10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2015. |
OR
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[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ to ______________ |
Commission File Number 0-26584
BANNER CORPORATION
(Exact name of registrant as specified in its charter)
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Washington | | 91-1691604 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number) |
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| 10 South First Avenue, Walla Walla, Washington 99362 | |
| (Address of principal executive offices and zip code) | |
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| Registrant's telephone number, including area code: (509) 527-3636 | |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |
| | | | | | | | Yes | [x] | | No | [ ] |
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). |
| | | | | | | | | | | | | | | | | | | Yes | [x] | | No | [ ] |
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. |
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Large accelerated filer [x] | Accelerated filer [ ] | 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 October 31, 2015 |
Common Stock, $.01 par value per share | | 32,823,123 shares |
Nonvoting Common Stock, $.01 par value per share | | | | | | 1,424,466 shares |
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BANNER CORPORATION AND SUBSIDIARIES
Table of Contents
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PART I – FINANCIAL INFORMATION | |
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Item 1 – Financial Statements. The Unaudited Condensed 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 September 30, 2015 and December 31, 2014 | |
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Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2015 and 2014 | |
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Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2015 and 2014 | |
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Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2015 and the Year Ended December 31, 2014 | |
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Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014 | |
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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 September 30, 2015 and December 31, 2014 | |
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Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2015 and 2014 | |
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Asset Quality | |
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Liquidity and Capital Resources | |
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Capital Requirements | |
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Item 3 – Quantitative and Qualitative Disclosures About Market Risk | |
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Market Risk and Asset/Liability Management | |
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Sensitivity Analysis | |
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Item 4 – Controls and Procedures | |
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PART II – OTHER INFORMATION | |
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Item 1 – Legal Proceedings | |
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Item 1A – Risk Factors | |
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Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds | |
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Item 3 – Defaults upon Senior Securities | |
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Item 4 – Mine Safety Disclosures | |
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Item 5 – Other Information | |
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Item 6 – Exhibits | |
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SIGNATURES | |
Special Note Regarding Forward-Looking Statements
Certain matters in this report on Form 10-Q contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, liquidity, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future economic performance and projections of financial items. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated or implied by our forward-looking statements, including, but not limited to: expected revenues, cost savings, synergies and other benefits from the merger of Banner Bank and Siuslaw Bank and of Banner Bank and AmericanWest Bank 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 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 in 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.
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited) (In thousands, except shares)
September 30, 2015 and December 31, 2014 |
| | | | | | | |
ASSETS | September 30 2015 |
| | December 31 2014 |
|
Cash and due from banks | $ | 74,695 |
| | $ | 71,077 |
|
Interest bearing deposits | 60,544 |
| | 54,995 |
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Total cash and cash equivalents | 135,239 |
| | 126,072 |
|
Securities—trading, amortized cost $42,716 and $47,480, respectively | 37,515 |
| | 40,258 |
|
Securities—available-for-sale, amortized cost $416,731 and $411,424, respectively | 418,254 |
| | 411,021 |
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Securities—held-to-maturity, fair value $138,255 and $137,608, respectively | 132,150 |
| | 131,258 |
|
Federal Home Loan Bank (FHLB) stock | 6,767 |
| | 27,036 |
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Loans receivable: | | | |
Held for sale | 3,136 |
| | 2,786 |
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Held for portfolio | 4,369,458 |
| | 3,831,034 |
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Allowance for loan losses | (77,320 | ) | | (75,907 | ) |
| 4,295,274 |
| | 3,757,913 |
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Accrued interest receivable | 17,966 |
| | 15,279 |
|
Real estate owned (REO), held for sale, net | 6,363 |
| | 3,352 |
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Property and equipment, net | 102,881 |
| | 91,185 |
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Goodwill and other intangibles, net | 26,605 |
| | 2,831 |
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Bank-owned life insurance (BOLI) | 71,842 |
| | 63,759 |
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Deferred tax assets, net | 23,536 |
