Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019 |
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 000-26584
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 every Interactive Data File required to be submitted 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 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth 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 [ ] |
Emerging growth company [ ] |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ] |
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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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Securities registered pursuant to Section 12(b) of the Act: |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, par value $.01 per share | | BANR | | | | The NASDAQ Stock Market LLC |
APPLICABLE ONLY TO CORPORATE ISSUERS |
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Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. |
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Title of class: | | As of April 30, 2019 |
Common Stock, $.01 par value per share | | 35,121,930 shares |
Non-voting Common Stock, $.01 par value per share | | | | | | 39,192 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 March 31, 2019 and December 31, 2018 | |
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Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018 | |
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Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2019 and 2018 | |
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Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2019 and the Year Ended December 31, 2018 | |
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Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 | |
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Selected Notes to the Consolidated Financial Statements | |
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Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations | |
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Executive Overview | |
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Comparison of Financial Condition at March 31, 2019 and December 31, 2018 | |
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Comparison of Results of Operations for the Three Months Ended March 31, 2019 and 2018 | |
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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 Form 10-Q constitute 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 and Skagit Bancorp, Inc. (Skagit) 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 customer 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 estimates of the adequacy of the allowance for loan losses and provisions 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 the allowance for loan losses not being adequate to cover actual losses and require a material increase in reserves; results of examinations by regulatory authorities, including the possibility that any such regulatory authority may, among other things, require the writing down of assets or increases in the allowance for loan losses; the ability to manage loan delinquency rates; competitive pressures among financial services companies; changes in consumer spending or borrowing and spending habits; interest rate movements generally and the relative differences between short and long-term interest rates, loan and deposit interest rates, net interest margin and funding sources; the impact of repricing and competitors’ pricing initiatives on loan and deposit products; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values; the ability to adapt successfully to technological changes to meet customers’ needs and developments in the marketplace; the ability to access cost-effective funding; increases in premiums for deposit insurance; the ability to control operating costs and expenses; the use of estimates in determining fair value of certain assets and liabilities, which estimates may prove to be incorrect and result in significant changes in valuation; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect employees, and potential associated charges; disruptions, security breaches or other adverse events, failures or interruptions in, or attacks on, information technology systems or on the third-party vendors who perform critical processing functions; changes in financial markets; changes in economic conditions in general and in Washington, Idaho, Oregon and California in particular; secondary market conditions for loans and the ability to sell loans in the secondary market; the costs, effects and outcomes of litigation; legislation or regulatory changes or reforms, 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 of 2010 and the implementing regulations; results of safety and soundness and compliance examinations by the Board of Governors of the Federal Reserve System, 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, require restitution or institute an informal or formal enforcement action which could require an increase in reserves for loan losses, write-downs of assets or changes in regulatory capital position, or affect the ability to borrow funds, or maintain or increase deposits, or impose additional requirements and restrictions, any of which could adversely affect liquidity and earnings; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; adverse changes in the securities markets; the inability of key third-party providers to perform their obligations; changes in accounting principles, policies or guidelines, 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 operations, pricing, products and services; future acquisitions by Banner of other depository institutions or lines of business; and future goodwill impairment due to changes in Banner’s business, changes in market conditions, or other factors; and other risks detailed from time to time in our filings with the U.S. Securities and Exchange Commission (SEC), including this report on Form 10-Q. 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. All references to “Banner” refer to Banner Corporation and those to “the Banks” refer to its wholly-owned subsidiaries, Banner Bank and Islanders Bank, collectively.
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited) (In thousands, except shares)
March 31, 2019 and December 31, 2018 |
| | | | | | | |
ASSETS | March 31 2019 |
| | December 31 2018 |
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Cash and due from banks | $ | 218,458 |
| | $ | 231,029 |
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Interest bearing deposits | 43,080 |
| | 41,167 |
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Total cash and cash equivalents | 261,538 |
| | 272,196 |
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Securities—trading, amortized cost $27,203 and $27,203, respectively | 25,838 |
| | 25,896 |
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Securities—available-for-sale, amortized cost $1,599,347 and $1,648,421, respectively | 1,603,804 |
| | 1,636,223 |
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Securities—held-to-maturity, fair value $220,112 and $232,537, respectively | 218,993 |
| | 234,220 |
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Total securities | 1,848,635 |
| | 1,896,339 |
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Federal Home Loan Bank (FHLB) stock | 27,063 |
| | 31,955 |
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Loans held for sale (includes $37.4 million and $164.8 million, at fair value, respectively) | 45,865 |
| | 171,031 |
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Loans receivable | 8,692,657 |
| | 8,684,595 |
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Allowance for loan losses | (97,308 | ) | | (96,485 | ) |
Net loans receivable | 8,595,349 |
| | 8,588,110 |
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Accrued interest receivable | 41,220 |
| | 38,593 |
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Real estate owned (REO), held for sale, net | 2,611 |
| | 2,611 |
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Property and equipment, net | 171,057 |
| | 171,809 |
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Goodwill | 339,154 |
| | 339,154 |
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Other intangibles, net | 30,647 |
| | 32,924 |
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Bank-owned life insurance (BOLI) | 178,202 |
| | 177,467 |
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Deferred tax assets, net | 69,642 |
| | 75,020 |
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Other assets | 129,302 |
| | 74,108 |
