BANR-9.30.2012-10Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q 
(Mark One)

[X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2012.
OR
[   ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ to ______________

 Commission File Number 0-26584

BANNER CORPORATION
(Exact name of registrant as specified in its charter)

 
 
 
 
 
 
 
 
 
 
Washington
 
91-1691604
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
 
 
 
 
 
10 South First Avenue, Walla Walla, Washington 99362
 
 
(Address of principal executive offices and zip code)
 
 
 
 
 
 
 
Registrant's telephone number, including area code:  (509) 527-3636
 
 
 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
 
 
 
 
 
 
 
Yes
[x]
 
No
[  ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Yes
[x]
 
No
[  ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
 
 
Large accelerated filer  [  ]
Accelerated filer    [x]
Non-accelerated filer   [  ]
Smaller reporting company  [ ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
[  ]
 
No
[x]
 
APPLICABLE ONLY TO CORPORATE ISSUERS
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Title of class:
 
As of October 31, 2012
Common Stock, $.01 par value per share
 
19,454,965 shares *
 
*  Includes 34,340 shares held by the Employee Stock Ownership Plan that have not been released, committed to be released, or allocated to participant accounts.
 
 



BANNER CORPORATION AND SUBSIDIARIES

Table of Contents

PART I - FINANCIAL INFORMATION
 
Item 1 - Financial Statements.  The Consolidated Financial Statements of Banner Corporation and Subsidiaries filed as a part of the report are as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
 
 
 
 
 
 
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
 
Item 1A - Risk Factors
 
 
 
 
 
 
 
 
 
 
Item 6 - Exhibits
 
 

2


Special Note Regarding Forward-Looking Statements

Certain matters in this report on Form 10-Q contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning our future operations.  These statements relate to our financial condition, results of operations, plans, objectives, future performance or business.  Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.”  Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future economic performance and projections of financial items.  These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated or implied by our forward-looking statements, including, but not limited to: the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets and may lead to increased losses and nonperforming assets, and may result in our allowance for loan losses not being adequate to cover actual losses and require us to materially increase our reserves; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates and the relative differences between short and long-term interest rates, loan and deposit interest rates, our net interest margin and funding sources; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; secondary market conditions for loans and our ability to sell loans in the secondary market; results of examinations of us by the Board of Governors of the Federal Reserve System (the Federal Reserve Board) and of our bank subsidiaries by the Federal Deposit Insurance Corporation (the FDIC), the Washington State Department of Financial Institutions, Division of Banks (the Washington DFI) or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, institute a formal or informal enforcement action against us or any of our bank subsidiaries which could require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds, or maintain or increase deposits, or impose additional requirements and restrictions on us, any of which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules including changes related to Basel III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the implementing regulations; our ability to attract and retain deposits; increases in premiums for deposit insurance; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets and liabilities, which estimates may prove to be incorrect and result in significant changes in valuation; difficulties in reducing risk associated with the loans on our balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; the failure or security breach of computer systems on which we depend; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our business strategies; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; our ability to manage loan delinquency rates; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; our ability to pay dividends on our common and preferred stock and interest or principal payments on our junior subordinated debentures; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the economic impact of war or any terrorist activities; other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and other risks detailed from time to time in our filings with the Securities and Exchange Commission.  Any forward-looking statements are based upon management’s beliefs and assumptions at the time they are made.  We do not undertake and specifically disclaim any obligation to update any forward-looking statements included in this report or the reasons why actual results could differ from those contained in such statements whether as a result of new information, future events or otherwise.  These risks could cause our actual results to differ materially from those expressed in any forward-looking statements by, or on behalf of, us.  In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur, and you should not put undue reliance on any forward-looking statements.

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

3


BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited) (In thousands, except shares)
September 30, 2012 and December 31, 2011
 
September 30

 
December 31

ASSETS
2012

 
2011

Cash and due from banks
$
203,756

 
$
132,436

Securities—trading, amortized cost $92,017 and $112,663, respectively
72,593

 
80,727

Securities—available-for-sale, amortized cost $456,228 and $462,579, respectively
459,958

 
465,795

Securities—held-to-maturity, fair value $95,176 and $80,107, respectively
88,626

 
75,438

Federal Home Loan Bank stock
37,038

 
37,371

Loans receivable:
 
 
 
Held for sale
6,898

 
3,007

Held for portfolio
3,206,625

 
3,293,331

Allowance for loan losses
(78,783
)
 
(82,912
)
 
3,134,740

 
3,213,426

Accrued interest receivable
16,118

 
15,570

Real estate owned, held for sale, net
20,356

 
42,965

Property and equipment, net
89,202

 
91,435

Intangible assets, net
4,740

 
6,331

Bank-owned life insurance (BOLI)
60,395

 
58,563

Deferred tax assets, net
41,474

 
—

Other assets
39,668

 
37,255

 
$
4,268,664

 
$
4,257,312

LIABILITIES
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
918,962

 
$
777,563

Interest-bearing transaction and savings accounts
1,480,234

 
1,447,594

Interest-bearing certificates
1,087,176

 
1,250,497

 
3,486,372

 
3,475,654

Advances from FHLB at fair value
10,367

 
10,533

Other borrowings
82,275

 
152,128

Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities)
73,071

 
49,988

Accrued expenses and other liabilities
36,109

 
23,253

Deferred compensation
14,375

 
13,306

 
3,702,569

 
3,724,862

COMMITMENTS AND CONTINGENCIES (Note 15)

 

