q5908.htm
|
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
|
Washington,
D.C. 20549
|
|
FORM
10-Q
|
|
|
(Mark
One)
|
|
[X]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF
1934 FOR THE QUARTERLY PERIOD ENDED MARCH
31, 2008 .
|
|
|
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
|
|
|
|
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 is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act (check one)
|
Large
accelerated filer |
[
] |
Accelerated
filer |
[X] |
Non-accelerated filer |
[
] |
Smaller
reporting company |
[
] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
|
Yes
|
[
] |
No
|
[X]
|
|
|
APPLICABLE
ONLY TO CORPORATE ISSUERS
|
|
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable
date.
|
Title of class:
Common Stock, $.01 par value per share
|
|
As
of April 30, 2008
15,977,000 shares*
|
|
|
* Includes
240,381 shares held by the Employee Stock Ownership Plan that have not
been released, committed to be released,
or allocated to participant
accounts.
|
|
BANNER
CORPORATION AND SUBSIDIARIES
Table of
Contents
PART
I - FINANCIAL INFORMATION
|
|
Item
1 - Financial Statements. The Consolidated Financial Statements
of Banner Corporation and Subsidiaries filed as a part of the report are
as follows:
|
Consolidated
Statements of Financial Condition as of March 31, 2008 and December 31,
2007
|
3
|
|
|
Consolidated
Statements of Income for the Quarters Ended March 31, 2008 and
2007
|
4
|
|
|
Consolidated
Statements of Comprehensive Income for the Quarters Ended March 31, 2008
and 2007
|
5
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity for the Quarters Ended March
31, 2008 and 2007
|
6
|
|
|
Consolidated
Statements of Cash Flows for the Quarters Ended March 31, 2008 and
2007
|
9
|
|
|
Selected
Notes to Consolidated Financial Statements
|
11
|
|
|
Item
2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
|
|
|
|
Special
Note Regarding Forward-Looking Statements
|
21
|
|
|
Executive
Overview
|
21
|
|
|
Comparison
of Financial Condition at March 31, 2008 and December 31,
2007
|
23
|
|
|
Comparison
of Results of Operations for the Quarters Ended March 31, 2008 and
2007
|
25
|
|
|
Asset
Quality
|
32
|
|
|
Liquidity
and Capital Resources
|
33
|
|
|
Financial
Instruments with Off-Balance-Sheet Risk
|
34
|
|
|
Capital
Requirements
|
34
|
|
|
Item
3 - Quantitative and Qualitative Disclosures About Market
Risk
|
|
|
|
Market
Risk and Asset/Liability Management
|
36
|
|
|
Sensitivity
Analysis
|
36
|
|
|
Item
4 - Controls and Procedures
|
40
|
|
|
PART
II - OTHER INFORMATION
|
|
|
|
Item
1 - Legal Proceedings
|
41
|
|
|
Item
1A - Risk Factors
|
41
|
|
|
Item
2 - Unregistered Sales of Equity Securities and Use of Proceeds
|
41
|
|
|
Item
3 - Defaults upon Senior Securities
|
41
|
|
|
Item
4 - Submission of Matters to a Vote of Security Holders
|
41
|
|
|
Item
5 - Other Information
|
41
|
|
|
Item
6 - Exhibits
|
42
|
|
|
SIGNATURES
|
44
|
BANNER
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(In thousands, except shares)
March
31, 2008 and December 31, 2007
|
|
March
31
|
|
|
December
31
|
|
ASSETS
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Restated
|
|
Cash
and due from banks
|
|
$ |
122,394 |
|
|
$ |
98,430 |
|
|
|
|
|
|
|
|
|
|
Securities
at fair value, cost $233,869 and $204,279, respectively
|
|
|
226,910 |
|
|
|
202,863 |
|
Securities
held to maturity, fair value $57,113 and $55,010,
respectively
|
|
|
55,647 |
|
|
|
53,516 |
|
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank (FHLB) stock
|
|
|
37,371 |
|
|
|
37,371 |
|
Loans
receivable:
|
|
|
|
|
|
|
|
|
Held
for sale, fair value $6,228 and $4,680, respectively
|
|
|
6,118 |
|
|
|
4,596 |
|
Held
for portfolio
|
|
|
3,833,875 |
|
|
|
3,805,021 |
|
Allowance
for loan losses
|
|
|
(50,446
|
) |
|
|
(45,827
|
) |
|
|
|
3,789,547 |
|
|
|
3,763,790 |
|
|
|
|
|
|
|
|
|
|
Accrued
interest receivable
|
|
|
23,795 |
|
|
|
24,980 |
|
Real
estate owned, held for sale, net
|
|
|
7,572 |
|
|
|
1,867 |
|
Property
and equipment, net
|
|
|
98,808 |
|
|
|
98,098 |
|
Goodwill
and other intangibles, net
|
|
|
136,918 |
|
|
|
137,654 |
|
Income
taxes receivable, net
|
|
|
-- |
|
|
|
1,610 |
|
Bank-owned
life insurance (BOLI)
|
|
|
51,725 |
|
|
|
51,483 |
|
Other
assets
|
|
|
21,538 |
|
|
|
20,996 |
|
|
|
$ |
4,572,225 |
|
|
$ |
4,492,658 |
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Non-interest-bearing
|
|
$ |
486,201 |
|
|
$ |
484,251 |
|
Interest-bearing
transactions and savings accounts
|
|
|
1,297,215 |
|
|
|
1,288,112 |
|
Interest-bearing
certificates
|
|
|
1,909,894 |
|
|
|
1,848,230 |
|
|
|
|
3,693,310 |
|
|
|
3,620,593 |
|
|
|
|
|
|
|
|
|
|
Advances
from FHLB at fair value
|
|
|
155,405 |
|
|
|
167,045 |
|
Other
borrowings
|
|
|
135,032 |
|
|
|
91,724 |
|
Junior
subordinated debentures at fair value (issued in connection with Trust
Preferred Securities)
|
|
|
105,516 |
|
|
|
113,270 |
|
Accrued
expenses and other liabilities
|
|
|
39,263 |
|
|
|
47,989 |
|
Deferred
compensation
|
|
|
12,224 |
|
|
|
11,596 |
|
Deferred
income tax liability, net
|
|
|
38 |
|
|
|
2,595 |
|
Income
taxes payable, net
|
|
|
1,899 |
|
|
|
-- |
|
|
|
|
4,142,687 |
|
|
|
4,054,812 |
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Preferred
stock - $0.01 par value, 500,000 shares authorized, none
issued
|
|
|
-- |
|
|
|
-- |
|
Common
stock - $0.01 par value per share, 25,000,000 shares authorized,
15,903,637 shares issued:
15,663,256
shares and 16,025,768 shares outstanding at March 31, 2008 and December
31, 2007, respectively
|
|
|
292,061 |
|
|
|
300,486 |
|
Retained
earnings
|
|
|
139,722 |
|
|
|
139,636 |
|
Accumulated
other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Unrealized
loss on securities available for sale transferred to held to
maturity
|
|
|
(162
|
) |
|
|
(176
|
) |
Unearned
shares of common stock issued to Employee Stock Ownership Plan (ESOP)
trust at cost:
|
|
|
|
|
|
|
|
|
240,381
and 240,381 restricted shares outstanding at March 31, 2008 and December
31, 2007, respectively
|
|
|
(1,987
|
) |
|
|
(1,987
|
) |
|
|
|
|
|
|
|
|
|
Carrying
value of shares held in trust for stock related compensation
plans
|
|
|
(8,100
|
) |
|
|
(7,960
|
) |
Liability
for common stock issued to deferred, stock related, compensation
plans
|
|
|
8,004 |
|
|
|
7,847 |
|
|
|
|
(96
|
) |
|
|
(113
|
) |
|
|
|
429,538 |
|
|
|
437,846 |
|
|
|
$ |
4,572,225 |
|
|
$ |
4,492,658 |
|
See
selected notes to consolidated financial statements
BANNER
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
(Unaudited)
(In thousands except for per share amounts)
For
the Quarters Ended March 31, 2008 and 2007
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
INTEREST
INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
receivable
|
|
|
|
|
|
|
$
|
68,073
|
|
$
|
61,828
|
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
1,153
|
|
|
1,775
|
|
Securities
and cash equivalents
|
|
|
|
|
|
|
|
2,727
|
|
|
1,843
|
|
|
|
|
|
|
|
|
|
71,953
|
|
|
65,446
|
|
INTEREST
EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
30,063
|
|
|
27,610
|
|
FHLB
advances
|
|
|
|
|
|
|
|
1,849
|
|
|
2,277
|
|
Other
borrowings
|
|
|
|
|
|
|
|
610
|
|
|
928
|
|
Junior
subordinated debentures
|
|
|
|
|
|
|
|
2,064
|
|
|
2,454
|
|
|
|
|
|
|
|
|
|
34,586
|
|
|
33,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income before provision for loan losses
|
|
|
|
|
|
|
|
37,367
|
|
|
32,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR LOAN LOSSES
|
|
|
|
|
|
|
|
6,500
|
|
|
1,000
|
|
Net
interest income
|
|
|
|
|
|
|
|
30,867
|
|
|
31,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
OPERATING INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit
fees and other service charges
|
|
|
|
|
|
|
|
5,013
|
|
|
2,963
|
|
Mortgage
banking operations
|
|
|
|
|
|
|
|
1,615
|
|
|
1,355
|
|
Loan
servicing fees
|
|
|
|
|
|
|
|
402
|
|
|
375
|
|
Miscellaneous
|
|
|
|
|
|
|
|
331
|
|
|
461
|
|
|
|
|
|
|
|
|
|
7,361
|
|
|
5,154
|
|
Gain
on sale of securities
|
|
|
|
|
|
|
|
--
|
|
|
--
|
|
Net
change in valuation of financial instruments carried at fair
value
|
|
|
|
|
|
|
|
823
|
|
|
1,180
|
|
Total
other operating income
|
|
|
|
|
|
|
|
8,184
|
|
|
6,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary
and employee benefits
|
|
|
|
|
|
|
|
19,638
|
|
|
16,468
|
|
Less
capitalized loan origination costs
|
|
|
|
|
|
|
|
(2,241
|
)
|
|
(2,594
|
)
|
Occupancy
and equipment
|
|
|
|
|
|
|
|
5,868
|
|
|
4,352
|
|
Information/computer
data services
|
|
|
|
|
|
|
|
1,989
|
|
|
1,369
|
|
Payment
and card processing expenses
|
|
|
|
|
|
|
|
1,531
|
|
|
988
|
|
Professional
services
|
|
|
|
|
|
|
|
755
|
|
|
559
|
|
Advertising
and marketing
|
|
|
|
|
|
|
|
1,418
|
|
|
1,857
|
|
State/municipal
business and use taxes
|
|
|
|
|
|
|
|
564
|
|
|
408
|
|
Amortization
of core deposit intangibles
|
|
|
|
|
|
|
|
736
|
|
|
--
|
|
Miscellaneous
|
|
|
|
|
|
|
|
3,450
|
|
|
2,664
|
|
Total
other operating expenses
|
|
|
|
|
|
|
|
33,708
|
|
|
26,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before provision for income taxes
|
|
|
|
|
|
|
|
5,343
|
|
|
11,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
|
|
|
|
|
1,509
|
|
|
3,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
|
|
|
|
$
|
3,834
|
|
$
|
7,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share (see Note 8):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
$
|
0.24
|
|
$
|
0.63
|
|
Diluted
|
|
|
|
|
|
|
$
|
0.24
|
|
$
|
0.62
|
|
Cumulative
dividends declared per common share:
|
|
|
|
|
|
|
$
|
0.20
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
selected notes to consolidated financial statements
BANNER
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
For
the Quarters Ended March 31, 2008 and 2007
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
NET
INCOME
|
|
|
|
|
|
|
$
|
3,834
|
|
$
|
7,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME, NET OF INCOME TAXES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of unrealized loss on tax exempt securities transferred from
available-for-sale to held-to-maturity
|
|
|
|
|
|
|
|
14
|
|
|
14
