NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business:
Washington Banking Company (the “Company”) was formed on April 30, 1996 and is a registered bank holding company whose primary business is conducted by its wholly-owned subsidiary, Whidbey Island Bank (the “Bank”). The business of the Bank, which is focused in the northern area of Western Washington, consists primarily of attracting deposits from the general public and originating loans. The Company and the Bank have formed two subsidiaries for various purposes as follows:
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▪
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Washington Banking Master Trust (the “Master Trust”) is a wholly-owned subsidiary of the Company. The Master Trust was formed in April 2007 for the exclusive purpose of issuing trust preferred securities.
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|
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▪
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Rural One, LLC (“Rural One”) is a majority-owned subsidiary of the Bank and is certified as a Community Development Entity by the Community Development Financial Institutions Fund of the United States Department of Treasury. Rural One was formed in September 2006 for the purpose of investing in Federal tax credits related to the New Markets Tax Credit program through a real estate development loan to a community development organization.
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On October 23, 2013, the Company and Heritage Financial Corporation (“Heritage”) jointly announced the signing of a definitive agreement under which the Company and Heritage will enter into a strategic merger to create one of the premier community banking franchises in Western Washington and the Pacific Northwest. See Note (12)
Subsequent Events
for additional information.
(b) Basis of Presentation:
The accompanying interim condensed consolidated financial statements include the accounts of the Company and its subsidiaries described above. The accompanying interim condensed consolidated financial statements have been prepared, without audit, 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 generally accepted accounting principles in the United States of America for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the December 31, 2012 audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC.
In preparing these financial statements, the Company has evaluated events and transactions subsequent to
September 30, 2013
for potential recognition or disclosure. In management’s opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the
three and nine
months ended
September 30, 2013
, are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. In preparing the condensed consolidated financial statements, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses are required. Actual results could differ from those estimates. Management considers the estimates used in developing the allowance for loan losses, the valuation of covered loans and the FDIC indemnification asset and determining the fair value of financial assets and liabilities to be particularly sensitive estimates that may be subject to revision in the near term.
(c) Reclassifications:
Certain amounts in prior year’s financial statements may have been reclassified to conform to the 2013 presentation. These reclassifications had no significant impact on previously reported net income, net income available per common share or equity.
(d) Significant Accounting Policies:
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements and the accompanying notes. Changes in these estimates and assumptions are considered reasonably possible and may have a material impact on the consolidated financial statements and thus actual results could differ from the amounts reported and disclosed herein. A more detailed description of the Company’s significant accounting policies are described in Note (1) of the Notes to Consolidated Financial Statements for the year ended
December 31, 2012
, as filed on Form 10-K.
WASHINGTON BANKING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) Recent Financial Accounting Pronouncements
In December 2011, the FASB issued ASU No. 2011-11,
Disclosures about Offsetting Assets and Liabilities
. The ASU requires an entity to offset, and present as a single net amount, a recognized eligible asset and a recognized eligible liability when it has an unconditional and legally enforceable right of setoff and intends either to settle the asset and liability on a net basis or to realize the asset and settle the liability simultaneously. The ASU requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The Company adopted the provisions of this ASU effective January 1, 2013. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
In July 2012, the FASB issued ASU No. 2012-2,
Testing Indefinite-Lived Intangible Assets for Impairment
. This ASU states that an entity has the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount, in accordance with Codification Subtopic 350-30, Intangibles—Goodwill and Other, General Intangibles Other than Goodwill. Under guidance in this ASU, an entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
In October 2012, the FASB issued ASU No. 2012-06,
Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution
. The ASU clarifies that when an entity recognizes an indemnification asset as a result of a government-assisted acquisition of a financial institution and subsequently, a change in the cash flows expected to be collected on the indemnification asset occurs, as a result of a change in cash flows expected to be collected on the assets subject to indemnification, the reporting entity should subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement. The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2012. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
In January 2013, the FASB issued ASU No. 2013-01,
Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities
. ASU No. 2013-01 clarifies that ASU No. 2011-11 applies only to derivatives, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting arrangement or similar agreement. Entities with other types of financial assets and financial liabilities subject to a master netting arrangement or similar agreement are no longer subject to the disclosure requirements in ASU No. 2011-11. The amendments are effective for annual and interim reporting periods beginning on or after January 1, 2013. The adoption of this ASU did not have a material impact on the Company's consolidated financial statements.
In February 2013, the FASB issued ASU No. 2013-02,
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
, to improve the transparency of reporting these reclassifications. The ASU does not amend any existing requirements for reporting net income or other comprehensive income in the financial statements but requires an entity to disaggregate the total change of each component of other comprehensive income and separately present reclassification adjustments and current period other comprehensive income. The provisions of this ASU also requires that entities present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line item affected by the reclassification. If a component is not required to be reclassified to net income in its entirety, entities would instead cross reference to the related note to the financial statements for additional information. The Company adopted the provisions of this ASU effective January 1, 2013. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
WASHINGTON BANKING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) Recent Financial Accounting Pronouncements (continued)
In July 2013, the FASB issued ASU No. 2013-11,
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists
. The ASU requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. No new recurring disclosures are required. The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2013, and are to be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
(3) Investment Securities
The following table presents the amortized cost, unrealized gains, unrealized losses and fair value of investment securities available for sale at
September 30, 2013
and
December 31, 2012
. At
September 30, 2013
and
December 31, 2012
, there were no investment securities classified as held to maturity or trading.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
September 30, 2013
|
|
|
Amortized cost
|
|
Unrealized gains
|
|
Unrealized losses
|
|
Fair value
|
|
U.S. government agencies
|
$
|
85,789
|
|
|
$
|
759
|
|
|
$
|
(633
|
)
|
|
$
|
85,915
|
|
|
Residential pass-through securities
|
171,312
|
|
|
911
|
|
|
(3,404
|
)
|
|
168,819
|
|
|
Taxable state and political subdivisions
|
2,295
|
|
|
215
|
|
|
—
|
|
|
2,510
|
|
|
Tax exempt state and political subdivisions
|
71,678
|
|
|
1,711
|
|
|
(990
|
)
|
|
72,399
|
|
|
Corporate obligations
|
11,000
|
|
|
—
|
|
|
(252
|
)
|
|
10,748
|
|
|
Agency-issued collateralized mortgage obligations
|
36,653
|
|
|
47
|
|
|
(962
|
)
|
|
35,738
|
|
|
Asset-backed securities
|
23,878
|
|
|
—
|
|
|
(1,644
|
)
|
|
22,234
|
|
|
Investments in mutual funds and other equities
|
2,018
|
|
|
—
|
|
|
(105
|
)
|
|
1,913
|
|
|
Total investment securities available for sale
|
$
|
404,623
|
|
|
$
|
3,643
|
|
|
$
|
(7,990
|
)
|
|
$
|
400,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
December 31, 2012
|
|
|
Amortized cost
|
|
Unrealized gains
|
|
Unrealized losses
|
|
Fair value
|
|
U.S. government agencies
|
$
|
87,297
|
|
|
$
|
1,321
|
|
|
$
|
(32
|
)
|
|
$
|
88,586
|
|
|
Residential pass-through securities
|
165,175
|
|
|
3,430
|
|
|
(182
|
)
|
|
168,423
|
|
|
Taxable state and political subdivisions
|
4,759
|
|
|
553
|
|
|
—
|
|
|
5,312
|
|
|
Tax exempt state and political subdivisions
|
56,431
|
|
|
2,703
|
|
|
(149
|
)
|
|
58,985
|
|
|
Corporate obligations
|
11,000
|
|
|
—
|
|
|
(565
|
)
|
|
10,435
|
|
|
Agency-issued collateralized mortgage obligations
|
13,967
|
|
|
79
|
|
|
—
|
|
|
14,046
|
|
|
Asset-backed securities
|
25,108
|
|
|
150
|
|
|
(70
|
)
|
|
25,188
|
|
|
Investments in mutual funds and other equities
|
2,018
|
|
|
—
|
|
|
(25
|
)
|
|
1,993
|
|
|
Total investment securities available for sale
|
$
|
365,755
|
|
|
$
|
8,236
|
|
|
$
|
(1,023
|
)
|
|
$
|
372,968
|
|
WASHINGTON BANKING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) Investment Securities
Investment securities that were in an unrealized loss position at
September 30, 2013
and
December 31, 2012
, are presented in the following tables, based on the length of time individual securities have been in an unrealized loss position. In the opinion of management, these securities are considered only temporarily impaired due to changes in market interest rates or the widening of market spreads subsequent to the initial purchase of the securities, and not due to concerns regarding the underlying credit of the issuers or the underlying collateral.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
September 30, 2013
|
|
|
Less than 12 Months
|
|
12 Months or Longer
|
|
Total
|
|
|
Fair value
|
|
Unrealized losses
|
|
Fair value
|
|
Unrealized losses
|
|
Fair value
|
|
Unrealized losses
|
|
U.S. government agencies
|
$
|
40,631
|
|
|
$
|
(633
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
40,631
|
|
|
$
|
(633
|
)
|
|
Residential pass-through securities
|
$
|
89,801
|
|
|
$
|
(2,116
|
)
|
|
$
|
23,936
|
|
|
$
|
(1,288
|
)
|
|
$
|
113,737
|
|
|
$
|
(3,404
|
)
|
|
Tax exempt state and political subdivisions
|
36,019
|
|
|
(990
|
)
|
|
—
|
|
|
—
|
|
|
36,019
|
|
|
(990
|
)
|
|
Corporate obligations
|
7,943
|
|
|
(57
|
)
|
|
2,805
|
|
|
(195
|
)
|
|
10,748
|
|
|
(252
|
)
|
|
Agency-issued collateralized mortgage obligations
|
25,594
|
|
|
(962
|
)
|
|
—
|
|
|
—
|
|
|
25,594
|
|
|
(962
|
)
|
|
Asset-backed securities
|
22,234
|
|
|
(1,644
|
)
|
|
—
|
|
|
—
|
|
|
22,234
|
|
|
(1,644
|
)
|
|
Investments in mutual funds and other equities
|
—
|
|
|
—
|
|
|
1,913
|
|
|
(105
|
)
|
|
1,913
|
|
|
(105
|
)
|
|
Total investment securities available for sale
|
$
|
222,222
|
|
|
$
|
(6,402
|
)
|
|
$
|
28,654
|
|
|
$
|
(1,588
|
)
|
|
$
|
250,876
|
|
|
$
|
(7,990
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
December 31, 2012
|
|
|
Less than 12 Months
|
|
12 Months or Longer
|
|
Total
|
|
|
Fair value
|
|
Unrealized losses
|
|
Fair value
|
|
Unrealized losses
|
|
Fair value
|
|
Unrealized losses
|
|
U.S. government agencies
|
$
|
12,056
|
|
|
$
|
(32
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,056
|
|
|
$
|
(32
|
)
|
|
Residential pass-through securities
|
27,680
|
|
|
(182
|
)
|
|
—
|
|
|
—
|
|
|
27,680
|
|
|
(182
|
)
|
|
Tax exempt state and political subdivisions
|
10,113
|
|
|
(149
|
)
|
|
—
|
|
|
—
|
|
|
10,113
|
|
|
(149
|
)
|
|
Corporate obligations
|
—
|
|
|
—
|
|
|
10,435
|
|
|
(565
|
)
|
|
10,435
|
|
|
(565
|
)
|
|
Asset-backed securities
|
9,856
|
|
|
(70
|
)
|
|
—
|
|
|
—
|
|
|
9,856
|
|
|
(70
|
)
|
|
Investments in mutual funds and other equities
|
—
|
|
|
—
|
|
|
1,993
|
|
|
(25
|
)
|
|
1,993
|
|
|
(25
|
)
|
|
Total investment securities available for sale
|
$
|
59,705
|
|
|
$
|
(433
|
)
|
|
$
|
12,428
|
|
|
$
|
(590
|
)
|
|
$
|
72,133
|
|
|
$
|
(1,023
|
)
|
At
September 30, 2013
and
December 31, 2012
, there were
80
and
25
investment securities in unrealized loss positions, respectively. For each security in an unrealized loss position, the Company assesses whether it intends to sell the security, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. For debt securities that are considered other-than-temporarily impaired and that the Company does not intend to sell and will not be required to sell prior to recovery of its amortized cost basis, the Company will separate the amount of the impairment into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is calculated as the difference between the security’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the security’s fair value and the present value of future expected cash flows is deemed to be due to factors that are not credit related and is recognized in other comprehensive income.