STOCKHOLDERS’ EQUITY
 
 
 
Preferred stock - $0.01 par value, 500,000 shares authorized; Series A – liquidation preference $1,000 per share, 73,416 and 124,000 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively
72,242

 
120,702

Common stock and paid in capital - $0.01 par value per share, 50,000,000 shares authorized, 19,454,879 shares issued: 19,420,539 shares and 17,519,132  shares outstanding at September 30, 2012 and December 31, 2011, respectively
567,659

 
531,149

Accumulated deficit
(74,212
)
 
(119,465
)
Accumulated other comprehensive income
2,393

 
2,051

Unearned shares of common stock issued to Employee Stock Ownership Plan (ESOP) trust at cost 34,340 restricted shares outstanding at September 30, 2012 and December 31, 2011
(1,987
)
 
(1,987
)
 
566,095

 
532,450

 
$
4,268,664

 
$
4,257,312

See Selected Notes to the Consolidated Financial Statements

4


BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In thousands except for per share amounts)
For the Three and Nine Months Ended September 30, 2012 and 2011
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2012

 
2011

 
2012

 
2011

INTEREST INCOME:
 
 
 
 
 
 
 
Loans receivable
$
43,953

 
$
45,641

 
$
131,981

 
$
139,242

Mortgage-backed securities
1,089

 
799

 
3,011

 
2,533

Securities and cash equivalents
2,132

 
3,121

 
6,645

 
7,337

 
47,174

 
49,561

 
141,637

 
149,112

INTEREST EXPENSE:
 

 
 

 
 

 
 

Deposits
3,536

 
6,169

 
12,019

 
20,995

FHLB advances
64

 
64

 
191

 
306

Other borrowings
71

 
559

 
694

 
1,706

Junior subordinated debentures
805

 
1,041

 
2,619

 
3,120

 
4,476

 
7,833

 
15,523

 
26,127

Net interest income before provision for loan losses
42,698

 
41,728

 
126,114

 
122,985

PROVISION FOR LOAN LOSSES
3,000

 
5,000

 
12,000

 
30,000

Net interest income
39,698

 
36,728

 
114,114

 
92,985

OTHER OPERATING INCOME:
 

 
 

 
 

 
 

Deposit fees and other service charges
6,681

 
6,096

 
18,833

 
17,068

Mortgage banking operations
3,397

 
1,401

 
8,901

 
3,218

Loan servicing fees, net of amortization and impairment
377

 
289

 
937

 
942

Miscellaneous
1,146

 
586

 
2,182

 
1,448

 
11,601

 
8,372

 
30,853

 
22,676

Gain on sale of securities
19

 
—

 
48

 
—

Other-than-temporary impairment recovery (loss)
(409
)
 
3,000

 
(409
)
 
3,000

Net change in valuation of financial instruments carried at fair value
473

 
(1,032
)
 
(16,901
)
 
1,163

Total other operating income
11,684

 
10,340

 
13,591

 
26,839

OTHER OPERATING EXPENSES:
 

 
 

 
 

 
 

Salary and employee benefits
19,614

 
18,226

 
58,514

 
53,769

Less capitalized loan origination costs
(2,655
)
 
(1,929
)
 
(7,652
)
 
(5,597
)
Occupancy and equipment
5,811

 
5,352

 
16,492

 
16,182

Information/computer data services
1,807

 
1,547

 
5,068

 
4,635

Payment and card processing expenses
2,335

 
2,132

 
6,341

 
5,718

Professional services
993

 
1,950

 
3,561

 
4,807

Advertising and marketing
1,897

 
1,602

 
5,613

 
5,245

Deposit insurance
791

 
1,299

 
2,970

 
4,657

State/municipal business and use taxes
582

 
553

 
1,715

 
1,591

REO operations
(1,304
)
 
6,698

 
3,263

 
17,897

Amortization of core deposit intangibles
508

 
554

 
1,583

 
1,721

Miscellaneous
2,976

 
3,054

 
9,466

 
8,812

Total other operating expenses
33,355

 
41,038

 
106,934

 
119,437

Income before provision for income taxes
18,027

 
6,030

 
20,771

 
387

PROVISION FOR (BENEFIT FROM) INCOME TAXES
2,407

 
—

 
(29,423
)
 
—

NET INCOME
15,620

 
6,030

 
50,194

 
387

PREFERRED STOCK DIVIDEND, DISCOUNT ACCRETION AND GAINS
 

 
 

 
 

 
 

Preferred stock dividend
1,227

 
1,550

 
4,327

 
4,650

Preferred stock discount accretion
1,216

 
425

 
2,124

 
1,276

Gain on repurchase and retirement of preferred stock
(2,070
)
 
—

 
(2,070
)
 
—

NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
$
15,247

 
$
4,055

 
$
45,813

 
$
(5,539
)
Earnings (loss) per common share:
 

 
 

 
 

 
 

Basic
$
0.80

 
$
0.24

 
$
2.49

 
$
(0.33
)
Diluted
$
0.79

 
$
0.24

 
$
2.48

 
$
(0.33
)
Cumulative dividends declared per common share:
$
0.01

 
$
0.01

 
$
0.03

 
$
0.09

See Selected Notes to the Consolidated Financial Statements

5


BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (In thousands)
For the Three and Nine Months Ended September 30, 2012 and 2011

 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2012

 
2011

 
2012

 
2011

NET INCOME
$
15,620

 
$
6,030

 
$
50,194

 
$
387

OTHER COMPREHENSIVE INCOME, NET OF INCOME TAXES:
 

