BANR-6.30.2014-10Q


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 JUNE 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 July 31, 2014
Common Stock, $.01 par value per share
 
19,572,823 shares *
 
 
 
 

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 June 30, 2014 and December 31, 2013
 
 
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2014 and 2013
 
 
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2014 and 2013
 
 
Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2014 and the Year Ended December 31, 2013
 
 
Consolidated Statements of Cash Flows for the Six Months Ended June 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 June 30, 2014 and December 31, 2013
 
 
Comparison of Results of Operations for the Three and Six Months Ended June 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)
June 30, 2014 and December 31, 2013
ASSETS
June 30
2014

 
December 31
2013

Cash and due from banks
$
146,561

 
$
137,349

Securities—trading, amortized cost $70,472 and $75,150, respectively
61,393

 
62,472

Securities—available-for-sale, amortized cost $455,232 and $474,960, respectively
455,353

 
470,280

Securities—held-to-maturity, fair value $138,065 and $103,610, respectively
133,186

 
102,513

Federal Home Loan Bank (FHLB) stock
31,191

 
35,390

Loans receivable:
 
 
 
Held for sale
7,322

 
2,734

Held for portfolio
3,755,277

 
3,415,711

Allowance for loan losses
(74,310
)
 
(74,258
)
 
3,688,289

 
3,344,187

Accrued interest receivable
15,579

 
13,996

Real estate owned (REO), held for sale, net
4,388

 
4,044

Property and equipment, net
91,912

 
90,267

Intangible assets, net
3,892

 
2,449

Bank-owned life insurance (BOLI)
62,815

 
61,945

Deferred tax assets, net
22,065

 
27,479

Income tax receivable
166

 
9,728

Other assets
28,509

 
26,799

 
$
4,745,299

 
$
4,388,898

LIABILITIES
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
1,210,068

 
$
1,115,346

Interest-bearing transaction and savings accounts
1,771,865

 
1,629,885

Interest-bearing certificates
936,986

 
872,695

 
3,918,919

 
3,617,926

Advances from FHLB at fair value
45,251

 
27,250

Other borrowings
88,946

 
83,056

Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities)
77,313

 
73,928

Accrued expenses and other liabilities
35,619

 
31,324

Deferred compensation
16,238

 
16,442

 
4,182,286

 
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, 19,568,704 shares issued and outstanding at June 30, 2014; 19,543,769 shares issued and 19,509,429 shares outstanding at December 31, 2013
567,483

 
569,028

Accumulated deficit
(4,541
)
 
(25,073
)
Accumulated other comprehensive income (loss)
71

 
(2,996
)
Unearned shares of common stock issued to Employee Stock Ownership Plan (ESOP) trust at cost: no shares outstanding at June 30, 2014 and 34,340 shares outstanding at December 31, 2013

 
(1,987
)
 
563,013

 
538,972

 
$
4,745,299

 
$
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 Six Months Ended June 30, 2014 and 2013

 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2014

 
2013

 
2014

 
2013

INTEREST INCOME:
 
 
 
 
 
 
 
Loans receivable
$
43,199

 
$
42,292

 
$
84,942

 
$
83,781

Mortgage-backed securities
1,446

 
1,394

 
2,917

 
2,566

Securities and cash equivalents
1,895

 
1,885

 
3,787

 
3,733

 
46,540

 
45,571

 
91,646

 
90,080

INTEREST EXPENSE:
 
 
 
 
 
 
 
Deposits
1,910

 
2,490

 
3,874

 
5,210

FHLB advances
51

 
40

 
90

 
64

Other borrowings
45

 
51

 
89

 
107

Junior subordinated debentures
726

 
742

 
1,446

 
1,482

 
2,732

 
3,323

 
5,499

 
6,863

Net interest income before provision for loan losses
43,808

 
42,248

 
86,147

 
83,217

PROVISION FOR LOAN LOSSES

 

 

 

Net interest income
43,808

 
42,248

 
86,147

 
83,217

OTHER OPERATING INCOME:
 
 
 
 
 
