |
| 2023 | | 2022 | | $ | | % |
| (Dollars in thousands) |
Compensation and employee benefits | $ | 25,008 | | | $ | 24,206 | | | $ | 802 | | | 3.3 | % |
Occupancy and equipment | 4,814 | | | 4,422 | | | 392 | | | 8.9 | |
Data processing | 4,366 | | | 4,185 | | | 181 | | | 4.3 | |
Marketing | 389 | | | 358 | | | 31 | | | 8.7 | |
Professional services | 582 | | | 639 | | | (57) | | | (8.9) | |
State/municipal business and use tax | 1,088 | | | 963 | | | 125 | | | 13.0 | |
Federal deposit insurance premium | 818 | | | 500 | | | 318 | | | 63.6 | |
| | | | | | | |
Amortization of intangible assets | 595 | | | 671 | | | (76) | | | (11.3) | |
Other expense | 3,310 | | | 3,203 | | | 107 | | | 3.3 | |
Total noninterest expense | $ | 40,970 | | | $ | 39,147 | | | $ | 1,823 | | | 4.7 | % |
|
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | |
| 2017 | | 2016 | | Change | | Percentage Change |
| (Dollars in thousands) |
Compensation and employee benefits | $ | 15,823 |
| | $ | 15,633 |
| | $ | 190 |
| | 1.2 | % |
Occupancy and equipment | 3,979 |
| | 3,926 |
| | 53 |
| | 1.3 |
|
Data processing | 2,090 |
| | 1,943 |
| | 147 |
| | 7.6 |
|
Marketing | 933 |
| | 745 |
| | 188 |
| | 25.2 |
|
Professional services | 1,453 |
| | 830 |
| | 623 |
| | 75.1 |
|
State and local taxes | 640 |
| | 820 |
| | (180 | ) | | (22.0 | ) |
Federal deposit insurance premium | 433 |
| | 296 |
| | 137 |
| | 46.3 |
|
Other real estate owned, net | (88 | ) | | (142 | ) | | 54 |
| | (38.0 | ) |
Amortization of intangible assets | 319 |
| | 359 |
| | (40 | ) | | (11.1 | ) |
Other expense | 2,373 |
| | 2,408 |
| | (35 | ) | | (1.5 | ) |
Total noninterest expense | $ | 27,955 |
| | $ | 26,818 |
| | $ | 1,137 |
| | 4.2 | % |
Professional servicesNoninterest expense increased $623,000,$1.8 million, or 75.1%4.7%, to $1.5 million during the three months ended September 30, 2017 from $830,000 during the three months ended September 30, 2016. The increase in the three months ended September 30, 20172023 compared to the same period in 2016 was2022 due primarily due to legal costs incurred for our pending merger with Puget Sound as discussed in Note (16) Definitive Agreement as well as benefit-based consulting fees related to the consumer and business deposit account consolidation processes, which correspondingly generated an increase in service charges and other fees.
Compensationcompensation and employee benefits increased $190,000, or 1.2%, to $15.8 million during the three months ended September 30, 2017resulting from $15.6 million during the three months ended September 30, 2016. Thean increase in the three months ended September 30, 2017 compared tonumber of full-time equivalent employees including the same periodaddition of commercial and relationship banking teams in 2016 was primarily due to senior level staffing increases2023 and standard salary increases.
The ratio of noninterest expense to average assets (annualized) was 2.76% for the three months ended September 30, 2017 compared to 2.81% for the three months ended September 30, 2016. The decrease was primarily a result of an increase in assetssalaries and cost efficiencies gained through efforts bywages due to annual salary increases. Occupancy and equipment expense increased due to our recent expansion into Eugene, Oregon and Boise, Idaho. Data processing costs increased due primarily to the Companyexpansion of digital services including the addition of the ability to manage noninterest expenses.open consumer deposit accounts online. Federal deposit insurance premiums increased due to the increase in the assessment rate starting in January 2023.
Comparison of the nine months ended September 30, 20172023 to the comparable period in the prior year
Noninterest expense increased $3.3 million, or 4.2%, to $83.0 million during the nine months ended September 30, 2017 compared to $79.7 million for the nine months ended September 30, 2016. The following table presents changes in the key components of noninterest expense for the periods noted.indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Change |
| 2023 | | 2022 | | $ | | % |
| (Dollars in thousands) |
Compensation and employee benefits | $ | 75,325 | | | $ | 67,236 | | | $ | 8,089 | | | 12.0 | % |
Occupancy and equipment | 14,372 | | | 12,924 | | | 1,448 | | | 11.2 | |
Data processing | 13,208 | | | 12,431 | | | 777 | | | 6.3 | |
Marketing | 1,232 | | | 968 | | | 264 | | | 27.3 | |
|
| | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | | | |
| 2017 | | 2016 | | Change | | Percentage Change |
| (Dollars in thousands) |
Compensation and employee benefits | $ | 48,119 |
| | $ | 45,652 |
| | $ | 2,467 |
| | 5.4 | % |
Occupancy and equipment | 11,607 |
| | 11,873 |
| | (266 | ) | | (2.2 | ) |
Data processing | 6,007 |
| | 5,564 |
| | 443 |
| | 8.0 |
|
Marketing | 2,545 |
| | 2,254 |
| | 291 |
| | 12.9 |
|
Professional services | 3,515 |
| | 2,508 |
| | 1,007 |
| | 40.2 |
|
State and local taxes | 1,828 |
| | 2,031 |
| | (203 | ) | | (10.0 | ) |
Federal deposit insurance premium | 1,090 |
| | 1,316 |
| | (226 | ) | | (17.2 | ) |
Other real estate owned, net | (36 | ) | | 330 |
| | (366 | ) | | (110.9 | ) |
Amortization of intangible assets | 966 |
| | 1,057 |
| | (91 | ) | | (8.6 | ) |
Other expense | 7,346 |
| | 7,079 |
| | 267 |
| | 3.8 |
|
Total noninterest expense | $ | 82,987 |
| | $ | 79,664 |
| | $ | 3,323 |
| | 4.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Change |
| 2023 | | 2022 | | $ | | % |
| (Dollars in thousands) |
Professional services | 1,961 | | | 1,867 | | | 94 | | | 5.0 | |
State/municipal business and use tax | 3,150 | | | 2,626 | | | 524 | | | 20.0 | |
Federal deposit insurance premium | 2,465 | | | 1,525 | | | 940 | | | 61.6 | |
| | | | | | | |
Amortization of intangible assets | 1,841 | | | 2,079 | | | (238) | | | (11.4) | |
Other expense | 10,346 | | | 8,918 | | | 1,428 | | | 16.0 | |
Total noninterest expense | $ | 123,900 | | | $ | 110,574 | | | $ | 13,326 | | | 12.1 | % |
Compensation and employee benefitsNoninterest expense increased $2.5$13.3 million, or 5.4%12.1%, to $48.1 million during the nine months ended September 30, 20172023 compared to the same period in 2022 due primarily to an increase in compensation and employee benefits resulting from $45.7 milliona 5.9% increase in the average number of full-time equivalent employees including the addition of commercial and relationship banking teams in 2023 and an increase in salaries and wages due to annual salary increases. Occupancy and equipment expense increased due to our recent expansion into Eugene, Oregon and Boise, Idaho. Data processing costs increased due primarily to the expansion of digital services including the addition of the ability to open consumer deposit accounts online. Federal deposit insurance premiums increased due to the increase in the assessment rate starting in January 2023. Other expense increased due to an increase in customer deposit loss expense and employee related expenses, which included additional expenses related to calling efforts for the newly added teams, as well as a general increase in operating costs.
Income Tax Expense Overview
Comparison of the three months ended September 30, 2023to the comparable period in the prior year
The following table presents the income tax expense, related metrics and their changes for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change |
| 2023 | | 2022 | | $ | | % |
| (Dollars in thousands) |
Income before income taxes | $ | 21,797 | | | $ | 25,647 | | | $ | (3,850) | | | (15.0) | % |
Income tax expense | $ | 3,578 | | | $ | 4,657 | | | $ | (1,079) | | | (23.2) | % |
Effective income tax rate | 16.4 | % | | 18.2 | % | | (1.8) | % | | (9.9) | % |
Income tax expense and the effective income tax rate both decreased due primarily to lower estimated pre-tax income which increased the impact of favorable permanent tax items such as tax-exempt investments, investments in bank owned life insurance and investments in low-income housing tax credits during the three months ended September 30, 2023 compared to the same period in 2022.
Comparison of the nine months ended September 30, 2023 to the comparable period in the prior year.
The following table presents the income tax expense and related metrics and the change for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | | | |
| 2023 | | 2022 | | Change | | % Change |
| (Dollars in thousands) |
Income before income taxes | $ | 66,338 | | | $ | 71,547 | | | $ | (5,209) | | | (7.3) | % |
Income tax expense | $ | 10,816 | | | $ | 12,216 | | | $ | (1,400) | | | (11.5) | % |
Effective income tax rate | 16.3 | % | | 17.1 | % | | (0.8) | % | | (4.7) | % |
Income tax expense and the effective income rate both decreased due primarily to lower estimated pre-tax income during the nine months ended September 30, 2016. The increase in the nine months ended September 30, 20172023 compared to the same period in 2016 was primarily due to senior level staffing increases, including2022 which increased the additionimpact of the new Portland, Oregon lending team members who startedfavorable permanent tax items such as tax-exempt investments, investments in May 2017,bank owned life insurance and standard salary increases.
Professional services increased $1.0 million, or 40.2%, to $3.5 million during the nine months ended September 30, 2017 from $2.5 million during the nine months ended September 30, 2016. The increaseinvestments in the nine months ended September 30, 2017 compared to the same period in 2016 was primarily due to due to benefit-based consulting fees related to the consumer deposit account consolidation process, which correspondingly generated an increase in service charges and other fees. Professional services also increased as a result of Trust-related expenses based on a renegotiated contract for 2017, which also increased other noninterest income, and legal costs incurred for our pending merger with Puget Sound as discussed in Note (16) Definitive Agreement.
