Noncovered Loans Receivable (Noncovered Loans) | 12 Months Ended |
Dec. 31, 2014 |
Noncovered Loans | |
Accounts, Notes, Loans and Financing Receivable [Line Items] | |
Noncovered Loans Receivable | Noncovered Loans Receivable |
The Company originates loans in the ordinary course of business and has also acquired loans through FDIC-assisted and open bank transactions. Loans that are not covered by FDIC shared-loss agreements are referred to as "noncovered loans." Disclosures related to the Company’s recorded investment in noncovered loans receivable generally exclude accrued interest receivable and net deferred loan origination fees and costs because they are insignificant. |
Loans acquired in a business combination may be further classified as “purchased” loans. Loans purchased with evidence of credit deterioration since origination for which it is probable that not all contractually required payments will be collected are accounted for under FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. These loans are identified as “purchased credit impaired” ("PCI") loans. Loans purchased that are not accounted for under FASB ASC 310-30 are accounted for under FASB ASC 310-20, Receivables—Nonrefundable Fees and Other Costs. |
(a) Loan Origination/Risk Management |
The Company categorizes loans in one of the four segments of the total loan portfolio: commercial business, real estate construction and land development, one-to-four family residential and consumer. Within these segments are classes of loans to which management monitors and assesses credit risk in the loan portfolios. The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies, and nonperforming and potential problem loans. The Company also conducts internal loan reviews and validates the credit risk assessment on a periodic basis and presents the results of these reviews to management. The loan review process complements and reinforces the risk identification and assessment decisions made by loan officers and credit personnel, as well as the Company’s policies and procedures. |
A discussion of the risk characteristics of each loan portfolio segment is as follows: |
Commercial Business: |
There are three significant classes of loans in the commercial portfolio segment: commercial and industrial loans, owner-occupied commercial real estate and non-owner occupied commercial real estate. The owner and non-owner occupied commercial real estate are both considered commercial real estate loans. As the commercial and industrial loans carry different risk characteristics than the commercial real estate loans, they are discussed separately below. |
Commercial and industrial. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may include a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. |
Commercial real estate. The Company originates commercial real estate loans within its primary market areas. These loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate involves more risk than other classes of loans in that the lending typically involves higher loan principal amounts, and payments on loans secured by real estate properties are dependent on successful operation and management of the properties. Repayment of these loans may be more adversely affected by conditions in the real estate market or the economy. Owner-occupied commercial real estate loans are generally of lower credit risk than non-owner occupied commercial real estate loans as the borrowers' businesses are likely dependent on the properties. |
One-to-Four Family Residential: |
The majority of the Company’s one-to-four family residential loans are secured by single-family residences located in its primary market areas. The Company’s underwriting standards require that single-family portfolio loans generally are owner-occupied and do not exceed 80% of the lower of appraised value at origination or cost of the underlying collateral. Terms of maturity typically range from 15 to 30 years. Historically, the Company sold most single-family loans in the secondary market and retained a smaller portion in its loan portfolio. From the second quarter of 2013 until May 1, 2014, the Company only originated single-family loans for its loan portfolio. As a result of the Washington Banking Merger, since May 1, 2014 the Company has once again begun originating and selling a majority of its single-family mortgages. |
Real Estate Construction and Land Development: |
The Company originates construction loans for one-to-four family residential and for five or more family residential and commercial properties. The one-to-four family residential construction loans generally include construction of custom homes whereby the home buyer is the borrower. The Company also provides financing to builders for the construction of pre-sold homes and, in selected cases, to builders for the construction of speculative residential property. Substantially all construction loans are short-term in nature and priced with variable rates of interest. Construction lending can involve a higher level of risk than other types of lending because funds are advanced partially based upon the value of the project, which is uncertain prior to the project’s completion. Because of the uncertainties inherent in estimating construction costs as well as the market value of a completed project and the effects of governmental regulation of real property, the Company’s estimates with regard to the total funds required to complete a project and the related loan-to-value ratio may vary from actual results. As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property or refinance the indebtedness. If the Company’s estimate of the value of a project at completion proves to be overstated, it may have inadequate security for repayment of the loan and may incur a loss if the borrower does not repay the loan. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being dependent upon successful completion of the construction project, interest rate changes, government regulation of real property, general economic conditions and the availability of long-term financing. |
