BANR-9.30.2013-10Q


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

FORM 10-Q 
(Mark One)

[X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2013.
OR
[   ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ to ______________

 Commission File Number 0-26584

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

 
 
 
 
 
 
 
 
 
 
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  [  ]
Accelerated filer    [x]
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, 2013
Common Stock, $.01 par value per share
 
19,543,769 shares *
 
*  Includes 34,340 shares held by the Employee Stock Ownership Plan that have not been released, committed to be released, or allocated to participant accounts.
 
 

1


BANNER CORPORATION AND SUBSIDIARIES

Table of Contents
PART I - FINANCIAL INFORMATION
 
 
 
Item 1 - Financial Statements.  The 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, 2013 and December 31, 2012
 
 
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2013 and 2012
 
 
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2013 and 2012
 
 
Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2013 and the Year Ended December 31, 2012
 
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012
 
 
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, 2013 and December 31, 2012
 
 
Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2013 and 2012
 
 
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 concerning our future operations.  These statements relate to our financial condition, liquidity, results of operations, plans, objectives, future performance or business.  Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.”  Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future economic performance and projections of financial items.  These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated or implied by our forward-looking statements, including, but not limited to: the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets and may lead to increased losses and nonperforming assets, and may result in our allowance for loan losses not being adequate to cover actual losses and require us to materially increase our reserves; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates and the relative differences between short and long-term interest rates, loan and deposit interest rates, our net interest margin and funding sources; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; secondary market conditions for loans and our ability to sell loans in the secondary market; results of examinations of us by the Board of Governors of the Federal Reserve System (the Federal Reserve Board) and of our bank subsidiaries by the Federal Deposit Insurance Corporation (the FDIC), the Washington State Department of Financial Institutions, Division of Banks (the Washington DFI) or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, institute a formal or informal enforcement action against us or any of our bank subsidiaries which could require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds, or maintain or increase deposits, or impose additional requirements and restrictions on us, any of which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules including changes related to Basel III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the implementing regulations; our ability to attract and retain deposits; increases in premiums for deposit insurance; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets and liabilities, which estimates may prove to be incorrect and result in significant changes in valuation; difficulties in reducing risk associated with the loans on our balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; the failure or security breach of computer systems on which we depend; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our business strategies; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; our ability to manage loan delinquency rates; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; our ability to pay dividends on our common stock and interest or principal payments on our junior subordinated debentures; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the economic impact of war or any terrorist activities; other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and other risks detailed from time to time in our filings with the Securities and Exchange Commission.  Any forward-looking statements are based upon management’s beliefs and assumptions at the time they are made.  We do not undertake and specifically disclaim any obligation to update any forward-looking statements included in this report or the reasons why actual results could differ from those contained in such statements whether as a result of new information, future events or otherwise.  These risks could cause our actual results to differ materially from those expressed in any forward-looking statements by, or on behalf of, us.  In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur, and you should not put undue reliance on any forward-looking statements.

As used throughout this report, the terms “we,” “our,” “us,” or the “Company” refer to Banner Corporation and its consolidated subsidiaries, unless the context otherwise requires.

3


BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited) (In thousands, except shares)
September 30, 2013 and December 31, 2012
ASSETS
September 30
2013

 
December 31
2012

Cash and due from banks
$
175,965

 
$
181,298

Securities—trading, amortized cost $76,525 and $90,339, respectively
63,887

 
71,232

Securities—available-for-sale, amortized cost $481,867 and $469,650, respectively
477,407

 
472,920

Securities—held-to-maturity, fair value $98,401 and $92,458, respectively
96,545

 
86,452

Federal Home Loan Bank (FHLB) stock
35,708

 
36,705

Loans receivable:
 
 
 
Held for sale
8,394

 
11,920

Held for portfolio
3,267,042

 
3,223,794

Allowance for loan losses
(76,657
)
 
(77,491
)
 
3,198,779

 
3,158,223

Accrued interest receivable
15,164

 
13,930

Real estate owned (REO), held for sale, net
4,818

 
15,778

Property and equipment, net
89,092

 
89,117

Intangible assets, net
2,937

 
4,230

Bank-owned life insurance (BOLI)
61,442

 
59,891

Deferred tax assets, net
26,070

 
35,007

Income tax receivable
10,964

 

Other assets
23,775

 
40,781

 
$
4,282,553

 
$
4,265,564

LIABILITIES
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
1,051,831

 
$
981,240

Interest-bearing transaction and savings accounts
1,583,430

 
1,547,271

Interest-bearing certificates
900,024

 
1,029,293

 
3,535,285

 
3,557,804

Advances from FHLB at fair value
20,258

 
10,304

Other borrowings
82,909

 
76,633

Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities)
73,637

 
73,063

Accrued expenses and other liabilities
24,830

 
26,389

Deferred compensation
15,642

 
14,452

 
3,752,561

 
3,758,645

COMMITMENTS AND CONTINGENCIES (Note 15)

 

STOCKHOLDERS’ EQUITY
 
 
 
Common stock and paid in capital - $0.01 par value per share, 50,000,000 shares authorized, 19,543,050 shares issued and 19,508,710 shares outstanding at September 30, 2013; 19,454,965 shares issued and 19,420,625 shares outstanding at December 31, 2012
568,535

 
567,907

Accumulated deficit
(33,701
)
 
(61,102
)
Accumulated other comprehensive (loss) income
(2,855
)
 
2,101

Unearned shares of common stock issued to Employee Stock Ownership Plan (ESOP) trust at cost: 34,340 restricted shares outstanding at September 30, 2013 and December 31, 2012
(1,987
)
 