Data processing increased $443,000, or 8.0%, to $6.0 million during the nine months ended September 30, 2017 from $5.6 million during the nine months ended September 30, 2016 primarily due to higher transactional activity in the core operating system and internet banking as a result of the growth in loans and deposits..
Other real estate owned, net decreased $366,000 or 110.9%, to income of $36,000 during the nine months ended September 30, 2017 compared to expense of $330,000 during the nine months ended September 30, 2016. The income recorded during the nine months ended September 30, 2017 was due to gain on sale of properties of $111,000, offset by maintenance expense of $75,000. For the nine months ended September 30, 2016, the Bank recorded a valuation adjustment of $383,000 and maintenance expense of $120,000, which was offset by the gain on sale of properties of $173,000.
The ratio of noninterest expense to average assets (annualized) was 2.82% for the nine months ended September 30, 2017, compared to 2.86% for the nine months ended September 30, 2016. The decrease was primarily a result of an increase in assets and cost efficiencies gained through efforts by the Company to manage noninterest expenses.
Income Tax Expense
Comparison of quarter ended September 30, 2017 to the comparable quarter in the prior year
Income tax expense decreased by $199,000, or 4.8%, to $3.9 million for the three months ended September 30, 2017 from $4.1 million for the three months ended September 30, 2016. The effective tax rate was 27.0% for the three months ended September 30, 2017 compared to 27.2% for the same period in 2016. The decrease in the effective tax rate during the three months ended September 30, 2017 compared to the same period in 2016 was due primarily to an increase in tax benefits from low incomelow-income housing tax credits, offset partially by the implementationcredits.
Comparison of nine months ended September 30, 2017 to the comparable period in the prior year
Income tax expense increased by $645,000, or 6.2%, to $11.1 million for the nine months ended September 30, 2017 from $10.4 million for the nine months ended September 30, 2016. The effective tax rate was 25.9% for the nine months ended September 30, 2017 compared to 26.5% for the same period in 2016. The decrease in the effective tax rate during the nine months ended September 30, 2017 compared to the same period in 2016 was due primarily to the implementation of FASB ASU 2016-09 requiring the excess tax benefits on option exercises and restricted stock vesting to be recognized in earnings prospectively starting on January 1, 2017.
Financial Condition Overview
Total assets increased $171.1 million, or 4.4%, to $4.05 billion as of September 30, 2017 compared to $3.88 billion as of December 31, 2016. Total loans receivable, net, increased $156.4 million, or 6.0%, to $2.77 billion at September 30, 2017 compared to $2.61 billion at December 31, 2016. Loans were mostly funded through an increase in deposits. Deposits increased by $91.2 million, or 2.8%, to $3.32 billion as of September 30, 2017 compared to $3.23 billion as of December 31, 2016. Total non-maturity deposits decreased to 88.1% of total deposits at September 30, 2017 from 88.9% at December 31, 2016 and certificates of deposits increased to 11.9% of total deposits at September 30, 2017 from 11.1% at December 31, 2016.
Prepaid expenses and other assets increased $8.4 million, or 10.6%, to $87.7 million at September 30, 2017 from $79.4 million at December 31, 2016 primarily as a result of the Company's investment in two new low income housing tax credit partnerships totaling $14.3 million. These investments had corresponding obligations recorded in accrued expenses and other liabilities of $14.3 million at September 30, 2017. These obligations will decrease as
projects in the partnerships are funded. During the nine months ended September 30, 2017 the Company made capital contributions related to other low income housing tax credit partnerships of $8.5 million, partially offsetting the increase in accrued expenses and other liabilities.
Federal Home Loan Bank advances increased $37.8 million, or 47.5%, to $117.4 million as of September 30, 2017 from $79.6 million as of December 31, 2016. The increase in advances was required as a supplement to deposits in order to fund loan growth.
Total stockholders’ equity increased $25.8 million, or 5.4%, to $507.6 million as of September 30, 2017 from $481.8 million at December 31, 2016. The increase during the nine months ended September 30, 2017 was due primarily to net income of $31.8 million and a $4.4 million improvement in accumulated other comprehensive income, net of tax, offset partially by cash dividends declared of $11.4 million. The Company’s equity position was 12.5% of total assets as of September 30, 2017 and 12.4% as of December 31, 2016.
The table below provides a comparison of the changes in the Company's financial condition from December 31, 2016at the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 | | Change |
| | | $ | | % |
| (Dollars in thousands) |
Assets | | | | | | | |
Cash and cash equivalents | $ | 220,503 | | | $ | 103,590 | | | $ | 116,913 | | | 112.9 | % |
Investment securities available for sale, at fair value, net | 1,147,547 | | | 1,331,443 | | | (183,896) | | | (13.8) | |
Investment securities held to maturity, at amortized cost, net | 746,845 | | | 766,396 | | | (19,551) | | | (2.6) | |
Loans held for sale | 263 | | | — | | | 263 | | | 100.0 | |
Loans receivable, net | 4,219,911 | | | 4,007,872 | | | 212,039 | | | 5.3 | |
| | | | | | | |
Premises and equipment, net | 76,436 | | | 76,930 | | | (494) | | | (0.6) | |
Federal Home Loan Bank stock, at cost | 8,373 | | | 8,916 | | | (543) | | | (6.1) | |
Bank owned life insurance | 123,639 | | | 122,059 | | | 1,580 | | | 1.3 | |
Accrued interest receivable | 18,794 | | | 18,547 | | | 247 | | | 1.3 | |
Prepaid expenses and other assets | 341,952 | | | 296,181 | | | 45,771 | | | 15.5 | |
Other intangible assets, net | 5,386 | | | 7,227 | | | (1,841) | | | (25.5) | |
Goodwill | 240,939 | | | 240,939 | | | — | | | — | |
Total assets | $ | 7,150,588 | | | $ | 6,980,100 | | | $ | 170,488 | | | 2.4 | % |
| | | | | | | |
Liabilities and Stockholders' Equity | | | | | | | |
Deposits | $ | 5,635,187 | | | $ | 5,907,420 | | | $ | (272,233) | | | (4.6) | % |
Deposits held for sale | — | | | 17,420 | | | (17,420) | | | (100.0) | |
Total deposits | 5,635,187 | | | 5,924,840 | | | (289,653) | | | (4.9) | |
Borrowings | 450,000 | | | — | | | 450,000 | | | 100.0 | |
Junior subordinated debentures | 21,692 | | | 21,473 | | | 219 | | | 1.0 | |
Securities sold under agreement to repurchase | 23,158 | | | 46,597 | | | (23,439) | | | (50.3) | |
Accrued expenses and other liabilities | 207,005 | | | 189,297 | | | 17,708 | | | 9.4 | |
Total liabilities | 6,337,042 | | | 6,182,207 | | | 154,835 | | | 2.5 | |
Common stock | 548,652 | | | 552,397 | | | (3,745) | | | (0.7) | |
Retained earnings | 377,522 | | | 345,346 | | | 32,176 | | | 9.3 | |
Accumulated other comprehensive loss, net | (112,628) | | | (99,850) | | | (12,778) | | | (12.8) | |
Total stockholders' equity | 813,546 | | | 797,893 | | | 15,653 | | | 2.0 | |
Total liabilities and stockholders' equity | $ | 7,150,588 | | | $ | 6,980,100 | | | $ | 170,488 | | | 2.4 | % |
Total assets increased due primarily to September 30, 2017.an increase in loans receivable, net due to loan growth and an increase in cash and cash equivalents, offset partially by a decrease in investment securities. Total liabilities and stockholders' equity increased due primarily to an increase in borrowings offset partially by a decrease in deposits.
Investment Activities Overview
Our investment policy is established by the Company's Board of Directors and monitored by the Risk Committee of the Board of Directors. It is designed primarily to provide and maintain liquidity, generate a favorable return on investments without incurring undue interest rate and credit risk, and complements the Company's lending activities. The policy permits investment in various types of liquid assets permissible under applicable regulations. Investments in non-investment grade bonds and stripped mortgage-backed securities are not permitted under the policy.
