XNAS:HFWA Heritage Financial Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-29480

 

 

HERITAGE FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Washington   91-1857900

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

201 Fifth Avenue SW,

Olympia, WA

  98501
(Address of principal executive offices)   (Zip Code)

(360) 943-1500

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:

As of July 13, 2012 there were 15,144,079 common shares outstanding, with no par value, of the registrant.

 

 

 


Table of Contents

HERITAGE FINANCIAL CORPORATION

FORM 10-Q

INDEX

 

          Page  

FORWARD LOOKING STATEMENT

  

PART I.

   Financial Information   

Item 1.

   Condensed Consolidated Financial Statements (Unaudited):   
   Condensed Consolidated Statements of Financial Condition as of June 30, 2012 and December 31, 2011      4   
   Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2012 and 2011      5   
   Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2012 and 2011      6   
   Condensed Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2012      7   
   Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011      8   
   Notes to Condensed Consolidated Financial Statements      9   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      43   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      53   

Item 4.

   Controls and Procedures      53   

PART II.

   Other Information   

Item 1.

   Legal Proceedings      53   

Item 1A.

   Risk Factors      53   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      53   

Item 3.

   Defaults Upon Senior Securities      54   

Item 4.

   Mine Safety Disclosures      54   

Item 5.

   Other Information      54   

Item 6.

   Exhibits      55   
   Signatures      57   
   Certifications      58   

 

2


Table of Contents

Forward Looking Statements

“Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995: This Form 10-Q contains forward-looking statements that are subject to risks and uncertainties, including, but not limited to: the credit and concentration risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; risks related to acquiring assets in or entering markets in which we have not previously operated and may not be familiar; fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas; results of examinations of us by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and of our bank subsidiaries by the Federal Deposit Insurance Corporation (the “FDIC”), the Washington State Department of Financial Institutions, Division of Banks (the “Washington DFI”) or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, including the interpretation of regulatory capital or other rules including changes from the Dodd-Frank Wall Street Reform and Consumer Protection Act and regulations that have been or will be promulgated thereunder; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risk associated with the loans on our balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; computer systems on which we depend could fail or experience a security breach; our ability to recruit and retain key members of our senior management team and staff; costs and effects of litigation, including settlements and judgments; our ability to implement our expansion strategy; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we have acquired including the Cowlitz Bank and Pierce Commercial Bank transactions or may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; risks relating to acquiring assets or entering markets in which we have not previously operated and may not be familiar; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and other risks detailed from time to time in our filings with the Securities and Exchange Commission.

The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company. The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for the remainder of 2012 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect the Company’s operating and stock price performance.

As used throughout this report, the terms “we”, “our”, “us”, or the “Company” refer to Heritage Financial Corporation and its consolidated subsidiaries, unless the context otherwise requires.

 

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ITEM 1. HERITAGE FINANCIAL CORPORATION

HERITAGE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands, except for per share amounts)

(Unaudited)

 

     June 30,
2012
    December 31,
2011
 
Assets     

Cash on hand and in banks

   $ 31,245      $ 30,193   

Interest earning deposits

     52,011        93,566   
  

 

 

   

 

 

 

Cash and cash equivalents

     83,256        123,759   

Investment securities available for sale

     149,778        144,602   

Investment securities held to maturity (fair value of $12,059 and $12,881)

     11,190        12,093   

Loans held for sale

     1,174        1,828   

Originated loans receivable

     853,633        837,924   

Less: Allowance for loan losses

     (20,843     (22,317
  

 

 

   

 

 

 

Originated loans receivable, net

     832,790        815,607   

Purchased covered loans receivable, net of allowance for loan losses of ($3,973 and $3,963)

     97,357        105,394   

Purchased non-covered loans receivable, net of allowance for loan losses of ($4,667 and $4,635)

     72,273        83,479   
  

 

 

   

 

 

 

Total loans receivable, net

     1,002,420        1,004,480   

FDIC indemnification asset

     8,212        10,350   

Other real estate owned ($563 and $774 covered by FDIC loss share, respectively)

     8,634        4,484   

Premises and equipment, net

     23,166        22,975   

Federal Home Loan Bank stock, at cost

     5,594        5,594   

Accrued interest receivable

     4,683        5,117   

Prepaid expenses and other assets

     14,982        8,190   

Deferred income taxes, net

     10,739        10,988   

Other intangible assets, net

     1,299        1,513   

Goodwill

     13,012        13,012   
  

 

 

   

 

 

 

Total assets

   $ 1,338,139      $ 1,368,985   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Deposits

   $ 1,113,346      $ 1,136,044   

Securities sold under agreement to repurchase

     13,656        23,091   

Accrued expenses and other liabilities

     11,002        7,330   
  

 

 

   

 

 

 

Total liabilities

     1,138,004        1,166,465   

Stockholders’ equity:

    

Preferred stock, no par value, 2,500,000 shares authorized; no shares issued and outstanding at June 30, 2012 and December 31, 2011

     —          —     

Common stock, no par value, 50,000,000 shares authorized; 15,143,189 and 15,456,297 shares outstanding at June 30, 2012 and December 31, 2011, respectively

     121,955        126,622   

Unearned compensation – Employee Stock Ownership Plan (“ESOP”)

     (50     (94

Retained earnings

     76,434        74,256   

Accumulated other comprehensive income, net

     1,796        1,736   
  

 

 

   

 

 

 

Total stockholders’ equity

     200,135        202,520   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,338,139      $ 1,368,985   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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HERITAGE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except for per share amounts)

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  

INTEREST INCOME:

        

Interest and fees on loans

   $ 16,465      $ 18,829      $ 33,483      $ 35,401   

Taxable interest on investment securities

     604        768        1,256        1,431   

Nontaxable interest on investment securities

     267        199        523        378   

Interest on interest bearing deposits

     53        61        116        141   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     17,389        19,857        35,378        37,351   

INTEREST EXPENSE:

        

Deposits

     1,163        1,682        2,440        3,557   

Other borrowings

     16        20        34        42   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     1,179        1,702        2,474        3,599   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     16,210        18,155        32,904        33,752   

Provision for loan losses on originated loans

     200        1,995        200        4,590   

Provision for loan losses on purchased loans

     419        1,529        310        3,307   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     15,591        14,631        32,394        25,855   

NON-INTEREST INCOME:

        

Gains on sales of loans, net

     53        35        116        186   

Service charges on deposits

     1,345        1,278        2,650        2,516   

Merchant Visa income, net

     182        129        352        259   

Change in FDIC indemnification asset

     (19     (1,712     (195     (912

Other income

     503        521        1,049        1,111   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     2,064        251        3,972        3,160   

NON-INTEREST EXPENSE:

        

Impairment loss on investment securities

     62        19        98        64   

Less: Portion recorded as other comprehensive loss

     (38     —          (38     (20
  

 

 

   

 

 

   

 

 

   

 

 

 

Impairment loss on investment securities, net

     24        19        60        44   

Salaries and employee benefits

     7,287        7,075        14,485        13,712   

Occupancy and equipment

     1,832        1,719        3,617        3,565   

Data processing

     668        636        1,259        1,458   

Marketing

     369        379        772        694   

Professional services

     628        413        1,182        1,047   

State and local taxes

     320        369        630        725   

Federal deposit insurance premium

     263        432        538        889   

Other real estate owned, net

     196        48        452        565   

Other expense

     1,283        1,483        2,473        2,957   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     12,870        12,573        25,468        25,656   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     4,785        2,309        10,898        3,359   

Income tax expense

     1,591        624        3,534        909   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 3,194      $ 1,685      $ 7,364      $ 2,450   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

        

Basic

   $ 0.21      $ 0.11      $ 0.48      $ 0.16   

Diluted

   $ 0.21      $ 0.11      $ 0.48      $ 0.16   

Dividends declared per common share:

   $ 0.28      $ 0.03      $ 0.34      $ 0.03   

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

HERITAGE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands, except for per share amounts)

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

Comprehensive Income

   2012     2011     2012     2011  

Net income

   $ 3,194      $ 1,685      $ 7,364      $ 2,450   

Change in fair value of securities available for sale, net of tax of $194, $178, $17 and $174

     360        928        33        922   

Reclassification adjustment of net gain from sale of available for sale securities included in income, net of tax of $0, $(7), $0 and $(8)

     —          (13     —          (14

Other-than-temporary impairment on securities held to maturity, net of tax of $(13), $0, $(13) and $(7)

     (25     —          (25     (13

Accretion of other-than-temporary impairment in securities held to maturity, net of tax of $14, $15, $28 and $35

     26        28        52        64   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

   $ 361      $ 943      $ 60      $ 959   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 3,555      $ 2,628      $ 7,424      $ 3,409   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

HERITAGE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE SIX MONTHS ENDED

JUNE 30, 2012

(Dollars and shares in thousands)

(Unaudited)

 

     Number
of
common
shares
    Common
stock
    Unearned
Compensation-
ESOP
    Retained
earnings
    Accumulated
other
comprehensive
income, net
     Total
stockholders’
equity
 

Balance at December 31, 2011

     15,456      $ 126,622      $ (94   $ 74,256      $ 1,736       $ 202,520   

Restricted stock awards issued, net of forfeitures

     73        —          —          —          —           —     

Stock option compensation expense

     —          60        —          —          —           60   

Exercise of stock options (including tax benefits from nonqualified stock options)

     1        11        —          —          —           11   

Share based payment and earned ESOP

     5        576        44        —          —           620   

Tax associated with share based payment and unallocated ESOP

     —          (44     —          —          —           (44

Common stock repurchased and retired

     (392     (5,270     —          —          —           (5,270

Net income

     —          —          —          7,364        —           7,364   

Other comprehensive income, net of tax

     —          —          —          —          60         60   

Cash dividends declared on common stock ($0.34 per share)

     —          —          —          (5,186     —           (5,186
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at June 30, 2012

     15,143      $ 121,955      $ (50   $ 76,434      $ 1,796       $ 200,135   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

HERITAGE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the six months ended June 30, 2012 and 2011

(Dollars in thousands)

(Unaudited)

 

     Six Months Ended
June 30,
 
     2012     2011  

Cash flows from operating activities:

    

Net income

   $ 7,364      $ 2,450   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     1,868        531   

Change in net deferred loan fees

     36        301   

Provision for loan losses

     510        7,897   

Net change in accrued interest receivable, prepaid expenses and other assets and accrued expenses and other liabilities

     (3,621     (2,141

Recognition of compensation related to ESOP shares and share based payment

     620        485   

Stock option compensation expense

     60        95   

Excess tax benefit realized from stock options exercised, share based payment and dividends on unallocated ESOP shares

     44        147   

Amortization of intangible assets

     214        226   

Deferred income taxes

     217        332   

Loss (gain) on investments

            (23

Impairment loss on investment securities

     60        44   

Origination of loans held for sale

     (7,568     (6,259

Gains on sales of loans, net

     (116     (186

Proceeds from sale of loans

     8,338        6,536   

Valuation adjustment on other real estate owned

     483        595   

Losses on sale of other real estate owned, net

     2        53   

Losses on sale of premises and equipment, net

     2        1   
  

 

 

   

 

 

 

Net cash provided by operating activities

     8,513        11,084   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Loans originated, net of principal payments

     (4,012     (11,377

Maturities of investment securities available for sale

     25,989        11,843   

Maturities of investment securities held to maturity

     1,037        976   

Purchases of investment securities available for sale

     (32,113     (33,559

Purchases of investment securities held to maturity

     —          (271

Purchases of premises and equipment

     (1,215     (1,587

Proceeds from sales of other real estate owned

     891        1,808   

Proceeds from sales of investment securities available for sale

     —          412   
  

 

 

   

 

 

 

Net cash used in investing activities

     (9,423     (31,755
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net decrease in deposits

     (22,698     (28,556

Common stock cash dividends paid

     (2,157     (470

Net decrease in securities sold under agreement to repurchase

     (9,435     (1,755

Proceeds from exercise of stock options

     11        —     

Excess tax benefits realized from stock options exercised, share based payment and dividends on unallocated ESOP shares

     (44     (147

Repurchase of common stock

     (5,270     —     
  

 

 

   

 

 

 

Net cash used in financing activities

     (39,593     (30,928
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (40,503     (51,599
  

 

 

   

 

 

 

Cash and cash equivalents at beginning of period

     123,759        168,991   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 83,256      $ 117,392   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Cash paid for interest

   $ 2,531      $ 3,692   

Cash paid for income taxes

     7,372        3,089   

Loans transferred to other real estate owned

   $ 5,526      $ 1,337   

See Notes to Condensed Consolidated Financial Statements.

 

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HERITAGE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and Six Months Ended June 30, 2012 and 2011

(Unaudited)

NOTE 1. Description of Business and Basis of Presentation

(a) Description of Business

Heritage Financial Corporation (the “Company”) is a bank holding company incorporated in the State of Washington in August 1997. The Company is primarily engaged in the business of planning, directing and coordinating the business activities of its wholly owned subsidiaries: Heritage Bank and Central Valley Bank (the “Banks”). The Banks are Washington-chartered commercial banks and their deposits are insured by the FDIC under the Deposit Insurance Fund (“DIF”). Heritage Bank conducts business from its main office in Olympia, Washington and its twenty-six branch offices located in western Washington and the greater Portland, Oregon area. Central Valley Bank conducts business from its main office in Toppenish, Washington and its five branch offices located in Yakima and Kittitas counties of Washington State.

The Company’s business consists primarily of lending and deposit relationships with small businesses and their owners in its market areas and attracting deposits from the general public. The Company also makes real estate construction and land development loans, one-to-four family residential loans, and consumer loans and originates for sale or investment purposes first mortgage loans on residential properties located in western and central Washington State and the greater Portland, Oregon area.

Effective July 30, 2010, Heritage Bank entered into a definitive agreement with the FDIC, pursuant to which Heritage Bank acquired certain assets and assumed certain liabilities of Cowlitz Bank, a Washington state-chartered bank headquartered in Longview, Washington (the “Cowlitz Acquisition”). The Cowlitz Acquisition included nine branches of Cowlitz Bank, including its division Bay Bank, which opened as branches of Heritage Bank as of August 2, 2010. It also included the Trust Services Division of Cowlitz Bank. Effective November 5, 2010, Heritage Bank entered into a definitive agreement with the FDIC, pursuant to which Heritage Bank acquired certain assets and assumed certain liabilities of Pierce Commercial Bank, a Washington state-chartered bank headquartered in Tacoma, Washington (the “Pierce Commercial Acquisition”). The Pierce Commercial Acquisition included one branch, which opened as a branch of Heritage Bank as of November 8, 2010. The Cowlitz Acquisition and the Pierce Commercial Acquisition are collectively referred to as the “Cowlitz and Pierce Acquisitions.”

(b) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles (“GAAP”), for interim financial information, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These condensed consolidated financial statements should be read with our December 31, 2011 audited consolidated financial statements and its accompanying notes included in our Annual Report on Form 10-K (“Form 10-K”). In our opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. In preparing the condensed consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Actual results could differ from those estimates. Estimates related to fair value measurements, the allowance for loan losses, expected cash flows from, and indemnification asset related to, purchased loans, other real estate owned, other-than-temporary impairment of investment securities, goodwill and other intangible assets, stock-based compensation and income taxes are particularly subject to change.

