Company Quick10K Filing
Quick10K
Northrim Bancorp
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$36.60 7 $251
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-05-23 Shareholder Vote
8-K 2019-04-29 Earnings, Exhibits
8-K 2019-04-26 Other Events, Exhibits
8-K 2019-01-28 Earnings, Exhibits
8-K 2019-01-28 Earnings, Exhibits
8-K 2019-01-02 Officers, Exhibits
8-K 2018-12-04 Officers, Exhibits
8-K 2018-10-29 Earnings, Exhibits
8-K 2018-07-30 Earnings, Exhibits
8-K 2018-05-24 Shareholder Vote
8-K 2018-04-30 Earnings, Exhibits
8-K 2018-01-29 Earnings, Exhibits
8-K 2018-01-02 Officers, Exhibits
ON ON Semiconductor 8,720
CNMD Conmed 2,310
INGN Inogen 1,580
MRC MRC Global 1,390
KEM Kemet 1,020
DCPH Deciphera Pharmaceuticals 929
RMED Ra Medical Systems 52
FRLI Frelii 0
GFMH Goliath Film & Media Holdings 0
QPWR Q2Earth 0
NRIM 2019-03-31
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 exhibit3112019q1.htm
EX-31.2 exhibit3122019q1.htm
EX-32.1 exhibit3212019q1.htm
EX-32.2 exhibit3222019q1.htm

Northrim Bancorp Earnings 2019-03-31

NRIM 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 nrim2019-10q1.htm 10-Q Document


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549
FORM 10-Q
(Mark One)
þ    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2019
o    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from_____to____
Commission File Number 000-33501
NORTHRIM BANCORP, INC.
(Exact name of registrant as specified in its charter)
Alaska
 
92-0175752
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
3111 C Street
Anchorage, Alaska 99503
(Address of principal executive offices)    (Zip Code) 

(907) 562-0062

(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   
ý Yes  ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 
ý Yes  ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:  
Large Accelerated Filer ¨  Accelerated Filer ý    Non-accelerated Filer ¨
Smaller Reporting Company ¨ Emerging Growth Company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      
¨ Yes  ý No
Securities registered pursuant to Section 12(b) of the Act: None
TITLE OF EACH CLASS
TRADING SYMBOL
NAME OF EXCHANGE
 
 
 
The number of shares of the issuer’s Common Stock, par value $1 per share, outstanding at May 7, 2019 was 6,850,104.




TABLE OF CONTENTS
 
 
 
Part  I
FINANCIAL INFORMATION
 
Item 1.
Financial Statements (unaudited)
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
Part II
OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.



1



PART I. FINANCIAL INFORMATION
These consolidated financial statements should be read in conjunction with the financial statements, accompanying notes and other relevant information included in Northrim BanCorp, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2018.

ITEM 1. FINANCIAL STATEMENTS

2


CONSOLIDATED FINANCIAL STATEMENTS
NORTHRIM BANCORP, INC.
Consolidated Balance Sheets
(Unaudited)
 
March 31,
2019
 
December 31,
2018
(In Thousands, Except Share Data)
 
ASSETS
 
 
 
Cash and due from banks

$30,266

 

$26,771

Interest bearing deposits in other banks
48,667

 
50,767

Investment securities available for sale, at fair value
274,441

 
271,610

Marketable equity securities
7,798

 
7,265

Investment in Federal Home Loan Bank stock
2,071

 
2,101

Loans held for sale
30,211

 
34,710

Loans
982,341

 
984,346

Allowance for loan losses
(20,209
)
 
(19,519
)
Net loans
962,132

 
964,827

Purchased receivables, net
21,286

 
14,406

Mortgage servicing rights, at fair value
11,254

 
10,821

Other real estate owned, net
7,043

 
7,962

Premises and equipment, net
38,978

 
39,090

Operating lease right-of-use asset
15,485

 

Goodwill
15,017

 
15,017

Other intangible assets, net
1,122

 
1,137

Other assets
54,280

 
56,504

Total assets

$1,520,051

 

$1,502,988

LIABILITIES
 
 
 
Deposits:
 
 
 
Demand

$417,068

 

$420,988

Interest-bearing demand
247,630

 
248,056

Savings
237,510

 
239,054

Money market
204,567

 
206,717

Certificates of deposit less than $250,000
78,858

 
75,318

Certificates of deposit $250,000 and greater
42,385

 
37,955

Total deposits
1,228,018

 
1,228,088

Securities sold under repurchase agreements
34,621

 
34,278

Borrowings
7,200

 
7,241

Junior subordinated debentures
10,310

 
10,310

Operating lease liability
15,358

 

Other liabilities
15,706

 
17,124

Total liabilities
1,311,213

 
1,297,041

SHAREHOLDERS' EQUITY
 
 
 
Preferred stock, $1 par value, 2,500,000 shares authorized, none issued or outstanding

 

Common stock, $1 par value, 10,000,000 shares authorized, 6,878,829 and 6,883,216 issued and outstanding at March 31, 2019 and December 31, 2018, respectively
6,879