| | 23,871 |
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Other assets | 37,918 |
| | 29,328 |
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| $ | 5,312,310 |
| | $ | 4,723,163 |
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LIABILITIES | | | |
Deposits: | | | |
Non-interest-bearing | $ | 1,561,516 |
| | $ | 1,298,866 |
|
Interest-bearing transaction and savings accounts | 2,095,476 |
| | 1,829,568 |
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Interest-bearing certificates | 730,661 |
| | 770,516 |
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| 4,387,653 |
| | 3,898,950 |
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Advances from FHLB at fair value | 16,435 |
| | 32,250 |
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Other borrowings | 88,083 |
| | 77,185 |
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Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities) | 85,183 |
| | 78,001 |
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Accrued expenses and other liabilities | 42,844 |
| | 37,082 |
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Deferred compensation | 20,910 |
| | 16,807 |
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| 4,641,108 |
| | 4,140,275 |
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COMMITMENTS AND CONTINGENCIES (Note 14) |
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STOCKHOLDERS’ EQUITY | | | |
Preferred stock - $0.01 par value per share, 500,000 shares authorized; no shares outstanding at September 30, 2015 and December 31, 2014 | — |
| | — |
|
Common stock and paid in capital - $0.01 par value per share, 50,000,000 shares authorized; 20,962,300 shares issued and outstanding at September 30, 2015; 19,571,548 shares issued and outstanding at December 31, 2014 | 628,958 |
| | 568,882 |
|
Common stock (non-voting) - $0.01 par value per share, 5,000,000 shares authorized; no shares issued and outstanding at September 30, 2015; and December 31, 2014 | — |
| | — |
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Retained earnings | 41,269 |
| | 14,264 |
|
Carrying value of shares held in trust for stock related compensation plans | (6,833 | ) | | (6,669 | ) |
Liability for common stock issued to deferred, stock related, compensation plans | 6,833 |
| | 6,669 |
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Accumulated other comprehensive income (loss) | 975 |
| | (258 | ) |
| 671,202 |
| | 582,888 |
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| $ | 5,312,310 |
| | $ | 4,723,163 |
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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 Nine Months Ended September 30, 2015 and 2014
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2015 |
| | 2014 |
| | 2015 |
| | 2014 |
|
INTEREST INCOME: | | | | | | | |
Loans receivable | $ | 51,749 |
| | $ | 46,496 |
| | $ | 149,192 |
| | $ | 131,439 |
|
Mortgage-backed securities | 1,307 |
| | 1,459 |
| | 3,609 |
| | 4,376 |
|
Securities and cash equivalents | 1,737 |
| | 1,809 |
| | 5,138 |
| | 5,595 |
|
| 54,793 |
| | 49,764 |
| | 157,939 |
| | 141,410 |
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INTEREST EXPENSE: | | | | | | | |
Deposits | 1,738 |
| | 1,903 |
| | 5,240 |
| | 5,776 |
|
FHLB advances | 4 |
| | 20 |
| | 24 |
| | 110 |
|
Other borrowings | 47 |
| | 43 |
| | 137 |
| | 133 |
|
Junior subordinated debentures | 816 |
| | 734 |
| | 2,357 |
| | 2,180 |
|
| 2,605 |
| | 2,700 |
| | 7,758 |
| | 8,199 |
|
Net interest income before provision for loan losses | 52,188 |
| | 47,064 |
| | 150,181 |
| | 133,211 |
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PROVISION FOR LOAN LOSSES | — |
| | — |
| | — |
| | — |
|
Net interest income | 52,188 |
| | 47,064 |
| | 150,181 |
| | 133,211 |
|
OTHER OPERATING INCOME: | | | | | | | |
Deposit fees and other service charges | 9,746 |
| | 8,289 |
| | 27,435 |
| | 22,237 |
|
Mortgage banking operations | 4,426 |
| | 2,842 |
| | 13,238 |
| | 7,282 |
|
Miscellaneous | 1,039 |
| | 946 |
| | 3,064 |
| | 2,577 |
|
| 15,211 |
| | 12,077 |
| | 43,737 |
| | 32,096 |
|
Gain (loss) on sale of securities | — |
| | 6 |
| | (537 | ) | | 41 |
|
Net change in valuation of financial instruments carried at fair value | (1,113 | ) | | 1,452 |
| | 735 |
| | 1,662 |
|
Acquisition bargain purchase gain | — |
| | — |
| | — |
| | 9,079 |
|
Total other operating income | 14,098 |
| | 13,535 |
| | 43,935 |
| | 42,878 |
|
OTHER OPERATING EXPENSES: | | | | | | | |
Salary and employee benefits | 27,026 |
| | 22,971 |
| | 78,057 |
| | 66,457 |
|
Less capitalized loan origination costs | (3,747 | ) | | (3,204 | ) | | (10,372 | ) | | (8,680 | ) |
Occupancy and equipment | 6,470 |
| | 5,819 |
| | 18,833 |
| | 17,055 |
|
Information/computer data services | 2,219 |
| | 2,131 |
| | 6,744 |
| | 5,984 |
|
Payment and card processing expenses | 4,168 |
| | 3,201 |
| | 10,926 |
| | 8,462 |
|
Professional services | 951 |
| | 784 |
| | 2,489 |
| | 2,900 |
|
Advertising and marketing | 1,959 |
| | 2,454 |
| | 5,767 |
| | 4,878 |
|
Deposit insurance | 713 |
| | 607 |
| | 1,905 |
| | 1,820 |
|
State/municipal business and use taxes | 475 |
| | 475 |
| | 1,383 |
| | 1,022 |
|
REO operations | (2 | ) | | (190 | ) | | 190 |
| | (260 | ) |
Amortization of core deposit intangibles | 286 |
| | 531 |
| | 1,268 |
| | 1,460 |
|
Miscellaneous | 3,972 |
| | 3,410 |
| | 11,416 |
| | 9,884 |
|
| 44,490 |
| | 38,989 |
| | 128,606 |
| | 110,982 |
|
Acquisition-related costs (recovery) | 2,207 |
| | (494 | ) | | 7,741 |
| | 1,530 |
|
Total other operating expenses | 46,697 |
| | 38,495 |
| | 136,347 |
| | 112,512 |
|
Income before provision for income taxes | 19,589 |
| | 22,104 |
| | 57,769 |
| | 63,577 |
|
PROVISION FOR INCOME TAXES | 6,642 |
| | 7,285 |
| | 19,440 |
| | 21,221 |
|
NET INCOME | $ | 12,947 |
| | $ | 14,819 |
| | $ | 38,329 |
| | $ | 42,356 |
|
Earnings per common share: | | | | | | | |
Basic | $ | 0.62 |
| | $ | 0.76 |
| | $ | 1.88 |
| | $ | 2.19 |
|
Diluted | $ | 0.62 |
| | $ | 0.76 |
| | $ | 1.87 |
| | $ | 2.18 |
|
Cumulative dividends declared per common share | $ | 0.18 |
| | $ | 0.18 |
| | $ | 0.54 |
| | $ | 0.54 |
|
See Selected Notes to the Consolidated Financial Statements
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (In thousands)
For the Three and Nine Months Ended September 30, 2015 and 2014
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2015 |