WASHINGTON BANKING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) Investment Securities (continued)
The Company does not intend to sell the securities that are temporarily impaired, and it is more likely than not that the Company will not have to sell those securities before recovery of the cost basis. Additionally, the Company has evaluated the credit ratings of its investment securities and their issuers and/or insurers, as applicable. Based on the Company’s evaluation, management has determined that no investment security in the Company’s investment portfolio was other-than-temporarily impaired at
September 30, 2013
or
December 31, 2012
.
The amortized cost and fair value of investment securities, by maturity, are shown in the table below. The amortized cost and fair value of residential pass-through securities, agency-issued collateralized mortgage obligations and asset-backed securities are presented by expected average life, rather than contractual maturity. Expected maturities may differ from contractual maturities because issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
September 30, 2013
|
|
|
Amortized cost
|
|
Fair value
|
|
Three months or less
|
$
|
1,411
|
|
|
$
|
1,415
|
|
|
Over three months to one year
|
2,519
|
|
|
2,550
|
|
|
After one year through three years
|
44,646
|
|
|
45,390
|
|
|
After three years through five years
|
233,541
|
|
|
230,633
|
|
|
After five years through ten years
|
83,607
|
|
|
82,337
|
|
|
After ten years
|
38,899
|
|
|
37,951
|
|
|
Total
|
$
|
404,623
|
|
|
$
|
400,276
|
|
The following table presents investment securities which were pledged to secure borrowings and public deposits as permitted or required by law:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
September 30, 2013
|
|
|
Amortized cost
|
|
Fair value
|
|
To state and local governments to secure public deposits
|
$
|
53,742
|
|
|
$
|
55,297
|
|
|
To Federal Reserve Bank to secure borrowings
|
18,226
|
|
|
18,259
|
|
|
To Federal Home Loan Bank to secure borrowings
|
525
|
|
|
544
|
|
|
Other securities pledged, principally to secure deposits
|
12,584
|
|
|
13,035
|
|
|
Total pledged investment securities
|
$
|
85,077
|
|
|
$
|
87,135
|
|
The following table presents the gross realized gains and gross realized losses on the sale of investment securities available for sale for the
three and nine
months ended
September 30, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Three Months Ended
|
Nine Months Ended
|
|
|
September 30,
|
September 30,
|
|
|
2013
|
|
2012
|
2013
|
|
2012
|
|
Gross realized gains
|
—
|
|
|
345
|
|
556
|
|
|
689
|
|
|
Gross realized losses
|
—
|
|
|
—
|
|
—
|
|
|
(2
|
)
|
|
Gain on sale of investment securities, net
|
$
|
—
|
|
|
$
|
345
|
|
$
|
556
|
|
|
$
|
687
|
|
WASHINGTON BANKING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) Non-Covered Loans
The following table presents the major types of non-covered loans at
September 30, 2013
and
December 31, 2012
. The classification of non-covered loan balances presented is reported in accordance with regulatory reporting requirements.
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
September 30, 2013
|
|
December 31, 2012
|
|
Commercial
|
$
|
173,003
|
|
|
$
|
162,481
|
|
|
Real estate mortgage
|
486,594
|
|
|
452,627
|
|
|
Real estate construction
|
51,102
|
|
|
81,398
|
|
|
Consumer
|
160,234
|
|
|
154,890
|
|
|
|
870,933
|
|
|
851,396
|
|
|
Deferred loan costs, net
|
1,703
|
|
|
1,738
|
|
|
Allowance for loan losses
|
(16,942
|
)
|
|
(17,147
|
)
|
|
Total non-covered loans, net
|
$
|
855,694
|
|
|
$
|
835,987
|
|
(5) Allowance for Non-Covered Loan Losses and Credit Quality
Activity in the Allowance for Non-Covered Loan Losses
The following table summarizes activity related to the allowance for loan losses on non-covered loans, by portfolio segment, for the
three and nine
months ended
September 30, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Three Months Ended September 30, 2013
|
|
|
Commercial
|
|
Real estate mortgage
|
|
Real estate construction
|
|
Consumer
|
|
Total
|
|
Beginning balance
|
$
|
4,316
|
|
|
$
|
7,055
|
|
|
$
|
2,575
|
|
|
$
|
3,021
|
|
|
$
|
16,967
|
|
|
Provision
|
(290
|
)
|
|
(194
|
)
|
|
501
|
|
|
508
|
|
|
525
|
|
|
Charge-offs
|
(70
|
)
|
|
—
|
|
|
—
|
|
|
(700
|
)
|
|
(770
|
)
|
|
Recoveries
|
48
|
|
|
70
|
|
|
3
|
|
|
99
|
|
|
220
|
|
|
Ending Balance
|
$
|
4,004
|
|
|
$
|
6,931
|
|
|
$
|
3,079
|
|
|
$
|
2,928
|
|
|
$
|
16,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Three Months Ended September 30, 2012
|
|
|
Commercial
|
|
Real estate mortgage
|
|
Real estate construction
|
|
Consumer
|
|
Total
|
|
Beginning balance
|
$
|
4,471
|
|
|
$
|
5,844
|
|
|
$
|
3,983
|
|
|
$
|
3,267
|
|
|
$
|
17,565
|
|
|
Provision
|
63
|
|
|
901
|
|
|
142
|
|
|
144
|
|
|
1,250
|
|
|
Charge-offs
|
(258
|
)
|
|
(655
|
)
|
|
(1,308
|
)
|
|
(278
|
)
|
|
(2,499
|
)
|
|
Recoveries
|
81
|
|
|
68
|
|
|
7
|
|
|
98
|
|
|
254
|
|
|
Ending Balance
|
$
|
4,357
|
|
|
$
|
6,158
|
|
|
$
|
2,824
|
|
|
$
|
3,231
|
|
|
$
|
16,570
|
|
WASHINGTON BANKING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) Allowance for Non-Covered Loan Losses and Credit Quality (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Nine Months Ended September 30, 2013
|
|
|
Commercial
|
|
Real estate mortgage
|
|
Real estate construction
|
|
Consumer
|
|
Total
|
|
Beginning balance
|
$
|
4,405
|
|
|
$
|
6,516
|
|
|
$
|
3,050
|
|
|
$
|
3,176
|
|
|
$
|
17,147
|
|
|
Provision
|
(45
|
)
|
|
467
|
|
|
92
|
|
|
1,311
|
|
|
1,825
|
|
|
Charge-offs
|
(506
|
)
|
|
(194
|
)
|
|
(70
|
)
|
|
(1,960
|
)
|
|
(2,730
|
)
|
|
Recoveries
|
150
|
|
|
142
|
|
|
7
|
|
|
401
|
|
|
700
|
|
|
Ending Balance
|
$
|
4,004
|
|
|
$
|
6,931
|
|
|
$
|
3,079
|
|
|
$
|
2,928
|
|
|
$
|
16,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Nine Months Ended September 30, 2012
|
|
|
Commercial
|
|
Real estate mortgage
|
|
Real estate construction
|
|
Consumer
|
|
Total
|
|
Beginning balance
|
$
|
4,034
|
|
|
$
|
6,500
|
|
|
$
|
4,046
|
|
|
$
|
3,452
|
|
|
$
|
18,032
|
|
|
Provision
|
1,443
|
|
|
2,766
|
|
|
809
|
|
|
582
|
|
|
5,600
|
|
|
Charge-offs
|
(1,234
|
)
|
|
(3,220
|
)
|
|
(2,041
|
)
|
|
(1,192
|
)
|
|
(7,687
|
)
|
|
Recoveries
|
114
|
|
|
112
|
|
|
10
|
|
|
389
|
|
|
625
|
|
|
Ending Balance
|
$
|
4,357
|
|
|
$
|
6,158
|
|
|
$
|
2,824
|
|
|
$
|
3,231
|
|
|
$
|
16,570
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables provides a summary of the allowance for non-covered loan losses and related non-covered loans, by portfolio segment, at
September 30, 2013
and December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
September 30, 2013
|
|
|
Commercial
|
|
Real estate mortgage
|
|
Real estate construction
|
|
Consumer
|
|
Total
|
|
Allowance for non-covered loan losses:
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
1,276
|
|
|
$
|
1,625
|
|
|
$
|
1,258
|
|
|
$
|
48
|
|
|
$
|
4,207
|
|
|
Collectively evaluated for impairment
|
2,728
|
|
|
5,306
|
|
|
1,821
|
|
|
2,880
|
|
|
12,735
|
|
|
Total allowance for non-covered loan losses
|
$
|
4,004
|
|
|
$
|
6,931
|
|
|
$
|
3,079
|
|
|
$
|
2,928
|
|
|
$
|
16,942
|
|
|
Non-covered loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
8,759
|
|
|
$
|
12,929
|
|
|
$
|
12,533
|
|
|
$
|
611
|
|
|
$
|
34,832
|
|
|
Collectively evaluated for impairment
|
164,244
|
|
|
473,665
|
|
|
38,569
|
|
|
159,623
|
|
|
836,101
|
|
|
Total non-covered loans
(1)
|
$
|
173,003
|
|
|
$
|
486,594
|
|
|
$
|
51,102
|
|
|
$
|
160,234
|
|
|
$
|
870,933
|
|
(1)
Total non-covered loans excludes deferred loan costs of
$1.7 million
.