|
| | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 | | Change | | Percent Change |
| | (Dollars in thousands) |
Assets | | | | | | | | |
Cash and cash equivalents | | $ | 111,258 |
| | $ | 103,745 |
| | $ | 7,513 |
| | 7.2 | % |
Investment securities | | 800,060 |
| | 794,645 |
| | 5,415 |
| | 0.7 |
|
Loans held for sale | | 5,368 |
| | 11,662 |
| | (6,294 | ) | | (54.0 | ) |
Total loans receivable, net | | 2,766,113 |
| | 2,609,666 |
| | 156,447 |
| | 6.0 |
|
Other real estate owned | | 523 |
| | 754 |
| | (231 | ) | | (30.6 | ) |
Premises and equipment, net | | 60,457 |
| | 63,911 |
| | (3,454 | ) | | (5.4 | ) |
Federal Home Loan Bank stock, at cost | | 9,343 |
| | 7,564 |
| | 1,779 |
| | 23.5 |
|
Bank owned life insurance | | 71,474 |
| | 70,355 |
| | 1,119 |
| | 1.6 |
|
Accrued interest receivable | | 12,295 |
| | 10,925 |
| | 1,370 |
| | 12.5 |
|
Prepaid expenses and other assets | | 87,728 |
| | 79,351 |
| | 8,377 |
| | 10.6 |
|
Other intangible assets, net | | 6,408 |
| | 7,374 |
| | (966 | ) | | (13.1 | ) |
Goodwill | | 119,029 |
| | 119,029 |
| | — |
| | — |
|
Total assets | | $ | 4,050,056 |
| | $ | 3,878,981 |
| | $ | 171,075 |
| | 4.4 | % |
| | | | | | | | |
Liabilities | | | | | | | | |
Deposits | | $ | 3,320,818 |
| | $ | 3,229,648 |
| | $ | 91,170 |
| | 2.8 |
|
Federal Home Loan Bank advances | | 117,400 |
| | 79,600 |
| | 37,800 |
| | 47.5 |
|
Junior subordinated debentures | | 19,936 |
| | 19,717 |
| | 219 |
| | 1.1 |
|
Securities sold under agreement to repurchase | | 28,668 |
| | 22,104 |
| | 6,564 |
| | 29.7 |
|
Accrued expenses and other liabilities | | 55,626 |
| | 46,149 |
| | 9,477 |
| | 20.5 |
|
Total liabilities | | 3,542,448 |
| | 3,397,218 |
| | 145,230 |
| | 4.3 |
|
Stockholders' equity | | | | | |
| | |
Common stock | | 360,113 |
| | 359,060 |
| | 1,053 |
| | 0.3 |
|
Retained earnings | | 145,677 |
| | 125,309 |
| | 20,368 |
| | 16.3 |
|
Accumulated other comprehensive income (loss), net | | 1,818 |
| | (2,606 | ) | | 4,424 |
| | 169.8 |
|
Total stockholders' equity | | 507,608 |
| | 481,763 |
| | 25,845 |
| | 5.4 |
|
Total liabilities and stockholders' equity | | $ | 4,050,056 |
| | $ | 3,878,981 |
| | $ | 171,075 |
| | 4.4 | % |
The following table provides information regarding our investment securities at the dates indicated:
Lending Activities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 | | Change |
| Balance | | % of Total | | Balance | | % of Total | | $ | | % |
| (Dollars in thousands) |
Investment securities available for sale, at fair value: |
U.S. government and agency securities | $ | 20,424 | | | 1.1 | % | | $ | 63,859 | | | 3.0 | % | | $ | (43,435) | | | (68.0) | % |
Municipal securities | 106,805 | | | 5.6 | | | 153,026 | | | 7.3 | | | (46,221) | | | (30.2) | |
Residential CMO and MBS(1) | 401,181 | | | 21.2 | | | 424,386 | | | 20.2 | | | (23,205) | | | (5.5) | |
Commercial CMO and MBS(1) | 597,213 | | | 31.5 | | | 664,421 | | | 31.8 | | | (67,208) | | | (10.1) | |
Corporate obligations | 3,780 | | | 0.2 | | | 3,834 | | | 0.2 | | | (54) | | | (1.4) | |
Other asset-backed securities | 18,144 | | | 1.0 | | | 21,917 | | | 1.0 | | | (3,773) | | | (17.2) | |
Total | $ | 1,147,547 | | | 60.6 | % | | $ | 1,331,443 | | | 63.5 | % | | $ | (183,896) | | | (13.8) | % |
| | | | | | | | | | | |
Investment securities held to maturity, at amortized cost: |
U.S. government and agency securities | $ | 151,040 | | | 8.0 | % | | $ | 150,936 | | | 7.2 | % | | $ | 104 | | | 0.07 | % |
| | | | | | | | | | | |
Residential CMO and MBS(1) | 273,609 | | | 14.4 | | | 290,318 | | | 13.8 | | | (16,709) | | | (5.8) | |
Commercial CMO and MBS(1) | 322,196 | | | 17.0 | | | 325,142 | | | 15.5 | | | (2,946) | | | (0.9) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total | $ | 746,845 | | | 39.4 | % | | $ | 766,396 | | | 36.5 | % | | $ | (19,551) | | | (2.6) | % |
| | | | | | | | | | | |
Total investment securities | $ | 1,894,392 | | | 100.0 | % | | $ | 2,097,839 | | | 100.0 | % | | $ | (203,447) | | | (9.7) | % |
As indicated in the table below, loans receivable, net was $2.80(1) U.S. government agency and government-sponsored enterprise CMO and MBS obligations.
Total investment securities decreased $203.4 million, or 9.7%, to $1.89 billion at September 30, 2017, an increase of $156.8 million, or 5.9%,2023 from $2.64$2.10 billion at December 31, 2016. 2022 due primarily to maturities and prepayments of $154.0 million and sales of $67.9 million, partially offset by purchases of $37.7 million.
Loan Portfolio Overview
Changes by loan type
The increase inCompany originates a wide variety of loans with a focus on commercial business loans. In addition to originating loans, the Company may also acquire loans through pool purchases, participation purchases and syndicated loan purchases. The following table provides information about our loan portfolio by type of loan at the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 | | Change |
| Amortized Cost | | % of Loans Receivable | | Amortized Cost | | % of Loans Receivable | | $ | | % |
| (Dollars in thousands) |
Commercial business: | | | | | | | | | | | |
Commercial and industrial | $ | 691,318 | | | 16.2 | % | | $ | 693,568 | | | 17.1 | % | | $ | (2,250) | | | (0.3) | % |
Owner-occupied CRE | 953,779 | | | 22.4 | | | 937,040 | | | 23.1 | | | 16,739 | | | 1.8 | |
Non-owner occupied CRE | 1,690,099 | | | 39.5 | | | 1,586,632 | | | 39.2 | | | 103,467 | | | 6.5 | |
Total commercial business | 3,335,196 | | | 78.1 | | | 3,217,240 | | | 79.4 | | | 117,956 | | | 3.7 | |
Residential real estate | 377,448 | | | 8.8 | | | 343,631 | | | 8.5 | | | 33,817 | | | 9.8 | |
Real estate construction and land development: |
Residential | 70,804 | | | 1.7 | | | 80,074 | | | 2.0 | | | (9,270) | | | (11.6) | |
Commercial and multifamily | 310,024 | | | 7.3 | | | 214,038 | | | 5.3 | | | 95,986 | | | 44.8 | |
Total real estate construction and land development | 380,828 | | | 9.0 | | | 294,112 | | | 7.3 | | | 86,716 | | | 29.5 | |
Consumer | 173,386 | | | 4.1 | | | 195,875 | | | 4.8 | | | (22,489) | | | (11.5) | |
Total | $ | 4,266,858 | | | 100.0 | % | | $ | 4,050,858 | | | 100.0 | % | | $ | 216,000 | | | 5.3 | % |
Loans receivable forincreased $216.0 million, or 5.3%, to $4.27 billion at September 30, 2023 from $4.05 billion at December 31, 2022 primarily due to new loan growth. New loans funded during the nine months ended September 30, 2017 was primarily due2023 were $370.2 million.
Owner-occupied CRE and non-owner occupied CRE loans increased by $120.2 million to increases in commercial business loans of $121.3 million, consumer loans of $15.5 million and real estate construction and land development loans of $15.3 million.
|
| | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Balance | | % of Total | | Balance | | % of Total |
| (Dollars in thousands) |
Commercial business: | | | | | | | |
Commercial and industrial | $ | 665,582 |
| | 23.8 | % | | $ | 637,773 |
| | 24.2 | % |
Owner-occupied commercial real estate | 602,238 |
| | 21.5 |
| | 558,035 |
| | 21.1 |
|
Non-owner occupied commercial real estate | 930,188 |
| | 33.3 |
| | 880,880 |
| | 33.4 |
|
Total commercial business | 2,198,008 |
| | 78.6 |
| | 2,076,688 |
| | 78.7 |
|
One-to-four family residential | 81,422 |
| | 2.9 |
| | 77,391 |
| | 2.9 |
|
Real estate construction and land development: | | | | | | |
|
One-to-four family residential | 51,451 |
| | 1.8 |
| | 50,414 |
| | 1.9 |
|
Five or more family residential and commercial properties | 122,981 |
| | 4.4 |
| | 108,764 |
| | 4.1 |
|
Total real estate construction and land development | 174,432 |
| | 6.2 |
| | 159,178 |
| | 6.0 |
|
Consumer | 340,643 |
| | 12.2 |
| | 325,140 |
| | 12.3 |
|
Gross loans receivable | 2,794,505 |
| | 99.9 |
| | 2,638,397 |
| | 99.9 |
|
Deferred loan costs, net | 3,008 |
| | 0.1 |
| | 2,352 |
| | 0.1 |
|
Loans receivable, net | $ | 2,797,513 |
| | 100.0 | % | | $ | 2,640,749 |
| | 100.0 | % |
Nonperforming Assets and Credit Quality Metrics
$2.64 billion at September 30, 2023, compared to $2.52 billion at December 31, 2022. The following table describes our nonperforming assetsprovides information about owner occupied CRE and other credit quality metricsnon-owner occupied CRE loans by collateral type at the dates indicated: |
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| (Dollars in thousands) |
Nonaccrual loans: | | | |
Commercial business | $ | 9,683 |
| | $ | 8,580 |
|
One-to-four family residential | 84 |
| | 94 |
|
Real estate construction and land development | 869 |
| | 2,008 |
|
Consumer | 316 |
| | 227 |
|
Total nonaccrual loans (1)(2) | 10,952 |
| | 10,909 |
|
Other real estate owned | 523 |
| | 754 |
|
Total nonperforming assets | $ | 11,475 |
| | $ | 11,663 |
|
| | | |
Allowance for loan losses | $ | 31,400 |
| | $ | 31,083 |
|
Allowance for loan losses to loans receivable, net | 1.12 | % | | 1.18 | % |
Allowance for loan losses to nonperforming loans | 286.71 | % | | 284.93 | % |
Nonperforming loans to loans receivable, net | 0.39 | % | | 0.41 | % |
Nonperforming assets to total assets | 0.28 | % | | 0.30 | % |
| | | |
Performing TDR loans: | | | |
Commercial business | $ | 18,571 |
| | $ | 19,837 |
|
One-to-four family residential | 219 |
| | 227 |
|
Real estate construction and land development | 1,136 |
| | 2,141 |
|
Consumer | 118 |
| | 83 |
|
Total performing TDR loans (3) | $ | 20,044 |
| | $ | 22,288 |
|
Accruing loans past due 90 days or more (4) | $ | — |
| | $ | — |
|
Potential problem loans (5) | 84,089 |
| | 87,762 |
|
| |
(1)
| At September 30, 2017 and December 31, 2016, $5.9 million and $6.9 million of nonperforming loans, respectively, were considered TDR loans. |