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Total assets | $ | 11,740,285 |
| | $ | 11,871,317 |
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LIABILITIES | | | |
Deposits: | | | |
Non-interest-bearing | $ | 3,676,984 |
| | $ | 3,657,817 |
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Interest-bearing transaction and savings accounts | 4,535,969 |
| | 4,498,966 |
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Interest-bearing certificates | 1,163,276 |
| | 1,320,265 |
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Total deposits | 9,376,229 |
| | 9,477,048 |
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Advances from FHLB | 418,000 |
| | 540,189 |
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Other borrowings | 121,719 |
| | 118,995 |
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Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities) | 113,917 |
| | 114,091 |
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Accrued expenses and other liabilities | 158,669 |
| | 102,061 |
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Deferred compensation | 40,560 |
| | 40,338 |
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Total liabilities | 10,229,094 |
| | 10,392,722 |
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COMMITMENTS AND CONTINGENCIES (Note 13) |
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SHAREHOLDERS’ EQUITY | | | |
Preferred stock - $0.01 par value per share, 500,000 shares authorized; no shares outstanding at March 31, 2019 and December 31, 2018 | — |
| | — |
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Common stock and paid in capital - $0.01 par value per share, 50,000,000 shares authorized; 35,113,554 shares issued and outstanding at March 31, 2019; 35,107,839 shares issued and outstanding at December 31, 2018 | 1,337,592 |
| | 1,336,030 |
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Common stock (non-voting) and paid in capital - $0.01 par value per share, 5,000,000 shares authorized; 39,192 shares issued and outstanding at March 31, 2019; 74,933 shares issued and outstanding at December 31, 2018 | 794 |
| | 1,406 |
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Retained earnings | 152,911 |
| | 134,055 |
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Carrying value of shares held in trust for stock-based compensation plans | (7,294 | ) | | (7,289 | ) |
Liability for common stock issued to stock related compensation plans | 7,294 |
| | 7,289 |
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Accumulated other comprehensive loss | 19,894 |
| | 7,104 |
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Total shareholders' equity | 1,511,191 |
| | 1,478,595 |
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Total liabilities and shareholders' equity | $ | 11,740,285 |
| | $ | 11,871,317 |
|
See Selected Notes to the Consolidated Financial Statements
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In thousands, except shares and per share amounts)
For the Three Months Ended March 31, 2019 and 2018
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 |
| | 2018 |
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INTEREST INCOME: | | | |
Loans receivable | $ | 115,455 |
| | $ | 94,022 |
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Mortgage-backed securities | 10,507 |
| | 7,331 |
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Securities and cash equivalents | 4,034 |
| | 3,467 |
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Total interest income | 129,996 |
| | 104,820 |
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INTEREST EXPENSE: | | | |
Deposits | 8,643 |
| | 3,358 |
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FHLB advances | 3,476 |
| | 677 |
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Other borrowings | 60 |
| | 70 |
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Junior subordinated debentures | 1,713 |
| | 1,342 |
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Total interest expense | 13,892 |
| | 5,447 |
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Net interest income | 116,104 |
| | 99,373 |
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PROVISION FOR LOAN LOSSES | 2,000 |
| | 2,000 |
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Net interest income after provision for loan losses | 114,104 |
| | 97,373 |
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NON-INTEREST INCOME: | | | |
Deposit fees and other service charges | 12,618 |
| | 11,296 |
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Mortgage banking operations | 3,415 |
| | 4,864 |
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Bank-owned life insurance (BOLI) | 1,276 |
| | 853 |
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Miscellaneous | 804 |
| | 1,037 |
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| 18,113 |
| | 18,050 |
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Net gain on sale of securities | 1 |
| | 4 |
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Net change in valuation of financial instruments carried at fair value | 11 |
| | 3,308 |
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Total non-interest income | 18,125 |
| | 21,362 |
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NON-INTEREST EXPENSE: | | | |
Salary and employee benefits | 54,640 |
| | 50,067 |
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Less capitalized loan origination costs | (4,849 | ) | | (4,011 | ) |
Occupancy and equipment | 13,766 |
| | 11,766 |
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Information/computer data services | 5,326 |
| | 4,381 |
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Payment and card processing expenses | 3,984 |
| | 3,700 |
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Professional and legal expenses | 2,434 |
| | 4,428 |
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Advertising and marketing | 1,529 |
| | 1,830 |
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Deposit insurance | 1,418 |
| | 1,341 |
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State/municipal business and use taxes | 945 |
| | 713 |
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REO operations | (123 | ) | | 439 |
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Amortization of core deposit intangibles | 2,052 |
| | 1,382 |
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Miscellaneous | 6,744 |
| | 5,670 |
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| 87,866 |
| | 81,706 |
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Acquisition-related expenses | 2,148 |
| | — |
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Total non-interest expense | 90,014 |
| | 81,706 |
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Income before provision for income taxes | 42,215 |
| | 37,029 |
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PROVISION FOR INCOME TAXES | 8,869 |
| | 8,239 |
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NET INCOME | $ | 33,346 |
| | $ | 28,790 |
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Earnings per common share: | | | |
Basic | $ | 0.95 |
| | $ | 0.89 |
|
Diluted | $ | 0.95 |
| | $ | 0.89 |
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Cumulative dividends declared per common share | $ | 0.41 |
| | $ | 0.35 |
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Weighted average number of common shares outstanding: | | | |
Basic | 35,050,376 |
| | 32,397,568 |
|
Diluted | 35,172,056 |
| | 32,516,456 |
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See Selected Notes to the Consolidated Financial Statements
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (In thousands)
For the Three Months Ended March 31, 2019 and 2018
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 |
| | 2018 |
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NET INCOME | $ | 33,346 |
| | $ | 28,790 |
|
OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES: | | | |
Unrealized holding gain (loss) on available-for-sale securities arising during the period | 16,656 |
| | (14,768 | ) |
Reclassification for net gains on available-for-sale securities realized in earnings | (1 | ) | | (2 | ) |
Changes in fair value of junior subordinated debentures related to instrument specific credit risk | 174 |
| | (13,809 | ) |
Income tax related to other comprehensive income (loss) | (4,039 | ) | | 6,802 |
|
Other comprehensive income (loss) | 12,790 |
| | (21,777 | ) |
COMPREHENSIVE INCOME | $ | 46,136 |
| | $ | 7,013 |
|
See Selected Notes to the Consolidated Financial Statements
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited) (In thousands, except shares)
For the Three Months Ended March 31, 2019 and the Year Ended December 31, 2018
