BANR-03.31.2015-10Q
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 MARCH 31, 2015.
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  [x]
Accelerated filer    [ ]
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 April 30, 2015
Common Stock, $.01 par value per share
 
20,975,823 shares *
 
 
 
 

1

BANNER CORPORATION AND SUBSIDIARIES

Table of Contents
PART I – FINANCIAL INFORMATION
 
 
 
Item 1 – Financial Statements.  The Unaudited Consolidated Financial Statements of Banner Corporation and Subsidiaries filed as a part of the report are as follows:
 
 
 
Consolidated Statements of Financial Condition as of March 31, 2015 and December 31, 2014
 
 
Consolidated Statements of Operations for the Three Months Ended March 31, 2015 and 2014
 
 
Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2015 and 2014
 
 
Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2015 and the Year Ended December 31, 2014
 
 
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014
 
 
Selected Notes to the Consolidated Financial Statements
 
 
Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Executive Overview
 
 
Comparison of Financial Condition at March 31, 2015 and December 31, 2014
 
 
Comparison of Results of Operations for the Three Months Ended March 31, 2015 and 2014
 
 
Asset Quality
 
 
Liquidity and Capital Resources
 
 
Capital Requirements
 
 
Item 3 – Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Market Risk and Asset/Liability Management
 
 
Sensitivity Analysis
 
 
Item 4 – Controls and Procedures
 
 
PART II – OTHER INFORMATION
 
 
 
Item 1 – Legal Proceedings
 
 
Item 1A – Risk Factors
 
 
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
 
 
Item 3 – Defaults upon Senior Securities
 
 
Item 4 – Mine Safety Disclosures
 
 
Item 5 – Other Information
 
 
Item 6 – Exhibits
 
 
SIGNATURES

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.  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: expected revenues, cost savings, synergies and other benefits from the merger of Banner Bank and Siuslaw Bank and of the proposed merger of Banner Bank and AmericanWest Bank ("AmericanWest") might not be realized within the expected time frames or at all and costs or difficulties relating to integration matters, including but not limited to customers, systems and employee retention, might be greater than expected; the requisite regulatory approvals for the AmericanWest transaction might not be obtained; 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 economic conditions in general and Washington, Idaho, Oregon, Utah and California in particular; 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; future goodwill impairment due to changes in our business, changes in market conditions, or other factors; 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.

3

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited) (In thousands, except shares)
March 31, 2015 and December 31, 2014
ASSETS
March 31
2015

 
December 31
2014

Cash and due from banks
$
298,515

 
$
126,072

Securities—trading, amortized cost $43,878 and $47,480, respectively
38,074

 
40,258

Securities—available-for-sale, amortized cost $393,831 and $411,424, respectively
395,607

 
411,021

Securities—held-to-maturity, fair value $140,499 and $137,608, respectively
133,649

 
131,258

Federal Home Loan Bank (FHLB) stock
25,544

 
27,036

Loans receivable:
 
 
 
Held for sale
9,419

 
2,786

Held for portfolio
4,105,399

 
3,831,034

Allowance for loan losses
(75,365
)
 
(75,907
)
 
4,039,453

 
3,757,913

Accrued interest receivable
16,873

 
15,279

Real estate owned (REO), held for sale, net
4,922

 
3,352

Property and equipment, net
98,728

 
91,185

Goodwill and other intangibles, net
27,258

 
2,831

Bank-owned life insurance (BOLI)
71,290

 
63,759

Deferred tax assets, net
22,289

 
23,871

Income tax receivable
2,462

 
—

Other assets
36,708

 
29,328

 
$
5,211,372

 
$
4,723,163

LIABILITIES
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
1,504,768

 
$
1,298,866

Interest-bearing transaction and savings accounts
2,036,600

 
1,829,568

Interest-bearing certificates
778,049

 
770,516

 
4,319,417

 
3,898,950

Advances from FHLB at fair value
250

 
32,250

Other borrowings
97,020

 
77,185

Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities)
84,326

 
78,001

Accrued expenses and other liabilities
38,164

 
37,082

Deferred compensation
20,882

 
16,807

 
4,560,059

 
4,140,275

COMMITMENTS AND CONTINGENCIES (Note 15)

 

STOCKHOLDERS’ EQUITY
 
 
 
Preferred stock - $0.01 par value per share, 500,000 shares authorized; no shares outstanding at March 31, 2015 and December 31, 2014
—

 
—

Common stock and paid in capital - $0.01 par value per share, 50,000,000 shares authorized; 20,976,641 shares issued and outstanding at March 31, 2015; 19,571,548 shares issued and outstanding at December 31, 2014
627,553

 
568,882

Common stock (not-voting) - $0.01 par value per share, 5,000,000 shares authorized; no shares issued and outstanding at March 31, 2015; no shares issued and outstanding at December 31, 2014
—

 
—

Retained earnings
22,623

 
14,264

Carrying value of shares held in trust for stock related compensation plans
(6,950
)
 
(6,669
)
Liability for common stock issued to deferred, stock related, compensation plans
6,950

 
6,669

Accumulated other comprehensive income (loss)
1,137

 
(258
)
 
651,313

 
582,888

 
$
5,211,372

 
$
4,723,163

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 Months Ended March 31, 2015 and 2014

 
Three Months Ended
March 31
 
2015

 
2014

INTEREST INCOME:
 
 
 
Loans receivable
$
46,365

 
$
41,743

Mortgage-backed securities
1,027

 
1,471

Securities and cash equivalents
1,677

 
1,892

 
49,069

 
45,106

INTEREST EXPENSE:
 
 
 