 
6,883

Additional paid-in capital
62,127

 
62,132

Retained earnings
139,677

 
137,452

Accumulated other comprehensive income (loss), net of tax
155

 
(520
)
Total shareholders' equity
208,838

 
205,947

Total liabilities and shareholders' equity

$1,520,051

 

$1,502,988

See notes to consolidated financial statements

3



NORTHRIM BANCORP, INC.
Consolidated Statements of Income
(Unaudited)
 
Three Months Ended
 
March 31,
(In Thousands, Except Per Share Data)
2019
 
2018
Interest Income
 
 
 
Interest and fees on loans and loans held for sale

$14,977

 

$13,263

Interest on investment securities available for sale
1,632

 
1,254

Dividends on marketable equity securities
107

 
82

Dividends on Federal Home Loan Bank stock
19

 
12

Interest on deposits in other banks
143

 
184

Total Interest Income
16,878

 
14,795

Interest Expense
 
 
 
Interest expense on deposits
938

 
372

Interest expense on securities sold under agreements to repurchase
22

 
9

Interest expense on borrowings
57

 
58

Interest expense on junior subordinated debentures
92

 
93

Total Interest Expense
1,109

 
532

Net Interest Income
15,769

 
14,263

Provision for loan losses
750

 

Net Interest Income After Provision for Loan Losses
15,019

 
14,263

Other Operating Income
 
 
 
Mortgage banking income
4,298

 
4,944

Purchased receivable income
809

 
840

Bankcard fees
650

 
625

Gain on marketable equity securities
534

 

Service charges on deposit accounts
413

 
354

Gain on sale of securities, net
23

 

Other income
806

 
699

Total Other Operating Income
7,533

 
7,462

Other Operating Expense
 
 
 
Salaries and other personnel expense
11,302

 
10,585

Occupancy expense
1,771

 
1,700

Data processing expense
1,679

 
1,548

Professional and outside services
556

 
499

Marketing expense
419

 
632

Insurance expense
258

 
296

Intangible asset amortization expense
15

 
18

OREO (income) expense, net rental income and gains on sale
(320
)
 
103

Other operating expense
1,400

 
1,414

Total Other Operating Expense
17,080

 
16,795

Income Before Provision for Income Taxes
5,472

 
4,930

Provision for income taxes
1,160

 
868

Net Income

$4,312

 

$4,062

Earnings Per Share, Basic

$0.63

 

$0.59

Earnings Per Share, Diluted

$0.62

 

$0.58

Weighted Average Shares Outstanding, Basic
6,879,619

 
6,871,963

Weighted Average Shares Outstanding, Diluted
6,981,951

 
6,968,082

See notes to consolidated financial statements

4



NORTHRIM BANCORP, INC.
Consolidated Statements of Comprehensive Income
(Unaudited)
2010
 
Three Months Ended March 31,
(In Thousands)
2019
2018
Net income

$4,312


$4,062

Other comprehensive income (loss), net of tax:
 
 
   Securities available for sale:
 
 
         Unrealized gains (losses) arising during the period

$1,433


($1,145
)
            Reclassification of net (gains) losses included in net income (net of tax (benefit) expense)
 
 
            of $7 and $0 for the first quarter of 2019 and 2018, respectively
(16
)

Derivatives and hedging activities:
 
 
     Unrealized (losses) gains arising during the period
(393
)
467

         Income tax (expense) benefit related to unrealized gains and losses
(349
)
260

Other comprehensive income (loss), net of tax
675

(418
)
Comprehensive income
4,987

3,644

 
See notes to consolidated financial statements


5



NORTHRIM BANCORP, INC.
Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
 
Common Stock
 
Additional Paid-in Capital
 
 Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
 Total
 
Number of Shares
 
Par Value
 
 
 
 
(In Thousands)
 
 
 
 
 
Balance as of January 1, 2018
6,872

 

$6,872

 

$61,793

 

$124,407

 

($270
)
 

$192,802

Cash dividend declared

 

 

 
(1,664
)
 

 
(1,664
)
Stock-based compensation expense

 

 
253

 

 

 
253

Other comprehensive loss, net of tax

 

 

 

 
(418
)
 
(418
)
Cumulative effect of adoption of accounting principles related to premium amortization of investment securities

 

 

 
(62
)
 

 
(62
)
Reclassification for cumulative effect of adoption of accounting principles related to fair value measurement of equity securities

 

 

 
191

 
(191
)
 

Net income

 

 

 
4,062

 

 
4,062

Balance as of March 31, 2018
6,872



$6,872

 

$62,046

 

$126,934

 

($879
)
 

$194,973

Cash dividend declared

 

 

 
(1,667
)
 

 
(1,667
)
Stock-based compensation expense

 

 
159

 

 

 
159

Exercise of stock options and vesting of restricted stock units, net
1

 
1

 
(18
)
 

 

 
(17
)
Other comprehensive income, net of tax

 

 

 

 
178

 
178

Net income

 

 

 
5,830

 

 
5,830

Balance as of June 30, 2018
6,873

 

$6,873

 

$62,187

 

$131,097

 

($701
)
 

$199,456

Cash dividend declared

 

