| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| CRE | | Farmland | | Residential Real Estate | | Other | | Total |
| (In thousands) |
Commercial and industrial | $ | 1,499 | | | $ | 4,362 | | | $ | 1,036 | | | $ | 245 | | | $ | 7,142 | |
Owner-occupied CRE | 3,035 | | | — | | | — | | | — | | | 3,035 | |
Non-owner occupied CRE | 1,273 | | | — | | | — | | | — | | | 1,273 | |
Total commercial business | 5,807 | | | 4,362 | | | 1,036 | | | 245 | | | 11,450 | |
| | | | | | | | | |
Real estate construction and land development: |
| | | | | | | | | |
Commercial and multifamily | 571 | | | — | | | — | | | — | | | 571 | |
| | | | | | | | | |
| | | | | | | | | |
Total | $ | 6,378 | | | $ | 4,362 | | | $ | 1,036 | | | $ | 245 | | | $ | 12,021 | |
There have been no significant changes to the collateral securing loans individually evaluated for credit losses and for which repayment was expected to be provided substantially through the operation or sale of the collateral during the six months ended June 30, 2022, except changes due to additions or removals of loans from this classification.
(g) Troubled Debt Restructured Loans
Loans that were modified as TDR loans are set forth in the following table for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| 2022 | | 2021 |
| Number of Contracts | | Amortized Cost (1) (2) | | Number of Contracts | | Amortized Cost (1) (2) |
| (Dollars in thousands) |
Commercial business: | | | | | | | |
Commercial and industrial | 3 | | $ | 1,727 | | | 18 | | $ | 5,673 | |
Owner-occupied CRE | — | | — | | | 1 | | 2,200 | |
Non-owner occupied CRE | — | | — | | | 1 | | 251 | |
Total commercial business | 3 | | 1,727 | | | 20 | | 8,124 | |
| | | | | | | |
Real estate construction and land development: | | | | | | | |
| | | | | | | |
Commercial and multifamily | — | | | — | | | 1 | | | 443 | |
| | | | | | | |
Consumer | 3 | | 44 | | | 6 | | 146 | |
Total | 6 | | $ | 1,771 | | | 27 | | $ | 8,713 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
| Number of Contracts | | Amortized Cost (1) (2) | | Number of Contracts | | Amortized Cost (1) (2) |
| (Dollars in thousands) |
Commercial business: | | | | | | | |
Commercial and industrial | 4 | | $ | 2,610 | | | 31 | | $ | 8,713 | |
Owner-occupied CRE | — | | — | | | 2 | | 5,857 | |
Non-owner occupied CRE | — | | — | | | 2 | | 2,222 | |
Total commercial business | 4 | | 2,610 | | | 35 | | 16,792 | |
Residential real estate | — | | — | | | 1 | | 181 | |
Real estate construction and land development: | | | | | | | |
| | | | | | | |
Commercial and multifamily | — | | | — | | | 1 | | | 443 | |
| | | | | | | |
Consumer | 8 | | 95 | | | 21 | | 511 | |
Total | 12 | | $ | 2,705 | | | 58 | | $ | 17,927 | |
(1) Number of contracts and amortized cost represent loans which have balances as of period end, net of subsequent payments after modifications. Certain TDR loans may have been paid-down or charged-off during the six months ended June 30, 2022 and 2021.
(2) As the Bank did not forgive any principal or interest balance as part of the loan modifications, the Bank’s amortized cost in each loan at the date of modification (pre-modification) did not change as a result of the modification (post-modification).
The Bank had an ACL on loans of $4,000 and $1.7 million at June 30, 2022 and June 30, 2021, respectively, related to these TDR loans which were restructured during the six months ended June 30, 2022 and June 30, 2021, respectively.
The unfunded commitment to borrowers related to TDR loans was $3.4 million and $5.7 million at June 30, 2022 and December 31, 2021, respectively.