Certain prior period amounts have been reclassified to conform to the current period’s presentation. Reclassifications had no effect on prior period net income or stockholders’ equity.

(c) Significant Accounting Policies

The significant accounting policies used in preparation of our consolidated financial statements are disclosed in our 2011 Annual Form 10-K. There have not been any material changes in our significant accounting policies compared to those contained in our Form 10-K disclosure for the year ended December 31, 2011.

(d) Recently Issued Accounting Pronouncements

Financial Accounting Standards Board (“FASB”) Accounting Standards Updates (“ASU”) 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, was issued in May 2011 as a result of the FASB and International Accounting Standards Board’s (IASB) goal to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting

 

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Standards. The provisions of this Update are effective during the interim or annual periods beginning after December 15, 2011, and are to be applied prospectively. The adoption of the Update did not have a material effect on the Company’s consolidated financial statements, however the additional disclosures are included in Note 10.

FASB ASU 2011-05, Presentation of Comprehensive Income, was issued in June 2011 requiring that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This Update also requires that reclassification adjustments for items that are reclassified from other comprehensive income to net income be presented on the face of the financial statements. The provisions of this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and are to be applied retrospectively. Early adoption is permitted. The adoption of the Update did not have a material effect on the Company’s consolidated financial statements at the date of adoption. The Company has presented condensed consolidated statements of comprehensive income for the three and six months ended June 30, 2012 and 2011 as a separate statement immediately following the condensed consolidated statements of income for the three and six months ended June 30, 2012 and 2011.

FASB ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, was issued in December 2011 updating and superseding certain pending paragraphs relating to the presentation on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. This Update is effective concurrent with ASU 2011-05, Presentation of Comprehensive Income, and will not have a material effect on the Company’s consolidated financial statements at the date of adoption.

NOTE 2. Loans Receivable

The Company originates loans under the normal course of business. These loans are identified as “originated” loans. Disclosures related to the Company’s recorded investment in originated loans receivable generally exclude accrued interest receivable and deferred loan origination fees and costs due to their insignificance. The Company has also acquired loans through FDIC-assisted transactions. Loans acquired in a business acquisition are designated as “purchased” loans. The Company refers to the purchased loans subject to the shared-loss agreements as “covered” loans, and those loans without a shared-loss agreement are referred to as “non-covered” loans. Loans purchased with evidence of credit deterioration since origination for which it is probable that all contractually required payments will not be collected are accounted for under FASB Accounting Standards Codification (“FASB ASC”) 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. These loans are identified as “purchased impaired” 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. These loans are identified as “purchased other” loans.

(a) Loan Origination/Risk Management

The Company originates loans in one of the four segments of the total loan portfolio: commercial business, real estate construction and land development, one-to-four family residential, and consumer. Within these segments are classes of loans to which management monitors and assesses credit risk in the loan portfolios. The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies, and nonperforming and potential problem loans. The Company also conducts external loan reviews and validates the credit risk assessment on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

A discussion of the risk characteristics of each portfolio segments is as follows:

Commercial Business: There are three significant classes of loans in the commercial portfolio segment, including commercial and industrial loans, owner-occupied commercial real estate, and non-owner occupied commercial real estate. The owner and non-owner occupied commercial real estate are both considered commercial real estate loans. As the commercial and industrial loans carry different risk characteristics than the commercial real estate loans, they are discussed separately below.

Commercial and industrial. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may include a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

 

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Commercial real estate. The Company originates commercial real estate loans within its primary market areas. These loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate involves more risk than other classes in that the lending typically involves higher loan principal amounts, and payments on loans secured by real estate properties are dependent on successful operation and management of the properties. Repayment of these loans may be more adversely affected by conditions in the real estate market or the economy.

One-to-Four Family Residential: The majority of the Company’s one-to four-family residential loans are secured by single-family residences located in its primary market areas. The Company’s underwriting standards require that single-family portfolio loans generally are owner-occupied and do not exceed 80% of the lower of appraised value at origination or cost of the underlying collateral. Terms typically range from 15 to 30 years. The Company generally sells most single-family loans in the secondary market. Management determines to what extent the Company will retain or sell these loans and other fixed rate mortgages in order to control the Banks’ interest rate sensitivity position, growth and liquidity.

Real Estate Construction and Land Development: The Company originates construction loans for one-to-four family residential and for five or more residential properties and commercial properties. The one-to-four family residential construction loans generally include construction of custom homes whereby the home buyer is the borrower. The Company also provides financing to builders for the construction of pre-sold homes and, in selected cases, to builders for the construction of speculative residential property. Substantially all construction loans are short-term in nature and priced with a variable rate of interest. Construction lending can involve a higher level of risk than other types of lending because funds are advanced partially based upon the value of the project, which is uncertain prior to the project’s completion. Because of the uncertainties inherent in estimating construction costs as well as the market value of a completed project and the effects of governmental regulation of real property, the Company’s estimates with regards to the total funds required to complete a project and the related loan-to-value ratio may vary from actual results. As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property or refinance the indebtedness. If the Company’s estimate of the value of a project at completion proves to be overstated, it may have inadequate security for repayment of the loan and may incur a loss if the borrower does not repay the loan. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

Consumer: The Company originates consumer loans and lines of credit that are both secured and unsecured. The underwriting process is developed to ensure a qualifying primary and secondary source of repayment. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage of 80%, collection remedies, the number of such loans a borrower can have at one time and documentation requirements. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed. The majority of the consumer loans are relatively small amounts spread across many individual borrowers which minimizes the credit risk. Additionally, trend reports are reviewed by management on a regular basis.

Originated loans receivable at June 30, 2012 and December 31, 2011 consisted of the following portfolio segments and classes:

 

     June 30, 2012     December 31, 2011  
     (In thousands)  

Commercial business:

    

Commercial and industrial

   $ 278,194      $ 273,590   

Owner-occupied commercial real estate

     180,982        166,881   

Non-owner occupied commercial real estate

     257,263        251,049   
  

 

 

   

 

 

 

Total commercial business

     716,439        691,520   

One-to-four family residential

     37,752        37,960   

Real estate construction and land development:

    

One-to-four family residential

     24,132        22,369   

Five or more family residential and commercial properties

     46,457        54,954   
  

 

 

   

 

 

 

Total real estate construction and land development

     70,589        77,323   

Consumer

     30,749        32,981   
  

 

 

   

 

 

 

Gross originated loans receivable

     855,529        839,784   

Net deferred loan fees

     (1,896     (1,860
  

 

 

   

 

 

 

Total originated loans receivable

   $ 853,633      $ 837,924   
  

 

 

   

 

 

 

 

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The recorded investment in purchased covered loans receivable at June 30, 2012 and December 31, 2011 consisted of the following portfolio segments and classes:

 

     June 30, 2012     December 31, 2011  
     (In thousands)  

Commercial business:

    

Commercial and industrial

   $ 36,032      $ 38,607   

Owner-occupied commercial real estate

     36,286        38,067   

Non-owner occupied commercial real estate

     13,961        15,753   
  

 

 

   

 

 

 

Total commercial business

     86,279        92,427   

One-to-four family residential

     5,051        5,197   

Real estate construction and land development:

    

One-to-four family residential

     4,271        5,786   

Five or more family residential and commercial properties

     —          —     
  

 

 

   

 

 

 

Total real estate construction and land development

     4,271        5,786   

Consumer

     5,729        5,947   
  

 

 

   

 

 

 

Total purchased covered loans receivable

     101,330        109,357   

Allowance for loan losses

     (3,973     (3,963
  

 

 

   

 

 

 

Purchased covered loans receivable, net

   $ 97,357      $ 105,394   
  

 

 

   

 

 

 

The June 30, 2012 and December 31, 2011 gross recorded investment balance of purchased impaired covered loans accounted for under FASB ASC 310-30 was $70.7 million and $78.7 million, respectively. The gross recorded investment balance of purchased other covered loans was $30.7 million at June 30, 2012 and December 31, 2011. As of June 30, 2012 and December 31, 2011, the recorded investment balance of purchased covered loans which are no longer covered under the FDIC loss-sharing agreements was $4.3 million and $3.8 million, respectively.