(1,987
)
 
529,992

 
506,919

 
$
4,282,553

 
$
4,265,564

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, 2013 and 2012
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2013

 
2012

 
2013

 
2012

INTEREST INCOME:
 
 
 
 
 
 
 
Loans receivable
$
41,953

 
$
43,953

 
$
125,734

 
$
131,981

Mortgage-backed securities
1,281

 
1,089

 
3,847

 
3,011

Securities and cash equivalents
1,803

 
2,132

 
5,535

 
6,645

 
45,037

 
47,174

 
135,116

 
141,637

INTEREST EXPENSE:
 
 
 
 
 
 
 
Deposits
2,330

 
3,536

 
7,539

 
12,019

FHLB advances
28

 
64

 
92

 
191

Other borrowings
44

 
71

 
151

 
694

Junior subordinated debentures
742

 
805

 
2,225

 
2,619

 
3,144

 
4,476

 
10,007

 
15,523

Net interest income before provision for loan losses
41,893

 
42,698

 
125,109

 
126,114

PROVISION FOR LOAN LOSSES

 
3,000

 

 
12,000

Net interest income
41,893

 
39,698

 
125,109

 
114,114

OTHER OPERATING INCOME:
 
 
 
 
 
 
 
Deposit fees and other service charges
6,982

 
6,681

 
19,911

 
18,833

Mortgage banking operations
2,590

 
3,774

 
9,002

 
9,838

Miscellaneous
920

 
1,146

 
2,375

 
2,182

 
10,492

 
11,601

 
31,288

 
30,853

Gain on sale of securities
2

 
19

 
1,020

 
48

Other-than-temporary impairment recovery (loss)

 
(409
)
 
409

 
(409
)
Net change in valuation of financial instruments carried at fair value
(352
)
 
473

 
(1,954
)
 
(16,901
)
Total other operating income
10,142

 
11,684

 
30,763

 
13,591

OTHER OPERATING EXPENSES:
 
 
 
 
 
 
 
Salary and employee benefits
21,244

 
19,614

 
63,197

 
58,514

Less capitalized loan origination costs
(2,915
)
 
(2,655
)
 
(8,856
)
 
(7,652
)
Occupancy and equipment
5,317

 
5,811

 
16,061

 
16,492

Information/computer data services
1,710

 
1,807

 
5,353

 
5,068

Payment and card processing expenses
2,530

 
2,335

 
7,284

 
6,341

Professional services
1,074

 
993

 
2,799

 
3,561

Advertising and marketing
1,556

 
1,897

 
4,853

 
5,613

Deposit insurance
564

 
791

 
1,826

 
2,970

State/municipal business and use taxes
461

 
582

 
1,463

 
1,715

REO operations
(601
)
 
(1,304
)
 
(1,047
)
 
3,263

Amortization of core deposit intangibles
471

 
508

 
1,453

 
1,583

Miscellaneous
3,079

 
2,976

 
9,660

 
9,466

Total other operating expenses
34,490

 
33,355

 
104,046

 
106,934

Income before provision for income taxes
17,545

 
18,027

 
51,826

 
20,771

PROVISION FOR (BENEFIT FROM) INCOME TAXES
5,880

 
2,407

 
16,825

 
(29,423
)
NET INCOME
11,665

 
15,620

 
35,001

 
50,194

PREFERRED STOCK DIVIDEND, DISCOUNT ACCRETION AND GAINS
 
 
 
 
 
 
 
Preferred stock dividend

 
1,227

 

 
4,327

Preferred stock discount accretion

 
1,216

 

 
2,124

Gain on repurchase of preferred stock

 
(2,070
)
 

 
(2,070
)
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
$
11,665

 
$
15,247

 
$
35,001

 
$
45,813

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.60

 
$
0.80

 
$
1.81

 
$
2.49

Diluted
$
0.60

 
$
0.79

 
$
1.80

 
$
2.48

Cumulative dividends declared per common share
$
0.15

 
$
0.01

 
$
0.39

 
$
0.03

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, 2013 and 2012

 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2013

 
2012

 
2013

 
2012

NET INCOME
$
11,665

 
$
15,620

 
$
35,001

 
$
50,194

OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES:
 
 
 
 
 
 
 
Unrealized holding gain (loss) on AFS securities arising during the period
1,239

 
641

 
(7,615
)
 
476

Income tax benefit (expense) related to AFS unrealized holding gains (losses)
(446
)
 
(225
)
 
2,733

 
(165
)
Reclassification for net (gains) losses on AFS securities realized in earnings

 
9

 
(116
)
 
38

Income tax benefit (expense) related to net gains (losses) on AFS securities realized in losses

 
(3
)
 
42

 
(14
)
Amortization of unrealized gain on tax exempt securities transferred from available-for-sale to held-to-maturity

 
2

 

 
7

Other comprehensive income (loss)
793

 
424

 
(4,956
)
 
342

COMPREHENSIVE INCOME
$
12,458

 
$
16,044

 
$
30,045

 
$
50,536


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, 2013

 
Common Stock
and Paid in Capital
 
(Accumulated
 Deficit)
 
Accumulated
Other Comprehensive Income (loss)
 
Unearned Restricted
ESOP Shares
 
Stockholders’
Equity
 
Shares
 
Amount
 
 
 
 
Balance, January 1, 2013
19,420,625

 
$
567,907

 
$
(61,102
)
 
$
2,101

 
(1,987
)
 
$
506,919

Net income
 
 
 
 
35,001

 
 
 
 