Consumer: |
The Company originates consumer loans and lines of credit that are both secured and unsecured. The underwriting process for these loans ensures a qualifying primary and secondary source of repayment. Underwriting standards for home equity loans are significantly influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage of 80%, collection remedies, the number of such loans a borrower can have at one time and documentation requirements. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed. The majority of consumer loans are for relatively small amounts disbursed among many individual borrowers which reduces the credit risk for this type of loan. To further reduce the risk, trend reports are reviewed by management on a regular basis. |
As a result of the Washington Banking Merger, the Company is originating indirect consumer loans. These loans are for new and used automobile and recreational vehicles that are originated indirectly by selected dealers located in the Company's market areas. The Company has limited its indirect loans purchased primarily to dealerships that are established and well known in their market areas and to applicants that are not classified as sub-prime. |
Noncovered loans receivable at December 31, 2014 and December 31, 2013 consisted of the following portfolio segments and classes: |
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| December 31, 2014 | | December 31, 2013 | | | | | | | | | | | | | | | | |
| (In thousands) | | | | | | | | | | | | | | | | |
Commercial business: | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | $ | 551,343 | | | $ | 336,540 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Owner-occupied commercial real estate | 535,742 | | | 281,309 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Non-owner occupied commercial real estate | 616,757 | | | 399,979 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Total commercial business | 1,703,842 | | | 1,017,828 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
One-to-four family residential | 63,540 | | | 43,082 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Real estate construction and land development: | | | | | | | | | | | | | | | | | | | |
One-to-four family residential | 46,749 | | | 19,724 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Five or more family residential and commercial properties | 61,360 | | | 48,655 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Total real estate construction and land development | 108,109 | | | 68,379 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Consumer | 250,323 | | | 41,547 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Gross noncovered loans receivable | 2,125,814 | | | 1,170,836 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Net deferred loan fees | (937 | ) | | (2,670 | ) | | | | | | | | | | | | | | | | |
Noncovered loans receivable, net | 2,124,877 | | | 1,168,166 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Allowance for loan losses | (22,153 | ) | | (22,657 | ) | | | | | | | | | | | | | | | | |
Noncovered loans receivable, net of allowance for loan losses | $ | 2,102,724 | | | $ | 1,145,509 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
(b) Concentrations of Credit |
Most of the Company’s lending activity occurs within Washington State, and to a lesser extent Oregon. The Company’s primary market areas have been concentrated along the I-5 corridor from Whatcom County to Clark County in Washington State and Multnomah County in Oregon, as well as other contiguous markets. The Washington Banking Merger has allowed the expansion of the market area north of Seattle, Washington to the Canadian border. The majority of the Company’s loan portfolio consists of (in order of balances at December 31, 2014) non-owner occupied commercial real estate, owner-occupied commercial real estate and commercial and industrial. As of December 31, 2014 and December 31, 2013, there were no concentrations of loans related to any single industry in excess of 10% of the Company’s total loans. |
(c) Credit Quality Indicators |
As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the risk grade of the loans, (ii) the level of classified loans, (iii) net charge-offs, (iv) nonperforming loans, and (v) the general economic conditions of the United States of America, and specifically the states of Washington and Oregon. The Company utilizes a risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 0 to 10. A description of the general characteristics of the risk grades is as follows: |
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• | Grades 0 to 5: These grades are considered “pass grade” and include loans with negligible to above average but acceptable risk. These borrowers generally have strong to acceptable capital levels and consistent earnings and debt service capacity. Loans with the higher grades within the “pass” category may include borrowers who are experiencing unusual operating difficulties, but have acceptable payment performance to date. Increased monitoring of financials and/or collateral may be appropriate. Loans with this grade show no immediate loss exposure. | | | | | | | | | | | | | | | | | | | | | | |
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• | Grade 6: This grade includes "Watch" loans and is considered a “pass grade”. The grade is intended to be utilized on a temporary basis for pass grade borrowers where a potentially significant risk-modifying action is anticipated in the near term. | | | | | | | | | | | | | | | | | | | | | | |
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• | Grade 7: This grade includes “Other Assets Especially Mentioned” (“OAEM”) loans in accordance with regulatory guidelines, and is intended to highlight loans with elevated risks. Loans with this grade show signs of deteriorating profits and capital, and the borrower might not be strong enough to sustain a major setback. The borrower is typically higher than normally leveraged, and outside support might be modest and likely illiquid. The loan is at risk of further decline unless active measures are taken to correct the situation. | | | | | | | | | | | | | | | | | | | | | | |
