10-Q

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

FORM 10-Q 
(Mark One)

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2015.
OR
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ to ______________

 Commission File Number 0-26584

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

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

1


BANNER CORPORATION AND SUBSIDIARIES

Table of Contents
PART I – FINANCIAL INFORMATION
 
 
 
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:
 
 
 
Consolidated Statements of Financial Condition as of September 30, 2015 and December 31, 2014
 
 
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2015 and 2014
 
 
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2015 and 2014
 
 
Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2015 and the Year Ended December 31, 2014
 
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014
 
 
Selected Notes to the Consolidated Financial Statements
 
 
Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Executive Overview
 
 
Comparison of Financial Condition at September 30, 2015 and December 31, 2014
 
 
Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2015 and 2014
 
 
Asset Quality
 
 
Liquidity and Capital Resources
 
 
Capital Requirements
 
 
Item 3 – Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Market Risk and Asset/Liability Management
 
 
Sensitivity Analysis
 
 
Item 4 – Controls and Procedures
 
 
PART II – OTHER INFORMATION
 
 
 
Item 1 – Legal Proceedings
 
 
Item 1A – Risk Factors
 
 
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
 
 
Item 3 – Defaults upon Senior Securities
 
 
Item 4 – Mine Safety Disclosures
 
 
Item 5 – Other Information
 
 
Item 6 – Exhibits
 
 
SIGNATURES

2


Special Note Regarding Forward-Looking Statements

Certain matters in this report on Form 10-Q contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements relate to our financial condition, liquidity, results of operations, plans, objectives, future performance or business.  Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.”  Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future economic performance and projections of financial items.  These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated or implied by our forward-looking statements, including, but not limited to: expected revenues, cost savings, synergies and other benefits from the merger of Banner Bank and Siuslaw Bank and of 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.

3


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

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

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

Loans receivable:
 
 
 
Held for sale
3,136

 
2,786

Held for portfolio
4,369,458

 
3,831,034

Allowance for loan losses
(77,320
)
 
(75,907
)
 
4,295,274

 
3,757,913

Accrued interest receivable
17,966

 
15,279

Real estate owned (REO), held for sale, net
6,363

 
3,352

Property and equipment, net
102,881

 
91,185

Goodwill and other intangibles, net
26,605

 
2,831

Bank-owned life insurance (BOLI)
71,842

 
63,759

Deferred tax assets, net
23,536

 
23,871

Other assets
37,918

 
29,328

 
$
5,312,310

 
$
4,723,163

LIABILITIES
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
1,561,516

 
$
1,298,866

Interest-bearing transaction and savings accounts
2,095,476

 
1,829,568

Interest-bearing certificates
730,661

 
770,516

 
4,387,653

 
3,898,950

Advances from FHLB at fair value
16,435

 
32,250

Other borrowings
88,083

 
77,185

Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities)
85,183

 
78,001

Accrued expenses and other liabilities
42,844

 
37,082

Deferred compensation
20,910

 
16,807

 
4,641,108

 
4,140,275

COMMITMENTS AND CONTINGENCIES (Note 14)

 

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

 

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

Accumulated other comprehensive income (loss)
975

 
(258
)
 
671,202

 
582,888

 
$
5,312,310

 
$
4,723,163

See Selected Notes to the Consolidated Financial Statements

4


BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In thousands except for per share amounts)
For the Three 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

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

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

5


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

6


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

7


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 securitiesheld-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)

8


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

9


BANNER CORPORATION AND SUBSIDIARIES
SELECTED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1:  BASIS OF PRESENTATION AND CRITICAL ACCOUNTING POLICIES

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

These unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (SEC). In preparing these 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

10


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.


11


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:
Cash of $130.0 million.
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

12


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.


13


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

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

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

 
 
Property and equipment
3,079

 
 
Core deposit intangible
2,372

 
 
Other assets
275

 
 
Total assets acquired
221,206

 
 
 
 
 
 
Fair value of liabilities assumed:
 
 
 
Deposits
212,085

 
 
Other liabilities
42

 
 
Total liabilities assumed
212,127

 
 
Net assets acquired
 
 
$
9,079

Acquisition bargain purchase gain
 
 
$
(9,079
)

The primary reason for the 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



14


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



15


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.

16



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



17


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



18


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.

19



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.
 
 
 
 
 
 
 
 

20


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.

21



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):