WASHINGTON BANKING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) Allowance for Non-Covered Loan Losses and Credit Quality (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
December 31, 2012
|
|
|
Commercial
|
|
Real estate mortgage
|
|
Real estate construction
|
|
Consumer
|
|
Total
|
|
Allowance for non-covered loan losses:
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
1,468
|
|
|
$
|
1,154
|
|
|
$
|
881
|
|
|
$
|
52
|
|
|
$
|
3,555
|
|
|
Collectively evaluated for impairment
|
2,937
|
|
|
5,362
|
|
|
2,169
|
|
|
3,124
|
|
|
13,592
|
|
|
Total allowance for non-covered loan losses
|
$
|
4,405
|
|
|
$
|
6,516
|
|
|
$
|
3,050
|
|
|
$
|
3,176
|
|
|
$
|
17,147
|
|
|
Non-covered loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
9,974
|
|
|
$
|
11,357
|
|
|
$
|
19,607
|
|
|
$
|
916
|
|
|
$
|
41,854
|
|
|
Collectively evaluated for impairment
|
152,507
|
|
|
441,270
|
|
|
61,791
|
|
|
153,974
|
|
|
809,542
|
|
|
Total non-covered loans
(1)
|
$
|
162,481
|
|
|
$
|
452,627
|
|
|
$
|
81,398
|
|
|
$
|
154,890
|
|
|
$
|
851,396
|
|
(1)
Total non-covered loans excludes deferred loan costs of
$1.7 million
.
Credit Quality and Nonperforming Non-Covered Loans
The Company manages credit quality and controls its credit risk through lending limits, credit review, approval policies and extensive, ongoing internal monitoring. Through this monitoring process, nonperforming loans are identified. Non-covered nonperforming loans consist of non-covered nonaccrual loans. Non-covered nonperforming loans are assessed for potential loss exposure on an individual or homogeneous group basis.
A loan is considered impaired when, based upon currently known information, it is deemed probable that the Company will be unable to collect all amounts due as scheduled according to the original terms of the agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, based on the loan’s observable market price or the fair value of collateral, if the loan is collateral dependent.
Loans are placed on nonaccrual status when collection of principal or interest is considered doubtful (generally when loans are 90 days or more past due). Loans placed on nonaccrual will typically remain on nonaccrual status until all principal and interest payments are brought current, there has been a sustained period of repayment performance (generally six months) and the prospects for future payments, in accordance with the loan agreement, appear relatively certain.
WASHINGTON BANKING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) Allowance for Non-Covered Loan Losses and Credit Quality (continued)
Interest income previously accrued on nonaccrual loans, but not yet received, is reversed in the period the loan is placed on nonaccrual status. Payments received are generally applied to principal. However, based on management’s assessment of the ultimate collectability of an impaired or nonaccrual loan, interest income may be recognized on a cash basis. Nonaccrual loans are returned to an accrual status when management determines the circumstances have improved to the extent that there has been a sustained period of repayment performance and both principal and interest are deemed collectible.
Non-Covered Impaired Loans
At
September 30, 2013
and December 31, 2012, the Company had non-covered impaired loans which consisted of nonaccrual loans and restructured loans. As of
September 30, 2013
, the Company had no commitments to extend additional credit on these non-covered impaired loans. Non-covered impaired loans and the related allowance for loan losses at
September 30, 2013
and December 31, 2012 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
September 30, 2013
|
|
December 31, 2012
|
|
|
Recorded investment
|
|
Allowance
|
|
Recorded investment
|
|
Allowance
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
Nonaccrual loans
|
$
|
9,603
|
|
|
$
|
—
|
|
|
$
|
15,479
|
|
|
$
|
—
|
|
|
Restructured loans
|
4,255
|
|
|
—
|
|
|
8,635
|
|
|
—
|
|
|
Total with no related allowance
|
$
|
13,858
|
|
|
$
|
—
|
|
|
$
|
24,114
|
|
|
$
|
—
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans
|
$
|
304
|
|
|
$
|
15
|
|
|
$
|
72
|
|
|
$
|
5
|
|
|
Restructured loans
|
20,670
|
|
|
4,192
|
|
|
17,668
|
|
|
3,550
|
|
|
Total with an allowance recorded
|
20,974
|
|
|
4,207
|
|
|
17,740
|
|
|
3,555
|
|
|
Total
|
$
|
34,832
|
|
|
$
|
4,207
|
|
|
$
|
41,854
|
|
|
$
|
3,555
|
|
WASHINGTON BANKING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) Allowance for Non-Covered Loan Losses and Credit Quality (continued)
The following table further summarizes impaired non-covered loans, by class, at
September 30, 2013
and December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
September 30, 2013
|
|
December 31, 2012
|
|
|
Recorded investment
|
|
Unpaid principal balance
|
|
Related allowance
|
|
Recorded investment
|
|
Unpaid principal balance
|
|
Related allowance
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
3,040
|
|
|
$
|
3,535
|
|
|
$
|
—
|
|
|
$
|
3,737
|
|
|
$
|
4,231
|
|
|
$
|
—
|
|
|
Real estate mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
555
|
|
|
632
|
|
|
—
|
|
|
938
|
|
|
1,132
|
|
|
—
|
|
|
Multi-family and commercial
|
2,744
|
|
|
3,137
|
|
|
—
|
|
|
3,605
|
|
|
4,283
|
|
|
—
|
|
|
Total real estate mortgages
|
3,299
|
|
|
3,769
|
|
|
—
|
|
|
4,543
|
|
|
5,415
|
|
|
—
|
|
|
Real estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
7,234
|
|
|
11,592
|
|
|
—
|
|
|
15,251
|
|
|
23,133
|
|
|
—
|
|
|
Total real estate construction
|
7,234
|
|
|
11,592
|
|
|
—
|
|
|
15,251
|
|
|
23,133
|
|
|
—
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
285
|
|
|
551
|
|
|
—
|
|
|
583
|
|
|
1,017
|
|
|
—
|
|
|
Total consumer
|
285
|
|
|
551
|
|
|
—
|
|
|
583
|
|
|
1,017
|
|
|
—
|
|
|
Total with no related allowance recorded
|
$
|
13,858
|
|
|
$
|
19,447
|
|
|
$
|
—
|
|
|
$
|
24,114
|
|
|
$
|
33,796
|
|
|
$
|
—
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
5,719
|
|
|
$
|
5,731
|
|
|
$
|
1,276
|
|
|
$
|
6,237
|
|
|
$
|
6,237
|
|
|
$
|
1,468
|
|
|
Real estate mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
731
|
|
|
731
|
|
|
87
|
|
|
524
|
|
|
524
|
|
|
53
|
|
|
Multi-family and commercial
|
8,900
|
|
|
9,277
|
|
|
1,538
|
|
|
6,290
|
|
|
6,657
|
|
|
1,101
|
|
|
Total real estate mortgages
|
9,631
|
|
|
10,008
|
|
|
1,625
|
|
|
6,814
|
|
|
7,181
|
|
|
1,154
|
|
|
Real estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
5,046
|
|
|
5,046
|
|
|
1,211
|
|
|
4,094
|
|
|
4,112
|
|
|
855
|
|
|
Multi-family and commercial
|
253
|
|
|
253
|
|
|
47
|
|
|
262
|
|
|
262
|
|
|
26
|
|
|
Total real estate construction
|
5,299
|
|
|
5,299
|
|
|
1,258
|
|
|
4,356
|
|
|
4,374
|
|
|
881
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
325
|
|
|
325
|
|
|
48
|
|
|
333
|
|
|
333
|
|
|
52
|
|
|
Total consumer
|
325
|
|
|
325
|
|
|
48
|
|
|
333
|
|
|
333
|
|
|
52
|
|
|
Total with an allowance recorded
|
20,974
|
|
|
21,363
|
|
|
4,207
|
|
|
17,740
|
|
|
18,125
|
|
|
3,555
|
|
|
Total impaired non-covered loans
|
$
|
34,832
|
|
|
$
|
40,810
|
|
|
$
|
4,207
|
|
|
$
|
41,854
|
|
|
$
|
51,921
|
|
|
$
|
3,555
|
|
The average recorded investment in non-covered impaired loans was
$36.2 million
and
$38.3 million
for the
three and nine
months ended
September 30, 2013
, compared to
$47.2 million
and
$47.0 million
for the same periods a year ago. For the
three and nine
months ended
September 30, 2013
, the Company recognized interest income on non-covered impaired loans of
$112 thousand
and
$400 thousand
, respectively. For the same periods a year ago, interest income on non-covered impaired loans was
$202 thousand
and
$406 thousand
, respectively. Additional interest income of
$70 thousand
and
$128 thousand
would have been recognized had the non-covered impaired loans accrued interest, in accordance with their original terms, for the
three and nine
months ended
September 30, 2013
, compared to
$282 thousand
and
$514 thousand
for the
three and nine
months ended September 30, 2012, respectively.