Funds advanced on the purchased covered loans subsequent to acquisition, referred to as “subsequent advances,” are included in the purchased covered loan balances as these subsequent advances are covered under the loss-sharing agreements. These subsequent advances are not accounted for under FASB ASC 310-30. The total balance of subsequent advances on the purchased covered loans was $13.7 million and $13.5 million as of June 30, 2012 and December 31, 2011, respectively.

The recorded investment in purchased non-covered loans receivable at June 30, 2012 and December 31, 2011 consisted of the following portfolio segments and classes:

 

     June 30, 2012     December 31, 2011  
     (In thousands)  

Commercial business:

    

Commercial and industrial

   $ 29,802      $ 35,607   

Owner-occupied commercial real estate

     16,984        17,052   

Non-owner occupied commercial real estate

     12,678        12,833   
  

 

 

   

 

 

 

Total commercial business

     59,464        65,492   

One-to-four family residential

     3,084        2,743   

Real estate construction and land development:

    

One-to-four family residential

     1,030        1,381   

Five or more family residential and commercial properties

     1,329        1,078   
  

 

 

   

 

 

 

Total real estate construction and land development

     2,359        2,459   

Consumer

     12,033        17,420   
  

 

 

   

 

 

 

Total purchased non-covered loans receivable

     76,940        88,114   

Allowance for loan losses

     (4,667     (4,635
  

 

 

   

 

 

 

Purchased non-covered loans receivable, net

   $ 72,273      $ 83,479   
  

 

 

   

 

 

 

 

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The June 30, 2012 and December 31, 2011 gross recorded investment balance of impaired purchased non-covered loans accounted for under FASB ASC 310-30 was $48.0 million and $56.1 million, respectively. The recorded investment balance of other purchased non-covered loans was $29.0 million and $32.0 million at June 30, 2012 and December 31, 2011, respectively.

(b) Concentrations of Credit

Most of the Company’s lending activity occurs within the State of Washington, and to a lesser extent the State of Oregon. The primary market areas include Thurston, Pierce, King, Mason, Cowlitz and Clark counties in Washington and Multnomah County in Oregon, as well as other markets. The majority of the Company’s loan portfolio consists of commercial and industrial, non-owner occupied commercial real estate, and owner occupied commercial real estate. As of June 30, 2012 and December 31, 2011, there were no concentrations of loans related to any single industry in excess of 10% of total loans.

(c) Credit Quality Indicators

As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the risk grade of the loans, (ii) the level of classified loans, (iii) net charge-offs, (iv) nonperforming loans, and (v) the general economic conditions of the United States of America, and specifically the states of Washington and Oregon. The Company utilizes a risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 0 to 9, and a “W”. A description of the general characteristics of the risk grades is as follows:

Grades 0 to 5: These grades are considered “pass grade” with negligible to above average but acceptable risk. These borrowers generally have strong to acceptable capital levels and consistent earnings and debt service capacity. Loans with the higher grades within the “pass” category may include borrowers who are experiencing unusual operating difficulties, but have acceptable payment performance to date. Increased monitoring of financials and/or collateral may be appropriate. Overall, loans with this grade show no immediate loss exposure.

Grade “W”: This grade includes loans on management’s “watch list” and is intended to be utilized on a temporary basis for pass grade borrowers where a potentially significant risk-modifying action is anticipated in the near term.

Grade 6: This grade is for “Other Assets Especially Mentioned” loans (“OAEM”) in accordance with regulatory guidelines, and is intended to highlight loans with elevated risks. Loans with this grade show signs of deteriorating profits and capital, and the borrower might not be strong enough to sustain a major setback. The borrower is typically higher than normally leveraged, and outside support might be modest and likely illiquid. The loan is at risk of further decline unless active measures are taken to correct the situation.

Grade 7: This grade includes “Substandard” loans, in accordance with regulatory guidelines, for which the loan has a high risk. The loan also has well-defined weaknesses which make payment default or principal exposure likely, but not yet certain. The borrower may have shown serious negative trends in financial ratios and performance. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment or an event outside of the normal course of business. Loans with this grade can be accrual or nonaccrual status based on the Company’s accrual policy.

Grade 8: This grade includes “Doubtful” loans in accordance with regulatory guidelines, and the Company has determined these loans to have excessive risk. Such loans are placed on nonaccrual status and may be dependent upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. Additionally, these loans generally have a specific valuation allowance.

Grade 9: This grade includes “Loss” loans in accordance with regulatory guidelines. These loans are determined to have the highest risk of loss. Such loans are charged-off or charged-down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. “Loss” is not intended to imply that the loan or some portion of it will never be paid, nor does it in any way imply that there has been a forgiveness of debt.

Loan grades for all commercial business loans and real estate construction and land development loans are established at the origination of the loan. One-to-four family residential loans and consumer loans (“non-commercial loans”) are not graded as a 0 to 9 at origination date as these loans are determined to be “pass graded” loans. These non-commercial loans may subsequently require a 0-9 risk grade if the credit department has evaluated the credit and determined it necessary to classify the loan. Loan grades are reviewed on a quarterly basis, or more frequently if necessary, by the credit department. Typically, an individual loan grade will not be changed from the prior period unless there is a specific indication of credit deterioration or improvement. Credit deterioration is evidenced by delinquency, direct communications with the borrower, or other borrower information that becomes known to management. Credit improvements are evidenced by known facts regarding the borrower or the collateral property.

The loan grades relate to the likelihood of losses in that the higher the grade, the greater the loss potential. Loans with a pass grade are believed to have some inherent losses in the portfolios, but to a lesser extent than the other loan grades. These pass graded loans might have a zero percent loss based on historical experience and current market trends. The OAEM loan grade is transitory in that the Company is waiting on additional information to determine the likelihood and extent of the potential loss. However, the likelihood of loss is greater than Watch grade because there has been measurable credit deterioration. Loans with a Substandard grade are generally loans for which the Company has individually analyzed for potential impairment. For Doubtful and Loss graded loans, the Company is almost certain of the losses, and the unpaid principal balances are generally charged-off.

 

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The following tables present the balance of the originated loans receivable by credit quality indicator as of June 30, 2012 and December 31, 2011.