 
 
Deposit fees and other service charges
7,346

 
6,628

 
13,947

 
12,928

Mortgage banking operations
2,600

 
3,574

 
4,440

 
6,412

Miscellaneous
644

 
664

 
1,281

 
1,455

 
10,590

 
10,866

 
19,668

 
20,795

Gain on sale of securities

 
12

 
35

 
1,018

Other-than-temporary impairment recovery

 

 

 
409

Net change in valuation of financial instruments carried at fair value
464

 
(255
)
 
209

 
(1,601
)
Acquisition bargain purchase gain
9,079

 

 
9,079

 

Total other operating income
20,133

 
10,623

 
28,991

 
20,621

OTHER OPERATING EXPENSES:
 
 
 
 
 
 
 
Salary and employee benefits
22,330

 
21,224

 
43,486

 
41,953

Less capitalized loan origination costs
(3,282
)
 
(3,070
)
 
(5,477
)
 
(5,941
)
Occupancy and equipment
5,540

 
5,415

 
11,236

 
10,744

Information/computer data services
1,918

 
1,923

 
3,853

 
3,643

Payment and card processing expenses
2,746

 
2,449

 
5,261

 
4,753

Professional services
1,109

 
820

 
2,115

 
1,726

Advertising and marketing
1,370

 
1,798

 
2,425

 
3,297

Deposit insurance
637

 
617

 
1,213

 
1,263

State/municipal business and use taxes
388

 
538

 
547

 
1,003

REO operations
(109
)
 
(195
)
 
(70
)
 
(446
)
Amortization of core deposit intangibles
450

 
477

 
929

 
982

Acquisition related costs
1,979

 

 
2,024

 

Miscellaneous
3,359

 
3,461

 
6,473

 
6,580

Total other operating expenses
38,435

 
35,457

 
74,015

 
69,557

Income before provision for income taxes
25,506

 
17,414

 
41,123

 
34,281

PROVISION FOR INCOME TAXES
8,499

 
5,661

 
13,545

 
10,945

NET INCOME
$
17,007

 
$
11,753

 
$
27,578

 
$
23,336

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.88

 
$
0.61

 
$
1.43

 
$
1.21

Diluted
$
0.88

 
$
0.60

 
$
1.42

 
$
1.20

Cumulative dividends declared per common share
$
0.18

 
$
0.12

 
$
0.36

 
$
0.24

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 Six Months Ended June 30, 2014 and 2013

 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2014

 
2013

 
2014

 
2013

NET INCOME
$
17,007

 
$
11,753

 
$
27,578

 
$
23,336

OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES:
 
 
 
 
 
 
 
Unrealized holding gain (loss) on AFS securities arising during the period
2,330

 
(8,476
)
 
4,767

 
(8,854
)
Income tax benefit (expense) related to AFS unrealized holding gains (losses)
(845
)
 
3,043

 
(1,722
)
 
3,179

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

 
1

 
34

 
(116
)
Income tax benefit (expense) related to AFS realized gains (losses)

 

 
(12
)
 
42

Other comprehensive income (loss)
1,485

 
(5,432
)
 
3,067

 
(5,749
)
COMPREHENSIVE INCOME
$
18,492

 
$
6,321

 
$
30,645

 
$
17,587


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 Six Months Ended June 30, 2014

 
Common Stock
and Paid in Capital
 
Accumulated
Deficit
 
Accumulated
Other Comprehensive Income (Loss)
 
Unearned Restricted
ESOP Shares
 
Stockholders’
Equity
 
Shares
 
Amount
 
 
 
 
Balance, January 1, 2014
19,509,429

 
$
569,028

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

Net income
 
 
 
 
27,578

 
 
 
 
 
27,578

Other comprehensive income, net of income tax
 
 
 
 
 
 
3,067

 
 
 
3,067

Accrual of dividends on common stock ($0.36/share cumulative)
 
 
 
 
(7,046
)
 
 
 
 
 
(7,046
)
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
1,451

 
60

 
 
 
 
 
 