 
 

 
 

 
 

Unrealized holding gain during the period, net of deferred income tax provision of $228, $0, $179 and $0, respectively
422

 
651

 
335

 
1,940

Amortization of unrealized gain on tax exempt securities transferred from available-for-sale to held-to-maturity
2

 
3

 
7

 
12

Other comprehensive income
424

 
654

 
342

 
1,952

COMPREHENSIVE INCOME
$
16,044

 
$
6,684

 
$
50,536

 
$
2,339


See Selected Notes to the Consolidated Financial Statements

6


BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited) (In thousands, except for shares)
For the Nine Months Ended September 30, 2012

 
Preferred Stock
 
Common Stock and Paid in Capital
 
 (Accumulated
 Deficit)
 
Accumulated
Other Comprehensive Income
 
Stockholders’
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
Balance, January 1, 2012
124,000

 
$
120,702

 
17,519,132

 
$
529,162

 
$
(119,465
)
 
$
2,051

 
$
532,450

Net income
 
 
 
 
 
 
 
 
50,194

 
 
 
50,194

Change in valuation of securities—available-for-sale, net of income tax
 
 
 
 
 
 
 
 
 
 
335

 
335

Amortization of unrealized loss on tax exempt securities transferred from available-for-sale to held-to-maturity, net of income tax
 
 
 
 
 
 
 
 
 
 
7

 
7

Accretion of preferred stock discount
 
 
2,124

 
 
 
 
 
(2,124
)
 
 
 
—

Accrual of dividends on preferred stock
 
 
 
 
 
 
 
 
(4,327
)
 
 
 
(4,327
)
Repurchase of preferred stock
(50,584
)
 
(50,584
)
 
 
 
 
 
2,070

 
 
 
(48,514
)
Accrual of dividends on common stock ($.03/share cumulative)
 
 
 
 
 
 
 
 
(560
)
 
 
 
(560
)
Proceeds from issuance of common stock for stockholder reinvestment program
 
 
 
 
1,814,234

 
36,314

 
 
 
 
 
36,314

Amortization of compensation related to restricted stock grant
 
 
 
 
87,173

 
189

 
 
 
 
 
189

Amortization of compensation related to stock options
 
 
 
 
 
 
7

 
 
 
 
 
7

BALANCE, September 30, 2012
73,416

 
$
72,242

 
19,420,539

 
$
565,672

 
$
(74,212
)
 
$
2,393

 
$
566,095



See Selected Notes to the Consolidated Financial Statements


7


BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited) (In thousands, except for shares)
For the Year Ended December 31, 2011

 
Preferred Stock
 
Common Stock and Paid in Capital
 
 (Accumulated
Deficit)
 
Accumulated
Other
Comprehensive Income
 
Stockholders’
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
Balance, January 1, 2011
124,000

 
$
119,000

 
16,130,441

 
$
507,470

 
$
(115,348
)
 
$
350

 
$
511,472

Net income
 
 
 
 
 
 
 
 
5,457

 
 
 
5,457

Change in valuation of securities—available-for-sale, net of income tax
 
 
 
 
 
 
 
 
 
 
1,685

 
1,685

Amortization of unrealized loss on tax exempt securities transferred from available-for-sale to held-to-maturity, net of income tax
 
 
 
 
 
 
 
 
 
 
16

 
16

Accretion of preferred stock discount
 
 
1,701

 
 
 
 
 
(1,701
)
 
 
 
—

Accrual of dividends on preferred stock
 
 
 
 
 
 
 
 
(6,200
)
 
 
 
(6,200
)
Accrual of dividends on common stock ($.10/share cumulative)
 
 
 
 
 
 
 
 
(1,673
)
 
 
 
(1,673
)
Proceeds from issuance of common stock for stockholder reinvestment program
 
 
 
 
1,372,625

 
21,556

 
 
 
 
 
21,556

Amortization of compensation related to restricted stock grant
 
 
 
 
16,066

 
111

 
 
 
 
 
111

Amortization of compensation related to stock options
 
 
 
 
 
 
25

 
 
 
 
 
25

Other
 
 
1

 
 
 
 
 
 
 
 
 
1

BALANCE, December 31, 2011
124,000

 
$
120,702

 
17,519,132

 
$
529,162

 
$
(119,465
)
 
$
2,051

 
$
532,450


See Selected Notes to the Consolidated Financial Statements


8


BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
For the Nine Months Ended September 30, 2012 and 2011

 
Nine Months Ended
September 30
 
2012

 
2011

OPERATING ACTIVITIES:
 
 
 
Net income
$
50,194

 
$
387

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

 
 

Depreciation
6,048

 
6,509

Deferred income and expense, net of amortization
1,871

 
1,207

Amortization of core deposit intangibles
1,583

 
1,721

Other-than-temporary impairment (recovery) or loss
409

 
(3,000
)
Net change in valuation of financial instruments carried at fair value
16,901

 
(1,163
)
Purchases of securities-trading
(2,161
)
 
—

Proceeds from sales of securities-trading
2,170

 
—

Principal repayments and maturities of securities—trading
13,838

 
11,305

Increase in deferred taxes
(41,474
)
 
—

Increase in current taxes payable
10,177

 
—

Equity-based compensation
195

 
91

Increase in cash surrender value of bank-owned life insurance
(1,489
)
 
(1,405
)
Gain on sale of loans, net of capitalized servicing rights
(6,117
)
 
(1,992
)
(Gain) loss on disposal of real estate held for sale and property and equipment
(3,645
)
 
