BANR-9.30.2014-10Q

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, 2014.
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, 2014
Common Stock, $.01 par value per share
 
19,571,713 shares *
 
 
 
 

1


BANNER CORPORATION AND SUBSIDIARIES

Table of Contents
PART I – FINANCIAL INFORMATION
 
 
 
Item 1 – Financial Statements.  The Unaudited 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, 2014 and December 31, 2013
 
 
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2014 and 2013
 
 
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2014 and 2013
 
 
Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2014 and the Year Ended December 31, 2013
 
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013
 
 
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, 2014 and December 31, 2013
 
 
Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2014 and 2013
 
 
Asset Quality
 
 
Liquidity and Capital Resources
 
 
Capital Requirements
 
 
Item 3 – Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Market Risk and Asset/Liability Management
 
 
Sensitivity Analysis
 
 
Item 4 – Controls and Procedures
 
 
PART II – OTHER INFORMATION
 
 
 
Item 1 – Legal Proceedings
 
 
Item 1A – Risk Factors
 
 
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
 
 
Item 3 – Defaults upon Senior Securities
 
 
Item 4 – Mine Safety Disclosures
 
 
Item 5 – Other Information
 
 
Item 6 – Exhibits
 
 
SIGNATURES

2


Special Note Regarding Forward-Looking Statements

Certain matters in this report on Form 10-Q contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements relate to our financial condition, liquidity, results of operations, plans, objectives, future performance or business.  Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.”  Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future economic performance and projections of financial items.  These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated or implied by our forward-looking statements, including, but not limited to: the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets and may lead to increased losses and non-performing assets, and may result in our allowance for loan losses not being adequate to cover actual losses and require us to materially increase our reserves; changes in 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 an informal or formal enforcement action against us or any of our bank subsidiaries which could require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds, or maintain or increase deposits, or impose additional requirements and restrictions on us, any of which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules including changes related to Basel III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the implementing regulations; our ability to attract and retain deposits; increases in premiums for deposit insurance; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets and liabilities, which estimates may prove to be incorrect and result in significant changes in valuation; difficulties in reducing risk associated with the loans on our balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; the failure or security breach of computer systems on which we depend; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our business strategies; 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, 2014 and December 31, 2013
ASSETS
September 30
2014

 
December 31
2013

Cash and due from banks
$
151,725

 
$
137,349

Securities—trading, amortized cost $58,390 and $75,150, respectively
51,076

 
62,472

Securities—available-for-sale, amortized cost $435,272 and $474,960, respectively
433,745

 
470,280

Securities—held-to-maturity, fair value $138,754 and $103,610, respectively
133,069

 
102,513

Federal Home Loan Bank (FHLB) stock
29,106

 
35,390

Loans receivable:
 
 
 
Held for sale
6,949

 
2,734

Held for portfolio
3,799,746

 
3,415,711

Allowance for loan losses
(74,331
)
 
(74,258
)
 
3,732,364

 
3,344,187

Accrued interest receivable
17,062

 
13,996

Real estate owned (REO), held for sale, net
3,928

 
4,044

Property and equipment, net
91,291

 
90,267

Intangible assets, net
3,362

 
2,449

Bank-owned life insurance (BOLI)
63,293

 
61,945

Deferred tax assets, net
21,830

 
27,479

Income tax receivable

 
9,728

Other assets
27,538

 
26,799

 
$
4,759,389

 
$
4,388,898

LIABILITIES
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
1,304,720

 
$
1,115,346

Interest-bearing transaction and savings accounts
1,833,404

 
1,629,885

Interest-bearing certificates
852,994

 
872,695

 
3,991,118

 
3,617,926

Advances from FHLB at fair value
250

 
27,250

Other borrowings
67,605

 
83,056

Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities)
77,624

 
73,928

Accrued expenses and other liabilities
32,375

 
31,324

Deferred compensation
16,359

 
16,442

 
4,185,331

 
3,849,926

COMMITMENTS AND CONTINGENCIES (Note 15)

 

STOCKHOLDERS’ EQUITY
 
 
 
Common stock and paid in capital - $0.01 par value per share, 50,000,000 shares authorized, 19,571,505 shares issued and outstanding at September 30, 2014; 19,543,769 shares issued and 19,509,429 shares outstanding at December 31, 2013
568,255

 
569,028

Retained earnings (accumulated deficit)
6,780

 
(25,073
)
Accumulated other comprehensive loss
(977
)
 
(2,996
)
Unearned shares of common stock issued to Employee Stock Ownership Plan (ESOP) trust at cost: no shares outstanding at September 30, 2014 and 34,340 shares outstanding at December 31, 2013

 
(1,987
)
 
574,058

 
538,972

 
$
4,759,389

 
$
4,388,898

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, 2014 and 2013

 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2014

 
2013

 
2014

 
2013

INTEREST INCOME:
 
 
 
 
 
 
 
Loans receivable
$
46,496

 
$
41,953

 
$
131,439

 
$
125,734

Mortgage-backed securities
1,459

 
1,281

 
4,376

 
3,847

Securities and cash equivalents
1,809

 
1,803

 
5,595

 
5,535

 
49,764

 
45,037

 
141,410

 
135,116

INTEREST EXPENSE:
 
