BANR-3.31.2014-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2014. |
OR
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[ ] | 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)
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Washington | | 91-1691604 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number) |
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| 10 South First Avenue, Walla Walla, Washington 99362 | |
| (Address of principal executive offices and zip code) | |
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| Registrant's telephone number, including area code: (509) 527-3636 | |
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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 | [ ] |
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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 | [ ] |
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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. |
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Large accelerated filer [ ] | Accelerated filer [x] | Non-accelerated filer [ ] | Smaller reporting company [ ] |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | Yes | [ ] | | No | [x] |
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APPLICABLE ONLY TO CORPORATE ISSUERS |
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Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. |
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Title of class: | | As of April 30, 2014 |
Common Stock, $.01 par value per share | | 19,575,904 shares * |
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BANNER CORPORATION AND SUBSIDIARIES
Table of Contents
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PART I – FINANCIAL INFORMATION | |
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Item 1 – Financial Statements. The Consolidated Financial Statements of Banner Corporation and Subsidiaries filed as a part of the report are as follows: | |
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Consolidated Statements of Financial Condition as of March 31, 2014 and December 31, 2013 | |
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Consolidated Statements of Operations for the Three Months Ended March 31, 2014 and 2013 | |
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Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2014 and 2013 | |
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Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2014 and the Year Ended December 31, 2013 | |
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Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013 | |
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Selected Notes to the Consolidated Financial Statements | |
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Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations | |
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Executive Overview | |
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Comparison of Financial Condition at March 31, 2014 and December 31, 2013 | |
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Comparison of Results of Operations for the Three Months Ended March 31, 2014 and 2013 | |
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Asset Quality | |
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Liquidity and Capital Resources | |
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Capital Requirements | |
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Item 3 – Quantitative and Qualitative Disclosures About Market Risk | |
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Market Risk and Asset/Liability Management | |
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Sensitivity Analysis | |
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Item 4 – Controls and Procedures | |
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PART II – OTHER INFORMATION | |
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Item 1 – Legal Proceedings | |
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Item 1A – Risk Factors | |
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Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds | |
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Item 3 – Defaults upon Senior Securities | |
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Item 4 – Mine Safety Disclosures | |
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Item 5 – Other Information | |
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Item 6 – Exhibits | |
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SIGNATURES | |
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. These statements relate to our financial condition, liquidity, 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 non-performing 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 an informal or formal 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; the requisite regulatory approvals for the Banner Bank-Idaho Banking Company merger might not obtained; whether Banner will be successful in the sale process that is being conducted pursuant to Chapter 363 of the Bankruptcy Code; 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 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.
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited) (In thousands, except shares)
March 31, 2014 and December 31, 2013
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ASSETS | March 31
2014 |
| | December 31
2013 |
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Cash and due from banks | $ | 144,775 |
| | $ | 137,349 |
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Securities—trading, amortized cost $71,110 and $75,150, respectively | 58,387 |
| | 62,472 |
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Securities—available-for-sale, amortized cost $466,866 and $474,960, respectively | 464,657 |
| | 470,280 |
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Securities—held-to-maturity, fair value $112,409 and $103,610, respectively | 109,567 |
| | 102,513 |
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Federal Home Loan Bank (FHLB) stock | 33,288 |
| | 35,390 |
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Loans receivable: | | | |
Held for sale | 3,239 |
| | 2,734 |
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Held for portfolio | 3,519,673 |
| | 3,415,711 |
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Allowance for loan losses | (74,371 | ) | | (74,258 | ) |
| 3,448,541 |
| | 3,344,187 |
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Accrued interest receivable | 15,202 |
| | 13,996 |
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Real estate owned (REO), held for sale, net | 3,236 |
| | 4,044 |
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Property and equipment, net | 89,440 |
| | 90,267 |
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Intangible assets, net | 1,970 |
| | 2,449 |
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Bank-owned life insurance (BOLI) | 62,377 |
| | 61,945 |
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Deferred tax assets, net | 26,341 |
| | 27,479 |
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Income tax receivable | 1,163 |
| | 9,728 |
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Other assets | 29,352 |
| | 26,799 |
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| $ | 4,488,296 |
| | $ | 4,388,898 |
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LIABILITIES | | | |
Deposits: | | | |
Non-interest-bearing | $ | 1,095,665 |
| | $ | 1,115,346 |
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Interest-bearing transaction and savings accounts | 1,681,854 |
| | 1,629,885 |
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Interest-bearing certificates | 905,016 |
| | 872,695 |
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| 3,682,535 |
| | 3,617,926 |
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Advances from FHLB at fair value | 48,351 |
| | 27,250 |
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Other borrowings | 89,921 |
| | 83,056 |
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Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities) | 74,135 |
