Covered Loans Receivable |
Covered Loans Receivable The Company acquired loans through FDIC-assisted transactions which are covered by FDIC shared-loss agreements. These loans are referred to as "covered loans." Covered loans were acquired in the Cowlitz acquisition in July 2010 and with the Washington Banking Merger in May 2014. Included in the covered loans acquired from Washington Banking were loans Washington Banking had acquired from City Bank in April 2010 and North County Bank in September 2010. As part of the Washington Banking Merger, the shared-loss agreements with these acquisitions were transferred to Heritage Bank. Loans purchased with evidence of credit deterioration since origination for which it is probable that not all contractually required payments will be collected are accounted for under FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality and are identified as PCI loans. Loans purchased that are not accounted for under FASB ASC 310-30 are accounted for under FASB ASC 310-20, Receivables—Nonrefundable Fees and Other Costs. Disclosures related to the Company’s recorded investment in covered loans receivable generally exclude accrued interest receivable because it is insignificant. (a) Risk Management The Company categorizes covered loans in the same four segments as the noncovered portfolio: commercial business, real estate construction and land development, one-to-four family residential and consumer. The recorded investment of covered loans receivable at December 31, 2014 and December 31, 2013 consisted of the following portfolio segments and classes: | | | | | | | | | | December 31, 2014 | | December 31, 2013 | | (In thousands) | Commercial business: | | | | Commercial and industrial | $ | 19,110 |
| | $ | 14,690 |
| Owner-occupied commercial real estate | 59,244 |
| | 24,366 |
| Non-owner occupied commercial real estate | 26,879 |
| | 14,625 |
| Total commercial business | 105,233 |
| | 53,681 |
| One-to-four family residential | 5,990 |
| | 4,777 |
| Real estate construction and land development: | | | | One-to-four family residential | 2,446 |
| | 1,556 |
| Five or more family residential and commercial properties | 3,560 |
| | — |
| Total real estate construction and land development | 6,006 |
| | 1,556 |
| Consumer | 8,971 |
| | 3,740 |
| Gross covered loans receivable | 126,200 |
| | 63,754 |
| Allowance for loan losses | (5,576 | ) | | (6,167 | ) | Covered loans receivable, net | $ | 120,624 |
| | $ | 57,587 |
|
At December 31, 2014 and December 31, 2013, the recorded investment balance of loans which are no longer covered under the FDIC shared-loss agreements, but are included in the covered loan table above as they are included in the loan pool established at the time of acquisition, was $872,000 and $2.6 million, respectively. (b) Credit Quality Indicators The following tables present the recorded invested balance of the covered loans receivable by credit quality indicator as of December 31, 2014 and December 31, 2013. | | | | | | | | | | | | | | | | | | | | | | December 31, 2014 | | Pass | | OAEM | | Substandard | | Doubtful | | Total | | (In thousands) | Commercial business: | | | | | | | | | | Commercial and industrial | $ | 11,297 |
| | $ | 131 |
| | $ | 5,442 |
| | $ | 2,240 |
| | $ | 19,110 |
| Owner-occupied commercial real estate | 40,357 |
| | 4,957 |
| | 13,583 |
| | 347 |
| | 59,244 |
| Non-owner occupied commercial real estate | 9,656 |
| | 40 |
| | 17,183 |
| | — |
| | 26,879 |
| Total commercial business | 61,310 |
| | 5,128 |
| | 36,208 |
| | 2,587 |
| | 105,233 |
| One-to-four family residential | 5,414 |
| | 425 |
| | 151 |
| |
|
| | 5,990 |
| Real estate construction and land development: | | | | | | | | | | One-to-four family residential | 2,178 |
| | — |
| | 268 |
| | — |
| | 2,446 |
| Five or more family residential and commercial properties | 1,758 |
| | — |
| | 1,802 |
| | — |
| | 3,560 |
| Total real estate construction and land development | 3,936 |
| | — |
| | 2,070 |
| | — |
| | 6,006 |
| Consumer | 7,030 |
| | — |
| | 1,941 |
| | — |
| | 8,971 |
| Gross covered loans receivable | $ | 77,690 |
| | $ | 5,553 |
| | $ | 40,370 |
| | $ | 2,587 |
| | $ | 126,200 |
|