|
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| Common Stock and Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | Shareholders’ Equity |
| Shares | | Amount | | | |
Balance, January 1, 2018 | 32,726,485 |
| | $ | 1,187,127 |
| | $ | 90,535 |
| | $ | (5,036 | ) | | $ | 1,272,626 |
|
| | | | | | | | | |
Cumulative effect of reclassification of the instrument-specific credit risk portion of junior subordinated debentures fair value adjustments and reclassification of equity securities from available-for-sale | | | | | (28,203 | ) | | 28,203 |
| | — |
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Net income | | | | | 28,790 |
| | | | 28,790 |
|
Other comprehensive loss, net of income tax | | | | | | | (21,777 | ) | | (21,777 | ) |
Repurchase of common stock | (269,711 | ) | | (15,359 | ) | | | | | | (15,359 | ) |
Accrual of dividends on common stock ($0.35/share) | | | | | (11,349 | ) | | | | (11,349 | ) |
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered | (33,101 | ) | | 1,192 |
| | | | | | 1,192 |
|
| | | | | | | | | |
Balance, March 31, 2018 | 32,423,673 |
| | $ | 1,172,960 |
| | $ | 79,773 |
| | $ | 1,390 |
| | $ | 1,254,123 |
|
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| | | | | | | | | | | | | | | | | | |
Balance, April 1, 2018 | 32,423,673 |
| | $ | 1,172,960 |
| | $ | 79,773 |
| | $ | 1,390 |
| | $ | 1,254,123 |
|
| | | | | | | | | |
Net income | | | | | 32,424 |
| | | | 32,424 |
|
Other comprehensive loss, net of income tax | | | | | | | (6,521 | ) | | (6,521 | ) |
Accrual of dividends on common stock ($0.85/share) | | | | | (27,712 | ) | | | | (27,712 | ) |
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered | (17,977 | ) | | 696 |
| | | | | | 696 |
|
| | | | | | | | | |
Balance, June 30, 2018 | 32,405,696 |
| | $ | 1,173,656 |
| | $ | 84,485 |
| | $ | (5,131 | ) | | $ | 1,253,010 |
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Continued on next page
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| Common Stock and Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | Shareholders’ Equity |
| Shares | | Amount | | | |
Balance, July 1, 2018 | 32,405,696 |
| | $ | 1,173,656 |
| | $ | 84,485 |
| | $ | (5,131 | ) | | $ | 1,253,010 |
|
| | | | | | | | | |
Net income | | | | | 37,773 |
| | | | 37,773 |
|
Other comprehensive loss, net of income tax | | | | | | | (7,863 | ) | | (7,863 | ) |
Accrual of dividends on common stock ($0.38/share) | | | | | (12,316 | ) | | | | (12,316 | ) |
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered | (2,939 | ) | | 1,594 |
| | | | | | 1,594 |
|
| | | | | | | | | |
Balance, September 30, 2018 | 32,402,757 |
| | $ | 1,175,250 |
| | $ | 109,942 |
| | $ | (12,994 | ) | | $ | 1,272,198 |
|
|
| | | | | | | | | | | | | | | | | | |
Balance, October 1, 2018 | 32,402,757 |
| | $ | 1,175,250 |
| | $ | 109,942 |
| | $ | (12,994 | ) | | $ | 1,272,198 |
|
| | | | | | | | | |
Net income | | | | | 37,527 |
| | | | 37,527 |
|
Other comprehensive income, net of income tax | | | | | | | 20,098 |
| | 20,098 |
|
Accrual of dividends on common stock ($0.38/share) | | | | | (13,414 | ) | | | | (13,414 | ) |
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered | (3,056 | ) | | 1,519 |
| | | | | | 1,519 |
|
Repurchase of common stock | (325,000 | ) | | (19,042 | ) | | | | | | (19,042 | ) |
Business acquisition | 3,108,071 |
| | 179,709 |
| | | | | | 179,709 |
|
| | | | | | | | | |
Balance, December 31, 2018 | 35,182,772 |
| | $ | 1,337,436 |
| | $ | 134,055 |
| | $ | 7,104 |
| | $ | 1,478,595 |
|
Continued on next page
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| | | | | | | | | | | | | | | | | | |
| Common Stock and Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Stockholders’ Equity |
| Shares | | Amount | | | |
Balance, January 1, 2019 | 35,182,772 |
| | $ | 1,337,436 |
| | $ | 134,055 |
| | $ | 7,104 |
| | $ | 1,478,595 |
|
| | | | | | | | | |
Net income | | | | | 33,346 |
| | | | 33,346 |
|
Other comprehensive income, net of income tax | | | | | | | 12,790 |
| | 12,790 |
|
Accrual of dividends on common stock ($0.41/share) | | | | | (14,490 | ) | | | | (14,490 | ) |
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered | (30,026 | ) | | 950 |
| | | | | | 950 |
|
| | | | | | | | | |
Balance, March 31, 2019 | 35,152,746 |
| | $ | 1,338,386 |
| | $ | 152,911 |
| | $ | 19,894 |
| | $ | 1,511,191 |
|
See Selected Notes to the Consolidated Financial Statements
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
For the Three Months Ended March 31, 2019 and 2018
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 |
| | 2018 |
|
OPERATING ACTIVITIES: | | | |
Net income | $ | 33,346 |
| | $ | 28,790 |
|
Adjustments to reconcile net income to net cash provided from operating activities: | | | |
Depreciation | 4,481 |
| | 3,584 |
|
Deferred income and expense, net of amortization | (895 | ) | | (608 | ) |
Amortization of core deposit intangibles | 2,052 |
| | 1,382 |
|
Gain on sale of securities | (1 | ) | | (4 | ) |
Net change in valuation of financial instruments carried at fair value | (11 | ) | | (3,308 | ) |
Decrease (increase) in deferred taxes | 5,379 |
| | (5,416 | ) |
Increase in current taxes payable | 7,243 |
| | 6,569 |
|
Stock-based compensation | 1,219 |
| | 1,320 |
|
Increase in cash surrender value of BOLI | (1,267 | ) | | (844 | ) |
Gain on sale of loans, net of capitalized servicing rights | (2,063 | ) | | (3,375 | ) |
Loss on disposal of real estate held for sale and property and equipment | 371 |
| | 58 |
|
Provision for loan losses | 2,000 |
| | 2,000 |
|
Provision for losses on real estate held for sale | — |
| | 160 |
|
Origination of loans held for sale | (134,747 | ) | | (222,168 | ) |
Proceeds from sales of loans held for sale | 261,978 |
| | 124,460 |
|
Net change in: | | | |
Other assets | (984 | ) | | (5,100 | ) |
Other liabilities | (12,847 | ) | | (2,311 | ) |
Net cash provided from (used in) operating activities | 165,254 |
| | (74,811 | ) |
INVESTING ACTIVITIES: | | | |
Purchases of securities—available-for-sale | (5,140 | ) | | (537,864 | ) |
Principal repayments and maturities of securities—available-for-sale | 51,910 |
| | 28,839 |
|
Proceeds from sales of securities—available-for-sale | 516 |
| | — |
|
Purchases of securities—held-to-maturity | — |
| | (5,312 | ) |
Principal repayments and maturities of securities—held-to-maturity | 14,744 |
| | 2,358 |
|
Loan originations, net of principal repayments | (8,988 | ) | | 45,574 |
|
Purchases of loans and participating interest in loans | — |
| | (1,340 | ) |
Proceeds from sales of other loans | 3,186 |
| | 1,750 |
|
Purchases of property and equipment | (4,435 | ) | | (5,024 | ) |
Proceeds from sale of real estate held for sale and sale of other property, net | 876 |
| | 192 |
|
Proceeds from FHLB stock repurchase program | 52,372 |
| | 32,558 |
|
Purchase of FHLB stock | (47,480 | ) | | (40,260 | ) |
Other | 485 |
| | 228 |
|
Net cash provided from (used in) investing activities | 58,046 |
| | (478,301 | ) |
FINANCING ACTIVITIES: | | | |
(Decrease) increase in deposits, net | (100,819 | ) | | 359,631 |
|
Proceeds from long term FHLB advances | 300,000 |
| | — |
|
Repayment of long term FHLB advances | (189 | ) | | (2 | ) |
(Repayment) proceeds from overnight and short term FHLB advances, net | (422,000 | ) | | 192,000 |
|
Increase in other borrowings, net | 2,724 |
| | 5,984 |
|
Cash dividends paid | (13,405 | ) | | (8,165 | ) |
Taxes paid related to net share settlement of equity awards | (269 | ) | | (129 | ) |
Cash paid for the repurchase of common stock | — |
| | (15,359 | ) |
Net cash (used in) provided from financing activities | (233,958 | ) | | 533,960 |
|
NET CHANGE IN CASH AND CASH EQUIVALENTS | (10,658 | ) | | (19,152 | ) |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 272,196 |
| | 261,200 |
|
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 261,538 |
| | $ | 242,048 |
|
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited) (In thousands)
For the Three Months Ended March 31, 2019 and 2018
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 |
| | 2018 |
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | | | |
Interest paid in cash | $ | 13,812 |
| | $ | 5,185 |
|
Tax refunds received, net | (71 | ) | | (3 | ) |
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 | — |
| | 976 |
|
Dividends accrued but not paid until after period end | 14,863 |
| | 11,450 |
|
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 SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements include the accounts of Banner Corporation (the Company or Banner), a bank holding company incorporated in the State of Washington and its wholly-owned subsidiaries, Banner Bank and Islanders Bank (the Banks).
