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Nature of Operations and Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2019

Business Combinations and Other Purchase of Business Transactions

The Bank is focused on relationship-based business banking to small, middle-market, and venture-backed businesses nationwide. The Bank offers a broad range of loan and lease and deposit products and services through 74 full-service branches located in California, one branch located in Durham, North Carolina, one branch located in Denver, Colorado, and numerous loan production offices across the country through its Community Banking, National Lending and Venture Banking groups. Community Banking provides real estate loans, commercial loans, and comprehensive deposit and treasury management services to small and medium-sized businesses conducted primarily through our California-based branch offices and Denver, Colorado branch office. National Lending provides asset-based, equipment, and real estate loans and treasury management services to established middle-market businesses on a national basis. Venture Banking offers loans and a comprehensive suite of financial services focused on entrepreneurial and venture-backed businesses and their venture capital and private equity investors, with offices located in key innovation hubs across the United States. In addition, we provide investment advisory and asset management services to select clients through Pacific Western Asset Management Inc., a wholly-owned subsidiary of the Bank and an SEC-registered investment adviser.

We generate our revenue primarily from interest received on loans and leases and, to a lesser extent, from interest received on investment securities, and fees received in connection with deposit services, extending credit and other services offered, including treasury management and investment management services. Our major operating expenses are the interest paid by the Bank on deposits and borrowings, compensation, occupancy, and general operating expenses.

Recently issued Accounting Standards

Accounting Standards Adopted in 2019

Effective January 1, 2019, the Company adopted ASU 2016-02, "Leases (Topic 842)," and the related amendments to this new standard issued in 2018. ASU 2016-02 supersedes ASC Topic 840, “Leases,” and is intended to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of the financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

The Company adopted the new standard using the optional transition method under ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” and recognized a cumulative effect adjustment to increase retained earnings by $938,000, net of taxes, without restating prior periods and applying the requirements of the new standard prospectively. The Company has elected the following practical expedients: (1) to not separate lease and non-lease components for facilities leases; (2) to not reassess whether any expired or existing contracts are or contain leases and to maintain existing lease classifications; (3) to not record short-term leases (initial term less than 12 months) on the balance sheet; and (4) to present sales tax on a net basis for those transactions in which the Company is the lessor.

The standard had a more significant impact on our consolidated balance sheet than our consolidated statement of earnings. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while the accounting for leases as a lessor remained substantially unchanged. The ROU asset is included within "Other assets," while the ROU liability is included within "Accrued interest payable and other liabilities." See Note 9. Other Assets and Note 10. Leases for further details.

Effective January 1, 2019, the Company early-adopted and removed or modified disclosures as permitted by ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to Disclosure Requirements for Fair Value Measurements,” but deferred adoption of the additional disclosures until the effective date of January 1, 2020 as permitted in the transition guidance in ASU 2018-13.

Effective January 1, 2019, the Company early-adopted ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (a consensus of the FASB Emerging Issues Task Force)," which aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license. The new guidance also prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense, and requires additional quantitative and qualitative disclosures. The Company opted to apply ASU 2018-15 prospectively. The primary effect of the provisions is to capitalize eligible implementation costs during the application development phase and to amortize those costs over the life of the agreement. There was no impact to our consolidated financial statements from the adoption of this new standard.

Recently Issued Accounting Standards

Basis of Presentation

(b) Basis of Presentation

The accounting and reporting policies of the Company are in accordance with U.S. generally accepted accounting principles, which we may refer to as U.S. GAAP. In the opinion of management, all significant intercompany accounts and transactions have been eliminated and adjustments, consisting solely of normal recurring accruals and considered necessary for the fair presentation of financial statements have been included.

Use of Estimates

We have made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period to prepare these consolidated financial statements in conformity with U.S. GAAP. Actual results could differ from those estimates. Material estimates subject to change in the near term include, among other items, the allowance for credit losses (the combination of the allowance for loan and lease losses and the reserve for unfunded loan commitments), the carrying value of intangible assets, the realization of deferred tax assets, and the fair value estimates of assets acquired and liabilities assumed in acquisitions. These estimates may be adjusted as more current information becomes available, and any adjustment may be significant.

As described in Note 3. Acquisitions below, we completed the CUB acquisition on October 20, 2017. The acquired assets and liabilities in this acquisition were measured at their estimated fair values. Management made significant estimates and exercised significant judgment in estimating such fair values and accounting for the acquired assets and assumed liabilities in this transaction.

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, cash and cash equivalents consist of: (1) cash and due from banks, and (2) interest‑earning deposits in financial institutions. Interest‑earning deposits in financial institutions represent mostly cash held at the FRBSF, the majority of which is immediately available.

Investment Securities

We determine the classification of securities at the time of purchase. If we have the intent and the ability at the time of purchase to hold securities until maturity, they are classified as held‑to‑maturity and stated at amortized cost. We do not classify any securities as held-to-maturity. Securities to be held for indefinite periods of time, but not necessarily to be held‑to‑maturity or on a long‑term basis, are classified as available‑for‑sale and carried at estimated fair value, with unrealized gains or losses reported as a separate component of stockholders’ equity in accumulated other comprehensive income, net of applicable income taxes. Securities available‑for‑sale include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates, prepayment risk, and other related factors. Securities are individually evaluated for appropriate classification when acquired. As a result, similar types of securities may be classified differently depending on factors existing at the time of purchase.

The carrying values of all securities are adjusted for amortization of premiums and accretion of discounts using the interest method. Premiums on callable securities are amortized to the earliest call date. Realized gains or losses on the sale of securities, if any, are determined using the amortized cost of the specific securities sold. Such gains or losses are included in "Gain (loss) on sale of securities" on the consolidated statements of earnings. Declines in the fair value of debt securities classified as available-for-sale are reviewed to determine whether the impairment is other-than-temporary. This review considers a number of factors, including the severity of the decline in fair value, current market conditions, historical performance of the security, risk ratings, and the length of time the security has been in an unrealized loss position. If we do not expect to recover the entire amortized cost basis of the security, then an other-than-temporary impairment is considered to have occurred. The cost basis of the security is written down to its estimated fair value and the amount of the write‑down is recognized through a charge to earnings.

Investments in FHLB stock are carried at cost and evaluated regularly for impairment. FHLB stock is expected to be redeemed at par and is a required investment based on measurements of the Bank’s assets and/or borrowing levels.

Loans and Leases

Originated loans. Loans are originated by the Company with the intent to hold them for investment and are stated at the principal amount outstanding, net of unearned income. Unearned income includes deferred unamortized nonrefundable loan fees and direct loan origination costs. Net deferred fees or costs are recognized as an adjustment to interest income over the contractual life of the loans primarily using the effective interest method or taken into income when the related loans are paid off or sold. The amortization of loan fees or costs is discontinued when a loan is placed on nonaccrual status. Interest income is recorded on an accrual basis in accordance with the terms of the respective loan.

