BANR-6.30.2013-10Q
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 JUNE 30, 2013.
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)
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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 July 31, 2013 |
Common Stock, $.01 par value per share | | 19,546,516 shares * |
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* Includes 34,340 shares held by the Employee Stock Ownership Plan that have not been released, committed to be released, or allocated to participant accounts. |
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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 June 30, 2013 and December 31, 2012 | |
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Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2013 and 2012 | |
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Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2013 and 2012 | |
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Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2013 and the Year Ended December 31, 2012 | |
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Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012 | |
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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 June 30, 2013 and December 31, 2012 | |
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Comparison of Results of Operations for the Three and Six Months Ended June 30, 2013 and 2012 | |
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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 concerning our future operations. 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 nonperforming assets, and may result in our allowance for loan losses not being adequate to cover actual losses and require us to materially increase our reserves; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates and the relative differences between short and long-term interest rates, loan and deposit interest rates, our net interest margin and funding sources; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; secondary market conditions for loans and our ability to sell loans in the secondary market; results of examinations of us by the Board of Governors of the Federal Reserve System (the Federal Reserve Board) and of our bank subsidiaries by the Federal Deposit Insurance Corporation (the FDIC), the Washington State Department of Financial Institutions, Division of Banks (the Washington DFI) or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, institute a formal or informal enforcement action against us or any of our bank subsidiaries which could require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds, or maintain or increase deposits, or impose additional requirements and restrictions on us, any of which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules including changes related to Basel III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the implementing regulations; our ability to attract and retain deposits; increases in premiums for deposit insurance; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets and liabilities, which estimates may prove to be incorrect and result in significant changes in valuation; difficulties in reducing risk associated with the loans on our balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; the failure or security breach of computer systems on which we depend; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our business strategies; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; our ability to manage loan delinquency rates; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; our ability to pay dividends on our common 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)
June 30, 2013 and December 31, 2012
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| | | | | | | |
ASSETS | June 30 2013 |
| | December 31 2012 |
|
Cash and due from banks | $ | 121,448 |
| | $ | 181,298 |
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Securities—trading, amortized cost 0 and 0, respectively | 65,524 |
| | 71,232 |
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Securities—available-for-sale, amortized cost 0 and 0, respectively | 469,137 |
| | 472,920 |
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Securities—held-to-maturity, fair value 0 and 0, respectively | 94,336 |
| | 86,452 |
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Federal Home Loan Bank (FHLB) stock | 36,040 |
| | 36,705 |
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Loans receivable: | | | |
Held for sale | 6,393 |
| | 11,920 |
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Held for portfolio | 3,283,808 |
| | 3,223,794 |
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Allowance for loan losses | (76,853 | ) | | (77,491 | ) |
| 3,213,348 |
| | 3,158,223 |
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Accrued interest receivable | 14,648 |
| | 13,930 |
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Real estate owned (REO), held for sale, net | 6,714 |
| | 15,778 |
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Property and equipment, net | 87,896 |
| | 89,117 |
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Intangible assets, net | 3,247 |
| | 4,230 |
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Bank-owned life insurance (BOLI) | 60,894 |
| | 59,891 |
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Income taxes | 37,592 |
| | 35,007 |
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Other assets | 25,466 |
| | 40,781 |
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| $ | 4,236,290 |
| | $ | 4,265,564 |
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LIABILITIES | | | |
Deposits: | | | |
Non-interest-bearing | $ | 958,674 |
| | $ | 981,240 |
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Interest-bearing transaction and savings accounts | 1,557,513 |
| | 1,547,271 |
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Interest-bearing certificates | 944,137 |
| | 1,029,293 |
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| 3,460,324 |
| | 3,557,804 |
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Advances from FHLB at fair value | 54,262 |
| | 10,304 |
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Other borrowings | 90,779 |
| | 76,633 |
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Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities) | 73,471 |
| | 73,063 |
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Accrued expenses and other liabilities | 22,010 |
| | 26,389 |
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Deferred compensation | 15,111 |
| | 14,452 |