1,254

Provision for losses on loans and real estate held for sale
16,451

 
42,407

Origination of loans held for sale
(369,251
)
 
(186,341
)
Proceeds from sales of loans held for sale
371,477

 
187,830

Net change in:
 

 
 

Other assets
(2,000
)
 
16,308

Other liabilities
3,678

 
(677
)
Net cash provided from operating activities
68,855

 
74,441

INVESTING ACTIVITIES:
 

 
 

Purchases of available-for-sale securities
(299,985
)
 
(420,910
)
Principal repayments and maturities of available-for-sale securities
290,440

 
224,716

Proceeds from sales of securities available-for-sale
13,282

 
13,179

Purchases of securities held-to-maturity
(16,115
)
 
(11,303
)
Principal repayments and maturities of securities held-to-maturity
2,800

 
7,066

Principal repayments of loans, net of originations
63,755

 
92,156

Purchases of loans and participating interest in loans
(4,863
)
 
(620
)
Purchases of property and equipment
(3,823
)
 
(2,486
)
Proceeds from sale of real estate held for sale, net
33,516

 
66,653

Other
(8
)
 
(169
)
Net cash provided from (used by) investing activities
78,999

 
(31,718
)
FINANCING ACTIVITIES:
 

 
 

Increase (decrease) in deposits, net
10,718

 
(53,764
)
Repayment of FHLB advances
(4
)
 
(32,804
)
Decrease in other borrowings, net
(69,853
)
 
(36,109
)
Cash dividends paid
(5,195
)
 
(7,107
)
Cash proceeds from issuance of stock for stockholder reinvestment plan
36,314

 
13,736

Repurchase of preferred stock
(48,514
)
 
—

Net cash used by financing activities
(76,534
)
 
(116,048
)
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS
71,320

 
(73,325
)
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD
132,436

 
361,652

CASH AND DUE FROM BANKS, END OF PERIOD
$
203,756

 
$
288,327

(Continued on next page)

9


BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited) (In thousands)
For the Nine Months Ended September 30, 2012 and 2011

 
Nine Months Ended
September 30
 
2012

 
2011

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Interest paid in cash
$
16,585

 
$
28,231

Taxes paid (received) in cash
2,579

 
(13,048
)
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
 

 
 

Loans, net of discounts, specific loss allowances and unearned income,
transferred to real estate owned and other repossessed assets
11,632

 
45,880


See Selected Notes to the Consolidated Financial Statements

10


BANNER CORPORATION AND SUBSIDIARIES
SELECTED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1:  BASIS OF PRESENTATION AND CRITICAL ACCOUNTING POLICIES

The accompanying unaudited consolidated financial statements include the accounts of Banner Corporation (the Company or Banner), a bank holding company incorporated in the State of Washington and its wholly-owned subsidiaries, Banner Bank and Islanders Bank (the Banks).

These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (SEC).  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included.  Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC.  Certain reclassifications have been made to the 2011 Consolidated Financial Statements and/or schedules to conform to the 2012 presentation.  These reclassifications may have affected certain ratios for the prior periods. The effect of these reclassifications is considered immaterial.  All significant intercompany transactions and balances have been eliminated.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements.  Various elements of the Company’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments.  In particular, management has identified several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of Banner’s financial statements.  These policies relate to (i) the methodology for the recognition of interest income, (ii) determination of the provision and allowance for loan and lease losses, (iii) the valuation of financial assets and liabilities recorded at fair value, including other-than-temporary impairment (OTTI) losses, (iv) the valuation of intangibles, such as core deposit intangibles and mortgage servicing rights, (v) the valuation of real estate held for sale and (vi) the valuation of or recognition of deferred tax assets and liabilities.  These policies and judgments, estimates and assumptions are described in greater detail in subsequent notes to the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations (Critical Accounting Policies) in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission (SEC).  Management believes that the judgments, estimates and assumptions used in the preparation of the financial statements are appropriate based on the factual circumstances at the time.  However, given the sensitivity of the financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in the Company’s results of operations or financial condition.  Further, subsequent changes in economic or market conditions could have a material impact on these estimates and the Company’s financial condition and operating results in future periods.

The information included in this Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC (2011 Form 10-K).  Interim results are not necessarily indicative of results for a full year.

Note 2:  RECENT DEVELOPMENTS AND SIGNIFICANT EVENTS

Regulatory Actions:  On March 19, 2012, the Memorandum of Understanding (MOU) by and between Banner Bank and the FDIC and Washington State Department of Financial Institutions, Division of Banks (originally effective March 29, 2010) was terminated.  On April 10, 2012, a similar MOU by and between the Company and the Federal Reserve Bank of San Francisco (originally effective March 23, 2010) was also terminated.

Income Tax Reporting and Accounting:

Amended Federal Income Tax Returns:  On October 25, 2011, the Company filed amended federal income tax returns for tax years 2005, 2006, 2008 and 2009.  The amended tax returns, which are under review by the Internal Revenue Service (IRS), could significantly affect the timing for recognition of credit losses within previously filed income tax returns and, if approved, would result in the refund of up to $13.6 million of previously paid taxes from the utilization of net operating loss carryback claims into prior tax years.  The outcome of the IRS review is inherently uncertain, and since there can be no assurance of approval of some or all of the tax carryback claims, no asset has been recognized to reflect the possible results of these amendments as of September 30, 2012, because of this uncertainty.  Accordingly, the Company does not anticipate recognizing any tax benefit until the results of the IRS review have been determined.