Purchased loans. Purchased loans are stated at the principal amount outstanding, net of unearned discounts or unamortized premiums. All loans acquired in our acquisitions are initially measured and recorded at their fair value on the acquisition date. A component of the initial fair value measurement is an estimate of the credit losses over the life of the purchased loans. Purchased loans are also evaluated for impairment as of the acquisition date and are accounted for as “acquired non‑impaired” or “purchased credit impaired” loans.

Acquired non‑impaired loans. Acquired non‑impaired loans are those loans for which there was no evidence of credit deterioration at their acquisition date and it was probable that we would be able to collect all contractually required payments. Acquired non‑impaired loans, together with originated loans, are referred to as Non‑PCI loans. Purchase discounts or premiums on acquired non‑impaired loans are recognized as an adjustment to interest income over the contractual life of such loans using the effective interest method or taken into income when the related loans are paid off or sold.

Purchased credit impaired loans. Purchased credit impaired loans are referred to as PCI loans and are accounted for in accordance with ASC Subtopic 310‑30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” A purchased loan is deemed to be credit impaired when there is evidence of credit deterioration since its origination and it is probable at the acquisition date that collection of all contractually required payments is unlikely. We apply PCI loan accounting when we acquire loans deemed to be impaired, and as a general policy election when we acquire a portfolio of loans in a distressed bank acquisition. As our gross PCI loan portfolio represented less than 0.4% of total loans as of the end of 2017, beginning in 2018 the PCI loans were accounted for as Non-PCI loans as the balance continued to decline and no purchases of credit impaired loans have occurred.

Leases to customers. We provide equipment financing to our customers primarily with direct financing and operating leases. For direct financing leases, lease receivables are recorded on the balance sheet but the leased property is not, although we generally retain legal title to the leased property until the end of each lease. Direct financing leases are stated at the net amount of minimum lease payments receivable, plus any unguaranteed residual value, less the amount of unearned income and net acquisition discount at the reporting date. Direct lease origination costs are amortized using the effective interest method over the life of the leases. Leases acquired in an acquisition are initially measured and recorded at their fair value on the acquisition date. Purchase discount or premium on acquired leases is recognized as an adjustment to interest income over the contractual life of the leases using the effective interest method or taken into income when the related leases are paid off. Direct financing leases are subject to our accounting for allowance for loans and leases.

We provide equipment financing through operating leases where we facilitate the purchase of equipment leased to customers. The equipment is shown on our consolidated balance sheets as "Equipment leased to others under operating leases" and is depreciated to its estimated residual value at the end of the lease term, shown as "Leased equipment depreciation" in the consolidated statements of earnings, according to our fixed asset accounting policy. We receive periodic rental income payments under the leases, which are recorded as "Noninterest income" in the consolidated statements of earnings.

Loans and leases held for sale. As part of our management of the loans and leases held in our portfolio, on occasion we will transfer loans from held for investment to held for sale. Upon transfer, any associated allowance for loan and lease loss is charged off and the carrying value of the loan is adjusted to the lower of cost or estimated fair value. The unamortized balance of net deferred fees and costs associated with loans held for sale is not accreted or amortized to interest income until the related loans are sold. Gains or losses on the sale of these loans are recorded as "Noninterest income" in the consolidated statements of earnings.

Delinquent or past due loans and leases. Loans and leases are considered delinquent when principal or interest payments are past due 30 days or more. Delinquent loans may remain on accrual status between 30 days and 89 days past due.

Nonaccrual loans and leases. When we discontinue the accrual of interest on a loan or lease it is designated as nonaccrual. We discontinue the accrual of interest on a loan or lease generally when a borrower's principal or interest payments or a lessee's payments are past due 90 days or when, in the opinion of management, there is a reasonable doubt as to collectability in the normal course of business. Loans with interest or principal payments past due 90 days or leases with payments past due 90 days may be accruing if the loans or leases are concluded to be well-secured and in the process of collection; however, these loans or leases are still reported as nonperforming. When loans or leases are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest on nonaccrual loans or leases is subsequently recognized only to the extent that cash is received and the loan principal balance or lease balance is deemed collectable. Loans or leases are restored to accrual status when the loans or leases become both well‑secured and are in the process of collection.

Impaired loans and leases. A loan or lease is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan or lease agreement. Impaired loans and leases include loans and leases on nonaccrual status and performing troubled debt restructured loans. Income from impaired loans is recognized on an accrual basis unless the loan is on nonaccrual status. Income from loans on nonaccrual status is recognized to the extent cash is received and when the loan’s principal balance is deemed collectable. We measure impairment of a loan or lease by using the estimated fair value of the collateral, less estimated costs to sell and other applicable costs, if the loan or lease is collateral‑dependent and the present value of the expected future cash flows discounted at the loan’s or lease’s effective interest rate if the loan or lease is not collateral‑dependent. The impairment amount on a collateral‑dependent loan or lease is charged‑off, and the impairment amount on a loan that is not collateral‑dependent is generally recorded as a specific reserve within our allowance for loan and lease losses.

Troubled debt restructurings. A loan is classified as a troubled debt restructuring when we grant a concession to a borrower experiencing financial difficulties that we otherwise would not consider under our normal lending policies. These concessions may include a reduction of the interest rate, principal or accrued interest, extension of the maturity date or other actions intended to minimize potential losses. All modifications of criticized loans are evaluated to determine whether such modifications are troubled debt restructurings as outlined under ASC Subtopic 310‑40, “Troubled Debt Restructurings by Creditors.” Loans restructured with an interest rate equal to or greater than that of a new loan with comparable market risk at the time the loan is modified may be excluded from certain restructured loan disclosures in years subsequent to the restructuring if the loans are in compliance with their modified terms.

A loan that has been placed on nonaccrual status that is subsequently restructured will usually remain on nonaccrual status until the borrower is able to demonstrate repayment performance in compliance with the restructured terms for a sustained period of time, typically for six months. A restructured loan may return to accrual status sooner based on other significant events or circumstances. A loan that has not been placed on nonaccrual status may be restructured and such loan may remain on accrual status after such restructuring. In these circumstances, the borrower has made payments before and after the restructuring. Generally, this restructuring involves maturity extensions, a reduction in the loan interest rate and/or a change to interest‑only payments for a period of time. The restructured loan is considered impaired despite the accrual status and a specific reserve is calculated based on the present value of expected cash flows discounted at the loan’s original effective interest rate or based on the fair value of the collateral if the loan is collateral-dependent.