 
 
 
 
 
 
Deposits
1,903

 
2,330

 
5,776

 
7,539

FHLB advances
20

 
28

 
110

 
92

Other borrowings
43

 
44

 
133

 
151

Junior subordinated debentures
734

 
742

 
2,180

 
2,225

 
2,700

 
3,144

 
8,199

 
10,007

Net interest income before provision for loan losses
47,064

 
41,893

 
133,211

 
125,109

PROVISION FOR LOAN LOSSES

 

 

 

Net interest income
47,064

 
41,893

 
133,211

 
125,109

OTHER OPERATING INCOME:
 
 
 
 
 
 
 
Deposit fees and other service charges
8,289

 
6,982

 
22,237

 
19,911

Mortgage banking operations
2,842

 
2,590

 
7,282

 
9,002

Miscellaneous
761

 
920

 
2,041

 
2,375

 
11,892

 
10,492

 
31,560

 
31,288

Gain on sale of securities
6

 
2

 
41

 
1,020

Other-than-temporary impairment recovery

 

 

 
409

Net change in valuation of financial instruments carried at fair value
1,452

 
(352
)
 
1,662

 
(1,954
)
Acquisition bargain purchase gain

 

 
9,079

 

Total other operating income
13,350

 
10,142

 
42,342

 
30,763

OTHER OPERATING EXPENSES:
 
 
 
 
 
 
 
Salary and employee benefits
22,971

 
21,244

 
66,457

 
63,197

Less capitalized loan origination costs
(3,204
)
 
(2,915
)
 
(8,680
)
 
(8,856
)
Occupancy and equipment
5,819

 
5,317

 
17,055

 
16,061

Information/computer data services
2,131

 
1,710

 
5,984

 
5,353

Payment and card processing expenses
3,201

 
2,530

 
8,462

 
7,284

Professional services
784

 
1,074

 
2,900

 
2,799

Advertising and marketing
2,454

 
1,556

 
4,878

 
4,853

Deposit insurance
607

 
564

 
1,820

 
1,826

State/municipal business and use taxes
475

 
461

 
1,022

 
1,463

REO operations
(190
)
 
(601
)
 
(260
)
 
(1,047
)
Amortization of core deposit intangibles
531

 
471

 
1,460

 
1,453

Acquisition-related costs
(494
)
 

 
1,530

 

Miscellaneous
3,410

 
3,079

 
9,884

 
9,660

Total other operating expenses
38,495

 
34,490

 
112,512

 
104,046

Income before provision for income taxes
21,919

 
17,545

 
63,041

 
51,826

PROVISION FOR INCOME TAXES
7,076

 
5,880

 
20,620

 
16,825

NET INCOME
$
14,843

 
$
11,665

 
$
42,421

 
$
35,001

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.77

 
$
0.60

 
$
2.19

 
$
1.81

Diluted
$
0.76

 
$
0.60

 
$
2.19

 
$
1.80

Cumulative dividends declared per common share
$
0.18

 
$
0.15

 
$
0.54

 
$
0.39

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, 2014 and 2013

 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2014

 
2013

 
2014

 
2013

NET INCOME
$
14,843

 
$
11,665

 
$
42,421

 
$
35,001

OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES:
 
 
 
 
 
 
 
Unrealized holding gain (loss) on available-for-sale securities arising during the period
(1,636
)
 
1,240

 
3,195

 
(6,314
)
Income tax benefit (expense) related to available-for-sale securities unrealized holding gains (losses)
592

 
(446
)
 
(1,150
)
 
2,273

Reclassification for net gains (losses) on available-for-sale securities realized in earnings
(6
)
 
(2
)
 
(41
)
 
(1,429
)
Income tax (benefit) expense related to available-for-sale securities realized (gains) losses
2

 
1

 
15

 
514

Other comprehensive income (loss)
(1,048
)
 
793

 
2,019

 
(4,956
)
COMPREHENSIVE INCOME
$
13,795

 
$
12,458

 
$
44,440

 
$
30,045


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, 2014 and the Year Ended December 31, 2013

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

 
$
567,907

 
$
(61,102
)
 
$
2,101

 
$
(1,987
)
 
$
506,919

Net income
 
 
 
 
46,555

 
 
 
 
 
46,555

Other comprehensive loss, net of income tax
 
 
 
 
 
 
(5,097
)
 
 
 
(5,097
)
Accrual of dividends on common stock ($0.54/share cumulative)
 
 
 
 
(10,526
)
 
 
 
 
 
(10,526
)
Proceeds from issuance of common stock for stockholder reinvestment program
2,098

 
72

 
 
 
 
 
 
 
72

Issuance of restricted stock and recognition of share-based compensation
86,706

 
1,049

 
 
 
 
 
 
 
1,049

BALANCE, December 31, 2013
19,509,429

 
$
569,028

 
$
(25,073
)
 
$
(2,996
)
 
$
(1,987
)
 
$
538,972


Balance, January 1, 2014
19,509,429

 
$
569,028

 
$
(25,073
)
 
$
(2,996
)
 
$
(1,987
)
 
$
538,972

Net income
 
 
 
 
42,421

 
 
 
 