The following table presents loans that were modified in a TDR and subsequently defaulted within twelve months from the modification date during the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| 2022 | | 2021 |
| Number of Contracts (1) | | Amortized Cost (1) | | Number of Contracts (1) | | Amortized Cost (1) |
| (Dollars in thousands) |
Commercial business: | | | | | | | |
Commercial and industrial | — | | $ | — | | | 1 | | $ | 46 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
| Number of Contracts (1) | | Amortized Cost (1) | | Number of Contracts (1) | | Amortized Cost (1) |
| (Dollars in thousands) |
Commercial business: | | | | | | | |
Commercial and industrial | — | | $ | — | | | 2 | | $ | 789 | |
Owner-occupied CRE | 1 | | 189 | | | — | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
(1) Number of contracts and amortized cost represent TDR loans which have balances as of period end, net of subsequent payments after modifications. Certain TDR loans may have been paid-down or charged-off during the six months ended June 30, 2022 and 2021.
The Bank had $3,000 ACL on loans at June 30, 2022 and $7,000 at June 30, 2021 related to these TDR loans which defaulted during the six months ended June 30, 2022 and 2021.
(h) Accrued interest receivable on loans receivable
Accrued interest receivable on loans receivable totaled $9.5 million and $10.1 million at June 30, 2022 and December 31, 2021, respectively. It is excluded from the calculation of the ACL on loans as interest accrued, but not received, is reversed timely.
(i) Foreclosure proceedings in process
At June 30, 2022, there were no consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process.
(4)Allowance for Credit Losses on Loans
The baseline loss rates used to calculate the ACL on loans at June 30, 2022 utilized the Bank's average quarterly historical loss information from December 31, 2012 through the balance sheet date. There were no changes to this assumption during the six months ended June 30, 2022. The Bank believes the historic loss rates are viable inputs to the current CECL model as the Bank's lending practice and business has remained relatively stable throughout the periods. While the Bank's assets have grown, the credit culture has stayed relatively consistent.
Prepayments included in the CECL model at June 30, 2022 were based on the 48-month rolling historical averages for each segment, which management believes is an accurate representation of future prepayment activity. There were no changes to this assumption during the six months ended June 30, 2022.
The reasonable and supportable period and subsequent reversion period used in the CECL model was five quarters and two quarters, respectively, at December 31, 2021. There were no changes to these assumptions during the six months ended June 30, 2022. Management believes forecasts beyond this seven quarter time period tend to diverge in economic assumptions and may be less comparable to actual future events. As the length of the reasonable and supportable period increases, the degree of judgment involved in estimating the allowance increases.
During the six months ended June 30, 2022, the ACL on loans decreased $2.7 million, or 6.3%, due primarily to a reversal of provision for credit losses on loans of $3.2 million driven by a $2.9 million reduction in the ACL on loans individually evaluated for losses and their related ACL as well as changes in the loan mix and continued improvement in forecasted economic indicators used to calculate credit losses. The ACL on loans at June 30, 2022 and December 31, 2021 did not include a reserve for SBA PPP loans as these loans are fully guaranteed by the SBA.
A summary of the changes in the ACL on loans during the six months ended June 30, 2022 and 2021 is as follows:
| | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | |
| 2022 | | 2021 | | | | |
| (In thousands) | | | | |
Beginning balance | $ | 42,361 | | | $ | 70,185 | | | | | |
Charge-offs | (604) | | | (320) | | | | | |
Recoveries of loans previously charged-off | 1,110 | | | 653 | | | | | |
Reversal of provision for credit losses on loans | (3,171) | | | (18,956) | | | | | |
Ending balance | $ | 39,696 | | | $ | 51,562 | | | | | |
The following tables detail the activity in the ACL on loans by segment and class for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2022 |
| Beginning Balance | | Charge-offs | | Recoveries | | (Reversal of) Provision for Credit Losses | | Ending Balance |