Allowance for Credit Losses

Allowance for Credit Losses on Loans and Leases Held for Investment

The allowance for credit losses on loans and leases held for investment is the combination of the allowance for loan and lease losses and the reserve for unfunded loan commitments. The allowance for loan and lease losses is reported as a reduction of outstanding loan and lease balances and the reserve for unfunded loan commitments is included within "Accrued interest payable and other liabilities" on the consolidated balance sheets. For loans and leases acquired and measured at fair value and deemed non-impaired on the acquisition date, our allowance methodology measures deterioration in credit quality or other inherent risks related to these acquired assets that may occur after the acquisition date.

The allowance for credit losses is maintained at a level deemed appropriate by management to adequately provide for known and inherent risks in the loan and lease portfolio and other extensions of credit at the balance sheet date. The allowance is based upon our review of the credit quality of the loan and lease portfolio, which includes payment trends, borrowers' compliance with loan agreements, borrowers' current and budgeted financial performance, collateral valuation trends, and current economic factors and external conditions that may affect our borrowers' ability to make payments to us in accordance with contractual terms. Loans and leases that are deemed to be uncollectable are charged off and deducted from the allowance. The provision for loan and lease losses and recoveries on loans and leases previously charged off are added to the allowance.

The allowance for loan and lease losses has a general reserve component for unimpaired loans and leases and a specific reserve component for impaired loans and leases.

A loan or lease is considered impaired when it is probable that we will be unable to collect all amounts due according to the original contractual terms of the agreement. We assess our loans and leases for impairment on an ongoing basis using certain criteria such as payment performance, borrower reported financial results and budgets, and other external factors when appropriate. We measure impairment of a loan or lease based upon the fair value of the underlying collateral if the loan or lease is collateral-dependent or the present value of cash flows, discounted at the effective interest rate, if the loan or lease is not collateral-dependent. To the extent a loan or lease balance exceeds the estimated collectable value, a specific reserve or charge-off is recorded depending upon either the certainty of the estimate of loss or the fair value of the loan’s collateral if the loan is collateral-dependent. Impaired loans and leases with outstanding balances less than or equal to $250,000 may not be individually assessed for impairment but would be assessed with reserves based on the average loss severity on historical impaired loans with similar risk characteristics.

Our allowance methodology for the general reserve component includes both quantitative and qualitative loss factors which are applied to our population of unimpaired loans and leases to estimate our general reserves. The quantitative loss factors determination is based on a probability of default/loss given default ("PD/LGD") methodology which considers the likelihood of loans defaulting based on the historical degree that similar loans defaulted and the degree of credit losses based on the historical average degree of loss experienced for these similar loans and leases pooled both by loan or lease type and credit risk rating; loans with more adverse credit risk ratings have higher quantitative loss factors. The qualitative loss factors consider, among other things, current economic trends and forecasts, current collateral values and performance trends, credit performance trends, and the loan portfolio's current composition.

The quantitative estimation of the allowance for credit losses at December 31, 2019 considered actual historical loan and lease charge-off experience over a 44-quarter look-back period starting with the first quarter of 2009. This look-back period is inclusive of the average timeframe over which charge-offs typically occur following loan or lease origination and allows for the capture of sufficient loss observations that are relevant to the current portfolio. When estimating the general reserve component for the various pools of similar loan types, the loss factors applied to the loan pools consider the current credit risk ratings, giving greater weight to loans with more adverse credit risk ratings. We recognize that the determination of the allowance for credit losses is sensitive to the assigned credit risk ratings and inherent loss rates at any given point in time.

The qualitative criteria we consider when establishing the loss factors include the following:


•	current economic trends and forecasts;


•	current collateral values, performance trends, and overall outlook in the markets where we lend;


•	legal and regulatory matters that could impact our borrowers’ ability to repay loans and leases;


•	loan and lease portfolio composition and any loan concentrations;


•	current lending policies and the effects of any new policies or policy amendments;


•	loan and lease production volume and mix;


•	loan and lease portfolio credit performance trends;


•	results of independent credit reviews; and


•	changes in management related to credit administration functions.

We estimate the reserve for unfunded loan commitments using the same loss factors as used for the allowance for loan and lease losses. The reserve for unfunded loan commitments is computed using expected future usage of the unfunded commitments based on historical usage of unfunded commitments for the various loan types.

The allowance for credit losses is directly correlated to the credit risk ratings of our loans. To ensure the accuracy of our credit risk ratings, an independent credit review function assesses the appropriateness of the credit risk ratings assigned to loans on a regular basis. The credit risk ratings assigned to every loan and lease are either “pass,” “special mention,” “substandard,” or “doubtful” and defined as follows:


•	Pass: Loans and leases rated as "pass" are not adversely classified and collection and repayment in full are expected.


•	Special Mention: Loans and leases rated as "special mention" have a potential weakness that requires management's attention. If not addressed, these potential weaknesses may result in further deterioration in the borrower's ability to repay the loan or lease.


•	Substandard: Loans and leases rated as "substandard" have a well-defined weakness or weaknesses that jeopardize the collection of the debt. They are characterized by the possibility that we will sustain some loss if the weaknesses are not corrected.


•	Doubtful: Loans and leases rated as "doubtful" have all the weaknesses of those rated as "substandard," with the additional trait that the weaknesses make collection or repayment in full highly questionable and improbable.

In addition, we may refer to the loans and leases with assigned credit risk ratings of "substandard" and "doubtful" together as "classified" loans and leases. For further information on classified loans and leases, see Note 5. Loans and Leases.

Management believes the allowance for credit losses is appropriate for the known and inherent risks in our loan and lease portfolio and the credit risk ratings and inherent loss rates currently assigned are appropriate. It is possible that others, given the same information, may at any point in time reach different conclusions that could result in a significant impact to the Company's financial statements. In addition, current credit risk ratings are subject to change as we continue to monitor our loans and leases. To the extent we experience, for example, increased levels of borrower loan defaults, borrowers' noncompliance with our loan agreements, adverse changes in collateral values, or negative changes in economic and business conditions that adversely affect our borrowers, our classified loans and leases may increase. Higher levels of classified loans and leases generally result in increased provisions for credit losses and an increased allowance for credit losses. Although we have established an allowance for credit losses that we consider appropriate, there can be no assurance that the established allowance will be sufficient to absorb future losses.

Land, Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation and amortization. Land is not depreciated. Depreciation and amortization is charged to "Noninterest expense" in the consolidated statements of earnings using the straight‑line method over the estimated useful lives of the assets. The estimated useful lives of furniture, fixtures and equipment range from 3 to 7 years and for buildings up to 30 years. Leasehold improvements are amortized over their estimated useful lives, or the life of the lease, whichever is shorter.