These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (SEC). In preparing these financial statements, the Company has evaluated events and transactions subsequent to March 31, 2019 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 2018 Consolidated Financial Statements and/or schedules to conform to the 2019 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 significant 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 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 (CDI) and mortgage servicing rights, (v) the valuation of real estate held for sale, (vi) the valuation of assets acquired and liabilities assumed in business combinations and subsequent recognition of related income and expense, and (vii) the valuation or recognition of deferred tax assets and liabilities. These policies and judgments, estimates and assumptions are described in greater detail in subsequent notes to the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations (Critical Accounting Policies) in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC (2018 Form 10-K). There have been no significant changes in our application of these accounting policies during the first three months of 2019, except as described in Note 2.
The information included in this Form 10-Q should be read in conjunction with our 2018 Form 10-K. Interim results are not necessarily indicative of results for a full year or any other interim period.
Note 2: ACCOUNTING STANDARDS RECENTLY ISSUED OR ADOPTED
Leases (Topic 842)
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). The amendments in this ASU require lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date; a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. In July 2018, FASB issued ASU No. 2018-11, Targeted Improvements. The amendments in this ASU provide entities with an additional (and optional) transition method to adopt the new leases standard. The Company adopted the requirements of Topic 842 effective January 1, 2019. The Company elected the transition option provided in ASU No. 2018-11 and applied the modified retrospective approach for leases that existed as of January 1, 2019, or were entered into thereafter. The Company elected certain relief options for practical expedients: the option to not separate lease and non-lease components and instead to account for them as a single lease component, and the option to not recognize right-of-use assets and lease liabilities that arise from short-term leases (i.e. lease terms of twelve months or less). In addition, the Company elected the package of practical expedients in transition, which permitted us to not reassess our prior conclusions pertaining to lease identification, lease classification, and initial direct costs on leases that commenced prior to our adoption of the new standard. In connection with the adoption of this ASU, as of January 1, 2019, the Company recorded a $56 million right-of-use asset and a $59 million lease liability on its Consolidated Statements of Financial Condition.
Financial Instruments—Credit Losses (Topic 326)
In June 2016, FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. Current GAAP requires an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The ASU affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial asset not excluded from the scope that have the contractual right to receive cash. The ASU replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The measurement of expected credit losses will be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This ASU broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss, which will be more decision useful to users of the financial statements. This ASU will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is still evaluating the effects this ASU will have on the Company’s Consolidated Financial Statements. The Company has formed an internal committee to oversee the project, engaged a third-party vendor to assist with the project and has completed its gap analysis phase of the project. In addition, the Company has selected a second third-party vendor to assist with building and developing the required models and has completed the initial build out of the required models. The Company has also selected a different third party to provide a reasonable and supportable forecast. Next the Company will begin to incorporate the reasonable and supportable forecast and qualitative factors into the models. Upon adoption, the Company expects changes in the processes and procedures used to calculate the allowance for loan losses, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. The new guidance may result in an increase in the allowance for loan losses which will also reflect the new requirement to include the nonaccretable principal differences on purchased credit-impaired loans; however, the Company is still in the process of determining the magnitude of the change and its impact on the Consolidated Financial Statements. In addition, the current accounting policy and procedures for other-than-temporary impairment on investment securities available-for-sale will be replaced with an allowance approach.
Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20)
In March 2017, FASB issued ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities. The amendments in this ASU shorten the premium amortization period for callable debt securities purchased at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. Under current GAAP, premiums and discounts on callable debt securities generally are amortized to the maturity date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to the maturity date. The amendments in this ASU more closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company adopted this ASU effective January 1, 2019. The adoption of this ASU has not had a material impact on the Company’s Consolidated Financial Statements.
Derivatives and Hedging (Topic 815)
In August 2017, FASB issued ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities. The amendments in this ASU are intended to provide investors better insight into an entity's risk management hedging strategies by permitting a company to recognize the economic results of its hedging strategies in its financial statements. The amendments in this ASU permit hedge accounting for hedging relationships involving nonfinancial risk and interest rate risk by removing certain limitations in cash flow and fair value hedging relationships. In addition, the ASU requires an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. This ASU is effective for fiscal years beginning after December 15, 2018. Adoption of ASU 2017-12 did not have a material impact on the Company's Consolidated Financial Statements.
Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40)
In August 2018, FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this ASU broaden the scope of ASC Subtopic 350-40 to include costs incurred to implement a hosting arrangement that is a service contract. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The costs are capitalized or expensed depending on the nature of the costs and the project stage during which they are incurred, consistent with the accounting for costs for internal-use software. The amendments in this ASU result in consistent capitalization of implementation costs of a hosting arrangement that is a service contract and implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU. This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The amendments in this ASU should be applied either retrospectively to all implementation costs incurred after the date of adoption. Adoption of ASU 2018-15 is not expected to have a material impact on the Company’s Consolidated Financial Statements.
Fair Value Measurement (Topic 820)
In August 2018, FASB issued ASU 2018-13, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The ASU removes, modifies and adds disclosure requirements in Topic 820. The following disclosure requirements were removed: 1) the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, 2) the policy for timing of transfers between levels, and 3) the valuation processes for Level 3 fair value measurements. This ASU modified disclosure requirements by requiring: that the measurement uncertainty disclosure communicates information about the uncertainty in measurement as of the reporting date. The following disclosure requirements were added: 1) changes in unrealized gains and losses for the period included in other comprehensive income for the recurring Level 3 fair value measurements held at the end of the reporting period, and 2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. Adoption of ASU 2018-13 is not expected to have a material impact on the Company’s Consolidated Financial Statements.
NOTE 3: BUSINESS COMBINATION
Acquisition of Skagit Bancorp, Inc.
Effective as of the close of business on November 1, 2018, the Company acquired 100% of the outstanding common shares of Skagit Bancorp, Inc. (“Skagit”) and its wholly-owned subsidiary, Skagit Bank, a Washington State chartered commercial bank headquartered in Burlington, Washington, with 11 branches serving markets along the I-5 corridor from Seattle to the Canadian border. On that date, Skagit merged with and into Banner and Skagit Bank merged with and into Banner Bank. Pursuant to the previously announced terms of the merger, the equity holders of Skagit received an aggregate of 3.1 million shares of Banner voting common stock, plus cash in lieu of fractional shares and to cancel Skagit stock options for total consideration paid of $180.0 million. The acquisition provided $915.8 million in assets, $810.2 million in deposits and $632.4 million in loans to Banner.