 
35,001

Change in valuation of securities—available-for-sale, net of income tax
 
 
 
 
 
 
(4,956
)
 
 
 
(4,956
)
Accrual of dividends on common stock ($0.39/share cumulative)
 
 
 
 
(7,600
)
 
 
 
 
 
(7,600
)
Proceeds from issuance of common stock for stockholder reinvestment program
1,379

 
45

 
 
 
 
 
 
 
45

Amortization of stock-based compensation
86,706

 
583

 
 
 
 
 
 
 
583

BALANCE, September 30, 2013
19,508,710

 
$
568,535

 
$
(33,701
)
 
$
(2,855
)
 
$
(1,987
)
 
$
529,992



See Selected Notes to the Consolidated Financial Statements


7


BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited) (In thousands, except for shares)
For the Year Ended December 31, 2012

 
Preferred Stock
 
Common Stock
and Paid in Capital
 
 (Accumulated
Deficit)
 
Accumulated
Other
Comprehensive Income
 
Unearned Restricted
ESOP Shares
 
Stockholders’
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
Balance, January 1, 2012
124,000

 
$
120,702

 
17,519,132

 
$
531,149

 
$
(119,465
)
 
$
2,051

 
$
(1,987
)
 
$
532,450

Net income
 
 
 
 
 
 
 
 
64,882

 
 
 
 
 
64,882

Change in valuation of securities—available-for-sale, net of income tax
 
 
 
 
 
 
 
 
 
 
42

 
 
 
42

Amortization of unrealized loss on tax exempt securities transferred from available-for-sale to held-to-maturity, net of income tax
 
 
 
 
 
 
 
 
 
 
8

 
 
 
8

Accretion of preferred stock discount
 
 
3,298

 
 
 
 
 
(3,298
)
 
 
 
 
 

Accrual of dividends on preferred stock
 
 
 
 
 
 
 
 
(4,938
)
 
 
 
 
 
(4,938
)
Repurchase of preferred stock
(124,000
)
 
(124,000
)
 
 
 
 
 
 
 
 
 
 
 
(124,000
)
Gain on repurchase of preferred stock
 
 
 
 
 
 
 
 
2,471

 
 
 
 
 
2,471

Accrual of dividends on common stock ($0.04/share cumulative)
 
 
 
 
 
 
 
 
(754
)
 
 
 
 
 
(754
)
Proceeds from issuance of common stock for stockholder reinvestment program
 
 
 
 
1,814,320

 
36,317

 
 
 
 
 
 
 
36,317

Amortization of compensation related to restricted stock grant
 
 
 
 
87,173

 
434

 
 
 
 
 
 
 
434

Amortization of compensation related to stock options
 
 
 
 
 
 
7

 
 
 
 
 
 
 
7

BALANCE, December 31, 2012

 
$

 
19,420,625

 
$
567,907

 
$
(61,102
)
 
$
2,101

 
$
(1,987
)
 
$
506,919


See Selected Notes to the Consolidated Financial Statements

8


BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
For the Nine Months Ended September 30, 2013 and 2012
 
Nine Months Ended
September 30
 
2013

 
2012

OPERATING ACTIVITIES:
 
 
 
Net income
$
35,001

 
$
50,194

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
5,540

 
6,048

Deferred income and expense, net of amortization
2,786

 
1,871

Amortization of core deposit intangibles
1,453

 
1,583

Gain on sale of securities
(1,020
)
 
(48
)
Other-than-temporary impairment (recovery) or loss
(409
)
 
409

Net change in valuation of financial instruments carried at fair value
1,954

 
16,901

Purchases of securities-trading
(27,458
)
 
(2,161
)
Proceeds from sales of securities-trading
29,351

 
2,170

Principal repayments and maturities of securities—trading
5,119

 
13,838

(Increase) decrease in deferred taxes
8,937

 
(41,474
)
Increase (decrease) in current taxes payable
(12,054
)
 
10,177

Equity-based compensation
583

 
195

Increase in cash surrender value of BOLI
(1,503
)
 
(1,489
)
Gain on sale of loans, net of capitalized servicing rights
(5,505
)
 
(6,117
)
Gain on disposal of real estate held for sale and property and equipment
(2,445
)
 
(3,645
)
Provision for losses on loans and real estate held for sale
490

 
16,451

Origination of loans held for sale
(360,602
)
 
(369,251
)
Proceeds from sales of loans held for sale
369,560

 
371,477

Net change in:
 
 
 
Other assets
20,666

 
(1,952
)
Other liabilities
(2,098
)
 
3,678

Net cash provided from operating activities
68,346

 
68,855

INVESTING ACTIVITIES:
 
 
 
Purchases of available-for-sale securities
(193,901
)
 
(299,985
)
Principal repayments and maturities of available-for-sale securities
74,642

 
290,440

Proceeds from sales of securities available-for-sale
103,274

 
13,282

Purchases of securities held-to-maturity
(12,963
)
 
(16,115
)
Principal repayments and maturities of securities held-to-maturity
2,613

 
2,800

Loan originations, net of principal repayments
(46,989
)
 
63,755

Purchases of loans and participating interest in loans
(166
)
 
(4,863
)
Purchases of property and equipment
(5,510
)
 
(3,823
)
Proceeds from sale of real estate held for sale, net
15,758

 
33,607

Proceeds from FHLB stock repurchase program
997

 
333

Other
(359
)
 
(432
)
Net cash (used by) provided from investing activities
(62,604
)
 
78,999

FINANCING ACTIVITIES:
 
 
 
Increase (decrease) in deposits, net
(22,519
)
 