| | | | | | | | | | | | | | | | | | | | | | December 31, 2013 | | Pass | | OAEM | | Substandard | | Doubtful | | Total | | (In thousands) | Commercial business: | | | | | | | | | | Commercial and industrial | $ | 9,516 |
| | $ | 3,887 |
| | $ | 702 |
| | $ | 585 |
| | $ | 14,690 |
| Owner-occupied commercial real estate | 21,084 |
| | 2,318 |
| | 708 |
| | 256 |
| | 24,366 |
| Non-owner occupied commercial real estate | 6,534 |
| | 55 |
| | 4,631 |
| | 3,405 |
| | 14,625 |
| Total commercial business | 37,134 |
| | 6,260 |
| | 6,041 |
| | 4,246 |
| | 53,681 |
| One-to-four family residential | 3,739 |
| | 882 |
| | 156 |
| | — |
| | 4,777 |
| Real estate construction and land development: | | | | | | | | | | One-to-four family residential | 698 |
| | — |
| | 858 |
| | — |
| | 1,556 |
| Five or more family residential and commercial properties | — |
| | — |
| | — |
| | — |
| | — |
| Total real estate construction and land development | 698 |
| | — |
| | 858 |
| | — |
| | 1,556 |
| Consumer | 3,116 |
| | 106 |
| | 518 |
| | — |
| | 3,740 |
| Gross covered loans receivable | $ | 44,687 |
| | $ | 7,248 |
| | $ | 7,573 |
| | $ | 4,246 |
| | $ | 63,754 |
|
(c) Nonaccrual Loans The recorded investment balance of covered nonaccrual loans, segregated by segments and classes of loans, were as follows as of December 31, 2014 and December 31, 2013: | | | | | | | | | | December 31, 2014 | | December 31, 2013 | | (In thousands) | Commercial business: | | | | Commercial and industrial | $ | 2,321 |
| | $ | — |
| Owner-occupied commercial real estate | 1,132 |
| | — |
| Non-owner-occupied commercial real estate | 424 |
| | — |
| Total commercial business | 3,877 |
| | — |
| Real estate construction and land development: | | | | One-to-four family residential | 179 |
| | — |
| Consumer | 6 |
| | 7 |
| Gross covered nonaccrual loans | $ | 4,062 |
| | $ | 7 |
|
Covered PCI loans are not included in the nonaccrual table above because the loans are accounted for under ASC 310-30, whereby accretable yield is calculated based on a loan's expected cash flow even if the loan is not performing under its contractual terms. (d) Past Due Loans The balances of covered past due loans, segregated by segments and classes of loans, as of December 31, 2014 and December 31, 2013 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2014 | | 30-89 Days | | 90 Days or Greater | | Total Past Due | | Current | | Total | | 90 Days or More and Still Accruing (1) | | (In thousands) | Commercial business: | | | | | | | | | | | | Commercial and industrial | $ | 2,262 |
| | $ | 1,163 |
| | $ | 3,425 |
| | $ | 15,685 |
| | $ | 19,110 |
| | $ | — |
| Owner-occupied commercial real estate | 645 |
| | 2,680 |
| | 3,325 |
| | 55,919 |
| | 59,244 |
| | — |
| Non-owner occupied commercial real estate | 1,713 |
| | 456 |
| | 2,169 |
| | 24,710 |
| | 26,879 |
| | — |
| Total commercial business | 4,620 |
| | 4,299 |
| | 8,919 |
| | 96,314 |
| | 105,233 |
| | — |
| One-to-four family residential | 112 |
| | — |
| | 112 |
| | 5,878 |
| | 5,990 |
| | — |
| Real estate construction and land development: | | | | | | | | | | | | One-to-four family residential | 178 |
| | 90 |
| | 268 |
| | 2,178 |
| | 2,446 |
| | — |
| Five or more family residential and commercial properties | — |
| | 220 |
| | 220 |
| | 3,340 |
| | 3,560 |
| | — |
| Total real estate construction and land development | 178 |
| | 310 |
| | 488 |
| | 5,518 |
| | 6,006 |
| | — |
| Consumer | 263 |
| | 727 |
| | 990 |
| | 7,981 |
| | 8,971 |
| | — |
| Gross covered loans receivable | $ | 5,173 |
| | $ | 5,336 |
| | $ | 10,509 |
| | $ | 115,691 |
| | $ | 126,200 |
| | $ | — |
|
| | (1) | Excludes covered PCI loans. |
| | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2013 | | 30-89 Days | | 90 Days or Greater | | Total Past Due | | Current | | Total | | 90 Days or More and Still Accruing (1) | | (In thousands) | Commercial business: | | | | | | | | | | | | Commercial and industrial | $ | 726 |
| | $ | 1,156 |
| | $ | 1,882 |
| | $ | 12,808 |
| | $ | 14,690 |
| | $ | — |
| Owner-occupied commercial real estate | 28 |
| | 147 |
| | 175 |
| | 24,191 |
| | 24,366 |
| | — |
| Non-owner occupied commercial real estate | — |
| | 3,540 |
| | 3,540 |
| | 11,085 |
| | 14,625 |