Foreclosed Assets

Foreclosed assets include OREO and repossessed non-real estate assets. Foreclosed assets are initially recorded at the estimated fair value of the property, based on current independent appraisals obtained at the time of acquisition, less estimated costs to sell, including senior obligations such as delinquent property taxes. The excess of the recorded loan balance over the estimated fair value of the property at the time of acquisition less estimated costs to sell is charged to the allowance for loan and lease losses. Any subsequent write‑downs are charged to "Noninterest expense" in the consolidated statements of earnings and recognized through a foreclosed assets valuation allowance. Subsequent increases in the fair value of the asset less selling costs reduce the foreclosed assets valuation allowance, but not below zero, and are credited to "Noninterest expense." Gains and losses on the sale of foreclosed assets and operating expenses of such assets are included in "Noninterest expense."

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in earnings in the period that includes the enactment date. Any interest or penalties assessed by the taxing authorities is classified in the financial statements as income tax expense. Deferred tax assets and liabilities of the same jurisdiction, net of valuation allowances, are grouped together and reported net on the consolidated balance sheets.

On a periodic basis, the Company evaluates its deferred tax assets to assess whether they are expected to be realized in the future. This determination is based on currently available facts and circumstances, including our current and projected future tax positions, the historical level of our taxable income, and estimates of our future taxable income. In most cases, the realization of deferred tax assets is based on our future profitability. To the extent our deferred tax assets are not considered more likely than not to be realized, we are required to record a valuation allowance on our deferred tax assets by charging earnings. The Company also evaluates existing valuation allowances periodically to determine if sufficient evidence exists to support an increase or reduction in the allowance.

Goodwill and Intangible Assets

Goodwill and Other Intangible Assets

Goodwill and other intangible assets arise from the acquisition method of accounting for business combinations. Goodwill and other intangible assets generated from business combinations and deemed to have indefinite lives are not subject to amortization and instead are tested for impairment at least annually unless certain events occur or circumstances change. Goodwill represents the excess of the purchase price over the fair value of the net assets and other identifiable intangible assets acquired. We test for goodwill impairment annually or earlier if events or changes in circumstances indicate goodwill might possibly be impaired. Impairment exists when the carrying value of the goodwill exceeds its implied fair value. An impairment loss would be recognized in an amount equal to that excess as a charge to "Noninterest expense" in the consolidated statements of earnings.

Intangible assets with estimable useful lives are amortized over such useful lives to their estimated residual values. CDI and CRI are recognized apart from goodwill at the time of acquisition based on market valuations. In preparing such valuations, variables considered included deposit servicing costs, attrition rates, and market discount rates. CDI assets are amortized to expense over their useful lives, which we have estimated to range from 7 to 10 years. CRI assets are amortized to expense over their useful lives, which we have estimated to range from 4 to 7 years. The amortization expense represents the estimated decline in the value of the underlying deposits or customer relationships acquired. Both CDI and CRI are reviewed for impairment quarterly or earlier if events or changes in circumstances indicate that their carrying values may not be recoverable. If the recoverable amount of either CDI or CRI is determined to be less than its carrying value, we would then measure the amount of impairment based on an estimate of the intangible asset’s fair value at that time. If the fair value is below the carrying value, then the intangible asset is reduced to such fair value; an impairment loss for such amount would be recognized as a charge to "Noninterest expense" in the consolidated statements of earnings.

Stock-based Compensation

Stock-Based Compensation

The Company issues stock-based compensation instruments consisting of TRSAs and PRSUs. Compensation expense related to TRSAs is based on the fair value of the underlying stock on the award date and is recognized over the vesting period using the straight‑line method. Forfeitures of stock-based awards are recognized when they occur. Compensation expense related to PRSUs is based on the fair value of the underlying stock on the award date and is amortized over the vesting period using the straight-line method unless it is determined that: (1) attainment of the financial metrics is less than probable, in which case a portion of the amortization is suspended, or (2) attainment of the financial metrics is improbable, in which case a portion of the previously recognized amortization is reversed and also suspended. If it is determined that attainment of a financial measure higher than target is probable, the amortization will increase up to 150% or 200% of the target amortization amount. Annual PRSU expense may vary during the three-year performance period based upon changes in management's estimate of the number of shares that may ultimately vest. In the case where the performance target for the PRSU’s is based on a market condition (such as total shareholder return), the amortization is neither reversed nor suspended if it is subsequently determined that the attainment of the performance target is less than probable or improbable and the employee continues to meet the service requirement of the award.

Unvested TRSAs participate with common stock in any dividends declared and paid. Dividends are paid on unvested TRSAs and are charged to equity and the related tax impact is recorded to income tax expense. Dividends paid on forfeited TRSAs are charged to compensation expense.

Derivative Instruments

(p) Derivative Instruments

Our derivative contracts primarily manage the foreign currency risk associated with certain assets and liabilities. As of December 31, 2019, all of our derivatives were held for risk management purposes and none were designated as accounting hedges. The objective is to manage the uncertainty of future foreign exchange rate fluctuations. These derivatives provide for a fixed exchange rate which has the effect of reducing or eliminating changes to anticipated cash flows to be received on assets and liabilities denominated in foreign currencies as the result of changes to exchange rates. Our derivatives are carried at fair value and recorded in other assets or other liabilities, as appropriate. The changes in fair value of our derivatives and the related interest are recognized in "Noninterest income - other" in the consolidated statements of earnings. At December 31, 2019, our derivative contracts had a notional value of $91.1 million.

Derivative instruments expose us to credit risk in the event of nonperformance by counterparties. This risk exposure consists primarily of the termination value of agreements where we are in a favorable position. We manage the credit risk associated with various derivative agreements through counterparty credit review and monitoring procedures.

Comprehensive Income

ative instruments expose us to credit risk in the event of nonperformance by counterparties. This risk exposure consists primarily of the termination value of agreements where we are in a favorable position. We manage

Earnings Per Share

In accordance with ASC Topic 260, “Earnings Per Share,” all outstanding unvested share‑based payment awards that contain rights to nonforfeitable dividends are considered participating securities and are included in the two‑class method of determining basic and diluted earnings per share. All of our unvested restricted stock participates with our common stockholders in dividends. Accordingly, earnings allocated to unvested restricted stock are deducted from net earnings to determine that amount of earnings available to common stockholders. In the two‑class method, the amount of our earnings available to common stockholders is divided by the weighted average shares outstanding, excluding any unvested restricted stock, for both the basic and diluted earnings per share.

Business Combinations

Business combinations are accounted for under the acquisition method of accounting in accordance with ASC Topic 805, “Business Combinations.” Under the acquisition method, the acquiring entity in a business combination recognizes 100 percent of the acquired assets and assumed liabilities, regardless of the percentage owned, at their estimated fair values as of the date of acquisition. Any excess of the purchase price over the fair value of net assets and other identifiable intangible assets acquired is recorded as goodwill. To the extent the fair value of net assets acquired, including other identifiable assets, exceeds the purchase price, a bargain purchase gain is recognized. Assets acquired and liabilities assumed from contingencies must also be recognized at fair value, if the fair value can be determined during the measurement period. Results of operations of an acquired business are included in the statement of earnings from the date of acquisition. Acquisition‑related costs, including conversion and restructuring charges, are expensed as incurred.