10,718

Advances, net of repayments of FHLB borrowings
9,995

 
(4
)
Increase (decrease) in other borrowings, net
6,276

 
(69,853
)
Cash dividends paid
(4,872
)
 
(5,195
)
Cash proceeds from issuance of stock for stockholder reinvestment plan
45

 
36,314

Repurchase of preferred stock

 
(48,514
)
Net cash used by financing activities
(11,075
)
 
(76,534
)
NET (DECREASE) INCREASE IN CASH AND DUE FROM BANKS
(5,333
)
 
71,320

CASH AND DUE FROM BANKS, BEGINNING OF PERIOD
181,298

 
132,436

CASH AND DUE FROM BANKS, END OF PERIOD
$
175,965

 
$
203,756

(Continued on next page)

9


BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited) (In thousands)
For the Nine Months Ended September 30, 2013 and 2012
 
Nine Months Ended
September 30
 
2013

 
2012

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Interest paid in cash
$
10,337

 
$
16,585

Taxes paid in cash
17,147

 
2,579

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
2,743

 
11,632


See Selected Notes to the Consolidated Financial Statements

10


BANNER CORPORATION AND SUBSIDIARIES
SELECTED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1:  BASIS OF PRESENTATION AND CRITICAL ACCOUNTING POLICIES

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

These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (SEC).  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included.  Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC.  Certain reclassifications have been made to the 2012 Consolidated Financial Statements and/or schedules to conform to the 2013 presentation.  These reclassifications may have affected certain ratios for the prior periods. The effect of these reclassifications is considered immaterial.  All significant intercompany transactions and balances have been eliminated.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements.  Various elements of the Company’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments.  In particular, management has identified several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of Banner’s financial statements.  These policies relate to (i) the methodology for the recognition of interest income, (ii) determination of the provision and allowance for loan and lease losses, (iii) the valuation of financial assets and liabilities recorded at fair value, including other-than-temporary impairment (OTTI) losses, (iv) the valuation of intangibles, such as core deposit intangibles and mortgage servicing rights, (v) the valuation of real estate held for sale and (vi) the valuation of or recognition of deferred tax assets and liabilities.  These policies and judgments, estimates and assumptions are described in greater detail in subsequent notes to the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations (Critical Accounting Policies) in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC.  Management believes that the judgments, estimates and assumptions used in the preparation of the financial statements are appropriate based on the factual circumstances at the time.  However, given the sensitivity of the financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in the Company’s results of operations or financial condition.  Further, subsequent changes in economic or market conditions could have a material impact on these estimates and the Company’s financial condition and operating results in future periods.

The information included in this Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC (2012 Form 10-K).  Interim results are not necessarily indicative of results for a full year.

Note 2:  RECENT DEVELOPMENTS AND SIGNIFICANT EVENTS

Proposed Acquisition of Home Federal Bancorp, Inc.

On September 24, 2013, Banner and Home Federal Bancorp, Inc. (NASDAQ: HOME), announced the signing of a definitive Agreement and Plan of Merger. The Agreement allowed a thirty-day period during which the board of directors of Home Federal could evaluate purchase offers from other institutions. On October 16, 2013, Home Federal's board declared that it had received a superior proposal from Cascade Bancorp. Under the terms of the Agreement, Banner's board of directors had the right but elected not to match Cascade's offer. Consequently, on October 23, 2013, Banner announced that the Agreement between it and Home Federal had been terminated. In connection with the termination of the Agreement, Home Federal paid a termination fee of $2.95 million to Banner.

Income Tax Reporting and Accounting:

Amended Federal Income Tax Returns:  The Company has years 2010-2012 open for tax examination under the statute of limitation provisions of the Internal Revenue Code of 1986 (Code). Tax years 2006-2009 are not open for assessment of additional tax, but remain open for adjustment to the amount of Net Operating Losses (NOLs), credit, and other carryforwards utilized in open years or to be utilized in the future. The Company filed amended federal income tax returns for tax years 2008 and 2009 to claim additional bad debt deductions, which resulted in additional NOLs for tax years 2008 and 2009. The Company also filed amended federal income tax returns for tax years 2005-2006 and a tentative refund claim for tax year 2007 to carryback the NOLs and general business credits from 2008 and 2009 to those earlier years. Review of the amended returns for all years was completed by the Internal Revenue Service (IRS) in the three months ended September 30, 2013. The Company signed a closing agreement with the IRS related to refund claims of $9.8 million, primarily all related to tax year 2006. Due to the uncertainty of the outcome, the Company had neither previously recorded a receivable nor adjusted deferred tax assets for the amendment. During the three months ended September 30, 2013, the Company recorded a tax receivable of $9.8 million with an offsetting adjustment to its deferred tax assets. Additionally, the Company received interest on the tax receivable of $450,000 in the quarter ending September 30, 2013, which is recorded in miscellaneous income. The Company will further analyze the impact of the closing agreement on subsequent tax years as well as the state income tax impact and record the necessary adjustments at year-end which are not expected to have a material effect on the Company's financial condition or results of operations.