| | — |
| Total commercial business | 754 |
| | 4,843 |
| | 5,597 |
| | 48,084 |
| | 53,681 |
| | — |
| One-to-four family residential | 113 |
| | — |
| | 113 |
| | 4,664 |
| | 4,777 |
| | — |
| Real estate construction and land development: | | | | | | | | | | | | One-to-four family residential | 213 |
| | 644 |
| | 857 |
| | 699 |
| | 1,556 |
| | — |
| Five or more family residential and commercial properties | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Total real estate construction and land development | 213 |
| | 644 |
| | 857 |
| | 699 |
| | 1,556 |
| | — |
| Consumer | 67 |
| | 78 |
| | 145 |
| | 3,595 |
| | 3,740 |
| | — |
| Gross covered loans receivable | $ | 1,147 |
| | $ | 5,565 |
| | $ | 6,712 |
| | $ | 57,042 |
| | $ | 63,754 |
| | $ | — |
|
| | (1) | Excludes covered PCI loans. |
(e) Impaired Loans A covered loan, not initially classified as PCI, generally becomes impaired when classified as nonaccrual or when its modification results in a TDR. Covered impaired loans as of December 31, 2014 and December 31, 2013 are set forth in the following tables. | | | | | | | | | | | | | | | | | | | | | | December 31, 2014 | | Recorded Investment With No Specific Valuation Allowance | | Recorded Investment With Specific Valuation Allowance | | Total Recorded Investment | | Unpaid Contractual Principal Balance | | Related Specific Valuation Allowance | | (In thousands) | Commercial business: | | | | | | | | | | Commercial and industrial | $ | 2,240 |
| | $ | 94 |
| | $ | 2,334 |
| | $ | 3,696 |
| | $ | 9 |
| Owner-occupied commercial real estate | — |
| | 1,132 |
| | 1,132 |
| | 1,156 |
| | 295 |
| Non-owner occupied commercial real estate | — |
| | 424 |
| | 424 |
| | 440 |
| | 66 |
| Total commercial business | 2,240 |
| | 1,650 |
| | 3,890 |
| | 5,292 |
| | 370 |
| Real estate construction and land development: | | | | | | | | | | One-to-four family residential | — |
| | 179 |
| | 179 |
| | 182 |
| | 51 |
| Total real estate construction and land development | — |
| | 179 |
| | 179 |
| | 182 |
| | 51 |
| Consumer | — |
| | 6 |
| | 6 |
| | 8 |
| | 2 |
| Gross covered impaired loans | $ | 2,240 |
| | $ | 1,835 |
| | $ | 4,075 |
| | $ | 5,482 |
| | $ | 423 |
|
| | | | | | | | | | | | | | | | | | | | | | December 31, 2013 | | Recorded Investment With No Specific Valuation Allowance | | Recorded Investment With Specific Valuation Allowance | | Total Recorded Investment | | Unpaid Contractual Principal Balance | | Related Specific Valuation Allowance | | (In thousands) | Commercial business: | | | | | | | | | | Commercial and industrial | $ | 10 |
| | $ | 3,751 |
| | $ | 3,761 |
| | $ | 3,761 |
| | $ | 629 |
| Total commercial business | 10 |
| | 3,751 |
| | 3,761 |
| | 3,761 |
| | 629 |
| One-to-four family residential | — |
| | 450 |
| | 450 |
| | 423 |
| | 31 |
| Consumer | 7 |
| | — |
| | 7 |
| | 8 |
| | — |
| Gross covered impaired loans | $ | 17 |
| | $ | 4,201 |
| | $ | 4,218 |
| | $ | 4,192 |
| | $ | 660 |
|
The average recorded investment of covered impaired loans for the years ended December 31, 2014 and 2013 are set forth in the following table. | | | | | | | | | | | | | | | | Years Ended December 31, | | | 2014 | | 2013 | | 2012 | | | (In thousands) | Commercial business: | | | | | | | Commercial and industrial | | $ | 3,421 |
| | $ | 1,484 |
| | $ | 21 |
| Owner-occupied commercial real estate | | 367 |
| | — |
| | — |
| Non-owner occupied commercial real estate | | 171 |
| | — |
| | — |
| Total commercial business | | 3,959 |
| | 1,484 |
| | 21 |
| One-to-four family residential | | 90 |
| | 459 |
| | 187 |
| Real estate construction and land development: | | | | | | | One-to-four family residential | | 36 |
| | — |
| | — |
| Total real estate construction and land development | | 36 |
| | — |
| | — |
| Consumer | | 7 |
| | 20 |
| | 26 |
| Gross covered impaired loans | | $ | 4,092 |
| | $ | 1,963 |
| | $ | 234 |
|
For the years ended December 31, 2014, 2013 and 2012, no interest income was recognized subsequent to a covered loan’s classification as nonaccrual. For the years ended December 31, 2014, 2013 and 2012, the Bank recorded $5,000, $16,000 and $7,000, respectively, of interest income related to covered performing TDR loans.