11


Deferred Tax Asset Valuation Allowance:  The Company and its wholly-owned subsidiaries file consolidated U.S. federal income tax returns, as well as state income tax returns in Oregon and Idaho.  Income taxes are accounted for using the asset and liability method.  Under this method a deferred tax asset or liability is determined based on the enacted tax rates which are expected to be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company’s income tax returns.  The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.  Under GAAP, a valuation allowance is required to be recognized if it is “more likely than not” that all or a portion of Banner’s deferred tax assets will not be realized.  During the quarter ended September 30, 2010, the Company evaluated its net deferred tax asset and determined it was prudent to establish a full valuation allowance against the net asset.  At each subsequent quarter-end, the Company has re-analyzed that position and the Company continued to maintain a full valuation allowance through March 31, 2012.  During the quarter ended June 30, 2012, management analyzed the Company’s performance and trends over the previous five quarters, focusing strongly on trends in asset quality, loan loss provisioning, capital position, net interest margin, core operating income and net income.  Based on this analysis, management determined that a full valuation allowance was no longer appropriate and reversed nearly all of the valuation allowance.  The Company utilized $4.0 million of the remaining $7.0 million in valuation allowance to offset a portion of its tax expense in the third quarter of 2012 and anticipates utilizing the remaining $3.0 million to offset tax expense in the fourth quarter of 2012.  The ultimate utilization of the remaining valuation allowance and realization of deferred tax assets is dependent upon the existence, or generation, of taxable income in the periods when those temporary differences and net operating loss and credit carryforwards are deductible.  Management considers the scheduled reversal of deferred tax assets and liabilities, taxes paid in carryback years, projected future taxable income, available tax planning strategies, and other factors in making its assessment to reverse the deferred tax valuation allowance.  As a result, the valuation allowance decreased to $3.0 million at September 30, 2012 from $38.2 million at December 31, 2011.  See Note 12 of the Selected Notes to the Consolidated Financial Statements for more information.

Stockholder Equity Transactions:
 
Restricted Stock Grants:  On April 24, 2012, shareholders approved the Banner Corporation 2012 Restricted Stock Plan (the Plan).  Under the Plan, the Company was authorized to issue up to 300,000 shares of its common stock to provide a means for attracting and retaining highly skilled officers of Banner and its affiliates.  Shares granted under the Plan have a minimum vesting period of three years.  The Plan shall continue in effect for a term of ten years, after which no further awards may be granted.  Concurrent with the approval of the Plan was the approval of a grant of $300,000 of restricted stock (14,535 restricted shares) that will vest in one-third increments over a three-year period to Mark J. Grescovich, President and Chief Executive Officer of Banner Corporation and Banner Bank.  Subsequent to that initial issuance from this new plan was the issuance of 77,500 additional shares to certain other officers of the Company. All of these shares also vest in one-third annual increments over the subsequent three-year period following the grant.
 
Preferred Stock:  On March 29, 2012, the Company’s $124 million of senior preferred stock with a liquidation value of $1,000 per share, originally issued to the U.S. Treasury as part of its Capital Purchase Program, was sold by the Treasury as part of its efforts to manage and recover its investments under the Troubled Asset Relief Program (TARP).  While the sale of these preferred shares to new owners did not result in any proceeds to the Company and did not change the Company’s capital position or accounting for these securities, it did eliminate restrictions put in place by the Treasury on TARP recipients.  The Treasury retained its related warrants to purchase up to $18.6 million in Banner common stock. During the third quarter of 2012, the Company repurchased 50,584 shares or 41% of its preferred stock in private transactions for $48.5 million at an average price of $959 per share. As a result, the Company realized gains of $2.1 million on the repurchases, which was partially offset by accelerated amortization of a portion of the initial discount recorded at the issuance of the preferred shares. In addition, the accrual of the quarterly dividend was reduced by the retirement of the repurchased shares.

Note 3:  ACCOUNTING STANDARDS RECENTLY ADOPTED

In May 2011, FASB issued ASU No. 2011-04, Fair Value Measurement - Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.  ASU 2011-04 amends Topic 820, Fair Value Measurements and Disclosures, to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures.  ASU 2011-04 became effective for the first interim or annual period beginning on or after December 15, 2011 and did not have a significant impact on the Company’s Consolidated Financial Statements.

In June 2011, FASB issued ASU No. 2011-05, Presentation of Comprehensive Income.  The amendments in this ASU were effective for fiscal years and interim periods within those years beginning after December 15, 2011 and were to be applied retrospectively.  The FASB decided to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity.  The amendments require that all non-owner changes in stockholders’ equity be

12


presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  Additionally, the amendments require the consecutive presentation of the statement of net income and other comprehensive income and require the presentation of reclassification adjustments on the face of the financial statements from other comprehensive income to net income.  See also ASU No. 2011-12.  The adoption of this guidance did not have a material effect on the Company’s Consolidated Financial Statements.

In December 2011, FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05.  This ASU was made to allow FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented.  While FASB is considering the operational concerns about the presentation requirements for reclassification adjustments, and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassification out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05.  The amendments in this ASU were effective at the same time as the amendments in ASU 2011-05 so that entities will not be required to comply with the presentation requirements effective at the same time as the amendments in ASU 2011-05 that this ASU is deferring.  The amendments in this ASU were effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The adoption of this guidance did not have a material effect on the Company’s Consolidated Financial Statements.