Deposits
1,733

 
1,964

FHLB advances
17

 
38

Other borrowings
43

 
44

Junior subordinated debentures
740

 
721

 
2,533

 
2,767

Net interest income before provision for loan losses
46,536

 
42,339

PROVISION FOR LOAN LOSSES
—

 
—

Net interest income
46,536

 
42,339

OTHER OPERATING INCOME:
 
 
 
Deposit fees and other service charges
8,126

 
6,602

Mortgage banking operations
4,109

 
1,840

Miscellaneous
921

 
810

 
13,156

 
9,252

Gain (loss) on sale of securities
(510
)
 
35

Net change in valuation of financial instruments carried at fair value
1,050

 
(255
)
Total other operating income
13,696

 
9,032

OTHER OPERATING EXPENSES:
 
 
 
Salary and employee benefits
24,287

 
21,156

Less capitalized loan origination costs
(2,838
)
 
(2,195
)
Occupancy and equipment
6,006

 
5,696

Information/computer data services
2,253

 
1,935

Payment and card processing expenses
3,016

 
2,515

Professional services
814

 
1,006

Advertising and marketing
1,610

 
1,055

Deposit insurance
567

 
576

State/municipal business and use taxes
453

 
159

REO operations
24

 
39

Amortization of core deposit intangibles
616

 
479

Miscellaneous
3,458

 
3,115

 
40,266

 
35,536

Acquisition-related costs
1,648

 
45

Total other operating expenses
41,914

 
35,581

Income before provision for income taxes
18,318

 
15,790

PROVISION FOR INCOME TAXES
6,184

 
5,241

NET INCOME
$
12,134

 
$
10,549

Earnings per common share:
 
 
 
Basic
$
0.61

 
$
0.55

Diluted
$
0.61

 
$
0.54

Cumulative dividends declared per common share
$
0.18

 
$
0.18

See Selected Notes to the Consolidated Financial Statements

5

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (In thousands)
For the Three Months Ended March 31, 2015 and 2014

 
Three Months Ended
March 31
 
2015

 
2014

NET INCOME
$
12,134

 
$
10,549

OTHER COMPREHENSIVE INCOME, NET OF INCOME TAXES:
 
 
 
Unrealized holding gains on available-for-sale securities arising during the period
2,283

 
2,506

Income tax expense related to available-for-sale securities unrealized holding gains
(822
)
 
(902
)
Reclassification for net gains on available-for-sale securities realized in earnings
(104
)
 
(34
)
Income tax benefit related to available-for-sale securities realized gains
38

 
12

Other comprehensive income
1,395

 
1,582

COMPREHENSIVE INCOME
$
13,529

 
$
12,131


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 Three Months Ended March 31, 2015 and the Year Ended December 31, 2014

 
Common Stock
and Paid in Capital
 
Retained Earnings (Accumulated
Deficit)
 
Accumulated
Other
Comprehensive Income (Loss)
 
Unearned Restricted
ESOP Shares
 
Stockholders’
Equity
 
Shares
 
Amount
 
 
 
Balance, January 1, 2014
19,543,769

 
$
569,028

 
$
(25,714
)
 
$
(2,996
)
 
$
(1,987
)
 
$
538,331

Net income
 
 
 
 
54,070

 
 
 
 
 
54,070

Other comprehensive income, net of income tax
 
 
 
 
 
 
2,738

 
 
 
2,738

Accrual of dividends on common stock ($0.54/share cumulative)
 
 
 
 
(14,092
)
 
 
 
 
 
(14,092
)
Redemption of unallocated shares upon termination of ESOP
(34,340
)
 
(1,987
)
 
 
 
 
 
1,987

 
—

Repurchase of shares upon termination of ESOP
(13,550
)
 
(555
)
 
 
 
 
 
 
 
(555
)
Proceeds from issuance of common stock for stockholder reinvestment program
3,170

 
127

 
 
 
 
 
 
 
127

Issuance of restricted stock and recognition of share-based compensation
72,499

 
2,269

 
 
 
 
 
 
 
2,269

BALANCE, December 31, 2014
19,571,548

 
$
568,882

 
$
14,264

 
$
(258
)
 
$
—

 
$
582,888


Balance, January 1, 2015
19,571,548

 
$
568,882

 
$
14,264

 
$
(258
)
 
$
—

 
$
582,888

Net income
 
 
 
 
12,134

 
 
 
 
 
12,134

Other comprehensive income, net of income tax
 
 
 
 
 
 
1,395

 
 
 
1,395

Accrual of dividends on common stock ($0.18/share cumulative)
 
 
 
 
(3,775
)
 
 
 
 
 
(3,775
)
Proceeds from issuance of common stock for stockholder reinvestment program
84,429

 
538

 
 
 
 
 
 
 
538

Issuance of restricted stock and recognition of share-based compensation
810

 
33

 
 
 
 
 
 
 
33

Issuance of shares for acquisitions
1,319,854

 
58,100

 
 
 
 
 
 
 
58,100

BALANCE, March 31, 2015
20,976,641

 
$
627,553

 
$
22,623

 
$
1,137

 
$
—

 
$
651,313



See Selected Notes to the Consolidated Financial Statements

7

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
For the Three Months Ended March 31, 2015 and 2014
 
Three Months Ended
March 31
 
2015

 
2014

OPERATING ACTIVITIES:
 
 
 
Net income
$
12,134

 
$
10,549

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
2,002

 
2,059

Deferred income and expense, net of amortization
885

 
1,127

Amortization of core deposit intangibles
616

 
479

Loss (gain) on sale of securities
510

 
(35
)
Net change in valuation of financial instruments carried at fair value
(1,050
)
 