| |
(2)
| At September 30, 2017 and December 31, 2016, $2.5 million and $2.8 million of nonperforming loans, respectively, were guaranteed by government agencies. |
| |
(3)
| At September 30, 2017 and December 31, 2016, $1.4 million and $682,000 of performing TDR loans, respectively, were guaranteed by government agencies. |
| |
(4)
| There were no accruing loans past due 90 days or more that were guaranteed by government agencies at September 30, 2017 or December 31, 2016. |
| |
(5)
| At September 30, 2017 and December 31, 2016, $1.7 million and $1.1 million of potential problem loans, respectively, were guaranteed by government agencies. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 | | Change |
| Amortized Cost | | % of CRE Loans | | Amortized Cost | | % of CRE Loans | | $ | | % |
| (Dollars in thousands) |
Owner occupied and non-owner occupied CRE loans by collateral type: |
Office | $ | 566,916 | | | 21.4 | % | | $ | 579,762 | | | 22.9 | % | | $ | (12,846) | | | (2.2) | % |
Industrial | 415,243 | | | 15.7 | | | 366,947 | | | 14.6 | | | 48,296 | | | 13.2 | |
Retail store / shopping center | 287,746 | | | 10.9 | | | 291,799 | | | 11.6 | | | (4,053) | | | (1.4) | |
Multi-family | 286,091 | | | 10.8 | | | 256,661 | | | 10.2 | | | 29,430 | | | 11.5 | |
Mini-storage | 158,475 | | | 6.0 | | | 148,580 | | | 5.9 | | | 9,895 | | | 6.7 | |
Mixed use property | 152,979 | | | 5.8 | | | 154,793 | | | 6.1 | | | (1,814) | | | (1.2) | |
Warehouse | 152,055 | | | 5.8 | | | 147,443 | | | 5.8 | | | 4,612 | | | 3.1 | |
Motel / hotel | 141,731 | | | 5.4 | | | 129,352 | | | 5.1 | | | 12,379 | | | 9.6 | |
Single purpose | 122,819 | | | 4.6 | | | 112,924 | | | 4.5 | | | 9,895 | | | 8.8 | |
Recreational / school | 68,469 | | | 2.6 | | | 70,565 | | | 2.8 | | | (2,096) | | | (3.0) | |
Other | 291,354 | | | 11.0 | | | 264,846 | | | 10.5 | | | 26,508 | | | 10.0 | |
Total | $ | 2,643,878 | | | 100.0 | % | | $ | 2,523,672 | | | 100.0 | % | | $ | 120,206 | | | 4.8 | % |
Nonperforming assets were $11.5Office loans represented the largest segment of owner-occupied and non-owner occupied CRE loans totaling $566.9 million, or 0.28%21.4% of the total assetsowner-occupied CRE and $11.7 million, or 0.30% of total assets as of September 30, 2017 and December 31, 2016, respectively. The balance of nonaccrual loans increased $43,000, or 0.4%, to $11.0 million ($2.5 million guaranteed by governmental agencies)non-owner occupied CRE, at September 30, 20172023. Of this total, $283.7 million, or 50.0%, were owner-occupied CRE loans. Owner-occupied CRE loans have a lower risk profile as there is less tenant rollover risk and generally have guarantees from $10.9the company occupying the space as well as the owners of the company. The average loan balance of owner-occupied CRE and non-owner occupied CRE was $1.2 million ($2.8 million guaranteed by governmental agencies) at December 31, 2016. For the nine months ended September 30, 2017, the increase in nonaccrual loans was primarily due to additions to nonaccrual loans of $5.1 million, offset partially by net principal reductions of $4.3 million and charge-offs of $750,000. The other real estate owned balance decreased to $523,000 at September 30, 2017 from $754,000 at December 31, 2016 primarily as a result of the sale of two properties.2023.
Performing TDRCommercial and multifamily construction loans increased $96.0 million or 44.8% due to new loan originations and advances on outstanding loans. New commitments for commercial and multifamily construction loans were $20.0 million and $22.3 million as of September 30, 2017 and December 31, 2016, respectively. The $2.2 million, or 10.1%, decrease in performing TDR loans for the nine months ended September 30, 2017 was primarily the result of net principal payments of $8.3 million and loans transferred to nonaccrual of $1.1 million, partially offset by troubled loans restructured during the period of $7.1 million. At September 30, 2017 and
December 31, 2016, the Company had an allowance for loan losses on the performing TDR loans of $2.1 million and $2.0 million, respectively.
Potential problem loans as of September 30, 2017 and December 31, 2016 were $84.1 million and $87.8 million, respectively. Potential problem loans are those loans that are currently accruing interest and are not considered impaired, but which we are monitoring because the financial information of the borrower causes concerns as to their ability to meet their loan repayment terms. Loans that are past due 90 days or more and still accruing interest are both well secured and in the process of collection. The $3.7 million, or 4.2%, decrease in potential problem loans was primarily the result of net principal payments of $18.9 million, loans transferred to held for sale of $5.8 million, loans transferred to nonaccrual status of $4.6 million and loan grade improvements of $4.4 million, partially offset by the addition of loans graded as potential problem loans of $31.4$209.5 million during the nine months ended September 30, 2017.2023.
Consumer loans decreased $22.5 million primarily due to a $33.1 million decline in indirect loans outstanding as the Bank ceased originating indirect auto loan originations in 2020.
Loans classified as nonaccrual and performing modified loans and nonperforming assets AnalysisThe following table provides information about our nonaccrual loans, performing modified loans and nonperforming assets for the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 | | Change |
| | | $ | | % |
| (Dollars in thousands) |
Nonaccrual loans: (1) | | | | | | | |
Commercial business | $ | 3,065 | | | $ | 5,869 | | | $ | (2,804) | | | (47.8) | % |
| | | | | | | |
Real estate construction and land development | — | | | 37 | | | (37) | | | (100.0) | |
| | | | | | | |
Total nonaccrual loans | 3,065 | | | 5,906 | | | (2,841) | | | (48.1) | |
Other real estate owned | — | | | — | | | — | | | — | |
Accruing loans past due 90 days or more | $ | 2,158 | | | $ | 1,615 | | | $ | 543 | | | 33.6 | % |
Total nonperforming assets | $ | 5,223 | | | $ | 7,521 | | | $ | (2,298) | | | (30.6) | % |
| | | | | | | |
Credit quality ratios: | | | | | | | |
Nonaccrual loans to loans receivable | 0.07 | % | | 0.15 | % | | (0.08) | % | | (53.3) | % |
Nonperforming loans to loans receivable | 0.12 | | | 0.19 | | | (0.07) | | | (36.8) | |
Nonperforming assets to total assets | 0.07 | | | 0.11 | | | (0.04) | | | (36.4) | |
Management maintains an allowance for loan losses (“ALL”) to provide for estimated probable incurred losses | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 | | Change |
| | | $ | | % |
Modified loans:(2) | | | | | | | |
Commercial business | $ | 9,471 | | | | | | | |
| | | | | | | |
Real estate construction and land development | 3,452 | | | | | | | |
Consumer | 45 | | | | | | | |
Total performing modified loans | $ | 12,968 | | | | | | | |
(1) At both September 30, 2023 and December 31, 2022, $1.5 million of nonaccrual loans, were guaranteed by government agencies.
(2) The Company adopted ASU 2022-02 on a prospective basis January 1, 2023.
The following table provides the changes in nonaccrual loans during the loan portfolio at the balance sheet date. The adequacy of the ALL is monitored through our ongoing quarterly loan quality assessments.nine months ended September 30, 2023:
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 |
(Dollars in thousands) |
Balance, beginning of period | $ | 5,906 | |
Additions | 908 | |
Net principal payments, sales and trends in delinquencies and classified and impaired loans;transfers to accruing status | (1,175) | |
Payoffs | (2,574) | |
| |
▪ | Levels of and trends in charge-offs and recoveries; |
| |
▪Balance, end of period | Trends in volume and terms of loans;$ |
3,065 | |
▪ | 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 ALLNonaccrual loans decreased $2.8 million, or 48.1%, due primarily to ongoing collection efforts including the payoff of a commercial business loan for loans in our loan portfolio, except PCI loans, by applying historical loss factors$1.6 million which also included a recovery of $1.1 million recognized during the three months ended September 30, 2023.
Allowance for homogeneous classes of the portfolio, adjusted for changes to the above-noted environmental factors. We may record specific provisions for impaired loans, including loansCredit Losses on nonaccrual status and TDRs, after a careful analysis of each loan’s credit and collateral factors. Our analysis of an appropriate ALL combines the provisions made for our non-impaired loans and the specific provisions made for each impaired loan.
The allowance for loan losses on loans designated as non-PCI loans is similar to the methodology described above except that for non-PCI loans, the remaining unaccreted discounts resulting from the fair value adjustments recorded at the time the loans were purchased are additionally factored into the allowance methodology.
For the PCI loans, the acquisition date fair value incorporated our estimate of future expected cash flows until the ultimate resolution of these credits. To the extent actual or projected cash flows are less than previously estimated, additional provisions for loan losses on the PCI loan portfolio will be recognized immediately into earnings. To the extent actual or projected cash flows are more than previously estimated, the increase in cash flows is recognized immediately as a recapture of provision for loan losses up to the previously recognized provision for that loan or pool of loans, if any, and then prospectively recognized in interest income as a yield adjustment.