| | 2014 |
| | 2015 |
| | 2014 |
|
NET INCOME | $ | 12,947 |
| | $ | 14,819 |
| | $ | 38,329 |
| | $ | 42,356 |
|
OTHER COMPREHENSIVE INCOME, NET OF INCOME TAXES: | | | | | | | |
Unrealized holding gain (loss) on available-for-sale securities arising during the period | 1,169 |
| | (1,641 | ) | | 2,051 |
| | 3,195 |
|
Income tax benefit (expense) related to available-for-sale securities unrealized holding gain (loss) | (421 | ) | | 597 |
| | (738 | ) | | (1,150 | ) |
Reclassification for net gains on available-for-sale securities realized in earnings | — |
| | (6 | ) | | (125 | ) | | (40 | ) |
Income tax benefit related to available-for-sale securities realized gains | — |
| | 2 |
| | 45 |
| | 14 |
|
Other comprehensive income (loss) | 748 |
| | (1,048 | ) | | 1,233 |
| | 2,019 |
|
COMPREHENSIVE INCOME | $ | 13,695 |
| | $ | 13,771 |
| | $ | 39,562 |
| | $ | 44,375 |
|
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 Nine Months Ended September 30, 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 ($0.72/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 | | | | | 38,329 |
| | | | | | 38,329 |
|
Other comprehensive income, net of income tax | | | | | | | 1,233 |
| | | | 1,233 |
|
Accrual of dividends on common stock ($0.54/share cumulative) | | | | | (11,324 | ) | | | | | | (11,324 | ) |
Proceeds from issuance of common stock for stockholder reinvestment program | 810 |
| | 33 |
| | | | | | | | 33 |
|
Issuance of restricted stock and recognition of share-based compensation | 70,088 |
| | 1,944 |
| | | | | | | | 1,944 |
|
Issuance of shares for acquisition | 1,319,854 |
| | 58,099 |
| | | | | | | | 58,099 |
|
BALANCE, September 30, 2015 | 20,962,300 |
| | $ | 628,958 |
| | $ | 41,269 |
| | $ | 975 |
| | $ | — |
| | $ | 671,202 |
|
See Selected Notes to the Consolidated Financial Statements
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
For the Nine Months Ended September 30, 2015 and 2014
|
| | | | | | | |
| Nine Months Ended September 30 |
| 2015 |
| | 2014 |
|
OPERATING ACTIVITIES: | | | |
Net income | $ | 38,329 |
| | $ | 42,356 |
|
Adjustments to reconcile net income to net cash provided from operating activities: | | | |
Depreciation | 6,279 |
| | 6,081 |
|
Deferred income and expense, net of amortization | 2,194 |
| | 2,555 |
|
Amortization of core deposit intangibles | 1,268 |
| | 1,460 |
|
Loss (gain) on sale of securities | 537 |
| | (41 | ) |
Net change in valuation of financial instruments carried at fair value | (735 | ) | | (1,662 | ) |
Purchases of securities—trading | (6,337 | ) | | (2,387 | ) |
Proceeds from sales of securities—trading | 2,485 |
| | 2,387 |
|
Principal repayments and maturities of securities—trading | 7,905 |
| | 16,791 |
|
Bargain purchase gain on acquisition | — |
| | (9,079 | ) |
Change in deferred taxes | 97 |
| | 5,713 |
|
Increase in current taxes payable | 2,800 |
| | 9,995 |
|
Equity-based compensation | 1,944 |
| | 1,677 |
|
Increase in cash surrender value of BOLI | (1,425 | ) | | (1,329 | ) |
Gain on sale of loans, net of capitalized servicing rights | (8,139 | ) | | (4,235 | ) |
Gain on disposal of real estate held for sale and property and equipment | (338 | ) | | (817 | ) |
Provision for losses on real estate held for sale | 216 |
| | 37 |
|
Origination of loans held for sale | (455,178 | ) | | (262,159 | ) |
Proceeds from sales of loans held for sale | 462,967 |
| | 262,179 |
|
Net change in: | | | |
Other assets | (5,888 | ) | | (2,118 | ) |
Other liabilities | 1,625 |
| | (33 | ) |
Net cash provided from operating activities | 50,606 |
| | 67,371 |
|
INVESTING ACTIVITIES: | | | |
Purchases of securities—available-for-sale | (93,508 | ) | | (48,022 | ) |
Principal repayments and maturities of securities—available-for-sale | 57,301 |
| | 29,198 |
|
Proceeds from sales of securities—available-for-sale | 40,293 |
| | 55,982 |
|
Purchases of securities—held-to-maturity | (11,490 | ) | | (35,121 | ) |
Principal repayments and maturities of securities—held-to-maturity | 9,609 |
| | 3,857 |
|
Loan originations, net of principal repayments | (78,947 | ) | | (151,355 | ) |
Purchases of loans and participating interest in loans | (243,282 | ) | | (152,321 | ) |
Proceeds from sales of other loans | 29,238 |
| | 4,609 |
|
Net cash received from acquisitions | 78,599 |
| | 127,557 |
|
Purchases of property and equipment | (9,847 | ) | | (4,024 | ) |
Proceeds from sale of real estate held for sale, net | 3,155 |
| | 3,631 |
|
Proceeds from FHLB stock repurchase program | 21,453 |
| | 6,284 |
|
Purchase of FHLB stock | (648 | ) | | — |
|
Other | 241 |
| | (2,063 | ) |
Net cash used by investing activities | (197,833 | ) | | (161,788 | ) |
FINANCING ACTIVITIES: | | | |
Increase in deposits, net | 172,298 |
| | 161,106 |
|
Repayments of FHLB borrowings, net | (15,806 | ) | | (27,005 | ) |
Increase (decrease) in other borrowings, net | 10,899 |
| | (15,451 | ) |
Cash dividends paid | (11,031 | ) | | (9,950 | ) |
Cash proceeds from issuance of stock for stockholder reinvestment plan | 34 |
| | 93 |
|
Net cash provided from financing activities | 156,394 |
| | 108,793 |
|
NET CHANGE IN CASH AND CASH EQUIVALENTS | 9,167 |
| | 14,376 |
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 126,072 |
| | 137,349 |
|
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 135,239 |
| | $ | 151,725 |
|
(Continued on next page)
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited) (In thousands)
For the Nine Months Ended September 30, 2015 and 2014
|
| | | | | | | |
| Nine Months Ended September 30 |
| 2015 |
| | 2014 |
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | | | |
Interest paid in cash | $ | 7,825 |
| | $ | 8,277 |
|
Taxes paid, net of refunds received in cash | 16,491 |
| | 6,102 |
|
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 | 3,251 |
| | 3,019 |
|
ACQUISITIONS (Note 4): | | | |
Assets acquired | 370,306 |
| | 221,206 |
|
Liabilities assumed | 327,548 |
| | 212,127 |
|
See Selected Notes to the Consolidated Financial Statements
BANNER CORPORATION AND SUBSIDIARIES
SELECTED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1: BASIS OF PRESENTATION AND CRITICAL ACCOUNTING POLICIES
The accompanying unaudited consolidated interim financial statements include the accounts of Banner Corporation (the Company or Banner), a bank holding company incorporated in the State of Washington and its wholly-owned subsidiaries, Banner Bank and Islanders Bank (the Banks).
These unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (SEC). In preparing these financial statements, the Company has evaluated events and transactions subsequent to September 30, 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 and the accounting standards for interim financial statements. 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 nine 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
Acquisition of AmericanWest Bank
As of the close of business on October 1, 2015, the Company completed its acquisition of Starbuck Bancshares, Inc. (Starbuck) and its subsidiary, AmericanWest Bank (AmericanWest), a Washington state chartered commercial bank headquartered in Spokane, Washington with 98 branches serving markets in Washington, Oregon, Idaho, California and Utah. On that date Starbuck merged with and into Banner and AmericanWest merged with and into Banner Bank. The merged banks are operating as Banner Bank. Pursuant to the previously announced terms of the merger, the equityholders of Starbuck received an aggregate of $130.0 million in cash and 13.23 million shares of Banner common stock and nonvoting common stock. At the closing date, the combined company had approximately $9.9 billion in assets and 203 branches. (See Note 4, Business Combinations, below in this Form 10-Q for additional information regarding this acquisition).
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 with and into Banner Corporation and Siuslaw Bank was merged with and into Banner Bank. The operating results produced by the ten branches acquired in the Siuslaw acquisition are included in Banner's financial results beginning March 7, 2015 and the combined banks are operating as Banner Bank. (See Note 4, Business Combinations, below in this Form 10-Q for additional information regarding this acquisition).
Note 3: ACCOUNTING STANDARDS RECENTLY ISSUED OR ADOPTED
Investing in Qualified Affordable Housing Projects
In January 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards 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 are applied retrospectively to all periods presented. ASU No. 2014-01 was effective beginning after December 15, 2014 and does 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. Under the terms of ASU 2015-14 the standard is effective for public entities for interim and annual 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.
Customer's Accounting for Fees Paid in a Cloud Computing Arrangement
In April 2015, FASB issued ASU No. 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. The amendments in this ASU provide guidance to customers in cloud computing arrangements about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The amendments are effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. This ASU is not expected to have a material effect on the Company's Consolidated Financial Statements.
Push-down Accounting—Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115
In May 2015, FASB issued ASU No. 2015-08, Push-down Accounting—Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115 (SEC Update). The amendments in the SEC Update conform the accounting guidance with the various SEC paragraphs pursuant to the SEC Staff Accounting Bulletin No. 115. These amendments are effective immediately. This ASU does not have a material effect on the Company's Consolidated Financial Statements.
Business Combinations—Simplifying the Accounting for Measurement-Period Adjustments
In September 2015, FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. Prior to this ASU, changes in provisional amounts for items recognized in a business combination were retrospectively applied. The amendments in this Update eliminate the requirement to retrospectively account for those adjustments. This Update requires an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The amendments in this Update are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. This ASU may have a material effect on the Company's Consolidated Financial Statements depending on the significance of future adjustments to provisional amounts, if any.
Note 4: BUSINESS COMBINATIONS
All business combinations are accounted for using the acquisition method of accounting and, accordingly, assets acquired and liabilities assumed, both tangible and intangible, and consideration exchanged were recorded at acquisition date fair values. The excess cost over fair value of net assets acquired is recorded as goodwill. In the event that the fair value of net assets acquired exceeds the purchase price, including fair value of liabilities assumed, a bargain purchase gain is recorded on the acquisition. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values becomes available.
Acquisition of Starbuck Bancshares, Inc.
Effective as of the close of business on October 1, 2015, the Company acquired Starbuck, the holding company of AmericanWest. As of October 1, 2015, Starbuck had $4.5 billion in total assets, $3.0 billion in loans and $3.6 billion in deposits.
The structure of the transaction was as follows:
| |
• | Starbuck merged with and into the Company and, immediately following, AmericanWest Bank merged with and into Banner Bank. |
| |
• | Starbuck shareholders received 13.23 million shares of Banner common stock and nonvoting common stock and $130.0 million in cash. |
The aggregate consideration for the purchase is estimated at $760.7 million and included the following:
| |
• | Common stock and nonvoting common stock issued of $630.7 million. |
The primary reason for the acquisition was to continue the Company’s growth strategy, including expanding our geographic footprint in markets throughout the Northwest and California. Preliminary fair values for all assets and liabilities are not reported herein as the Company is still in the process of determining the preliminary fair values. Goodwill expected to be recorded in the transaction will not be deductible for income tax purposes as the acquisition is accounted for as a tax-free exchange for tax purposes. The Company expects to disclose preliminary estimates of assets acquired and liabilities assumed, including fair value adjustments, as well as supplemental pro forma information, in a Form 8-K to be filed in the fourth quarter of 2015. In addition, the Company expects that the Form 8-K filing will include audited financial information for Starbuck Bancshares as of December 31, 2014 and unaudited financial information as of September 30, 2015. The Company's December 31, 2015 Form 10-K will include the results of operations produced by the acquired company beginning on October 2, 2015.
