Banner Corporation
2014 Annual Report
Fellow Shareholders,
In February 2014, we announced our
intention to purchase six branches in
southwestern Oregon. It would be Banner’s
first acquisition since 2007. Although the
intervening years saw some early setbacks,
Banner gradually returned to the strength
and profitability needed to make last
winter’s announcement. It proved to be a
noteworthy beginning to an exciting year of
transformational change that will, pending
final approvals, result in a near doubling of
Banner’s size.
In June, we completed the purchase of those
six branches in Coos and Douglas counties
from Umpqua Bank, successor to Sterling
Savings Bank, expanding our franchise along
the Oregon coast south of Portland. We
have integrated these branches into our
core operating system and are making great
strides in terms of new account openings
and client development.
In August, we announced the proposed
acquisition of Siuslaw Financial Group, Inc.,
the holding company for Siuslaw Bank, with
ten branches in Lane County (Eugene),
Oregon, complementing our earlier
purchase. I am pleased to report that this
acquisition has recently been completed,
including the core system conversion. We
welcome the shareholders and clients of
Siuslaw Bank and look forward to serving
their banking needs.
Finally, in November, we announced the
proposed acquisition of AmericanWest Bank
through the merger of its holding company,
Starbuck Bancshares, Inc., with a subsidiary
of Banner and the subsequent merger of
AmericanWest Bank with Banner Bank.
With headquarters in Spokane, Washington,
AmericanWest Bank has 98 branches in
Washington, Oregon, Idaho, Utah and
California.
The combined bank will be a super
community bank with over $9.7 billion in
assets, $6.8 billion in loans, $7.9 billion in
deposits, and approximately 190 branches.
Banner will benefit from a diversified
geography encompassing nine of the top
20 western Metropolitan Statistical Areas
by population. Our expanded balance
sheet will have solid core deposit funding,
excellent asset quality and a strong capital
base. The combination will bring together
management teams with proven client
acquisition strategies, business banking
prowess, and the experience of successfully
integrating 11 whole-bank and three branch
acquisitions over the past nine years.
In addition to having a robust year of
acquisitions, we continue to successfully
operate in a challenging economic
environment with exceptionally low interest
rates, fierce competition and a complex
and shifting regulatory framework. Despite
these conditions, it is gratifying to report that
Banner has sustained its strategic direction
and strong earnings momentum while
maintaining a moderate risk profile.
For the year ended December 31, 2014,
Banner Corporation reported a net profit
available to common shareholders of $54.2
million or $2.79 per share, compared to
$46.6 million or $2.40 per share in 2013.
Banner’s results for 2014 were augmented
by a $9.1 million bargain purchase gain
in connection with the Oregon branch
acquisition, offset by $4.3 million in
acquisition-related expenses. Banner’s
before-tax income in 2014 improved 16% to
$80.4 million or $4.14 per share compared to
$69.1 million or $3.56 per share in the prior
year.
Through hard work and a dedication to
revenue growth initiatives, our revenues
from core operations increased 8% to $223.6
million in 2014 compared to $208.0 million
in 2013. We’ve improved our ability to
consistently generate revenue through:
• Outstanding client acquisition and
new account growth with core deposit
accounts up 15%,
• Strong loan growth of 12%,
• A strong net interest margin of 4.07%
aided by growth in non-interest-bearing
deposits and further reductions in non-
performing assets,
• Strong mortgage banking revenue that
improved as the year progressed,
• A 15% increase in deposit fees and other
services-based revenues, and
• Ongoing improvements in asset quality
with non-performing assets falling to
0.43% of total assets.
While these results include the operations
of the six new branches acquired in June,
these results largely come from organic
growth and underscore the benefits of
our super community banking strategy
implemented in 2010: Delivering to all our
clients—individuals, middle market and
small businesses, business owners, their
families and employees—a compelling
value proposition of providing the financial
sophistication and breadth of products of
a regional bank while retaining the appeal,
responsiveness and superior service level of
a community bank.
Throughout the year we have continued to
invest in our franchise by adding talented
commercial and retail personnel and
integrating all our bankers into Banner’s
proven credit and sales culture. Further,
we have received marketplace recognition
of our progress as the SBA Seattle District
Office awarded Banner Bank “Community
Lender of the Year” for the Seattle and
Spokane district for the second consecutive
year. In addition, Forbes magazine ranked
Banner Corporation as one of the top 50
most trustworthy financial institutions in the
U.S.
We’re especially pleased with these 2014
results:
•
•
•
•
1.17% return on average assets,
$414 million increase in loans (12%
growth),
16% growth in non-interest-bearing
deposits,
14% growth in core deposit balances
(now at 80% of total deposits, up from
76% the year before and 71% two years
ago),
• A loan loss reserve of 1.98% and a
tangible common equity ratio of 12.30%
providing one of the industry’s strongest
balance sheets, and
15 consecutive quarters of profitability.
•
As shareholders, we’ve benefited directly
from all of the results listed above. In
addition, our quarterly dividend has
increased from $0.01 per share in 2012 to
$0.15 per share for the first quarter of 2014
and to $0.18 per share since the second
quarter. And most importantly, Banner’s
stock price has appreciated substantially
from $18.76 per share at December 31, 2009
to $43.20 per share at December 31, 2014.
These results would be unattainable without
the commitment and hard work of all my
colleagues throughout the company. On
behalf of all shareholders, I congratulate and
thank them.
Finally, the recently completed acquisition of
Siuslaw Bank and the proposed acquisition
of AmericanWest Bank will afford us the
opportunity to deploy our super community
bank model throughout a strengthened
presence in Washington, Oregon and
Idaho and the entry into attractive growth
markets in California and Utah. This will
bring significant benefits to our expanded
group of clients, communities, shareholders
and employees. With more scale, we believe
we will improve our ability to perform at a
top quartile level. In addition to continuing
our performance in 2015, we will be focused
on integrating these acquisitions into an
organization that is scalable to $10 billion
and beyond.
As we go forward, we will be guided by our
strategic priorities:
• Building sustainable revenue growth
and profitability,
• Retaining, attracting and developing
talented people,
•
Improving operating efficiency,
• Building and protecting the Banner
brand, and
• Maintaining a moderate risk profile.
Thank you for your interest in and financial
commitment to Banner. Our task for the
coming year has been set. In twelve months,
I’ll report back on 2015. I’m confident you’ll
once again see your investment building
value.
Mark J. Grescovich
President & Chief Executive Officer
Banner Corporation & Banner Bank
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
FISCAL YEAR ENDED DECEMBER 31, 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
(State or other jurisdiction of incorporation
or organization)
91-1691604
(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
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share
(Title of Each Class)
The NASDAQ Stock Market LLC
(Name of Each Exchange on Which Registered)
Securities registered pursuant to section 12(g) of the Act:
None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes __ No X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act Yes __No X
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 Web site, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K. ____
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 definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer X
Accelerated filer
Non-accelerated filer
Smaller reporting company ____
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes ____ No X
The aggregate market value of the voting and nonvoting common equity held by nonaffiliates of the registrant based on the closing sales price
of the registrant’s common stock quoted on The NASDAQ Stock Market on June 30, 2014, was:
Common Stock – $755,828,076
(The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the Registrant
that such person is an affiliate of the Registrant.)
The number of shares outstanding of the registrant’s classes of common stock as of February 28, 2015:
Common Stock, $.01 par value – 19,579,326 shares
Documents Incorporated by Reference
Portions of Proxy Statement for Annual Meeting of Shareholders to be held April 21, 2015 are incorporated by reference into Part III.
BANNER CORPORATION AND SUBSIDIARIES
Table of Contents
PART I
Item 1.
Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recent Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lending Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposit Activities and Other Sources of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . .
Executive Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comparison of Financial Condition at December 31, 2014 and 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comparison of Results of Operations
Years ended December 31, 2014 and 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years ended December 31, 2013 and 2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market Risk and Asset/Liability Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of Inflation and Changing Prices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contractual Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
Page
4
4
6
7
11
12
14
15
15
15
15
22
23
24
33
33
33
33
34
37
40
40
47
64
70
73
78
79
79
80
80
80
80
80
81
82
82
82
83
83
Item 15.
Exhibits and Financial Statement Schedules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
84
85
2
Forward-Looking Statements
Certain matters in this Form 10-K constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
liquidity, results of operations, plans, objectives, future performance or
1995. These statements relate to our financial condition,
business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use
of the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,”
“outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” Forward-looking statements
include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future economic
performance and projections of financial items. These forward-looking statements are subject to known and unknown risks, uncertainties and
other factors that could cause actual results to differ materially from the results anticipated or implied by our forward-looking statements,
including, but not limited to: expected revenues, cost savings, synergies and other benefits from the merger of Banner Bank and Siuslaw Bank
and of the proposed merger of Banner Bank and AmericanWest Bank ("AmericanWest") might not be realized within the expected time frames
or at all and costs or difficulties relating to integration matters, including but not limited to customers, systems and employee retention, might
be greater than expected; the requisite shareholder and regulatory approvals for the AmericanWest transaction might not be obtained; the credit
risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan
losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets and may lead to
increased losses and non-performing assets, and may result in our allowance for loan losses not being adequate to cover actual losses and require
us to materially increase our reserves; changes in economic conditions in general and in Washington, Idaho, Oregon, Utah and California in
particular; changes in the levels of general interest rates and the relative differences between short and long-term interest rates, loan and deposit
interest rates, our net interest margin and funding sources; fluctuations in the demand for loans, the number of unsold homes, land and other
properties and fluctuations in real estate values in our market areas; secondary market conditions for loans and our ability to sell loans in the
secondary market; results of examinations of us by the Board of Governors of the Federal Reserve System (the Federal Reserve Board) and of
our bank subsidiaries by the Federal Deposit Insurance Corporation (the FDIC), the Washington State Department of Financial Institutions,
Division of Banks (the Washington DFI) or other regulatory authorities, including the possibility that any such regulatory authority may, among
other things, institute an informal or formal enforcement action against us or any of our bank subsidiaries which could require us to increase our
reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds, or maintain or increase
deposits, or impose additional requirements and restrictions on us, any of which could adversely affect our liquidity and earnings; legislative or
regulatory changes that adversely affect our business including changes in regulatory policies and principles, or the interpretation of regulatory
capital or other rules, including changes related to Basel III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act
and the implementing regulations; our ability to attract and retain deposits; increases in premiums for deposit insurance; our ability to control
operating costs and expenses; the use of estimates in determining fair value of certain of our assets and liabilities, which estimates may prove
to be incorrect and result in significant changes in valuation; difficulties in reducing risk associated with the loans on our balance sheet; staffing
fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated
charges; the failure or security breach of computer systems on which we depend; our ability to retain key members of our senior management
team; costs and effects of litigation, including settlements and judgments; our ability to implement our business strategies; future goodwill
impairment due to changes in our business, changes in market conditions, or other factors; our ability to manage loan delinquency rates; increased
competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; the availability of
resources to address changes in laws, rules, or regulations or to respond to regulatory actions; our ability to pay dividends on our common stock
and interest or principal payments on our junior subordinated debentures; adverse changes in the securities markets; inability of key third-party
providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory
agencies or the Financial Accounting Standards Board including additional guidance and interpretation on accounting issues and details of the
implementation of new accounting methods; the economic impact of war or any terrorist activities; other economic, competitive, governmental,
regulatory, and technological factors affecting our operations, pricing, products and services; and other risks detailed from time to time in our
filings with the Securities and Exchange Commission, including this report on Form 10-K. Any forward-looking statements are based upon
management’s beliefs and assumptions at the time they are made. We do not undertake and specifically disclaim any obligation to update any
forward-looking statements included in this report or the reasons why actual results could differ from those contained in such statements, whether
as a result of new information, future events or otherwise. These risks could cause our actual results to differ materially from those expressed
in any forward-looking statements by, or on behalf of, us. In light of these risks, uncertainties and assumptions, the forward-looking statements
discussed in this report might not occur, and you should not put undue reliance on any forward-looking statements.
As used throughout this report, the terms “we,” “our,” “us,” or the “Company” refer to Banner Corporation and its consolidated subsidiaries,
unless the context otherwise requires. All references to “Banner” refer to Banner Corporation and those to “the Banks” refer to its wholly-owned
subsidiaries, Banner Bank and Islanders Bank, collectively.
3
Item 1 – Business
PART 1
General
Banner Corporation (the Company) is a bank holding company incorporated in the State of Washington. We are primarily engaged in the business
of planning, directing and coordinating the business activities of our wholly-owned subsidiaries, Banner Bank and Islanders Bank. Banner Bank
is a Washington-chartered commercial bank that conducts business from its main office in Walla Walla, Washington and, as of December 31,
2014, its 90 branch offices and ten loan production offices located in Washington, Oregon and Idaho. Islanders Bank is also a Washington-
chartered commercial bank that conducts business from three locations in San Juan County, Washington. Banner Corporation is subject to
regulation by the Board of Governors of the Federal Reserve System (the Federal Reserve Board). Banner Bank and Islanders Bank (the Banks)
are subject to regulation by the Washington State Department of Financial Institutions, Division of Banks (the DFI) and the Federal Deposit
Insurance Corporation (the FDIC). As of December 31, 2014, we had total consolidated assets of $4.7 billion, net loans of $3.8 billion, total
deposits of $3.9 billion and total stockholders’ equity of $584 million. Our common stock is traded on the NASDAQ Global Select Market
under the ticker symbol “BANR.”
Banner Bank is a regional bank which offers a wide variety of commercial banking services and financial products to individuals, businesses
and public sector entities in its primary market areas. Islanders Bank is a community bank which offers similar banking services to individuals,
businesses and public entities located primarily in the San Juan Islands. The Banks' primary business is that of traditional banking institutions,
accepting deposits and originating loans in locations surrounding our offices in portions of Washington, Oregon and Idaho. Banner Bank is also
an active participant in the secondary market, engaging in mortgage banking operations largely through the origination and sale of one- to four-
family residential loans. Lending activities include commercial business and commercial real estate loans, agriculture business loans, construction
and land development loans, one- to four-family residential loans and consumer loans.
Since becoming a public company in 1995, we have invested significantly in expanding our branch and distribution systems with a primary
emphasis on strengthening our market presence in our five primary markets in the Northwest. Those markets include the four largest metropolitan
areas in the Northwest: the Puget Sound region of Washington and the greater Portland, Oregon, Boise, Idaho, and Spokane, Washington markets,
as well as our historical base in the vibrant agricultural communities in the Columbia Basin region of Washington and Oregon. Our aggressive
franchise expansion during this period included the acquisition and consolidation of eight commercial banks, as well as the opening of 28 new
branches, the acquisition of seven branches and relocating 12 others. Since changing our name in 2001, we also have invested heavily in
advertising campaigns designed to significantly increase the brand awareness for Banner Bank as well as expanded product offerings. These
investments, which have been significant elements in our strategies to grow loans, deposits and customer relationships, have increased our
presence within desirable marketplaces and allow us to better serve existing and future customers. This emphasis on growth and development
resulted in an elevated level of operating expenses during much of this period; however, we believe the expanded branch network, broader
product line and heightened brand awareness have created a franchise that is well positioned and is allowing us to successfully execute on our
super community bank model. That strategy is focused on delivering customers, including middle market and small businesses, business owners,
their families and employees, a compelling value proposition by providing the financial sophistication and breadth of products of a regional
bank while retaining the appeal, responsiveness, and superior service level of a community bank.
At year end 2014, we had two previously announced and pending acquisitions that will significantly increase the size and geographic reach of
the Company and Banner Bank. On August 7, 2014, we announced the execution of a definitive agreement to purchase Siuslaw Financial Group
(Siuslaw), the holding company of Siuslaw Bank, an Oregon state chartered commercial bank headquartered in Florence, Oregon, with ten
branches serving multiple locations in Lane County including Eugene, Oregon. This acquisition closed on March 6, 2015 at which time Siuslaw
merged into Banner and Siuslaw Bank merged into Banner Bank. On November 5, 2014, we announced the execution of a definitive agreement
to purchase Starbuck Bancshares, Inc. (Starbuck), the bank holding company of AmericanWest Bank (AmericanWest), a Washington state
chartered commercial bank headquartered in Spokane, Washington, with 94 branches serving markets in Washington, Oregon, Idaho, California
and Utah. The merger agreement provides that Starbuck will merge with and into a wholly-owned subsidiary of the Company. Immediately
following the merger, Starbuck's wholly owned bank subsidiary, AmericanWest will merge with Banner Bank. At September 30, 2014,
AmericanWest had $4.1 billion in assets, $2.5 billion in net loans, $3.3 billion in deposits and members' equity of $561.3 million excluding
AmericanWest's recent acquisition of Greater Sacramento Bancorp. At September 30, 2014, Greater Sacramento Bancorp had $481 million in
assets, $410 million in deposits and stockholders' equity of $39 million. The merged banks will operate under the Banner Bank brand. Under
the terms of the agreement, the aggregate consideration to be received by AmericanWest equity holders 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. The merger is subject to approval by Banner's shareholders and regulatory agencies
as well as other customary closing conditions and is expected to close late in the second quarter or early in the third quarter of 2015. In addition,
in June of 2014, Banner Bank acquired six branches in southwestern Oregon (the "Branch Acquisition") which have been fully integrated into
Banner Bank. In the aggregate, Banner Bank acquired $212 million in deposit accounts, $88 million in loans, and $3 million in branch properties.
Banner Bank also received $128 million in cash from the transaction. Upon completion of the AmericanWest merger, Banner Bank will have
more than 190 locations in five western states, a significantly expanded customer base and meaningfully increased business opportunities. See
Notes 2 and 4 of the Notes to our Audited Consolidated Financial Statements contained in Item 8 of this report for additional information.
Banner Corporation's successful execution of its strategic turnaround plan and operating initiatives, which resulted in our return to profitability
in 2011, continued and strengthened in 2012, 2013 and 2014 and delivered noteworthy results as evidenced by our solid profitability for each
of these years. Over this period we achieved substantial success on our goals to achieve and maintain the Company's moderate risk profile as
well as to develop and continue strong earnings momentum going forward. Highlights of this success have included continued substantial
4
improvement in our asset quality, outstanding client acquisition results and account growth, significantly increased non-interest-bearing deposit
balances and strong revenue generation from core operations. As a result, for the year ended December 31, 2014, we had net income available
to common shareholders of $54.2 million, or $2.79 per diluted share, for the year ended December 31, 2013, we had net income available to
common shareholders of $46.6 million, or $2.40 per diluted share, and for the year ended December 31, 2012, we had net income available to
common shareholders of $64.9 million, or $3.16 per diluted share.
Although there continue to be indications that economic conditions are improving, the pace of expansion has been modest and uneven and
ongoing uncertainty in the economy and low interest rates will likely continue to present a challenging banking environment going forward. As
a result, our future operating results and financial performance will be significantly affected by the course of economic activity. However, over
the past four years we have significantly added to our client relationships and account base, as well as substantially improved our risk profile
by aggressively managing and reducing our problem assets, which has resulted in stronger and sustainable revenues and low credit costs, and
which we believe has positioned the Company well to meet this challenging environment with continued success.
Our operating results depend primarily on our net interest income, which is the difference between interest income on interest-earning assets,
consisting of loans and investment securities, and interest expense on interest-bearing liabilities, composed primarily of customer deposits and
borrowings. Net interest income is primarily a function of our interest rate spread, which is the difference between the yield earned on interest-
earning assets and the rate paid on interest-bearing liabilities, as well as a function of the average balances of interest-earning assets and interest-
bearing liabilities. Our net interest income before provision for loan losses increased 8% to $179.9 million for the year ended December 31,
2014, compared to $166.7 million for the year earlier. This increase in net interest income reflects the significant growth in earning assets and
occurred despite a decrease in the net interest spread. Our interest rate spread decreased to 4.04% for the year ending December 31, 2014 from
4.08% for the year ending December 31, 2013, while our net interest margin decreased to 4.07% in the current year compared to 4.11% a year
earlier. The decrease in interest rate spread reflects declining yields on performing loans, partially offset by increased yields on securities, the
net of which was only partially offset by continuing reductions in deposit and other funding costs. Pressure on our net interest margin in the
exceptionally low market interest rate environment that the Federal Reserve has maintained for an extended period following the recessionary
period of 2008 and 2009 is a particularly challenging issue for banks, which appears likely to persist in the foreseeable future.
Our net income also is affected by the level of our other operating income, including deposit fees and service charges, loan origination and
servicing fees, and gains and losses on the sale of loans and securities, as well as our non-interest operating expenses and income tax provisions.
In addition, our net income is affected by the net change in the value of certain financial instruments carried at fair value, and in certain periods
by other-than-temporary impairment (OTTI) charges or recoveries. Further, in the year ended December 31, 2014, our net income was significantly
augmented by an acquisition bargain purchase gain related to the purchase of the six branches in southwestern Oregon (see Note 4 of the Notes
to the Consolidated Financial Statements) and in the year ended December 31, 2013 by a termination fee related to the cancellation of the
proposed acquisition of Home Federal Bancorp, Inc. (See Note 22 of the Notes to the Consolidated Financial Statements.) For the year ended
December 31, 2014, we recorded a net gain of $1.4 million for fair value adjustments, $42,000 in net gains on the sale of securities, and the $9.1
million acquisition bargain purchase gain. In comparison, for the year ended December 31, 2013, we recorded a net charge of $2.3 million for
fair value adjustments, which was offset by $1.0 million in net gains on the sale of securities, $409,000 in OTTI recoveries and the $3.0 million
acquisition termination fee.
Our total other operating income, which includes the net gain on sale of securities, OTTI losses and recoveries, changes in the value of financial
instruments carried at fair value, as well as the acquisition bargain purchase gain in the current year and termination fee in the prior year, was
$54.3 million for the year ended December 31, 2014, compared to $43.3 million for the year ended December 31, 2013. As a result, our total
revenues (net interest income before the provision for loan losses plus other operating income) for 2014 increased to $234.1 million, compared
to $210.1 million for 2013. However, our total revenues, excluding the net gain on sale of securities, OTTI, fair value adjustments, the bargain
purchase gain in the current year and termination fee in the prior year, which we believe is more indicative of our core operations, were $223.6
million for the year ended December 31, 2014, an increase of 8% compared to $208.0 million for the year ended December 31, 2013. The
increase in revenues in the current year reflects significant increases in net interest income and deposit fees and service charges, which were
only partially offset by a modest decrease in mortgage banking revenues. Importantly, this increase in revenues is primarily the result of increased
loan balances, deposit accounts and customer relationships.
As a result of adequate reserves already in place as well as declining net charge-offs, we did not record a provision for loan losses in the years
ended December 31, 2014 and December 31, 2013. By contrast, we recorded a $13.0 million provision for the year ended December 31, 2012
and substantially larger provisions in the three years immediately prior to 2012. The decrease in loan loss provisioning compared to the earlier
years reflects our significant progress in reducing the levels of delinquencies, non-performing loans and net charge-offs, particularly for loans
for the construction of one- to four-family homes and for acquisition and development of land for residential properties. As a result of our
focused efforts, non-performing loans decreased by 32% to $16.7 million at December 31, 2014, compared to $24.8 million a year earlier. Our
allowance for loan losses at December 31, 2014 was $75.9 million, representing 1.98% of total loans outstanding and 454% of non-performing
loans. (See Note 6, Loans Receivable and the Allowance for Loan Losses, as well as “Asset Quality” below in this Form 10-K.)
Our other operating expenses increased to $153.7 million for the year ended December 31, 2014, compared to $141.0 million for the year ended
December 31, 2013, largely as a result of increased costs related to acquisition activities, including the operation of six newly acquired branches
as well as transaction, integration and conversion-related expense for those branches and for the merger with Siuslaw and the pending merger
with AmericanWest, as well as increased compensation expense.
Other operating income, revenues and other earnings information excluding fair value adjustments, OTTI losses or recoveries, gains or losses
on sale of securities and other one-time transactions and related expenses are financial measures not made in conformity with U.S. generally
5
acceptable accounting principles (GAAP). Management has presented these non-GAAP financial measures in this discussion and analysis
because it believes that they provide useful and comparative information to assess trends in our core operations. However, these non-GAAP
financial measures are supplemental and are not a substitute for any analysis based on GAAP. Where applicable, we have also presented
comparable earnings information using GAAP financial measures. For a reconciliation of these non-GAAP financial measures, see the tables
that set forth reconciliations of non-GAAP financial measures located in Item 7, "Management's Discussions and Analysis of Financial Condition
—Executive Overview." Because not all companies use the same calculations, our presentation may not be comparable to other similarly titled
measures as calculated by other companies. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” for more detailed information about our financial performance, critical accounting policies and reconciliations of these non-GAAP
financial measures.
Proposed Acquisition of AmericanWest Bank
Recent Developments and Significant Events
On November 5, 2014, the Company announced the execution of a definitive agreement to purchase Starbuck Bancshares, the holding company
for AmericanWest, a Washington state charted commercial bank. Pursuant to the agreement, AmericanWest’s holding company will merge with
and into Banner and AmericanWest 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. The definitive merger agreement was approved unanimously by the boards of
directors of both companies. The merger is expected to close late in the second quarter or early in the third quarter of 2015 and is subject to
approval by regulatory agencies and obtaining the requisite shareholder approval to issue the shares necessary to complete the transaction, as
well as other customary closing conditions.
Acquisition of Siuslaw Financial Group, Inc.
On March 6, 2015, the Company completed its acquisition of Siuslaw, the holding company of Siuslaw Bank, an Oregon state charted commercial
bank. Siuslaw shareholders received 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 reflects a payment of approximately 90% stock and 10% cash. Upon closing of the transaction Siuslaw
was merged into Banner and Siuslaw Bank was merged into Banner Bank.
Acquisition of Six Sterling Savings Bank Branches
Effective as of the close of business on June 20, 2014, Banner Bank completed the purchase of the six branches in Oregon from Umpqua Bank
(the "Branch Acquisition"), successor to Sterling Savings Bank. In the aggregate, Banner acquired $212 million in deposit accounts, $88 million
in loans, and $3 million in branch properties. Banner Bank also received $128 million in cash from the transaction.
Income Tax Reporting and Accounting
Amended Federal Income Tax Returns: The Company has years 2011 - 2013 open for tax examination under the statute of limitation provisions
of the state and of the Internal Revenue Code of 1986 (Code). Tax years 2008 - 2010 are not open for assessment of additional tax, but remain
open for adjustment to the amount of Net Operating Losses (NOLs), credit, and other carryforwards utilized in open years or to be utilized in
the future. The Company filed amended federal income tax returns for tax years 2008 and 2009 to claim additional bad debt deductions, which
resulted in additional NOLs for tax years 2008 and 2009. The Company also filed amended federal income tax returns for tax years 2005 - 2006
and a tentative refund claim for tax year 2007 to carryback the NOLs and general business credits from 2008 and 2009 to those earlier years.
Review of the amended returns for all years was completed by the Internal Revenue Service (IRS) in 2013 and the Company signed a closing
agreement with the IRS related to refund claims of $9.8 million, primarily related to tax year 2006. As of December 31, 2013, the Company
had recorded a tax receivable of $9.8 million with an offsetting adjustment to its deferred tax assets. As of December 31, 2014, the Company
had reduced its tax receivable by $9.8 million due to the receipt of that amount in 2014.
Deferred Tax Asset Valuation Allowance: The Company and its wholly-owned subsidiaries file consolidated U.S. federal income tax returns,
as well as state income tax returns in Oregon and Idaho. Income taxes are accounted for using the asset and liability method. Under this method
a deferred tax asset or liability is determined based on the enacted tax rates which are expected to be in effect when the differences between the
financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company’s income tax
returns. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Under
GAAP, a valuation allowance is required to be recognized if it is “more likely than not” that all or a portion of Banner’s deferred tax assets will
not be realized. During 2010, the Company evaluated its net deferred tax asset and determined it was prudent to establish a full valuation
allowance against the net asset. While the full valuation allowance remained in effect, the Company did not recognize any tax expense or benefit
in its Consolidated Statements of Operations. During 2012, management analyzed the Company’s performance and trends since December 31,
2010, focusing on trends in asset quality, loan loss provisioning, capital position, net interest margin, core operating income and net income and
the likelihood of continued profitability. Based on this analysis, management determined that a full valuation allowance was no longer appropriate
and reversed all of the valuation allowance during the year ending December 31, 2012. The ultimate realization of deferred tax assets is dependent
upon the existence, or generation, of taxable income in the periods when those temporary differences and net operating loss and credit carryforwards
are deductible. See Note 13 of the Notes to the Consolidated Financial Statements for more information.
6
Stockholder Equity Transactions
Preferred Stock: On March 29, 2012, the Company's $124 million of Series A Preferred Stock with a liquidation value of $1,000 per share,
originally issued to the U.S. Treasury (Treasury) as part of its Capital Purchase Program, was sold by the Treasury as part of its efforts to manage
and recover its investments under the Troubled Asset Relief Program (TARP). While the sale of these preferred shares to new owners did not
result in any proceeds to the Company and did not change the Company's capital position or accounting for these securities, it did eliminate
restrictions put in place by the Treasury on TARP recipients. During the year ended December 31, 2012, the Company repurchased or redeemed
all of its Series A Preferred Stock. The related warrants to purchase up to $18.6 million in Banner common stock (243,998 shares) were sold
by the Treasury at public auction in June 2013. That sale did not change the Company's capital position and did not have any impact on the
financial accounting and reporting for these securities.
Lending Activities
General: All of our lending activities are conducted through Banner Bank, its subsidiary, Community Financial Corporation, a residential
construction lender located in Portland, Oregon, and Islanders Bank. We offer a wide range of loan products to meet the demands of our customers
and our loan portfolio is very diversified by product type, borrower and geographic location within our market area. We originate loans for our
own loan portfolio and for sale in the secondary market. Management’s strategy has been to maintain a well diversified portfolio with a significant
percentage of assets in the loan portfolio having more frequent interest rate repricing terms or shorter maturities than traditional long-term fixed-
rate mortgage loans. As part of this effort, we have developed a variety of floating or adjustable interest rate products that correlate more closely
with our cost of interest bearing funds, particularly loans for commercial business and real estate, agricultural business, and construction and
development purposes. However, in response to customer demand, we continue to originate fixed-rate loans, including fixed interest rate
mortgage loans with terms of up to 30 years. The relative amount of fixed-rate loans and adjustable-rate loans that can be originated at any time
is largely determined by the demand for each in a competitive environment.
We offer a wide range of loan products to meet the demands of our customers. Our lending activities are primarily directed toward the origination
of real estate and commercial loans. Commercial real estate loans for both owner-occupied and investment properties, including construction
and development loans for these types of properties, totaled $1.432 billion, or approximately 37% of our loan portfolio at December 31, 2014.
In addition, multifamily residential real estate loans, including construction and development loans for these types of properties, totaled $228
million or approximately 6% of our loan portfolio. While our level of activity and investment in commercial and multifamily real estate loans
has been relatively stable for many years, we have experienced an increase in new originations in recent periods resulting in growth in these
loan balances. Commercial real estate loans increased by $215 million and multifamily loans increased by $38 million during the year ended
December 31, 2014. We also originate residential construction, land and land development loans and, although our portfolio balances are well
below the peak levels before the recent recession, since 2011 we have experienced increased demand for one- to four-family construction loans.
Outstanding residential construction, land and land development balances increased $46 million, or 17%, to $322 million at December 31, 2014
compared to $276 million at December 31, 2013. Still, residential construction, land and land development loans represented only approximately
8% of our total loan portfolio at December 31, 2014. Our commercial business lending is directed toward meeting the credit and related deposit
needs of various small- to medium-sized business and agribusiness borrowers operating in our primary market areas. Reflecting the uncertain
economy, demand for these types of commercial business loans has been modest although our production levels have increased in recent periods.
In recent years, our commercial business lending has also included participation in certain national syndicated loans, including shared national
credits, which totaled $119 million at December 31, 2014. Commercial and agricultural business loans increased $52 million, or 6%, to $962
million at December 31, 2014, compared to $910 million at December 31, 2013. Commercial and agricultural business loans represented
approximately 25% of our portfolio at December 31, 2014. At December 31, 2014, our net loan portfolio totaled $3.758 billion compared to
$3.344 billion at December 31, 2013.
Our residential mortgage loan originations have been relatively strong in recent years, as exceptionally low interest rates have supported demand
for loans to refinance existing debt as well as loans to finance home purchases. However, most of the one- to four-family loans that we originate
are sold in the secondary markets with net gains on sales and loan servicing fees reflected in our revenues from mortgage banking. As a result
growth in this portion of our portfolio has been modest. At December 31, 2014, our outstanding balances for residential mortgages increased
$10 million to $540 million and represented nearly 14% of our loan portfolio.
Our consumer loan activity is primarily directed at meeting demand from our existing deposit customers. We have increased our emphasis on
consumer lending in recent years, and while demand for consumer loans has been modest during most of this period as we believe many consumers
have been focused on reducing their personal debt, we saw some meaningful growth in 2014. At December 31, 2014, consumer loans, including
consumer loans secured by one- to four-family residences, increased $54 million to $349 million, or 9% of our portfolio with most of the increase
arising from increased usage of home equity lines of credit.
For additional information concerning our loan portfolio, see Item 7, “Management’s Discussion and Analysis of Financial Condition—
Comparison of Financial Condition at December 31, 2014 and 2013—Loans and Lending” including Tables 7 and 8, which sets forth the
composition and geographic concentration of our loan portfolio, and Tables 9 and 10, which contain information regarding the loans maturing
in our portfolio.
One- to Four-Family Residential Real Estate Lending: At both Banner Bank and Islanders Bank, we originate loans secured by first mortgages
on one- to four-family residences in the Northwest communities where we have offices. Through our mortgage banking activities, we sell
residential loans on either a servicing-retained or servicing-released basis. In recent years, we have generally sold a significant portion of our
conventional residential mortgage originations and nearly all of our government insured loans in the secondary market. At December 31, 2014,
7
$540 million, or 14% of our loan portfolio, consisted of permanent loans on one- to four-family residences compared with $529 million, or 15%
at December 31, 2013.
We offer fixed- and adjustable-rate mortgages (ARMs) at rates and terms competitive with market conditions, primarily with the intent of selling
these loans into the secondary market. Fixed-rate loans generally are offered on a fully amortizing basis for terms ranging from 10 to 30 years
at interest rates and fees that reflect current secondary market pricing. Most ARM products offered adjust annually after an initial period ranging
from one to five years, subject to a limitation on the annual change of 1.0% to 2.0% and a lifetime limitation of 5.0% to 6.0%. For a small
portion of the portfolio, where the initial period exceeds one year, the first rate change may exceed the annual limitation on subsequent rate
changes. Our ARM products most frequently adjust based upon the average yield on Treasury securities adjusted to a constant maturity of one
year or certain London Interbank Offered Rate (LIBOR) indices plus a margin or spread above the index. ARM loans held in our portfolio may
allow for interest-only payments for an initial period up to five years but do not provide for negative amortization of principal and carry no
prepayment restrictions. The retention of ARM loans in our loan portfolio can help reduce our exposure to changes in interest rates. However,
borrower demand for ARM loans versus fixed-rate mortgage loans is a function of the level of interest rates, the expectations of changes in the
level of interest rates and the difference between the initial interest rates and fees charged for each type of loan. In recent years, borrower demand
for ARM loans has been limited and we have chosen not to aggressively pursue ARM loans by offering minimally profitable, deeply discounted
teaser rates or option-payment ARM products. As a result, ARM loans have represented only a small portion of our loans originated during this
period and of our portfolio.
Our residential loans are generally underwritten and documented in accordance with the guidelines established by the Federal Home Loan
Mortgage Corporation (Freddie Mac or FHLMC) and the Federal National Mortgage Association (Fannie Mae or FNMA). Government insured
loans are underwritten and documented in accordance with the guidelines established by the Department of Housing and Urban Development
(HUD) and the Veterans Administration (VA). In the loan approval process, we assess the borrower’s ability to repay the loan, the adequacy of
the proposed security, the employment stability of the borrower and the creditworthiness of the borrower. For ARM loans, our standard practice
provides for underwriting based upon fully indexed interest rates and payments. Generally, we will lend up to 95% of the lesser of the appraised
value or purchase price of the property on conventional loans, although higher loan-to-value ratios are available on secondary market
programs. We require private mortgage insurance on conventional residential loans with a loan-to-value ratio at origination exceeding 80%.
Construction and Land Lending: Historically, we have invested a significant portion of our loan portfolio in residential construction and land
loans to professional home builders and developers. We regularly monitor our construction and land loan portfolios and the economic conditions
and housing inventory in each of our markets and increase or decrease this type of lending as we observe market conditions change. As housing
markets weakened, the amount of this investment was substantially reduced from 2009 through 2011. However, beginning in 2012, in response
to improvement in certain sub-markets, our residential construction and land and land development lending has been increasing and has made
a meaningful contribution to net income and profitability. To a lesser extent, we also originate construction loans for commercial and multifamily
real estate. Although well diversified with respect to sub-markets, price ranges and borrowers, our construction, land and land development
loans are significantly concentrated in the greater Puget Sound region of Washington State and the Portland, Oregon market area. At December 31,
2014, construction, land and land development loans totaled $411 million, or 11% of total loans, consisting of $220 million of one- to four-
family construction loans, $102 million of residential land or land development loans, $78 million of commercial and multifamily real estate
construction loans and $11 million of commercial land or land development loans.
Construction and land lending affords us the opportunity to achieve higher interest rates and fees with shorter terms to maturity than are usually
available on other types of lending. Construction and land lending, however, involves a higher degree of risk than other lending opportunities
because of the inherent difficulty in estimating both a property’s value at completion of the project and the estimated cost of the project. If the
estimate of construction cost proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit
completion of the project. If the estimate of value upon completion proves to be inaccurate, we may be confronted at, or prior to, the maturity
of the loan with a project the value of which is insufficient to assure full repayment. Disagreements between borrowers and builders and the
failure of builders to pay subcontractors may also jeopardize projects. Loans to builders to construct homes for which no purchaser has been
identified carry additional risk because the payoff for the loan is dependent on the builder’s ability to sell the property before the construction
loan is due. We attempt to address these risks by adhering to strict underwriting policies, disbursement procedures and monitoring practices.
Construction loans made by us include those with a sales contract or permanent loan in place for the finished homes and those for which purchasers
for the finished homes may be identified either during or following the construction period. We actively monitor the number of unsold homes
in our construction loan portfolio and local housing markets to attempt to maintain an appropriate balance between home sales and new loan
originations. The maximum number of speculative loans (loans that are not pre-sold) approved for each builder is based on a combination of
factors, including the financial capacity of the builder, the market demand for the finished product and the ratio of sold to unsold inventory the
builder maintains. We have attempted to diversify the risk associated with speculative construction lending by doing business with a large
number of small and mid-sized builders spread over a relatively large geographic region with numerous sub-markets within our three-state
service area.
Loans for the construction of one- to four-family residences are generally made for a term of twelve to eighteen months. Our loan policies
include maximum loan-to-value ratios of up to 75% for speculative loans. Individual speculative loan requests are supported by an independent
appraisal of the property, a set of plans, a cost breakdown and a completed specifications form. Underwriting is focused on the borrowers’
financial strength, credit history and demonstrated ability to produce a quality product and effectively market and manage their operations. All
speculative construction loans must be approved by senior loan officers.
8
Historically, we have also made land loans to developers, builders and individuals to finance the acquisition and/or development of improved
lots or unimproved land, although in recent years we have only originated a very limited amount of this type of loan. In making land loans, we
follow underwriting policies and disbursement and monitoring procedures similar to those for construction loans. The initial term on land loans
is typically one to three years with interest only payments, payable monthly, and provisions for principal reduction as lots are sold and released
from the lien of the mortgage.
Commercial and Multifamily Real Estate Lending: We originate loans secured by multifamily and commercial real estate including, as noted
above, loans for construction of multifamily and commercial real estate projects. Commercial real estate loans are made for both owner-occupied
and investor properties. At December 31, 2014, our loan portfolio included $168 million in multifamily and $1.404 billion in commercial real
estate loans, including $547 million in owner-occupied commercial real estate loans and $857 million in non-owner-occupied commercial real
estate loans, which in aggregate comprised 37% of our total loans. Multifamily and commercial real estate lending affords us an opportunity to
receive interest at rates higher than those generally available from one- to four-family residential lending. However, loans secured by multifamily
and commercial properties are generally greater in amount, more difficult to evaluate and monitor and, therefore, potentially riskier than one-
to four-family residential mortgage loans. Because payments on loans secured by multifamily and commercial properties are often dependent
on the successful operation and management of the properties, repayment of these loans may be affected by adverse conditions in the real estate
market or the economy. In addition, many of our commercial and multifamily real estate loans often are not fully amortizing and contain large
balloon payments upon maturity. Such balloon payments may require the borrower to either sell or refinance the underlying property in order
to make the payment, which may increase the risk of default or non-payment. In originating multifamily and commercial real estate loans, we
consider the location, marketability and overall attractiveness of the properties. Our underwriting guidelines for multifamily and commercial
real estate loans require an appraisal from a qualified independent appraiser and an economic analysis of each property with regard to the annual
revenue and expenses, debt service coverage and fair value to determine the maximum loan amount. In the approval process we assess the
borrowers’ willingness and ability to manage the property and repay the loan and the adequacy of the collateral in relation to the loan amount.
Multifamily and commercial real estate loans originated by us are both fixed- and adjustable-rate loans generally with intermediate terms of five
to ten years. A significant portion of our multifamily and commercial real estate loans are linked to various Federal Home Loan Bank (FHLB)
advance rates, certain prime rates or other market rate indices. Rates on these adjustable-rate loans generally adjust with a frequency of one to
five years after an initial fixed-rate period ranging from one to ten years. Our commercial real estate portfolio consists of loans on a variety of
property types with no large concentrations by property type, location or borrower. At December 31, 2014, the average size of our commercial
real estate loans was $588,601 and the largest commercial real estate loan in our portfolio was approximately $16 million.
Commercial Business Lending: We are active in small- to medium-sized business lending and are engaged in agricultural lending primarily by
providing crop production loans. Our commercial bankers are focused on local markets and devote a great deal of effort to developing customer
relationships and providing these types of borrowers with a full array of products and services delivered in a thorough and responsive
manner. While also strengthening our commitment to small business lending, in recent years we have added experienced officers and staff
focused on corporate lending opportunities for borrowers with credit needs generally in a $3 million to $15 million range. In addition to providing
earning assets, commercial business lending has helped us increase our deposit base. In recent years, our commercial business lending has
included participation in certain national syndicated loans, including shared national credits. We also originate smaller balance business loans
principally through our retail branch network, using our Quick Step business loan program, which is closely aligned with our consumer lending
operations and relies on centralized underwriting procedures. Quick Step business loans and lines of credit are available from $5,000 - $500,000
and owner-occupied real estate loans are available up to $1.0 million.
Commercial business loans may entail greater risk than other types of loans. Commercial business loans may be unsecured or secured by special
purpose or rapidly depreciating assets, such as equipment, inventory and receivables, which may not provide an adequate source of repayment
on defaulted loans. In addition, commercial business loans are dependent on the borrower’s continuing financial strength and management
ability, as well as market conditions for various products, services and commodities. For these reasons, commercial business loans generally
provide higher yields or related revenue opportunities than many other types of loans but also require more administrative and management
attention. Loan terms, including the fixed or adjustable interest rate, the loan maturity and the collateral considerations, vary significantly and
are negotiated on an individual loan basis.
We underwrite our commercial business loans on the basis of the borrower’s cash flow and ability to service the debt from earnings rather than
on the basis of the underlying collateral value. We seek to structure these loans so that they have more than one source of repayment. The
borrower is required to provide us with sufficient information to allow us to make a prudent lending determination. In most instances, this
information consists of at least three years of financial statements, tax returns, a statement of projected cash flows, current financial information
on any guarantor and information about the collateral. Loans to closely held businesses typically require personal guarantees by the
principals. Our commercial business loan portfolio is geographically dispersed across the market areas serviced by our branch network and
there are no significant concentrations by industry or products.
Our commercial business loans may be structured as term loans or as lines of credit. Commercial business term loans are generally made to
finance the purchase of fixed assets and have maturities of five years or less. Commercial business lines of credit are typically made for the
purpose of providing working capital and are usually approved with a term of one year. Adjustable- or floating-rate loans are primarily tied to
various prime rate or LIBOR indices. At December 31, 2014, commercial business loans totaled $724 million, or 19% of our total loans, including
$119 million of shared national credits.
Agricultural Lending: Agriculture is a major industry in many parts of our service areas. We make agricultural loans to borrowers with a strong
capital base, sufficient management depth, proven ability to operate through agricultural cycles, reliable cash flows and adequate financial
9
reporting. Payments on agricultural loans depend, to a large degree, on the results of operations of the related farm entity. The repayment is
also subject to other economic and weather conditions as well as market prices for agricultural products, which can be highly volatile. At
December 31, 2014, agricultural business loans, including collateral secured loans to purchase farm land and equipment, totaled $238 million,
or 6% of our loan portfolio.
Agricultural operating loans generally are made as a percentage of the borrower’s anticipated income to support budgeted operating
expenses. These loans are secured by a blanket lien on all crops, livestock, equipment, accounts and products and proceeds thereof. In the case
of crops, consideration is given to projected yields and prices from each commodity. The interest rate is normally floating based on the prime
rate or a LIBOR index plus a negotiated margin. Because these loans are made to finance a farm or ranch’s annual operations, they are usually
written on a one-year review and renewable basis. The renewal is dependent upon the prior year’s performance and the forthcoming year’s
projections as well as the overall financial strength of the borrower. We carefully monitor these loans and related variance reports on income
and expenses compared to budget estimates. To meet the seasonal operating needs of a farm, borrowers may qualify for single payment notes,
revolving lines of credit and/or non-revolving lines of credit.
In underwriting agricultural operating loans, we consider the cash flow of the borrower based upon the expected operating results as well as the
value of collateral used to secure the loans. Collateral generally consists of cash crops produced by the farm, such as milk, grains, fruit, grass
seed, peas, sugar beets, mint, onions, potatoes, corn and alfalfa or livestock. In addition to considering cash flow and obtaining a blanket security
interest in the farm’s cash crop, we may also collateralize an operating loan with the farm’s operating equipment, breeding stock, real estate and
federal agricultural program payments to the borrower.
We also originate loans to finance the purchase of farm equipment. Loans to purchase farm equipment are made for terms of up to seven
years. On occasion, we also originate agricultural real estate loans secured primarily by first liens on farmland and improvements thereon located
in our market areas, although generally only to service the needs of our existing customers. Loans are written in amounts ranging from 50% to
75% of the tax assessed or appraised value of the property for terms of five to 20 years. These loans generally have interest rates that adjust at
least every five years based upon a Treasury index or FHLB advance rate plus a negotiated margin. Fixed-rate loans are granted on terms usually
not to exceed five years. In originating agricultural real estate loans, we consider the debt service coverage of the borrower’s cash flow, the
appraised value of the underlying property, the experience and knowledge of the borrower, and the borrower’s past performance with us and/or
the market area. These loans normally are not made to start-up businesses and are reserved for existing customers with substantial equity and
a proven history.
Among the more common risks to agricultural lending can be weather conditions and disease. These risks may be mitigated through multi-peril
crop insurance. Commodity prices also present a risk, which may be reduced by the use of set price contracts. Normally, required beginning
and projected operating margins provide for reasonable reserves to offset unexpected yield and price deficiencies. In addition to these risks, we
also consider management succession, life insurance and business continuation plans when evaluating agricultural loans.
Consumer and Other Lending: We originate a variety of consumer loans, including home equity lines of credit, automobile, boat and recreational
vehicle loans and loans secured by deposit accounts. While consumer lending has traditionally been a small part of our business, with loans
made primarily to accommodate our existing customer base, it has received consistent emphasis in recent years. Part of this emphasis includes
a Banner Bank-owned credit card program. Similar to other consumer loan programs, we focus this credit card program on our existing customer
base to add to the depth of our customer relationships. In addition to earning balances, credit card accounts produce non-interest revenues
through interchange fees and other activity-based revenues. Our underwriting of consumer loans is focused on the borrower’s credit history and
ability to repay the debt as evidenced by documented sources of income. At December 31, 2014, we had $349 million, or 9% of our loan portfolio,
in consumer related loans, including $222 million, or 6% of our loan portfolio, in consumer loans secured by one- to four-family residences and
$24 million in credit card balances.
Similar to commercial business loans, our consumer loans often entail greater risk than residential mortgage loans. Home equity lines of credit
generally entail greater risk than do one- to four-family residential mortgage loans where we are in the first lien position. For those home equity
lines secured by a second mortgage, it is less likely that we will be successful in recovering all of our loan proceeds in the event of default. Our
foreclosure on these loans requires that the value of the property be sufficient to cover the repayment of the first mortgage loan, as well as the
costs associated with foreclosure. In the case of consumer loans which are unsecured or secured by rapidly depreciating assets such as automobiles,
any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as
a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection
efforts against the borrower. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are
more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and
state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on these consumer
loans. Loans that we purchased, or indirectly originated, may also give rise to claims and defenses by a consumer loan borrower against an
assignee of such loans such as us, and a borrower may be able to assert against the assignee claims and defenses that it has against the seller of
the underlying collateral.
Loan Solicitation and Processing: We originate real estate loans in our market areas by direct solicitation of real estate brokers, builders,
developers, depositors, walk-in customers and visitors to our Internet website. Loan applications are taken by our mortgage loan officers or
through our Internet website and are processed in branch or regional locations. Most underwriting and loan administration functions for our
real estate loans are performed by loan personnel at central locations.
10
Our commercial bankers solicit commercial and agricultural business loans through call programs focused on local businesses and farmers. While
commercial bankers are delegated reasonable commitment authority based upon their qualifications, credit decisions on significant commercial
and agricultural loans are made by senior loan officers or in certain instances by the Board of Directors of Banner Bank and Islanders Bank.
We originate consumer loans and Quick Step commercial business loans through various marketing efforts directed primarily toward our existing
deposit and loan customers. Consumer loan and Quick Step commercial business loan applications are primarily underwritten and documented
by centralized administrative personnel.
Loan Originations, Sales and Purchases
While we originate a variety of loans, our ability to originate each type of loan is dependent upon the relative customer demand and competition
in each market we serve. For the years ended December 31, 2014, 2013 and 2012, we originated loans, net of repayments, including our
participation in syndicated loans, of $506 million, $595 million, and $458 million, respectively. The decrease in net originations for 2014
compared with 2013 largely reflects a slowdown in residential mortgage refinance activity and certain large payoffs of multifamily loans. The
increase for 2013 compared to 2012 reflected a significant increase in production of one- to four-family residential loans, as well as increased
new commercial business and agricultural business loans and commercial real estate loans.
We sell many of our newly originated one- to four-family residential mortgage loans to secondary market purchasers as part of our interest rate
risk management strategy. Originations of one- to four-family residential loans for sale decreased to $368 million for the year ended December
31, 2014 from $443 million during 2013, reflecting reduced refinancing activity. Proceeds from sales of loans for the years ended December 31,
2014, 2013 and 2012, totaled $379 million, $463 million, and $515 million, respectively. Sales of loans generally are beneficial to us because
these sales may generate income at the time of sale, provide funds for additional lending and other investments, increase liquidity or reduce
interest rate risk. We sell loans on both a servicing-retained and a servicing-released basis. All loans are sold without recourse. The decision
to hold or sell loans is based on asset liability management goals, strategies and policies and on market conditions. See “Loan Servicing.” At
December 31, 2014, we had $3 million in loans held for sale.
We periodically purchase whole loans and loan participation interests or participate in syndicates originating new loans, including shared national
credits, primarily during periods of reduced loan demand in our primary market area and at times to support our Community Reinvestment Act
lending activities. Any such purchases or loan participations are made generally consistent with our underwriting standards; however, the loans
may be located outside of our normal lending area. During the years ended December 31, 2014, 2013 and 2012, we purchased $194 million,
$49 million and $18 million, respectively, of loans and loan participation interests.
Loan Servicing
We receive fees from a variety of institutional owners in return for performing the traditional services of collecting individual payments and
managing portfolios of sold loans. At December 31, 2014, we were servicing $1.391 billion of loans for others. Loan servicing includes
processing payments, accounting for loan funds and collecting and paying real estate taxes, hazard insurance and other loan-related items such
as private mortgage insurance. In addition to earning fee income, we retain certain amounts in escrow for the benefit of the lender for which
we incur no interest expense but are able to invest the funds into earning assets. At December 31, 2014, we held $6.7 million in escrow for our
portfolio of loans serviced for others. The loan servicing portfolio at December 31, 2014 was composed of $847 million of Freddie Mac residential
mortgage loans, $415 million of Fannie Mae residential mortgage loans and $129 million of both residential and non-residential mortgage loans
serviced for a variety of private investors. The portfolio included loans secured by property located primarily in the states of Washington, Oregon
and Idaho. For the year ended December 31, 2014, we recognized $1.1 million in income from loan servicing in our results of operations, which
was net of $2.1 million of servicing rights amortization and included no valuation adjustments to mortgage servicing rights.
Mortgage Servicing Rights: We record mortgage servicing rights (MSRs) with respect to loans we originate and sell in the secondary market
on a servicing-retained basis. The value of MSRs is capitalized and amortized in proportion to, and over the period of, the estimated future net
servicing income. For the years ended December 31, 2014, 2013 and 2012, we capitalized $3.0 million, $2.9 million, and $3.7 million,
respectively, of MSRs relating to loans sold with servicing retained. No MSRs were purchased in those periods. Amortization of MSRs for the
years ended December 31, 2014, 2013 and 2012, was $2.1 million, $2.4 million, and $2.6 million, respectively. Management periodically
evaluates the estimates and assumptions used to determine the carrying values of MSRs and the amortization of MSRs. MSRs generally are
adversely affected by higher levels of current or anticipated prepayments resulting from decreasing interest rates. These carrying values are
adjusted when the valuation indicates the carrying value is impaired. During 2014, we recorded no valuation adjustments to MSRs. In 2013
we reversed $1.3 million in valuation allowance that had previously been recognized against our MSRs, and during 2012 we recorded valuation
allowances totaling $400,000. At December 31, 2014, our MSRs were carried at a value of $9.0 million, net of amortization.
Asset Quality
Classified Assets: State and federal regulations require that the Banks review and classify their problem assets on a regular basis. In addition,
in connection with examinations of insured institutions, state and federal examiners have authority to identify problem assets and, if appropriate,
require them to be classified. Historically, we have not had any meaningful differences of opinion with the examiners with respect to asset
classification. Banner Bank’s Credit Policy Division reviews detailed information with respect to the composition and performance of the loan
portfolios, including information on risk concentrations, delinquencies and classified assets for both Banner Bank and Islanders Bank. The
Credit Policy Division approves all recommendations for new classified loans or, in the case of smaller-balance homogeneous loans including
residential real estate and consumer loans, it has approved policies governing such classifications, or changes in classifications, and develops
11
and monitors action plans to resolve the problems associated with the assets. The Credit Policy Division also approves recommendations for
establishing the appropriate level of the allowance for loan losses. Significant problem loans are transferred to Banner Bank’s Special Assets
Department for resolution or collection activities. The Banks’ and Banner Corporation’s Boards of Directors are given a detailed report on
classified assets and asset quality at least quarterly. For additional information regarding asset quality and non-performing loans, see Item 7,
“Management’s Discussion and Analysis of Financial Condition—Comparison of Financial Condition at December 31, 2014 and 2013—Asset
Quality,” and Tables 15, 16 and 17 contained therein.
Allowance for Loan Losses: In originating loans, we recognize that losses will be experienced and that the risk of loss will vary with, among
other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in
the case of a secured loan, the quality of the security for the loan. As a result, we maintain an allowance for loan losses consistent with U.S.
generally accepted accounting principles (GAAP) guidelines. We increase our allowance for loan losses by charging provisions for possible
loan losses against our income. The allowance for losses on loans is maintained at a level which, in management’s judgment, is sufficient to
provide for probable losses based on evaluating known and inherent risks in the loan portfolio and upon continuing analysis of the factors
underlying the quality of the loan portfolio. At December 31, 2014, we had an allowance for loan losses of $76 million, which represented
1.98% of loans and 454% of non-performing loans compared to 2.17% and 300%, respectively, at December 31, 2013. For additional information
concerning our allowance for loan losses, see Item 7, “Management’s Discussion and Analysis of Financial Condition—Comparison of Results
of Operations for the Years Ended December 31, 2014 and 2013—Provision and Allowance for Loan Losses,” and Tables 21 and 22 contained
therein.
Real Estate Owned: Real estate owned (REO) is property acquired by foreclosure or receiving a deed in lieu of foreclosure, and is recorded at
the lower of the estimated fair value of the property, less expected selling costs, or the carrying amount of the defaulted loan. Development and
improvement costs relating to the property are capitalized to the extent they add value to the property. The carrying value of the property is
periodically evaluated by management and, if necessary, allowances are established to reduce the carrying value to net realizable value. Gains
or losses at the time the property is sold are credited or charged to operations in the period in which they are realized. The amounts we will
ultimately recover from REO may differ substantially from the carrying value of the assets because of market factors beyond our control or
because of changes in our strategies for recovering the investment. If the book value of the REO is determined to be in excess of the fair market
value, a valuation allowance is recognized against earnings. At December 31, 2014, we had REO of $3 million, compared to $4 million at
December 31, 2013. Valuation allowances recognized during 2014 were $36,000 and for 2013 and 2012 were $785,000 and $5.2 million,
respectively. Net gains on the disposal of REO were $973,000, $2.5 million, and $4.7 million, respectively, for the years ended December 31,
2014, 2013, and 2012. For additional information on REO, see Item 7, “Management’s Discussion and Analysis of Financial Condition—
Comparison of Financial Condition at December 31, 2014 and 2013—Asset Quality” and Table 18 contained therein and Note 7 of the Notes
to the Consolidated Financial Statements.
Investment Securities
Investment Activities
Under Washington state law, banks are permitted to invest in various types of marketable securities. Authorized securities include but are not
limited to Treasury obligations, securities of various federal agencies (including government-sponsored enterprises), mortgage-backed and asset-
backed securities, certain certificates of deposit of insured banks and savings institutions, bankers’ acceptances, repurchase agreements, federal
funds, commercial paper, corporate debt and equity securities and obligations of states and their political subdivisions. Our investment policies
are designed to provide and maintain adequate liquidity and to generate favorable rates of return without incurring undue interest rate or credit
risk. Our policies generally limit investments to U.S. Government and agency (including government-sponsored entities) securities, municipal
bonds, certificates of deposit, corporate debt obligations and mortgage-backed securities. Investment in mortgage-backed securities may include
those issued or guaranteed by Freddie Mac, Fannie Mae, Government National Mortgage Association (Ginnie Mae or GNMA) and privately-
issued mortgage-backed securities that have an AA credit rating or higher at the time of purchase, as well as collateralized mortgage obligations
(CMOs). A high credit rating indicates only that the rating agency believes there is a low risk of loss or default. To the best of our knowledge,
we do not have any investments in mortgage-backed securities, collateralized debt obligations or structured investment vehicles that have a
material exposure to sub-prime mortgages. However, we do have modest investments in single-issuer trust preferred securities and collateralized
debt obligations secured by pooled trust preferred securities that have been materially adversely impacted by concerns related to the banking
and insurance industries as well as payment deferrals and defaults by certain issuers. Further, all of our investment securities, including those
that have high credit ratings, are subject to market risk in so far as a change in market rates of interest or other conditions may cause a change
in an investment’s earnings performance and/or market value.
At December 31, 2014, our consolidated investment portfolio totaled $583 million and consisted principally of U.S. Government agency
obligations, mortgage-backed securities, municipal bonds, corporate debt obligations, and asset-backed securities. From time to time, investment
levels may be increased or decreased depending upon yields available on investment alternatives and management’s projections as to the demand
for funds to be used in loan originations, deposits and other activities. During the year ended December 31, 2014, holdings of mortgage-backed
securities decreased $24 million to $326 million, while Treasury and agency obligations decreased $28 million to $33 million, corporate securities
including equities decreased $18 million to $26 million, municipal bonds increased $18 million to $171 million, and investments in asset-backed
securities remained the same at $26 million.
For detailed information on our investment securities, see Item 7, “Management’s Discussion and Analysis of Financial Condition—Comparison
of Financial Condition at December 31, 2014 and 2013—Investments,” and Tables 1 to 6 contained therein.
12
Derivatives
Off-Balance-Sheet Derivatives: The Company, through its Banner Bank subsidiary, is party to various derivative instruments that are used for
asset and liability management and customer financing needs. Derivative instruments are contracts between two or more parties that have a
notional amount and an underlying variable, require no net investment and allow for the net settlement of positions. The notional amount serves
as the basis for the payment provision of the contract and takes the form of units, such as shares or dollars. The underlying variable represents
a specified interest rate, index, or other component. The interaction between the notional amount and the underlying variable determines the
number of units to be exchanged between the parties and influences the market value of the derivative contract. We obtain dealer quotations to
value our derivative contracts.
Our predominant derivative and hedging activities involve interest rate swaps related to certain term loans and forward sales contracts associated
with mortgage banking activities. Generally, these instruments help us manage exposure to market risk and meet customer financing needs.
Market risk represents the possibility that economic value or net interest income will be adversely affected by fluctuations in external factors
such as market-driven interest rates and prices or other economic factors.
Derivatives Designated in Hedge Relationships
Our fixed rate loans result in exposure to losses in value or net interest income as interest rates change. The risk management objective for
hedging fixed rate loans is to effectively convert the fixed rate received to a floating rate. We have hedged our exposure to changes in the fair
value of certain fixed rate loans through the use of interest rate swaps. For a qualifying fair value hedge, changes in the value of the derivatives
are recognized in current period earnings along with the corresponding changes in the fair value of the designated hedged item attributable to
the risk being hedged.
Derivatives Not Designated in Hedge Relationships
Interest Rate Swaps: Banner Bank has been using an interest rate swap program for commercial loan customers, termed the Back-to-Back
Program, since 2010. In the Back-to-Back Program, we provide the client with a variable rate loan and enter into an interest rate swap in which
the client receives a variable rate payment in exchange for a fixed rate payment. We offset our risk exposure by entering into an offsetting interest
rate swap with a dealer counterparty for the same notional amount and length of term as the client interest rate swap providing the dealer
counterparty with a fixed rate payment in exchange for a variable rate payment. There are also a few interest rate swaps from prior to 2009 that
were not designated in hedge relationships that are included in these totals. These swaps do not qualify as designated hedges; therefore, each
swap is accounted for as a free standing derivative.
Mortgage Banking: In the normal course of business, we sell originated mortgage loans into the secondary mortgage loan markets. During the
period of loan origination and prior to the sale of the loans in the secondary market, we have exposure to movements in interest rates associated
with written rate lock commitments with potential borrowers to originate loans that are intended to be sold and for closed loans that are awaiting
sale and delivery into the secondary market.
Written loan commitments that relate to the origination of mortgage loans that will be held for resale are considered free-standing derivatives
and do not qualify for hedge accounting. Written loan commitments generally have a term of up to 60 days before the closing of the loan. The
loan commitment does not bind the potential borrower to enter into the loan, nor does it guarantee that we will approve the potential borrower
for the loan. Therefore, when determining fair value, we make estimates of expected “fallout” (loan commitments not expected to close), using
models which consider cumulative historical fallout rates, current market interest rates and other factors.
Written loan commitments in which the borrower has locked in an interest rate results in market risk to us to the extent market interest rates
change from the rate quoted to the borrower. We economically hedge the risk of changing interest rates associated with our interest rate lock
commitments by entering into forward sales contracts.
Mortgage loans which are held for sale are subject to changes in fair value due to fluctuations in interest rates from the loan's closing date through
the date of sale of the loans into the secondary market. Typically, the fair value of these loans declines when interest rates increase and rises
when interest rates decrease. To mitigate this risk, we enter into forward sales contracts on a significant portion of these loans to provide an
economic hedge against those changes in fair value. Mortgage loans held for sale and the forward sales contracts are recorded at fair value with
ineffective changes in value recorded in current earnings as loan sales income.
We are exposed to credit-related losses in the event of nonperformance by the counterparty to these agreements. Credit risk of the financial
contract is controlled through the credit approval, limits, and monitoring procedures and we do not expect the counterparties to fail their obligations.
In connection with the interest rate swaps between Banner Bank and the dealer counterparties, the agreements contain a provision where if
Banner Bank fails to maintain its status as a well/adequately capitalized institution, then the counterparty could terminate the derivative positions
and we would be required to settle its obligations. Similarly, we could be required to settle our obligations under certain of these agreements if
specific regulatory events occur, such as a publicly issued prompt corrective action directive, cease and desist order, or a capital maintenance
agreement that required Banner Bank to maintain a specific capital level. If we had breached any of these provisions at December 31, 2014 or
2013, we could have been required to settle our obligations under the agreements at the termination value. As of December 31, 2014 and 2013,
the termination value of derivatives in a net liability position related to these agreements was $6.3 million and $2.7 million, respectively. We
generally post collateral against derivative liabilities in the form of government agency-issued bonds, mortgage-backed securities, or commercial
13
mortgage-backed securities. Collateral posted against derivative liabilities was $11.1 million and $8.9 million as of December 31, 2014 and
2013, respectively.
Derivative assets and liabilities are recorded at fair value on the balance sheet and do not take into account the effects of master netting agreements.
Master netting agreements allow us to settle all derivative contracts held with a single counterparty on a net basis and to offset net derivative
positions with related collateral where applicable.