WASHINGTON BANKING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) Allowance for Non-Covered Loan Losses and Credit Quality (continued)
Troubled Debt Restructurings
A troubled debt restructured loan is classified as a restructuring when the Company grants a concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider. Examples of such concessions include forgiveness of principal or accrued interest, extending the maturity date(s) or providing a lower interest rate than would be normally available for a transaction of similar risk. As a result of these concessions, restructured loans are considered impaired as the Company will not collect all amounts due, both principal and interest, in accordance with the terms of the original loan agreement.
Troubled debt restructurings at
September 30, 2013
and December 31, 2012 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
September 30, 2013
|
|
December 31, 2012
|
|
|
Accrual status
|
|
Nonaccrual status
|
|
Total modifications
|
|
Accrual status
|
|
Nonaccrual status
|
|
Total modifications
|
|
Troubled debt restructurings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
6,324
|
|
|
$
|
636
|
|
|
$
|
6,960
|
|
|
$
|
7,008
|
|
|
$
|
1,160
|
|
|
$
|
8,168
|
|
|
Real estate mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
768
|
|
|
326
|
|
|
1,094
|
|
|
573
|
|
|
340
|
|
|
913
|
|
|
Multi-family and commercial
|
10,544
|
|
|
1,052
|
|
|
11,596
|
|
|
7,993
|
|
|
1,823
|
|
|
9,816
|
|
|
Total real estate mortgage
|
11,312
|
|
|
1,378
|
|
|
12,690
|
|
|
8,566
|
|
|
2,163
|
|
|
10,729
|
|
|
Real estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
6,710
|
|
|
5,506
|
|
|
12,216
|
|
|
10,135
|
|
|
9,013
|
|
|
19,148
|
|
|
Multi-family and commercial
|
253
|
|
|
—
|
|
|
253
|
|
|
262
|
|
|
—
|
|
|
262
|
|
|
Total real estate construction
|
6,963
|
|
|
5,506
|
|
|
12,469
|
|
|
10,397
|
|
|
9,013
|
|
|
19,410
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
326
|
|
|
14
|
|
|
340
|
|
|
332
|
|
|
20
|
|
|
352
|
|
|
Total consumer
|
326
|
|
|
14
|
|
|
340
|
|
|
332
|
|
|
20
|
|
|
352
|
|
|
Total restructured loans
|
$
|
24,925
|
|
|
$
|
7,534
|
|
|
$
|
32,459
|
|
|
$
|
26,303
|
|
|
$
|
12,356
|
|
|
$
|
38,659
|
|
The Company’s policy is that loans placed on nonaccrual will typically remain on nonaccrual status until all principal and interest payments are brought current and the prospect for future payment in accordance with the loan agreement appear relatively certain. The Company’s policy generally refers to six months of payment performance as sufficient to warrant a return to accrual status.
WASHINGTON BANKING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) Allowance for Non-Covered Loan Losses and Credit Quality (continued)
Troubled Debt Restructurings Modification Terms
The Company offers a variety of modifications to borrowers. In restructuring a loan with a borrower, the Company normally employs several types of modifications terms. The modification terms offered by the Company are as follows:
Rate Modification:
A modification in which the interest rate is changed.
Term Modification:
A modification in which the maturity date, the timing of payments, or frequency of payments is changed.
Interest Only Modification:
A modification in which the loan is converted to interest only payments for a period of time.
Payment Modification:
A modification in which the dollar amount of the payment is changed, other than an interest only modification described above.
Combination Modification:
Any other type of modification, including the use of multiple terms above.
The following tables present loans restructured during the nine months ended
September 30, 2013
and the
three and nine
months ended September 30, 2012. There were no loans restructured during the three months ended
September 30, 2013
. During the periods presented, all modification terms were a combination of terms employed by the Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
For the Three Months Ended September 30, 2012
|
|
|
Number of contracts
|
|
Pre-modification recorded investment
|
|
Post-modification recorded investment
|
|
Troubled debt restructurings:
|
|
|
|
|
|
|
Commercial
|
8
|
|
|
$
|
4,013
|
|
|
$
|
3,892
|
|
|
Real estate mortgages:
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
1
|
|
|
173
|
|
|
173
|
|
|
Multi-family and commercial
|
1
|
|
|
376
|
|
|
376
|
|
|
Total real estate mortgage
|
2
|
|
|
549
|
|
|
549
|
|
|
Real estate construction:
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
1
|
|
|
631
|
|
|
631
|
|
|
Multi-family and commercial
|
1
|
|
|
265
|
|
|
265
|
|
|
Total real estate construction
|
2
|
|
|
896
|
|
|
896
|
|
|
Total restructured loans
|
12
|
|
|
$
|
5,458
|
|
|
$
|
5,337
|
|
WASHINGTON BANKING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) Allowance for Non-Covered Loan Losses and Credit Quality (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
For the Nine Months Ended September 30, 2013
|
|
|
Number of contracts
|
|
Pre-modification recorded investment
|
|
Post-modification recorded investment
|
|
Troubled debt restructurings:
|
|
|
|
|
|
|
Commercial
|
2
|
|
|
$
|
108
|
|
|
$
|
106
|
|
|
Real estate mortgages:
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
1
|
|
|
214
|
|
|
214
|
|
|
Multi-family and commercial
|
7
|
|
|
3,296
|
|
|
3,296
|
|
|
Total real estate mortgage
|
8
|
|
|
3,510
|
|
|
3,510
|
|
|
Real estate construction:
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
2
|
|
|
176
|
|
|
89
|
|
|
Total real estate construction
|
2
|
|
|
176
|
|
|
89
|
|
|
Total restructured loans
|
12
|
|
|
$
|
3,794
|
|
|
$
|
3,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
For the Nine Months Ended September 30, 2012
|
|
|
Number of contracts
|
|
Pre-modification recorded investment
|
|
Post-modification recorded investment
|
|
Troubled debt restructurings:
|
|
|
|
|
|
|
Commercial
|
13
|
|
|
$
|
5,042
|
|
|
$
|
4,884
|
|
|
Real estate mortgages:
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
2
|
|
|
221
|
|
|
221
|
|
|
Multi-family and commercial
|
1
|
|
|
374
|
|
|
374
|
|
|
Total real estate mortgage
|
3
|
|
|
595
|
|
|
595
|
|
|
Real estate construction:
|
|
|
|
|
|
|
One-to-four family residential
|
2
|
|
|
1,070
|
|
|
947
|
|
|
Multi-family and commercial
|
1
|
|
|
265
|
|
|
265
|
|
|
Total real estate construction
|
3
|
|
|
1,335
|
|
|
1,212
|
|
|
Total restructured loans
|
19
|
|
|
$
|
6,972
|
|
|
$
|
6,691
|
|
There were no loans modified as troubled debt restructurings, within the previous twelve months, for which there was a payment default for the
three and nine
months ended
September 30, 2013
. For the three and nine months ended September 30, 2012, there was a
$37 thousand
commercial loan that had been restructured within the previous twelve months that subsequently defaulted.
WASHINGTON BANKING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) Allowance for Non-Covered Loan Losses and Credit Quality (continued)
Non-Covered Nonaccrual Loans and Loans Past Due
The following table summarizes non-covered nonaccrual loans and past due loans, by class, as of
September 30, 2013
and December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
September 30, 2013
|
|
|
30 - 59 Days past due
|
|
60 - 89 Days past due
|
|
Greater than 90 days and accruing
|
|
Total past due
|
|
Nonaccrual
|
|
Current
|
|
Total non-covered loans
|
|
Commercial
|
$
|
873
|
|
|
$
|
59
|
|
|
$
|
—
|
|
|
$
|
932
|
|
|
$
|
2,435
|
|
|
$
|
169,636
|
|
|
$
|
173,003
|
|
|
Real estate mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
—
|
|
|
214
|
|
|
—
|
|
|
214
|
|
|
518
|
|
|
39,294
|
|
|
40,026
|
|
|
Multi-family and commercial
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,099
|
|
|
445,469
|
|
|
446,568
|
|
|
Total real estate mortgages
|
—
|
|
|
214
|
|
|
—
|
|
|
214
|
|
|
1,617
|
|
|
484,763
|
|
|
486,594
|
|
|
Real estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,570
|
|
|
30,043
|
|
|
35,613
|
|
|
Multi-family and commercial
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15,489
|
|
|
15,489
|
|
|
Total real estate construction
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,570
|
|
|
45,532
|
|
|
51,102
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect
|
734
|
|
|
168
|
|
|
44
|
|
|
946
|
|
|
—
|
|
|
77,835
|
|
|
78,781
|
|
|
Direct
|
355
|
|
|
9
|
|
|
—
|
|
|
364
|
|
|
285
|
|
|
80,804
|
|
|
81,453
|
|
|
Total consumer
|
1,089
|
|
|
177
|
|
|
44
|
|
|
1,310
|
|
|
285
|
|
|
158,639
|
|
|
160,234
|
|
|
Total
|
$
|
1,962
|
|
|
$
|
450
|
|
|
$
|
44
|
|
|
$
|
2,456
|
|
|
$
|
9,907
|
|
|
$
|
858,570
|
|
|
870,933
|
|
|
Deferred loan costs, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,703
|
|
|
Total non-covered loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
872,636
|
|
WASHINGTON BANKING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) Allowance for Non-Covered Loan Losses and Credit Quality (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
December 31, 2012
|
|
|
30 - 59 Days past due
|
|
60 - 89 Days past due
|
|
Greater than 90 days and accruing
|
|
Total past due
|
|
Nonaccrual
|
|
Current
|
|
Total non-covered loans
|
|
Commercial
|
$
|
232
|
|
|
$
|
373
|
|
|
$
|
—
|
|
|
$
|
605
|
|
|
$
|
2,966
|
|
|
$
|
158,910
|
|
|
$
|
162,481
|
|
|
Real estate mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
889
|
|
|
35,984
|
|
|
36,873
|
|
|
Multi-family and commercial
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,903
|
|
|
413,851
|
|
|
415,754
|
|
|
Total real estate mortgages
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,792
|
|
|
449,835
|
|
|
452,627
|
|
|
Real estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
—
|
|
|
63
|
|
|
—
|
|
|
63
|
|
|
9,210
|
|
|
37,199
|
|
|
46,472
|
|
|
Multi-family and commercial
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
34,926
|
|
|
34,926
|
|
|
Total real estate construction
|
—
|
|
|
63
|
|
|
—
|
|
|
63
|
|
|
9,210
|
|
|
72,125
|
|
|
81,398
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect
|
966
|
|
|
112
|
|
|
—
|
|
|
1,078
|
|
|
—
|
|
|
76,518
|
|
|
77,596
|
|
|
Direct
|
469
|
|
|
415
|
|
|
—
|
|
|
884
|
|
|
583
|
|
|
75,827
|
|
|
77,294
|
|
|
Total consumer
|
1,435
|
|
|
527
|
|
|
—
|
|
|
1,962
|
|
|
583
|
|
|
152,345
|
|
|
154,890
|
|
|
Total
|
$
|
1,667
|
|
|
$
|
963
|
|
|
$
|
—
|
|
|
$
|
2,630
|
|
|
$
|
15,551
|
|
|
$
|
833,215
|
|
|
851,396
|
|
|
Deferred loan costs, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,738
|
|
|
Total non-covered loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
853,134
|
|
Non-Covered Credit Quality Indicators
The Company’s internal risk rating methodology assigns risk ratings from
1
to
9
, where a higher rating represents higher risk. The nine risk ratings can be generally described by the following groups:
Pass/Watch:
Pass/watch loans, risk rated
1
through
5
, range from minimal credit risk to lower than average, but still acceptable, credit risk.