 

 
(1,874
)
 

 
(1,874
)
Stock-based compensation expense

 

 
159

 

 

 
159

Exercise of stock options and vesting of restricted stock units, net
11

 
11

 
166

 

 

 
177

Other comprehensive income, net of tax

 

 

 

 
60

 
60

Net income

 

 

 
5,264

 

 
5,264

Balance as of September 30, 2018
6,884

 

$6,884

 

$62,512

 

$134,487

 

($641
)
 

$203,242

Cash dividend declared

 

 

 
(1,883
)
 

 
(1,883
)
Stock-based compensation expense

 

 
245

 

 

 
245

Exercise of stock options and vesting of restricted stock units, net
15

 
15

 
(147
)
 

 

 
(132
)
Repurchase of common stock
(16
)
 
(16
)
 
(478
)
 

 

 
(494
)
Other comprehensive income, net of tax

 

 

 

 
121

 
121

Net income

 

 

 
4,848

 

 
4,848

Balance as of December 31, 2018
6,883

 

$6,883

 

$62,132

 

$137,452

 

($520
)
 

$205,947

 






6



NORTHRIM BANCORP, INC.
Consolidated Statements of Changes in Shareholders’ Equity
(Continued)
(Unaudited)

 
Common Stock
 
Additional Paid-in Capital
 
 Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
 Total
 
Number of Shares
 
Par Value
 
 
 
 
(In Thousands)
 
 
 
 
 
Balance as of January 1, 2019
6,883

 

$6,883

 

$62,132

 

$137,452

 

($520
)
 

$205,947

Cash dividend declared

 

 

 
(2,087
)
 

 
(2,087
)
Stock-based compensation expense

 

 
196

 

 

 
196

Exercise of stock options and vesting of restricted stock units, net
2

 
2

 
(2
)
 

 

 

Repurchase of common stock
(6
)
 
(6
)
 
(199
)
 

 

 
(205
)
Other comprehensive income, net of tax

 

 

 

 
675

 
675

Net income

 

 

 
4,312

 

 
4,312

Balance as of March 31, 2019
6,879

 

$6,879

 

$62,127

 

$139,677

 

$155

 

$208,838

See notes to consolidated financial statements

7



NORTHRIM BANCORP, INC.
Consolidated Statements of Cash Flows
(Unaudited)
 
Three Months Ended March 31,
(In Thousands)
2019
 
2018
Operating Activities:
 
 
 
Net income

$4,312

 

$4,062

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
 

 
 

Gain on sale of securities, net
(23
)
 

Loss on disposal of premises and equipment

 
(28
)
Depreciation and amortization of premises and equipment
733

 
716

Amortization of software
246

 
303

Intangible asset amortization
15

 
18

Amortization of investment security premium, net of discount accretion
25

 
55

Change in fair value of marketable equity securities
(534
)
 

Deferred tax expense (benefit)
365

 
(260
)
Stock-based compensation
196

 
253

Deferral of loan fees and (costs), net
(187
)
 
(48
)
Provision for loan losses
750

 

(Benefit) reserve for purchased receivables
(49
)
 
9

Additions to mortgage servicing rights carried at fair value
(1,107
)
 
(760
)
Change in fair value of home mortgage servicing rights carried at fair value
674

 
26

Change in fair value of commercial servicing rights carried at fair value
23

 

Gain on sale of loans
(2,927
)
 
(3,346
)
Proceeds from the sale of loans held for sale
99,873

 
115,178

Origination of loans held for sale
(92,447
)
 
(109,069
)
Gain on sale of other real estate owned
(316
)
 

Net changes in assets and liabilities:
 

 
 
Increase in accrued interest receivable
(193
)
 
(383
)
Decrease (increase) in other assets
1,030

 
(220
)
Decrease in other liabilities
(1,441
)
 
(1,797
)
Net Cash Provided by Operating Activities
9,018

 
4,709

Investing Activities:
 

 
 

Investment in securities:
 

 
 
Purchases of investment securities available for sale
(10,376
)
 
(10,000
)
Purchases of FHLB stock
(210
)
 

Proceeds from sales/calls/maturities of securities available for sale
8,977

 
18,388

Proceeds from redemption of FHLB stock
240

 
9

(Increase) decrease in purchased receivables, net
(6,831
)
 
2,810

Decrease (increase) in loans, net
2,282

 
(13,821
)
Proceeds from sale of other real estate owned
1,085

 
71

Purchases of software
(132
)
 

Purchases of premises and equipment
(621
)
 
(152
)
Net Cash Used by Investing Activities
(5,586
)
 
(2,695
)
Financing Activities:
 

 
 
(Decrease) increase in deposits
(70
)
 
2,507

Increase in securities sold under repurchase agreements
343

 
3,272

Decrease in borrowings
(41
)
 
(24
)
Repurchase of common stock
(205
)
 

Cash dividends paid
(2,064
)
 
(1,648
)
Net Cash (Used) Provided by Financing Activities
(2,037
)
 
