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Business Combinations
9 Months Ended
Sep. 30, 2018
Business Combinations [Abstract]  
Business Combinations
Business Combinations
During the nine months ended September 30, 2018, the Company completed the acquisitions of Puget Sound Bancorp and Premier Commercial Bancorp. There were no acquisitions completed during the nine months ended September 30, 2017.
Puget Sound:
On July 26, 2017, the Company, along with the Bank, and Puget Sound Bancorp, Inc. and its wholly owned subsidiary bank, Puget Sound Bank, jointly announced the signing of a definitive agreement. The Puget Sound Merger was effective on January 16, 2018. As of the acquisition date, Puget Sound merged into Heritage and Puget Sound Bank merged into Heritage Bank.
Pursuant to the terms of the Puget Sound Merger, all outstanding Puget Sound restricted stock awards became immediately vested on the acquisition date of the Puget Sound Merger and Puget Sound shareholders received 1.1688 shares of Heritage common stock per share of Puget Sound stock. Heritage issued an aggregate of 4,112,258 shares of its common stock based on the January 12, 2018 closing price of Heritage Common stock of $31.80 for total fair value of common shares issued of $130.8 million and paid cash of $3,000 for fractional shares in the transaction for total consideration paid of $130.8 million. Total consideration includes $851,000 representing 26,741 shares which were forfeited by the Puget Sound shareholders to pay applicable taxes.
During the three and nine months ended September 30, 2018, the Company incurred acquisition-related costs of approximately $67,000 and $5.1 million, respectively, for the Puget Sound Merger. The Company incurred acquisition related costs of $387,000 for the three and nine months ended September 30, 2017 for the Puget Sound Merger.
Premier Commercial:
On March 24, 2018, the Company, along with the Bank, and Premier Commercial Bancorp and its wholly owned subsidiary bank, Premier Community Bank, jointly announced the signing of a definitive agreement. The Premier Merger was effective on July 2, 2018. As of the acquisition date, Premier merged into Heritage and Premier Commercial Bank merged into Heritage Bank.
Pursuant to the terms of the Premier Merger, Premier Commercial shareholders received 0.4863 shares of Heritage common stock in exchange for each share of Premier Commercial common stock based on the closing date price per share of Heritage common stock on June 29, 2018 of $34.85. Heritage issued an aggregate of 2,848,579 shares of its common stock and paid cash of $2,000 for fractional shares in the transaction for total consideration paid of $99.3 million.
During the three and nine months ended September 30, 2018, the Company incurred acquisition-related costs of approximately $3.3 million and $4.0 million, respectively, for the Premier Merger. The Company did not incur acquisition related costs for the three and nine months ended September 30, 2017 for the Premier Merger.
Business Combination Accounting:
The Premier Merger and Puget Sound Merger resulted in $53.3 million and $68.5 million, respectively, of goodwill. This goodwill is not deductible for tax purposes.
The primary reason for the Premier and Puget Mergers was to create depth in the Company's geographic footprint consistent with its ongoing growth strategy, focused heavily on metro markets, and to achieve operational scale and realize efficiencies of a larger combined organization. The mergers constitute business acquisitions as defined by FASB ASC 805, Business Combinations. FASB ASC 805 establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired and the liabilities assumed. Heritage was considered the acquirer in these transactions. Accordingly, the preliminary estimates of fair values of Premier Commercial and Puget Sound assets, including the identifiable intangible assets, and the assumed liabilities in the Premier Merger and Puget Sound Merger were measured and recorded as of July 2, 2018 and January 16, 2018, respectively. Fair values on the acquisition dates are preliminary and represent management’s best estimates based on available information and facts and circumstances in existence on the acquisition date. Fair values are subject to refinement for up to one year after the closing date of the acquisitions as additional information regarding the closing date fair values becomes available. The Company expects to finalize the purchase price allocation for both mergers by the end of the fourth quarter of 2018 when the valuation of certain matters, including tax-related balances, is complete.
The preliminary fair value estimates of the assets acquired and liabilities assumed in the Premier and Puget Mergers were as follows:
 
Premier Merger
 
Puget Sound Merger
 
(In thousands)
Assets
 
 
 
Cash and cash equivalents
$
22,534

 
$
25,889

Interest earning deposits
3,309

 
54,247

Investment securities available for sale
4,493

 
80,353

Loans receivable
330,085

 
388,462

Other real estate owned
1,796

 