| | 73,928 |
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Accrued expenses and other liabilities | 29,189 |
| | 31,324 |
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Deferred compensation | 16,641 |
| | 16,442 |
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| 3,940,772 |
| | 3,849,926 |
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COMMITMENTS AND CONTINGENCIES (Note 15) |
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STOCKHOLDERS’ EQUITY | | | |
Common stock and paid in capital - $0.01 par value per share, 50,000,000 shares authorized, 19,576,535 shares issued and outstanding at March 31, 2014; 19,543,769 shares issued and 19,509,429 shares outstanding at December 31, 2013 | 566,964 |
| | 569,028 |
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Accumulated deficit | (18,026 | ) | | (25,073 | ) |
Accumulated other comprehensive (loss) income | (1,414 | ) | | (2,996 | ) |
Unearned shares of common stock issued to Employee Stock Ownership Plan (ESOP) trust at cost: no shares outstanding at March 31, 2014 and 34,340 shares outstanding at December 31, 2013 | — |
| | (1,987 | ) |
| 547,524 |
| | 538,972 |
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| $ | 4,488,296 |
| | $ | 4,388,898 |
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See Selected Notes to the Consolidated Financial Statements
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In thousands except for per share amounts)
For the Three Months Ended March 31, 2014 and 2013
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| Three Months Ended
March 31 |
| 2014 |
| | 2013 |
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INTEREST INCOME: | | | |
Loans receivable | $ | 41,743 |
| | $ | 41,489 |
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Mortgage-backed securities | 1,471 |
| | 1,172 |
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Securities and cash equivalents | 1,892 |
| | 1,847 |
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| 45,106 |
| | 44,508 |
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INTEREST EXPENSE: | | | |
Deposits | 1,964 |
| | 2,719 |
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FHLB advances | 38 |
| | 24 |
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Other borrowings | 44 |
| | 56 |
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Junior subordinated debentures | 721 |
| | 741 |
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| 2,767 |
| | 3,540 |
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Net interest income before provision for loan losses | 42,339 |
| | 40,968 |
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PROVISION FOR LOAN LOSSES | — |
| | — |
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Net interest income | 42,339 |
| | 40,968 |
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OTHER OPERATING INCOME: | | | |
Deposit fees and other service charges | 6,602 |
| | 6,301 |
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Mortgage banking operations | 1,840 |
| | 2,838 |
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Miscellaneous | 636 |
| | 790 |
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| 9,078 |
| | 9,929 |
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Gain on sale of securities | 35 |
| | 1,006 |
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Other-than-temporary impairment recovery | — |
| | 409 |
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Net change in valuation of financial instruments carried at fair value | (255 | ) | | (1,347 | ) |
Total other operating income | 8,858 |
| | 9,997 |
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OTHER OPERATING EXPENSES: | | | |
Salary and employee benefits | 21,156 |
| | 20,729 |
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Less capitalized loan origination costs | (2,195 | ) | | (2,871 | ) |
Occupancy and equipment | 5,696 |
| | 5,329 |
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Information/computer data services | 1,935 |
| | 1,720 |
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Payment and card processing expenses | 2,515 |
| | 2,305 |
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Professional services | 1,038 |
| | 905 |
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Advertising and marketing | 1,057 |
| | 1,499 |
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Deposit insurance | 576 |
| | 645 |
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State/municipal business and use taxes | 159 |
| | 464 |
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REO operations | 39 |
| | (251 | ) |
Amortization of core deposit intangibles | 479 |
| | 505 |
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Miscellaneous | 3,126 |
| | 3,120 |
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Total other operating expenses | 35,581 |
| | 34,099 |
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Income before provision for income taxes | 15,616 |
| | 16,866 |
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PROVISION FOR INCOME TAXES | 5,046 |
| | 5,284 |
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NET INCOME | $ | 10,570 |
| | $ | 11,582 |
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Earnings per common share: | | | |
Basic | $ | 0.55 |
| | $ | 0.60 |
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Diluted | $ | 0.54 |
| | $ | 0.60 |
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Cumulative dividends declared per common share | $ | 0.18 |
| | $ | 0.12 |
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See Selected Notes to the Consolidated Financial Statements
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (In thousands)
For the Three Months Ended March 31, 2014 and 2013
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| | | | | | | |
| Three Months Ended
March 31 |
| 2014 |
| | 2013 |
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NET INCOME | $ | 10,570 |
| | $ | 11,582 |
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OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES: | | | |
Unrealized holding gain (loss) on AFS securities arising during the period | 2,437 |
| | (378 | ) |
Income tax benefit (expense) related to AFS unrealized holding gains (losses) | (877 | ) | | 136 |
|
Reclassification for net (gains) losses on AFS securities realized in earnings | 34 |
| | (117 | ) |
Income tax benefit (expense) related to AFS realized gains (losses) | (12 | ) | | 42 |
|
Amortization of unrealized gain on tax exempt securities transferred from AFS to HTM | — |
| | — |
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Other comprehensive income (loss) | 1,582 |
| | (317 | ) |
COMPREHENSIVE INCOME | $ | 12,152 |
| | $ | 11,265 |
|
See Selected Notes to the Consolidated Financial Statements
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited) (In thousands, except for shares)
For the Three Months Ended March 31, 2014
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| | | | | | | | | | | | | | | | | | | | | | |
| Common Stock and Paid in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Unearned Restricted ESOP Shares | | Stockholders’ Equity |
| Shares | | Amount | | | | |
Balance, January 1, 2014 | 19,509,429 |
| | $ | 569,028 |
| | $ | (25,073 | ) | | $ | (2,996 | ) | | $ | (1,987 | ) | | $ | 538,972 |
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Net income | | | | | 10,570 |
| | | | | | 10,570 |
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Change in valuation of securities—available-for-sale, net of income tax | | | | | | | 1,582 |
| | | | 1,582 |
|
Accrual of dividends on common stock ($0.18/share cumulative) | | | | | (3,523 | ) | | | | | | (3,523 | ) |
Redemption of unallocated shares upon termination of ESOP | | | (1,987 | ) | | | | | | 1,987 |
| | — |
|
Repurchase of shares upon termination of ESOP | (13,550 | ) | | (556 | ) | | | | | | | | (556 | ) |
Proceeds from issuance of common stock for stockholder reinvestment program | 612 |
| | 27 |
| | | | | | | | 27 |
|
Issuance of restricted stock and amortization of related compensation | 80,044 |
| | 452 |
| | | | | | | | 452 |
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BALANCE, March 31, 2014 | 19,576,535 |
| | $ | 566,964 |