While we believe we use the best information available to determine the allowance for loan losses, our results of operations could be significantly affected if circumstances differ substantially from the assumptions used in determining the allowance. A decline in national and local economic conditions, or other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Company’s financial condition and results of operations. In addition, the determination of the amount of the allowance for loan losses is subject to review by bank regulators, as part of their routine examination process, which may result in the establishment of additional allowance for loan losses based upon their judgment of information available to them at the time of their examination.
Loans Overview
The following table provides information regarding changes in our allowance for loan losses as of andACL on loans for the threeperiods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| At or For the Nine Months Ended September 30, | | Change |
| 2023 | | 2022 | | $ | | % |
| (Dollars in thousands) |
ACL on loans at the end of period | $ | 46,947 | | | $ | 42,089 | | | $ | 4,858 | | | 11.5 | % |
| | | | | | | |
Credit quality ratios: | | | | | | | |
ACL on loans to loans receivable | 1.10 | % | | 1.05 | % | | 0.05 | | | 4.8 | |
ACL on loans to nonaccrual loans | 1,531.71 | | | 675.15 | | | 856.56 | | | 126.9 | |
| | | | | | | |
Net recoveries | $ | (895) | | | $ | (980) | | | $ | 85 | | | (8.7) | |
Average balance of loans receivable, net during the period(1) | 4,129,429 | | | 3,815,387 | | | 314,042 | | | 8.2 | |
Net recoveries on loans to average loans receivable, net(2) | (0.03) | % | | (0.03) | % | | — | % | | — | % |
(1) Average balance of loans receivable, net includes loans held for sale.
(2) Annualized.
The ACL on loans increased $4.0 million, or 9.2%, to $46.9 million atSeptember 30, 2023 from $43.0 million at December 31, 2022due primarily to an increase in loans receivable, net as well as a change in mix of loans.
The following table presents the ACL on loans by loan portfolio segment at the indicated dates:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 | | | | |
| ACL on Loans | | ACL as a % of Loans in Loan Category | | % of Loans in Loan Category to Total Loans | | ACL on Loans | | ACL as a % of Loans in Loan Category | | % of Loans in Loan Category to Total Loans | | | | |
| (Dollars in thousands) |
Commercial business | $ | 31,105 | | | 0.93 | % | | 78.1 | % | | $ | 30,718 | | | 0.95 | % | | 79.4 | % | | | | |
Residential real estate | 3,549 | | | 0.94 | | | 8.8 | | | 2,872 | | | 0.84 | | | 8.5 | | | | | |
Real estate construction and land development | 9,959 | | | 2.62 | | | 9.0 | | | 7,063 | | | 2.40 | | | 7.3 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 | | | | |
| ACL on Loans | | ACL as a % of Loans in Loan Category | | % of Loans in Loan Category to Total Loans | | ACL on Loans | | ACL as a % of Loans in Loan Category | | % of Loans in Loan Category to Total Loans | | | | |
| (Dollars in thousands) |
Consumer | 2,334 | | | 1.35 | | | 4.1 | | | 2,333 | | | 1.19 | | | 4.8 | | | | | |
Total ACL on loans | $ | 46,947 | | | 1.10 | % | | 100.0 | % | | $ | 42,986 | | | 1.06 | % | | 100.0 | % | | | | |
Deposits Overview
The following table summarizes the Company's deposits at the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 | | Change |
| Balance (1) | | % of Total Deposits | | Balance (1) | | % of Total Deposits | | $ | | % |
| (Dollars in thousands) |
Noninterest demand deposits | $ | 1,789,293 | | | 31.7 | % | | $ | 2,099,464 | | | 35.5 | % | | $ | (310,171) | | | (14.8) | % |
Interest bearing demand deposits | 1,630,007 | | | 28.9 | | | 1,830,727 | | | 30.9 | | | (200,720) | | | (11.0) | |
Money market accounts | 1,081,253 | | | 19.2 | | | 1,063,243 | | | 17.9 | | | 18,010 | | | 1.7 | |
Savings accounts | 506,028 | | | 9.0 | | | 623,833 | | | 10.5 | | | (117,805) | | | (18.9) | |
Total non-maturity deposits | 5,006,581 | | | 88.8 | | | 5,617,267 | | | 94.8 | | | (610,686) | | | (10.9) | |
Certificates of deposit | 628,606 | | | 11.2 | | | 307,573 | | | 5.2 | | | 321,033 | | | 104.4 | |
Total deposits | $ | 5,635,187 | | | 100.0 | % | | $ | 5,924,840 | | | 100.0 | % | | $ | (289,653) | | | (4.9) | % |
(1) Deposit balances at December 31, 2022 include deposits held for sale of $17.4 million, respectively.
Total deposits decreased $289.7 million, or 4.9%, to $5.64 billion at September 30, 2023, compared to $5.92 billion at December 31, 2022 due primarily to an overall reduction in market liquidity, as well as interest rate sensitive clients moving a portion of their non-operating deposits to higher yielding accounts. Certificate of deposits increased due to increasing rates which, attracted customers to this deposit type as well as the addition of $107.5 million in brokered deposits.
The Bank entered into a purchase and ninesale agreement with a third party to sell and transfer certain assets, deposits and other liabilities of its branch in Ellensburg, WA in September 2022. During the three months ended September 30, 20172023, $13.8 million in deposits were sold as part of the closing of the Ellensburg branch sale, which included $13.6 million of non-maturity deposits. At December 31, 2022, $17.4 million in deposits were classified as held for sale.
Borrowings Overview
The FHLB functions as a member-owned cooperative providing credit for member financial institutions. Advances are made pursuant to several different programs. Each credit program has its own interest rate and 2016: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, 2023, the Bank maintained a credit facility with the FHLB with available borrowing capacity of $1.20 billion. The Bank had no FHLB advances outstanding at both September 30, 2023 and December 31, 2022. Advances from the FHLB may be collateralized by FHLB stock owned by the Bank, deposits at the FHLB, certain commercial and residential real estate loans, investment securities or other assets.
The Bank maintains a credit facility with the FRB through both the Discount Window and BTFP with available borrowing capacity of $823.1 million as of September 30, 2023. The Bank had $450.0 million in BTFP borrowings outstanding at September 30, 2023. The BTFP offers loans of up to one year in length to institutions pledging eligible investment securities. The advance rate on the collateral is at par value. The average rate on borrowings from the BTFP was 4.74%. The Bank had no FRB borrowings outstanding at December 31, 2022. All advances are secured by investment securities.
The Company utilizes securities sold under agreement to repurchase with one day maturities as a supplement to funding sources. Securities sold under agreement to repurchase are secured by pledged investment securities. Under the securities sold under agreement to repurchase, the Company is required to maintain an aggregate market value of securities pledged greater than the balance of the securities sold under agreement to repurchase. At September 30, 2023 and December 31, 2022, the Company had securities sold under agreements to repurchase of $23.2 million and $46.6 million, respectively.
In addition to funds obtained in the ordinary course of business, the Company assumed trust preferred securities and junior subordinated debentures as part of a prior acquisition. For regulatory capital purposes, the trust preferred securities are included in Tier 2 capital. The junior subordinated debentures outstanding as of September 30, 2023 and December 31, 2022 were $21.7 million and $21.5 million, respectively, net of unaccreted discount.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (Dollars in thousands) |
Loans receivable, net at the end of the period | $ | 2,797,513 |
| | $ | 2,578,977 |
| | $ | 2,797,513 |
| | $ | 2,578,977 |
|
Average loans receivable during the period | 2,737,535 |
| | 2,526,150 |
| | 2,676,153 |
| | 2,461,856 |
|
| | | | | | | |
Allowance for loan losses on loans at the beginning of the period | $ | 32,751 |
| | $ | 28,426 |
| | $ | 31,083 |
| | $ | 29,746 |
|
Provision for loan losses | 884 |
| | 1,495 |
| | 2,882 |
| | 3,754 |
|
Charge-offs: | | | | | | | |
Commercial business | (1,497 | ) | | (328 | ) | | (1,940 | ) | | (3,698 | ) |
One-to-four family residential | (15 | ) | | — |
| | (15 | ) | | — |
|
Real estate construction and land development | (556 | ) | | — |
| | (556 | ) | | (154 | ) |
Consumer | (478 | ) | | (572 | ) | | (1,419 | ) | | (1,370 | ) |
Total charge-offs | (2,546 | ) | | (900 | ) | | (3,930 | ) | | (5,222 | ) |
Recoveries: | | | | | | | |
Commercial business | 8 |
| | 993 |
| | 834 |
| | 1,352 |
|
One-to-four family residential | — |
| | — |
| | 1 |
| | 2 |
|
Real estate construction and land development | 191 |
| | — |
| | 201 |
| | 83 |
|
Consumer | 112 |
| | 197 |
| | 329 |
| | 496 |
|
Total recoveries | 311 |
| | 1,190 |
| | 1,365 |
| | 1,933 |
|
Net (charge-offs) recoveries | (2,235 | ) | | 290 |
| | (2,565 | ) | | (3,289 | ) |
Allowance for loan losses at the end of the period | $ | 31,400 |
| | $ | 30,211 |
| | $ | 31,400 |
| | $ | 30,211 |
|
| | | | | | | |
Allowance for loan losses to loans receivable, net | 1.12 | % | | 1.17 | % | | 1.12 | % | | 1.17 | % |
Net charge-offs (recoveries) on loans to average loans, annualized | 0.32 | % | | (0.05 | )% | | 0.13 | % | | 0.18 | % |
The Bank maintains available unsecured federal funds lines with five correspondent banks totaling $145.0 million, with no outstanding borrowings at September 30, 2023.