Deposit Activities and Other Sources of Funds
General: Deposits, FHLB advances (or other borrowings) and loan repayments are our major sources of funds for lending and other investment
purposes. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are
influenced by general economic, interest rate and money market conditions and may vary significantly. Borrowings may be used on a short-
term basis to compensate for reductions in the availability of funds from other sources. Borrowings may also be used on a longer-term basis for
general business purposes, including funding loans and investments.
We compete with other financial institutions and financial intermediaries in attracting deposits. There is strong competition for transaction
balances and savings deposits from commercial banks, credit unions and non-bank corporations, such as securities brokerage companies, mutual
funds and other diversified companies, some of which have nationwide networks of offices. Much of the focus of our branch expansion,
relocations and renovation and advertising and marketing campaigns has been directed toward attracting additional deposit customer relationships
and balances. In addition, our electronic banking activities including debit card and automated teller machine (ATM) programs, on-line Internet
banking services and, most recently, customer remote deposit and mobile banking capabilities are all directed at providing products and services
that enhance customer relationships and result in growing deposit balances, as well as fee income. Growing core deposits (transaction and
savings accounts) is a fundamental element of our business strategy. Core deposits increased to 80% of total deposits at December 31, 2014
compared to 76% a year earlier and 71% two years ago.
Deposit Accounts: We generally attract deposits from within our primary market areas by offering a broad selection of deposit instruments,
including demand checking accounts, interest-bearing checking accounts, money market deposit accounts, regular savings accounts, certificates
of deposit, cash management services and retirement savings plans. Deposit account terms vary according to the minimum balance required,
the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of deposit accounts, we
consider current market interest rates, profitability to us, matching deposit and loan products and customer preferences and concerns. At
December 31, 2014, we had $3.899 billion of deposits, including $3.128 billion of transaction and savings accounts and $771 million in time
deposits. For additional information concerning our deposit accounts, see Item 7, “Management’s Discussion and Analysis of Financial Condition
—Comparison of Financial Condition at December 31, 2014 and 2013—Deposit Accounts.” See also Table 11 contained therein, which sets
forth the balances of deposits in the various types of accounts, and Table 12, which sets forth the amount of our certificates of deposit greater
than $100,000 by time remaining until maturity as of December 31, 2014. In addition, see Note 9 of the Notes to the Consolidated Financial
Statements.
Borrowings: While deposits are the primary source of funds for our lending and investment activities and for general business purposes, we
also use borrowings to supplement our supply of lendable funds, to meet deposit withdrawal requirements and to more efficiently leverage our
capital position. The FHLB-Seattle serves as our primary borrowing source, although in recent years we have significantly reduced our use of
FHLB advances. The FHLB-Seattle provides credit for member financial institutions such as Banner Bank and Islanders Bank. As members,
the Banks are required to own capital stock in the FHLB-Seattle and are authorized to apply for advances on the security of that stock and certain
of their mortgage loans and securities provided certain credit worthiness standards have been met. Limitations on the amount of advances are
based on the financial condition of the member institution, the adequacy of collateral pledged to secure the credit, and FHLB stock ownership
requirements. At December 31, 2014, we had $32 million of borrowings from the FHLB-Seattle. At that date, Banner Bank had been authorized
by the FHLB-Seattle to borrow up to $901 million under a blanket floating lien security agreement, while Islanders Bank was approved to borrow
up to $23 million under a similar agreement. The Federal Reserve Bank also serves as an important source of borrowing capacity. The Federal
Reserve Bank provides credit based upon acceptable loan collateral, which includes certain loan types not eligible for pledging to the FHLB-
Seattle. At December 31, 2014, based upon our available unencumbered collateral, Banner Bank was eligible to borrow $639 million from the
Federal Reserve Bank, although at that date we had no funds borrowed under this arrangement. Although eligible to participate, Islanders Bank
has not applied for approval to borrow from the Federal Reserve Bank. For additional information concerning our borrowings, see Item 7,
“Management’s Discussion and Analysis of Financial Condition—Comparison of Financial Condition at December 31, 2014 and 2013—
Borrowings,” Table 14 contained therein, and Notes 10 and 11 of the Notes to the Consolidated Financial Statements.
We issue retail repurchase agreements, generally due within 90 days, as an additional source of funds, primarily in connection with cash
management services provided to our larger deposit customers. At December 31, 2014, we had issued retail repurchase agreements totaling $77
million, which were secured by a pledge of certain U.S. Government and agency notes and mortgage-backed securities with a market value of
$99 million. We also may borrow funds through the use of secured wholesale repurchase agreements with securities brokers; however, during
the three years ended December 31, 2014, we did not have any wholesale repurchase borrowings.
We have also issued $120 million of junior subordinated debentures in connection with the sale of trust preferred securities (TPS). The TPS
were issued from 2002 through 2007 by special purpose business trusts formed by Banner Corporation and were sold in private offerings to
pooled investment vehicles. The junior subordinated debentures associated with the TPS have been recorded as liabilities and are reported at
fair value on our Consolidated Statements of Financial Condition. All of the debentures issued to the Trusts, measured at their fair value, less
the common stock of the Trusts, qualified as Tier I capital as of December 31, 2014, under guidance issued by the Board of Governors of the
14
Federal Reserve System. We invested substantially all of the proceeds from the issuance of the TPS as additional paid in capital at Banner
Bank. For additional information about deposits and other sources of funds, see Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Liquidity and Capital Resources,” and Notes 9, 10, 11 and 12 of the Notes to the Consolidated Financial
Statements.
As of December 31, 2014, we had 1,102 full-time and 91 part-time employees. Banner Corporation has no employees except for those who are
also employees of Banner Bank, its subsidiaries, and Islanders Bank. The employees are not represented by a collective bargaining unit. We
believe our relationship with our employees is good.
Personnel
Federal Taxation
Taxation
General: For tax reporting purposes, we report our income on a calendar year basis using the accrual method of accounting on a consolidated
basis. We are subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the
reserve for bad debts. Reference is made to Note 13 of the Notes to the Consolidated Financial Statements for additional information concerning
the income taxes payable by us.
State Taxation
Washington Taxation: We are subject to a Business and Occupation (B&O) tax which is imposed under Washington law at the current rate of
1.50% of gross receipts. On April 12, 2010, the Washington State Legislature temporarily increased the rate to 1.80% for the period May 1,
2010 through June 30, 2013. Interest received on loans secured by mortgages or deeds of trust on residential properties, residential mortgage-
backed securities, and certain U.S. Government and agency securities is not subject to this tax. Our B&O tax expense was $1.4 million, $1.9
million, and $2.3 million for the years ended December 31, 2014, 2013 and 2012, respectively.
Oregon and Idaho Taxation: Corporations with nexus in the states of Oregon and Idaho are subject to a corporate level income tax. Our operations
in those states resulted in corporate income taxes paid of approximately $865,000, $761,000, and $540,000 for the years ended December 31,
2014, 2013 and 2012, respectively. As our operations in these states increase, the state income tax provision will have an increasing effect on
our effective tax rate and results of operations.
Competition
We encounter significant competition both in attracting deposits and in originating loans. Our most direct competition for deposits comes from
other commercial and savings banks, savings associations and credit unions with offices in our market areas. We also experience competition
from securities firms, insurance companies, money market and mutual funds, and other investment vehicles. We expect continued strong
competition from such financial institutions and investment vehicles in the foreseeable future, including competition from on-line Internet
banking competitors. Our ability to attract and retain deposits depends on our ability to provide transaction services and investment opportunities
that satisfy the requirements of depositors. We compete for deposits by offering a variety of accounts and financial services, including robust
electronic banking capabilities, with competitive rates and terms, at convenient locations and business hours, and delivered with a high level of
personal service and expertise.
Competition for loans comes principally from other commercial banks, loan brokers, mortgage banking companies, savings banks and credit
unions and for agricultural loans from the Farm Credit Administration. The competition for loans is intense as a result of the large number of
institutions competing in our market areas. We compete for loans primarily by offering competitive rates and fees and providing timely decisions
and excellent service to borrowers.
Banner Bank and Islanders Bank
Regulation
General: As state-chartered, federally insured commercial banks, Banner Bank and Islanders Bank (the Banks) are subject to extensive regulation
and must comply with various statutory and regulatory requirements, including prescribed minimum capital standards. The Banks are regularly
examined by the FDIC and the Washington DFI and file periodic reports concerning their activities and financial condition with these banking
regulators. The Banks' relationship with depositors and borrowers also is regulated to a great extent by both federal and state law, especially in
such matters as the ownership of deposit accounts and the form and content of mortgage and other loan documents.
Federal and state banking laws and regulations govern all areas of the operation of the Banks, including reserves, loans, investments, deposits,
capital, issuance of securities, payment of dividends and establishment of branches. Federal and state bank regulatory agencies also have the
general authority to limit the dividends paid by insured banks and bank holding companies if such payments should be deemed to constitute an
unsafe and unsound practice. The Federal Reserve Board and FDIC as the respective primary federal regulators of Banner Corporation and each
of Banner Bank and Islanders Bank have authority to impose penalties, initiate civil and administrative actions and take other steps intended to
prevent banks from engaging in unsafe or unsound practices.
15
The laws and regulations affecting banks and bank holding companies have changed significantly particularly in connection with the enactment
of The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). Among other changes, the Dodd-Frank Act
established the Consumer Protection Financial Bureau (CPFB) as an independent bureau of the Federal Reserve Board. The CPFB assumed
responsibility for the implementation of the federal financial consumer protection and fair lending laws and regulations and has authority to
impose new requirements. Any change in applicable laws, regulations, or regulatory policies may have a material effect on our business,
operations, and prospects. We cannot predict the nature or the extent of the effects on our business and earnings that any fiscal or monetary
policies or new federal or state legislation may have in the future. For additional information concerning the Dodd-Frank Act and the CPFB,
see Item 1A., “Risk Factors—We operate in a highly regulated environment and may be adversely affected by changes in federal and state laws
and regulations that are expected to increase our costs of operation” and “We may be subject to additional regulatory scrutiny if and when Banner
or Banker Bank’s total assets exceed $10.0 billion.”
The following is a summary discussion of certain laws and regulations applicable to Banner and the Banks which is qualified in its entirety by
reference to the actual laws and regulations.
State Regulation and Supervision: As a Washington state-chartered commercial bank with branches in the States of Washington, Oregon and
Idaho, Banner Bank is subject not only to the applicable provisions of Washington law and regulations, but is also subject to Oregon and Idaho
law and regulations. These state laws and regulations govern Banner Bank's ability to take deposits and pay interest thereon, to make loans on
or invest in residential and other real estate, to make consumer loans, to invest in securities, to offer various banking services to its customers
and to establish branch offices. In a similar fashion, Washington state laws and regulations for state-chartered commercial banks also apply to
Islanders Bank.
Deposit Insurance: The Deposit Insurance Fund of the FDIC insures deposit accounts of the Banks up to $250,000 per separately insured
depositor. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of, and to require reporting by,
FDIC-insured institutions. Banner Bank's and Islanders Bank's deposit insurance premiums expense for the year ended December 31, 2014,
were $2.3 million and $159,000, respectively.
The Dodd-Frank Act requires the FDIC's deposit insurance assessments to be based on assets instead of deposits. The FDIC has issued rules
which specify that the assessment base for a bank is equal to its total average consolidated assets less average tangible capital. The FDIC
assessment rates range from approximately five basis points to 35 basis points, depending on applicable adjustments for unsecured debt issued
by an institution and brokered deposits (and to further adjustment for institutions that hold unsecured debt of other FDIC-insured institutions),
until such time as the FDIC's reserve ratio equals 1.15%. Once the FDIC's reserve ratio reaches 1.15% and the reserve ratio for the immediately
prior assessment period is less than 2.0%, the applicable assessment rates may range from three basis points to 30 basis points (subject to
adjustments as described above). If the reserve ratio for the prior assessment period is equal to, or greater than 2.0% and less than 2.5%, the
assessment rates may range from two basis points to 28 basis points and if the reserve ratio for the prior assessment period is greater than 2.5%,
the assessment rates may range from one basis point to 25 basis points (in each case subject to adjustments as described above). No institution
may pay a dividend if it is in default on its federal deposit insurance assessment.
The FDIC conducts examinations of and requires reporting by state non-member banks, such as the Banks. The FDIC also may prohibit any
insured institution from engaging in any activity determined by regulation or order to pose a serious risk to the deposit insurance fund.
The FDIC may terminate the deposit insurance of any insured depository institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance if the institution has no tangible capital. If insurance of accounts is terminated, the accounts
at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years,
as determined by the FDIC. Management is not aware of any existing circumstances which would result in termination of the deposit insurance
of either Banner Bank or Islanders Bank.
Standards for Safety and Soundness: The federal banking regulatory agencies have prescribed, by regulation, guidelines for all insured depository
institutions relating to internal controls, information systems and internal audit systems; loan documentation; credit underwriting; interest rate
risk exposure; asset growth; asset quality; earnings; and compensation, fees and benefits. The guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes
includes
impaired. Each insured depository institution must
administrative, technical, and physical safeguards appropriate to the institution's size and complexity and the nature and scope of its activities. The
information security program must be designed to ensure the security and confidentiality of customer information, protect against any
unanticipated threats or hazards to the security or integrity of such information, protect against unauthorized access to or use of such information
that could result in substantial harm or inconvenience to any customer, and ensure the proper disposal of customer and consumer information. Each
insured depository institution must also develop and implement a risk-based response program to address incidents of unauthorized access to
customer information in customer information systems. If the FDIC determines that an institution fails to meet any of these guidelines, it may
require an institution to submit to the FDIC an acceptable plan to achieve compliance.
implement a comprehensive written information security program that
Capital Requirements: Federally insured financial institutions, such as Banner Bank and Islanders Bank, are required to maintain a minimum
level of regulatory capital. Currently, FDIC regulations recognized two types, or tiers, of capital: core (Tier 1) capital and supplementary (Tier
16
2) capital. Tier 1 capital generally includes common stockholders' equity, qualifying restricted core capital elements (other than cumulative
perpetual preferred stock), less deductions for disallowed intangibles and disallowed deferred tax assets. Tier 2 capital, which recognizes up to
100% of Tier 1 capital for risk-based capital purposes includes such items as qualifying general loan loss reserves (up to 1.25% of risk-weighted
assets), qualified subordinated debt, redeemable preferred stock, other restricted core capital elements, cumulative perpetual preferred stock,
and net unrealized holding gains on equity securities (subject to certain limitations); provided, however, the amount of term subordinated debt
and intermediate term preferred stock that may be included in Tier 2 capital for risk-based capital purposes is limited to 50% of Tier 1 capital.
The FDIC currently measures an institution's capital using a leverage limit together with certain risk-based ratios. The FDIC's minimum leverage
capital requirement specifies a minimum ratio of Tier 1 capital to average total assets. Most banks are required to maintain a minimum leverage
ratio of at least 3% to 4% of total assets. At December 31, 2014, Banner Bank and Islanders Bank had Tier 1 leverage capital ratios of 12.40%
and 13.68%, respectively. The FDIC retains the right to require an institution to maintain a higher capital level based on an institution's particular
risk profile.
FDIC regulations also establish a measure of capital adequacy based on ratios of qualifying capital to risk-weighted assets. Assets are placed
in one of four categories and given a percentage weight based on the relative risk of the category. In addition, certain off-balance-sheet items
are converted to balance-sheet credit equivalent amounts, and each amount is then assigned to one of the four categories. Under the guidelines,
the ratio of total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets must be at least 8%, and the ratio of Tier 1 capital to risk-
weighted assets must be at least 4%. In evaluating the adequacy of a bank's capital, the FDIC may also consider other factors that may affect
the bank's financial condition. Such factors may include interest rate risk exposure, liquidity, funding and market risks, the quality and level of
earnings, concentration of credit risk, risks arising from nontraditional activities, loan and investment quality, the effectiveness of loan and
investment policies, and management's ability to monitor and control financial operating risks. At December 31, 2014, Banner Bank and Islanders
Bank had Tier 1 risk-based capital ratios of 14.25% and 18.69%, respectively, and total risk-based capital ratios of 15.51% and 19.92%,
respectively.
On July 2, 2013, the Federal Reserve approved a final rule (Final Rule) to establish a new comprehensive regulatory capital framework for all
U.S. financial institutions and their holding companies. On July 9, 2013, the Final Rule was approved as an interim final rule by the FDIC. The
Final Rule implements the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. The final rule includes new risk-
based capital and leverage ratios, which are effective January 1, 2015 and revise the definition of what constitutes “capital” for purposes of
calculating those ratios.
Effective January 1, 2015 (with some changes transitioned into full effectiveness over two to four years), Banner and the Banks became subject
to the new capital requirements adopted by the Federal Reserve and the FDIC. These new requirements create a new required ratio for common
equity Tier 1 (“CET1”) capital, increase the leverage and Tier 1 capital ratios, change the risk-weights of certain assets for purposes of the risk-
based capital ratios, create an additional capital conservation buffer over the required capital ratios and change what qualifies as capital for
purposes of meeting these various capital requirements. Beginning in 2016, failure to maintain the required capital conservation buffer will
limit our ability and the ability of our bank subsidiary to pay dividends, repurchase shares or pay discretionary bonuses. Under the new capital
regulations, the minimum capital ratios applicable to Banner and the Banks are: (i) a CETI capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6%
(increased from 4%); (iii) a total capital ratio of 8% (unchanged from prior rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. CET1
generally consists of common stock; retained earnings; accumulated other comprehensive income (“AOCI”), explained below, unless we elect
to exclude AOCI from regulatory capital, as discussed below; and certain minority interests; all subject to applicable regulatory adjustments and
deductions. There are a number of changes in what constitutes regulatory capital, some of which are subject to transition periods. These changes
include the phasing-out of certain instruments as qualifying capital. Banner and the Banks do not have any of these instruments. Under the new
requirements for total capital, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing
rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of CET1 will be deducted from
capital.
In addition, Tier 1 capital will include AOCI, which includes all unrealized gains and losses on available for sale debt and equity
securities. Because of our asset size, we have the one-time option of deciding in the first quarter of 2015 whether to permanently opt-out of the
inclusion of accumulated other comprehensive income in our capital calculations. We are planning to take advantage of this opt-out to reduce
the impact of market volatility on our regulatory capital levels.
The new requirements also include changes in the risk-weights of assets to better reflect credit risk and other risk exposures. These include a
150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and for
non-residential mortgage loans that are 90 days past due or otherwise in non-accrual status; a 20% (up from 0%) credit conversion factor for the
unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (currently set at 0%); a
250% risk weight (up from 100%) for mortgage servicing and deferred tax assets that are not deducted from capital; and increased risk-weights
(0% to 600%) for equity exposures.
In addition to the minimum CET1, Tier 1 and total capital ratios, Banner and the Banks will have to maintain a capital conservation buffer
consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations
on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that
could be utilized for such actions. This new capital conservation buffer requirement will be phased in beginning in January 2016 at 0.625% of
risk-weighted assets and increasing each year until fully implemented in January 2019.
Prompt Corrective Action: Federal statutes establish a supervisory framework based on five capital categories: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. An institution's category depends upon where its
capital levels are in relation to relevant capital measures, which include a risk-based capital measure, a leverage ratio capital measure and certain
17
other factors. The federal banking agencies have adopted regulations that implement this statutory framework. Under these regulations, an
institution is treated as well capitalized if its ratio of total capital to risk-weighted assets is 10% or more, its ratio of core capital to risk-weighted
assets is 6% or more, its ratio of core capital to total assets (leverage ratio) is 5% or more, and it is not subject to any federal supervisory order
or directive to meet a specific capital level. In order to be adequately capitalized, an institution must have a total risk-based capital ratio of not
less than 8%, a core capital to risk-weighted assets ratio of not less than 4%, and a leverage ratio of not less than 4%. An institution that is not
well capitalized is subject to certain restrictions on brokered deposits, including restrictions on the rates it can offer on its deposits generally. Any
institution which is neither well capitalized nor adequately capitalized is considered undercapitalized. In connection with the approval of new
capital rules by the federal banking agencies, the general structure of the prompt corrective action rules were maintained, but include a new
common equity requirement for Tier 1 capital and incorporate an increased Tier 1 capital requirement into the prompt corrective action framework.
See “Capital Requirements” below.
Undercapitalized institutions are subject to certain prompt corrective action requirements, regulatory controls and restrictions which become
more extensive as an institution becomes more severely undercapitalized. Failure by either Banner Bank and Islanders Bank to comply with
applicable capital requirements would, if unremedied, result in progressively more severe restrictions on its activities and lead to enforcement
actions, including, but not limited to, the issuance of a capital directive to ensure the maintenance of required capital levels and, ultimately, the
appointment of the FDIC as receiver or conservator. Banking regulators will take prompt corrective action with respect to depository institutions
that do not meet minimum capital requirements. Additionally, approval of any regulatory application filed for their review may be dependent
on compliance with capital requirements.
At December 31, 2014, both Banner Bank and Islanders Bank were categorized as “well capitalized” under the prompt corrective action regulations
of the FDIC. For additional information, see Note 18 of the Notes to Consolidated Financial Statements.
The FDIC’s prompt corrective action standards changed effective January 1, 2015. Under the new standards, in order to be considered well-
capitalized, each of our bank subsidiaries must have a CET1 ratio of 6.5% (new), a Tier 1 ratio of 8% (increased from 6%), a total risk-based
capital ratio of 10% (unchanged) and a leverage ratio of 5% (unchanged).
For a complete description of Banner Bank's and Islander Bank’s required and actual capital levels as of December 31, 2014, see Note 18 of
the Notes to the Consolidated Financial Statements.
Commercial Real Estate Lending Concentrations: The federal banking agencies have issued guidance on sound risk management practices for
concentrations in commercial real estate lending. The particular focus is on exposure to commercial real estate loans that are dependent on the
cash flow from the real estate held as collateral and that are likely to be sensitive to conditions in the commercial real estate market (as opposed
to real estate collateral held as a secondary source of repayment or as an abundance of caution). The purpose of the guidance is not to limit a
bank's commercial real estate lending but to guide banks in developing risk management practices and capital levels commensurate with the
level and nature of real estate concentrations. The guidance directs the FDIC and other bank regulatory agencies to focus their supervisory
resources on institutions that may have significant commercial real estate loan concentration risk. A bank that has experienced rapid growth in
commercial real estate lending, has notable exposure to a specific type of commercial real estate loan, or is approaching or exceeding the following
supervisory criteria may be identified for further supervisory analysis with respect to real estate concentration risk:
• Total reported loans for construction, land development and other land represent 100% or more of the bank's capital; or
• Total commercial real estate loans (as defined in the guidance) represent 300% or more of the bank's total capital or the outstanding
balance of the bank's commercial real estate loan portfolio has increased 50% or more during the prior 36 months.
The guidance provides that the strength of an institution's lending and risk management practices with respect to such concentrations will be
taken into account in supervisory guidance on evaluation of capital adequacy. As of December 31, 2014, Banner Bank's and Islanders Bank's
aggregate loans for construction, land development and land loans were 116% and 27% of total capital, respectively. In addition, at December 31,
2014, Banner Bank's and Islanders Bank's loans on commercial real estate were 286% and 172% of total capital, respectively.
Activities and Investments of Insured State-Chartered Financial Institutions: Federal law generally limits the activities and equity investments
of FDIC insured, state-chartered banks to those that are permissible for national banks. An insured state bank is not prohibited from, among
other things, (1) acquiring or retaining a majority interest in a subsidiary, (2) investing as a limited partner in a partnership the sole purpose of
which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such
limited partnership investments may not exceed 2% of the bank's total assets, (3) acquiring up to 10% of the voting stock of a company that
solely provides or re-insures directors', trustees' and officers' liability insurance coverage or bankers' blanket bond group insurance coverage for
insured depository institutions, and (4) acquiring or retaining the voting shares of a depository institution if certain requirements are met.
Washington State has enacted a law regarding financial institution parity. Primarily, the law affords Washington-chartered commercial banks
the same powers as Washington-chartered savings banks. In order for a bank to exercise these powers, it must provide 30 days notice to the
Director of the Washington Department of Financial Institutions and the Director must authorize the requested activity. In addition, the law
provides that Washington-chartered commercial banks may exercise any of the powers that the Federal Reserve has determined to be closely
related to the business of banking and the powers of national banks, subject to the approval of the Director in certain situations. The law also
provides that Washington-chartered savings banks may exercise any of the powers of Washington-chartered commercial banks, national banks
and federally-chartered savings banks, subject to the approval of the Director in certain situations. Finally, the law provides additional flexibility
18
for Washington-chartered commercial and savings banks with respect to interest rates on loans and other extensions of credit. Specifically, they
may charge the maximum interest rate allowable for loans and other extensions of credit by federally-chartered financial institutions to Washington
residents.
Environmental Issues Associated With Real Estate Lending: The Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA) is a federal statute that generally imposes strict liability on all prior and present “owners and operators” of sites containing hazardous
waste. However, Congress acted to protect secured creditors by providing that the term “owner and operator” excludes a person whose ownership
is limited to protecting its security interest in the site. Since the enactment of the CERCLA, this “secured creditor exemption” has been the
subject of judicial interpretations which have left open the possibility that lenders could be liable for cleanup costs on contaminated property
that they hold as collateral for a loan. To the extent that legal uncertainty exists in this area, all creditors, including Banner Bank and Islanders
Bank, that have made loans secured by properties with potential hazardous waste contamination (such as petroleum contamination) could be
subject to liability for cleanup costs, which costs often substantially exceed the value of the collateral property.
Federal Reserve System: The Federal Reserve Board requires that all depository institutions maintain reserves on transaction accounts or non-
personal time deposits. These reserves may be in the form of cash or non-interest-bearing deposits with the regional Federal Reserve
Bank. Interest-bearing checking accounts and other types of accounts that permit payments or transfers to third parties fall within the definition
of transaction accounts and are subject to Regulation D reserve requirements, as are any non-personal time deposits at a bank. At December 31,
2014, the Banks' deposits with the Federal Reserve Bank and vault cash exceeded their reserve requirements.
Affiliate Transactions: Banner Corporation, Banner Bank and Islanders Bank are separate and distinct legal entities. Federal laws strictly limit
the ability of banks to engage in certain transactions with their affiliates, including their bank holding companies. Transactions deemed to be a
“covered transaction” under Section 23A of the Federal Reserve Act and between a subsidiary bank and its parent company or any non-bank
subsidiary of the bank holding company are limited to 10% of the subsidiary bank's capital and surplus and, with respect to the parent company
and all such non-bank subsidiaries, to an aggregate of 20% of the subsidiary bank's capital and surplus. Further, covered transactions that are
loans and extensions of credit generally are required to be secured by eligible collateral in specified amounts. Federal law also requires that
covered transactions and certain other transactions listed in Section 23B of the Federal Reserve Act between a bank and its affiliates be on terms
as favorable to the bank as transactions with non-affiliates.
Community Reinvestment Act: Banner Bank and Islanders Bank are subject to the provisions of the Community Reinvestment Act of 1977
(CRA), which requires the appropriate federal bank regulatory agency to assess a bank's performance under the CRA in meeting the credit needs
of the community serviced by the bank, including low and moderate income neighborhoods. The regulatory agency's assessment of the bank's
record is made available to the public. Further, a bank's CRA performance rating must be considered in connection with a bank's application
to, among other things, to establish a new branch office that will accept deposits, relocate an existing office or merge or consolidate with, or
acquire the assets or assume the liabilities of, a federally regulated financial institution. Both Banner Bank and Islanders Bank received a
“satisfactory” rating during their most recent CRA examinations.
Dividends: The amount of dividends payable by the Banks to the Company depend upon their earnings and capital position, and is limited by
federal and state laws, regulations and policies. Federal law further provides that no insured depository institution may make any capital
distribution (which includes a cash dividend) if, after making the distribution, the institution would be “undercapitalized,” as defined in the
prompt corrective action regulations. Moreover, the federal bank regulatory agencies also have the general authority to limit the dividends paid
by insured banks if such payments should be deemed to constitute an unsafe and unsound practice.
Privacy Standards: The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (GLBA) modernized the financial services industry
by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other
financial service providers. Banner Bank and Islanders Bank are subject to FDIC regulations implementing the privacy protection provisions
of the GLBA. These regulations require the Banks to disclose their privacy policy, including informing consumers of their information sharing
practices and informing consumers of their rights to opt out of certain practices.
Anti-Money Laundering and Customer Identification: The Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act) was signed into law on October 26, 2001. The USA PATRIOT and Bank Secrecy
Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist
activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of
Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the
identity of customers seeking to open new financial accounts. Bank regulators are directed to consider a holding company's effectiveness in
combating money laundering when ruling on Bank Holding Company Act and Bank Merger Act applications. Banner Bank's and Islanders
Bank's policies and procedures comply with the requirements of the USA Patriot Act.
Other Consumer Protection Laws and Regulations: The Dodd-Frank Act established the CPFB and empowered it to exercise broad regulatory,
supervisory and enforcement authority with respect to both new and existing consumer financial protection laws. The Banks are subject to
consumer protection regulations issued by the CPFB, but as financial institutions with assets of less than $10 billion, the Banks are generally
subject to supervision and enforcement by the FDIC and the DFI with respect to our compliance with consumer financial protection laws and
CPFB regulations.
19
The Banks are subject to a broad array of federal and state consumer protection laws and regulations that govern almost every aspect of its
business relationships with consumers. While the list set forth below is not exhaustive, these include the Truth-in-Lending Act, the Truth in
Savings Act, the Electronic Fund Transfers Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act,
the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Right to Financial Privacy
Act, the Home Ownership and Equity Protection Act, the Fair Credit Billing Act, the Homeowners Protection Act, the Check Clearing for the
21st Century Act, laws governing flood insurance, laws governing consumer protections in connection with the sale of insurance, federal and
state laws prohibiting unfair and deceptive business practices, and various regulations that implement some or all of the foregoing. These laws
and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when
taking deposits, making loans, collecting loans, and providing other services. Failure to comply with these laws and regulations can subject the
Banks to various penalties, including but not limited to, enforcement actions, injunctions, fines, civil liability, criminal penalties, punitive damages,
and the loss of certain contractual rights.
Banner Corporation
General: Banner Corporation, as sole shareholder of Banner Bank and Islanders Bank, is a bank holding company registered with the Federal
Reserve. Bank holding companies are subject to comprehensive regulation by the Federal Reserve under the Bank Holding Company Act of
1956, as amended, or the BHCA, and the regulations of the Federal Reserve. We are required to file quarterly reports with the Federal Reserve
and provide additional information as the Federal Reserve may require. The Federal Reserve may examine us, and any of our subsidiaries, and
charge us for the cost of the examination. The Federal Reserve also has extensive enforcement authority over bank holding companies, including,
among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company
divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and
unsafe or unsound practices. Banner Corporation is also required to file certain reports with, and otherwise comply with the rules and regulations
of the Securities and Exchange Commission.
The Bank Holding Company Act: Under the BHCA, we are supervised by the Federal Reserve. The Federal Reserve has a policy that a bank
holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations
in an unsafe or unsound manner. In addition, the Dodd-Frank Act and earlier Federal Reserve policy provide that a bank holding company
should serve as a source of strength to its subsidiary banks by having the ability to provide financial assistance to its subsidiary banks during
periods of financial distress to the banks. A bank holding company's failure to meet its obligation to serve as a source of strength to its subsidiary
banks will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve's
regulations or both. No regulations have yet been proposed by the Federal Reserve to implement the source of strength doctrine required by the
Dodd-Frank Act. Banner Corporation and any subsidiaries that it may control are considered “affiliates” within the meaning of the Federal
Reserve Act, and transactions between Banner Bank and affiliates are subject to numerous restrictions. With some exceptions, Banner
Corporation, and its subsidiaries, are prohibited from tying the provision of various services, such as extensions of credit, to other services offered
by Banner Corporation, or by its affiliates.
Acquisitions: The BHCA prohibits a bank holding company, with certain exceptions, from acquiring ownership or control of more than 5% of
the voting shares of any company that is not a bank or bank holding company and from engaging in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. Under the BHCA, the Federal Reserve may approve the ownership of
shares by a bank holding company in any company, the activities of which the Federal Reserve has determined to be so closely related to the
business of banking or managing or controlling banks as to be a proper incident thereto. These activities include: operating a savings institution,
mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing
certain investment and financial advice; underwriting and acting as an insurance agent for certain types of credit-related insurance; leasing
property on a full-payout, non-operating basis; selling money orders, travelers' checks and U.S. Savings Bonds; real estate and personal property
appraising; providing tax planning and preparation services; and, subject to certain limitations, providing securities brokerage services for
customers.
Federal Securities Laws: Banner Corporation's common stock is registered with the Securities and Exchange Commission under Section 12(b)
of the Securities Exchange Act of 1934, as amended. We are subject to information, proxy solicitation, insider trading restrictions and other
requirements under the Securities Exchange Act of 1934 (the Exchange Act).
The Dodd-Frank Act: On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank-Act imposes new restrictions and an expanded
framework of regulatory oversight for financial institutions, including depository institutions and implements new capital regulations that Banner
Corporation and the Banks will become subject to and that are discussed above under the section entitled “Banner Bank and Islanders Bank-
Capital Requirements-New Capital Rules.”
In addition, among other changes, the Dodd-Frank Act requires public companies, like Banner Corporation, to (i) provide their shareholders
with a non-binding vote (a) at least once every three years on the compensation paid to executive officers and (b) at least once every six years
on whether they should have a “say on pay” vote every one, two or three years; (ii) have a separate, non-binding shareholder vote regarding
golden parachutes for named executive officers when a shareholder vote takes place on mergers, acquisitions, dispositions or other transactions
that would trigger the parachute payments; (iii) provide disclosure in annual proxy materials concerning the relationship between the executive
compensation paid and the financial performance of the issuer; and (iv) amend Item 402 of Regulation S-K to require companies to disclose the
ratio of the Chief Executive Officer's annual total compensation to the median annual total compensation of all other employees. For certain of
these changes, the implementing regulations have not been promulgated, so the full impact of the Dodd-Frank Act on public companies cannot
be determined at this time.
20
The federal banking agencies have issued final rules to implement the provisions of Section 619 of the Dodd Frank Act commonly referred to
as the Volcker Rule. The regulations contain prohibitions and restrictions on the ability of financial institutions holding companies and their
affiliates to engage in proprietary trading and to hold certain interests in, or to have certain relationships with, various types of investment funds,
including hedge funds and private equity funds. The regulations became effective on April 1, 2014 with full compliance being phased in over
a period ending on July 21, 2015. Banner Corporation is continuously reviewing its investment portfolio to determine if changes in its investment
strategies may be required in order to comply with the various provisions of the Volcker Rule regulations.
Sarbanes-Oxley Act of 2002: As a public company that files periodic reports with the Securities and Exchange Commission (SEC), under the
Securities Exchange Act of 1934, Banner Corporation is subject to the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act), which addresses,
among other issues, corporate governance, auditing and accounting, executive compensation and enhanced and timely disclosure of corporate
information. The Sarbanes-Oxley Act represents significant federal involvement in matters traditionally left to state regulatory systems, such
as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management
and between a board of directors and its committees. Our policies and procedures have been updated to comply with the requirements of the
Sarbanes-Oxley Act.
Interstate Banking and Branching: The Federal Reserve must approve an application of a bank holding company to acquire control of, or acquire
all or substantially all of the assets of, a bank located in a state other than the holding company's home state, without regard to whether the
transaction is prohibited by the laws of any state. The Federal Reserve may not approve the acquisition of a bank that has not been in existence
for the minimum time period (not exceeding five years) specified by the statutory law of the host state. Nor may the Federal Reserve approve
an application if the applicant (and its depository institution affiliates) controls or would control more than 10% of the insured deposits in the
United States or 30% or more of the deposits in the target bank's home state or in any state in which the target bank maintains a branch. Federal
law does not affect the authority of states to limit the percentage of total insured deposits in the state which may be held or controlled by a bank
holding company to the extent such limitation does not discriminate against out-of-state banks or bank holding companies. Individual states
may also waive the 30% state-wide concentration limit contained in the federal law.
The federal banking agencies are authorized to approve interstate merger transactions without regard to whether the transaction is prohibited by
the law of any state, unless the home state of one of the banks adopted a law prior to June 1, 1997 which applies equally to all out-of-state banks
and expressly prohibits merger transactions involving out-of-state banks. Interstate acquisitions of branches will be permitted only if the law
of the state in which the branch is located permits such acquisitions. Interstate mergers and branch acquisitions will also be subject to the
nationwide and statewide insured deposit concentration amounts described above. Under the Dodd-Frank Act, the federal banking agencies
may generally approve interstate de novo branching.
Dividends: The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses
its view that although there are no specific regulations restricting dividend payments by bank holding companies other than state corporate laws,
a bank holding company must maintain an adequate capital position and generally should not pay cash dividends unless the company's net
income for the past year is sufficient to fully fund the cash dividends and that the prospective rate of earnings appears consistent with the
company's capital needs, asset quality, and overall financial condition. The Federal Reserve policy statement also indicates that it would be
inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. As described above under “Capital
Requirements,” beginning January 1, 2016 the capital conversion buffer requirement can also restrict Banner Corporation’s and the Banks’ability
to pay dividends.
Capital Requirements: The Federal Reserve has established capital adequacy guidelines for bank holding companies that generally parallel the
capital requirements of the FDIC for the Banks, although the Federal Reserve regulations provide for the inclusion of certain trust preferred
securities for up to 25% of Tier 1 capital in determining compliance with the guidelines. The Federal Reserve regulations provide that capital
standards will be applied on a consolidated basis in the case of a bank holding company with $500 million or more in total consolidated assets. The
guidelines require that a company's total risk-based capital must equal 8% of risk-weighted assets and one half of the 8% (4%) must consist of
Tier 1 (core) capital. As of December 31, 2014, Banner Corporation's total risk-based capital was 16.80% of risk-weighted assets and its Tier
1 (core) capital was 15.54% of risk-weighted assets. In July 2013, the Federal Reserve and the FDIC approved a new rule that will substantially
amend the regulatory risk-based capital rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act.
For a discussion of the new capital rules, see the section above entitled “Banner Bank and Islanders Bank-Capital Requirements-New Capital
Rules.”
Stock Repurchases: A bank holding company, except for certain “well-capitalized” and highly rated bank holding companies, is required to give
the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the
purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding twelve
months, is equal to 10% or more of its consolidated net worth. The Federal Reserve may disapprove such a purchase or redemption if it determines
that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order or any condition
imposed by, or written agreement with, the Federal Reserve. During the year ended December 31, 2014, Banner repurchased 14,422 shares of
its common stock that were surrendered by employees to satisfy tax withholding obligations upon the vesting of restricted stock grants and
13,550 shares that were redeemed upon the termination of the ESOP.
21
Executive Officers
Management Personnel
The following table sets forth information with respect to the executive officers of Banner Corporation and Banner Bank as of December 31,
2014:
Name
Age
Position with Banner Corporation
Position with Banner Bank
Mark J. Grescovich
Lloyd W. Baker
Cynthia D. Purcell
Richard B. Barton
Steven W. Rust
Douglas M. Bennett
Tyrone J. Bliss
Gary W. Wagers
Anne L. Wuesthoff
James T. Reed, Jr.
M. Kirk Quillin
50
66
57
71
67
62
57
54
54
52
52
President, Chief Executive Officer,
Director
President, Chief Executive Officer, Director
Executive Vice President,
Chief Financial Officer
Executive Vice President,
Chief Financial Officer
Executive Vice President,
Retail Banking and Administration
Executive Vice President,
Chief Lending Officer
Executive Vice President,
Chief Information Officer
Executive Vice President,
Real Estate Lending Operations
Executive Vice President,
Risk Management and Compliance Officer
Executive Vice President,
Retail Products and Services
Executive Vice President,
Human Resources
Senior Vice President,
Commercial Banking
Senior Vice President,
Commercial Banking
Biographical Information
Set forth below is certain information regarding the executive officers of Banner Corporation and Banner Bank. There are no family relationships
among or between the directors or executive officers.
Mark J. Grescovich is President and Chief Executive Officer, and a director, of Banner Corporation and Banner Bank. Mr. Grescovich joined
the Bank in April 2010 and became Chief Executive Officer in August 2010 following an extensive banking career specializing in finance, credit
administration and risk management. Prior to joining the Bank, Mr. Grescovich was the Executive Vice President and Chief Corporate Banking
Officer for Akron, Ohio-based FirstMerit Corporation and FirstMerit Bank N.A., a commercial bank with $14.5 billion in assets and over 200
branch offices in three states. He assumed the role and responsibility for FirstMerit’s commercial and regional line of business in 2007, having
served since 1994 in various commercial and corporate banking positions, including that of Chief Credit Officer. Prior to joining FirstMerit,
Mr. Grescovich was a Managing Partner in corporate finance with Sequoia Financial Group, Inc. of Akron, Ohio and a commercial and corporate
lending officer and credit analyst with Society National Bank of Cleveland, Ohio.
Lloyd W. Baker joined First Savings Bank of Washington (now Banner Bank) in 1995 as Asset/Liability Manager, has been a member of the
executive management committee since 1998 and has served as the Chief Financial Officer of Banner Corporation and Banner Bank since
2000. His banking career began in 1973.
Cynthia D. Purcell was formerly the Chief Financial Officer of Inland Empire Bank (now Banner Bank), which she joined in 1981. She has
served as Executive Vice President since 2000. Ms. Purcell is responsible for managing Retail Banking including Mortgage Banking, Small
Business Banking, and Digital Delivery Channels, as well as administrative support functions for the organization.
Richard B. Barton joined Banner Bank in 2002 as Chief Credit Officer. Mr. Barton’s banking career began in 1972 with Seafirst Bank and Bank
of America, where he served in a variety of commercial lending and credit risk management positions. In his last positions at Bank of America
before joining Banner Bank, he served as the senior real estate risk management executive for the Pacific Northwest and as the credit risk
management executive for the west coast home builder division. Mr. Barton was named Chief Lending Officer in 2008.
22
Steven W. Rust joined Banner Bank in October 2005. Mr. Rust has over 36 years of relevant industry experience prior to joining Banner Bank
and was founder and President of InfoSoft Technology, through which he worked for nine years as a technology consultant and interim Chief
Information Officer for banks and insurance companies. He worked 19 years with US Bank/West One Bancorp as Senior Vice President &
Manager of Information Systems.
Douglas M. Bennett, who joined First Federal Savings and Loan (now Banner Bank) in 1974, has over 38 years of experience in real estate
lending. He has served as a member of Banner Bank’s executive management committee since 2004.
Tyrone J. Bliss joined Banner Bank in 2002 and has served in his current position since 2006. Mr. Bliss is a Certified Regulatory Compliance
Manager with more than 35 years of commercial banking experience. Prior to joining Banner Bank, his career included senior risk management
and compliance positions with Bank of America’s Consumer Finance Group, Barnett Banks, Inc., and Florida-based community banks.
Gary W. Wagers joined Banner Bank as Senior Vice President, Consumer Lending Administration in 2002 and was named to his current position
in Retail Products and Services in January 2008. Mr. Wagers began his banking career in 1982 at Idaho First National Bank. Prior to joining
Banner Bank, his career included senior management positions in retail lending and branch banking operations with West One Bank and US
Bank.
Anne L. Wuesthoff has more than 29 years of human resources and organizational development experience in multiple industries and joined
Banner Bank in 2011 with significant experience in financial services. She was a senior vice president at Washington Mutual for eight years
with responsibility for leading human resources for the retail, corporate and specialty finance business units. She also led the talent and
organizational capability function, where she had responsibility for executive and corporate recruitment, executive development, enterprise-
wide learning and training, organizational development, employee communications, and talent management and diversity programs. Ms.
Wuesthoff began her career in human resources at the Quaker Oats Company at various manufacturing locations and at corporate headquarters.
She has also served in various human resources positions at Allied Signal, now Honeywell, Inc., and at Casey Family Programs, a non-profit
dedicated to improving the lives of vulnerable families and children.
James T. Reed, Jr. joined Towne Bank (now Banner Bank) as a Vice President and Commercial Branch Manager in July 1995 and was named
to his current position as the West Region Commercial Banking Executive in July 2012. He is responsible for Commercial Banking in Western
Washington and Western Oregon as well as Specialty Banking. Mr. Reed began his banking career with Rainier Bank which later became
Security Pacific Bank and later still West One Bank. He earned a Bachelor of Arts in Interdisciplinary Arts and Sciences from the University
of Washington, and earned certificates from Pacific Coast Banking School, Northwest Intermediate Banking School and Northwest Intermediate
Commercial Lending School. Currently, Mr. Reed sits on the University of Washington Bothell Advisory Board, the University of Washington
Foundation Board and the Association of Washington Business Board of Directors.
M. Kirk Quillin joined Banner Bank's commercial banking group in 2002 as a Senior Vice President and commercial loan manager and was
named to his current position as the East Region Commercial Banking Executive in July 2012. He is responsible for commercial and specialty
banking for all locations in Eastern Washington, Eastern Oregon and Idaho. Mr. Quillin began his career in the banking industry in 1984 with
Idaho First National Bank, which is now U.S. Bank. His career also included management positions in commercial lending with Washington
Mutual. He earned a B.S. in Finance and Economics from Boise State University and was certified by the Pacific Coast Banking School and
Northwest Intermediate Commercial Lending School.
Corporate Information
Our principal executive offices are located at 10 South First Avenue, Walla Walla, Washington 99362. Our telephone number is (509)
527-3636. We maintain a website with the address www.bannerbank.com. The information contained on our website is not included as a part
of, or incorporated by reference into, this Annual Report on Form 10-K. Other than an investor’s own Internet access charges, we make available
free of charge through our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and
amendments to these reports, as soon as reasonably practicable after we have electronically filed such material with, or furnished such material
to, the Securities and Exchange Commission.
23
Item 1A – Risk Factors
An investment in our common stock is subject to risks inherent in our business. Before making an investment decision, you should
carefully consider the risks and uncertainties described below together with all of the other information included in this report. In
addition to the risks and uncertainties described below, other risks and uncertainties not currently known to us or that we currently
deem to be immaterial also may materially and adversely affect our business, financial condition, capital levels, cash flows, liquidity,
results of operations and prospects. The market price of our common stock could decline significantly due to any of these identified or
other risks, and you could lose some or all of your investment. The risks discussed below also include forward-looking statements, and
our actual results may differ substantially from those discussed in these forward-looking statements. This report is qualified in its
entirety by these risk factors.
Our business may be adversely affected by downturns in the national economy and the regional economies on which we depend.
Our operations are significantly affected by national and regional economic conditions. Weakness in the national economy or the economies of
the markets in which we operate could have a material adverse effect on our financial condition, results of operations and prospects. Most of
our loans are to businesses and individuals in the states of Washington, Oregon and Idaho. All of our branches and most of our deposit customers
are also located in these three states. Further, as a result of a high concentration of our customer base in the Puget Sound area of Washington
State, the deterioration of businesses in the Puget Sound area, or one or more businesses with a large employee base in that area, could have a
material adverse effect on our business, financial condition, liquidity, results of operations and prospects. In addition, weakness in the global
economy has adversely affected many businesses operating in our markets that are dependent upon international trade.
A deterioration in economic conditions in the market areas we serve, in particular the Puget Sound area of Washington State, the Portland, Oregon
metropolitan area, Spokane, Washington, Boise, Idaho, southwestern Oregon and the agricultural regions of the Columbia Basin, could result
in the following consequences, any of which could have a material adverse effect on our business, financial condition, liquidity and results of
operations:
•
•
•
•
•
demand for our products and services may decline;
loan delinquencies, problem assets and foreclosures may increase;
collateral for loans, especially real estate, may decline in value, in turn reducing customers’ borrowing power, reducing the value of
assets and collateral associated with existing loans;
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; and
the amount of our low-cost or non-interest-bearing deposits may decrease.
A return of recessionary conditions could result in increases in our level of non-performing loans and/or reduce demand for our products
and services, which could have adverse effect on our results of operations.
Economic conditions have improved since the end of the economic recession that officially ended in June, 2009; however, economic growth
has been slow and uneven, unemployment remains relatively high and concerns still exist over the federal deficit, government spending and
global geopolitical risks which have all contributed to diminished expectations for the economy. A return of recessionary conditions and/or
negative developments in the domestic and international credit markets may significantly affect the markets in which we do business, the value
of our loans and investments, and our ongoing operations, costs and profitability. Declines in real estate values and sales volumes and high
unemployment levels may result in higher than expected loan delinquencies and a decline in demand for our products and services. These
negative events may cause us to incur losses and may adversely affect our capital, liquidity, and financial condition.
Furthermore, the Board of Governors of the Federal Reserve System, in an attempt to help the economy, has, among other things, kept interest
rates low through its targeted federal funds rate and the purchase of U.S. Treasury and mortgage-backed securities. If the Federal Reserve Board
increases the federal funds rate market interest rates would likely rise, which may negatively affect the housing markets and the U.S. economic
recovery.
In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our
borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial
performance.
Our loan portfolio includes loans with a higher risk of loss.
We originate construction and land loans, commercial and multifamily mortgage loans, commercial business loans, agricultural mortgage loans
and agricultural loans, and consumer loans, primarily within our market areas. We had $3.29 billion outstanding in these types of higher risk
loans at December 31, 2014 compared to $2.89 billion at December 31, 2013. These loans typically present different risks to us for a number
of reasons, including those discussed below:
• Construction and Land Loans. At December 31, 2014, construction and land loans were $411 million or 11% of our total loan
portfolio. This type of lending contains the inherent difficulty in estimating both a property’s value at completion of the project and
the estimated cost (including interest) of the project. If the estimate of construction cost proves to be inaccurate, we may be required
to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of value upon completion
proves to be inaccurate, we may be confronted at, or prior to, the maturity of the loan with a project the value of which is insufficient
24
to assure full repayment. In addition, speculative construction loans to a builder are often associated with homes that are not pre-sold,
and thus pose a greater potential risk to us than construction loans to individuals on their personal residences. Loans on land under
development or held for future construction also pose additional risk because of the lack of income being produced by the property and
the potential illiquid nature of the collateral. These risks can be significantly impacted by supply and demand conditions. As a result,
this type of lending often involves the disbursement of substantial funds with repayment dependent on the success of the ultimate project
and the ability of the borrower to sell the property, rather than the ability of the borrower or guarantor to independently repay principal
and interest. While our origination of these types of loans has decreased significantly from earlier periods, as a result of the recent
improvement in real estate values in certain of our market areas, this category of lending has increased in recent years and our investment
in construction and land loans increased by $60 million or 17% in 2014. At December 31, 2014, construction and land loans that were
non-performing were $1 million, or 7% of our total non-performing loans.
• Commercial and Multifamily Real Estate Loans. At December 31, 2014, commercial and multifamily real estate loans were $1.571
billion, or 41% of our total loan portfolio. These loans typically involve higher principal amounts than other types of loans and some
of our commercial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one
loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to
a one- to four-family residential mortgage loan. Repayment of these loans is dependent upon income being generated from the property
securing the loan in amounts sufficient to cover operating expenses and debt service, which may be adversely affected by changes in
the economy or local market conditions. In addition, many of our commercial and multifamily real estate loans are not fully amortizing
and contain large balloon payments upon maturity. Such balloon payments may require the borrower to either sell or refinance the
underlying property in order to make the payment, which may increase the risk of default or non-payment. This risk was exacerbated
in the recent recession and could remain an elevated risk in the current slow recovery economic environment. At December 31, 2014,
commercial and multifamily real estate loans that were non-performing were $1 million, or 7% of our total non-performing loans.
• Commercial Business Loans. At December 31, 2014, commercial business loans were $724 million, or 19% of our total loan portfolio.
Our commercial loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided
by the borrower. The borrowers’ cash flow may prove to be unpredictable, and collateral securing these loans may fluctuate in
value. Most often, this collateral is accounts receivable, inventory, equipment or real estate. In the case of loans secured by accounts
receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to
collect amounts due from its customers. Other collateral securing loans may depreciate over time, may be difficult to appraise, may be
illiquid and may fluctuate in value based on the success of the business. At December 31, 2014, commercial business loans that were
non-performing were $537,000, or 3% of our total non-performing loans.
• Agricultural Loans. At December 31, 2014, agricultural loans were $238 million, or 6% of our total loan portfolio. Repayment is
dependent upon the successful operation of the business, which is greatly dependent on many things outside the control of either us or
the borrowers. These factors include weather, commodity prices, and interest rates among others. Collateral securing these loans may
be difficult to evaluate, manage or liquidate and may not provide an adequate source of repayment. At December 31, 2014, there were
$2 million of agricultural loans that were non-performing or 10% of total non-performing loans.
• Consumer Loans. At December 31, 2014, consumer loans were $349 million, or 9% of our total loan portfolio. Consumer loans (such
as personal lines of credit) are collateralized, if at all, with assets that may not provide an adequate source of payment of the loan due
to depreciation, damage, or loss. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability,
and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered
on these loans. At December 31, 2014, consumer loans that were non-performing were $1 million, or 7% of our total non-performing
loans.
Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio which would cause our results of
operations, liquidity and financial condition to be adversely affected.
Lending money is a substantial part of our business and each loan carries a certain risk that it will not be repaid in accordance with its terms or
that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other things:
•
•
•
•
•
cash flow of the borrower and/or the project being financed;
in the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral;
the duration of the loan;
the character and creditworthiness of a particular borrower; and
changes in economic and industry conditions.
We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, which we believe
is appropriate to provide for probable losses in our loan portfolio. The amount of this allowance is determined by our management through
periodic reviews and consideration of several factors, including, but not limited to:
25
•
•
•
our general reserve, based on our historical default and loss experience, certain macroeconomic factors, and management’s expectations
of future events;
our specific reserve, based on our evaluation of non-performing loans and their underlying collateral; and
an unallocated reserve to provide for other credit losses inherent in our portfolio that may not have been contemplated in the other loss
factors.
The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to
make significant estimates of current credit risks and future trends, all of which may undergo material changes. Deterioration in economic
conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both
within and outside of our control, may require an increase in the allowance for loan losses. In addition, bank regulatory agencies periodically
review our allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan
charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for loan
losses, we may need additional provisions to replenish the allowance for loan losses. Any increases in the allowance for loan losses will result
in a decrease in net income and, most likely, capital, and may have a material negative effect on our financial condition and results of operations.
We pursue a strategy of supplementing internal growth by acquiring other financial companies or their assets and liabilities that we
believe will help us fulfill our strategic objectives and enhance our earnings. There are risks associated with this strategy, including the
following:
•
• We may be exposed to potential asset quality issues or unknown or contingent liabilities of the banks, businesses, assets, and liabilities
If these issues or liabilities exceed our estimates, our results of operations and financial condition may be materially
we acquire.
negatively affected;
Prices at which acquisitions can be made fluctuate with market conditions. We have experienced times during which acquisitions could
not be made in specific markets at prices we considered acceptable and expect that we will experience this condition in the future;
• The acquisition of other entities generally requires integration of systems, procedures and personnel of the acquired entity into our
company to make the transaction economically successful. This integration process is complicated and time consuming and can also
be disruptive to the customers of the acquired business. If the integration process is not conducted successfully and with minimal
adverse effect on the acquired business and its customers, we may not realize the anticipated economic benefits of particular acquisitions
within the expected time frame, and we may lose customers or employees of the acquired business. We may also experience greater
than anticipated customer losses even if the integration process is successful;
• To the extent our costs of an acquisition exceed the fair value of the net assets acquired, the acquisition will generate goodwill. As
discussed below, we are required to assess our goodwill for impairment at least annually, and any goodwill impairment charge could
have a material adverse effect on our results of operations and financial condition; and
• To finance an acquisition, we may borrow funds, thereby increasing our leverage and diminishing our liquidity, or raise additional
capital, which could dilute the interests of our existing shareholders.
The success of our acquisition of Siuslaw and pending acquisition of AmericanWest are dependent on a number of factors beyond our
control.
The success of our acquisition of Siuslaw and pending acquisition of AmericanWest is subject to a number of uncertain factors, including, but
not limited to:
•
•
•
•
obtaining the requisite regulatory approvals in order to consummate the transactions. To complete the acquisition of AmericanWest,
we must obtain approvals from the Federal Reserve Board, the FDIC and state banking regulators. The U.S. Department of Justice
may also review the impact of the merger on competition. Other approvals, waivers or consents from regulators may also be required.
An adverse development in either Banner’s or AmericanWest’s regulatory standing or other factors could result in an inability to obtain
approval or delay their receipt. These regulators may impose conditions on the completion of the transactions or require changes to
the terms of the merger that could have the effect of delaying or preventing completion of the merger or impose additional costs on
or limit the revenues of the combined company following the merger, any of which might have an adverse effect on the combined
company following the merger;
obtaining the requisite shareholder approval to issue the shares necessary to complete the AmericanWest transaction.
our ability to realize expected revenues, cost savings, synergies and other benefits from the Siuslaw and AmericanWest acquisitions
within the expected time frames or at all, and costs or difficulties relating to integration matters, including but not limited to customer
and employee retention, might be greater than expected; and
the credit quality of loans and other assets acquired from AmericanWest and Siuslaw.
Banner and AmericanWest have each operated and, until the completion of the acquisition, will continue to operate, independently. The success
of the acquisitions, including anticipated benefits and cost savings, will depend, in part, on Banner’s ability to successfully combine the businesses
of Banner, AmericanWest and Siuslaw. To realize these anticipated benefits and cost savings, after the completion of the acquisitions, Banner
expects to integrate AmericanWest’s and Siuslaw's business into its own. It is possible that the integration process could result in the loss of key
employees, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely
affect the combined company’s ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated
benefits and cost savings of the mergers. The loss of key employees could adversely affect Banner’s ability to successfully conduct its business
26
in the markets in which AmericanWest or Siuslaw have operated and could have an adverse effect on Banner’s financial results and the value
of its common stock. If Banner experiences difficulties with the integration process, the anticipated benefits of the acquisition may not be realized
fully or at all, or may take longer to realize than expected. As with any merger of financial institutions, there also may be business disruptions
that cause Banner and/or AmericanWest to lose customers or cause customers to close their accounts with Banner and/or AmericanWest and
move their business to competing financial institutions. Integration efforts between the companies will also divert management attention and
resources. Any such distraction on the part of management, if significant, could affect Banner’s ability to service existing business and develop
new business and adversely affect the business and earnings of the combined company following completion of the merger.
The value of Banner common stock after the merger may be affected by factors different from those currently affecting the values of Banner
common stock. See also “We may be subject to additional regulatory scrutiny if and when Banner Bank’s total assets exceed $10.0 billion.”
The required accounting treatment of troubled loans we acquire through acquisitions could result in higher net interest margins and
interest income in current periods and lower net interest margins and interest income in future periods.
Under GAAP, we are required to record troubled loans acquired through acquisitions at fair value, which may underestimate the actual performance
of such loans. As a result, if these loans outperform our original fair value estimates, the difference between our original estimate and the actual
performance of the loan (the “discount”) is accreted into net interest income. Thus, our net interest margins may initially appear higher. We
expect the yields on our loans to decline as our acquired loan portfolio pays down or matures, and we expect downward pressure on our interest
income to the extent that the runoff on our acquired loan portfolio is not replaced with comparable high-yielding loans. This could result in
higher net interest margins and interest income in current periods and lower net interest rate margins and lower interest income in future periods.
Our expansion into new market areas in California and Utah may present increased risk.
AmericanWest Bank's lending operations are concentrated in the states of California, Utah, Oregon, Idaho, and Washington. The merger with
AmericanWest will result in Banner’s initial entry into the states of California and Utah where Banner has little or no operating experience.
Although Banner will retain a number of AmericanWest Bank’s lending and business development officers with experience in these markets,
Banner is new to these market areas and has conducted only limited banking business in California and Utah. Our entry into these markets will
present us with different competitive conditions, customer preferences and banking products than we have experienced in the Pacific Northwest
markets we know. As a result, it is possible that our operations in these states may be less successful than our operations in the Pacific Northwest.
In addition, the financial condition and results of operations of the combined company will be subject to general economic conditions and the
conditions in the real estate markets prevailing in California and Utah as well as the Pacific Northwest markets we know. If economic conditions
in any one of these states worsens or if the real estate market declines, the combined company may suffer decreased net income or losses associated
with higher default rates and decreased collateral values on its existing portfolio, and may not be able to originate loans at acceptable risk levels
and upon acceptable terms, to maintain Banner’s risk profile and asset quality.
Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is
needed or the cost of that capital may be very high.
We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. We may at some point, however,
need to raise additional capital to support continued growth or be required by our regulators to increase our capital resources. Any capital we
obtain may result in the dilution of the interests of existing holders of our common stock. Our ability to raise additional capital, if needed, will
depend on conditions in the capital markets at
time, which are outside our control, and on our financial condition and
performance. Accordingly, we cannot make assurances that we will be able to raise additional capital if needed on terms that are acceptable to
us, or at all. If we cannot raise additional capital when needed, our ability to further expand our operations could be materially impaired and
our financial condition and liquidity could be materially and adversely affected. In addition, if we are unable to raise additional capital when
required by our bank regulators, we may be subject to adverse regulatory action.
that
If our investments in real estate are not properly valued or sufficiently reserved to cover actual losses, or if we are required to increase
our valuation reserves, our earnings could be reduced.
We obtain updated valuations in the form of appraisals and broker price opinions when a loan has been foreclosed and the property taken in as
REO and at certain other times during the assets holding period. Our net book value (NBV) in the loan at the time of foreclosure and thereafter
is compared to the updated market value of the foreclosed property less estimated selling costs (fair value). A charge-off is recorded for any
excess in the asset’s NBV over its fair value. If our valuation process is incorrect, or if property values decline, the fair value of the investments
in real estate may not be sufficient to recover our carrying value in such assets, resulting in the need for additional write-downs. Significant
write-downs to our investments in real estate could have a material adverse effect on our financial condition, liquidity and results of operations.
In addition, bank regulators periodically review our REO and may require us to recognize further write-downs. Any increase in our write-downs,
as required by the bank regulators, may have a material adverse effect on our financial condition, liquidity and results of operations.
Our securities portfolio may be negatively impacted by fluctuations in market value and interest rates.
Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income and/
or earnings. Fluctuations in market value may be caused by changes in market interest rates, lower market prices for securities and limited
27
investor demand. Our securities portfolio is evaluated for other-than-temporary impairment. If this evaluation shows impairment to the actual
or projected cash flows associated with one or more securities, a potential loss to earnings may occur. Changes in interest rates can also have
an adverse effect on our financial condition, as our available-for-sale securities are reported at their estimated fair value, and therefore are
impacted by fluctuations in interest rates. We increase or decrease our shareholders' equity by the amount of change in the estimated fair value
of the available-for-sale securities, net of taxes. There can be no assurance that the declines in market value will not result in other-than-temporary
impairments of these assets, which would lead to accounting charges that could have a material adverse effect on our net income and capital
levels.
An increase in interest rates, change in the programs offered by secondary market purchasers or our ability to qualify for their programs
may reduce our mortgage banking revenues, which would negatively impact our non-interest income.
Our mortgage banking operations provide a significant portion of our non-interest income. We generate mortgage revenues primarily from gains
on the sale of single-family mortgage loans pursuant to programs currently offered by Fannie Mae, Freddie Mac, Ginnie Mae and non-GSE
investors. These entities account for a substantial portion of the secondary market in residential mortgage loans. Any future changes in these
programs, our eligibility to participate in such programs, the criteria for loans to be accepted or laws that significantly affect the activity of such
entities could, in turn, materially adversely affect our results of operations. Mortgage banking is generally considered a volatile source of income
because it depends largely on the level of loan volume which, in turn, depends largely on prevailing market interest rates. In a rising or higher
interest rate environment, our originations of mortgage loans may decrease, resulting in fewer loans that are available to be sold to investors. This
would result in a decrease in mortgage banking revenues and a corresponding decrease in non-interest income. In addition, our results of
operations are affected by the amount of non-interest expense associated with mortgage banking activities, such as salaries and employee benefits,
occupancy, equipment and data processing expense and other operating costs. During periods of reduced loan demand, our results of operations
may be adversely affected to the extent that we are unable to reduce expenses commensurate with the decline in loan originations. In addition,
although we sell loans into the secondary market without recourse, we are required to give customary representations and warranties about the
loans to the buyers. If we breach those representations and warranties, the buyers may require us to repurchase the loans and we may incur a
loss on the repurchase.
Our results of operations, liquidity and cash flows are subject to interest rate risk.
Our earnings and cash flows are largely dependent upon our net interest income. Interest rates are highly sensitive to many factors that are
beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the
Federal Reserve. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and
investments and the amount of interest we pay on deposits and borrowings, but these changes could also affect (i) our ability to originate loans
and obtain deposits, (ii) the fair value of our financial assets and liabilities and (iii) the average duration of our mortgage-backed securities
portfolio and other interest-earning assets. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest
rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. As a result of the
exceptionally low interest rate environment, an increasing percentage of our deposits have been comprised of deposits bearing no or a relatively
low rate of interest. We would incur a higher cost of funds to retain these deposits in a rising interest rate environment. Earnings could also be
adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other
borrowings. In addition, a substantial amount of our loans have adjustable interest rates. As a result, these loans may experience a higher rate
of default in a rising interest rate environment. Further, a significant portion of our adjustable rate loans have interest rate floors below which
the loan’s contractual interest rate may not adjust. Approximately 66% of our loan portfolio was comprised of adjustable or floating-rate loans
at December 31, 2014, and approximately $1.6 billion, or 64%, of those loans contained interest rate floors, below which the loans’ contractual
interest rate may not adjust. At December 31, 2014, the weighted average floor interest rate of these loans was 4.79%. At that date, approximately
$1.4 billion, or 85%, of these loans were at their floor interest rate. The inability of our loans to adjust downward can contribute to increased
income in periods of declining interest rates, although this result is subject to the risks that borrowers may refinance these loans during periods
of declining interest rates. Also, when loans are at their floors, there is a further risk that our interest income may not increase as rapidly as our
cost of funds during periods of increasing interest rates which could have a material adverse effect on our results of operations.
Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity
and results of operations. Further, a prolonged period of exceptionally low market interest rates, such as we are currently experiencing, limits
our ability to lower our interest expense, while the average yield on our interest-earning assets may continue to decrease as our loans reprice or
are originated at these low market rates. Accordingly, our net interest income may continue to decrease, which may have an adverse effect on
our profitability. Also, our interest rate risk modeling techniques and assumptions likely may not fully predict or capture the impact of actual
interest rate changes on our balance sheet or projected operating results.
We operate in a highly regulated environment and may be adversely affected by changes in federal and state laws and regulations that
are expected to increase our costs of operations.
As state-chartered, federally insured commercial banks, Banner Bank and Islanders Bank (the Banks) are currently subject to extensive
examination, supervision and comprehensive regulation by the FDIC and the Washington DFI and as a bank holding company Banner is subject
to examination, supervision and regulation by the FRB. These regulatory authorities have extensive discretion in connection with their supervisory
and enforcement activities, including the ability to impose restrictions on an institution's operations, reclassify assets, determine the adequacy
of an institution's allowance for loan losses and determine the level of deposit insurance premiums assessed.
28
Additionally, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) has significantly changed the bank
regulatory structure and will affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding
companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations and to
prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and
regulations, and consequently many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.
Certain provisions of the Dodd-Frank Act are expected to have a near term impact on us. For example, a provision of the Dodd-Frank Act
eliminates the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts.
Depending on competitive responses, this significant change to existing law could have an adverse impact on our interest expense.
The Dodd-Frank Act created a new Consumer Financial Protection Bureau (the CFPB) with broad powers to supervise and enforce consumer
protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings
institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement
authority over all banks and savings institutions with more than $10 billion in assets. Financial institutions such as Banner Bank with $10 billion
or less in assets will continue to be examined for compliance with the consumer laws by their primary bank regulators but are subject to the
rules of the CFPB.
In January of 2013, the CFPB issued several final regulations and changes to certain consumer protections under existing laws. These final
rules, most of the provisions of which (including the qualified mortgage rule) became effective January 10, 2014, generally prohibit creditors
from extending mortgage loans without regard for the consumer’s ability-to-repay and add restrictions and requirements to mortgage origination
and servicing practices. In addition, these rules limit prepayment penalties and require the creditor to retain evidence of compliance with the
ability-to-repay requirement for three years. Compliance with these rules will likely increase our overall regulatory compliance costs and may
require changes to our underwriting practices with respect to mortgage loans. Moreover, these rules may adversely affect the volume of mortgage
loans that we underwrite and may subject us to increased potential liabilities related to such residential loan origination activities.
The Dodd-Frank Act requires minimum leverage (Tier 1) and risk-based capital requirements for bank holding companies and savings and loan
holding companies that are no less stringent than those applicable to banks, which will limit our ability to borrow at the holding company level
and invest the proceeds from such borrowings as capital in the Banks, and will exclude certain instruments that previously have been eligible
for inclusion by bank holding companies as Tier 1 capital, such as trust preferred securities.
It is difficult to predict at this time what specific impact the Dodd-Frank Act and the yet to be written implementing rules and regulations will
have on community banks. However, it is expected that at a minimum they will increase our operating and compliance costs, which could
adversely affect key operating efficiency ratios, and could increase our interest expense. See “Business - Regulation” contained in Part I, Item
I of this report.
New or changing tax, accounting, and regulatory rules and interpretations could significantly impact strategic initiatives, results of
operations, cash flows, and financial condition.
The banking industry is extensively regulated. Federal and state banking regulations are designed primarily to protect the deposit insurance
funds and consumers, not to benefit a company’s shareholders. These regulations may sometimes impose significant limitations on operations.
The significant federal and state banking regulations that affect us are described in this report under the heading “Item 1. Business-Regulation.”
These regulations, along with the currently existing tax, accounting, securities, insurance, and monetary laws, regulations, rules, standards,
policies, and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax
compliance, and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies, and interpretations are constantly
evolving and may change significantly over time. Any new regulations or legislation, change in existing regulations or oversight, whether a
change in regulatory policy or a change in a regulator's interpretation of a law or regulation, could have a material impact on our operations,
increase our costs of regulatory compliance and of doing business and or otherwise adversely affect us and our profitability. Further, changes
in accounting standards can be both difficult to predict and involve judgment and discretion in their interpretation by us and our independent
accounting firms. These changes could materially impact, potentially even retroactively, how we report our financial condition and results of
our operations as could our interpretation of those changes.
Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions and
limit our ability to get regulatory approval of acquisitions.
The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used
for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports
with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for
identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result
in fines or sanctions and limit our ability to get regulatory approval of acquisitions. Recently several banking institutions have received large
fines for non-compliance with these laws and regulations. While we have developed policies and procedures designed to assist in compliance
with these laws and regulations, no assurance can be given that these policies and procedures will be effective in preventing violations of these
laws and regulations.
29
We may be subject to additional regulatory scrutiny if and when Banner or Banner Bank’s total assets exceed $10.0 billion.
Banner Bank's total assets were $4.724 billion at December 31, 2014 and AmericanWest Bank had $4.095 billion in total assets at that date.
Following the closing of the merger with AmericanWest Bank, Banner Bank’s assets will be approaching $10 billion. Following the fourth
consecutive quarter where Banner or Banner Bank exceeds $10 billion, Banner or Banner Bank, as applicable, will become subject to a number
of additional requirements (such as annual stress testing requirements implemented pursuant to the Dodd-Frank Act and general oversight by
the CFPB) that will impose additional compliance costs on our business. As a result, there may also be additional higher expectations from
regulators. The CFPB has near exclusive supervision authority, including examination authority, over “very large” institutions and their affiliates
to assess compliance with federal consumer financial laws, to obtain information about the institutions’ activities and compliance systems and
procedures, and to detect and assess risks to consumers and markets.
Under Dodd Frank, the minimum ratio of net worth to insured deposits of the Deposit Insurance Fund was increased from 1.15% to 1.35% and
the FDIC is required, in setting deposit insurance assessments, to offset the effect of the increase on institutions with assets of less than $10
billion, which results in institutions with assets greater than $10 billion paying higher assessments. In addition, if Banner Bank exceeds $10
billion in assets, its assessment base for federal deposit insurance would change from the amount of insured deposits to consolidated average
assets less tangible capital to a scorecard method. The scorecard method uses a performance score and a loss severity score, which are combined
and converted into an initial base assessment rate. The performance score is based on measures of the bank’s ability to withstand asset-related
stress and funding-related stress and weighted CAMELS ratings. The loss severity score is a measure of potential losses to the FDIC in the
event of the bank’s failure. Under a formula, the performance score and loss severity score are combined and converted to a total score that
determines the bank’s initial base assessment rate. The FDIC has the discretion to alter the total score based on factors not captured by the
scorecard. The resulting initial base assessment rate is also subject to adjustments downward based on long term unsecured debt issued by the
bank, to adjustment upward based on long term unsecured debt held by the bank that is issued by other FDIC-insured institutions, and to further
adjustment upward if the bank’s brokered deposits exceed 10% of its domestic deposits.
Further, Banner Bank may be impacted by the Durbin Amendment to the Dodd-Frank Act regarding limits on debit card interchange fees. The
Durbin Amendment gave the Federal Reserve Board the authority to establish rules regarding interchange fees charged for electronic debit
transactions by a payment card issuer that, together with its affiliates, has assets of $10 billion or more and to enforce a new statutory requirement
that such fees be reasonable and proportional to the actual cost of a transaction to the issuer. The Federal Reserve Board has adopted rules under
this provision that limit the swipe fees that a debit card issuer can charge a merchant for a transaction to the sum of 21 cents and five basis points
times the value of the transaction, plus up to one cent for fraud prevention costs.
The Dodd-Frank Act also requires publicly-traded bank holding companies with assets of $10 billion or more to establish a risk committee
responsible for enterprise-wide risk management practices, comprised of independent directors, including one risk management expert.
As a result of the above, if and when Banner Bank’s total assets exceed $10 billion, deposit insurance assessments are likely to increase, as well
as expenses related to regulatory compliance, which may be significant. In addition, compliance with the Durbin Amendment would reduce our
non-interest income significantly. We currently believe the impact of the Durbin Amendment on combined debit card revenues for Banner Bank
and AmericanWest Bank could be a reduction of approximately $8.0 million annually.
We may experience future goodwill impairment.
In accordance with GAAP, we record assets acquired and liabilities assumed at their fair value, and, as such, acquisitions typically result in
recording goodwill. We perform a goodwill evaluation at least annually to test for goodwill impairment. As part of its testing, the Company
first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying
amount. If the Company determines the fair value of a reporting unit is less than its carrying amount using these qualitative factors, the Company
then compares the fair value of goodwill with its carrying amount, and then measures impairment loss by comparing the implied fair value of
goodwill with the carrying amount of that goodwill. Adverse conditions in our business climate, including a significant decline in future operating
cash flows, a significant change in our stock price or market capitalization, or a deviation from our expected growth rate and performance may
significantly affect the fair value of our goodwill and may trigger additional impairment losses, which could be materially adverse to our operating
results and financial position.
We cannot provide assurance that we will not be required to take an impairment charge in the future. Any impairment charge has an adverse
effect on our results of shareholders’ equity and financial results and could cause a decline in our stock price. It is expected that the completion
of our pending acquisitions will increase goodwill.
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
Liquidity is essential to our business. We rely on a number of different sources in order to meet our potential liquidity demands. Our primary
sources of liquidity are increases in deposit accounts, cash flows from loan payments and our securities portfolio. Borrowings also provide us
with a source of funds to meet liquidity demands. An inability to raise funds through deposits, borrowings, the sale of loans or investment
securities and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to
finance our activities or on terms which are acceptable to us could be impaired by factors that affect us specifically, or the financial services
industry or economy in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our
business activity as a result of a downturn in the markets in which our loans are concentrated, negative operating results, or adverse regulatory
30
action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets
or negative views and expectations about the prospects for the financial services industry or deterioration in credit markets.
Additionally, collateralized public funds are bank deposits of state and local municipalities. These deposits are required to be secured by certain
investment grade securities to ensure repayment, which on the one hand tends to reduce our contingent liquidity risk by making these funds
somewhat less credit sensitive, but on the other hand reduces standby liquidity by restricting the potential liquidity of the pledged collateral.
Although these funds historically have been a relatively stable source of funds for us, availability depends on the individual municipality's fiscal
policies and cash flow needs.
We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects.
Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified persons with
knowledge of, and experience in, the community banking industry where the Banks conduct their business. The process of recruiting personnel
with the combination of skills and attributes required to carry out our strategies is often lengthy. Our success depends to a significant degree
upon our ability to attract and retain qualified management, loan origination, finance, administrative, marketing and technical personnel and
upon the continued contributions of our management and personnel. In particular, our success has been and continues to be highly dependent
upon the abilities of key executives, including our President, and certain other employees. In addition, our success has been and continues to
be highly dependent upon the services of our directors, many of whom are at or nearing retirement age, and we may not be able to identify and
attract suitable candidates to replace such directors. The loss of these key persons could negatively impact the affected banking operations. The
pending AmericanWest acquisition could impact the retention of key personnel. See "The success of our acquisition of Siuslaw and pending
acquisition of AmericanWest are dependent on a number of factors beyond our control."
Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes.
Our loans to businesses and individuals and our deposit relationships and related transactions are subject to exposure to the risk of loss due to
fraud and other financial crimes. Nationally, reported incidents of fraud and other financial crimes have increased. We have also experienced
losses due to apparent fraud and other financial crimes. While we have policies and procedures designed to prevent such losses, there can be
no assurance that such losses will not occur.
Managing reputational risk is important to attracting and maintaining customers, investors and employees.
Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices,
employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable or fraudulent
activities of our customers. We have policies and procedures in place to protect our reputation and promote ethical conduct, but these policies
and procedures may not be fully effective. Negative publicity regarding our business, employees, or customers, with or without merit, may
result in the loss of customers, investors and employees, costly litigation, a decline in revenues and increased governmental regulation.
We are subject to certain risks in connection with our use of technology.
Our security measures may not be sufficient to mitigate the risk of a cyber attack. Communications and information systems are essential to the
conduct of our business, as we use such systems to manage our customer relationships, our general ledger and virtually all other aspects of our
business. Our operations rely on the secure processing, storage, and transmission of confidential and other information in our computer systems
and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our computer
systems, software, and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious code and
cyber attacks that could have a security impact. If one or more of these events occur, this could jeopardize our or our customers' confidential
and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions
or malfunctions in our operations or the operations of our customers or counterparties. We may be required to expend significant additional
resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation
and financial losses that are either not insured against or not fully covered through any insurance maintained by us. We could also suffer significant
reputational damage.
Security breaches in our Internet banking activities could further expose us to possible liability and damage our reputation. Any compromise
of our security also could deter customers from using our Internet banking services that involve the transmission of confidential information.
We rely on standard Internet security systems to provide the security and authentication necessary to effect secure transmission of data. These
precautions may not protect our systems from compromises or breaches of our security measures, which could result in significant legal liability
and significant damage to our reputation and our business.
Our security measures may not protect us from systems failures or interruptions. While we have established policies and procedures to prevent
or limit the impact of systems failures and interruptions, there can be no assurance that such events will not occur or that they will be adequately
addressed if they do. In addition, we outsource certain aspects of our data processing and other operational functions to certain third-party
providers. If our third-party providers encounter difficulties, or if we have difficulty in communicating with them, our ability to adequately
process and account for transactions could be affected, and our business operations could be adversely impacted. Threats to information security
also exist in the processing of customer information through various other vendors and their personnel.
31
The occurrence of any failures or interruptions may require us to identify alternative sources of such services, and we cannot assure you that we
could negotiate terms that are as favorable to us, or could obtain services with similar functionality as found in our existing systems without the
need to expend substantial resources, if at all. Further, the occurrence of any systems failure or interruption could damage our reputation and
result in a loss of customers and business, could subject us to additional regulatory scrutiny, or could expose us to legal liability. Any of these
occurrences could have a material adverse effect on our financial condition and results of operations.
Sales of substantial amounts of Banner’s common stock in the open market by former Siuslaw and SKBHC shareholders could depress
Banner’s stock price.
Sales of a substantial number of shares of our common stock in the public markets and the availability of those shares for sale could adversely
affect the market price of our common stock. Shares of Banner common stock that were issued to shareholders of Siuslaw in the Siuslaw merger
will be freely tradeable without restrictions or further registration under the Securities Act of 1933. Shares of Banner common stock that are
issued to equity holders of SKBHC in the merger of Banner and AmericanWest who do not become affiliates of Banner will be freely tradeable
without restrictions or further registration six months after completion of that merger. In addition, certain of such equity holders of SKBHC will
benefit from registration rights that will permit them to cause Banner to register their shares of Banner common stock for resale. Based on the
shares of Siuslaw common stock and SKBHC common units outstanding as of December 31, 2014, the maximum number of shares of common
stock Banner will issue upon completion of the two mergers is approximately 14,549,995 shares. If the mergers are completed and if former
shareholders of Siuslaw and SKBHC sell substantial amounts of Banner common stock in the public market following completion of the merger,
the market price of Banner common stock may decrease. These sales might also make it more difficult for Banner to sell equity or equity-related
securities at a time and price that it otherwise would deem appropriate.
We rely on dividends from the Bank for substantially all of our revenue at the holding company level.
We are an entity separate and distinct from our principal subsidiary, Banner Bank, and derive substantially all of our revenue at the holding
company level in the form of dividends from that subsidiary. Accordingly, we are, and will be, dependent upon dividends from Banner Bank
to pay the principal of and interest on our indebtedness, to satisfy our other cash needs and to pay dividends on our common stock. Banner
Bank's ability to pay dividends is subject to its ability to earn net income and to meet certain regulatory requirements. In the event Banner Bank
is unable to pay dividends to us, we may not be able to pay dividends on our common stock. Also, our right to participate in a distribution of
assets upon a subsidiary's liquidation or reorganization is subject to the prior claims of the subsidiary's creditors.
Our articles of incorporation contains a provision which could limit the voting rights of a holder of our common stock.
Our charter provides that any person or group who acquires beneficial ownership of our common stock in excess of 10.0% of the outstanding
shares may not vote the excess shares. Accordingly, if you acquire beneficial ownership of more than 10.0% of the outstanding shares of our
common stock, your voting rights with respect to our common stock will not be commensurate with your economic interest in our company.
Anti-takeover provisions could negatively affect our shareholders.
Provisions in our articles of incorporation and bylaws, the corporate laws of the state of Washington and federal laws and regulations could delay
or prevent a third party from acquiring us, despite the possible benefit to our stockholders, or otherwise negatively affect the market value of
our stock. These provisions include: a prohibition on voting shares of our common stock beneficially owned in excess of 10.0% of total shares
outstanding; advance notice requirements for nominations for election to our board of directors and for proposing matters that shareholders may
act on at shareholder meetings; and staggered three-year terms for directors. Our articles of incorporation also authorizes our board of directors
to issue preferred or other stock, and preferred or other stock could be issued as a defensive measure in response to a takeover proposal. In
addition, because we are a bank holding company, the ability of a third party to acquire us is limited by applicable banking laws and regulations.
The Bank Holding Company Act requires any bank holding company to obtain the approval of the Federal Reserve Board before acquiring 5%
or more of any class of our voting securities. Any entity that is a holder of 25% or more of any class of our voting securities, or a holder of a
lesser percentage if such holder otherwise exercises a “controlling influence” over us, is subject to regulation as a bank holding company under
the Bank Holding Company Act. Under the Change in Bank Control Act of 1978, as amended, any person (or persons acting in concert), other
than a bank holding company, is required to notify the Federal Reserve Board before acquiring 10% or more of any class of our voting securities.
If our investment in the Federal Home Loan Bank of Seattle becomes impaired, our earnings and shareholders' equity could decrease.
At December 31, 2014, the Company had recorded $27.0 million in FHLB stock, compared to $35.4 million at December 31, 2013. The Banks'
investments in FHLB stock are generally viewed as a long-term investment and are carried at par value ($100 per share), which reasonably
approximates its fair value. 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. As members of the FHLB system, the Banks are required to maintain a minimum
level of investment in FHLB stock. This requirement is based, in part, upon the outstanding principal balance of advances from the FHLB and
is calculated in accordance with the Capital Plan of the FHLB. We monitor on a recurring basis the financial condition of the FHLB as it relates
to, among other things, the recoverability of our investment.
On September 25, 2014, the FHLB Seattle and FHLB Des Moines announced a proposed merger. Under this proposal, each of our Banks would
become a member of FHLB Des Moines and all shares of our FHLB Seattle stock would convert to equal shares of FHLB Des Moines stock.
If the merger is terminated by either the FHLB Des Moines or the FHLB Seattle, the terminating FHLB must pay $57 million in termination
32
fees. If the FHLB Seattle were to terminate the agreement, this could result in significant impairment to our investment in the FHLB Seattle,
potentially decreasing our earnings and shareholders' equity.
Item 1B – Unresolved Staff Comments
None.
Item 2 – Properties
Banner Corporation maintains its administrative offices and main branch office, which is owned by us, in Walla Walla, Washington. In total, as
of December 31, 2014, we have 93 branch offices located in Washington, Oregon and Idaho. Ninety branches are Banner Bank branches and
three of those 93 are Islanders Bank branches. Sixty-three branches are located in Washington, twenty-one in Oregon and nine in Idaho. Of
those offices, approximately half are owned and the other half are leased facilities. We also have ten leased locations for loan production offices
spread throughout the same three-state area. The lease terms for our branch and loan production offices are not individually material. Lease
expirations range from one to 25 years. Administrative support offices are primarily in Washington, where we have eight facilities, of which
we own four and lease four. Additionally, we have one leased administrative support office in Idaho and own one located in Oregon. In the
opinion of management, all properties are adequately covered by insurance, are in a good state of repair and are appropriately designed for their
present and future use.
Item 3 – Legal Proceedings
In the normal course of business, we have various legal proceedings and other contingent matters outstanding. These proceedings and the
associated legal claims are often contested and the outcome of individual matters is not always predictable. These claims and counter-claims
typically arise during the course of collection efforts on problem loans or with respect to action to enforce liens on properties in which we hold
a security interest. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial
condition or operations.
Item 4 – Mine Safety Disclosures
Not applicable.
33
PART II
Item 5 – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Price Range of Common Stock and Dividend Information
Our common stock is traded on the NASDAQ Global Select Market under the symbol “BANR.” Shareholders of record as of December 31,
2014 totaled 1,441 based upon securities position listings furnished to us by our transfer agent. This total does not reflect the number of persons
or entities who hold stock in nominee or “street” name through various brokerage firms. The following tables show the reported high and low
sale prices of our common stock for the periods presented as well as the cash dividends declared per share of common stock for each of those
periods.
Year Ended December 31, 2014
High
Low
First quarter
Second quarter
Third quarter
Fourth quarter
First quarter
Second quarter
Third quarter
Fourth quarter
Year Ended December 31, 2013
$
$
$
$
44.88
42.02
40.69
43.70
32.03
34.30
38.44
45.15
High
Low
Cash Dividend
Declared
0.18
0.18
0.18
0.18
Cash Dividend
Declared
0.12
0.12
0.15
0.15
$
$
35.64
37.59
37.77
37.77
29.14
29.33
33.78
35.62
The timing and amount of cash dividends paid on our common stock depends on our earnings, capital requirements, financial condition and
other relevant factors and is subject to the discretion of our board of directors. As a result of improved earnings, levels of capital, asset quality
and financial condition, beginning in the first quarter of 2013 we increased the dividend, further increased it in the third quarter of 2013 and
again increased it in the first quarter of 2014. There can be no assurance that we will pay dividends on our common stock in the future.
Our ability to pay dividends on our common stock depends primarily on dividends we receive from Banner Bank and Islanders Bank. Under
federal regulations, the dollar amount of dividends the Banks may pay depends upon their capital position and recent net income. Generally, if
a bank satisfies its regulatory capital requirements, it may make dividend payments up to the limits prescribed under state law and FDIC
regulations. In addition, an institution that has converted to a stock form of ownership may not declare or pay a dividend on, or repurchase any
of, its common stock if the effect thereof would cause the regulatory capital of the institution to be reduced below the amount required for the
liquidation account which was established in connection with the conversion. Banner Bank, our primary subsidiary, converted to a stock form
of ownership and is therefore subject to the limitation described in the preceding sentence. In addition, under Washington law, no bank may
declare or pay any dividend in an amount greater than its retained earnings without the prior approval of the Washington DFI. The Washington
DFI also has the power to require any bank to suspend the payment of any and all dividends.
Further, under Washington law, Banner Corporation is prohibited from paying a dividend if, after making such dividend payment, it would be
unable to pay its debts as they become due in the usual course of business, or if its total liabilities, plus the amount that would be needed, in the
event Banner Corporation were to be dissolved at the time of the dividend payment, to satisfy preferential rights on dissolution of holders of
preferred stock ranking senior in right of payment to the capital stock on which the applicable distribution is to be made, exceed our total assets.
In addition to the foregoing regulatory considerations, there are numerous governmental requirements and regulations that affect our business
activities. A change in applicable statutes, regulations or regulatory policy may have a material effect on our business and on our ability to pay
dividends on our common stock.
Payments of the distributions on our trust preferred securities (TPS) from the special purpose subsidiary trusts we sponsored are fully and
unconditionally guaranteed by us. The junior subordinated debentures that we have issued to our subsidiary trusts are ranked senior to our shares
of common stock. We must make required payments on the junior subordinated debentures before any dividends can be paid on our TPS and
our common stock and, in the event of our bankruptcy, dissolution or liquidation, the interest and principal obligations under the junior subordinated
debentures must be satisfied before any distributions can be made on our common stock. We may defer the payment of interest on each of the
junior subordinated debentures for a period not to exceed 20 consecutive quarters, provided that the deferral period does not extend beyond the
stated maturity. During such deferral period, distributions on the corresponding TPSs will also be deferred and we may not pay cash dividends
to the holders of shares of our common stock. At December 31, 2014, we were current on all interest payments.
34
Issuer Purchases of Equity Securities
The following table provides information about repurchases of common stock by the Company during the quarter ended December 31, 2014:
Period
October 1, 2014 - October 31, 2014
November 1, 2014 - November 30, 2014
December 1, 2014 - December 31, 2014
Total for quarter
Total Number of
Common Shares
Purchased
Average Price
Paid per
Common Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plan
Maximum Number of
Remaining Shares that May
be Purchased at Period End
under the Plan
— $
—
—
—
—
—
—
—
n/a
n/a
n/a
n/a
978,826
978,826
978,826
978,826
No shares were surrendered by employees to satisfy tax withholding obligations upon the vesting of restricted stock grants in the fourth quarter.
On March 26, 2014, the Company announced that its Board of Directors had authorized the repurchase of up to 978,826 shares of the Company's
common stock, or 5% of the Company's outstanding shares. Under the plan, shares may be repurchased by the Company in open market
purchases. The extent to which the Company repurchases its shares and the timing of such repurchases will depend upon market conditions and
other corporate considerations.
35
Equity Compensation Plan Information
The equity compensation plan information presented under Part III, Item 12 of this report is incorporated herein by reference.
Performance Graph. The following graph compares the cumulative total shareholder return on Banner Corporation common stock with the
cumulative total return on the NASDAQ (U.S. Stock) Index, a peer group of the SNL $1 Billion to $5 Billion Asset Bank Index and a peer group
of the SNL NASDAQ Bank Index. Total return assumes the reinvestment of all dividends.
Index
Banner Corporation
NASDAQ Composite
SNL Bank $1B-$5B
SNL Bank NASDAQ
Period Ended
12/31/09
12/31/10
12/31/11
12/31/12
12/31/13
12/31/14
100.00
100.00
100.00
100.00
87.92
118.15
113.35
117.98
93.77
117.22
103.38
104.68
168.33
138.02
127.47
124.77
249.24
193.47
185.36
179.33
243.50
222.16
193.81
185.73
*Assumes $100 invested in Banner Corporation common stock and each index at the close of business on December 31, 2009 and that all
dividends were reinvested. Information for the graph was provided by SNL Financial L.C. © 2015.
36
Item 6 – Selected Financial Data
The following condensed consolidated statements of financial condition and operations and selected performance ratios as of December 31,
2014, 2013, 2012, 2011, and 2010 and for the years then ended have been derived from our audited consolidated financial statements.
The information below is qualified in its entirety by the detailed information included elsewhere herein and should be read along with “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8, Financial Statement and Supplementary
Data.”
FINANCIAL CONDITION DATA:
(In thousands)
Total assets
Cash and securities (1)
Loans receivable, net
Deposits
Borrowings
Common stockholders’ equity
Preferred stockholders' equity
Total stockholders’ equity
Shares outstanding
Shares outstanding excluding unearned, restricted
shares held in ESOP
OPERATING DATA:
(In thousands)
Interest income
Interest expense
2014
2013
$ 4,723,899
582,537
3,757,913
3,898,950
187,436
584,106
—
584,106
19,572
$ 4,388,166
772,614
3,343,455
3,617,926
184,234
538,972
—
538,972
19,544
December 31
2012
$ 4,265,564
811,902
3,158,223
3,557,804
160,000
506,919
—
506,919
19,455
2011
2010
$ 4,257,312
754,396
3,213,426
3,475,654
212,649
411,748
120,702
532,450
17,553
$ 4,406,082
729,345
3,305,716
3,591,198
267,761
392,472
119,000
511,472
16,165
19,572
19,509
19,421
17,519
16,130
For the Year Ended December 31
2014
2013
2012
2011
2010
$
$
190,661
10,789
$
179,712
12,996
$
187,162
19,514
$
197,563
32,992
Net interest income before provision for loan losses
Provision for loan losses
Net interest income
Deposit fees and other service charges
Mortgage banking operations revenue
Other-than-temporary impairment recoveries (losses)
Net change in valuation of financial instruments carried at
fair value
All other operating income
Total other operating income
REO operations expense (recoveries), net
All other operating expenses
Total other operating expense
Income (loss) before provision for income tax expense
(benefit)
Provision for income tax expense (benefit)
179,872
—
179,872
30,553
10,249
—
1,374
12,078
54,254
(446)
154,187
153,741
80,385
26,220
166,716
—
166,716
26,581
11,170
409
(2,278)
7,460
43,342
(689)
141,664
140,975
69,083
22,528
167,648
13,000
154,648
25,266
13,812
(409)
(16,515)
4,748
26,902
3,354
138,099
141,453
40,097
(24,785)
164,571
35,000
129,571
22,962
6,146
3,000
(624)
2,506
33,990
22,262
135,842
158,104
5,457
—
Net income (loss)
$
54,165
$
46,555
$
64,882
$
5,457
$
(61,896)
(footnotes follow)
37
218,082
60,312
157,770
70,000
87,770
22,009
6,370
(4,231)
1,747
3,253
29,148
26,025
134,776
160,801
(43,883)
18,013
PER COMMON SHARE DATA:
At or For the Years Ended December 31
2014
2013
2012
2011
2010
Net income (loss):
Basic
Diluted
Common stockholders’ equity per share (2)(9)
Common stockholders’ tangible equity per share (2)(9)
Cash dividends
$
$
2.80
2.79
29.82
29.68
0.72
$
2.40
2.40
27.63
27.50
0.54
$
$
3.17
3.16
26.10
25.88
0.04
(0.15)
(0.15)
23.50
23.14
0.10
(7.21)
(7.21)
24.33
23.80
0.28
Dividend payout ratio (basic)
Dividend payout ratio (diluted)
25.53%
25.53%
22.50%
22.50%
1.26%
1.27%
(66.67)%
(66.67)%
(3.88)%
(3.88)%
OTHER DATA:
Full time equivalent employees
Number of branches
As of December 31
2014
1,150
93
2013
1,084
88
2012
1,074
88
2011
1,078
89
2010
1,060
89
(footnotes follow)
38
KEY FINANCIAL RATIOS:
Performance Ratios:
Return on average assets (3)
Return on average common equity (4)
Average common equity to average assets
Interest rate spread (5)
Net interest margin (6)
Non-interest income to average assets
Non-interest expense to average assets
Efficiency ratio (7)
Average interest-earning assets to funding liabilities
Selected Financial Ratios:
Allowance for loan losses as a percent of total loans at
end of period
Net charge-offs (recoveries) as a percent of average
outstanding loans during the period
Non-performing assets as a percent of total assets
Allowance for loan losses as a percent of non-
performing loans (8)
Common stockholders’ tangible equity to tangible
assets (9)
Consolidated Capital Ratios:
Total capital to risk-weighted assets
Tier 1 capital to risk-weighted assets
Tier 1 leverage capital to average assets
At or For the Years Ended December 31
2014
2013
2012
2011
2010
1.17%
9.60
12.20
4.04
4.07
1.17
3.32
65.67
108.78
1.98
(0.05)
0.43
1.09%
8.85
12.36
4.08
4.11
1.02
3.31
67.11
108.28
2.17
0.08
0.66
1.54%
14.03
10.96
4.13
4.17
0.64
3.35
72.71
109.11
2.37
0.57
1.18
0.13%
1.37
9.31
3.99
4.05
0.79
3.69
79.62
106.90
2.52
1.50
2.79
(1.36)%
(17.19)
7.90
3.61
3.67
0.64
3.53
86.03
104.32
2.86
1.88
5.77
453.56
299.81
223.20
110.09
64.30
12.30
12.23
11.80
9.54
8.73
16.80
15.54
13.41
16.99
15.73
13.64
16.96
15.70
12.74
18.07
16.80
13.44
16.92
15.65
12.24
Includes securities available-for-sale and held-to-maturity.
(1)
(2) Calculated using shares outstanding excluding unearned restricted shares held in ESOP and adjusted for 1-for-7 reverse stock split.
(3) Net income divided by average assets.
(4) Net income divided by average common equity.
(5) Difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(6) Net interest income before provision for loan losses as a percent of average interest-earning assets.
(7) Other operating expenses divided by the total of net interest income before loan losses and other operating income (non-interest
income).
(8) Non-performing loans consist of nonaccrual and 90 days past due loans.
(9) Common stockholders’ tangible equity per share and the ratio of tangible common stockholders’ equity to tangible assets are non-GAAP
financial measures. We calculate tangible common equity by excluding the balance of goodwill, other intangible assets and preferred
equity from stockholders’ equity. We calculate tangible assets by excluding the balance of goodwill and other intangible assets from total
assets. We believe that this is consistent with the treatment by our bank regulatory agencies, which exclude goodwill and other intangible
assets from the calculation of risk-based capital ratios. In addition, excluding preferred equity, the level of which may vary from company
to company, allows investors to more easily compare our capital adequacy to other companies in the industry that also use this
measure. Management believes that these non-GAAP financial measures provide information to investors that is useful in understanding
the basis of our capital position. However, these non-GAAP financial measures are supplemental and are not a substitute for any analysis
based on GAAP. Because not all companies use the same calculation of tangible common equity and tangible assets, this presentation may
not be comparable to other similarly titled measures as calculated by other companies. For a reconciliation of these non–GAAP measures,
see Item 7, "Management's Discussion and Analysis of Financial Condition—Executive Overview."
39
Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of results of operations is intended to assist in understanding our financial condition and results of
operations. The information contained in this section should be read in conjunction with the Consolidated Financial Statements and accompanying
Notes to the Consolidated Financial Statements of this Form 10-K.
Executive Overview
We are a bank holding company incorporated in the State of Washington and own two subsidiary banks, Banner Bank and Islanders Bank.
Banner Bank is a Washington-chartered commercial bank that conducts business from its main office in Walla Walla, Washington and, as of
December 31, 2014, its 90 branch offices and ten loan production offices located in Washington, Oregon and Idaho. Islanders Bank is also a
Washington-chartered commercial bank and conducts its business from three locations in San Juan County, Washington. As of December 31,
2014, we had total consolidated assets of $4.7 billion, net loans of $3.8 billion, total deposits of $3.9 billion and total stockholders’ equity of
$584 million.
Banner Bank is a regional bank which offers a wide variety of commercial banking services and financial products to individuals, businesses
and public sector entities in its primary market areas. Islanders Bank is a community bank which offers similar banking services to individuals,
businesses and public entities located in the San Juan Islands. The Banks’ primary business is that of traditional banking institutions, accepting
deposits and originating loans in locations surrounding their offices in portions of Washington, Oregon and Idaho. Banner Bank is also an active
participant in the secondary market, engaging in mortgage banking operations largely through the origination and sale of one- to four-family
residential loans. Lending activities include commercial business and commercial real estate loans, agriculture business loans, construction and
land development loans, one- to four-family residential loans and consumer loans.
Banner Corporation's successful execution of its strategic plan and operating initiatives continued in 2014, as evidenced by our solid operating
results and profitability. Highlights for the year included further improvement in our asset quality, significantly increased core deposits (transaction
and savings accounts), solid revenues from core operations, strong loan growth and additional client acquisition. For the year ended December
31, 2014, Banner had a significant increase in net interest income, as well as a meaningful increase in deposit fees and service charges and solid
revenue from mortgage banking. The year ended December 31, 2014 was also highlighted by the acquisition of six branches in southwestern
Oregon (the Branch Acquisition). In connection with the Branch Acquisition, as of June 20, 2014, the Company acquired approximately $212
million in deposits, $88 million in loans and 10,500 new customer relationships. In addition, the Company recognized a $9.1 million bargain
purchase gain related to the Branch Acquisition, which net of related expenses added $0.25 per diluted share to the 2014 earnings. Additionally,
the quarterly cash dividend was increased to $0.18 per share in 2014 from $0.15 per share in the last two quarters of 2013, reflecting the strong
performance and our expectation of continued success and sustained profitability.
In spite of persistently weak economic conditions and exceptionally low interest rates which have created an unusually challenging banking
environment for an extended period, the Company experienced marked improvement and consistent profitability in 2012 and 2013 which
continued in 2014. For the year ended December 31, 2014, our net income to common shareholders was $54.2 million or $2.79 per diluted
share, compared to net income to common shareholders of $46.6 million, or $2.40 per diluted share for the year ended December 31, 2013 and
$59.1 million, or $3.16 per diluted share for the year ended December 31, 2012. Although there continue to be indications that economic
conditions are improving from the recessionary downturn, the pace of recovery has been modest and uneven and ongoing uncertainty in the
economy and low interest rates will likely continue to be challenging going forward. However, over the past four years we have significantly
added to our client relationships and account base, as well as substantially improved our risk profile by aggressively managing and reducing our
problem assets, which has resulted in lower credit costs and stronger and sustainable revenues, and which we believe has positioned the Company
well to meet this challenging environment with continued success.
Our return to profitability was punctuated in the second quarter of 2012 by management's decision to reverse the valuation allowance against
our deferred tax assets. This decision resulted in a substantial tax benefit for the full year 2012, and resulted in a significant reduction in our tax
expense for the year ended December 31, 2012. The decision to reverse the valuation allowance reflected our confidence in the sustainability
of our future profitability. Further, as a result of our return to profitability, including the reversal of our deferred tax asset, our improved asset
quality and operating trends, strong capital position and our expectation for sustainable profitability for the foreseeable future, we also significantly
reduced the credit risk component associated with the estimated fair value of the junior subordinated debentures issued by the Company. Changes
in these two significant accounting estimates, while substantial, represent non-cash valuation adjustments that had no effect on our liquidity or
our ability to fund our operations.
Our operating results depend primarily on our net interest income, which is the difference between interest income on interest-earning assets,
consisting of loans and investment securities, and interest expense on interest-bearing liabilities, composed primarily of customer deposits and
borrowings. Net interest income is primarily a function of our interest rate spread, which is the difference between the yield earned on interest-
earning assets and the rate paid on interest-bearing liabilities, as well as a function of the average balances of interest-earning assets and interest-
bearing liabilities. Our net interest income before provision for loan losses increased 8% to $179.9 million for the year ended December 31,
2014, compared to $166.7 million for the year earlier. This increase in net interest income reflects the significant growth in earning assets and
occurred despite the decrease in interest rate spread as a result of declining yields on earning assets, which was only partially offset by continuing
reductions in deposit and other funding costs. During the year ended December 31, 2014, our interest spread decreased to 4.04% from 4.08%
for the prior year while our net interest margin decreased to 4.07% compared to 4.11% for the prior year.
40
As a result of adequate reserves already in place as well as declining net charge-offs, we did not record a provision for loan losses in the years
ended December 31, 2014 and December 31, 2013. By contrast, we recorded a $13.0 million provision for the year ended December 31, 2012
and substantially larger provisions in the three years immediately prior to 2012. The decrease in loan loss provisioning compared to the earlier
years reflects our significant progress in reducing the levels of delinquencies, non-performing loans and net charge-offs. As a result of our
continued focused efforts, non-performing loans decreased by 32% to $16.7 million at December 31, 2014, compared to $24.8 million a year
earlier. Our allowance for loan losses at December 31, 2014 was $75.9 million, representing 1.98% of total loans outstanding and 454% of
non-performing loans. (See Note 6, Loans Receivable and the Allowance for Loan Losses, as well as “Asset Quality” below in this Form 10-
K.)
Our net income also is affected by the level of our other operating income, including deposit fees and service charges, loan origination and
servicing fees, and gains and losses on the sale of loans and securities, as well as our non-interest operating expenses and income tax provisions.
In addition, our net income is affected by the net change in the value of certain financial instruments carried at fair value, and in certain periods
by other-than-temporary impairment (OTTI) charges or recoveries.
Further, in the year ended December 31, 2014, our net income was
significantly augmented by an acquisition bargain purchase gain related to the Branch Acquisition and in the year ended December 31, 2013 by
a termination fee related to the cancellation of the proposed acquisition of Home Federal Bancorp, Inc.
(See Note 22 of the Notes to the
Consolidated Financial Statements.) For the year ended December 31, 2014, we recorded a net gain of $1.4 million for fair value adjustments,
$42,000 in net gains on the sale of securities, and the $9.1 million acquisition bargain purchase gain.
In comparison, for the year ended
December 31, 2013, we recorded a net charge of $2.3 million for fair value adjustments, which was offset by $1.0 million in net gains on the
sale of securities, $409,000 in OTTI recoveries and a $3.0 million proposed acquisition termination fee.
Our total other operating income, which includes net gains on sale of securities, changes in the value of financial instruments carried at fair value
and, for 2014, includes the acquisition bargain purchase gain, was $54.3 million for the year ended December 31, 2014, compared to $43.3
million for the year ended December 31, 2013, including the proposed acquisition termination fee. Other operating income excluding the net
gain on sale of securities, OTTI adjustments, changes in the value of financial instruments, the acquisition bargain purchase gain and proposed
acquisition termination fee, which we believe is more indicative of our core operations, increased 6% to $43.8 million for the year ended
December 31, 2014 compared to $41.2 million for the same period a year earlier, as increased deposit fees and service charges more than offset
decreased mortgage banking revenues.
Our total revenues (net interest income before the provision for loan losses plus total other operating income) for the year ended December 31,
2014 increased $24.1 million, or 11%, to $234.1 million, compared to $210.1 million for the same period a year earlier, largely as a result of the
net fair value gain in 2014 and the acquisition bargain purchase gain somewhat offset by a drop in net gains on the sale of securities. Our total
revenues from core operations, which excludes net gains on sale of securities, OTTI and fair value adjustments, the bargain purchase gain and
termination fee, increased by $15.6 million, or 8%, to $223.6 million for the year ended December 31, 2014, compared to $208.0 million for
the same period a year earlier.
For the year ended December 31, 2014, other operating expenses increased 9% to $153.7 million, compared to $141.0 million for the year ended
December 31, 2013, largely as a result of increased costs related to acquisition activities, including the operation of six newly acquired branches
as well as transaction, integration and conversion-related expense for those branches and for the Siuslaw and AmericanWest transactions and
increased compensation expense.
Other operating income, revenues and other earnings information excluding fair value adjustments, OTTI losses or recoveries, net gains or losses
on sale of securities and, in certain periods, acquisition-related bargain purchase gains and costs, are non-GAAP financial measures. Management
has presented these non-GAAP financial measures in this discussion and analysis because it believes that they provide useful and comparative
information to assess trends in our core operations and in understanding our capital position. However, these non-GAAP financial measures are
supplemental and are not a substitute for any analysis based on GAAP. Where applicable, we have also presented comparable earnings information
using GAAP financial measures. For a reconciliation of these non-GAAP financial measures, see the tables below. Because not all companies
use the same calculations, our presentation may not be comparable to other similarly titled measures as calculated by other companies. See
“Comparison of Results of Operations for the Years Ended December 31, 2014 and 2013” for more detailed information about our financial
performance.
41
The following tables set forth reconciliations of non-GAAP financial measures discussed in this report (dollars in thousands, except per share
data):
Total other operating income (GAAP)
Exclude net gain on sale of securities
Exclude other-than-temporary impairment (recovery) loss
Exclude change in valuation of financial instruments carried at fair value
Exclude one-time termination fee
Exclude acquisition bargain purchase gain
Total other operating income from core operations (non-GAAP)
Net interest income before provision for loan losses
Total other operating income
Total GAAP revenue
Exclude net gain on sale of securities
Exclude other-than-temporary impairment (recovery) loss
Exclude change in valuation of financial instruments carried at fair value
Exclude one-time termination fee
Exclude acquisition bargain purchase gain
Revenue from core operations (non-GAAP)
Income before provision for taxes (GAAP)
Exclude net gain on sale of securities
Exclude other-than-temporary impairment (recovery) loss
Exclude change in valuation of financial instruments carried at fair value
Exclude one-time termination fee
Exclude acquisition bargain purchase gain
Exclude acquisition related costs
Income from core operations before provision for taxes (non-GAAP)
Net income (GAAP)
Exclude net gain on sale of securities
Exclude other-than-temporary impairment (recovery) loss
Exclude change in valuation of financial instruments carried at fair value
Exclude one-time termination fee
Exclude acquisition bargain purchase gain
Exclude acquisition related costs
Exclude related tax expense (benefit)
Total earnings from core operations (non-GAAP)
Acquisition bargain purchase gain
Proposed acquisition termination fee
Acquisition related costs
Related tax expense
Total net effect of acquisitions (including proposed acquisitions) on earnings
Diluted weighted shares outstanding
Total net effect of acquisition on diluted earnings per share
42
For the Years Ended December 31
$
2014
54,254
(42)
—
(1,374)
—
(9,079)
$
2013
43,342
(1,022)
(409)
2,278
(2,954)
—
2012
26,902
(51)
409
16,515
—
—
43,759
$
41,235
$
43,775
$
179,872
54,254
234,126
(42)
—
(1,374)
—
(9,079)
$
166,716
43,342
210,058
(1,022)
(409)
2,278
(2,954)
—
167,648
26,902
194,550
(51)
409
16,515
—
—
223,631
$
207,951
$
211,423
$
80,385
(42)
—
(1,374)
—
(9,079)
4,325
$
69,083
(1,022)
(409)
2,278
(2,954)
—
550
40,097
(51)
409
16,515
—
—
—
74,215
$
67,526
$
56,970
$
54,165
(42)
—
(1,374)
—
(9,079)
4,325
2,833
$
46,555
(1,022)
(409)
2,278
(2,954)
—
550
561
64,882
(51)
409
16,515
—
—
—
(6,074)
50,828
$
45,559
$
75,681
9,079
—
(4,325)
(2,323)
$
— $
2,954
(550)
(865)
2,431
$
1,539
$
—
—
—
—
—
19,402,656
19,397,360
18,722,859
0.13
$
0.08
$
—
$
$
$
$
$
$
$
$
$
$
$
Common stockholders' tangible equity per share and the ratio of tangible common stockholders' equity to tangible assets referred to in footnote
(9) to Item 6 - Selected Financial Data above are also non-GAAP financial measures. We calculate tangible common equity by excluding other
intangible assets from stockholders' equity. We calculate tangible assets by excluding the balance of other intangible assets from total assets.
We believe that this is consistent with the treatment by our bank regulatory agencies, which exclude goodwill and other intangible assets from
the calculation of risk-based capital ratios. Management believes that this non-GAAP financial measure provides information to investors that
is useful in understanding the basis of our capital position (dollars in thousands).
Stockholders’ equity (GAAP)
Exclude other intangible assets, net
Tangible common stockholders’ equity (non-GAAP)
Total assets (GAAP)
Exclude other intangible assets, net
Total tangible assets (non-GAAP)
December 31
2014
2013
2012
$
$
$
583,624
2,831
580,793
4,723,899
2,831
$
$
$
538,972
2,449
536,523
4,388,898
2,449
$
$
$
506,919
4,230
502,689
4,265,564
4,230
$
4,721,068
$
4,386,449
$
4,261,334
Tangible common stockholders’ equity to tangible assets (non-GAAP)
12.30%
12.23%
11.80%
Common stockholders' tangible equity per share (non-GAAP)
$
29.68
$
27.50
$
25.88
Loans are our most significant and generally highest yielding earning assets. We attempt to maintain a portfolio of loans in a range of 90% to
95% of total deposits to enhance our revenues, while adhering to sound underwriting practices and appropriate diversification guidelines in order
to maintain a moderate risk profile. At December 31, 2014, our net loan portfolio totaled $3.758 billion compared to $3.344 billion at December 31,
2013.
We offer a wide range of loan products to meet the demands of our customers. Our lending activities are primarily directed toward the origination
of real estate and commercial loans. Commercial real estate loans for both owner-occupied and investment properties, including construction
and development loans for these types of properties, totaled $1.432 billion, or approximately 37% of our loan portfolio at December 31, 2014.
In addition, multifamily residential real estate loans, including construction and development loans for these types of properties, totaled $228
million and comprise approximately 6% of our loan portfolio. While our level of activity and investment in commercial and multifamily real
estate loans has been relatively stable for many years, we have experienced an increase in new originations in recent periods resulting in growth
in these loan balances. Commercial real estate loans increased by $215 million during the year ended December 31, 2014 and multifamily loans
increased by $38 million.
We also originate residential construction, land and land development loans and, although our portfolio balances are well below the peak levels
before the financial crisis, beginning in 2011 and continuing since then we have experienced increased demand for one- to four-family construction
loans. Outstanding residential construction, land and land development balances increased $46 million, or 17%, to $322 million at December
31, 2014 compared to $276 million at December 31, 2013. Still, residential construction, land and land development loans represented only
approximately 8% of our total loan portfolio at December 31, 2014.
Our commercial business lending is directed toward meeting the credit and related deposit needs of various small- to medium-sized business
and agribusiness borrowers operating in our primary market areas. Reflecting the slowly recovering economy, demand for these types of
commercial business loans has been modest although our production levels have increased in recent periods. Commercial and agricultural
business loans increased $52 million, or 6%, to $962 million at December 31, 2014, compared to $910 million at December 31, 2013. Commercial
and agricultural business loans represented approximately 25% of our portfolio at December 31, 2014.
Our residential mortgage loan originations have been relatively strong in recent years, as exceptionally low interest rates have supported demand
for loans to refinance existing debt as well as loans to finance home purchases. Refinancing activity was particularly significant in 2012 and in
the first six months of 2013, leading to meaningful increases in residential mortgage originations during those periods; however, the rise in
mortgage interest rates that began in the second quarter of 2013 slowed origination activity and has resulted in much lower refinancing activity
in recent periods. At December 31, 2014, our outstanding balances for residential mortgages increased $11 million to $540 million, compared
to $529 million at December 31, 2013. One- to four-family residential real estate loans represented nearly 14% of our loan portfolio at December
31, 2014. Most of the one- to four-family loans that we originate are sold in the secondary markets with net gains on sales and loan servicing
fees reflected in our revenues from mortgage banking.
Our consumer loan activity is primarily directed at meeting demand from our existing deposit customers. We have increased our emphasis on
consumer lending in recent years, and while demand for consumer loans has been modest during this period of economic weakness as we believe
43
many consumers have been focused on reducing their personal debt, we began to see some meaningful growth in 2014. For the year 2014,
consumer loans, including consumer loans secured by one- to four-family residences, increased $54 million to $349 million, or 9% of our portfolio
at December 31, 2014, with most of the increase arising from increased usage of home equity lines of credit.
Deposits, customer retail repurchase agreements and loan repayments are the major sources of our funds for lending and other investment
purposes. We compete with other financial institutions and financial intermediaries in attracting deposits and we generally attract deposits within
our primary market areas. Much of the focus of our branch expansion over many years, including the Branch Acquisition, and our current
marketing efforts has been directed toward attracting additional deposit customer relationships and balances. This effort has been particularly
directed towards increasing transaction and savings accounts and for the past three years we have been very successful in increasing these core
deposit balances. The long-term success of our deposit gathering activities is reflected not only in the growth of deposit balances, but also in
increases in the level of deposit fees, service charges and other payment processing revenues compared to periods prior to that expansion.
Total deposits were $3.899 billion at December 31, 2014 compared to $3.618 billion a year earlier. Non-interest-bearing account balances
increased 16% to $1.299 billion at December 31, 2014, compared to $1.115 billion a year ago. Interest-bearing transaction and savings accounts
totaled $1.830 billion at December 31, 2014, compared to $1.630 billion a year ago, while certificates of deposit further decreased to $771
million compared to $873 million a year earlier. Non-certificate core deposits represented 80% of total deposits at December 31, 2014, compared
to 76% of total deposits a year ago and 71% two years earlier.
Critical Accounting Policies
In the opinion of management, the accompanying Consolidated Statements of Financial Condition and related Consolidated Statements of
Operations, Comprehensive Income, Changes in Stockholders’ Equity and Cash Flows reflect all adjustments (which include reclassification
and normal recurring adjustments) that are necessary for a fair presentation in conformity with U.S. Generally Accepted Accounting Principles
(GAAP). 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 our 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 our 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 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 below. Management believes 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 our results of operations or financial condition. Further, subsequent changes in economic or market conditions could
have a material impact on these estimates and our financial condition and operating results in future periods. There have been no significant
changes in our application of accounting policies since December 31, 2013. For additional information concerning critical accounting policies,
see Notes 1, 6, 13, 21 and 22 of the Notes to the Consolidated Financial Statements and the following:
Interest Income: (Notes 1 and 6) Interest on loans and securities is accrued as earned unless management doubts the collectability of the asset
or the unpaid interest. Interest accruals on loans are generally discontinued when loans become 90 days past due for payment of interest and
the loans are then placed on nonaccrual status. All previously accrued but uncollected interest is deducted from interest income upon transfer
to nonaccrual status. For any future payments collected, interest income is recognized only upon management’s assessment that there is a strong
likelihood that the full amount of a loan will be repaid or recovered. A loan may be put on nonaccrual status sooner than this policy would dictate
if, in management’s judgment, the amounts owed, principal or interest, may be uncollectable. While less common, similar interest reversal and
nonaccrual treatment is applied to investment securities if their ultimate collectability becomes questionable.
Provision and Allowance for Loan Losses: (Notes 1 and 6) The provision for loan losses reflects the amount required to maintain the allowance
for losses at an appropriate level based upon management’s evaluation of the adequacy of general and specific loss reserves. We maintain an
allowance for loan losses consistent in all material respects with the GAAP guidelines outlined in ASC 450, Contingencies. We have established
systematic methodologies for the determination of the adequacy of our allowance for loan losses. The methodologies are set forth in a formal
policy and take into consideration the need for an overall general valuation allowance as well as specific allowances that are tied to individual
problem loans. We increase our allowance for loan losses by charging provisions for probable loan losses against our income and value impaired
loans consistent with the accounting guidelines outlined in ASC 310, Receivables.
The allowance for losses on loans is maintained at a level sufficient to provide for probable losses based on evaluating known and inherent risks
in the loan portfolio and upon our continuing analysis of the factors underlying the quality of the loan portfolio. These factors include, among
others, changes in the size and composition of the loan portfolio, delinquency rates, actual loan loss experience, current and anticipated economic
conditions, detailed analysis of individual loans for which full collectability may not be assured, and determination of the existence and realizable
value of the collateral and guarantees securing the loans. Realized losses related to specific assets are applied as a reduction of the carrying
value of the assets and charged immediately against the allowance for loan loss reserve. Recoveries on previously charged off loans are credited
to the allowance. The reserve is based upon factors and trends identified by us at the time financial statements are prepared. Although we use
the best information available, future adjustments to the allowance may be necessary due to economic, operating, regulatory and other conditions
beyond our control. The adequacy of general and specific reserves is based on our continuing evaluation of the pertinent factors underlying the
44
quality of the loan portfolio as well as individual review of certain large balance loans. Loans are considered impaired when, based on current
information and events, we determine that it is probable that we will be unable to collect all amounts due according to the contractual terms of
the loan agreement. Factors involved in determining impairment include, but are not limited to, the financial condition of the borrower, the
value of the underlying collateral and the current status of the economy. Impaired loans are measured based on the present value of expected
future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value
of collateral if the loan is collateral dependent. Subsequent changes in the value of impaired loans are included within the provision for loan
losses in the same manner in which impairment initially was recognized or as a reduction in the provision that would otherwise be reported. Large
groups of smaller-balance homogeneous loans are collectively evaluated for impairment. Loans that are collectively evaluated for impairment
include residential real estate and consumer loans and, as appropriate, smaller balance non-homogeneous loans. Larger balance non-homogeneous
residential construction and land, commercial real estate, commercial business loans and unsecured loans are individually evaluated for
impairment.
Our methodology for assessing the appropriateness of the allowance consists of several key elements, which include specific allowances, an
allocated formula allowance and an unallocated allowance. Losses on specific loans are provided for when the losses are probable and
estimable. General loan loss reserves are established to provide for inherent loan portfolio risks not specifically provided for. The level of
general reserves is based on analysis of potential exposures existing in our loan portfolio including evaluation of historical trends, current market
conditions and other relevant factors identified by us at the time the financial statements are prepared. The formula allowance is calculated by
applying loss factors to outstanding loans, excluding those loans that are subject to individual analysis for specific allowances. Loss factors are
based on our historical loss experience adjusted for significant environmental considerations, including the experience of other banking
organizations, which in our judgment affect the collectability of the portfolio as of the evaluation date. The unallocated allowance is based upon
our evaluation of various factors that are not directly measured in the determination of the formula and specific allowances. This methodology
may result in losses or recoveries differing significantly from those provided in the Consolidated Financial Statements.
While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, there can be no
assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not
exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial condition
and results of operations. In addition, the determination of the amount of the Banks’ allowance for loan losses is subject to review by bank
regulators as part of the routine examination process, which may result in the adjustment of reserves based upon their judgment of information
available to them at the time of their examination.
Fair Value Accounting and Measurement: (Notes 1 and 22) We use fair value measurements to record fair value adjustments to certain financial
assets and liabilities and to determine fair value disclosures. We include in the Notes to the Consolidated Financial Statements information about
the extent to which fair value is used to measure financial assets and liabilities, the valuation methodologies used and the impact on our results
of operations and financial condition. Additionally, for financial instruments not recorded at fair value we disclose, where appropriate, our
estimate of their fair value. For more information regarding fair value accounting, please refer to Note 22 in the Notes to the Consolidated
Financial Statements.
Other Intangible Assets: (Notes 1 and 21) Other intangible assets consists primarily of core deposit intangibles (CDI), which are amounts
recorded in business combinations or deposit purchase transactions related to the value of transaction-related deposits and the value of the
customer relationships associated with the deposits. Core deposit intangibles are being amortized on an accelerated basis over a weighted average
estimated useful life of eight years. These assets are reviewed at least annually for events or circumstances that could impact their
recoverability. These events could include loss of the underlying core deposits, increased competition or adverse changes in the economy. To
the extent other identifiable intangible assets are deemed unrecoverable, impairment losses are recorded in other non-interest expense to reduce
the carrying amount of the assets.
Mortgage Servicing Rights: Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of
loans. Generally, purchased servicing rights are capitalized at the cost to acquire the rights. For sales of mortgage loans, the value of the servicing
right is estimated and capitalized. Fair value is based on market prices for comparable mortgage servicing contracts. Capitalized servicing rights
are reported in other assets and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing
income of the underlying financial assets.
Real Estate Held for Sale: (Notes 1 and 7) Property acquired by foreclosure or deed in lieu of foreclosure is recorded at the lower of the estimated
fair value of the property, less expected selling costs, or the carrying value of the defaulted loan. Development and improvement costs relating
to the property may be capitalized, while other holding costs are expensed. The carrying value of the property is periodically evaluated by
management and, if necessary, allowances are established to reduce the carrying value to net realizable value. Gains or losses at the time the
property is sold are charged or credited to operations in the period in which they are realized. The amounts the Banks will ultimately recover
from real estate held for sale may differ substantially from the carrying value of the assets because of market factors beyond the Banks’ control
or because of changes in the Banks’ strategies for recovering the investment.
Income Taxes and Deferred Taxes: (Note 13) The Company and its wholly-owned subsidiaries file consolidated U.S. federal income tax returns,
as well as state income tax returns in Oregon and Idaho. Income taxes are accounted for using the asset and liability method. Under this method
a deferred tax asset or liability is determined based on the enacted tax rates which are expected to be in effect when the differences between the
financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company’s income tax
returns. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Under
45
GAAP (ASC 740), a valuation allowance is required to be recognized if it is “more likely than not” that all or a portion of our deferred tax assets
will not be realized.
Accounting Standards Recently Adopted or Issued
Unrecognized Tax Benefits
In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standard 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 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.
Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures
In June 2014, FASB issued ASU No. 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures, which requires
the Company to consider these transactions as secured borrowings. The ASU seeks to prevent activities used leading up to the financial crisis
regarding repurchase agreements, whereby pledges to maturity were recorded as sales, which may have over-reported income and may have
under-reported liabilities, making it difficult for stakeholders to understand how a company was performing. The accounting changes in this
ASU are effective for public business entities for the first interim or annual period beginning after December 15, 2014. Earlier application for
46
a public business entity is prohibited. The accounting changes in this ASU are not expected to have a material impact on the Company's
consolidated financial statements.
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 ASU 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.
Income Statement—Extraordinary and Unusual Items (Subtopic 225-20)
In January 2015, FASB issued ASU No. 2015-01, Income Statement—Extraordinary and Unusual Items (Subtopic 225-20). The ASU eliminates
from GAAP the concept of extraordinary items. Under subtopic 225-20, entities were required to separately classify, present, and disclose
extraordinary events and transactions that were both unusual in nature and infrequent in occurrence. This amendment will save time and reduce
costs for preparers, as well as alleviate uncertainty for auditors and regulators in evaluating potentially extraordinary items. The amendment is
effective for fiscal years and interim reporting periods after December 15, 2015. It may be applied prospectively, and retrospectively to all
reporting periods presented in the financial statements. The adoption of ASU No. 2015-01 is not expected to have a material impact on the
Company's consolidated financial statements.
Comparison of Financial Condition at December 31, 2014 and 2013
General. Total assets increased $335 million, or 8%, to $4.724 billion at December 31, 2014, compared to $4.389 billion at December 31,
2013. Net loans receivable (gross loans less deferred fees and discounts, and allowance for loan losses) increased $414 million, or 12%, to
$3.758 billion at December 31, 2014, from $3.344 billion at December 31, 2013. The increase in net loans included increases of $209 million
in commercial real estate loans, $30 million in multifamily real estate loans, $19 million in one- to four-family construction loans, $13 million
in multifamily and commercial construction loans and $27 million in land and land development loans. Commercial business loans increased
by $42 million while agricultural business loans increased $10 million. Consumer loans increased by $54 million, including $19 million as a
result of the Branch Acquisition, and one- to four-family real estate loans increased by $10 million.
The increase in commercial real estate loans included $164 million for investment properties and $44 million for owner-occupied properties.
The increase in construction and development loans was particularly helpful to the net interest margin as interest rates, loan fees and the velocity
of turnover in this lending activity are generally higher than for most other categories of loans. While demand for commercial and consumer
loans remained modest and utilization of existing credit lines for consumer and commercial borrowers was low, our production of new commercial
real estate and commercial loans was again encouraging.
Securities decreased to $583 million at December 31, 2014, from $635 million at December 31, 2013, and the aggregate total of securities and
interest-bearing deposits decreased $65 million, or 9%, to $638 million at December 31, 2014, compared to $703 million a year earlier. Securities
purchases during the current year have been modest and were primarily mortgage-backed securities and intermediate-term taxable and tax-
exempt municipal securities. Securities sales have also been modest and were primarily sales of mortgage-backed securities. The average
effective duration of Banner's securities portfolio was approximately 3.1 years at December 31, 2014. At December 31, 2014, the fair value of
our trading securities was $7 million less than their amortized cost. In addition, fair value adjustments for securities designated as available-
for-sale reflected an increase of $4.2 million for the year ended December 31, 2014, which was included net of the associated tax expense of
$1.5 million as a component of other comprehensive income and largely occurred as a result of modestly decreased market interest rates.
Periodically, we also acquire securities (primarily municipal bonds) which are designated as held-to-maturity and this portfolio increased by $29
million from the prior year-end balances. (See Notes 5 and 22 of the Notes to the Consolidated Financial Statements.)
REO decreased another $1 million, to $3 million at December 31, 2014 compared to $4 million at December 31, 2013 and $16 million at
December 31, 2012, continuing the improving trend with respect to these non-earning assets. The December 31, 2014 total included $2 million
in residential land or land development projects and $2 million in single-family homes and related residential construction. During the year
ended December 31, 2014, we transferred $3 million of loans into REO, capitalized additional investments of $30,000 in acquired properties,
disposed of approximately $5 million of properties and recognized $1 million of gains in current earnings, net of valuation adjustments, for REO
properties sold. (See “Asset Quality” discussion below.)
Deposits increased $281 million, or 8%, to $3.899 billion at December 31, 2014, from $3.618 billion at December 31, 2013, largely as a result
of the Branch Acquisition. Non-interest-bearing deposits increased by $184 million, or 16%, to $1.299 billion from $1.115 billion, and interest-
bearing transaction and savings accounts increased by $200 million, or 12%, to $1.830 billion at December 31, 2014 from $1.630 billion at
December 31, 2013. Offsetting these increases, certificates of deposit decreased $102 million, or 12%, to $771 million at December 31, 2014
from $873 million at December 31, 2013. Core deposits increased to 80% of total deposits at December 31, 2014, compared to 76% of total
47
deposits one year earlier. The Branch Acquisition resulted in a $207 million increase in deposits, including $69 million in non-interest bearing
deposits, $105 million in interest-bearing transaction and savings accounts, and $33 million in certificates of deposit as of December 31, 2014.
FHLB advances increased $5 million, to $32 million at December 31, 2014 from $27 million at December 31, 2013. The new FHLB advances
were all very short-term maturities with correspondingly low interest rates. Other borrowings, consisting of retail repurchase agreements primarily
related to customer cash management accounts, decreased $6 million to $77 million at December 31, 2014, compared to $83 million at
December 31, 2013. No additional junior subordinated debentures were issued or matured during the year; however, the estimated fair value of
these instruments increased $4 million to $78 million at December 31, 2014 from $74 million a year ago, primarily as a result of the impact of
the passage of time on the years to maturity in the net present value calculation used to estimate fair value of these financial instruments. For
more information, see Notes 10, 11 and 12 of the Notes to the Consolidated Financial Statements.