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
14
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
|
|
|
|
|
$
|
3,848
|
|
$
|
7,827
|
|
See
selected notes to consolidated financial statements
BANNER
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands, except per share amounts)
For
the Quarters Ended March 31, 2008 and 2007
|
|
Common
Stock
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other Comprehensive Income (Loss)
|
|
|
Unearned
Restricted
ESOP
Shares
|
|
|
Carrying
Value,
Net
of Liability, Of Shares Held in Trust for Stock-Related Compensation
Plans
|
|
|
Stockholders’
Equity
|
|
BALANCE,
January 1, 2008
|
|
$ |
300,486 |
|
|
$ |
139,636 |
|
|
$ |
(176 |
) |
|
$ |
(1,987 |
) |
|
$ |
(113 |
) |
|
$ |
437,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
3,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of adoption of EITF 06-4 relating to liabilities under split dollar
life insurance arrangements
|
|
|
|
|
|
|
(617
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(617
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of unrealized loss on tax exempt securities transferred from available for
sale to held to maturity
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividend on common stock ($.20/share cumulative)
|
|
|
|
|
|
|
(3,131
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,131
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
and retirement of common stock
|
|
|
(14,265
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,265
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock for exercise of stock
options
|
|
|
551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock for stockholder reinvestment
program
|
|
|
5,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
issuance of stock through employer’s stock plans, including tax
benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of compensation expense related to stock options
|
|
|
96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of compensation expense related to MRP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17 |
|
|
|
17 |
|
BALANCE,
March 31, 2008
|
|
$ |
292,061 |
|
|
$ |
139,722 |
|
|
$ |
(162 |
) |
|
$ |
(1,987 |
) |
|
$ |
(96 |
) |
|
$ |
429,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
selected notes to consolidated financial statements
BANNER
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Continued)
(Unaudited)
(In thousands, except per share amounts)
For
the Quarters Ended March 31, 2008 and 2007
|
|
Common
Stock
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other Comprehensive Income (Loss)
|
|
|
Unearned
Restricted
ESOP
Shares
|
|
|
Carrying
Value,
Net
of Liability, Of Shares Held in Trust for Stock-Related Compensation
Plans
|
|
|
Stockholders’
Equity
|
|
BALANCE,
January 1, 2007
(As
previously reported)
|
|
$ |
135,149 |
|
|
$ |
120,206 |
|
|
$ |
(2,852 |
) |
|
$ |
(1,987 |
) |
|
$ |
(289 |
) |
|
$ |
250,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
ESOP tax expense
|
|
|
|
|
|
|
(2,452
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,452
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
benefit from prior periods
|
|
|
2,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2007 (Restated)
|
|
|
137,981 |
|
|
|
117,754 |
|
|
|
(2,852
|
) |
|
|
(1,987
|
) |
|
|
(289
|
) |
|
|
250,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
7,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of early adoption of SFAS Nos. 157 & 159 Fair Value
Option
|
|
|
|
|
|
|
(3,520
|
) |
|
|
2,623 |
|
|
|
|
|
|
|
|
|
|
|
(897
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of unrealized loss on tax exempt securities transferred from available for
sale to held to maturity
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividend on common stock ($.19/share cumulative)
|
|
|
|
|
|
|
(2,429
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,429
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
and retirement of common stock
|
|
|
(335
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(335
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock for exercise of stock
options
|
|
|
502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock for stockholder reinvestment
program
|
|
|
26,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
issuance of stock through employer’s stock plans, including tax
benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of compensation expense related to stock options
|
|
|
84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of compensation expense related to MRP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46 |
|
|
|
46 |
|
BALANCE,
March 31, 2007
|
|
$ |
164,677 |
|
|
$ |
119,618 |
|
|
$ |
(215 |
) |
|
$ |
(1,987 |
) |
|
$ |
(243 |
) |
|
$ |
281,850 |
|
See
selected notes to consolidated financial statements
BANNER
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (continued)
(Unaudited)
(In thousands)
For
the Quarters Ended March 31, 2008 and 2007
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHARES
ISSUED AND OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock, shares issued, beginning of period
|
|
|
|
|
|
|
|
16,266
|
|
|
12,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
and retirement of common stock
|
|
|
|
|
|
|
|
(614
|
)
|
|
(8
|
)
|
Issuance
of common stock for exercised stock options and/or
employee stock plans
|
|
|
|
|
|
|
|
28
|
|
|
27
|
|
Issuance
of common stock for stockholder reinvestment program
|
|
|
|
|
|
|
|
223
|
|
|
646
|
|
Number
of shares (retired) issued during the period
|
|
|
|
|
|
|
|
(363
|
)
|
|
665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHARES
ISSUED AND OUTSTANDING, END OF PERIOD
|
|
|
|
|
|
|
|
15,903
|
|
|
12,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNEARNED,
RESTRICTED ESOP SHARES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of shares, beginning of period
|
|
|
|
|
|
|
|
(240
|
)
|
|
(240
|
)
|
Issuance/adjustment
of earned shares
|
|
|
|
|
|
|
|
--
|
|
|
--
|
|
Number
of shares, end of period
|
|
|
|
|
|
|
|
(240
|
)
|
|
(240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
SHARES OUTSTANDING
|
|
|
|
|
|
|
|
15,663
|
|
|
12,739
|
|
See
selected notes to consolidated financial statements
BANNER
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For
the Quarters Ended March 31, 2008 and 2007
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
$
|
3,834
|
|
$
|
7,813
|
|
Adjustments
to reconcile net income to net cash provided by
operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
|
2,535
|
|
|
1,654
|
|
Deferred
income and expense, net of amortization
|
|
|
|
|
|
|
|
(152
|
)
|
|
(851
|
)
|
Loss
(gain) on sale of securities
|
|
|
|
|
|
|
|
--
|
|
|
--
|
|
Net
change in valuation of financial instruments carried at fair
value
|
|
|
|
|
|
|
|
(823
|
)
|
|
(1,180
|
)
|
Purchases
of securities at fair value
|
|
|
|
|
|
|
|
(49,012
|
)
|
|
(769
|
)
|
Principal
repayments and maturities of securities at fair value
|
|
|
|
|
|
|
|
16,800
|
|
|
6,285
|
|
Proceeds
from sales of securities at fair value
|
|
|
|
|
|
|
|
2,598
|
|
|
3,122
|
|
Deferred
taxes
|
|
|
|
|
|
|
|
(2,557
|
)
|
|
429
|
|
Equity-based
compensation
|
|
|
|
|
|
|
|
113
|
|
|
130
|
|
Tax
benefits realized from equity-based compensation
|
|
|
|
|
|
|
|
--
|
|
|
--
|
|
Increase
in cash surrender value of bank-owned life insurance
|
|
|
|
|
|
|
|
(242
|
)
|
|
(408
|
)
|
Gain
on sale of loans, excluding capitalized servicing rights
|
|
|
|
|
|
|
|
(1,218
|
)
|
|
(1200
|
)
|
Loss
(gain) on disposal of real estate held for sale and property
and
equipment
|
|
|
|
|
|
|
|
58
|
|
|
(113
|
)
|
Provision
for losses on loans and real estate held for sale
|
|
|
|
|
|
|
|
6,500
|
|
|
1,000
|
|
Origination
of loans held for sale
|
|
|
|
|
|
|
|
(111,088
|
)
|
|
(83,887
|
)
|
Proceeds
from sales of loans held for sale
|
|
|
|
|
|
|
|
109,566
|
|
|
83,627
|
|
Net
change in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
|
|
|
|
|
2,826
|
|
|
(335
|
)
|
Other
liabilities
|
|
|
|
|
|
|
|
(6,759
|
)
|
|
9,373
|
|
Net
cash (used) provided by operating activities
|
|
|
|
|
|
|
|
(27,021
|
)
|
|
24,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of securities held to maturity
|
|
|
|
|
|
|
|
(2,176
|
)
|
|
--
|
|
Principal
repayments and maturities of securities held to maturity
|
|
|
|
|
|
|
|
27
|
|
|
21
|
|
Origination
of loans, net of principal repayments
|
|
|
|
|
|
|
|
(30,602
|
)
|
|
(43,669
|
)
|
Purchases
of loans and participating interest in loans
|
|
|
|
|
|
|
|
(4,229
|
)
|
|
(10
|
)
|
Purchases
of property and equipment, net
|
|
|
|
|
|
|
|
(3,286
|
)
|
|
(6,634
|
)
|
Proceeds
from sale of real estate held for sale, net
|
|
|
|
|
|
|
|
400
|
|
|
33
|
|
Other
|
|
|
|
|
|
|
|
(414
|
)
|
|
(735
|
)
|
Net
cash used by investing activities
|
|
|
|
|
|
|
|
(40,280
|
)
|
|
(50,994
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in deposits
|
|
|
|
|
|
|
|
72,717
|
|
|
126,556
|
|
Proceeds
from FHLB advances
|
|
|
|
|
|
|
|
92,800
|
|
|
--
|
|
Repayment
of FHLB advances
|
|
|
|
|
|
|
|
(105,835
|
)
|
|
(83,500
|
)
|
Increase
(decrease) in repurchase agreement borrowings, net
|
|
|
|
|
|
|
|
--
|
|
|
(7,802
|
)
|
Increase
(decrease) in other borrowings, net
|
|
|
|
|
|
|
|
43,308
|
|
|
(1,013
|
)
|
Cash
dividends paid
|
|
|
|
|
|
|
|
(3,204
|
)
|
|
(2,291
|
)
|
Repurchases
of stock, net of forfeitures
|
|
|
|
|
|
|
|
(14,265
|
)
|
|
(335
|
)
|
Tax
benefits realized from equity-based compensation
|
|
|
|
|
|
|
|
--
|
|
|
--
|
|
Cash
proceeds from issuance of stock, net of registration costs
|
|
|
|
|
|
|
|
5,193
|
|
|
26,445
|
|
Exercise
of stock options
|
|
|
|
|
|
|
|
551
|
|
|
502
|
|
Net
cash provided by financing activities
|
|
|
|
|
|
|
|
91,265
|
|
|
58,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH AND DUE FROM BANKS
|
|
|
|
|
|
|
|
23,964
|
|
|
32,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND DUE FROM BANKS, BEGINNING OF PERIOD
|
|
|
|
|
|
|
|
98,430
|
|
|
73,385
|
|
CASH
AND DUE FROM BANKS, END OF PERIOD
|
|
|
|
|
|
|
$
|
122,394
|
|
$
|
105,643
|
|
(Continued
on next page)
BANNER