Business Segments

(t) Business Segments

We regularly assess our strategic plans, operations and reporting structures to identify our reportable segments. Changes to our reportable segments are expected to be infrequent. As of December 31, 2019 and since December 31, 2015, we operated as one reportable segment. The factors considered in making this determination include the nature of products and offered services, geographic regions in which we operate, the applicable regulatory environment, and the discrete financial information reviewed by our key decision makers. Through our network of banking offices nationwide, our entire operations provide relationship-based banking products, services and solutions for small to mid-sized companies, entrepreneurial and venture-backed businesses, venture capital and private equity investors, real estate investors, professionals and other individuals. Our products and services include commercial real estate, multi-family, commercial business, construction and land, consumer and government-guaranteed small business loans, business and personal deposit products, and treasury cash management services.

Loans and Leases

NOTE 5. LOANS AND LEASES

Loans and Leases Held for Investment

The following table summarizes the composition of our loans and leases held for investment as of the dates indicated:



	December 31,
	2019			2018
	(In thousands)
Real estate mortgage	$	7,982,383		$	7,933,859
Real estate construction and land	2,773,209			2,262,710
Commercial	7,714,358			7,428,500
Consumer	440,790			401,296
Total gross loans and leases held for investment	18,910,740			18,026,365
Deferred fees, net	(63,868		)	(68,652		)
Total loans and leases held for investment, net of deferred fees	18,846,872			17,957,713
Allowance for loan and lease losses	(138,785		)	(132,472		)
Total loans and leases held for investment, net	$	18,708,087		$	17,825,241

The following tables present an aging analysis of our loans and leases held for investment, net of deferred fees, by loan portfolio segment and class as of the dates indicated:



	December 31, 2019
	30 - 89		90 or More
	Days		Days		Total
	Past Due		Past Due		Past Due		Current		Total
	(In thousands)
Real estate mortgage:
Commercial	$	2,448	$	5,919	$	8,367	$	4,194,320	$	4,202,687
Income producing and other residential	2,105		802		2,907		3,767,153		3,770,060
Total real estate mortgage	4,553		6,721		11,274		7,961,473		7,972,747
Real estate construction and land:
Commercial	—		—		—		1,082,368		1,082,368
Residential	1,429		—		1,429		1,654,005		1,655,434
Total real estate construction and land	1,429		—		1,429		2,736,373		2,737,802
Commercial:
Asset-based	19		—		19		3,748,388		3,748,407
Venture capital	—		—		—		2,179,422		2,179,422
Other commercial	2,781		4,164		6,945		1,760,722		1,767,667
Total commercial	2,800		4,164		6,964		7,688,532		7,695,496
Consumer	1,006		200		1,206		439,621		440,827
Total	$	9,788	$	11,085	$	20,873	$	18,825,999	$	18,846,872



	December 31, 2018
	30 - 89		90 or More
	Days		Days		Total
	Past Due		Past Due		Past Due		Current		Total
	(In thousands)
Real estate mortgage:
Commercial	$	3,487	$	7,541	$	11,028	$	4,813,270	$	4,824,298
Income producing and other residential	1,557		476		2,033		3,091,810		3,093,843
Total real estate mortgage	5,044		8,017		13,061		7,905,080		7,918,141
Real estate construction and land:
Commercial	—		442		442		912,141		912,583
Residential	1,527		—		1,527		1,319,546		1,321,073
Total real estate construction and land	1,527		442		1,969		2,231,687		2,233,656
Commercial:
Asset-based	47		646		693		3,304,728		3,305,421
Venture capital	4,705		—		4,705		2,034,043		2,038,748
Other commercial	5,181		1,285		6,466		2,053,960		2,060,426
Total commercial	9,933		1,931		11,864		7,392,731		7,404,595
Consumer	581		333		914		400,407		401,321
Total	$	17,085	$	10,723	$	27,808	$	17,929,905	$	17,957,713

The following table presents our nonaccrual and performing loans and leases held for investment, net of deferred fees, by loan portfolio segment and class as of the dates indicated:



	December 31,
	2019						2018
	Nonaccrual		Performing		Total		Nonaccrual		Performing		Total
	(In thousands)
Real estate mortgage:
Commercial	$	18,346	$	4,184,341	$	4,202,687	$	15,321	$	4,808,977	$	4,824,298
Income producing and other residential	2,478		3,767,582		3,770,060		2,524		3,091,319		3,093,843
Total real estate mortgage	20,824		7,951,923		7,972,747		17,845		7,900,296		7,918,141
Real estate construction and land:
Commercial	364		1,082,004		1,082,368		442		912,141		912,583
Residential	—		1,655,434		1,655,434		—		1,321,073		1,321,073
Total real estate construction and land	364		2,737,438		2,737,802		442		2,233,214		2,233,656
Commercial:
Asset-based	30,162		3,718,245		3,748,407		32,324		3,273,097		3,305,421
Venture capital	12,916		2,166,506		2,179,422		20,299		2,018,449		2,038,748
Other commercial	27,594		1,740,073		1,767,667		7,380		2,053,046		2,060,426
Total commercial	70,672		7,624,824		7,695,496		60,003		7,344,592		7,404,595
Consumer	493		440,334		440,827		1,043		400,278		401,321
Total	$	92,353	$	18,754,519	$	18,846,872	$	79,333	$	17,878,380	$	17,957,713

It is our policy to discontinue accruing interest when principal or interest payments are past due 90 days or more unless the loan is both well secured and in the process of collection or when, in the opinion of management, there is a reasonable doubt as to the collectability of a loan or lease in the normal course of business. Interest income on nonaccrual loans is recognized only to the extent cash is received and the principal balance of the loan is deemed collectable. The amount of interest income that would have been recorded on nonaccrual loans and leases at December 31, 2019 and 2018 had such loans and leases been current in accordance with their original terms was $8.1 million and $9.3 million for 2019 and 2018.

At December 31, 2019, nonaccrual loans and leases included $11.1 million of loans and leases 90 or more days past due, $1.2 million of loans 30 to 89 days past due and $80.0 million of current loans that were placed on nonaccrual status based on management’s judgment regarding their collectability. At December 31, 2018, nonaccrual loans and leases included $10.7 million of loans and leases 90 or more days past due, $6.6 million of loans 30 to 89 days past due and $62.0 million of current loans that were placed on nonaccrual status based on management’s judgment regarding their collectability.

As of December 31, 2019, our three largest loan relationships on nonaccrual status had an aggregate carrying value of $50.3 million and represented 54% of total nonaccrual loans and leases.