Total stockholders’ equity increased $45 million, or 8%, to $584 million at December 31, 2014 compared to $539 million at December 31, 2013,
primarily due to retained earnings from operations, a $3 million gain, net of income taxes, as a result of changes in other comprehensive income,
and $2 million related to share-based compensation, which was partially offset by the payment of $14 million in cash dividends to common
shareholders and $2 million related to the redemption of shares in connection with the termination of the ESOP. Tangible common stockholders'
equity, which excludes intangible assets, also increased $44 million to $581 million, or 12.30% of tangible assets at December 31, 2014, compared
to $537 million, or 12.23% at December 31, 2013, reflecting the net additions to equity and the reduction through amortization in core deposit
intangibles. During the year ended December 31, 2014, the only Banner Corporation shares we repurchased were 12,185 shares surrendered
by employees to satisfy tax withholding obligations upon the vesting of restricted stock grants and 47,890 shares redeemed related to the
termination of the ESOP.
Investments. At December 31, 2014, our consolidated investment portfolio totaled $583 million and consisted principally of U.S. Government
and agency obligations, mortgage-backed and mortgage-related securities, municipal bonds, corporate debt obligations, and asset-backed
securities. From time to time, our investment levels may be increased or decreased depending upon yields available on investment alternatives
and management’s projections as to the demand for funds to be used in our loan origination, deposit and other activities. During the year ended
December 31, 2014, our aggregate investment in securities decreased $53 million. Holdings of U.S. Government and agency obligations
decreased $28 million, mortgage-backed securities decreased $24 million, corporate bonds decreased $18 million and a there was small net
decrease in asset-backed securities. Partially offsetting these decreases was a net increase in municipal bonds of $18 million.
U.S. Government and Agency Obligations: Our portfolio of U.S. Government and agency obligations had a carrying value of $33 million (also
with an amortized cost of $33 million) at December 31, 2014, a weighted average contractual maturity of 4.1 years and a weighted average
coupon rate of 1.42%. Most of the U.S. Government and agency obligations we own include call features which allow the issuing agency the
right to call the securities at various dates prior to the final maturity. Certain agency obligations also include step-up provisions which provide
for periodic increases in the coupon rate if the call options are not exercised.
Mortgage-Backed Obligations: At December 31, 2014, our mortgage-backed and mortgage-related securities had a carrying value of $326
million ($325 million at amortized cost, with a fair value adjustment of $1 million). The weighted average coupon rate of these securities was
2.51% and the weighted average contractual maturity was 8.0 years, although we receive principal payments on these securities each period
resulting in a much shorter expected average life. As of December 31, 2014, 98% of the mortgage-backed and mortgage-related securities pay
interest at a fixed rate and 2% pay at an adjustable-interest rate.
Municipal Bonds: The carrying value of our tax-exempt bonds at December 31, 2014 was $142 million (also with an amortized cost of $142
million), and was comprised of general obligation bonds (i.e., backed by the general credit of the issuer) and revenue bonds (i.e., backed by
revenues from the specific project being financed) issued by cities and counties and various housing authorities, and hospital, school, water and
sanitation districts located in the states of Washington, Oregon and Idaho, our primary service area. We also had taxable bonds in our municipal
bond portfolio, which at December 31, 2014 had a carrying value of $30 million (also $30 million at amortized cost). Many of our qualifying
municipal bonds are not rated by a nationally recognized credit rating agency due to the smaller size of the total issuance and a portion of these
bonds have been acquired through direct private placement by the issuers. We have not experienced any defaults or payment deferrals on our
municipal bonds. At December 31, 2014, our municipal bond portfolio, including taxable and tax-exempt, had a weighted average maturity of
approximately 10.8 years and a weighted average coupon rate of 4.31%.
Corporate Bonds: Our corporate bond portfolio, which had a carrying value of $26 million ($35 million at amortized cost, with a fair value
adjustment of $9 million) at December 31, 2014, was comprised principally of long-term adjustable-rate capital securities issued by financial
institutions, including single issuers trust preferred securities and collateralized debt obligations secured by pools of trust preferred securities
issued by bank holding companies and insurance companies. The market for these capital securities deteriorated significantly in 2008 and 2009
and in our opinion is still not currently functioning in a meaningful manner. As a result, the fair value estimates for many of these securities are
more subjective than in periods before 2008 when they were acquired. Nonetheless, it is apparent that the values have declined appreciably
since purchase, which is reflected in our financial statements and results of operations, although values have recently improved and we had a
$1.0 million recovery during the year ended December 31, 2013 on certain collateralized debt obligations that had previously been written off.
In addition, during 2014 we had approximately $5.1 million of recovery in our fair value adjustments as a result of the full payoff of two
investments in similar collateralized debt obligations that had previously been valued substantially below their amortized cost. (See “Critical
Accounting Policies” above and Note 22 of the Notes to the Consolidated Financial Statements.) At December 31, 2014, the portfolio had a
weighted average maturity of 18.7 years and a weighted average coupon rate of 2.08%.
48
Asset-Backed Securities: At December 31, 2014, our asset-backed securities portfolio had a carrying value of $26 million (also with an amortized
cost of $26 million), and was comprised of securitized pools of student loans issued or guaranteed by the Student Loan Marketing Association
(SLMA) and credit card receivables. The weighted average coupon rate of these securities was 1.86% and the weighted average contractual
maturity was 8.1 years. Approximately 62% of these securities have adjustable interest rates tied to three-month LIBOR while the remaining
securities have fixed interest rates.
The following tables set forth certain information regarding carrying values and percentage of total carrying values of our portfolio of securities
—trading and securities—available-for-sale, both carried at estimated fair market value, and securities—held-to-maturity, carried at amortized
cost as of December 31, 2014, 2013 and 2012 (dollars in thousands):
Table 1: Securities—Trading
2014
December 31
2013
2012
Carrying
Value
Percent of
Total
Carrying
Value
Percent of
Total
Carrying
Value
Percent of
Total
U.S. Government and agency obligations
$
1,505
3.7% $
1,481
2.4% $
1,637
2.3%
Municipal bonds:
Tax exempt
Corporate bonds
Mortgage-backed or related securities:
1-4 residential agency guaranteed
Multifamily, agency guaranteed
Total mortgage-backed or related securities
Equity securities
1,440
19,118
8,726
9,410
18,136
59
3.6
47.5
21.7
23.4
45.1
0.1
5,023
35,140
11,230
9,530
20,760
68
8.0
56.2
18.0
15.3
33.3
0.1
5,684
35,741
17,911
10,196
28,107
63
8.0
50.2
25.1
14.3
39.4
0.1
Total securities—trading
$
40,258
100.0% $
62,472
100.0% $
71,232
100.0%
Table 2: Securities—Available-for-Sale
2014
December 31
2013
2012
Carrying
Value
Percent of
Total
Carrying
Value
Percent of
Total
Carrying
Value
Percent of
Total
U.S. Government and agency obligations
$
29,770
7.2% $
58,660
12.5% $
338,971
72.8%
Municipal bonds:
Taxable
Tax exempt
Total municipal bonds
Corporate bonds
Mortgage-backed or related securities:
1-4 residential agency guaranteed
1-4 residential other
Multifamily agency guaranteed
Multifamily other
Total mortgage-backed or related securities
Asset-backed securities:
SLMA
Other asset-backed securities
Total asset-backed securities
16,578
33,450
50,028
5,018
48,519
713
241,081
10,497
300,810
15,629
9,766
25,395
4.0
8.2
12.2
1.2
11.8
0.2
58.7
2.5
73.2
3.8
2.4
6.2
23,664
29,191
52,855
6,964
46,887
1,051
268,438
10,234
326,610
15,681
9,510
25,191
5.0
6.2
11.2
1.5
10.0
0.2
57.1
2.2
69.5
3.3
2.0
5.3
10,581
16,729
27,310
6,260
70,500
1,835
20,919
—
93,254
—
—
—
2.3
3.6
5.9
1.3
15.1
0.4
4.5
—
20.0
—
—
—
Total securities—available-for-sale
$
411,021
100.0% $
470,280
100.0% $
465,795
100.0%
49
Table 3: Securities—Held-to-Maturity
2014
December 31
2013
2012
Carrying
Value
Percent of
Total
Carrying
Value
Percent of
Total
Carrying
Value
Percent of
Total
U.S. Government and agency obligations
$
2,146
1.6% $
1,186
1.2% $
—
—%
Municipal bonds:
Taxable
Tax exempt
Total municipal bonds
Corporate bonds
Mortgage-backed or related securities:
12,988
106,963
119,951
1,800
9.9
81.5
91.4
1.4
10,552
85,374
95,926
2,050
10.3
83.3
93.6
2.0
7,496
66,692
74,188
1,250
9.9
88.4
98.3
1.7
Multifamily, agency guaranteed
5,781
4.4
3,351
3.2
—
—
Total securities—held-to-maturity
Estimated market value
$
$
131,258
100.0% $
102,513
100.0% $
75,438
100.0%
137,608
$
103,610
$
80,107
50
The following table shows the maturity or period to repricing of our consolidated portfolio of securities—trading at fair value as of December 31, 2014 (dollars in thousands):
Table 4: Securities—Trading Maturity/Repricing and Rates
Securities—Trading at December 31, 2014
One Year or Less
After One to Five
Years
After Five to Ten Years
After Ten to Twenty
Years
After Twenty Years
Total
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
$
—
—% $
—
—% $
1,504
5.27% $
—
—% $
—
—% $
1,504
5.27%
U.S. Government and agency
obligations:
Fixed-rate
Municipal bonds:
Fixed-rate taxable
1,094
3.64
345
3.98
Corporate bonds:
Adjustable-rate
Mortgage-backed or related
securities:
Fixed-rate
Adjustable-rate
Equity securities
Total securities—trading—
carrying value
Total securities—trading—
amortized cost
14,398
2.55
4,721
2.33
—
2,491
2,491
59
—
2.35
2.35
—
6,752
—
6,752
—
4.87
—
4.87
—
—
—
6,223
—
6,223
—
—
—
4.71
—
7.71
—
—
—
2,671
—
2,671
—
—
—
5.00
—
5.00
—
$ 18,042
2.58
$ 11,818
3.64
$ 25,421
$ 12,595
$
$
7,727
4.81
7,035
$
$
2,671
5.00
2,429
$
$
51
—
—
—
—
—
—
—
—
—
—
—
—
—
1,439
3.72
19,119
2.51
15,646
2,491
18,137
59
4.83
2.35
4.48
—
— $ 40,258
3.31
—
$ 47,480
The following table shows the maturity or period to repricing of our consolidated portfolio of securities—available-for-sale at fair value as of December 31, 2014 (dollars in thousands):
Table 5: Securities—Available-for-Sale Maturity/Repricing and Rates
Securities—Available-for-Sale at December 31, 2014
One Year or Less
After One to Five
Years
After Five to Ten Years
After Ten to Twenty
Years
After Twenty Years
Total
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
$
—
16,658
16,658
—% $ 11,548
1,030
12,578
0.91
0.91
1.03% $
1.19
1.04
4,088
5,276
9,364
0.88
1.21
1.07
12,029
15,740
27,769
1.44
1.19
1.30
—
—
—
461
—
461
—% $
—
—
534
—
534
2.20
—
2.20
—
8,414
8,414
1.47% $
—
1.47
—
1.86
1.86
—
—
—
—
4,020
4,020
—% $ 12,082
17,688
—
29,770
—
—
2.02
2.02
16,578
33,450
50,028
1.05%
0.93
0.98
1.32
1.47
1.42
5,018
1.03
—
—
—
—
—
—
—
—
5,018
1.03
—
3,293
3,293
—
15,629
15,629
—
1.32
1.32
—
1.34
1.34
220,434
—
220,434
—
—
—
1.29
—
1.29
—
—
—
14,736
—
14,736
9,766
—
9,766
2.80
—
2.80
1.65
—
1.65
4,931
—
4,931
—
—
—
1.51
—
1.51
—
—
—
57,416
—
57,416
—
—
—
2.31
—
2.31
—
—
—
297,517
3,293
300,810
9,766
15,629
25,395
1.56
1.32
1.56
1.65
1.34
1.46
$ 49,962
1.11
$ 260,781
1.28
$ 24,963
2.33
$ 13,879
1.72
$ 61,436
2.29
$ 411,021
1.49
U.S. Government and agency
obligations:
Fixed-rate
Adjustable-rate
Municipal bonds:
Fixed-rate taxable
Fixed-rate tax exempt (1)
Corporate bonds:
Adjustable-rate
Mortgage-backed or related
securities:
Fixed-rate
Adjustable-rate
Asset-backed securities:
Fixed-rate
Adjustable-rate
Total securities—available-for-
sale—carrying value
Total securities—available-for sale
amortized cost
$ 49,783
$ 261,930
$ 24,963
$ 13,846
$ 60,902
$ 411,424
(1) Yields on tax-exempt municipal bonds are not calculated as tax equivalent.
52
U.S. Government and agency
obligations:
Fixed-rate
Municipal bonds:
Fixed-rate taxable
Fixed-rate tax exempt (1)
Corporate bonds:
Fixed-rate
Mortgage-backed or related
securities:
The following table shows the maturity or period to repricing of our consolidated portfolio of securities—held-to-maturity as of December 31, 2014 (dollars in thousands):
Table 6: Securities—Held-to-Maturity Maturity/Repricing and Rates
Securities—Held-to-Maturity at December 31, 2014
One Year or Less
After One to Five
Years
After Five to Ten Years
After Ten to Twenty
Years
After Twenty Years
Total
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
$
—
—% $
1,000
1.13% $
—
—% $
1,146
1.20% $
—
—% $
2,146
1.17%
100
417
517
4.15
3.22
3.40
4,963
8,499
13,462
3.54
2.30
2.76
634
16,768
17,402
2.50
2.78
2.77
7,290
67,593
74,883
3.98
3.75
3.77
—
13,687
13,687
—
2.89
2.89
12,987
106,964
119,951
3.74
3.37
3.41
250
3.00
500
3.00
1,050
3.52
—
—
—
—
—
1,800
3.31
—
1,580
2.26
7,361
2.63
Fixed-rate
—
—
—
—
5,781
2.73
Total securities held-to-maturity—
carrying value
Total securities held-to-maturity—
estimated market value
$
$
767
3.27
$ 14,962
2.66
$ 24,233
2.80
$ 76,029
3.74
$ 15,267
2.83
$ 131,258
3.33
771
$ 15,184
$ 24,678
$ 81,361
$ 15,614
$ 137,608
(1) Yields on tax-exempt municipal bonds are not calculated as tax equivalent.
53
Loans and Lending. Our loan portfolio increased $415 million, or 12%, during the year ended December 31, 2014, compared to an increase
of $183 million, or 6%, during the year ended December 31, 2013. While we originate a variety of loans, our ability to originate each type of
loan is dependent upon the relative customer demand and competition in each market we serve. We have implemented strategies designed to
capture more market share and achieve increases in targeted loans and our loan originations increased meaningfully in 2013 and 2014. Nonetheless,
looking forward, new loan originations and portfolio balances will continue to be significantly affected by the course of economic activity. For
the years ended December 31, 2014, 2013 and 2012, we originated loans, net of repayments and charge-offs, of $506 million, $595 million and
$458 million, respectively. The level of net originations during all three years was significantly impacted by a substantial amount of loan
repayments. We generally sell a significant portion of our newly originated one- to four-family residential mortgage loans to secondary market
purchasers. Proceeds from sales of loans for the years ended December 31, 2014, 2013 and 2012 totaled $379 million, $463 million and $515
million, respectively. See “Loan Servicing Portfolio” below. Loans held for sale were unchanged at $3 million at both December 31, 2014,
and 2013.
At various times, we also purchase whole loans and participation interests in loans. During the years ended December 31, 2014, 2013 and 2012,
we purchased $194 million, $49 million and $18 million, respectively, of loans and loan participation interests. The significant increase in loan
purchases in the current year primarily reflects participations in commercial real estate loans.
One- to Four-Family Residential Real Estate Lending: At December 31, 2014, $540 million, or 14%, of our loan portfolio, consisted of permanent
loans on one- to four-family residences. We are active originators of one- to four-family residential loans in most communities where we have
established offices in Washington, Oregon and Idaho. Our originations of one- to four-family residential loans were particularly strong in 2012
and 2013; however, since most of these new loans were sold in the secondary market and principal repayments on existing loans were substantial,
our balance of loans on one- to four-family residences decreased in those years. Our one- to four-family loan originations totaled $410 million
for the year ended December 31, 2014, compared to $511 million and $538 million for the years ended December 31, 2013 and 2012, respectively.
Despite somewhat lower origination volume and continued loan sales, our balance of loans for one- to four-family residences increased by $10
million in 2014, largely as a result of loans acquired as a part of the Branch Acquisition.
Construction and Land Lending: Our construction loan originations have increased for each of the past three years as builders have adjusted
to new price levels and certain sub-markets have become very active. As a result, one- to four-family construction loans have increased by $17
million in 2012, $40 million in 2013, and $19 million in 2014, to total $220 million at December 31, 2014. In addition, during the year ended
December 31, 2014, land development loans (both residential and commercial) increased by $27 million to $114 million at December 31,
2014. Our construction and land development loan originations totaled $710 million for the year ended December 31, 2014, compared to $681
million for the year ended December 31, 2013, and $492 million for the year ended December 31, 2012. At December 31, 2014, construction
and land loans totaled $411 million (including $220 million of one- to four-family construction loans, $102 million of residential land or land
development loans, $78 million of commercial and multifamily real estate construction loans and $11 million of commercial land or land
development loans), or 11% of total loans, compared to $351 million, or 10%, at December 31, 2013. The geographic distribution of our
construction and land development loans is approximately 38% in the greater Puget Sound market and 38% in the greater Portland, Oregon
market, with the remaining 24% in the various eastern Washington, eastern Oregon and western Idaho markets we serve. At December 31, 2014,
only $1 million of these loans were non-performing. For the years ended December 31, 2014 and 2013, performing construction loans made a
very important contribution to our net interest income and profitability.
Commercial and Multifamily Real Estate Lending: We also originate loans secured by multifamily and commercial real estate. Multifamily
and commercial real estate loans originated by us are both fixed- and adjustable-rate loans generally with intermediate terms of five to ten
years. Our commercial real estate portfolio consists of loans on a variety of property types with no significant concentrations by property type,
borrowers or locations. We experienced reasonably strong demand for both multifamily and commercial real estate loans in 2014, and total
balances in these categories increased $239 million or 18% from the prior year end. At December 31, 2014, our loan portfolio included $1.404
billion of commercial real estate loans, or 37% of the total loan portfolio. Our portfolio of multifamily loans was much smaller, at $168 million,
or 4% of total loans.
Commercial Business Lending: We are active in small- to medium-sized business lending. In addition to providing earning assets, this type of
lending has helped increase our deposit base. For 2014, our production levels for targeted business loans were good and resulted in a $42 million,
or 6%, increase in commercial business loans. Although line utilizations remain low, the increase in commercial business loans is an encouraging
sign of improving economic activity as well as additional successful sales results for our lending offices. At December 31, 2014, commercial
business loans totaled $724 million, or 19% of total loans, compared to $682 million, or 20%, at December 31, 2013.
Agricultural Lending: Agriculture is a major industry in many Washington, Oregon and Idaho locations in our service area. While agricultural
loans are not a large part of our portfolio, we routinely make agricultural loans to borrowers with a strong capital base, sufficient management
depth, proven ability to operate through agricultural cycles, reliable cash flows and adequate financial reporting. Payments on agricultural loans
depend, to a large degree, on the results of operation of the related farm entity. The repayment is also subject to other economic and weather
conditions as well as market prices for agricultural products, which can be highly volatile at times. Generally, in recent years, weather conditions,
production levels and market prices have been good for most of our agricultural borrowers. Our 2014 production levels for agricultural loans
were consistent with recent years and at December 31, 2014, agricultural loans totaled $238 million, or 6% of the loan portfolio, compared to
$228 million, or 7%, at December 31, 2013.
Consumer and Other Lending: We originate a variety of consumer loans, including home equity lines of credit, automobile, recreational vehicle
and boat loans, credit cards and loans secured by deposit accounts. Consumer lending has traditionally been a modest part of our business with
loans made primarily to accommodate our existing customer base. In recent years, including 2014, demand for consumer loans has been
54
restrained; however, outstanding balances have increased modestly despite mortgage refinancing activity that has resulted in repayments on
home equity lines of credit. The significant increase in consumer loan balances in 2014 largely reflects loans acquired as part of the Branch
Acquisition, although we also experienced a slow down in the payoff of consumer loans related to mortgage refinance transactions. The modest
increase in 2012 and 2013 was due principally to the purchase during the fourth quarter of 2012 of approximately $13 million of consumer loans
originated by another northwest financial institution that are secured by recreational boats, and in 2013 the purchase of an additional $9 million
of similar boat loans from that lender. To date the performance of these purchased loans has been in accordance with our expectations as the
amount of non-performing boat loans is insignificant. At December 31, 2014, our consumer loans were $54 million greater compared with the
prior year. At December 31, 2014, we had $349 million, or 9% of our loan portfolio, in consumer loans, compared to $295 million, or 9%, at
December 31, 2013. As of December 31, 2014, 64% of our consumer loans were secured by one- to four-family real estate, including home
equity lines of credit. Credit card balances totaled $24 million at December 31, 2014 compared to $22 million a year earlier.
Loan Servicing Portfolio: At December 31, 2014, we were servicing $1.391 billion of loans for others and held $6.7 million in escrow for our
portfolio of loans serviced for others. The loan servicing portfolio at December 31, 2014 was composed of $847 million of Freddie Mac residential
mortgage loans, $415 million of Fannie Mae residential mortgage loans and $129 million of both residential and non-residential mortgage loans
serviced for a variety of private investors. The portfolio included loans secured by property located primarily in the states of Washington, Oregon
and Idaho. For the year ended December 31, 2014, we recognized $1.1 million of loan servicing fees in our results of operations, which was
net of $2.1 million of amortization for mortgage servicing rights (MSRs) and included no impairment charges or reversals for a valuation
adjustment to MSRs.
Mortgage Servicing Rights: For the years ended December 31, 2014, 2013 and 2012, we capitalized $3.0 million, $2.9 million, and $3.7 million,
respectively, of MSRs relating to loans sold with servicing retained. No MSRs were purchased in those periods. Amortization of MSRs for the
years ended December 31, 2014, 2013 and 2012 was $2.1 million, $2.4 million, and $2.6 million, respectively. Management periodically
evaluates the estimates and assumptions used to determine the carrying values of MSRs and the amortization of MSRs. At December 31, 2014,
our MSRs were carried at a value of $9.0 million, net of amortization, compared to $8.1 million at December 31, 2013.
55
The following table sets forth the composition of the Company’s loan portfolio, including loans held for sale, by type of loan as of the dates indicated (dollars in thousands):
Table 7: Loan Portfolio Analysis
2014
2013
December 31
2012
2011
2010
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
Commercial real estate:
Owner-occupied
Investment properties
Multifamily real estate
Commercial construction
Multifamily construction
One- to four-family construction
Land and land development:
Residential
Commercial
Commercial business
Agricultural business, including secured by
farmland
One- to four-family real estate
Consumer secured by one- to four-family real
estate
Consumer—other
$
546,783
856,942
167,524
17,337
60,193
219,889
102,435
11,152
723,964
238,499
539,894
222,205
127,003
14.3% $
22.3
4.4
0.4
1.6
5.7
2.7
0.3
18.9
6.2
14.1
5.8
3.3
502,601
692,457
137,153
12,168
52,081
200,864
75,695
10,450
682,169
228,291
529,494
173,188
121,834
14.7% $
20.2
4.0
0.4
1.5
5.9
2.2
0.3
20.0
6.7
15.5
5.1
3.5
489,581
583,641
137,504
30,229
22,581
160,815
77,010
13,982
618,049
230,031
581,670
170,123
120,498
15.1% $
18.0
4.3
0.9
0.7
5.0
2.4
0.4
19.1
7.1
18.0
5.3
3.7
469,806
621,622
139,710
42,391
19,436
144,177
97,491
15,197
601,440
218,171
642,501
181,049
103,347
14.2% $
18.9
4.2
1.3
0.6
4.4
3.0
0.5
18.2
6.6
19.5
5.5
3.1
515,093
550,610
134,634
62,707
27,394
153,383
167,764
32,386
585,457
204,968
682,924
186,036
99,761
15.1%
16.2
4.0
1.8
0.8
4.5
4.9
1.0
17.2
6.0
20.1
5.5
2.9
Total loans outstanding
3,833,820
100.0%
3,418,445
100.0%
3,235,714
100.0%
3,296,338
100.0%
3,403,117
100.0%
Less allowance for loan losses
(75,907)
(74,258)
(77,491)
(82,912)
(97,401)
Net loans
$ 3,757,913
$ 3,344,187
$ 3,158,223
$ 3,213,426
$ 3,305,716
56
The following table sets forth the Company’s loans by geographic concentration at December 31, 2014 (dollars in thousands):
Table 8: Loans by Geographic Concentration
Commercial real estate:
Owner-occupied
Investment properties
Multifamily real estate
Commercial construction
Multifamily construction
One- to four-family construction
Land and land development:
Residential
Commercial
Commercial business
Agricultural business, including secured by farmland
One-to four-family real estate
Consumer secured by one- to four-family real estate
Consumer—other
Total loans outstanding
Percent of total loans
Washington
Oregon
Idaho
Other
Total
$
$
383,950
523,806
116,793
15,599
50,931
129,499
56,675
5,781
397,103
119,617
341,944
136,888
79,520
$
86,937
124,604
35,527
—
8,850
88,468
44,707
2,529
125,235
69,843
172,974
69,172
40,803
56,348
60,053
14,759
1,738
412
1,922
1,053
2,842
85,580
48,997
24,223
14,984
6,243
$
19,548
148,479
445
—
—
—
—
—
116,046
42
753
1,161
437
$
546,783
856,942
167,524
17,337
60,193
219,889
102,435
11,152
723,964
238,499
539,894
222,205
127,003
$ 2,358,106
$
869,649
$
319,154
$
286,911
$ 3,833,820
61.5%
22.7%
8.3%
7.5%
100.0%
The following table sets forth certain information at December 31, 2014 regarding the dollar amount of loans maturing in our portfolio based
on their contractual terms to maturity, but does not include scheduled payments or potential prepayments. Demand loans, loans having no stated
schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. Loan balances are net of unamortized
premiums and discounts, include loans held for sale and exclude the allowance for loan losses (in thousands):
Table 9: Loans by Maturity
Maturing in
One Year or
Less
Maturing
After One to
Three Years
Maturing
After Three
to Five Years
Maturing
After Five to
Ten Years
Maturing
After Ten
Years
Total
$
Commercial real estate:
Owner-occupied
Investment properties
Multifamily real estate
Commercial construction
Multifamily construction
One- to four-family construction
Land and land development:
Residential
Commercial
Commercial business
Agricultural business, including secured
by farmland
One- to four-family real estate
Consumer secured by one- to four-family
real estate
Consumer—other
$
16,763
43,555
30,452
8,540
24,828
202,524
58,716
3,969
323,409
114,949
12,815
1,730
13,062
$
57,378
91,337
14,255
6,943
35,365
14,102
40,303
4,884
127,129
24,512
13,474
3,261
12,196
$
64,017
96,676
5,716
—
—
164
3,260
1,292
114,875
29,300
15,548
3,039
11,658
$
307,739
450,446
69,872
1,854
—
697
—
489
116,263
58,766
32,535
14,979
31,690
$
100,886
174,928
47,229
—
—
2,402
156
518
42,288
10,972
465,522
199,196
58,397
546,783
856,942
167,524
17,337
60,193
219,889
102,435
11,152
723,964
238,499
539,894
222,205
127,003
Total loans
$
855,312
$
445,139
$
345,545
$ 1,085,330
$ 1,102,494
$ 3,833,820
Contractual maturities of loans do not necessarily reflect the actual life of such assets. The average life of loans typically is substantially less
than their contractual maturities because of principal repayments and prepayments. In addition, due-on-sale clauses on certain mortgage loans
generally give us the right to declare loans immediately due and payable in the event that the borrower sells the real property subject to the
mortgage and the loan is not repaid. The average life of mortgage loans tends to increase; however, when current mortgage loan market rates
are substantially higher than rates on existing mortgage loans and, conversely, decreases when rates on existing mortgage loans are substantially
higher than current mortgage loan market rates.
57
The following table sets forth the dollar amount of all loans maturing after December 31, 2015 which have fixed interest rates and floating or
adjustable interest rates (in thousands):
Table 10: Loans Maturing after One Year
Commercial real estate:
Owner-occupied
Investment properties
Multifamily real estate
Commercial construction
Multifamily construction
One- to four-family construction
Land and land development:
Residential
Commercial
Commercial business
Agricultural business, including secured by farmland
One- to four-family real estate
Consumer secured by one- to four-family real estate
Consumer—other
Fixed Rates
Floating or
Adjustable
Rates
Total
$
$
89,695
303,711
57,447
4,253
18,503
2,435
1,316
1,562
205,883
54,612
352,313
14,160
96,810
$
440,325
509,676
79,624
4,545
16,862
14,930
42,403
5,621
194,672
68,938
174,766
206,314
17,132
530,020
813,387
137,071
8,798
35,365
17,365
43,719
7,183
400,555
123,550
527,079
220,474
113,942
Total loans maturing after one year
$
1,202,700
$
1,775,808
$
2,978,508
Deposits. We made further progress in 2014 implementing our strategies to strengthen our franchise by remixing our deposits away from higher
cost certificates of deposit and emphasizing core deposit activity in non-interest-bearing and other transaction and savings accounts. Increasing
core deposits (transaction and savings accounts) is a fundamental element of our business strategy. This strategy continues to improve our cost
of funds and increase the opportunity for deposit fee revenues, while stabilizing our funding base. Total deposits increased $281 million, or 8%,
to $3.899 billion at December 31, 2014 from $3.618 billion at December 31, 2013, non-interest-bearing deposits increased by $184 million, or
16%, to $1.299 billion at year end from $1.115 billion at December 31, 2013, and interest-bearing transaction and savings accounts increased
by $200 million, or 12%, to $1.830 billion at December 31, 2014 compared to $1.630 billion a year earlier. This core deposit growth augmented
similarly strong results in 2013 and coupled with significantly better pricing was primarily responsible for the reduced deposit costs and helped
us to achieve the strong net interest margin we experienced in 2014. Offsetting these increases, certificates of deposit decreased $102 million,
or 12%, to $771 million at December 31, 2014 from $873 million at December 31, 2013. The decrease in certificate balances in 2014 is net of
a $508,000 increase in brokered deposits to $5 million at December 31, 2014. Most of the decrease in certificates of deposit reflects a reduction
in retail certificates as a result of management’s pricing decisions designed to allow maturing higher priced certificates to migrate off the balance
sheet or into core deposit accounts. In addition to our organic growth in deposits, the Branch Acquisition resulted in a $207 million increase in
deposits, including $69 million in non-interest bearing deposits, $105 million in interest-bearing transaction and savings accounts, and $33
million in certificates of deposit as of December 31, 2014.
58
The following table sets forth the balances of deposits in the various types of accounts offered by the Banks at the dates indicated (dollars in thousands):
Table 11: Deposits
Non-interest-bearing checking
Interest-bearing checking
Regular savings
Money market
Total transaction and savings accounts
Certificates maturing:
Within one year
After one year, but within two years
After two years, but within five years
After five years
Total certificate accounts
December 31
2014
Percent of
Total
Increase
(Decrease)
Amount
2013
Percent of
Total
2012
Increase
(Decrease)
Amount
Percent of
Total
33.3% $
11.3
23.1
12.5
80.2
183,520
16,570
102,378
80,735
383,203
$ 1,115,346
422,910
798,764
408,211
2,745,231
30.8% $
11.7
22.1
11.3
75.9
$
134,106
12,594
70,807
(787)
216,720
981,240
410,316
727,957
408,998
2,528,511
Amount
$ 1,298,866
439,480
901,142
488,946
3,128,434
564,501
117,724
83,732
4,559
770,516
14.5
3.1
2.1
0.1
19.8
(95,893)
(65)
(7,148)
927
(102,179)
660,394
117,789
90,880
3,632
872,695
18.2
3.3
2.5
0.1
24.1
(99,232)
(35,582)
(21,892)
108
(156,598)
759,626
153,371
112,772
3,524
1,029,293
27.6%
11.5
20.5
11.5
71.1
21.3
4.3
3.2
0.1
28.9
Total Deposits
$ 3,898,950
100.0% $
281,024
$ 3,617,926
100.0% $
60,122
$ 3,557,804
100.0%
Included in Total Deposits:
Public transaction accounts
Public interest-bearing certificates
Total public deposits
Total brokered deposits
$
$
$
102,854
35,346
138,200
2.6% $
0.9
15,333
(16,119)
$
87,521
51,465
2.4% $
1.4
$
7,566
(9,053)
79,955
60,518
3.5% $
(786) $
138,986
3.8% $
(1,487) $
140,473
2.2%
1.7
3.9%
4,799
0.1% $
508
$
4,291
0.1% $
(11,411) $
15,702
0.4%
59
The following table indicates the amount of the Banks’ certificates of deposit with balances equal to or greater than $100,000 by time remaining
until maturity as of December 31, 2014 (in thousands):
Table 12: Maturity Period—$100,000 or greater CDs
Maturing in three months or less
Maturing after three months through six months
Maturing after six months through twelve months
Maturing after twelve months
Total
Certificates of
Deposit $100,000
or Greater
$
$
117,197
55,819
129,209
110,102
412,327
The following table provides additional detail on geographic concentrations of our deposits at December 31, 2014 (in thousands):
Table 13: Geographic Concentration of Deposits
Total deposits
Percent of total deposits
Washington
Oregon
Idaho
Total
$
2,789,542
$
865,937
$
243,471
$
3,898,950
71.6%
22.2%
6.2%
100.0%
Borrowings. The FHLB-Seattle serves as our primary borrowing source. To access funds, we are required to own a sufficient level of capital
stock in the FHLB-Seattle and may apply for advances on the security of such stock and certain of our mortgage loans and securities provided
that certain creditworthiness standards have been met. At December 31, 2014, we had $32 million of borrowings from the FHLB-Seattle (at
fair value) at a weighted average rate of 0.27%, an increase of $5 million compared to a year earlier. Also at December 31, 2014, we had an
investment of $27 million in FHLB-Seattle capital stock. At that date, Banner Bank was authorized by the FHLB-Seattle to borrow up to $901
million under a blanket floating lien security agreement, while Islanders Bank was approved to borrow up to $23 million under a similar agreement.
The following table provides additional detail on our FHLB advances as of December 31, 2014 and 2013 (dollars in thousands):
Table 14: FHLB Advances Outstanding
December 31
2014
2013
Amount
Weighted
Average Rate
Amount
Weighted
Average Rate
Maturing in one year or less
Maturing after one year through three years
Maturing after three years through five years
Maturing after five years
$
Total FHLB advances, at par
Fair value adjustment
Total FHLB advances, carried at fair value
$
32,000
—
—
196
32,196
54
32,250
0.27% $
—
—
5.94
0.27
$
27,000
—
—
203
27,203
47
27,250
0.23%
—
—
5.94
0.27
At certain times the Federal Reserve Bank has also served as an important source of borrowings. The Federal Reserve Bank provides credit
based upon acceptable loan collateral, which includes certain loan types not eligible for pledging to the FHLB-Seattle. At December 31, 2014,
based upon our available unencumbered collateral, Banner Bank was eligible to borrow $639 million from the Federal Reserve Bank; however,
at that date we had no funds borrowed under this arrangement.
We also issue retail repurchase agreements to customers that are primarily related to customer cash management accounts and in the past have
borrowed funds through the use of secured wholesale repurchase agreements with securities brokers. In each case, the repurchase agreements
are generally due within 90 days. At December 31, 2014, retail repurchase agreements totaling $77 million, with a weighted average rate of
0.20%, were secured by a pledge of certain mortgage-backed securities and agency securities. Retail repurchase agreement balances, which are
primarily associated with sweep account arrangements, decreased $6 million, or 7%, from the 2013 year-end balance. We had no outstanding
borrowings under wholesale repurchase agreements at December 31, 2014 or 2013.
60
We have issued an aggregate of $120 million, net of repayments, of trust preferred securities (TPS) since 2002. The junior subordinated debentures
associated with the TPS have been recorded as liabilities on our Consolidated Statements of Financial Condition, although portions of the TPS
qualify as Tier 1 or Tier II capital for regulatory capital purposes. The junior subordinated debentures are carried at fair value on our Consolidated
Statements of Financial Condition and have an estimated fair value of $78 million at December 31, 2014. At December 31, 2014, the TPS had
a weighted average rate of 2.32%. See Notes 1 and 12 of the Notes to the Consolidated Financial Statements for additional information with
respect to the TPS.
Asset Quality. Achieving and maintaining a moderate risk profile by employing appropriate underwriting standards, avoiding excessive asset
concentrations and aggressively managing troubled assets has been and will continue to be a primary focus for us. As a result, our non-performing
assets declined substantially over the last three years. All of our key credit quality metrics have improved compared to a year ago, and as a result
our collection costs have been further reduced. In addition, our reserve levels are substantial and, as a result of our impairment analysis and
charge-off actions, reflect current appraisals and valuation estimates as well as recent regulatory examination results. While our non-performing
assets and credit costs have been materially reduced, we continue to be actively engaged with our borrowers in resolving remaining problem
assets and with the effective management of real estate owned as a result of foreclosures.
Non-performing assets decreased to $20 million, or 0.43% of total assets, at December 31, 2014, from $29 million, or 0.66% of total assets, at
December 31, 2013, and $50 million, or 1.18% of total assets, at December 31, 2012. Construction and land development loans, including
related REO, represented approximately 14% of our non-performing assets at December 31, 2014. Reflecting lingering weakness in the economy
and property values which now have generally stabilized but are lower than when many of the related loans were originated, we continued to
maintain a substantial allowance for loan losses at year end even though non-performing loans declined. At December 31, 2014, our allowance
for loan losses was $76 million, or 1.98% of total loans and 454% of non-performing loans, compared to $74 million, or 2.17% of total loans
and 300% of non-performing loans at December 31, 2013. Included in our allowance at December 31, 2014 was an unallocated portion of $5
million, which is based upon our evaluation of various factors that are not directly measured in the determination of the formula and specific
allowances. We continue to believe our level of non-performing loans and assets, which declined significantly during the past two years, is
manageable and further believe that we have sufficient capital and human resources to manage the collection of our non-performing assets in
an orderly fashion.
The primary components of the $20 million in non-performing assets are $15 million in nonaccrual loans and $3 million in REO and other
repossessed assets. The geographic distribution of non-performing assets included approximately $8 million, or 42%, in the Puget Sound region,
$4 million, or 21%, in the greater Portland market area, $1 million, or 4%, in the greater Boise market area, and $7 million, or 33%, in other
areas of Washington, Oregon and Idaho.
Loans are reported as restructured when we grant concessions to a borrower experiencing financial difficulties that we would not otherwise
consider. As a result of these concessions, restructured loans or TDRs are impaired as the Banks will not collect all amounts due, both principal
and interest, in accordance with the terms of the original loan agreement. If any restructured loan becomes delinquent or other matters call into
question the borrower's ability to repay full interest and principal in accordance with the restructured terms, the restructured loan(s) would be
reclassified as nonaccrual. At December 31, 2014, we had $29 million of restructured loans currently performing under their restructured terms.
61
The following table sets forth information with respect to our non-performing assets and restructured loans, at the dates indicated (dollars in
thousands):
Table 15: Non-Performing Assets
Nonaccrual loans: (1)
Secured by real estate:
Commercial
Multifamily
Construction/land
One- to four-family
Commercial business
Agricultural business, including secured by farmland
Consumer
Loans more than 90 days delinquent, still on accrual:
Secured by real estate:
One- to four-family
Commercial business
Agricultural business, including secured by farmland
Consumer
December 31
2014
2013
2012
2011
2010
$
$
1,132
—
1,275
8,834
537
1,597
1,187
14,562
2,095
—
—
79
2,174
$
6,287
—
1,193
12,532
723
—
1,173
21,908
2,611
—
105
144
2,860
6,579
—
3,672
12,964
4,750
—
3,396
31,361
2,877
—
—
152
3,029
34,390
—
15,778
75
$
9,226
362
27,731
17,408
13,460
1,896
2,905
72,988
2,147
4
—
173
2,324
$
24,727
1,889
75,734
16,869
21,100
5,853
2,332
148,504
2,955
—
—
30
2,985
75,312
151,489
500
42,965
74
1,896
100,872
73
Total non-performing loans
16,736
24,768
Securities on nonaccrual
REO assets held for sale, net (2)
Other repossessed assets held for sale, net
—
3,352
76
—
4,044
115
Total non-performing assets
$
20,164
$
28,927
$
50,243
$ 118,851
$ 254,330
Total non-performing loans to net loans before allowance for
loan losses
Total non-performing loans to total assets
Total non-performing assets to total assets
Restructured loans (3)
Loans 30-89 days past due and on accrual
0.44%
0.35%
0.43%
0.72%
0.56%
0.66%
1.06%
0.81%
1.18%
2.28%
1.77%
2.79%
4.45%
3.44%
5.77%
$
$
29,154
8,387
$
$
47,428
8,784
$
$
57,462
11,685
$
$
54,533
9,962
$
$
60,115
28,847
(1)
Includes $2.3 million of non-accrual restructured loans. For the year ended December 31, 2014, $599,000 in interest income would have
been recorded had nonaccrual loans been current, and no interest income on these loans was included in net income for this period.
(2) Real estate acquired by us as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate held for sale until it is
sold. When property is acquired, it is recorded at the lower of the estimated fair value of the property, less expected selling costs, or the
carrying value of the defaulted loan. Subsequent to foreclosure, the property is carried at the lower of the foreclosed amount or net
realizable value. Upon receipt of a new appraisal and market analysis, the carrying value is written down through the establishment of
a specific reserve to the anticipated sales price, less selling and holding costs.
These loans are performing under their restructured terms.
(3)
In addition to the non-performing loans noted in Table 15 as of December 31, 2014, we had classified loans with an aggregate outstanding
balance of $82 million that are not on nonaccrual status with respect to which known information concerning possible credit problems with the
borrowers or the cash flows of the properties securing the respective loans has caused management to be concerned about the ability of the
borrowers to comply with present loan repayment terms. This may result in the future inclusion of such loans in the nonaccrual loan category.
62
The following table provides additional detail and geographic concentration of non-performing assets at December 31, 2014 (dollars in thousands):
Table 16: Non-Performing Assets by Geographic Concentration
Secured by real estate:
Commercial
Construction and land
Residential land acquisition & development
Residential land improved lots
Total construction and land
One- to four-family
Commercial business
Agricultural business, including secured by farmland
Consumer
Total non-performing loans
REO and repossessed assets
Washington
Oregon
Idaho
Total
$
1,095
$
— $
36
$
1,131
—
—
—
8,888
500
604
1,015
12,102
1,769
750
525
1,275
1,506
37
993
46
3,857
1,626
—
—
—
535
—
—
206
777
33
750
525
1,275
10,929
537
1,597
1,267
16,736
3,428
Total non-performing assets at end of the period
$
13,871
$
5,483
$
810
$
20,164
Percent of non-performing assets
68.8%
27.2%
4.0%
100.0%
In addition to the non-performing loans as of December 31, 2014, we had other classified loans with an aggregate outstanding balance of $82
million that are not on nonaccrual status with respect to which known information concerning possible credit problems with the borrowers or
the cash flows of the properties securing the respective loans has caused management to be concerned about the ability of the borrowers to
comply with present loan repayment terms. This may result in the future inclusion of such loans in the nonaccrual loan category.
Within our non-performing loans, we have no nonaccrual lending relationships with aggregate loan exposures in excess of $1 million as of
December 31, 2014. There were four non-performing lending relationships, each above $500,000, that collectively comprise $2.5 million, or
15% of our total non-performing loans as of December 31, 2014. At that date the single largest non-performing lending relationship consisted
of one $750,000 loan secured by real estate being developed for residential purposes in the greater Portland, Oregon area. The second largest
non-performing lending relationship consisted of one $701,000 loan secured by commercial real estate in the greater Seattle-Puget Sound area.
The third largest non-performing lending relationship consisted of one $552,000 loan secured by a residence on a 114 acre farm in southwestern
Oregon. The remaining balance of our non-performing loans consists of 123 lending relationships with borrowers located throughout our market
areas.
We record REO (acquired through a lending relationship) at fair value on a non-recurring basis. All REO properties are recorded at the lower
of the estimated fair value of the property, less estimate selling costs, or the carrying value of the loan. From time to time, non-recurring fair
value adjustments to REO are recorded to reflect partial write-downs based on an observable market price or current appraised value of property.
The individual carrying values of these assets are reviewed for impairment at least annually and any additional impairment charges are expensed
to operations. For the years ended December 31, 2014, 2013 and 2012, we recognized $36,000, $785,000 and $5.2 million, respectively, of
these impairment charges. During the years ended December 31, 2014, 2013 and 2012, we received net proceeds from the sale of REO of $4.9
million, $16.9 million and $41.0 million, respectively, and recorded net gains on those sales of $973,000, $2.5 million and $4.7 million,
respectively.
At December 31, 2014, we had $3.4 million of REO, the most significant components of which are a commercial office building in the greater
Spokane, Washington area with a book value of $935,000 and a subdivision in the greater Portland, Oregon area consisting of eight residential
buildable lots and 33.2 acres of undeveloped land with a book value of $798,000. All other REO holdings have individual book values of less
than $500,000. The geographic distribution of REO included approximately $1.6 million, or 48%, in the greater Portland market area, $935,000,
or 28%, in the greater Spokane market area, $567,000, or 17%, in the Puget Sound market area, $33,000, or 1%, in the greater Boise market
area, and $192,000, or 6%, in other areas of Washington, Oregon and Idaho.
63
Comparison of Results of Operations for the Years Ended December 31, 2014 and 2013
For the year ended December 31, 2014, we had net income and net income available to common shareholders of $54.2 million, or $2.79 per
diluted share. This compares to net income and net income available to common shareholders of $46.6 million, or $2.40 per diluted share, for
the year ended December 31, 2013. Our current year operating results continued to be influenced by very low interest rates which produced
downward pressure on asset yields. Nonetheless, significant growth in earning assets, as well as changes in the asset mix and further reductions
in funding costs combined to offset this yield pressure. In addition, credit costs remained low and deposit fees and other payment processing
revenues increased compared to the prior year reflecting further growth in client relationships. In the year ended December 31, 2014, net income
was also significantly augmented by a $9.1 million bargain purchase gain ($5.8 million net of income tax) realized from the the Branch Acquisition.
As a result, Banner's net income for the year ended December 31, 2014 increased 16% compared to a year earlier, represents further progress
on our strategic priorities and initiatives, and produced a return on average assets of 1.17%, an improvement from 1.09% for the year ended
December 31, 2013.
Our operating results depend largely on our net interest income which, as explained below, increased by $13.2 million to $179.9 million, primarily
because of a significant increase in average interest-earning assets and further reductions in deposit and funding costs and despite a reduction
in loan yields. Our operating results for the year ended December 31, 2014 also reflected a significant increase in other operating income, which
was particularly influenced by the bargain purchase gain related to the Branch Acquisition and a $3.7 million favorable variance in the net change
in valuation of financial instruments carried at fair value. Excluding fair value and OTTI adjustments, net gains on sale of securities, the bargain
purchase gain in 2014, and, in 2013, a proposed acquisition termination fee, our other operating income from core operations increased by $2.5
million to $43.8 million for the year ended December 31, 2014 compared to $41.2 million the preceding year, primarily as a result of a $4.0
million increase in deposit fees and other service charges. This increase in operating income from core operations, coupled with the increase in
net interest income, produced an increase of $15.7 million, or 8%, in revenue from core operations to $223.6 million for the year ended
December 31, 2014 compared to $208.0 million for the year ended December 31, 2013. Other operating expenses increased to $153.7 million
for the year ended December 31, 2014 compared with $141.0 million for the year ended December 31, 2013 largely as a result of increased costs
related to transaction, integration and conversion expenses for the Branch Acquisition, acquisition expenses related to the Siuslaw and
AmericanWest transactions and increased compensation expense.
Net Interest Income. Net interest income before provision for loan losses increased by $13.2 million, or 8%, to $179.9 million for the year
ended December 31, 2014, compared to $166.7 million one year earlier, as a decrease in the net interest margin was more than offset by an
increase in the average balance of interest-earning assets. The net interest margin of 4.07% for the year ended December 31, 2014 was four
basis points lower than the prior year reflecting the impact of persistently low market interest rates on earning asset yields, which was only
partially offset by changes in the earning asset mix and reductions in deposit and other funding costs. Nonaccruing loans reduced the margin
by two basis points during the year ended December 31, 2014, compared to a margin reduction of just one basis point in the year ended
December 31, 2013. As a result of continuing low market interest rates, the yield on interest-earning assets for the year ended December 31,
2014 decreased by 12 basis points compared to the prior year. Funding costs were also significantly lower, although not enough to offset the
entire decline in asset yields, as the cost of funding liabilities decreased by eight basis points compared to the prior year. As a result, the net
interest spread decreased to 4.04% for the year ended December 31, 2014 compared to 4.08% for the prior year.
Interest Income. Interest income for the year ended December 31, 2014 was $190.7 million, compared to $179.7 million for the prior year, an
increase of $10.9 million, or 6%. The increase in interest income occurred as a result of an increase in the average balances of interest-earning
assets, which was partially offset by a decline in the average yield. The average balance of interest-earning assets was $4.420 billion for the
year ended December 31, 2014, an increase of $367 million, or 9%, compared to $4.053 billion one year earlier. The yield on average interest-
earning assets decreased 12 basis points to 4.31% for the year ended December 31, 2014, compared to 4.43% one year earlier. The decrease in
the yield on earning assets reflects the continuing erosion of yields as loans mature or prepay and are replaced by lower yielding assets in the
current low interest rate environment. The continuing pressure from lower market interest rates was particularly evident as our loan yields
decreased 27 basis points to 4.83% for the year ended December 31, 2014 compared to 5.10% in the preceding year. Average loans receivable
for the year ended December 31, 2014 increased $403 million, or 12%, to $3.679 billion, compared to $3.276 billion for the prior year. Interest
income on loans increased by $10.3 million, or 6%, to $177.5 million for the year ended December 31, 2014, from $167.2 million for the prior
year, reflecting the impact of the $403 million increase in average loan balances, partially offset by the 27 basis point decrease in the average
yield on loans.
The combined average balance of mortgage-backed securities, other investment securities, daily interest-bearing deposits and FHLB stock
decreased to $740 million for the year ended December 31, 2014 (excluding the effect of fair value adjustments), compared to $777 million for
the year ended December 31, 2013; however, the interest and dividend income from those investments increased by $612,000 compared to the
prior year. The average yield on the combined portfolio increased to 1.77% for the year ended December 31, 2014, from 1.61% for the prior
year. Portfolio yields improved from higher rates on new purchases and from the maturity or sale of some lower yielding securities. The yield
on this portfolio also benefited from a $4 million reduction in the average balance of FHLB stock which had a very low 0.11% dividend yield.
For the year ended December 31, 2014, the yield on mortgage-backed securities increased 14 basis points to 1.68% compared to the prior year,
while the yield on other securities increased 19 basis points to 2.41% compared to the prior year.
Interest Expense. Interest expense for the year ended December 31, 2014 was $10.8 million, compared to $13.0 million for the prior year, a
decrease of $2.2 million, or 17%. The decrease in interest expense occurred as a result of an eight basis point decrease in the average cost of
all funding liabilities to 0.27% for the year ended December 31, 2014, from 0.35% one year earlier, partially offset by a $320 million, or 9%,
increase in average funding liabilities. This increase in average funding liabilities reflects increases in core deposits including non-interest-
64
bearing accounts and advances from the FHLB, partially offset by a continued decline in certificates of deposits. The growth in non-interest-
bearing deposits and other core deposits during the past three years has significantly contributed to our reduced funding costs.
Deposit interest expense decreased $2.1 million, or 22%, to $7.6 million for the year ended December 31, 2014 compared to $9.7 million for
the prior year as a result of an eight basis point decrease in the cost of deposits, partially offset by a $300 million, or 9%, increase in the average
balance of deposits. Average deposit balances increased to $3.816 billion for the year ended December 31, 2014, from $3.515 billion for the
year ended December 31, 2013, while the average rate paid on deposit balances decreased to 0.20% in the current year from 0.28% for the prior
year. The cost of interest-bearing deposits decreased by ten basis points to 0.29% for the current year compared to 0.39% in the prior year. Also
contributing to the decrease in total deposit costs was a $193 million increase in the average balances of non-interest-bearing accounts. Deposit
costs are significantly affected by changes in the level of market interest rates; however, changes in the average rate paid for interest-bearing
deposits frequently tend to lag changes in market interest rates as evidenced by the continuing decline in our deposit costs despite relatively
stable short-term market interest rates over the past twelve months. Further, continuing changes in our deposit mix, especially growth in lower
cost transaction and savings accounts, in particular non-interest-bearing deposits, meaningfully contributed to the decrease in our funding costs
compared to earlier periods, and should also result in lower deposit costs going forward.
Average FHLB advances (excluding the effect of fair value adjustments) increased to $39 million for the year ended December 31, 2014, compared
to $19 million for the prior year, while the average rate paid on FHLB advances for the year ended December 31, 2014 decreased to 0.32% from
0.52% for the year ended December 31, 2013. Average FHLB advances increased as a result of certain cash management activities at Banner
Bank, while the cost of the advances declined partially as a result of the maturity of a higher rate fixed-term advance in February 2013. The
increase in average balances on FHLB advances was responsible for the $26,000 increase in the related interest expense to $125,000 for the year
ended December 31, 2014, from $99,000 in the prior year, despite the decrease in the average rate paid for the year.
Other borrowings consist primarily of retail repurchase agreements with customers secured by certain investment securities. The average balance
for other borrowings decreased $1 million to $84 million during the current year from $85 million one year earlier, while the average rate on
other borrowings decreased to 0.20% from 0.23% a year earlier. As a result, interest expense for other borrowing decreased to $172,000 for the
year ended December 31, 2014, compared to $192,000 for the year ended December 31, 2013.
Junior subordinated debentures which were issued in connection with trust preferred securities had an average balance of $124 million (excluding
the effect of fair value adjustments) for both the years ended December 31, 2014 and 2013. During 2014, the average rate decreased to 2.36%
compared to 2.40% for 2013. Our junior subordinated debentures are adjustable-rate instruments with repricing frequencies of three months
based upon the three-month LIBOR index. A modestly lower level of LIBOR resulted in the lower cost of the junior subordinated debentures
for the year ended December 31, 2014 compared to the prior year.
Table 17, Analysis of Net Interest Spread, presents, for the periods indicated, our condensed average balance sheet information, together with
interest income and yields earned on average interest-earning assets and interest expense and rates paid on average interest-bearing
liabilities. Average balances are computed using daily average balances. (See the footnotes to the tables for more information on average
balances.)
65
The following table provides an analysis of our net interest spread for the last three years (dollars in thousands):
Table 17: Analysis of Net Interest Spread
Interest-earning assets:
Mortgage loans
Commercial/agricultural loans
Consumer and other loans
Total loans (1)
Mortgage-backed securities
Other securities
Interest-bearing deposits with banks
FHLB stock
Total investment securities
Total interest-earning assets
Non-interest-earning assets
Total assets
Deposits:
Interest-bearing checking accounts
Savings accounts
Money market accounts
Certificates of deposit
Total interest-bearing deposits
Non-interest-bearing deposits
Total deposits
Other interest-bearing liabilities:
FHLB advances
Other borrowings
Junior subordinated debentures
Total borrowings
Total funding liabilities
Other non-interest-bearing liabilities (2)
Total liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
Net interest income/rate spread
Net interest margin
Average interest-earning assets / average interest-
bearing liabilities
Average interest-earning assets / average funding
liabilities
Year Ended December 31, 2014
Year Ended December 31, 2013
Year Ended December 31, 2012
Average
Balance
Interest and
Dividends
Yield/
Cost (3)
Average
Balance
Interest and
Dividends
Yield/
Cost (3)
Average
Balance
Interest and
Dividends
Yield/
Cost (3)
133,576
36,793
7,172
177,541
5,779
7,103
204
34
13,120
190,661
347
1,310
776
5,145
7,578
—
7,578
125
172
2,914
3,211
10,789
$
$
$ 2,681,747
882,291
115,226
3,679,264
344,571
295,082
68,696
31,981
740,330
4,419,594
205,378
$ 4,624,972
$
428,875
856,736
461,372
875,340
2,622,323
1,193,656
3,815,979
39,121
84,126
123,716
246,963
4,062,942
(1,991)
4,060,951
564,021
$ 4,624,972
124,859
35,622
6,723
167,204
5,168
7,108
214
18
12,508
179,712
380
1,572
950
6,835
9,737
—
9,737
99
192
2,968
3,259
12,996
$
$
4.98% $ 2,388,222
783,076
4.17
104,469
6.22
3,275,767
4.83
335,680
1.68
320,283
2.41
85,178
0.30
36,154
0.11
777,295
1.77
4,053,062
4.31
204,077
$ 4,257,139
0.08
0.15
0.17
0.59
0.29
—
0.20
0.32
0.20
2.36
1.30
0.27
$
398,668
763,318
410,031
943,268
2,515,285
1,000,208
3,515,493
18,935
84,961
123,716
227,612
3,743,105
(11,970)
3,731,135
526,004
$ 4,257,139
131,523
36,836
5,963
174,322
4,176
8,328
336
—
12,840
187,162
505
1,825
1,319
11,458
15,107
—
15,107
254
758
3,395
4,407
19,514
$
$
5.23% $ 2,380,308
751,486
4.55
91,983
6.44
3,223,777
5.10
188,806
1.54
431,580
2.22
138,179
0.25
37,263
0.05
1.61
795,828
4,019,605
4.43
199,561
$ 4,219,166
0.10
0.21
0.23
0.72
0.39
—
0.28
0.52
0.23
2.40
1.43
0.35
$
367,804
682,173
411,453
1,150,288
2,611,718
836,187
3,447,905
10,215
102,193
123,716
236,124
3,684,029
(22,757)
3,661,272
557,894
$ 4,219,166
5.53%
4.90
6.48
5.41
2.21
1.93
0.24
—
1.61
4.66
0.14
0.27
0.32
1.00
0.58
—
0.44
2.49
0.74
2.74
1.87
0.53
$
179,872
4.04%
4.07%
154.03%
108.78%
(footnotes follow)
66
$
166,716
4.08%
4.11%
147.77%
108.28%
$
167,648
4.13%
4.17%
141.15%
109.11%
(1) Average balances include loans accounted for on a nonaccrual basis and loans 90 days or more past due. Amortization of net deferred
loan fees/costs is included with interest on loans.
(2) Average other non-interest-bearing liabilities include fair value adjustments related to FHLB advances and junior subordinated debentures.
(3) Yields and costs have not been adjusted for the effect of tax-exempt interest.
The following table sets forth the effects of changing rates and volumes on our net interest income during the periods shown (in
thousands). Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in volume multiplied
by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Effects on interest
income attributable to changes in rate and volume (changes in rate multiplied by changes in volume) have been allocated between changes in
rate and changes in volume (in thousands):
Table 18: Rate/Volume Analysis
Interest-earning assets:
Mortgage loans
Commercial/agricultural loans
Consumer and other loans
Total loans (1)
Mortgage-backed securities
Other securities
Interest-bearing deposits with banks
FHLB stock
Total investment securities
Year Ended December 31, 2014
Compared to Year Ended
December 31, 2013
Increase (Decrease) in
Income/Expense Due to
Year Ended December 31, 2013
Compared to Year Ended
December 31, 2012
Increase (Decrease) in
Income/Expense Due to
Rate
Volume
Net
Rate
Volume
Net
$
(6,105) $
(3,116)
(226)
(9,447)
14,822
4,286
675
19,783
$
8,717
1,170
449
10,336
$
(7,100) $
(2,721)
(43)
(9,864)
471
579
35
20
1,105
139
(582)
(45)
(4)
(492)
610
(3)
(10)
16
613
(1,547)
1,131
11
19
(386)
$
436
1,507
804
2,747
2,539
(2,352)
(133)
(1)
53
(6,664)
(1,214)
761
(7,117)
992
(1,221)
(122)
18
(333)
Total net change in interest income on interest-earning
assets
(8,342)
19,291
10,949
(10,250)
2,800
(7,450)
Interest-bearing liabilities:
Deposits (2)
FHLB advances
Other borrowings
Junior subordinated debentures
Total borrowings
(2,033)
(126)
(2,159)
(3,795)
(1,575)
(5,370)
(49)
(18)
(54)
(121)
75
(2)
—
73
26
(20)
(54)
(48)
(283)
(455)
(427)
(1,165)
128
(111)
—
17
(155)
(566)
(427)
(1,148)
Total net change in interest expense on interest-bearing
liabilities
(2,154)
(53)
(2,207)
(4,960)
(1,558)
(6,518)
Net change in net interest income
$
(6,188) $
19,344
$
13,156
$
(5,290) $
4,358
$
(932)
(1)
(2)
Includes loans accounted for on a nonaccrual basis and loans 90 days or more past due. Amortization of net deferred loan fees/costs is
included with interest on loans.
Includes non-interest-bearing deposits.
Provision and Allowance for Loan Losses. As a result of adequate reserves already in place representing 1.98% of total loans outstanding, as
well as declining delinquencies and net charge-offs, we did not record a provision for loan losses in the year ended December 31, 2014. Similarly,
we did not record a provision for the year ended December 31, 2013. As discussed in the “Summary of Critical Accounting Policies” section
above and in Note 1 of the Notes to the Consolidated Financial Statements, the provision and allowance for loan losses is one of the most critical
accounting estimates included in our Consolidated Financial Statements.
The provision for loan losses reflects the amount required to maintain the allowance for losses at an appropriate level based upon management’s
evaluation of the adequacy of general and specific loss reserves, trends in delinquencies and net charge-offs and current economic conditions.
Our credit quality indicators have continued to significantly improve, eliminating the need for a provision for loan losses for the year ended
December 31, 2014. Nonetheless, reflecting lingering weakness in the economy, we continue to maintain a substantial allowance for loan losses
at December 31, 2014.
67
We recorded net recoveries of $1.6 million for the year ended December 31, 2014, compared to net charge-offs of $2.5 million for the prior year,
and non-performing loans decreased by $8 million during the year to $17 million at December 31, 2014, compared to $25 million at December 31,
2013. A comparison of the allowance for loan losses at December 31, 2014 and 2013 reflects an increase of $2 million, or 2%, to $76 million
at December 31, 2014, from $74 million at December 31, 2013. Included in our allowance at December 31, 2014 was an unallocated portion
of $5 million, which was based upon our evaluation of various factors that were not directly measured in the determination of the formula and
specific allowances. The allowance for loan losses as a percentage of total loans (loans receivable excluding allowance for losses) decreased to
1.98% at December 31, 2014, compared to 2.17% at December 31, 2013. However, as a result of the reduction in problem loans, the allowance
as a percentage of non-performing loans increased to 454% at December 31, 2014, compared to 300% a year earlier.
As of December 31, 2014, we had identified $46 million of impaired loans. Impaired loans are comprised of loans on nonaccrual, TDRs that
are performing under their restructured terms and loans that are 90 days or more past due, but are still on accrual. Impaired loans may be
evaluated for reserve purposes using either a specific impairment analysis or collectively evaluated as part of homogeneous pools. For more
information on these impaired loans, refer to Notes 6 and 22 of the Notes to the Consolidated Financial Statements.
We believe that the allowance for loan losses as of December 31, 2014 was adequate to absorb the known and inherent risks of loss in the loan
portfolio at that date. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable,
there can be no assurance that these estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future
provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our
financial condition and results of operations. In addition, the determination of the amount of the allowance for loan losses is subject to review
by bank regulators as part of the routine examination process, which may result in the establishment of additional reserves based upon their
judgment of information available to them at the time of their examination.