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
(In thousands)
For
the Quarters Ended March 31, 2008 and 2007
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid in cash
|
|
|
|
|
|
|
$
|
35,362
|
|
$
|
29,664
|
|
Taxes
paid in cash
|
|
|
|
|
|
|
|
544
|
|
|
163
|
|
Non-cash
investing and financing transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
net of discounts, specific loss allowances and unearned income,
transferred to real estate owned and other repossessed
assets
|
|
|
|
|
|
|
|
6,112
|
|
|
67
|
|
Net
change in accrued dividends payable
|
|
|
|
|
|
|
|
73
|
|
|
138
|
|
Change
in other assets/liabilities
|
|
|
|
|
|
|
|
141
|
|
|
805
|
|
Adoption
of EITF 06-4
Accrual
of liability for split-dollar life insurance
|
|
|
|
|
|
|
|
617
|
|
|
--
|
|
Adoption
of SFAS Nos. 157 and 159:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale
transferred
to fair value
|
|
|
|
|
|
|
|
|
|
|
226,153
|
|
FHLB
advances adjustment to fair value
|
|
|
|
|
|
|
|
|
|
|
678
|
|
Junior
subordinated debentures
including
unamortized origination costs adjustment to fair value
|
|
|
|
|
|
|
|
|
|
|
2,079
|
|
Deferred
tax asset related to fair value adjustments
|
|
|
|
|
|
|
|
|
|
|
504
|
|
See
selected notes to consolidated financial statements
BANNER
CORPORATION AND SUBSIDIARIES
SELECTED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1: Basis of Presentation and Critical Accounting
Policies
Banner
Corporation (Banner or 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, subsequent to May 1, 2007, Islanders Bank, a
recent acquisition, as explained below. Banner Bank is a
Washington-chartered commercial bank that conducts business from its main office
in Walla Walla, Washington and, as of March 31, 2008, its 81 branch offices and
12 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 and the Federal Deposit Insurance
Corporation (FDIC). The consolidated financial statements and results
of operation presented in this report on Form 10-Q include financial information
for Islanders Bank and our other recent acquisitions, F&M Bank, Spokane,
Washington, and NCW Community Bank, Wenatchee, Washington, which were merged
into Banner Bank in 2007. (See Note 5 of the Selected Notes to the
Consolidated Financial Statements for additional information with respect to
these acquisitions.)
In the
opinion of management, the accompanying consolidated statements of financial
condition and related interim consolidated statements of income, comprehensive
income, changes in stockholders’ equity and cash flows reflect all adjustments
(which include reclassifications and normal recurring adjustments) that are
necessary for a fair presentation in conformity with 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 and (iii) the valuation of financial assets
and liabilities recorded at fair value, goodwill, mortgage servicing rights and
real estate held for sale. These policies and the judgments,
estimates and assumptions are described in greater detail below in Management’s
Discussion and Analysis of Financial Condition and Results of Operations and in
Note 1 of the Notes to the Consolidated Financial Statements in our Annual
Report on Form 10-K for the year ended December 31, 2007 filed with the
Securities and Exchange Commission (SEC). Management believes that
the judgments, estimates and assumptions used in the preparation of our
consolidated 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 different
judgments, estimates and assumptions could result in material differences in our
results of operations or financial condition. There have been no
significant changes in our application of accounting policies since December 31,
2007 except for the adoption of Emerging Issues Task Force Issue 06-4, Accounting
for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements, and the adoption of this
standard did not have a material effect on our financial condition or results of
operations (for additional information, see Note 3 of the Selected Notes to the
Consolidated Financial Statements).
Certain
information and disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles (GAAP) have been
condensed or omitted pursuant to the rules and regulations of the
SEC. Certain reclassifications have been made to the 2007
Consolidated Financial Statements and/or schedules to conform to the 2008
presentation. These reclassifications may have affected certain ratios for the
prior periods. The effect of these reclassifications is considered immaterial.
All significant intercompany transactions and balances have been
eliminated.
The
information included in this Form 10-Q should be read in conjunction with our
Annual Report on Form 10-K for the year ended December 31, 2007 filed with the
SEC. Interim results are not necessarily indicative of results for a
full year.
Note
2: Restatement under Securities and Exchange Commission Staff
Accounting Bulletin (SAB) 108
In
connection with reviewing our previous accounting for the tax (benefits)
provisions related to stock-based compensation for our ESOP share releases,
exercises of non-qualified stock options and distributions of stock from
deferred compensation plans, we determined there were net immaterial errors in
the reporting in prior period financial statements. These errors
resulted in the understatement of our previously reported income tax provisions
as a result of the difference between the tax and book accounting basis for ESOP
share releases to individual participants, as well as benefits to stockholders’
equity from the release of the Company’s shares of common stock in connection
with the exercise of stock options and deferred compensation
distributions. We concluded that while the amounts related to
individual years were immaterial, in the aggregate they resulted in cumulative
adjustments that the Board of Directors and management felt required the
restatement of previously reported financial statements. The effects
of these adjustments were reductions of $380,000 in income taxes payable and
$2.4 million in retained earnings and increases of $2.8 million and $380,000,
respectively, in common stock (paid-in capital) and total stockholders’ equity
as of December 31, 2006. These adjustments are reflected in the March
31, 2007 Consolidated Statement of Financial Condition and Consolidated
Statement of Changes in Stockholder’s Equity that are shown for comparative
purposes in these financial statements. The restatement has had no
impact on management’s previous conclusions regarding the effectiveness of
internal controls over financial reporting and disclosure controls and
procedures for the years ended December 31, 2006 and 2005, nor on our
conclusions for the year ended December 31, 2007. These adjustments have
immaterially affected certain previously reported ratios for the quarter ended
March 31, 2007.
The
following tables summarize the impact of the restatement discussed above on the
previously issued Consolidated Financial Statements as of March 31, 2008
(dollars in thousands).
|
|
|
|
December
31, 2006 (January 1, 2007)
|
|
|
As
Previously Reported Rate
|
|
Adjustment
|
|
Restated
|
|
Consolidated
Statement of Financial Condition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes payable
|
$
|
2,504
|
|
$
|
(380
|
)
|
$
|
2,124
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
135,149
|
|
|
2,832
|
|
|
137,981
|
|
Retained
earnings
|
|
120,206
|
|
|
(2,452
|
)
|
|
117,754
|
|
Total
stockholders’ equity
|
|
250,227
|
|
|
380
|
|
|
250,607
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
$
|
135,149
|
|
|
2,832
|
|
|
137,981
|
|
Retained
earnings
|
|
120,206
|
|
|
(2,452
|
)
|
|
117,754
|
|
Total
stockholders’ equity
|
|
250,227
|
|
|
380
|
|
|
250,607
|
|
|
|
|
|
|
|
|
|
|
|
Note
3: Recent Developments and Significant Events
Stock
Repurchase and Option Exercise Activity: On July 26, 2007, our
Board of Directors authorized the purchase of up to 750,000 shares of our
outstanding common stock over the next twelve months. As of March 31,
2008, we had repurchased 663,600 shares of stock under this
program. During the quarter ended March 31, 2008, we repurchased
605,800 shares of our common stock under this program at an average price of
$23.19 per share.
In
addition to shares repurchased under this program, during the quarter ended
March 31, 2008, we purchased 8,103 shares as consideration for the exercise of
certain vested stock options at current market prices on the date of
exercise. In total, we issued 28,211 shares of common stock on
exercise of vested options during the quarter ended March 31, 2008.
Issuance
of Shares through Dividend Reinvestment and Direct Stock Purchase and Sale
Plan: During the year ended December 31, 2007, we issued
995,590 new shares of common stock at an average net price of $37.75 through our
Dividend Reinvestment and Direct Stock Purchase and Sale Plan
(DRIP). On October 23, 2007, our Board of Directors authorized the
registration and issuance of up to an additional 1,000,000 shares of common
stock through continuation of our DRIP. During the quarter ended
March 31, 2008, we issued 223,180 shares at an average price, net of issuance
costs, of $23.27 per share through our DRIP.
Acquisition
of F&M Bank, San Juan Financial Holding Company and NCW Community
Bank: We completed the acquisitions of F&M Bank (F&M)
and San Juan Financial Holding Company (SJFHC) effective May 1, 2007, and NCW
Community Bank (NCW) effective October 10, 2007. SJFHC was merged
into Banner Corporation and its wholly owned subsidiary, Islanders Bank, has
continued operations as a subsidiary of Banner Corporation. F&M
and NCW were merged into Banner Bank upon acquisition and now operate under the
Banner Bank name. The financial results for the quarter ended March
31, 2008 include the assets, liabilities and results of operations for all three
of the acquired companies which were not in the comparable period a year
earlier. (See Note 5 of the Selected Notes to the Consolidated
Financial Statements for additional information with respect to these
acquisitions.)