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• | Grade 8: This grade includes “Substandard” loans in accordance with regulatory guidelines, which the Company has determined have a high credit risk. These loans also have well-defined weaknesses which make payment default or principal exposure likely, but not yet certain. The borrower may have shown serious negative trends in financial ratios and performance. Such loans may be dependent upon collateral liquidation, a secondary source of repayment or an event outside of the normal course of business. Loans with this grade can be placed on accrual or nonaccrual status based on the Company’s accrual policy. | | | | | | | | | | | | | | | | | | | | | | |
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• | Grade 9: This grade includes “Doubtful” loans in accordance with regulatory guidelines, and the Company has determined these loans to have excessive credit risk. Such loans are placed on nonaccrual status and may be dependent upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. Additionally, these loans generally have a specific valuation allowance or have been partially charged-off for the amount considered uncollectible. | | | | | | | | | | | | | | | | | | | | | | |
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• | Grade 10: This grade includes “Loss” loans in accordance with regulatory guidelines, and the Company has determined these loans have the highest risk of loss. Such loans are charged-off or charged-down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. “Loss” is not intended to imply that the loan or some portion of it will never be paid, nor does it in any way imply that there has been a forgiveness of debt. | | | | | | | | | | | | | | | | | | | | | | |
Numerical loan grades for all commercial business loans and real estate construction and land development loans are established at the origination of the loan. Prior to November 2014, one-to-four family residential loans and consumer loans (“non-commercial loans”) were not numerically graded at origination date as these loans were determined to be “pass graded” loans. A numeric grade was assigned to these non-commercial loans if subsequent to origination, the credit department evaluated the credit and determined it necessary to classify the loan. Subsequent to November 2014, the non-commercial loans were designated a loan grade “4” at origination date to reflect a "pass grade". The Bank follows its regulator’s Uniform Retail Credit Classification and Account Management Policy for subsequent classification in the event of payment delinquencies or default. Loan grades are reviewed on a quarterly basis, or more frequently if necessary, by the credit department. Typically, an individual loan grade will not be changed from the prior period unless there is a specific indication of credit deterioration or improvement. Credit deterioration is evidenced by delinquency, direct communications with the borrower, or other borrower information that becomes known to management. Credit improvements are evidenced by known facts regarding the borrower or the collateral property. |
The loan grades relate to the likelihood of losses in that the higher the grade, the greater the loss potential. Loans with a pass grade may have some estimated inherent losses, but to a lesser extent than the other loan grades. The OAEM loan grade is transitory in that the Company is waiting on additional information to determine the likelihood and extent of the potential loss. The likelihood of loss for OAEM graded loans, however, is greater than Watch graded loans because there has been measurable credit deterioration. Loans with a Substandard grade are generally loans for which the Company has individually analyzed for potential impairment. For Doubtful and Loss graded loans, the Company is almost certain of the losses, and the unpaid principal balances are generally charged-off to the realizable value. |
The following tables present the balance of the noncovered loans receivable by credit quality indicator as of December 31, 2014 and December 31, 2013. |
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| December 31, 2014 | | | | |
| Pass | | OAEM | | Substandard | | Doubtful | | Total | | | | |
| (In thousands) | | | | |
Commercial business: | | | | | | | | | | | | | |
Commercial and industrial | $ | 509,483 | | | $ | 14,487 | | | $ | 27,049 | | | $ | 324 | | | $ | 551,343 | | | | | |
| | | |
Owner-occupied commercial real estate | 496,234 | | | 22,946 | | | 16,562 | | | — | | | 535,742 | | | | | |
| | | |
Non-owner occupied commercial real estate | 584,262 | | | 17,643 | | | 14,852 | | | — | | | 616,757 | | | | | |
| | | |
Total commercial business | 1,589,979 | | | 55,076 | | | 58,463 | | | 324 | | | 1,703,842 | | | | | |
| | | |
One-to-four family residential | 61,185 | | | 315 | | | 2,040 | | | — | | | 63,540 | | | | | |
| | | |
Real estate construction and land development: | | | | | | | | | | | | | |
One-to-four family residential | 34,356 | | | 3,977 | | | 8,416 | | | — | | | 46,749 | | | | | |
| | | |
Five or more family residential and commercial properties | 57,025 | | | — | | | 4,335 | | | — | | | 61,360 | | | | | |
| | | |
Total real estate construction and land development | 91,381 | | | 3,977 | | | 12,751 | | | — | | | 108,109 | | | | | |
| | | |
Consumer | 242,836 | | | — | | | 7,487 | | | — | | | 250,323 | | | | | |
| | | |
Gross noncovered loans | $ | 1,985,381 | | | $ | 59,368 | | | $ | 80,741 | | | $ | 324 | | | $ | 2,125,814 | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2013 | | | | |
| Pass | | OAEM | | Substandard | | Doubtful | | Total | | | | |
| (In thousands) | | | | |
Commercial business: | | | | | | | | | | | | | |