255

Purchases of securities—trading
—

 
(2,387
)
Proceeds from sales of securities—trading
2,290

 
2,387

Principal repayments and maturities of securities—trading
679

 
4,055

Decrease in deferred taxes
1,344

 
1,159

Increase (decrease) in current taxes payable
(3,555
)
 
8,566

Equity-based compensation
539

 
452

Increase in cash surrender value of BOLI
(432
)
 
(425
)
Gain on sale of loans, net of capitalized servicing rights
(2,692
)
 
(981
)
Gain on disposal of real estate held for sale and property and equipment
(122
)
 
(159
)
Provision for losses on real estate held for sale
—

 
37

Origination of loans held for sale
(137,290
)
 
(68,388
)
Proceeds from sales of loans held for sale
133,349

 
68,864

Net change in:
 
 
 
Other assets
(4,703
)
 
(4,366
)
Other liabilities
776

 
(3,099
)
Net cash provided from operating activities
5,280

 
20,149

INVESTING ACTIVITIES:
 
 
 
Purchases of securities—available-for-sale
(22,622
)
 
(28,846
)
Principal repayments and maturities of securities—available-for-sale
29,255

 
7,868

Proceeds from sales of securities—available-for-sale
22,310

 
28,207

Purchases of securities—held-to-maturity
(7,664
)
 
(7,269
)
Principal repayments and maturities of securities—held-to-maturity
4,972

 
45

Loan originations, net of principal repayments
(1,805
)
 
(52,247
)
Purchases of loans and participating interest in loans
(41,684
)
 
(53,978
)
Proceeds from sales of other loans
15,000

 
1,319

Net cash received from acquisition
78,599

 
—

Purchases of property and equipment
(1,418
)
 
(1,231
)
Proceeds from sale of real estate held for sale, net
1,738

 
1,641

Proceeds from FHLB stock repurchase program
2,029

 
2,102

Other
37

 
(5
)
Net cash provided from (used by) investing activities
78,747

 
(102,394
)
FINANCING ACTIVITIES:
 
 
 
Increase in deposits, net
104,061

 
64,609

Advances, net of repayments of FHLB borrowings
(32,002
)
 
21,098

Increase in other borrowings, net
19,835

 
6,864

Cash dividends paid
(3,512
)
 
(2,927
)
Cash proceeds from issuance of stock for stockholder reinvestment plan
34

 
27

Net cash provided from financing activities
88,416

 
89,671

NET CHANGE IN CASH AND DUE FROM BANKS
172,443

 
7,426

CASH AND DUE FROM BANKS, BEGINNING OF PERIOD
126,072

 
137,349

CASH AND DUE FROM BANKS, END OF PERIOD
$
298,515

 
$
144,775

(Continued on next page)

8

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited) (In thousands)
For the Three Months Ended March 31, 2015 and 2014
 
Three Months Ended
March 31
 
2015

 
2014

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Interest paid in cash
$
2,576

 
$
2,821

Taxes paid, net of refunds received in cash
8,935

 
(3,785
)
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
690

 
870

ACQUISITIONS (Note 4):
 
 
 
   Assets acquired
370,306

 
—

   Liabilities assumed
327,548

 
—


See Selected Notes to the Consolidated Financial Statements

9

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 preparing these condensed consolidated financial statements, the Company has evaluated events and transactions subsequent to March 31, 2015 for potential recognition or disclosure. 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 2014 Consolidated Financial Statements and/or schedules to conform to the 2015 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 goodwill, core deposit intangibles and mortgage servicing rights, (v) the valuation of or recognition of deferred tax assets and liabilities, and (vi) the application of acquisition accounting standards to business combinations including purchased credit-impaired loans. 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, 2014 filed with the SEC.  There have been no significant changes in our application of accounting policies during the first three months of 2015.

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, 2014 as filed with the SEC (2014 Form 10-K).  Interim results are not necessarily indicative of results for a full year or any other interim period.

Note 2:  RECENT DEVELOPMENTS AND SIGNIFICANT EVENTS

Proposed Acquisition of AmericanWest Bank

On November 5, 2014, we announced the execution of a definitive agreement to purchase Starbuck Bancshares, Inc. (Starbuck) the bank holding company of AmericanWest Bank (AmericanWest), a Washington state chartered commercial bank headquartered in Spokane, Washington, with 94 branches serving markets in Washington, Oregon, Idaho, California and Utah. The merger agreement provides that Starbuck will merge with and into a wholly-owned subsidiary of the Company. Immediately following the merger, Starbuck's wholly owned bank subsidiary, AmericanWest will merge with Banner Bank. At March 31, 2015, Starbuck had $4.6 billion in assets, $3.0 billion in net loans, $3.7 billion in deposits and equity of $586 million, including AmericanWest's recent acquisition of Greater Sacramento Bancorp which was completed on February 6, 2015. The merged banks will operate under the Banner Bank brand. Under the terms of the agreement, the aggregate consideration to be received by Starbuck equity holders will consist of a fixed amount of 13.23 million shares of Banner common stock and $130.0 million in cash. Upon completion of the transaction, such shares will represent an approximately 38.8% pro forma ownership interest in Banner. The merger is expected to close early in the third quarter of 2015 and is subject to approval by regulatory agencies as well as other customary closing conditions. Upon completion of the AmericanWest merger, Banner Bank will have more than 190 locations in five western states, a significantly expanded customer base and meaningfully increased business opportunities.

Acquisition of Siuslaw Financial Group, Inc.

As of the close of business on March 6, 2015, the Company completed its acquisition of Siuslaw Financial Group (Siuslaw) and its subsidiary, Siuslaw Bank, an Oregon state chartered commercial bank with ten branches in Lane County, Oregon, including Eugene, Oregon. On that date Siuslaw was merged into Banner Corporation and Siuslaw Bank was merged into Banner Bank. The operating results produced by the ten branches acquired in the Siuslaw acquisition are included in Banner Bank's financial results beginning March 7, 2015 and the combined banks are operating under the Banner Bank name and brand. (See Note 4, Business Combinations, below in this Form 10-Q for additional information regarding the acquisition).