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| 3,715,957 |
| | 3,758,645 |
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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, 19,553,189 shares issued and 19,518,849 shares outstanding at June 30, 2013; 19,454,965 shares issued and 19,420,625 shares outstanding at December 31, 2012 | 568,408 |
| | 567,907 |
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Accumulated deficit | (42,440 | ) | | (61,102 | ) |
Accumulated other comprehensive (loss) income | (3,648 | ) | | 2,101 |
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Unearned shares of common stock issued to Employee Stock Ownership Plan (ESOP) trust at cost: 34,340 restricted shares outstanding at June 30, 2013 and December 31, 2012 | (1,987 | ) | | (1,987 | ) |
| 520,333 |
| | 506,919 |
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| $ | 4,236,290 |
| | $ | 4,265,564 |
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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 and Six Months Ended June 30, 2013 and 2012
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| | | | | | | | | | | | | | | |
| Three Months Ended June 30 | | Six Months Ended June 30 |
| 2013 |
| | 2012 |
| | 2013 |
| | 2012 |
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INTEREST INCOME: | | | | | | | |
Loans receivable | $ | 42,292 |
| | $ | 44,473 |
| | $ | 83,781 |
| | $ | 88,824 |
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Mortgage-backed securities | 1,394 |
| | 995 |
| | 2,566 |
| | 1,922 |
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Securities and cash equivalents | 1,885 |
| | 2,230 |
| | 3,733 |
| | 4,513 |
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| 45,571 |
| | 47,698 |
| | 90,080 |
| | 95,259 |
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INTEREST EXPENSE: | | | | | | | |
Deposits | 2,490 |
| | 4,035 |
| | 5,210 |
| | 8,483 |
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FHLB advances | 40 |
| | 64 |
| | 64 |
| | 127 |
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Other borrowings | 51 |
| | 74 |
| | 107 |
| | 623 |
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Junior subordinated debentures | 742 |
| | 802 |
| | 1,482 |
| | 1,814 |
|
| 3,323 |
| | 4,975 |
| | 6,863 |
| | 11,047 |
|
Net interest income before provision for loan losses | 42,248 |
| | 42,723 |
| | 83,217 |
| | 84,212 |
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PROVISION FOR LOAN LOSSES | — |
| | 4,000 |
| | — |
| | 9,000 |
|
Net interest income | 42,248 |
| | 38,723 |
| | 83,217 |
| | 75,212 |
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OTHER OPERATING INCOME: | | | | | | | |
Deposit fees and other service charges | 6,628 |
| | 6,283 |
| | 12,928 |
| | 12,152 |
|
Mortgage banking operations | 3,574 |
| | 2,736 |
| | 6,412 |
| | 5,211 |
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Miscellaneous | 664 |
| | 514 |
| | 1,455 |
| | 1,093 |
|
| 10,866 |
| | 9,533 |
| | 20,795 |
| | 18,456 |
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Gain on sale of securities | 12 |
| | 29 |
| | 1,018 |
| | 29 |
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Other-than-temporary impairment recovery | — |
| | — |
| | 409 |
| | — |
|
Net change in valuation of financial instruments carried at fair value | (255 | ) | | (19,059 | ) | | (1,601 | ) | | (17,374 | ) |
Total other operating income | 10,623 |
| | (9,497 | ) | | 20,621 |
| | 1,111 |
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OTHER OPERATING EXPENSES: | | | | | | | |
Salary and employee benefits | 21,224 |
| | 19,390 |
| | 41,953 |
| | 38,900 |
|
Less capitalized loan origination costs | (3,070 | ) | | (2,747 | ) | | (5,941 | ) | | (4,997 | ) |
Occupancy and equipment | 5,415 |
| | 5,204 |
| | 10,744 |
| | 10,681 |
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Information/computer data services | 1,923 |
| | 1,746 |
| | 3,643 |
| | 3,261 |
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Payment and card processing expenses | 2,449 |
| | 2,116 |
| | 4,753 |
| | 4,006 |
|
Professional services | 820 |
| | 1,224 |
| | 1,726 |
| | 2,568 |
|
Advertising and marketing | 1,798 |
| | 1,650 |
| | 3,297 |
| | 3,716 |
|
Deposit insurance | 617 |
| | 816 |
| | 1,263 |
| | 2,179 |
|
State/municipal business and use taxes | 538 |
| | 565 |
| | 1,003 |
| | 1,133 |
|
REO operations | (195 | ) | | 1,969 |
| | (446 | ) | | 4,567 |
|
Amortization of core deposit intangibles | 477 |
| | 523 |
| | 982 |
| | 1,075 |
|
Miscellaneous | 3,461 |
| | 3,210 |
| | 6,580 |
| | 6,490 |
|
Total other operating expenses | 35,457 |
| | 35,666 |
| | 69,557 |
| | 73,579 |
|
Income (loss) before provision for income taxes | 17,414 |
| | (6,440 | ) | | 34,281 |
| | 2,744 |
|
PROVISION FOR (BENEFIT FROM) INCOME TAXES | 5,661 |
| | (31,830 | ) | | 10,945 |
| | (31,830 | ) |
NET INCOME | 11,753 |
| | 25,390 |
| | 23,336 |
| | 34,574 |
|
PREFERRED STOCK DIVIDEND, DISCOUNT ACCRETION AND GAINS | | | | | | | |
Preferred stock dividend | — |
| | 1,550 |
| | — |
| | 3,100 |
|
Preferred stock discount accretion | — |
| | 454 |
| | — |
| | 908 |
|
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS | $ | 11,753 |
| | $ | 23,386 |
| | $ | 23,336 |
| | $ | 30,566 |
|
Earnings per common share: | | | | | | | |
Basic | $ | 0.61 |
| | $ | 1.27 |
| | $ | 1.21 |
| | $ | 1.69 |
|
Diluted | $ | 0.60 |
| | $ | 1.27 |
| | $ | 1.20 |
| | $ | 1.69 |
|
Cumulative dividends declared per common share | $ | 0.12 |
| | $ | 0.01 |
| | $ | 0.24 |
| | $ | 0.02 |
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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 and Six Months Ended June 30, 2013 and 2012
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| | | | | | | | | | | | | | | |
| Three Months Ended June 30 | | Six Months Ended June 30 |
| 2013 |
| | 2012 |
| | 2013 |
| | 2012 |
|
NET INCOME | $ | 11,753 |
| | $ | 25,390 |
| | $ | 23,336 |
| | $ | 34,574 |
|
OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES: | | | | | | | |
Unrealized holding gain (loss) on AFS securities arising during the period | (8,476 | ) | | (81 | ) | | (8,854 | ) | | (136 | ) |
Income tax benefit (expense) related to AFS unrealized holding gains (losses) | 3,043 |
| | 29 |
| | 3,179 |
| | 49 |
|
Reclassification for net (gains) losses on AFS securities realized in earnings | 1 |
| | — |
| | (116 | ) | | — |
|
Income tax benefit (expense) related to net gains (losses) on AFS securities realized in losses | — |
| | — |
| | 42 |
| | — |
|
Amortization of unrealized gain on tax exempt securities transferred from available-for-sale to held-to-maturity | — |
| | 3 |
| | — |
| | 5 |
|
Other comprehensive income (loss) | (5,432 | ) | | (49 | ) | | (5,749 | ) | | (82 | ) |