Acquisition of Siuslaw Financial Group, Inc.
Effective as of the close of business on March 6, 2015, the Company completed the acquisition 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 acquisition provided $370 million in assets, $316 million in deposits and $247 million in loans.
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 acquisition complements the Company's growth strategy, including expanding our geographic footprint in markets throughout the Northwest. 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 8, Goodwill, Other Intangible Assets and Mortgage Servicing Rights for the accounting for goodwill and other intangible assets.
Amounts recorded are estimates of fair value. Additional adjustments to the purchase price allocation may be required and would most likely involve loans or property and equipment. 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. This discount is being accreted into income over the life of the loans on an effective yield basis.
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 and nine months ended September 30, 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 actually 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 amounts):
|
| | | | | | | | | | | | | | | |
| Pro Forma |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2015 |
| | 2014 |
| | 2015 |
| | 2014 |
|
Total revenues (net interest income plus non-interest income) | $ | 66,286 |
| | $ | 65,444 |
| | $ | 197,048 |
| | $ | 189,944 |
|
Net income | $ | 12,947 |
| | $ | 16,048 |
| | $ | 38,714 |
| | $ | 45,438 |
|
Earnings per share - basic | $ | 0.62 |
| | $ | 0.78 |
| | $ | 1.87 |
| | $ | 2.20 |
|
Earnings per share - diluted | $ | 0.62 |
| | $ | 0.77 |
| | $ | 1.86 |
| | $ | 2.19 |
|
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 September 30, 2015. Disclosure of the amount of Siuslaw’s revenue and net income (excluding integration costs) included in the Company’s Consolidated Statements of Operations 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 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 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.
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 Branch 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 September 30, 2015. Pro forma results of operations for the nine months ended September 30, 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 no purchased credit-impaired loans acquired in connection with the Branch Acquisition.
Acquisition-Related Costs
In the quarter ended September 30, 2014, Banner adjusted the accrued estimated acquisition-related expenses to reflect amounts actually incurred, which resulted in a net reversal of expense totaling $494,000 for the quarter. The following tables present the key components of acquisition-related costs in connection with the Branch Acquisition, the acquisition of Siuslaw and the acquisition of Starbuck, including AmericanWest, for the three and nine months ended September 30, 2015 and 2014 (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2015 | | 2014 | | 2015 | | 2014 |
Acquisition-related costs recognized in other operating expenses: | | | | | | | |
Personnel severance/retention fees | $ | 227 |
| | $ | — |
| | $ | 443 |
| | $ | — |
|
Non-capitalized equipment and repairs | 5 |
| | 70 |
| | 55 |
| | 99 |
|
Client communications | 151 |
| | (108 | ) | | 221 |
| | 130 |
|
Information/computer data services | 301 |
| | (335 | ) | | 807 |
| | 297 |
|
Payment and processing expenses | 16 |
| | (205 | ) | | 16 |
| | 66 |
|
Professional services | 1,185 |
| | 55 |
| | 5,411 |
| | 674 |
|
Miscellaneous | 322 |
| | 29 |
| | 788 |
| | 264 |
|
| $ | 2,207 |
| | $ | (494 | ) | | $ | 7,741 |
| | $ | 1,530 |
|
| | | | | | | |
The Branch Acquisition | $ | — |
| | $ | (494 | ) | | $ | — |
| | $ | 1,530 |
|
Siuslaw | 340 |
| | — |
| | 1,867 |
| | — |
|
Starbuck | 1,867 |
| | — |
| | 5,874 |
| | — |
|
| $ | 2,207 |
| | $ | (494 | ) | | $ | 7,741 |
| | $ | 1,530 |
|
Note 5: SECURITIES
Securities—Trading: The amortized cost and estimated fair value of securities—trading at September 30, 2015 and December 31, 2014 are summarized as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| September 30, 2015 | | December 31, 2014 |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
U.S. Government and agency obligations | $ | 1,230 |
| | $ | 1,389 |
| | $ | 1,340 |
| | $ | 1,505 |
|
Municipal bonds | 1,403 |
| | 1,418 |
| | 1,405 |
| | 1,440 |
|
Corporate bonds | 25,026 |
| | 18,340 |
| | 27,995 |
| | 19,118 |
|
Mortgage-backed or related securities | 15,043 |
| | 16,313 |
| | 16,726 |
| | 18,136 |
|
Equity securities | 14 |
| | 55 |
| | 14 |
| | 59 |
|
| $ | 42,716 |
| | $ | 37,515 |
| | $ | 47,480 |
| | $ | 40,258 |
|
There were two sales of securities—trading totaling $2.5 million with a resulting realized loss of $690,000 during the nine months ended September 30, 2015; however, the realized loss was offset by the reversal of fair value allowances totaling $1.2 million resulting in net gains on these securities sales of $550,000. There were three sales of securities—trading totaling $2.4 million with a resulting net gain of $1,000 during the nine months ended September 30, 2014. The Company did not recognize any OTTI charges or recoveries on securities—trading during the nine months ended September 30, 2015 or 2014. There were no securities—trading on nonaccrual status at September 30, 2015 or 2014.