Stockholders' Equity Overview
The allowance for loan lossesCompany’s stockholders' equity to assets ratio was 11.4% at September 30, 2023 and December 31, 2022. Total stockholders' equity increased $15.7 million, or 2.0%, to $31.4$813.5 million at September 30, 20172023 from $31.1$797.9 millionat December 31, 2016.2022. The increase was thedue primarily to $55.5 million in net income recognized, offset partially by $23.3 million in cash dividends declared, an increase of $12.8 million in accumulated other comprehensive loss as a result of provisiondeclining fair values of investment securities available for loan lossessale, and $6.9 million for the repurchase of $2.9 million, partially offset by net charge-offs of $2.6 million recordedthe Company's common stock during the nine months ended September 30, 2017,2023.
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 included PCI loan pool charge-offsis the Company’s predominant source of $1.7 million. income. On October 18, 2023, the Company’s board of directors declared a regular quarterly dividend of $0.22 per common share payable on November 15, 2023 to shareholders of record on November 1, 2023.
Regulatory Requirements Overview
The allowance for loan lossesCompany is a bank holding company under the supervision of the Federal Reserve Bank. Bank holding companies are subject to loans receivable, net, decreasedcapital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. The Bank is a federally insured institution and thereby is subject to 1.12% atthe 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 unaudited Condensed Consolidated Financial Statements. Additionally, the Company and the Bank are required to maintain a capital conservation buffer of common equity Tier 1 capital above 2.5% to avoid restrictions on certain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers. Management believes that as of September 30, 2017 from 1.18% at December 31, 2016.2023, the Company and the Bank met all capital adequacy requirements to which they are subject.
The ratio of net charge-offs (recoveries) on loans to average loans, annualized deteriorated to net charge-off of 0.32% for the three months ended September 30, 2017 compared to net recoveries of 0.05% for the three months ended September 30, 2016, primarily due to PCI loan pool charge-offs of $1.5 million for the three months ended September 30, 2017. The ratio of net charge-offs (recoveries) on loans to average loans, annualized improved to a net charge-off of 0.13% for the nine months ended September 30, 2017 from 0.18% for the nine months ended September 30, 2016. The improvement of the ratio was due primarily to fewer net charge-offs recorded during the nine months ended September 30, 2017 compared to the same period in 2016 in addition to growth in the loan portfolio.
Nonperforming loans were $11.0 million and $10.9 million at September 30, 2017 and December 31, 2016, respectively, or 0.39% and 0.41% of loans receivable, net, respectively. The allowance for loan losses to nonperforming loans was 286.71% at September 30, 2017 and 284.93% at December 31, 2016. As of September 30, 2017,2023 and December 31, 2022, the most recent regulatory notifications categorized the Bank identified $31.0 millionas 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 presents the actual capital ratios of impaired loans,the Company and the Bank at the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Company | | Bank |
| September 30, 2023 | | December 31, 2022 | | September 30, 2023 | | December 31, 2022 |
Common equity Tier 1 capital ratio | 12.9 | % | | 12.8 | % | | 12.9 | % | | 12.9 | % |
Leverage ratio | 9.9 | | | 9.7 | | | 9.7 | | | 9.4 | |
Tier 1 capital ratio | 13.3 | | | 13.2 | | | 12.9 | | | 12.9 | |
Total capital ratio | 14.1 | | | 14.0 | | | 13.8 | | | 13.7 | |
Capital conservation buffer | 6.1 | | | 6.0 | | | 5.8 | | | 5.7 | |
As of which $10.5 million had no specific valuation allowance as their estimated collateral value or discounted estimated cash flow was equal to or exceeds their carrying value. The remaining $20.5 million of impaired loans atboth September 30, 2017 had related specific valuation allowances totaling $3.1 million. Impaired loans totaled $33.2 million at2023 and December 31, 2016, of which $10.1 million had no specific valuation allowance2022, the capital measures reflect the revised CECL capital transition provisions adopted by the Federal Reserve and $23.1 million had $2.7 million of specific valuation allowance.
Based on the established comprehensive methodology, management deemedFDIC that allowed the allowanceBank the option to delay for loan losses of $31.4 million at September 30, 2017 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 attwo years until December 31, 20162021 an estimate of $31.1 million. AtCECL’s effect on regulatory capital, relative to the applicable acquisition or merger dates, no allowanceincurred loss methodology’s effect on regulatory capital, followed by a three-year transition period.
Liquidity and Capital Resources
We maintain sufficient cash and cash equivalents and investment securities to meet short-term liquidity needs and actively monitor our long-term liquidity position to ensure the availability of capital resources for contractual obligations, strategic loan losses was established on purchased loansgrowth objectives and to fund operations. Our funding strategy has been to acquire non-maturity deposits from our retail accounts, and noninterest bearing demand deposits from our commercial customers and to use our borrowing availability to fund growth in assets. Our liquidity policy permits the purchase of brokered deposits in an amount not to exceed 15% of the Bank's total deposits as the loans were accounteda secondary source for at their fair value and a discount was established for the loans.funding. At September 30, 2017 and December 31, 2016, the remaining fair value discount for these purchased loans was $11.72023, we had $107.5 million and $13.5 million, respectively.
The following table outlines the allowance for loan losses and related loan balances at September 30, 2017 and December 31, 2016:
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| (Dollars in thousands) |
General Valuation Allowance: | | | |
Allowance for loan losses | $ | 24,113 |
| | $ | 21,791 |
|
Gross loans, excluding PCI and impaired loans | $ | 2,719,813 |
| | $ | 2,540,751 |
|
Percentage | 0.89 | % | | 0.86 | % |
| | | |
PCI Allowance: | | | |
Allowance for loan losses | $ | 4,176 |
| | $ | 6,558 |
|
Gross PCI loans | $ | 43,696 |
| | $ | 64,448 |
|
Percentage | 9.56 | % | | 10.18 | % |
| | | |
Specific Valuation Allowance: | | | |
Allowance for loan losses | $ | 3,111 |
| | $ | 2,734 |
|
Gross impaired loans | $ | 30,996 |
| | $ | 33,198 |
|
Percentage | 10.04 | % | | 8.24 | % |
| | | |
Total Allowance for Loan Losses: | | | |
Allowance for loan losses | $ | 31,400 |
| | $ | 31,083 |
|
Gross loans receivable | $ | 2,794,505 |
| | $ | 2,638,397 |
|
Percentage | 1.12 | % | | 1.18 | % |
While the Bank believes it has established its existing allowances for loan losses in accordance with U.S. GAAP, there can be no assurance that bank regulators, in reviewing the Bank’s loan portfolio, will not request the Bank to increase significantly its allowance for loan losses. In addition, 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 credit qualitybrokered deposits, which constituted 1.91% 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.
Based on management’s assessment of loan quality and current economic conditions, the Company believes that its allowance for loan losses was appropriate to absorb the probable incurred losses and inherent risks of loss in the loan portfolio at September 30, 2017.
Deposits and Other Borrowings
As indicated in the table below, total deposits were $3.32 billion at September 30, 2017, an increase of $91.2 million, or 2.8%, from $3.23 billion at December 31, 2016.
|
| | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Balance | | % of Total | | Balance | | % of Total |
| (Dollars in thousands) |
Noninterest bearing demand deposits | $ | 916,265 |
| | 27.6 | % | | $ | 882,091 |
| | 27.3 | % |
Interest bearing demand deposits | 1,031,449 |
| | 31.0 |
| | 963,821 |
| | 29.8 |
|
Money market accounts | 480,899 |
| | 14.5 |
| | 523,875 |
| | 16.2 |
|
Savings accounts | 497,024 |
| | 15.0 |
| | 502,460 |
| | 15.6 |
|
Total non-maturity deposits | 2,925,637 |
| | 88.1 |
| | 2,872,247 |
| | 88.9 |
|
Certificates of deposit | 395,181 |
| | 11.9 |
| | 357,401 |
| | 11.1 |
|
Total deposits | $ | 3,320,818 |
| | 100.0 | % | | $ | 3,229,648 |
| | 100.0 | % |
Non-maturity deposits (total deposits less certificates of deposit) increased $53.4 million, or 1.9%, to $2.93 billion at September 30, 2017 from $2.87 billion at December 31, 2016. Certificate of deposit accounts increased $37.8 million, or 10.6%, to $395.2 million at September 30, 2017 from $357.4 million at December 31, 2016 due primarily to the addition of $44.1 million of brokered certificates of deposit, which were used to supplement deposit growth in the funding of loan growth. Based on the change in the mix and volume of deposits, the percentage of certificates of deposit to total deposits increased to 11.9% at September 30, 2017 from 11.1% at December 31, 2016.
deposits. 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 utilizing securities sold under agreement to repurchase as a supplement to its funding sources. Our repurchase agreements are secured by available for sale investment securities. At September 30, 2017, the Bank had securities sold under agreement to repurchase of $28.7 million, an increase of $6.6 million, or 29.7%, from $22.1 million at December 31, 2016. The increase was the result of customer activity during the period.
The Company also has junior subordinated debentures with a par value of $25.0 million which pay quarterly interest based on three-month LIBOR plus 1.56%. The debentures mature in 2037. The balance of the junior subordinated debentures was $19.9 million at September 30, 2017, which reflects the fair value of the debentures established during the Washington Banking Merger, adjusted for the accretion of discount from purchase accounting fair value adjustment.
At September 30, 2017, the Bank maintained credit facilities with the FHLB of Des Moines for $662.4 million and credit facilities with the Federal Reserve Bank of San Francisco for $50.6 million. The Company had FHLB advances outstanding of $117.4 million and $79.6 million at September 30, 2017 and December 31, 2016, respectively. The average cost of the FHLB advances during the nine months ended September 30, 2017 was1.09%. The Bank also maintains lines of credit with four correspondent banks to purchase federal funds totaling $90.0 million as of September 30, 2017. There were no federal funds purchased as of September 30, 2017 or December 31, 2016.