The following table sets forth an analysis of our allowance for loan losses for the periods indicated (dollars in thousands):
Table 19: Changes in Allowance for Loan Losses
Balance, beginning of period
$
74,258
$
76,759
$
82,180
$
96,669
$
94,537
Provision
—
—
13,000
35,000
70,000
Years Ended December 31
2014
2013
2012
2011
2010
Recoveries of loans previously charged off:
Commercial real estate
Construction and land
Commercial business
Agricultural business, including secured by farmland
One- to four-family real estate
Consumer
Loans charged off:
Commercial real estate
Multifamily real estate
Construction and land
Commercial business
Agricultural business, including secured by farmland
One- to four-family real estate
Consumer
1,507
1,776
988
1,576
618
528
6,993
(1,239)
(20)
(207)
(1,344)
(179)
(885)
(1,470)
(5,344)
2,367
2,275
1,673
697
145
340
7,497
(2,569)
—
(1,821)
(1,782)
(248)
(2,139)
(1,439)
(9,998)
921
2,954
2,425
49
586
531
7,466
(4,065)
—
(6,546)
(6,485)
(456)
(5,328)
(3,007)
(25,887)
53
1,602
1,082
20
356
304
3,417
(6,079)
(682)
(26,328)
(8,396)
(477)
(9,910)
(1,034)
(52,906)
—
897
2,865
45
136
284
4,227
(1,668)
—
(43,592)
(15,244)
(1,940)
(7,860)
(1,791)
(72,095)
Net (charge-offs) recoveries
1,649
(2,501)
(18,421)
(49,489)
(67,868)
Balance, end of period
$
75,907
$
74,258
$
76,759
$
82,180
$
96,669
Allowance for loan losses as a percent of total loans
Net loan (charge-offs) recoveries as a percent of average
outstanding loans during the period
Allowance for loan losses as a percent of non-performing
loans
2.17 %
2.37 %
2.49 %
2.84 %
(0.08)%
(0.57)%
(1.50)%
(1.88)%
300 %
223 %
109 %
64 %
1.98%
0.04%
454%
68
The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated (dollars in thousands):
Table 20: Allocation of Allowance for Loan Losses
2014
2013
December 31
2012
Specific or allocated loss allowances (1):
Commercial real estate
Multifamily real estate
Construction and land
Commercial business
Agricultural business, including secured by
farmland
One- to four-family real estate
Consumer
Total allocated
Unallocated (1)
Amount
$
18,784
4,562
23,545
12,043
2,821
8,447
483
70,685
5,222
Percent
of Loans
in Each
Category
to Total
Loans
Amount
Percent
of Loans
in Each
Category
to Total
Loans
Amount
Percent
of Loans
in Each
Category
to Total
Loans
2011
2010
Percent
of Loans
in Each
Category
to Total
Loans
Amount
Percent
of Loans
in Each
Category
to Total
Loans
Amount
36.6% $
4.4
10.7
18.9
6.2
14.1
9.1
16,759
5,306
17,640
11,773
2,841
11,486
1,335
67,140
34.9% $
4.0
10.3
20.0
6.7
15.5
8.6
15,322
4,506
14,991
9,957
2,295
16,475
1,348
64,894
33.1% $
4.3
9.4
19.1
7.1
18.0
9.0
16,457
3,952
18,184
15,159
1,548
12,299
1,253
68,852
33.1% $
4.2
9.8
18.2
6.6
19.5
8.6
11,779
3,963
33,121
24,545
1,846
5,829
1,794
82,877
31.3%
4.0
13.0
17.2
6.0
20.1
8.4
n/a
7,118
n/a
11,865
n/a
13,328
n/a
13,792
n/a
Total allowance for loan losses
$
75,907
100.0% $
74,258
100.0% $
76,759
100.0% $
82,180
100.0% $
96,669
100.0%
(1) We establish specific loss allowances when individual loans are identified that present a possibility of loss (i.e., that full collectability is not reasonably assured). The remainder of the
allocated and unallocated allowance for loan losses is established for the purpose of providing for estimated losses which are inherent in the loan portfolio.
69
Other Operating Income. Other operating income, which includes changes in the valuation of financial instruments carried at fair value, OTTI
charges and recoveries, net gain on sale of securities, an acquisition bargain purchase gain in 2014 and a proposed acquisition termination fee
in 2013, as well as non-interest revenues from core operations, increased $10.9 million to $54.3 million for the year ended December 31, 2014,
compared to $43.3 million for the year ended December 31, 2013. This increase was primarily due to a $9.1 million bargain purchase gain on
the Branch Acquisition. Excluding fair value and OTTI adjustments, net gains on the sale of securities, the bargain purchase gain in the current
year, and, in the prior year, a fee received from the termination of a proposed acquisition, other operating income from core operations increased
$2.5 million to $43.8 million for the year ended December 31, 2014 compared to $41.2 million at December 31, 2013, largely as a result of
increased revenues from deposit fees and other service charges. Reflecting growth in the number of deposit accounts, increased transaction
activity and our decision to change our debit card relationship to MasterCard®, income from deposit fees and other service charges increased
by $4.0 million, or approximately 15%, to $30.6 million for the year ended December 31, 2014, compared to $26.6 million for the prior year.
Mortgage banking revenues decreased by $921,000 to $10.2 million for the year ended December 31, 2014, compared to $11.2 million in the
prior year; however, revenues from mortgage banking operations for the year ended December 31, 2013 included $1.3 million as a result of
reversing prior-period valuation adjustments for mortgage servicing rights. Loan sales for the year ended December 31, 2014 totaled $379
million, compared to $463 million for the year ended December 31, 2013 reflecting reduced refinancing activity. Miscellaneous revenues
decreased $527,000, largely because of a $450,000 recovery from the IRS as a result of amending certain prior-period income tax returns that
was recorded in income in 2013.
For the year ended December 31, 2014, we recorded a net gain of $1.4 million for changes in the valuation of financial instruments carried at
fair value, compared to a net charge of $2.3 million for the year ended December 31, 2013. The adjustments in 2014 primarily reflect changes
in the valuation of certain investment securities, which resulted in $5.5 million in net gains, as well as changes in the valuation of the junior
subordinated debentures we have issued, which resulted in $4.1 million in charges. The net fair value loss in 2013 primarily reflected changes
in the valuation of certain investment securities resulting in $1.5 million in net charges and changes in the valuation of the junior subordinated
debentures, which resulted in $865,000 in charges. As discussed more thoroughly in Note 22 of the Notes to the Consolidated Financial Statements,
the valuation for many of these financial instruments has been difficult and more subjective in recent periods as current and reliable observable
transaction data is very limited.
Other Operating Expenses. Other operating expenses for the year ended December 31, 2014 totaled $153.7 million compared to $141.0 million
in 2013, an increase of $12.8 million, or 9.1%, compared to the prior year, largely attributable to acquisition-related costs and incremental costs
associated with operating the acquired branches, as well as generally increased compensation expenses. Acquisition-related costs added $4.3
million to other operating expenses in the current year compared to $550,000 in the year ended December 31, 2013. Compensation expense
increased $5.4 million to $89.8 million for the year ended December 31, 2014 from $84.4 million for the year ended December 31, 2013, primarily
reflecting salary and wage adjustments, increased staffing and higher benefit costs, partially offset by a $503,000 increase in the amount of the
credit for capitalized loan origination costs, reflecting an increase in loan originations. Payment and card processing expenses increased by $1.6
million, reflecting the significant growth in core deposits and account activity. Occupancy and equipment expenses increased $1.3 million, or
6%, to $22.7 million in 2014, compared to $21.4 million in 2013 largely as a result of the Branch Acquisition. Information and computer data
services expense increased $822,000, or 11%, to $8.1 million in the current year, compared to $7.3 million in the prior year. REO operations
for the year ended December 31, 2014 resulted in a net credit of $446,000, compared to a net credit of $689,000 in the prior year, and included
$36,000 of valuation adjustments and $973,000 of net gains on the sale of properties. Partially offsetting these increases, advertising and
marketing decreased $619,000 (9%) and state/municipal business and use taxes decreased $504,000 (26%) for the year ended December 31,
2014 compared to the prior year. Most other operating expenses were little changed from a year earlier.
Income Taxes. For the year ended December 31, 2014, we recognized $26.2 million in income tax expense for an effective rate of 32.6%, which
reflects our normal statutory rate reduced by the impact of tax-exempt income and certain tax credits. Our normal, expected statutory income
tax rate is 36.3%, representing a blend of the statutory federal income tax rate of 35.0% and apportioned effects of the 7.6% Oregon and 7.4%
Idaho income tax rates. For the year ended December 31, 2013, we recognized $22.5 million in income tax expense for an effective tax rate of
32.6%. For more information on income taxes and deferred taxes, see Note 13 of the Notes to the Consolidated Financial Statements.
Comparison of Results of Operations for the Years Ended December 31, 2013 and 2012
For the year ended December 31, 2013, we had net income and net income available to common shareholders of $46.6 million, or $2.40 per
diluted share. This compared to net income of $64.9 million, which, after providing for the preferred stock dividend of $4.9 million, the related
discount accretion of $3.3 million, and including a $2.5 million gain on repurchase and retirement of preferred stock, resulted in net income to
common shareholders of $59.1 million, or $3.16 per diluted share, for the year ended December 31, 2012. While our return to profitability in
2011 and further earning improvement in 2012 and 2013 largely resulted from a material decrease in credit costs, particularly our provision for
loan losses, it also reflected strong revenue generation from our core operations. The decrease in credit costs reflected a significantly reduced
level of non-performing assets while the improvement in net revenues was driven largely by increased deposit fees and other service charges
fueled by growth in core deposits and a significant increase in revenues from mortgage banking, notwithstanding a decrease in 2013 compared
to 2012, as well as solid net interest income as a result of lower funding costs and reduced non-performing assets. In addition, deposit insurance
expenses decreased due to improvements in our asset quality and earnings performance. Despite these positive trends, 2013 results reflected
the difficult operating environment presented by continued very low market interest rates and slow economic growth, which resulted in a decline
in our net interest margin, and modest loan demand as well as reduced mortgage banking revenues as refinancing activity moderated. The results
for the year ended December 31, 2013 also included a $22.5 million provision for income taxes while the results for 2012 included a $24.8
million net benefit from income taxes as a result of reversing the valuation allowance for our deferred tax assets during the year.
70
Aside from credit costs, our operating results depend largely on our net interest income which, as explained below, decreased by $932,000 to
$166.7 million for the year ended December 31, 2013, primarily because of a significant reduction in loan yields and despite an increase in
average interest-earning assets and further reductions in deposit and funding costs. Our operating results for the year ended December 31, 2013
also reflected a significant increase in other operating income, which was particularly influenced by a termination fee of $3.0 million related to
a proposed acquisition, $1.0 million in net gains on the sale of securities and a reduction of $14.2 million in net charges as a result of changes
in the valuation of financial instruments carried at fair value. Excluding fair value and OTTI adjustments, the acquisition termination fee and
net gains on sale of securities, our other operating income decreased by $2.5 million to $41.2 million for the year ended December 31, 2013
compared to $43.8 million the preceding year, primarily as a result of a $2.6 million decrease in mortgage banking revenue. Other operating
expenses decreased modestly to $141.0 million for the year ended December 31, 2013 compared with $141.5 million for the year ended December
31, 2012, primarily as a result of reduced expenses related to REO and FDIC deposit insurance which were generally offset by increased
compensation, payment and card processing expenses, and costs associated with the proposed acquisition of Home Federal Bancorp, Inc.
Net Interest Income. Net interest income before provision for loan losses decreased by $932,000, or 0.6%, to $166.7 million for the year ended
December 31, 2013, compared to $167.6 million one year earlier, primarily as a result of a decrease in the net interest margin and despite a
modest increase in average interest-earning assets. The net interest margin of 4.11% for the year ended December 31, 2013 decreased six basis
points from the prior year, largely as a result of the impact of continuing exceptionally low market interest rates on asset yields. Nonaccruing
loans reduced the margin by just one basis point during the year ended December 31, 2013, compared to a margin reduction of eight basis points
in the year ended December 31, 2012. Reflecting the low interest rate environment, the yield on interesting-earning assets for the year ended
December 31, 2013 decreased by 23 basis points compared to the prior year. Funding costs were also significantly lower, although not enough
to offset the decline in asset yields, as the cost of interest-bearing liabilities decreased by 18 basis points compared to the prior year. As a result,
the net interest spread decreased to 4.08% for the year ended December 31, 2013 compared to 4.13% for the prior year and was only partially
offset by the 1% increase in average interest-earning assets.
Interest Income. Interest income for the year ended December 31, 2013 was $179.7 million, compared to $187.2 million for the prior year, a
decrease of $7.5 million, or 4%. The decrease in interest income occurred as a result of a decline in the yield on interest-earning assets, which
was only partially offset by an increase in average balances. The average balance of interest-earning assets was $4.053 billion for the year ended
December 31, 2013, an increase of $33 million, or 1%, compared to $4.020 billion one year earlier. The yield on average interest-earning assets
decreased 23 basis points to 4.43% for the year ended December 31, 2013, compared to 4.66% one year earlier. The decrease in the yield on
earning assets reflected the continuing erosion of yields as loans and investments mature or prepay and are replaced by lower yielding assets in
the current low interest rate environment. The continuing pressure from lower market interest rates was particularly evident as our loan yields
decreased 31 basis points to 5.10% for the year ended December 31, 2013 compared to 5.41% in the preceding year. Average loans receivable
for the year ended December 31, 2013 increased $52 million, or 2%, to $3.276 billion, compared to $3.224 billion for the prior year. Interest
income on loans decreased by $7.1 million, or 4%, to $167.2 million for the year ended December 31, 2013 from $174.3 million for the year
ended December 31, 2012, reflecting the impact of the 31 basis point decrease in the average yield on loans, partially offset by the $52 million
increase in average loan balances.
The combined average balance of mortgage-backed securities, investment securities, daily interest-bearing deposits and FHLB stock decreased
to $777 million for the year ended December 31, 2013 (excluding the effect of fair value adjustments), compared to $796 million for the year
ended December 31, 2012 and the interest and dividend income from those investments decreased by $332,000 compared to the prior year. The
average yield on the combined portfolio was 1.61% for the year ended December 31, 2013, unchanged from the prior year. The adverse impact
of lower market rates on the combined yield on these investments was offset by changes in the mix to include lower balances of daily interest-
bearing deposits and more securities.
Interest Expense. Interest expense for the year ended December 31, 2013 was $13.0 million, compared to $19.5 million for the prior year, a
decrease of $6.5 million, or 33%. The decrease in interest expense occurred as a result of an 18 basis point decrease in the average cost of all
funding liabilities to 0.35% for the year ended December 31, 2013, from 0.53% one year earlier, partially offset by a $59 million, or 2%, increase
in average funding liabilities. This increase in average funding balances reflected increases in core deposits and advances from the FHLB, offset
by a continued decline in certificates of deposits. The growth in non-interest-bearing deposits and other core deposits during 2013 and 2012
significantly contributed to our reduced funding costs.
Deposit interest expense decreased $5.4 million, or 36%, to $9.7 million for the year ended December 31, 2013 compared to $15.1 million for
the prior year as a result of a 16 basis point decrease in the cost of deposits, partially offset by a $68 million, or 2%, increase in the average
balance of deposits. Average deposit balances increased to $3.515 billion for the year ended December 31, 2013, from $3.448 billion for the
year ended December 31, 2012, while the average rate paid on deposit balances decreased to 0.28% in the current year from 0.44% for the prior
year. Deposit costs are significantly affected by changes in the level of market interest rates; however, changes in the average rate paid for
interest-bearing deposits frequently tend to lag changes in market interest rates as evidenced by the continuing decline in our deposit costs despite
relatively stable short-term market interest rates over the year ended December 31, 2013.
Average FHLB advances (excluding the effect of fair value adjustments) increased to $18.9 million for the year ended December 31, 2013,
compared to $10.2 million for the prior year, while the average rate paid on FHLB advances for the year ended December 31, 2013 decreased
to 0.52% from 2.49% for the year ended December 31, 2012. Average FHLB advances increased as a result of certain cash management activities
at Banner Bank, while the cost of the advances declined as a result of the maturity of a higher rate fixed-term advance in February 2013. The
decline in average rate paid on FHLB advances was responsible for the $155,000 decrease in the related interest expense to $99,000 for the year
ended December 31, 2013, from $254,000 in the prior year, despite the increase in the average balance outstanding for the year.
71
Other borrowings consist of retail repurchase agreements with customers secured by certain investment securities and, prior to March 31, 2012,
$50 million of senior bank notes issued under the Temporary Liquidity Guarantee Program (TLGP). The average balance for other borrowings
decreased $17 million to $85 million during the year ended December 31, 2013 from $102 million one year earlier, while the average rate on
other borrowings decreased to 0.23% from 0.74% a year earlier. As a result, interest expense for other borrowing decreased to $192,000 for the
year ended December 31, 2013, compared to $758,000 for the year ended December 31, 2012. The senior bank notes had a fixed rate of 2.625%,
plus a 1.00% guarantee fee, and matured on March 31, 2012.
Junior subordinated debentures which were issued in connection with trust preferred securities had an average balance of $124 million (excluding
the effect of fair value adjustments) for both the years ended December 31, 2013 and 2012. During 2013, the average rate decreased to 2.40%
compared to 2.74% for 2012. Generally, the junior subordinated debentures are adjustable-rate instruments with repricing frequencies of three
months based upon the three-month LIBOR index; however, one $25 million issue of junior subordinated debentures had a fixed rate of 6.56%
for an initial five-year period which expired on February 29, 2012. Subsequent to that date, the interest rate on that debenture resets every three
months at a rate of three-month LIBOR plus 1.62%. The change in the rate on that debenture, coupled with a modestly lower level of LIBOR,
resulted in the lower cost of the junior subordinated debentures for the year ended December 31, 2013 compared to the prior year.
Provision and Allowance for Loan Losses. As a result of adequate reserves already in place representing 2.17% of total loans outstanding, as
well as declining delinquencies and net charge-offs, during the year ended December 31, 2013 we did not record a provision for loan losses.
This compared to a $13 million provision for the year ended December 31, 2012.
We recorded net charge-offs of $3 million for the year ended December 31, 2013, compared to $18 million for the prior year, and non-performing
loans decreased by $9 million during the year to $25 million at December 31, 2013, compared to $34 million at December 31, 2012. Acomparison
of the allowance for loan losses at December 31, 2013 and 2012 reflects a decrease of $3 million, or 3%, to $74 million at December 31, 2013,
from $77 million at December 31, 2012. Included in our allowance at December 31, 2013 was an unallocated portion of $7 million, which was
based upon our evaluation of various factors that were not directly measured in the determination of the formula and specific allowances. The
allowance for loan losses as a percentage of total loans (loans receivable excluding allowance for losses) decreased to 2.17% at December 31,
2013, compared to 2.37% at December 31, 2012. However, as a result of the reduction in problem loans, the allowance as a percentage of non-
performing loans increased to 300% at December 31, 2013, compared to 223% a year earlier. As of December 31, 2013, we had identified $72
million of impaired loans, including loans on nonaccrual, TDRs that were performing under their restructured terms and loans that were 90 days
or more past due, but are still on accrual.
Other Operating Income. Other operating income, which included changes in the valuation of financial instruments carried at fair value, OTTI
charges and recoveries, net gain on sale of securities and a proposed acquisition termination fee in 2013, as well as non-interest revenues from
core operations, increased $16.4 million to $43.3 million for the year ended December 31, 2013, compared to $26.9 million for the year ended
December 31, 2012. This increase was primarily due to a $14.2 million favorable variance in net fair value adjustments compared to the prior
year. Excluding fair value and OTTI adjustments, net gains on the sale of securities, and, in 2013, a fee received from the termination of a
proposed acquisition, other operating income from core operations decreased $2.5 million to $41.2 million for the year ended December 31,
2013 compared to $43.8 million at December 31, 2012, largely as a result of decreased revenues from mortgage banking. Mortgage banking
revenues decreased by $2.6 million as production and sales of loans were adversely impacted by lower levels of refinancing in the second half
of 2013. Loan sales for the year ended December 31, 2013 totaled $445 million, compared to $505 million for the year ended December 31,
2012. The reduction in gains from loan sales was partially offset by the reversal during 2013 of a $1.3 million valuation allowance for our
mortgage servicing rights. Importantly, and primarily as a result of growth in our customer base, income from deposit fees and other service
charges increased by $1.3 million, or approximately 5%, to $26.6 million for the year ended December 31, 2013, compared to $25.3 million for
the prior year. Miscellaneous revenues decreased $1.2 million, largely as a result of decreased fees associated with interest rate swaps and
income on bank-owned life insurance, which was elevated in 2012 as a result of a death benefit, partially offset by a $450,000 recovery from
the IRS as a result of amending certain prior-period income tax returns.
For the year ended December 31, 2013, we recorded a net charge of $2.3 million for changes in the valuation of financial instruments carried at
fair value, compared to a net charge of $16.5 million for the year ended December 31, 2012. The adjustments in 2013 primarily reflect changes
in the valuation of certain investment securities, which resulted in $1.5 million in charges, as well as changes in the valuation of the junior
subordinated debentures we have issued, which resulted in $865,000 in charges. The net fair value loss in 2012 was largely a result of changes
in the valuation of our junior subordinated debentures, which resulted in $23.1 million in charges that were partially offset by $6.3 million in
net gains in the values of certain investment securities.
Other Operating Expenses. Other operating expenses for the year ended December 31, 2013 totaled $141.0 million compared to $141.5 million
in 2012, a decrease of $478,000, or 0.3%, compared to the prior year, largely as a result of decreased costs related to REO and FDIC deposit
insurance which were partially offset by increased compensation and payment and card processing expenses. Total REO expenses reflected a
net credit of $689,000, including $2.4 million of net gains on sale of properties and $785,000 in write-downs, for the year ended December 31,
2013, compared to a net expense of $3.4 million, including $4.7 million in gains and $5.2 million in write-downs, for the year ended December 31,
2012. Importantly, our total REO was reduced by nearly $12 million during 2013 to $4 million at December 31, 2013, compared to $16 million
a year earlier. The cost of FDIC insurance decreased by $1.4 million compared to the prior year, largely as a result of a reduction in the premium
assessment rate attributed to improvements in the asset quality and earnings performance of Banner Bank. Compensation expense increased
$5.7 million to $84.4 million for the year ended December 31, 2013 from $78.7 million for the year ended December 31, 2012, primarily reflecting
salary and wage adjustments, increased staffing and higher benefit costs. The increase in compensation costs was partially offset by an $823,000
increase in the amount of the credit for capitalized loan origination costs reflecting an increase in loan originations. Payment and card processing
72
expenses increased by $1.3 million, reflecting the significant growth in core deposits and account activity. Most other expenses were little
changed from a year earlier; however, we incurred approximately $550,000 of expenses associated with a proposed acquisition.
Income Taxes. For the year ended December 31, 2013, we recognized $22.5 million in income tax expense for an effective rate of 32.6%, which
reflects our normal statutory rate reduced by the impact of tax-exempt income and certain tax credits. Our normal, expected statutory income
tax rate is 36.5%, representing a blend of the statutory federal income tax rate of 35.0% and apportioned effects of the 7.6% Oregon and Idaho
income tax rates.
During 2010, we evaluated our net deferred tax asset and determined it was prudent to establish a valuation allowance against the entire asset.
While the full valuation allowance remained in effect, we did not recognize any tax expense or benefit in our Consolidated Statements of
Operations. During 2012, we determined that maintaining the full valuation allowance was no longer appropriate and reversed all of the valuation
allowance resulting in a substantial tax benefit for the year. The reversal of the valuation allowance, net of adjustments to tax expense/(benefits),
resulted in a net benefit from income taxes for the year ended December 31, 2012 of $24.8 million.
Market Risk and Asset/Liability Management
Our financial condition and operations are influenced significantly by general economic conditions, including the absolute level of interest rates
as well as changes in interest rates and the slope of the yield curve. Our profitability is dependent to a large extent on our net interest income,
which is the difference between the interest received from our interest-earning assets and the interest expense incurred on our interest-bearing
liabilities.
Our activities, like all financial institutions, inherently involve the assumption of interest rate risk. Interest rate risk is the risk that changes in
market interest rates will have an adverse impact on the institution’s earnings and underlying economic value. Interest rate risk is determined
by the maturity and repricing characteristics of an institution’s assets, liabilities and off-balance-sheet contracts. Interest rate risk is measured
by the variability of financial performance and economic value resulting from changes in interest rates. Interest rate risk is the primary market
risk affecting our financial performance.
The greatest source of interest rate risk to us results from the mismatch of maturities or repricing intervals for rate sensitive assets, liabilities
and off-balance sheet contracts. This mismatch or gap is generally characterized by a substantially shorter maturity structure for interest-bearing
liabilities than interest-earning assets, although our floating-rate assets tend to be more immediately responsive to changes in market rates than
most funding deposit liabilities. Additional interest rate risk results from mismatched repricing indices and formula (basis risk and yield curve
risk), and product caps and floors and early repayment or withdrawal provisions (option risk), which may be contractual or market driven, that
are generally more favorable to customers than to us. An exception to this generalization is the beneficial effect of interest rate floors on a
substantial portion of our performing floating-rate loans, which help us maintain higher loan yields in periods when market interest rates decline
significantly. However, in a declining interest rate environment, as loans with floors are repaid they generally are replaced with new loans which
have lower interest rate floors. As of December 31, 2014, our loans with interest rate floors totaled approximately $1.6 billion and had a weighted
average floor rate of 4.79%. An additional source of interest rate risk, which is currently of concern, is a prolonged period of exceptionally low
market interest rates. Because interest-bearing deposit costs have been reduced to nominal levels, there is very little possibility that they will
be significantly further reduced and our non-interest-bearing deposits are an increasingly significant percentage of total deposits. By contrast,
if market rates remain very low, loan and securities yields will likely continue to decline as longer-term instruments mature or are repaid. As a
result, a prolonged period of very low interest rates will likely result in compression of our net interest margin. While this pressure on the margin
may be mitigated by further changes in the mix of assets and deposits, particularly increases in non-interest-bearing deposits, a prolonged period
of low interest rates will present a very difficult operating environment for most banks, including us.
The principal objectives of asset/liability management are: to evaluate the interest rate risk exposure; to determine the level of risk appropriate
given our operating environment, business plan strategies, performance objectives, capital and liquidity constraints, and asset and liability
allocation alternatives; and to manage our interest rate risk consistent with regulatory guidelines and policies approved by the Board of
Directors. Through such management, we seek to reduce the vulnerability of our earnings and capital position to changes in the level of interest
rates. Our actions in this regard are taken under the guidance of the Asset/Liability Management Committee, which is comprised of members
of our senior management. The Committee closely monitors our interest sensitivity exposure, asset and liability allocation decisions, liquidity
and capital positions, and local and national economic conditions and attempts to structure the loan and investment portfolios and funding sources
to maximize earnings within acceptable risk tolerances.
Sensitivity Analysis
Our primary monitoring tool for assessing interest rate risk is asset/liability simulation modeling, which is designed to capture the dynamics of
balance sheet, interest rate and spread movements and to quantify variations in net interest income resulting from those movements under different
rate environments. The sensitivity of net interest income to changes in the modeled interest rate environments provides a measurement of interest
rate risk. We also utilize economic value analysis, which addresses changes in estimated net economic value of equity arising from changes in
the level of interest rates. The net economic value of equity is estimated by separately valuing our assets and liabilities under varying interest
rate environments. The extent to which assets gain or lose value in relation to the gains or losses of liability values under the various interest
rate assumptions determines the sensitivity of net economic value to changes in interest rates and provides an additional measure of interest rate
risk.
73
The interest rate sensitivity analysis performed by us incorporates beginning-of-the-period rate, balance and maturity data, using various levels
of aggregation of that data, as well as certain assumptions concerning the maturity, repricing, amortization and prepayment characteristics of
loans and other interest-earning assets and the repricing and withdrawal of deposits and other interest-bearing liabilities into an asset/liability
computer simulation model. We update and prepare simulation modeling at least quarterly for review by senior management and the directors.
We believe the data and assumptions are realistic representations of our portfolio and possible outcomes under the various interest rate
scenarios. Nonetheless, the interest rate sensitivity of our net interest income and net economic value of equity could vary substantially if
different assumptions were used or if actual experience differs from the assumptions used.
The following table sets forth as of December 31, 2014 and 2013, the estimated changes in our net interest income over one-year and two-year
time horizons and the estimated changes in economic value of equity based on the indicated interest rate environments (dollars in thousands):
Table 21: Interest Rate Risk Indicators
Change (in Basis Points) in Interest Rates (1)
Net Interest Income
Next 12 Months
Net Interest Income
Next 24 Months
Economic Value of
Equity
December 31, 2014
Estimated Increase (Decrease) in
+400
+300
+200
+100
0
-25
Change (in Basis Points) in Interest Rates (1)
+400
+300
+200
+100
0
-25
$
$
(2,541)
(1,807)
(1,040)
(1,088)
—
264
(1.4)% $
(1.0)
(0.6)
(0.6)
—
0.1
7,254
6,201
5,157
2,088
—
(826)
2% $ (49,388)
(30,791)
(15,628)
(2,209)
—
(9,681)
1.7
1.4
0.6
—
(0.2)
(6.3)%
(3.9)
(2.0)
(0.3)
—
(1.2)
December 31, 2013
Estimated Increase (Decrease) in
Net Interest Income
Next 12 Months
Net Interest Income
Next 24 Months
Economic Value of
Equity
(1,137)
(930)
(594)
(855)
—
70
(0.7)% $
(0.6)
(0.4)
(0.5)
—
—
8,024
6,326
4,936
2,012
—
(1,211)
2.4% $ (83,191)
(60,858)
1.9
(39,896)
1.5
(17,462)
0.6
—
—
(5,443)
(0.4)
(10.8)%
(7.9)
(5.2)
(2.3)
—
(0.7)
(1) Assumes an instantaneous and sustained uniform change in market interest rates at all maturities; however, no rates are allowed to go
below zero. The current federal funds rate is 0.25%.
Another (although less reliable) monitoring tool for assessing interest rate risk is gap analysis. The matching of the repricing characteristics of
assets and liabilities may be analyzed by examining the extent to which assets and liabilities are interest sensitive and by monitoring an institution’s
interest sensitivity gap. An asset or liability is said to be interest sensitive within a specific time period if it will mature or reprice within that
time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets anticipated, based upon
certain assumptions, to mature or reprice within a specific time period and the amount of interest-bearing liabilities anticipated to mature or
reprice, based upon certain assumptions, within that same time period. A gap is considered positive when the amount of interest-sensitive assets
exceeds the amount of interest-sensitive liabilities. A gap is considered negative when the amount of interest-sensitive liabilities exceeds the
amount of interest-sensitive assets. Generally, during a period of rising rates, a negative gap would tend to adversely affect net interest income
while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would
tend to result in an increase in net interest income while a positive gap would tend to adversely affect net interest income.
Certain shortcomings are inherent in gap analysis. For example, although certain assets and liabilities may have similar maturities or periods
of repricing, they may react in different degrees to changes in market rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain
assets, such as ARM loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the
event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating
the table. Finally, the ability of some borrowers to service their debt may decrease in the event of a severe change in market rates.
Table 22, Interest Sensitivity Gap, presents our interest sensitivity gap between interest-earning assets and interest-bearing liabilities at
December 31, 2014 and 2013. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities which are
anticipated by us, based upon certain assumptions, to reprice or mature in each of the future periods shown. At December 31, 2014, total interest-
74
earning assets maturing or repricing within one year exceeded total interest-bearing liabilities maturing or repricing in the same time period by
$688 million, representing a one-year cumulative gap to total assets ratio of 14.56%.
Management is aware of the sources of interest rate risk and in its opinion actively monitors and manages it to the extent possible. The interest
rate risk indicators and interest sensitivity gaps as of December 31, 2014 and 2013 are within our internal policy guidelines and management
considers that our current level of interest rate risk is reasonable.
75
The following tables provide a GAP analysis as of December 31, 2014 and 2013 (dollars in thousands):
Table 22: Interest Sensitivity Gap
Interest-earning assets: (1)
Construction loans
Fixed-rate mortgage loans
Adjustable-rate mortgage loans
Fixed-rate mortgage-backed securities
Adjustable-rate mortgage-backed securities
Fixed-rate commercial/agricultural loans
Adjustable-rate commercial/agricultural loans
Consumer and other loans
Investment securities and interest-earning deposits
Total rate sensitive assets
Interest-bearing liabilities: (2)
Regular savings
Interest-bearing checking accounts
Money market deposit accounts
Certificates of deposit
FHLB advances
Other borrowings
Trust preferred securities
Retail repurchase agreements
Total rate sensitive liabilities
Excess (deficiency) of interest-sensitive assets over interest-sensitive
liabilities
Cumulative excess (deficiency) of interest-sensitive assets
Within
6 Months
After 6
Months
Within 1 Year
After 1 Year
Within 3
Years
After 3 Years
Within 5
Years
After 5 Years
Within 10
Years
Over
10 Years
Total
December 31, 2014
$
$
$
220,128
132,836
502,365
62,779
638
53,010
588,831
199,946
120,766
1,881,299
135,172
78,540
244,473
327,611
32,000
—
123,716
77,185
1,018,697
$
10,904
102,120
152,182
48,554
1,703
37,997
9,093
25,792
14,244
402,589
135,172
63,695
146,684
231,987
—
—
—
—
577,538
$
$
16,196
259,532
450,989
147,033
—
98,897
30,071
64,915
40,483
1,108,116
315,400
148,622
97,789
168,773
—
—
—
—
730,584
2,308
159,540
283,728
31,593
—
34,143
20,717
22,935
70,982
625,946
315,400
148,622
—
37,355
—
—
—
—
501,377
$
156
193,387
22,467
11,918
—
15,173
2,284
15,331
51,470
312,186
—
—
—
4,752
—
—
—
—
4,752
$
$
2,811
101,966
132
14,862
—
1,973
—
1,219
40,703
163,666
—
—
—
38
—
—
—
—
38
252,503
949,381
1,411,863
316,739
2,341
241,193
650,996
330,138
338,648
4,493,802
901,144
439,479
488,946
770,516
32,000
—
123,716
77,185
2,832,986
862,602
$ (174,949)
$
377,532
$
124,569
$
307,434
$
163,628
$ 1,660,816
862,602
$
687,653
$ 1,065,185
$ 1,189,754
$ 1,497,188
$ 1,660,816
$ 1,660,816
Cumulative ratio of interest-earning assets to interest-bearing liabilities
184.68%
143.08 %
145.78%
142.07%
152.85%
158.62%
158.62%
Interest sensitivity gap to total assets
18.26%
(3.70)%
7.99%
2.64%
6.51%
3.46%
35.16%
Ratio of cumulative gap to total assets
18.26%
14.56 %
22.55%
25.19%
31.69%
35.16%
35.16%
(footnotes follow)
76
Table 22: Interest Sensitivity Gap (continued)
Interest-earning assets: (1)
Construction loans
Fixed-rate mortgage loans
Adjustable-rate mortgage loans
Fixed-rate mortgage-backed securities
Adjustable-rate mortgage-backed securities
Fixed-rate commercial/agricultural loans
Adjustable-rate commercial/agricultural loans
Consumer and other loans
Investment securities and interest-earning deposits
Total rate sensitive assets
Interest-bearing liabilities: (2)
Interest-bearing checking accounts
Regular savings
Money market deposit accounts
Certificates of deposit
FHLB advances
Other borrowings
Trust preferred securities
Retail repurchase agreements
Total rate sensitive liabilities
Excess (deficiency) of interest-sensitive assets over interest-sensitive
liabilities
Cumulative excess (deficiency) of interest-sensitive assets
Within
6 Months
After 6
Months
Within 1 Year
After 1 Year
Within 3
Years
December 31, 2013
After 3 Years
Within 5
Years
After 5 Years
Within 10
Years
Over
10 Years
Total
$
$
$
190,986
125,198
488,491
40,564
701
52,951
545,102
167,485
164,089
1,775,567
74,501
119,815
204,106
388,230
27,203
—
123,716
83,056
1,020,627
$
14,034
80,918
170,618
39,231
2,054
37,070
12,670
15,513
34,652
406,760
61,484
119,815
122,463
267,746
—
—
—
—
571,508
754,940
$ (164,748)
754,940
$
590,192
$
$
$
14,762
215,708
367,014
150,201
—
96,339
33,587
51,210
48,021
976,842
143,462
279,567
81,642
169,442
—
—
—
—
674,113
$
6,716
132,365
262,053
71,491
—
36,071
17,297
24,105
35,117
585,215
143,462
279,567
—
43,386
—
—
—
—
466,415
$
6,104
143,301
14,501
20,489
—
12,117
532
14,756
67,131
278,931
—
—
3,856
—
—
—
—
3,856
$
$
75
74,153
—
18,682
—
294
—
1,483
49,119
143,806
—
—
35
—
—
—
—
35
232,677
771,643
1,302,677
340,658
2,755
234,842
609,188
274,552
398,129
4,167,121
422,909
798,764
408,211
872,695
27,203
—
123,716
83,056
2,736,554
302,729
$
118,800
$
275,075
$
143,771
$ 1,430,567
892,921
$ 1,011,721
$ 1,286,796
$ 1,430,567
$ 1,430,567
Cumulative ratio of interest-earning assets to interest-bearing liabilities
173.97%
137.07 %
139.40%
137.02%
147.02%
152.28%
152.28%
Interest sensitivity gap to total assets
17.20%
(3.75)%
6.90%
2.71%
6.27%
3.28%
32.60%
Ratio of cumulative gap to total assets
17.20%
13.45 %
20.35%
23.06%
29.32%
32.60%
32.60%
(footnotes follow)
77
(1) Adjustable-rate assets are included in the period in which interest rates are next scheduled to adjust rather than in the period in which
they are due to mature, and fixed-rate assets are included in the period in which they are scheduled to be repaid based upon scheduled
amortization, in each case adjusted to take into account estimated prepayments. Mortgage loans and other loans are not reduced for
allowances for loan losses and non-performing loans. Mortgage loans, mortgage-backed securities, other loans and investment securities
are not adjusted for deferred fees and unamortized acquisition premiums and discounts.
(2) Adjustable-rate liabilities are included in the period in which interest rates are next scheduled to adjust rather than in the period they are
due to mature. Although regular savings, demand, interest-bearing checking, and money market deposit accounts are subject to immediate
withdrawal, based on historical experience management considers a substantial amount of such accounts to be core deposits having
significantly longer maturities. For the purpose of the gap analysis, these accounts have been assigned decay rates to reflect their longer
effective maturities. If all of these accounts had been assumed to be short-term, the one-year cumulative gap of interest-sensitive assets
would have been $(338.2) million, or (7.2%) of total assets at December 31, 2014, and $(337.5) million, or (7.7%), at December 31,
2013. Interest-bearing liabilities for this table exclude certain non-interest-bearing deposits that are included in the average balance
calculations reflected in Table 17, Analysis of Net Interest Spread.
Liquidity and Capital Resources
Our primary sources of funds are deposits, borrowings, proceeds from loan principal and interest payments and sales of loans, and the maturity
of and interest income on mortgage-backed and investment securities. While maturities and scheduled amortization of loans and mortgage-
backed securities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates,
economic conditions, competition and our pricing strategies.
Our primary investing activity is the origination and purchase of loans and, in certain periods, the purchase of securities. During the years ended
December 31, 2014, 2013 and 2012, our loan originations exceeded our loan repayments by $506 million, $595 million and $458 million,
respectively. During those periods we purchased loans of $194 million, $49 million and $18 million, respectively. This activity was funded
primarily by sales of loans and increased deposits. During the years ended December 31, 2014, 2013 and 2012, we sold $379 million, $463
million, and $515 million, respectively, of loans. Securities purchased during the years ended December 31, 2014, 2013 and 2012 totaled $100
million, $257 million, and $442 million, respectively, and securities repayments, maturities and sales in those periods were $158 million, $238
million, and $435 million, respectively.
Our primary financing activity is gathering deposits. Deposits increased by $281 million during the year ended December 31, 2014, including
a $102 million decline in certificates of deposit. Deposits increased by $60 million during the year ended December 31, 2013 and increased
$82 million in the prior year. The Branch Acquisition contributed $207 million to the increase in deposits, including $69 million in non-interest
bearing deposits, $105 million in interest-bearing transaction and savings accounts, and $33 million in certificates of deposit as of December 31,
2014. The decrease in certificate balances in 2014 includes an increase in brokered deposits by $1 million to $5 million at December 31, 2014.
In each of the last three years our core deposits have significantly increased as a result of our increased marketing focus on retail deposits and
our pricing decisions designed to shift our deposit portfolio into lower cost checking, savings and money market accounts, and allow higher rate
certificates of deposit to run-off. Certificates of deposits are generally more price sensitive than other retail deposits and our pricing of those
deposits varies significantly based upon our liquidity management strategies at any point in time. At December 31, 2014, certificates of deposit
amounted to $771 million, or 20% of our total deposits, including $565 million which were scheduled to mature within one year. Certificates
of deposit declined from 24% of our total deposits at December 31, 2013, and 29% of total deposits at December 31, 2012, reflecting our efforts
to shift the portfolio mix into lower cost core deposits. While no assurance can be given as to future periods, historically, we have been able to
retain a significant amount of our deposits as they mature.
FHLB advances (excluding fair value adjustments) increased $5 million for the year ended December 31, 2014, after increasing $17 million,
and decreasing $10 million, respectively, for the years ended December 31, 2013 and 2012. Other borrowings at December 31, 2014 decreased
$6 million to $77 million following an increase of $6 million in 2013 and a decrease of $75 million in 2012. The decrease in other borrowings
in 2014 was due to a decrease in retail repurchase agreements, while the decrease in 2012 was primarily due to the $50 million prepayment of
the senior bank notes issued under the TLGP.
We must maintain an adequate level of liquidity to ensure the availability of sufficient funds to accommodate deposit withdrawals, to support
loan growth, to satisfy financial commitments and to take advantage of investment opportunities. During the years ended December 31, 2014,
2013 and 2012, we used our sources of funds primarily to fund loan commitments, purchase securities and pay maturing savings certificates and
deposit withdrawals. At December 31, 2014, we had outstanding loan commitments totaling $1.227 billion, including undisbursed loans in
process and unused credit lines totaling $1.197 billion. While representing potential growth in the loan portfolio and lending activities, this level
of commitments is proportionally consistent with our historical experience and does not represent a departure from normal operations.
We generally maintain sufficient cash and readily marketable securities to meet short-term liquidity needs; however, our primary liquidity
management practice to supplement deposits is to increase or decrease short-term borrowings, including FHLB advances and Federal Reserve
Bank of San Francisco (FRBSF) borrowings. We maintain credit facilities with the FHLB-Seattle, which at December 31, 2014 provide for
advances that in the aggregate may equal the lesser of 35% of Banner Bank’s assets or adjusted qualifying collateral (subject to a sufficient level
of ownership of FHLB stock), up to a total possible credit line of $901 million, and 25% of Islanders Bank’s assets or adjusted qualifying
collateral, up to a total possible credit line of $23 million. Advances under these credit facilities (excluding fair value adjustments) totaled $32
million, or less than 1% of our assets at December 31, 2014. In addition, Banner Bank has been approved for participation in the FRBSF's
Borrower-In-Custody (BIC) program. Under this program Banner Bank had available lines of credit of approximately $639 million as of
December 31, 2014, subject to certain collateral requirements, namely the collateral type and risk rating of eligible pledged loans. We had no
78
funds borrowed from the FRBSF at December 31, 2014 or 2013. Management believes it has adequate resources and funding potential to meet
our foreseeable liquidity requirements.
Banner Corporation is a separate legal entity from the Banks and, on a stand-alone level, must provide for its own liquidity and pay its own
operating expenses and cash dividends. Banner's primary sources of funds consist of capital raised through dividends or capital distributions
from the Banks, although there are regulatory restrictions on the ability of the Banks to pay dividends. At December 31, 2014, Banner Corporation
(on an unconsolidated basis) had liquid assets of $46 million.
As noted below, Banner Corporation and its subsidiary banks continued to maintain capital levels significantly in excess of the requirements to
be categorized as “Well-Capitalized” under applicable regulatory standards. During the year ended December 31, 2014, total equity increased
$45 million, or 8%, to $584 million due to our net income. Total equity at December 31, 2014 is entirely attributable to common stock. At
December 31, 2014, tangible common stockholders’ equity, which excludes other intangible assets, was $581 million, or 12.30% of tangible
assets. See the discussion and reconciliation of non-GAAP financial information above in the Executive Overview section of this Management’s
Discussion and Analysis of Financial Condition and Results of Operation for more detailed information with respect to tangible common
stockholders’ equity. Also, see the capital requirements discussion and table below with respect to our regulatory capital positions.
Capital Requirements
Banner Corporation is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to capital adequacy
requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended (BHCA), and the regulations of the Federal
Reserve. Banner Bank and Islanders Bank, as state-chartered, federally insured commercial banks, are subject to the capital requirements
established by the FDIC.
The capital adequacy requirements are quantitative measures established by regulation that require Banner Corporation and the Banks to maintain
minimum amounts and ratios of capital. The Federal Reserve requires Banner Corporation to maintain capital adequacy that generally parallels
the FDIC requirements. The FDIC requires the Banks to maintain minimum ratios of Tier 1 total capital to risk-weighted assets as well as Tier
1 leverage capital to average assets. At December 31, 2014, Banner Corporation and the Banks each exceeded all current regulatory capital
requirements. (See Item 1, “Business–Regulation,” and Note 18 of the Notes to the Consolidated Financial Statements for additional information
regarding Banner Corporation’s and Banner Bank’s regulatory capital requirements.)
The following table shows the regulatory capital ratios of Banner Corporation and its subsidiaries, Banner Bank and Islanders Bank, as of
December 31, 2014, and minimum regulatory requirements for the Banks to be categorized as “well-capitalized.”
Table 23: Regulatory Capital Ratios
Capital Ratios
Banner Corporation
Banner Bank
Islanders Bank
“Well-Capitalized”
Minimum Ratio (1)
Total capital to risk-weighted assets
Tier 1 capital to risk-weighted assets
Tier 1 leverage capital to average assets
16.80%
15.54
13.41
15.53%
14.27
12.42
19.92%
18.69
13.68
10.00%
6.00
5.00
(1) A bank holding company such as Banner Corporation does not have a “Well-capitalized” measurement. “Well-capitalized” only applies
to the Banks.
Effective January 1, 2015 (with some changes transitioned into full effectiveness over two to four years), Banner and the Banks became
subject to new capital requirements adopted by the Federal Reserve and the FDIC. The new capital requirements implement the “Basel III”
regulatory capital reforms and changes required by the Dodd-Frank Act. (See Item 1, “Business–Regulation,” and Note 18 of the Notes to
the Consolidated Financial Statements for additional information regarding Banner Corporation’s and Banner Bank’s regulatory capital
requirements.)
Effect of Inflation and Changing Prices
The Consolidated Financial Statements and related financial data presented herein have been prepared in accordance with accounting principles
generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical
dollars, without considering the changes in relative purchasing power of money over time due to inflation. The primary effect of inflation on
our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates generally have a more significant effect on a financial institution’s performance
than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and
services.
79
The following table shows the obligations of Banner Corporation and its subsidiaries as of December 31, 2014 by maturity (in thousands):
Table 24: Contractual Obligations
One Year or
Less
After One to
Three Years
After Three to
Five Years
After Five
Years
Total
Advances from Federal Home Loan Bank
$
32,000
$
— $
— $
196
$
Junior subordinated debentures
Retail repurchase agreements
Operating lease obligations
Purchase obligation
—
77,185
7,612
11,075
—
—
10,411
7,873
—
—
7,626
1,944
123,716
—
9,570
—
32,196
123,716
77,185
35,219
20,892
Total
$
127,872
$
18,284
$
9,570
$
133,482
$
289,208
At December 31, 2014, we had commitments to extend credit of $1.227 billion. In addition, we have contracts with various vendors to provide
services, including information processing, for periods generally ranging from one to five years, for which our financial obligations are dependent
upon acceptable performance by the vendor. For additional information regarding future financial commitments, this discussion should be read
in conjunction with our Consolidated Financial Statements and related notes included elsewhere in this filing, including Note 27: “Financial
Instruments with Off-Balance-Sheet Risk.”
ITEM 7A – Quantitative and Qualitative Disclosures about Market Risk
See pages 72–77 of Management’s Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 8 – Financial Statements and Supplementary Data
For financial statements, see index on page 83.
ITEM 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
ITEM 9A – Controls and Procedures
The management of Banner Corporation is responsible for establishing and maintaining adequate internal control over financial reporting, as
such term is defined in Rule 13a-15(f) of the Securities Exchange Act of 1934 (Exchange Act). A control procedure, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that its objectives are met. Also, because of the inherent limitations in all
control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the
Company have been detected. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply
its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls
and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future conditions. As a result of these inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Further, projections of any evaluation of effectiveness to future periods are subject
to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e)
of the Exchange Act) was carried out under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer
and several other members of our senior management as of the end of the period covered by this report. Based on their evaluation, our Chief
Executive Officer and Chief Financial Officer concluded for the reason provided below that, as of December 31, 2014, our disclosure controls
and procedures were not effective in ensuring that the information required to be disclosed by us in the reports we file or submit under the
Exchange Act is (i) accumulated and communicated to our management (including the Chief Executive Officer and Chief Financial Officer) in
a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. We
failed to recognize the Company’s change in status, based on its increased market capitalization, from an accelerated filer to a large accelerated
filer. Accordingly, the Company did not submit this Form 10-K within the shortened time period for large accelerated filers as specified in the
Securities and Exchange Commission’s requirements. Our disclosure controls and procedures have been revised, effective immediately, to
ensure reporting within the time specified under the SEC's rules.
(b) Changes in Internal Controls Over Financial Reporting: In the quarter ended December 31, 2014, there was no change in our internal
control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
80
Management’s Annual Report on Internal Control over Financial Reporting: Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we
included a report of management’s assessment of the effectiveness of its internal controls as part of this Annual Report on Form 10-K for the
year ended December 31, 2014.
ITEM 9B – Other Information
None.
81
ITEM 10 – Directors, Executive Officers and Corporate Governance
PART III
The information required by this item contained under the section captioned “Proposal – Election of Directors,” “Meetings and Committees of
the Board of Directors” and “Shareholder Proposals” in the Proxy Statement for the Annual Meeting of Stockholders, which will be filed with
the Securities and Exchange Commission no later than 120 days after the end of our fiscal year, is incorporated herein by reference.
Information regarding the executive officers of the Registrant is provided herein in Part I, Item 1 hereof.
The information regarding our Audit Committee and Financial Expert included under the sections captioned “Meetings and Committees of the
Board of Directors” and “Audit Committee Matters” in the Proxy Statement for the Annual Meeting of Stockholders, which will be filed with
the Securities and Exchange Commission no later than 120 days after the end of our fiscal year, is incorporated herein by reference.
Reference is made to the cover page of this Annual Report and the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance”
of the Proxy Statement for the Annual Meeting of the Stockholders, which will be filed with the Securities and Exchange Commission no later
than 120 days after the end of our fiscal year, regarding compliance with Section 16(a) of the Securities Exchange Act of 1934.
Code of Ethics
The Board of Directors adopted a Code of Business Conduct and Ethics for our officers (including its senior financial officers), directors, and
employees. The Code of Business Conduct and Ethics requires our officers, directors, and employees to maintain the highest standards of
professional conduct. A copy of the Code of Business Conduct and Ethics was filed as an exhibit to our Annual Report on Form 10-K for the
year ended December 31, 2004 and is available without charge, upon request to Investor Relations, Banner Corporation, P.O. Box 907, Walla
Walla, WA 99362.
Whistleblower Program and Protections
We subscribe to the Ethicspoint reporting system and encourage employees, customers, and vendors to call the Ethicspoint hotline at 1-866-
ETHICSP (384-4277) or visit its website at www.Ethicspoint.com to report any concerns regarding financial statement disclosures, accounting,
internal controls, or auditing matters. We will not retaliate against any of our officers or employees who raise legitimate concerns or questions
about an ethics matter or a suspected accounting, internal control, financial reporting, or auditing discrepancy or otherwise assists in investigations
regarding conduct that the employee reasonably believes to be a violation of Federal Securities Laws or any rule or regulation of the Securities
Exchange Commission, Federal Securities Laws relating to fraud against shareholders or violations of applicable banking laws. Non-retaliation
against employees is fundamental to our Code of Ethics and there are strong legal protections for those who, in good faith, raise an ethical
concern or a complaint about their employer.
ITEM 11 – Executive Compensation
Information required by this item regarding management compensation and employment contracts, director compensation, and Compensation
Committee interlocks and insider participation in compensation decisions is incorporated by reference to the sections captioned “Executive
Compensation,” “Directors’ Compensation,” and “Compensation Committee Matters,” respectively, in the Proxy Statement for the Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange Commission no later than 120 days after the end of our fiscal
year.
ITEM 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
(a) Security Ownership of Certain Beneficial Owners and Management
Information required by this item is incorporated herein by reference to the section captioned "Security Ownership of Certain Beneficial Owners
and Management" in the proxy statement for the Annual Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission no later than 120 days after the end of our fiscal year.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference to the section captioned "Security Ownership of Certain Beneficial Owners
and Management" in the proxy statement for the Annual Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission no later than 120 days after the end of our fiscal year.
(c) Change in Control
Banner Corporation is not aware of any arrangements, including any pledge by any person of securities of Banner Corporation, the operation
of which may at a subsequent date result in a change in control of Banner Corporation.
82
(d) Equity Compensation Plan Information
The following table sets forth information about equity compensation plans that provide for the award of securities or the grant of options to
purchase securities to employees and directors of Banner and its subsidiaries that were in effect at December 31, 2014:
Plan category
Equity compensation plans approved by security holders
1998 Stock Option Plan
2001 Stock Option Plan
2012 Restricted Stock and Incentive Bonus Plan
2014 Omnibus Incentive Plan
Equity compensation plans not approved by security holders
Total
(A)
(B)
(C)
Number of securities
to be issued upon
exercise of
outstanding options
or maturity of
outstanding restricted
stock grants
Weighted average
exercise price of
outstanding options
and rights
Number of securities
remaining available for
future issuance under
equity compensation
plans excluding
securities reflected in
column (A)
216.16
202.95
n/a
n/a
2,493
8,171
$
$
185,537
9,352
205,553
—
205,553
33,222
890,648
923,870
—
923,870
There were no shares tendered in connection with option exercises during the years ended December 31, 2014 and 2013, respectively. Restricted
shares canceled to pay withholding taxes totaled 14,422 and 12,185 during the years ended December 31, 2014 and 2013, respectively.
ITEM 13 – Certain Relationships and Related Transactions, and Director Independence
The information required by this item contained under the sections captioned “Related Party Transactions” and “Director Independence” in the
Proxy Statement for the Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission no later than 120
days after the end of our fiscal year, is incorporated herein by reference.
ITEM 14 – Principal Accounting Fees and Services
The information required by this item contained under the section captioned “Independent Auditors” in the Proxy Statement for the Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange Commission no later than 120 days after the end of our fiscal
year, is incorporated herein by reference.
83
ITEM 15 – Exhibits and Financial Statement Schedules
PART IV
(a)
(1)
Financial Statements
See Index to Consolidated Financial Statements on page 86.
(2)
Financial Statement Schedules
All financial statement schedules are omitted because they are not applicable or not required, or because the required information
is included in the Consolidated Financial Statements or the Notes thereto or in Part 1, Item 1.
(3)
Exhibits
See Index of Exhibits on page 159.
(b)
Exhibits
See Index of Exhibits on page 159.
84
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 16, 2015
Banner Corporation
/s/ Mark J. Grescovich
Mark J. Grescovich
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
/s/ Mark J. Grescovich
Mark J. Grescovich
President and Chief Executive Officer; Director
(Principal Executive Officer)
/s/ Lloyd W. Baker
Lloyd W. Baker
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 16, 2015
/s/ John R. Layman
John R. Layman
Director
Date: March 16, 2015
/s/ Connie R. Collingsworth
Connie R. Collingsworth
Director
Date: March 16, 2015
/s/ Gary Sirmon
Gary Sirmon
Chairman of the Board
Date: March 16, 2015
/s/ Brent A. Orrico
Brent A. Orrico
Director
Date: March 16, 2015
/s/ Michael M. Smith
Michael M. Smith
Director
Date: March 16, 2015
/s/ Constance H. Kravas
Constance H. Kravas
Director
Date: March 16, 2015
Date: March 16, 2015
/s/ Robert D. Adams
Robert D. Adams
Director
Date: March 16, 2015
/s/ Jesse G. Foster
Jesse G. Foster
Director
Date: March 16, 2015
/s/ D. Michael Jones
D. Michael Jones
Former President and Chief Executive Officer; Director
Date: March 16, 2015
/s/ Gordon E. Budke
Gordon E. Budke
Director
Date: March 16, 2015
/s/ David A. Klaue
David A. Klaue
Director
Date: March 16, 2015
85
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
BANNER CORPORATION AND SUBSIDIARIES
(Item 8 and Item 15(a)(1))
Report of Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management Report on Internal Control Over Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Financial Condition as of December 31, 2014 and 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for the Years Ended December 31, 2014, 2013 and 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2014, 2013 and 2012 . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2014, 2013 and 2012 . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
87
87
88
89
90
91
92
96
98
86
March 16, 2015
Report of Management
To the Shareholders:
The management of Banner Corporation (the Company) is responsible for the preparation, integrity, and fair presentation of its published financial
statements and all other information presented in this annual report. The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America and, as such, include amounts based on informed judgments and estimates made
by management. In the opinion of management, the financial statements and other information herein present fairly the financial condition and
operations of the Company at the dates indicated in conformity with accounting principles generally accepted in the United States of America.
Management is responsible for establishing and maintaining an effective system of internal control over financial reporting. The internal control
system is augmented by written policies and procedures and by audits performed by an internal audit staff (assisted in certain instances by
contracted external audit resources other than the independent registered public accounting firm), which reports to the Audit Committee of the
Board of Directors. Internal auditors monitor the operation of the internal and external control system and report findings to management and
the Audit Committee. When appropriate, corrective actions are taken to address identified control deficiencies and other opportunities for
improving the system. The Audit Committee provides oversight to the financial reporting process. There are inherent limitations in the
effectiveness of any system of internal control, including the possibility of human error and circumvention or overriding of controls. Accordingly,
even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Further, because
of changes in conditions, the effectiveness of an internal control system may vary over time.
The Audit Committee of the Board of Directors is comprised entirely of outside directors who are independent of the Company’s management. The
Audit Committee is responsible for the selection of the independent auditors. It meets periodically with management, the independent auditors
and the internal auditors to ensure that they are carrying out their responsibilities. The Committee is also responsible for performing an oversight
role by reviewing and monitoring the financial, accounting, and auditing procedures of the Company in addition to reviewing the Company’s
financial reports. The independent auditors and the internal auditors have full and free access to the Audit Committee, with or without the
presence of management, to discuss the adequacy of the internal control structure for financial reporting and any other matters which they believe
should be brought to the attention of the Committee.
Mark J. Grescovich, Chief Executive Officer
Lloyd W. Baker, Chief Financial Officer
Management Report on Internal Control over Financial Reporting
March 16, 2015
The management of Banner Corporation is responsible for establishing and maintaining adequate internal control over financial reporting, as
such term is defined in Exchange Act Rule 13a-15(f).
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. All internal control systems,
no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding
controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial
statement preparation. Also, projection of any evaluation of effectiveness to future periods is subject to risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management with the participation of the Chief Executive Officer and Chief Financial Officer assessed the effectiveness of Banner Corporation’s
internal control over financial reporting as of December 31, 2014. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013).
Based on its assessment, Management concluded that Banner Corporation maintained effective internal control over financial reporting as of
December 31, 2014.
The Company’s independent registered public accounting firm has audited the Company’s consolidated financial statements and the effectiveness
of our internal control over financial reporting as of and for the year ended December 31, 2014 that are included in this annual report and issued
their Report of Independent Registered Public Accounting Firm, appearing under Item 8. The attestation report expresses an unqualified opinion
on the effectiveness of the Company’s internal controls over financial reporting as of December 31, 2014.
87
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Banner Corporation and Subsidiaries
Walla Walla, Washington
We have audited the accompanying consolidated statements of financial condition of Banner Corporation and subsidiaries, (the “Company”) as
of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity,
and cash flows for each of the three years in the period ended December 31, 2014. We also have audited the Company’s internal control over
financial reporting as of December 31, 2014, based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control — Integrated Framework (2013). The Company’s management is responsible for these consolidated
financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial
reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated
financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that
our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position
of Banner Corporation and subsidiaries as of December 31, 2014 and 2013, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 2014, in conformity with generally accepted accounting principles. Also in our
opinion, Banner Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2014, based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control — Integrated Framework (2013).