Branch
Expansion: Over the past several years, we have invested
significantly in expanding Banner Bank’s branch and distribution systems with a
primary emphasis on the greater Boise, Idaho and Portland, Oregon markets and
the Puget Sound region of Washington. This branch expansion is a
significant element in our strategy to grow loans, deposits and customer
relationships. This emphasis on growth has resulted in an elevated
level of operating expenses; however, we believe that over time these new
branches should help improve profitability by providing low cost core deposits
which will allow Banner Bank to proportionately reduce higher cost borrowings as
a source of funds. From March 2004 through December 2007, Banner Bank
opened 26 new branch offices, relocated eight additional branch offices and
significantly refurbished its main office in Walla Walla. Branch
expansion activity included ten new offices opened at various times during 2007,
including four during the quarter ended March 31, 2007. We plan a
more moderate pace of expansion going forward with just two new branches
scheduled to open in 2008.
Recently
Adopted Accounting Standards: In September 2006, the Emerging Issues Task
Force (EITF) issued EITF 06-4, Accounting
for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements. EITF 06-4
implemented a change in accounting principle that required the recognition of a
liability and related compensation costs for endorsement split-dollar life
insurance policies that provide a benefit to an employee that extends to
postretirement periods. On January 1, 2008, the Company adopted EITF
06-4 and recognized the effects of this change in accounting principle through a
cumulative effect adjustment charge to opening retained earnings and an increase
in benefit plan reserve liability of $617,000, respectively. The
Company will record an annual charge in 2008 of approximately $64,000 from the
adoption of EITF 06-4.
Banner
Corporation elected early adoption of Statement of Financial Accounting
Standards (SFAS) No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities, and
SFAS No. 157, Fair
Value Measurements, effective January 1, 2007. SFAS No. 159,
which was issued in February 2007, generally permits the measurement of selected
eligible financial instruments at fair value at specified election
dates. SFAS No. 157 defines fair value, establishes a framework for
measuring fair value under GAAP, and expands disclosures about fair value
measurement. The Company made this election to allow more flexibility
with respect to the management of our investment securities, wholesale
borrowings and interest rate risk position in future periods.
Upon
adoption of SFAS No. 159, the Company selected fair value measurement for all of
its “available for sale” investment securities, FHLB advances and junior
subordinated debentures, which had fair values of approximately $226.2 million,
$176.8 million and $124.4 million, respectively, on January 1,
2007. The initial fair value measurement of these instruments
resulted in a $3.5 million adjustment for the cumulative effect, net of tax, as
a result of the change in accounting, which was recorded as a reduction in
retained earnings as of January 1, 2007, and which under SFAS No. 159 has not
been recognized in earnings. While the adjustment to retained
earnings is permanent, approximately $2.6 million of the amount was previously
reported as accumulated other comprehensive loss at December 31, 2006, so the
reduction in total stockholders’ equity was $897,000 on January 1,
2007. Following the initial election, changes in the value of
financial instruments recorded at fair value are recognized as gains or losses
in earnings in subsequent financial reporting periods. As a result of
the adoption of SFAS No. 159 and changes in the fair value measurement of the
financial assets and liabilities noted above, the Company recorded net gains of
$1.2 million ($755,000 after tax) and $823,000 ($527,000 after tax),
respectively, for the quarters ended March 31, 2007 and 2008. (For further
information, see Note 7 of the Selected Notes to the Consolidated Financial
Statements.)
In June
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, Accounting
for Uncertainties in Income Taxes, an Interpretation of FASB Statement No.
109 (FIN 48). On January 1, 2007, the Company adopted FIN
48. FIN 48 prescribes a recognition threshold and measurement
attribute for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return, and also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. Currently, the Company is subject
to United States federal income tax and income tax of the States of Idaho and
Oregon. The years 2004 through 2006 remain open to examination for
federal and state income taxes. As of March 31, 2008 and December 31,
2007, the Company believes it had insignificant unrecognized tax benefits or
uncertain tax positions. In addition, the Company had no material
accrued interest or penalties as of either date. It is our policy to
record interest and penalties as a component of income tax
expense. The amount of interest and penalties for the year ended
December 31, 2007 was also immaterial. The adoption of this
accounting standard has not had a material impact on the Company’s Consolidated
Financial Statements.
Note
4: Business Segments
The
Company is managed by legal entity and not by lines of business. Each
of the Banks is a community oriented commercial bank chartered in the State of
Washington. 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 its consumer and commercial customers. Lending
activities include the origination of real estate, commercial/agriculture
business and consumer loans. Banner Bank is also an active
participant in the secondary market, originating residential loans for sale on
both a servicing released and servicing retained basis. In addition
to interest income on loans and investment securities, the Banks receive other
income from deposit service charges, loan servicing fees and from the sale of
loans and investments. The performance of the Banks is reviewed by
the Company’s executive management and Board of Directors on a monthly
basis. All of the executive officers of the Company are members of
Banner Bank’s management team.
Generally
accepted accounting principles establish standards to report information about
operating segments in annual financial statements and require reporting of
selected information about operating segments in interim reports to
stockholders. The Company has determined that its current business
and operations consist of a single business segment.
Note
5: Acquisitions of F&M Bank, San Juan Financial Holding Company
and NCW Community Bank
On May 1,
2007, we completed the acquisition of F&M Bank, Spokane, Washington
(F&M), in a stock and cash transaction valued at approximately $98.1
million, with $19.4 million of cash and 1,773,402 shares of Banner common stock,
for 100% of the outstanding common shares of F&M. F&M was
merged into Banner Bank and the results of its operations are included in those
of Banner Bank starting in the quarter ended June 30, 2007. The
purchase of F&M allowed us to immediately expand Banner Bank’s franchise in
the Spokane, Washington area, the fourth largest metropolitan market in the
Pacific Northwest, by the addition of 13 branches and one loan
office.
On May 1,
2007, we completed the acquisition of San Juan Financial Holding Company
(SJFHC), the parent company of Islanders Bank, Friday Harbor, Washington, in a
stock and cash transaction valued at approximately $41.6 million, with $6.2
million of cash and 819,209 shares of Banner common stock, for 100% of the
outstanding common shares of SJFHC. SJFHC was merged into Banner
Corporation and Islanders Bank has continued to operate as a separate subsidiary
of Banner. The results of its operations are included in the
Company’s consolidated operations beginning in the quarter ended June 30,
2007. The acquisition of Islanders Bank, with its three branches
located in the San Juan Islands, added to Banner Corporation’s presence in the
North Puget Sound region.
On
October 10, 2007, we completed the acquisition of NCW Community Bank, Wenatchee,
Washington (NCW), in a stock and cash transaction valued at approximately $18.5
million, with $6.5 million of cash and 339,860 shares of Banner common stock,
for 100% of the outstanding common shares of NCW. NCW was merged into
Banner Bank and the results of its operations are included in Banner Bank’s
consolidated operations beginning in the fourth quarter of 2007. The
acquisition of NCW added two branches to our network and significantly enhanced
our presence and market share within a desirable central Washington
community.
The
acquisitions were accounted for as purchases in accordance with SFAS No.
141. Accordingly, the purchase price was allocated to the assets
acquired and the liabilities assumed based on their estimated fair values at the
acquisition date as summarized in the following table:
Date of
acquisition |
F&M
May
1, 2007
(in
thousands)
|
|
SJFHC
May
1, 2007
(in
thousands)
|
|
NCW
October
10, 2007
(in
thousands)
|
|
Total
(in
thousands)
|
New
shares issued in acquisition
|
1,773,402 |
|
819,209 |
|
339,860 |
|
2,932,471 |
|
|
|
|
|
|
|
|
Cash
paid to shareholders
|
$
19,404 |
|
$
6,159 |
|
$
6,505 |
|
$
32,068 |
Total
value of Banner’s common stock exchange with
acquiree’s
shareholders
|
78,030
|
|
35,177
|
|
11,813
|
|
125,020
|
Transaction
closing costs
|
680 |
|
253 |
|
143 |
|
1,076 |
Total
purchase price
|
$
98,114 |
|
41,589 |
|
18,461 |
|
158,164 |
|
|
|
|
|
|
|
|
Allocation
of purchase price
|
|
|
|
|
|
|
|
Acquisitions’
equity
|
$
32,849 |
|
$
16,782 |
|
$
9,601 |
|
$
59,232 |
Adjustments
to record assets and liabilities at estimated
fair
value
|
|
|
|
|
|
|
|
Loans
|
(195 |
) |
(604 |
) |
(90 |
) |
(889) |
Premises
and equipment
|
3,315 |
|
1,800 |
|
-- |
|
5,115 |
Core
deposit intangible (CDI)
|
10,867 |
|
6,147 |
|
1,245 |
|
18,259 |
Deposits
|
(336 |
) |
37 |
|
(197 |
) |
(496) |
Deferred
taxes, net
|
(4,916 |
) |
(2,659 |
) |
(345 |
) |
(7,920) |
Estimated
fair value of net assets acquired
|
41,584 |
|
21,503 |
|
10,214 |
|
73,301 |
|
|
|
|
|
|
|
|
Goodwill
resulting from acquisition
|
$
56,530 |
|
$
20,086 |
|
$
8,247 |
|
$
84,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair
value of assets and liabilities of acquired institutions at the date of
acquisition follows:
Date
of acquisition
|
|
F&M
May
1, 2007
(in
thousands)
|
|
SJFHC
May
1, 2007
(in
thousands)
|
|
NCW
October
10, 2007
(in
thousands)
|
|
Total
(in
thousands)
|
|
Cash
|
$ |
12,056 |
$ |
7,449
|
$ |
2,916 |
$ |
22,421 |
|
Securities
–available for sale
|
|
6,768 |
|
26,263 |
|
1,200 |
|
34,231 |
|
Federal
funds sold and interest bearing deposits at
banks
|
|
137 |
|
-- |
|
-- |
|
137 |
|
Loans-net
of allowance for loan losses of $4,528, $1,429 and
$1,319, respectively
|
|
389,290 |
|
116,999 |
|
90,522 |
|
596,811 |
|
Premises
and equipment, net
|
|
11,872 |
|
5,756 |
|
3,012 |
|
20,640 |
|
BOLI
|
|
8,662 |
|
2,315 |
|
|
|
10,977 |
|
Other
assets |
|
7,529 |
|
2,082 |
|
1,597 |
|
11,208 |
|
Goodwill
|
|
56,530 |
|
20,086 |
|
8,247 |
|
84,863 |
|
Core
deposit intangible (CDI)
|
|
10,867 |
|
6,298 |
|
1,245 |
|
18,410 |
|
Total
assets
|
|
503,711 |
|
187,248 |
|
108,739 |
|
799,698 |
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
(348,822 |
) |
(124,264 |
) |
(86,756 |
) |
(559,842 |
) |
Advances
from Federal Home Loan Bank
|
|
(20,000 |
) |
15,726 |
) |
-- |
|
(35,726 |
) |
Federal
funds purchased and other borrowings
|
|
(19,625 |
) |
-- |
|
(1,590 |
) |
(21,215 |
) |
Other
liabilities
|
|
(17,150 |
) |
(5,669 |
) |
(1,932 |
) |
(24,751 |
) |
Total
liabilities |
|
(405,597 |
) |
(145,659 |
) |
(90,278 |
) |
(641,534 |
) |
|
|
|
|
|
|
|
|
|
|
Net
assets acquired |
$ |
98,114 |
$ |
41,589 |
$ |
18,461 |
$ |
158,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
adjustments to the purchase price allocation may be required, specifically
related to other assets and taxes. The CDI asset shown in the table
above represents the value ascribed to the long-term deposit relationships
acquired. This intangible asset is being amortized using an
accelerated method over an estimated useful life of eight years. The
core deposit intangible asset is not estimated to have a significant residual
value. Goodwill represents the excess of the total purchase price
paid for the banks over the fair values of the assets acquired, net of the fair
values of the liabilities assumed. Goodwill is not amortized, but is
evaluated for possible impairment at least annually and more frequently if
events and circumstances indicate that the asset might be
impaired. No impairment losses have been recognized in connection
with core deposit intangible or goodwill assets during the period from
acquisition to the end of the current reporting period.