Note 3:  ACCOUNTING STANDARDS RECENTLY ISSUED OR ADOPTED
 
Investing in Qualified Affordable Housing Projects

10


In January 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("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 have been applied retrospectively to all periods presented. ASU No. 2014-01 is effective beginning after December 15, 2014 and did not 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 did not have a material impact on the Company's consolidated financial statements.

Revenue from Contracts with Customers
In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which creates Topic 606 and supersedes Topic 605, Revenue Recognition. The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In general, the new guidance requires companies to use more judgment and make more estimates than under current guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The standard is effective for public entities for interim and annual periods beginning after December 15, 2016 although FASB issued a proposed ASU on April 29, 2015 that would defer the effective date by one year (i.e. to reporting periods beginning after December 15, 2017); early adoption is not permitted. For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. The Company is currently evaluating the provisions of ASU No. 2014-09 to determine the potential impact the standard will have on the Company’s consolidated financial statements.

Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure

In August 2014, FASB issued ASU No. 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. The amendments in this ASU affect creditors that hold government-guaranteed mortgage loans, including those guaranteed by the FHA and the VA. The ASU provides specific guidance on how to classify or measure foreclosed mortgage loans that are government guaranteed. The amendments in this Update require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: 1) the loan has a government guarantee that is not separable from the loan before foreclosure, 2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and creditor has the ability to recover under the claim and, 3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. ASU No. 2014-14 is effective for fiscal years and interim periods beginning after December 15, 2014 and did not have a material impact on the Company's consolidated financial statements.

Income Statement - Extraordinary and Unusual Items (Subtopic 225-20)

In January 2015, FASB issued ASU No. 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20). The ASU eliminated from GAAP the concept of extraordinary items. Under subtopic 225-20, entities were required to separately classify, present, and disclose extraordinary events and transactions that were both unusual in nature and infrequent in occurrence. This amendment will save time and reduce costs for preparers, as well as alleviate uncertainty for auditors and regulators in evaluating potentially extraordinary items. The amendment is effective for fiscal years and interim reporting periods after December 15, 2015. It may be applied prospectively, and retrospectively to all reporting periods presented in the financial statements. The adoption of ASU No. 2015-01 did not have a material impact on the Company's consolidated financial statements.


Note 4:  BUSINESS COMBINATIONS


11

Acquisition of Siuslaw Financial Group, Inc.

Effective as of the close of business on March 6, 2015, the Company completed the purchase of Siuslaw, the holding company of Siuslaw Bank. Siuslaw merged with and into the Company and, immediately following, Siuslaw Bank merged with and into Banner Bank. Siuslaw shareholders received 0.32231 shares of the Company's common stock and $1.41622 in cash in exchange for each share of Siuslaw common stock. The Company acquired 100% of Siuslaw's voting equity interests in the transaction. The acquisition provided $370 million in assets, $316 million in deposits and $247 million in loans.

The assets acquired and liabilities assumed in the purchase have been accounted for under the acquisition method of accounting and, accordingly, the assets and liabilities, both tangible and intangible, were recorded at their estimated fair value as of the acquisition date. The application of the acquisition method of accounting resulted in recognition of a core deposit intangible asset of $3.9 million and goodwill of $21.1 million. The acquired core deposit intangible has been determined to have a useful life of approximately eight years and will be amortized on an accelerated basis. Goodwill is not amortized but will be evaluated for impairment on an annual basis or more often if circumstances dictate to determine if the carrying value remains appropriate. Goodwill will not be deductible for income tax purposes as the acquisition is accounted for as a tax-free exchange for tax purposes.

The following table presents a summary of the consideration paid and the estimated fair values as of the acquisition date for each major class of assets acquired and liabilities assumed (in thousands):
 
Siuslaw
 
March 6, 2015
Consideration to Siuslaw shareholders:
 
 
 
Cash paid
 
 
$
5,806

Fair value of common shares issued
 
 
58,100

Total consideration
 
 
63,906

Fair value of assets acquired:
 
 
 
Cash and cash equivalents
$
84,405

 
 
Securities—available-for-sale
12,865

 
 
Loans receivable (contractual amount of $252.2 million)
247,098

 
 
Real estate owned, held for sale
2,525

 
 
Property and equipment
8,127

 
 
Core deposit intangible
3,895

 
 
Other assets
11,391

 
 
Total assets acquired
370,306

 
 
Fair value of liabilities assumed:
 
 
 
Deposits
316,406

 
 
Junior subordinated debentures
5,959

 
 
Other liabilities
5,183

 
 
Total liabilities assumed
327,548

 
 
Net assets acquired
 
 
42,758

Goodwill
 
 
$
21,148


Acquired goodwill represents the premium the Company paid over the fair value of the net tangible and intangible assets acquired. The Company paid this premium for a number of reasons, including growing the Company's customer base, acquiring assembled workforces, and expanding its presence in new markets. See Note 9, Goodwill and Other Intangible Assets for the accounting for goodwill and other intangible assets.

Amounts recorded are preliminary estimates of fair value. Additional adjustments to the purchase price allocation may be required and would most likely involve loans or property and equipment. The primary reason for the acquisition was to continue the Company's growth strategy, including expanding our geographic footprint in markets throughout the Northwest. As of March 6, 2015, the unpaid principal balance on purchased non-credit-impaired loans was $244.2 million. The fair value of the purchased non-credit-impaired loans was $241.4 million, resulting in a discount of $2.8 million recorded on these loans.