The application of the acquisition method of accounting resulted in recognition of a CDI asset of $16.4 million and goodwill of $96.5 million. The acquired CDI has been determined to have a useful life of approximately nine 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):
|
| | | | | | |
| Skagit |
| November 1, 2018 |
Consideration to Skagit equity holders: | | |
Cash paid | | $ | 329 |
|
Fair value of common shares issued | | 179,709 |
|
Total consideration | | $ | 180,038 |
|
| | |
Fair value of assets acquired: | | |
Cash and cash equivalents | $ | 19,167 |
| |
Securities | 210,326 |
| |
Loans receivable (contractual amount of $645.6 million) | 632,374 |
| |
Real estate owned held for sale | 2,593 |
| |
Property and equipment | 15,788 |
| |
Core deposit intangible | 16,368 |
| |
Deferred tax asset | 95 |
| |
Other assets | 19,110 |
| |
Total assets acquired | 915,821 |
| |
| | |
Fair value of liabilities assumed: | | |
Deposits | 810,209 |
| |
Other liabilities | 22,069 |
| |
Total liabilities assumed | 832,278 |
| |
| | |
Net assets acquired | | 83,543 |
|
Goodwill | | $ | 96,495 |
|
Acquired goodwill represents the premium the Company paid over the fair value of the net tangible and intangible assets acquired. The primary reason for the acquisition was to expand the Company’s presence and density in the North Sound region of the Pacific Northwest along the I-5 corridor. 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 existing markets. See Note 7, Goodwill, Other Intangible Assets and Mortgage Servicing Rights for the accounting for goodwill and other intangible assets.
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. Additional adjustments to the acquisition accounting that may be required would most likely involve loans, property and equipment, or the deferred tax asset. As of November 1, 2018, the unpaid principal balance on purchased non-credit-impaired loans was $637.4 million. The fair value of the purchased non-credit-impaired loans was $625.2 million, resulting in a discount of $12.2 million recorded on these loans, which includes $7.9 million of a credit related discount. This discount is being accreted into income over the life of the loans on an effective yield basis.
The following table presents the acquired PCI loans as of the acquisition date (in thousands):
|
| | | |
| Skagit |
| November 1, 2018 |
Acquired PCI loans: | |
Contractually required principal and interest payments | $ | 9,897 |
|
Nonaccretable difference | (1,915 | ) |
Cash flows expected to be collected | 7,982 |
|
Accretable yield | (995 | ) |
Fair value of PCI loans | $ | 6,987 |
|
The operating results of the Company include the operating results produced by the acquired assets and assumed liabilities of Skagit for the period since November 2, 2018. Disclosure of the amount of Skagit’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. The pro forma impact of the Skagit acquisition to the historical financial results was determined to not be significant.
Note 4: SECURITIES
The amortized cost, gross unrealized gains and losses and estimated fair value of securities at March 31, 2019 and December 31, 2018 are summarized as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| March 31, 2019 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Trading: | | | | | | | |
Corporate bonds | $ | 27,203 |
| | | | | | $ | 25,838 |
|
| $ | 27,203 |
| | | | | | $ | 25,838 |
|
Available-for-Sale: | | | | | | | |
U.S. Government and agency obligations | $ | 139,621 |
| | $ | 134 |
| | $ | (1,440 | ) | | $ | 138,315 |
|
Municipal bonds | 116,954 |
| | 3,288 |
| | (187 | ) | | 120,055 |
|
Corporate bonds | 4,057 |
| | 4 |
| | (17 | ) | | 4,044 |
|
Mortgage-backed or related securities | 1,320,826 |
| | 10,952 |
| | (8,201 | ) | | 1,323,577 |
|
Asset-backed securities | 17,889 |
| | 5 |
| | (81 | ) | | 17,813 |
|
| $ | 1,599,347 |
| | $ | 14,383 |
| | $ | (9,926 | ) | | $ | 1,603,804 |
|
Held-to-Maturity: | | | | | | | |
U.S. Government and agency obligations | $ | 389 |
| | $ | 3 |
| | $ | — |
| | $ | 392 |
|
Municipal bonds | 163,614 |
| | 2,527 |
| | (1,248 | ) | | 164,893 |
|
Corporate bonds | 3,701 |
| | — |
| | (13 | ) | | 3,688 |
|
Mortgage-backed or related securities | 51,289 |
| | 151 |
| | (301 | ) | | 51,139 |
|
| $ | 218,993 |
| | $ | 2,681 |
| | $ | (1,562 | ) | | $ | 220,112 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2018 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Trading: | | | | | | | |
Corporate bonds | $ | 27,203 |
| | | | | | $ | 25,896 |
|
| $ | 27,203 |
| | | | | | $ | 25,896 |
|
Available-for-Sale: | | | | | | | |
U.S. Government and agency obligations | $ | 151,012 |
| | $ | 149 |
| | $ | (2,049 | ) | | $ | 149,112 |
|
Municipal bonds | 116,548 |
| | 1,806 |
| | (532 | ) | | 117,822 |
|
Corporate bonds | 3,556 |
| | — |
| | (61 | ) | | 3,495 |
|
Mortgage-backed or related securities | 1,355,258 |
| | 5,210 |
| | (16,607 | ) | | 1,343,861 |
|
Asset-backed securities | 22,047 |
| | 6 |
| | (120 | ) | | 21,933 |
|
| $ | 1,648,421 |
| | $ | 7,171 |
| | $ | (19,369 | ) | | $ | 1,636,223 |
|
Held-to-Maturity: | | | | | | | |
U.S. Government and agency obligations | $ | 1,006 |
| | $ | 14 |
| | $ | (1 | ) | | $ | 1,019 |
|
Municipal bonds | 176,663 |
| | 1,727 |
| | (2,578 | ) | | 175,812 |
|
Corporate bonds | 3,736 |
| | — |
| | (13 | ) | | 3,723 |
|
Mortgage-backed or related securities | 52,815 |
| | 66 |
| | (898 | ) | | 51,983 |
|
| $ | 234,220 |
| | $ | 1,807 |
| | $ | (3,490 | ) | | $ | 232,537 |
|
At March 31, 2019 and December 31, 2018, the gross unrealized losses and the fair value for securities available-for-sale and held-to-maturity aggregated by the length of time that individual securities have been in a continuous unrealized loss position were as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2019 |
| Less Than 12 Months | | 12 Months or More | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Available-for-Sale: | | | | | | | | | | | |
U.S. Government and agency obligations | $ | 713 |
| | $ | (4 | ) | | $ | 120,227 |
| | $ | (1,436 | ) | | $ | 120,940 |
| | $ | (1,440 | ) |
Municipal bonds | 753 |
| | (3 | ) | | 23,686 |
| | (184 | ) | | 24,439 |
| | (187 | ) |
Corporate bonds | 2,344 |
| | (14 | ) | | 297 |