Special Mention:
Special mention loans, risk rated
6
,
are loans that present certain potential weaknesses that require management’s attention. Those weaknesses, if left uncorrected, may result in deterioration of the borrower’s repayment ability or the Company’s credit position in the future.
Substandard:
Substandard loans, risk rated
7
, are inadequately protected by the current worth and paying capacity of the borrower or of the collateral pledged, if any. There are well-defined weaknesses that may jeopardize the repayment of debt. Such weaknesses include deteriorated financial condition of the borrower resulting from insufficient income, excessive expenses or other factors that result in inadequate cash flows to meet all scheduled obligations.
WASHINGTON BANKING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) Allowance for Non-Covered Loan Losses and Credit Quality (continued)
Doubtful/Loss:
Doubtful/loss loans are risk rated
8
and
9
. Loans assigned as doubtful have all the weaknesses inherent with substandard loans, with the added characteristic that the weaknesses make collection in full, on the basis of currently existing facts, conditions and values, highly questionable. The possibility of loss is high, but because of certain important and reasonably specific pending factors that may work to the advantage of, and strengthen the credit, its classification as an estimated loss is deferred until a more exact status may be determined. The Company charges off loans that would otherwise be classified loss.
The following table summarizes our internal risk rating, by class, as of
September 30, 2013
and December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
September 30, 2013
|
|
|
Pass/Watch
|
|
Special mention
|
|
Substandard
|
|
Doubtful/Loss
|
|
Total
|
|
Commercial
|
$
|
153,047
|
|
|
$
|
4,016
|
|
|
$
|
15,940
|
|
|
$
|
—
|
|
|
$
|
173,003
|
|
|
Real estate mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
35,110
|
|
|
31
|
|
|
4,885
|
|
|
—
|
|
|
40,026
|
|
|
Multi-family and commercial
|
386,400
|
|
|
30,489
|
|
|
29,679
|
|
|
—
|
|
|
446,568
|
|
|
Total real estate mortgages
|
421,510
|
|
|
30,520
|
|
|
34,564
|
|
|
—
|
|
|
486,594
|
|
|
Real estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
21,866
|
|
|
3,155
|
|
|
10,592
|
|
|
—
|
|
|
35,613
|
|
|
Multi-family and commercial
|
13,312
|
|
|
59
|
|
|
2,118
|
|
|
—
|
|
|
15,489
|
|
|
Total real estate construction
|
35,178
|
|
|
3,214
|
|
|
12,710
|
|
|
—
|
|
|
51,102
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect
|
77,540
|
|
|
13
|
|
|
1,228
|
|
|
—
|
|
|
78,781
|
|
|
Direct
|
75,788
|
|
|
1,544
|
|
|
4,121
|
|
|
—
|
|
|
81,453
|
|
|
Total consumer
|
153,328
|
|
|
1,557
|
|
|
5,349
|
|
|
—
|
|
|
160,234
|
|
|
Total
|
$
|
763,063
|
|
|
$
|
39,307
|
|
|
$
|
68,563
|
|
|
$
|
—
|
|
|
870,933
|
|
|
Deferred loan costs, net
|
|
|
|
|
|
|
|
|
|
|
|
|
1,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
872,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
December 31, 2012
|
|
|
Pass/Watch
|
|
Special mention
|
|
Substandard
|
|
Doubtful/Loss
|
|
Total
|
|
Commercial
|
$
|
140,809
|
|
|
$
|
4,412
|
|
|
$
|
17,260
|
|
|
$
|
—
|
|
|
$
|
162,481
|
|
|
Real estate mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
31,511
|
|
|
1,139
|
|
|
4,223
|
|
|
—
|
|
|
36,873
|
|
|
Multi-family and commercial
|
363,408
|
|
|
26,287
|
|
|
26,059
|
|
|
—
|
|
|
415,754
|
|
|
Total real estate mortgages
|
394,919
|
|
|
27,426
|
|
|
30,282
|
|
|
—
|
|
|
452,627
|
|
|
Real estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
25,389
|
|
|
776
|
|
|
20,307
|
|
|
—
|
|
|
46,472
|
|
|
Multi-family and commercial
|
32,166
|
|
|
472
|
|
|
2,288
|
|
|
—
|
|
|
34,926
|
|
|
Total real estate construction
|
57,555
|
|
|
1,248
|
|
|
22,595
|
|
|
—
|
|
|
81,398
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect
|
76,076
|
|
|
16
|
|
|
1,504
|
|
|
—
|
|
|
77,596
|
|
|
Direct
|
71,176
|
|
|
450
|
|
|
5,668
|
|
|
—
|
|
|
77,294
|
|
|
Total consumer
|
147,252
|
|
|
466
|
|
|
7,172
|
|
|
—
|
|
|
154,890
|
|
|
Total
|
$
|
740,535
|
|
|
$
|
33,552
|
|
|
$
|
77,309
|
|
|
$
|
—
|
|
|
851,396
|
|
|
Deferred loan costs, net
|
|
|
|
|
|
|
|
|
|
|
|
|
1,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
853,134
|
|
WASHINGTON BANKING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) Covered Assets and FDIC Indemnification Asset
(a) Covered Loans
:
Loans acquired in an FDIC-assisted acquisition that are subject to a loss share agreement are referred to as “covered loans” and reported separately in the
Condensed Consolidated Statements of Financial Condition
. Covered loans are reported exclusive of the expected cash flow reimbursements from the FDIC.
The following table presents the major types of covered loans at
September 30, 2013
and
December 31, 2012
. The classification of covered loan balances presented is reported in accordance with the regulatory reporting requirements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
September 30, 2013
|
|
|
City Bank
|
|
North County Bank
|
|
Total
|
|
Commercial
|
$
|
10,169
|
|
|
$
|
10,868
|
|
|
$
|
21,037
|
|
|
Real estate mortgages:
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
2,663
|
|
|
8,467
|
|
|
11,130
|
|
|
Multi-family residential and commercial
|
91,974
|
|
|
44,157
|
|
|
136,131
|
|
|
Total real estate mortgages
|
94,637
|
|
|
52,624
|
|
|
147,261
|
|
|
Real estate construction:
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
4,185
|
|
|
2,066
|
|
|
6,251
|
|
|
Multi-family and commercial
|
7,749
|
|
|
4,423
|
|
|
12,172
|
|
|
Total real estate construction
|
11,934
|
|
|
6,489
|
|
|
18,423
|
|
|
Consumer - direct
|
2,109
|
|
|
5,406
|
|
|
7,515
|
|
|
Subtotal
|
118,849
|
|
|
75,387
|
|
|
194,236
|
|
|
Fair value discount
|
(11,965
|
)
|
|
(10,855
|
)
|
|
(22,820
|
)
|
|
Total covered loans
|
106,884
|
|
|
64,532
|
|
|
171,416
|
|
|
Allowance for loan losses
|
(12,772
|
)
|
|
(2,254
|
)
|
|
(15,026
|
)
|
|
Total covered loans, net
|
$
|
94,112
|
|
|
$
|
62,278
|
|
|
$
|
156,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
December 31, 2012
|
|
|
City Bank
|
|
North County Bank
|
|
Total
|
|
Commercial
|
$
|
13,863
|
|
|
$
|
15,148
|
|
|
$
|
29,011
|
|
|
Real estate mortgages:
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
3,783
|
|
|
10,412
|
|
|
14,195
|
|
|
Multi-family residential and commercial
|
132,280
|
|
|
52,303
|
|
|
184,583
|
|
|
Total real estate mortgages
|
136,063
|
|
|
62,715
|
|
|
198,778
|
|
|
Real estate construction:
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
4,764
|
|
|
3,000
|
|
|
7,764
|
|
|
Multi-family and commercial
|
12,369
|
|
|
6,374
|
|
|
18,743
|
|
|
Total real estate construction
|
17,133
|
|
|
9,374
|
|
|
26,507
|
|
|
Consumer - direct
|
2,698
|
|
|
7,521
|
|
|
10,219
|
|
|
Subtotal
|
169,757
|
|
|
94,758
|
|
|
264,515
|
|
|
Fair value discount
|
(28,980
|
)
|
|
(18,196
|
)
|
|
(47,176
|
)
|
|
Total covered loans
|
140,777
|
|
|
76,562
|
|
|
217,339
|
|
|
Allowance for loan losses
|
(2,727
|
)
|
|
(525
|
)
|
|
(3,252
|
)
|
|
Total covered loans, net
|
$
|
138,050
|
|
|
$
|
76,037
|
|
|
$
|
214,087
|
|
WASHINGTON BANKING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) Covered Assets and FDIC Indemnification Asset (continued)
The following table presents the changes in the accretable yield for the
three and nine
months ended
September 30, 2013
and
2012
, for each respective acquired loan portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Three Months Ended September 30,
|
|
|
2013
|
|
2012
|
|
|
City Bank
|
|
North County Bank
|
|
City Bank
|
|
North County Bank
|
|
Balance, beginning of period
|
$
|
29,223
|
|
|
$
|
15,999
|
|
|
$
|
63,623
|
|
|
$
|
26,845
|
|
|
Accretion to interest income
|
(3,023
|
)
|
|
(2,354
|
)
|
|
(5,247
|
)
|
|
(3,694
|
)
|
|
Disposals
|
(4,927
|
)
|
|
(400
|
)
|
|
(1,718
|
)
|
|
(2,796
|
)
|
|
Reclassification (to) from nonaccretable difference
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
Balance, end of period
|
$
|
21,273
|
|
|
$
|
13,245
|
|
|
$
|
56,658
|
|
|
$
|
20,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Nine Months Ended September 30,
|
|
|
2013
|
|
2012
|
|
|
City Bank
|
|
North County Bank
|
|
City Bank
|
|
North County Bank
|
|
Balance, beginning of period
|
$
|
49,168
|
|
|
$
|
19,567
|
|
|
$
|
78,004
|
|
|
$
|
29,574
|
|
|
Accretion to interest income
|
(10,791
|
)
|
|
(7,343
|
)
|
|
(16,552
|
)
|
|
(11,443
|
)
|
|
Disposals
|
(11,555
|
)
|
|
(2,845
|
)
|
|
(4,441
|
)
|
|
(5,517
|
)
|
|
Reclassification (to) from nonaccretable difference
|
(5,549
|
)
|
|
3,866
|
|
|
(353
|
)
|
|
7,745
|
|
|
Balance, end of period
|
$
|
21,273
|
|
|
$
|
13,245
|
|
|
$
|
56,658
|
|
|
$
|
20,359
|
|
WASHINGTON BANKING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) Covered Assets and FDIC Indemnification Asset (continued)
(b) Covered Other Real Estate Owned:
All OREO acquired in FDIC-assisted acquisitions that are subject to an FDIC loss share agreement are referred to as “covered OREO” and reported separately in the
Condensed Consolidated Statements of Financial Condition
. Covered OREO is reported exclusive of expected reimbursed cash flows from the FDIC. Foreclosed covered loan collateral is transferred into covered OREO at the lower of the loan’s appraised value, less selling costs, or the carrying value.