 
60

Issuance of restricted stock and amortization of related compensation
71,374

 
938

 
 
 
 
 
 
 
938

BALANCE, June 30, 2014
19,568,704

 
$
567,483

 
$
(4,541
)
 
$
71

 
$

 
$
563,013



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, 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
 
 
 
 
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 amortization of related compensation
86,706

 
1,049

 
 
 
 
 
 
 
1,049

BALANCE, December 31, 2013
19,509,429

 
$
569,028

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


See Selected Notes to the Consolidated Financial Statements

8


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

 
2013

OPERATING ACTIVITIES:
 
 
 
Net income
$
27,578

 
$
23,336

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
4,053

 
3,679

Deferred income and expense, net of amortization
1,883

 
2,233

Amortization of core deposit intangibles
929

 
982

Gain on sale of securities
(35
)
 
(1,018
)
Other-than-temporary impairment recovery

 
(409
)
Net change in valuation of financial instruments carried at fair value
(209
)
 
1,601

Purchases of securities—trading
(2,387
)
 
(23,377
)
Proceeds from sales of securities—trading
2,387

 
25,267

Principal repayments and maturities of securities—trading
4,702

 
3,657

Bargain purchase gain on acquisition
(9,079
)
 

Decrease in deferred taxes
5,414

 
570

Increase (decrease) in current taxes payable
9,562

 
(4,245
)
Equity-based compensation
818

 
478

Increase in cash surrender value of BOLI
(858
)
 
(982
)
Gain on sale of loans, net of capitalized servicing rights
(2,528
)
 
(4,303
)
Gain on disposal of real estate held for sale and property and equipment
(453
)
 
(1,454
)
Provision for losses on real estate held for sale
37

 
299

Origination of loans held for sale
(160,625
)
 
(263,111
)
Proceeds from sales of loans held for sale
158,565

 
272,941

Net change in:
 
 
 
Other assets
(1,967
)
 
19,440

Other liabilities and equity
2,946

 
(5,019
)
Net cash provided from operating activities
40,733

 
50,565

INVESTING ACTIVITIES:
 
 
 
Purchases of securities—available-for-sale
(30,272
)
 
(179,555
)
Principal repayments and maturities of securities—available-for-sale
20,085

 
68,488

Proceeds from sales of securities—available-for-sale
28,207

 
103,274

Purchases of securitiesheld-to-maturity
(33,686
)
 
(9,029
)
Principal repayments and maturities of securities—held-to-maturity
2,603

 
987

Loan originations, net of principal repayments
(155,279
)
 
(66,066
)
Purchases of loans and participating interest in loans
(101,840
)
 
(91
)
Proceeds from sales of other loans
2,491

 
3,288

Net cash received from acquisition
127,557

 

Purchases of property and equipment
(2,617
)
 
(2,439
)
Proceeds from sale of real estate held for sale, net
2,672

 
11,787

Proceeds from FHLB stock repurchase program
4,199

 
665

Other
(2,054
)
 
120

Net cash used by investing activities
(137,934
)
 
(68,571
)
FINANCING ACTIVITIES:
 
 
 
Increase (decrease) in deposits, net
88,907

 
(97,480
)
Advances, net of repayments of FHLB borrowings
17,996

 
43,997

Increase in other borrowings, net
5,889

 
14,146

Cash dividends paid
(6,439
)
 
(2,530
)
Cash proceeds from issuance of stock for stockholder reinvestment plan
60

 
23

Net cash provided from (used by) financing activities
106,413

 
(41,844
)
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS
9,212

 
(59,850
)
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD
137,349

 
181,298

CASH AND DUE FROM BANKS, END OF PERIOD
$
146,561

 
$
121,448

(Continued on next page)

9


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

 
2013

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Interest paid in cash
$
5,527

 
$
7,087

Taxes paid, net of refunds received in cash
292

 
11,376

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
2,885

 
1,770

ACQUISITIONS (Note 2):
 
 
 
   Assets acquired
221,206

 

   Liabilities assumed
212,127

 


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 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, (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, 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 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. The consideration for the transaction is approximately 90% stock and 10% cash. Based on the Banner closing priced of $39.14 per share on August 7, 2014 the aggregate consideration would be $57.5 million. The purchase is subject to approval by Siuslaw shareholders, regulatory approval and other customary conditions of closing. Upon closing of the transaction, which is anticipated to take place in the latter part of the fourth quarter of 2014, Siuslaw will be merged into Banner and Siuslaw Bank will be merged into Banner Bank.