 
42,421

Other comprehensive income, net of income tax
 
 
 
 
 
 
2,019

 
 
 
2,019

Accrual of dividends on common stock ($0.54/share cumulative)
 
 
 
 
(10,568
)
 
 
 
 
 
(10,568
)
Redemption of unallocated shares upon termination of ESOP
 
 
(1,987
)
 
 
 
 
 
1,987

 

Repurchase of shares upon termination of ESOP
(13,550
)
 
(556
)
 
 
 
 
 
 
 
(556
)
Proceeds from issuance of common stock for stockholder reinvestment program
2,295

 
93

 
 
 
 
 
 
 
93

Issuance of restricted stock and recognition of share-based compensation
73,331

 
1,677

 
 
 
 
 
 
 
1,677

BALANCE, September 30, 2014
19,571,505

 
$
568,255

 
$
6,780

 
$
(977
)
 
$

 
$
574,058



See Selected Notes to the Consolidated Financial Statements



7


BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
For the Nine Months Ended September 30, 2014 and 2013
 
Nine Months Ended
September 30
 
2014

 
2013

OPERATING ACTIVITIES:
 
 
 
Net income
$
42,421

 
$
35,001

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
6,081

 
5,540

Deferred income and expense, net of amortization
2,555

 
2,786

Amortization of core deposit intangibles
1,460

 
1,453

Gain on sale of securities
(41
)
 
(1,020
)
Other-than-temporary impairment recovery

 
(409
)
Net change in valuation of financial instruments carried at fair value
(1,662
)
 
1,954

Purchases of securities—trading
(2,387
)
 
(27,458
)
Proceeds from sales of securities—trading
2,387

 
29,351

Principal repayments and maturities of securities—trading
16,791

 
5,119

Bargain purchase gain on acquisition
(9,079
)
 

Decrease in deferred taxes
5,648

 
8,937

Increase (decrease) in current taxes payable
9,995

 
(12,054
)
Equity-based compensation
1,677

 
583

Increase in cash surrender value of BOLI
(1,329
)
 
(1,503
)
Gain on sale of loans, net of capitalized servicing rights
(4,235
)
 
(5,505
)
Gain on disposal of real estate held for sale and property and equipment
(817
)
 
(2,445
)
Provision for losses on real estate held for sale
37

 
490

Origination of loans held for sale
(262,159
)
 
(360,602
)
Proceeds from sales of loans held for sale
262,179

 
369,560

Net change in:
 
 
 
Other assets
(2,118
)
 
20,666

Other liabilities
(33
)
 
(2,098
)
Net cash provided from operating activities
67,371

 
68,346

INVESTING ACTIVITIES:
 
 
 
Purchases of securities—available-for-sale
(48,022
)
 
(193,901
)
Principal repayments and maturities of securities—available-for-sale
29,198

 
74,642

Proceeds from sales of securities—available-for-sale
55,982

 
103,274

Purchases of securitiesheld-to-maturity
(35,121
)
 
(12,963
)
Principal repayments and maturities of securities—held-to-maturity
3,857

 
2,613

Loan originations, net of principal repayments
(151,355
)
 
(51,792
)
Purchases of loans and participating interest in loans
(152,321
)
 
(166
)
Proceeds from sales of other loans
4,609

 
4,803

Net cash received from acquisition
127,557

 

Purchases of property and equipment
(4,024
)
 
(5,510
)
Proceeds from sale of real estate held for sale, net
3,631

 
15,758

Proceeds from FHLB stock repurchase program
6,284

 
997

Other
(2,063
)
 
(359
)
Net cash used by investing activities
(161,788
)
 
(62,604
)
FINANCING ACTIVITIES:
 
 
 
Increase (decrease) in deposits, net
161,106

 
(22,519
)
Advances, net of repayments of FHLB borrowings
(27,005
)
 
9,995

Increase in other borrowings, net
(15,451
)
 
6,276

Cash dividends paid
(9,950
)
 
(4,872
)
Cash proceeds from issuance of stock for stockholder reinvestment plan
93

 
45

Net cash provided from (used by) financing activities
108,793

 
(11,075
)
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS
14,376

 
(5,333
)
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD
137,349

 
181,298

CASH AND DUE FROM BANKS, END OF PERIOD
$
151,725

 
$
175,965

(Continued on next page)

8


BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited) (In thousands)
For the Nine Months Ended September 30, 2014 and 2013
 
Nine Months Ended
September 30
 
2014

 
2013

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Interest paid in cash
$
8,277

 
$
10,337

Taxes paid, net of refunds received in cash
6,102

 
17,147

NON-CASH INVESTING AND FINANCING TRANSACTIONS:
 
 
 
Loans, net of discounts, specific loss allowances and unearned income,
transferred to real estate owned and other repossessed assets
3,019

 
2,743

ACQUISITIONS (Note 4):
 
 
 
   Assets acquired
221,206

 

   Liabilities assumed
212,127

 


See Selected Notes to the Consolidated Financial Statements

9


BANNER CORPORATION AND SUBSIDIARIES
SELECTED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1:  BASIS OF PRESENTATION AND CRITICAL ACCOUNTING POLICIES