/s/Moss Adams LLP
Portland, Oregon
March 16, 2015
88
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except shares)
December 31, 2014 and 2013
ASSETS
Cash and due from banks
Securities—trading, amortized cost $47,480 and $75,150, respectively
Securities—available-for-sale, amortized cost $411,424 and $474,960, respectively
Securities—held-to-maturity, fair value $137,608 and $103,610, respectively
Federal Home Loan Bank stock
Loans receivable:
Held for sale
Held for portfolio
Allowance for loan losses
Accrued interest receivable
Real estate owned (REO), held for sale, net
Property and equipment, net
Intangible assets, net
Bank-owned life insurance (BOLI)
Deferred tax assets, net
Income tax receivable, net
Other assets
LIABILITIES
Deposits:
Non-interest-bearing
Interest-bearing transaction and savings accounts
Interest-bearing certificates
Advances from FHLB at fair value
Other borrowings
Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities)
Accrued expenses and other liabilities
Deferred compensation
COMMITMENTS AND CONTINGENCIES (Notes 19 and 27)
STOCKHOLDERS’ EQUITY
Preferred stock - $0.01 par value, 500,000 shares authorized;
no shares outstanding at December 31, 2014 and December 31, 2013
Common stock and paid in capital - $0.01 par value per share, 50,000,000 shares authorized, 19,571,548
shares issued and outstanding at December 31, 2014; 19,543,769 shares issued and 19,509,429 shares
outstanding at December 31, 2013
Retained earnings (accumulated deficit)
Accumulated other comprehensive loss
Unearned shares of common stock issued to Employee Stock Ownership Plan (ESOP) at cost: no shares
outstanding at December 31, 2014 and 34,340 restricted shares outstanding at December 31, 2013
Carrying value of shares held in trust for stock related compensation plans
Liability for common stock issued to deferred, stock related, compensation plans
See notes to consolidated financial statements
89
2014
$
126,072
$
40,258
411,021
131,258
27,036
2,786
3,831,034
(75,907)
3,757,913
15,279
3,352
91,185
2,831
63,759
24,607
—
29,328
2013
137,349
62,472
470,280
102,513
35,390
2,734
3,415,711
(74,258)
3,344,187
13,996
4,044
90,267
2,449
61,945
27,479
9,728
26,799
$
$
4,723,899
$
4,388,898
$
1,298,866
1,829,568
770,516
3,898,950
32,250
77,185
78,001
37,082
16,807
4,140,275
1,115,346
1,629,885
872,695
3,617,926
27,250
83,056
73,928
31,324
16,442
3,849,926
—
—
568,882
15,000
(258)
—
(6,669)
6,669
583,624
569,028
(25,073)
(2,996)
(1,987)
(7,063)
7,063
538,972
$
4,723,899
$
4,388,898
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except for per share amounts)
For the Years Ended December 31, 2014, 2013 and 2012
2014
2013
2012
INTEREST INCOME:
Loans receivable
Mortgage-backed securities
Securities and cash equivalents
INTEREST EXPENSE:
Deposits
FHLB advances
Other borrowings
Junior subordinated debentures
Net interest income before provision for loan losses
PROVISION FOR LOAN LOSSES
Net interest income
OTHER OPERATING INCOME:
Deposit fees and other service charges
Mortgage banking operations
Miscellaneous
Net gain on sale of securities
Other-than-temporary impairment recovery (loss)
Net change in valuation of financial instruments carried at fair value
Proposed acquisition termination fee
Acquisition bargain purchase gain
Total other operating income
OTHER OPERATING EXPENSES:
Salary and employee benefits
Less capitalized loan origination costs
Occupancy and equipment
Information/computer data services
Payment and card processing expenses
Professional services
Advertising and marketing
Deposit insurance
State/municipal business and use taxes
REO operations
Amortization of core deposit intangibles
Miscellaneous
Acquisition related costs
Total other operating expenses
Income before provision for (benefit from) income taxes
PROVISION FOR (BENEFIT FROM) INCOME TAXES
NET INCOME
PREFERRED STOCK DIVIDEND AND DISCOUNT ACCRETION
Preferred stock dividend
Preferred stock discount accretion
Gain on repurchase of preferred stock
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
Earnings per common share
Basic
Diluted
Cumulative dividends declared per common share
$
$
$
$
$
$
177,541
5,779
7,341
190,661
7,578
125
172
2,914
10,789
179,872
—
179,872
30,553
10,249
2,957
43,759
42
—
1,374
—
9,079
54,254
89,778
(11,730)
22,743
8,131
11,460
3,753
6,266
2,415
1,437
(446)
1,990
13,619
149,416
4,325
153,741
80,385
26,220
54,165
$
167,204
5,168
7,340
179,712
9,737
99
192
2,968
12,996
166,716
—
166,716
26,581
11,170
3,484
41,235
1,022
409
(2,278)
2,954
—
43,342
84,388
(11,227)
21,423
7,309
9,870
3,781
6,885
2,329
1,941
(689)
1,941
12,474
140,425
550
140,975
69,083
22,528
46,555
—
—
—
54,165
2.80
2.79
0.72
$
$
$
$
—
—
—
46,555
2.40
2.40
0.54
$
$
$
$
174,322
4,176
8,664
187,162
15,107
254
758
3,395
19,514
167,648
13,000
154,648
25,266
13,812
4,697
43,775
51
(409)
(16,515)
—
—
26,902
78,696
(10,404)
21,812
6,904
8,604
4,411
7,215
3,685
2,289
3,354
2,092
12,795
141,453
—
141,453
40,097
(24,785)
64,882
4,938
3,298
(2,471)
59,117
3.17
3.16
0.04
See notes to the consolidated financial statements
90
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
For the Years Ended December 31, 2014, 2013 and 2012
NET INCOME
$
54,165
$
46,555
$
64,882
2014
2013
2012
OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES:
Unrealized holding gain (loss) on securities—available-for-sale arising during the
period
Income tax benefit (expense) related to securities—available-for-sale unrealized
holding gains (losses)
Reclassification for net (gains) losses on securities—available-for-sale realized in
earnings
Income tax benefit (expense) related to securities—available-for-sale realized
(gains) losses
Amortization of unrealized gain on tax exempt securities transferred from available-
for-sale to held-to-maturity
Other comprehensive income (loss)
4,237
(7,835)
(1,525)
2,813
41
(15)
—
2,738
(116)
42
—
(5,096)
28
(10)
38
(14)
8
50
COMPREHENSIVE INCOME
$
56,903
$
41,459
$
64,932
See notes to the consolidated financial statements
91
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands)
For the Years Ended December 31, 2014, 2013 and 2012
Balance, January 1, 2014
Net income
Other comprehensive income
Accrual of dividends on common stock ($0.72/share-cumulative)
Redemption of unallocated shares upon termination of ESOP
Repurchase of shares upon termination of ESOP
Proceeds from issuance of common stock for stockholder reinvestment
program
Amortization of share-based compensation related to restricted stock
grants, net of shares surrendered
Common Stock
and Paid in
Capital
Retained
Earnings
(Accumulated
Deficit)
Accumulated
Other
Comprehensive
Income (Loss)
Unearned
Restricted
ESOP Shares
Stockholders'
Equity
Preferred Stock
$
— $
569,028
$
(25,073) $
(2,996) $
(1,987) $
538,972
54,165
(14,092)
2,738
1,987
54,165
2,738
(14,092)
—
(555)
127
2,269
(1,987)
(555)
127
2,269
BALANCE, December 31, 2014
$
— $
568,882
$
15,000
$
(258) $
— $
583,624
Continued
92
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(continued) (in thousands)
For the Years Ended December 31, 2014, 2013 and 2012
Common Stock
and Paid in
Capital
Retained
Earnings
(Accumulated
Deficit)
Accumulated
Other
Comprehensive
Income (Loss)
Unearned
Restricted
ESOP Shares
Stockholders’
Equity
Preferred Stock
Balance, January 1, 2013
$
— $
567,907
$
(61,102) $
2,101
$
(1,987) $
506,919
Net income
Other comprehensive loss
Accrual of dividends on common stock ($0.54/share-cumulative)
Proceeds from issuance of common stock for stockholder reinvestment
program
Amortization of share-based compensation related to restricted stock
grants, net of shares surrendered
46,555
(10,526)
(5,097)
72
1,049
46,555
(5,097)
(10,526)
72
1,049
BALANCE, December 31, 2013
$
— $
569,028
$
(25,073) $
(2,996) $
(1,987) $
538,972
Continued
93
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(continued) (in thousands)
For the Years Ended December 31, 2014, 2013 and 2012
Balance, January 1, 2012
$
120,702
$
531,149
$
(119,465) $
2,051
$
(1,987) $
532,450
Common Stock
and Paid in
Capital
Retained
Earnings
(Accumulated
Deficit)
Accumulated
Other
Comprehensive
Income (Loss)
Unearned
Restricted
ESOP Shares
Stockholders’
Equity
Preferred Stock
Net income
Other comprehensive income
Accretion of preferred stock discount
Repurchase of preferred stock
Gain on repurchase of preferred stock
Accrual of dividends on preferred stock
3,298
(124,000)
Accrual of dividends on common stock ($0.04/share cumulative)
Proceeds from issuance of common stock for stockholder reinvestment
program
Amortization of share-based compensation related to restricted stock
grants, net of shares surrendered
Amortization of compensation related to stock options
36,317
434
7
50
64,882
(3,298)
2,471
(4,938)
(754)
64,882
50
—
(124,000)
2,471
(4,938)
(754)
36,317
434
7
BALANCE, December 31, 2012
$
— $
567,907
$
(61,102) $
2,101
$
(1,987) $
506,919
Continued
94
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(continued) (in thousands)
For the Years Ended December 31, 2014, 2013 and 2012
2014
2013
2012
COMMON STOCK—SHARES ISSUED
Common stock, shares issued, beginning of period
19,543
19,455
17,553
Issuance of unvested restricted common stock, net
Issuance of common stock for stockholder reinvestment program
Redemption of unallocated shares upon termination of ESOP
Repurchase of shares upon termination of ESOP
Net number of shares issued during the period
73
3
(34)
(14)
28
86
2
—
—
88
COMMON SHARES ISSUED, END OF PERIOD
19,571
19,543
87
1,815
—
—
1,902
19,455
UNEARNED, RESTRICTED ESOP SHARES
—
(34)
(34)
NET COMMON STOCK—SHARES OUTSTANDING
19,571
19,509
19,421
See notes to consolidated financial statements
95
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended December 31, 2014, 2013 and 2012
OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
54,165
$
46,555
$
64,882
2014
2013
2012
Depreciation
Deferred income and expense, net of amortization
Amortization of core deposit intangibles
Gain on sale of securities, net
Other-than-temporary impairment (recovery) loss
Net change in valuation of financial instruments carried at fair value
Purchases of securities—trading
Proceeds from sales of securities—trading
Principal repayments and maturities of securities—trading
Bargain purchase gain on acquisition
Decrease (increase) in deferred taxes
Increase (decrease) in current taxes payable
Equity-based compensation
Increase in cash surrender value of BOLI
Gain on sale of loans, net of capitalized servicing rights
Gain on disposal of real estate held for sale and property and equipment
Provision for losses on loans and real estate held for sale
Origination of loans held for sale
Proceeds from sales of loans held for sale
Net change in:
Other assets
Other liabilities
Net cash provided from operating activities
INVESTING ACTIVITIES:
Purchases of securities—available-for-sale
Principal repayments and maturities of securities—available-for-sale
Proceeds from sales of securities—available-for-sale
Purchases of securities—held-to-maturity
Principal repayments and maturities of securities—held-to-maturity
Loan originations, net of principal repayments
Purchases of loans and participating interest in loans
Proceeds from sales of other loans
Net cash received from acquisitions
Purchases of property and equipment, net of sales
Proceeds from sale of real estate held for sale, net
Proceeds from FHLB stock repurchase program
Other
Net cash provided from (used by) investing activities
FINANCING ACTIVITIES
Increase in deposits, net
Advances, net of (repayments) of FHLB borrowings
Increase (decrease) in other borrowings, net
Cash dividends paid
Cash proceeds from issuance of stock for stockholder reinvestment plan
Redemption of preferred stock
Net cash provided from (used by) financing activities
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS
CASH AND DUE FROM BANKS, BEGINNING OF YEAR
8,064
1,541
1,990
(42)
—
(1,374)
(2,387)
2,387
27,709
(9,079)
2,871
11,771
2,269
(1,788)
(6,080)
(1,076)
36
(361,859)
367,888
(2,310)
3,370
98,066
(58,705)
62,520
56,267
(38,961)
9,194
(144,152)
(194,381)
11,277
127,557
(5,935)
4,923
8,354
(2,025)
(164,067)
68,938
4,992
(5,871)
(13,462)
127
—
54,724
(11,277)
137,349
7,457
3,200
1,941
(1,022)
(409)
2,278
(32,413)
34,308
6,509
—
7,528
(10,818)
1,049
(1,999)
(6,498)
(2,521)
785
(427,542)
443,225
19,426
4,327
95,366
(197,911)
84,424
103,274
(26,221)
9,788
(167,085)
(48,725)
19,305
6,809
(8,211)
16,944
1,315
(127)
(206,421)
51,417
16,993
6,423
(7,799)
72
—
67,106
(43,949)
181,298
CASH AND DUE FROM BANKS, END OF YEAR
$
126,072
$
137,349
$
(Continued on next page)
96
7,788
2,864
2,092
(51)
409
16,515
(5,408)
5,073
15,880
—
(35,007)
1,089
440
(2,554)
(10,154)
(4,614)
18,178
(503,492)
504,734
(818)
3,569
81,415
(413,482)
389,414
13,282
(23,007)
11,806
45,979
(18,477)
9,851
—
(5,613)
40,965
666
1,095
52,479
82,150
(6)
(75,495)
(6,470)
36,317
(121,528)
(85,032)
48,862
132,436
181,298
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued) (in thousands)
For the Years Ended December 31, 2014, 2013 and 2012
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid in cash
Taxes paid in cash
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
2014
2013
$
$
10,929
13,047
$
13,362
22,828
2012
20,712
9,631
Loans, net of discounts, specific loss allowances and unearned income, transferred to
real estate owned and other repossessed assets
3,493
3,448
14,070
ACQUISITIONS (Note 4):
Assets acquired
Liabilities assumed
221,206
212,127
8,710
8,710
—
—
See notes to consolidated financial statements
97
BANNER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: Banner Corporation (Banner or the Company) is a bank holding company incorporated in the State of Washington. The
Company is primarily engaged in the business of planning, directing and coordinating the business activities of two wholly-owned subsidiaries,
Banner Bank and Islanders Bank. Banner Bank is a Washington-chartered commercial bank that conducts business from its main office in Walla
Walla, Washington and, as of December 31, 2014, its 90 branch offices and ten loan production offices located in Washington, Oregon and
Idaho. Islanders Bank is also a Washington-chartered commercial bank that conducts business from three locations in San Juan County,
Washington. Banner Corporation is subject to regulation by the Board of Governors of the Federal Reserve System. Banner Bank and Islanders
Bank (the Banks) are subject to regulation by the Washington State Department of Financial Institutions, Division of Banks (DFI) and the Federal
Deposit Insurance Corporation (the FDIC).
The Company’s operating results depend primarily on its net interest income, which is the difference between interest income on interest-earning
assets, consisting of loans and investment securities, and interest expense on interest-bearing liabilities, composed primarily of customer deposits,
Federal Home Loan Bank (FHLB) advances, other borrowings and junior subordinated debentures. Net income also is affected by the level of
the Company’s other operating income, including deposit fees and service charges, loan origination and servicing fees, and gains and losses on
the sale of loans and securities, as well as non-interest operating expenses, provisions for loan losses and income tax provisions. In addition,
net income is affected by the net change in the value of certain financial instruments carried at fair value.
Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All
material intercompany transactions, profits and balances have been eliminated.
Subsequent Events: The Company has evaluated events and transactions subsequent to December 31, 2014 for potential recognition or disclosure
through March 16, 2015, which is the date the financial statements were available to be issued.
Business Combinations: Business combinations are accounted for using the acquisition method of accounting. Under the acquisition method
of accounting, assets acquired and liabilities assumed are recorded at estimated fair value at the date of acquisition. Any difference in purchase
consideration over the fair value of assets acquired and liabilities assumed results in the recognition of goodwill should purchase consideration
exceed net estimated fair values, or a bargain purchase gain, should estimated fair values exceed purchase consideration. Expenses incurred in
connection with a business combination are expensed as incurred. Changes in deferred tax asset valuation allowances acquired tax uncertainties
after the measurement period are recognized in net income.
Use of Estimates: In the opinion of management, the accompanying consolidated statements of financial condition and related consolidated
statements of operations, comprehensive income (loss), changes in stockholders’ equity and cash flows reflect all adjustments (which include
reclassification and normal recurring adjustments) that are necessary for a fair presentation in conformity with U.S. Generally Accepted
Accounting Principles (GAAP). 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 this Annual Report on Form 10-K
for the year ended December 31, 2014 filed with the Securities and Exchange Commission (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.
Securities: Securities are classified as held-to-maturity when the Company has the ability and positive intent to hold them to maturity. Securities
classified as available-for-sale are available for future liquidity requirements and may be sold prior to maturity. Securities classified as trading
are also available for future liquidity requirements and may be sold prior to maturity. Purchase premiums and discounts are recognized in interest
income using the interest method over the terms of the securities. Securities classified as held-to-maturity are carried at cost, adjusted for
amortization of premiums and accretion of discounts to maturity and, if appropriate, any other-than-temporary impairment losses. Securities
classified as available-for-sale are recorded at fair value. Unrealized holding gains and losses on securities classified as available-for-sale are
excluded from earnings and are reported net of tax as accumulated other comprehensive income (loss), a component of stockholders’ equity,
until realized. Securities classified as trading are also recorded at fair value. Unrealized holding gains and losses on securities classified as
trading are included in earnings. (See Note 22 for a more complete discussion of accounting for the fair value of financial instruments.) Declines
in the fair value of securities below their cost that are deemed to be other-than-temporary are recognized in earnings as realized losses. Realized
gains and losses on sale are computed on the specific identification method and are included in earnings on the trade date sold.
98
The Company reviews investment securities on an ongoing basis for the presence of OTTI or permanent impairment, taking into consideration
current market conditions, fair value in relationship to cost, extent and nature of the change in fair value, issuer rating changes and trends, whether
the Company intends to sell a security or if it is likely that it will be required to sell the security before recovery of the amortized cost basis of
the investment, which may be maturity, and other factors.
For debt securities, if the Company intends to sell the security or it is likely that the Company will be required to sell the security before recovering
its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If the Company does not intend to sell the security and
it is not likely that the Company will be required to sell the security but the Company does not expect to recover the entire amortized cost basis
of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a security
is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected. Projected cash
flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential
OTTI. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected
and fair value, is recognized as a charge to other comprehensive income (OCI). Impairment losses related to all other factors are presented as
separate categories within OCI.
For investment securities transferred from held-to-maturity to available-for-sale, unrealized gains or losses from the time of transfer are accreted
or amortized over the remaining life of the debt security based on the amount and timing of future estimated cash flows. The accretion or
amortization of the amount recorded in OCI increases the carrying value of the investment and does not affect earnings.
Investment in FHLB Stock: At December 31, 2014, the Company had $27.0 million in FHLB stock, compared to $35.4 million at December 31,
2013. The Banks' investments in FHLB stock are generally viewed as a long-term investment and are carried at par value ($100 per share), which
reasonably approximates its fair value. FHLB stock 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. 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.
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.
The FHLB of Seattle announced that it had a risk-based capital deficiency under the regulations of the Federal Housing Finance Agency (the
FHFA), its primary regulator, as of December 31, 2008, and that it would suspend future dividends and the repurchase and redemption of
outstanding common stock. The FHLB of Seattle announced on September 7, 2012 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 consent of the FHFA. The FHFA
subsequently approved the repurchase of portions of FHLB of Seattle stock, and as of December 31, 2014, the FHLB had repurchased $9.7
million of the Banks' stock. For the years ended December 31, 2012 and 2011, the Banks did not receive any dividend income on FHLB stock.
The FHLB continued to progress and on November 11, 2013 an Amended Consent Arrangement was agreed to with the FHLB's regulator. During
the year ended December 31, 2013, the FHLB of Seattle paid two dividends, one in August and one in October, totaling $18,000 in dividend
income for that year. During the year ended December 31, 2014, the FHLB of Seattle paid four dividends totaling $34,000 in dividend income
for the Banks for the year.
On September 25, 2014, the FHLB Seattle and FHLB Des Moines announced a proposed merger. Under this proposal, each of our Banks would
become a member of FHLB Des Moines and all shares of our FHLB Seattle stock would convert to equal shares of FHLB Des Moines stock.
If the merger is terminated by either the FHLB Des Moines or the FHLB Seattle, the terminating FHLB must pay $57 million in termination
fees. If the FHLB Seattle were to terminate the agreement, this could result in significant impairment to our investment in the FHLB Seattle,
potentially decreasing our earnings and shareholders' equity. The Company will continue to monitor the financial condition of the FHLB of
Seattle as it relates to, among other things, the recoverability of Banner's investment. Based on the above, the Company has determined there
is not any impairment on the FHLB stock investment as of December 31, 2014.
Loans Receivable: The Banks originate residential mortgage loans for both portfolio investment and sale in the secondary market. At the time
of origination, mortgage loans are designated as held for sale or held for investment. Loans held for sale are stated at lower of cost or estimated
market value determined on an aggregate basis. Net unrealized losses on loans held for sale are recognized through a valuation allowance by
charges to income. The Banks also originate construction and land development, commercial and multifamily real estate, commercial business,
agricultural and consumer loans for portfolio investment. Loans receivable not designated as held for sale are recorded at the principal amount
outstanding, net of allowance for loan losses, deferred fees, discounts and premiums. Premiums, discounts and deferred loan fees are amortized
to maturity using the level-yield methodology.
Some of the Company’s loans are reported as troubled debt restructures (TDRs). Loans are reported as restructured when the Bank grants a
concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider. Examples of such concessions include
forgiveness of principal or accrued interest, extending the maturity date(s) or providing a lower interest rate than would be normally available
for a transaction of similar risk. As a result of these concessions, loans identified as TDRs are impaired as the Bank will not collect all amounts
99
due, both principal and interest, in accordance with the terms of the original loan agreement. TDRs are accounted for in accordance with the
Banks’ impaired loan accounting policies.
Income Recognition on Nonaccrual and Impaired Loans: Interest on loans and securities is accrued as earned unless management doubts the
collectability of the asset or the unpaid interest. Interest accruals on loans are generally discontinued when loans become 90 days past due for
payment of interest and the loans are then placed on nonaccrual status. All previously accrued but uncollected interest is deducted from interest
income upon transfer to nonaccrual status. For any future payments collected, interest income is recognized only upon management’s assessment
that there is a strong likelihood that the full amount of a loan will be repaid or recovered. A loan may be put on nonaccrual status sooner than
this policy would dictate if, in management’s judgment, the interest may be uncollectable. While less common, similar interest reversal and
nonaccrual treatment is applied to investment securities if their ultimate collectability becomes questionable.
Provision and Allowance for Loan Losses: The provision for loan losses reflects the amount required to maintain the allowance for losses at an
appropriate level based upon management’s evaluation of the adequacy of general and specific loss reserves. The Company maintains an
allowance for loan losses consistent in all material respects with generally accepted accounting principles. The Company has established
systematic methodologies for the determination of the adequacy of the Company’s allowance for loan losses. The methodologies are set forth
in a formal policy and take into consideration the need for a general valuation allowance as well as specific allowances that are tied to individual
problem loans. The Company increases its allowance for loan losses by charging provisions for probable loan losses against its income and
values impaired loans consistent with accounting guidelines.
The allowance for losses on loans is maintained at a level sufficient to provide for estimated losses based on evaluating known and inherent
risks in the loan portfolio and upon the Company’s continuing analysis of the factors underlying the quality of the loan portfolio. These factors
include, among others, changes in the size and composition of the loan portfolio, delinquency rates, actual loan loss experience, current and
anticipated economic conditions, detailed analysis of individual loans for which full collectability may not be assured, and determination of the
existence and realizable value of the collateral and guarantees securing the loans. Realized losses related to specific assets are applied as a
reduction of the carrying value of the assets and charged immediately against the allowance for loan loss reserve. Recoveries on previously
charged off loans are credited to the allowance. The reserve is based upon factors and trends identified by Banner at the time financial statements
are prepared. Although the Company uses the best information available, future adjustments to the allowance may be necessary due to economic,
operating, regulatory and other conditions beyond the Company’s control. The adequacy of general and specific reserves is based on a continuing
evaluation of the pertinent factors underlying the quality of the loan portfolio as well as individual review of certain large balance loans. Large
groups of smaller-balance homogeneous loans are collectively evaluated for impairment. Loans that are collectively evaluated for impairment
include residential real estate and consumer loans and, as appropriate, smaller balance non-homogeneous loans. Larger balance non-homogeneous
residential construction and land, commercial real estate, commercial business loans and unsecured loans are individually evaluated for
impairment. Loans are considered impaired when, based on current information and events, the Company determines that it is probable that it
will be unable to collect all amounts due according to the contractual terms of the loan agreement. Factors involved in determining impairment
include, but are not limited to, the financial condition of the borrower and the value of the underlying collateral. Impaired loans are measured
based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s
observable market price or the fair value of collateral if the loan is collateral dependent. Subsequent changes in the value of impaired loans are
included within the provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the provision
that would otherwise be reported.
The Company’s methodology for assessing the appropriateness of the allowance consists of several key elements, which include specific
allowances, an allocated formula allowance and an unallocated allowance. Losses on specific loans are provided for when the losses are probable
and estimable. General loan loss reserves are established to provide for inherent loan portfolio risks not specifically provided for. The level of
general reserves is based on analysis of potential exposures existing in the loan portfolio including evaluation of historical trends, current market
conditions and other relevant factors identified by us at the time the financial statements are prepared. The formula allowance is calculated by
applying loss factors to outstanding loans, excluding those loans that are subject to individual analysis for specific allowances. Loss factors are
based on the Company’s historical loss experience adjusted for significant environmental considerations, including the experience of other
banking organizations, which in the judgment of management affects the collectability of the portfolio as of the evaluation date. The unallocated
allowance is based upon the Company’s evaluation of various factors that are not directly measured in the determination of the formula and
specific allowances.
While the Company believes the estimates and assumptions used in the determination of the adequacy of the allowance are reasonable, there
can be no assurance that such estimates and assumptions will not be proved incorrect in the future, or that the actual amount of future provisions
will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact the financial
condition and results of operations of the Company. In addition, the determination of the amount of the allowance for loan losses is subject to
review by bank regulators as part of the routine examination process, which may result in the adjustment of reserves based upon their judgment
of information available to them at the time of their examination.
Loan Origination and Commitment Fees: Loan origination fees, net of certain specifically defined direct loan origination costs, are deferred
and recognized as an adjustment of the loans’ interest yield using the level-yield method over the contractual term of each loan adjusted for
actual loan prepayment experience. Net deferred fees or costs related to loans held for sale are recognized in income at the time the loans are
sold. Loan commitment fees are deferred until the expiration of the commitment period unless management believes there is a remote likelihood
that the underlying commitment will be exercised, in which case the fees are amortized to fee income using the straight-line method over the
commitment period. If a loan commitment is exercised, the deferred commitment fee is accounted for in the same manner as a loan origination
fee. Deferred commitment fees associated with expired commitments are recognized as fee income.
100
Real Estate Held for Sale: Property acquired by foreclosure or deed in lieu of foreclosure is recorded at the lower of the estimated fair value of
the property, less expected selling costs, or the carrying value of the defaulted loan. Development and improvement costs relating to the property
are capitalized while direct holding costs are expensed. The carrying value of the property is periodically evaluated by management and, if
necessary, allowances are established to reduce the carrying value to net realizable value. Gains or losses at the time the property is sold are
charged or credited to operations in the period in which they are realized. The amounts the Banks will ultimately recover from real estate held
for sale may differ substantially from the carrying value of the assets because of market factors beyond the Banks’ control or because of changes
in the Banks’ strategies for recovering the investment.
Property and Equipment: The provision for depreciation is based upon the straight-line method applied to individual assets and groups of assets
acquired in the same year at rates adequate to charge off the related costs over their estimated useful lives:
Buildings and leased improvements
Furniture and equipment
10–30 years
3–10 years
Routine maintenance, repairs and replacement costs are expensed as incurred. Expenditures which significantly increase values or extend useful
lives are capitalized. The Company reviews buildings, leasehold improvements and equipment for impairment whenever events or changes in
circumstances indicate that the undiscounted cash flows for the property are less than its carrying value. If identified, an impairment loss is
recognized through a charge to earnings based on the fair value of the property.
Other Intangible Assets: Other intangible assets consist primarily of core deposit intangibles (CDI), which are amounts recorded in business
combinations or deposit purchase transactions related to the value of transaction-related deposits and the value of the customer relationships
associated with the deposits. Core deposit intangibles are being amortized on an accelerated basis over a weighted average estimated useful life
of three to eight years. These assets are reviewed at least annually for events or circumstances that could impact their recoverability. These
events could include loss of the underlying core deposits, increased competition or adverse changes in the economy. To the extent other identifiable
intangible assets are deemed unrecoverable, impairment losses are recorded in other non-interest expense to reduce the carrying amount of the
assets.
Mortgage Servicing Rights: Servicing assets are recognized as separate assets when rights are acquired through purchase or sale of
loans. Generally, purchased servicing rights are capitalized at the cost to acquire the rights. For sales of mortgage loans, the value of the servicing
right is estimated and capitalized. Fair value is based on market prices for comparable mortgage servicing contracts. Capitalized servicing rights
are reported in other assets and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing
income of the underlying financial assets.
Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined
by stratifying rights into tranches based on predominant risk characteristics for the underlying loans, such as interest rate, balance outstanding,
loan type, age and remaining term, and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the
extent that fair value is less than the capitalized amount for the tranche. If the Company later determines that all or a portion of the impairment
no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase to income.
Servicing fee income is recorded for fees earned for servicing loans and is reflected in mortgage banking operations on the consolidated statement
of operations. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income
when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income.
Bank-Owned Life Insurance (BOLI): The Banks have purchased, or acquired through mergers, life insurance policies in connection with the
implementation of certain executive supplemental income, salary continuation and deferred compensation retirement plans. These policies
provide protection against the adverse financial effects that could result from the death of a key employee and provide tax-exempt income to
offset expenses associated with the plans. It is the Banks’ intent to hold these policies as a long-term investment; however, there may be an
income tax impact if the Bank chooses to surrender certain policies. Although the lives of individual current or former management-level
employees are insured, the Banks are the respective owners and sole or partial beneficiaries. At December 31, 2014 and 2013, the cash surrender
value of these policies was $63.8 million and $61.9 million, respectively.
Derivative Instruments: Derivatives include “off-balance-sheet” financial products, the value of which is dependent on the value of underlying
financial assets, such as stock, bonds, foreign currency, or a reference rate or index. Such derivatives include “forwards,” “futures,” “options”
or “swaps.” As a result of the 2007 acquisition of F&M Bank, Banner Bank became a party to approximately $23 million ($13 million as of
December 31, 2014) in notional amounts of interest rate swaps. Some of these swaps serve as hedges to an equal amount of fixed rate loans
which include market value prepayment penalties that mirror the provision of the specifically matched interest rate swaps. In addition, in 2011
we began actively marketing interest rate swaps to certain loan customers in connection with longer-term floating rate loans, allowing them to
effectively fix their loan interest rates. These customer swaps are matched with third party swaps with qualified broker/dealer or banks to offset
the risk. As of December 31, 2014, we had $129 million in notional amounts of these customer interest rate swaps outstanding, with an equal
amount of offsetting third party swaps also in place. The fair value adjustments for these swaps and the related loans are reflected in other assets
or other liabilities as appropriate, and in the carrying value of the related loans.
Further, as a part of its mortgage banking activities, the Company issues “rate lock” commitments to borrowers and obtains offsetting “best
efforts” delivery commitments from purchasers of loans. The Company also uses forward contracts for the sale of mortgage-backed securities
101
and mandatory delivery commitments for the sale of loans to hedge "rate lock" commitments and loans held for sale. The commitments to
originate mortgage loans held for sale and the related delivery contracts are considered derivatives. The Company recognizes all derivatives as
either assets or liabilities in the balance sheet and requires measurement of those instruments at fair value through adjustments to current
earnings. None of these residential mortgage loan related derivatives are designated as hedging instruments for accounting purposes. Rather,
they are accounted for as free-standing derivatives, or economic hedges, and the Company reports changes in fair values of its derivatives in
current period net income. The fair value of the derivative loan commitments is estimated using the present value of expected future cash
flows. Assumptions used include rate assumptions based on historical information, current mortgage interest rates, the stage of completion of
the underlying application and underwriting process, the time remaining until the expiration of the derivative loan commitment, and the expected
net future cash flows related to the associated servicing of the loan (see Note 28 for a more complete discussion of derivatives and hedging).
Transfers of Financial Assets: Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control
over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Banks, (2) the transferee obtains the right
(free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Banks do not
maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Advertising Expenses: Advertising costs are expensed as incurred. Costs related to production of advertising are considered incurred when the
advertising is first used.
Income Taxes: The Company files a consolidated income tax return including all of its wholly-owned subsidiaries on a calendar year
basis. Income taxes are accounted for using the asset and liability method. Under this method, a deferred tax asset or liability is determined
based on the enacted tax rates which will be in effect when the differences between the financial statement carrying amounts and tax bases of
existing assets and liabilities are expected to be reported in the Company’s income tax returns. The effect on deferred taxes of a change in tax
rates is recognized in income in the period of change. A valuation allowance is recognized as a reduction to deferred tax assets when management
determines it is more likely than not that deferred tax assets will not be available to offset future income tax liabilities.
Accounting standards for income taxes prescribe a recognition threshold and measurement process for financial statement recognition and
measurement of uncertain tax positions taken or expected to be taken in a tax return, and also provides guidance on the de-recognition of
previously recorded benefits and their classification, as well as the proper recording of interest and penalties, accounting in interim periods,
disclosures and transition. The Company periodically reviews its income tax positions based on tax laws and regulations and financial reporting
considerations, and records adjustments as appropriate. This review takes into consideration the status of current taxing authorities’examinations
of the Company’s tax returns, recent positions taken by the taxing authorities on similar transactions, if any, and the overall tax environment.
As of December 31, 2014, the Company had an insignificant amount of unrecognized tax benefits for uncertain tax positions, none of which
would materially affect the effective tax rate if recognized. The Company does not anticipate that the amount of unrecognized tax benefits will
significantly increase or decrease in the next twelve months. The Company’s policy is to recognize interest and penalties on unrecognized tax
benefits in the income tax expense. The amount of interest and penalties accrued for the years ended December 31, 2014 and 2013 is immaterial.
The Company files consolidated income tax returns in Oregon and Idaho and for federal purposes. The Company has tax years 2011–2013 open
for tax examination under the statute of limitation provisions of the Internal Revenue Code of 1986 (Code). Tax years 2008–2010 are not open
for assessment of additional tax, but remain open for adjustment to the amount of Net Operating Losses (NOLs), credit, and other carryforwards
utilized in open years or to be utilized in the future.
Employee Stock Ownership Plan: In 1995, the Company established an ESOP and related trust for eligible employees of Banner Bank as of
January 1, 1995 and eligible employees of the Banks or Company employed after such date. No ESOP contributions were made for the years
ended December 31, 2014, 2013 or 2012. On December 17, 2013, the Company's Board of Directors elected to terminate the ESOP effective
January 1, 2014. Termination of the ESOP had no impact on the net equity position of the Company or its current and future operating results.
Share-Based Compensation: At December 31, 2014, the Company had the following share-based employee/director compensation plans as
approved by the shareholders: the 1998 Stock Option Plan, and the 2001 Stock Option Plan (collectively, the SOPs), the 2012 Restricted Stock
and Incentive Bonus Plan, the 2006 Banner Corporation Long-Term Incentive Plan and the Banner Corporation 2014 Omnibus Incentive Plan. In
addition, in 2011 and 2010, the Company made restricted stock grants to Mark Grescovich, President and CEO of Banner Bank and Banner
Corporation, in accordance with his employment agreement.
The Company has adopted the fair value recognition for recognizing stock compensation expense, using the modified-prospective-transition
method. Under that method, compensation costs are recognized based upon grant date fair value. This method requires the cash flows resulting
from the tax benefits of tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as
financing cash flows. The restricted stock grants value shares awarded at their fair value, which is their intrinsic value on the date of the award
grant. The expense of the award grants are accrued ratably over the vesting period from the date of each award. These plans are described more
fully in Note 16.
The Banner Corporation Long-Term Incentive Plan (the Plan) was initiated in June 2006. The Plan is an account-based type of benefit, the value
of which is directly related to changes in the value of the Company’s common stock (the excess of the fair market value of a share of the
Company’s common stock on the date of vesting over the fair market value of such share on the date granted) plus, for certain awards, dividends
declared on the Company’s common stock and changes in Banner Bank’s average earnings rate. Awards granted through the Plan are considered
stock appreciation rights (SARs) and are included in deferred compensation. The Company remeasures the fair value of a SAR each reporting
period until the award is settled and compensation expense is recognized each reporting period for changes in the SAR’s fair value and vesting.
102
Banner Corporation 2014 Omnibus Incentive Plan: The 2014 Plan was approved by shareholders on April 22, 2014. The 2014 Plan provides
for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance
shares, performance units, other stock-based awards and other cash awards, and provides for vesting requirements which may include time-
based or performance-based conditions. The Company has reserved 900,000 shares of its common stock for issuance under the 2014 Plan in
connection with exercise of awards. As of December 31, 2014, 9,352 shares had been granted to directors under the 2014 Omnibus Incentive
Plan.
Comprehensive Income (Loss): Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net
income. In addition, certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as
a separate component of the equity section of the Consolidated Statements of Financial Condition, and such items, along with net income, are
components of comprehensive income (loss) which is reported in the Consolidated Statements of Comprehensive Income (Loss).
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. The Banks’ primary business is that of a traditional banking institution, gathering deposits and
originating loans for portfolio in its respective primary market areas. The Banks offer a wide variety of deposit products to their consumer and
commercial customers. Lending activities include the origination of real estate, commercial/agriculture business and consumer loans. Banner
Bank is also an active participant in the secondary market, originating residential loans for sale on both a servicing released and servicing retained
basis. In addition to interest income on loans and investment securities, the Banks receive other income from deposit service charges, loan
servicing fees and from the sale of loans and investments. The performance of the Banks is reviewed by the Company’s executive management
and Board of Directors on a monthly basis. All of the executive officers of the Company are members of Banner Bank’s management team.
Generally Accepted Accounting Principles establish standards to report information about operating segments in annual financial statements and
require reporting of selected information about operating segments in interim reports to stockholders. The Company has determined that its
current business and operations consist of a single business segment.
Reclassification: Certain reclassifications have been made to the prior years’ consolidated financial statements and/or schedules to conform to
the current year’s presentation. These reclassifications may have affected certain reported amounts and ratios for the prior periods. These
reclassifications had no effect on retained earnings (accumulated deficit) or net income as previously presented and the effect of these
reclassifications is considered immaterial.
Note 2: RECENT DEVELOPMENTS AND SIGNIFICANT EVENTS
Proposed Acquisition of AmericanWest Bank: On November 5, 2014, we announced the execution of a definitive agreement to purchase Starbuck
Bancshares, Inc. (Starbuck) the bank holding company of AmericanWest Bank (AmericanWest), a Washington state chartered commercial bank
headquartered in Spokane, Washington, with 94 branches serving markets in Washington, Oregon, Idaho, California and Utah. The merger
agreement provides that Starbuck will merge with and into a wholly-owned subsidiary of the Company. Immediately following the merger,
Starbuck's wholly owned bank subsidiary, AmericanWest will merge with Banner Bank. At September 30, 2014, AmericanWest had $4.1 billion
in assets, $2.5 billion in net loans, $3.3 billion in deposits and members' equity of $561.3 million excluding AmericanWest's recent acquisition
of Greater Sacramento Bancorp, which was completed on February 6, 2015. At September 30, 2014, Greater Sacramento Bancorp had $481
million in assets, $410 million in deposits and stockholders' equity of $39 million. The merged banks will operate under the Banner Bank brand.
Under the terms of the agreement, the aggregate consideration to be received by AmericanWest equity holders 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. The merger is expected to close late in the second quarter or early in the third
quarter of 2015 and is subject to approval by regulatory agencies, obtaining the requisite shareholder approval to issue the shares necessary to
complete the transaction, as well as other customary closing conditions. Upon completion of the AmericanWest merger, Banner Bank will have
more than 190 locations in five western states, a significantly expanded customer base and meaningfully increased business opportunities.
Shareholder Equity Transactions
Restricted Stock Grants: Under the 2012 Restricted Stock Plan, which was approved on April 24, 2012, the Company is authorized to issue up
to 300,000 shares of its common stock to provide a means for attracting and retaining highly skilled officers of Banner Corporation and its
affiliates. Shares granted under the Plan have a minimum vesting period of three years. The Plan will continue in effect for a term of ten years,
after which no further awards may be granted. Vesting requirements may include time-based conditions, performance-based conditions, or
market-based conditions. The 2012 Restricted Stock Plan was amended on April 23, 2013 to provide for the ability to grant (1) cash-denominated
incentive-based awards payable in cash or common stock, including those that are eligible to qualify as qualified performance-based compensation
for the purposes of Section 162(m) of the Code and (2) restricted stock awards that qualify as qualified performance-based compensation for
the purposes of Section 162(m) of the Code. As of December 31, 2014, the Company had granted 266,778 shares of restricted stock from the
2012 Restricted Stock Plan, of which 81,241 shares had vested and 185,537 shares remain unvested.
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
103
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.
Common Stock Repurchase Program: On March 26, 2014, the Company announced that its Board of Directors had authorized the repurchase
of up to 978,826 shares of the Company's common stock, or 5% of the Company's outstanding shares. Under the plan, shares may be repurchased
by the Company in open market purchases. The extent to which the Company repurchases its shares and the timing of such repurchases will
depend upon market conditions and other corporate considerations.
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.
104
Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures
In June 2014, FASB issued ASU No. 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures, which requires
the Company to consider these transactions as secured borrowings. The ASU seeks to prevent activities used leading up to the financial crisis
regarding repurchase agreements, whereby pledges to maturity were recorded as sales, which may have over-reported income and may have
under-reported liabilities, making it difficult for stakeholders to understand how a company was performing. The accounting changes in this
ASU are effective for public business entities for the first interim or annual period beginning after December 15, 2014. Earlier application for
a public business entity is prohibited. The accounting changes in this ASU are not expected to have a material impact on the Company's
consolidated financial statements.
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 ASU 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, 2015 and is not expected to have
a material impact on the Company's consolidated financial statements.
Income Statement—Extraordinary and Unusual Items (Subtopic 225-20)
In January 2015, FASB issued ASU No. 2015-01, Income Statement—Extraordinary and Unusual Items (Subtopic 225-20). The ASU eliminates
from GAAP the concept of extraordinary items. Under subtopic 225-20, entities were required to separately classify, present, and disclose
extraordinary events and transactions that were both unusual in nature and infrequent in occurrence. This amendment will save time and reduce
costs for preparers, as well as alleviate uncertainty for auditors and regulators in evaluating potentially extraordinary items. The amendment is
effective for fiscal years and interim reporting periods after December 15, 2015. It may be applied prospectively, and retrospectively to all
reporting periods presented in the financial statements. The adoption of ASU No. 2015-01 is not expected to have a material impact on the
Company's consolidated financial statements.
Note 4: BUSINESS COMBINATIONS
Acquisition of Siuslaw Financial Group, Inc.
Effective as of the close of business on March 6, 2015, the Company completed the purchase of Siuslaw Financial Group, Inc. (Siuslaw), the
holding company of Siuslaw Bank, an Oregon state chartered commercial bank. The results of Siuslaw's operations will be included in the
Company's operating results beginning March 7, 2015 and the combined company's banking operations will operate under the Banner Bank
name and brand. As of March 6, 2015, Siuslaw had $370 million in total assets, $252 million in loans, and $318 million in deposits.
The structure of the transaction is as follows:
•
•
Siuslaw merged with and into the Company and, immediately following, Siuslaw Bank merged with and into Banner Bank;
Siuslaw shareholders received 0.32231 shares of the Company's common stock and $1.41622 in cash in exchange for each share of
Siuslaw common stock.
Aggregate consideration for the purchase is estimated at $63.9 million and includes the following:
•
•
Cash of $5.8 million;
Common stock issued of $58.1 million.
The primary reason for the acquisition is to continue the Company's growth strategy, including expanding our geographic footprint in markets
throughout the Northwest. The assets acquired and liabilities assumed in the purchase will be accounted for under the acquisition method of
accounting and, accordingly, the assets and liabilities, both tangible and intangible will be recorded at fair value as of the acquisition date.
Preliminary fair values for all assets and liabilities are not reported herein as the Company is still in the process of determining the preliminary
fair values. The Company expects to disclose preliminary assets acquired and liabilities assumed, including fair value adjustments, as well as
supplemental pro forma information, in the Company's March 31, 2015 Form 10-Q. Goodwill will not be deductible for income tax purposes
as the acquisition is accounted for as a tax-free exchange for tax purposes.
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.
105
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 $7.0 million discount on the assets acquired in this required branch
divestiture combined with a $2.4 million core deposit intangible, net of approximately $300,000 in other fair value adjustments. The acquired
core deposit intangible 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):
Assets:
Cash
Loans receivable (contractual amount of $88.3 million)
Property and equipment
Core deposit intangible
Other assets
Total assets
Liabilities:
Deposits
Other liabilities
Total liabilities
Acquisition bargain purchase gain
Fair Value at Acquisition
June 20, 2014
$
$
127,557
87,923
3,079
2,372
275
221,206
212,085
42
212,127
9,079
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. The operating results of the Company include
the operating results produced by the six acquired branches from June 21, 2014 to December 31, 2014. Pro forma results of operations for the
years ended December 31, 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.
Acquisition Related Costs
The following table presents the key components of acquisition related costs in connection with the Branch Acquisition, the acquisition of
Siuslaw, and the proposed acquisition of AmericanWest for the years ended December 31, 2014, 2013 and 2012 (in thousands):
Acquisition-related costs recognized in other operating expenses:
Non-capitalized equipment and repairs
Client communications
Information/computer data services
Payment and processing expenses
Professional services
Miscellaneous
Years Ended December 31
$
$
2014
105
327
334
185
2,953
421
$
4,325
$
2013
2012
— $
—
—
—
550
—
550
$
—
—
—
—
—
—
—
106
Note 5: CASH AND SECURITIES
Cash, due from bank and cash equivalents consisted of the following at the dates indicated (in thousands):
Cash on hand and due from banks
Cash equivalents:
Short-term cash investments
December 31
2014
2013
125,689
$
136,810
383
539
126,072
$
137,349
$
$
Federal regulations require depository institutions to maintain certain minimum reserve balances. Included in cash and demand deposits were
required reserves of $33.0 million and $30.0 million at December 31, 2014 and 2013, respectively.
The following table sets forth a summary of Banner’s 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):
Interest-bearing deposits included in cash and due from banks
$
54,995
$
December 31
2014
U.S. Government and agency obligations
Municipal bonds:
Taxable
Tax exempt
Total municipal bonds
Corporate bonds
Mortgage-backed or related securities:
One- to four-family residential agency guaranteed
One- to four-family residential other
Multifamily agency guaranteed
Multifamily other
Total mortgage-backed securities
Asset-backed securities:
Student Loan Marketing Association (SLMA)
Other asset-backed securities
Total asset-backed securities
Equity securities (excludes FHLB stock)
Total securities
FHLB stock
33,421
29,566
141,853
171,419
25,936
58,825
713
256,272
10,497
326,307
15,629
9,766
25,395
59
582,537
27,036
2013
67,638
61,327
34,216
119,588
153,804
44,154
58,117
1,051
281,319
10,234
350,721
15,681
9,510
25,191
68
635,265
35,390
$
664,568
$
738,293
107
Securities—Trading: The amortized cost and estimated fair value of securities—trading at December 31, 2014 and 2013 are summarized as
follows (dollars in thousands):
December 31, 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
$
1,505
3.7% $
1,370
$
1,481
2.4%
Municipal bonds:
Tax exempt
Corporate bonds
Mortgage-backed or related securities:
One- to four-family residential agency guaranteed
Multifamily agency guaranteed
Total mortgage-backed or related securities
Equity securities
1,405
1,440
27,995
19,118
8,077
8,649
16,726
14
8,726
9,410
18,136
59
3.6
47.5
21.7
23.4
45.1
0.1
4,969
5,023
49,498
35,140
10,483
8,816
19,299
14
11,230
9,530
20,760
68
8.0
56.2
18.0
15.3
33.3
0.1
$
47,480
$
40,258
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 for the year ended December 31, 2014.
There were 44 sales of securities—trading totaling $34.3 million with a resulting net gain of $1.5 million for the year ended December 31, 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 for the year ended
December 31, 2013, which was related to the sale of certain equity securities issued by government-sponsored entities. There were eight sales
of securities—trading totaling $5.1 million with a resulting net gain of $13,000 for the year ended December 31, 2012. The Company did not
recognize any OTTI charges or recoveries on securities—trading during the year ended December 31, 2014. The $409,000 OTTI recovery in
2013 reversed a $409,000 OTTI charge during the year ended December 31, 2012 related to the same equity securities. There were no securities
—trading in a nonaccrual status at December 31, 2014 and 2013. Net unrealized holding gains of $5.5 million were recognized in 2014.
The amortized cost and estimated fair value of securities—trading at December 31, 2014 and 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.
Maturing in one year or less
Maturing after one year through five years
Maturing after five years through ten years
Maturing after ten years through twenty years
Maturing after twenty years
Equity securities
December 31, 2014
December 31, 2013
Amortized Cost
Fair Value
Amortized Cost
Fair Value
$
$
1,071
6,595
7,035
11,196
21,569
47,466
14
$
1,094
7,097
7,727
10,083
14,198
40,199
59
$
260
7,056
12,602
33,335
21,883
75,136
14
263
7,298
13,572
27,472
13,799
62,404
68
$
47,480
$
40,258
$
75,150
$
62,472
108
Securities—Available-for-Sale: The amortized cost, gross unrealized losses and gains and estimated fair value of securities— available-for-
sale at December 31, 2014 and 2013 are summarized as follows (dollars in thousands):
December 31, 2014
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Percent of
Total
U.S. Government and agency obligations
$
29,973
$
8
$
(211) $
29,770
7.2%
Municipal bonds:
Taxable
Tax exempt
Total municipal bonds
Corporate bonds
Mortgage-backed or related securities:
One- to four-family residential agency guaranteed
One- to four-family residential other
Multifamily agency guaranteed
Multifamily other
Total mortgage-backed or related securities
Asset-backed securities:
SLMA
Other asset-backed securities
Total asset-backed securities
16,565
33,394
49,959
5,000
48,001
675
241,800
10,503
300,979
15,462
10,051
25,513
65
125
190
18
758
38
627
6
1,429
167
—
167
(52)
(69)
(121)
—
(240)
—
(1,346)
(12)
(1,598)
—
(285)
(285)
16,578
33,450
50,028
5,018
48,519
713
241,081
10,497
300,810
15,629
9,766
25,395
4.0
8.2
12.2
1.2
11.8
0.2
58.7
2.5
73.2
3.8
2.4
6.2
$
411,424
$
1,812
$
(2,215) $
411,021
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
Tax exempt
Total municipal bonds
Corporate bonds
Mortgage-backed or related securities:
One- to four-family residential agency guaranteed
One- to four-family residential other
Multifamily agency guaranteed
Multifamily other
Total mortgage-backed or related securities
Asset-backed securities:
SLMA
Other asset-backed securities
Total asset-backed securities
23,842
29,229
53,071
7,001
47,077
988
271,428
10,604
330,097
15,553
10,060
25,613
100
170
270
2
648
63
402
—
1,113
128
—
128
(278)
(208)
(486)
(39)
(838)
—
(3,392)
(370)
(4,600)
—
(550)
(550)
23,664
29,191
52,855
6,964
46,887
1,051
268,438
10,234
326,610
15,681
9,510
25,191
5.0
6.2
11.2
1.5
10.0
0.2
57.1
2.2
69.5
3.3
2.0
5.3
$
474,960
$
1,630
$
(6,310) $
470,280
100.0%
109
At December 31, 2014 and 2013, an aging of unrealized losses and fair value of related securities—available-for-sale was as follows (in thousands):
December 31, 2014
Less Than 12 Months
12 Months or More
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
U.S. Government and agency obligations
$
15,983
$
(58) $
9,847
$
(153) $
25,830
$
(211)
Municipal bonds:
Taxable
Tax exempt
Total municipal bonds
Mortgage-backed or related securities:
One- to four-family residential agency guaranteed
Multifamily agency guaranteed
Multifamily other
Total mortgage-backed or related securities
Asset-backed securities:
Other asset-backed securities
7,247
9,075
16,322
6,287
76,309
8,450
91,046
(23)
(38)
(61)
(57)
(167)
(12)
(236)
3,461
3,668
7,129
11,744
95,522
—
107,266
(29)
(31)
(60)
10,708
12,743
23,451
(183)
(1,179)
—
(1,362)
18,031
171,831
8,450
198,312
(52)
(69)
(121)
(240)
(1,346)
(12)
(1,598)
—
—
9,765
(285)
9,765
(285)
$ 123,351
$
(355) $ 134,007
$
(1,860) $ 257,358
$
(2,215)
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
Tax exempt
Total municipal bonds
Corporate bonds
Mortgage-backed or related securities:
15,580
8,217
23,797
4,961
One- to four-family residential agency guaranteed
Multifamily agency guaranteed
Multifamily other
Total mortgage-backed or related securities
14,972
199,407
10,234
224,613
(261)
(205)
(466)
(39)
(133)
(3,162)
(370)
(3,665)
413
487
900
—
22,560
10,096
—
32,656
(17)
(3)
(20)
—
(705)
(230)
—
(935)
15,993
8,704
24,697
4,961
37,532
209,503
10,234
257,269
(278)
(208)
(486)
(39)
(838)
(3,392)
(370)
(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 13 sales of securities—available-for-sale totaling $56.3 million with a resulting net gain of $41,000 for the year ended December 31,
2014. There were 35 sales of securities—available-for-sale totaling $103.3 million with a resulting net loss of $116,000 for the year ended
December 31, 2013. There were three sales of securities—available-for-sale totaling $13.3 million with a resulting net gain of $38,000 for the
year ended December 31, 2012. At December 31, 2014, there were 94 securities—available-for-sale with unrealized losses, compared to 114
at December 31, 2013 and 52 at December 31, 2012. Management does not believe that any individual unrealized loss as of December 31, 2014,
2013 or 2012 represented 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—available-for-sale in a nonaccrual status at December 31,
2014 and 2013.
110
The amortized cost and estimated fair value of securities—available-for-sale at December 31, 2014 and 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.
Maturing in one year or less
Maturing after one year through five years
Maturing after five years through ten years
Maturing after ten years through twenty years
Maturing after twenty years
December 31, 2014
December 31, 2013
$
Amortized Cost
9,334
$
278,629
45,425
13,846
64,190
Fair Value
9,364
277,439
45,610
13,879
64,729
$
Amortized Cost
25,136
$
322,493
58,468
15,535
53,328
Fair Value
25,256
319,489
57,782
15,135
52,618
$
411,424
$
411,021
$
474,960
$
470,280
Securities—Held-to-Maturity: The amortized cost, gross gains and losses and estimated fair value of securities—held-to-maturity at
December 31, 2014 and 2013 are summarized as follows (dollars in thousands):
December 31, 2014
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Percent of
Total
Amortized
Cost
U.S. Government and agency obligations
$
2,146
$
— $
(19) $
2,127
1.6%
Municipal bonds:
Taxable
Tax exempt
Total municipal bonds
Corporate bonds
Mortgage-backed or related securities:
One- to four-family residential agency guaranteed
Multifamily agency guaranteed
Total mortgage-backed or related securities
12,988
106,963
119,951
1,800
1,580
5,781
7,361
371
5,948
6,319
—
1
104
105
(1)
(47)
(48)
—
(7)
—
(7)
13,358
112,864
126,222
1,800
1,574
5,885
7,459
9.9
81.5
91.4
1.4
1.2
4.4
5.6
$
131,258
$
6,424
$
(74) $
137,608
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
1.1%
Municipal bonds:
Taxable
Tax exempt
Total municipal bonds
Corporate bonds
Mortgage-backed or related securities:
Multifamily agency guaranteed
10,552
85,374
95,926
2,050
3,351
193
2,545
2,738
—
—
(204)
(1,299)
(1,503)
—
10,541
86,620
97,161
2,050
10.3
83.3
93.6
2.0
(58)
3,293
3.3
$
102,513
$
2,738
$
(1,641) $
103,610
100.0%
111
At December 31, 2014 and 2013, an age analysis of unrealized losses and fair value of related securities—held-to-maturity was as follows (in
thousands):
December 31, 2014
Less Than 12 Months
12 Months or More
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
U.S. Government and agency obligations
$
— $
— $
1,127
$
(19) $
1,127
$
(19)
Municipal bonds:
Taxable
Tax exempt
Total municipal bonds
Mortgage-backed or related securities:
724
9,097
9,821
One- to four-family residential agency guaranteed
1,018
(1)
(43)
(44)
(7)
—
592
592
—
—
(4)
(4)
724
9,689
10,413
—
1,018
$
10,839
$
(51) $
1,719
$
(23) $
12,558
$
(1)
(47)
(48)
(7)
(74)
U.S. Government and agency obligations
Municipal bonds:
Taxable
Tax exempt
Total municipal bonds
Mortgage-backed or related securities:
Multifamily agency guaranteed
December 31, 2013
Less Than 12 Months
12 Months or More
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$
1,106
$
(80) $
— $
— $
1,106
$
(80)
3,344
31,234
34,578
(110)
(1,282)
(1,392)
2,964
303
3,267
(94)
(17)
(111)
6,308
31,537
37,845
(204)
(1,299)
(1,503)
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 years ended December 31, 2014, 2013 or 2012. At December 31, 2014, there
were 25 securities—held-to-maturity with unrealized losses, compared to 36 at December 31, 2013 and five at December 31, 2012. Management
does not believe that any individual unrealized losses as of December 31, 2014 or 2013 represented 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 in a nonaccrual status at December 31, 2014 and 2013.
The amortized cost and estimated fair value of securities—held-to-maturity at December 31, 2014 and 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.
Maturing in one year or less
Maturing after one year through five years
Maturing after five years through ten years
Maturing after ten years through twenty years
Maturing after twenty years
December 31, 2014
December 31, 2013
Amortized Cost
Fair Value
Amortized Cost
Fair Value
$
$
767
14,962
24,233
76,029
15,267
$
771
15,184
24,678
81,361
15,614
$
1,270
10,834
17,948
59,643
12,818
1,281
11,206
17,908
60,791
12,424
$
131,258
$
137,608
$
102,513
$
103,610
112
Pledged Securities: The following table presents, as of December 31, 2014, investment securities which were pledged to secure borrowings,
public deposits or other obligations as permitted or required by law (in thousands):
Purpose or beneficiary:
State and local governments public deposits
Interest rate swap counterparties
Retail repurchase transaction accounts
Other
Total pledged securities
Carrying Value
Amortized Cost
Fair Value
$
$
$
116,273
11,051
98,735
248
$
116,242
10,648
98,435
248
122,130
11,051
98,735
248
226,307
$
225,573
$
232,164
Interest Income from Securities and Cash Equivalents: The following table sets forth the composition of interest income from securities and
cash equivalents for the periods indicated (in thousands):
Mortgage-backed securities interest
Other taxable interest income
Tax-exempt interest income
FHLB stock—dividend income
Total interest income from securities and cash equivalents
Years Ended December 31
2014
2013
2012
$
$
$
5,779
3,101
4,206
34
$
5,168
3,601
3,721
18
4,176
5,087
3,577
—
13,120
$
12,508
$
12,840
Note 6: LOANS RECEIVABLE AND THE ALLOWANCE FOR LOAN LOSSES
Loans receivable, including loans held for sale, at December 31, 2014 and 2013 are summarized as follows (dollars in thousands):
Commercial real estate:
Owner-occupied
Investment properties
Multifamily real estate
Commercial construction
Multifamily construction
One- to four-family construction
Land and land development:
Residential
Commercial
Commercial business
Agricultural business, including secured by farmland
One- to four-family residential
Consumer:
Consumer secured by one- to four-family
Consumer—other
Total loans outstanding
Less allowance for loan losses
December 31, 2014
December 31, 2013
Amount
Percent of Total
Amount
Percent of Total
$
546,783
856,942
167,524
17,337
60,193
219,889
102,435
11,152
723,964
238,499
539,894
222,205
127,003
14.3% $
22.3
4.4
0.4
1.6
5.7
2.7
0.3
18.9
6.2
14.1
5.8
3.3
502,601
692,457
137,153
12,168
52,081
200,864
75,695
10,450
682,169
228,291
529,494
173,188
121,834
14.7%
20.2
4.0
0.4
1.5
5.9
2.2
0.3
20.0
6.7
15.5
5.1
3.5
3,833,820
100.0%
3,418,445
100.0%
(75,907)
(74,258)
Net loans
$
3,757,913
$
3,344,187
Loan amounts are net of unearned, unamortized loan fees (and costs) of approximately $5.8 million at December 31, 2014 and approximately
$8.3 million at December 31, 2013.
113
The Company’s loans by geographic concentration at December 31, 2014 were as follows (dollars in thousands):
Commercial real estate:
Owner-occupied
Investment properties
Multifamily real estate
Commercial construction
Multifamily construction
One- to four-family construction
Land and land development:
Residential
Commercial
Commercial business
Agricultural business, including secured by
farmland
One- to four-family residential
Consumer:
Consumer secured by one- to four-family
Consumer—other
Total loans
Percent of total loans
Washington
Oregon
Idaho
Other
Total
$
$
383,950
523,806
116,793
15,599
50,931
129,499
56,675
5,781
397,103
119,617
341,944
136,888
79,520
$
86,937
124,604
35,527
—
8,850
88,468
44,707
2,529
125,235
69,843
172,974
69,172
40,803
$
56,348
60,053
14,759
1,738
412
1,922
1,053
2,842
85,580
48,997
24,223
14,984
6,243
$
19,548
148,479
445
—
—
—
—
—
116,046
42
753
1,161
437
546,783
856,942
167,524
17,337
60,193
219,889
102,435
11,152
723,964
238,499
539,894
222,205
127,003
$
2,358,106
$
869,649
$
319,154
$
286,911
$
3,833,820
61.5%
22.7%
8.3%
7.5%
100.0%
The geographic concentrations of land and land development loans by state at December 31, 2014 were as follows (dollars in thousands):
Residential:
Acquisition and development
Improved land and lots
Unimproved land
Commercial and industrial:
Improved land and lots
Unimproved land
Washington
Oregon
Idaho
Total
$
$
28,901
21,703
6,071
3,750
2,031
$
24,378
17,262
3,067
478
2,051
$
916
137
—
1,783
1,059
54,195
39,102
9,138
6,011
5,141
Total land and land development loans
$
62,456
$
47,236
$
3,895
$
113,587
Percent of land and land development loans
55.0%
41.6%
3.4%
100.0%
114
The Company originates both adjustable- and fixed-rate loans. At December 31, 2014 and 2013, the maturity and repricing composition of
those loans, less undisbursed amounts and deferred fees and origination costs, were as follows (in thousands):
Fixed-rate (term to maturity):
Maturing in one year or less
Maturing after one year through three years
Maturing after three years through five years
Maturing after five years through ten years
Maturing after ten years
Total fixed-rate loans
Adjustable-rate (term to rate adjustment):
Maturing or repricing in one year or less
Maturing or repricing after one year through three years
Maturing or repricing after three years through five years
Maturing or repricing after five years through ten years
Maturing or repricing after ten years
Total adjustable-rate loans
Total loans
December 31
2014
2013
$
$
115,571
184,707
180,449
240,742
572,793
122,313
143,322
187,279
209,869
439,004
1,294,262
1,101,787
1,468,316
416,433
566,371
87,506
932
1,390,579
279,791
541,529
99,503
5,256
2,539,558
2,316,658
$
3,833,820
$
3,418,445
The adjustable-rate loans have interest rate adjustment limitations and are generally indexed to various prime or LIBOR rates, FHLB advance
rates or One- to Five-Year Constant Maturity Treasury Indices. Future market factors may affect the correlation of the interest rate adjustment
with the rates the Banks pay on the short-term deposits that primarily have been utilized to fund these loans.
The Company’s loans to directors, executive officers and related entities are on substantially the same terms and underwriting as those prevailing
at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectability. Such loans had the
following balances and activity during the years ended December 31, 2014 and 2013 (in thousands):
Balance at beginning of year
New loans or advances
Repayments and adjustments
Balance at end of period
Years Ended December 31
2014
$
15,976
38,241
(45,608)
2013
12,463
39,921
(36,408)
8,609
$
15,976
$
$
Impaired Loans and the Allowance for Loan Losses: A loan is considered impaired when, based on current information and circumstances, the
Company determines it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan agreement,
including scheduled interest payments. Impaired loans are comprised of loans on nonaccrual, TDRs that are performing under their restructured
terms, and loans that are 90 days or more past due, but are still on accrual.
115
The amount of impaired loans and the related allocated reserve for loan losses at the dates indicated were as follows (in thousands):
December 31, 2014
December 31, 2013
Loan Amount
Allocated
Reserves
Loan Amount
Allocated
Reserves
Impaired loans:
Nonaccrual loans
Commercial real estate:
Owner-occupied
Investment properties
One- to four-family construction
Land and land development:
Residential
$
Commercial business
Agricultural business, including secured by farmland
One- to four-family residential
Consumer:
Consumer secured by one- to four-family
Consumer—other
Total nonaccrual loans
Loans 90 days past due and still accruing
Agricultural business, including secured by farmland
One- to four-family residential
Consumer:
Consumer secured by one- to four-family
Consumer—other
Total loans 90 days past due and still accruing
Troubled debt restructuring on accrual status:
Commercial real estate:
Owner-occupied
Investment properties
Multifamily real estate
One- to four-family construction
Land and land development:
Residential
Commercial business
One- to four-family residential
Consumer:
Consumer secured by one- to four-family
Consumer—other
Total troubled debt restructurings on accrual status
$
1,365
32
—
1,275
537
1,597
8,507
838
411
14,562
—
2,095
80
—
2,175
184
6,021
786
3,923
1,279
739
15,792
233
197
29,154
20
5
—
—
46
26
35
47
—
179
—
10
—
—
10
4
724
86
640
346
82
987
28
6
2,903
$
$
2,466
3,821
269
924
724
—
12,532
903
269
21,908
105
2,611
13
131
2,860
186
5,367
5,744
6,864
4,061
1,299
23,302
360
245
47,428
Total impaired loans
$
45,891
$
3,092
$
72,196
$
31
89
—
6
104
—
250
13
1
494
8
16
—
1
25
4
415
1,139
1,002
754
222
1,355
33
34
4,958
5,477
As of December 31, 2014 and 2013, the Company had commitments to advance funds up to an additional amount of $2.1 million and $225,000,
respectively, related to TDRs.
116
The following tables provide additional information on impaired loans with and without specific allowance reserves as of December 31, 2014
and December 31, 2013. Recorded investment includes the unpaid principal balance or the carrying amount of loans less charge-offs and net
deferred loan fees (in thousands):
At or For the Year Ended December 31, 2014
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
Without a specific allowance reserve (1)
Commercial real estate:
Owner-occupied
Investment properties
Commercial business
Agricultural business, including secured by farmland
One- to four-family residential
Consumer:
Consumer secured by one- to four-family
Consumer—other
$
With a specific allowance reserve (2)
Commercial real estate:
Owner-occupied
Investment properties
Multifamily real estate
One- to four-family construction
Land and land development:
Residential
Commercial business
Agricultural business, including secured by farmland
One- to four-family residential
Consumer:
Consumer secured by one- to four-family
Consumer—other
Total
Commercial real estate:
Owner occupied
Investment properties
Multifamily real estate
One- to four-family construction
Land and land development:
Residential
Commercial business
Agricultural business, including secured by farmland
One- to four-family residential
Consumer:
Consumer secured by one- to four-family
Consumer—other
$
399
32
537
853
8,546
783
295
11,445
1,149
6,022
786
3,923
2,554
739
744
17,848
368
313
34,446
1,548
6,054
786
3,923
2,554
1,276
1,597
26,394
1,151
608
$
449
32
763
853
9,244
888
305
12,534
1,149
6,426
786
3,923
3,710
739
744
18,611
368
329
36,785
1,598
6,458
786
3,923
3,710
1,502
1,597
27,855
1,256
634
$
20
5
46
26
18
11
—
126
4
724
86
640
346
82
—
1,014
64
6
2,966
24
729
86
640
346
128
26
1,032
75
6
$
526
44
566
1,122
7,284
838
270
10,650
1,315
6,101
795
2,655
2,872
762
744
18,809
410
327
34,790
1,841
6,145
795
2,655
2,872
1,328
1,866
26,093
1,248
597
—
—
—
—
29
3
—
32
12
315
45
118
89
41
—
841
16
19
1,496
12
315
45
118
89
41
—
870
19
19
$
45,891
$
49,319
$
3,092
$
45,440
$
1,528
117
At or For the Year Ended December 31, 2013
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
Without a specific allowance reserve (1)
Commercial real estate:
Owner-occupied
Investment properties
Commercial business
Agricultural business, including secured by farmland
One- to four-family residential
Consumer:
Consumer secured by one- to four-family
Consumer—other
$
With a specific allowance reserve (2)
Commercial real estate:
Owner-occupied
Investment properties
Multifamily real estate
One- to four-family construction
Land and land development:
Residential
Commercial business
One- to four-family residential
Consumer:
Consumer secured by one- to four-family
Consumer—other
Total
Commercial real estate:
Owner-occupied
Investment properties
Multifamily real estate
One- to four-family construction
Land and land development:
Residential
Commercial business
Agricultural business, including secured by farmland
One- to four-family residential
Consumer:
Consumer secured by one- to four-family
Consumer—other
$
534
429
724
105
8,611
870
276
11,549
2,118
8,759
5,744
7,133
4,985
1,298
29,834
406
370
60,647
2,652
9,188
5,744
7,133
4,985
2,022
105
38,445
1,276
646
$
584
974
1,040
105
9,229
1,013
285
13,230
2,118
10,395
5,744
7,213
6,140
1,298
31,440
407
386
65,141
2,702
11,369
5,744
7,213
6,140
2,338
105
40,669
1,420
671
$
31
89
104
8
42
13
2
289
4
415
1,139
1,002
760
222
1,579
33
34
5,188
35
504
1,139
1,002
760
326
8
1,621
46
36
$
569
624
896
110
8,889
900
287
12,275
2,192
8,353
5,705
5,870
6,053
1,340
31,668
503
390
62,074
2,761
8,977
5,705
5,870
6,053
2,236
110
40,557
1,403
677
—
—
—
8
31
1
8
48
12
241
298
239
221
59
1,032
24
21
2,147
12
241
298
239
221
59
8
1,063
25
29
$
72,196
$
78,371
$
5,477
$
74,349
$
2,195
(1)
(2)
Loans without a specific allowance reserve have not been individually evaluated for impairment, but have been included in pools of
homogeneous loans for evaluation of related allowance reserves.