Commercial and industrial | $ | 304,959 | | | $ | 9,183 | | | $ | 20,849 | | | $ | 1,549 | | | $ | 336,540 | | | | | |
| | | |
Owner-occupied commercial real estate | 269,130 | | | 3,814 | | | 8,365 | | | — | | | 281,309 | | | | | |
| | | |
Non-owner occupied commercial real estate | 381,355 | | | 9,037 | | | 8,723 | | | 864 | | | 399,979 | | | | | |
| | | |
Total commercial business | 955,444 | | | 22,034 | | | 37,937 | | | 2,413 | | | 1,017,828 | | | | | |
| | | |
One-to-four family residential | 40,245 | | | 269 | | | 2,568 | | | — | | | 43,082 | | | | | |
| | | |
Real estate construction and land development: | | | | | | | | | | | | | |
One-to-four family residential | 11,582 | | | 4,159 | | | 3,983 | | | — | | | 19,724 | | | | | |
| | | |
Five or more family residential and commercial properties | 45,332 | | | — | | | 3,323 | | | — | | | 48,655 | | | | | |
| | | |
Total real estate construction and land development | 56,914 | | | 4,159 | | | 7,306 | | | — | | | 68,379 | | | | | |
| | | |
Consumer | 39,432 | | | 248 | | | 1,867 | | | — | | | 41,547 | | | | | |
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Gross noncovered loans | $ | 1,092,035 | | | $ | 26,710 | | | $ | 49,678 | | | $ | 2,413 | | | $ | 1,170,836 | | | | | |
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|
Noncovered potential problem loans are loans classified as OAEM or worse that are currently accruing interest and are not considered impaired, but which management is monitoring because the financial information of the borrower causes concern as to their ability to meet their loan repayment terms. Noncovered potential problem loans also include PCI loans as these loans continue to accrete loan discounts established at acquisition based on the guidance of ASC 310-30. Noncovered potential problem loans as of December 31, 2014 and December 31, 2013 were $117.3 million and $52.8 million, respectively. The balance of noncovered potential problem loans guaranteed by a governmental agency, which guarantees reduce the Company's credit exposure, was $2.0 million and $1.8 million as of December 31, 2014 and December 31, 2013, respectively. |
(d) Nonaccrual Loans |
Noncovered nonaccrual loans, segregated by segments and classes of loans, were as follows as of December 31, 2014 and December 31, 2013: |
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| December 31, 2014 | | December 31, 2013 | | | | | | | | | | | | | | | | |
| (In thousands) | | | | | | | | | | | | | | | | |
Commercial business: | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | $ | 3,463 | | | $ | 4,648 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Owner-occupied commercial real estate | 1,163 | | | 1,024 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Non-owner occupied commercial real estate | 93 | | | 3 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Total commercial business | 4,719 | | | 5,675 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
One-to-four family residential | — | | | 340 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Real estate construction and land development: | | | | | | | | | | | | | | | | | | | |
One-to-four family residential | 2,652 | | | 1,045 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Total real estate construction and land development | 2,652 | | | 1,045 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Consumer | 139 | | | 678 | | | | | | | | | | | | | | | | | |
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Gross noncovered nonaccrual loans | $ | 7,510 | | | $ | 7,738 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
The Company had $1.6 million and $1.7 million of noncovered nonaccrual loans guaranteed by governmental agencies at December 31, 2014 and December 31, 2013, respectively. |
Noncovered PCI loans are not included in the nonaccrual table above because these loans are accounted for under ASC 310-30, which provides that accretable yield is calculated based on a loan's expected cash flow even if the loan is not performing under its conventional terms. |
(e) Past due loans |
The Company performs an aging analysis of past due loans using the categories of 30-89 days past due and 90 or more days past due. This policy is consistent with regulatory reporting requirements. |
The balances of noncovered past due loans, segregated by segments and classes of loans, as of December 31, 2014 and December 31, 2013 were as follows: |
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| December 31, 2014 |
| 30-89 Days | | 90 Days or | | Total Past | | Current | | Total | | 90 Days or More |
Greater | Due | and Still |
| | Accruing (1) |
| (In thousands) |
Commercial business: | | | | | | | | | | | |
Commercial and industrial | $ | 2,503 | | | $ | 1,962 | | | $ | 4,465 | | | $ | 546,878 | | | $ | 551,343 | | | $ | — | |
|
Owner-occupied commercial real estate | 1,038 | | | 100 | | | 1,138 | | | 534,604 | | | 535,742 | | | — | |
|
Non-owner occupied commercial real estate | 113 | | | 75 | | | 188 | | | 616,569 | | | 616,757 | | | — | |
|
Total commercial business | 3,654 | | | 2,137 | | | 5,791 | | | 1,698,051 | | | 1,703,842 | | | — | |
|
One-to-four family residential | 200 | | | — | | | 200 | | | 63,340 | | | 63,540 | | | — | |
|
Real estate construction and land development: | | | | | | | | | | | |
One-to-four family residential | 62 | | | 2,135 | | | 2,197 | | | 44,552 | | | 46,749 | | | — | |
|
Five or more family residential and commercial properties | — | | | 376 | | | 376 | | | 60,984 | | | 61,360 | | | — | |
|
Total real estate construction and land development | 62 | | | 2,511 | | | 2,573 | | | 105,536 | | | 108,109 | | | — | |
|
Consumer | 2,413 | | | 125 | | | 2,538 | | | 247,785 | | | 250,323 | | | — | |
|
Gross noncovered loans | $ | 6,329 | | | $ | 4,773 | | | $ | 11,102 | | | $ | 2,114,712 | | | $ | 2,125,814 | | | $ | — | |
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-1 | Excludes PCI loans. | | | | | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2013 |