Note 4:  BUSINESS SEGMENTS

The Company is managed by legal entity and not by lines of business.  Each of the Banks is a community oriented commercial bank chartered in the State of Washington.  The Banks’ primary business is that of a traditional banking institution, gathering deposits and originating loans for portfolio in its respective primary market areas.  The Banks offer a wide variety of deposit products to their consumer and commercial customers.  Lending activities include the origination of real estate, commercial/agriculture business and consumer loans.  Banner Bank is also an active participant in the secondary market, originating residential loans for sale on both a servicing released and servicing retained basis.  In addition to interest income on loans and investment securities, the Banks receive other income from deposit service charges, loan servicing fees and from the sale of loans and investments.  The performance of the Banks is reviewed by the Company’s executive management and Board of Directors on a monthly basis.  All of the executive officers of the Company are members of Banner Bank’s management team.

Generally accepted accounting principles establish standards to report information about operating segments in annual financial statements and require reporting of selected information about operating segments in interim reports to stockholders.  The Company has determined that its current business and operations consist of a single business segment.


13


Note 5:  INTEREST-BEARING DEPOSITS AND SECURITIES

The following table sets forth additional detail regarding our interest-bearing deposits and securities at the dates indicated (includes securities—trading, available-for-sale and held-to-maturity, all at carrying value) (in thousands):

 
September 30
2012

 
December 31
2011

 
September 30
2011

Interest-bearing deposits included in cash and due from banks
$
143,251

 
$
69,758

 
$
234,824

U.S. Government and agency obligations
159,885

 
341,606

 
292,012

Municipal bonds:
 

 
 

 
 

Taxable
26,742

 
18,497

 
15,220

Tax exempt
106,171

 
88,963

 
92,432

Total municipal bonds
132,913

 
107,460

 
107,652

Corporate bonds
40,505

 
42,565

 
52,238

Mortgage-backed or related securities:
 

 
 

 
 

Fannie Mae (FNMA)
158,334

 
66,519

 
47,177

Freddie Mac (FHLMC)
65,661

 
42,001

 
25,350

Ginnie Mae (GNMA)
29,665

 
19,572

 
20,815

Private issuer
1,412

 
1,835

 
2,589

Total mortgage-backed or related securities
255,072

 
129,927

 
95,931

Asset-backed securities:
 

 
 

 
 

Student Loan Marketing Association (SLMA)
32,752

 
—

 
—

Equity securities (excludes FHLB stock)
50

 
402

 
545

Total securities
621,177

 
621,960

 
548,378

FHLB stock
37,038

 
37,371

 
37,371

 
$
801,466

 
$
729,089

 
$
820,573



14


Securities—Trading:  The amortized cost and estimated fair value of securities—trading at September 30, 2012 and December 31, 2011 are summarized as follows (dollars in thousands):

 
September 30, 2012
 
December 31, 2011
 
Amortized
Cost
 
Fair Value
 
Percent of
Total
 
Amortized
Cost
 
Fair Value
 
Percent of
Total
U.S. Government and agency obligations
$
1,380

 
$
1,642

 
2.3
%
 
$
2,401

 
$
2,635

 
3.3
%
Municipal bonds:
 

 
 

 
 
 
 

 
 

 
 
Taxable
—

 
—

 
—

 
391

 
420

 
0.5

Tax exempt
5,439

 
5,535

 
7.6

 
5,431

 
5,542

 
6.9

Total municipal bonds
5,439

 
5,535

 
7.6

 
5,822

 
5,962

 
7.4

Corporate bonds
57,820

 
35,180

 
48.4

 
63,502

 
35,055

 
43.4

Mortgage-backed or related securities:
 

 
 

 
 
 
 

 
 

 
 
FNMA
19,383

 
21,543

 
29.7

 
23,489

 
25,427

 
31.5

FHLMC
7,981

 
8,643

 
11.9

 
10,535

 
11,246

 
13.9

Total mortgage-backed or
related securities
27,364

 
30,186

 
41.6

 
34,024

 
36,673

 
45.4

Equity securities
14

 
50

 
0.1

 
6,914

 
402

 
0.5

 
$
92,017

 
$
72,593

 
100.0
%
 
$
112,663

 
$
80,727

 
100.0
%

There were three sales of securities—trading totaling $2.2 million with a resulting gain of $10,000 during the nine months ended September 30, 2012. There were no sales of securities—trading during the nine months ended September 30, 2011.  The Company recognized $409,000 in OTTI charges on securities—trading related to certain equity securities issued by government sponsored entities during the nine months ended September 30, 2012 and no OTTI charges during the nine months ended September 30, 2011.  At September 30, 2012, there were no securities—trading in a nonaccrual status.  At September 30, 2011, there was one single-issuer trust preferred security that was on nonaccrual; however, subsequently, deferred and current payments have been received, removing the security from nonaccrual status.

The amortized cost and estimated fair value of securities—trading at September 30, 2012 and December 31, 2011, by contractual maturity, are shown below (in thousands).  Expected maturities will differ from contractual maturities because some securities may be called or prepaid with or without call or prepayment penalties.