Note
6: Additional Information Regarding Interest-Bearing Deposits and
Securities
The
following table sets forth additional detail on our interest-bearing deposits
and securities at the dates indicated (at carrying value) (in
thousands):
|
March
31
|
|
December
31
|
|
March
31
|
|
|
2008
|
|
2007
|
|
2007
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits included in Cash and due from banks
|
$
|
28,760
|
|
$
|
310
|
|
$
|
46,122
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
|
|
94,954
|
|
|
99,775
|
|
|
145,490
|
|
Other
securities—taxable
|
|
123,864
|
|
|
98,067
|
|
|
74,577
|
|
Other
securities—tax exempt
|
|
56,653
|
|
|
50,812
|
|
|
42,777
|
|
Equity
securities with dividends
|
|
7,086
|
|
|
7,725
|
|
|
3,464
|
|
Total
securities
|
|
282,557
|
|
|
256,379
|
|
|
266,308
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
stock
|
|
37,371
|
|
|
37,371
|
|
|
35,844
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
348,688
|
|
$
|
294,060
|
|
$
|
348,274
|
|
The
following table provides additional detail on income from deposits and
securities for the periods indicated (in thousands):
|
|
|
Quarters
Ended
March
31
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Mortgage-backed
securities interest
|
|
|
|
|
|
|
$
|
1,153
|
|
$
|
1,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
interest income
|
|
|
|
|
|
|
|
1,916
|
|
|
1,302
|
|
Tax-exempt
interest income
|
|
|
|
|
|
|
|
583
|
|
|
465
|
|
Other
stock—dividend income
|
|
|
|
|
|
|
|
135
|
|
|
40
|
|
FHLB
stock dividends
|
|
|
|
|
|
|
|
93
|
|
|
36
|
|
|
|
|
|
|
|
|
|
2,727
|
|
|
1,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,880
|
|
$
|
3,618
|
|
Note
7: Fair Value Accounting and Measurement
The
Company elected early adoption of SFAS No. 159, The
Fair Value Option for Financial Assets
and Financial Liabilities, and SFAS No. 157, Fair
Value Measurements, effective January 1, 2007. SFAS No. 159,
which was issued in February 2007, generally permits the measurement of selected
eligible financial instruments at fair value (FV) at specified election
dates. Upon adoption of SFAS No. 159, the Company selected fair value
measurement for all of our “available for sale” investment securities, FHLB
advances and junior subordinated debentures, which had fair values of
approximately $226.2 million, $176.8 million and $124.4 million, respectively,
on January 1, 2007. The initial fair value measurement of these
instruments resulted in a $3.5 million adjustment for the cumulative effect, net
of tax, as a result of the change in accounting, which was recorded as a
reduction in retained earnings as of January 1, 2007, and which under SFAS No.
159 has not been recognized in current earnings. While the adjustment
to retained earnings is permanent, approximately $2.6 million of the amount was
previously reported as accumulated other comprehensive loss at December 31,
2006, so the reduction in the January 1, 2007 opening stockholders’ equity was
$897,000 when SFAS No. 159 was adopted. The following tables detail
the financial instruments measured at fair value, on a recurring basis, on the
dates indicated (in thousands):
|
Cumulative
Adjustment on Adoption of SFAS 159
|
|
|
|
January
1, 2007
|
|
March
31, 2007
|
|
|
Amortized
Cost
|
|
|
Fair
Market Valuation Adjustment
|
|
|
Fair
Value
|
|
|
Related
Taxes
|
|
|
Cumulative
Effect of Adoption
|
|
|
Amortized
Cost
|
|
|
Fair
Market Valuation Adjustment
|
|
|
Fair
Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale
reclassified to fair value
|
|
$ |
230,189 |
|
|
$ |
(4,036 |
) |
|
$ |
226,153 |
|
|
$ |
1,413 |
|
|
$ |
(2,623 |
) |
|
$ |
221,427 |
|
|
$ |
(2,950 |
) |
|
$ |
218,477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances
from FHLB
|
|
$ |
177,430 |
|
|
$ |
(678 |
) |
|
$ |
176,752 |
|
|
$ |
244 |
|
|
$ |
(434 |
) |
|
$ |
93,930 |
|
|
$ |
(499 |
) |
|
$ |
93,431 |
|
Junior
subordinated debentures,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of unamortized deferred
origination
costs
|
|
|
122,287 |
|
|
|
2,079 |
|
|
|
124,366 |
|
|
|
(748
|
) |
|
|
1,331 |
|
|
|
122,313 |
|
|
|
1,806 |
|
|
|
124,119 |
|
|
|
$ |
299,717 |
|
|
$ |
1,401 |
|
|
$ |
301,118 |
|
|
$ |
(504 |
) |
|
$ |
897 |
|
|
$ |
216,243 |
|
|
$ |
1,307 |
|
|
$ |
217,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
adjustment
|
|
|
|
|
|
$ |
(5,437 |
) |
|
|
|
|
|
|
|
|
|
$ |
(3,520 |
) |
|
|
|
|
|
$ |
(4,257 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
transfer from accumulated other comprehensive loss to retained
earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
reduction of opening stockholders’ equity at January 1, 2007 upon adoption
of SFAS No. 159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(897 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
|
March
31, 2008
|
|
|
Amortized
Cost
|
|
Fair
Market Valuation Adjustment
|
|
Basis
at
FMV
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Fair
Market Valuation Adjustment
|
|
Basis
at
FMV
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale reclassified
to fair value
|
|
$ |
204,279 |
|
|
$ |
(1,416 |
) |
|
$ |
202,863 |
|
|
|
|
|
|
|
|
|
|
$ |
233,869 |
|
|
$ |
(6,959 |
) |
|
$ |
226,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances
from FHLB
|
|
$ |
167,073 |
|
|
$ |
(28 |
) |
|
$ |
167,045 |
|
|
|
|
|
|
|
|
|
|
$ |
154,036 |
|
|
$ |
1,369 |
|
|
$ |
155,405 |
|
Junior
subordinated debentures,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of unamortized deferred
origination
costs
|
|
|
122,884 |
|
|
|
(9,614
|
) |
|
|
113,270 |
|
|
|
|
|
|
|
|
|
|
|
122,898 |
|
|
|
(17,382
|
) |
|
|
105,516 |
|
|
|
$ |
289,957 |
|
|
$ |
(9,642 |
) |
|
$ |
280,315 |
|
|
|
|
|
|
|
|
|
|
$ |
276,934 |
|
|
$ |
(16,013 |
) |
|
$ |
260,921 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Adjustment
|
|
|
|
|
|
$ |
8,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,054 |
|
|
|
|
|
Note
7: Fair Value Accounting and Measurement (continued)
SFAS No. 157
defines fair value, establishes a consistent framework for measuring fair value
and expands disclosure requirements about fair value
measurements. SFAS No. 157, among other things, requires the Company
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 market assumptions. These two types of inputs create the
following fair value hierarchy:
·
|
Level
1 – Quoted prices for identical instruments
in active markets
|
·
|
Level
2 – Quoted prices for similar instruments
in active markets; quoted prices for identical or similar instruments in
markets that are not active;
and
model-derived
valuations whose inputs are observable or whose significant value drivers
are observable.
|
·
|
Level
3 – Instruments whose significant value drivers are
unobservable.
|
The
Company holds fixed and variable rate interest bearing securities, investments
in marketable equity securities and certain other financial instruments, which
are carried at fair value. Fair value is determined based upon quoted
prices when available or through the use of alternative approaches, such as
matrix or model pricing, when market quotes are not readily accessible or
available.
The
Company also carries its FHLB advances and junior subordinated debentures at
fair value. In determining the fair value of its obligations, various
factors are considered including: price activity for equivalent or similar
instruments, discounting the expected cash flows using market interest rates and
its credit standing.