The following tables present the credit risk rating categories for loans and leases held for investment by loan portfolio segment and class as of the dates indicated. Classified loans and leases are those with a credit risk rating of either substandard or doubtful.



	December 31, 2019
	Classified		Special Mention		Pass		Total
	(In thousands)
Real estate mortgage:
Commercial	$	33,535	$	30,070	$	4,139,082	$	4,202,687
Income producing and other residential	8,600		1,711		3,759,749		3,770,060
Total real estate mortgage	42,135		31,781		7,898,831		7,972,747
Real estate construction and land:
Commercial	364		—		1,082,004		1,082,368
Residential	—		1,429		1,654,005		1,655,434
Total real estate construction and land	364		1,429		2,736,009		2,737,802
Commercial:
Asset-based	32,223		38,936		3,677,248		3,748,407
Venture capital	35,316		74,813		2,069,293		2,179,422
Other commercial	65,261		174,785		1,527,621		1,767,667
Total commercial	132,800		288,534		7,274,162		7,695,496
Consumer	613		1,212		439,002		440,827
Total	$	175,912	$	322,956	$	18,348,004	$	18,846,872



	December 31, 2018
	Classified		Special Mention		Pass		Total
	(In thousands)
Real estate mortgage:
Commercial	$	57,734	$	74,785	$	4,691,779	$	4,824,298
Income producing and other residential	10,521		968		3,082,354		3,093,843
Total real estate mortgage	68,255		75,753		7,774,133		7,918,141
Real estate construction and land:
Commercial	442		7,041		905,100		912,583
Residential	—		1,527		1,319,546		1,321,073
Total real estate construction and land	442		8,568		2,224,646		2,233,656
Commercial:
Asset-based	45,957		48,338		3,211,126		3,305,421
Venture capital	28,731		77,588		1,932,429		2,038,748
Other commercial	92,526		50,136		1,917,764		2,060,426
Total commercial	167,214		176,062		7,061,319		7,404,595
Consumer	1,199		1,015		399,107		401,321
Total	$	237,110	$	261,398	$	17,459,205	$	17,957,713

Nonaccrual loans and leases and performing TDRs are considered impaired for reporting purposes. TDRs are a result of rate reductions, term extensions, fee concessions and debt forgiveness or a combination thereof. At December 31, 2019 and 2018, we had unfunded commitments related to TDRs of $1.2 million and $1.3 million.

The following table presents the composition of our impaired loans and leases held for investment, net of deferred fees, by loan portfolio segment as of the dates indicated:



	December 31, 2019						December 31, 2018
					Total						Total
	Nonaccrual				Impaired		Nonaccrual				Impaired
	Loans				Loans		Loans				Loans
	and		Performing		and		and		Performing		and
	Leases		TDRs		Leases		Leases		TDRs		Leases
	(In thousands)
Real estate mortgage	$	20,824	$	10,165	$	30,989	$	17,845	$	11,484	$	29,329
Real estate construction and land	364		1,470		1,834		442		5,420		5,862
Commercial	70,672		550		71,222		60,003		692		60,695
Consumer	493		72		565		1,043		105		1,148
Total	$	92,353	$	12,257	$	104,610	$	79,333	$	17,701	$	97,034

The following tables present information regarding our impaired loans and leases held for investment, net of deferred fees, by loan portfolio segment and class as of and for the years indicated:



	December 31,
	2019						2018
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
Impaired Loans and Leases	Investment		Balance		Allowance		Investment		Balance		Allowance
	(In thousands)
With An Allowance Recorded:
Real estate mortgage:
Commercial	$	479	$	479	$	71	$	1,736	$	1,648	$	170
Income producing and other residential	2,002		2,005		160		2,569		2,563		247
Commercial:
Venture capital	7,811		9,106		2,581		11,621		13,255		3,141
Other commercial	14,805		15,191		3,385		473		482		473
With No Related Allowance Recorded:
Real estate mortgage:
Commercial	$	21,264	$	36,247	$	—	$	17,783	$	32,035	$	—
Income producing and other residential	7,244		9,442		—		7,241		9,425		—
Real estate construction and land:
Commercial	1,834		1,887		—		5,862		5,870		—
Commercial:
Asset-based	30,162		52,139		—		32,324		38,100		—
Venture capital	5,270		44,468		—		8,678		41,335		—
Other commercial	13,174		32,242		—		7,599		25,740		—
Consumer	565		728		—		1,148		1,470		—
Total Loans and Leases With and
Without an Allowance Recorded:
Real estate mortgage	$	30,989	$	48,173	$	231	$	29,329	$	45,671	$	417
Real estate construction and land	1,834		1,887		—		5,862		5,870		—
Commercial	71,222		153,146		5,966		60,695		118,912		3,614
Consumer	565		728		—		1,148		1,470		—
Total	$	104,610	$	203,934	$	6,197	$	97,034	$	171,923	$	4,031



	Year Ended December 31,
	2019				2018				2017 ⁽²⁾
	Weighted		Interest		Weighted		Interest		Weighted		Interest
	Average		Income		Average		Income		Average		Income
Impaired Loans and Leases	Balance ⁽¹⁾		Recognized		Balance ⁽¹⁾		Recognized		Balance ⁽¹⁾		Recognized
	(In thousands)
With An Allowance Recorded:
Real estate mortgage:
Commercial	$	479	$	31	$	1,736	$	72	$	15,538	$	881
Income producing and other residential	2,001		58		2,199		75		2,787		55
Commercial:
Venture capital	7,008		—		9,449		—		10,228		—
Other commercial	3,710		—		35		—		20,329		60
Consumer	—		—		—		—		100		8
With No Related Allowance Recorded:
Real estate mortgage:
Commercial	$	16,252	$	230	$	15,714	$	236	$	89,554	$	2,648
Income producing and other residential	6,898		217		7,191		181		3,842		59
Real estate construction and land:
Commercial	1,834		118		5,460		383		5,690		306
Commercial:
Asset-based	28,829		—		32,324		—		31,388		—
Venture capital	4,735		—		689		—		2,860		—
Other commercial	7,303		75		6,286		98		3,404		84
Consumer	413		5		844		7		20		—
Total Loans and Leases With and
Without an Allowance Recorded:
Real estate mortgage	$	25,630	$	536	$	26,840	$	564	$	111,721	$	3,643
Real estate construction and land	1,834		118		5,460		383		5,690		306
Commercial	51,585		75		48,783		98		68,209		144
Consumer	413		5		844		7		120		8
Total	$	79,462	$	734	$	81,927	$	1,052	$	185,740	$	4,101

_________________________


(1)	For loans and leases reported as impaired at December 31, 2019, 2018, and 2017, amounts were calculated based on the period of time such loans and leases were impaired during the reported period.


(2)	Excludes PCI loans. See Note 1(h). Nature of Operations and Summary of Significant Accounting Policies.