Premises and equipment, net
3,053

 
732

Federal Home Loan Bank stock, at cost
1,120

 
623

Bank owned life insurance
10,852

 
6,264

Accrued interest receivable
1,006

 
1,448

Prepaid expenses and other assets
1,828

 
1,354

Other intangible assets
7,075

 
11,270

Total assets acquired
$
387,151

 
$
570,642

Liabilities
 
 
 
Deposits
$
318,717

 
$
505,885

Federal Home Loan Bank advances
16,000

 

Securities sold under agreement to repurchase
462

 

Accrued expenses and other liabilities
5,985

 
2,504

Total liabilities acquired
$
341,164

 
$
508,389

 
 
 
 
Fair value of net assets acquired
$
45,987

 
$
62,253


A summary of the net assets purchased and the preliminary estimated fair value adjustments and resulting goodwill recognized from the Premier and Puget Sound Mergers are presented in the following tables. Goodwill represents the excess of the consideration transferred over the estimated fair value of the net assets acquired and liabilities assumed.
 
Premier
Merger
 
Puget Sound Merger
 
(In thousands)
Cost basis of net assets on merger date
$
40,579

 
$
54,405

Consideration transferred
(99,275
)
 
(130,773
)
Fair value adjustments:
 
 
 
Investment securities
(135
)
 
(348
)
Total loans receivable, net
(184
)
 
1,400

Other real estate owned
(1,017
)
 

Premises and equipment
1,312

 
(121
)
Other intangible assets
7,075

 
9,207

Prepaid expenses and other assets
(1,686
)
 
(2,282
)
Deposits
(310
)
 
(62
)
Accrued expenses and other liabilities
353

 
54

Goodwill recognized from the mergers
$
(53,288
)
 
$
(68,520
)



The operating results of the Company for the three and nine months ended September 30, 2018 include the operating results produced by the net assets acquired in the Premier and Puget Mergers since the July 2, 2018 and January 16, 2018 merger dates. The Company has considered the requirement of FASB ASC 805 related to the contribution of the Premier and Puget Mergers to the Company’s results of operations. The table below presents only the significant results for the acquired businesses since the July 2, 2018 and January 16, 2018 merger dates:
 
Premier Merger (1)
 
Puget Sound Merger(1)
 
Total
 
Three Months Ended
 
Nine
Months Ended
 
Three Months Ended
 
Nine
Months Ended
 
Three Months Ended
 
Nine
Months Ended
 
September 30, 2018
 
(In thousands)
Interest income: Interest and fees on loans(2)
$
5,422

 
$
5,422

 
$
5,959

 
$
16,606

 
$
11,381

 
$
22,028

Interest income: Interest and fees on investments (3)
39

 
39

 

 
59

 
39

 
98

Interest income: Other interest earning assets
115

 
115

 

 
113

 
115

 
228

Interest expense
(232
)
 
(232
)
 
(179
)
 
(503
)
 
(411
)
 
(735
)
Provision for loan losses for loans
(150
)
 
(150
)
 
(350
)
 
(900
)
 
(500
)
 
(1,050
)
Noninterest income
44

 
44

 
110

 
367

 
154

 
411

Noninterest expense (4)
(5,435
)
 
(5,435
)
 
(1,619
)
 
(9,291
)
 
(7,054
)
 
(14,726
)
Net effect, pre-tax
$
(197
)
 
$
(197
)
 
$
3,921

 
$
6,451

 
$
3,724

 
$
6,254

(1) The Premier Merger was completed on July 2, 2018. The Puget Sound Merger was completed on January 16, 2018.
(2) Includes the accretion of the discount on the purchased loans of $1.9 million and $3.4 million during the three and nine months ended September 30, 2018, respectively.
(3) All securities acquired in the Puget Sound Merger were sold with trade date of January 16, 2018 and settlement dates on or before February 14, 2018.
(4) Excludes certain compensation and employee benefits for management as it is impracticable to determine due to the integration of the operations for this merger. Also includes certain merger-related costs incurred by the Company.
The Company also considered the pro forma requirements of FASB ASC 805 and deemed it not necessary to provide pro forma financial statements as required under the standard as the Premier and Puget Mergers are individually and collectively not material to the Company. The Company believes that the historical Premier Commercial and Puget Sound operating results, individually or collectively, are not considered of enough significance to be meaningful to the Company’s results of operations.