11


Deferred Tax Asset Valuation Allowance:  The Company and its wholly-owned subsidiaries file consolidated U.S. federal income tax returns, as well as state income tax returns in Oregon and Idaho.  Income taxes are accounted for using the asset and liability method.  Under this method a deferred tax asset or liability is determined based on the enacted tax rates which are expected to be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company’s income tax returns.  The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.  Under GAAP, a valuation allowance is required to be recognized if it is “more likely than not” that all or a portion of Banner’s deferred tax assets will not be realized.  During the quarter ended September 30, 2010, the Company evaluated its net deferred tax asset and determined it was prudent to establish a full valuation allowance against the net asset.  At each subsequent quarter-end, the Company ``re-analyzed that position and the Company continued to maintain a full valuation allowance through March 31, 2012.  During the quarter ended June 30, 2012, management analyzed the Company’s performance and trends over the previous five quarters, focusing on trends in asset quality, loan loss provisioning, capital position, net interest margin, core operating income and net income and the likelihood of continued profitability.  Based on this analysis, management determined that a full valuation allowance was no longer appropriate and reversed nearly all of the valuation allowance at that time.  The Company utilized the remaining valuation allowance to offset tax expense in the third and fourth quarters of 2012.  The ultimate realization of deferred tax assets is dependent upon the existence, or generation, of taxable income in the periods when those temporary differences and net operating loss and credit carryforwards are deductible.  See Note 12 of the Selected Notes to the Consolidated Financial Statements for more information.

Preferred Stock Transactions:
 
On March 29, 2012, the Company’s $124 million of senior preferred stock with a liquidation value of $1,000 per share, originally issued to the U.S. Treasury as part of its Capital Purchase Program, was sold by the Treasury as part of its efforts to manage and recover its investments under the Troubled Asset Relief Program (TARP).  While the sale of these preferred shares to new owners did not result in any proceeds to the Company and did not change the Company’s capital position or accounting for these securities, it did eliminate restrictions put in place by the Treasury on TARP recipients.  During the year ended December 31, 2012, the Company repurchased or redeemed all of its Series A Preferred Stock. The related warrants to purchase up to $18.6 million in Banner common stock (243,998 shares) were sold by the Treasury at public auction in June 2013. That sale did not change the Company's capital position and did not have any impact on the financial accounting and reporting for these securities.

Note 3:  ACCOUNTING STANDARDS RECENTLY ADOPTED

Offsetting Assets and Liabilities

In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update ("ASU") No. 2011-11, "Disclosures About Offsetting Assets and Liabilities." The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial condition as well as instruments and transactions subject to an agreement similar to a master netting arrangement. ASU No. 2011-11 also requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements.

In January 2013, FASB issued ASU No. 2013-01, "Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities." The provisions of ASU No. 2013-01 limit the scope of the new balance sheet offsetting disclosures to the following financial instruments, to the extent they are offset in the financial statements or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in the statement of financial position: (1) derivative financial instruments; (2) repurchase agreements and reverse repurchase agreements; and (3) securities borrowing and securities lending transactions.

The Company adopted the provisions of ASU No. 2011-11 and ASU No. 2013-01 effective January 1, 2013. As the provisions of ASU No. 2011-11 and ASU No. 2013-01 only impact disclosure requirements related to the offsetting of assets and liabilities and information instruments and transactions eligible for offset in the statement of financial condition, the adoption had no impact on the Company's consolidated statements of operations and financial condition.

Reclassifications Out of Accumulated Other Comprehensive Income

In February 2013, FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU No. 2013-02 does not amend any existing requirements for reporting net income or other comprehensive income in the financial statements. ASU No. 2013-02 requires an entity to disaggregate the total change of each component of other comprehensive income (e.g., unrealized gains or losses on available-for-sale investment securities) and separately present reclassification adjustments and current period other comprehensive income. The provisions of ASU No. 2013-02 also require that entities present, either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source (e.g., unrealized gains or losses on available-for-sale investment securities). The Company adopted the provisions of ASU No. 2013-02 effective January 1, 2013. The adoption of this guidance did not have a material effect on the Company's consolidated financial statements.

Unrecognized Tax Benefits

In July 2013, FASB issued ASU No. 2013-11, "Presentation of an Unrecognized Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." This ASU requires an unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. An exception exists to

12


the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax of the applicable jurisdiction does not require the entity to use, and entity does not intend to use, the deferred tax asset for such a purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU No. 2013-11 is effective for fiscal years and interim periods beginning after December 15, 2013 and is not expected to have a material impact on the Company's consolidated financial statements.

Note 4:  BUSINESS SEGMENTS

The Company is managed by legal entity and not by lines of business.  Each of the Banks is a community oriented commercial bank chartered in the State of Washington.  Each of the Banks’ primary business is that of traditional banking institutions, gathering deposits and originating loans for portfolios in their respective markets.  The Banks offer a wide variety of deposit products to their consumer and commercial customers.  Lending activities include the origination of real estate, commercial/agriculture business and consumer loans.  Banner Bank is also an active participant in the secondary market, originating residential loans for sale on both a servicing released and servicing retained basis.  In addition to interest income on loans and investment securities, the Banks receive other income from deposit service charges, loan servicing fees and from the sale of loans and investments.  The performance of the Banks is reviewed by the Company’s executive management and Board of Directors on a monthly basis.  All of the executive officers of the Company are members of Banner Bank’s management team.

Generally accepted accounting principles establish standards to report information about operating segments in annual financial statements and require reporting of selected information about operating segments in interim reports to stockholders.  The Company has determined that its current business and operations consist of a single business segment.