12

The following table presents the acquired purchased credit-impaired loans as of the acquisition date (in thousands):
 
 
Siuslaw
 
 
March 6, 2015
Acquired purchased credit-impaired loans:
 
 
Contractually required principal and interest payments
 
$
11,134

Nonaccretable difference
 
(3,238
)
Cash flows expected to be collected
 
7,896

Accretable yield
 
(2,239
)
Fair value of purchased credit-impaired loans
 
$
5,657

 
The following table presents certain unaudited pro forma information for illustrative purposes only, for the three months ended March 31, 2015 and 2014 as if Siuslaw had been acquired on January 1, 2014. This unaudited estimated pro forma financial information combines the historical results of Siuslaw with the Company’s consolidated historical results. The pro forma information is not indicative of what would have occurred had the acquisition occurred on January 1, 2014. In particular, no adjustments have been made to eliminate the impact of other-than-temporary impairment losses and losses recognized on the sale of securities that may not have been necessary had the investment securities been recorded at fair value as of January 1, 2014. The unaudited pro forma information does not consider any changes to the provision for credit losses resulting from recording loan assets at fair value. Additionally, Banner expects to achieve further operating cost savings and other business synergies, including revenue growth, as a result of the acquisition which are not reflected in the pro forma amounts that follow. As a result, actual amounts would have differed from the unaudited pro forma information presented. (in thousands except per share).
 
Pro Forma
 
Three Months Ended March 31,
 
2015

 
2014

Total revenues (net interest income plus non-interest income
$
63,164

 
$
55,829

Net income
$
12,518

 
$
11,413

Earnings per share - basic
$
0.59

 
$
0.55

Earnings per share - diluted
$
0.59

 
$
0.55

The operating results of the Company include the operating results produced by the acquired assets and assumed liabilities of Siuslaw for the period March 7, 2015 to March 31, 2015. Disclosure of the amount of Siuslaw’s revenue and net income (excluding integration costs) included in the Company’s consolidated income statement is impracticable due to the integration of the operations and accounting for this acquisition.
Acquisition of Six Oregon Branches

Effective as of the close of business on June 20, 2014, Banner Bank completed the purchase of six branches from Umpqua Bank, successor to Sterling Savings Bank (the Branch Acquisition). Five of the six branches are located in Coos County, Oregon and the sixth branch is located in Douglas County, Oregon. The purchase provided $212 million in deposit accounts, $88 million in loans, and $3 million in branch properties. Banner Bank received $128 million in cash from the transaction.

The assets acquired and liabilities assumed in the purchase have been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the acquisition date. The application of the acquisition method of accounting resulted in recognition of a core deposit intangible asset of $2.4 million and an acquisition bargain purchase gain of $9.1 million. The bargain purchase gain represents the excess fair value of the net assets acquired over the purchase price, including fair value of liabilities assumed. The bargain purchase gain consisted primarily of a $7.0 million discount on the assets acquired in this required branch divestiture combined with a $2.4 million core deposit intangible, net of approximately $300,000 in other fair value adjustments. The acquired core deposit intangible was determined to have a useful life of approximately eight years and is being amortized on an accelerated basis.


13

The following table displays the fair value as of the acquisition date for each major class of assets acquired and liabilities assumed (in thousands):
 
Branch Acquisition
 
June 20, 2014
Total consideration
 
 
$
—

Fair value of assets acquired:
 
 
 
Cash and cash equivalents
$
127,557

 
 
Loans receivable (contractual amount of $88.3 million)
87,923

 
 
Property and equipment
3,079

 
 
Core deposit intangible
2,372

 
 
Other assets
275

 
 
Total assets acquired
221,206

 
 
 
 
 
 
Fair value of liabilities assumed:
 
 
 
Deposits
212,085

 
 
Other liabilities
42

 
 
Total liabilities assumed
212,127

 
 
Net assets acquired
 
 
$
9,079

Acquisition bargain purchase gain
 
 
$
(9,079
)

The primary reason for the acquisition was to continue the Company's growth strategy, including expanding its geographic footprint in markets throughout the Northwest. As of June 20, 2014, the transaction had no remaining contingencies. The operating results of the Company include the operating results produced by the Branch Acquisition from June 21, 2014 to March 31, 2015. Pro forma results of operations for the three months ended March 31, 2015 and 2014, as if the Branch Acquisition had occurred on January 1, 2014, have not been presented because historical financial information was not available. There were not any purchased credit-impaired loans acquired in connection with the Branch Acquisition.

Acquisition Related Costs

The following table presents the key components of acquisition related costs in connection with the Branch Acquisition, the acquisition of Siuslaw, and the proposed acquisition of AmericanWest for the three months ended March 31, 2015 and 2014 (in thousands):
 
Three Months Ended
March 31
 
2015
 
2014
Acquisition-related costs recognized in other operating expenses:
 
 
 
Non-capitalized equipment and repairs
$
24

 
$
—

Client communications
66

 
2

Information/computer data services
40

 
—

Payment and processing expenses
—

 
—

Professional services
1,280

 
32

Miscellaneous
238

 
11

 
$
1,648

 
$
45



14

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, 2015
 
December 31, 2014
Interest-bearing deposits included in cash and due from banks
$
215,114

 
$
54,995

U.S. Government and agency obligations
26,242

 
33,421

Municipal bonds:


 


Taxable
29,374

 
29,566

Tax exempt
154,853

 
141,853

Total municipal bonds
184,227

 
171,419

Corporate bonds
24,297

 
25,936

Mortgage-backed or related securities:


 


