Business Combinations

12 Months Ended

Dec. 31, 2019

There were no acquisitions or mergers completed during the years ended December 31, 2019 and 2017. During the year ended December 31, 2018, the Company completed the acquisitions of Puget Sound Bancorp and Premier Commercial Bancorp.

Puget Sound Merger:

On July 26, 2017, the Company, along with the Bank, and Puget Sound Bancorp, Inc. and its wholly-owned subsidiary bank, Puget Sound Bank, jointly announced the signing of a definitive agreement. The Puget Sound Merger was effective on January 16, 2018. As of the acquisition date, Puget Sound merged into Heritage and Puget Sound Bank merged into Heritage Bank. The Puget Sound Merger resulted in $68.5 million of goodwill.

Pursuant to the terms of the Puget Sound Merger, all outstanding Puget Sound restricted stock awards became immediately vested on the acquisition date of the Puget Sound Merger. Puget Sound shareholders received 1.1688 shares of Heritage common stock per share of Puget Sound stock. Heritage issued an aggregate of 4,112,258 shares of its common stock based on the January 12, 2018 closing price of Heritage Common stock of $31.80 for total fair value of common shares issued of $130.8 million and paid cash of $3,000 for fractional shares in the transaction for total consideration paid of $130.8 million. Total consideration includes $851,000, representing 26,741 shares which were forfeited by the Puget Sound shareholders to pay applicable taxes.

The Company incurred acquisition-related costs of $75,000, $5.4 million and $810,000 for the years ended December 31, 2019, 2018 and 2017 respectively, for the Puget Sound Merger.

Premier Merger:

On March 24, 2018, the Company, along with the Bank, and Premier Commercial Bancorp and its wholly-owned subsidiary bank, Premier Community Bank, jointly announced the signing of a definitive agreement. The Premier Merger was effective on July 2, 2018. As of the acquisition date, Premier Commercial Bancorp merged into Heritage and Premier Community Bank merged into Heritage Bank.

Pursuant to the terms of the Premier Merger, Premier Commercial shareholders received 0.4863 shares of Heritage common stock in exchange for each share of Premier Commercial common stock based on the closing date price per share of Heritage common stock on June 29, 2018 of $34.85. Heritage issued an aggregate of 2,848,579 shares of its common stock and paid cash of $2,000 for fractional shares in the transaction for total consideration paid of $99.3 million.

The Company incurred acquisition-related costs of $57,000, and $4.9 million, for the years ended December 31, 2019 and 2018 for the Premier Merger, respectively. There were no incurred acquisition-related costs for the year ended December 31, 2017 for the Premier Merger.

Business Combination Accounting:

The Premier Merger and Puget Sound Merger resulted in $53.4 million and $68.5 million, respectively, of goodwill. This goodwill is not deductible for tax purposes.

The primary reason for the Premier and Puget Mergers was to create depth in the Company's geographic footprint consistent with its ongoing growth strategy, focused heavily on metro markets, and to achieve operational scale and realize efficiencies of a larger combined organization. The mergers constitute business acquisitions as defined by FASB ASC 805, Business Combinations. FASB ASC 805 establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired and the liabilities assumed. Heritage was considered the acquirer in these transactions. Accordingly, the preliminary estimates of fair values of Premier Commercial and Puget Sound assets, including the identifiable intangible assets, and the assumed liabilities, were measured and recorded as of the respective acquisition dates. Fair values on the acquisition dates are preliminary and represent management’s best estimates based on available information and facts and circumstances in existence on the acquisition date. Fair values are subject to refinement for up to one year after the closing date of the acquisitions as additional information regarding the closing date fair values becomes available. The Company finalized the purchase price allocation for both mergers as of December 31, 2018.

The fair value estimates of the assets acquired and liabilities assumed in the Premier and Puget Mergers were as follows:



	Premier Merger		Puget Sound Merger
	(In thousands)
Assets
Cash and cash equivalents	$	22,534	$	25,889
Interest earning deposits	3,309		54,247
Investment securities available for sale	4,493		80,353
Loans receivable ⁽¹⁾	330,158		388,462
Other real estate owned	1,796		—
Premises and equipment, net	3,053		732
Federal Home Loan Bank stock, at cost	1,120		623
Bank owned life insurance	10,852		6,264
Accrued interest receivable	1,006		1,448
Prepaid expenses and other assets	1,603		1,354
Other intangible assets	7,075		11,270
Total assets acquired	$	386,999	$	570,642
Liabilities
Deposits	$	318,717	$	505,885
Federal Home Loan Bank advances	16,000		—
Securities sold under agreement to repurchase	462		—
Accrued expenses and other liabilities	5,935		2,504
Total liabilities acquired	$	341,114	$	508,389

Fair value of net assets acquired	$	45,885	$	62,253

⁽¹⁾The outstanding loan balance acquired in the Premier Merger and Puget Sound Merger was $335.4 million and $392.7 million, respectively, at the acquisition date.

A summary of the net assets purchased and the estimated fair value adjustments and resulting goodwill recognized from the Premier and Puget Sound Mergers are presented in the following tables. Goodwill represents the excess of the consideration transferred over the estimated fair value of the net assets acquired and liabilities assumed.



	Premier Merger			Puget Sound Merger
	(In thousands)
Consideration transferred	$	99,275		$	130,773

Cost basis of net assets on merger date	$	40,629		$	54,405
Fair value adjustments:
Investment securities	(135		)	(348		)
Total loans receivable, net	(111		)	1,400
Other real estate owned	(1,017		)	—
Premises and equipment	1,312			(121		)
Other intangible assets	7,075			9,207
Prepaid expenses and other assets	(1,912		)	(2,282		)
Deposits	(310		)	(62		)
Accrued expenses and other liabilities	354			54
Fair value of net assets on merger date	$	45,885		$	62,253

Goodwill recognized from the mergers	$	53,390		$	68,520

The following table presents certain pro forma information, for illustrative purposes only, for the years ended December 31, 2018 and 2017 as if the Premier and Puget Mergers had occurred on January 1, 2017. The estimated pro forma information combines the historical results of Premier Commercial and Puget Sound 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 Premier and Puget Mergers occurred on January 1, 2017. In particular, the pro forma information 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 Premier and Puget Mergers 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,
	2018		2017
	(Dollars in thousands, except per share amounts)
Net interest income	$	194,989	$	174,190
Net income	69,515		41,551
Basic earnings per common share	$	1.88	$	1.12
Dilutive Earnings per common share	$	1.87	$	1.12

The Company believes that the historical Premier Commercial and Puget Sound operating results, individually or collectively, are not considered of enough significance to be meaningful to the Company’s results of operations.