Termination of Proposed Acquisition of Idaho Banking Company

On June 30, 2014, the Company announced it had terminated its agreement to acquire Idaho Banking Company (Idaho Banking) through the bidding process under Section 363 of Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for the District of Idaho (Bankruptcy Court). Banner proposed to purchase all of the issued and outstanding shares of Idaho Banking Company pursuant to an Asset Purchase Agreement (Agreement) it had entered into with Idaho Bancorp, the bank holding company of Idaho Banking, on April 24, 2014. In connection with the June 26, 2014 Bankruptcy Court-supervised auction process, as contemplated by the Agreement, Idaho Banking received the highest offer from another bidder. Accordingly, the Agreement has been terminated. Pursuant to the Agreement, the Company will be reimbursed for its expenses in connection with the transaction.

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. 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.

11



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, and are subject to change for up to one year after the closing date of the acquisition. 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 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
June 20, 2014
Assets:
 
Cash
$
127,557

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

Property and equipment, net
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. 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 six months ended June 30, 2014 and 2013, as if the branch acquisitions had occurred on January 1, 2013, have not been presented because historical financial information was not available.

The operating results of the Company include the operating results produced by the six acquired branches from June 21, 2014 to June 30, 2014. In connection with the acquisition, Banner recognized $2.0 million of acquisition-related expenses for the three and six months ended June 30, 2014 as follows (in thousands):
 
Three Months Ended
June 30, 2014
 
Six Months Ended
June 30, 2014
Acquisition-related costs recognized in other operating expenses:
 
 
 
Non-capitalized equipment
$
29

 
$
29

Client communications
236

 
238

Information/computer data services
632

 
632

Payment and processing expenses
271

 
271

Professional services
587

 
619

Miscellaneous
224

 
235

 
$
1,979

 
$
2,024


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. The purpose of the 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 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 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.


12


Note 3:  ACCOUNTING STANDARDS RECENTLY 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, the 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.


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 a traditional banking institution, gathering deposits and originating loans for its portfolios in its 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.

13



Generally Accepted Accounting Principles, or GAAP, 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):
 
June 30
2014

 
December 31
2013

Interest-bearing deposits included in cash and due from banks
$
62,990

 
$
67,638

U.S. Government and agency obligations
55,908

 
61,327

Municipal bonds:


 


Taxable
35,227

 
34,216

Tax exempt
138,859

 
119,588

Total municipal bonds
174,086

 
153,804

Corporate bonds
45,340

 
44,154

Mortgage-backed or related securities:


 


One- to four-family residential agency guaranteed
56,063

 
58,117

One- to four-family residential other
911

 
1,051

Multifamily agency guaranteed
281,421

 
281,319

Multifamily other
10,676

 
10,234

Total mortgage-backed or related securities
349,071

 
350,721

Asset-backed securities:


 


Student Loan Marketing Association (SLMA)
15,732

 
15,681

Other asset-backed securities
9,734

 
9,510

Total asset-backed securities
25,466

 
25,191

Equity securities (excludes FHLB stock)
61

 
68

Total securities
649,932

 
635,265

Total interest-bearing deposits and securities
$
712,922

 
$
702,903


Securities—Trading:  The amortized cost and estimated fair value of securities—trading at June 30, 2014 and December 31, 2013 are summarized as follows (dollars in thousands):
 
June 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
$
1,370

 
$
1,530

 
2.5
%
 
$
1,370

 
$
1,481

 
2.4
%
Municipal bonds:


 


 
 
 
 
 
 
 
 