4,107

Net Change in Cash and Cash Equivalents
1,395

 
6,121

Cash and Cash Equivalents at Beginning of Period
77,538

 
77,841


8



Cash and Cash Equivalents at End of Period

$78,933

 

$83,962

 
 
 
 
Supplemental Information:
 

 
 
Interest paid

$1,074

 

$498

Transfer of loans to other real estate owned

$—

 

$235

Non-cash lease liability arising from obtaining right of use assets

$528

 

$—

Cash dividends declared but not paid

$23

 

$16

 
See notes to consolidated financial statements

9



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation and Significant Accounting Policies
The accompanying unaudited consolidated financial statements and corresponding footnotes have been prepared by Northrim BanCorp, Inc. (the “Company”) in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with instructions to Form 10-Q under the Securities Exchange Act of 1934, as amended. The year-end Consolidated Balance Sheet data was derived from the Company's audited financial statements. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The Company owns a 100% interest in Residential Mortgage Holding Company, LLC, the parent company of Residential Mortgage, LLC (collectively "RML") and consolidates their balance sheets and income statement into its financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain immaterial reclassifications have been made to prior year amounts to maintain consistency with the current year with no impact on net income or total shareholders’ equity. The Company determined that it operates in two primary operating segments: Community Banking and Home Mortgage Lending. The Company has evaluated subsequent events and transactions for potential recognition or disclosure. Operating results for the interim period ended March 31, 2019, are not necessarily indicative of the results anticipated for the year ending December 31, 2019. These consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. The Company’s significant accounting policies are discussed in Note 1 to the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.
Reclassification of Prior Year Presentation
Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations.
Recent Accounting Pronouncements
Accounting pronouncements implemented in 2019
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires lessees, among other things, to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous authoritative guidance. This update also introduces new disclosure requirements for leasing arrangements. In July 2018, the FASB issued ASU 2018-11, Leases - Targeted Improvements ("ASU 2018-11") to provide entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU 2016-02. Specifically, under the amendments in ASU 2018-11: (1) entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and (2) lessors may elect not to separate lease and non-lease components when certain conditions are met. The Company adopted ASU 2016-02 on January 1, 2019, utilizing the modified retrospective approach provided under the transition option in ASU 2018-11 for leases that exist on, or are entered into, after the adoption date. Accordingly, ASU 2016-02 has not been applied to comparative periods included in the Company's financial statements. The Company also elected certain relief options offered in ASU 2016-02 and ASU 2018-11, including the practical expedient on not separating lease components from nonlease components for all operating leases and instead to account for them as a single lease component and the option not to recognize right-of-use assets and lease liabilities that arise from short-term leases (i.e., leases with terms of twelve months or less). The Company did not elect the hindsight practical expedient, which allows entities to use hindsight when determining lease term and impairment of right-of-use assets. The Company has several lease agreements, such as branch locations, which were considered operating leases prior to the adoption of ASU 2016-02, and therefore, were not recognized on the Company’s consolidated statements of condition. The Company recognized these lease agreements on the consolidated statements of condition as a $15.9 million right-of-use asset and a $15.9 million lease liability upon adoption of ASU 2016-02 on January 1, 2019. The adoption of ASU 2016-02 did not have an impact on the Company’s consolidated statements of income.
Accounting pronouncements to be implemented in future periods    
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“ASU 2016-13”). ASU 2016-13 is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The standard requires the measurement of all expected credit losses for certain financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable

10



forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates, but will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. ASU 2016-13 requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization's portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2019. Early application will be permitted for specified periods. ASU 2016-13 is effective for the Company’s financial statements for annual and interim periods beginning on or after December 15, 2019, and must be applied prospectively. The Company has formed a cross-functional team to begin implementation efforts of this new standard. The team is evaluating the data elements and modeling options that are expected to be critical to the new process and has engaged external consulting services related to this effort. An estimate of the impact of this standard on the Company's consolidated financial position and results of operations has not yet been determined; however, the impact on the Company's process for calculating the allowance for loan losses ("Allowance") is expected to be significant.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (“ASU 2017-04”). ASU 2017-04 simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. ASU 2017-04 is effective for the Company’s financial statements for annual and interim periods beginning on or after December 15, 2019, and must be applied on a prospective basis. The Company does not believe that the adoption of this standard will have a material impact on the Company’s consolidated financial position or results of operations.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. ASU 2018-13 is effective for the Company’s financial statements for annual and interim periods beginning on or after December 15, 2019. The Company does not believe that the adoption of this standard will have a material impact on the Company’s consolidated financial position or results of operations.

    
2. Leases

We adopted ASU 2016-02 using the modified retrospective approach with an effective date as of January 1, 2019. Prior year financial statements were not recast under the new standard and, therefore, those amounts are not presented below. We elected the package of transition provisions available for expired or existing contracts, which allowed us to carryforward our historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. The Company also elected the practical expedient on not separating lease components from nonlease components for all operating leases. Additionally, the Company has elected to not apply ASU 2016-02 to short-term leases. Short-term leases are those leases that, at the lease commencement date, have a lease term of 12 months or less and do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise.