Note 5:  INTEREST-BEARING DEPOSITS AND SECURITIES

The following table sets forth additional detail regarding our interest-bearing deposits and securities at the dates indicated (includes securities—trading, available-for-sale and held-to-maturity, all at carrying value) (in thousands):
 
September 30
2013

 
December 31
2012

 
September 30
2012

Interest-bearing deposits included in cash and due from banks
$
106,625

 
$
114,928

 
$
143,251

U.S. Government and agency obligations
61,473

 
98,617

 
159,885

Municipal bonds:


 


 


Taxable
36,501

 
31,480

 
26,742

Tax exempt
115,333

 
103,545

 
106,171

Total municipal bonds
151,834

 
135,025

 
132,913

Corporate bonds
46,145

 
48,519

 
40,505

Mortgage-backed or related securities:


 


 


One- to four-family residential agency guaranteed
58,616

 
105,770

 
108,830

One- to four-family residential other
1,100

 
1,299

 
1,412

Multifamily agency guaranteed
283,252

 
188,136

 
144,830

Multifamily other
10,102

 
10,659

 

Total mortgage-backed or related securities
353,070

 
305,864

 
255,072

Asset-backed securities:


 


 


Student Loan Marketing Association (SLMA)
15,676

 
32,474

 
32,752

Other asset-backed securities
9,573

 
10,042

 

Total asset-backed securities
25,249

 
42,516

 
32,752

Equity securities (excludes FHLB stock)
68

 
63

 
50

Total securities
637,839

 
630,604

 
621,177

FHLB stock
35,708

 
36,705

 
37,038

 
$
780,172

 
$
782,237

 
$
801,466


13



Securities—Trading:  The amortized cost and estimated fair value of securities—trading at September 30, 2013 and December 31, 2012 are summarized as follows (dollars in thousands):
 
September 30, 2013
 
December 31, 2012
 
Amortized
Cost
 
Fair Value
 
Percent of
Total
 
Amortized
Cost
 
Fair Value
 
Percent of
Total
U.S. Government and agency obligations
$
1,370

 
$
1,510

 
2.4
%
 
$
1,380

 
$
1,637

 
2.3
%
Municipal bonds:


 


 
 
 
 
 
 
 
 
Tax exempt
4,966

 
4,987

 
7.8

 
5,590

 
5,684

 
8.0

Total municipal bonds
4,966

 
4,987

 
7.8

 
5,590

 
5,684

 
8.0

Corporate bonds
49,507

 
35,095

 
54.9

 
57,807

 
35,741

 
50.2

Mortgage-backed or related securities:


 


 
 
 
 
 
 
 
 
One- to four-family residential agency guaranteed
11,811

 
12,587

 
19.7

 
16,574

 
17,911

 
25.1

Multifamily agency guaranteed
8,857

 
9,640

 
15.1

 
8,974

 
10,196

 
14.3

Total mortgage-backed or related securities
20,668

 
22,227

 
34.8

 
25,548

 
28,107

 
39.4

Equity securities
14

 
68

 
0.1

 
14

 
63

 
0.1

 
$
76,525

 
$
63,887

 
100.0
%
 
$
90,339

 
$
71,232

 
100.0
%

There were 40 sales of securities—trading totaling $29.4 million with a resulting net gain of $1.5 million during the nine months ended September 30, 2013, including $1.0 million which represented recoveries on certain collateralized debt obligations that had previously been written off. There were three sales of securities—trading during the nine months ended September 30, 2012.  Included in the net gain of $1.5 million was a $409,000 OTTI recovery on securities—trading related to the sale of certain equity securities issued by government-sponsored entities during the nine months ended September 30, 2013 and a $409,000 OTTI charge during the nine months ended September 30, 2012 related to these same equity securities.  As of September 30, 2013 and 2012, there were no securities—trading on a nonaccrual status. 

The amortized cost and estimated fair value of securities—trading at September 30, 2013 and December 31, 2012, by contractual maturity, are shown below (in thousands).  Expected maturities will differ from contractual maturities because some securities may be called or prepaid with or without call or prepayment penalties.
 
September 30, 2013
 
December 31, 2012
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$

 
$

 
$

 
$

Due after one year through five years
3,957

 
4,219

 
4,496

 
4,867

Due after five years through ten years
16,483

 
17,502

 
14,251

 
15,536

Due after ten years through twenty years
21,947

 
18,737

 
12,055

 
11,346

Due after twenty years
34,124

 
23,361

 
59,523

 
39,420

 
76,511

 
63,819

 
90,325

 
71,169

Equity securities
14

 
68

 
14

 
63

 
$
76,525

 
$
63,887

 
$
90,339

 
$
71,232



14


Securities—Available-for-Sale:  The amortized cost and estimated fair value of securities—available-for-sale at September 30, 2013 and December 31, 2012 are summarized as follows (dollars in thousands):
 
September 30, 2013
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Percent of
Total
U.S. Government and agency obligations
$
59,217

 
$
173

 
$
(622
)
 
$
58,768

 
12.3
%
Municipal bonds:


 


 


 


 
 
Taxable
25,669

 
113

 
(230
)
 
25,552

 
5.4

Tax exempt
29,847

 
160

 
(244
)
 
29,763

 
6.2

Total municipal bonds
55,516

 
273

 
(474
)
 
55,315

 
11.6

Corporate bonds
9,006

 
13

 
(19
)
 
9,000

 
1.9

Mortgage-backed or related securities:


 


 


 


 
 
One- to four-family residential agency guaranteed
46,162

 
807

 
(940
)
 
46,029

 
9.6

One- to four-family residential other
1,025

 
75

 

 
1,100

 
0.2

Multifamily agency guaranteed
274,674

 
455

 
(3,285
)
 
271,844

 
57.0

Multifamily other
10,628

 

 
(526
)
 
10,102

 
2.1

Total mortgage-backed or related securities
332,489

 
1,337

 
(4,751
)
 
329,075

 
68.9

Asset-backed securities:


 


 


 


 
 
SLMA
15,576

 
100

 

 
15,676

 
3.3

Other asset-backed securities
10,063

 