COMPREHENSIVE INCOME | $ | 6,321 |
| | $ | 25,341 |
| | $ | 17,587 |
| | $ | 34,492 |
|
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 Six Months Ended June 30, 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 |
|
Net income | | | | | 23,336 |
| | | | | | 23,336 |
|
Change in valuation of securities—available-for-sale, net of income tax | | | | | | | (5,749 | ) | | | | (5,749 | ) |
Accrual of dividends on common stock ($0.24/share cumulative) | | | | | (4,674 | ) | | | | | | (4,674 | ) |
Proceeds from issuance of common stock for stockholder reinvestment program | 760 |
| | 23 |
| | | | | | | | 23 |
|
Amortization of stock-based compensation | 97,464 |
| | 478 |
| | | | | | | | 478 |
|
BALANCE, June 30, 2013 | 19,518,849 |
| | $ | 568,408 |
| | $ | (42,440 | ) | | $ | (3,648 | ) | | $ | (1,987 | ) | | $ | 520,333 |
|
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, 2012
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock | | Common Stock and Paid in Capital | | (Accumulated Deficit) | | Accumulated Other Comprehensive Income | | Unearned Restricted ESOP Shares | | Stockholders’ Equity |
| Shares | | Amount | | Shares | | Amount | | | |
Balance, January 1, 2012 | 124,000 |
| | $ | 120,702 |
| | 17,519,132 |
| | $ | 531,149 |
| | $ | (119,465 | ) | | $ | 2,051 |
| | $ | (1,987 | ) | | $ | 532,450 |
|
Net income | | | | | | | | | 64,882 |
| | | | | | 64,882 |
|
Change in valuation of securities—available-for-sale, net of income tax | | | | | | | | | | | 42 |
| | | | 42 |
|
Amortization of unrealized loss on tax exempt securities transferred from available-for-sale to held-to-maturity, net of income tax | | | | | | | | | | | 8 |
| | | | 8 |
|
Accretion of preferred stock discount | | | 3,298 |
| | | | | | (3,298 | ) | | | | | | — |
|
Accrual of dividends on preferred stock | | | | | | | | | (4,938 | ) | | | | | | (4,938 | ) |
Repurchase of preferred stock | (124,000 | ) | | (124,000 | ) | | | | | | | | | | | | (124,000 | ) |
Gain on repurchase of preferred stock | | | | | | | | | 2,471 |
| | | | | | 2,471 |
|
Accrual of dividends on common stock ($0.04/share cumulative) | | | | | | | | | (754 | ) | | | | | | (754 | ) |
Proceeds from issuance of common stock for stockholder reinvestment program | | | | | 1,814,320 |
| | 36,317 |
| | | | | | | | 36,317 |
|
Amortization of compensation related to restricted stock grant | | | | | 87,173 |
| | 434 |
| | | | | | | | 434 |
|
Amortization of compensation related to stock options | | | | | | | 7 |
| | | | | | | | 7 |
|
BALANCE, December 31, 2012 | — |
| | $ | — |
| | 19,420,625 |
| | $ | 567,907 |
| | $ | (61,102 | ) | | $ | 2,101 |
| | $ | (1,987 | ) | | $ | 506,919 |
|
See Selected Notes to the Consolidated Financial Statements
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
For the Six Months Ended June 30, 2013 and 2012
|
| | | | | | | |
| Six Months Ended June 30 |
| 2013 |
| | 2012 |
|
OPERATING ACTIVITIES: | | | |
Net income | $ | 23,336 |
| | $ | 34,574 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation | 3,679 |
| | 2,384 |
|
Deferred income and expense, net of amortization | 2,233 |
| | 1,273 |
|
Amortization of core deposit intangibles | 982 |
| | 1,075 |
|
Gain on sale of securities | (1,018 | ) | | (29 | ) |
Other-than-temporary impairment recovery | (409 | ) | | — |
|
Net change in valuation of financial instruments carried at fair value | 1,601 |
| | 17,374 |
|
Purchases of securities-trading | (23,377 | ) | | — |
|
Proceeds from sales of securities-trading | 25,267 |
| | — |
|
Principal repayments and maturities of securities—trading | 3,657 |
| | 6,520 |
|
Decrease in deferred taxes | 570 |
| | (31,572 | ) |
Decrease in current taxes payable | (4,245 | ) | | — |
|
Equity-based compensation | 478 |
| | 107 |
|
Increase in cash surrender value of BOLI | (982 | ) | | (917 | ) |
Gain on sale of loans, net of capitalized servicing rights | (4,303 | ) | | (3,651 | ) |
Gain on disposal of real estate held for sale and property and equipment | (1,454 | ) | | (688 | ) |
Provision for losses on loans and real estate held for sale | 299 |
| | 12,197 |
|
Origination of loans held for sale | (263,111 | ) | | (243,516 | ) |
Proceeds from sales of loans held for sale | 272,941 |
| | 243,422 |
|
Net change in: | | | |
Other assets | 19,440 |
| | 131 |
|
Other liabilities | (5,019 | ) | | 855 |
|
Net cash provided from operating activities | 50,565 |
| | 39,539 |
|
INVESTING ACTIVITIES: | | | |
Purchases of available-for-sale securities | (179,555 | ) | | (186,650 | ) |
Principal repayments and maturities of available-for-sale securities | 68,488 |
| | 202,722 |
|
Proceeds from sales of securities available-for-sale | 103,274 |
| | 11,751 |
|
Purchases of securities held-to-maturity | (9,029 | ) | | (10,224 | ) |
Principal repayments and maturities of securities held-to-maturity | 987 |
| | 2,287 |
|
Loan originations, net of principal repayments | (62,760 | ) | | 72,176 |
|
Purchases of loans and participating interest in loans | (109 | ) | | (4,735 | ) |
Purchases of property and equipment | (2,439 | ) | | (1,184 | ) |
Proceeds from sale of real estate held for sale, net | 11,787 |
| | 23,239 |
|
Other | 785 |
| | (330 | ) |
Net cash (used by) provided from investing activities | (68,571 | ) | | 109,052 |
|
FINANCING ACTIVITIES: | | | |
Decrease in deposits, net | (97,480 | ) | | (49,905 | ) |
Advances, net of repayments of FHLB borrowings | 43,997 |
| | (3 | ) |
Increase (decrease) in other borrowings, net | 14,146 |
| | (62,098 | ) |
Cash dividends paid | (2,530 | ) | | (3,456 | ) |
Cash proceeds from issuance of stock for stockholder reinvestment plan | 23 |
| | 23,611 |
|
Net cash used by financing activities | (41,844 | ) | | (91,851 | ) |
NET (DECREASE) INCREASE IN CASH AND DUE FROM BANKS | (59,850 | ) | | 56,740 |
|
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD | 181,298 |
| | 132,436 |
|
CASH AND DUE FROM BANKS, END OF PERIOD | $ | 121,448 |
| | $ | 189,176 |
|
(Continued on next page)
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited) (In thousands)
For the Six Months Ended June 30, 2013 and 2012
|
| | | | | | | |
| Six Months Ended June 30 |
| 2013 |
| | 2012 |
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | | | |
Interest paid in cash | $ | 7,087 |
| | $ | 11,799 |
|
Taxes paid in cash | 11,376 |
| | 800 |
|
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 | 1,770 |
| | 8,521 |
|
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 financial statements include the accounts of Banner Corporation (the Company or Banner), a bank holding company incorporated in the State of Washington and its wholly-owned subsidiaries, Banner Bank and Islanders Bank (the Banks).