The following table presents our troubled debt restructurings of loans held for investment and defaulted troubled debt restructurings of loans held for investment by loan portfolio segment and class for the years indicated:



						Troubled Debt Restructurings
	Troubled Debt Restructurings					That Subsequently Defaulted⁽¹⁾
		Pre-Modification		Post-Modification
	Number	Outstanding		Outstanding		Number
	of	Recorded		Recorded		of	Recorded
	Loans	Investment		Investment		Loans	Investment⁽¹⁾
	(Dollars In thousands)
Year Ended December 31, 2019
Real estate mortgage:
Commercial	3	$	121	$	—	—	$	—
Income producing and other residential	9	1,591		1,591		1	254
Commercial:
Asset-based	5	3,082		3,082		—	—
Venture capital	14	19,017		19,155		—	—
Other commercial	20	3,835		3,835		4	154
Total	51	$	27,646	$	27,663	5	$	408
Year Ended December 31, 2018
Real estate mortgage:
Commercial	10	$	17,181	$	2,604	—	$	—
Income producing and other residential	10	3,262		2,203		—	—
Commercial:
Asset-based ⁽²⁾	4	28,947		33,947		—	—
Venture capital	14	37,416		36,919		—	—
Other commercial	19	14,399		14,027		—	—
Consumer	3	673		673		—	—
Total	60	$	101,878	$	90,373	—	$	—
Year Ended December 31, 2017
Real estate mortgage:
Commercial	5	$	2,527	$	2,463	—	$	—
Income producing and other residential	8	1,328		489		—	—
Real estate construction and land:
Residential	1	362		—		—	—
Commercial:
Asset-based	5	4,219		4,219		—	—
Venture capital	11	29,733		29,733		—	—
Other commercial	19	31,471		22,236		1	1
Consumer	1	97		97		—	—
Total	50	$	69,737	$	59,237	1	$	1

_________________________

(1)

The population of defaulted TDRs for the period indicated includes only those loans restructured during the preceding 12-month period. For example, for the year ended December 31, 2019, the population of defaulted TDRs includes only those loans restructured after December 31, 2018. The table excludes defaulted TDRs in those classes for which the recorded investment was zero at the end of the period.


(2)	One commercial asset-based loan with a pre-modification balance of $27.3 million and a post-modification balance of $32.3 million was previously restructured in December 2017.

Leases Receivable

We provide equipment financing to our customers primarily with operating and direct financing leases. For direct financing leases, lease receivables are recorded on the balance sheet but the leased equipment is not, although we generally retain legal title to the leased equipment until the end of each lease. Direct financing leases are stated at the net amount of minimum lease payments receivable, plus any unguaranteed residual value, less the amount of unearned income and net acquisition discount at the reporting date. Direct lease origination costs are amortized using the effective interest method over the life of the leases. Direct financing leases are subject to our accounting for allowance for loan and lease losses. See Note 10. Leases for information regarding operating leases where we are the lessor.

The following table provides the components of leases receivable income for the period indicated:



	Year Ended
	December 31, 2019
	(In thousands)
Component of leases receivable income:
Interest income on net investments in leases	$	11,061

The following table presents the components of leases receivable as of the date indicated:



	December 31, 2019
	(In thousands)
Net investment in sales type and direct financing leases:
Lease payments receivable	$	147,729
Unguaranteed residual assets	20,806
Deferred fees and other	655
Aggregate net investment in leases	$	169,190

The following table presents maturities of leases receivable as of the date indicated:



	December 31, 2019
	(In thousands)
Year Ending December 31,
2020	$	66,113
2021	51,735
2022	20,562
2023	12,491
2024	8,856
2025 and thereafter	1,015
Total undiscounted cash flows	160,772
Less: Unearned income	(13,043		)
Present value of lease payments	$	147,729

Allowance for Loan and Lease Losses

The following tables present a summary of the activity in the allowance for loan and lease losses on loans and leases held for investment by loan portfolio segment for the years indicated:



	Year Ended December 31, 2019
				Real Estate
	Real Estate			Construction
	Mortgage			and Land		Commercial			Consumer			Total
	(In thousands)
Allowance for Loan and lease losses:
Balance, beginning of year	$	46,021		$	28,209	$	56,360		$	1,882		$	132,472
Charge-offs	(997		)	—		(30,426		)	(839		)	(32,262		)
Recoveries	983			—		14,397			195			15,575
Net charge-offs	(14		)	—		(16,029		)	(644		)	(16,687		)
(Negative provision) provision	(1,432		)	2,335		21,197			900			23,000
Balance, end of year	$	44,575		$	30,544	$	61,528		$	2,138		$	138,785

Ending Allowance by
Impairment Methodology:
Individually evaluated for impairment	$	231		$	—	$	5,966		$	—		$	6,197
Collectively evaluated for impairment	$	44,344		$	30,544	$	55,562		$	2,138		$	132,588

Ending Loans and Leases by
Impairment Methodology:
Individually evaluated for impairment	$	28,038		$	1,834	$	69,674		$	—		$	99,546
Collectively evaluated for impairment	7,944,709			2,735,968		7,625,822			440,827			18,747,326
Ending balance	$	7,972,747		$	2,737,802	$	7,695,496		$	440,827		$	18,846,872



	Year Ended December 31, 2018
				Real Estate
	Real Estate			Construction
	Mortgage			and Land		Commercial			Consumer			Total
	(In thousands)
Allowance for Loan and lease losses:
Balance, beginning of year ⁽¹⁾	$	40,051		$	13,055	$	84,022		$	2,328		$	139,456
Charge-offs	(8,190		)	—		(50,481		)	(371		)	(59,042		)
Recoveries	2,350			195		12,566			173			15,284
Net (charge-offs) recoveries	(5,840		)	195		(37,915		)	(198		)	(43,758		)
Provision (negative provision)	11,810			14,959		10,253			(248		)	36,774
Balance, end of year	$	46,021		$	28,209	$	56,360		$	1,882		$	132,472

Ending Allowance by
Impairment Methodology:
Individually evaluated for impairment	$	417		$	—	$	3,614		$	—		$	4,031
Collectively evaluated for impairment	$	45,604		$	28,209	$	52,746		$	1,882		$	128,441

Ending Loans and Leases by
Impairment Methodology:
Individually evaluated for impairment	$	26,473		$	5,862	$	59,288		$	444		$	92,067
Collectively evaluated for impairment	7,891,668			2,227,794		7,345,307			400,877			17,865,646
Ending balance	$	7,918,141		$	2,233,656	$	7,404,595		$	401,321		$	17,957,713

______________________________________


(1)	The allowance for loan losses related to PCI loans of $6.4 million as of December 31, 2017 is reflected in the beginning balance of the allowance for loan and lease losses for the year ended December 31, 2018.