The following tables summarize the activity related to covered OREO for the
three and nine
months ended
September 30, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Three Months Ended September 30, 2013
|
|
|
City Bank
|
|
North County Bank
|
|
Total
|
|
Balance, beginning of period
|
$
|
9,125
|
|
|
$
|
3,802
|
|
|
$
|
12,927
|
|
|
Additions to covered OREO
|
—
|
|
|
282
|
|
|
282
|
|
|
Dispositions of covered OREO, net
|
(5,653
|
)
|
|
(3,256
|
)
|
|
(8,909
|
)
|
|
Valuation adjustments
|
—
|
|
|
(191
|
)
|
|
(191
|
)
|
|
Balance, end of period
|
$
|
3,472
|
|
|
$
|
637
|
|
|
$
|
4,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Three Months Ended September 30, 2012
|
|
|
City Bank
|
|
North County Bank
|
|
Total
|
|
Balance, beginning of period
|
$
|
13,580
|
|
|
$
|
9,420
|
|
|
$
|
23,000
|
|
|
Additions to covered OREO
|
561
|
|
|
744
|
|
|
1,305
|
|
|
Dispositions of covered OREO, net
|
(4,579
|
)
|
|
(812
|
)
|
|
(5,391
|
)
|
|
Valuation adjustments
|
$
|
—
|
|
|
$
|
(103
|
)
|
|
$
|
(103
|
)
|
|
Balance, end of period
|
$
|
9,562
|
|
|
$
|
9,249
|
|
|
$
|
18,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Nine Months Ended September 30, 2013
|
|
|
City Bank
|
|
North County Bank
|
|
Total
|
|
Balance, beginning of period
|
$
|
7,399
|
|
|
$
|
6,061
|
|
|
$
|
13,460
|
|
|
Additions to covered OREO
|
6,777
|
|
|
808
|
|
|
7,585
|
|
|
Dispositions of covered OREO, net
|
(10,130
|
)
|
|
(5,420
|
)
|
|
(15,550
|
)
|
|
Valuation adjustments
|
(574
|
)
|
|
(812
|
)
|
|
(1,386
|
)
|
|
Balance, end of period
|
$
|
3,472
|
|
|
$
|
637
|
|
|
$
|
4,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Nine Months Ended September 30, 2012
|
|
|
City Bank
|
|
North County Bank
|
|
Total
|
|
Balance, beginning of period
|
$
|
19,341
|
|
|
$
|
7,281
|
|
|
$
|
26,622
|
|
|
Additions to covered OREO
|
1,517
|
|
|
6,961
|
|
|
8,478
|
|
|
Dispositions of covered OREO, net
|
(9,338
|
)
|
|
(4,049
|
)
|
|
(13,387
|
)
|
|
Valuation adjustments
|
(1,958
|
)
|
|
(944
|
)
|
|
(2,902
|
)
|
|
Balance, end of period
|
$
|
9,562
|
|
|
$
|
9,249
|
|
|
$
|
18,811
|
|
WASHINGTON BANKING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) Covered Assets and FDIC Indemnification Asset (continued)
(c) FDIC Indemnification Asset:
The following table summarizes the activity related to the FDIC indemnification asset for the
three and nine
months ended
September 30, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Three Months Ended September 30, 2013
|
|
|
City Bank
|
|
North County Bank
|
|
Total
|
|
Balance, beginning of period
|
$
|
21,979
|
|
|
$
|
10,853
|
|
|
$
|
32,832
|
|
|
Change in FDIC indemnification asset
|
(689
|
)
|
|
(341
|
)
|
|
(1,030
|
)
|
|
Reduction due to loans paid in full
|
(3,784
|
)
|
|
(371
|
)
|
|
(4,155
|
)
|
|
Transfers to (due from) FDIC
|
(1,687
|
)
|
|
(521
|
)
|
|
(2,208
|
)
|
|
Balance, end of period
|
$
|
15,819
|
|
|
$
|
9,620
|
|
|
$
|
25,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Three Months Ended September 30, 2012
|
|
|
City Bank
|
|
North County Bank
|
|
Total
|
|
Balance, beginning of period
|
$
|
37,587
|
|
|
$
|
17,280
|
|
|
$
|
54,867
|
|
|
Change in FDIC indemnification asset
|
(2,510
|
)
|
|
(252
|
)
|
|
(2,762
|
)
|
|
Reduction due to loans paid in full
|
(415
|
)
|
|
(130
|
)
|
|
(545
|
)
|
|
Transfers to (due from) FDIC
|
(5,154
|
)
|
|
(1,693
|
)
|
|
(6,847
|
)
|
|
Balance, end of period
|
$
|
29,508
|
|
|
$
|
15,205
|
|
|
$
|
44,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Nine Months Ended September 30, 2013
|
|
|
City Bank
|
|
North County Bank
|
|
Total
|
|
Balance, beginning of period
|
$
|
20,390
|
|
|
$
|
14,181
|
|
|
$
|
34,571
|
|
|
Change in FDIC indemnification asset
|
4,994
|
|
|
1,304
|
|
|
6,298
|
|
|
Reduction due to loans paid in full
|
(5,194
|
)
|
|
(1,562
|
)
|
|
(6,756
|
)
|
|
Transfers to (due from) FDIC
|
(4,371
|
)
|
|
(4,303
|
)
|
|
(8,674
|
)
|
|
Balance, end of period
|
$
|
15,819
|
|
|
$
|
9,620
|
|
|
$
|
25,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Nine Months Ended September 30, 2012
|
|
|
City Bank
|
|
North County Bank
|
|
Total
|
|
Balance, beginning of period
|
$
|
43,235
|
|
|
$
|
22,351
|
|
|
$
|
65,586
|
|
|
Change in FDIC indemnification asset
|
(8,273
|
)
|
|
(625
|
)
|
|
(8,898
|
)
|
|
Reduction due to loans paid in full
|
(1,739
|
)
|
|
(2,430
|
)
|
|
(4,169
|
)
|
|
Transfers to (due from) FDIC
|
(3,715
|
)
|
|
(4,091
|
)
|
|
(7,806
|
)
|
|
Balance, end of period
|
$
|
29,508
|
|
|
$
|
15,205
|
|
|
$
|
44,713
|
|
WASHINGTON BANKING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) Non-Covered Other Real Estate Owned
The following table presents the changes in non-covered other real estate owned for the
three and nine
months ended
September 30, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Balance, beginning of period
|
$
|
4,726
|
|
|
$
|
4,414
|
|
|
$
|
3,023
|
|
|
$
|
1,976
|
|
|
Additions to OREO
|
187
|
|
|
554
|
|
|
3,827
|
|
|
4,296
|
|
|
Capitalized improvements
|
20
|
|
|
—
|
|
|
222
|
|
|
—
|
|
|
Dispositions of OREO, net
|
—
|
|
|
(759
|
)
|
|
(1,783
|
)
|
|
(1,514
|
)
|
|
Valuation adjustments
|
(186
|
)
|
|
(129
|
)
|
|
(542
|
)
|
|
(678
|
)
|
|
Balance, end of period
|
$
|
4,747
|
|
|
$
|
4,080
|
|
|
$
|
4,747
|
|
|
$
|
4,080
|
|
(8) Earnings per Common Share
Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed in the same manner as basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if certain shares issuable upon exercise of options and non-vested restricted stock were included.