| | $ | (18,026 | ) | | $ | (1,414 | ) | | $ | — |
| | $ | 547,524 |
|
See Selected Notes to the Consolidated Financial Statements
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited) (In thousands, except for shares)
For the Year Ended December 31, 2013
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| Common Stock and Paid in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Unearned Restricted ESOP Shares | | Stockholders’ Equity |
| Shares | | Amount | | | |
Balance, January 1, 2013 | 19,420,625 |
| | $ | 567,907 |
| | $ | (61,102 | ) | | $ | 2,101 |
| | $ | (1,987 | ) | | $ | 506,919 |
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Net income | | | | | 46,555 |
| | | | | | 46,555 |
|
Change in valuation of securities—available-for-sale, net of income tax | | | | | | | (5,097 | ) | | | | (5,097 | ) |
Accrual of dividends on common stock ($0.54/share cumulative) | | | | | (10,526 | ) | | | | | | (10,526 | ) |
Proceeds from issuance of common stock for stockholder reinvestment program | 2,098 |
| | 72 |
| | | | | | | | 72 |
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Issuance of restricted stock and amortization of related compensation | 86,706 |
| | 1,049 |
| | | | | | | | 1,049 |
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BALANCE, December 31, 2013 | 19,509,429 |
| | $ | 569,028 |
| | $ | (25,073 | ) | | $ | (2,996 | ) | | $ | (1,987 | ) | | $ | 538,972 |
|
See Selected Notes to the Consolidated Financial Statements
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
For the Three Months Ended March 31, 2014 and 2013
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| | | | | | | |
| Three Months Ended
March 31 |
| 2014 |
| | 2013 |
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OPERATING ACTIVITIES: | | | |
Net income | $ | 10,570 |
| | $ | 11,582 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation | 2,059 |
| | 1,852 |
|
Deferred income and expense, net of amortization | 1,127 |
| | 1,516 |
|
Amortization of core deposit intangibles | 479 |
| | 505 |
|
Gain on sale of securities | (35 | ) | | (1,006 | ) |
Other-than-temporary impairment recovery | — |
| | (409 | ) |
Net change in valuation of financial instruments carried at fair value | 255 |
| | 1,347 |
|
Purchases of securities—trading | (2,387 | ) | | (4,190 | ) |
Proceeds from sales of securities—trading | 2,387 |
| | 6,070 |
|
Principal repayments and maturities of securities—trading | 4,055 |
| | 1,948 |
|
Decrease in deferred taxes | 1,138 |
| | 6,212 |
|
Increase (decrease) in current taxes payable | 8,566 |
| | (6,537 | ) |
Equity-based compensation | 452 |
| | 207 |
|
Increase in cash surrender value of BOLI | (425 | ) | | (528 | ) |
Gain on sale of loans, net of capitalized servicing rights | (981 | ) | | (2,130 | ) |
Gain on disposal of real estate held for sale and property and equipment | (159 | ) | | (816 | ) |
Provision for losses on real estate held for sale | 37 |
| | 73 |
|
Origination of loans held for sale | (68,388 | ) | | (127,214 | ) |
Proceeds from sales of loans held for sale | 68,864 |
| | 135,880 |
|
Net change in: | | | |
Other assets | (4,366 | ) | | 3,707 |
|
Other liabilities and equity | (3,099 | ) | | (2,885 | ) |
Net cash provided from operating activities | 20,149 |
| | 25,184 |
|
INVESTING ACTIVITIES: | | | |
Purchases of securities—available-for-sale | (28,846 | ) | | (52,673 | ) |
Principal repayments and maturities of securities—available-for-sale | 7,868 |
| | 33,055 |
|
Proceeds from sales of securities—available-for-sale | 28,207 |
| | 13,900 |
|
Purchases of securities—held-to-maturity | (7,269 | ) | | (2,083 | ) |
Principal repayments and maturities of securities—held-to-maturity | 45 |
| | 54 |
|
Loan originations, net of principal repayments | (52,247 | ) | | (13,980 | ) |
Purchases of loans and participating interest in loans | (53,978 | ) | | (91 | ) |
Proceeds from sales of other loans | 1,319 |
| | 995 |
|
Purchases of property and equipment | (1,231 | ) | | (1,133 | ) |
Proceeds from sale of real estate held for sale, net | 1,641 |
| | 6,480 |
|
Proceeds from FHLB stock repurchase program | 2,102 |
| | 333 |
|
Other | (5 | ) | | (23 | ) |
Net cash used by investing activities | (102,394 | ) | | (15,166 | ) |
FINANCING ACTIVITIES: | | | |
Increase (decrease) in deposits, net | 64,609 |
| | (37,220 | ) |
Advances, net of (repayments) of FHLB borrowings | 21,098 |
| | (10,002 | ) |
Increase in other borrowings, net | 6,864 |
| | 11,813 |
|
Cash dividends paid | (2,927 | ) | | (195 | ) |
Cash proceeds from issuance of stock for stockholder reinvestment plan | 27 |
| | 2 |
|
Net cash provided from (used by) financing activities | 89,671 |
| | (35,602 | ) |
NET INCREASE(DECREASE) IN CASH AND DUE FROM BANKS | 7,426 |
| | (25,584 | ) |
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD | 137,349 |
| | 181,298 |
|
CASH AND DUE FROM BANKS, END OF PERIOD | $ | 144,775 |
| | $ | 155,714 |
|
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited) (In thousands)
For the Three Months Ended March 31, 2014 and 2013
|
| | | | | | | |
| Three Months Ended
March 31 |
| 2014 |
| | 2013 |
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | | | |
Interest paid in cash | $ | 2,821 |
| | $ | 3,710 |
|
Taxes paid (refunds received) in cash | (3,785 | ) | | 5,431 |
|
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 | 870 |
| | 1,341 |
|
See Selected Notes to the Consolidated Financial Statements
BANNER CORPORATION AND SUBSIDIARIES
SELECTED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1: BASIS OF PRESENTATION AND CRITICAL ACCOUNTING POLICIES
The accompanying unaudited consolidated interim 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 interim 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 annual 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 2013 Consolidated Financial Statements and/or schedules to conform to the 2014 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, 2013 filed with the 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, 2013 as filed with the SEC (2013 Form 10-K). Interim results are not necessarily indicative of results for a full year.
Note 2: RECENT DEVELOPMENTS AND SIGNIFICANT EVENTS
Proposed Acquisition of Idaho Banking Company
On April 24, 2014, the Company announced that it had entered into an agreement with Idaho Bancorp, the holding company for Idaho Banking Company, pursuant to which Banner Corporation will purchase all of the stock and equity interests in Idaho Banking Company and merge it with and into Banner Bank. The transaction is subject to regulatory approval and other customary conditions of closing and is anticipated to be completed in the third quarter of 2014. The purchase agreement contemplates that Idaho Bancorp (the holding company) will file a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code and that the sale will be conducted under Section 363 of the Bankruptcy Code.
Proposed Acquisition of Six Sterling Savings Bank Branches
On February 19, 2014, the Company announced that Banner Bank had entered into an agreement for the acquisition of six branches in Oregon from Sterling Savings Bank, now Umpqua Holdings Corporation, after the consummation of the merger between those two institutions. On April 23, 2014, we received regulatory approval for the transaction. The purchase of the branches is still subject to the satisfaction of customary closing conditions and is expected to be completed in the second quarter of 2014.
Stockholder Equity Transactions:
Omnibus Incentive Plan: On January 8, 2014, the Company's board of directors unanimously adopted, and on April 22, 2014 the Company's shareholders approved, the Banner Corporation 2014 Omnibus Incentive Plan. The purpose of the Plan is to promote the success and enhance the value of Banner by linking the personal interests of employees and directors with those of Banner's shareholders. The Plan is further intended to provide flexibility to Banner in its ability to motivate, attract, and retain the services of employees and directors upon whose judgment, interest and special effort Banner depends. The Plan also allows performance-based compensation to be provided in a manner that exempts such compensation from the deduction limits imposed by Section 162(m) of the Internal Revenue Code.