Tax exempt
1,666

 
1,716

 
2.8

 
4,969

 
5,023

 
8.0

Corporate bonds
49,466

 
38,529

 
62.7

 
49,498

 
35,140

 
56.2

Mortgage-backed or related securities:


 


 
 
 
 
 
 
 
 
One- to four-family residential agency guaranteed
9,222

 
9,987

 
16.3

 
10,483

 
11,230

 
18.0

Multifamily agency guaranteed
8,734

 
9,570

 
15.6

 
8,816

 
9,530

 
15.3

Total mortgage-backed or related securities
17,956

 
19,557

 
31.9

 
19,299

 
20,760

 
33.3

Equity securities
14

 
61

 
0.1

 
14

 
68

 
0.1

 
$
70,472

 
$
61,393

 
100.0
%
 
$
75,150

 
$
62,472

 
100.0
%


14


There were three sales of securities—trading totaling $2.4 million with a resulting net gain of $1,000 during the six months ended June 30, 2014. There were 37 sales of securities—trading totaling $25.3 million with a resulting net gain of $1.0 million during the six months ended June 30, 2013, including $1.0 million which represented recoveries on certain collateralized debt obligations that had previously been written off.  In addition to the $1.0 million net gain, the Company also recognized a $409,000 OTTI recovery on sales of securities—trading during the six months ended June 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 six months ended June 30, 2014. No securities—trading were on nonaccrual status at June 30, 2014 and 2013.

The amortized cost and estimated fair value of securities—trading at June 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.
 
June 30, 2014
 
December 31, 2013
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
 
 
 
 
 
 
 
Maturing in one year or less
$
11,759

 
$
11,763

 
$
260

 
$
263

Maturing after one year through five years
6,524

 
6,969

 
7,056

 
7,298

Maturing after five years through ten years
8,976

 
9,915

 
12,602

 
13,572

Maturing after ten years through twenty years
21,352

 
17,930

 
33,335

 
27,472

Maturing after twenty years
21,847

 
14,755

 
21,883

 
13,799

 
70,458

 
61,332

 
75,136

 
62,404

Equity securities
14

 
61

 
14

 
68

 
$
70,472

 
$
61,393

 
$
75,150

 
$
62,472



15


Securities—Available-for-Sale:  The amortized cost and estimated fair value of securities—available-for-sale at June 30, 2014 and December 31, 2013 are summarized as follows (dollars in thousands):
 
June 30, 2014
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Percent of Total
U.S. Government and agency obligations
$
52,424

 
$
41

 
$
(253
)
 
$
52,212

 
11.5
%
Municipal bonds:


 


 


 


 
 
Taxable
19,733

 
116

 
(40
)
 
19,809

 
4.4

Tax exempt
30,876

 
194

 
(78
)
 
30,992

 
6.8

Total municipal bonds
50,609

 
310

 
(118
)
 
50,801

 
11.2

Corporate bonds
5,000

 
11

 

 
5,011

 
1.1

Mortgage-backed or related securities:


 


 


 


 
 
One- to four-family residential agency guaranteed
43,883

 
839

 
(452
)
 
44,270

 
9.7

One- to four-family residential other
860

 
51

 

 
911

 
0.2

Multifamily agency guaranteed
266,339

 
877

 
(1,210
)
 
266,006

 
58.4

Multifamily other
10,554

 
122

 

 
10,676

 
2.3

Total mortgage-backed or related securities
321,636

 
1,889

 
(1,662
)
 
321,863

 
70.6

Asset-backed securities:


 


 


 


 
 
SLMA
15,508

 
224

 

 
15,732

 
3.5

Other asset-backed securities
10,055

 

 
(321
)
 
9,734

 
2.1

Total asset-backed securities
25,563

 
224

 
(321
)
 
25,466

 
5.6

 
$
455,232

 
$
2,475

 
$
(2,354
)
 
$
455,353

 
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
%


16


At June 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):
 
June 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
$
6,691

 
$
(8
)
 
$
20,299

 
$
(245
)
 
$
26,990

 
$
(253
)
Municipal bonds:


 


 


 


 


 


Taxable
3,031

 
(6
)
 
3,829

 
(34
)
 
6,860

 
(40
)
Tax exempt
1,617

 
(3
)
 
3,757

 
(75
)
 
5,374

 
(78
)
Total municipal bonds
4,648

 
(9
)
 
7,586

 
(109
)
 
12,234

 
(118
)
Mortgage-backed or related securities:


 


 


 


 


 


One- to four-family residential agency guaranteed
10,338

 
(79
)
 
12,107

 
(373
)
 
22,445

 
(452
)
Multifamily agency guaranteed
21,224

 
(84
)
 
119,731

 
(1,126
)
 
140,955

 
(1,210
)
Total mortgage-backed or related securities
31,562

 
(163
)
 
131,838

 
(1,499
)
 
163,400

 
(1,662
)
Asset-backed securities:


 


 


 


 


 
 
Other asset-backed securities

 

 
9,734

 
(321
)
 
9,734

 
(321
)
 
$
42,901

 
$
(180
)
 
$
169,457

 
$
(2,174
)
 
$
212,358

 
$
(2,354
)
 
 
 
 
 
 
 
 
 
 
 
 
 
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 six sales of securities—available-for-sale totaling $28.2 million with a resulting net gain of $34,000 during the six months ended June 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 six months ended June 30, 2013.  At June 30, 2014, there were 64 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 June 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 June 30, 2014 or 2013.


17


The amortized cost and estimated fair value of securities—available-for-sale at June 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.
 
June 30, 2014
 
December 31, 2013
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
 
 
 
 
 
 
 
Maturing in one year or less
$
20,198

 
$
20,248

 
$
25,136

 
$
25,256

Maturing after one year through five years
314,605

 
314,067

 
322,493

 
319,489

Maturing after five years through ten years
56,558

 
56,708

 
58,468

 
57,782

Maturing after ten years through twenty years
5,923

 
5,819

 
15,535

 
15,135

Maturing after twenty years
57,948

 
58,511

 
53,328

 
52,618

 
$
455,232

 
$
455,353

 
$
474,960

 
$
470,280


Securities—Held-to-Maturity:  The amortized cost and estimated fair value of securities—held-to-maturity at June 30, 2014 and December 31, 2013 are summarized as follows (dollars in thousands):
 
June 30, 2014
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Percent of Total Amortized Cost
U.S. Government and agency obligations
$
2,166

 
$

 
$
(29
)
 
$
2,137

 
1.6
%
Municipal bonds:
 
 
 
 
 
 
 
 
 
Taxable
15,418

 
287

 
(38
)
 
15,667

 
11.6

Tax exempt
106,151

 
4,970

 
(361
)
 
110,760

 
79.7

Total municipal bonds
121,569

 
5,257

 
(399
)
 
126,427

 
91.3

Corporate bonds
1,800

 

 

 
1,800

 
1.4

Mortgage-backed or related securities:
 
 
 
 
 
 
 
 
 
One- to four-family residential agency guaranteed
1,806

 

 
(10
)
 
1,796

 
1.4

Multifamily agency guaranteed
5,845

 
60

 

 
5,905

 
4.3

Total mortgage-backed or related securities
7,651

 
60

 
(10
)
 
7,701

 
5.7

 
$
133,186

 
$
5,317

 
$
(438
)
 
$
138,065

 
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
%


18


At June 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):
 
June 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
$
1,000

 
$
(1
)
 
$
1,137

 
$
(28
)
 
$
2,137

 
$
(29
)
Municipal bonds:
 
 
 
 
 
 
 
 
 
 
 
Taxable
2,222

 
(8
)
 
2,837

 
(30
)
 
5,059

 
(38
)
Tax exempt
7,499

 
(82
)
 
9,080

 
(279
)
 
16,579

 
(361
)
Total municipal bonds
9,721

 
(90
)
 
11,917

 
(309
)
 
21,638

 
(399
)
Mortgage-backed or related securities:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family residential agency guaranteed
1,796

 
(10
)
 

 

 
1,796

 
(10
)
 
$
12,517

 
$
(101
)
 
$
13,054

 
$
(337
)
 
$
25,571

 
$
(438
)
 
 
 
 
 
 
 
 
 
 
 
 
 
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 six months ended June 30, 2014 and 2013.  At June 30, 2014, there were 37 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 June 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 June 30, 2014 or 2013.