These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (SEC). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. Certain reclassifications have been made to the 2012 Consolidated Financial Statements and/or schedules to conform to the 2013 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, 2012 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, 2012 filed with the SEC (2012 Form 10-K). Interim results are not necessarily indicative of results for a full year.
Note 2: RECENT DEVELOPMENTS AND SIGNIFICANT EVENTS
Income Tax Reporting and Accounting:
Amended Federal Income Tax Returns: The Company has years 2008-2012 open under the Statute of Limitations provisions of the Internal Revenue Code of 1986 (Code). The Company has filed amended tax returns seeking tax refunds for years 2005-2007 through the carry back of 2008 and 2009 net operating losses (NOLs) and tax credits. Aside from the refund claims applied for in 2005-2007, those years are otherwise closed under the Statute of Limitations. The amended tax returns, which are under review by the Internal Revenue Service (IRS), could significantly affect the timing for recognition of credit losses within previously filed income tax returns and, if approved, would result in the refund of approximately $9.8 million of previously paid taxes from the utilization of NOL carryback claims into prior tax years. The outcome of the IRS review is inherently uncertain, and since there can be no assurance of approval of some or all of the tax carryback claims, no asset has been recognized to reflect the possible results of these amendments as of June 30, 2013 and 2012. Accordingly, the Company does not anticipate recognizing any tax benefit until the results of the IRS review have been determined. We expect this review to be completed and the issue resolved during 2013.
Deferred Tax Asset Valuation Allowance: The Company and its wholly-owned subsidiaries file consolidated U.S. federal income tax returns, as well as state income tax returns in Oregon and Idaho. Income taxes are accounted for using the asset and liability method. Under this method a deferred tax asset or liability is determined based on the enacted tax rates which are expected to be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company’s income tax returns. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Under GAAP, a valuation allowance is required to be recognized if it is “more likely than not” that all or a portion of Banner’s deferred tax assets will not be realized. During the quarter ended September 30, 2010, the Company evaluated its net deferred tax asset and determined it was prudent to establish a full valuation allowance against the net asset. At each subsequent quarter-end, the Company has re-analyzed that position and the Company continued to maintain a full valuation allowance through March 31, 2012. During the quarter ended June 30, 2012, management analyzed the Company’s performance and trends over the previous five quarters, focusing on trends in asset quality, loan loss provisioning, capital position, net interest margin, core operating income and net income and the likelihood of continued profitability. Based on this analysis, management determined that a full valuation allowance was no longer appropriate and reversed nearly all of the valuation allowance at that time. The Company utilized the remaining valuation allowance to offset tax expense in the third and fourth quarters of 2012. The ultimate realization of deferred tax assets is dependent upon the existence, or generation, of taxable income in the periods when those temporary differences and net
operating loss and credit carryforwards are deductible. See Note 12 of the Selected Notes to the Consolidated Financial Statements for more information.
Shareholder Equity Transactions:
Preferred Stock: On March 29, 2012, the Company’s $124 million of senior preferred stock with a liquidation value of $1,000 per share, originally issued to the U.S. Treasury as part of its Capital Purchase Program, was sold by the Treasury as part of its efforts to manage and recover its investments under the Troubled Asset Relief Program (TARP). While the sale of these preferred shares to new owners did not result in any proceeds to the Company and did not change the Company’s capital position or accounting for these securities, it did eliminate restrictions put in place by the Treasury on TARP recipients. Subsequent to March 29, 2012 and by the end of the year ended December 31, 2012, the Company repurchased or redeemed all of its Series A Preferred Stock. The Treasury retained its related warrants to purchase up to $18.6 million in Banner common stock (243,998 shares). In June 2013, the Treasury sold the warrants at public auction. That sale did not change the Company's capital position and did not have any impact on the financial accounting and reporting for these securities.
Note 3: ACCOUNTING STANDARDS RECENTLY ADOPTED
Offsetting Assets and Liabilities
In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update ("ASU") No. 2011-11, "Disclosures About Offsetting Assets and Liabilities." The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial condition as well as instruments and transactions subject to an agreement similar to a master netting arrangement. ASU No. 2011-11 also requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements.
In January 2013, FASB issued ASU No. 2013-01, "Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities." The provisions of ASU No. 2013-01 limit the scope of the new balance sheet offsetting disclosures to the following financial instruments, to the extent they are offset in the financial statements or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in the statement of financial position: (1) derivative financial instruments; (2) repurchase agreements and reverse repurchase agreements; and (3) securities borrowing and securities lending transactions.
The Company adopted the provisions of ASU No. 2011-11 and ASU No. 2013-01 effective January 1, 2013. As the provisions of ASU No. 2011-11 and ASU No. 2013-01 only impact disclosure requirements related to the offsetting of assets and liabilities and information instruments and transactions eligible for offset in the statement of financial condition, the adoption had no impact on the Company's consolidated statements of operations and financial condition.