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

These unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (SEC). In 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. Certain reclassifications have been made to the 2013 Consolidated Financial Statements and/or schedules to conform to the 2014 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, and (v) 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, 2013 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, 2013 as filed with the SEC (2013 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 AmericanWest Bank

On November 5, 2014, the Company announced the execution of a definitive agreement to purchase the holding company for AmericanWest Bank (AmericanWest), a Washington state charted commercial bank. Pursuant to the agreement, AmericanWest’s holding company will merge with and into Banner and AmericanWest Bank will merge with and into Banner Bank. The merged banks will operate under the Banner Bank brand. Under the terms of the agreement, the aggregate consideration to be received by AmericanWest equityholders will consist of a fixed amount of 13.23 million shares of Banner common stock and $130.0 million in cash. Upon completion of the transaction, such shares will represent an approximately 38.8% pro forma ownership interest in Banner. Based on the closing price of Banner common stock on November 4, 2014, the aggregate value of the transaction is approximately $702 million. The definitive merger agreement was approved unanimously by the boards of directors of both companies. The merger is expected to close during the second quarter of 2015 and is subject to approval by Banner’s shareholders and regulatory agencies as well as other customary closing conditions.

Proposed Acquisition of Siuslaw Financial Group, Inc.

On August 7, 2014, the Company announced the execution of a definitive agreement to purchase Siuslaw Financial Group, Inc. (Siuslaw), the holding company of Siuslaw Bank, an Oregon state charted commercial bank. Subject to the terms and conditions of the merger agreement, the transaction provides for the Siuslaw shareholders to receive consideration of $1.41622 in cash plus 0.32231 of a share of Banner common stock in exchange for each share of Siuslaw common stock, which is approximately 90% stock and 10% cash. In connection with the transaction, Banner has received approval from the Federal Deposit Insurance Corporation, the Washington Department of Financial Institutions and the Oregon Department of Consumer Business and Services of the proposed merger of Siuslaw Bank with and into Banner Bank. Banner has filed a waiver request with the Federal Reserve Board requesting that it waive its application requirements with respect to the proposed merger of Siuslaw with and into Banner. Completion of the transaction is subject to customary conditions, including approval of the Merger Agreement by Siuslaw's shareholders and the receipt of the waiver from the Federal Reserve Board. Upon closing of the transaction Siuslaw will be merged into Banner and Siuslaw Bank will be merged into Banner Bank.


10


Stockholder Equity Transactions:
 
Omnibus Incentive Plan: On January 28, 2014, the Company's board of directors unanimously adopted, and on April 22, 2014 the Company's shareholders approved, the Banner Corporation 2014 Omnibus Incentive Plan (2014 Plan). The purpose of the 2014 Plan is to promote the success and enhance the value of Banner by linking the personal interests of employees and directors with those of Banner's shareholders. The 2014 Plan is further intended to provide flexibility to Banner in its ability to motivate, attract, and retain the services of employees and directors upon whose judgment, interest and special effort Banner depends. The 2014 Plan also allows performance-based compensation to be provided in a manner that exempts such compensation from the deduction limits imposed by Section 162(m) of the Internal Revenue Code.

Note 3:  ACCOUNTING STANDARDS RECENTLY ISSUED OR ADOPTED

Unrecognized Tax Benefits

In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 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. The Company adopted the provisions of ASU No. 2013-11 effective January 1, 2014. The adoption of this guidance did not have a material effect on the Company's consolidated financial statements.
 
Investing in Qualified Affordable Housing Projects

In January 2014, FASB issued ASU No. 2014-01, Accounting for Investments in Qualified Affordable Housing Projects. The objective of this ASU is to provide guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. The amendments in this ASU modify the conditions that a reporting entity must meet to be eligible to use a method other than the equity or cost methods to account for qualified affordable housing project investments. If the modified conditions are met, the amendments permit an entity to amortize the initial cost of the investment in proportion to the amount of tax credits and other tax benefits received and recognize the net investment performance in the income statement as a component of income tax expense (benefit). Additionally, the amendments introduce new recurring disclosures about all investments in qualified affordable housing projects irrespective of the method used to account for the investments. The amendments in this ASU should be applied retrospectively to all periods presented. ASU No. 2014-01 is effective beginning after December 15, 2014 and is not expected to have a material impact on the Company's consolidated financial statements.

Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure

In January 2014, FASB issued ASU No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments in this ASU clarify that an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU No. 2014-04 is effective for fiscal years and interim periods beginning after December 15, 2014 and is not expected to have a material impact on the Company's consolidated financial statements.

Revenue from Contracts with Customers
In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which creates Topic 606 and supersedes Topic 605, Revenue Recognition. The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In general, the new guidance requires companies to use more judgment and make more estimates than under current guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The standard is effective for public entities for interim and annual periods beginning after December 15, 2016; early adoption is not permitted. For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. The Company is currently evaluating the provisions of ASU No. 2014-09 to determine the potential impact the standard will have on the Company’s consolidated financial statements.