One- to four-family residential agency guaranteed
57,966

 
58,825

One- to four-family residential other
575

 
713

Multifamily agency guaranteed
237,816

 
256,272

Multifamily other
10,650

 
10,497

Total mortgage-backed or related securities
307,007

 
326,307

Asset-backed securities:


 


Student Loan Marketing Association (SLMA)
15,611

 
15,629

Other asset-backed securities
9,889

 
9,766

Total asset-backed securities
25,500

 
25,395

Equity securities (excludes FHLB stock)
57

 
59

Total securities
567,330

 
582,537

Total interest-bearing deposits and securities
$
782,444

 
$
637,532


Securities—Trading:  The amortized cost and estimated fair value of securities—trading at March 31, 2015 and December 31, 2014 are summarized as follows (dollars in thousands):
 
March 31, 2015
 
December 31, 2014
 
Amortized Cost
 
Fair Value
 
Percent of Total
 
Amortized Cost
 
Fair Value
 
Percent of Total
U.S. Government and agency obligations
$
1,340

 
$
1,515

 
4.0
%
 
$
1,340

 
$
1,505

 
3.7
%
Municipal bonds:


 


 
 
 
 
 
 
 
 
Tax exempt
1,404

 
1,432

 
3.8

 
1,405

 
1,440

 
3.6

Corporate bonds
24,968

 
17,456

 
45.8

 
27,995

 
19,118

 
47.5

Mortgage-backed or related securities:


 


 
 
 
 
 
 
 
 
One- to four-family residential agency guaranteed
7,547

 
8,188

 
21.5

 
8,077

 
8,726

 
21.7

Multifamily agency guaranteed
8,605

 
9,426

 
24.8

 
8,649

 
9,410

 
23.4

Total mortgage-backed or related securities
16,152

 
17,614

 
46.3

 
16,726

 
18,136

 
45.1

Equity securities
14

 
57

 
0.1

 
14

 
59

 
0.1

 
$
43,878

 
$
38,074

 
100.0
%
 
$
47,480

 
$
40,258

 
100.0
%

There was one sale of securities—trading totaling $2.3 million with a resulting net loss of $642,000 during the three months ended March 31, 2015. 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.  The Company did not recognize any OTTI charges or recoveries on securities—trading during the three months ended March 31, 2015 or 2014. There were no securities—trading on nonaccrual status at March 31, 2015 or 2014.


15

The amortized cost and estimated fair value of securities—trading at March 31, 2015 and December 31, 2014, 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, 2015
 
December 31, 2014
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
 
 
 
 
 
 
 
Maturing in one year or less
$
1,071

 
$
1,087

 
$
1,071

 
$
1,094

Maturing after one year through five years
6,400

 
6,904

 
6,595

 
7,097

Maturing after five years through ten years
6,923

 
7,670

 
7,035

 
7,727

Maturing after ten years through twenty years
10,819

 
9,837

 
11,196

 
10,083

Maturing after twenty years
18,651

 
12,519

 
21,569

 
14,198

 
43,864

 
38,017

 
47,466

 
40,199

Equity securities
14

 
57

 
14

 
59

 
$
43,878

 
$
38,074

 
$
47,480

 
$
40,258



16

Securities—Available-for-Sale:  The amortized cost and estimated fair value of securities—available-for-sale at March 31, 2015 and December 31, 2014 are summarized as follows (dollars in thousands):
 
March 31, 2015
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Percent of Total
U.S. Government and agency obligations
$
22,648

 
$
12

 
$
(69
)
 
$
22,591

 
5.7
%
Municipal bonds:


 


 


 


 
 
Taxable
16,524

 
89

 
(10
)
 
16,603

 
4.2

Tax exempt
43,608

 
169

 
(72
)
 
43,705

 
11.0

Total municipal bonds
60,132

 
258

 
(82
)
 
60,308

 
15.2

Corporate bonds
5,000

 
41

 
—

 
5,041

 
1.3

Mortgage-backed or related securities:


 


 


 


 
 
One- to four-family residential agency guaranteed
47,569

 
893

 
(161
)
 
48,301

 
12.2

One- to four-family residential other
544

 
31

 
—

 
575

 
0.1

Multifamily agency guaranteed
221,970

 
1,217

 
(546
)
 
222,641

 
56.3

Multifamily other
10,480

 
170

 
—

 
10,650

 
2.7

Total mortgage-backed or related securities
280,563

 
2,311

 
(707
)
 
282,167

 
71.3

Asset-backed securities:


 


 


 


 
 
SLMA
15,440

 
171

 
—

 
15,611

 
4.0

Other asset-backed securities
10,048

 
—

 
(159
)
 
9,889

 
2.5

Total asset-backed securities
25,488

 
171

 
(159
)
 
25,500

 
6.5

 
$
393,831

 
$
2,793

 
$
(1,017
)
 
$
395,607

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Percent of Total
U.S. Government and agency obligations
$
29,973

 
$
8

 
$
(211
)
 
$
29,770

 
7.2
%
Municipal bonds:
 
 
 
 
 
 
 
 
 
Taxable
16,565

 
65

 
(52
)
 
16,578

 
4.0

Tax exempt
33,394

 
125

 
(69
)
 
33,450

 
8.2

Total municipal bonds
49,959

 
190

 
(121
)
 
50,028

 
12.2

Corporate bonds
5,000

 
18

 
—

 
5,018

 
1.2

Mortgage-backed or related securities:
 
 
 
 
 
 
 
 
 
One- to four-family residential agency guaranteed
48,001

 
758

 
(240
)
 
48,519

 
11.8

One- to four-family residential other
675

 
38

 
—

 
713

 
0.2

Multifamily agency guaranteed
241,800

 
627

 
(1,346
)
 