Note 3: ACCOUNTING STANDARDS RECENTLY ADOPTED
Unrecognized Tax Benefits
In July 2013, FASB issued Accounting Standards Update (ASU) No. 2013-11, Presentation of an Unrecognized Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This ASU requires an unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. An exception exists to the extent that 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 of the applicable jurisdiction does not require the entity to use, and entity does not intend to use, the deferred tax asset for such a purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU No. 2013-11 is effective for fiscal years and interim periods beginning after December 15, 2013. The Company adopted the provisions of ASU No. 2013-11 effective January 1, 2014. The adoption of this guidance did not have a material effect on the Company's consolidated financial statements.
Investing in Qualified Affordable Housing Projects
In January 2014, FASB issued ASU No. 2014-01, Accounting for Investments in Qualified Affordable Housing Projects. The objective of this ASU is to provide guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. The amendments in this ASU modify the conditions that a reporting entity must meet to be eligible to use a method other than the equity or cost methods to account for qualified affordable housing project investments. If the modified conditions are met, the amendments permit an entity to amortize the initial cost of the investment in proportion to the amount of tax credits and other tax benefits received and recognize the net investment performance in the income statement as a component of income tax expense (benefit). Additionally, the amendments introduce new recurring disclosures about all investments in qualified affordable housing projects irrespective of the method used to account for the investments. The amendments in this ASU should be applied retrospectively to all periods presented. ASU No. 2014-01 is effective beginning after December 15, 2014 and is not expected to have a material impact on the Company's consolidated financial statements.
Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure
In January 2014, FASB issued ASU No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments in this ASU clarify that an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU No. 2014-04 is effective for fiscal years and interim periods beginning after December 15, 2014 and is not expected to have a material impact 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. Each of the Banks’ primary business is that of traditional banking institutions, gathering deposits and originating loans for portfolios in their respective markets. 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.
—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):
|
| | | | | | | | | | | |
| March 31
2014 |
| | December 31
2013 |
| | March 31
2013 |
|
Interest-bearing deposits included in cash and due from banks | $ | 71,459 |
| | $ | 67,638 |
| | $ | 96,300 |
|
U.S. Government and agency obligations | 61,438 |
| | 61,327 |
| | 79,959 |
|
Municipal bonds: |
|
| |
|
| |
|
|
Taxable | 30,372 |
| | 34,216 |
| | 43,921 |
|
Tax exempt | 124,692 |
| | 119,588 |
| | 110,062 |
|
Total municipal bonds | 155,064 |
| | 153,804 |
| | 153,983 |
|
Corporate bonds | 42,097 |
| | 44,154 |
| | 47,233 |
|
Mortgage-backed or related securities: |
|
| |
|
| |
|
|
One- to four-family residential agency guaranteed | 57,263 |
| | 58,117 |
| | 89,036 |
|
One- to four-family residential other | 1,003 |
| | 1,051 |
| | 1,282 |
|
Multifamily agency guaranteed | 279,912 |
| | 281,319 |
| | 200,012 |
|
Multifamily other | 10,415 |
| | 10,234 |
| | 10,787 |
|
Total mortgage-backed or related securities | 348,593 |
| | 350,721 |
| | 301,117 |
|
Asset-backed securities: |
|
| |
|
| |
|
|
Student Loan Marketing Association (SLMA) | 15,749 |
| | 15,681 |
| | 32,239 |
|
Other asset-backed securities | 9,608 |
| | 9,510 |
| | 18,261 |
|
Total asset-backed securities | 25,357 |
| | 25,191 |
| | 50,500 |
|
Equity securities (excludes FHLB stock) | 62 |
| | 68 |
| | 60 |
|
Total securities | 632,611 |
| | 635,265 |
| | 632,852 |
|
FHLB stock (see Note 6) | 33,288 |
| | 35,390 |
| | 36,373 |
|
| $ | 737,358 |
| | $ | 738,293 |
| | $ | 765,525 |
|
Securities—Trading: The amortized cost and estimated fair value of securities—trading at March 31, 2014 and December 31, 2013 are summarized as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | |
| March 31, 2014 | | December 31, 2013 |
| Amortized Cost | | Fair Value | | Percent of Total | | Amortized Cost | | Fair Value | | Percent of Total |
U.S. Government and agency obligations | $ | 1,370 |
| | $ | 1,511 |
| | 2.6 | % | | $ | 1,370 |
| | $ | 1,481 |
| | 2.4 | % |
Municipal bonds: |
|
| |
|
| | | | | | | | |
Tax exempt | 1,666 |
| | 1,719 |
| | 2.9 |
| | 4,969 |
| | 5,023 |
| | 8.0 |
|
Corporate bonds | 49,464 |
| | 35,062 |
| | 60.1 |
| | 49,498 |
| | 35,140 |
| | 56.2 |
|
Mortgage-backed or related securities: |
|
| |
|
| | | | | | | | |
One- to four-family residential agency guaranteed | 9,822 |
| | 10,545 |
| | 18.1 |
| | 10,483 |
| | 11,230 |
| | 18.0 |
|
Multifamily agency guaranteed | 8,774 |
| | 9,488 |
| | 16.2 |
| | 8,816 |
| | 9,530 |
| | 15.3 |
|
Total mortgage-backed or related securities | 18,596 |
| | 20,033 |
| | 34.3 |
| | 19,299 |
| | 20,760 |
| | 33.3 |
|
Equity securities | 14 |
| | 62 |
| | 0.1 |
| | 14 |
| | 68 |
| | 0.1 |
|
| $ | 71,110 |
| | $ | 58,387 |
| | 100.0 | % | | $ | 75,150 |
| | $ | 62,472 |
| | 100.0 | % |
There were three sales of securities—trading totaling $2.4 million with a resulting net gain of $1,000 during the three months ended March 31, 2014. There were 21 sales of securities—trading totaling $6.1 million with a resulting net gain of $1.1 million during the three months ended March 31, 2013, including $1.0 million which represented recoveries on certain collateralized debt obligations that had previously been written
off. In addition to the $1.1 million net gain, the Company also recognized a $409,000 OTTI recovery on sales of securities—trading during the three months ended March 31, 2013, which was related to the sale of certain equity securities issued by government-sponsored entities. The Company recognized no OTTI charges or recoveries on securities—trading during the three months ended March 31, 2014. There were no securities—trading on nonaccrual status at March 31, 2014 and 2013.