11


Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure

In August 2014, FASB issued ASU No. 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. The amendments in this ASU affect creditors that hold government-guaranteed mortgage loans, including those guaranteed by the FHA and the VA. The ASU provides specific guidance on how to classify or measure foreclosed mortgage loans that are government guaranteed. The amendments in this Update require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: 1) the loan has a government guarantee that is not separable from the loan before foreclosure, 2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and creditor has the ability to recover under the claim and, 3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. ASU No. 2014-14 is effective for fiscal years and interim periods beginning after December 15, 2014 and is not expected to have a material impact on the Company's consolidated financial statements.

Note 4:  BUSINESS COMBINATIONS

Acquisition of Six Oregon Branches

Effective as of the close of business on June 20, 2014, Banner Bank completed the purchase of six branches from Umpqua Bank, successor to Sterling Savings Bank (the Branch Acquisition). Five of the six branches are located in Coos County, Oregon and the sixth branch is located in Douglas County, Oregon. The purchase provided $212 million in deposit accounts, $88 million in loans, and $3 million in branch properties. Banner Bank received $128 million in cash from the transaction.

The assets acquired and liabilities assumed in the purchase have been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the acquisition date. The application of the acquisition method of accounting resulted in recognition of a core deposit intangible asset of $2.4 million and an acquisition bargain purchase gain of $9.1 million. The bargain purchase gain represents the excess fair value of the net assets acquired over the purchase price, including fair value of liabilities assumed. The bargain purchase gain consisted primarily of a $7 million discount on the assets acquired in this required branch divestiture combined with a $2.4 million core deposit intangible, net of approximately $300,000 in other fair value adjustments. The acquired core deposit intangible has been determined to have a useful life of approximately eight years and will be amortized on an accelerated basis.

The following table displays the fair value as of the acquisition date for each major class of assets acquired and liabilities assumed (in thousands):
 
Fair Value at Acquisition
June 20, 2014
Assets:
 
Cash
$
127,557

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

Property and equipment
3,079

Core deposit intangible
2,372

Other assets
275

Total assets
221,206

 
 
Liabilities:
 
Deposits
212,085

Other liabilities
42

Total liabilities
212,127

Acquisition bargain purchase gain
$
9,079


Amounts recorded are preliminary estimates of fair value. Additional adjustmentss to the purchase price allocation may be required and would most likely involve loans or property and equipment. The primary reason for the acquisition was to continue the Company's growth strategy, including expanding our geographic footprint in markets throughout the Northwest. As of June 20, 2014, the transaction had no remaining contingencies. Pro forma results of operations for the three and nine months ended September 30, 2014 and 2013, as if the Branch Acquisition had occurred on January 1, 2013, have not been presented because historical financial information was not available.


12


The operating results of the Company include the operating results produced by the six acquired branches from June 21, 2014 to September 30, 2014. In connection with the acquisition, Banner recognized actual expenses and accrued for anticipated expenses a total of $2.0 million in the quarter ended June 30, 2014. In the quarter ended September 30, 2014, Banner adjusted the accrued estimated expenses to reflect amounts actually incurred, which resulted in a reversal of expenses totaling $494,000 for the quarter. For the nine months ended September 30, 2014, acquisition-related expenses totaled $1.5 million. See the following table of acquisition-related expenses for the three and nine months ended September 30, 2014 as follows (in thousands):
 
Three Months Ended September 30, 2014
 
Nine Months Ended
September 30, 2014
Acquisition-related costs recognized in other operating expenses:
 
 
 
Non-capitalized equipment and repairs
$
70

 
$
99

Client communications
(108
)
 
130

Information/computer data services
(335
)
 
297

Payment and processing expenses
(205
)
 
66

Professional services
56

 
674

Miscellaneous
28

 
264

 
$
(494
)
 
$
1,530


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, 2014

 
December 31, 2013

Interest-bearing deposits included in cash and due from banks
$
82,702

 
$
67,638

U.S. Government and agency obligations
46,943

 
61,327

Municipal bonds:


 


Taxable
35,020

 
34,216

Tax exempt
137,979

 
119,588

Total municipal bonds
172,999

 
153,804

Corporate bonds
35,862

 
44,154

Mortgage-backed or related securities:


 


One- to four-family residential agency guaranteed
56,331

 
58,117

One- to four-family residential other
753

 
1,051

Multifamily agency guaranteed
269,143

 
281,319

Multifamily other
10,476

 
10,234

Total mortgage-backed or related securities
336,703

 
350,721

Asset-backed securities:


 


Student Loan Marketing Association (SLMA)
15,650

 
15,681

Other asset-backed securities
9,671

 
9,510

Total asset-backed securities
25,321

 
25,191

Equity securities (excludes FHLB stock)
62

 
68

Total securities
617,890

 
635,265

Total interest-bearing deposits and securities
$
700,592

 
$
702,903


13



Securities—Trading:  The amortized cost and estimated fair value of securities—trading at September 30, 2014 and December 31, 2013 are summarized as follows (dollars in thousands):
 
September 30, 2014
 
December 31, 2013
 
Amortized Cost
 
Fair Value
 
Percent of Total
 
Amortized Cost
 
Fair Value
 
Percent of Total
U.S. Government and agency obligations
$
1,340

 
$
1,494

 
2.9
%
 
$
1,370

 
$
1,481

 
2.4
%
Municipal bonds:


 


 
 
 
 
 
 
 
 