 

     June 30, 2012  
     Pass      OAEM      Substandard      Doubtful      Total  
     (In thousands)  

Commercial business:

              

Commercial and industrial

   $ 253,643       $ 2,623       $ 20,378       $ 1,550       $ 278,194   

Owner-occupied commercial real estate

     176,542         1,775         2,665         —           180,982   

Non-owner occupied commercial real estate

     244,885         4,094         7,915         369         257,263   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial business

     675,070         8,492         30,958         1,919         716,439   

One-to-four family residential

     35,977         427         944         404         37,752   

Real estate construction and land development:

              

One-to-four family residential

     13,126         2,694         8,312         —           24,132   

Five or more family residential and commercial properties

     41,815         —           4,642         —           46,457   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate construction and land development

     54,941         2,694         12,954         —           70,589   

Consumer

     30,465         100        182         2        30,749   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross originated loans

   $ 796,453       $ 11,713       $ 45,038       $ 2,325       $ 855,529   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  
     Pass      OAEM      Substandard      Doubtful      Total  
     (In thousands)  

Commercial business:

              

Commercial and industrial

   $ 247,503       $ 2,770       $ 22,887       $ 430       $ 273,590   

Owner-occupied commercial real estate

     162,536         1,225         3,120         —           166,881   

Non-owner occupied commercial real estate

     240,096         2,063         8,890         —           251,049   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial business

     650,135         6,058         34,897         430         691,520   

One-to-four family residential

     36,997         431        532         —           37,960   

Real estate construction and land development:

              

One-to-four family residential

     10,725         2,828         8,816         —           22,369   

Five or more family residential and commercial properties

     42,541         —           12,413         —           54,954   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate construction and land development

     53,266         2,828         21,229         —           77,323   

Consumer

     32,629         —           346         6        32,981   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross originated loans

   $ 773,027       $ 9,317       $ 57,004       $ 436       $ 839,784   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The tables above include impaired loan balances. Potential problem loans are those loans that are currently accruing interest and are not considered impaired, but which management is monitoring because the financial information of the borrower causes concern as to their ability to meet their loan repayment terms. Potential problem originated loans as of June 30, 2012 and December 31, 2011 were $28.3 million and $29.7 million, respectively. The balance of potential problem originated loans guaranteed by a governmental agency was $3.2 million and $2.8 million as of June 30, 2012 and December 31, 2011, respectively. This guarantee reduces the Company’s credit exposure.

The following tables present the recorded balance of the purchased other covered and non-covered loans receivable by credit quality indicator as of June 30, 2012 and December 31, 2011.

 

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     June 30, 2012  
     Pass      OAEM      Substandard      Doubtful      Total  
     (In thousands)  

Commercial business:

              

Commercial and industrial

   $ 13,643       $ 87       $ 705       $ —         $ 14,435   

Owner-occupied commercial real estate

     26,892         2,442        341         —           29,675   

Non-owner occupied commercial real estate

     4,536         491         979         —           6,006   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial business

     45,071         3,020         2,025         —           50,116   

One-to-four family residential

     1,396         —           —           —           1,396   

Real estate construction and land development:

              

One-to-four family residential

     48         —           —           —           48   

Five or more family residential and commercial properties

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate construction and land development

     48         —           —           —           48   

Consumer

     7,476         —           170         417        8,063   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross purchased other loans

   $ 53,991       $ 3,020       $ 2,195       $ 417      $ 59,623   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  
     Pass      OAEM      Substandard      Doubtful      Total  
     (In thousands)  

Commercial business:

              

Commercial and industrial

   $ 11,781       $ 125       $ 780       $ —         $ 12,686   

Owner-occupied commercial real estate

     29,791         —           587         —           30,378   

Non-owner occupied commercial real estate

     4,427         1,046         441         —           5,914   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial business

     45,999         1,171         1,808         —           48,978   

One-to-four family residential

     1,529         —           42         —           1,571   

Real estate construction and land development:

              

One-to-four family residential

     50         —           —           —           50   

Five or more family residential and commercial properties

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate construction and land development

     50         —           —           —           50   

Consumer

     11,435         —           674        —           12,109   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross purchased other loans

   $ 59,013       $ 1,171       $ 2,524       $ —         $ 62,708   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(d) Nonaccrual loans

Originated nonaccrual loans, segregated by segments and classes of loans, were as follows as of June 30, 2012 and December 31, 2011:

 

     June 30, 2012(1)      December 31, 2011(1)  
     (In thousands)  

Commercial business:

     

Commercial and industrial

   $ 6,491       $ 6,946   

Owner-occupied commercial real estate

     647         399   

Non-owner occupied commercial real estate

     369         921   
  

 

 

    

 

 

 

Total commercial business

     7,507         8,266   

One-to-four family residential

     753         —     

Real estate construction and land development:

     

One-to-four family residential

     3,647         5,150   

Five or more family residential and commercial properties

     4,642         9,797   
  

 

 

    

 

 

 

Total real estate construction and land development

     8,289         14,947   

Consumer

     148         125   
  

 

 

    

 

 

 

Gross originated nonaccrual loans

   $ 16,697       $ 23,338   
  

 

 

    

 

 

 

 

(1) $2.3 million and $1.8 million of nonaccrual originated loans were guaranteed by governmental agencies at June 30, 2012 and December 31, 2011, respectively.

 

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Table of Contents

The recorded investment balance of purchased other nonaccrual loans, segregated by segments and classes of loans, were as follows as of June 30, 2012 and December 31, 2011:

 

     June 30, 2012      December 31, 2011  
     (In thousands)  

Commercial business:

     

Commercial and industrial

   $ 263       $ —     

Owner-occupied commercial real estate

     144         —     

Non-owner occupied commercial real estate

     437         —     
  

 

 

    

 

 

 

Total commercial business

     844         —     

Consumer

     424         497   
  

 

 

    

 

 

 

Gross purchased other nonaccrual loans

   $ 1,268       $ 497   
  

 

 

    

 

 

 

(e) Aged loans

The Company performs aging analysis of past due loans using the categories of 30-89 days past due and 90 or more days past due. This policy is consistent with regulatory reporting requirements. The balances of originated past due loans, segregated by segments and classes of loans, as of June 30, 2012 and December 31, 2011 were as follows:

 

     June 30, 2012  
     30-89 Days      90 Days or
Greater
     Total Past Due      Current      Total      90 Days or More
and Still
Accruing
 
     (In thousands)  

Commercial business:

                 

Commercial and industrial

   $ 3,290       $ 4,041       $ 7,331       $ 270,863       $ 278,194       $ —     

Owner-occupied commercial real estate

     545         719         1,264         179,718         180,982         560   

Non-owner occupied commercial real estate

     551        369        920         256,343         257,263         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial business

     4,386         5,129         9,515         706,924         716,439         560   

One-to-four family residential

     305         721         1,026         36,726         37,752         —     

Real estate construction and land development:

                 

One-to-four family residential

     1,305        3,647         4,952         19,180         24,132         —     

Five or more family residential and commercial properties

     2,594         4,289         6,883         39,574         46,457         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate construction and land development

     3,899         7,936         11,835         58,754         70,589         —     

Consumer

     122         54         176         30,573         30,749         4  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross originated loans

   $ 8,712       $ 13,840       $ 22,552       $ 832,977       $ 855,529       $ 564   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

16


Table of Contents
     December 31, 2011  
     30-89 Days      90 Days or
Greater
     Total Past Due      Current      Total      90 Days or More
and Still
Accruing
 
     (In thousands)  

Commercial business:

                 

Commercial and industrial

   $ 3,716       $ 4,769       $ 8,485       $ 265,105       $ 273,590       $ 921   

Owner-occupied commercial real estate

     1,903         398         2,301         164,580         166,881         —     

Non-owner occupied commercial real estate

     369        —           369         250,680         251,049         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial business

     5,988         5,167         11,155         680,365         691,520         921   

One-to-four family residential

     1,251         404         1,655         36,305         37,960         404   

Real estate construction and land development:

                 

One-to-four family residential

     582        5,150         5,732         16,637         22,369         —     

Five or more family residential and commercial properties

     369         9,428         9,797         45,157         54,954         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate construction and land development

     951         14,578         15,529         61,794         77,323         —     

Consumer

     465         60         525         32,456         32,981         3  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross originated loans

   $ 8,655       $ 20,209       $ 28,864       $ 810,920       $ 839,784       $ 1,328   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

The balances of purchased other past due loans, segregated by segments and classes of loans, as of June 30, 2012 and December 31, 2011 are as follows:

 

     June 30, 2012  
     30-89 Days      90 Days or
Greater
     Total Past Due      Current      Total      90 Days or More
and Still
Accruing
 
     (In thousands)  

Commercial business:

                 