The amortized cost and estimated fair value of securities—trading at March 31, 2014 and December 31, 2013, 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.
|
| | | | | | | | | | | | | | | |
| March 31, 2014 | | December 31, 2013 |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Maturing in one year or less | $ | 260 |
| | $ | 261 |
| | $ | 260 |
| | $ | 263 |
|
Maturing after one year through five years | 5,803 |
| | 6,147 |
| | 7,056 |
| | 7,298 |
|
Maturing after five years through ten years | 10,181 |
| | 11,063 |
| | 12,602 |
| | 13,572 |
|
Maturing after ten years through twenty years | 33,005 |
| | 26,608 |
| | 33,335 |
| | 27,472 |
|
Maturing after twenty years | 21,847 |
| | 14,246 |
| | 21,883 |
| | 13,799 |
|
| 71,096 |
| | 58,325 |
| | 75,136 |
| | 62,404 |
|
Equity securities | 14 |
| | 62 |
| | 14 |
| | 68 |
|
| $ | 71,110 |
| | $ | 58,387 |
| | $ | 75,150 |
| | $ | 62,472 |
|
Securities—Available-for-Sale: The amortized cost and estimated fair value of securities—available-for-sale at March 31, 2014 and December 31, 2013 are summarized as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | |
| March 31, 2014 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Percent of Total |
U.S. Government and agency obligations | $ | 59,139 |
| | $ | 83 |
| | $ | (471 | ) | | $ | 58,751 |
| | 12.6 | % |
Municipal bonds: |
|
| |
|
| |
|
| |
|
| | |
Taxable | 19,774 |
| | 125 |
| | (78 | ) | | 19,821 |
| | 4.2 |
|
Tax exempt | 30,505 |
| | 173 |
| | (165 | ) | | 30,513 |
| | 6.6 |
|
Total municipal bonds | 50,279 |
| | 298 |
| | (243 | ) | | 50,334 |
| | 10.8 |
|
Corporate bonds | 5,000 |
| | — |
| | (15 | ) | | 4,985 |
| | 1.1 |
|
Mortgage-backed or related securities: |
|
| |
|
| |
|
| |
|
| | |
One- to four-family residential agency guaranteed | 46,234 |
| | 971 |
| | (487 | ) | | 46,718 |
| | 10.1 |
|
One- to four-family residential other | 945 |
| | 58 |
| | — |
| | 1,003 |
| | 0.2 |
|
Multifamily agency guaranteed | 269,103 |
| | 457 |
| | (2,466 | ) | | 267,094 |
| | 57.5 |
|
Multifamily other | 10,580 |
| | — |
| | (165 | ) | | 10,415 |
| | 2.2 |
|
Total mortgage-backed or related securities | 326,862 |
| | 1,486 |
| | (3,118 | ) | | 325,230 |
| | 70.0 |
|
Asset-backed securities: |
|
| |
|
| |
|
| |
|
| | |
SLMA | 15,528 |
| | 221 |
| | — |
| | 15,749 |
| | 3.4 |
|
Other asset-backed securities | 10,058 |
| | — |
| | (450 | ) | | 9,608 |
| | 2.1 |
|
Total asset-backed securities | 25,586 |
| | 221 |
| | (450 | ) | | 25,357 |
| | 5.5 |
|
| $ | 466,866 |
| | $ | 2,088 |
| | $ | (4,297 | ) | | $ | 464,657 |
| | 100.0 | % |
| | | | | | | | | |
| December 31, 2013 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Percent of Total |
U.S. Government and agency obligations | $ | 59,178 |
| | $ | 117 |
| | $ | (635 | ) | | $ | 58,660 |
| | 12.5 | % |
Municipal bonds: | | | | | | | | | |
Taxable | 23,842 |
| | 100 |
| | (278 | ) | | 23,664 |
| | 5.0 |
|
Tax exempt | 29,229 |
| | 170 |
| | (208 | ) | | 29,191 |
| | 6.2 |
|
Total municipal bonds | 53,071 |
| | 270 |
| | (486 | ) | | 52,855 |
| | 11.2 |
|
Corporate bonds | 7,001 |
| | 2 |
| | (39 | ) | | 6,964 |
| | 1.5 |
|
Mortgage-backed or related securities: | | | | | | | | | |
One- to four-family residential agency guaranteed | 47,077 |
| | 648 |
| | (838 | ) | | 46,887 |
| | 10.0 |
|
One- to four-family residential other | 988 |
| | 63 |
| | — |
| | 1,051 |
| | 0.2 |
|
Multifamily agency guaranteed | 271,428 |
| | 402 |
| | (3,392 | ) | | 268,438 |
| | 57.1 |
|
Multifamily other | 10,604 |
| | — |
| | (370 | ) | | 10,234 |
| | 2.2 |
|
Total mortgage-backed or related securities | 330,097 |
| | 1,113 |
| | (4,600 | ) | | 326,610 |
| | 69.5 |
|
Asset-backed securities: | | | | | | | | | |
SLMA | 15,553 |
| | 128 |
| | — |
| | 15,681 |
| | 3.3 |
|
Other asset-backed securities | 10,060 |
| | — |
| | (550 | ) | | 9,510 |
| | 2.0 |
|
Total asset-backed securities | 25,613 |
| | 128 |
| | (550 | ) | | 25,191 |
| | 5.3 |
|
| $ | 474,960 |
| | $ | 1,630 |
| | $ | (6,310 | ) | | $ | 470,280 |
| | 100.0 | % |
At March 31, 2014 and December 31, 2013, an aging of unrealized losses and fair value of related securities—available-for-sale was as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2014 |
| 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 | $ | 29,777 |
| | $ | (471 | ) | | $ | — |
| | $ | — |
| | $ | 29,777 |
| | $ | (471 | ) |
Municipal bonds: |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Taxable | 7,413 |
| | (73 | ) | | 425 |
| | (5 | ) | | 7,838 |
| | (78 | ) |
Tax exempt | 8,863 |
| | (58 | ) | | 1,626 |
| | (107 | ) | | 10,489 |
| | (165 | ) |
Total municipal bonds | 16,276 |
| | (131 | ) | | 2,051 |
| | (112 | ) | | 18,327 |
| | (243 | ) |
Corporate bonds | 4,986 |
| | (15 | ) | | — |
| | — |
| | 4,986 |
| | (15 | ) |
Mortgage-backed or related securities: |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
One- to four-family residential agency guaranteed | 3,514 |
| | (44 | ) | | 12,297 |
| | (443 | ) | | 15,811 |
| | (487 | ) |