 
September 30, 2012
 
December 31, 2011
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$
—

 
$
—

 
$
1,000

 
$
1,009

Due after one year through five years
1,543

 
1,614

 
1,545

 
1,626

Due after five years through ten years
4,076

 
4,101

 
4,087

 
4,123

Due after ten years through twenty years
1,626

 
1,645

 
6,544

 
6,184

Due after twenty years
57,394

 
34,997

 
58,549

 
30,710

 
64,639

 
42,357

 
71,725

 
43,652

Mortgage-backed securities
27,364

 
30,186

 
34,024

 
36,673

Equity securities
14

 
50

 
6,914

 
402

 
$
92,017

 
$
72,593

 
$
112,663

 
$
80,727



15


Securities—Available-for-Sale:  The amortized cost and estimated fair value of securities—available-for-sale at September 30, 2012 and December 31, 2011 are summarized as follows (dollars in thousands):
 
September 30, 2012
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Percent of
Total
U.S. Government and agency obligations
$
157,662

 
$
584

 
$
(4
)
 
$
158,242

 
34.4
%
Municipal bonds:
 

 
 

 
 

 
 

 
 
Taxable
15,940

 
268

 
(41
)
 
16,167

 
3.5

Tax exempt
23,571

 
269

 
(4
)
 
23,836

 
5.2

Total municipal bonds
39,511

 
537

 
(45
)
 
40,003

 
8.7

Corporate bonds
4,027

 
48

 
—

 
4,075

 
0.9

Mortgage-backed or related securities:
 

 
 

 
 

 
 

 
 
FNMA
135,929

 
1,276

 
(414
)
 
136,791

 
29.7

FHLMC
56,631

 
476

 
(89
)
 
57,018

 
12.4

GNMA
28,533

 
1,211

 
(79
)
 
29,665

 
6.5

Private issuer
1,329

 
83

 
—

 
1,412

 
0.3

Total mortgage-backed or
related securities
222,422

 
3,046

 
(582
)
 
224,886

 
48.9

Asset-backed securities:
 

 
 

 
 

 
 

 
 
SLMA
32,606

 
194

 
(48
)
 
32,752

 
7.1

 
$
456,228

 
$
4,409

 
$
(679
)
 
$
459,958

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Percent of
Total
U.S. Government and agency obligations
$
338,165

 
$
862

 
$
(56
)
 
$
338,971

 
72.8
%
Municipal bonds:
 

 
 

 
 

 
 

 
 
Taxable
10,358

 
225

 
(2
)
 
10,581

 
2.3

Tax exempt
16,535

 
210

 
(16
)
 
16,729

 
3.6

Total municipal bonds
26,893

 
435

 
(18
)
 
27,310

 
5.9

Corporate bonds
6,240

 
20

 
—

 
6,260

 
1.3

Mortgage-backed or related securities:
 

 
 

 
 

 
 

 
 
FHLMC
30,504

 
284

 
(33
)
 
30,755

 
6.6

FNMA
40,897

 
310

 
(115
)
 
41,092

 
8.8

GNMA
18,145

 
1,427

 
—

 
19,572

 
4.2

Private issuer
1,735

 
100

 
—

 
1,835

 
0.4

Total mortgage-backed or
related securities
91,281

 
2,121

 
(148
)
 
93,254

 
20.0

 
$
462,579

 
$
3,438

 
$
(222
)
 
$
465,795

 
100.0
%

16


At September 30, 2012 and December 31, 2011, an aging of unrealized losses and fair value of related securities—available-for-sale was as follows (in thousands):
 
September 30, 2012
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
U.S. Government and agency obligations
$
11,054

 
$
(4
)
 
$
—

 
$
—

 
$
11,054

 
$
(4
)
Municipal bonds:
 

 
 

 
 

 
 

 
 

 
 

Taxable
5,224

 
(41
)
 
—

 
—

 
5,224

 
(41
)
Tax exempt
2,519

 
(4
)
 
—

 
—

 
2,519

 
(4
)
Total municipal bonds
7,743

 
(45
)
 
—

 
—

 
7,743

 
(45
)
Mortgage-backed or related securities:
 

 
 

 
 

 
 

 
 

 
 

FNMA
48,467

 
(414
)
 
—

 
—

 
48,467

 
(414
)
FHLMC
17,239

 
(89
)
 
—

 
—

 
17,239

 
(89
)
GNMA
9,417

 
(79
)
 
—

 
—

 
9,417

 
(79
)
Total mortgage-backed or
related securities
75,123

 
(582
)
 
—

 
—

 
75,123

 
(582
)
Asset-backed securities:
 

 
 

 
 

 
 

 
 

 


SLMA
5,013

 
(48
)
 
—

 
—

 
5,013

 
(48
)
 
$
98,933

 
$
(679
)
 
$
—

 
$
—

 
$
98,933

 
$
(679
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Unrealized
 Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
U.S. Government and agency obligations
$
74,326

 
$
(56
)
 
$
—

 
$
—

 
$
74,326

 
$
(56
)
Municipal bonds:
 

 
 

 
 

 
 

 
 
 
 

Taxable
3,599

 
(2
)
 
—

 
—

 
3,599

 
(2
)
Tax exempt
4,075

 
(16
)
 
—

 
—

 
4,075

 
(16
)
Total municipal bonds
7,674

 
(18
)
 
—

 
—

 
7,674

 
(18
)
Mortgage-backed or related securities:
 

 
 

 
 

 
 

 
 

 
 

FNMA
27,332

 
(115
)
 
—

 
—

 
27,332

 
(115
)
FHLMC
6,556

 
(33
)
 
—

 
—

 
6,556

 
(33
)
Total mortgage-backed or
related securities
33,888

 
(148
)
 
—

 
—

 
33,888

 
(148
)
 
$
115,888

 
$
(222
)
 
$
—

 
$
—

 
$
115,888

 
$
(222
)

Proceeds from the sale of three securities—available-for-sale during the nine months ended September 30, 2012 were $13.3 million with a resulting gain of $38,000 compared to proceeds of $13.2 million from the sale of three securities with no resulting gain or loss during the nine months ended September 30, 2011.  At September 30, 2012, there were 23 securities—available for sale with unrealized losses, compared to 26 securities at December 31, 2011.  Management does not believe that any individual unrealized loss as of September 30, 2012 represents OTTI.  The decline in fair market values of these securities was generally due to changes in interest rates and changes in market-desired spreads subsequent to their purchase.