Loans with a specific allowance reserve have been individually evaluated for impairment using either a discounted cash flow analysis
or, for collateral dependent loans, current appraisals to establish realizable value. These analyses may identify a specific impairment
amount needed or may conclude that no reserve is needed. Any specific impairment that is identified is included in the category’s "Related
Allowance" column.
118
The following tables present TDRs at December 31, 2014 and 2013 (in thousands):
Commercial real estate:
Owner-occupied
Investment properties
Multifamily real estate
One- to four-family construction
Land and land development:
Residential
Commercial business
One- to four-family residential
Consumer:
Consumer secured by one- to four-family
Consumer—other
Commercial real estate:
Owner-occupied
Investment properties
Multifamily real estate
One- to four-family construction
Land and land development:
Residential
Commercial business
One- to four-family residential
Consumer:
Consumer secured by one- to four-family
Consumer—other
December 31, 2014
Accrual
Status
Nonaccrual
Status
Total
TDRs
$
$
183
6,021
786
3,923
1,279
739
15,793
233
197
$
109
32
—
—
525
87
1,363
117
116
292
6,053
786
3,923
1,804
826
17,156
350
313
$
29,154
$
2,349
$
31,503
December 31, 2013
Accrual
Status
Nonaccrual
Status
Total
TDRs
$
$
186
5,367
5,744
6,864
4,061
1,299
23,302
360
245
$
613
1,630
—
269
174
164
2,474
252
123
799
6,997
5,744
7,133
4,235
1,463
25,776
612
368
$
47,428
$
5,699
$
53,127
119
The following tables present new TDRs that occurred during the years ended December 31, 2014 and 2013 (dollars in thousands):
Recorded Investment (1) (2)
Commercial real estate:
Owner-occupied
One- to four-family construction
Commercial business
One- to four-family residential
Consumer - other
Recorded Investment (1) (2)
Commercial real estate:
Owner-occupied
Multifamily real estate
One- to four-family construction
Land and land development:
Residential
Commercial business
One- to four-family residential
Year Ended December 31, 2014
Number of
Contracts
Pre-modification
Outstanding
Recorded
Investment
Post-modification
Outstanding
Recorded
Investment
$
1
10
1
4
1
$
203
2,153
100
905
9
17
$
3,370
$
203
2,153
100
862
9
3,327
Year Ended December 31, 2013
Number of
Contracts
Pre-modification
Outstanding
Recorded
Investment
Post-modification
Outstanding
Recorded
Investment
$
1
1
8
2
1
10
$
1,246
375
3,082
1,029
100
2,726
23
$
8,558
$
1,246
375
3,082
1,029
100
2,726
8,558
(1)
(2)
Since most loans were already considered classified and/or on non-accrual status prior to restructuring, the modifications did not have
a material effect on the Company’s determination of the allowance for loan losses.
The majority of these modifications do not fit into one separate type, such as: rate, term, amount, interest-only or payment; but instead
are a combination of multiple types of modifications, therefore they are disclosed in aggregate.
The following table presents TDRs which incurred a payment default within the years ended December 31, 2014 and 2013, for which the payment
default occurred within twelve months of the restructure date. A default on a restructured loan results in a transfer to nonaccrual status, a charge-
off or a combination of both (in thousands):
Construction and land
Commercial business
One- to four-family residential
Total
Years Ended December 31
2014
2013
Number of
Loans
Amount
Number of
Loans
Amount
— $
—
—
— $
—
—
—
—
2
2
2
6
$
$
483
321
222
1,026
Credit Quality Indicators: To appropriately and effectively manage the ongoing credit quality of the Company’s loan portfolio, management
has implemented a risk-rating or loan grading system for its loans. The system is a tool to evaluate portfolio asset quality throughout each
applicable loan’s life as an asset of the Company. Generally, loans and leases are risk rated on an aggregate borrower/relationship basis with
individual loans sharing similar ratings. There are some instances when specific situations relating to individual loans will provide the basis for
different risk ratings within the aggregate relationship. Loans are graded on a scale of 1 to 9. A description of the general characteristics of
these categories is shown below:
120
Overall Risk Rating Definitions: Risk-ratings contain both qualitative and quantitative measurements and take into account the financial strength
of a borrower and the structure of the loan or lease. Consequently, the definitions are to be applied in the context of each lending transaction
and judgment must also be used to determine the appropriate risk rating, as it is not unusual for a loan or lease to exhibit characteristics of more
than one risk-rating category. Consideration for the final rating is centered in the borrower’s ability to repay, in a timely fashion, both principal
and interest. There were no material changes in the risk-rating or loan grading system in 2014.
Risk Rating 1: Exceptional
A credit supported by exceptional financial strength, stability, and liquidity. The risk rating of 1 is reserved for the Company’s top quality loans,
generally reserved for investment grade credits underwritten to the standards of institutional credit providers.
Risk Rating 2: Excellent
A credit supported by excellent financial strength, stability and liquidity. The risk rating of 2 is reserved for very strong and highly stable
customers with ready access to alternative financing sources.
Risk Rating 3: Strong
A credit supported by good overall financial strength and stability. Collateral margins are strong, cash flow is stable although susceptible to
cyclical market changes.
Risk Rating 4: Acceptable
A credit supported by the borrower’s adequate financial strength and stability. Assets and cash flow are reasonably sound and provide for orderly
debt reduction. Access to alternative financing sources will be more difficult to obtain.
Risk Rating 5: Watch
A credit with the characteristics of an acceptable credit but one which requires more than the normal level of supervision and warrants formal
quarterly management reporting. Credits in this category are not yet criticized or classified, but due to adverse events or aspects of underwriting
require closer than normal supervision. Generally, credits should be watch credits in most cases for six months or less as the impact of stress
factors are analyzed.
Risk Rating 6: Special Mention
A credit with potential weaknesses that deserves management’s close attention is risk rated a 6. If left uncorrected, these potential weaknesses
will result in deterioration in the capacity to repay debt. A key distinction between Special Mention and Substandard is that in a Special Mention
credit, there are identified weaknesses that pose potential risk(s) to the repayment sources, versus well defined weaknesses that pose risk(s) to
the repayment sources. Assets in this category are expected to be in this category no more than 9-12 months as the potential weaknesses in the
credit are resolved.
Risk Rating 7: Substandard
A credit with well defined weaknesses that jeopardize the ability to repay in full is risk rated a 7. These credits are inadequately protected by
either the sound net worth and payment capacity of the borrower or the value of pledged collateral. These are credits with a distinct possibility
of loss. Loans headed for foreclosure and/or legal action due to deterioration are rated 7 or worse.
Risk Rating 8: Doubtful
A credit with an extremely high probability of loss is risk rated 8. These credits have all the same critical weaknesses that are found in a
substandard loan; however, the weaknesses are elevated to the point that based upon current information, collection or liquidation in full is
improbable. While some loss on doubtful credits is expected, pending events may strengthen a credit making the amount and timing of any loss
indeterminate. In these situations taking the loss is inappropriate until it is clear that the pending event has failed to strengthen the credit and
improve the capacity to repay debt.
Risk Rating 9: Loss
A credit that is considered to be currently uncollectible or of such little value that it is no longer a viable Bank asset is risk rated 9. Losses are
taken in the accounting period in which the credit is determined to be uncollectible. Taking a loss does not mean that a credit has absolutely no
recovery or salvage value but, rather, it is not practical or desirable to defer writing off the credit, even though partial recovery may occur in the
future.
121
The following table shows Banner’s portfolio of risk-rated loans and non-risk-rated loans by grade or other characteristic as of December 31,
2014 (in thousands):
Commercial
Real Estate
Multifamily
Real Estate
Construction
and Land
Commercial
Business
Agricultural
Business
One- to
Four-Family
Residential
Consumer
Total Loans
December 31, 2014
Risk-rated loans:
Pass (Risk
Ratings 1-5) (1) $ 1,375,885
Special
mention
Substandard
Doubtful
3,717
24,123
—
$
166,712
$
395,356
$
691,143
$
234,101
$
527,384
$
346,456
$ 3,737,037
—
812
—
—
15,650
—
27,453
5,368
—
1,055
3,343
—
63
12,447
—
140
2,601
11
32,428
64,344
11
Total loans
$ 1,403,725
$
167,524
$
411,006
$
723,964
$
238,499
$
539,894
$
349,208
$ 3,833,820
Performing loans
$ 1,402,328
$
167,524
$
409,731
$
723,427
$
236,902
$
529,292
$
347,880
$ 3,817,084
Non-performing
loans (2)
1,397
—
1,275
537
1,597
10,602
1,328
16,736
Total loans
$ 1,403,725
$
167,524
$
411,006
$
723,964
$
238,499
$
539,894
$
349,208
$ 3,833,820
(1)
The Pass category includes some performing loans that are part of homogenous pools which are not individually risk-rated. This includes
all consumer loans, all one- to four-family residential loans and, as of December 31, 2014, in the commercial business category, $115
million of credit-scored small business loans. As loans in these pools become non-performing, they are individually risk-rated.
(2) Non-performing loans include loans on non-accrual status and loans more than 90 days delinquent, but still accruing interest.
The following table shows Banner’s portfolio of risk-rated loans and non-risk-rated loans by grade or other characteristic as of December 31,
2013 (in thousands):
Commercial
Real Estate
Multifamily
Real Estate
Construction
and Land
Commercial
Business
Agricultural
Business
One- to
Four-Family
Residential
Consumer
Total Loans
December 31, 2013
Risk-rated loans:
Pass (Risk
Ratings 1-5) (1) $ 1,160,921
Special
mention
Substandard
Doubtful
6,614
26,979
544
$
131,523
$
332,150
$
655,007
$
225,329
$
511,967
$
291,992
$ 3,308,889
—
5,630
—
350
18,758
—
10,484
16,669
9
561
2,401
—
—
17,527
—
106
2,924
—
18,115
90,888
553
Total loans
$ 1,195,058
$
137,153
$
351,258
$
682,169
$
228,291
$
529,494
$
295,022
$ 3,418,445
Performing loans
$ 1,188,771
$
137,153
$
350,065
$
681,445
$
228,187
$
514,351
$
293,705
$ 3,393,677
Non-performing
loans (2)
6,287
—
1,193
724
104
15,143
1,317
24,768
Total loans
$ 1,195,058
$
137,153
$
351,258
$
682,169
$
228,291
$
529,494
$
295,022
$ 3,418,445
(1)
The Pass category includes some performing loans that are part of homogenous pools which are not individually risk-rated. This includes
all consumer loans, all one- to four-family residential loans and, as of December 31, 2013, in the commercial business category, $94
million of credit-scored small business loans. As loans in these pools become non-performing, they are individually risk-rated.
(2) Non-performing loans include loans on non-accrual status and loans more than 90 days delinquent, but still accruing interest.
122
The following tables provide additional detail on the age analysis of Banner’s past due loans as of December 31, 2014 and 2013 (in thousands):
December 31, 2014
30–59
Days Past
Due
60–89
Days Past
Due
90 Days
or More
Past Due
Total Past
Due
Current
Total Loans
Loans 90
Days or
More Past
Due and
Accruing
$
— $
639
—
—
—
840
759
—
775
597
877
59
491
1,984
—
—
—
—
—
—
—
35
466
1,623
60
88
$
— $
—
—
—
—
—
750
—
100
744
7,526
139
293
$
1,984
639
—
—
—
840
1,509
—
910
1,807
10,026
258
872
$
544,799
856,303
167,524
17,337
60,193
219,049
100,926
11,152
723,054
236,692
529,868
221,947
126,131
$
546,783
856,942
167,524
17,337
60,193
219,889
102,435
11,152
723,964
238,499
539,894
222,205
127,003
—
—
—
—
—
—
—
—
—
—
2,095
80
—
Commercial real estate:
Owner-occupied
Investment properties
Multifamily real estate
Commercial construction
Multifamily construction
One- to four-family construction
Land and land development:
Residential
Commercial
Commercial business
Agricultural business, including
secured by farmland
One- to four-family residential (1)
Consumer:
Consumer secured by one- to
four-family
Consumer—other
Total
$
5,037
$
4,256
$
9,552
$
18,845
$ 3,814,975
$ 3,833,820
$
2,175
December 31, 2013
30–59
Days Past
Due
60–89
Days Past
Due
90 Days
or More
Past Due
Total Past
Due
Current
Total Loans
Loans 90
Days or
More Past
Due and
Accruing
$
883
—
1,845
—
—
9
—
—
2,001
—
521
723
384
$
$
550
—
785
—
—
7
—
—
2
$
813
—
—
—
—
4
251
—
299
$
2,246
—
2,630
—
—
20
251
—
2,302
—
2,550
—
9,142
—
12,213
93
99
918
131
1,734
614
$
500,355
692,457
134,523
12,168
52,081
200,844
75,444
10,450
679,867
228,291
517,281
171,454
121,220
$
502,601
692,457
137,153
12,168
52,081
200,864
75,695
10,450
682,169
228,291
529,494
173,188
121,834
—
—
—
—
—
—
—
—
—
105
2,611
13
131
Commercial real estate:
Owner-occupied
Investment properties
Multifamily real estate
Commercial construction
Multifamily construction
One- to four-family construction
Land and land development:
Residential
Commercial
Commercial business
Agricultural business, including
secured by farmland
One- to four-family residential (1)
Consumer:
Consumer secured by one- to
four-family
Consumer—other
Total
$
6,366
$
4,086
$
11,558
$
22,010
$ 3,396,435
$ 3,418,445
$
2,860
(1) One- to four-family loans are not considered past due until they exceed 30 days and are not reflected herein. One- to four-family
loans exactly 30 days past due at December 31, 2014 and 2013 were $8 million and $6 million, respectively.
123
The following tables provide additional information on the allowance for loan losses and loan balances individually and collectively evaluated for impairment at or for the year ended December 31,
2014 (in thousands):
Commercial
Real Estate
Multifamily
Real Estate
Construction
and Land
Commercial
Business
Agricultural
Business
One- to Four-
Family
Residential
Consumer
Unallocated
Total
For the Year Ended December 31, 2014
Allowance for loan losses:
Beginning balance
$
Provision for loan losses
Recoveries
Charge-offs
$
16,759
1,757
1,507
(1,239)
$
5,306
(724)
—
(20)
$
17,640
6,336
1,776
(207)
$
11,773
626
988
(1,344)
$
2,841
(417)
1,576
(179)
$
11,486
(5,772)
618
(885)
$
1,335
90
528
(1,470)
$
7,118
(1,896)
—
—
74,258
—
6,993
(5,344)
Ending balance
$
18,784
$
4,562
$
25,545
$
12,043
$
3,821
$
5,447
$
483
$
5,222
$
75,907
Commercial
Real Estate
Multifamily
Real Estate
Construction
and Land
Commercial
Business
Agricultural
Business
One- to Four-
Family
Residential
Consumer
Unallocated
Total
December 31, 2014
Allowance individually evaluated
for impairment
$
728
$
86
$
986
$
82
$
— $
1,014
$
70
$
— $
2,966
Allowance collectively evaluated
for impairment
18,056
4,476
24,559
11,961
3,821
4,433
413
5,222
72,941
Total allowance for loan losses
$
18,784
$
4,562
$
25,545
$
12,043
$
3,821
$
5,447
$
483
$
5,222
$
75,907
Commercial
Real Estate
Multifamily
Real Estate
Construction
and Land
Commercial
Business
Agricultural
Business
One- to Four-
Family
Residential
Consumer
Unallocated
Total
December 31, 2014
Loan balances:
Loans individually evaluated for
impairment
Loans collectively evaluated for
impairment
Total loans
$
7,171
$
786
$
6,477
$
739
$
744
$
17,848
$
681
$
— $
34,446
1,396,554
166,738
404,529
723,225
237,755
522,046
348,527
—
3,799,374
$
1,403,725
$
167,524
$
411,006
$
723,964
$
238,499
$
539,894
$
349,208
$
— $
3,833,820
124
The following tables provide additional information on the allowance for loan losses and loan balances individually and collectively evaluated for impairment at or for the year ended December 31,
2013 (in thousands):
Commercial
Real Estate
Multifamily
Real Estate
Construction
and Land
Commercial
Business
Agricultural
Business
One- to Four-
Family
Residential
Consumer
Unallocated
Total
For the Year Ended December 31, 2013
Allowance for loan losses:
Beginning balance
$
Provision for loan losses
Recoveries
Charge-offs
$
15,322
1,639
2,367
(2,569)
$
4,506
800
—
—
$
14,991
2,195
2,275
(1,821)
$
9,957
1,925
1,673
(1,782)
$
2,295
97
697
(248)
$
16,475
(2,995)
145
(2,139)
$
1,348
1,086
340
(1,439)
$
11,865
(4,747)
—
—
76,759
—
7,497
(9,998)
Ending balance
$
16,759
$
5,306
$
17,640
$
11,773
$
2,841
$
11,486
$
1,335
$
7,118
$
74,258
Commercial
Real Estate
Multifamily
Real Estate
Construction
and Land
Commercial
Business
Agricultural
Business
One- to Four-
Family
Residential
Consumer
Unallocated
Total
December 31, 2013
Allowance individually evaluated
for impairment
$
419
$
1,139
$
1,762
$
222
$
— $
1,579
$
67
$
— $
5,188
Allowance collectively evaluated
for impairment
16,340
4,167
15,878
11,551
2,841
9,907
1,268
7,118
69,070
Total allowance for loan losses
$
16,759
$
5,306
$
17,640
$
11,773
$
2,841
$
11,486
$
1,335
$
7,118
$
74,258
Commercial
Real Estate
Multifamily
Real Estate
Construction
and Land
Commercial
Business
Agricultural
Business
One- to Four-
Family
Residential
Consumer
Unallocated
Total
December 31, 2013
Loan balances:
Loans individually evaluated for
impairment
Loans collectively evaluated
for impairment
$
10,877
$
5,744
$
12,118
$
1,298
$
— $
29,834
$
776
$
— $
60,647
1,184,181
131,409
339,140
680,871
228,291
499,660
294,246
—
3,357,798
Total loans
$
1,195,058
$
137,153
$
351,258
$
682,169
$
228,291
$
529,494
$
295,022
$
— $
3,418,445
125
Note 7: REAL ESTATE OWNED, HELD FOR SALE, NET
The following table presents the changes in real estate owned (REO), net of valuation allowance, for the years ended December 31, 2014, 2013
and 2012 (in thousands):
Years Ended December 31
2014
2013
2012
Balance, beginning of period
$
4,044
$
15,778
$
42,965
Additions from loan foreclosures
Additions from capitalized costs
Proceeds from dispositions of REO
Gain on sale of REO
Valuation adjustments in the period
3,264
30
(4,923)
973
(36)
3,166
348
(16,944)
2,481
(785)
13,930
300
(40,965)
4,725
(5,177)
Balance, end of period
$
3,352
$
4,044
$
15,778
The following table shows REO by type and geographic location by state as of December 31, 2014 (dollars in thousands):
Land development—residential
One- to four-family real estate
Total REO
Percent of total REO
Note 8: PROPERTY AND EQUIPMENT, NET
Oregon
Idaho
Total
Washington
259
1,435
1,271
355
$
1,694
$
1,626
$
32
—
32
$
1,562
1,790
3,352
50.5%
48.5%
1.0%
100.0%
Land, buildings and equipment owned by the Company and its subsidiaries at December 31, 2014 and 2013 are summarized as follows (in
thousands):
Land
Buildings and leasehold improvements
Furniture and equipment
Less accumulated depreciation
Property and equipment, net
$
December 31
2014
21,969
98,901
72,152
$
2013
19,974
99,351
65,912
193,022
185,237
(101,837)
(94,970)
$
91,185
$
90,267
The Company’s depreciation expense related to property and equipment was $8.1 million, $7.5 million, and $7.8 million for the years ended
December 31, 2014, 2013 and 2012, respectively. The Company’s rental expense was $7.6 million, $7.3 million, and $7.1 million for the years
ended December 31, 2014, 2013 and 2012, respectively.
The Company’s obligations under long-term property leases are as follows:
Year
2015
2016
2017
2018
2019
Thereafter
Amount
$ 7.6 million
5.7 million
4.7 million
4.2 million
3.4 million
9.6 million
Total
$ 35.2 million
126
Note 9: DEPOSITS
Deposits consist of the following at December 31, 2014 and 2013 (dollars in thousands):
Non-interest-bearing checking
Interest-bearing checking
Regular savings accounts
Money market accounts
Total transaction and savings accounts
Certificates of deposit:
Up to 1.00%
1.01% to 2.00%
2.01% to 3.00%
3.01% to 4.00%
4.01% and greater
Total certificates of deposit
Total deposits
Included in total deposits:
Public fund transaction accounts
Public fund interest-bearing certificates
Total public deposits
Total brokered deposits
December 31
2014
2013
Amount
Percent of
Total
Amount
Percent of
Total
1,298,866
439,480
901,142
488,946
3,128,434
643,065
87,661
32,184
3,024
4,582
770,516
33.3% $
11.3
23.1
12.5
80.2
16.5
2.3
0.8
0.1
0.1
19.8
1,115,346
422,910
798,764
408,211
2,745,231
723,891
95,663
43,062
6,663
3,416
872,695
30.8%
11.7
22.1
11.3
75.9
20.0
2.6
1.2
0.2
0.1
24.1
3,898,950
100.0% $
3,617,926
100.0%
102,854
35,346
138,200
2.6% $
0.9
87,521
51,465
3.5% $
138,986
2.4%
1.4
3.8%
4,799
0.1% $
4,291
0.1%
$
$
$
$
$
Deposits at December 31, 2014 and 2013 included deposits from the Company’s directors, executive officers and related entities totaling $6.2
million and $6.7 million, respectively.
Certificate of deposit accounts by total balance at December 31, 2014 and 2013 were as follows (in thousands):
Certificates of deposit less than $100,000
Certificates of deposit $100,000 through $250,000
Certificates of deposit more than $250,000
Total certificates of deposit
December 31
2014
358,189
275,156
137,171
$
2013
386,745
308,130
177,820
770,516
$
872,695
$
$
Certificates of deposit of $250,000 and greater totaled $141 million and $184 million at December 31, 2014 and 2013, respectively.
127
Scheduled maturities and weighted average interest rates of certificate accounts at December 31, 2014 and 2013 are as follows (dollars in
thousands):
December 31
2014
2013
Amount
Weighted
Average Rate
Amount
Weighted
Average Rate
Maturing in one year or less
Maturing after one year through two years
Maturing after two years through three years
Maturing after three years through four years
Maturing after four years through five years
Maturing after five years
$
564,501
117,724
46,378
20,016
17,338
4,559
0.46% $
0.89
1.19
1.42
1.22
2.09
660,394
117,789
47,362
26,443
17,075
3,632
Total certificates of deposit
$
770,516
1.06% $
872,695
0.47%
1.05
1.34
1.56
1.34
1.78
0.65%
The following table sets forth the deposit activities for the years ended December 31, 2014, 2013 and 2012 (in thousands):
Balance at beginning of year
Net increase before interest credited
Interest credited
Net increase in deposits
Balance at end of year
Years Ended December 31
2014
2013
2012
$
3,617,926
$
3,557,804
$
3,475,654
273,446
7,578
281,024
50,385
9,737
60,122
67,043
15,107
82,150
$
3,898,950
$
3,617,926
$
3,557,804
Deposit interest expense by type for the years ended December 31, 2014, 2013 and 2012 was as follows (in thousands):
Certificates of deposit (1)
Demand, interest-bearing checking and money market accounts
Regular savings
Years Ended December 31
2014
5,145
1,123
1,310
$
2013
6,836
1,329
1,572
$
7,578
$
9,737
$
2012
11,458
1,824
1,825
15,107
$
$
(1)
Interest expense on certificate of deposit accounts with balances of $100,000 or more totaled $3.1 million, $4.0 million, and $6.7 million
for the years ended December 31, 2014, 2013 and 2012, respectively.
128
Note 10: ADVANCES FROM FEDERAL HOME LOAN BANK OF SEATTLE
Utilizing a blanket pledge, qualifying loans receivable at December 31, 2014 and 2013, were pledged as security for FHLB borrowings and there
were no securities pledged as collateral as of December 31, 2014 or 2013. At December 31, 2014 and 2013, FHLB advances were scheduled
to mature as follows (dollars in thousands):
Maturing in one year or less
Maturing after one year through three years
Maturing after three years through five years
Maturing after five years
Total FHLB advances, at par
Fair value adjustment
December 31
2014
2013
Amount
Weighted
Average Rate
Amount
Weighted
Average Rate
$
32,000
—
—
196
32,196
54
0.27% $
—
—
5.94
0.27
27,000
—
—
203
27,203
47
0.23%
—
—
5.94
0.27
Total FHLB advances, carried at fair value
$
32,250
$
27,250
The maximum, average outstanding and year-end balances (excluding fair value adjustments) and average interest rates on advances from the
FHLB were as follows at or for the years ended December 31, 2014, 2013 and 2012 (dollars in thousands):
Maximum outstanding at any month end, at par
Average outstanding, at par
Year-end outstanding, at par
Weighted average interest rates:
Annual
End of period
At or For the Years Ended December 31
2014
2013
2012
$
$
105,450
39,121
32,196
$
60,377
18,935
27,203
10,216
10,215
10,210
0.32%
0.27%
0.52%
0.27%
2.49%
2.45%
Interest expense during the period
$
125
$
99
$
254
As of December 31, 2014, Banner Bank has established a borrowing line with the FHLB to borrow up to 35% of its total assets, contingent on
having sufficient qualifying collateral and ownership of FHLB stock. Islanders Bank has a similar line of credit, although it may borrow up to
25% of its total assets, also contingent on collateral and FHLB stock. At December 31, 2014, the maximum total FHLB credit line was $901
million and $23 million for Banner Bank and Islanders Bank, respectively.
Note 11: OTHER BORROWINGS
Other borrowings consist of retail repurchase agreements, other term borrowings and Federal Reserve Bank borrowings.
Retail Repurchase Agreements: At December 31, 2014, retail repurchase agreements carry interest rates ranging from 0.15% to 0.40%, and are
secured by the pledge of certain mortgage-backed and agency securities with a carrying value of $99 million. Banner Bank has the right to
pledge or sell these securities, but they must replace them with substantially the same security.
Federal Reserve Bank of San Francisco and Other Borrowings: Banner Bank periodically borrows funds on an overnight basis from the Federal
Reserve Bank through the Borrower-In-Custody (BIC) program. Such borrowings are secured by a pledge of eligible loans. At December 31,
2014, based upon available unencumbered collateral, Banner Bank was eligible to borrow $639 million from the Federal Reserve Bank, although,
at that date, as well as at December 31, 2013, the Bank had no funds borrowed under this or other borrowing arrangements.
There were no wholesale repurchase agreements, other short-term borrowings, or any Fed Funds, outstanding as of December 31, 2014 and
2013.
129
A summary of all other borrowings at December 31, 2014 and 2013 by the period remaining to maturity is as follows (dollars in thousands):
Retail repurchase agreements:
Maturing in one year or less
Maturing after one year through two years
Maturing after two years
Total year-end outstanding
Average outstanding
Maximum outstanding at any month-end
At or for the Years Ended December 31
2014
2013
Amount
Weighted
Average Rate
Amount
Weighted
Average Rate
$
$
$
77,185
—
—
77,185
83,965
89,921
0.20% $
—
—
0.20
0.20
n/a
$
$
83,056
—
—
83,056
84,877
91,964
0.20%
—
—
0.20
0.23
n/a
The table below summarizes interest expense for other borrowings for the years ended December 31, 2014, 2013 and 2012 (in thousands):
Retail repurchase agreements
FDIC guaranteed debt
Total expense
Years Ended December 31
2014
2013
$
172
—
172
$
$
192
—
192
$
2012
281
477
758
$
$
130
NOTE 12: JUNIOR SUBORDINATED DEBENTURES AND MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES
At December 31, 2014, six wholly-owned subsidiary grantor trusts, Banner Capital Trust II, III, IV, V, VI and VII (BCT II, BCT III, BCT IV, BCT V, BCT VI and BCT VII (collectively, the
Trusts)), established by the Company had issued $120 million of trust preferred securities to third parties, as well as $3.7 million of common capital securities, carried among other assets, which
were issued to the Company. Trust preferred securities and common capital securities accrue and pay distributions periodically at specified annual rates as provided in the indentures. The Trusts
used the proceeds from the offerings to purchase a like amount of junior subordinated debentures (the Debentures) of the Company. The Debentures are the sole assets of the Trusts. The Company’s
obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the obligations of the Trusts. The trust preferred securities
are mandatorily redeemable upon the maturity of the Debentures, or upon earlier redemption as provided in the indentures. The Company has the right to redeem the Debentures in whole on or
after specific dates, at a redemption price specified in the indentures plus any accrued but unpaid interest to the redemption date. All of the trust preferred securities issued by the Trusts qualified
as Tier 1 capital as of December 31, 2014, under guidance issued by the Board of Governors of the Federal Reserve System. At December 31, 2014, the Trusts comprised $74.3 million, or 11.8%
of the Company’s total risk-based capital.
The following table is a summary of trust preferred securities at December 31, 2014 (dollars in thousands):
Aggregate
Liquidation
Amount of
Trust
Preferred
Securities
Aggregate
Liquidation
Amount of
Common
Capital
Securities
Aggregate
Principal
Amount of
Junior
Subordinated
Debentures
Stated
Maturity
Current
Interest
Rate
Name of Trust
Reset
Period
Interest Rate
Spread
Interest Deferral
Period
Redemption Option
Banner Capital Trust II
$
15,000
$
464
$
15,464
2033
3.58% Quarterly
Three-month
LIBOR + 3.35%
20 Consecutive
Quarters
On or after
January 7, 2008
Banner Capital Trust III
15,000
Banner Capital Trust IV
15,000
Banner Capital Trust V
25,000
Banner Capital Trust VI
25,000
Banner Capital Trust VII
25,000
465
465
774
774
774
15,465
2033
3.13
Quarterly
Three-month
LIBOR + 2.90%
20 Consecutive
Quarters
On or after
October 8, 2008
15,465
2034
3.08
Quarterly
Three-month
LIBOR + 2.85%
20 Consecutive
Quarters
On or after
April 7, 2009
25,774
2035
1.80
Quarterly
Three-month
LIBOR + 1.57%
20 Consecutive
Quarters
On or after
November 23, 2010
25,774
2037
1.86
Quarterly
Three-month
LIBOR + 1.62%
20 Consecutive
Quarters
On or after
March 1, 2012
25,774
2037
1.62
Quarterly
Three-month
LIBOR + 1.38%
20 Consecutive
Quarters
On or after
July 31, 2012
Total TPS liability at par
$
120,000
$
3,716
123,716
2.32%
Fair value adjustment
Total TPS liability at fair value
(45,715)
$
78,001
131
Note 13: INCOME TAXES
The following table presents the components of the provision for income tax (benefit) expense included in the Consolidated Statement of
Operations for the years ended December 31, 2014, 2013 and 2012 (in thousands):
Current
Deferred
Increase (decrease) in valuation allowance
Provision for (benefit from) income taxes
Years Ended December 31
2014
24,855
1,365
—
$
2013
12,121
10,407
—
$
2012
10,759
841
(36,385)
26,220
$
22,528
$
(24,785)
$
$
The following tables present the reconciliation of the provision for income taxes computed at the federal statutory rate to the actual effective
rate for the years ended December 31, 2014, 2013 and 2012 (dollars in thousands):
Years Ended December 31
2014
2013
2012
Provision for (benefit from) income taxes computed at federal statutory rate
$
28,134
$
24,179
$
14,034
Increase (decrease) in taxes due to:
Tax-exempt interest
Investment in life insurance
State income taxes (benefit), net of federal tax offset
Tax credits
Valuation allowance
Other
(2,084)
(626)
916
(661)
—
541
(1,633)
(707)
824
(636)
—
501
(1,710)
(894)
539
(788)
(36,385)
419
Provision for (benefit from) income taxes
$
26,220
$
22,528
$
(24,785)
Federal income tax statutory rate
Increase (decrease) in tax rate due to:
Tax-exempt interest
Investment in life insurance
State income taxes (benefit), net of federal tax offset
Tax credits
Valuation allowance
Other
Years Ended December 31
2014
35.0%
(2.6)
(0.8)
1.1
(0.8)
—
0.7
2013
35.0%
(2.4)
(1.0)
1.2
(0.9)
—
0.7
2012
35.0 %
(4.3)
(2.2)
1.3
(2.0)
(90.7)
1.1
Effective income tax rate
32.6%
32.6%
(61.8)%
132
The following table reflects the effect of temporary differences that gave rise to the components of the net deferred tax asset as of December 31,
2014 and 2013 (in thousands):
Deferred tax assets:
REO and loan loss reserves
Deferred compensation
Net operating loss carryforward
Low income housing tax credits
State net operating losses
Other
Total deferred tax assets
Deferred tax liabilities:
FHLB stock dividends
Depreciation
Deferred loan fees, servicing rights and loan origination costs
Intangibles
Financial instruments accounted for under fair value accounting
Loan discount
Total deferred tax liabilities
Deferred income tax asset
Unrealized loss on securities—available-for-sale
$
December 31
2014
2013
$
26,536
9,223
17,577
3,676
1,009
1,344
59,365
(4,805)
(4,479)
(7,843)
(975)
(15,611)
(1,190)
(34,903)
24,462
145
17,326
7,305
27,639
3,676
957
1,235
58,138
(5,875)
(4,074)
(6,444)
(833)
(15,118)
—
(32,344)
25,794
1,685
Deferred tax asset, net
$
24,607
$
27,479
At December 31, 2014, the Company has federal and state net operating loss carryforwards of approximately $50.2 million and $21.2 million,
respectively, which will expire, if unused, by the end of 2033. The Company has federal general business credit carryforwards of $2.7 million,
which will expire, if unused, by the end of 2031. The Company also has alternative minimum tax credit carryforwards of approximately $900,000,
which are available to reduce future federal regular income taxes, if any, over an indefinite period. At December 31, 2013, the Company had
federal and state net operating loss carryforwards of approximately $79.0 million and $20.4 million, respectively, and federal general business
credits carryforwards of $2.7 million. The Company also had alternative minimum tax credit carryforwards of approximately $900,000.
As a consequence of our capital raise in June 2010, the Company experienced a change in control within the meaning of Section 382 of the
Internal Revenue Code of 1986, as amended. Section 382 limits the ability of a corporate taxpayer to use net operating loss carryforwards,
general business credit, and recognized built-in-losses incurred prior to the change in control against income earned after the change in control.
As a result of the Section 382 limitation, the Company expects it will be able to utilize approximately $6.9 million of net operating loss
carryforwards on an annual basis. Based on its analysis, the Company does not believe the change in control will impact its ability to utilize all
of the available net operating loss carryforwards, general business credit, and recognized built-in-losses.
Retained earnings (accumulated deficits) at December 31, 2014 and 2013 include approximately $5.4 million in tax basis bad debt reserves for
which no income tax liability has been booked. In the future, if this tax bad debt reserve is used for purposes other than to absorb bad debts or
the Company no longer qualifies as a bank or is completely liquidated, the Company will incur a federal tax liability at the then-prevailing
corporate tax rate, established as $1.9 million at December 31, 2014.
As of December 31, 2014, the Company had reduced its previous year's tax receivable by $9.8 million as a result of the approval of a closing
agreement with the IRS related to amended 2006, 2008 and 2009 federal income tax returns. Review of the amended federal returns was
completed by the Internal Revenue Service (IRS) in 2013 and the Company signed a closing agreement with the IRS related to refund claims
of $9.8 million, which was received in 2014.
Note 14: EMPLOYEE BENEFIT PLANS
Employee Retirement Plans: Substantially all of the Company’s employees are eligible to participate in its 401(k)/Profit Sharing Plan, a defined
contribution and profit sharing plan sponsored by the Company. Employees may elect to have a portion of their salary contributed to the plan
in conformity with Section 401(k) of the Internal Revenue Code. At the discretion of the Company’s Board of Directors, the Company may
elect to make matching and/or profit sharing contributions for the employees’ benefit. For the years ended December 31, 2014, 2013 and 2012,
$1.4 million, $1.0 million and, $43,000 respectively, was expensed for 401(k) contributions. The Board of Directors has elected to make a 4%
of eligible compensation matching contribution for 2015.
133
Supplemental Retirement and Salary Continuation Plans: Through the Banks, the Company is obligated under various non-qualified deferred
compensation plans to help supplement the retirement income of certain executives, including certain retired executives, selected by resolution
of the Banks’ Boards of Directors or in certain cases by the former directors of acquired banks. These plans are unfunded, include both defined
benefit and defined contribution plans, and provide for payments after the executive’s retirement. In the event of a participant employee’s death
prior to or during retirement, the Bank is obligated to pay to the designated beneficiary the benefits set forth under the plan. For the years ended
December 31, 2014, 2013 and 2012, expense recorded for supplemental retirement and salary continuation plan benefits totaled $1.2 million,
$1.5 million, and $879,000, respectively. At December 31, 2014 and 2013, liabilities recorded for the various supplemental retirement and salary
continuation plan benefits totaled $14.2 million and $13.6 million, respectively, and are recorded in a deferred compensation liability account.
Deferred Compensation Plans and Rabbi Trusts: The Company and the Banks also offer non-qualified deferred compensation plans to members
of their Boards of Directors and certain employees. The plans permit each participant to defer a portion of director fees, non-qualified retirement
contributions, salary or bonuses for future receipt. Compensation is charged to expense in the period earned. In connection with its acquisitions,
the Company also assumed liability for certain deferred compensation plans for key employees, retired employees and directors.
In order to fund the plans’ future obligations, the Company has purchased life insurance policies or other investments, including Banner
Corporation common stock, which in certain instances are held in irrevocable trusts commonly referred to as “Rabbi Trusts.” As the Company
is the owner of the investments and the beneficiary of the insurance policies, and in order to reflect the Company’s policy to pay benefits equal
to the accumulations, the assets and liabilities are reflected in the Consolidated Statements of Financial Condition. Banner Corporation common
stock held for such plans is reported as a contra-equity account and was recorded at an original cost of $6.7 million at December 31, 2014 and
$7.1 million at December 31, 2013. At December 31, 2014 and 2013, liabilities recorded in connection with deferred compensation plan benefits
totaled $8.2 million ($6.7 million in contra-equity) and $8.5 million ($7.1 million in contra-equity), respectively, and are recorded in deferred
compensation or equity as appropriate.
The Banks have purchased, or acquired through mergers, life insurance policies in connection with the implementation of certain executive
supplemental retirement, salary continuation and deferred compensation retirement plans, as well as additional policies not related to any specific
plan. These policies provide protection against the adverse financial effects that could result from the death of a key employee and provide tax-
exempt income to offset expenses associated with the plans. It is the Banks’ intent to hold these policies as a long-term investment. However,
there will be an income tax impact if the Banks choose to surrender certain policies. Although the lives of individual current or former management-
level employees are insured, the Banks are the owners and sole or partial beneficiaries. At December 31, 2014 and 2013, the cash surrender
value of these policies was $63.8 million and $61.9 million, respectively. The Banks are exposed to credit risk to the extent an insurance company
is unable to fulfill its financial obligations under a policy. In order to mitigate this risk, the Banks use a variety of insurance companies and
regularly monitor their financial condition.
Note 15: EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
In 1995, the Company established an ESOP and related trust for eligible employees of Banner Bank as of January 1, 1995 and eligible employees
of the Banks or Company employed after such date. The ESOP borrowed $8.7 million from the Company in order to purchase the common
stock. The loan was repaid principally from the Company’s contributions to the ESOP. Shares were released to participants for allocation based
on the cumulative debt service paid to the Company by the ESOP divided by cumulative debt service paid to date plus the scheduled debt service
remaining. No ESOP contributions were made for the years ended December 31, 2014, 2013 or 2012 and no payments were made on the loan
in those years. On December 17, 2013, the Company's Board of Directors elected to terminate the ESOP effective January 1, 2014. The allocated
shares held by the ESOP were distributed to the participants of the plan during 2014. The unallocated shares held by the ESOP were forfeited
and redeemed and the outstanding balance of the loan was canceled. Termination of the ESOP had no impact on the net equity position of the
Company or its current and future operating results.
Note 16: STOCK-BASED COMPENSATION PLANS
The Company operates the following stock-based compensation plans as approved by the shareholders: the 1996 Stock Option Plan, the 1998
Stock Option Plan and 2001 Stock Option Plan (collectively, SOPs), the 2012 Restricted Stock and Incentive Bonus Plan, and the 2014 Omnibus
Incentive Plan. In addition, the Board approved in 2006 the Banner Corporation Long-Term Incentive Plan. The purpose of these plans is to
promote the success and enhance the value of the Company by providing a means for attracting and retaining highly skilled employees, officers
and directors of Banner Corporation and its affiliates and linking their personal interests with those of the Company's shareholders. Under these
plans the Company currently has outstanding restricted stock grants, stock options and stock appreciation rights.
Restricted Stock Grants: Under the 2012 Restricted Stock and Incentive Bonus Plan, which was initially approved on April 24, 2012, the
Company is authorized to issue up to 300,000 shares of its common stock to provide a means for attracting and retaining highly skilled officers
of Banner Corporation and its affiliates. Shares granted under the Plan have a minimum vesting period of three years. The Plan will continue
in effect for a term of ten years, after which no further awards may be granted. The 2012 Restricted Stock and Incentive Bonus Plan was amended
on April 23, 2013 to provide for the ability to grant (1) cash-denominated incentive-based awards payable in cash or common stock, including
those that are eligible to qualify as qualified performance-based compensation for the purposes of Section 162(m) of the IRS Code and (2)
restricted stock awards that qualify as qualified performance-based compensation for the purposes of Section 162(m) of the IRS Code. Vesting
requirements may include time-based conditions, performance-based conditions, or market-based conditions. As of December 31, 2014, the
Company had granted 266,778 shares of restricted stock, net of forfeitures, from the 2012 Restricted Stock and Incentive Bonus Plan, of which
81,241 shares had vested and 185,537 shares remain unvested.
134
Banner Corporation 2014 Omnibus Incentive Plan: The 2014 Plan was approved by shareholders on April 22, 2014. The 2014 Plan provides
for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance
shares, performance units, other stock-based awards and other cash awards, and provides for vesting requirements which may include time-
based or performance-based conditions. The Company has reserved 900,000 shares of its common stock for issuance under the 2014 Plan in
connection with exercise of awards. As of December 31, 2014, 9,352 shares had been granted to directors under the 2014 Omnibus Incentive
Plan.
The expense associated with all restricted stock grants was $2.7 million, $1.5 million and $434,000, respectively, for the years ended December 31,
2014, 2013 and 2012. Unrecognized compensation expense for these awards as of December 31, 2014 was $3.9 million and will be amortized
over the next 30 months.
A summary of the Company's Restricted Stock award activity during the years ended December 31, 2012, 2013 and 2014 follows:
Unvested at December 31, 2011
Granted
Vested
Forfeited
Unvested at December 31, 2012
Granted
Vested
Forfeited
Unvested at December 31, 2013
Granted
Vested
Forfeited
Unvested at December 31, 2014
Weighted
Average
Grant-Date
Fair Value
14.50
21.77
14.60
21.94
20.59
30.81
19.85
—
26.94
40.07
24.81
31.00
32.83
Shares
28,735
$
92,035
(11,419)
(1,500)
107,851
98,891
(42,250)
—
164,492
90,181
(56,307)
(3,260)
195,106
Stock Options: Under the SOPs, Banner reserved 2,284,186 shares for issuance pursuant to the exercise of stock options to be granted to directors
and employees. Authority to grant additional options under the 1998 Stock Option Plan terminated on July 24, 2008 with all options having
been granted. Authority to grant additional options under the 2001 Stock Option Plan terminated on April 20, 2011. The exercise price of the
stock options is set at 100% of the fair market value of the stock price on the date of grant. Options granted vest at a rate of 20% per year from
the date of grant and any unexercised incentive stock options will expire ten years after date of grant or 90 days after employment or service
ends.
During the years ended December 31, 2014, 2013 and 2012, the Company did not grant any stock options. Additionally, there were no significant
modifications made to any stock option grants during the period. The fair values of stock options granted are amortized as compensation expense
on a straight-line basis over the vesting period of the grant.
For the years ended December 31, 2014 and 2013, there were no stock option compensation expenses recorded. For the year ended December 31,
2012, stock-based compensation costs related to the SOPs was $7,000. The SOPs' stock option grant compensation costs are generally based
on the fair value calculated from the Black-Scholes option pricing on the date of the grant award. The Black-Scholes model assumes an expected
stock price volatility based on the historical volatility at the date of the grant and an expected term based on the remaining contractual life of
the vesting period. The Company bases the estimate of risk-free interest rate on the Treasury's Constant Maturities Indices in effect at the time
of the grant. The dividend yield is based on the current quarterly dividend in effect at the time of the grant.
The Company is required to estimate potential forfeitures of stock option grants and adjust compensation cost recorded accordingly. The estimate
of forfeitures is adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such
estimates. Changes in estimated forfeitures are recognized through a cumulative catch-up adjustment in the period of change and also impact
the amount of stock compensation expense to be recognized in future periods.
135
A summary of the Company’s stock option award activity for the years ended December 31, 2012, 2013 and 2014 follows:
Outstanding at December 31, 2011
51,729
$
168.98
2.40
n/a
Weighted
Average
Exercise Price
Shares
Weighted
Average
Remaining
Contractual
Term, In Years
Aggregate
Intrinsic Value
Granted
Exercised
Forfeited
Outstanding at December 31, 2012
Granted
Exercised
Forfeited
Outstanding at December 31, 2013
Granted
Exercised
Forfeited
Outstanding at December 31, 2014
Outstanding at December 31, 2014, net of expected forfeitures
—
—
(9,208)
42,521
—
—
(16,157)
26,364
—
—
(15,700)
10,664
—
—
—
145.97
173.98
—
—
121.29
206.27
—
—
206.44
206.03
—
Exercisable at December 31, 2014
10,664
206.03
1.75
n/a
1.58
n/a
1.90
n/a
1.90
n/a
n/a
The intrinsic value of stock options is calculated as the amount by which the market price of Banner's common stock exceeds the exercise price
at the time of exercise or the end of the period as applicable.
At December 31, 2014, financial data pertaining to outstanding stock options was as follows:
Exercise Price
Weighted Average
Exercise Price of
Option Shares
Granted
Number of Option
Shares Granted
Weighted Average
Option Shares
Vested and
Exercisable
Weighted Average
Exercise Price of
Option Shares
Exercisable
$0.00 to $184.00
$184.01 to $220.00
$
176.72
212.96
206.44
2,593
8,071
10,664
$
2,593
8,071
10,664
176.72
212.96
206.27
Remaining
Contractual Life
0.1 years
1.8 years
During the year ended December 31, 2014, there were no exercises of stock options. Cash was not used to settle any equity instruments previously
granted. The Company issues shares from authorized but unissued shares upon the exercise of stock options. The Company does not currently
expect to repurchase shares from any source to satisfy such obligations under the SOPs.
The following are the stock-option compensation costs recognized in the Company’s consolidated statements of operations for the years ended
December 31, 2014, 2013 and 2012 (in thousands):
Salary and employee benefits
Decrease in provision for income taxes
Decrease in equity, net
Years Ended December 31
2014
2013
2012
$
$
— $
—
— $
— $
—
— $
11
(4)
7
Banner Corporation Long-Term Incentive Plan: In June 2006, the Board of Directors adopted the Banner Corporation Long-Term Incentive
Plan effective July 1, 2006. The Plan is an account-based type of benefit, the value of which is directly related to changes in the value of Company
common stock, dividends declared on Company common stock and changes in Banner Bank’s average earnings rate, and is considered a stock
appreciation right (SAR). Each SAR entitles the holder to receive cash, upon vesting, equal to the excess of the fair market value of a share of
136
the Company’s common stock on the date of maturity of the SAR over the fair market value of such share on the date granted plus, for some
grants, the dividends declared on the stock from the date of grant to the date of vesting. The primary objective of the Plan is to create a retention
incentive by allowing officers who remain with the Company or the Banks for a sufficient period of time to share in the increases in the value
of Company stock. The Company re-measures the fair value of SARs each reporting period until the award is settled and recognizes changes
in fair value and vesting in compensation expense. The Company recognized compensation expense of $89,000, $1.0 million, and $314,000,
respectively, for the years ended December 31, 2014, 2013 and 2012 related to the increase in the fair value of SARs and additional vesting
during the period. At December 31, 2014, the aggregate liability related to SARs was $1.1 million and is included in deferred compensation.
Note 17: PREFERRED STOCK AND RELATED WARRANT
On November 21, 2008, as part of the Capital Purchase Program established by the U.S. Treasury under the Emergency Economic Stabilization
Act of 2008 (the EESA), the Company entered into a Purchase Agreement with Treasury pursuant to which the Company issued and sold to
Treasury 124,000 shares of Series A Preferred Stock, having a liquidation preference of $1,000 per share ($124 million liquidation preference
in the aggregate), and as more fully explained below, a ten-year warrant to purchase up to 243,998 shares (post reverse-split) of the Company’s
common stock, par value $0.01 per share, at an initial exercise price of $76.23 per share (post reverse-split), for an aggregate purchase price of
$18.6 million in cash. The warrant issued is immediately exercisable, in whole or in part, has a ten-year term and the number of shares is subject
to certain customary anti-dilution and other adjustments. The warrant is not subject to any contractual restrictions on transfer. The Company
has granted the warrant holder piggyback registration rights for the warrant and the common stock underlying the warrant and has agreed to
take such other steps as may be reasonably requested to facilitate the transfer of the warrant and the common stock underlying the warrant. The
holder of the warrant is not entitled to any common stockholder rights.
On March 29, 2012, the Company's $124 million of Series A Preferred Stock was sold by the Treasury as part of its efforts to manage and recover
its investments under the Troubled Assets Relief Program (TARP). While the sale of these preferred shares to new owners did not result in any
proceeds to the Company and did not change the Company's capital position or accounting for these securities, it did eliminate restrictions put
in place by the Treasury on TARP recipients. During the year ended December 31, 2012, the Company repurchased or redeemed its Series A
Preferred Stock. The related warrants to purchase up to $18.6 million in Banner common stock (243,998 shares) were sold by the Treasury at
public auction in June 2013. That sale did not change the Company's capital position and did not have any impact on the financial accounting
and reporting for these securities.
Note 18: REGULATORY CAPITAL REQUIREMENTS
Banner Corporation is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to capital adequacy
requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended (BHCA), and the regulations of the Federal
Reserve. Banner Bank and Islanders Bank, as state-chartered federally insured commercial banks, are subject to the capital requirements
established by the FDIC. The Federal Reserve requires Banner to maintain capital adequacy that generally parallels the FDIC requirements.
Federal statutes establish a supervisory framework based on five capital categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. An institution’s category depends upon where its capital levels are in relation to
relevant capital measures, which include a risk-based capital measure, a leverage ratio capital measure and certain other factors. The federal
banking agencies have adopted regulations that implement this statutory framework. Under these regulations, an institution is treated as well
capitalized if its ratio of total capital to risk-weighted assets is 10% or more, its ratio of core capital to risk-weighted assets is 6% or more, its
ratio of core capital to adjusted total assets (leverage ratio) is 5% or more, and it is not subject to any federal supervisory order or directive to
meet a specific capital level. In order to be adequately capitalized, an institution must have a total risk-based capital ratio of not less than 8%,
a core capital to risk-weighted assets ratio of not less than 4%, and a leverage ratio of not less than 4%. Any institution which is neither well
capitalized nor adequately capitalized is considered undercapitalized.
Undercapitalized institutions are subject to certain prompt corrective action requirements, regulatory controls and restrictions which become
more extensive as an institution becomes more severely undercapitalized. Failure by either Banner Bank and Islanders Bank to comply with
applicable capital requirements would, if unremedied, result in progressively more severe restrictions on their respective activities and lead to
enforcement actions, including, but not limited to, the issuance of a capital directive to ensure the maintenance of required capital levels and,
ultimately, the appointment of the FDIC as receiver or conservator. Banking regulators will take prompt corrective action with respect to
depository institutions that do not meet minimum capital requirements. Additionally, approval of any regulatory application filed for their review
may be dependent on compliance with capital requirements.
FDIC regulations recognize two types, or tiers, of capital: core (Tier 1) capital and supplementary (Tier 2) capital. Tier 1 capital generally
includes common stockholders’ equity and qualifying noncumulative perpetual preferred stock, less most intangible assets. Tier 2 capital, which
is recognized up to 100% of Tier 1 capital for risk-based capital purposes (after any deductions for disallowed intangibles and disallowed deferred
tax assets), includes such items as qualifying general loan loss reserves (up to 1.25% of risk-weighted assets), cumulative perpetual preferred
stock, long-term preferred stock, certain perpetual preferred stock, hybrid capital instruments including mandatory convertible debt, term
subordinated debt, intermediate-term preferred stock (original average maturity of at least five years), and net unrealized holding gains on equity
securities (subject to certain limitations); provided, however, the amount of term subordinated debt and intermediate term preferred stock that
may be included in Tier 2 capital for risk-based capital purposes is limited to 50% of Tier 1 capital.
The FDIC currently measures an institution’s capital using a leverage limit together with certain risk-based ratios. The FDIC’s minimum leverage
capital requirement specifies a minimum ratio of Tier 1 capital to average total assets. Most banks are required to maintain a minimum leverage
137
ratio of at least 3% to 4% of total assets. The FDIC retains the right to require a particular institution to maintain a higher capital level based
on an institution’s particular risk profile.
FDIC regulations also establish a measure of capital adequacy based on ratios of qualifying capital to risk-weighted assets. Assets are placed
in one of four categories and given a percentage weight—0%, 20%, 50% or 100%—based on the relative risk of the category. In addition, certain
off-balance-sheet items are converted to balance-sheet credit equivalent amounts, and each amount is then assigned to one of the four
categories. Under the guidelines, the ratio of total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets must be at least 8%, and the
ratio of Tier 1 capital to risk-weighted assets must be at least 4%. In evaluating the adequacy of a bank’s capital, the FDIC may also consider
other factors that may affect the bank’s financial condition. Such factors may include interest rate risk exposure, liquidity, funding and market
risks, the quality and level of earnings, concentration of credit risk, risks arising from nontraditional activities, loan and investment quality, the
effectiveness of loan and investment policies, and management’s ability to monitor and control financial operating risks.
FDIC capital requirements are designated as the minimum acceptable standards for banks whose overall financial condition is fundamentally
sound, which are well-managed and have no material or significant financial weaknesses. The FDIC capital regulations state that, where the
FDIC determines that the financial history or condition, including off-balance-sheet risk, managerial resources and/or the future earnings prospects
of a bank are not adequate and/or a bank has a significant volume of assets classified substandard, doubtful or loss or otherwise criticized, the
FDIC may determine that the minimum adequate amount of capital for the bank is greater than the minimum standards established in the
regulation.
The following table shows the regulatory capital ratios of the Company and the Banks and the minimum regulatory requirements (dollars in
thousands):
Actual
Minimum for Capital
Adequacy Purposes
Minimum to be
Categorized as “Well-
Capitalized” Under
Prompt Corrective Action
Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2014:
The Company—consolidated:
Total capital to risk-weighted assets
Tier 1 capital to risk-weighted assets
Tier 1 leverage capital to average assets
$
684,583
633,317
633,317
16.80% $
15.54
13.41
326,071
163,036
188,885
8.00%
4.00
4.00
n/a
n/a
n/a
n/a
n/a
n/a
Banner Bank:
Total capital to risk- weighted assets
Tier 1 capital to risk- weighted assets
Tier 1 leverage capital to average assets
Islanders Bank:
Total capital to risk- weighted assets
Tier 1 capital to risk- weighted assets
Tier 1 leverage capital to average assets
December 31, 2013:
The Company—consolidated:
605,997
556,897
556,897
36,590
34,332
34,332
15.53
14.27
12.42
19.92
18.69
13.68
312,220
156,110
179,304
14,693
7,347
10,040
8.00
4.00
4.00
8.00
4.00
4.00
$
390,274
234,165
224,130
10.00%
6.00
5.00
18,367
11,020
12,550
10.00
6.00
5.00
Total capital to risk-weighted assets
Tier 1 capital to risk-weighted assets
Tier 1 leverage capital to average assets
$
631,674
584,838
584,838
16.99% $
15.73
13.64
297,493
148,747
171,553
8.00%
4.00
4.00
n/a
n/a
n/a
n/a
n/a
n/a
Banner Bank:
Total capital to risk- weighted assets
Tier 1 capital to risk- weighted assets
Tier 1 leverage capital to average assets
Islanders Bank:
Total capital to risk- weighted assets
Tier 1 capital to risk- weighted assets
Tier 1 leverage capital to average assets
557,253
512,689
512,689
34,795
32,469
32,469
15.75
14.49
12.65
18.73
17.48
13.60
282,984
141,192
162,174
14,859
7,430
9,553
8.00
4.00
4.00
8.00
4.00
4.00
$
353,730
212,238
202,707
10.00%
6.00
5.00
18,574
11,144
11,941
10.00
6.00
5.00
At December 31, 2014, Banner Corporation and the Banks each exceeded all regulatory capital adequacy requirements. There have been no
conditions or events since December 31, 2014 that have materially adversely changed the Tier 1 or Tier 2 capital of the Company or the
Banks. However, events beyond the control of the Banks, such as weak or depressed economic conditions in areas where the Banks have most
138
of their loans, could adversely affect future earnings and, consequently, the ability of the Banks to meet their respective capital requirements. The
Company may not declare or pay cash dividends on, or repurchase, any of its shares of common stock if the effect thereof would cause equity
to be reduced below applicable regulatory capital maintenance requirements or if such declaration and payment would otherwise violate regulatory
requirements.
On July 2, 2013, the Federal Reserve approved a final rule (Final Rule) to establish a new comprehensive regulatory capital framework for all
U.S. financial institutions and their holding companies. On July 9, 2013, the Final Rule was approved as an interim final rule by the FDIC. The
Final Rule implements the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. The final rule includes new risk-
based capital and leverage ratios, which are effective January 1, 2015 and revise the definition of what constitutes “capital” for purposes of
calculating those ratios.
Effective January 1, 2015 (with some changes transitioned into full effectiveness over two to four years), Banner and the Banks became subject
to the new capital requirements adopted by the Federal Reserve and the FDIC. These new requirements create a new required ratio for common
equity Tier 1 (“CET1”) capital, increase the leverage and Tier 1 capital ratios, change the risk-weights of certain assets for purposes of the risk-
based capital ratios, create an additional capital conservation buffer over the required capital ratios and change what qualifies as capital for
purposes of meeting these various capital requirements. Beginning in 2016, failure to maintain the required capital conservation buffer will
limit our ability and the ability of our bank subsidiary to pay dividends, repurchase shares or pay discretionary bonuses. Under the new capital
regulations, the minimum capital ratios applicable to Banner and the Banks are: (i) a CETI capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6%
(increased from 4%); (iii) a total capital ratio of 8% (unchanged from prior rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. CET1
generally consists of common stock; retained earnings; accumulated other comprehensive income (“AOCI”), explained below, unless we elect
to exclude AOCI from regulatory capital, as discussed below; and certain minority interests; all subject to applicable regulatory adjustments and
deductions. There are a number of changes in what constitutes regulatory capital, some of which are subject to transition periods. These changes
include the phasing-out of certain instruments as qualifying capital. Banner and the Banks do not have any of these instruments. Under the new
requirements for total capital, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing
rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of CET1 will be deducted from
capital.
In addition, Tier 1 capital will include AOCI, which includes all unrealized gains and losses on available for sale debt and equity
securities. Because of our asset size, we have the one-time option of deciding in the first quarter of 2015 whether to permanently opt-out of the
inclusion of accumulated other comprehensive income in our capital calculations. We are planning to take advantage of this opt-out to reduce
the impact of market volatility on our regulatory capital levels.
The new requirements also include changes in the risk-weights of assets to better reflect credit risk and other risk exposures. These include a
150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and for
non-residential mortgage loans that are 90 days past due or otherwise in non-accrual status; a 20% (up from 0%) credit conversion factor for the
unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (currently set at 0%); a
250% risk weight (up from 100%) for mortgage servicing and deferred tax assets that are not deducted from capital; and increased risk-weights
(0% to 600%) for equity exposures.
In addition to the minimum CET1, Tier 1 and total capital ratios, Banner and the Banks will have to maintain a capital conservation buffer
consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations
on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that
could be utilized for such actions. This new capital conservation buffer requirement will be phased in beginning in January 2016 at 0.625% of
risk-weighted assets and increasing each year until fully implemented in January 2019.
Note 19: CONTINGENCIES
In the normal course of business, the Company and/or its subsidiaries have various legal proceedings and other contingent matters
outstanding. These proceedings and the associated legal claims are often contested and the outcome of individual matters is not always
predictable. These claims and counter-claims typically arise during the course of collection efforts on problem loans or with respect to action
to enforce liens on properties in which the Banks hold a security interest. Based upon the information known to management at this time, the
Company and the Banks are not a party to any legal proceedings that management believes would have a material adverse effect on the results
of operations or consolidated financial position at December 31, 2014.
In connection with certain asset sales, the Banks typically make representations and warranties about the underlying assets conforming to specified
guidelines. If the underlying assets do not conform to the specifications, the Bank may have an obligation to repurchase the assets or indemnify
the purchaser against any loss. The Banks believe that the potential for material loss under these arrangements is remote. Accordingly, the fair
value of such obligations is not material.
In February 2009, for the first time in its history, the State of Washington’s Public Deposit Protection Commission assessed all Qualified Public
Depositories participating in the State’s public deposit program an amount that, in aggregate, covered the uninsured portion of the public funds
on deposit at a failed Washington bank. Generally, the maximum liability should any member(s) of the State’s public deposit program default
on its uninsured public funds is limited to 10% of the public funds held by the Banks. A similar program is also in place in Oregon, where
Banner Bank also holds public deposits. Should other bank failures occur in either state, the Banks could be subject to additional assessments;
however, the rules for participation have been revised to require 100% collateralization of these deposits in the State of Washington and a range
of 50% to 110% in the State of Oregon, depending of an institution's CAMEL rating, which serves to significantly limit the contingent liability
that currently exists for Qualified Public Depositories. As a result of these collateralization requirements, the Banks have generally sought to
139
reduce their reliance on public funds since February 2009. Public funds totaled $138 million at December 31, 2014 as compared to $139 million
at December 31, 2013.
Note 20: INTEREST RATE RISK
The financial condition and operation of the Company are influenced significantly by general economic conditions, including the absolute level
of interest rates as well as changes in interest rates and the slope of the yield curve. The Company’s profitability is dependent to a large extent
on its net interest income, which is the difference between the interest received from its interest-earning assets and the interest expense incurred
on its interest-bearing liabilities.
The activities of the Company, like all financial institutions, inherently involve the assumption of interest rate risk. Interest rate risk is the risk
that changes in market interest rates will have an adverse effect on the institution’s earnings and underlying economic value. Interest rate risk
is determined by the maturity and repricing characteristics of an institution’s assets, liabilities and off-balance-sheet contracts. Interest rate risk
is measured by the variability of financial performance and economic value resulting from changes in interest rates. Interest rate risk is the
primary market risk impacting the Company’s financial performance.
The greatest source of interest rate risk to the Company results from the mismatch of maturities or repricing intervals for rate-sensitive assets,
liabilities and off-balance-sheet contracts. Additional interest rate risk results from mismatched repricing indices and formula (basis risk and
yield curve risk), product caps and floors, and early repayment or withdrawal provisions (option risk), which may be contractual or market
driven, that are generally more favorable to customers than to the Company.
The Company’s primary monitoring tool for assessing interest rate risk is asset/liability simulation modeling, which is designed to capture the
dynamics of balance sheet, interest rate and spread movements, and to quantify variations in net interest income and economic value of equity
resulting from those movements under different rate environments. Another monitoring tool used by the Company to assess interest rate risk is
gap analysis. The matching of repricing characteristics of assets and liabilities may be analyzed by examining the extent to which such assets
and liabilities are interest sensitive and by monitoring the Company’s interest sensitivity gap. Management is aware of the sources of interest
rate risk and in its opinion actively monitors and manages it to the extent possible, and considers that the Company’s current level of interest
rate risk is reasonable.
Note 21: INTANGIBLE ASSETS AND MORTGAGE SERVICING RIGHTS
Intangible Assets: At December 31, 2014, intangible assets consisted primarily of core deposit intangibles (CDI), which are amounts recorded
in business combinations or deposit purchase transactions related to the value of transaction-related deposits and the value of the customer
relationships associated with the deposits.
The Company amortizes CDI over its estimated useful life and reviews it at least annually for events or circumstances that could impair its
value. The CDI assets shown in the table below represent the value ascribed to the long-term deposit relationships acquired in three separate
bank acquisitions during 2007, a single branch acquisition in 2013, and the Branch Acquisition in 2014. These intangible assets are being
amortized using an accelerated method over estimated useful lives of three to eight years. The CDI assets are not estimated to have a significant
residual value. Other intangible assets are amortized over their estimated useful lives and are also reviewed for impairment.