Fair
values are determined as follows:
·
|
Securities
at fair value are priced using matrix pricing based on the securities’
relationship to other benchmark quoted prices and are considered a Level 2
input method.
|
·
|
Advances
from FHLB are priced using discounted cash flows to the date of maturity
based on the FHLB of Seattle’s current rate sheet for member bank advances
on the date of valuation and are considered a Level 2 input
method.
|
·
|
Junior
subordinated debentures are priced using discounted cash flows to maturity
or the next available redemption date as appropriate on the date of
valuation based on recent issuances or quotes from brokers for comparable
bank holding companies and are considered a Level 2 input
method.
|
The
following table outlines the net change in fair values recorded at the dates
indicated (in thousands):
|
|
|
|
|
Quarters
Ended
March
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale
reclassified
as carried at fair value
|
|
|
|
|
|
|
$
|
(5,554
|
)
|
$
|
1,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances
from FHLB
|
|
|
|
|
|
|
|
(1,396
|
)
|
|
179
|
|
Junior
subordinated debentures net of
unamortized
deferred issuance costs
|
|
|
|
|
|
|
|
7,773
|
|
|
273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in fair value
|
|
|
|
|
|
|
$
|
823
|
|
$
|
1,180
|
|
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
rate and reported in interest expense. The change in fair market
value of these financial instruments has been recorded as a component of other
operating income.
The
significant changes in fair value during the period for junior subordinated
debentures are not the result of any instrument-specific credit risk, but rather
of market changes in the pricing of this type of debt. Increases in
market rate spreads significantly above some of the Company’s debt rate spreads
contributed to the positive fair value adjustments. These same market
rate increases also resulted in calculating the fair value adjustments out to
maturity dates, instead of to call dates, on some debt.
The
Company is required to record at fair value other assets on a nonrecurring
basis. These nonrecurring fair value adjustments typically involve
the application of lower-of-cost-or market value accounting or write-downs of
individual assets. At March 31, 2008, the Company had impaired loans
recorded at a carrying value of $55,901,000 that were subjected to nonrecurring
fair value adjustments that would be classified as a Level 3 input
method.
Note
8: Calculation of Weighted Average Shares Outstanding for Earnings
Per Share (EPS)
The
following table reconciles basic to diluted weighted shares outstanding used to
calculate earnings per share data (in thousands):
|
|
|
Quarters
Ended
March
31
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
|
|
|
|
|
15,848
|
|
|
12,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus
unvested MRP and stock option incremental shares
considered
outstanding for diluted EPS calculations
|
|
|
|
|
|
|
|
117
|
|
|
330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average shares outstanding
|
|
|
|
|
|
|
|
15,965
|
|
|
12,652
|
|
Note
9: Stock-Based Compensation Plans and Stock Options
The
Company operates the following stock-based compensation plans as approved by the
shareholders: the 1996 Management Recognition and Development Plan
(MRP), a restricted stock plan; and the 1996 Stock Option Plan, the 1998 Stock
Option Plan and the 2001 Stock Option Plan (collectively, SOPs). In
addition, during 2006 the Board of Directors approved the Banner Corporation
Long-Term Incentive Plan.
MRP
Stock Grants: Under the MRP, the Company was authorized to
grant up to 528,075 shares of restricted stock to its directors, officers and
employees. On July 26, 2006, this stock program expired with 522,660
shares having been granted and no additional shares eligible to be
granted. Shares granted under the MRP vest ratably over a five-year
period from the date of grant. The Consolidated Statements of Income
for the quarters ended March 31, 2008, and 2007 reflect accruals of $17,000 and
$46,000, respectively, for these grant awards. The MRP stock grants’
fair value equals their intrinsic value on the date of
grant.
A summary
of the Company’s unvested MRP shares activity during the quarters ended March
31, 2008, and 2007 follows:
|
|
Shares
|
|
|
Weighted-Average
Grant-Date
Fair
Value
|
|
|
|
|
Unvested
at December 31, 2006
|
|
19,360
|
|
$
|
22.07
|
|
|
|
|
Granted
|
|
--
|
|
|
--
|
|
|
|
|
Vested
|
|
(4,000
|
)
|
|
17.80
|
|
|
|
|
Forfeited
|
|
--
|
|
|
--
|
|
|
|
|
Unvested
at March 31, 2007
|
|
15,360
|
|
$
|
23.19
|
|
|
|
|
|
|
Shares
|
|
|
Weighted-Average
Grant-Date
Fair
Value
|
|
|
|
|
Unvested
at December 31, 2007
|
|
10,040
|
|
$
|
22.73
|
|
|
|
|
Granted
|
|
--
|
|
|
--
|
|
|
|
|
Vested
|
|
(4,000
|
)
|
|
17.80
|
|
|
|
|
Forfeited
|
|
--
|
|
|
--
|
|
|
|
|
Unvested
at March 31, 2008
|
|
6,040
|
|
$
|
25.99
|
|
|
|
|
Stock
Options: Under the SOPs, we 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 1996 Stock Option Plan terminated on July 26, 2006 with 6,613 stock options
remaining ungranted at the time of termination. As of March 31, 2008,
there were 6,897 options eligible for grants under the 1998 and 2001
plans. 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. Such
options have graded vesting 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 quarters ended March 31, 2008 and 2007, the Company did not award any stock
options. The Company did award 52,500 stock options during the third
quarter of 2007. Also, 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.
Stock-based
compensation costs related to the SOPs were $96,000 and $84,000 for the quarters
ended March 31, 2008 and 2007, respectively. 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. Assumptions used in the Black-Scholes model are an expected
volatility based on the historical volatility at the date of the
grant. The expected term is based on the remaining contractual life
of the vesting period. The Company bases the estimate of risk-free
interest rate on the U.S. Treasury 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.
|
|
|
|
|
Quarter
Ended
March
31, 2008
|
|
|
Year
Ended
December
31, 2007
|
|
|
Annual
dividend yield
|
|
|
N/A |
|
|
|
2.46 |
|
%
|
Expected
volatility
|
|
|
N/A |
|
|
24.0
to 28.8
|
|
%
|
Risk
free interest rate
|
|
|
N/A |
|
|
4.64
to 4.82
|
|
%
|
Expected
lives
|
|
|
N/A |
|
|
5
to 9
|
|
yrs
|
As part
of the provisions of SFAS No. 123(R), the Company is required to estimate
potential forfeitures of stock grants and adjust compensation cost recorded
accordingly. The estimate of forfeitures will be 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 will be recognized through a cumulative catch-up adjustment in the
period of change and will also impact the amount of stock compensation expense
to be recognized in future periods.
A summary
of the Company’s SOPs’ stock compensation activity for the quarters ended March
31, 2008 and 2007 follows (dollars in thousands, except shares and per share
data):
|
|
Shares
|
|
|
Weighted-Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual Term,
In
Years
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
713,460
|
|
$
|
20.49
|
|
|
|
|
|
|
|
Granted
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
Exercised
|
|
(26,923
|
)
|
|
18.65
|
|
|
|
|
$
|
644
|
|
Forfeited
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2007
|
|
686,537
|
|
$
|
20.57
|
|
|
5.3
|
|
$
|
14,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
668,590
|
|
$
|
21.56
|
|
|
|
|
|
|
|
Granted
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
Exercised
|
|
(28,211
|
)
|
|
19.54
|
|
|
|
|
$
|
143
|
|
Forfeited
|
|
(1,600
|
)
|
|
29.71
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2008
|
|
638,779
|
|
$
|
21.63
|
|
|
4.9
|
|
$
|
899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
at March 31, 2008 and expected to vest
|
|
634,577
|
|
$
|
21.58
|
|
|
4.9
|
|
$
|
927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at March 31, 2008
|
|
505,889
|
|
$
|
19.60
|
|
|
4.2
|
|
$
|
1,739
|
|
The
intrinsic value of stock options is calculated as the amount by which the market
price of our common stock exceeds the exercise price of the option.
A summary
of the Company’s unvested stock option activity with respect to the quarters
ended March 31, 2008 and 2007 follows:
|
|
Shares
|
|
|
Weighted-
Average
Grant-
Date
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested
at December 31, 2006
|
|
211,810
|
|
$
|
7.57
|
|
|
|
|
|
|
|
Granted
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
Vested
|
|
(41,250
|
)
|
|
6.78
|
|
|
|
|
|
|
|
Forfeited
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested
at March 31, 2007
|
|
170,560
|
|
$
|
7.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested
at December 31, 2007
|
|
162,940
|
|
$
|
7.81
|
|
|
|
|
|
|
|
Granted
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
Vested
|
|
(29,500
|
)
|
|
5.93
|
|
|
|
|
|
|
|
Forfeited
|
|
(550
|
)
|
|
9.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested
at March 31, 2008
|
|
132,890
|
|
$
|
8.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company had $422,000 of total unrecognized compensation costs related to stock
options at March 31, 2008 that are expected to be recognized over a remaining
period of 4.3 years.
During
the quarter ended March 31, 2008, $551,000 was received from the exercise 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-based compensation costs recognized in the Company’s
condensed consolidated statements of income (in thousands):
|
Quarters
Ended
March
31
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Salary
and employee benefits
|
$
|
113
|
|
$
|
130
|
|
|
|
|
Total
decrease in income before provision for income taxes
|
|
113
|
|
|
130
|
|
|
|
|
Decrease
in provision for income taxes
|
|
(29
|
)
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
in net income
|
$
|
84
|
|
$
|
105
|
|
|
|
|
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 stock, dividends
declared on the Company stock and changes in Banner Bank’s average earnings
rate, and under SFAS 123(R) 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 the Company’s common
stock on the date of exercise over the fair market value of such share on the
date granted plus the dividends declared on the stock from the date of grant to
the date of vesting. Vesting occurs upon the completion of 60 months
of continuous service from the date of grant. On April 27, 2008, the
Board of Directors amended the plan and also authorized the repricing of certain
awards to non-executive officers based upon the price of Banner common stock
three business days following the public announcement of the Company’s earnings
for the quarter ended March 31, 2008. The primary objective of the
Plan is to create a retention incentive by allowing officers who remain with the
Company or the Bank for a sufficient period of time to share in the increases in
the value of Company stock. Detailed information with respect to the
Plan and the amendments to the plan were disclosed on Forms 8-K filed with SEC
on July 19, 2006 and May 6, 2008. SFAS No. 123(R) requires the
Company to remeasure the fair value of SARs each reporting period until the
award is settled. In addition, compensation expense must be recognized
each reporting period for changes in fair value and vesting. The
Company recognized compensation expense (recovery) of $(42,000) and $152,000,
respectively, for the quarters ended March 31, 2008 and 2007 related to the
change in the fair value of SARs and additional vesting during the
period.