| 30-89 Days | | 90 Days or | | Total Past | | Current | | Total | | 90 Days or More |
Greater | Due | and Still |
| | Accruing (1) |
| (In thousands) |
Commercial business: | | | | | | | | | | | |
Commercial and industrial | $ | 2,493 | | | $ | 4,379 | | | $ | 6,872 | | | $ | 329,668 | | | $ | 336,540 | | | $ | — | |
|
Owner-occupied commercial real estate | 808 | | | 849 | | | 1,657 | | | 279,652 | | | 281,309 | | | — | |
|
Non-owner occupied commercial real estate | 1,161 | | | 179 | | | 1,340 | | | 398,639 | | | 399,979 | | | 6 | |
|
Total commercial business | 4,462 | | | 5,407 | | | 9,869 | | | 1,007,959 | | | 1,017,828 | | | 6 | |
|
One-to-four family residential | 571 | | | 509 | | | 1,080 | | | 42,002 | | | 43,082 | | | — | |
|
Real estate construction and land development: | | | | | | | | | | | |
One-to-four family residential | 821 | | | 1,045 | | | 1,866 | | | 17,858 | | | 19,724 | | | — | |
|
Five or more family residential and commercial properties | 384 | | | 453 | | | 837 | | | 47,818 | | | 48,655 | | | — | |
|
Total real estate construction and land development | 1,205 | | | 1,498 | | | 2,703 | | | 65,676 | | | 68,379 | | | — | |
|
Consumer | 210 | | | 13 | | | 223 | | | 41,324 | | | 41,547 | | | — | |
|
Gross noncovered loans | $ | 6,448 | | | $ | 7,427 | | | $ | 13,875 | | | $ | 1,156,961 | | | $ | 1,170,836 | | | $ | 6 | |
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-1 | Excludes PCI loans. | | | | | | | | | | | | | | | | | | | | | | |
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(f) Impaired loans |
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Noncovered impaired loans includes noncovered nonaccrual loans and noncovered performing TDRs. The balance of noncovered impaired loans as of December 31, 2014 and December 31, 2013 are set forth in the following tables. |
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| December 31, 2014 | | | | |
| Recorded | | Recorded | | Total | | Unpaid | | Related | | | | |
Investment With | Investment With | Recorded | Contractual | Specific | | | | |
No Specific | Specific | Investment | Principal | Valuation | | | | |
Valuation | Valuation | | Balance | Allowance | | | | |
Allowance | Allowance | | | | | | | |
| (In thousands) | | | | |
Commercial business: | | | | | | | | | | | | | |
Commercial and industrial | $ | 1,134 | | | $ | 7,906 | | | $ | 9,040 | | | $ | 9,349 | | | $ | 1,325 | | | | | |
| | | |
Owner-occupied commercial real estate | 360 | | | 2,421 | | | 2,781 | | | 2,781 | | | 684 | | | | | |
| | | |
Non-owner occupied commercial real estate | 2,459 | | | 4,846 | | | 7,305 | | | 7,279 | | | 465 | | | | | |
| | | |
Total commercial business | 3,953 | | | 15,173 | | | 19,126 | | | 19,409 | | | 2,474 | | | | | |
| | | |
One-to-four family residential | — | | | 245 | | | 245 | | | 245 | | | 75 | | | | | |
| | | |
Real estate construction and land development: | | | | | | | | | | | | | |
One-to-four family residential | 2,307 | | | 2,217 | | | 4,524 | | | 4,964 | | | 396 | | | | | |
| | | |
Five or more family residential and commercial properties | — | | | 2,056 | | | 2,056 | | | 2,056 | | | 234 | | | | | |
| | | |
Total real estate construction and land development | 2,307 | | | 4,273 | | | 6,580 | | | 7,020 | | | 630 | | | | | |
| | | |
Consumer | 33 | | | 172 | | | 205 | | | 208 | | | 56 | | | | | |
| | | |
Gross noncovered loans | $ | 6,293 | | | $ | 19,863 | | | $ | 26,156 | | | $ | 26,882 | | | $ | 3,235 | | | | | |
| | | |
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2013 | | | | |
| Recorded | | Recorded | | Total | | Unpaid | | Related | | | | |
Investment With | Investment With | Recorded | Contractual | Specific | | | | |
No Specific | Specific | Investment | Principal | Valuation | | | | |
Valuation | Valuation | | Balance | Allowance | | | | |
Allowance | Allowance | | | | | | | |
| (In thousands) | | | | |
Commercial business: | | | | | | | | | | | | | |
Commercial and industrial | $ | 6,140 | | | $ | 4,850 | | | $ | 10,990 | | | $ | 13,287 | | | $ | 2,716 | | | | | |
| | | |
Owner-occupied commercial real estate | 1,118 | | | 1,880 | | | 2,998 | | | 3,023 | | | 595 | | | | | |
| | | |
Non-owner occupied commercial real estate | 3,300 | | | 4,123 | | | 7,423 | | | 7,412 | | | 364 | | | | | |
| | | |
Total commercial business | 10,558 | | | 10,853 | | | 21,411 | | | 23,722 | | | 3,675 | | | | | |
| | | |
One-to-four family residential | 592 | | | — | | | 592 | | | 619 | | | — | | | | | |
| | | |
Real estate construction and land development: | | | | | | | | | | | | | |
One-to-four family residential | 3,773 | | | 911 | | | 4,684 | | | 5,426 | | | 211 | | | | | |
| | | |
Five or more family residential and commercial properties | 2,404 | | | — | | | 2,404 | | | 2,404 | | | — | | | | | |
| | | |
Total real estate construction and land development | 6,177 | | | 911 | | | 7,088 | | | 7,830 | | | 211 | | | | | |
| | | |
Consumer | 100 | | | 678 | | | 778 | | | 780 | | | 153 | | | | | |
| | | |
Gross noncovered loans | $ | 17,427 | | | $ | 12,442 | | | $ | 29,869 | | | $ | 32,951 | | | $ | 4,039 | | | | | |
| | | |
|
The Company had governmental guarantees of $2.4 million and $2.9 million related to the noncovered impaired loan balances at December 31, 2014 and December 31, 2013, respectively. |
The average recorded investment of noncovered impaired loans for the years ended December 31, 2014, 2013 and 2012 are set forth in the following table. |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | | | | | | | | | | | |
| 2014 | | 2013 | | 2012 | | | | | | | | | | | | |
| (In thousands) | | | | | | | | | | | | |
Commercial business: | | | | | | | | | | | | | | | | | |
Commercial and industrial | $ | 10,946 | | | $ | 12,628 | | | $ | 11,467 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Owner-occupied commercial real estate | 3,215 | | | 2,638 | | | 2,141 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Non-owner occupied commercial real estate | 7,744 | | | 7,897 | | | 8,174 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Total commercial business | 21,905 | | | 23,163 | | | 21,782 | | | | | | | | | | | | | |