The Company has lease agreements for land and office facilities that it occupies to operate several of its retail branch locations, as well as one storage facility, that are classified as operating leases and are recognized on the balance sheet as right-of-use ("ROU") assets and lease liabilities. Most of these leases contain options to extend the duration of the leases at management's discretion. Management has recognized these renewal options as part of its ROU asset and lease liabilities when management is reasonably certain to exercise these options. Whether or not management is reasonably certain to exercise such an option is determined based on facts and circumstances for each individual lease. However, if a renewal option is offered at below market terms, management considers the exercise of that option to be reasonably certain for the purposes of calculating its ROU assets and lease liabilities. None of the Company's leases include residual value guarantees, and there are no restrictions or covenants imposed by these leases that impose significant additional financial obligations on the Company. The Company uses the rate implicit in each lease as the discount rate to determine the lease liability, which is the present value of lease payments not yet paid at the lease commencement date. If the rate implicit in each lease is not readily determinable, which is often the case, the Company uses its incremental borrowing rate as the discount rate. The incremental borrowing rate is the rate that the Company would have incurred to borrow the funds necessary to purchase the leased asset over a similar term.

As of March 31, 2019, the Company has operating lease ROU assets of $15.5 million and operating lease liabilities of $15.4 million. The Company does not have any agreements that are classified as finance leases.


11



The following table presents additional information about the Company's operating leases:
(In Thousands)
Three Months Ended March 31,
 
2019
Lease Cost
 
 
Operating lease cost(1)

$678

 
Short term lease cost(1)
9

 
Total lease cost

$687

 
 
 
Other information
 
 
Operating leases - operating cash flows

$682

 
Weighted average lease term - operating leases
11.22 years

 
Weighted average discount rate - operating leases
3.31
%
(1) 
Expenses are classified within occupancy expense on the Consolidated Statements of Income.
 

The table below reconciles the remaining undiscounted cash flows for the next five years for each twelve-month period presented (unless otherwise indicated) and the total of the subsequent remaining years to the operating lease liabilities recorded on the balance sheet:

(In Thousands)
Operating Leases
2019 (Nine months)

$2,003

2020
2,532

2021
2,439

2022
1,998

2023
1,775

Thereafter
8,131

Total minimum lease payments

$18,878

Less: amount of lease payment representing interest
(3,520
)
Present value of future minimum lease payments

$15,358




3. Revenue
The Company's revenue is included in net interest income and other operating income on its Consolidated Statements of Income. ASU 2014-09, which amends Topic 606 in the Accounting Standards Codification ("ASC"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.
The majority of our ongoing revenue-generating transactions are not subject to ASC 606, including revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, purchased receivable income, financial guarantees, and derivatives are also not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees, merchant services income, and commissions from the sales of mutual funds and other investments. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s non-interest revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.

12



Bankcard fees
Bankcard fees are primarily comprised of debit card income and ATM fees. Debit card income is primarily comprised of interchange fees earned whenever the Company’s debit cards are processed through card payment networks such as Visa or MasterCard. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. The Company’s performance obligation for bankcard fees are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payments are typically received immediately or in the following month.
Service charges on deposit accounts
Service charges on deposit accounts consist of general service fees for monthly account maintenance, activity- or transaction-based fees, and account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), and other deposit account related fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed. Payments for service charges on deposit accounts are primarily received immediately or in the following month through a direct charge to customers’ accounts.
Other
Other operating income consists of other recurring revenue streams such as merchant services income, commissions from sales of mutual funds and other investments, safety deposit box rental fees, bank check and other check fees, unrealized gains and losses on marketable securities, and other miscellaneous revenue streams. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. The Company’s performance obligation for merchant services income is largely satisfied, and related revenue recognized, when the transactions have been completed. Payment is typically received immediately or in the following month. The Company earns commissions from the sale of mutual funds as periodic service fees (i.e., trailers) from Elliott Cove Capital Management typically based on a percentage of net asset value. Trailer revenue is recorded over time, quarterly, as net asset value is determined. The Company also earns commission income from the sale of annuity products. The Company acts as an intermediary between the Company's customer and Elliott Cove Investment Advisors for these transactions, and commissions from annuity product sales are recorded when the Company’s performance obligation is satisfied, which is generally upon the issuance of the annuity policy. The Company does not earn trailer fees on annuity sales. Payment for commissions from sales of mutual funds and other investments and annuity sales is typically received in the following quarter. Other service charges include revenue from safety deposit box rental fees, processing wire transfers, bank check and other check fees, and other services. The Company’s performance obligations for these other revenue streams are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payments are typically received immediately or in the following month.
The following presents other operating income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three-month periods ended March 31, 2019 and 2018:
(In Thousands)
Three Months Ended March 31,
Other operating income
2019
2018
 
In-scope of Topic 606:
 
 
 
 
Bankcard fees

$650


$625

 
 
Service charges on deposit accounts
413

354

 
 
Other
365

363

 
Other operating income (in-scope of Topic 606)

$1,428


$1,342

 
Other operating income (out-of-scope of Topic 606)
6,105

6,120

Total other operating income

$7,533


$7,462

Gains on the sale of OREO are also within the scope of Topic 606 and are recorded within other operating expense on the Company's Consolidated Statements of Income. Gains on the sale of OREO properties were $316,000 and $0 for the three months ended March 31, 2019 and 2018, respectively.