Commercial and industrial

   $ —         $ 262      $ 262       $ 14,173       $ 14,435       $ —     

Owner-occupied commercial real estate

     980         63        1,043         28,632         29,675         62  

Non-owner occupied commercial real estate

     120         437        557         5,449         6,006         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial business

     1,100         762        1,862         48,254         50,116         62  

One-to-four family residential

     —           —           —           1,396         1,396         —     

Real estate construction and land development:

                 

One-to-four family residential

     —           —           —           48         48         —     

Five or more family residential and commercial properties

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate construction and land development

     —           —           —           48         48         —     

Consumer

     370         417         787         7,276         8,063         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross purchased other loans

   $ 1,470       $ 1,179      $ 2,649       $ 56,974       $ 59,623       $ 62  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  
     30-89 Days      90 Days or
Greater
     Total Past Due      Current      Total      90 Days or More
and Still
Accruing
 
     (In thousands)  

Commercial business:

                 

Commercial and industrial

   $ 243       $ 15      $ 258       $ 12,428       $ 12,686       $ 15  

Owner-occupied commercial real estate

     151         —           151         30,227         30,378         —     

Non-owner occupied commercial real estate

     441         —           441         5,473         5,914         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial business

     835         15        850         48,128         48,978         15  

One-to-four family residential

     42         —           42        1,529         1,571         —     

Real estate construction and land development:

                 

One-to-four family residential

     —           —           —           50         50         —     

Five or more family residential and commercial properties

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate construction and land development

     —           —           —           50         50         —     

Consumer

     757         490        1,247         10,862         12,109         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross purchased other loans

   $ 1,634       $ 505      $ 2,139       $ 60,569       $ 62,708       $ 15  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(f) Impaired loans

Impaired originated loans (including restructured loans) at June 30, 2012 and December 31, 2011 are set forth in the following tables.

 

18


Table of Contents

 

     June 30, 2012  
     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

   $ 9,168       $ 3,010       $ 12,178       $ 13,308       $ 1,288   

Owner-occupied commercial real estate

     476         570         1,046         1,565         245   

Non-owner occupied commercial real estate

     2,964         4,277         7,241         7,241         727   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial business

     12,608         7,857         20,465         22,114         2,260   

One-to-four family residential

     —           1,179         1,179         1,881         183   

Real estate construction and land development:

              

One-to-four family residential

     1,098         3,309         4,407         5,580         910   

Five or more family residential and commercial properties

     —           4,642         4,642         4,706         1,009   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate construction and land development

     1,098         7,951         9,049         10,286         1,919   

Consumer

     49         100         149         572        100   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross impaired originated loans

   $ 13,755       $ 17,087       $ 30,842       $ 34,853       $ 4,462   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  
     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

   $ 4,532       $ 6,139       $ 10,671       $ 10,586       $ 1,488   

Owner-occupied commercial real estate

     603         1,368         1,971         2,271         107   

Non-owner occupied commercial real estate

     3,915         4,314         8,229         9,980         764  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial business

     9,050         11,821         20,871         22,837         2,359   

One-to-four family residential

     —           835         835         1,046         187   

Real estate construction and land development:

              

One-to-four family residential

     748         4,765         5,513         6,813         1,436   

Five or more family residential and commercial properties

     963         8,835         9,798         14,219         530   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate construction and land development

     1,711         13,600         15,311         21,032         1,966   

Consumer

     120         6         126         159        6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross impaired originated loans

   $ 10,881       $ 26,262       $ 37,143       $ 45,074       $ 4,518   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company had governmental guarantees of $2.8 million and $1.8 million related to the impaired originated loan balances at June 30, 2012 and December 31, 2011, respectively.

 

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Table of Contents

The average recorded investment of impaired originated loans (including restructured loans) for the three and six months ended June 30, 2012 and June 30, 2011 are set forth in the following tables.

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  
     (In thousands)  

Commercial business:

           

Commercial and industrial

   $ 12,044       $ 9,361       $ 11,226       $ 9,605   

Owner-occupied commercial real estate

     1,780         1,052         1,706         426   

Non-owner occupied commercial real estate

     7,406         1,847         7,736         1,872   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial business

     21,230         12,260         20,668         11,903   

One-to-four family residential

     1,165         —           1,007         —     

Real estate construction and land development:

           

One-to-four family residential

     4,606         6,570         4,960         8,564   

Five or more family residential and commercial properties

     4,652         10,202         7,220         7,561   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate construction and land development

     9,258         16,772         12,180         16,125   

Consumer

     189         52         137         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross impaired originated loans

   $ 31,842       $ 29,084       $ 33,992       $ 28,028   
  

 

 

    

 

 

    

 

 

    

 

 

 

Impaired purchased other loans (including restructured loans) at June 30, 2012 and December 31, 2011 are set forth in the following tables.

 

     June 30, 2012  
     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

   $ 18       $ —         $ 18       $ 18       $ —     

Owner-occupied commercial real estate

     —           —           —           —           —     

Non-owner occupied commercial real estate

     —           542         542         528         23   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial business

     18         542         560         546         23   

Consumer

     —           7         7         9        3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross impaired purchased other loans

   $ 18       $ 549       $ 567       $ 555       $ 26   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  
     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)  

Consumer

   $ —         $ 9       $ 9       $ 9      $ 5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross impaired purchased other loans

   $ —         $ 9       $ 9       $ 9       $ 5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents

The average recorded investment of impaired purchased other loans (including restructured loans) for the three and six months ended June 30, 2012 and June 30, 2011 are set forth in the following tables.

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
         2012              2011              2012              2011      
     (In thousands)  

Commercial business:

           

Commercial and industrial

   $ 19       $ —         $ 9       $ —     

Owner-occupied commercial real estate

     —           —           —           —     

Non-owner occupied commercial real estate

     289         —           289         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial business

     308         —           298         —     

Consumer

     7         —           7         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross impaired purchased other loans

   $ 315       $ —         $ 305       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

For the three and six months ended June 30, 2012 and June 30, 2011 no interest income was recognized subsequent to a loan’s classification as impaired.

(g) Troubled Debt Restructured Loans

A troubled debt restructured loan (“TDR”) is a restructuring in which the Banks, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. TDRs are considered impaired and are separately measured for impairment under ASC 310-10-35, whether on accrual or nonaccrual status. At June 30, 2012 and December 31, 2011, the balance of originated accruing TDRs was $14.1 million and $13.8 million, respectively. The related allowance for loan losses on the originated accruing TDRs was $1.2 million and $1.4 million as of June 30, 2012 and December 31, 2011, respectively. At June 30, 2012, originated non-accruing TDRs were $10.3 million and had a related allowance for loan losses of $2.1 million. At December 31, 2011, originated non-accruing TDRs of $11.7 million had a related allowance for loan losses of $1.8 million. At June 30, 2012 and December 31, 2011, the balance of purchased other TDRs was $567,000 and $9,000, respectively. The related allowance for loan losses on the purchased other TDRs was $26,000 and $5,000 as of June 30, 2012 and December 31, 2011, respectively.