The following table reconciles the numerators and denominators of the basic and diluted earnings per common share computations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Income available to common shareholders
|
$
|
4,502
|
|
|
$
|
4,638
|
|
|
$
|
11,994
|
|
|
$
|
12,258
|
|
|
Weighted average number of common shares, basic
|
15,531,000
|
|
|
15,413,000
|
|
|
15,491,000
|
|
|
15,418,000
|
|
|
Effect of dilutive stock awards
|
58,000
|
|
|
33,000
|
|
|
47,000
|
|
|
35,000
|
|
|
Weighted average number of common shares, diluted
|
15,589,000
|
|
|
15,446,000
|
|
|
15,538,000
|
|
|
15,453,000
|
|
|
Earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.29
|
|
|
$
|
0.30
|
|
|
$
|
0.77
|
|
|
$
|
0.80
|
|
|
Diluted
|
$
|
0.29
|
|
|
$
|
0.30
|
|
|
$
|
0.77
|
|
|
$
|
0.79
|
|
|
Antidulitive stock awards excluded from the
|
|
|
|
|
|
|
|
|
|
|
|
|
computation of diluted earnings per common share (in shares)
|
38,000
|
|
|
44,000
|
|
|
39,000
|
|
|
46,000
|
|
(9) Stock-Based Compensation
(a)
Stock Options:
The Company measures the fair value of each stock option grant at the date of the grant, using the Black-Scholes option pricing model. There were
no
options granted during the
three and nine
months ended
September 30, 2013
and
2012
.
The Company recognizes compensation expense for stock option grants on a straight-line basis over the requisite service period of the grant.
No
stock-based compensation expense was recognized for the
three and nine
months ended
September 30, 2013
. No stock-based compensation expense was recognized for the three months ended September 30, 2012. The Company recognized
$8 thousand
in stock-based compensation expense, as a component of salaries and benefits, for the nine months ended
September 30, 2012
. As of
September 30, 2013
, there was
no
remaining unrecognized compensation costs related to nonvested stock option grants.
WASHINGTON BANKING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) Stock-Based Compensation (continued)
The following table summarizes information on stock option activity during
2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted average exercise price per share
|
|
Weighted average remaining contractual terms (in years)
|
|
Total intrinsic value (in thousands)
|
|
Outstanding, January 1, 2013
|
107,845
|
|
|
$
|
11.58
|
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
|
Exercised
|
(5,432
|
)
|
|
10.28
|
|
|
|
|
$
|
23
|
|
|
Forfeited, expired or cancelled
|
(1,763
|
)
|
|
15.98
|
|
|
|
|
|
|
|
Outstanding, September 30, 2013
|
100,650
|
|
|
$
|
11.57
|
|
|
4.14
|
|
$
|
308
|
|
|
Exercisable at September 30, 2013
|
100,650
|
|
|
$
|
11.57
|
|
|
4.14
|
|
$
|
308
|
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (i.e., the difference between the Company’s closing stock price on
September 30, 2013
, and the exercise price, times the number of shares) that would have been received by the option holders had all the option holders exercised their options on
September 30, 2013
. This amount changes based upon the fair market value of the Company’s stock.
(b)
Restricted Stock Units:
The Company grants restricted stock units (“RSU”) periodically for the benefit of employees and directors. Recipients of RSUs receive shares of the Company’s stock upon the lapse of their related restrictions and do not pay any cash consideration to the Company for the shares. Restrictions are based on continuous service.
The following table summarizes information on RSU activity during
2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted average fair value per share
|
|
Weighted average remaining contractual terms (in years)
|
|
Outstanding, January 1, 2013
|
99,811
|
|
|
$
|
13.16
|
|
|
|
|
Granted
|
81,100
|
|
|
13.91
|
|
|
|
|
Vested
|
(45,938
|
)
|
|
13.15
|
|
|
|
|
Forfeited, expired or cancelled
|
(3,498
|
)
|
|
13.50
|
|
|
|
|
Outstanding, September 30, 2013
|
131,475
|
|
|
$
|
13.62
|
|
|
2.08
|
For the
three and nine
months ended
September 30, 2013
, the Company recognized
$202 thousand
and $
680 thousand
in RSU compensation expense, respectively, as a component of salaries and benefits, compared to
$252 thousand
and $
583 thousand
for the same periods a year ago. As of
September 30, 2013
, there was
$1.3 million
of total unrecognized compensation costs related to nonvested RSUs.
WASHINGTON BANKING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) Fair Value Measurements
(a)
Fair Value Hierarchy and Fair Value Measurement
: The Company groups its assets and liabilities that are recorded at fair value in three levels, based on the markets, if any, in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1: Quoted prices for identical instruments in active markets.
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3: Significant inputs to the valuation model are unobservable.
The following table presents the Company’s financial instruments measured at fair value on a recurring basis at
September 30, 2013
and
December 31, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Fair Value at September 30, 2013
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
U.S. government agencies
|
|
$
|
—
|
|
|
$
|
85,915
|
|
|
$
|
—
|
|
|
$
|
85,915
|
|
|
Residential pass-through securities
|
|
—
|
|
|
168,819
|
|
|
—
|
|
|
168,819
|
|
|
Taxable state and political subdivisions
|
|
—
|
|
|
2,510
|
|
|
—
|
|
|
2,510
|
|
|
Tax exempt state and political subdivisions
|
|
—
|
|
|
72,399
|
|
|
—
|
|
|
72,399
|
|
|
Corporate obligations
|
|
5,798
|
|
|
4,950
|
|
|
—
|
|
|
10,748
|
|
|
Agency-issued collateralized mortgage obligations
|
|
—
|
|
|
35,738
|
|
|
—
|
|
|
35,738
|
|
|
Asset-backed securities
|
|
—
|
|
|
22,234
|
|
|
—
|
|
|
22,234
|
|
|
Investments in mutual funds and other equities
|
|
1,913
|
|
|
—
|
|
|
—
|
|
|
1,913
|
|
|
Total
|
|
$
|
7,711
|
|
|
$
|
392,565
|
|
|
$
|
—
|
|
|
$
|
400,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Fair Value at December 31, 2012
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
U.S. government agencies
|
|
$
|
—
|
|
|
$
|
88,586
|
|
|
$
|
—
|
|
|
$
|
88,586
|
|
|
Residential pass-through securities
|
|
—
|
|
|
168,423
|
|
|
—
|
|
|
168,423
|
|
|
Taxable state and political subdivisions
|
|
—
|
|
|
5,312
|
|
|
—
|
|
|
5,312
|
|
|
Tax exempt state and political subdivisions
|
|
—
|
|
|
58,985
|
|
|
—
|
|
|
58,985
|
|
|
Corporate obligations
|
|
2,985
|
|
|
7,450
|
|
|
—
|
|
|
10,435
|
|
|
Agency-issued collateralized mortgage obligations
|
|
—
|
|
|
14,046
|
|
|
—
|
|
|
14,046
|
|
|
Asset-backed securities
|
|
—
|
|
|
25,188
|
|
|
—
|
|
|
25,188
|
|
|
Investments in mutual funds and other equities
|
|
1,993
|
|
|
—
|
|
|
—
|
|
|
1,993
|
|
|
Total
|
|
$
|
4,978
|
|
|
$
|
367,990
|
|
|
$
|
—
|
|
|
$
|
372,968
|
|
There were no transfers between Level 1, Level 2 and Level 3 during the
three and nine
months ended
September 30, 2013
or during the year ended
December 31, 2012
.
When available, the Company uses quoted market prices to determine the fair value of investment securities. These investments are included in Level 1. When quoted market prices are unobservable, the Company uses quotes from independent pricing vendors based on recent trading activity and other relevant information including market interest rate curves, referenced credit spreads and estimated prepayment rates where applicable. These investments are included in Level 2 and comprise the Company’s portfolio of U.S. agency securities, U.S. treasury securities, residential pass-through securities, municipal bonds and other corporate bonds.
Certain financial assets of the Company may be measured at fair value on a non-recurring basis. These assets are subject to fair value adjustments that result from application of lower-of-cost-or-market accounting or write-downs of individual assets.
WASHINGTON BANKING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) Fair Value Measurements (continued)
The following table presents the carrying value of financial instruments by level within the fair value hierarchy, for which a non-recurring change in fair value has been recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Fair Value at September 30, 2013
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Total losses for the period
|
|
Non-covered impaired loans
(1)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30,625
|
|
|
$
|
30,625
|
|
|
$
|
(4,407
|
)
|
|
Non-covered other real estate owned
(2)
|
|
—
|
|
|
—
|
|
|
4,747
|
|
|
4,747
|
|
|
(542
|
)
|
|
Covered other real estate owned
(2)
|
|
—
|
|
|
—
|
|
|
4,109
|
|
|
4,109
|
|
|
(1,386
|
)
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
39,481
|
|
|
$
|
39,481
|
|
|
$
|
(6,335
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Fair Value at December 31, 2012
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Total losses for the period
|
|
Non-covered impaired loans
(1)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
38,299
|
|
|
$
|
38,299
|
|
|
$
|
(8,485
|
)
|
|
Non-covered other real estate owned
(2)
|
|
—
|
|
|
—
|
|
|
3,023
|
|
|
3,023
|
|
|
(844
|
)
|
|
Covered other real estate owned
(2)
|
|
—
|
|
|
—
|
|
|
13,460
|
|
|
13,460
|
|
|
(3,704
|
)
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
54,782
|
|
|
$
|
54,782
|
|
|
$
|
(13,033
|
)
|
(1)
Represents carrying value and related specific valuation allowances, which are included in the allowance for loan losses.
(2)
Represents the fair value and related losses of foreclosed real estate and other collateral owned that were measured at fair value subsequent to their initial classification as non-covered other real estate owned and covered other real estate owned.
Following is a description of methods and assumptions used to estimate the fair value of each class of financial instrument for which a non-recurring change in fair value has been recorded:
Non-covered impaired loans
:
A loan is considered impaired when, based upon currently known information, it is deemed probable that the Company will be unable to collect all amounts due as scheduled according to the original terms of the agreement. Non-covered impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, based on the loan’s observable market price or the fair value of the collateral, if the loan is collateral dependent.