Contract Balances
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s

13



obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s other operating revenue streams are largely based on transactional activity, or standard month-end revenue accruals. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of March 31, 2019 and December 31, 2018, the Company did not have any significant contract balances.
Contract Acquisition Costs
An entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606 on January 1, 2018, the Company did not capitalize any contract acquisition costs.


4. Cash and Cash Equivalents
The Company is required to maintain a $1.1 million minimum average daily balance with the Federal Reserve Bank of San Francisco ("Federal Reserve Bank") for purposes of settling financial transactions and charges for Federal Reserve Bank services. The Company is also required to maintain cash balances or deposits with the Federal Reserve Bank sufficient to meet its statutory reserve requirements. The average reserve requirement for the maintenance period which included March 31, 2019, was $0.
The Company is required to maintain a $500,000 balance with a correspondent bank for outsourced servicing of ATMs.

The Company is required to maintain a $100,000 and $300,000 balance with a correspondent bank to collateralize the initial margin and the fair value exposure of its interest rate swap, respectively.


5. Investment Securities
The carrying values and estimated fair values of investment securities at the periods indicated are presented below:
(In Thousands)
Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Fair Value
March 31, 2019
 


 


 


 

Securities available for sale
 


 


 


 

U.S. Treasury and government sponsored entities

$212,502



$634



$839



$212,297

Municipal securities
3,906


9


17


3,898

Corporate bonds
40,137


246


46


40,337

Collateralized loan obligations
17,979

 
1

 
71

 
17,909

Total securities available for sale

$274,524



$890



$973



$274,441

December 31, 2018
 


 


 


 

Securities available for sale
 


 


 


 

U.S. Treasury and government sponsored entities

$209,908



$391



$1,439



$208,860

Municipal securities
9,089


17


22


9,084

Corporate bonds
40,139


38


397


39,780

Collateralized loan obligations
13,990

 

 
104

 
13,886

Total securities available for sale

$273,126



$446



$1,962



$271,610



14



Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2019 and December 31, 2018 were as follows:

 
Less Than 12 Months
More Than 12 Months
Total
(In Thousands)
Fair Value
Unrealized Losses
Fair Value
Unrealized Losses
Fair Value
Unrealized Losses
March 31, 2019:
 
 
 
 
 
 
Securities Available for Sale
 
 
 
 
 
 
     U.S. Treasury and government sponsored entities

$6,380


$3


$133,117


$836


$139,497


$839

     Corporate bonds
11,963

46



11,963

46

     Collateralized loan obligations
10,919

71



10,919

71

     Municipal securities


1,410

17

1,410

17

          Total

$29,262


$120


$134,527


$853


$163,789


$973

December 31, 2018:
 
 
 
 
 
 
Securities Available for Sale
 
 
 
 
 
 
     U.S. Treasury and government sponsored entities

$5,030


$6


$135,807


$1,433


$140,837


$1,439

     Corporate bonds
22,285

397



22,285

397

     Collateralized Loan Obligation
13,886

104



13,886

104

     Municipal securities


1,673

22

1,673

22

          Total

$41,201


$507


$137,480


$1,455


$178,681


$1,962


The unrealized losses on investments in U.S. treasury and government sponsored entities, corporate bonds, collateralized loan obligations, and municipal securities in both periods were caused by changes in interest rates. At March 31, 2019 and December 31, 2018, there were 9 and 14 available-for-sale securities with unrealized losses that have been in a loss position for less than twelve months, respectively. There were 21 and 23 securities as of March 31, 2019 and December 31, 2018 that have been in an unrealized loss position for more than twelve months, respectively.  The contractual terms of the investments in a loss position do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because it is more likely than not that the Company will hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

At March 31, 2019 and December 31, 2018, $58.6 million and $58.4 million in securities were pledged for deposits and borrowings, respectively.


15



The amortized cost and estimated fair values of debt securities at March 31, 2019, are distributed by contractual maturity as shown below.  Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. 
(In Thousands)
Amortized Cost

Fair Value

Weighted Average Yield
US Treasury and government sponsored entities
 

 

 
Within 1 year

$75,030



$74,731


1.48
%
1-5 years
137,472


137,566


2.41
%
Total

$212,502



$212,297


2.08
%
Corporate bonds
 

 

 
Within 1 year

$12,449



$12,520


3.64
%
1-5 years
20,678


20,842


3.72
%
5-10 years
7,010


6,975


3.74
%
Total

$40,137



$40,337


3.70
%
Collateralized loan obligations
 
 
 
 
 
5-10 years

$3,000

 

$2,999

 
4.28
%
Over 10 years
14,979

 
14,910

 
4.01
%
Total

$17,979

 

$17,909

 
4.06
%
Municipal securities
 

 