Originated TDRs that were modified during the three and six months ended June 30, 2012 and June 30, 2011 are set forth in the following tables:

 

     Three Months Ended June 30,  
     2012      2011  
     (Dollars in thousands)  
     Number of
Contracts
     Outstanding
Principal
Balance (1)
     Number of
Contracts
     Outstanding
Principal
Balance (1)
 

Commercial business:

           

Commercial and industrial

     9       $ 1,248         6       $ 3,180   

Owner-occupied commercial real estate

     —         $ —           1       $ 1,380   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial business

     9         1,248         7         4,560   

One-to-four family residential

     —           —           2         841   

Real estate construction and land development:

           

Five or more family residential and commercial properties

     —           —           2         4,813   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate construction and land development

     —           —           2         4,813   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total originated TDRs

     9       $ 1,248         11       $ 10,214   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

21


Table of Contents
     Six Months Ended June 30,  
     2012      2011  
     (Dollars in thousands)  
     Number of
Contracts (2)
     Outstanding
Principal Balance
(1)(2)
     Number of
Contracts (2)
     Outstanding
Principal Balance
(1)(2)
 

Commercial business:

           

Commercial and industrial

     13       $ 1,864         11       $ 4,110   

Owner-occupied commercial real estate

     1         198         2         1,585   

Non-owner occupied commercial real estate

     —           —           1         669   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial business

     14         2,062         14         6,364   

One-to-four family residential

     —           —           2         841   

Real estate construction and land development:

           

One-to-four family residential

     2         397         2         364   

Five or more family residential and commercial properties

     —           —           2         4,813   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate construction and land development

     2         397         4         5,177   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total originated TDRs

     16       $ 2,459         20       $ 12,382   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes subsequent payments after modifications and reflects the balance as of June 30, 2012 and June 30, 2011, respectively. The Banks’ initial recorded investments in the loans did not change as a result of the modifications as the Banks did not forgive any principal or interest balance as part of the modifications.
(2) Number of contracts and outstanding principal balance represents loans which have balances as of June 30, 2012 and June 30, 2011 as certain loans may have been paid-down or charged-off during the three months ended June 30, 2012 and June 30, 2011.

Purchased other TDRs that were modified during the three and six months ended June 30, 2012 are set forth in the following table:

 

     Three Months Ended
June 30, 2012
     Six Months Ended
June 30, 2012
 
     Number of
Contracts
     Outstanding
Principal
Balance (1)
     Number of
Contracts
     Outstanding
Principal
Balance (1)
 
    

(Dollars in thousands)

 

Commercial business:

           

Commercial and industrial

     —         $ —           1       $ 18   

Non-owner occupied commercial real estate

     1         542         1         542   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial business

     1         542         2         560   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total purchased other TDRs

     1       $ 542         2       $ 560   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes subsequent payments after modifications and reflects the balance as of June 30, 2012 and June 30, 2011, respectively. The Banks’ initial recorded investments in the loans did not change as a result of the modifications as the Banks did not forgive any principal or interest balance as part of the modifications.

There were no purchased other TDRs modified during the three or six months ended June 30, 2011.

The majority of the Banks’ TDRs are a result of granting extensions to troubled credits which have already been adversely classified. We grant such extensions to reassess the borrower’s financial status and develop a plan for repayment. Certain modifications with extensions also include interest rate reductions, which is the second most prevalent concession. Certain TDRs were additionally re-amortized over a longer period of time. These modifications would all be considered a concession for a borrower that could not obtain similar financing terms from another source other than from the Banks.

The financial effects of each modification will vary based on the specific restructure. For the majority of the Banks’ TDRs, the loans were interest-only with a balloon payment at maturity. If the interest rate is not adjusted and the terms are consistent with market, the Banks might not experience any loss associated with the restructure. If, however, the restructure involves forbearance agreements or interest rate modifications, the Banks might not collect all the principal and interest based on the original contractual terms. The Banks estimate the necessary allowance for loan losses on TDRs using the same guidance as other impaired loans.

 

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Table of Contents

The balance of TDRs that had been modified within the previous twelve months ended June 30, 2012 that subsequently defaulted during the three and six months ended June 30, 2012 were as follows:

 

     Three Months Ended
June 30, 2012
     Six Months Ended
June 30, 2012
 
     Number of
Contracts
     Outstanding
Principal
Balance
     Number of
Contracts
     Outstanding
Principal
Balance
 
     (Dollars in thousands)  

Commercial business:

           

Commercial and industrial

     3       $ 411         6       $ 1,161   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial business

     3         411         6         1,161   
  

 

 

    

 

 

    

 

 

    

 

 

 

Real estate construction and land development:

           

One-to-four family residential

     1         222         1         122   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate construction and land development

     1         222         1         122   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total originated TDRs

     4       $ 633         7       $ 1,283   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no TDRs that had been modified within the previous twelve months ended June 30, 2011 that subsequently defaulted within the three and six months ended June 30, 2011. There were also no purchased other TDRs that had been modified within the twelve months ended June 20, 2012 and June 30, 2011 that subsequently defaulted during the three and six months ended June 20, 2012 and June 30, 2011.

Of the restructured loans that defaulted during the three months ended June 30, 2012 in the table above, the defaults of the three commercial and industrial loans were the results of granting additional extensions on the credits after they had been classified as TDRs. The Banks typically grant shorter extension periods to continually monitor the troubled credits despite the fact that the extended date might not be the date we expect the cash flow. The Banks have considered these subsequent defaults in our allowance for loan loss calculations. At June 30, 2012, the allowance for loan losses related to the defaulted loans was $82,000.

(h) Impaired Purchased Loans

As indicated above, the Company purchased impaired loans from the Cowlitz and Pierce Acquisitions which are accounted for under FASB ASC 310-30.

The following tables reflect the outstanding principal balance at June 30, 2012 and December 31, 2011 of the purchased impaired loans:

 

     Cowlitz Bank  
     June 30,
2012
     December 31,
2011
 
     (In thousands)  

Purchased covered loans:

     

Commercial business:

     

Commercial and industrial

   $ 32,512       $ 36,267   

Owner-occupied commercial real estate

     18,282         19,601   

Non-owner occupied commercial real estate

     13,316         16,212   
  

 

 

    

 

 

 

Total commercial business

     64,110         72,080   

One-to-four family residential

     4,317         4,371   

Real estate construction and land development:

     

One-to-four family residential

     6,175         8,524   

Five or more family residential and commercial properties

     —           —     
  

 

 

    

 

 

 

Total real estate construction and land development

     6,175         8,524   

Consumer

     3,607         3,917   
  

 

 

    

 

 

 

Gross purchased impaired covered loans

     78,209         88,892   

 

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Table of Contents
     Cowlitz Bank  
     June 30,
2012
     December 31,
2011
 
     (In thousands)  

Purchased non-covered loans:

     

Consumer

     340         435   
  

 

 

    

 

 

 

Total purchased impaired loans

   $ 78,549       $ 89,327   
  

 

 

    

 

 

 

The total balance of subsequent advances on the purchased impaired covered loans was $10.3 million as of June 30, 2012 and $10.5 million as of December 31, 2011. Heritage Bank has the option to modify certain purchased covered loans which may terminate the FDIC loss-share coverage on those modified loans. As of June 30, 2012 and December 31, 2011, the recorded investment balance of purchased impaired covered loans which are no longer covered under the FDIC loss-sharing agreements was $1.8 million and $2.0 million, respectively. Heritage 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 properly adjusted to reflect the change in the loan status.

 

     Pierce Commercial Bank  
     June 30, 2012      December 31, 2011  
     (In thousands)  

Purchased non-covered loans:

     

Commercial business:

     

Commercial and industrial

   $ 26,081       $ 34,352   

Owner-occupied commercial real estate

     6,938         7,043   

Non-owner occupied commercial real estate

     8,506         8,624   
  

 

 

    

 

 

 

Total commercial business

     41,525         50,019   

One-to-four family residential

     3,397         3,506   

Real estate construction and land development:

     

One-to-four family residential

     5,044         7,244   

Five or more family residential and commercial properties

     1,850         3,797   
  

 

 

    

 

 

 

Total real estate construction and land development

     6,894         11,041   

Consumer

     4,949         6,205   
  

 

 

    

 

 

 

Gross purchased impaired non-covered loans

   $ 56,765       $ 70,771   
  

 

 

    

 

 

 

On the acquisition date, the amount by which the undiscounted expected cash flows of the purchased impaired loans exceed the estimate fair value of the loan is the “accretable yield”. The accretable yield is then measured at each financial reporting date and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the purchased impaired loan.