Reclassifications Out of Accumulated Other Comprehensive Income
In February 2013, FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU No. 2013-02 does not amend any existing requirements for reporting net income or other comprehensive income in the financial statements. ASU No. 2013-02 requires an entity to disaggregate the total change of each component of other comprehensive income (e.g., unrealized gains or losses on available-for-sale investment securities) and separately present reclassification adjustments and current period other comprehensive income. The provisions of ASU No. 2013-02 also require that entities present, either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source (e.g., unrealized gains or losses on available-for-sale investment securities). The Company adopted the provisions of ASU No. 2013-02 effective January 1, 2013. The adoption of this guidance did not have a material effect on the Company's consolidated financial statements.
Note 4: BUSINESS SEGMENTS
The Company is managed by legal entity and not by lines of business. Each of the Banks is a community oriented commercial bank chartered in the State of Washington. The Banks’ primary business is that of a traditional banking institution, gathering deposits and originating loans for portfolio in its respective primary market areas. The Banks offer a wide variety of deposit products to their consumer and commercial customers. Lending activities include the origination of real estate, commercial/agriculture business and consumer loans. Banner Bank is also an active participant in the secondary market, originating residential loans for sale on both a servicing released and servicing retained basis. In addition to interest income on loans and investment securities, the Banks receive other income from deposit service charges, loan servicing fees and from the sale of loans and investments. The performance of the Banks is reviewed by the Company’s executive management and Board of Directors on a monthly basis. All of the executive officers of the Company are members of Banner Bank’s management team.
Generally accepted accounting principles establish standards to report information about operating segments in annual financial statements and require reporting of selected information about operating segments in interim reports to stockholders. The Company has determined that its current business and operations consist of a single business segment.
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):
|
| | | | | | | | | | | |
| June 30 2013 |
| | December 31 2012 |
| | June 30 2012 |
|
Interest-bearing deposits included in cash and due from banks | $ | 67,080 |
| | $ | 114,928 |
| | $ | 132,536 |
|
U.S. Government and agency obligations | 60,638 |
| | 98,617 |
| | 229,669 |
|
Municipal bonds: |
|
| |
|
| |
|
|
Taxable | 36,690 |
| | 31,480 |
| | 19,225 |
|
Tax exempt | 115,142 |
| | 103,545 |
| | 102,139 |
|
Total municipal bonds | 151,832 |
| | 135,025 |
| | 121,364 |
|
Corporate bonds | 46,150 |
| | 48,519 |
| | 42,923 |
|
Mortgage-backed or related securities: |
|
| |
|
| |
|
|
One- to four-family residential agency guaranteed | 48,249 |
| | 105,770 |
| | 114,284 |
|
One- to four-family residential other | 1,128 |
| | 1,299 |
| | 1,780 |
|
Multifamily agency guaranteed | 285,928 |
| | 188,136 |
| | 53,844 |
|
Multifamily other | 10,059 |
| | 10,659 |
| | — |
|
Total mortgage-backed or related securities | 345,364 |
| | 305,864 |
| | 169,908 |
|
Asset-backed securities: |
|
| |
|
| |
|
|
Student Loan Marketing Association (SLMA) | 15,497 |
| | 32,474 |
| | 32,492 |
|
Other asset-backed securities | 9,460 |
| | 10,042 |
| | — |
|
Total asset-backed securities | 24,957 |
| | 42,516 |
| | 32,492 |
|
Equity securities (excludes FHLB stock) | 56 |
| | 63 |
| | 454 |
|
Total securities | 628,997 |
| | 630,604 |
| | 596,810 |
|
FHLB stock | 36,040 |
| | 36,705 |
| | 37,371 |
|
| $ | 732,117 |
| | $ | 782,237 |
| | $ | 766,717 |
|
Securities—Trading: The amortized cost and estimated fair value of securities—trading at June 30, 2013 and December 31, 2012 are summarized as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | |
| June 30, 2013 | | December 31, 2012 |
| Amortized Cost | | Fair Value | | Percent of Total | | Amortized Cost | | Fair Value | | Percent of Total |
U.S. Government and agency obligations | $ | 1,370 |
| | $ | 1,534 |
| | 2.3 | % | | $ | 1,380 |
| | $ | 1,637 |
| | 2.3 | % |
Municipal bonds: |
|
| |
|
| | | | | | | | |
Tax exempt | 4,963 |
| | 4,990 |
| | 7.6 |
| | 5,590 |
| | 5,684 |
| | 8.0 |
|
Total municipal bonds | 4,963 |
| | 4,990 |
| | 7.6 |
| | 5,590 |
| | 5,684 |
| | 8.0 |
|
Corporate bonds | 49,518 |
| | 35,105 |
| | 53.6 |
| | 57,807 |
| | 35,741 |
| | 50.2 |
|
Mortgage-backed or related securities: |
|
| |
|
| | | | | | | | |
One- to four-family residential agency guaranteed | 13,213 |
| | 14,110 |
| | 21.5 |
| | 16,574 |
| | 17,911 |
| | 25.1 |
|
Multifamily agency guaranteed | 8,896 |
| | 9,729 |
| | 14.9 |
| | 8,974 |
| | 10,196 |
| | 14.3 |
|
Total mortgage-backed or related securities | 22,109 |
| | 23,839 |
| | 36.4 |
| | 25,548 |
| | 28,107 |
| | 39.4 |
|
Equity securities | 14 |
| | 56 |
| | 0.1 |
| | 14 |
| | 63 |
| | 0.1 |
|
| $ | 77,974 |
| | $ | 65,524 |
| | 100.0 | % | | $ | 90,339 |
| | $ | 71,232 |
| | 100.0 | % |
There were 37 sales of securities—trading totaling $25.3 million with a resulting net gain of $1.1 million during the six months ended June 30, 2013, including $1.0 million which represented recoveries on certain collateralized debt obligations that had previously been written off. There
were no sales of securities—trading during the six months ended June 30, 2012. The Company recognized a $409,000 OTTI recovery on securities—trading related to the sale of certain equity securities issued by government sponsored entities during the six months ended June 30, 2013 and no OTTI charges or recoveries during the six months ended June 30, 2012. As of June 30, 2013 and 2012, there were no securities—trading on a nonaccrual status.