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, 2017, cash and cash equivalents totaled $111.3 million, or 2.7% of total assets. The fair value of investment securities available for sale totaled $800.1 million at September 30, 2017 of which $257.0 million were pledged to secure public deposits or borrowing arrangements. The fair value of investment securities available for sale that were not pledged totaled $543.1 million, or 13.4%, of total assets at September 30, 2017. The fair value of investment securities available for sale with maturities of one year or less were $6.6 million, or 0.2%, of total assets at September 30, 2017.
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.competition so we adhere to internal management targets assigned to the loan to deposit ratio,
liquidity ratio, net short-term non-core funding ratio and non-core liabilities to total assets ratio to ensure an appropriate liquidity position. The principal objectiveCompany regularly monitors liquidity, models liquidity stress scenarios to ensure that adequate liquidity is available, and has contingency funding plans in place, which are reviewed and tested on a regular, recurring basis.
The following table summarizes the Company's available liquidity as of the Bank’s liquidity management programdates indicated:
| | | | | | | | | | | |
| September 30, 2023 | | December 31 2022 |
| (Dollars in thousands) |
FRB borrowing availability | $ | 823,117 | | | $ | 46,827 | |
FHLB borrowing availability(1) | 1,202,172 | | | 1,226,234 | |
Unencumbered investment securities available for sale(2) | 779,871 | | | 1,323,947 | |
Cash and cash equivalents | 220,503 | | | 103,590 | |
Fed funds line borrowing availability with correspondent banks | 145,000 | | | 215,000 | |
Total sources of liquidity | 3,170,663 | | | 2,915,598 | |
Less: Borrowings outstanding | (450,000) | | | — | |
Total available liquidity | $ | 2,720,663 | | | $ | 2,915,598 | |
(1) Includes FHLB borrowing availability of $1.20 billion at September 30, 2023 based on pledged assets, however, maximum credit capacity 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 all45% 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, 2017, the Company (on an unconsolidated basis) had cash and cash equivalents and investmentBank's total assets one quarter in arrears or $3.10 billion.
(2) Investment securities available for sale with no stated maturities of $11.6 million.at fair value.
Consolidated Cash Flows: AsManagement believes the capital sources are adequate to meet all reasonably foreseeable short-term and long-term cash requirements and there has not been a material change in our capital resources since the information disclosed in our 2022 Annual Form 10-K. We are not aware of any reasonably likely material changes in the Condensed Consolidated Statementsmix and relative cost of Cash Flows, net cash provided by operating activities was $53.8 million forsuch resources.
Critical Accounting Estimates
Our critical accounting estimates are described in detail in the "Critical Accounting Estimates" section within Item 7 of our 2022 Annual Form the Form 10-K. The SEC defines "critical accounting estimates" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. The Company's critical accounting estimates include estimates of the ACL on loans, the ACL on unfunded commitments and goodwill. There have been no material changes in these estimates during the nine months ended September 30, 2017, and primarily consisted of net income of $31.8 million, net proceeds from origination and sale of loans held for sale of $2.2 million and net change in accrued interest receivable, prepaid expenses and other assets, accrued expenses and other liabilities of $8.3 million. During the nine months ended September 30, 2017, net cash used in investing activities was $169.9 million, which consisted primarily of net loan originations of $178.8 million, investment in low income housing tax credit partnerships of $8.5 million and net proceeds from purchase and sale of investment securities available for sale of $3.4 million. Net cash provided by financing activities was $123.6 million for the nine months ended September 30, 2017, and primarily consisted of a net increase in deposits of $91.2 million, net FHLB advances of $37.8 million and a net increase in securities sold under agreements to repurchase of $6.6 million, offset partially by cash dividends on common stock of $11.4 million during the period.2023.
Capital and Capital Requirements
Stockholders’ equity at September 30, 2017 was $507.6 million compared with $481.8 million at December 31, 2016. During the nine months ended September 30, 2017, the Company realized net income of $31.8 million, declared cash dividends of $11.4 million, recorded other comprehensive income of $4.4 million, recognized stock-based compensation expense of $1.6 million, and recorded a net decrease to common stock due to common stock repurchases and exercises of stock options, net of tax, of $515,000.
Pursuant to minimum capital requirements of the FDIC effective on January 1, 2015, all FDIC-insured financial institutions, including Heritage Bank, are required to maintain a minimum common equity Tier 1 risk-based capital to risk-weighted assets ratio of 4.5%, a minimum Tier 1 leverage ratio to average assets of 4.0% and minimum risk-based capital ratios of Tier 1 capital to risk-weighted assets and total capital to risk-weighted assets of 6.0% and 8.0%, respectively.
As of September 30, 2017 and December 31, 2016, the most recent regulatory notifications categorized Heritage 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 provides our capital requirements and actual results.
|
| | | | | | | | | | | | | | | | | | | | | |
| | Minimum Requirements | | Well-Capitalized Requirements | | Actual |
| | (Dollars in thousands) |
As of September 30, 2017: | | | | | | | | | | | | |
The Company consolidated | | | | | | | | | | | | |
Common equity Tier 1 capital to risk-weighted assets | | $ | 151,086 |
| | 4.5 | % | | N/A |
| | N/A |
| | $ | 383,546 |
| | 11.4 | % |
Tier 1 leverage capital to average assets | | 155,761 |
| | 4.0 |
| | N/A |
| | N/A |
| | 403,444 |
| | 10.4 |
|
Tier 1 capital to risk-weighted assets | | 201,448 |
| | 6.0 |
| | N/A |
| | N/A |
| | 403,444 |
| | 12.0 |
|
Total capital to risk-weighted assets | | 268,598 |
| | 8.0 |
| | N/A |
| | N/A |
| | 435,119 |
| | 13.0 |
|
Heritage Bank | | | | | | | | | | | | |
Common equity Tier 1 capital to risk-weighted assets | | 150,874 |
| | 4.5 |
| | $ | 217,929 |
| | 6.5 | % | | 388,852 |
| | 11.6 |
|
Tier 1 leverage capital to average assets | | 155,582 |
| | 4.0 |
| | 194,478 |
| | 5.0 |
| | 388,852 |
| | 10.0 |
|
Tier 1 capital to risk-weighted assets | | 201,165 |
| | 6.0 |
| | 268,221 |
| | 8.0 |
| | 388,852 |
| | 11.6 |
|
Total capital to risk-weighted assets | | 268,221 |
| | 8.0 |
| | 335,276 |
| | 10.0 |
| | 420,422 |
| | 12.5 |
|
| | | | | | | | | | | | |
As of December 31, 2016: | | | | | | | | | | | | |
The Company consolidated | | | | | | | | | | | | |
Common equity Tier 1 capital to risk-weighted assets | | $ | 142,688 |
| | 4.5 | % | | N/A |
| | N/A |
| | $ | 362,350 |
| | 11.4 | % |
Tier 1 leverage capital to average assets | | 148,144 |
| | 4.0 |
| | N/A |
| | N/A |
| | 381,989 |
| | 10.3 |
|
Tier 1 capital to risk-weighted assets | | 190,250 |
| | 6.0 |
| | N/A |
| | N/A |
| | 381,989 |
| | 12.0 |
|
Total capital to risk-weighted assets | | 253,667 |
| | 8.0 |
| | N/A |
| | N/A |
| | 413,320 |
| | 13.0 |
|
Heritage Bank | | | | | | | | | | | | |
Common equity Tier 1 capital to risk-weighted assets | | 142,573 |
| | 4.5 |
| | $ | 205,938 |
| | 6.5 | % | | 369,915 |
| | 11.7 |
|
Tier 1 leverage capital to average assets | | 148,024 |
| | 4.0 |
| | 185,030 |
| | 5.0 |
| | 369,915 |
| | 10.0 |
|
Tier 1 capital to risk-weighted assets | | 190,097 |
| | 6.0 |
| | 253,462 |
| | 8.0 |
| | 369,915 |
| | 11.7 |
|
Total capital to risk-weighted assets | | 253,462 |
| | 8.0 |
| | 316,828 |
| | 10.0 |
| | 401,168 |
| | 12.7 |
|
Although new capital requirements were effective on January 1, 2015, certain provisions of the new rule will be phased-in from the effective date through 2019, including, among others, a new capital conservation buffer requirement, which requires financial institutions to maintain a common equity capital ratio more than 2.5% above the required minimum levels in order to avoid limitations on capital distributions, including dividend payments, and certain discretionary bonus payments based on percentages of eligible retained income that could be utilized for such actions. The new capital conservation buffer requirement began to be phased-in on January 1, 2016 at 0.625% of risk-weighted assets and will continue to increase by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019. At September 30, 2017, the capital conservation buffer was 5.07% and 4.65% for the Company and the Bank, respectively, and the minimum conservation buffer requirement was 1.25%.
Quarterly, the Company reviews the potential payment of cash dividends to its common shareholders. The timing and amount of cash dividends paid on our 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. On October 25, 2017, the Company’s Board of Directors declared a regular dividend of $0.13 per common share and a special dividend of $0.10 per common share payable on November 22, 2017 to shareholders of record on November 8, 2017.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through our exposure to market interest rates, equity prices and credit spreads. Our results of operations are highly dependent upon our ability to manage interest rate risk. We considerprimary market risk is interest rate risk, to be a significantwhich is the risk of loss of net interest income or net interest margin resulting from changes in market risk that could have a material effect on our financial condition and results of operations.interest rates. Interest rate risk is measuredresults primarily from the traditional banking activities in which the Bank engages, such as gathering deposits and assessedextending loans. Many factors, including economic and financial conditions, movements in interest rates and consumer preferences, affect the difference between the interest earned on a quarterly basis. In our opinion, there has not been a material changeassets and the interest paid on our liabilities. Management regularly reviews our exposure to changes in ourinterest rates. Among the factors considered are changes in the mix of interest earning assets and interest bearing liabilities, interest rate spreads and repricing periods. The risk committee of the Board of Directors oversees market risk management, including the monitoring of risk measures and limits and policy guidelines, for the amount of interest rate risk exposure sinceand its effect on net interest income and capital.