| | | | | | | | | | | |
One-to-four family residential | 514 | | | 880 | | | 977 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Real estate construction and land development: | | | | | | | | | | | | | | | | | |
One-to-four family residential | 5,416 | | | 4,237 | | | 4,381 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Five or more family residential and commercial properties | 2,154 | | | 2,839 | | | 5,415 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Total real estate construction and land development | 7,570 | | | 7,076 | | | 9,796 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Consumer | 779 | | | 254 | | | 427 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Gross noncovered impaired loans | $ | 30,768 | | | $ | 31,373 | | | $ | 32,982 | | | | | | | | | | | | | |
| | | | | | | | | | | |
For the years ended December 31, 2014, 2013 and 2012, no interest income was recognized subsequent to a loan’s classification as nonaccrual. For the years ended December 31, 2014, 2013 and 2012, the Bank recorded $1.2 million, $1.1 million and $1.0 million, respectively, of interest income related to noncovered performing TDR loans. |
(g) Troubled Debt Restructured Loans |
A troubled debt restructured loan is a restructuring in which the Bank, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. 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 majority of the Bank’s noncovered TDRs 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. Certain modifications with extensions also include interest rate reductions, which is the second most prevalent concession. Certain TDRs were additionally re-amortized over a longer period of time. The Bank additionally advanced funds to a troubled speculative home builder to complete established projects. These modifications would all be considered a concession for a borrower that could not obtain similar financing terms from another source other than from the Bank. |
The financial effects of each modification will vary based on the specific restructure. For the majority of the Bank’s TDRs, the noncovered 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 noncovered TDRs using the same methods used for other noncovered impaired loans. |
The recorded investment balance and related allowance for loan losses of noncovered performing and noncovered nonaccrual TDRs as of December 31, 2014 and December 31, 2013 were as follows: |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2014 | | December 31, 2013 | | | | | | | | |
| Performing | | Nonaccrual | | Performing | | Nonaccrual | | | | | | | | |
TDRs | TDRs | TDRs | TDRs | | | | | | | | |
| (In thousands) | | | | | | | | |
Noncovered TDRs | $ | 18,764 | | | $ | 5,010 | | | $ | 22,131 | | | $ | 2,634 | | | | | | | | | |
| | | | | | | |
Allowance for loan losses on noncovered TDRs | 1,908 | | | 1,033 | | | 2,957 | | | 191 | | | | | | | | | |
| | | | | | | |
|
The unfunded commitment to borrowers related to noncovered TDRs was $1.8 million and $4.5 million at December 31, 2014 and December 31, 2013, respectively. |
Noncovered loans that were modified as TDRs during the years ended December 31, 2014 and 2013 are set forth in the following table: |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | | | | | | | | | |
| 2014 | | 2013 | | | | | | | | | | |
| Number of | | Outstanding | | Number of | | Outstanding | | | | | | | | | | |
Contracts | Principal Balance | Contracts | Principal Balance | | | | | | | | | | |
-1 | (1)(2) | -1 | (1)(2) | | | | | | | | | | |
| (Dollars in thousands) | | | | | | | | | | |
Commercial business: | | | | | | | | | | | | | | | | | |
Commercial and industrial | 32 | | | $ | 5,926 | | | 33 | | | $ | 6,570 | | | | | | | | | | | |
| | | | | | | | | |
Owner-occupied commercial real estate | 3 | | | 1,063 | | | 5 | | | 537 | | | | | | | | | | | |
| | | | | | | | | |
Non-owner occupied commercial real estate | 3 | | | 6,548 | | | 2 | | | 192 | | | | | | | | | | | |
| | | | | | | | | |
Total commercial business | 38 | | | 13,537 | | | 40 | | | 7,299 | | | | | | | | | | | |
| | | | | | | | | |
One-to-four family residential | — | | | — | | | 1 | | | 252 | | | | | | | | | | | |
| | | | | | | | | |
Real estate construction and land development: | | | | | | | | | | | | | | | | | |
One-to-four family residential | 10 | | | 3,553 | | | 24 | | | 3,639 | | | | | | | | | | | |
| | | | | | | | | |
Five or more family residential and commercial properties | — | | | — | | | 1 | | | 2,404 | | | | | | | | | | | |
| | | | | | | | | |
Total real estate construction and land development | 10 | | | 3,553 | | | 25 | | | 6,043 | | | | | | | | | | | |
| | | | | | | | | |
Consumer | 3 | | | 219 | | | 3 | | | 141 | | | | | | | | | | | |
| | | | | | | | | |
Total noncovered TDRs | 51 | | | $ | 17,309 | | | 69 | | | $ | 13,735 | | | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
-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 years ended December 31, 2014 and 2013. | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
-2 | Includes subsequent payments after modifications and reflects the balance as of period end. As the Bank did not forgive any principal or interest balance as part of the loan modification, the Bank’s recorded investment in each loan at the date of modification (pre-modification) did not change as a result of the modification (post-modification), except when the modification was the initial advance on a one-to-four family residential real estate construction and land development loan under a master guidance line. During the year ended December 31, 2014, the Company's initial advance at the time of modification on these construction loans totaled $45,000, the total commitment amount was $190,000 and the outstanding principal balance at December 31, 2014 was $188,000. During the year ended December 31, 2013, the Company's initial advance at the time of modification on these construction loans totaled $1.1 million, the total commitment amount was $4.3 million and the outstanding principal balance at December 31, 2013 was $2.5 million. | | | | | | | | | | | | | | | | | | | | | | |