 
(490
)
 
9,573

 
2.0

Total asset-backed securities
25,639

 
100

 
(490
)
 
25,249

 
5.3

 
$
481,867

 
$
1,896

 
$
(6,356
)
 
$
477,407

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Percent of
Total
U.S. Government and agency obligations
$
96,666

 
$
367

 
$
(53
)
 
$
96,980

 
20.5
%
Municipal bonds:
 
 
 
 
 
 
 
 
 
Taxable
20,987

 
233

 
(67
)
 
21,153

 
4.5

Tax exempt
23,575

 
221

 
(11
)
 
23,785

 
5.0

Total municipal bonds
44,562

 
454

 
(78
)
 
44,938

 
9.5

Corporate bonds
10,701

 
37

 
(9
)
 
10,729

 
2.3

Mortgage-backed or related securities:
 
 
 
 
 
 
 
 
 
One- to four-family residential agency guaranteed
87,392

 
1,051

 
(584
)
 
87,859

 
18.6

One- to four-family residential other
1,223

 
76

 

 
1,299

 
0.3

Multifamily agency guaranteed
176,026

 
2,140

 
(226
)
 
177,940

 
37.6

Multifamily other
10,700

 
4

 
(45
)
 
10,659

 
2.2

Total mortgage-backed or related securities
275,341

 
3,271

 
(855
)
 
277,757

 
58.7

Asset-backed securities:
 
 
 
 
 
 
 
 
 
SLMA
32,309

 
210

 
(45
)
 
32,474

 
6.9

Other asset-backed securities
10,071

 

 
(29
)
 
10,042

 
2.1

Total asset-backed securities
42,380

 
210

 
(74
)
 
42,516

 
9.0

 
$
469,650

 
$
4,339

 
$
(1,069
)
 
$
472,920

 
100.0
%


15


At September 30, 2013 and December 31, 2012, an aging of unrealized losses and fair value of related securities—available-for-sale was as follows (in thousands):
 
September 30, 2013
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
U.S. Government and agency obligations
$
40,637

 
$
(622
)
 
$

 
$

 
$
40,637

 
$
(622
)
Municipal bonds:


 


 


 


 


 


Taxable
17,756

 
(230
)
 

 

 
17,756

 
(230
)
Tax exempt
11,363

 
(243
)
 
379

 
(1
)
 
11,742

 
(244
)
Total municipal bonds
29,119

 
(473
)
 
379

 
(1
)
 
29,498

 
(474
)
Corporate bonds
4,981

 
(19
)
 

 

 
4,981

 
(19
)
Mortgage-backed or related securities:


 


 


 


 


 


One- to four-family residential agency guaranteed
4,133

 
(274
)
 
19,478

 
(666
)
 
23,611

 
(940
)
Multifamily agency guaranteed
194,062

 
(3,219
)
 
3,040

 
(66
)
 
197,102

 
(3,285
)
Multifamily other
10,102

 
(526
)
 

 

 
10,102

 
(526
)
Total mortgage-backed or related securities
208,297

 
(4,019
)
 
22,518

 
(732
)
 
230,815

 
(4,751
)
Asset-backed securities:


 


 


 


 


 
 
Other asset-backed securities
9,573

 
(490
)
 

 

 
9,573

 
(490
)
Total asset-backed securities
9,573

 
(490
)
 

 

 
9,573

 
(490
)
 
$
292,607

 
$
(5,623
)
 
$
22,897

 
$
(733
)
 
$
315,504

 
$
(6,356
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Unrealized
 Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
U.S. Government and agency obligations
$
22,955

 
$
(53
)
 
$

 
$

 
$
22,955

 
$
(53
)
Municipal bonds:
 
 
 
 
 
 
 
 
 
 
 
Taxable
11,009

 
(67
)
 

 

 
11,009

 
(67
)
Tax exempt
4,619

 
(11
)
 

 

 
4,619

 
(11
)
Total municipal bonds
15,628

 
(78
)
 

 

 
15,628

 
(78
)
Corporate bonds
6,670

 
(9
)
 

 

 
6,670

 
(9
)
Mortgage-backed or related securities:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family residential agency guaranteed
32,459

 
(503
)
 
5,746

 
(81
)
 
38,205

 
(584
)
Multifamily agency guaranteed
32,170

 
(226
)
 

 

 
32,170

 
(226
)
Multifamily other
7,279

 
(45
)
 

 

 
7,279

 
(45
)
Total mortgage-backed or related securities
71,908

 
(774
)
 
5,746

 
(81
)
 
77,654

 
(855
)
Asset-backed securities:
 
 
 
 
 
 
 
 
 
 
 
SLMA
9,674

 
(45
)
 

 

 
9,674

 
(45
)
Other asset-backed securities
10,042

 
(29
)
 

 

 
10,042

 
(29
)
Total asset-backed securities
19,716

 
(74
)
 

 

 
19,716

 
(74
)
 
$
136,877

 
$
(988
)
 
$
5,746

 
$
(81
)
 
$
142,623

 
$
(1,069
)

Proceeds from the sale of 35 securities—available-for-sale during the nine months ended September 30, 2013 were $103.3 million with a resulting loss of $116,000. There were three sales of securities—available-for-sale totaling $13.3 million with a resulting gain of $38,000 during the nine months ended September 30, 2012.  At September 30, 2013, there were 124 securities—available for sale with unrealized losses, compared to 52 securities at December 31, 2012.  Management does not believe that any individual unrealized loss as of September 30, 2013 represents OTTI.  The decline in fair market values of these securities was generally due to changes in interest rates and changes in market-desired spreads subsequent to their purchase.