Multifamily agency guaranteed | 170,998 |
| | (2,143 | ) | | 23,891 |
| | (323 | ) | | 194,889 |
| | (2,466 | ) |
Multifamily other | 10,415 |
| | (165 | ) | | — |
| | — |
| | 10,415 |
| | (165 | ) |
Total mortgage-backed or related securities | 184,927 |
| | (2,352 | ) | | 36,188 |
| | (766 | ) | | 221,115 |
| | (3,118 | ) |
Asset-backed securities: |
|
| |
|
| |
|
| |
|
| |
|
| | |
Other asset-backed securities | — |
| | — |
| | 9,608 |
| | (450 | ) | | 9,608 |
| | (450 | ) |
| $ | 235,966 |
| | $ | (2,969 | ) | | $ | 47,847 |
| | $ | (1,328 | ) | | $ | 283,813 |
| | $ | (4,297 | ) |
| | | | | | | | | | | |
| December 31, 2013 |
| 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 | $ | 39,621 |
| | $ | (633 | ) | | $ | 998 |
| | $ | (2 | ) | | $ | 40,619 |
| | $ | (635 | ) |
Municipal bonds: | | | | | | | | | | | |
Taxable | 15,580 |
| | (261 | ) | | 413 |
| | (17 | ) | | 15,993 |
| | (278 | ) |
Tax exempt | 8,217 |
| | (205 | ) | | 487 |
| | (3 | ) | | 8,704 |
| | (208 | ) |
Total municipal bonds | 23,797 |
| | (466 | ) | | 900 |
| | (20 | ) | | 24,697 |
| | (486 | ) |
Corporate bonds | 4,961 |
| | (39 | ) | | — |
| | — |
| | 4,961 |
| | (39 | ) |
Mortgage-backed or related securities: | | | | | | | | | | | |
One- to four-family residential agency guaranteed | 14,972 |
| | (133 | ) | | 22,560 |
| | (705 | ) | | 37,532 |
| | (838 | ) |
Multifamily agency guaranteed | 199,407 |
| | (3,162 | ) | | 10,096 |
| | (230 | ) | | 209,503 |
| | (3,392 | ) |
Multifamily other | 10,234 |
| | (370 | ) | | — |
| | — |
| | 10,234 |
| | (370 | ) |
Total mortgage-backed or related securities | 224,613 |
| | (3,665 | ) | | 32,656 |
| | (935 | ) | | 257,269 |
| | (4,600 | ) |
Asset-backed securities: | | | | | | | | | | | |
Other asset-backed securities | — |
| | — |
| | 9,510 |
| | (550 | ) | | 9,510 |
| | (550 | ) |
| $ | 292,992 |
| | $ | (4,803 | ) | | $ | 44,064 |
| | $ | (1,507 | ) | | $ | 337,056 |
| | $ | (6,310 | ) |
There were six sales of securities—available-for-sale totaling $28.2 million with a resulting net gain of $34,000 during the three months ended March 31, 2014. There were four sales of securities—available-for-sale totaling $13.9 million with a resulting net loss of $117,000 during the three months ended March 31, 2013. At March 31, 2014, there were 94 securities—available for sale with unrealized losses, compared to 114 securities at December 31, 2013. Management does not believe that any individual unrealized loss as of March 31, 2014 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. There were no securities—available-for-sale on nonaccrual status at March 31, 2014 and 2013.
The amortized cost and estimated fair value of securities—available-for-sale at March 31, 2014 and December 31, 2013, 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.
|
| | | | | | | | | | | | | | | |
| March 31, 2014 | | December 31, 2013 |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Maturing in one year or less | $ | 22,596 |
| | $ | 22,669 |
| | $ | 25,136 |
| | $ | 25,256 |
|
Maturing after one year through five years | 320,498 |
| | 318,483 |
| | 322,493 |
| | 319,489 |
|
Maturing after five years through ten years | 56,619 |
| | 56,325 |
| | 58,468 |
| | 57,782 |
|
Maturing after ten years through twenty years | 5,220 |
| | 5,045 |
| | 15,535 |
| | 15,135 |
|
Maturing after twenty years | 61,933 |
| | 62,135 |
| | 53,328 |
| | 52,618 |
|
| $ | 466,866 |
| | $ | 464,657 |
| | $ | 474,960 |
| | $ | 470,280 |
|
Securities—Held-to-Maturity: The amortized cost and estimated fair value of securities—held-to-maturity at March 31, 2014 and December 31, 2013 are summarized as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | |
| March 31, 2014 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Percent of Total Amortized Cost |
U.S. Government and agency obligations | $ | 1,176 |
| | $ | — |
| | $ | (59 | ) | | $ | 1,117 |
| | 1.1 | % |
Municipal bonds: | | | | | | | | | |
Taxable | 10,551 |
| | 208 |
| | (80 | ) | | 10,679 |
| | 9.6 |
|
Tax exempt | 92,460 |
| | 3,523 |
| | (723 | ) | | 95,260 |
| | 84.4 |
|
Total municipal bonds | 103,011 |
| | 3,731 |
| | (803 | ) | | 105,939 |
| | 94.0 |
|
Corporate bonds | 2,050 |
| | — |
| | — |
| | 2,050 |
| | 1.9 |
|
Mortgage-backed or related securities: | | | | | | | | | |
Multifamily agency guaranteed | 3,330 |
| | 3 |
| | (30 | ) | | 3,303 |
| | 3.0 |
|
| $ | 109,567 |
| | $ | 3,734 |
| | $ | (892 | ) | | $ | 112,409 |
| | 100.0 | % |
| | | | | | | | | |
| December 31, 2013 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Percent of Total Amortized Cost |
U.S. Government and agency obligations | $ | 1,186 |
| | $ | — |
| | $ | (80 | ) | | $ | 1,106 |
| | 1.2 | % |
Municipal bonds: | | | | | | | | | |
Taxable | 10,552 |
| | 193 |
| | (204 | ) | | 10,541 |
| | 10.3 |
|
Tax exempt | 85,374 |
| | 2,545 |
| | (1,299 | ) | | 86,620 |
| | 83.3 |
|
Total municipal bonds | 95,926 |
| | 2,738 |
| | (1,503 | ) | | 97,161 |
| | 93.6 |
|
Corporate bonds | 2,050 |
| | — |
| | — |
| | 2,050 |