The Company generally obtains appraisals for collateral dependent loans on an annual basis. Depending on the loan, the Company may obtain appraisals more frequently than
12 months
, particularly if the credit is deteriorating. If the loan is performing and market conditions are stable, the Company may not obtain appraisals on an annual basis. This policy does not vary by loan type.
Impaired loans that are collateral dependent are reviewed quarterly. The review involves a collateral valuation review, which also contemplates an assessment of whether the last appraisal is outdated. Recent appraisals, adjustments to outdated appraisals, knowledgeable third party opinions of value and current market conditions are combined to determine whether a specific reserve and/or a loan charge-off is required. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. For the period ended
September 30, 2013
,
one
non-covered impaired loan totaling
$105 thousand
had an adjustment to the appraisal, based on unobservable inputs, of
30%
.
In the rare case where an appraisal is not available, the Company consults with third party industry specific experts for estimates as well as relies upon the Company’s market knowledge and expertise.
Non-covered and covered other real estate owned
:
Non-covered and covered other real estate owned includes properties acquired through foreclosure. These properties are recorded at the lower of cost or estimated fair value, less estimated cost to sell, based on periodic evaluations.
WASHINGTON BANKING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) Fair Value Measurements (continued)
The Company deducts
10%
of the appraised value for selling costs on non-covered and covered other real estate owned. If the property has been actively listed for sale for more than nine months and has had limited interest, the Company will typically reduce the fair value further based upon input from third party industry experts and knowledgeable management and may include adjustments for outdated appraisals (Level 3).
(b)
Disclosures about Fair Value of Financial Instruments:
The table below is a summary of fair value estimates for financial instruments at
September 30, 2013
and
December 31, 2012
, excluding financial instruments recorded at fair value on a recurring and nonrecurring basis (summarized in the table above). The carrying amounts in the following table are recorded in the statement of financial condition under the indicated captions. The Company has excluded non-financial assets and non-financial liabilities such as Bank premises and equipment, deferred taxes and other liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
September 30, 2013
|
|
|
|
|
|
Fair value measurements using:
|
|
|
|
Carrying value
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
36,360
|
|
|
$
|
36,360
|
|
|
$
|
36,360
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest-bearing deposits
|
|
75,145
|
|
|
75,145
|
|
|
75,145
|
|
|
—
|
|
|
—
|
|
|
Investment securities available for sale
|
|
400,276
|
|
|
400,276
|
|
|
7,711
|
|
|
392,565
|
|
|
—
|
|
|
FHLB stock
|
|
7,239
|
|
|
7,239
|
|
|
7,239
|
|
|
—
|
|
|
—
|
|
|
Loans held for sale
|
|
4,191
|
|
|
4,191
|
|
|
—
|
|
|
4,191
|
|
|
—
|
|
|
Non-covered loans
|
|
872,636
|
|
|
869,618
|
|
|
—
|
|
|
—
|
|
|
869,618
|
|
|
Covered loans
|
|
171,416
|
|
|
158,381
|
|
|
—
|
|
|
—
|
|
|
158,381
|
|
|
Bank owned life insurance
|
|
17,817
|
|
|
17,817
|
|
|
17,817
|
|
|
—
|
|
|
—
|
|
|
FDIC indemnification asset
|
|
25,439
|
|
|
34,564
|
|
|
—
|
|
|
—
|
|
|
34,564
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
1,429,279
|
|
|
1,434,047
|
|
|
1,048,262
|
|
|
385,785
|
|
|
—
|
|
|
Junior subordinated debentures
|
|
25,774
|
|
|
17,774
|
|
|
—
|
|
|
—
|
|
|
17,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
December 31, 2012
|
|
|
|
|
|
Fair value measurements using:
|
|
|
|
Carrying value
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
32,145
|
|
|
$
|
32,145
|
|
|
$
|
32,145
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest-bearing deposits
|
|
75,428
|
|
|
75,428
|
|
|
75,428
|
|
|
—
|
|
|
—
|
|
|
Investment securities available for sale
|
|
372,968
|
|
|
372,968
|
|
|
4,978
|
|
|
367,990
|
|
|
—
|
|
|
FHLB stock
|
|
7,441
|
|
|
7,441
|
|
|
7,441
|
|
|
—
|
|
|
—
|
|
|
Loans held for sale
|
|
18,043
|
|
|
18,043
|
|
|
—
|
|
|
18,043
|
|
|
—
|
|
|
Non-covered loans
|
|
853,134
|
|
|
858,660
|
|
|
—
|
|
|
—
|
|
|
858,660
|
|
|
Covered loans
|
|
217,339
|
|
|
234,396
|
|
|
—
|
|
|
—
|
|
|
234,396
|
|
|
Bank owned life insurance
|
|
17,704
|
|
|
17,704
|
|
|
17,704
|
|
|
—
|
|
|
—
|
|
|
FDIC indemnification asset
|
|
34,571
|
|
|
22,630
|
|
|
—
|
|
|
—
|
|
|
22,630
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
1,462,973
|
|
|
1,468,189
|
|
|
1,015,075
|
|
|
453,114
|
|
|
—
|
|
|
Junior subordinated debentures
|
|
25,774
|
|
|
12,155
|
|
|
—
|
|
|
—
|
|
|
12,155
|
|
WASHINGTON BANKING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) Fair Value Measurements (continued)
Following is a description of methods and assumptions used to estimate the fair value of each class of financial instrument not recorded at fair value but required for disclosure purposes:
Cash and Cash Equivalents:
The carrying value of cash and cash equivalent instruments approximates fair value.
Interest-bearing Deposits:
The carrying values of interest-bearing deposits maturing within ninety days approximate their fair values. Fair values of other interest-earning deposits are estimated using discounted cash flow analysis based on current rates for similar types of deposits.
Investment Securities:
Fair values of investment securities are based on quoted market prices when available or through the use of alternative approaches, such as matrix or model pricing, or broker indicative bids, when market quotes are not readily accessible or available.
FHLB stock:
The Bank’s investment in FHLB stock is carried at par value, which approximates its fair value.
Loans Held for Sale:
The carrying value of loans held for sale approximates fair value.
Non-covered Loans:
The loan portfolio is composed of commercial, consumer, real estate construction and real estate loans. The carrying value of variable rate loans approximates their fair value. The fair value of fixed rate loans is estimated by discounting the estimated future cash flows of loans, sorted by type and security, by the weighted average rate of such loans and rising rates currently offered by the Bank for similar loans.
Covered Loans:
Covered loans are measured at estimated fair value on the date of acquisition. Subsequent to acquisition, the fair value of covered loans is measured using the same methodology as that of non-covered loans.
Bank Owned Life Insurance:
Fair values of insurance policies owned are based on the insurance contract’s cash surrender value.
FDIC Indemnification Asset:
The FDIC indemnification asset is calculated as the expected future cash flows under the loss share agreement discounted by a rate reflective of a U.S. government agency security.
Deposits:
For deposits with no contractual maturity such as checking accounts, money market accounts and savings accounts, fair values approximate book values. The fair value of certificates of deposit are based on discounted cash flows using the difference between the actual deposit rate and an alternative cost of funds rate, currently offered by the Bank for similar types of deposits.
Trust Preferred Securities/Junior Subordinated Debentures:
The fair value of trust preferred securities is estimated using discounted cash flow analysis based on current rates for similar types of debt.
Off-Balance Sheet Items:
Commitments to extend credit represent the principal category of off-balance sheet financial instruments. The fair value of these commitments are not material since they are for relatively short periods of time and are subject to customary credit terms, which would not include terms that would expose the Company to significant gains or losses.
WASHINGTON BANKING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) Commitments and Contingencies
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Except for certain long-term guarantees, most guarantees expire within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral supporting those commitments, for which collateral is deemed necessary, generally amounted to
one
hundred percent of the commitment amount at
September 30, 2013
. The Company routinely charges a fee for these credit facilities. Such fees are amortized into income over the life of the agreement and unamortized amounts were not significant as of
September 30, 2013
. At
September 30, 2013
, the commitments under these agreements totaled
$1.6 million
.
At
September 30, 2013
, the Company was the guarantor of trust preferred securities. The Company issued junior subordinated debentures to a wholly owned special purpose trust, which has issued trust preferred securities. The sole assets of the special purpose trust are the junior subordinated debentures issued by the Company. Washington Banking Company has fully and unconditionally guaranteed the capital securities along with all obligations of the Trust under the trust agreements. The maximum amount of future payments the Company will be required to make under these agreements is the principal and interest of the trust preferred securities, the principal of which totaled
$25.8 million
at
September 30, 2013
and
December 31, 2012
.
(12) Subsequent Events
On October 23, 2013, the Company and Heritage Financial Corporation (“Heritage”) jointly announced the signing of a definitive agreement under which the Company and Heritage will enter into a strategic merger to create one of the premier community banking franchises in Western Washington and the Pacific Northwest. Under the terms of the merger agreement, the Company's shareholders will receive
0.89000
shares of Heritage common stock and
$2.75
in cash for each share of the Company's common stock. Based on the closing price of Heritage common stock of
$15.89
on October 23, 2013, the consideration value per share for the Company was
$16.89
, or approximately
$265.1 million
in aggregate. Upon consummation, the shareholders of the Company will own approximately
46%
of the combined company and the shareholders of Heritage will own approximately
54%
.
The definitive agreement has been unanimously approved by the boards of directors of the Company and Heritage. The merger is subject to regulatory approvals, approval by Company and Heritage shareholders, and certain other customary closing conditions and is expected to close in the first half of 2014. The transaction is intended to qualify as a tax-free reorganization for U.S. federal income tax purposes and Company shareholders are not expected to recognize any taxable gain or loss in connection with the share exchange to the extent of the stock consideration received. A summary of the terms of the definitive agreement with Heritage and other related agreements are summarized in, and the Merger Agreement has been filed as an exhibit to, the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 25, 2013.
On
October 23, 2013
, the Company announced that its Board of Directors declared a cash dividend of
$0.145
per common share to shareholders of record as of
November 4, 2013
, payable on
November 19, 2013
.