(f) Troubled Debt Restructured Loans The recorded investment balance and related allowance for loan losses of covered performing and covered nonaccrual TDRs as of December 31, 2014 and December 31, 2013 were as follows: | | | | | | | | | | | | | | | | | | December 31, 2014 | | December 31, 2013 | | Performing TDRs | | Nonaccrual TDRs | | Performing TDRs | | Nonaccrual TDRs | | (In thousands) | Covered TDRs | $ | 10,289 |
| | $ | 2,246 |
| | $ | 4,211 |
| | $ | 7 |
| Allowance for loan losses on covered TDRs | 1 |
| | 2 |
| | 660 |
| | — |
|
There were no unfunded commitments related to credits classified as covered TDRs at December 31, 2014 and December 31, 2013. Covered loans that were modified as TDRs during the years ended December 31, 2014 and 2013 are set forth in the following table: | | | | | | | | | | | | | | | | Years Ended December 31, | | 2014 | | 2013 | | Number of Contracts (1) | | Outstanding Principal Balance (1)(2) | | Number of Contracts (1) | | Outstanding Principal Balance (1)(2) | | (Dollars in thousands) | Commercial business: | | | | | | | | Commercial and industrial | 7 |
| | $ | 3,394 |
| | 3 |
| | $ | 3,792 |
| Owner-occupied commercial real estate | 2 |
| | 1,133 |
| | — |
| | — |
| Non-owner occupied commercial real estate | 2 |
| | 7,561 |
| | — |
| | — |
| Total commercial business | 11 |
| | 12,088 |
| | 3 |
| | 3,792 |
| One-to-four family residential | — |
| | — |
| | — |
| | — |
| Real estate construction and land development: | | | | | | | | One-to-four family residential | — |
| | — |
| | — |
| | — |
| Five or more family residential and commercial properties | 1 |
| | 428 |
| | — |
| | — |
| Total real estate construction and land development | 1 |
| | 428 |
| | — |
| | — |
| Consumer | — |
| | — |
| | — |
| | — |
| Total covered TDRs | 12 |
| | $ | 12,516 |
| | 3 |
| | $ | 3,792 |
|
| | (1) | Number of contracts and outstanding principal balance represent loans which have balances as of year end as certain loans may have been paid-down or charged-off during the years ended December 31, 2014 and 2013. |
| | (2) | Includes subsequent payments after modifications and reflects the balance as of period end. As the Bank did not forgive any principal or interest balance as part of the loan modification, the Bank’s recorded investment in each loan at the date of modification (pre-modification) did not change as a result of the modification (post-modification). |
Of the twelve covered loans modified as TDRs during the year ended December 31, 2014, eleven loans totaling $10.3 million were related to PCI loans acquired in the Washington Banking Merger. There was no allowance for loan losses at December 31, 2014 on these modified loans as the recorded investment was less than the estimated net present value of future cash flows. Four of these modified loans totaling $7.7 million at December 31, 2014 were modified as a result of bankruptcy rulings and the courts dictated the future payment terms. One covered TDR totaling $2.2 million at December 31, 2014 was modified during both the years ended December 31, 2014 and 2013 because the loan's maturity date was extended in each modification. The Bank provided for a shorter maturity date than it expected to receive the cash flows to more closely monitor the borrower. At December 31, 2014, this loan did not have a specific valuation allowance as the loan had been charged-down to the net realizable value during fourth quarter 2014. The other two loans modified as TDRs during the year ended December 31, 2013 also had maturity date extensions. These two loans have outstanding principal balances of $13,000 and specific valuation of $1,000 at December 31, 2014. There were no covered loans modified during the previous twelve months ended December 31, 2014 and December 31, 2013 that subsequently defaulted during the years ended December 31, 2014 and 2013.