17


The amortized cost and estimated fair value of securities—available-for-sale at September 30, 2012 and December 31, 2011, by contractual maturity, are shown below (in thousands).  Expected maturities will differ from contractual maturities because some securities may be called or prepaid with or without call or prepayment penalties.

 
September 30, 2012
 
December 31, 2011
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$
17,266

 
$
17,301

 
$
19,520

 
$
19,602

Due after one year through five years
157,169

 
158,130

 
312,862

 
313,930

Due after five years through ten years
37,693

 
37,776

 
38,916

 
39,009

Due after ten years through twenty years
21,678

 
21,865

 
—

 
—

Due after twenty years
—

 
—

 
—

 
—

 
233,806

 
235,072

 
371,298

 
372,541

Mortgage-backed securities
222,422

 
224,886

 
91,281

 
93,254

 
$
456,228

 
$
459,958

 
$
462,579

 
$
465,795


Securities—Held-to-Maturity:  The amortized cost and estimated fair value of securities—held-to-maturity at September 30, 2012 and December 31, 2011 are summarized as follows (dollars in thousands):

 
September 30, 2012
 
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
Percent of
Total
Municipal bonds:
 
 
 
 
 
 
 
 
 
Taxable
$
10,575

 
$
462

 
$
(91
)
 
$
10,946

 
11.5
%
Tax exempt
76,801

 
6,179

 
—

 
82,980

 
87.2

Total municipal bonds
87,376

 
6,641

 
(91
)
 
93,926

 
98.7

Corporate bonds
1,250

 
—

 
—

 
1,250

 
1.3

 
$
88,626

 
$
6,641

 
$
(91
)
 
$
95,176

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011
 
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
Percent of
Total
Municipal bonds:
 

 
 

 
 

 
 

 
 

Taxable
$
7,496

 
$
390

 
$
—

 
$
7,886

 
9.8
%
Tax exempt
66,692

 
4,281

 
—

 
70,973

 
88.6

Total municipal bonds
74,188

 
4,671

 
—

 
78,859

 
98.4

Corporate bonds
1,250

 
—

 
(2
)
 
1,248

 
1.6

 
$
75,438

 
$
4,671

 
$
(2
)
 
$
80,107

 
100.0
%


18


At September 30, 2012 and December 31, 2011, an age analysis of unrealized losses and fair value of related securities—held-to-maturity was as follows (in thousands):

 
September 30, 2012
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
Municipal bonds:
 
 
 
 
 
 
 
 
 
 
 
Taxable
$
4,238

 
$
(91
)
 
$
—

 
$
—

 
$
4,238

 
$
(91
)
 
$
4,238

 
$
(91
)
 
$
—

 
$
—

 
$
4,238

 
$
(91
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
Corporate bonds
$
—

 
—

 
$
498

 
$
(2
)
 
$
498

 
$
(2
)
 
$
—

 
—

 
$
498

 
$
(2
)
 
$
498

 
$
(2
)

There were no sales of securities—held-to-maturity during the nine months ended September 30, 2012 and 2011.  The Company recognized no OTTI charges on securities—held-to-maturity during the nine months ended September 30, 2012. During the same period in 2011, we did recognize $3.0 million from the recovery of one security—held-to-maturity which had previously been charged off as OTTI in the previous year; however, there were no other OTTI charges for the nine months ended September 30, 2011.  As of September 30, 2012, there were no securities—held-to-maturity in a nonaccrual status.  There were two securities—held-to-maturity with unrealized losses at September 30, 2012 and December 31, 2011, respectively.  Management does not believe that any individual unrealized loss as of September 30, 2012 represents OTTI.  The decline in fair market value of these securities was generally due to changes in interest rates and changes in market-desired spreads subsequent to their purchase.

The amortized cost and estimated fair value of securities—held-to-maturity at September 30, 2012 and December 31, 2011, by contractual maturity, are shown below (in thousands).  Expected maturities will differ from contractual maturities because some securities may be called or prepaid with or without call or prepayment penalties.

 
September 30, 2012
 
December 31, 2011
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$
4,152

 
$
4,164

 
$
2,707

 
$
2,768

Due after one year through five years
14,539

 
15,332

 
14,420

 
15,150

Due after five years through ten years
11,395

 
11,823

 
9,726

 
10,254

Due after ten years through twenty years
56,248

 
61,334

 
46,741

 
49,936

Due after twenty years
2,292

 
2,523

 
1,844

 
1,999

 
$
88,626

 
$
95,176

 
$
75,438

 
$
80,107



19


Pledged Securities: The following table presents, as of September 30, 2012, investment securities which were pledged to secure borrowings, public deposits or other obligations as permitted or required by law (in thousands):

 
Amortized Cost
 
Fair Value
Purpose or beneficiary:
 
 
 
State and local governments public deposits
$
92,740

 
$
99,358

Interest rate swap counterparties
10,841

 
11,025

Retail repurchase agreements
101,315

 
104,036

Other
5,976

 
6,149

Total pledged securities
$
210,872

 
$
220,568


Note 6:  FHLB STOCK

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