Of the 51 noncovered loans modified during the year ended December 31, 2014, 17 loans with a total outstanding principal balance of $4.7 million had no prior modifications. The remaining noncovered loans included in the tables above for the year ended December 31, 2014 were previously reported as noncovered TDRs. The Bank typically grants shorter extension periods to continually monitor the troubled credits despite the fact that the extended date might not be the date the Bank expects the cash flow. The Company does not consider these modifications a subsequent default of a noncovered TDR as new loan terms, specifically 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 noncovered TDR and adjusted, as necessary, in the current periods based on more recent information. The related specific valuation allowance for noncovered loans that were modified as TDRs during the year ended December 31, 2014 was $1.8 million at December 31, 2014. |
The noncovered loans modified during the previous twelve months ended December 31, 2014 and 2013 that subsequently defaulted during the years ended December 31, 2014 and 2013 are included in the following table: |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2014 | | Year Ended December 31, 2013 | | | | | | | | | | |
| Number of | | Outstanding | | Number of | | Outstanding | | | | | | | | | | |
Contracts | Principal Balance | Contracts | Principal Balance | | | | | | | | | | |
| (Dollars in thousands) | | | | | | | | | | | | | | |
Commercial business: | | | | | | | | | | | | | | | | | |
Commercial and industrial | — | | | $ | — | | | 3 | | | $ | 918 | | | | | | | | | | | |
| | | | | | | | | |
Non-owner occupied commercial real estate | 1 | | | 75 | | | — | | | — | | | | | | | | | | | |
| | | | | | | | | |
Total commercial business | 1 | | | 75 | | | 3 | | | 918 | | | | | | | | | | | |
| | | | | | | | | |
Total noncovered loans receivable | 1 | | | $ | 75 | | | 3 | | | $ | 918 | | | | | | | | | | | |
| | | | | | | | | |
The one loan included in the above table defaulted during the year ended December 31, 2014 because it was past its modified maturity date, and the borrower has not repaid the credit. The Bank does not intend to extend the maturity. The three loans which defaulted during the year ended December 31, 2013 defaulted as the loans were greater than 90 days past due at December 31, 2013. At December 31, 2014 and 2013, the Bank had a specific valuation allowance of $4,000 and $63,000, respectively, related to these credits. |
|
(h) Noncovered Purchased Credit Impaired Loans |
The Company acquired noncovered PCI loans in the Washington Banking Merger and in previously completed acquisitions which are accounted for under FASB ASC 310-30. These previous acquisitions include the FDIC-assisted acquisitions of Cowlitz Bank ("Cowlitz") and Pierce Commercial Bank ("Pierce") on July 30, 2010 and November 8, 2010, respectively. In addition, the Company completed the acquisitions of NCB on January 9, 2013 and the acquisition of Valley on July 15, 2013. |
The following tables reflect the outstanding principal balance and recorded investment at December 31, 2014 and December 31, 2013 of the noncovered PCI loans: |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2014 | | 31-Dec-13 | | | | | | | | |
| Outstanding Principal | | Recorded Investment | | Outstanding Principal | | Recorded Investment | | | | | | | | |
| (In thousands) | | | | | | | | |
Commercial business: | | | | | | | | | | | | | | | |
Commercial and industrial | $ | 22,144 | | | $ | 18,040 | | | $ | 18,193 | | | $ | 16,779 | | | | | | | | | |
| | | | | | | |
Owner-occupied commercial real estate | 18,165 | | | 16,208 | | | 5,510 | | | 5,119 | | | | | | | | | |
| | | | | | | |
Non-owner occupied commercial real estate | 12,684 | | | 11,185 | | | 8,276 | | | 6,785 | | | | | | | | | |
| | | | | | | |
Total commercial business | 52,993 | | | 45,433 | | | 31,979 | | | 28,683 | | | | | | | | | |
| | | | | | | |
One-to-four family residential | 2,269 | | | 2,235 | | | 4,055 | | | 3,768 | | | | | | | | | |
| | | | | | | |
Real estate construction and land development: | | | | | | | | | | | | | | | |
One-to-four family residential | 8,456 | | | 4,223 | | | 1,967 | | | 32 | | | | | | | | | |
| | | | | | | |
Five or more family residential and commercial properties | 2,721 | | | 2,963 | | | 1,077 | | | 1,357 | | | | | | | | | |
| | | | | | | |
Total real estate construction and land development | 11,177 | | | 7,186 | | | 3,044 | | | 1,389 | | | | | | | | | |
| | | | | | | |
Consumer | 5,983 | | | 7,055 | | | 1,150 | | | 2,177 | | | | | | | | | |
| | | | | | | |
Gross noncovered PCI loans | $ | 72,422 | | | $ | 61,909 | | | $ | 40,228 | | | $ | 36,017 | | | | | | | | | |
| | | | | | | |
On the acquisition dates, the amount by which the undiscounted expected cash flows of the noncovered PCI loans exceeded the estimated fair value of the loan is the “accretable yield”. The accretable yield is then measured at each financial reporting date and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the noncovered PCI loans. |
The following tables summarize the accretable yield on the noncovered PCI loans resulting from the Pierce, NCB, Valley and Washington Banking acquisitions for the years ended December 31, 2014, 2013 and 2012. |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | | | | | | | | | | |
| | 2014 | | 2013 | | 2012 | | | | | | | | | | | |
| (In thousands) | | | | | | | | | | | |
Balance at the beginning of the year | | $ | 7,714 | | | $ | 7,352 | | | $ | 14,638 | | | | | | | | | | | | |
| | | | | | | | | | |
Accretion | | (4,305 | ) | | (4,402 | ) | | (6,238 | ) | | | | | | | | | | | |
Disposal and other | | (3,263 | ) | | (318 | ) | | (2,798 | ) | | | | | | | | | | | |
Change in accretable yield (1) | | 12,426 | | | 5,082 | | | 1,750 | | | | | | | | | | | | |