241,081

 
58.7

Multifamily other
10,503

 
6

 
(12
)
 
10,497

 
2.5

Total mortgage-backed or related securities
300,979

 
1,429

 
(1,598
)
 
300,810

 
73.2

Asset-backed securities:
 
 
 
 
 
 
 
 
 
SLMA
15,462

 
167

 
—

 
15,629

 
3.8

Other asset-backed securities
10,051

 
—

 
(285
)
 
9,766

 
2.4

Total asset-backed securities
25,513

 
167

 
(285
)
 
25,395

 
6.2

 
$
411,424

 
$
1,812

 
$
(2,215
)
 
$
411,021

 
100.0
%


17

At March 31, 2015 and December 31, 2014, an aging of unrealized losses and fair value of related securities—available-for-sale was as follows (in thousands):
 
March 31, 2015
 
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
$
909

 
$
(10
)
 
$
9,941

 
$
(59
)
 
$
10,850

 
$
(69
)
Municipal bonds:


 


 


 


 


 


Taxable
1,766

 
(3
)
 
2,240

 
(7
)
 
4,006

 
(10
)
Tax exempt
8,076

 
(65
)
 
1,212

 
(7
)
 
9,288

 
(72
)
Total municipal bonds
9,842

 
(68
)
 
3,452

 
(14
)
 
13,294

 
(82
)
Mortgage-backed or related securities:


 


 


 


 


 


One- to four-family residential agency guaranteed
14,341

 
(77
)
 
3,401

 
(84
)
 
17,742

 
(161
)
Multifamily agency guaranteed
29,888

 
(23
)
 
87,584

 
(523
)
 
117,472

 
(546
)
Total mortgage-backed or related securities
44,229

 
(100
)
 
90,985

 
(607
)
 
135,214

 
(707
)
Asset-backed securities:


 


 


 


 


 
 
Other asset-backed securities
—

 
—

 
9,889

 
(159
)
 
9,889

 
(159
)
 
$
54,980

 
$
(178
)
 
$
114,267

 
$
(839
)
 
$
169,247

 
$
(1,017
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 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
$
15,983

 
$
(58
)
 
$
9,847

 
$
(153
)
 
$
25,830

 
$
(211
)
Municipal bonds:
 
 
 
 
 
 
 
 
 
 
 
Taxable
7,247

 
(23
)
 
3,461

 
(29
)
 
10,708

 
(52
)
Tax exempt
9,075

 
(38
)
 
3,668

 
(31
)
 
12,743

 
(69
)
Total municipal bonds
16,322

 
(61
)
 
7,129

 
(60
)
 
23,451

 
(121
)
Mortgage-backed or related securities:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family residential agency guaranteed
6,287

 
(57
)
 
11,744

 
(183
)
 
18,031

 
(240
)
Multifamily agency guaranteed
76,309

 
(167
)
 
95,522

 
(1,179
)
 
171,831

 
(1,346
)
Multifamily other
8,450

 
(12
)
 
—

 
—

 
8,450

 
(12
)
Total mortgage-backed or related securities
91,046

 
(236
)
 
107,266

 
(1,362
)
 
198,312

 
(1,598
)
Asset-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Other asset-backed securities
—

 
—

 
9,765

 
(285
)
 
9,765

 
(285
)
 
$
123,351

 
$
(355
)
 
$
134,007

 
$
(1,860
)
 
$
257,358

 
$
(2,215
)

There were 42 sales of securities—available-for-sale totaling $22.3 million with a resulting net gain of $103,000 during the three months ended March 31, 2015. 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.  At March 31, 2015, there were 59 securities—available for sale with unrealized losses, compared to 94 securities at December 31, 2014.  Management does not believe that any individual unrealized loss as of March 31, 2015 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, 2015 or 2014.


18

The amortized cost and estimated fair value of securities—available-for-sale at March 31, 2015 and December 31, 2014, 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, 2015
 
December 31, 2014
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
 
 
 
 
 
 
 
Maturing in one year or less
$
9,300

 
$
9,324

 
$
9,334

 
$
9,364

Maturing after one year through five years
255,299

 
255,522

 
278,629

 
277,439

Maturing after five years through ten years
48,963

 
49,436

 
45,425

 
45,610

Maturing after ten years through twenty years
17,921

 
17,987

 
13,846

 
13,879

Maturing after twenty years
62,348

 
63,338

 
64,190

 
64,729

 
$
393,831

 
$
395,607

 
$
411,424

 
$
411,021


Securities—Held-to-Maturity:  The amortized cost and estimated fair value of securities—held-to-maturity at March 31, 2015 and December 31, 2014 are summarized as follows (dollars in thousands):
 
March 31, 2015
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Percent of Total Amortized Cost
U.S. Government and agency obligations
$
2,136

 
$
2

 
$
—

 
$
2,138

 
1.6
%
Municipal bonds:
 
 
 
 
 
 
 
 
 
Taxable
12,771

 
428

 
—

 
13,199

 
9.6

Tax exempt
109,716

 
6,295

 
(82
)
 
115,929

 
82.1

Total municipal bonds
122,487

 
6,723

 
(82
)
 
129,128

 
91.7

Corporate bonds
1,800

 
—

 
—

 
1,800

 
1.3

Mortgage-backed or related securities:
 
 
 
 
 
 
 
 
 
One- to four-family residential agency guaranteed
1,477

 
18

 
(3
)
 
1,492

 
1.1

Multifamily agency guaranteed
5,749

 
192

 
—

 
5,941

 
4.3

Total mortgage-backed or related securities
7,226

 
210

 
(3
)
 
7,433

 
5.4

 
$
133,649

 
$
6,935

 
$
(85
)
 