| | 2.0 |
|
Mortgage-backed or related securities: | | | | | | | | | |
Multifamily agency guaranteed | 3,351 |
| | — |
| | (58 | ) | | 3,293 |
| | 3.2 |
|
| $ | 102,513 |
| | $ | 2,738 |
| | $ | (1,641 | ) | | $ | 103,610 |
| | 100.0 | % |
At March 31, 2014 and December 31, 2013, an age analysis of unrealized losses and fair value of related securities—held-to-maturity was as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2014 |
| 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 | $ | 1,117 |
| | $ | (59 | ) | | $ | — |
| | $ | — |
| | $ | 1,117 |
| | $ | (59 | ) |
Municipal bonds: | | | | | | | | | | | |
Taxable | 1,593 |
| | (25 | ) | | 3,002 |
| | (55 | ) | | 4,595 |
| | (80 | ) |
Tax exempt | 22,129 |
| | (708 | ) | | 306 |
| | (15 | ) | | 22,435 |
| | (723 | ) |
Total municipal bonds | 23,722 |
| | (733 | ) | | 3,308 |
| | (70 | ) | | 27,030 |
| | (803 | ) |
Mortgage-backed or related securities: | | | | | | | | | | | |
Multifamily agency guaranteed | 2,231 |
| | (30 | ) | | — |
| | — |
| | 2,231 |
| | (30 | ) |
| $ | 27,070 |
| | $ | (822 | ) | | $ | 3,308 |
| | $ | (70 | ) | | $ | 30,378 |
| | $ | (892 | ) |
| | | | | | | | | | | |
| December 31, 2013 |
| 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 | $ | 1,106 |
| | $ | (80 | ) | | $ | — |
| | $ | — |
| | $ | 1,106 |
| | $ | (80 | ) |
Municipal bonds: | | | | | | | | | | | |
Taxable | 3,344 |
| | (110 | ) | | 2,964 |
| | (94 | ) | | 6,308 |
| | (204 | ) |
Tax exempt | 31,234 |
| | (1,282 | ) | | 303 |
| | (17 | ) | | 31,537 |
| | (1,299 | ) |
Total municipal bonds | 34,578 |
| | (1,392 | ) | | 3,267 |
| | (111 | ) | | 37,845 |
| | (1,503 | ) |
Mortgage-backed or related securities: | | | | | | | | | | | |
Multifamily agency guaranteed | 3,293 |
| | (58 | ) | | — |
| | — |
| | 3,293 |
| | (58 | ) |
| $ | 38,977 |
| | $ | (1,530 | ) | | $ | 3,267 |
| | $ | (111 | ) | | $ | 42,244 |
| | $ | (1,641 | ) |
There were no sales of securities—held-to-maturity during the three months ended March 31, 2014 and 2013. At March 31, 2014, there were 31 securities—held-to-maturity with unrealized losses, compared to 36 securities at December 31, 2013. Management does not believe that any individual unrealized loss as of March 31, 2014 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. There were no securities—held-to-maturity on nonaccrual status at March 31, 2014 and 2013.
The amortized cost and estimated fair value of securities—held-to-maturity at March 31, 2014 and December 31, 2013, 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.
|
| | | | | | | | | | | | | | | |
| March 31, 2014 | | December 31, 2013 |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Maturing in one year or less | $ | 1,270 |
| | $ | 1,277 |
| | $ | 1,270 |
| | $ | 1,281 |
|
Maturing after one year through five years | 10,824 |
| | 11,170 |
| | 10,834 |
| | 11,206 |
|
Maturing after five years through ten years | 21,001 |
| | 21,059 |
| | 17,948 |
| | 17,908 |
|
Maturing after ten years through twenty years | 60,268 |
| | 62,598 |
| | 59,643 |
| | 60,791 |
|
Maturing after twenty years | 16,204 |
| | 16,305 |
| | 12,818 |
| | 12,424 |
|
| $ | 109,567 |
| | $ | 112,409 |
| | $ | 102,513 |
| | $ | 103,610 |
|
Pledged Securities: The following table presents, as of March 31, 2014, investment securities which were pledged to secure borrowings, public deposits or other obligations as permitted or required by law (in thousands):
|
| | | | | | | | | | | |
| Carrying Value | | Amortized Cost | | Fair Value |
Purpose or beneficiary: | | | | | |
State and local governments public deposits | $ | 128,207 |
| | $ | 127,997 |
| | $ | 130,975 |
|
Interest rate swap counterparties | 8,850 |
| | 8,527 |
| | 8,850 |
|
Retail repurchase agreements | 103,394 |
| | 103,120 |
| | 103,394 |
|
Total pledged securities | $ | 240,451 |
| | $ | 239,644 |
| | $ | 243,219 |
|
Note 6: FHLB STOCK
The Banks’ investments in Federal Home Loan Bank of Seattle stock are carried at par value ($100 per share), which reasonably approximates its fair value. As members of the FHLB system, the Banks are required to maintain a minimum level of investment in FHLB stock based on specific percentages of their outstanding FHLB advances. At March 31, 2014 and December 31, 2013, respectively, the Company had recorded $33.3 million and $35.4 million in investments in FHLB stock. This stock is generally viewed as a long-term investment and it does not have a readily determinable fair value. Ownership of FHLB stock is restricted to the FHLB and member institutions and can only be purchased and redeemed at par. For the three months ended March 31, 2014, the Banks received dividend income of $9,000 on FHLB stock. For the three months ended March 31, 2013, the Banks did not receive any dividend income on FHLB stock.
Management periodically evaluates FHLB stock for impairment. Management’s determination of whether these investments are impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB, and (4) the liquidity position of the FHLB.