Tax exempt
1,665

 
1,707

 
3.4

 
4,969

 
5,023

 
8.0

Corporate bonds
37,981

 
29,013

 
56.8

 
49,498

 
35,140

 
56.2

Mortgage-backed or related securities:


 


 
 
 
 
 
 
 
 
One- to four-family residential agency guaranteed
8,697

 
9,393

 
18.4

 
10,483

 
11,230

 
18.0

Multifamily agency guaranteed
8,693

 
9,407

 
18.4

 
8,816

 
9,530

 
15.3

Total mortgage-backed or related securities
17,390

 
18,800

 
36.8

 
19,299

 
20,760

 
33.3

Equity securities
14

 
62

 
0.1

 
14

 
68

 
0.1

 
$
58,390

 
$
51,076

 
100.0
%
 
$
75,150

 
$
62,472

 
100.0
%

There were three sales of securities—trading totaling $2.4 million with a resulting net gain of $1,000 during the nine months ended September 30, 2014. 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.  In addition to the $1.5 million net gain, the Company also recognized a $409,000 OTTI recovery on sales of securities—trading during the nine months ended September 30, 2013, which was related to the sale of certain equity securities issued by government-sponsored entities.  The Company did not recognize any OTTI charges or recoveries on securities—trading during the nine months ended September 30, 2014. No securities—trading were on nonaccrual status at September 30, 2014 and 2013.

The amortized cost and estimated fair value of securities—trading at September 30, 2014 and December 31, 2013, 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, 2014
 
December 31, 2013
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
 
 
 
 
 
 
 
Maturing in one year or less
$
260

 
$
262

 
$
260

 
$
263

Maturing after one year through five years
7,917

 
8,467

 
7,056

 
7,298

Maturing after five years through ten years
7,159

 
7,805

 
12,602

 
13,572

Maturing after ten years through twenty years
21,181

 
20,024

 
33,335

 
27,472

Maturing after twenty years
21,859

 
14,456

 
21,883

 
13,799

 
58,376

 
51,014

 
75,136

 
62,404

Equity securities
14

 
62

 
14

 
68

 
$
58,390

 
$
51,076

 
$
75,150

 
$
62,472



14


Securities—Available-for-Sale:  The amortized cost and estimated fair value of securities—available-for-sale at September 30, 2014 and December 31, 2013 are summarized as follows (dollars in thousands):
 
September 30, 2014
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Percent of Total
U.S. Government and agency obligations
$
43,565

 
$
15

 
$
(287
)
 
$
43,293

 
10.0
%
Municipal bonds:


 


 


 


 
 
Taxable
19,567

 
97

 
(44
)
 
19,620

 
4.5

Tax exempt
29,944

 
168

 
(53
)
 
30,059

 
6.9

Total municipal bonds
49,511

 
265

 
(97
)
 
49,679

 
11.4

Corporate bonds
5,000

 
49

 

 
5,049

 
1.2

Mortgage-backed or related securities:


 


 


 


 
 
One- to four-family residential agency guaranteed
44,897

 
792

 
(437
)
 
45,252

 
10.4

One- to four-family residential other
712

 
41

 

 
753

 
0.2

Multifamily agency guaranteed
255,519

 
438

 
(2,035
)
 
253,922

 
58.6

Multifamily other
10,529

 
11

 
(64
)
 
10,476

 
2.4

Total mortgage-backed or related securities
311,657

 
1,282

 
(2,536
)
 
310,403

 
71.6

Asset-backed securities:


 


 


 


 
 
SLMA
15,486

 
164

 

 
15,650

 
3.6

Other asset-backed securities
10,053

 

 
(382
)
 
9,671

 
2.2

Total asset-backed securities
25,539

 
164

 
(382
)
 
25,321

 
5.8

 
$
435,272

 
$
1,775

 
$
(3,302
)
 
$
433,745

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Percent of Total
U.S. Government and agency obligations
$
59,178

 
$
117

 
$
(635
)
 
$
58,660

 
12.5
%
Municipal bonds:
 
 
 
 
 
 
 
 
 
Taxable
23,842

 
100

 
(278
)
 
23,664

 
5.0

Tax exempt
29,229

 
170

 
(208
)
 
29,191

 
6.2

Total municipal bonds
53,071

 
270

 
(486
)
 
52,855

 
11.2

Corporate bonds
7,001

 
2

 
(39
)
 
6,964

 
1.5

Mortgage-backed or related securities:
 
 
 
 
 
 
 
 
 
One- to four-family residential agency guaranteed
47,077

 
648

 
(838
)
 
46,887

 
10.0

One- to four-family residential other
988

 
63

 

 
1,051

 
0.2

Multifamily agency guaranteed
271,428

 
402

 
(3,392
)
 
268,438

 
57.1

Multifamily other
10,604

 

 
(370
)
 
10,234

 
2.2

Total mortgage-backed or related securities
330,097

 
1,113

 
(4,600
)
 
326,610

 
69.5

Asset-backed securities:
 
 
 
 
 
 
 
 
 
SLMA
15,553

 
128

 

 
15,681

 
3.3

Other asset-backed securities
10,060

 

 
(550
)
 
9,510

 
2.0

Total asset-backed securities
25,613

 
128

 
(550
)
 