| (In thousands) |
Commercial business: | | | | | | | | | |
Commercial and industrial | $ | 15,265 | | | $ | (117) | | | $ | 149 | | | $ | (1,264) | | | $ | 14,033 | |
Owner-occupied CRE | 7,085 | | | — | | | — | | | 1,077 | | | 8,162 | |
Non-owner occupied CRE | 9,582 | | | — | | | — | | | (70) | | | 9,512 | |
Total commercial business | 31,932 | | | (117) | | | 149 | | | (257) | | | 31,707 | |
Residential real estate | 1,803 | | | — | | | — | | | 334 | | | 2,137 | |
Real estate construction and land development: |
Residential | 1,124 | | | — | | | 6 | | | (49) | | | 1,081 | |
Commercial and multifamily | 3,175 | | | — | | | 53 | | | (1,025) | | | 2,203 | |
Total real estate construction and land development | 4,299 | | | — | | | 59 | | | (1,074) | | | 3,284 | |
Consumer | 2,299 | | | (132) | | | 53 | | | 348 | | | 2,568 | |
Total | $ | 40,333 | | | $ | (249) | | | $ | 261 | | | $ | (649) | | | $ | 39,696 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 |
| Beginning Balance | | Charge-offs | | Recoveries | | (Reversal of) Provision for Credit Losses | | Ending Balance |
| (In thousands) |
Commercial business: | | | | | | | | | |
Commercial and industrial | $ | 17,777 | | | $ | (280) | | | $ | 421 | | | $ | (3,885) | | | $ | 14,033 | |
Owner-occupied CRE | 6,411 | | | (36) | | | — | | | 1,787 | | | 8,162 | |
Non-owner occupied CRE | 8,861 | | | — | | | — | | | 651 | | | 9,512 | |
Total commercial business | 33,049 | | | (316) | | | 421 | | | (1,447) | | | 31,707 | |
Residential real estate | 1,409 | | | (30) | | | 3 | | | 755 | | | 2,137 | |
Real estate construction and land development: |
Residential | 1,304 | | | — | | | 14 | | | (237) | | | 1,081 | |
Commercial and multifamily | 3,972 | | | — | | | 53 | | | (1,822) | | | 2,203 | |
Total real estate construction and land development | 5,276 | | | — | | | 67 | | | (2,059) | | | 3,284 | |
Consumer | 2,627 | | | (258) | | | 619 | | | (420) | | | 2,568 | |
Total | $ | 42,361 | | | $ | (604) | | | $ | 1,110 | | | $ | (3,171) | | | $ | 39,696 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 |
| Beginning Balance | | Charge-offs | | Recoveries | | (Reversal of) Provision for Credit Losses | | Ending Balance |
| (In thousands) |
Commercial business: | | | | | | | | | |
Commercial and industrial | $ | 21,770 | | | $ | (13) | | | $ | 132 | | | $ | (4,404) | | | $ | 17,485 | |
Owner-occupied CRE | 10,464 | | | — | | | 11 | | | (1,913) | | | 8,562 | |
Non-owner occupied CRE | 12,970 | | | — | | | — | | | (2,340) | | | 10,630 | |
Total commercial business | 45,204 | | | (13) | | | 143 | | | (8,657) | | | 36,677 | |
Residential real estate | 1,402 | | | — | | | — | | | (249) | | | 1,153 | |
Real estate construction and land development: |
Residential | 2,048 | | | — | | | 4 | | | (416) | | | 1,636 | |
Commercial and multifamily | 11,223 | | | — | | | — | | | (2,388) | | | 8,835 | |
Total real estate construction and land development | 13,271 | | | — | | | 4 | | | (2,804) | | | 10,471 | |
Consumer | 4,348 | | | (120) | | | 144 | | | (1,111) | | | 3,261 | |
Total | $ | 64,225 | | | $ | (133) | | | $ | 291 | | | $ | (12,821) | | | $ | 51,562 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2021 |
| Beginning Balance | | Charge-offs | | Recoveries | | (Reversal of) Provision for Credit Losses | | Ending Balance |
| (In thousands) |
Commercial business: | | | | | | | | | |
Commercial and industrial | $ | 30,010 | | | $ | (14) | | | $ | 337 | | | $ | (12,848) | | | $ | 17,485 | |
Owner-occupied CRE | 9,486 | | | — | | | 13 | | | (937) | | | 8,562 | |
Non-owner occupied CRE | 10,112 | | | — | | | — | | | 518 | | | 10,630 | |
Total commercial business | 49,608 | | | (14) | | | 350 | | | (13,267) | | | 36,677 | |
Residential real estate | 1,591 | | | — | | | — | | | (438) | | | 1,153 | |
Real estate construction and land development: |
Residential | 1,951 | | | — | | | 20 | | | (335) | | | 1,636 | |
Commercial and multifamily | 11,141 | | | (1) | | | — | | | (2,305) | | | 8,835 | |
Total real estate construction and land development | 13,092 | | | (1) | | | 20 | | | (2,640) | | | 10,471 | |
Consumer | 5,894 | | | (305) | | | 283 | | | (2,611) | | | 3,261 | |
Total | $ | 70,185 | | | $ | (320) | | | $ | 653 | | | $ | (18,956) | | | $ | 51,562 | |
(5)Goodwill and Other Intangible Assets
(a) Goodwill
There were no additions to goodwill during the three and six months ended June 30, 2022 and 2021. 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, 2021 and concluded that there was no impairment.