Previously, the Federal Housing Finance Agency (the FHFA), the FHLB of Seattle's primary regulator, determined that the FHLB of Seattle had a risk-based capital deficiency as of December 31, 2008, and required the FHLB to suspend future dividends and the repurchase and redemption of outstanding common stock. Subsequent improvement in the FHLB's operating performance and financial condition, however, led to a September 7, 2012 announcement by the FHLB that the FHFA now considers the FHLB of Seattle to be adequately capitalized. Dividends on, or repurchases of, the FHLB of Seattle stock continue to require the consent of the FHFA. However, the FHFA has subsequently approved the repurchase of portions of FHLB of Seattle stock in each quarter since the third quarter of 2012, and has approved the payment of cash dividends by the FHLB of Seattle in each quarter since the third quarter of 2013. The FHLB repurchased $2.1 million of the Banks' stock during the quarter ending March 31, 2014. The FHLB of Seattle announced on February 20, 2014 that, based on fourth quarter 2013 financial results, its Board of Directors had declared a $0.025 per share cash dividend. It is the third dividend in a number of years and represents a significant milestone in FHLB of Seattle's return to normal operations. The Company will continue to monitor the financial condition of the FHLB as it relates to, among other things, the recoverability of Banner's investment. Based on the above, the Company has determined there is no impairment on the FHLB stock investment as of March 31, 2014.
Note 7: LOANS RECEIVABLE AND THE ALLOWANCE FOR LOAN LOSSES
The Banks originate residential mortgage loans for both portfolio investment and sale in the secondary market. At the time of origination, mortgage loans are designated as held for sale or held for investment. Loans held for sale are stated at the lower of cost or estimated market value determined on an aggregate basis. Net unrealized losses on loans held for sale are recognized through a valuation allowance by charges to income. The Banks also originate construction, land and land development, commercial and multifamily real estate, commercial business, agricultural business and consumer loans for portfolio investment. Loans receivable not designated as held for sale are recorded at the principal amount outstanding, net of deferred fees and origination costs, and discounts and premiums. Premiums, discounts and deferred loan fees and origination costs are amortized to maturity using the level-yield methodology.
Interest is accrued as earned unless management doubts the collectability of the loan or the unpaid interest. Interest accruals are generally discontinued when loans become 90 days past due for scheduled interest payments. All previously accrued but uncollected interest is deducted from interest income upon transfer to nonaccrual status. Future collection of interest is included in interest income based upon an assessment of the likelihood that the loans will be repaid or recovered. A loan may be put on nonaccrual status sooner than this policy would dictate if, in management’s judgment, the loan may be uncollectable. Such interest is then recognized as income only if it is ultimately collected.
Loans receivable, including loans held for sale, at March 31, 2014, December 31, 2013 and March 31, 2013 are summarized as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| March 31, 2014 | | December 31, 2013 | | March 31, 2013 |
| Amount | | Percent of Total | | Amount | | Percent of Total | | Amount | | Percent of Total |
Commercial real estate: | | | | | | | | | | | |
Owner-occupied | $ | 504,429 |
| | 14.3 | % | | $ | 502,601 |
| | 14.7 | % | | $ | 497,442 |
| | 15.3 | % |
Investment properties | 746,670 |
| | 21.2 |
| | 692,457 |
| | 20.3 |
| | 602,761 |
| | 18.6 |
|
Multifamily real estate | 153,003 |
| | 4.3 |
| | 137,153 |
| | 4.0 |
| | 134,290 |
| | 4.1 |
|
Commercial construction | 11,146 |
| | 0.3 |
| | 12,168 |
| | 0.4 |
| | 34,762 |
| | 1.1 |
|
Multifamily construction | 63,862 |
| | 1.8 |
| | 52,081 |
| | 1.5 |
| | 34,147 |
| | 1.1 |
|
One- to four-family construction | 219,169 |
| | 6.2 |
| | 200,864 |
| | 5.8 |
| | 171,876 |
| | 5.3 |
|
Land and land development: | |
| | | | |
| | | | |
| | |
Residential | 73,733 |
| | 2.1 |
| | 75,695 |
| | 2.2 |
| | 78,446 |
| | 2.4 |
|
Commercial | 10,864 |
| | 0.3 |
| | 10,450 |
| | 0.3 |
| | 12,477 |
| | 0.4 |
|
Commercial business | 716,546 |
| | 20.4 |
| | 682,169 |
| | 20.0 |
| | 619,478 |
| | 19.1 |
|
Agricultural business, including secured by farmland | 208,817 |
| | 5.9 |
| | 228,291 |
| | 6.7 |
| | 210,225 |
| | 6.5 |
|
One- to four-family residential | 517,621 |
| | 14.7 |
| | 529,494 |
| | 15.5 |
| | 566,730 |
| | 17.5 |
|
Consumer: | | | | | | | | | | | |
Consumer secured by one- to four-family | 177,855 |
| | 5.1 |
| | 173,188 |
| | 5.1 |
| | 165,305 |
| | 5.1 |
|
Consumer-other | 119,197 |
| | 3.4 |
| | 121,834 |
| | 3.5 |
| | 112,382 |
| | 3.5 |
|
Total loans outstanding | 3,522,912 |
| | 100.0 | % | | 3,418,445 |
| | 100.0 | % | | 3,240,321 |
| | 100.0 | % |
Less allowance for loan losses | (74,371 | ) | | |
| | (74,258 | ) | | |
| | (76,396 | ) | | |
|
Net loans | $ | 3,448,541 |
| | |
| | $ | 3,344,187 |
| | |
| | $ | 3,163,925 |
| | |
|
Loan amounts are net of unearned loan fees in excess of unamortized costs of $8.2 million as of March 31, 2014, $8.3 million as of December 31, 2013 and $9.0 million as of March 31, 2013.
The Company’s total loans by geographic concentration at March 31, 2014 were as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Washington | | Oregon | | Idaho | | Other | | Total |
Commercial real estate: | | | | | | | | | |
Owner-occupied | $ | 375,100 |
| | $ | 58,446 |
| | $ | 58,503 |
| | $ | 12,380 |
| | $ | 504,429 |
|
Investment properties | 512,057 |
| | 105,742 |
| | 58,988 |
| | 69,883 |
| | 746,670 |
|
Multifamily real estate | 119,490 |
| | 18,360 |
| | 15,014 |
| | 139 |
| | 153,003 |
|
Commercial construction | 10,663 |
| | — |
| | 483 |
| | — |
| | 11,146 |
|
Multifamily construction | 46,652 |
| | 17,210 |
| | — |
| | — |
| |