(g) Covered Purchased Credit Impaired Loans The Company acquired covered loans which the Bank accounts for under FASB ASC 310-30 as they were deemed PCI at the time of acquisition. The following tables reflect the outstanding principal balance and recorded investment at December 31, 2014 and December 31, 2013 of the covered PCI loans: | | | | | | | | | | | | | | | | | | December 31, 2014 | | December 31, 2013 | | Outstanding Principal | | Recorded Investment | | Outstanding Principal | | Recorded Investment | | (In thousands) | Commercial business: | | | | | | | | Commercial and industrial | $ | 9,635 |
| | $ | 7,134 |
| | $ | 10,608 |
| | $ | 8,680 |
| Owner-occupied commercial real estate | 23,071 |
| | 20,666 |
| | 11,538 |
| | 10,923 |
| Non-owner occupied commercial real estate | 20,607 |
| | 20,257 |
| | 10,611 |
| | 12,187 |
| Total commercial business | 53,313 |
| | 48,057 |
| | 32,757 |
| | 31,790 |
| One-to-four family residential | 3,837 |
| | 3,478 |
| | 3,966 |
| | 3,530 |
| Real estate construction and land development: | | | | | | | | One-to-four family residential | 103 |
| | 1,308 |
| | 1,298 |
| | 1,556 |
| Five or more family residential and commercial properties | 2,140 |
| | 1,802 |
| | — |
| | — |
| Total real estate construction and land development | 2,243 |
| | 3,110 |
| | 1,298 |
| | 1,556 |
| Consumer | 2,945 |
| | 2,717 |
| | 2,022 |
| | 2,000 |
| Gross covered PCI loans | $ | 62,338 |
| | $ | 57,362 |
| | $ | 40,043 |
| | $ | 38,876 |
|
The Bank has the option to modify covered PCI loans; however, modifying the loan may terminate the FDIC shared-loss coverage on those loans. At December 31, 2014 and December 31, 2013, the recorded investment balance of covered PCI loans which are no longer covered under the FDIC shared-loss agreements was $476,000 and $1.7 million, respectively. The Bank continues to report these loans in the covered portfolio as they are in a pool and they continue to be accounted for under FASB ASC 310-30. The FDIC indemnification asset has been adjusted to reflect the change in the loan status.
(h) Accretable Yield The following table summarizes the accretable yield on the covered PCI loans resulting from the Cowlitz Acquisition and Washington Banking Merger for the years ended December 31, 2014, 2013 and 2012. | | | | | | | | | | | | | | Years Ended December 31, | | 2014 | | 2013 | | 2012 | | (In thousands) | Balance at the beginning of the year | $ | 9,535 |
| | $ | 14,286 |
| | $ | 19,912 |
| Accretion | (3,749 | ) | | (4,210 | ) | | (6,679 | ) | Disposal and other | (1,718 | ) | | (4,902 | ) | | (1,140 | ) | Change in accretable yield (1) | 4,452 |
| | 4,361 |
| | 2,193 |
| Balance at the end of the year | $ | 8,520 |
| | $ | 9,535 |
| | $ | 14,286 |
|
| | (1) | Includes accretable difference at acquisition. |
On the May 1, 2014 merger date of the Washington Banking Merger, the contractual cash flows on covered PCI loans acquired in the Washington Banking Merger were $75.1 million and the expected cash flows were $52.2 million, resulting in a $22.9 million non-accretable difference. The fair value was estimated at $48.7 million, resulting in a $3.5 million accretable yield which is included in the table above as a change in accretable yield for the year ended December 31, 2014. The contractual cash flows on the covered non-PCI loans were $70.3 million and the expected cash flows were $66.5 million, resulting in $3.8 million of cash flows not expected to be collected. The fair value of the covered non-PCI loans acquired in the Washington Banking Merger at May 1, 2014 was $58.4 million. |