(b) Other Intangible Assets
Other intangible assets represent core deposit intangible acquired in business combinations with estimated useful lives of ten years. There were no additions to other intangible assets during the three and six months ended June 30, 2022 and 2021.
(6)Derivative Financial Instruments
The Company utilizes interest rate swap derivative contracts to facilitate the needs of its commercial customers whereby it enters into an interest rate swap with a customer while at the same time entering into an offsetting interest rate swap with another financial institution. The transaction allows the Company’s customer to effectively convert a variable rate loan to a
fixed rate and the Company recognizes immediate income based upon the difference in the bid/ask spread of the underlying transactions with its customers and the third-party. These interest rate swaps are not designated as hedging instruments.
The Company is exposed to interest rate risk as part of the transaction. However, the Company acts as an intermediary for its customer therefore 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 the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Notional Amounts | | Estimated Fair Value | | Notional Amounts | | Estimated Fair Value |
| (In thousands) |
Non-hedging interest rate derivatives | | | | | | | |
Interest rate swap asset (1) | $ | 305,902 | | | 19,842 | | | $ | 322,726 | | | $ | 15,219 | |
Interest rate swap liability (1) | 305,902 | | | (19,842) | | | 322,726 | | | (15,286) | |
(1) The estimated fair value of derivatives with customers was $(19.0) million and $9.8 million as of June 30, 2022 and December 31, 2021, respectively. The estimated fair value of derivatives with third-parties was $19.0 million and $(9.8) million as of June 30, 2022 and December 31, 2021, 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.
(7)Stockholders’ Equity
(a) Earnings Per Common Share
The following table illustrates the calculation of weighted average shares used for earnings per common share computations for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (In thousands, except shares) |
| | | | | | | |
Net income | $ | 18,584 | | | $ | 32,702 | | | $ | 38,341 | | | $ | 58,046 | |
| | | | | | | |
| | | | | | | |
Basic: | | | | | | | |
Weighted average common shares outstanding | 35,110,334 | | | 35,994,740 | | | 35,102,572 | | | 35,961,032 | |
| | | | | | | |
| | | | | | | |
Diluted: | | | | | | | |
Basic weighted average common shares outstanding | 35,110,334 | | | 35,994,740 | | | 35,102,572 | | | 35,961,032 | |
Effect of potentially dilutive common shares (1) | 299,190 | | | 294,724 | | | 310,150 | | | 307,829 | |
Total diluted weighted average common shares outstanding | 35,409,524 | | | 36,289,464 | | | 35,412,722 | | | 36,268,861 | |
Potentially dilutive shares that were excluded from the computation of diluted earnings per share because to do so would be anti-dilutive (2) | 16,978 | | | 7,065 | | | 14,334 | | | 4,766 | |
(1)Represents the effect of the vesting of restricted stock units.
(2) Anti-dilution occurs when the unrecognized compensation cost per share of a restricted stock unit exceeds the market price of the Company’s stock.
(b) Dividends
The timing and amount of cash dividends paid on the Company's common stock depends on the Company’s earnings, capital requirements, financial condition and other relevant factors. Dividends on common stock from the Company depend
substantially upon receipt of dividends from the Bank, which is the Company’s predominant source of income.
The following table summarizes the dividend activity during the six months ended June 30, 2022 and the calendar year 2021:
| | | | | | | | | | | | | | | | | | | | | | |
Declared | | Cash Dividend per Share | | Record Date | | Paid Date | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
January 27, 2021 | | $0.20 | | February 10, 2021 | | February 24, 2021 | | |
April 21, 2021 | | $0.20 | | May 5, 2021 | | May 19, 2021 | | |
July 21, 2021 | | $0.20 | | August 4, 2021 | | August 18, 2021 | | |
October 20, 2021 | | $0.21 | | November 3, 2021 | | November 17, 2021 | | |
January 26, 2022 | | $0.21 | | February 9, 2022 | | February 23, 2022 | | |
April 20, 2022 | | $0.21 | | May 4, 2022 | | May 18, 2022 | | |
The FDIC and the Washington State Department of Financial Institutions, Division of Banks have the authority under their supervisory powers to prohibit the payment of dividends by the Bank to the Company. Additionally, current guidance from the Federal Reserve provides, among other things, that dividends per share on the Company’s common stock generally should not exceed earnings per share, measured over the previous four fiscal quarters. Current regulations allow the Company and the Bank to pay dividends on their common stock if the Company’s or the Bank’s regulatory capital would not be reduced below the statutory capital requirements set by the Federal Reserve and the FDIC.