| | (3 | ) | | 2,641 |
| | (17 | ) |
Mortgage-backed or related securities | 42,354 |
| | (203 | ) | | 608,455 |
| | (7,998 | ) | | 650,809 |
| | (8,201 | ) |
Asset-backed securities | 6,861 |
| | (32 | ) | | 9,956 |
| | (49 | ) | | 16,817 |
| | (81 | ) |
| $ | 53,025 |
| | $ | (256 | ) | | $ | 762,621 |
| | $ | (9,670 | ) | | $ | 815,646 |
| | $ | (9,926 | ) |
Held-to-Maturity | | | | | | | | | | | |
Municipal bonds | $ | 915 |
| | $ | (1 | ) | | $ | 42,524 |
| | $ | (1,247 | ) | | $ | 43,439 |
| | $ | (1,248 | ) |
Corporate bonds | — |
| | — |
| | 488 |
| | (13 | ) | | 488 |
| | (13 | ) |
Mortgage-backed or related securities | 1,037 |
| | (7 | ) | | 32,991 |
| | (294 | ) | | 34,028 |
| | (301 | ) |
| $ | 1,952 |
| | $ | (8 | ) | | $ | 76,003 |
| | $ | (1,554 | ) | | $ | 77,955 |
| | $ | (1,562 | ) |
| | | | | | | | | | | |
| December 31, 2018 |
| Less Than 12 Months | | 12 Months or More | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Available-for-Sale: | | | | | | | | | | | |
U.S. Government and agency obligations | $ | 75,885 |
| | $ | (1,240 | ) | | $ | 50,508 |
| | $ | (809 | ) | | $ | 126,393 |
| | $ | (2,049 | ) |
Municipal bonds | 6,422 |
| | (54 | ) | | 27,231 |
| | (478 | ) | | 33,653 |
| | (532 | ) |
Corporate bonds | 3,199 |
| | (56 | ) | | 295 |
| | (5 | ) | | 3,494 |
| | (61 | ) |
Mortgage-backed or related securities | 316,074 |
| | (2,939 | ) | | 571,989 |
| | (13,668 | ) | | 888,063 |
| | (16,607 | ) |
Asset-backed securities | 10,582 |
| | (24 | ) | | 9,913 |
| | (96 | ) | | 20,495 |
| | (120 | ) |
| $ | 412,162 |
| | $ | (4,313 | ) | | $ | 659,936 |
| | $ | (15,056 | ) | | $ | 1,072,098 |
| | $ | (19,369 | ) |
Held-to-Maturity | | | | | | | | | | | |
U.S. Government and agency obligations | $ | 145 |
| | $ | (1 | ) | | $ | — |
| | $ | — |
| | $ | 145 |
| | $ | (1 | ) |
Municipal bonds | 29,898 |
| | (274 | ) | | 44,637 |
| | (2,304 | ) | | 74,535 |
| | (2,578 | ) |
Corporate bonds | — |
| | — |
| | 487 |
| | (13 | ) | | 487 |
| | (13 | ) |
Mortgage-backed or related securities | 10,761 |
| | (220 | ) | | 30,035 |
| | (678 | ) | | 40,796 |
| | (898 | ) |
| $ | 40,804 |
| | $ | (495 | ) | | $ | 75,159 |
| | $ | (2,995 | ) | | $ | 115,963 |
| | $ | (3,490 | ) |
At March 31, 2019, there were 233 securities—available-for-sale with unrealized losses, compared to 271 at December 31, 2018. At March 31, 2019, there were 49 securities—held-to-maturity with unrealized losses, compared to 90 at December 31, 2018. Management does not believe that any individual unrealized loss as of March 31, 2019 or December 31, 2018 represented other-than-temporary impairment (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 sales of securities—trading during the three-month periods ended March 31, 2019 or 2018. The Company did not recognize any OTTI charges or recoveries on securities—trading during the three-month periods ended March 31, 2019 or 2018. There were no securities—trading in a nonaccrual status at March 31, 2019 or December 31, 2018. Net unrealized holding losses of $58,000 were recognized during the three months ended March 31, 2019 compared to $3.4 million of net unrealized holdings gains recognized during the three months ended March 31, 2018.
There was one sale of securities—available-for-sale during the three months ended March 31, 2019, with a net gain of $1,000. There were no sales of securities—available-for-sale during the three months ended March 31, 2018, although partial calls of securities resulted in a net gain
of $4,000 for the three months ended March 31, 2018. There were no securities—available-for-sale in a nonaccrual status at March 31, 2019 or December 31, 2018.
There were no sales of securities—held-to-maturity during the three-month periods ended March 31, 2019 and 2018. There were no securities—held-to-maturity in a nonaccrual status at March 31, 2019 or December 31, 2018.
The amortized cost and estimated fair value of securities at March 31, 2019, by contractual maturity, are shown below (in thousands). Expected maturities will differ from contractual maturities because some securities may be called or prepaid with or without call or prepayment penalties.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2019 |
| Trading | | Available-for-Sale | | Held-to-Maturity |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Maturing in one year or less | $ | — |
| | $ | — |
| | $ | 6,520 |
| | $ | 6,514 |
| | $ | 2,869 |
| | $ | 2,865 |
|
Maturing after one year through five years | — |
| | — |
| | 86,092 |
| | 86,474 |
| | 61,698 |
| | 61,839 |
|
Maturing after five years through ten years | — |
| | — |
| | 382,934 |
| | 386,318 |
| | 57,947 |
| | 58,934 |
|
Maturing after ten years through twenty years | 27,203 |
| | 25,838 |
| | 198,705 |
| | 201,247 |
| | 62,540 |
| | 63,667 |
|
Maturing after twenty years | — |
| | — |
| | 925,096 |
| | 923,251 |
| | 33,939 |
| | 32,807 |
|
| $ | 27,203 |
| | $ | 25,838 |
| | $ | 1,599,347 |
| | $ | 1,603,804 |
| | $ | 218,993 |
| | $ | 220,112 |
|
The following table presents, as of March 31, 2019, investment securities which were pledged to secure borrowings, public deposits or other obligations as permitted or required by law (in thousands):
|
| | | | | | | | | | | |
| March 31, 2019 |
| Carrying Value | | Amortized Cost | | Fair Value |
Purpose or beneficiary: | | | | | |
State and local governments public deposits | $ | 149,193 |
| | $ | 149,306 |
| | $ | 150,815 |
|
Interest rate swap counterparties | 10,835 |
| | 10,931 |
| | 10,895 |
|
Repurchase agreements | 150,783 |
| | 150,027 |
| | 150,783 |
|
Other | 2,739 |
| | 2,739 |
| | 2,678 |
|
Total pledged securities | $ | 313,550 |
| | $ | 313,003 |
| | $ | 315,171 |
|
Note 5: LOANS RECEIVABLE AND THE ALLOWANCE FOR LOAN LOSSES
Loans receivable at March 31, 2019 and December 31, 2018 are summarized as follows (dollars in thousands):
|
| | | | | | | | | | | | | |
| March 31, 2019 | | December 31, 2018 |
| Amount | | Percent of Total | | Amount | | Percent of Total |
Commercial real estate: | | | | | | | |
Owner-occupied | $ | 1,442,724 |
| | 16.6 | % | | $ | 1,430,097 |
| | 16.4 | % |
Investment properties | 2,124,049 |
| | 24.4 |
| | 2,131,059 |
| | 24.5 |
|
Multifamily real estate | 387,142 |
| | 4.5 |
| | 368,836 |
| | 4.2 |