The amortized cost and estimated fair value of securities—trading at September 30, 2015, by contractual maturity, are shown below (in thousands). Expected maturities will differ from contractual maturities because some securities may be called or prepaid with or without call or prepayment penalties.
|
| | | | | | | |
| September 30, 2015 |
| Amortized Cost | | Fair Value |
| | | |
Maturing in one year or less | $ | 1,070 |
| | $ | 1,075 |
|
Maturing after one year through five years | 9,021 |
| | 9,735 |
|
Maturing after five years through ten years | 3,567 |
| | 3,961 |
|
Maturing after ten years through twenty years | 4,018 |
| | 4,349 |
|
Maturing after twenty years | 25,026 |
| | 18,340 |
|
| 42,702 |
| | 37,460 |
|
Equity securities | 14 |
| | 55 |
|
| $ | 42,716 |
| | $ | 37,515 |
|
Securities—Available-for-Sale: The amortized cost and estimated fair value of securities—available-for-sale at September 30, 2015 and December 31, 2014 are summarized as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| September 30, 2015 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
U.S. Government and agency obligations | $ | 12,043 |
| | $ | — |
| | $ | (51 | ) | | $ | 11,992 |
|
Municipal bonds | 67,459 |
| | 300 |
| | (102 | ) | | 67,657 |
|
Corporate bonds | 5,000 |
| | 22 |
| | — |
| | 5,022 |
|
Mortgage-backed or related securities | 300,929 |
| | 2,391 |
| | (520 | ) | | 302,800 |
|
Asset-backed securities | 31,300 |
| | — |
| | (517 | ) | | 30,783 |
|
| $ | 416,731 |
| | $ | 2,713 |
| | $ | (1,190 | ) | | $ | 418,254 |
|
| | | | | | | |
| December 31, 2014 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
U.S. Government and agency obligations | $ | 29,973 |
| | $ | 8 |
| | $ | (211 | ) | | $ | 29,770 |
|
Municipal bonds | 49,959 |
| | 190 |
| | (121 | ) | | 50,028 |
|
Corporate bonds | 5,000 |
| | 18 |
| | — |
| | 5,018 |
|
Mortgage-backed or related securities | 300,979 |
| | 1,429 |
| | (1,598 | ) | | 300,810 |
|
Asset-backed securities | 25,513 |
| | 167 |
| | (285 | ) | | 25,395 |
|
| $ | 411,424 |
| | $ | 1,812 |
| | $ | (2,215 | ) | | $ | 411,021 |
|
At September 30, 2015 and December 31, 2014, an aging of unrealized losses and fair value of related securities—available-for-sale was as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 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 | $ | 1,334 |
| | $ | (9 | ) | | $ | 10,658 |
| | $ | (42 | ) | | $ | 11,992 |
| | $ | (51 | ) |
Municipal bonds | 15,727 |
| | (95 | ) | | 3,199 |
| | (7 | ) | | 18,926 |
| | (102 | ) |
Mortgage-backed or related securities | 41,550 |
| | (248 | ) | | 72,167 |
| | (272 | ) | | 113,717 |
| | (520 | ) |
Asset-backed securities | 20,835 |
| | (422 | ) | | 9,948 |
| | (95 | ) | | 30,783 |
| | (517 | ) |
| $ | 79,446 |
| | $ | (774 | ) | | $ | 95,972 |
| | $ | (416 | ) | | $ | 175,418 |
| | $ | (1,190 | ) |
| | | | | | | | | | | |
| 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 | 16,322 |
| | (61 | ) | | 7,129 |
| | (60 | ) | | 23,451 |
| | (121 | ) |
Corporate bonds | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Mortgage-backed or related securities | 91,046 |
| | (236 | ) | | 107,266 |
| | (1,362 | ) | | 198,312 |
| | (1,598 | ) |
Asset-backed securities | — |
| | — |
| | 9,765 |
| | (285 | ) | | 9,765 |
| | (285 | ) |
| $ | 123,351 |
| | $ | (355 | ) | | $ | 134,007 |
| | $ | (1,860 | ) | | $ | 257,358 |
| | $ | (2,215 | ) |
There were 44 sales of securities—available-for-sale totaling $40.3 million with a resulting net gain of $126,000 during the nine months ended September 30, 2015. There were twelve sales of securities—available-for-sale totaling $56.0 million with a resulting net gain of $40,000 during the nine months ended September 30, 2014. At September 30, 2015, there were 83 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 September 30, 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 September 30, 2015 or 2014.
The amortized cost and estimated fair value of securities—available-for-sale at September 30, 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.
|
| | | | | | | |
| September 30, 2015 |
| Amortized Cost | | Fair Value |
| | | |
Maturing in one year or less | $ | 17,491 |
| | $ | 17,462 |
|
Maturing after one year through five years | 250,837 |
| | 251,489 |
|
Maturing after five years through ten years | 37,545 |
| | 37,541 |
|
Maturing after ten years through twenty years | 30,856 |
| | 31,376 |
|
Maturing after twenty years | 80,002 |
| | 80,386 |
|
| $ | 416,731 |
| | $ | 418,254 |
|
Securities—Held-to-Maturity: The amortized cost and estimated fair value of securities—held-to-maturity at September 30, 2015 and December 31, 2014 are summarized as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| September 30, 2015 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
U.S. Government and agency obligations | $ | 1,116 |
| | $ | 10 |
| | $ | — |
| | $ | 1,126 |
|
Municipal bonds | 121,937 |
| | 6,073 |
| | (197 | ) | | 127,813 |
|
Corporate bonds | 1,800 |
| | — |
| | — |
| | 1,800 |
|
Mortgage-backed or related securities | 7,297 |
| | 220 |
| | (1 | ) | | 7,516 |
|
| $ | 132,150 |
| | $ | 6,303 |
| | $ | (198 | ) | | $ | 138,255 |
|
| | | | | | | |
| December 31, 2014 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
U.S. Government and agency obligations | $ | 2,146 |
| | $ | — |
| | $ | (19 | ) | | $ | 2,127 |
|
Municipal bonds | 119,951 |
| | 6,319 |
| | (48 | ) | | 126,222 |
|
Corporate bonds | 1,800 |
| | — |
| | — |
| | 1,800 |
|
Mortgage-backed or related securities | 7,361 |
| | 105 |
| | (7 | ) | | 7,459 |
|
| $ | 131,258 |
| | $ | 6,424 |
| | $ | (74 | ) | | $ | 137,608 |
|
At September 30, 2015 and December 31, 2014, an aging analysis of unrealized losses and fair value of related securities—held-to-maturity was as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 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 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Municipal bonds | 8,542 |
| | (193 | ) | | 255 |
| | (4 | ) | | 8,797 |
| | (197 | ) |
Mortgage-backed or related securities | — |
| | — |
| | 287 |
| | (1 | ) | | 287 |
| | (1 | ) |
| $ | 8,542 |
| | $ | (193 | ) | | $ | 542 |
| | $ | (5 | ) | | $ | 9,084 |
| | $ | (198 | ) |
| | | | | | | | | | | |
| 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 | 9,821 |
| | (44 | ) | | 592 |
| | (4 | ) | | 10,413 |
| | (48 | ) |
Mortgage-backed or related securities | 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 nine months ended September 30, 2015 and 2014. At September 30, 2015, there were 14 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 September 30, 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 September 30, 2015 or 2014.