 
Within 1 year

$1,913



$1,914


1.81
%
1-5 years
1,993


1,984


4.31
%
Total

$3,906



$3,898


3.08
%

The proceeds and resulting gains and losses, computed using specific identification, from sales of investment securities for the three-month periods ending March 31, 2019 and 2018, are as follows: 
(In Thousands)
Proceeds

Gross Gains

Gross Losses
Three Months Ended March 31, 2019
 
 
 
 
 
Available for sale securities

$4,219

 

$23

 

$—

Three Months Ended March 31, 2018
 
 
 
 
 
Available for sale securities

$—

 

$—

 

$—

    
A summary of interest income for the three-month periods ending March 31, 2019 and 2018, on available for sale investment securities are as follows:
 
Three Months Ended March 31,
(In Thousands)
2019
 
2018
US Treasury and government sponsored entities

$1,071

 

$890

Other
509

 
278

Total taxable interest income

$1,580

 

$1,168

Municipal securities

$52

 

$86

Total tax-exempt interest income

$52

 

$86

Total

$1,632

 

$1,254



16



6.  Loans and Credit Quality
The following table presents total portfolio loans by portfolio segment and class of financing receivable, based on the Company's asset quality rating ("AQR") criteria:
(In Thousands)
Commercial

Real estate construction one-to-four family

Real estate construction other

Real estate term owner occupied

Real estate term non-owner occupied

Real estate term other

Consumer secured by 1st deeds of trust

Consumer other

Total
March 31, 2019
 

 

 

 

 

 

 

 

 
AQR Pass

$323,263



$34,061



$72,920



$120,469



$297,268



$42,682



$18,259



$24,075



$932,997

AQR Special Mention
3,467






3,886


17,963








25,316

AQR Substandard
17,434


2,423




5,786


930


1,228


457


69


28,327

AQR Doubtful














1


1

Subtotal

$344,164



$36,484



$72,920



$130,141



$316,161



$43,910



$18,716



$24,145



$986,641

Less: Unearned origination fees, net of origination costs

 

 

(4,300
)
        Total loans
 

 

 

 

 

 

 

 


$982,341

December 31, 2018
 

 

 

 

 

 

 

 

 
AQR Pass

$315,112



$33,729



$72,256



$117,174



$307,126



$40,792



$18,768



$23,595



$928,552

AQR Special Mention
5,116


3,382




3,987


18,129


670


140


2


31,426

AQR Substandard
22,192






5,253


465


577


320


47


28,854

AQR Doubtful














1


1

Subtotal

$342,420



$37,111



$72,256



$126,414



$325,720



$42,039



$19,228



$23,645



$988,833

Less: Unearned origination fees, net of origination costs

 

 

(4,487
)
        Total loans
 

 

 

 

 

 

 

 


$984,346

Loans are carried at their principal amount outstanding, net of charge-offs, unamortized fees and direct loan origination costs.  Loan balances are charged-off to the Allowance when management believes that collection of principal is unlikely.  Interest income on loans is accrued and recognized on the principal amount outstanding except for loans in a nonaccrual status.  All classes of loans are placed on nonaccrual and considered impaired when management believes doubt exists as to the collectability of the interest or principal.  Cash payments received on nonaccrual loans are directly applied to the principal balance.  Generally, a loan may be returned to accrual status when the delinquent principal and interest is brought current in accordance with the terms of the loan agreement.  Additionally, certain ongoing performance criteria, which generally includes a performance period of six months, must be met in order for a loan to be returned to accrual status.  Loans are reported as past due when installment payments, interest payments, or maturity payments are past due based on contractual terms.

17



Nonaccrual loans: Nonaccrual loans net of government guarantees totaled $18.5 million and $14.7 million at March 31, 2019 and December 31, 2018, respectively. Nonaccrual loans at the periods indicated are presented below by segment:
(In  Thousands)
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Greater Than
90 Days Past Due
 
Current
 
Total
March 31, 2019
 
 
 
 
 
 
 
 
 
Commercial

$261

 

$1,337

 

$2,559

 

$7,529

 

$11,686

Real estate construction one-to-four family

 

 

 
2,423

 
2,423

Real estate term owner occupied
393

 

 
2,418

 
963

 
3,774

Real estate term other

 

 
577

 
650

 
1,227

Consumer secured by 1st deeds of trust

 

 

 
360

 
360

Consumer other

 

 
39

 
7

 
46

Total nonperforming loans
654

 
1,337

 
5,593

 
11,932

 
19,516

Government guarantees on nonaccrual loans

 
(269
)
 

 
(769
)
 
(1,038
)
Net nonaccrual loans

$654

 

$1,068

 

$5,593

 

$11,163

 

$18,478

December 31, 2018
 
 
 
 
 
 
 
 
 
Commercial

$1,329

 

$324

 

$1,287

 

$9,731

 

$12,671

Real estate term owner occupied

 

 
1,694

 

 
1,694

Real estate term other

 

 
577

 

 
577

Consumer secured by 1st deeds of trust

 

 

 
220

 
220

Consumer other

 

 
39

 
9

 
48

Total nonperforming loans
1,329

 
324

 
3,597

 
9,960

 
15,210

Government guarantees on nonaccrual loans
(269
)
 