(c) Stock Repurchase Program
The Company has had various stock repurchase programs since March 1999. On March 12, 2020, the Company's Board of Directors authorized the repurchase of up to 5% of the Company's outstanding common shares, or 1,799,054 shares, under the twelfth stock repurchase plan. 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 plan for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | |
| 2022 | | 2021 | | 2022 | | 2021 | | Plan Total(1) |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Repurchased shares | 19,531 | | | — | | | 100,090 | | | — | | | 1,160,840 | |
Stock repurchase average share price | $ | 24.63 | | | $ | — | | | $ | 25.07 | | | $ | — | | | $ | 23.94 | |
(1)Represents shares repurchased and average price per share paid during the duration of the plan.
In addition to the stock repurchases under a stock repurchase plan, the Company repurchases shares to pay withholding taxes on the vesting of restricted stock awards and units. The following table provides total shares repurchased to pay withholding taxes during the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Repurchased shares to pay withholding taxes | 1,649 | | | 2,557 | | | 26,180 | | | 25,803 | |
Stock repurchase to pay withholding taxes average share price | $ | 24.43 | | | $ | 27.47 | | | $ | 25.40 | | | $ | 29.33 | |
(8)Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1: Valuations for assets and liabilities traded in active exchange markets, or interest in open-end mutual funds that allow the Company to sell its ownership interest back to the fund at net asset value on a daily basis. Valuations are obtained from readily available pricing sources for market transactions involving identical assets, liabilities, or funds.
Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or valuations using methodologies with observable inputs.
Level 3: Valuations for assets and liabilities that are derived from other valuation methodologies, such as option pricing models, discounted cash flow models and similar techniques using unobservable inputs, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
(a) Recurring and Nonrecurring Basis
The Company used the following methods and significant assumptions to measure the fair value of certain assets on a recurring and nonrecurring basis:
Investment Securities:
The fair values of all investment securities are based upon the assumptions that market participants would use in pricing the security. If available, fair values of investment securities are determined by quoted market prices (Level 1). For investment securities where quoted market prices are not available, fair values are calculated based on market prices on similar securities (Level 2). For investment securities where quoted prices or market prices of similar securities are not available, fair values are calculated by using observable and unobservable inputs such as discounted cash flows or other market indicators (Level 3). Investment security valuations are obtained from third-party pricing services.
Collateral-Dependent Loans:
Collateral-dependent loans are identified for the calculation of the ACL on loans. The fair value used to measure credit loss for this type of loan is commonly based on recent real estate appraisals which are generally obtained at least every 18 months or earlier if there are changes to risk characteristics of the underlying loan. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available. The Bank also incorporates an estimate of cost to sell the collateral when the sale is probable. Such adjustments may be significant and result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value based on the borrower’s financial statements or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation and management’s expertise and knowledge of the customer and customer’s business (Level 3). Individually evaluated loans are analyzed for credit loss on a quarterly basis and the ACL on loans is adjusted as required based on the results.
Appraisals on collateral-dependent loans are performed by certified general appraisers for commercial properties or certified residential appraisers for residential properties whose qualifications and licenses have been reviewed and verified by the Bank. Once received, the Bank's internal appraisal department reviews and approves the assumptions and approaches utilized in the appraisal as well as the resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.
Derivative Financial Instruments:
The Bank obtains broker or dealer quotes to value its interest rate derivative contracts, which use valuation models using observable market data as of the measurement date (Level 2), and incorporates credit valuation adjustments to reflect nonperformance risk in the measurement of fair value (Level 3). Although the Bank has determined that the majority of the inputs used to value its interest rate swap derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as borrower risk ratings, to evaluate the likelihood of default by itself and its counterparties. As of June 30, 2022 and December 31, 2021, the Bank assessed the significance of the impact of the credit valuation adjustment on the overall valuation of its interest rate swap derivatives and determined the credit valuation adjustment was not significant to the overall valuation of its interest rate swap derivatives. As a result, the Bank has classified its interest rate swap derivative valuations in Level 2 of the fair value hierarchy.