The following table summarizes the accretable yield on the Cowlitz Bank and Pierce Commercial Bank purchased impaired loans for the three and six months ended June 30, 2012 and June 30, 2011:

 

     Three Months Ended
June 30, 2012
    Six Months Ended
June 30, 2012
 
     Cowlitz
Bank
    Pierce
Commercial
Bank
    Cowlitz
Bank
    Pierce
Commercial
Bank
 
     (In thousands)  

Balance at the beginning of period

   $ 17,824      $ 12,548      $ 19,912      $ 14,638   

Accretion

     (1,743     (1,585     (3,659     (3,156

Disposals and other

     (147     (225     (386     (744

Change in accretable yield

     630        1,077        697        1,077   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at the end of period

   $ 16,564      $ 11,815      $ 16,564      $ 11,815   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Three Months Ended
June 30, 2011
    Six Months Ended
June 30, 2011
 
     Cowlitz
Bank
    Pierce
Commercial
Bank
    Cowlitz
Bank
    Pierce
Commercial
Bank
 
     (In thousands)  

Balance at the beginning of period

   $ 25,485      $ 10,251      $ 20,082      $ 10,943   

Accretion

     (3,370     (1,731     (5,438     (2,856

Disposals and other

     (462     1,219        1,056        1,652   

Change in accretable yield

     569        6,536        6,522        6,536   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at the end of period

   $ 22,222      $ 16,275      $ 22,222      $ 16,275   
  

 

 

   

 

 

   

 

 

   

 

 

 

NOTE 3. Allowance for Loan Losses

The allowance for loan losses is maintained at a level deemed appropriate by management to adequately provide for probable incurred losses from known and inherent risks in the loan portfolio. A summary of the changes in the originated loans’ allowance for loan losses for the three and six months ended June 30, 2012 and June 30, 2011 are as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  
     (In thousands)  

Balance at the beginning of period

   $ 22,563      $ 21,382      $ 22,317      $ 22,062   

Loans charged off

     (1,961     (1,552     (3,295     (5,546

Recoveries of loans charged off

     41        186        1,621        905   

Provision charged to operations

     200        1,995        200        4,590   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at the end of period

   $ 20,843      $ 22,011      $ 20,843      $ 22,011   
  

 

 

   

 

 

   

 

 

   

 

 

 

A summary of the changes in the purchased loans’ allowance for loan losses for the three and six months ended June 30, 2012 and June 30, 2011 are as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012     2011      2012     2011  
     (In thousands)  

Balance at the beginning of period

   $ 8,232      $ 1,778       $ 8,598      $ —     

Loans charged off

     (11     —           (268     —     

Provision charged to operations

     419        1,529         310        3,307   
  

 

 

   

 

 

    

 

 

   

 

 

 

Balance at the end of period

   $ 8,640      $ 3,307       $ 8,640      $ 3,307   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents

The following table details activity in the allowance for loan losses disaggregated on the basis of the Company’s impairment method as of and for the three and six months ended June 30, 2012:

 

    Commercial
and
industrial
    Owner-
occupied
commercial
real estate
    Non-owner
occupied
commercial
real estate
    One-to-four
family
residential
    Real estate
construction
and land
development:
one-to-four
family
residential
    Real estate
construction
and land
development:
five or more
family
residential
and
commercial
properties
    Consumer     Unallocated     Total  
    (In thousands)  

Allowance for loan losses for the three months ended June 30, 2012:

                 

March 31, 2012

  $ 11,695      $ 3,668      $ 4,424      $ 857      $ 4,039      $ 3,677      $ 1,460      $ 975      $ 30,795   

Charge-offs

    (411     (1,000     (292     (76     (104     —          (89     —          (1,972

Recoveries

    29        8        —          —          —          —          4        —          41   

Provisions

    (580     817        300        367        (115     (325     202        (47     619   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2012

  $ 10,733      $ 3,493      $ 4,432      $ 1,148      $ 3,820      $ 3,352      $ 1,577      $ 928      $ 29,483   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses for the six months ended June 30, 2012:

                 

December 31, 2011

  $ 11,805      $ 2,979      $ 4,394      $ 794      $ 4,823      $ 3,800      $ 1,410      $ 910      $ 30,915   

Charge-offs

    (900     (1,000     (292     (118     (475     (445     (333     —          (3,563

Recoveries

    1,457        8        11       —          125        —          20        —          1,621   

Provisions

    (1,629     1,506        319        472        (653     (3     480        18        510   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2012

  $ 10,733      $ 3,493      $ 4,432      $ 1,148      $ 3,820      $ 3,352      $ 1,577      $ 928      $ 29,483   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses as of June 30, 2012 allocated to:

                 

Originated loans individually evaluated for impairment

  $ 1,288      $ 245      $ 727     $ 183      $ 910      $ 1,009      $ 100      $ —        $ 4,462   

Originated loans collectively evaluated for impairment

    5,778        1,844        2,406       558        2,013        2,236        618        928       16,381   

Purchased other covered loans individually evaluated for impairment

    —          —          —          —          —          —          3       —          3   

Purchased other covered loans collectively evaluated for impairment

    48        69        —          21       —          —          9        —          147   

Purchased other non-covered loans individually evaluated for impairment

    —          —          23        —          —          —          —          —          23   

Purchased other non-covered loans collectively evaluated for impairment

    85        52        11       16       —          —          63       —          227   

Purchased impaired covered loans collectively evaluated for impairment

    1,148        933        889        146        581        —          126        —          3,823   

Purchased impaired non-covered loans collectively evaluated for impairment

    2,386        350        376        224        316        107        658        —          4,417   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2012

  $ 10,733      $ 3,493      $ 4,432      $ 1,148      $ 3,820      $ 3,352      $ 1,577      $ 928      $ 29,483   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The purchased loans acquired in the Cowlitz and Pierce Acquisitions are subject to the Company’s internal and external credit review. If and when credit deterioration occurs subsequent to the acquisition dates, a provision for loan losses will be charged to earnings for the full amount without regard to the FDIC loss-sharing agreement for the covered loan balances. The portion of the estimated loss reimbursable from the FDIC is recorded in noninterest income and increases the FDIC indemnification asset.

The following table details the recorded investment balance of the loan receivables disaggregated on the basis of the Company’s impairment method as of June 30, 2012:

 

    Commercial
and
industrial
    Owner-
occupied
commercial
real estate
    Non-owner
occupied
commercial
real estate
    One-to-four
family
residential
    Real estate
construction
and land
development:
one-to-four
family
residential
    Real estate
construction
and land
development:
five or more
family
residential
and
commercial
properties
    Consumer     Total  
    (In thousands)  

Originated loans individually evaluated for impairment

  $ 12,178      $ 1,046      $ 7,241      $ 1,179      $ 4,407      $ 4,642      $ 149     $ 30,842   

Originated loans collectively evaluated for impairment

    266,016        179,936        250,022        36,573        19,725        41,815        30,600        824,687   

Purchased other covered loans individually evaluated for impairment

    18        —          —          —          —          —          7        25   

Purchased other covered loans collectively evaluated for impairment

    7,669        18,895        547        1,335        48        —          2,139        30,633   

Purchased other non-covered loans individually evaluated for impairment

    —          —          542        —          —          —          —          542   

Purchased other non-covered loans collectively evaluated for impairment

    6,748        10,780        4,917        61        —          —          5,917        28,423   

Purchased impaired covered loans collectively evaluated for impairment

    28,345        17,391        13,414        3,716        4,223        —          3,583        70,672   

Purchased impaired non-covered loans collectively evaluated for impairment

    23,054     <