 

 
(247
)
 
(516
)
Net nonaccrual loans

$1,060

 

$324

 

$3,597

 

$9,713

 

$14,694




18



Past Due Loans: Past due loans and nonaccrual loans at the periods indicated are presented below by segment:
(In Thousands)
30-59 Days
Past Due
Still
Accruing

60-89 Days
Past Due
Still
Accruing

Greater Than
90 Days
Still
Accruing

Total Past
Due
 
Nonaccrual

Current

Total
March 31, 2019
 

 

 

 
 
 

 

 
Commercial

$809

 

$534

 

$—

 

$1,343

 

$11,686

 

$331,135

 

$344,164

Real estate construction one-to-four family

 

 

 

 
2,423

 
34,061

 
36,484

Real estate construction other
268

 

 

 
268

 

 
72,652

 
72,920

Real estate term owner occupied
265

 
1,141

 

 
1,406

 
3,774

 
124,961

 
130,141

Real estate term non-owner occupied

 

 

 

 

 
316,161

 
316,161

Real estate term other

 

 

 

 
1,227

 
42,683

 
43,910

Consumer secured by 1st deed of trust
388

 

 

 
388

 
360

 
17,968

 
18,716

Consumer other
220

 

 

 
220

 
46

 
23,879

 
24,145

Subtotal

$1,950

 

$1,675

 

$—

 

$3,625

 

$19,516

 

$963,500

 

$986,641

Less: Unearned origination fees,  net of origination costs

 

 
 

 


(4,300
)
     Total
 


 


 


 

 
 


 



$982,341

December 31, 2018
 

 

 

 
 
 

 

 
Commercial

$872

 

$857

 

$—

 

$1,729

 

$12,671

 

$328,020

 

$342,420

Real estate construction one-to-four family

 

 

 

 

 
37,111

 
37,111

Real estate construction other

 

 

 

 

 
72,256

 
72,256

Real estate term owner occupied
1,197

 

 

 
1,197

 
1,694

 
123,523

 
126,414

Real estate term non-owner occupied

 

 

 

 

 
325,720

 
325,720

Real estate term other

 

 

 

 
577

 
41,462

 
42,039

Consumer secured by 1st deed of trust
224

 
100

 

 
324

 
220

 
18,684

 
19,228

Consumer other
190

 

 

 
190

 
48

 
23,407

 
23,645

Subtotal

$2,483

 

$957

 

$—

 

$3,440

 

$15,210

 

$970,183

 

$988,833

Less: Unearned origination fees,  net of origination costs

 

 
 

 


(4,487
)
     Total
 


 


 


 

 
 


 



$984,346


Impaired Loans: The Company considers a loan to be impaired when it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Once a loan is determined to be impaired, the impairment is measured based on the present value of the expected future cash flows discounted at the loan’s effective interest rate, except that if the loan is collateral dependent, the impairment is measured by using the fair value of the loan’s collateral.  Nonperforming loans with an outstanding balance of $50,000 or greater are individually evaluated for impairment based upon the borrower’s overall financial condition, resources, and payment record, and the prospects for support from any financially responsible guarantors.

19



At March 31, 2019 and December 31, 2018, the recorded investment in loans that are considered to be impaired was $31.1 million and $31.7 million, respectively.  The following table presents information about impaired loans by class as of the periods indicated:
(In Thousands)
Recorded Investment

Unpaid Principal Balance

Related Allowance
March 31, 2019
 

 

 
With no related allowance recorded
 

 

 
Commercial - AQR pass

$2,076



$2,076



$—

Commercial - AQR substandard
16,467


17,539



Real estate construction one-to-four family - AQR substandard
2,423


2,423



Real estate term owner occupied- AQR substandard
5,786


5,786



Real estate term non-owner occupied- AQR pass
284


284



Real estate term non-owner occupied- AQR substandard
929


929



Real estate term other - AQR pass
467


467



Real estate term other - AQR substandard
578


578



Consumer secured by 1st deeds of trust - AQR pass
128

 
128

 

Consumer secured by 1st deeds of trust - AQR substandard
241


241



          Subtotal

$29,379



$30,451



$—

With an allowance recorded
 

 

 
Commercial - AQR substandard

$840



$1,343



$212

Real estate term other - AQR substandard
650


650


54

Consumer secured by 1st deeds of trust - AQR substandard
216


216


39

  Subtotal

$1,706



$2,209



$305

Total
 
 
 
 
 
Commercial - AQR pass

$2,076

 

$2,076

 

$—

Commercial - AQR substandard
17,307


18,882


212

Real estate construction one-to-four family - AQR substandard
2,423


2,423



Real estate term owner-occupied - AQR substandard
5,786


5,786



Real estate term non-owner occupied - AQR pass
284


284



Real estate term non-owner occupied - AQR substandard
929


929



Real estate term other - AQR pass
467


467



Real estate term other - AQR substandard
1,228


1,228


54

Consumer secured by 1st deeds of trust - AQR pass
128

 
128

 

Consumer secured by 1st deeds of trust - AQR substandard
457


457


39