Neither we, nor the information disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.
We do notBank, maintain a trading account for any class of financial instrument, nor do we, or the Bank, engage in hedging activities or purchase high-riskhigh risk derivative instruments. Moreover, neither we, have no materialnor the Bank, are subject to foreign currency exchange rate risk or commodity price risk.
Net interest income simulation
An income simulation model is the primary tool we use to assess the direction and magnitude of changes in net interest income resulting from changes in interest rates. Modeling the sensitivity of net interest income is highly dependent on numerous assumptions incorporated into the modeling process. Key assumptions in the model include prepayment speeds on loans and investment securities, repricing betas on non-maturity deposits, and pricing on investment securities, loans, and borrowings. In order to measure the interest rate risk sensitivity, this simulation model uses a “no balance sheet growth” assumption and assumes an instantaneous and sustained uniform change in market interest rates at all maturities. These assumptions are inherently uncertain and, as a result, the net interest income projections should be viewed as an estimate of the net interest income sensitivity at the time of the analysis. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors.
Based on the results of the simulation model, the following table presents the change in our net interest income as a result of parallel rate shock scenarios for the presented periods after the dates shown:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| Amount | | % Change in Net Interest Income | | Amount | | % Change in Net Interest Income |
| (Dollars in thousands) |
Modeled increase in market interest rates of 100 basis points |
Increase in net interest income in Year 1 | $ | 2,420 | | | 1.1 | % | | $ | 5,113 | | | 2.0 | % |
Increase in net interest income in Year 2 | 4,104 | | | 1.6 | | | 11,147 | | | 4.1 | |
Modeled increase in market interest rates of 200 basis points |
Increase in net interest income in Year 1 | 3,184 | | | 1.4 | | | 8,181 | | | 3.2 | |
Increase in net interest income in Year 2 | 6,266 | | | 2.4 | | | 19,889 | | | 7.3 | |
Modeled decrease in market interest rates of 100 basis points |
Increase (decrease) in net interest income in Year 1 | 3,125 | | | 1.4 | | | (5,433) | | | (2.1) | |
Decrease in net interest income in Year 2 | 318 | | | 0.1 | | | (10,534) | | | (3.9) | |
Modeled decrease in market interest rates of 200 basis points |
Increase (decrease) in net interest income in Year 1 | 2,812 | | | 1.2 | | | (16,840) | | | (6.6) | |
Decrease in net interest income in Year 2 | $ | (4,113) | | | (1.6) | % | | $ | (29,942) | | | (11.0) | % |
These scenarios are based on market interest rates as of the last day of a reporting period published by independent sources that are actively traded in the open market. The simulations used to manage market risk are based on numerous assumptions regarding the effect of changes in interest rates on the timing and extent of reprice characteristics, future cash flows and customer behavior. These assumptions are inherently uncertain and actual results will differ, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower net interest income.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
An evaluation of the Company’s disclosure controls and procedureprocedures (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, 2017 are2023 were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act iswas (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 quarterthree months ended September 30, 2017,2023, 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
Heritage and HeritageNeither the Company nor the Bank are notis 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 2022 Annual Report on Form 10-K for the year ended December 31, 2016.10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, AND USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES
(a) Not applicable.
(b) Not applicable.
(c) Repurchase Plans
The following table provides information about repurchases of common stock by the Company has had variousduring the three months ended September 30, 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
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 | | Maximum number of shares that may yet be purchased under the plans or programs (2) |
July 1, 2023—July 31, 2023 | — | | | $ | — | | | 10,169,168 | | | 455,909 | |
August 1, 2023— August 31, 2023 | — | | | — | | | 10,169,168 | | | 455,909 | |
September 1, 2023—September 30, 2023 | 148,454 | | | 17.08 | | | 10,317,287 | | | 307,790 | |
Total | 148,454 | | | $ | 17.08 | | | | | |
(1)Of the common shares repurchased by the Company between July1, 2023 and September 30, 2023, a total of 335 shares represented the cancellation of stock to pay withholding taxes on vested restricted stock units and were not repurchased pursuant to the publicly announced stock repurchase programs sinceprogram.
(2)On March 1999. On October 23, 2014,12, 2020 the Company's Board of Directors authorizedannounced the repurchase of up to 5% of the Company's outstanding common shares, or approximately 1,513,0001,799,054 shares, under the eleventhtwelfth stock repurchase plan. The number, timingrepurchase program does not have a set expiration date and pricewill expire upon repurchase of the full amount of authorized shares, repurchased will depend on business and market conditions, and other factors, including opportunities to deployunless terminated sooner by the Company's capital.board of directors. The repurchase program may be suspended or discontinued at any time by the Company’s board of directors.
The following table provides total repurchased shares and average share prices under the
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable plan for the periods indicated:
ITEM 5. OTHER INFORMATION
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | |
| 2017 | | 2016 | | 2017 | | 2016 | | Plan Total (1) |
Eleventh Plan | | | | | | | | | |
Repurchased shares | — |
| | 38,000 |
| | — |
| | 138,000 |
| | 579,996 |
|
Stock repurchase average share price | $ | — |
| | $ | 17.46 |
| | $ | — |
| | $ | 17.16 |
| | $ | 16.76 |
|
(a) None | |
(1) | Represents shares repurchased and average price per share paid during the duration of the plan. |
In addition to the stock repurchases disclosed in the table above, the Company repurchased shares to pay withholding taxes on the vesting of restricted stock. (b) None
(c) During the three and nine months ended September 30, 2017,2023, there were no Rule 10b5‑1 trading arrangements (as defined in Item 408(a) of Regulation S-K) or non-Rule 10b5-1 trading arrangements (as defined in Item 408(c) of Regulation S-K) adopted or terminated by any director or officer (as defined in Rule 16a‑1(f) under the Company repurchased 344 and 27,711 sharesExchange Act) of common stock at an average price per share of $25.80 and $24.61 to pay withholding taxes on the vesting of restricted stock that vested during the respective periods. During the three and nine months ended September 30, 2016, the Company repurchased 5,276 and 29,206 shares of common stock at an average price per share of $18.64 and $17.77 to pay withholding taxes on the vesting of restricted stock that vested during the respective periods.Company.
The following table sets forth information about the Company’s purchases of its outstanding common stock during the quarter ended September 30, 2017.
|
| | | | | | | | | | | | | |
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 | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
July 1, 2017— July 31, 2017 | | — |
| | $ | — |
| | 7,893,389 |
| | 935,034 |
|
August 1, 2017— August 31, 2017 | | — |
| | — |
| | 7,893,389 |
| | 935,034 |
|
September 1, 2017— September 30, 2017 | | 344 |
| | 25.80 |
| | 7,893,389 |
| | 935,034 |
|
Total | | 344 |
| | $ | 25.80 |
| | 7,893,389 |
| | 935,034 |
|
| |
(1) | All of the common shares repurchased by the Company between July 1, 2017 and September 30, 2017 were shares of restricted stock that represented the cancellation of stock to pay withholding taxes. |
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 |
Exhibit No. | | Description of Exhibit | | Form | | Exhibit | | Filing Date/Period End Date |
10.1* | | | | DEF 14A | | 4.4 | | 03/22/2023 |
10.2* | | | | S-8 | | 4.5 | | 05/08/23 |
10.3* | | | | S-8 | | 4.6 | | 05/08/23 |
31.1 | | | | | | | | |
31.2 | | | | | | | | |
32.1 | | | | | | | | |
101.INS | | XBRL Instance Document (1) | | | | | | |
101.SCH | | XBRL Taxonomy Extension Schema Document (1) | | | | | | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document (1) | | | | | | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document (1) | | | | | | |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document (1) | | | | | | |
|
| | | | | | | | | |
| | | | Incorporated by Reference |
Exhibit No. | | Description of Exhibit | | Form | | Exhibit | | Filing Date/Period End Date |
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2.5 |
| | | | 8-K | | 2.1 | | 7/27/17 |
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31.1 |
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31.2 |
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32.1 |
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101 |
| | The following financial information from Heritage Financial Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 is formatted in XBRL: (i) the Unaudited Condensed Consolidated Statements of Financial Condition, (ii) the Unaudited Condensed Consolidated Statements of Income, (iii) the Unaudited Condensed Consolidated Statements Comprehensive Income, (iv) the Unaudited Condensed Consolidated Statements of Stockholders’ Equity, (v) the Unaudited Condensed Consolidated Statements of Cash Flows and (vi) the Unaudited Notes to Condensed Consolidated Financial Statements. | | | | | | |
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| | | | Incorporated by Reference |
Exhibit No. | | Description of Exhibit | | Form | | Exhibit | | Filing Date/Period End Date |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document (1) | | | | | | |
104 | | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) | | | | | | |
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* Indicates management contract or compensatory plan or arrangement.
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: | | |
Date:November 8, 2023 | | /S/ JEFFREY J. DEUEL |
November 9, 2017 | | /S/ BRIAN L. VANCEJeffrey J. Deuel |
| | Brian L. Vance |
| | President and Chief Executive Officer |
Date: | | (Duly Authorized Officer) |
November 8, 2023 | | |
Date: | | |
November 9, 2017 | | /S/ DONALD J. HINSON |
| | Donald J. Hinson |
| | Executive Vice President and Chief Financial Officer |
| | (Principal Financial and Accounting Officer) |