Allowance for Credit Losses

The allowance for credit losses is the combination of the allowance for loan and lease losses and the reserve for unfunded loan commitments. The reserve for unfunded loan commitments is included within "Accrued interest payable and other liabilities" on the consolidated balance sheets.

The following tables present a summary of the activity in the allowance for loan and lease losses and reserve for unfunded loan commitments for the years indicated:



	Year Ended December 31, 2019
	Allowance for			Reserve for			Total
	Loan and			Unfunded Loan			Allowance for
	Lease Losses			Commitments			Credit Losses
	(In thousands)
Balance, beginning of year	$	132,472		$	36,861		$	169,333
Charge-offs	(32,262		)	—			(32,262		)
Recoveries	15,575			—			15,575
Net charge-offs	(16,687		)	—			(16,687		)
Provision (negative provision)	23,000			(1,000		)	22,000
Balance, end of year	$	138,785		$	35,861		$	174,646



	Year Ended December 31, 2018
	Allowance for			Reserve for		Total
	Loan and			Unfunded Loan		Allowance for
	Lease Losses			Commitments		Credit Losses
	(In thousands)
Balance, beginning of year ⁽¹⁾	$	139,456		$	28,635	$	168,091
Charge-offs	(59,042		)	—		(59,042		)
Recoveries	15,284			—		15,284
Net charge-offs	(43,758		)	—		(43,758		)
Provision	36,774			8,226		45,000
Balance, end of year	$	132,472		$	36,861	$	169,333

_______________________________________

(1)

The allowance for loan losses related to PCI loans of $6.4 million as of December 31, 2017 is reflected in the beginning balance of the allowance for loan and lease losses for the year ended December 31, 2018.

Leases policy

The Company adopted ASU 2016-02, "Leases (Topic 842)," effective January 1, 2019, and applied the guidance to all leases within the scope of ASC Topic 842, "Leases," as of that date. We have adopted the guidance using the optional transition method under ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” and recognized a cumulative effect adjustment to increase retained earnings by $938,000, net of taxes, without restating prior periods and applying the requirements of the new standard prospectively.

We determine if an arrangement is a lease at inception by assessing whether there is an identified asset, and whether the contract conveys the right to control the use of the identified asset for a period of time in exchange for consideration. ASC Topic 842 also requires a lessee to classify a lease as either finance or operating. As of December 31, 2019, we only had operating leases related to our leased facilities, which consisted of 72 full-service branch offices and 75 other offices.

ROU assets represent a lessee's right to use an underlying asset for the lease term and lease liabilities represent a lessee's obligation to make lease payments arising from the lease. On January 1, 2019, ROU assets and operating lease liabilities were initially recognized based on the present value of future minimum lease payments over the remaining lease terms. We used our incremental borrowing rates on January 1, 2019 to determine the present value of future payments. The ROU assets also include any prepaid lease payments and initial direct costs incurred less any lease incentives received. We amortize the operating lease ROU assets and record interest expense on the operating lease liabilities over the lease terms.

Our leases have remaining terms ranging from one to 27 years. Short-term leases (initial term of less than 12 months) are not recorded on the balance sheet and lease expense is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, which are accounted for as a single lease component. Most leases include one or more options to renew, with renewal terms that can extend the lease from one to ten years. The exercise of lease renewal options is at our sole discretion. Some of our leases also include termination options. We have determined that we do not meet the reasonably certain threshold to exercise any renewal or termination options, therefore our lease terms do not reflect any optional periods. We rent or sublease certain office space to third parties. Our subleases consist of operating leases for offices that we have fully or partially vacated.

Certain of our lease agreements also include rental payments that adjust periodically based on changes in the CPI. We initially measured our lease payments using the index at the lease commencement date. Subsequent increases in the CPI are treated as variable lease payments and recognized in the period in which the obligation for those payments is incurred. The ROU assets and lease liabilities are not re-measured as a result of changes in the CPI. Our lease agreements do not contain any purchase options, residual value guarantees, or restrictive covenants.

Effect on the Financial Statements

Description

or Other Significant Matters

ASU 2016-13, "Measurement of Credit Losses on Financial Instruments,"
ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses,”
ASU 2019-05, "Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief," and ASU 2019-11, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses"

This Update changes the accounting and recognition of credit losses and impairment of financial assets recorded at amortized cost. Under the CECL model, the standard requires immediate recognition of estimated credit losses expected to occur over the remaining life of the asset. The forward-looking concept of CECL requires loss estimates for the remaining estimated life of the financial assets using historical experience, current conditions and reasonable and supportable forecasts. The Update modifies the other-than-temporary impairment (OTTI) model for AFS debt securities to require an allowance for credit impairment instead of a direct write-down, which allows for reversal of credit improvements in future periods.
In addition, the Update eliminates the existing guidance for PCI loans, but requires an allowance for purchased financial assets with credit deterioration.
Receivables arising from operating leases are not within the scope of CECL. The Update must be applied using the modified retrospective method with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. A prospective transition approach is required for available-for-sale debt securities for which an OTTI had been recognized before the adoption date. Early adoption is permitted.

January 1, 2020

The Company established a multidisciplinary project team in 2016 to work on the implementation of CECL. During this implementation project, we developed a detailed implementation plan, selected a new software solution, reached accounting decisions on various matters, developed econometric models for our reasonable and supportable ("R&S") forecast period, selected key assumptions used in the economic regression models of Real GDP, unemployment rates, CRE Price Index and BBB spreads, developed a prepayment model and framework based on our historical prepayment experience, completed the validation of new models, redesigned our qualitative framework, and conducted five preliminary calculations during 2019. Key decisions made in our planned approach under CECL include the use of a probability of default/loss given default methodology, the use of a single scenario based on the Moody's consensus forecast for our economic forecast over the R&S period, an R&S forecast period of four quarters, a post R&S reversion period of two quarters using a straight-line approach, and a historical loss period of at least 40 quarters among other decisions. As part of performing our preliminary calculations, we performed sensitivity analyses and other steps to assess modeling assumptions and results, while also updating our disclosures, internal controls, policies, and procedures. We adopted this new standard on January 1, 2020 and, using our December 31, 2019 loan and lease balances and other information, calculated the day one impact and transition adjustment to be an increase in our allowance for credit losses of approximately $7.3 million, or 4.2%. The day one impact is a decrease to retained earnings of $5.3 million, net of tax, or a decrease of approximately two basis points to our capital ratios. The impact reflects our loan composition, which is primarily a short-duration commercial portfolio. The calculation of the allowance for credit losses under CECL is sensitive and highly dependent on loan composition, model methodologies, the macroeconomic conditions, economic forecasts, model assumptions, and other decisions and judgments made by management. We expect the provisions for credit losses to be susceptible to more volatility post-adoption due to these same factors and influenced by the volume of new loan originations, loan payoffs, and the seasoning of the loan portfolio.