25,191

 
5.3

 
$
474,960

 
$
1,630

 
$
(6,310
)
 
$
470,280

 
100.0
%


15


At September 30, 2014 and December 31, 2013, an aging of unrealized losses and fair value of related securities—available-for-sale was as follows (in thousands):
 
September 30, 2014
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
U.S. Government and agency obligations
$
16,102

 
$
(50
)
 
$
20,301

 
$
(237
)
 
$
36,403

 
$
(287
)
Municipal bonds:


 


 


 


 


 


Taxable
4,585

 
(6
)
 
3,691

 
(38
)
 
8,276

 
(44
)
Tax exempt
2,140

 
(3
)
 
3,661

 
(50
)
 
5,801

 
(53
)
Total municipal bonds
6,725

 
(9
)
 
7,352

 
(88
)
 
14,077

 
(97
)
Mortgage-backed or related securities:


 


 


 


 


 


One- to four-family residential agency guaranteed
7,459

 
(61
)
 
11,836

 
(376
)
 
19,295

 
(437
)
Multifamily agency guaranteed
92,070

 
(426
)
 
104,790

 
(1,609
)
 
196,860

 
(2,035
)
Multifamily other
8,417

 
(64
)
 

 

 
8,417

 
(64
)
Total mortgage-backed or related securities
107,946

 
(551
)
 
116,626

 
(1,985
)
 
224,572

 
(2,536
)
Asset-backed securities:


 


 


 


 


 
 
Other asset-backed securities

 

 
9,671

 
(382
)
 
9,671

 
(382
)
 
$
130,773

 
$
(610
)
 
$
153,950

 
$
(2,692
)
 
$
284,723

 
$
(3,302
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 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
$
39,621

 
$
(633
)
 
$
998

 
$
(2
)
 
$
40,619

 
$
(635
)
Municipal bonds:
 
 
 
 
 
 
 
 
 
 
 
Taxable
15,580

 
(261
)
 
413

 
(17
)
 
15,993

 
(278
)
Tax exempt
8,217

 
(205
)
 
487

 
(3
)
 
8,704

 
(208
)
Total municipal bonds
23,797

 
(466
)
 
900

 
(20
)
 
24,697

 
(486
)
Corporate bonds
4,961

 
(39
)
 

 

 
4,961

 
(39
)
Mortgage-backed or related securities:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family residential agency guaranteed
14,972

 
(133
)
 
22,560

 
(705
)
 
37,532

 
(838
)
Multifamily agency guaranteed
199,407

 
(3,162
)
 
10,096

 
(230
)
 
209,503

 
(3,392
)
Multifamily other
10,234

 
(370
)
 

 

 
10,234

 
(370
)
Total mortgage-backed or related securities
224,613

 
(3,665
)
 
32,656

 
(935
)
 
257,269

 
(4,600
)
Asset-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Other asset-backed securities

 

 
9,510

 
(550
)
 
9,510

 
(550
)
 
$
292,992

 
$
(4,803
)
 
$
44,064

 
$
(1,507
)
 
$
337,056

 
$
(6,310
)

There were 12 sales of securities—available-for-sale totaling $56.0 million with a resulting net gain of $40,000 during the nine months ended September 30, 2014. There were 35 sales of securities—available-for-sale totaling $103.3 million with a resulting net loss of $116,000 during the nine months ended September 30, 2013.  At September 30, 2014, there were 90 securities—available for sale with unrealized losses, compared to 114 securities at December 31, 2013.  Management does not believe that any individual unrealized loss as of September 30, 2014 represents OTTI.  The decline in fair market values of these securities was generally due to changes in interest rates and changes in market-desired spreads subsequent to their purchase. There were no securities—available-for-sale on nonaccrual status at September 30, 2014 or 2013.


16


The amortized cost and estimated fair value of securities—available-for-sale at September 30, 2014 and December 31, 2013, 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, 2014
 
December 31, 2013
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
 
 
 
 
 
 
 
Maturing in one year or less
$
3,951

 
$
3,955

 
$
25,136

 
$
25,256

Maturing after one year through five years
312,365

 
310,514

 
322,493

 
319,489

Maturing after five years through ten years
48,536

 
48,587

 
58,468

 
57,782

Maturing after ten years through twenty years
12,100

 
12,107

 
15,535

 
15,135

Maturing after twenty years
58,320

 
58,582

 
53,328

 
52,618

 
$
435,272

 
$
433,745

 
$
474,960

 
$
470,280


Securities—Held-to-Maturity:  The amortized cost and estimated fair value of securities—held-to-maturity at September 30, 2014 and December 31, 2013 are summarized as follows (dollars in thousands):
 
September 30, 2014
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Percent of Total Amortized Cost
U.S. Government and agency obligations
$
2,156

 
$

 
$
(25
)
 
$
2,131

 
1.6
%
Municipal bonds:
 
 
 
 
 
 
 
 
 
Taxable
15,400

 
286

 
(4
)
 
15,682

 
11.6

Tax exempt
106,213

 
5,591

 
(167
)
 
111,637

 
79.8

Total municipal bonds
121,613

 
5,877

 
(171
)
 
127,319

 
91.4

Corporate bonds
1,800

 

 

 
1,800

 
1.4

Mortgage-backed or related securities:
 