ITEM
2 - Management's Discussion and Analysis of Financial Condition and Results of
Operations
Special
Note Regarding Forward-Looking Statements
Management’s
Discussion and Analysis and other portions of this report on Form 10-Q contain
certain forward-looking statements concerning our future
operations. Management desires to take advantage of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and is
including this statement so that we may rely on the protections of such safe
harbor with respect to all forward-looking statements contained in this report
and our Annual Report on form 10-K for the year ended December 31,
2007. We have used forward-looking statements to describe future
plans and strategies, including expectations of our future financial
results. Our ability to predict results or the effect of future plans
or strategies is inherently uncertain. Factors which could cause
actual results to differ materially include, but are not limited to, the credit
risks of lending activities, including changes in the level and trend of loan
delinquencies and write-offs; changes in general economic conditions, either
nationally or in our market areas; changes in the levels of general interest
rates, deposit interest rates, our net interest margin and funding sources;
fluctuations in the demand for loans and in real estate values in our market
areas; fluctuations in agricultural commodity prices, crop yields and weather
conditions; our ability to control operating costs and expenses; our ability to
successfully implement our branch expansion strategy; our ability to
successfully integrate any assets, liabilities, customers, systems, and
management personnel we may acquire into our operations and our ability to
realize related revenue synergies and cost savings within expected time frames;
our ability to manage loan delinquency rates; our ability to retain key members
of our senior management team; costs and effects of litigation, including
settlements and judgments; increased competitive pressures among financial
services companies; changes in consumer spending, borrowing and savings habits;
legislative or regulatory changes that adversely affect our business; 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; war or 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. We caution readers not to place undue reliance on any
forward-looking statements. We do not undertake and specifically
disclaim any obligation to revise any forward-looking statements to reflect the
occurrence of anticipated or unanticipated events or circumstances after the
date of such statements. These risks could cause our actual results
for 2008 and beyond to differ materially from those expressed in any
forward-looking statements by, or on behalf of, us.
As used
throughout this report, the terms “we”, “our”, “us”, or the “Company” refer to
Banner Corporation and its consolidated subsidiaries.
Executive
Overview
We are 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,
subsequent to May 1, 2007, Islanders Bank (together, the Banks, as explained
below. Banner Bank is a Washington-chartered commercial bank that
conducts business from its main office in Walla Walla, Washington and, as of
March 31, 2008, its 81 branch offices and 12 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 March 31, 2008, we
had total consolidated assets of $4.6 billion, total loans of $3.8 billion,
total deposits of $3.7 billion and total stockholders’ equity of $430
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.
Branch
expansion has been a significant element in our strategy to grow loans, deposits
and customer relationships. Over the past several years, we have
invested significantly in expanding our branch and distributions systems with a
primary emphasis on expanding our presence in the four largest areas of commerce
in the Northwest: the Puget Sound region of Washington and the
greater Boise, Idaho, Portland, Oregon, and Spokane, Washington
markets. As a result of our aggressive franchise expansion, we have
added 18 new branches through acquisitions, opened 21 new branches and relocated
eight others in the last three years. In 2007 alone, we opened ten
branches, relocated five others and closed three acquisitions. In
large part because of this expansion activity, we have experienced loan growth
of $1.7 billion and deposit growth of $1.7 billion over the last three-year
period. The acquisitions and new branches have increased our presence
within desirable markets and allow us to better serve existing and future
customers. This emphasis on growth has resulted in an elevated level
of operating expenses; however, we believe that over time these new branches
should help improve profitability by providing lower cost core deposits which
will allow us to proportionately reduce higher cost borrowings as a source of
funds. We have reached our goal in terms of the number of branches
required to generate deposit growth sufficient to fund our expected loan growth
and produce significant fee generating opportunities. As a result, we
plan to open only two additional branches in 2008, a normal level of growth for
a bank of our size.
We
completed the acquisitions of F&M Bank and San Juan Financial Holding
Company effective May 1, 2007, and NCW Community Bank effective October 10,
2007. SJFHC was merged into Banner and its wholly owned subsidiary,
Islanders Bank, has continued operations as a subsidiary of
Banner. F&M and NCW were merged into Banner Bank upon acquisition
and now operate under the Banner Bank name. The financial results for
the quarter ended March 31, 2008 include the assets, liabilities and results of
operations for all three of the recently acquired companies.
For the
quarter ended March 31, 2008, we had net income of $3.8 million, compared to
$7.8 million for the quarter ended March 31, 2007. Our net income for
the current quarter was significantly adversely affected by a provision for loan
losses that is materially increased from the amount we have recorded in recent
periods. Further, as a result of the significant increase in the
average number of shares outstanding, primarily as a result of the acquisitions
and the issuance of shares through our stock reinvestment plan, earnings per
share (diluted) declined to $0.24 for the quarter ended March 31, 2008, compared
to $0.62 per share (diluted) for the quarter ended March 31,
2007. The provision for loan losses was $6.5 million for the quarter
ended March 31, 2008, an increase of $5.5 million compared to the quarter ended
March 31, 2007. The increase in the provision for loan losses in the
current quarter reflects an increase in delinquencies and non-performing loans,
particularly loans for the construction of one- to four-family homes and for
acquisition and development of land for residential properties, and a higher
although still modest level of net charge-offs. The increase in the
provision for loan losses also reflects our concern that the higher levels of
delinquencies and loan loss provisioning recently announced by a number of
lenders in our markets could lead to significant discounting of property values
in efforts to expedite problem loan resolutions.
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, FHLB advances, other
borrowings and junior subordinated debentures. 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. As more
fully explained below, our net interest income before provision for loan losses
increased $5.2 million for the quarter ended March 31, 2008 to $37.4 million as
compared to the same quarter in the prior year, primarily as a result of
significant growth in interest-earning assets and interest-bearing liabilities,
including growth resulting from the three acquisitions, and despite a meaningful
contraction in our net interest margin as asset yields have declined sharply
over the past six months in response to the Federal Reserve’s action designed to
dramatically lower short-term interest rates. Further, increased
delinquencies and the well-documented slowdown in the sale and construction of
new homes over the past six months have had an adverse impact on our net
interest margin, as well as the amount of our loan loss provision.
Our net
income also is affected by the level of our other income, including deposit
service charges, loan origination and servicing fees, and gains and losses on
the sale of loans and securities, as well as our operating expenses and income
tax provisions. Other operating income, excluding the fair value
adjustments, increased by $2.2 million, or 43%, to $7.4 million for the quarter
ended March 31, 2008 from $5.2 million for the quarter ended March 31, 2007,
primarily as a result of increased deposit fees and other service charges
reflecting in part the recent acquisitions. Revenues (net interest
income before the provision for loan losses plus other operating income),
excluding the gain on sale of securities and fair value adjustments, increased
20% to $44.7 million for the quarter ended March 31, 2008, compared to $37.3
million for the quarter ended March 31, 2007. Other operating
expenses increased $7.6 million to $33.7 million for the quarter ended March 31,
2008 from $26.1 million for 2007, an increase of 29% from the quarter one year
earlier, largely reflecting our continued growth and the effect of our
acquisitions.
In the
quarters ended March 31, 2008 and 2007, our net income included the net
increases in the valuation of the selected financial assets and liabilities we
record at fair value pursuant to the adoption of SFAS No. 159. These
fair value adjustments resulted in increases of $527,000 (net after tax), or
$0.03 per share (diluted), and $1.2 million, or $0.06 per share (diluted), to
net income reported for the quarters ended March 31, 2008 and 2007,
respectively. Excluding the net fair value adjustments in each
quarter, net income from recurring operations declined to $3.3 million, or $0.21
per share (diluted), for the quarter ended March 31, 2008, compared to $7.1
million, or $0.56 per share (diluted), for the quarter ended March 31,
2007. Earnings from recurring operations and other earnings
information excluding the change in valuation of financial instruments carried
at fair value represent non-GAAP financial measures. Management has
presented these non-GAAP financial measures in this discussion and analysis
because it believes that they provide more useful and comparative information to
assess trends in our core operations. Where applicable, we have also
presented comparable earnings information using GAAP financial
measures. The decrease in net income and earnings from recurring
operations despite a much larger earning asset base primarily reflects a
narrower net interest margin, increased loan loss provisioning and a higher
level of operating expenses as a result of the new branches and the
acquisitions.
We offer
a wide range of loan products to meet the demands of our customers; however, we
do not now and have not previously engaged in any sub-prime lending
programs. Historically, our lending activities have been primarily
directed toward the origination of real estate and commercial
loans. Real estate lending activities have been significantly focused
on residential construction and first mortgages on owner occupied, one- to
four-family residential properties; however, over the past year our origination
of construction and land development loans has declined
materially. Our total construction and land development loan
originations in 2007 were approximately 35% lower than in the previous year, and
this trend continued as construction and land development loan originations in
the first quarter of 2008 were approximately 60% lower than in the first quarter
of 2007. Our lending activities have also included the origination of
multifamily and commercial real estate loans. Our commercial business
lending has been directed toward meeting the credit and related deposit needs of
various small- to medium-sized business and agri-business borrowers operating in
our primary market areas. In part reflecting a still active Northwest
economy, we have been particularly encouraged by increases in our commercial
business loan balances in recent quarters. We have also increased our emphasis
on consumer lending, although the portion of the loan portfolio invested in
consumer loans is still relatively small. While continuing our
commitment to construction and residential lending, we expect commercial lending
(including commercial real estate, commercial business and agricultural loans)
and consumer lending to become increasingly important activities for
us.
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. There is strong competition for transaction balances and
savings deposits from commercial banks, credit unions and nonbank 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 recent branch expansion, relocations and renovation has been
directed toward attracting additional deposit customer relationships and
balances. The 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 and service charges.
We
generally attract deposits from within our primary market areas by offering a
broad selection of deposit instruments, including demand checking accounts,
negotiable order of withdrawal (NOW) 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,
matching deposit and loan products, and customer preferences and
concerns.
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 contained in Item 1 of this Form 10-Q.