The following table summarizes the changes in the Company’s CDI and other intangibles for the years ended December 31, 2012, 2013 and
2014 (in thousands):
CDI
Other
Total
Balance, December 31, 2011
$
6,322
$
Amortization
Balance, December 31, 2012
Additions through acquisition
Amortization
Balance, December 31, 2013
Additions through acquisition
Amortization
(2,092)
4,230
160
(1,941)
2,449
2,372
(1,990)
9
$
(9)
—
—
—
—
—
—
Balance, December 31, 2014
$
2,831
$
— $
6,331
(2,101)
4,230
160
(1,941)
2,449
2,372
(1,990)
2,831
140
Estimated amortization expense in future years with respect to existing intangibles as of December 31, 2014 (in thousands):
Year Ended:
December 31, 2015
December 31, 2016
December 31, 2017
December 31, 2018
Thereafter
Net carrying amount
CDI
1,007
353
321
296
854
2,831
$
$
Mortgage servicing rights are reported in other assets. Mortgage servicing rights are initially reported at fair value and are amortized in proportion
to, and over the period of, the estimated future net servicing income of the underlying financial assets. Mortgage servicing rights are subsequently
evaluated for impairment based upon the fair value of the rights compared to the amortized cost (remaining unamortized initial fair value). If
the fair value is less than the amortized cost, a valuation allowance is created through an impairment charge to servicing fee income. However,
if the fair value is greater than the amortized cost, the amount above the amortized cost is not recognized in the carrying value. In 2014, the
Company did not record any impairment charges or recoveries against mortgage servicing rights. In 2013, the Company recorded a recovery
of $1.3 million in previously recognized impairment charges against mortgage servicing rights. In 2012, the Company recorded $400,000 in
impairment charges against mortgage servicing rights. Loans serviced for others totaled $1.391 billion and $1.216 billion at December 31, 2014
and 2013, respectively. Custodial accounts maintained in connection with this servicing totaled $6.7 million and $5.7 million at December 31,
2014 and 2013, respectively.
An analysis of the mortgage servicing rights for the years ended December 31, 2014, 2013 and 2012 is presented below (in thousands):
Balance, beginning of the year
Amounts capitalized
Amortization (1)
Valuation adjustments in the period
Balance, end of the year (2)
Years Ended December 31
2014
2013
8,086
$
6,244
$
3,023
(2,079)
—
2,913
(2,371)
1,300
9,030
$
8,086
$
$
$
2012
5,584
3,662
(2,602)
(400)
6,244
(1) Amortization of mortgage servicing rights is recorded as a reduction of loan servicing income and any unamortized balance is fully
written off if the loan repays in full.
(2) Balances as of December 31, 2014 and 2013 are net of no valuation allowances, and as of December 31, 2012 are net of a $1.3 million
valuation allowance.
Note 22: FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has elected to record certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (that is, not a forced liquidation
or distressed sale). GAAP (ASC 820, Fair Value Measurements) establishes a consistent framework for measuring fair value and disclosure
requirements about fair value measurements. Among other things, the standard requires us to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value. Observable inputs reflect market data obtained from independent sources, while
unobservable inputs reflect the Company’s estimates for market assumptions. These two types of inputs create the following fair value hierarchy:
• Level 1 – Quoted prices in active markets for identical instruments. An active market is a market in which transactions occur with
sufficient frequency and volume to provide pricing information on an ongoing basis. A quoted price in an active market provides the
most reliable evidence of fair value and shall be used to measure fair value whenever available.
• Level 2 – Observable inputs other than Level 1 including quoted prices in active markets for similar instruments, quoted prices in less
active markets for identical or similar instruments, or other observable inputs that can be corroborated by observable market data. Our
use of Level 2 measurements for these securities is generally based upon a matrix pricing model from an investment reporting and
valuation service. Matrix pricing is a mathematical technique used principally to value debt securities without relying exclusively on
quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities.
• Level 3 – Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing
models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value
requires significant management judgment or estimation; also includes observable inputs from non-binding single dealer quotes not
141
corroborated by observable market data. In developing Level 3 measurements, management incorporates whatever market data might
be available and uses discounted cash flow models where appropriate. These calculations include projections of future cash flows,
including appropriate default and loss assumptions, and market based discount rates.
The estimated fair value amounts of financial instruments have been determined by the Company using available market information and
appropriate valuation methodologies. However, considerable judgment
is required to interpret data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value
amounts. In addition, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation
techniques and numerous estimates that must be made given the absence of active secondary markets for many of the financial instruments. This
lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values. Transfers between levels
of the fair value hierarchy are deemed to occur at the end of the reporting period.
Items Measured at Fair Value on a Recurring Basis
Banner records trading account securities, securities available-for-sale, FHLB advances, junior subordinated debentures and certain derivative
transactions at fair value on a recurring basis.
•
Investment securities primarily consist of U.S. Government and agency obligations, municipal bonds, corporate bonds, single issue trust
preferred securities (TPS), pooled trust preferred collateralized debt obligation securities (TRUP CDO), mortgage-backed securities,
asset-backed securities, equity securities and certain other financial instruments.
From mid-2008 through the current year, the lack of active markets and market participants for certain securities resulted in an increase
in Level 3 measurements. In particular, the market for our TRUP CDO securities has been generally inactive during this period. This
was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which TRUP CDOs trade and then by a
significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive as almost no new TRUP
CDOs have been issued since 2007. There are still very few market participants who are willing and/or able to transact for these
securities. Thus, a low market price for a particular bond may only provide evidence of lack of an active market rather than being an
indicator of credit problems with a particular issuer or of the fair value of the security. As of December 31, 2014, Banner owned $10
million in current par value of these securities.
Given these conditions and the absence of observable transactions in the secondary and new issue markets, management determined
that for the TRUP CDOs at December 31, 2014 and 2013:
• The few observable transactions and market quotations that were available were not reliable for purposes of determining fair
value,
• An income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and
minimizes the use of unobservable inputs was equally or more representative of fair value than the market approach valuation
technique, and
• The Company’s TRUP CDOs should be classified exclusively within Level 3 of the fair value hierarchy because of the significant
assumptions required to determine fair value at the measurement date.
The TRUP CDO valuations were derived using input from independent third parties who used proprietary cash flow models for analyzing
collateralized debt obligations. Their approaches to determining fair value involve considering the credit quality of the collateral,
assuming a level of defaults based on the probability of default of each underlying trust preferred security, creating expected cash flows
for each TRUP CDO security and discounting that cash flow at an appropriate risk-adjusted rate plus a liquidity premium.
Where appropriate, management reviewed the valuation methodologies, and assumptions used by the independent third party providers
and for certain securities determined that the fair value estimates were reasonable and utilized those estimates in the Company’s reported
financial statements, while for other securities management adjusted the third party providers modeling to be more reflective of the
characteristics of the Company’s remaining TRUP CDOs. Further, during the year ended December 31, 2014, two of our TRUP CDOs,
which had previously incurred significant fair value write downs, were repaid in full, resulting in equally significant fair value gains on
those securities in 2014. The net result of the fair value analysis of these Level 3 measurements was a fair value gain of $4.9 million
for the year-ended December 31, 2014, primarily a result of repayment of the two securities noted above, compared to a $255,000 fair
value loss in the year ended December 31, 2013 and a $3.3 million gain in the year ended December 31, 2012. The small loss in the
year ending December 31, 2013, was primarily the result of a modest adjustment to the discount rate which more than offset the impact
of the passage of time on the years to maturity in the discounted present value calculation used to estimate the fair value of these securities.
In management's opinion the small valuation change was consistent with general market stability for credit spreads supported by other
market observations. The more significant gain in the year ended December 31, 2012, was primarily caused by a reduction in the spread
between the benchmark credit equivalent indices used to establish an appropriate discount rate and a similar maturity point on the interest
rate swap curve, which resulted in a more substantial adjustment to the discount rate.
At December 31, 2014, Banner also directly owned approximately $19 million in amortized cost of single issuer TPS securities for
which no market data or independent valuation source is available. Similar to the TRUP CDOs above, there were too few, if any,
issuances of new TPS securities or sales of existing TPS securities to provide Level 1 or even Level 2 fair value measurements for these
142
securities. Management, therefore, utilized a discounted cash-flow model to calculate the present value of each security’s expected
future cash flows to determine their respective fair values. Management took into consideration the limited market data that was available
regarding similar securities and assessed the performance of the three individual issuers of TPS securities owned by the Company. At
December 31, 2014, the Company again sought input from independent third parties to help it establish an appropriate set of parameters
to identify a reasonable range of discount rates for use in its fair value model. Management concluded that market yields have been
reasonably stable in recent periods but that the indicated spreads and implied yields for non-investment grade securities as well as the
yields associated with individual issuers in the third party analyst reports suggested that a 500 basis point spread over the three-month
LIBOR index, 25 basis points less than the spread as used a year earlier, was a reasonable basis for determining an appropriate discount
rate to estimate the fair value of these securities. These factors were then incorporated into the model at December 31, 2014, where a
discount rate equal to three-month LIBOR plus 500 basis points was used to calculate the respective fair values of these securities The
result of this Level 3 fair value measurement was a fair value gain of $35,000 in the year ended December 31, 2014, compared to a gain
of $74,000 in the year ended December 31, 2013 and a gain of $578,000 in the year ended December 31, 2012. The much larger valuation
change in 2012 was the result of decreasing the spreads to 525 basis points from a range of 600–800 used in 2011. The Company has
and will continue to assess the appropriate fair value hierarchy for determination of these fair values on a quarterly basis.
For trading securities other than TRUP CDOs and single-issuer TPS securities and for securities—available-for-sale we used matrix
pricing models from investment reporting and valuation services. Management considers this to be a Level 2 input method.
•
Fair valuations for FHLB advances are estimated using fair market values provided by the lender, the FHLB of Seattle. The FHLB of
Seattle prices advances by discounting the future contractual cash flows for individual advances using its current cost of funds curve to
provide the discount rate. Management considers this to be a Level 2 input method.
• The fair valuations of junior subordinated debentures (TPS-related debt that the Company has issued) were also valued using discounted
cash flows. These debentures carry interest rates that reset quarterly, using the three-month LIBOR index plus spreads of 1.38% to
3.35%. While the quarterly reset of the index on this debt would seemingly keep its fair value reasonably close to book values, the
disparity in the fixed spreads above the index and the inability to determine realistic current market spreads, due to lack of new issuances
and trades, resulted in having to rely more heavily on assumptions about what spread would be appropriate if market transactions were
to take place. In periods prior to the third quarter of 2008, the discount rate used was based on recent issuances or quotes from brokers
on the date of valuation for comparable bank holding companies and was considered to be a Level 2 input method. However, as noted
above in the discussion of TPS and TRUP CDOs, due to the unprecedented disruption of certain financial markets, management concluded
that there were insufficient transactions or other indicators to continue to reflect these measurements as Level 2 inputs. Due to this
reliance on assumptions and not on directly observable transactions, management believes fair value for these instruments should follow
a Level 3 input methodology. Since the discount rate used in the fair value modeling is the most sensitive unobservable estimate in the
calculation, the Company again utilized input from the same independent third party noted above to help it establish an appropriate set
of parameters to identify a reasonable range of discount rates for use in its fair value model. In valuing the debentures at June 30, 2012,
these changes in credit quality were the primary factor contributing to a reduction in the discount rate from 800 basis points to 550 basis
points. In further valuing the debentures at September 30, 2012, management evaluated the general market tightening of credit spreads
as noted above and reduced the discount rate to the period-ending three-month LIBOR plus 525 basis points. This spread of 525 basis
points to LIBOR was used to establish discount rates and fair value estimates at December 31, 2012 and 2013. As noted above in the
discussion about single-issuer TPS securities, since market spreads have been reasonably stable in recent periods; however, we further
reduced the spread to 500 basis points at December 31, 2014, resulting in a fair value loss on these instruments of $4.1 million for the
year ended December 31, 2014, compared to a $865,000 loss in the year ended December 31, 2013 and a $23.1 million loss in the year
ended December 31, 2012. The fair value adjustment in the current year was primarily the result of the passage of time on the years to
maturity in the discounted present value calculation used to estimate the fair value.
• Derivative instruments include interest rate commitments related to one- to four family loans and residential mortgage backed securities
and interest rate swaps. The fair value of interest rate lock commitments and forward sales commitments are estimated using quoted
or published market prices for similar instruments, adjusted for factors such as pull-through rate assumptions based on historical trends,
where appropriate. The fair value of interest rate swaps is determined by using current market quotes on similar instruments provided
by active broker/dealers in the swap market. Management considers these to be Level 2 input methods. The changes in the fair value
of all these derivative instruments are primarily attributable to changes in the level of market interest rates. The Company has elected
to record the fair value of these derivative instruments on a net basis.
143
The following tables present financial assets and liabilities measured at fair value on a recurring basis and the level within the fair value hierarchy
of the fair value measurements for those assets and liabilities as of December 31, 2014 and 2013 (in thousands):
December 31, 2014
Level 1
Level 2
Level 3
Total
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
$
29,770
50,028
5,018
300,810
25,395
411,021
1,505
1,440
—
18,136
59
21,140
—
6,290
— $
—
—
—
—
—
—
—
19,118
—
—
19,118
317
—
29,770
50,028
5,018
300,810
25,395
411,021
1,505
1,440
19,118
18,136
59
40,258
317
6,290
— $
438,451
$
19,435
$
457,886
— $
32,250
$
— $
32,250
—
—
—
—
78,001
78,001
198
6,290
—
—
198
6,290
— $
38,738
$
78,001
$
116,739
Assets:
Securities—available-for-sale
U.S. Government and agency
Municipal bonds
Corporate bonds
Mortgage-backed securities
Asset-backed securities
Securities—trading
U.S. Government and agency
Municipal bonds
TPS and TRUP CDOs
Mortgage-backed securities
Equity securities and other
Derivatives
Interest rate lock commitments
Interest rate swaps
Liabilities
Advances from FHLB at fair value
Junior subordinated debentures net of unamortized deferred
issuance costs at fair value
Derivatives
Interest rate forward sales commitments
Interest rate swaps
$
$
$
$
144
December 31, 2013
Level 1
Level 2
Level 3
Total
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
$
58,660
52,855
6,964
326,610
25,191
470,280
1,481
5,023
—
20,760
68
27,332
—
4,946
— $
—
—
—
—
—
—
—
35,140
—
—
35,140
130
—
58,660
52,855
6,964
326,610
25,191
470,280
1,481
5,023
35,140
20,760
68
62,472
130
4,946
— $
502,558
$
35,270
$
537,828
— $
27,250
$
— $
27,250
—
—
—
—
73,928
73,928
43
4,946
—
—
43
4,946
— $
32,239
$
73,928
$
106,167
Assets:
Securities—available-for-sale
U.S. Government and agency
Municipal bonds
Corporate bonds
Mortgage-backed securities
Asset-backed securities
Securities—trading
U.S. Government and agency
Municipal bonds
TPS and TRUP CDOs
Mortgage-backed securities
Equity securities and other
Derivatives
Interest rate lock commitments
Interest rate swaps
Liabilities
Advances from FHLB at fair value
Junior subordinated debentures net of unamortized deferred
issuance costs at fair value
Derivatives
Interest rate forward sales commitments
Interest rate swaps
$
$
$
$
145
The following table provides a reconciliation of the assets and liabilities measured at fair value using significant unobservable inputs (Level 3)
on a recurring basis during the year ended December 31, 2014 and 2013 (in thousands):
Beginning balance at December 31, 2013
Total gains or losses recognized
Assets gains (losses)
Liabilities (gains) losses
Purchases, issuances and settlements
Paydowns and maturities
Transfers in and/or out of Level 3
Ending balance at December 31, 2014
Beginning balance at December 31, 2012
Total gains or losses recognized
Assets gains (losses)
Liabilities (gains) losses
Purchases, issuances and settlements
Paydowns and maturities
Transfers in and/or out of Level 3
Ending balance at December 31, 2013
Year Ended December 31, 2014
Level 3 Fair Value Inputs
TPS and TRUP
CDOs
Borrowings—
Junior Subordinated
Debentures
35,140
$
73,928
5,481
—
—
(21,502)
—
—
4,073
—
—
—
19,119
$
78,001
Year Ended December 31, 2013
Level 3 Fair Value Inputs
TPS and TRUP
CDOs
Borrowings—
Junior Subordinated
Debentures
35,741
$
73,063
(181)
—
—
(420)
—
—
865
—
—
—
35,140
$
73,928
$
$
$
$
The Company has elected to continue to recognize the interest income and dividends from the securities reclassified to fair value as a component
of interest income as was done in prior years when they were classified as available-for-sale. Interest expense related to the FHLB advances
and junior subordinated debentures continues to be measured based on contractual interest rates and reported in interest expense. The change
in fair value of these financial instruments has been recorded as a component of other operating income.
Items Measured at Fair Value on a Non-recurring Basis
Carrying values of certain impaired loans are periodically evaluated to determine if valuation adjustments, or partial write-downs, should be
recorded. These non-recurring fair value adjustments are recorded when observable market prices or current appraised values of collateral
indicate a shortfall in collateral value or discounted cash flows indicate a shortfall compared to current carrying values of the related loan. If
the Company determines that the value of the impaired loan is less than the carrying value of the loan, the Company either establishes an
impairment reserve as a specific component of the allowance for loan and lease losses (ALLL) or charges off the impaired amount. The remaining
impaired loans are evaluated for reserve needs in homogenous pools within the Company’s ALLL methodology. As of December 31, 2014, the
Company reviewed all of its adversely classified loans totaling $64 million and identified $46 million which were considered impaired. Of those
$46 million in impaired loans, $34 million were individually evaluated to determine if valuation adjustments, or partial write-downs, should be
recorded, or if specific impairment reserves should be established. The $34 million had original carrying values of $37 million which have been
reduced by partial write-downs totaling $3 million. In addition to these write-downs, in order to bring the impaired loan balances to fair value,
Banner also established $3 million in specific reserves on these impaired loans. Impaired loans that were collectively evaluated for reserve
purposes within homogenous pools totaled $11 million and were found to require allowances totaling $126,000. The valuation inputs for impaired
loans are considered to be Level 3 inputs.
The Company records REO (acquired through a lending relationship) at fair value on a non-recurring basis. All REO properties are recorded at
the lower of the estimated fair value of the properties, less expected selling costs, or the carrying amount of the defaulted loans. From time to
time, non-recurring fair value adjustments to REO are recorded to reflect partial write-downs based on an observable market price or current
appraised value of property. Banner considers any valuation inputs related to REO to be Level 3 inputs. The individual carrying values of these
assets are reviewed for impairment at least annually and any additional impairment charges are expensed to operations. For the years ended
146
December 31, 2014 and 2013, the Company recognized $37,000 and $785,000, respectively of impairment charges related to these types of
assets.
Mortgage servicing rights are reported in other assets. Mortgage servicing rights are initially reported at fair value and are amortized in proportion
to, and over the period of, the estimated future net servicing income of the underlying financial assets. Mortgage servicing rights are subsequently
evaluated for impairment based upon the fair value of the rights compared to the amortized cost (remaining unamortized initial fair value). If
the fair value is less than the amortized cost, a valuation allowance is created through an impairment charge to servicing fee income. However,
if the fair value is greater than the amortized cost, the amount above the amortized cost is not recognized in the carrying value. In 2014, the
Company did not record any impairment charges against mortgage servicing rights. In 2013, the Company reversed $1.3 million in previously
recorded impairment charges against mortgage servicing rights.
The following tables present financial assets and liabilities measured at fair value on a non-recurring basis and the level within the fair value
hierarchy at December 31, 2014 and 2013 (in thousands):
At or For the Year Ended December 31, 2014
Level 1
Level 2
Level 3
Total
Net Losses
Recognized
During the
Period
$
$
— $
—
— $
—
$
4,725
3,352
$
4,725
3,352
(512)
(453)
At or For the Year Ended December 31, 2013
Level 1
Level 2
Level 3
Total
Net Losses
Recognized
During the
Period
— $
—
— $
—
$
10,627
4,044
$
10,627
4,044
(4,890)
(853)
Impaired loans
REO
Impaired loans
REO
Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3)
The following table provides a description of the valuation technique, unobservable inputs, and qualitative information about the unobservable
inputs for the Company's assets and liabilities classified as Level 3 and measured at fair value on a recurring and nonrecurring basis at December 31,
2014 and 2013:
Financial Instruments
Valuation Technique
Unobservable
Inputs
December 31
2014
Weighted
Average
Rate
2013
Weighted
Average
Rate
Discounted cash flows Discount rate
5.26%
5.50%
TPS securities
TRUP CDOs
Junior subordinated debentures
Discounted cash flows Discount rate
Discounted cash flows Discount rate
3.96
5.26
3.85
5.50
Impaired loans
REO
Discounted cash flows Discount rate
Market values
Collateral Valuations
Various
n/a
Various
n/a
Appraisals
Market values
n/a
n/a
TPS and TRUP CDOs: Management believes that the credit risk-adjusted spread used to develop the discount rate utilized in the fair value
measurement of TPS and TRUP CDOs is indicative of the risk premium a willing market participant would require under current market conditions
for instruments with similar contractual rates and terms and conditions and issuers with similar credit risk profiles and with similar expected
probability of default. Management attributes the change in fair value of these instruments, compared to their par value, primarily to perceived
general market adjustments to the risk premiums for these types of assets subsequent to their issuance.
147
Junior subordinated debentures: Similar to the TPS and TRUP CDOs discussed above, management believes that the credit risk-adjusted spread
utilized in the fair value measurement of the junior subordinated debentures is indicative of the risk premium a willing market participant would
require under current market conditions for an issuer with Banner's credit risk profile. Management attributes the change in fair value of the
junior subordinated debentures, compared to their par value, primarily to perceived general market adjustments to the risk premiums for these
types of liabilities subsequent to their issuance. Future contractions in the risk adjusted spread relative to the spread currently utilized to measure
the Company's junior subordinated debentures at fair value as of December 31, 2014, or the passage of time, will result in negative fair value
adjustments. At December 31, 2014, the discount rate utilized was based on a credit spread of 500 basis points and three month LIBOR of 26
basis points.
Impaired loans: Loans are considered impaired when, based on current information and events; we determine that it is probable that we will be
unable to collect all amounts due according to the contractual terms of the loan agreement. Factors involved in determining impairment include,
but are not limited to, the financial condition of the borrower, the value of the underlying collateral and the current status of the economy. Impaired
loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of collateral if the loan is collateral dependent. If this practical expedient is
used, the impaired loans are considered to be held at fair value. Subsequent changes in the value of impaired loans are included within the
provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the provision that would otherwise
be reported.
REO: Fair value adjustments on REO are based on updated real estate appraisals, less selling costs,which are based on current market conditions.
MSRs: Management believes that the discount rate utilized in the fair valuation of our MSRs is indicative of a reasonable yield expectation in
an orderly transaction between willing market participants at the measurement date. Generally, any significant increases in the prepayment rate
and discount rate utilized in the fair value measurement of the mortgage servicing rights will result in negative fair value adjustments and a
decrease in the fair value measurement. Alternatively, a decrease in the prepayment rate and discount rate will result in a positive fair value
adjustment and increase in the fair value measurement. An increase in the weighted average life assumptions will result in a decrease in the
prepayment rate and a decrease in the weighted average life will result in an increase of the prepayment rate.
148
Fair Values of Financial Instruments
The following table presents estimated fair values of the Company’s financial instruments as of December 31, 2014 and 2013, whether or not
recognized or recorded in the consolidated Statements of Financial Condition. The estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessary to interpret
market data in the development of the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the
amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies
may have a material effect on the estimated fair value amounts. The carrying value and estimated fair value of financial instruments at
December 31, 2014 and 2013 are as follows (in thousands):
Assets:
Cash and due from banks
Securities—trading
Securities—available-for-sale
Securities—held-to-maturity
Loans receivable held for sale
Loans receivable
FHLB stock
BOLI
Mortgage servicing rights
Derivatives:
Interest rate swaps
Interest rate lock commitments
Liabilities:
Demand, interest-bearing checking and money market
Regular savings
Certificates of deposit
Advances from FHLB at fair value
Junior subordinated debentures at fair value
Other borrowings
Derivatives:
Interest rate swaps
Interest rate forward sales commitments
December 31, 2014
December 31, 2013
Carrying
Value
Estimated
Fair Value
Carrying
Value
Estimated
Fair Value
$
$
126,072
40,258
411,021
131,258
2,786
3,831,034
27,036
63,759
9,030
6,290
317
2,227,292
901,142
770,516
32,250
78,001
77,185
6,290
198
$
126,072
40,258
411,021
137,608
2,807
3,722,179
27,036
63,759
12,987
6,290
317
1,998,649
784,006
764,549
32,250
78,001
77,185
6,290
198
$
137,349
62,472
470,280
102,513
2,734
3,415,711
35,390
61,945
8,086
4,946
130
1,946,467
798,764
872,695
27,250
73,928
83,056
4,946
43
137,349
62,472
470,280
103,610
2,751
3,297,936
35,390
61,945
11,529
4,946
130
1,697,095
695,863
867,904
27,250
73,928
83,056
4,946
43
Fair value estimates, methods and assumptions and the level within the fair value hierarchy of the fair value measurements are set forth below
for the Company’s financial and off-balance sheet instruments:
Cash and Due from Banks: The carrying amount of these items is a reasonable estimate of their fair value. These fair values are considered
Level 1 measures.
Securities: The estimated fair values of investment securities and mortgaged-backed securities are priced using current active market quotes, if
available, which are considered Level 1 measurements. For most of the portfolio, matrix pricing based on the securities’ relationship to other
benchmark quoted prices is used to establish the fair value. These measurements are considered Level 2. Due to continued credit concerns in
the capital markets and inactivity in the trust preferred markets that have limited the observability of market spreads for some of the Company’s
TPS and TRUP CDO securities (see earlier discussion above in determining the securities’ fair market value), management has classified these
securities as a Level 3 fair value measure.
Loans Receivable Held for Sale: Carrying values are based on the lower of estimated fair values or book values. Fair values are estimated based
on secondary market pricing for similar loans. This is considered a Level 2 fair value measure.
Loans Receivable: Fair values are estimated first by stratifying the portfolios of loans with similar financial characteristics. Loans are segregated
by type such as multifamily real estate, residential mortgage, nonresidential mortgage, commercial/agricultural, consumer and other. Each loan
category is further segmented into fixed- and adjustable-rate interest terms and by performing and non-performing categories. A preliminary
estimate of fair value is then calculated based on discounted cash flows using as a discount rate the current rate offered on similar products, plus
an adjustment for liquidity to reflect the non-homogeneous nature of the loans. The preliminary estimate is then further reduced by the amount
of the allowance for loan losses to arrive at a final estimate of fair value. Fair value for significant non-performing loans is based on recent
149
appraisals or estimated cash flows discounted using rates commensurate with risk associated with the estimated cash flows. Assumptions regarding
credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information.
Management considers this to be a Level 2 measurement.
FHLB Stock: The fair value is based upon the redemption value of the stock which equates to its carrying value. This fair value is considered
a Level 3 measure.
Bank-Owned Life Insurance: The fair value of BOLI policies owned are based on the various insurance contracts' cash surrender value. This
fair value is considered a Level 1 measure.
Mortgage Servicing Rights: Fair values are estimated based on current pricing for sales of servicing for new loans adjusted up or down based
on the serviced loan's interest rate versus current new loan rates. Management considers this to be a Level 3 measure.
Deposit Liabilities: The fair value of deposits with no stated maturity, such as savings and checking accounts, is estimated by applying decay
rate assumptions to segregated portfolios of similar deposit types to generate cash flows which are then discounted using short-term market
interest rates. The market value of certificates of deposit is based upon the discounted value of contractual cash flows. The discount rate is
determined using the rates currently offered on comparable instruments. Fair value estimates for deposits are considered Level 3 measures.
FHLB Advances and Other Borrowings: Fair valuations for Banner’s FHLB advances are estimated using fair market values provided by the
lender, the FHLB of Seattle. The FHLB of Seattle prices advances by discounting the future contractual cash flows for individual advances
using its current cost of funds curve to provide the discount rate. This is considered to be a Level 2 input method. Other borrowings are priced
using discounted cash flows to the date of maturity based on using current rates at which such borrowings can currently be obtained. This fair
value is considered a Level 3 measure.
Junior Subordinated Debentures: Due to continued credit concerns in the capital markets and inactivity in the trust preferred markets that have
limited the observability of market spreads (see earlier discussion above in determining the junior subordinated debentures’ fair market value),
junior subordinated debentures have been classified as a Level 3 fair value measure. Management believes that the credit risk adjusted spread
and resulting discount rate utilized is indicative of those that would be used by market participants.
Derivative Instruments: Derivatives include interest rate swap agreements, interest rate lock commitments to originate loans held for sale and
forward sales contracts to sell loans and securities related to mortgage banking activities. Fair values for the interest rate swaps which generally
change as a result of changes in the level of market interest rates , are estimated based on dealer quotes and secondary market sources. Management
considers these to be Level 2 inputs. The fair value of the interest rate lock commitments and forward sales commitments are estimated using
quoted or published market prices for similar instruments, adjusted for factors such as pull-through rate assumptions where appropriate. The
pull-through rate assumptions are considered Level 3 valuation inputs and are significant to the interest rate lock commitment valuation; as such,
the interest rate lock commitment derivatives are classified as Level 3.
Limitations: The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2014
and 2013. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have
not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may
differ significantly from the amounts presented herein.
Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated
future business. The fair value has not been estimated for assets and liabilities that are not considered financial instruments. Significant assets
and liabilities that are not financial instruments include the deferred tax assets/liabilities; land, buildings and equipment; costs in excess of net
assets acquired; and real estate held for sale.
150
Note 23: BANNER CORPORATION (PARENT COMPANY ONLY)
Summary financial information is as follows (in thousands):
Statements of Financial Condition
ASSETS
Cash
Investment in trust equities
Investment in subsidiaries
Other assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Miscellaneous liabilities
Deferred tax liability
Junior subordinated debentures at fair value
Stockholders’ equity
December 31
2014
2013
$
52,124
3,716
611,468
8,279
45,998
3,716
575,023
7,280
675,587
$
632,017
$
2,446
11,516
78,001
583,624
6,157
12,960
73,928
538,972
675,587
$
632,017
$
$
$
$
Statements of Operations
INTEREST INCOME:
Interest-bearing deposits
OTHER INCOME (EXPENSE):
Dividend income from subsidiaries
Equity in undistributed income of subsidiaries
Other income
Net change in valuation of financial instruments carried at fair value
Interest on other borrowings
Other expenses
Net income before taxes
BENEFIT FROM INCOME TAXES
NET INCOME
PREFERRED STOCK DIVIDEND AND DISCOUNT ACCRETION
Preferred stock dividend
Preferred stock discount accretion
Gain on repurchase of preferred stock
Years Ended December 31
2014
2013
$
96
$
82
$
26,027
33,707
67
(4,073)
(2,914)
(2,519)
50,391
(3,774)
54,165
—
—
—
24,725
23,994
3,016
(865)
(2,968)
(2,794)
45,190
(1,365)
46,555
—
—
—
2012
218
61,329
23,507
55
(23,075)
(3,395)
(2,375)
56,264
(8,618)
64,882
4,938
3,298
(2,471)
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
$
54,165
$
46,555
$
59,117
151
Statements of Cash Flows
OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed earnings of subsidiaries
Increase (decrease) in deferred taxes
Net change in valuation of financial instruments carried at fair value
(Increase) decrease in other assets
Increase (decrease) in other liabilities
Net cash provided from operating activities
INVESTING ACTIVITIES:
Funds transferred to deferred compensation trust
Net cash used by investing activities
FINANCING ACTIVITIES:
Issuance of stock for stockholder reinvestment program
Redemption of senior preferred stock
Cash dividends paid
Net cash used by financing activities
NET INCREASE (DECREASE) IN CASH
CASH, BEGINNING OF PERIOD
CASH, END OF PERIOD
Note 24: STOCK REPURCHASES
Years Ended December 31
2014
2013
2012
$
54,165
$
46,555
$
64,882
(33,707)
(1,444)
4,073
(3,822)
222
19,487
(26)
(26)
127
—
(13,462)
(13,335)
6,126
45,998
(23,994)
17
865
(4,655)
(1,921)
16,867
(27)
(27)
72
—
(7,798)
(7,726)
9,114
36,884
$
52,124
$
45,998
$
(23,507)
(13,030)
23,075
(496)
4,940
55,864
(332)
(332)
36,317
(121,528)
(6,470)
(91,681)
(36,149)
73,033
36,884
During 2012, the Company repurchased or redeemed all of its Series A Preferred Stock, realizing gains aggregating $2.5 million, which was
partially offset by accelerated amortization of a portion of the initial discount recorded at the issuance of the Series A Preferred Stock. As a
result, the accrual for the quarterly dividend was reduced by the retirement of the repurchased shares. As of December 31, 2012, all of the Series
A Preferred Stock had been retired.
On March 26, 2014, the Company announced that its Board of Directors had authorized the repurchase of up to 978,826 shares of the Company's
common stock, or 5% of the Company's outstanding shares. Under the plan, shares may be repurchased by the Company in open market
purchases. The extent to which the Company repurchases its shares and timing of such repurchases will depend upon market conditions and
other corporate considerations.
The Company did not repurchase any of its common stock during the years ended December 31, 2014, 2013 or 2012 except for shares surrendered
by employees to satisfy tax withholding obligations upon the vesting of restricted stock grants and shares redeemed relating to the termination
of the ESOP.
152
Note 25: CALCULATION OF EARNINGS PER COMMON SHARE
The following tables show the calculation of earnings (loss) per common share (in thousands, except per share data):
Net income
Preferred stock dividend accrual
Preferred stock discount accretion
Gain on repurchase of preferred stock
Net income available to common shareholders
Weighted average number of common shares outstanding
Basic
Diluted
Earnings per common share
Basic
Diluted
Years Ended December 31
2014
2013
2012
54,165
$
46,555
$
64,882
—
—
—
—
—
—
(4,938)
(3,298)
2,471
54,165
$
46,555
$
59,117
19,359
19,403
19,361
19,397
2.80
2.79
$
$
2.40
2.40
$
$
18,650
18,723
3.17
3.16
$
$
$
$
At December 31, 2014, there were 195,106 issued but unvested restricted stock shares that were included in the computation of diluted earnings
per share.
Options to purchase an additional 10,664 shares of common stock and a warrant to purchase up to 243,998 shares of common stock were not
included in the computation of diluted earnings per share because their exercise price resulted in them being anti-dilutive.
Note 26: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Results of operations on a quarterly basis for the years ended December 31, 2014, 2013 and 2012 were as follows (dollars in thousands except
for per share data):
Year Ended December 31, 2014
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Interest income
Interest expense
Net interest income before provision for loan losses
Provision for loan losses
Net interest income
Other operating income
Other operating expenses
Income before provision for income taxes
Provision for income taxes
Net income
Preferred stock dividend
Preferred stock discount accretion
Gain on repurchase and retirement of preferred stock
Net income available to common shareholders
Basic earnings per share
Diluted earnings per share
Dividends declared
$
45,106
2,767
42,339
—
42,339
8,858
35,581
15,616
5,046
10,570
—
—
—
$
46,540
2,732
43,808
—
43,808
20,133
38,435
25,506
8,499
17,007
—
—
—
$
49,764
2,700
47,064
—
47,064
13,350
38,495
21,919
7,076
14,843
—
—
—
$
$
10,570
0.55
0.54
0.18
$
$
17,007
0.88
0.88
0.18
$
$
14,843
0.77
0.76
0.18
49,251
2,590
46,661
—
46,661
11,913
41,230
17,344
5,599
11,745
—
—
—
11,745
0.61
0.60
0.18
$
$
$
153
Interest income
Interest expense
Net interest income before provision for loan losses
Provision for loan losses
Net interest income
Other operating income
Other operating expenses
Income before provision for income taxes
Provision for income taxes
Net income
Preferred stock dividend
Preferred stock discount accretion
Gain on repurchase and retirement of preferred stock
Net income available to common shareholders
Basic earnings per share
Diluted earnings per share
Dividends declared
Interest income
Interest expense
Net interest income before provision for loan losses
Provision for loan losses
Net interest income
Other operating income
Other operating expenses
Income (loss) before provision for income taxes
Provision (benefit) for income taxes
Net income
Preferred stock dividend
Preferred stock discount accretion
Gain on repurchase and retirement of preferred stock
Net income available to common shareholders
Basic earnings per share
Diluted earnings per share
Dividends declared
Year Ended December 31, 2013
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
$
$
$
$
$
$
$
$
$
$
$
44,508
3,540
40,968
—
40,968
9,997
34,099
16,866
5,284
11,582
—
—
—
11,582
0.60
0.60
0.12
First
Quarter
47,198
6,072
41,126
5,000
36,126
10,971
37,913
9,184
—
9,184
1,550
454
—
7,180
0.40
0.40
0.01
$
45,571
3,323
42,248
—
42,248
10,623
35,457
17,414
5,661
11,753
—
—
—
$
$
11,753
0.60
0.60
0.12
45,037
3,144
41,893
—
41,893
10,142
34,490
17,545
5,880
11,665
—
—
—
11,665
0.60
0.60
0.15
Year Ended December 31, 2012
Second
Quarter
Third
Quarter
$
$
$
47,265
4,975
42,290
4,000
38,290
(9,064)
35,666
(6,440)
(31,830)
25,390
1,550
454
—
23,386
1.27
1.27
0.01
47,174
4,476
42,698
3,000
39,698
11,684
33,355
18,027
2,407
15,620
1,227
1,216
(2,070)
15,247
0.81
0.80
0.01
$
$
$
$
$
$
44,595
2,988
41,607
—
41,607
12,580
36,929
17,258
5,704
11,554
—
—
—
11,554
0.60
0.60
0.15
Fourth
Quarter
45,525
3,991
41,534
1,000
40,534
13,311
34,519
19,326
4,638
14,688
611
1,174
(401)
13,304
0.69
0.69
0.01
Note 27: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company has financial instruments with off-balance-sheet risk generated in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to extend credit, commitments related to standby letters of credit, commitments
to originate loans, commitments to sell loans, and commitments to buy or sell securities. These instruments involve, to varying degrees, elements
of credit and interest rate risk similar to the risk involved in on-balance sheet items recognized in our Consolidated Statements of Financial
Condition.
Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument from commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of those instruments. We use the same credit policies in making
commitments and conditional obligations as for on-balance sheet instruments.
154
Outstanding commitments for which no asset or liability for the notional amount has been recorded consisted of the following at the dates
indicated (in thousands):
Contract or Notional Amount
December 31, 2014
December 31, 2013
Commitments to extend credit
Standby letters of credit and financial guarantees
Commitments to originate loans
$
$
1,166,165
9,934
20,988
Derivatives also included in Note 28:
Commitments to originate loans held for sale
Commitments to sell loans secured by one- to four-family residential properties
Commitments to sell securities related to mortgage banking activities
29,851
8,714
25,000
1,073,897
6,990
15,776
21,434
9,378
15,200
Commitments to extend credit are agreements to lend to a customer, as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Many of the
commitments may expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash
requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary
upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies, but may include accounts receivable,
inventory, property, plant and equipment, and income producing commercial properties.
Standby letters of credit are conditional commitments issued to guarantee a customer’s performance or payment to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
Interest rates on residential one- to four-family mortgage loan applications are typically rate locked (committed) to customers during the application
stage for periods ranging from 30 to 60 days, the most typical period being 45 days. Traditionally, these loan applications with rate lock
commitments had the pricing for the sale of these loans locked with various qualified investors under a best-efforts delivery program at or near
the time the interest rate is locked with the customer. The Bank then attempts to deliver these loans before their rate locks expired. This
arrangement generally required delivery of the loans prior to the expiration of the rate lock. Delays in funding the loans required a lock extension.
The cost of a lock extension at times was borne by the customer and at times by the Bank. These lock extension costs have not had a material
impact to our operations. In 2012, the Company also began entering into forward commitments at specific prices and settlement dates to deliver
either: (1) residential mortgage loans for purchase by secondary market investors (i.e., Freddie Mac or Fannie Mae), or (2) mortgage-backed
securities to broker/dealers. The purpose of these forward commitments is to offset the movement in interest rates between the execution of its
residential mortgage rate lock commitments with borrowers and the sale of those loans to the secondary market investor. There were no
counterparty default losses on forward contracts during 2014 or 2013. Market risk with respect to forward contracts arises principally from
changes in the value of contractual positions due to changes in interest rates. The Company limits its exposure to market risk by monitoring
differences between commitments to customers and forward contracts with market investors and securities broker/dealers. In the event the
Company has forward delivery contract commitments in excess of available mortgage loans, the transaction is completed by either paying or
receiving a fee to or from the investor or broker/dealer equal to the increase or decrease in the market value of the forward contract. Changes
in the value of rate lock commitments are recorded as assets and liabilities as explained in Note 1: “Derivative Instruments.”
NOTE 28: DERIVATIVES AND HEDGING
The Company, through its Banner Bank subsidiary, is party to various derivative instruments that are used for asset and liability management
and customer financing needs. Derivative instruments are contracts between two or more parties that have a notional amount and an underlying
variable, require no net investment and allow for the net settlement of positions. The notional amount serves as the basis for the payment
provision of the contract and takes the form of units, such as shares or dollars. The underlying variable represents a specified interest rate, index,
or other component. The interaction between the notional amount and the underlying variable determines the number of units to be exchanged
between the parties and influences the market value of the derivative contract. The Company obtains dealer quotations to value its derivative
contracts.
The Company's predominant derivative and hedging activities involve interest rate swaps related to certain term loans and forward sales contracts
associated with mortgage banking activities. Generally, these instruments help the Company manage exposure to market risk and meet customer
financing needs. Market risk represents the possibility that economic value or net interest income will be adversely affected by fluctuations in
external factors such as market-driven interest rates and prices or other economic factors.
Derivatives Designated in Hedge Relationships
The Company's fixed rate loans result in exposure to losses in value or net interest income as interest rates change. The risk management
objective for hedging fixed rate loans is to effectively convert the fixed rate received to a floating rate. The Company has hedged exposure to
changes in the fair value of certain fixed rate loans through the use of interest rate swaps. For a qualifying fair value hedge, changes in the value
155
of the derivatives are recognized in current period earnings along with the corresponding changes in the fair value of the designated hedged item
attributable to the risk being hedged.
In a program brought to Banner Bank through its merger with F&M Bank in 2007, customers received fixed interest rate commercial loans and
the Bank subsequently hedged that fixed rate loan by entering into an interest rate swap with a dealer counterparty. The Bank receives fixed
rate payments from the customers on the loans and makes similar fixed rate payments to the dealer counterparty on the swaps in exchange for
variable rate payments based on the one-month LIBOR index. Some of these interest rate swaps are designated as fair value hedges. Through
application of the “short cut method of accounting,” there is an assumption that the hedges are effective. The Bank discontinued originating
interest rate swaps under this program in 2008.
As of December 31, 2014 and December 31, 2013, the notional values or contractual amounts and fair values of the Company's derivatives
designated in hedge relationships were as follows (in thousands):
Asset Derivatives
Liability Derivatives
December 31, 2014
December 31, 2013
December 31, 2014
December 31, 2013
Notional/
Contract
Amount
Fair
Value (1)
Notional/
Contract
Amount
Fair
Value (1)
Notional/
Contract
Amount
Fair
Value (2)
Notional/
Contract
Amount
Fair
Value (2)
Interest rate swaps
$
7,089
$
1,165
$
7,420
$
1,295
$
7,089
$
1,165
$
7,420
$
1,295
(1)
(2)
Included in Loans Receivable on the Consolidated Statement of Financial Condition.
Included in Other Liabilities on the Consolidated Statement of Financial Condition.
Derivatives Not Designated in Hedge Relationships
Interest Rate Swaps: Banner Bank, has been using an interest rate swap program for commercial loan customers, termed the Back-to-Back
Program, since 2010. In the Back-to-Back Program, the Bank provides the client with a variable rate loan and enters into an interest rate swap
in which the client receives a variable rate payment in exchange for a fixed rate payment. The Bank offsets its risk exposure by entering into
an offsetting interest rate swap with a dealer counterparty for the same notional amount and length of term as the client interest rate swap providing
the dealer counterparty with a fixed rate payment in exchange for a variable rate payment. There are also a few interest rate swaps from prior
to 2009 that were not designated in hedge relationships that are included in these totals. These swaps do not qualify as designated hedges;
therefore, each swap is accounted for as a free standing derivative.
Mortgage Banking: In the normal course of business, the Company sells originated mortgage loans into the secondary mortgage loan markets.
During the period of loan origination and prior to the sale of the loans in the secondary market, the Company has exposure to movements in
interest rates associated with written rate lock commitments with potential borrowers to originate loans that are intended to be sold and for closed
loans that are awaiting sale and delivery into the secondary market.
Written loan commitments that relate to the origination of mortgage loans that will be held for resale are considered free-standing derivatives
and do not qualify for hedge accounting. Written loan commitments generally have a term of up to 60 days before the closing of the loan. The
loan commitment does not bind the potential borrower to enter into the loan, nor does it guarantee that the Company will approve the potential
borrower for the loan. Therefore, when determining fair value, the Company makes estimates of expected “fallout” (loan commitments not
expected to close), using models which consider cumulative historical fallout rates, current market interest rates and other factors.
Written loan commitments in which the borrower has locked in an interest rate results in market risk to the Company to the extent market interest
rates change from the rate quoted to the borrower. The Company economically hedges the risk of changing interest rates associated with its
interest rate lock commitments by entering into forward sales contracts.
Mortgage loans which are held for sale are subject to changes in fair value due to fluctuations in interest rates from the loan's closing date through
the date of sale of the loans into the secondary market. Typically, the fair value of these loans declines when interest rates increase and rises
when interest rates decrease. To mitigate this risk, the Company enters into forward sales contracts on a significant portion of these loans to
provide an economic hedge against those changes in fair value. Mortgage loans held for sale and the forward sales contracts are recorded at fair
value with ineffective changes in value recorded in current earnings as loan sales and servicing income.
156
As of December 31, 2014 and December 31, 2013, the notional values or contractual amounts and fair values of the Company's derivatives not
designated in hedge relationships were as follows (in thousands):
Asset Derivatives
Liability Derivatives
December 31, 2014
December 31, 2013
December 31, 2014
December 31, 2013
Notional/
Contract
Amount
Fair
Value (1)
Notional/
Contract
Amount
Fair
Value (1)
Notional/
Contract
Amount
Fair
Value (2)
Notional/
Contract
Amount
Fair
Value (2)
Interest rate swaps
$
134,512
$
5,125
$
135,122
$
3,651
$
134,512
$
5,125
$
135,122
$
3,651
Mortgage loan
commitments
Forward sales
contracts
29,311
—
317
—
14,107
22,526
57
73
—
33,174
—
198
7,326
—
43
—
$
163,823
$
5,442
$
171,755
$
3,781
$
167,686
$
5,323
$
142,448
$
3,694
(1)
(2)
Included in Other Assets on the Consolidated Statements of Financial Condition, with the exception of those interest rate swaps from
prior to 2009 that were not designated in hedge relationships (with a fair value of $558,000 at December 31, 2014 and $791,000 at
December 31, 2013), which are included in Loans Receivable.
Included in Other Liabilities on the Consolidated Statements of Financial Condition.
Gains (losses) recognized in income on non-designated hedging instruments for the years ended December 31, 2014 and 2013 were as follows
(in thousands):
Mortgage loan commitments
Forward sales contracts
Mortgage banking operations
Mortgage banking operations
Location on Income Statement
For the Year Ended December 31
2014
$
221
(188)
33
$
2013
(174)
310
136
$
$
The Company is exposed to credit-related losses in the event of nonperformance by the counterparty to these agreements. Credit risk of the
financial contract is controlled through the credit approval, limits, and monitoring procedures and management does not expect the counterparties
to fail their obligations.
In connection with the interest rate swaps between Banner Bank and the dealer counterparties, the agreements contain a provision where if
Banner Bank fails to maintain its status as a well/adequately capitalized institution, then the counterparty could terminate the derivative positions
and Banner Bank would be required to settle its obligations. Similarly, Banner Bank could be required to settle its obligations under certain of
its agreements if specific regulatory events occur, such as a publicly issued prompt corrective action directive, cease and desist order, or a capital
maintenance agreement that required Banner Bank to maintain a specific capital level. If Banner Bank had breached any of these provisions at
December 31, 2014 or December 31, 2013, it could have been required to settle its obligations under the agreements at the termination value.
As of December 31, 2014 and 2013, the termination value of derivatives in a net liability position related to these agreements was $6.3 million
and $2.7 million, respectively. The Company generally posts collateral against derivative liabilities in the form of government agency-issued
bonds, mortgage-backed securities, or commercial mortgage-backed securities. Collateral posted against derivative liabilities was $11.1 million
and $8.9 million as of December 31, 2014 and 2013, respectively.
Derivative assets and liabilities are recorded at fair value on the balance sheet and do not take into account the effects of master netting agreements.
Master netting agreements allow the Company to settle all derivative contracts held with a single counterparty on a net basis and to offset net
derivative positions with related collateral where applicable.
157
The following table illustrates the potential effect of the Company's derivative master netting arrangements, by type of financial instrument, on
the Company's Consolidated Statements of Financial Condition as of December 31, 2014 and December 31, 2013 (in thousands):
December 31, 2014
Gross Amounts of Financial
Instruments Not Offset in the
Statement of Financial Condition
Gross
Amounts
Recognized
Amounts
offset in the
Statement
of Financial
Condition
Net Amounts
in the
Statement
of Financial
Condition
Netting
Adjustment Per
Applicable
Master Netting
Agreements
Fair Value
of Financial
Collateral
in the Statement
of Financial
Condition
Net Amount
$
$
$
$
6,290
6,290
6,290
6,290
$
$
$
$
— $
— $
— $
— $
6,290
6,290
6,290
6,290
$
$
$
$
(6) $
(6) $
(6) $
(6) $
— $
— $
6,284
6,284
(6,279) $
(6,279) $
5
5
December 31, 2013
Gross Amounts of Financial
Instruments Not Offset in the
Statement of Financial Condition
Gross
Amounts
Recognized
Amounts
offset in the
Statement
of Financial
Condition
Net Amounts
in the
Statement
of Financial
Condition
Netting
Adjustment Per
Applicable
Master Netting
Agreements
Fair Value
of Financial
Collateral
in the Statement
of Financial
Condition
Net Amount
$
$
$
$
4,946
4,946
4,946
4,946
$
$
$
$
— $
— $
— $
— $
4,946
4,946
4,946
4,946
$
$
$
$
(554) $
(554) $
— $
— $
(554) $
(2,657) $
(554) $
(2,657) $
4,392
4,392
1,735
1,735
Derivative assets
Interest rate swaps
Derivative liabilities
Interest rate swaps
Derivative assets
Interest rate swaps
Derivative liabilities
Interest rate swaps
158
BANNER CORPORATION
Exhibit
2.1{a}
2.1{b}
3{a}
3{b}
4{a}
10{a}
10{b}
10{c}
10{d}
10{e}
10{f}
10{g}
10{h}
10{i}
10{j}
10{k}
10{l}
Index of Exhibits
Agreement and Plan of Merger, dated as of November 5, 2014, by and among the Registrant, SKBHC Holdings LLC and Starbuck
Bancshares, Inc. [incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed on November
12, 2014 (File No. 000-26584)].
Agreement and Plan of Merger dated as of August 7, 2014 by and between Banner Corporation and Siuslaw Financial Group, Inc.
[incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed on August 8, 2014 (File No.
000-26584)].
Amended and Restated Articles of Incorporation of Registrant [incorporated by reference to the Registrant's Current Report on
Form 8-K filed on April 28, 2010 (File No. 000-26584)], as amended on May 26, 2011 [incorporated by reference to the Current
Report on Form 8-K filed on June 1, 2011 (File No. 000-26584)].
Bylaws of Registrant [incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed on April 1, 2011 (File No.
000-26584)].
Warrant to purchase shares of Company's common stock dated November 21, 2008 [incorporated by reference to the Registrant's
Current Report on Form 8-K filed on November 24, 2008 (File No. 000-26584)]
Executive Salary Continuation Agreement with Gary L. Sirmon [incorporated by reference to exhibits filed with the Annual Report
on Form 10-K for the year ended March 31, 1996 (File No. 000-26584)].
Amended and Restated Employment Agreement, with Mark J. Grescovich [incorporated by reference to Exhibit 10.1 to the Current
Report on Form 8-K filed on June 4, 2013 (File No. 000-26584].
1996 Stock Option Plan [incorporated by reference to Exhibit 99.1 to the Registration Statement on Form S-8 dated August 26,
1996 (File No. 333-10819)].
Supplemental Retirement Plan as Amended with Jesse G. Foster [incorporated by reference to exhibits filed with the Annual Report
on Form 10-K for the year ended March 31, 1997 (File No. 000-26584)].
Supplemental Executive Retirement Program Agreement with D. Michael Jones [incorporated by reference to exhibits filed with
the Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 000-26584)].
Form of Supplemental Executive Retirement Program Agreement with Gary Sirmon, Michael K. Larsen, Lloyd W. Baker, Cynthia
D. Purcell and Richard B. Barton [incorporated by reference to exhibits filed with the Annual Report on Form 10-K for the year
ended December 31, 2001 and the exhibits filed with the Form 8-K on May 6, 2008 (File No. 000-26584)].
1998 Stock Option Plan [incorporated by reference to exhibits filed with the Registration Statement on Form S-8 dated February
2, 1999 (File No. 333-71625)].
2001 Stock Option Plan [incorporated by reference to Exhibit 99.1 to the Registration Statement on Form S-8 dated August 8, 2001
(File No. 333-67168)].
Form of Employment Contract entered into with Lloyd W. Baker, Cynthia D. Purcell, Richard B. Barton and Douglas M. Bennett
[incorporated by reference to exhibits filed with the Form 8-K on June 25, 2014 (File No. 000-26584)].
2004 Executive Officer and Director Stock Account Deferred Compensation Plan [incorporated by reference to exhibits filed with
the Annual Report on Form 10-K for the year ended December 31, 2005 (File No. 000-26584)].
2004 Executive Officer and Director Investment Account Deferred Compensation Plan [incorporated by reference to exhibits filed
with the Annual Report on Form 10-K for the year ended December 31, 2005 (File No. 000-26584)].
Long-Term Incentive Plan and Form of Repricing Agreement [incorporated by reference to the exhibits filed with the Form 8-K
on May 6, 2008 (File No. 000-26584)].
10{m}
2005 Executive Officer and Director Stock Account Deferred Compensation Plan [incorporated by reference to exhibits filed with
the Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 000-26584)].
10{n}
10{o}
10{p}
10{q}
10{r}
Entry into an Indemnification Agreement with each of the Registrant's Directors [incorporated by reference to exhibits filed with
the Form 8-K on January 29, 2010 (File No. 000-26584)].
2012 Restricted Stock and Incentive Bonus Plan [incorporated by reference to Appendix B to the Registrant's Definitive Proxy
Statement on Schedule 14A filed on March 19, 2013 (File No. 000-26584)].
Form of Performance-Based Restricted Stock Award Agreement [incorporated by reference to Exhibit 10.1 included in the
Registrant's Current Report on Form 8-K filed on June 4, 2013 (File No. 000-26584)].
Form of Time-Based Restricted Stock Award Agreement [incorporated by reference to Exhibit 10.1 included in the Registrant's
Current Report on Form 8-K filed on June 4, 2013 (File No. 000-26584)].
2014 Omnibus Incentive Plan [incorporated by reference as Appendix C to the Registrant's Definitive Proxy Statement on Schedule
14A filed on March 24, 2014 (File No. 000-26584)].
159
10{s}
10{t}
10{u}
10{v}
10{w}
10{x}
14
21
23.1
31.1
31.2
32
101
Forms of Equity-Based Award Agreements: Incentive Stock Option Award Agreement, Non-Qualified Stock Option Award
Agreement, Restricted Stock Award Agreement, Restricted Stock Unit Award Agreement, Stock Appreciation Right Award
Agreement, and Performance Unit Award Agreement [incorporated by reference to Exhibits 10.2 - 10.7 included in the Registration
Statement on Form S-8 dated May 9, 2014 (File No. 333-195835)].
Employment agreement entered into with Johan Mehlum [incorporated by reference to Exhibit 10.1 included in the Registration
Statement on Form S-4 dated October 8, 2014 (File No. 333-199211)].
Employment agreement entered into with Lonnie Iholts [incorporated by reference to Exhibit 10.2 included in the Registration
Statement on Form S-4 dated October 8, 2014 (File No. 333-199211)].
Investor Letter Agreement dated as of November 5, 2014 by and between Banner Corporation, and Oaktree Principal Fund V
(Delaware), L.P. and certain of its affiliates (incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on
Form 8-K filed on November 12, 2014 (File No. 000-26584)].
Investor Letter Agreement dated as of November 5, 2014 by and between Banner Corporation, and Friedman Fleischer and Lowe
Capital Partners III, L.P. and certain of its affiliates (incorporated herein by reference to Exhibit 2.1 to the Registrant's Current
Report on Form 8-K filed on November 12, 2014 (File No. 000-26584)].
Investor Letter Agreement dated as of November 5, 2014 by and between Banner Corporation, and GS Capital Partners VI Fund
L.P. and certain of its affiliates (incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K
filed on November 12, 2014 (File No. 000-26584)]
Code of Ethics [incorporated by reference to exhibits filed with the Annual Report on Form 10-K for the year ended December 31,
2004 (File No. 000-26584)].
Subsidiaries of the Registrant.
Consent of Registered Independent Public Accounting Firm – Moss Adams LLP.
Certification of Chief Executive Officer pursuant to the Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to the Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
Certificate of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
The following materials from Banner Corporation’s Annual Report on Form 10-K for the year ended December 31, 2014, formatted
in Extensible Business Reporting Language (XBRL): (a) Consolidated Balance Sheets; (b) Consolidated Statements of Operations;
(c) Consolidated Statements of Comprehensive Income; (d) Consolidated Statements of Shareholders' Equity; (e) Consolidated
Statements of Cash Flows; and (f) Notes to Consolidated Financial Statements. *
* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or
prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934,
as amended, and otherwise are not subject to liability under those sections.
160
SUBSIDIARIES OF THE REGISTRANT
EXHIBIT 21
Parent
Banner Corporation
Subsidiaries
Banner Bank (1)
Islanders Bank (1)
Banner Capital Trusts II, III, IV, V, VI, and VII (1)
Springer Development LLC (2)
Community Financial Corporation (2)
Northwest Financial Corporation (2)
Banner Investment Advisors, LLC (2)
Siuslaw Statutory Trust I (1)
(1) Wholly-owned by Banner Corporation
(2) Wholly-owned by Banner Bank
Percentage of
Ownership
Jurisdiction of State of
Incorporation
100%
100%
100%
100%
100%
100%
100%
100%
Washington
Washington
Washington
Washington
Oregon
Washington
Washington
Connecticut
161
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EXHIBIT 23.1
We consent to the incorporation by reference in Registration Statement Nos. 333-10819, 333-71625, 333-67168, 333-187256 and 333-195835
on Form S-8 and Registration Statement 333-180925 on Form S-3 of our report dated March 16, 2015, with respect to the consolidated statements
of financial condition of Banner Corporation and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of
operations, comprehensive income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31,
2014, and the effectiveness of internal control over financial reporting as of December 31, 2014, which report appears in the annual report on
Form 10-K of Banner Corporation for the year ended December 31, 2014.
/s/ Moss Adams LLP
Portland, Oregon
March 16, 2015
162
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF BANNER CORPORATION
PURSUANT TO RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES ACT OF 1934
I, Mark J. Grescovich, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Banner Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent
functions):
a)
b)
March 16, 2015
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
/s/Mark J. Grescovich
Mark J. Grescovich
Chief Executive Officer
163
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER OF BANNER CORPORATION
PURSUANT TO RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES ACT OF 1934
I, Lloyd W. Baker, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Banner Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent
functions):
a)
b)
March 16, 2015
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
/s/ Lloyd W. Baker
Lloyd W. Baker
Chief Financial Officer
164
EXHIBIT 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
OF BANNER CORPORATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certify in his capacity as an officer of Banner Corporation, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this Annual Report on Form 10-K, that:
•
•
the report fully complies with the requirements of Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, and
the information contained in the report fairly presents, in all material respects, the Company’s financial condition and results of
operations as of the dates and for the periods presented in the financial statements included in such report.
March 16, 2015
March 16, 2015
/s/ Mark J. Grescovich
Mark J. Grescovich
Chief Executive Officer
/s/ Lloyd W. Baker
Lloyd W. Baker
Chief Financial Officer
165
CORPORATE HEADQUARTERS
10 South First Avenue
PO Box 907
Walla Walla, WA 99362-0265
509-527-3636
800-272-9933
Website: bannerbank.com
Email: bannerbank@bannerbank.com
SUBSIDIARIES
Banner Bank – bannerbank.com
Islanders Bank – islandersbank.com
Community Financial Corporation
TRANSFER AGENT and REGISTRAR
Computershare Trust Company, N.A.
PO Box 30170
College Station, TX 77842-3170
INDEPENDENT PUBLIC
ACCOUNTANTS and AUDITORS
Moss Adams LLP
805 SW Broadway, Suite 1200
Portland, OR 97205
SPECIAL COUNSEL
Breyer & Associates PC
8180 Greensboro Drive, Suite 785
McLean, VA 22102
ANNUAL MEETING of SHAREHOLDERS
10 a.m., Tuesday, April 21, 2015
Marcus Whitman Hotel
6 West Rose Street
Walla Walla, WA 99362
DIVIDEND PAYMENTS SENT QUARTERLY
Dividend payments are reviewed quarterly by the
Board of Directors and, if appropriate and
authorized, have historically been paid during
the months of January, April, July and October.
To avoid delay or lost mail, and to reduce costs,
we encourage you to request direct deposit of
dividend payments to your bank account. To
enroll in the Direct Deposit Plan, telephone the
Company’s Investor Services Department at
800-272-9933.
DIVIDEND REINVESTMENT and
STOCK PURCHASE PLAN
Banner Corporation offers a dividend
reinvestment program whereby shareholders
may reinvest all or a portion of their dividends
in additional shares of the Company’s common
stock. Information concerning this optional
program is available from the Investor Services
Department or from Computershare Investor
Services at 800-697-8924.
INVESTOR INFORMATION
Shareholders and others will find the Company’s
financial information, press releases and other
information on the Company’s website at www.
bannerbank.com. There is a direct link from the
website to the Securities and Exchange Commission
(SEC) filings via the EDGAR database, including
Forms 10-K, 10-Q and 8-K.
SHAREHOLDERS MAY CONTACT:
Investor Relations, Banner Corporation
PO Box 907
Walla Walla, WA 99362
Or call 800-272-9933 to obtain a hard copy of these
reports without charge.
DIRECTORS
Robert D. Adams
David A. Klaue
Gordon E. Budke
Constance H. Kravas
Connie R. Collingsworth
John R. Layman
Jesse G. Foster
Brent A. Orrico
Mark J. Grescovich
Gary Sirmon
D. Michael Jones
Michael M. Smith
EXECUTIVE OFFICERS
Mark J. Grescovich
President and Chief Executive Officers
Lloyd W. Baker
EVP and Chief Financial Officer
Richard B. Barton
EVP, Chief Lending Officer
Douglas M. Bennett
EVP, Real Estate Lending Division
Tyrone J. Bliss
EVP, Risk Management and Compliance Officer
Cynthia D. Purcell
EVP, Retail Banking and Administration
M. Kirk Quillin
SVP, East Region Commercial Banking
James T. Reed, Jr.
SVP, West Region Commercial Banking
Steven W. Rust
EVP and Chief Information Officer
Gary W. Wagers
EVP, Retail Products and Services
Anne L. Wuesthoff
EVP, Human Resources
CORPORATE PROFILE
Banner Corporation is a dynamic banking organization that has developed a significant and expanding
regional franchise throughout the Pacific Northwest. Formed in 1995, Banner Corporation is the holding
company for Banner Bank, a Washington-chartered commercial bank headquartered in Walla Walla,
Washington, with roots that date back to 1890. In 2007, the Company acquired Islanders Bank, which
operates in Washington’s San Juan Islands.
Banner Bank and Islanders Bank strive to deliver a high level of individualized service as community banks
while offering advantages available from being part of a larger financial institution. The Company’s leadership
consists of an experienced executive management team headed by President and CEO, Mark J. Grescovich.
Banner Corporation aims to be the premier Pacific Nortwest banking franchise. Serving a growing and
prosperous region with a full range of deposit services and business, commercial real estate, construction,
residential, agricultural and consumer loans, the Company provides community banking services through
a combined total of 103 branch offices and ten loan offices located in 32 counties of Washington, Oregon
and Idaho. The Company’s employees take pride in extending the highest levels of service, convenience, and
banking knowledge to their clients.
Banner Bank and Islanders Bank are members of the Federal Home Loan Bank of Seattle and their deposits
are insured by the Federal Deposit Insurance Corporation. Banner Bank and Islanders Bank are wholly-owned
subsidiaries of Banner Corporation. Banner Corporation common stock is traded over the counter on the
NASDAQ Global Select Market® under the symbol “BANR.” This document, together with the Company’s
Form 10-K, represents the annual report to shareholders of Banner Corporation.
Corporate Headquarters: 10 South First Avenue, P.O. Box 907, Walla Walla, WA 99362-0265
509-527-3636 800-272-9933 bannerbank.com e: bannerbank@bannerbank.com