|
Commercial construction | 181,888 |
| | 2.1 |
| | 172,410 |
| | 2.0 |
|
Multifamily construction | 183,203 |
| | 2.1 |
| | 184,630 |
| | 2.1 |
|
One- to four-family construction | 514,468 |
| | 5.9 |
| | 534,678 |
| | 6.2 |
|
Land and land development: | |
| | | | |
| | |
Residential | 187,660 |
| | 2.2 |
| | 188,508 |
| | 2.2 |
|
Commercial | 28,928 |
| | 0.3 |
| | 27,278 |
| | 0.3 |
|
Commercial business | 1,524,298 |
| | 17.5 |
| | 1,483,614 |
| | 17.1 |
|
Agricultural business, including secured by farmland | 373,322 |
| | 4.3 |
| | 404,873 |
| | 4.7 |
|
One- to four-family residential | 967,581 |
| | 11.1 |
| | 973,616 |
| | 11.2 |
|
Consumer: | | | | | | | |
Consumer secured by one- to four-family | 564,872 |
| | 6.5 |
| | 568,979 |
| | 6.6 |
|
Consumer—other | 212,522 |
| | 2.5 |
| | 216,017 |
| | 2.5 |
|
Total loans | 8,692,657 |
| | 100.0 | % | | 8,684,595 |
| | 100.0 | % |
Less allowance for loan losses | (97,308 | ) | | |
| | (96,485 | ) | | |
|
Net loans | $ | 8,595,349 |
| | |
| | $ | 8,588,110 |
| | |
|
Loan amounts are net of unearned loan fees in excess of unamortized costs of $724,000 as of March 31, 2019 and $1.4 million as of December 31, 2018. Net loans include net discounts on acquired loans of $24.2 million and $25.7 million as of March 31, 2019 and December 31, 2018, respectively.
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 (PCI) or purchased non-credit-impaired. PCI 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 PCI loans, excluding acquisition accounting adjustments, was $20.7 million at March 31, 2019 and $22.0 million at December 31, 2018. The carrying balance of PCI loans was $13.3 million at March 31, 2019 and $14.4 million at December 31, 2018.
The following table presents the changes in the accretable yield for PCI loans for the three months ended March 31, 2019 and 2018 (in thousands):
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
Balance, beginning of period | $ | 5,216 |
| | $ | 6,520 |
|
Accretion to interest income | (493 | ) | | (1,097 | ) |
Disposals | — |
| | 58 |
|
Reclassifications from non-accretable difference | 55 |
| | 807 |
|
Balance, end of period | $ | 4,778 |
| | $ | 6,288 |
|
As of March 31, 2019 and December 31, 2018, the non-accretable difference between the contractually required payments and cash flows expected to be collected was $6.5 million and $7.1 million, respectively.
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 restructurings (TDRs) that are performing under their restructured terms, and loans that are 90 days or more past due, but are still on accrual. PCI loans are considered performing within the scope of the purchased credit-impaired accounting guidance and are not included in the impaired loan tables.
The following tables provide information on impaired loans, excluding PCI loans, with and without allowance reserves at March 31, 2019 and December 31, 2018. Recorded investment includes the unpaid principal balance or the carrying amount of loans less charge-offs and net deferred loan fees (in thousands):
|
| | | | | | | | | | | | | | | |
| March 31, 2019 |
| Unpaid Principal Balance | | Recorded Investment | | Related Allowance |
| | Without Allowance (1) | | With Allowance (2) | |
Commercial real estate: | | | | | | | |
Owner-occupied | $ | 3,771 |
| | $ | 3,345 |
| | $ | 200 |
| | $ | 21 |
|
Investment properties | 8,624 |
| | 2,388 |
| | 5,574 |
| | 219 |
|
Multifamily construction | 1,901 |
| | 1,427 |
| | — |
| | — |
|
One- to four-family construction | 919 |
| | 919 |
| | — |
| | — |
|
Land and land development: | | | | | | | |
Residential | 1,026 |
| | 690 |
| | — |
| | — |
|
Commercial business | 4,948 |
| | 3,615 |
| | 393 |
| | 12 |
|
Agricultural business/farmland | 5,619 |
| | 2,507 |
| | 2,561 |
| | 66 |
|
One- to four-family residential | 6,335 |
| | 3,961 |
| | 2,333 |
| | 59 |
|
Consumer: | | | | | | | |
Consumer secured by one- to four-family | 2,130 |
| | 1,948 |
| | 132 |
| | 5 |
|
Consumer—other | 345 |
| | 275 |
| | 61 |
| | 3 |
|
| $ | 35,618 |
| | $ | 21,075 |
| | $ | 11,254 |
| | $ | 385 |
|
| | | | | | | |
| December 31, 2018 |
| Unpaid Principal Balance | | Recorded Investment | | Related Allowance |
| | Without Allowance (1) | | With Allowance (2) | |
Commercial real estate: | | | | | | | |
Owner-occupied | $ | 3,193 |
| | $ | 2,768 |
| | $ | 200 |
| | $ | 19 |
|
Investment properties | 7,287 |
| | 1,320 |
| | 5,606 |
| | 226 |
|
Multifamily real estate | 1,901 |
| | 1,427 |
| | — |
| | — |
|
One- to four-family construction | 919 |
| | 919 |
| | — |
| | — |
|
Land and land development: | | | | | | | |
Residential | 1,134 |
| | 798 |
| | — |
| | — |
|
Commercial | 44 |
| | 44 |
| | — |
| | — |
|
Commercial business | 4,014 |
| | 2,937 |
| | 391 |
| | 16 |
|
Agricultural business/farmland | 4,863 |
| | 1,751 |
| | 2,561 |
| | 96 |
|
One- to four-family residential | 6,724 |
| | 4,314 |
| | 2,358 |
| | 51 |
|
Consumer: | | | | | | | |
Consumer secured by one- to four-family | 1,622 |
| | 1,438 |
| | 133 |
| | 6 |
|
Consumer—other | 112 |
| | 49 |
| | 62 |
| | 2 |
|
| $ | 31,813 |
| | $ | 17,765 |
| | $ | 11,311 |
| | $ | 416 |
|
| |
(1) | Includes loans without an allowance reserve that have been individually evaluated for impairment and that evaluation concluded that no reserve was needed, and $10.6 million and $9.0 million, respectively, of homogenous and small balance loans as of March 31, 2019 and December 31, 2018, that are collectively evaluated for impairment for which a general reserve has been established. |
| |
(2) | 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 table summarizes our average recorded investment and interest income recognized on impaired loans by loan class for the three months ended March 31, 2019 and 2018 (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2019 | | Three Months Ended March 31, 2018 |
| Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized |
Commercial real estate: | | | | | | | |
Owner-occupied | $ | 3,451 |
| | $ | 2 |
| | $ | 5,383 |
| | $ | 3 |
|
Investment properties | 7,227 |
| | 76 |
| | 9,972 |
| | 83 |
|
Commercial construction | 1,427 |
| | — |
| | — |
| | — |
|
One- to four-family construction | 919 |
| | — |
| | 605 |
| | 4 |
|
Land and land development: | | | | | | | |