$
140,499

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Percent of Total Amortized Cost
U.S. Government and agency obligations
$
2,146

 
$
—

 
$
(19
)
 
$
2,127

 
1.6
%
Municipal bonds:
 
 
 
 
 
 
 
 
 
Taxable
12,988

 
371

 
(1
)
 
13,358

 
9.9

Tax exempt
106,963

 
5,948

 
(47
)
 
112,864

 
81.5

Total municipal bonds
119,951

 
6,319

 
(48
)
 
126,222

 
91.4

Corporate bonds
1,800

 
—

 
—

 
1,800

 
1.4

Mortgage-backed or related securities:
 
 
 
 
 
 
 
 
 
One- to four-family residential agency guaranteed
1,580

 
1

 
(7
)
 
1,574

 
1.2

Multifamily agency guaranteed
5,781

 
104

 
—

 
5,885

 
4.4

Total mortgage-backed or related securities
7,361

 
105

 
(7
)
 
7,459

 
5.6

 
$
131,258

 
$
6,424

 
$
(74
)
 
$
137,608

 
100.0
%


19

At March 31, 2015 and December 31, 2014, an age analysis of unrealized losses and fair value of related securities—held-to-maturity was as follows (in thousands):
 
March 31, 2015
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Municipal bonds:
 
 
 
 
 
 
 
 
 
 
 
Tax exempt
$
6,892

 
$
(82
)
 
$
—

 
$
—

 
$
6,892

 
$
(82
)
Mortgage-backed or related securities:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family residential agency guaranteed
371

 
(3
)
 
—

 
—

 
371

 
(3
)
 
$
7,263

 
$
(85
)
 
$
—

 
$
—

 
$
7,263

 
$
(85
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 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
$
—

 
$
—

 
$
1,127

 
$
(19
)
 
$
1,127

 
$
(19
)
Municipal bonds:
 
 
 
 
 
 
 
 
 
 
 
Taxable
724

 
(1
)
 
—

 
—

 
724

 
(1
)
Tax exempt
9,097

 
(43
)
 
592

 
(4
)
 
9,689

 
(47
)
Total municipal bonds
9,821

 
(44
)
 
592

 
(4
)
 
10,413

 
(48
)
Mortgage-backed or related securities:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family residential agency guaranteed
1,018

 
(7
)
 
—

 
—

 
1,018

 
(7
)
 
$
10,839

 
$
(51
)
 
$
1,719

 
$
(23
)
 
$
12,558

 
$
(74
)

There were no sales of securities—held-to-maturity during the three months ended March 31, 2015 and 2014.  At March 31, 2015, there were ten securities—held-to-maturity with unrealized losses, compared to 25 securities at December 31, 2014.  Management does not believe that any individual unrealized loss as of March 31, 2015 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, 2015 or 2014.

The amortized cost and estimated fair value of securities—held-to-maturity at March 31, 2015 and December 31, 2014, 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, 2015
 
December 31, 2014
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
 
 
 
 
 
 
 
Maturing in one year or less
$
516

 
$
519

 
$
767

 
$
771

Maturing after one year through five years
15,666

 
15,885

 
14,962

 
15,184

Maturing after five years through ten years
24,473

 
25,104

 
24,233

 
24,678

Maturing after ten years through twenty years
76,633

 
82,101

 
76,029

 
81,361

Maturing after twenty years
16,361

 
16,890

 
15,267

 
15,614

 
$
133,649

 
$
140,499

 
$
131,258

 
$
137,608


20


Pledged Securities: The following table presents, as of March 31, 2015, investment securities and interest-bearing deposits 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
$
105,891

 
$
105,831

 
$
112,123

Interest rate swap counterparties
13,383

 
12,786

 
13,383

Retail repurchase agreements
113,680

 
112,900

 
113,680

Other
248

 
248

 
248

Total pledged securities and interest-bearing deposits
$
233,202

 
$
231,765

 
$
239,434


Note 6:  FHLB STOCK

The Banks’ investments in Federal Home Loan Bank of Seattle stock are carried at cost, which is its par value ($100 per share) and 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, 2015 and December 31, 2014, respectively, the Company had recorded $25.5 million and $27.0 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, 2015 and 2014, the Banks received dividend income of $7,000 and $9,000, respectively, 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.

The FHLB repurchased $2.0 million of the Banks' stock during the quarter ending March 31, 2015. On September 25, 2014, the FHLB of Seattle entered into an Agreement and Plan of Merger with and into the FHLB of Des Moines. The merger was approved by the members of both the Seattle and Des Moines Federal Home Loan Banks on February 27, 2015 and the merger is expected to be completed by mid-year 2015. Based on the above, the Company has determined there was no impairment on its FHLB stock investment as of March 31, 2015.

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.  Loans acquired in business combinations are recorded at their fair value at the date of acquisition. 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.

21

Loans receivable, including loans held for sale, at March 31, 2015 and December 31, 2014 are summarized as follows (dollars in thousands):
 
March 31, 2015
 
December 31, 2014
 
Amount
 
Percent of Total
 
Amount
 
Percent of Total
Commercial real estate:
 
 
 
 
 
 
 
Owner-occupied
$
627,531

 
15.3
%
 
$
546,783

 
14.3
%
Investment properties
936,693

 
22.8

 
856,942

 
22.3

Multifamily real estate
208,687

 
5.1

 
167,524

 
4.4

Commercial construction
30,434

 
0.7

 
17,337

 
0.4

Multifamily construction
56,201

 
1.4

 
60,193

 
1.6

One- to four-family construction
228,224

 
5.5

 
219,889

 
5.7

Land and land development:
 

 
 
 
 

 
 
Residential
98,930

 
2.4

 
102,435

 
2.7

Commercial
17,174