| | | | | | | | | | |
Balance at the end of the year | | $ | 12,572 | | | $ | 7,714 | | | $ | 7,352 | | | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
-1 | Includes accretable difference at acquisition. | | | | | | | | | | | | | | | | | | | | | | |
|
On the May 1, 2014 merger date for the Washington Banking Merger, the contractual cash flows on noncovered PCI loans acquired in the Washington Banking Merger were $75.7 million and the expected cash flows were $59.1 million, resulting in a $16.6 million non-accretable difference. The fair value was estimated at $48.9 million, resulting in a $10.2 million accretable yield which is included in the table above as a change in accretable yield for the year ended December 31, 2014. The contractual cash flows on the noncovered non-PCI loans, excluding credit cards, were $1.12 billion and the expected cash flows were $1.06 billion, resulting in $53.5 million of cash flows not expected to be collected. The fair value of the noncovered non-PCI loans, excluding credit cards, at May 1, 2014 was $841.3 million. The credit cards loans acquired in the Washington Banking Merger totaling $5.8 million at merger date were included in noncovered consumer loans totals. The fair value of the credit cards approximated the carrying values; therefore, there was no cash flows not expected to be collected. |
(i) Related Party Loans |
In the ordinary course of business, the Company has granted loans to certain directors, executive officers and their affiliates (collectively referred to as “related parties”). |
Activity in related party loans for the years ended December 31, 2014, 2013 and 2012 was as follows (in thousands): |
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Balance outstanding at December 31, 2011 | $ | 10,391 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Principal additions | 8,906 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Principal reductions | (7,855 | ) | | | | | | | | | | | | | | | | | | | | |
Balance outstanding at December 31, 2012 | 11,442 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Principal additions | — | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Elimination of outstanding loan balance due to change in related party status | (3,045 | ) | | | | | | | | | | | | | | | | | | | | |
Principal reductions | (923 | ) | | | | | | | | | | | | | | | | | | | | |
Balance outstanding at December 31, 2013 | 7,474 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Principal additions | 23 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Additional of outstanding loan balance due to change in related party status | 1,858 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Principal reductions | (191 | ) | | | | | | | | | | | | | | | | | | | | |
Balance outstanding at December 31, 2014 | $ | 9,164 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
The Company had $228,000 and $184,000 of unfunded commitments to related parties as of December 31, 2014 and 2013, respectively. The Company did not have any borrowings from related parties at December 31, 2014 or 2013. |
|
(j) Mortgage Banking Activities and SBA Loan Sales |
The Bank originates certain one-to-four family residential loans to be sold on the secondary market. These loans were presented as loans held for sale. The Bank ceased these mortgage banking activities in the second quarter of 2013, and resumed activities again in the second quarter of 2014 in connection with the Washington Banking Merger. The Bank does not retain servicing on loans sold in the secondary market. Details of certain mortgage banking activities are as follows: |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended or As of December 31, | | | | | | | | | | | | | | | |
| | 2014 | | 2013 | | | | | | | | | | | | | | | |
| | (In thousands) | | | | | | | | | | | | | | | |
Loans held for sale at lower of cost or market | | $ | 5,582 | | | $ | — | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
One-to-four family residential loans sold during the year | | 55,997 | | | 8,460 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Commitments to sell mortgage loans | | 10,625 | | | — | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Commitments to fund mortgage loans (at interest rates approximating market rates): | | | | | | | | | | | | | | | | | | | |
Fixed rate | | $ | 8,467 | | | $ | — | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Variable or adjustable rate | | 2,158 | | | — | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
|
The Company may chose to sell the conditionally guaranteed portion of certain loans guaranteed by the Small Business Administration or the U.S. Department of Agriculture (collectively referred to as "SBA loans") and retain a participating interest in the unguaranteed portion of the loans. These loans are carried at the aggregate cost. SBA loans are sold with servicing retained. Details of certain SBA loan sales activities are as follows: |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | 31-Dec-14 | | 31-Dec-13 | | | | | | | | | | | | | | | |
| | (In thousands) | | | | | | | | | | | | | | | |
SBA loans serviced for others with participating interest (1) | | $ | 77,233 | | | $ | 26,854 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
SBA loans serviced for others with no participating interest | | — | | | — | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
-1 | Represents the gross balance of the loan at year end. The participation owned by the Bank totaled $29.0 million and $9.4 million, respectively, at December 31, 2014 and 2013 and is included in the balance of noncovered loans receivable on the Company's Consolidated Statements of Financial Condition. | | | | | | | | | | | | | | | | | | | | | | |
There was $260,000, $106,000 and $139,000 of servicing fee income and fees from SBA loans serviced for others for the years ended December 31, 2014, 2013 and 2012. Servicing fee income is reported in other income on the Company's Consolidated Statements of Income. |