Residential | 726 |
| | — |
| | 798 |
| | — |
|
Commercial business | 3,803 |
| | 5 |
| | 4,007 |
| | 7 |
|
Agricultural business/farmland | 5,117 |
| | 27 |
| | 9,109 |
| | 33 |
|
One- to four-family residential | 6,446 |
| | 65 |
| | 8,892 |
| | 101 |
|
Consumer: | | | | | | | |
Consumer secured by one- to four-family | 2,063 |
| | 5 |
| | 1,390 |
| | 2 |
|
Consumer—other | 319 |
| | 1 |
| | 149 |
| | 1 |
|
| $ | 31,498 |
| | $ | 181 |
| | $ | 40,305 |
| | $ | 234 |
|
Troubled Debt Restructurings. Some of the Company’s loans are reported as TDRs. Loans are reported as TDRs when the bank grants one or more concessions to a borrower experiencing financial difficulties that it would not otherwise consider. Examples of such concessions include forgiveness of principal or accrued interest, extending the maturity date(s) or providing a lower interest rate than would be normally available for a transaction of similar risk. Our TDRs have generally not involved forgiveness of amounts due, but almost always include a modification of multiple factors; the most common combination includes interest rate, payment amount and maturity date. As a result of these concessions, restructured loans are impaired as the Company will not collect all amounts due, both principal and interest, in accordance with the terms of the original loan agreement. Loans identified as TDRs are accounted for in accordance with the Company's impaired loan accounting policies.
The following table presents TDRs by accrual and nonaccrual status at March 31, 2019 and December 31, 2018 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2019 | | December 31, 2018 |
| Accrual Status | | Nonaccrual Status | | Total TDRs | | Accrual Status | | Nonaccrual Status | | Total TDRs |
Commercial real estate: | | | | | | | | | | | |
Owner-occupied | $ | 200 |
| | $ | 76 |
| | $ | 276 |
| | $ | 200 |
| | $ | 78 |
| | $ | 278 |
|
Investment properties | 5,574 |
| | 1,090 |
| | 6,664 |
| | 5,606 |
| | — |
| | 5,606 |
|
Commercial business | 392 |
| | — |
| | 392 |
| | 391 |
| | — |
| | 391 |
|
Agricultural business, including secured by farmland | 2,561 |
| | — |
| | 2,561 |
| | 2,561 |
| | — |
| | 2,561 |
|
One- to four-family residential | 4,116 |
| | 239 |
| | 4,355 |
| | 4,469 |
| | 239 |
| | 4,708 |
|
Consumer: | | | | | | | | | | | |
Consumer secured by one- to four-family | 132 |
| | — |
| | 132 |
| | 133 |
| | — |
| | 133 |
|
Consumer—other | 61 |
| | — |
| | 61 |
| | 62 |
| | — |
| | 62 |
|
| $ | 13,036 |
| | $ | 1,405 |
| | $ | 14,441 |
| | $ | 13,422 |
| | $ | 317 |
| | $ | 13,739 |
|
As of March 31, 2019 and December 31, 2018, the Company had commitments to advance additional funds related to TDRs up to $49,000 and none, respectively.
One new TDR occurred during the three months ended March 31, 2019 and none during the three months ended March 31, 2018 (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2019 | | Three Months Ended March 31, 2018 |
| Number of Contracts | | Pre-modification Outstanding Recorded Investment | | Post-modification Outstanding Recorded Investment | | Number of Contracts | | Pre- modification Outstanding Recorded Investment | | Post- modification Outstanding Recorded Investment |
Recorded Investment | | | | | | | | | | | |
Commercial real estate | | | | | | | | | | | |
Investment properties | 1 |
| | $ | 1,090 |
| | $ | 1,090 |
| |
|
| | $ | — |
| | $ | — |
|
Total | 1 |
| | $ | 1,090 |
| | $ | 1,090 |
| | — |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | |
There were no TDRs which incurred a payment default within twelve months of the restructure date during the three-month periods ended March 31, 2019 and 2018. A default on a TDR results in either a transfer to nonaccrual status or a partial charge-off, or both.
Credit Quality Indicators: To appropriately and effectively manage the ongoing credit quality of the Company’s loan portfolio, management has implemented a risk-rating or loan grading system for its loans. The system is a tool to evaluate portfolio asset quality throughout each applicable loan’s life as an asset of the Company. Generally, loans and leases are risk rated on an aggregate borrower/relationship basis with individual loans sharing similar ratings. There are some instances when specific situations relating to individual loans will provide the basis for different risk ratings within the aggregate relationship. Loans are graded on a scale of 1 to 9. A description of the general characteristics of these categories is shown below:
Overall Risk Rating Definitions: Risk-ratings contain both qualitative and quantitative measurements and take into account the financial strength of a borrower and the structure of the loan or lease. Consequently, the definitions are to be applied in the context of each lending transaction and judgment must also be used to determine the appropriate risk rating, as it is not unusual for a loan or lease to exhibit characteristics of more than one risk-rating category. Consideration for the final rating is centered in the borrower’s ability to repay, in a timely fashion, both principal and interest. There were no material changes in the risk-rating or loan grading system in the three months ended March 31, 2019.
Risk Rating 1: Exceptional
A credit supported by exceptional financial strength, stability, and liquidity. The risk rating of 1 is reserved for the Company’s top quality loans, generally reserved for investment grade credits underwritten to the standards of institutional credit providers.
Risk Rating 2: Excellent
A credit supported by excellent financial strength, stability and liquidity. The risk rating of 2 is reserved for very strong and highly stable customers with ready access to alternative financing sources.
Risk Rating 3: Strong
A credit supported by good overall financial strength and stability. Collateral margins are strong; cash flow is stable although susceptible to cyclical market changes.
Risk Rating 4: Acceptable
A credit supported by the borrower’s adequate financial strength and stability. Assets and cash flow are reasonably sound and provide for orderly debt reduction. Access to alternative financing sources will be more difficult to obtain.
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