 
 
 
 
 
 
 
 
One- to four-family residential agency guaranteed
1,686

 

 
(12
)
 
1,674

 
1.2

Multifamily agency guaranteed
5,814

 
18

 
(2
)
 
5,830

 
4.4

Total mortgage-backed or related securities
7,500

 
18

 
(14
)
 
7,504

 
5.6

 
$
133,069

 
$
5,895

 
$
(210
)
 
$
138,754

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Percent of Total Amortized Cost
U.S. Government and agency obligations
$
1,186

 
$

 
$
(80
)
 
$
1,106

 
1.2
%
Municipal bonds:
 
 
 
 
 
 
 
 
 
Taxable
10,552

 
193

 
(204
)
 
10,541

 
10.3

Tax exempt
85,374

 
2,545

 
(1,299
)
 
86,620

 
83.3

Total municipal bonds
95,926

 
2,738

 
(1,503
)
 
97,161

 
93.6

Corporate bonds
2,050

 

 

 
2,050

 
2.0

Mortgage-backed or related securities:
 
 
 
 
 
 
 
 
 
Multifamily agency guaranteed
3,351

 

 
(58
)
 
3,293

 
3.2

 
$
102,513

 
$
2,738

 
$
(1,641
)
 
$
103,610

 
100.0
%


17


At September 30, 2014 and December 31, 2013, an age analysis of unrealized losses and fair value of related securities—held-to-maturity was as follows (in thousands):
 
September 30, 2014
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
U.S. Government and agency obligations
$

 
$

 
$
1,131

 
$
(25
)
 
$
1,131

 
$
(25
)
Municipal bonds:
 
 
 
 
 
 
 
 
 
 
 
Taxable
1,147

 
(4
)
 

 

 
1,147

 
(4
)
Tax exempt
5,091

 
(39
)
 
7,418

 
(128
)
 
12,509

 
(167
)
Total municipal bonds
6,238

 
(43
)
 
7,418

 
(128
)
 
13,656

 
(171
)
Mortgage-backed or related securities:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family residential agency guaranteed
1,674

 
(12
)
 

 

 
1,674

 
(12
)
Multifamily agency guaranteed
2,230

 
(2
)
 

 

 
2,230

 
(2
)
Total mortgage-backed or related securities
3,904

 
(14
)
 

 

 
3,904

 
(14
)
 
$
10,142

 
$
(57
)
 
$
8,549

 
$
(153
)
 
$
18,691

 
$
(210
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 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
$
1,106

 
$
(80
)
 
$

 
$

 
$
1,106

 
$
(80
)
Municipal bonds:
 
 
 
 
 
 
 
 
 
 
 
Taxable
3,344

 
(110
)
 
2,964

 
(94
)
 
6,308

 
(204
)
Tax exempt
31,234

 
(1,282
)
 
303

 
(17
)
 
31,537

 
(1,299
)
Total municipal bonds
34,578

 
(1,392
)
 
3,267

 
(111
)
 
37,845

 
(1,503
)
Mortgage-backed or related securities:
 
 
 
 
 
 
 
 
 
 
 
Multifamily agency guaranteed
3,293

 
(58
)
 

 

 
3,293

 
(58
)
 
$
38,977

 
$
(1,530
)
 
$
3,267

 
$
(111
)
 
$
42,244

 
$
(1,641
)

There were no sales of securities—held-to-maturity during the nine months ended September 30, 2014 and 2013.  At September 30, 2014, there were 27 securities—held-to-maturity with unrealized losses, compared to 36 securities at December 31, 2013.  Management does not believe that any individual unrealized loss as of September 30, 2014 represents OTTI.  The decline in fair market value of these securities was generally due to changes in interest rates and changes in market-desired spreads subsequent to their purchase. There were no securities—held-to-maturity on nonaccrual status at September 30, 2014 or 2013.

The amortized cost and estimated fair value of securities—held-to-maturity at September 30, 2014 and December 31, 2013, 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, 2014
 
December 31, 2013
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
 
 
 
 
 
 
 
Maturing in one year or less
$
940

 
$
947

 
$
1,270

 
$
1,281

Maturing after one year through five years
15,400

 
15,679

 
10,834

 
11,206

Maturing after five years through ten years
26,090

 
26,440

 
17,948

 
17,908

Maturing after ten years through twenty years
75,613

 
80,421

 
59,643

 
60,791

Maturing after twenty years
15,026

 
15,267

 
12,818

 
12,424

 
$
133,069

 
$
138,754

 
$
102,513

 
$
103,610


18



Pledged Securities: The following table presents, as of September 30, 2014, investment securities and interest-bearing deposits which were pledged to secure borrowings, public deposits or other obligations as permitted or required by law (in thousands):
 
Carrying Value
 
Amortized Cost
 
Fair Value
Purpose or beneficiary:
 
 
 
 
 
State and local governments public deposits
$
137,864

 
$
137,738

 
$
143,306

Interest rate swap counterparties
9,751

 
9,405

 
9,751

Retail repurchase agreements
100,350

 
100,115

 
100,350

Other
248

 
248

 
248

Total pledged securities and interest-bearing deposits
$
248,213

 
$
247,506

 
$
253,655