16



The amortized cost and estimated fair value of securities—available-for-sale at September 30, 2013 and December 31, 2012, by contractual maturity, are shown below (in thousands).  Expected maturities will differ from contractual maturities because some securities may be called or prepaid with or without call or prepayment penalties.
 
September 30, 2013
 
December 31, 2012
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$
25,195

 
$
25,361

 
$
16,369

 
$
16,393

Due after one year through five years
301,409

 
298,978

 
205,913

 
207,147

Due after five years through ten years
86,050

 
84,906

 
132,372

 
133,407

Due after ten years through twenty years
13,219

 
12,856

 
43,386

 
43,414

Due after twenty years
55,994

 
55,306

 
71,610

 
72,559

 
$
481,867

 
$
477,407

 
$
469,650

 
$
472,920


Securities—Held-to-Maturity:  The amortized cost and estimated fair value of securities—held-to-maturity at September 30, 2013 and December 31, 2012 are summarized as follows (dollars in thousands):
 
September 30, 2013
 
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
Percent of
Total Amortized
Cost
U.S. Government and agency obligations
$
1,195

 
$

 
$
(62
)
 
$
1,133

 
1.2
%
Municipal bonds:
 
 
 
 
 
 
 
 
 
Taxable
10,949

 
237

 
(182
)
 
11,004

 
11.3

Tax exempt
80,583

 
3,080

 
(1,203
)
 
82,460

 
83.6

Total municipal bonds
91,532

 
3,317

 
(1,385
)
 
93,464

 
94.9

Corporate bonds
2,050

 

 

 
2,050

 
2.1

Mortgage-backed or related securities:
 
 
 
 
 
 
 
 
 
Multifamily agency guaranteed
1,768

 

 
(14
)
 
1,754

 
1.8

Total mortgage-backed or related securities
1,768

 

 
(14
)
 
1,754

 
1.8

 
$
96,545

 
$
3,317

 
$
(1,461
)
 
$
98,401

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
Percent of
Total Amortized
Cost
Municipal bonds:
 
 
 
 
 
 
 
 
 
Taxable
$
10,326

 
$
436

 
$
(157
)
 
$
10,605

 
11.9
%
Tax exempt
74,076

 
5,757

 
(30
)
 
79,803

 
85.7

Total municipal bonds
84,402

 
6,193

 
(187
)
 
90,408

 
97.6

Corporate bonds
2,050

 

 

 
2,050

 
2.4

 
$
86,452

 
$
6,193

 
$
(187
)
 
$
92,458

 
100.0
%


17


At September 30, 2013 and December 31, 2012, an age analysis of unrealized losses and fair value of related securities—held-to-maturity was as follows (in thousands):
 
September 30, 2013
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
U.S. Government and agency obligations
$
1,133

 
$
(62
)
 
$

 
$

 
$
1,133

 
$
(62
)
Municipal bonds:
 
 
 
 
 
 
 
 
 
 
 
Taxable
5,827

 
(182
)
 

 

 
5,827

 
(182
)
Tax exempt
20,954

 
(1,203
)
 

 

 
20,954

 
(1,203
)
Total municipal bonds
26,781

 
(1,385
)
 

 

 
26,781

 
(1,385
)
Mortgage-backed or related securities:
 
 
 
 
 
 
 
 
 
 
 
Multifamily agency guaranteed
1,754

 
(14
)
 

 

 
1,754

 
(14
)
Total mortgage-backed or related securities
1,754

 
(14
)
 

 

 
1,754

 
(14
)
 
$
29,668

 
$
(1,461
)
 
$

 
$

 
$
29,668

 
$
(1,461
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
Municipal bonds:
 
 
 
 
 
 
 
 
 
 
 
Taxable
$
4,137

 
$
(157
)
 
$

 
$

 
$
4,137

 
$
(157
)
Tax exempt
910

 
(30
)
 

 

 
910

 
(30
)
Total municipal bonds
$
5,047

 
$
(187
)
 
$

 
$

 
$
5,047

 
$
(187
)

There were no sales of securities—held-to-maturity and the Company did not recognize any OTTI charges on securities—held-to-maturity during the nine months ended September 30, 2013 and 2012.  As of September 30, 2013, there were no securities—held-to-maturity in a nonaccrual status.  There were 32 securities—held-to-maturity with unrealized losses at September 30, 2013, compared to five securities at December 31, 2012.  Management does not believe that any individual unrealized loss on a security as of September 30, 2013 represents OTTI.  The decline in fair market value of these securities was generally due to changes in interest rates and changes in market-desired spreads subsequent to their purchase.

The amortized cost and estimated fair value of securities—held-to-maturity at September 30, 2013 and December 31, 2012, by contractual maturity, are shown below (in thousands).  Expected maturities will differ from contractual maturities because some securities may be called or prepaid with or without call or prepayment penalties.
 
September 30, 2013
 
December 31, 2012
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$
3,185

 
$
3,201

 
$
3,323

 
$
3,410

Due after one year through five years
12,970

 
13,410

 
13,641

 
14,335

Due after five years through ten years
15,870

 
15,880

 
13,295

 
13,452

Due after ten years through twenty years
61,422

 
63,032

 
53,031

 
57,868

Due after twenty years
3,098

 
2,878

 
3,162

 
3,393

 
$
96,545

 
$
98,401

 
$
86,452

 
$
92,458


18



Pledged Securities: The following table presents, as of September 30, 2013, investment securities which were pledged to secure borrowings, public deposits or other obligations as permitted or required by law (in thousands):