The amortized cost and estimated fair value of securities—trading at June 30, 2013 and December 31, 2012, 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.
|
| | | | | | | | | | | | | | | |
| June 30, 2013 | | December 31, 2012 |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Due in one year or less | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Due after one year through five years | 4,095 |
| | 4,373 |
| | 4,496 |
| | 4,867 |
|
Due after five years through ten years | 14,339 |
| | 15,186 |
| | 14,251 |
| | 15,536 |
|
Due after ten years through twenty years | 21,017 |
| | 17,913 |
| | 12,055 |
| | 11,346 |
|
Due after twenty years | 38,509 |
| | 27,996 |
| | 59,523 |
| | 39,420 |
|
| 77,960 |
| | 65,468 |
| | 90,325 |
| | 71,169 |
|
Equity securities | 14 |
| | 56 |
| | 14 |
| | 63 |
|
| $ | 77,974 |
| | $ | 65,524 |
| | $ | 90,339 |
| | $ | 71,232 |
|
Securities—Available-for-Sale: The amortized cost and estimated fair value of securities—available-for-sale at June 30, 2013 and December 31, 2012 are summarized as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | |
| June 30, 2013 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Percent of Total |
U.S. Government and agency obligations | $ | 58,548 |
| | $ | 202 |
| | $ | (851 | ) | | $ | 57,899 |
| | 12.3 | % |
Municipal bonds: |
|
| |
|
| |
|
| |
|
| | |
Taxable | 25,837 |
| | 125 |
| | (231 | ) | | 25,731 |
| | 5.5 |
|
Tax exempt | 30,174 |
| | 150 |
| | (294 | ) | | 30,030 |
| | 6.4 |
|
Total municipal bonds | 56,011 |
| | 275 |
| | (525 | ) | | 55,761 |
| | 11.9 |
|
Corporate bonds | 9,011 |
| | 22 |
| | (39 | ) | | 8,994 |
| | 1.9 |
|
Mortgage-backed or related securities: |
|
| |
|
| |
|
| |
|
| | |
One- to four-family residential agency guaranteed | 34,496 |
| | 720 |
| | (1,077 | ) | | 34,139 |
| | 7.3 |
|
One- to four-family residential other | 1,052 |
| | 77 |
| | — |
| | 1,129 |
| | 0.2 |
|
Multifamily agency guaranteed | 279,410 |
| | 429 |
| | (3,639 | ) | | 276,200 |
| | 58.9 |
|
Multifamily other | 10,653 |
| | — |
| | (594 | ) | | 10,059 |
| | 2.2 |
|
Total mortgage-backed or related securities | 325,611 |
| | 1,226 |
| | (5,310 | ) | | 321,527 |
| | 68.5 |
|
Asset-backed securities: |
|
| |
|
| |
|
| |
|
| | |
SLMA | 15,591 |
| | — |
| | (94 | ) | | 15,497 |
| | 3.3 |
|
Other asset-backed securities | 10,065 |
| | — |
| | (606 | ) | | 9,459 |
| | 2.0 |
|
Total asset-backed securities | 25,656 |
| | — |
| | (700 | ) | | 24,956 |
| | 5.3 |
|
| $ | 474,837 |
| | $ | 1,725 |
| | $ | (7,425 | ) | | $ | 469,137 |
| | 99.9 | % |
| | | | | | | | | |
| December 31, 2012 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Percent of Total |
U.S. Government and agency obligations | $ | 96,666 |
| | $ | 367 |
| | $ | (53 | ) | | $ | 96,980 |
| | 20.5 | % |
Municipal bonds: | | | | | | | | | |
Taxable | 20,987 |
| | 233 |
| | (67 | ) | | 21,153 |
| | 4.5 |
|
Tax exempt | 23,575 |
| | 221 |
| | (11 | ) | | 23,785 |
| | 5.0 |
|
Total municipal bonds | 44,562 |
| | 454 |
| | (78 | ) | | 44,938 |
| | 9.5 |
|
Corporate bonds | 10,701 |
| | 37 |
| | (9 | ) | | 10,729 |
| | 2.3 |
|
Mortgage-backed or related securities: | | | | | | | | | |
One- to four-family residential agency guaranteed | 87,392 |
| | 1,051 |
| | (584 | ) | | 87,859 |
| | 18.6 |
|
One- to four-family residential other | 1,223 |
| | 76 |
| | — |
| | 1,299 |
| | 0.3 |
|
Multifamily agency guaranteed | 176,026 |
| | 2,140 |
| | (226 | ) | | 177,940 |
| | 37.6 |
|
Multifamily other | 10,700 |
| | 4 |
| | (45 | ) | | 10,659 |
| | 2.2 |
|
Total mortgage-backed or related securities | 275,341 |
| | 3,271 |
| | (855 | ) | | 277,757 |
| | 58.8 |
|
Asset-backed securities: | | | | | | | | | |
SLMA | 32,309 |
| | 210 |
| | (45 | ) | | 32,474 |
| | 6.9 |
|
Other asset-backed securities | 10,071 |
| | — |
| | (29 | ) | | 10,042 |
| | 2.1 |
|
Total asset-backed securities | 42,380 |
| | 210 |
| | (74 | ) | | 42,516 |
| | 9.0 |
|
| $ | 469,650 |
| | $ | 4,339 |
| | $ | (1,069 | ) | | $ | 472,920 |
| | 100.1 | % |
At June 30, 2013 and December 31, 2012, an aging of unrealized losses and fair value of related securities—available-for-sale was as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 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 | $ | 41,901 |
| | $ | (851 | ) | | $ | — |
| | $ | — |
| | $ | 41,901 |
| | $ | (851 | ) |
Municipal bonds: |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Taxable | 18,244 |
| | (231 | ) | | — |
| | — |
| | 18,244 |
| | (231 | ) |
Tax exempt | 13,509 |
| | (293 | ) | | 381 |
| | (1 | ) | | 13,890 |
| | (294 | ) |
Total municipal bonds | 31,753 |
| | (524 | ) | | 381 |
| | (1 | ) | | 32,134 |
| | (525 | ) |
Corporate bonds | 4,961 |
| | (39 | ) | | — |
| | — |
| | 4,961 |
| | (39 | ) |
Mortgage-backed or related securities: |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
One- to four-family residential agency guaranteed | 13,489 |
| | (821 | ) | | 10,530 |
| | (256 | ) | | 24,019 |
| | (1,077 | ) |
Multifamily agency guaranteed | 215,156 |
| | (3,639 | ) | | — |
| | — |
| | 215,156 |
| | (3,639 | ) |
Multifamily other | 10,059 |