Branches held for sale:
Branches held for sale are recorded at fair value less costs to sell when transferred from premises and equipment, net to prepaid expenses and other assets on the unaudited Condensed Consolidated Statements of Financial Condition with any valuation adjustment recorded within other noninterest expense on the unaudited Condensed Consolidated Statements of Income. The fair value of branches held for sale is determined based on a real estate appraisal or broker price opinion. Adjustments are routinely made in the appraisal and broker price opinion process by independent appraisers and commercial real estate brokers, respectively, to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in Level 3 classification of the inputs for determining fair value. Additionally, the fair value of branches held for sale can be adjusted based on executed agreements of sale to be completed at a future date.
Recurring Basis
The following tables summarize the balances of assets and liabilities measured at fair value on a recurring basis at the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 |
| Total | | Level 1 | | Level 2 | | Level 3 |
| (In thousands) |
Assets | | | | | | | |
Investment securities available for sale: | | | | | | | |
U.S. government and agency securities | $ | 65,668 | | | $ | 19,939 | | | $ | 45,729 | | | $ | — | |
Municipal securities | 200,010 | | | — | | | 200,010 | | | — | |
Residential CMO and MBS | 398,156 | | | — | | | 398,156 | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 |
| Total | | Level 1 | | Level 2 | | Level 3 |
| (In thousands) |
Commercial CMO and MBS | 493,620 | | | — | | | 493,620 | | | — | |
Corporate obligations | 5,978 | | | — | | | 5,978 | | | — | |
Other asset-backed securities | 24,156 | | | — | | | 24,156 | | | — | |
Total investment securities available for sale | 1,187,588 | | | 19,939 | | | 1,167,649 | | | — | |
Equity security | 186 | | | 186 | | | — | | | — | |
Derivative assets - interest rate swaps | 19,842 | | | — | | | 19,842 | | | — | |
Liabilities | | | | | | | |
Derivative liabilities - interest rate swaps | $ | 19,842 | | | $ | — | | | $ | 19,842 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Total | | Level 1 | | Level 2 | | Level 3 |
| (In thousands) |
Assets | | | | | | | |
Investment securities available for sale: | | | | | | | |
U.S. government and agency securities | $ | 21,373 | | | $ | — | | | $ | 21,373 | | | $ | — | |
Municipal securities | 221,212 | | | — | | | 221,212 | | | — | |
Residential CMO and MBS | 306,884 | | | — | | | 306,884 | | | — | |
Commercial CMO and MBS | 315,861 | | | — | | | 315,861 | | | — | |
Corporate obligations | 2,014 | | | — | | | 2,014 | | | — | |
Other asset-backed securities | 26,991 | | | — | | | 26,991 | | | — | |
Total investment securities available for sale | 894,335 | | | — | | | 894,335 | | | — | |
Equity security | 240 | | | 240 | | | — | | | — | |
Derivative assets - interest rate swaps | 15,219 | | | — | | | 15,219 | | | — | |
Liabilities | | | | | | | |
Derivative liabilities - interest rate swaps | $ | 15,286 | | | $ | — | | | $ | 15,286 | | | $ | — | |
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 represent assets measured at fair value on a nonrecurring basis at the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value at June 30, 2022 |
| Basis(1) | | Total | | Level 1 | | Level 2 | | Level 3 |
| (In thousands) |
Collateral-dependent loans: | | | | | | | | | |
Commercial business: | | | | | | | | | |
Commercial and industrial | $ | 1,054 | | | $ | 969 | | | $ | — | | | $ | — | | | $ | 969 | |
Owner-occupied CRE | 613 | | | 186 | | | — | | | — | | | 186 | |
| | | | | | | | | |
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|
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| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Total assets measured at fair value on a nonrecurring basis | $ | 1,667 | | | $ | 1,155 | | | $ | — | | | $ | — | | | $ | 1,155 | |
(1) Basis represents the outstanding principal balance of collateral-dependent loans.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value at December 31, 2021 |
| Basis(1) | | Total | | Level 1 | | Level 2 | | Level 3 |
| (In thousands) |
Collateral-dependent loans: | | | | | | | | | |
Commercial business: | | | | | | | | | |
Commercial and industrial | $ | 1,911 | | | $ | 1,049 | | | $ | — | | | $ | — | | | $ | 1,049 | |
Owner-occupied CRE | 613 | | | 189 | | | — | | | — | | | 189 | |
| | | | | | | | | |
Total commercial business | 2,524 | | | 1,238 | | | — | | | — | | | 1,238 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate construction and land development: |
| | | | | | | | | |
Commercial and multifamily | 991 | | | $ | 534 | | | — | | | — | | | 534 | |
| | | | | | | | | |
| | | | | | | | | |
Total | 3,515 | | | 1,772 | | | — | | | — | | | 1,772 | |
Prepaid expenses and other assets: | | | | | | | | | |
Branch held for sale (2) | 698 | | | 698 | | | — | | | — | | | 698 | |
Total assets measured at fair value on a nonrecurring basis | $ | 4,213 | | | $ | 2,470 | | | $ | — | | | $ | — | | | $ | 2,470 | |
(1) Basis represents the outstanding principal balance of collateral-dependent loans and the carrying value of the branch held for sale.
