Business Combinations (Tables)

12 Months Ended

Dec. 31, 2014

The total consideration transferred in the Washington Banking Merger consisted of the following:



	Washington Banking
	(In thousands)
Consideration transferred
Cash paid (1)	$	42,895
Fair value of common shares issued (2)	224,151
Fair value of restricted stock unit awards (3)	2,092
Fair value of common stock options	481
Total consideration transferred	$	269,619


(1)	Includes $3,000 of cash paid due to fractional shares and $27,000 of cash paid from dissenters.


(2)	Total of 13,870,716 shares issued. Excludes 1,686 shares dissented and paid in cash and 165 fractional shares paid in cash.


(3)	Total number of converted shares was 129,462. Fair value includes 26,783 shares which were forfeited by the Washington Banking stockholder to pay applicable taxes, totaling fair value of $433,000.

Preliminary fair value estimates of assets acquired and liabilities assumed

The fair value estimates of the assets acquired and liabilities assumed in the indicated merger and acquisitions were as follows:



	Washington Banking		Valley		NCB
	May 1, 2014		July 15, 2013		January 9, 2013
	(In thousands)
Assets
Cash and cash equivalents	$	74,947	$	40,643	$	2,712
Other interest earning deposits	—		13,866		1,003
Investment securities available for sale	458,312		31,444		2,753
Investment securities held to maturity	—		22,908		—
Loans held for sale	3,923		—		—
Noncovered loans receivable	895,978		117,071		51,509
Covered loans receivable	107,050		—		—
FDIC indemnification asset	7,174		—		—
Other real estate owned ($5,122, $0, and $0 covered by FDIC shared-loss agreements, respectively)	7,121		—		2,279
Premises and equipment	31,776		6,558		214
Federal Home Loan Bank stock	7,064		366		88
Bank owned life insurance	32,519		—		—
Accrued Interest Receivable	4,943		465		232
Other intangible assets	11,194		916		156
Prepaid expenses and other assets	14,852		3,087		4,048
Total assets acquired	1,656,853		237,324		64,994
Liabilities
Deposits	1,433,894		207,013		60,442
Junior subordinated debentures	18,937		—		—
Accrued expenses and other liabilities	24,067		342		1,186
Total liabilities assumed	1,476,898		207,355		61,628
Net assets acquired	$	179,955	$	29,969	$	3,366

A summary of the net assets purchased, the fair value adjustments and resulting goodwill recognized from the Washington Banking Merger and Valley Acquisition and the resulting bargain purchase gain recognized on the NCB Acquisition are presented in the following table. Goodwill on mergers and acquisitions represents the excess of the consideration transferred over the estimated fair value of the net assets acquired and liabilities assumed. A bargain purchase gain on bank acquisition represents the excess of the estimated fair value of the net assets acquired and liabilities assumed over the value of the consideration paid. The bargain purchase gain in the NCB Acquisition was influenced significantly by the net deferred tax asset acquired. NCB had significant net operating losses and as a result of its estimate of whether or not it was more likely than not that the net deferred tax asset would be realized, had recorded a full valuation allowance on the net deferred tax asset. The Company, however, has reviewed the net deferred tax asset and determined it is more likely than not that the net deferred tax asset would be realized by the Company.



	Washington Banking			Valley			NCB
	May 1, 2014			July 15, 2013			January 9, 2013
	(In thousands)
Cost basis of net assets on merger date	$	181,782		$	29,720		$	6,113
Less: Consideration transferred	(269,619		)	(46,323		)	(2,967		)
Fair value adjustments:
Other interest earning deposits	—			162			7
Investment securities	—			—			(2		)
Loans held for sale	86			—			—
Noncovered loans receivable	(12,811		)	(3,003		)	(3,299		)
Covered loans receivable	6,384			—			—
FDIC indemnification asset	357			—			—
Other real estate owned	387			—			(1,301		)
Premises and equipment	(1,540		)	1,837			(69		)
Other intangible assets	10,216			916			156
Prepaid expenses and other assets	(6,416		)	198			2,394
Deposits	(1,737		)	(9		)	(11		)
Junior subordinated debentures	6,837			—			—
Accrued expenses and other liabilities	(3,590		)	149			(622		)
(Goodwill) bargain purchase gain recognized	$	(89,664	)	$	(16,353	)	$	399

Unaudited pro forma information

The following table presents certain pro forma information, for illustrative purposes only, for the years ended December 31, 2014 and 2013 as if the Washington Banking Merger had occurred on January 1, 2013. The estimated pro forma information combines the historical results of Washington Banking with the Company's consolidated historical results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the Washington Banking Merger occurred on January 1, 2013. In particular, no adjustments have been made to eliminate the impact of the Washington Banking loans previously accounted for under ASC 310-30 that may have been necessary if these loans had been recorded at fair value at January 1, 2013. The pro forma information also does not consider any changes to the provision for loan losses resulting from recorded loans at fair value. Additionally, Heritage expects to achieve further operating savings and other business synergies, including interest income growth, as a result of the Washington Banking Merger which are not reflected in the pro forma amounts in the following table. As a result, actual amounts will differ from the pro forma information presented.



	Pro Forma for the Year Ended December 31,
	2014		2013
	(Dollars In Thousands, except per share amounts)
Net interest income	$	144,470	$	147,267
Net income	35,758		30,718
Basic earnings per common share	$	1.19	$	1.04
Diluted earnings per common share	1.18		1.04