| | (594 | ) | | — |
| | — |
| | 10,059 |
| | (594 | ) |
Total mortgage-backed or related securities | 238,704 |
| | (5,054 | ) | | 10,530 |
| | (256 | ) | | 249,234 |
| | (5,310 | ) |
Asset-backed securities: |
|
| |
|
| |
|
| |
|
| |
|
| | |
SLMA | 15,497 |
| | (94 | ) | | — |
| | — |
| | 15,497 |
| | (94 | ) |
Other asset-backed securities | 9,460 |
| | (606 | ) | | — |
| | — |
| | 9,460 |
| | (606 | ) |
Total asset-backed securities | 24,957 |
| | (700 | ) | | — |
| | — |
| | 24,957 |
| | (700 | ) |
| $ | 342,276 |
| | $ | (7,168 | ) | | $ | 10,911 |
| | $ | (257 | ) | | $ | 353,187 |
| | $ | (7,425 | ) |
| | | | | | | | | | | |
| December 31, 2012 |
| Less Than 12 Months | | 12 Months or More | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
U.S. Government and agency obligations | $ | 22,955 |
| | $ | (53 | ) | | $ | — |
| | $ | — |
| | $ | 22,955 |
| | $ | (53 | ) |
Municipal bonds: | | | | | | | | | | | |
Taxable | 11,009 |
| | (67 | ) | | — |
| | — |
| | 11,009 |
| | (67 | ) |
Tax exempt | 4,619 |
| | (11 | ) | | — |
| | — |
| | 4,619 |
| | (11 | ) |
Total municipal bonds | 15,628 |
| | (78 | ) | | — |
| | — |
| | 15,628 |
| | (78 | ) |
Corporate bonds | 6,670 |
| | (9 | ) | | — |
| | — |
| | 6,670 |
| | (9 | ) |
Mortgage-backed or related securities: | | | | | | | | | | | |
One- to four-family residential agency guaranteed | 32,459 |
| | (503 | ) | | 5,746 |
| | (81 | ) | | 38,205 |
| | (584 | ) |
Multifamily agency guaranteed | 32,170 |
| | (226 | ) | | — |
| | — |
| | 32,170 |
| | (226 | ) |
Multifamily other | 7,279 |
| | (45 | ) | | — |
| | — |
| | 7,279 |
| | (45 | ) |
Total mortgage-backed or related securities | 71,908 |
| | (774 | ) | | 5,746 |
| | (81 | ) | | 77,654 |
| | (855 | ) |
Asset-backed securities: | | | | | | | | | | | |
SLMA | 9,674 |
| | (45 | ) | | — |
| | — |
| | 9,674 |
| | (45 | ) |
Other asset-backed securities | 10,042 |
| | (29 | ) | | — |
| | — |
| | 10,042 |
| | (29 | ) |
Total asset-backed securities | 19,716 |
| | (74 | ) | | — |
| | — |
| | 19,716 |
| | (74 | ) |
| $ | 136,877 |
| | $ | (988 | ) | | $ | 5,746 |
| | $ | (81 | ) | | $ | 142,623 |
| | $ | (1,069 | ) |
Proceeds from the sale of 35 securities—available-for-sale during the six months ended June 30, 2013 were $103.3 million with a resulting loss of $116,000. There were two sales of securities—available-for-sale totaling $11.8 million with a resulting gain of $29,000 during the six months ended June 30, 2012. At June 30, 2013, there were 131 securities—available for sale with unrealized losses, compared to 52 securities at December 31, 2012. Management does not believe that any individual unrealized loss as of June 30, 2013 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.
The amortized cost and estimated fair value of securities—available-for-sale at June 30, 2013 and December 31, 2012, 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.
|
| | | | | | | | | | | | | | | |
| June 30, 2013 | | December 31, 2012 |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Due in one year or less | $ | 11,930 |
| | $ | 12,031 |
| | $ | 16,369 |
| | $ | 16,393 |
|
Due after one year through five years | 301,551 |
| | 298,992 |
| | 205,913 |
| | 207,147 |
|
Due after five years through ten years | 85,648 |
| | 83,758 |
| | 132,372 |
| | 133,407 |
|
Due after ten years through twenty years | 30,115 |
| | 29,665 |
| | 43,386 |
| | 43,414 |
|
Due after twenty years | 45,593 |
| | 44,691 |
| | 71,610 |
| | 72,559 |
|
| $ | 474,837 |
| | $ | 469,137 |
| | $ | 469,650 |
| | $ | 472,920 |
|
Securities—Held-to-Maturity: The amortized cost and estimated fair value of securities—held-to-maturity at June 30, 2013 and December 31, 2012 are summarized as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | |
| June 30, 2013 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Percent of Total |
U.S. Government and agency obligations | $ | 1,205 |
| | $ | — |
| | $ | (48 | ) | | $ | 1,157 |
| | 1.2 | % |
Municipal bonds: | | | | | | | | | |
Taxable | 10,959 |
| | 296 |
| | (141 | ) | | 11,114 |
| | 11.5 | % |
Tax exempt | 80,122 |
| | 3,188 |
| | (1,074 | ) | | 82,236 |
| | 85.2 |
|
Total municipal bonds | 91,081 |
| | 3,484 |
| | (1,215 | ) | | 93,350 |
| | 96.7 |
|
Corporate bonds | 2,050 |
| | — |
| | — |
| | 2,050 |
| | 2.1 |
|
| $ | 94,336 |
| | $ | 3,484 |
| | $ | (1,263 | ) | | $ | 96,557 |
| | 100.0 | % |
| | | | | | | | | |
| December 31, 2012 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Percent of Total |
Municipal bonds: | | | | | | | | | |
Taxable | $ | 10,326 |
| | $ | 436 |
| | $ | (157 | ) | | $ | 10,605 |
| | 11.5 | % |
Tax exempt | 74,076 |
| | 5,757 |
| | (30 | ) | | 79,803 |
| | 86.3 |
|
Total municipal bonds | 84,402 |
| | 6,193 |
| | (187 | ) | | 90,408 |
| | 97.8 |
|
Corporate bonds | 2,050 |
| | — |
| | — |
| | 2,050 |
| | 2.2 |
|
| $ | 86,452 |
| | $ | 6,193 |
| | $ | (187 | ) | | $ | 92,458 |
| | 100.0 | % |
At June 30, 2013 and December 31, 2012, an age analysis of unrealized losses and fair value of related securities—held-to-maturity was as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 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 | $ | 1,157 |