The amortized cost and estimated fair value of securities—held-to-maturity at September 30, 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.
|
| | | | | | | |
| September 30, 2015 |
| Amortized Cost | | Fair Value |
| | | |
Maturing in one year or less | $ | 3,747 |
| | $ | 3,799 |
|
Maturing after one year through five years | 13,852 |
| | 14,041 |
|
Maturing after five years through ten years | 24,951 |
| | 25,608 |
|
Maturing after ten years through twenty years | 76,642 |
| | 81,606 |
|
Maturing after twenty years | 12,958 |
| | 13,201 |
|
| $ | 132,150 |
| | $ | 138,255 |
|
Pledged Securities: The following table presents, as of September 30, 2015, 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 | $ | 132,234 |
| | $ | 137,818 |
|
Interest rate swap counterparties | 13,419 |
| | 13,949 |
|
Retail repurchase agreements | 110,258 |
| | 111,037 |
|
Total pledged securities | $ | 255,911 |
| | $ | 262,804 |
|
Note 6: LOANS RECEIVABLE AND THE ALLOWANCE FOR LOAN LOSSES
Loans receivable, including loans held for sale, at September 30, 2015 and December 31, 2014 are summarized as follows (dollars in thousands):
|
| | | | | | | | | | | | | |
| September 30, 2015 | | December 31, 2014 |
| Amount | | Percent of Total | | Amount | | Percent of Total |
Commercial real estate: | | | | | | | |
Owner-occupied | $ | 635,146 |
| | 14.5 | % | | $ | 546,783 |
| | 14.3 | % |
Investment properties | 1,062,418 |
| | 24.3 |
| | 856,942 |
| | 22.3 |
|
Multifamily real estate | 198,874 |
| | 4.6 |
| | 167,524 |
| | 4.4 |
|
Commercial construction | 47,490 |
| | 1.1 |
| | 17,337 |
| | 0.4 |
|
Multifamily construction | 72,987 |
| | 1.7 |
| | 60,193 |
| | 1.6 |
|
One- to four-family construction | 246,715 |
| | 5.6 |
| | 219,889 |
| | 5.7 |
|
Land and land development: | |
| | | | |
| | |
Residential | 111,091 |
| | 2.5 |
| | 102,435 |
| | 2.7 |
|
Commercial | 15,517 |
| | 0.4 |
| | 11,152 |
| | 0.3 |
|
Commercial business | 812,070 |
| | 18.6 |
| | 723,964 |
| | 18.9 |
|
Agricultural business, including secured by farmland | 242,556 |
| | 5.5 |
| | 238,499 |
| | 6.2 |
|
One- to four-family residential | 536,325 |
| | 12.3 |
| | 539,894 |
| | 14.1 |
|
Consumer: | | | | | | | |
Consumer secured by one- to four-family | 250,029 |
| | 5.7 |
| | 222,205 |
| | 5.8 |
|
Consumer—other | 141,376 |
| | 3.2 |
| | 127,003 |
| | 3.3 |
|
Total loans outstanding | 4,372,594 |
| | 100.0 | % | | 3,833,820 |
| | 100.0 | % |
Less allowance for loan losses | (77,320 | ) | | |
| | (75,907 | ) | | |
|
Net loans | $ | 4,295,274 |
| | |
| | $ | 3,757,913 |
| | |
|
Loan amounts are net of unearned loan fees in excess of unamortized costs of $10.0 million as of September 30, 2015 and $5.8 million as of December 31, 2014. Net loans include net discounts on acquired loans of $4.3 million and $148,000 as of September 30, 2015 and December 31, 2014, respectively.
The Company originates both adjustable- and fixed-rate loans. The maturity and repricing composition of those loans, less undisbursed amounts and deferred fees and origination costs, at September 30, 2015 were as follows (in thousands):
|
| | | |
| September 30, 2015 |
|
Fixed-rate (term to maturity): | |
Maturing in one year or less | $ | 150,889 |
|
Maturing after one year through three years | 203,434 |
|
Maturing after three years through five years | 165,674 |
|
Maturing after five years through ten years | 272,660 |
|
Maturing after ten years | 482,673 |
|
Total fixed-rate loans | 1,275,330 |
|
Adjustable-rate (term to rate adjustment): | |
|
Maturing or repricing in one year or less | 1,631,649 |
|
Maturing or repricing after one year through three years | 606,056 |
|
Maturing or repricing after three years through five years | 605,590 |
|
Maturing or repricing after five years through ten years | 225,164 |
|
Maturing or repricing after ten years | 28,805 |
|
Total adjustable-rate loans | 3,097,264 |
|
Total loans | $ | 4,372,594 |
|
The adjustable-rate loans have various interest rate adjustment limitations and are generally indexed to various prime or London Inter-bank Offering Rate (LIBOR) rates, One to Five Year Constant Maturity Treasury Indices or FHLB advance rates. Future market factors may affect the correlation of the interest rate adjustment with the rates the Banks pay on the short-term deposits that were primarily utilized to fund these loans.