(2) In December 2021, one branch was written down to its net realizable value concurrent with the signing of an agreement for sale at a future date.
The following table represents the net (loss) gain recorded in earnings as a result of nonrecurring fair value adjustments recorded during the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (In thousands) |
Collateral-dependent loans: | | | | | | | |
Commercial business: | | | | | | | |
Commercial and industrial | $ | 35 | | | $ | 6 | | | $ | 23 | | | $ | (28) | |
Owner-occupied CRE | (3) | | | (76) | | | (3) | | | (76) | |
| | | | | | | |
Total commercial business | 32 | | | (70) | | | 20 | | | (104) | |
| | | | | | | |
Real estate construction and land development: | | | | | | | |
| | | | | | | |
Commercial and multifamily | — | | | (23) | | | — | | | (38) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Net loss from nonrecurring fair value adjustments | $ | 32 | | | $ | (93) | | | $ | 20 | | | $ | (142) | |
The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 |
| Fair Value | | Valuation Technique(s) | | Unobservable Input(s) | | Range of Inputs; Weighted Average |
| (Dollars in thousands) |
Collateral-dependent loans | $ | 1,155 | | | Market approach | | Adjustment for differences between the comparable sales | | N/A(1) |
| | | | | | | |
(1)Quantitative disclosures are not provided for collateral-dependent loans because there were no adjustments made to the appraisal or stated values during the current period.
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| December 31, 2021 |
| Fair Value | | Valuation Technique(s) | | Unobservable Input(s) | | Range of Inputs; Weighted Average |
| (Dollars in thousands) |
Collateral-dependent loans | $ | 1,772 | | | Market approach | | Adjustment for differences between the comparable sales | | 35.0% - (11.0%); 13.8% |
Branch held for sale | $ | 698 | | | Market approach | | Sale agreement | | Not applicable |
(b) Fair Value of Financial Instruments
Broadly traded markets do not exist for most of the Company’s financial instruments; therefore, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. These determinations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. For all of these reasons, the aggregation of the fair value calculations presented herein do not represent, and should not be construed to represent, the underlying value of the Company.