The amortized cost and estimated fair value of securities—held-to-maturity at June 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.
 
June 30, 2014
 
December 31, 2013
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
 
 
 
 
 
 
 
Maturing in one year or less
$
1,365

 
$
1,377

 
$
1,270

 
$
1,281

Maturing after one year through five years
14,447

 
14,774

 
10,834

 
11,206

Maturing after five years through ten years
26,912

 
27,231

 
17,948

 
17,908

Maturing after ten years through twenty years
64,444

 
68,049

 
59,643

 
60,791

Maturing after twenty years
26,018

 
26,634

 
12,818

 
12,424

 
$
133,186

 
$
138,065

 
$
102,513

 
$
103,610


19



Pledged Securities: The following table presents, as of June 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
$
131,022

 
$
130,863

 
$
135,798

Interest rate swap counterparties
9,902

 
9,468

 
9,902

Retail repurchase agreements
102,175

 
101,574

 
102,175

Other
248

 
248

 
248

Total pledged securities and interest-bearing deposits
$
243,347

 
$
242,153

 
$
248,123


Note 6:  FHLB STOCK

The Banks’ investments in Federal Home Loan Bank of Seattle stock are carried at cost, which is its par value ($100 per share), and which reasonably approximates its fair value.  As members of the FHLB system, the Banks are required to maintain a minimum level of investment in FHLB stock based on specific percentages of their outstanding FHLB advances.  At June 30, 2014 and December 31, 2013, respectively, the Company had recorded $31.2 million and $35.4 million in investments in FHLB stock.  This stock is generally viewed as a long-term investment and it does not have a readily determinable fair value.  Ownership of FHLB stock is restricted to the FHLB and member institutions and can only be purchased and redeemed at par. For the six months ended June 30, 2014, the Banks received dividend income of $18,000 on FHLB stock. For the six months ended June 30, 2013, the Banks did not receive any dividend income on FHLB stock.

Management periodically evaluates FHLB stock for impairment.  Management’s determination of whether these investments are impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value.  The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB, and (4) the liquidity position of the FHLB.

Previously, the Federal Housing Finance Agency (the FHFA), the FHLB of Seattle's primary regulator, determined that the FHLB of Seattle had a risk-based capital deficiency as of December 31, 2008, and required the FHLB to suspend future dividends and the repurchase and redemption of outstanding common stock. Subsequent improvement in the FHLB's operating performance and financial condition, however, led to a September 7, 2012 announcement by the FHLB that the FHFA now considers the FHLB of Seattle to be adequately capitalized. Dividends on, or repurchases of, the FHLB of Seattle stock continue to require the consent of the FHFA. Since the third quarter of 2012, the FHFA has approved the repurchase of portions of FHLB of Seattle stock in each subsequent quarter and since the third quarter of 2013 has approved the payment of cash dividends by the FHLB of Seattle in each subsequent quarter. The FHLB repurchased $2.1 million of the Banks' stock during the quarter ending June 30, 2014. The FHLB of Seattle announced on July 29, 2014 that, based on second quarter 2014 financial results, its Board of Directors had declared a $0.025 per share cash dividend. This is the fourth dividend received since dividends recommenced in the third quarter of 2013. Even though the payment of dividends and stock repurchases have resumed, the Company will continue to monitor the financial condition of the FHLB as it relates to, among other things, the recoverability of Banner's investment. Based on the above, the Company has determined there is no impairment on the FHLB stock investment as of June 30, 2014.

Note 7: LOANS RECEIVABLE AND THE ALLOWANCE FOR LOAN LOSSES

The Banks originate residential mortgage loans for both portfolio investment and sale in the secondary market. At the