Purchased credit-impaired loans and purchased non-credit-impaired loans. Purchased loans, including loans acquired in business combinations, are recorded at their fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore, an allowance for loan and lease losses is not recorded at the acquisition date. Acquired loans are evaluated upon acquisition and classified as either purchased credit-impaired or purchased non-credit-impaired. Purchased credit-impaired loans reflect credit deterioration since origination such that it is probable at acquisition that the Company will be unable to collect all contractually required payments. The outstanding contractual unpaid principal balance of purchased credit-impaired loans, excluding acquisition accounting adjustments, was $8.8 million at September 30, 2015. The carrying balance of purchased credit-impaired loans was $5.4 million at September 30, 2015. There were no purchased credit-impaired loans at December 31, 2014 or September 30, 2014.
The following table presents the changes in the accretable yield for purchased credit-impaired loans for the three and nine months ended September 30, 2015 and 2014 (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2015 |
| | 2014 |
| | 2015 |
| | 2014 |
|
Balance, beginning of period | $ | 2,149 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Additions | — |
| | — |
| | 2,239 |
| | — |
|
Accretion to interest income | (68 | ) | | — |
| | (158 | ) | | — |
|
Disposals | — |
| | — |
| | — |
| | — |
|
Reclassifications from non-accretable difference | — |
| | — |
| | — |
| | — |
|
Balance, end of period | $ | 2,081 |
| | $ | — |
| | $ | 2,081 |
| | $ | — |
|
As of September 30, 2015, the non-accretable difference between the contractually required payments and cash flows expected to be collected was $3.2 million.
Impaired Loans and the Allowance for Loan Losses. A loan is considered impaired when, based on current information and circumstances, the Company determines it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. Factors involved in determining impairment include, but are not limited to, the financial condition of the borrower, the value of the underlying collateral and the current status of the economy. Impaired loans are comprised of loans on nonaccrual, troubled debt restructures (TDRs) that are performing under their restructured terms, and loans that are 90 days or more past due, but are still on accrual.
The following tables provide information on impaired loans with and without allowance reserves at September 30, 2015 and December 31, 2014. Recorded investment includes the unpaid principal balance or the carrying amount of loans less charge-offs and net deferred loan fees (in thousands):
|
| | | | | | | | | | | | | | | |
| September 30, 2015 |
| Unpaid Principal Balance | | Recorded Investment | | Related Allowance |
| | Without Allowance (1) | | With Allowance (2) | |
Commercial real estate: | | | | | | | |
Owner-occupied | $ | 1,619 |
| | $ | 129 |
| | $ | 1,439 |
| | $ | 57 |
|
Investment properties | 8,788 |
| | — |
| | 8,384 |
| | 988 |
|
Multifamily real estate | 361 |
| | — |
| | 361 |
| | 73 |
|
One- to four-family construction | 2,582 |
| | — |
| | 2,582 |
| | 216 |
|
Land and land development: | | | | | | | |
Residential | 3,552 |
| | 750 |
| | 1,647 |
| | 455 |
|
Commercial | 1,899 |
| | 1,549 |
| | — |
| | — |
|
Commercial business | 1,878 |
| | 9 |
| | 1,620 |
| | 226 |
|
Agricultural business/farmland | 1,078 |
| | — |
| | 1,004 |
| | 40 |
|
One- to four-family residential | 19,555 |
| | 2,148 |
| | 16,161 |
| | 716 |
|
Consumer: | | | | | | | |
Consumer secured by one- to four-family | 985 |
| | 72 |
| | 734 |
| | 56 |
|
Consumer—other | 398 |
| | 85 |
| | 231 |
| | 6 |
|
| $ | 42,695 |
| | $ | 4,742 |
| | $ | 34,163 |
| | $ | 2,833 |
|
| | | | | | | |
| December 31, 2014 |
| Unpaid Principal Balance | | Recorded Investment | | Related Allowance |
| | Without Allowance (1) | | With Allowance (2) | |
Commercial real estate: | | | | | | | |
Owner-occupied | $ | 1,598 |
| | $ | 966 |
| | $ | 582 |
| | $ | 24 |
|
Investment properties | 6,458 |
| | 30 |
| | 6,023 |
| | 729 |
|
Multifamily real estate | 786 |
| | — |
| | 786 |
| | 86 |
|
One- to four-family construction | 3,923 |
| | — |
| | 3,923 |
| | 640 |
|
Land and land development: | | | | | | | |
Residential | 3,710 |
| | 1,275 |
| | 1,280 |
| | 346 |
|
Commercial business | 1,502 |
| | — |
| | 1,276 |
| | 128 |
|
Agricultural business/farmland | 1,597 |
| | 744 |
| | 854 |
| | 26 |
|
One- to four-family residential | 27,855 |
| | 1,865 |
| | 24,529 |
| | 1,032 |
|
Consumer: | | | | | | | |
Consumer secured by one- to four-family | 1,256 |
| | 73 |
| | 1,077 |
| | 75 |
|
Consumer—other | 634 |
| | 138 |
| | 470 |
| | 6 |
|
| $ | 49,319 |
| | $ | 5,091 |
| | $ | 40,800 |
| | $ | 3,092 |
|
| |
(1) | Loans without an allowance reserve have been individually evaluated for impairment and that evaluation concluded that no reserve was needed. |
| |
(2) | Includes general reserves for loans evaluated in pools of homogeneous loans and loans with a specific reserve allowance. Loans with a specific allowance reserve have been individually evaluated for impairment using either a discounted cash flow analysis or, for collateral dependent loans, current appraisals less costs to sell to establish realizable value. |
The following tables summarize our average recorded investment and interest income recognized on impaired loans by loan class for the three and nine months ended September 30, 2015 and 2014 (in thousands):