The following tables present the carrying value amount of the Company’s financial instruments and their corresponding
estimated fair values at the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 |
| Carrying Value | | Fair Value | | Fair Value Measurements Using: |
| | Level 1 | | Level 2 | | Level 3 |
| (In thousands) |
Financial Assets: | | | | | | | | | |
Cash and cash equivalents | $ | 994,055 | | | $ | 994,055 | | | $ | 994,055 | | | $ | — | | | $ | — | |
Investment securities available for sale | 1,187,588 | | | 1,187,588 | | | 19,939 | | | 1,167,649 | | | — | |
Investment securities held to maturity | 615,653 | | | 559,312 | | | — | | | 559,312 | | | — | |
Loans held for sale | 1,311 | | | 1,353 | | | — | | | 1,353 | | | — | |
Loans receivable, net | 3,834,368 | | | 3,760,294 | | | — | | | — | | | 3,760,294 | |
Accrued interest receivable | 15,908 | | | 15,908 | | | 272 | | | 6,185 | | | 9,451 | |
Derivative assets - interest rate swaps | 19,842 | | | 19,842 | | | — | | | 19,842 | | | — | |
Equity security | 186 | | | 186 | | | 186 | | | — | | | — | |
Financial Liabilities: | | | | | | | | | |
Non-maturity deposits | $ | 6,019,421 | | | $ | 6,019,421 | | | $ | 6,019,421 | | | $ | — | | | $ | — | |
Certificates of deposit | 310,769 | | | 311,481 | | | — | | | 311,481 | | | — | |
| | | | | | | | | |
Securities sold under agreement to repurchase | 41,827 | | | 41,827 | | | 41,827 | | | — | | | — | |
Junior subordinated debentures | 21,326 | | | 19,250 | | | — | | | — | | | 19,250 | |
Accrued interest payable | 83 | | | 83 | | | 31 | | | 16 | | | 36 | |
Derivative liabilities - interest rate swaps | 19,842 | | | 19,842 | | | — | | | 19,842 | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Carrying Value | | Fair Value | | Fair Value Measurements Using: |
| | Level 1 | | Level 2 | | Level 3 |
| (In thousands) |
Financial Assets: | | | | | | | | | |
Cash and cash equivalents | $ | 1,723,292 | | | $ | 1,723,292 | | | $ | 1,723,292 | | | $ | — | | | $ | — | |
Investment securities available for sale | 894,335 | | | 894,335 | | | — | | | 894,335 | | | — | |
Investment securities held to maturity | 383,393 | | | 376,331 | | | — | | | 376,331 | | | — | |
Loans held for sale | 1,476 | | | 1,527 | | | — | | | 1,527 | | | — | |
Loans receivable, net | 3,773,301 | | | 3,849,602 | | | — | | | — | | | 3,849,602 | |
Accrued interest receivable | 14,657 | | | 14,657 | | | 14 | | | 4,582 | | | 10,061 | |
Derivative assets - interest rate swaps | 15,219 | | | 15,219 | | | — | | | 15,219 | | | — | |
Equity security | 240 | | | 240 | | | 240 | | | — | | | — | |
Financial Liabilities: | | | | | | | | | |
Non-maturity deposits | $ | 6,038,498 | | | $ | 6,038,498 | | | $ | 6,038,498 | | | $ | — | | | $ | — | |
Certificates of deposit | 342,839 | | | 344,025 | | | — | | | 344,025 | | | — | |
| | | | | | | | | |
Securities sold under agreement to repurchase | 50,839 | | | 50,839 | | | 50,839 | | | — | | | — | |
Junior subordinated debentures | 21,180 | | | 18,750 | | | — | | | — | | | 18,750 | |
Accrued interest payable | 73 | | | 73 | | | 33 | | | 19 | | | 21 | |
Derivative liabilities - interest rate swaps | 15,286 | | | 15,286 | | | — | | | 15,286 | | | — | |
(9)Cash Restriction
The Bank had no cash restrictions at June 30, 2022 and had restricted cash included in interest earning deposits of $9.8 million at December 31, 2021 relating to collateral required on interest rate swaps from third-parties as discussed in Note (6) Derivative Financial Instruments. The Bank does not have a collateral requirement with customers.
(10)Commitments and Contingencies
In the ordinary course of business, the Bank may enter into various types of transactions that include commitments to extend credit that are not included in its 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, at the dates indicated:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| (In thousands) |
Commercial business: | | | |
Commercial and industrial | $ | 553,134 | | | $ | 570,156 | |
Owner-occupied CRE | 3,612 | | | 2,252 | |
Non-owner occupied CRE | 13,310 | | | 7,487 | |
Total commercial business | 570,056 | | | 579,895 | |
| | | |
Real estate construction and land development: | | | |
Residential | 52,374 | | | 51,838 | |
Commercial and multifamily | 217,177 | | | 209,217 | |
Total real estate construction and land development | 269,551 | | | 261,055 | |
Consumer | 307,906 | | | 285,010 | |
Total outstanding commitments | $ | 1,147,513 | | | $ | 1,125,960 | |
The following table details the activity in the ACL on unfunded commitments during the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (In thousands) |
Balance, beginning of period | $ | 1,552 | | | $ | 3,617 | | | $ | 2,607 | | | $ | 4,681 | |
Reversal of provision for credit losses on unfunded commitments | (555) | | | (1,166) | | | (1,610) | | | (2,230) | |
Balance, end of period | $ | 997 | | | $ | 2,451 | | | $ | 997 | | | $ | 2,451 | |