| | $ | (48 | ) | | $ | — |
| | $ | — |
| | $ | 1,157 |
| | $ | (48 | ) |
Municipal bonds: | | | | | | | | | | | |
Taxable | 4,757 |
| | (141 | ) | | — |
| | — |
| | 4,757 |
| | (141 | ) |
Tax exempt | 20,158 |
| | (1,074 | ) | | — |
| | — |
| | 20,158 |
| | (1,074 | ) |
| $ | 26,072 |
| | $ | (1,263 | ) | | $ | — |
| | $ | — |
| | $ | 26,072 |
| | $ | (1,263 | ) |
| | | | | | | | | | | |
| December 31, 2012 |
| Less Than 12 Months | | 12 Months or More | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Municipal bonds: | | | | | | | | | | | |
Taxable | $ | 4,137 |
| | $ | (157 | ) | | $ | — |
| | $ | — |
| | $ | 4,137 |
| | $ | (157 | ) |
Tax exempt | 910 |
| | (30 | ) | | — |
| | — |
| | 910 |
| | (30 | ) |
| $ | 5,047 |
| | $ | (187 | ) | | $ | — |
| | $ | — |
| | $ | 5,047 |
| | $ | (187 | ) |
There were no sales of securities—held-to-maturity and the Company did not recognize any OTTI charges on securities—held-to-maturity during the six months ended June 30, 2013 and 2012. As of June 30, 2013, there were no securities—held-to-maturity in a nonaccrual status. There were 29 securities—held-to-maturity with unrealized losses at June 30, 2013, compared to five securities at December 31, 2012. Management does not believe that any individual unrealized loss on a security as of June 30, 2013 represents OTTI. The decline in fair market value of these securities was generally due to changes in interest rates and changes in market-desired spreads subsequent to their purchase.
The amortized cost and estimated fair value of securities—held-to-maturity at June 30, 2013 and December 31, 2012, 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.
|
| | | | | | | | | | | | | | | |
| June 30, 2013 | | December 31, 2012 |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Due in one year or less | $ | 3,321 |
| | $ | 3,360 |
| | $ | 3,323 |
| | $ | 3,410 |
|
Due after one year through five years | 13,469 |
| | 13,950 |
| | 13,641 |
| | 14,335 |
|
Due after five years through ten years | 14,782 |
| | 14,813 |
| | 13,295 |
| | 13,452 |
|
Due after ten years through twenty years | 59,653 |
| | 61,443 |
| | 53,031 |
| | 57,868 |
|
Due after twenty years | 3,111 |
| | 2,991 |
| | 3,162 |
| | 3,393 |
|
| $ | 94,336 |
| | $ | 96,557 |
| | $ | 86,452 |
| | $ | 92,458 |
|
Pledged Securities: The following table presents, as of June 30, 2013, investment securities which were pledged to secure borrowings, public deposits or other obligations as permitted or required by law (in thousands):
|
| | | | | | | |
| Amortized Cost | | Fair Value |
Purpose or beneficiary: | | | |
State and local governments public deposits | $ | 116,770 |
| | $ | 114,301 |
|
Interest rate swap counterparties | 6,782 |
| | 6,402 |
|
Retail repurchase agreements | 105,167 |
| | 105,412 |
|
Other | 2,745 |
| | 2,712 |
|
Total pledged securities | $ | 231,464 |
| | $ | 228,827 |
|
The carrying value of investment securities pledged to secure borrowings, public deposits or other obligations as of June 30, 2013 was $229.0 million.
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. For the three months and six months ended June 30, 2013 and 2012, the Banks did not receive any dividend income on FHLB stock. At June 30, 2013 and December 31, 2012, respectively, the Company had recorded $36.0 million and $36.7 million in FHLB stock. This stock is generally viewed as a long-term investment and is carried at par. 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.
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 of Seattle announced that it had a risk-based capital deficiency under the regulations of the Federal Housing Finance Agency (the FHFA), its primary regulator, as of December 31, 2008, and that it would suspend future dividends and the repurchase and redemption of outstanding common stock. The FHLB of Seattle announced on September 7, 2012 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. The FHFA subsequently approved the repurchase of portions of FHLB of Seattle stock, and as of June 30, 2013, the FHLB had repurchased $1.3 million of the Banks' stock, including $333,000 during the quarter ending June 30, 2013. The FHLB of Seattle announced July 22, 2013 that, based on second quarter 2013 financial results, their Board of Directors had declared a $0.025 per share cash dividend. It is the first 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 not any impairment on the FHLB stock investment as of June 30, 2013.
Note 7: LOANS RECEIVABLE AND THE ALLOWANCE FOR LOAN LOSSES
We 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 allowance for loan losses, deferred fees and origination costs, 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 June 30, 2013, December 31, 2012 and June 30, 2012 are summarized as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| June 30, 2013 | | December 31, 2012 | | June 30, 2012 |
| Amount | | Percent of Total | | Amount | | Percent of Total | | Amount | | Percent of Total |
Commercial real estate: | | | | | | | | | | | |
Owner-occupied | $ | 500,812 |
| | 15.2 | |