Comparison
of Financial Condition at March 31, 2008 and December 31, 2007
General. Total
assets increased $80 million, or 2%, from $4.493 billion at December 31, 2007,
to $4.572 billion at March 31, 2008. Net loans receivable (gross
loans less loans in process, deferred fees and discounts, and allowance for loan
losses) increased $26 million, or 1%, from $3.764 billion at December 31, 2007,
to $3.790 billion at March 31, 2008. Loan growth was largely due to
the $40 million, or 6%, growth in commercial business
loans. Reflecting a core competency of Banner Bank, we continue to
maintain a significant investment in construction and land loans; however,
production of new loans has declined appreciably over the last four
quarters. As a result of a much slower pace of new originations and
continuing payoffs on existing loans, loans to finance the construction of one-
to four-family residential real estate decreased by $42 million, or 7%, since
December 31, 2007. By contrast, land and development loans increased
modestly by $4 million, or 1%, primarily reflecting disbursements on loans
originated in earlier periods. Given the current housing and economic
environment, we anticipate that construction and land loan balances will
continue to decline for another two to four quarters. In addition,
loans, including construction loans, to finance commercial real estate increased
by $19 million, or 2%, while loans, including construction loans, secured by
multi-family real estate were essentially unchanged. Agricultural
loans decreased by $5 million, or 3%, loans to finance existing one- to
four-family residential properties increased by $11 million, or 2%, and consumer
loans increased by $4 million, or 2%, at March 31, 2008 compared to December 31,
2007.
Securities
increased $26 million, or 10%, from $256 million at December 31, 2007, to $283
million at March 31, 2008, as purchases exceeded sales and
repayments. Effective January 1, 2007, we elected to reclassify all
our securities available for sale to fair value following our adoption of SFAS
No. 159. At March 31, 2008, the amortized cost of our securities
available for sale, which are carried at fair value, exceeded their fair value
by $7.0 million. Property and equipment increased by $710,000 to $99
million at March 31, 2008, from $98 million at December 31, 2007, primarily
reflecting improvements to two new branches scheduled to open early in the
second quarter. We also had an increase of $6 million in real estate
owned, largely as a result of a foreclosure of a loan secured by a residential
subdivision located in Salem, Oregon. (See Asset Quality discussion
below.)
Deposits
increased $73 million, or 2%, from $3.620 billion at December 31, 2007, to
$3.693 billion at March 31, 2008. Non-interest-bearing deposits
increased a modest $2 million to $486 million, while interest-bearing deposits
increased $71 million, or 2%, to $3.207 billion at March 31,
2008. Notwithstanding good growth in the number of accounts and
customer relationships, growth in aggregate deposit balances was dampened by
meaningful decreases in the average account balances of many of our real
estate-related customers, reflecting the slowdown of home sales and transaction
closings. The aggregate total of transaction and savings accounts,
including money market accounts, increased by $11 million, or 1%, to $1.783
billion. Increasing core deposits is a key element of our expansion
strategy, including the recent and planned additions and renovations of branch
locations. Reflecting internally generated growth and the effects of
the acquisitions, transaction and savings accounts represent 48% of total
deposits at March 31, 2008, compared to 45% a year earlier. FHLB
advances decreased $12 million, including fair value adjustments, from $167
million at December 31, 2007, to $155 million at March 31, 2008, while other
borrowings increased $43 million to $135 million at March 31,
2008. The increase in other borrowings reflects an increase in short
term overnight borrowings of $50 million, offset by a $7 million decrease in
retail repurchase agreements that are primarily related to customer cash
management accounts. Junior subordinated debentures decreased by $8
million, primarily reflecting the cumulative fair value adjustments recorded
subsequent to the adoption of SFAS 159, as recent changes in credit market
conditions had a particularly significant impact on this type of
security.
During
the quarter ended March 31,
2008, we repurchased 613,903 shares of Banner Corporation common stock
for an aggregate price of approximately $14.3 million, or $23.24 per
share. In addition, we issued 223,180 new shares of common stock at
an average net per share price of $23.27 through our Dividend Reinvestment and
Direct Stock Purchase and Sale Plan. We also issued a net 28,211
shares in connection with the exercise of vested stock options and
grants. This stock repurchase and issuance activity, combined with
the changes in retained earnings as a result of operations and net of quarterly
dividend distributions, resulted in a $8.3 million decrease in stockholders’
equity. Book value per share increased from $27.32 at December 31,
2007 to $27.42 at March 31, 2008, and tangible book value per share decreased
from $18.73 to $18.68, respectively, for the same period.
The
following tables provide additional detail on our loans and deposits (dollars in
thousands):
|
March
31
2008
|
|
December
31
2007
|
|
March
31
2007
|
|
Loan
Portfolio:
|
Amount
|
|
Percent
of
Total
|
|
Amount
|
|
Percent
of
Total
|
|
Amount
|
|
Percent
of
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
(including loans held for sale):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate
|
$
|
899,333
|
|
|
23.4
|
%
|
$
|
882,523
|
|
|
23.2
|
%
|
$
|
583,478
|
|
|
19.4
|
%
|
Multifamily
real estate
|
|
163,110
|
|
|
4.2
|
|
|
165,886
|
|
|
4.4
|
|
|
150,488
|
|
|
5.0
|
|
Commercial
construction
|
|
75,849
|
|
|
2.0
|
|
|
74,123
|
|
|
1.9
|
|
|
97,007
|
|
|
3.2
|
|
Multifamily
construction
|
|
38,434
|
|
|
1.0
|
|
|
35,318
|
|
|
0.9
|
|
|
45,897
|
|
|
1.5
|
|
One-
to four-family construction
|
|
571,720
|
|
|
14.9
|
|
|
613,779
|
|
|
16.1
|
|
|
587,290
|
|
|
19.5
|
|
Land
and land development
|
|
502,077
|
|
|
13.1
|
|
|
497,962
|
|
|
13.1
|
|
|
421,407
|
|
|
14.0
|
|
Commercial
business
|
|
735,802
|
|
|
19.2
|
|
|
696,350
|
|
|
18.3
|
|
|
480,730
|
|
|
16.0
|
|
Agricultural
business, including
secured
by farmland
|
|
181,403
|
|
|
4.7
|
|
|
186,305
|
|
|
4.9
|
|
|
159,652
|
|
|
5.3
|
|
One-to
four-family real estate
|
|
456,199
|
|
|
11.9
|
|
|
445,222
|
|
|
11.7
|
|
|
364,986
|
|
|
12.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
95,714
|
|
|
2.5
|
|
|
93,183
|
|
|
2.4
|
|
|
52,285
|
|
|
1.7
|
|
Consumer
secured by one-to four-family
|
|
120,352
|
|
|
3.1
|
|
|
118,966
|
|
|
3.1
|
|
|
68,601
|
|
|
2.3
|
|
Total
consumer
|
|
216,066
|
|
|
5.6
|
|
|
212,149
|
|
|
5.5
|
|
|
120,886
|
|
|
4.0
|
|
Total
loans outstanding
|
|
3,839,993
|
|
|
100.0
|
%
|
|
3,809,617
|
|
|
100.0
|
%
|
|
3,011,821
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
allowance for loan losses
|
|
(50,446
|
)
|
|
|
|
|
(45,827
|
)
|
|
|
|
|
(36,299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net loans outstanding at
end
of period
|
$
|
3,789,547
|
|
|
|
|
$
|
3,763,790
|
|
|
|
|
$
|
2,975,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
substantial portion of the loans are to borrowers in the state of Washington,
Oregon and Idaho. Accordingly, their ultimate collectibility is
particularly susceptible to, among other things, changes in market and economic
conditions within these states.
Loans
by geographic concentration at
March
31,
2008
|
|
Washington
|
|
Oregon
|
|
Idaho
|
|
Other
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate
|
|
$
|
706,235
|
|
$
|
116,326
|
|
$
|
45,792
|
|
$
|
30,980
|
|
|
899,333
|
Multifamily
real estate
|
|
|
119,646
|
|
|
20,332
|
|
|
4,747
|
|
|
18,385
|
|
|
163,110
|
Commercial
construction
|
|
|
53,488
|
|
|
11,492
|
|
|
10,703
|
|
|
166
|
|
|
75,849
|
Multifamily
construction
|
|
|
30,306
|
|
|
8,128
|
|
|
--
|
|
|
--
|
|
|
38,434
|
One-
to four-family construction
|
|
|
270,728
|
|
|
261,513
|
|
|
39,479
|
|
|
--
|
|
|
571,720
|
Land
and land development
|
|
|
209,607
|
|
|
204,158
|
|
|
88,312
|
|
|
--
|
|
|
502,077
|
Commercial
business
|
|
|
543,628
|
|
|
93,676
|
|
|
84,811
|
|
|
13,687
|
|
|
735,802
|
Agricultural
business, including secured by farmland
|
|
|
73,783
|
|
|
45,999
|
|
|
61,535
|
|
|
86
|
|
|
181,403
|
One-
to four-family real estate
|
|
|
398,065
|
|
|
31,148
|
|
|
20,012
|
|
|
6,974
|
|
|
456,199
|
Consumer
|
|
|
163,274
|
|
|
36,141
|
|
|
11,308
|
|
|
5,343
|
|
|
216,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans outstanding
|
|
|
2,568,760
|
|
$
|
828,913
|
|
$
|
366,699
|
|
$
|
75,621
|
|
$
|
3,839,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
of total loans
|
|
|
66.9%
|
|
|
21.6%
|
|
|
9.5%
|
|
|
2.0%
|
|
|
100.0%
|
|
March
31
2008
|
|
December
31
2007
|
|
March
31
2007
|
|
Deposits:
|
Amount
|
|
Percent
of
Total
|
|
Amount
|
|
Percent
of
Total
|
|
Amount
|
|
Percent
of
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing
accounts
|
$
|
486,201
|
|
|
13.2
|
%
|
$
|
484,251
|
|
|
13.4
|
%
|
$
|
348,890
|
|
|
11.9
|
%
|
Interest-bearing
checking
|
|
452,531
|
|
|
12.3
|
|
|
430,636
|
|
|
11.9
|
|
|
345,805
|
|
|
11.8
|
|
Regular
savings accounts
|
|
610,085
|
|
|
16.5
|
|
|
609,073
|
|
|
16.8
|
|
|
432,823
|
|
|
14.8
|
|
Money
market accounts
|
|
234,599
|
|
|
6.3
|
|
|
248,403
|
|
|
6.9
|
|
|
180,965
|
|
|
6.3
|
|
Total
transaction and saving accounts
|
|
1,783,416
|
|
|
48.3
|
|
|
1,772,363
|
|
|
49.0
|
|
|
1,308,483
|
|
|
44.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
which mature or reprice:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
1 year
|
|
1,656,117
|
|
|
44.8
|
|
|
1,610,247
|
|
|
44.5
|
|
|
1,402,354
|
|
|
48.0
|
|
After
1 year, but within 3 years
|
|
201,017
|
|
|
5.4
|
|
|
187,851
|
|
|
5.2
|
|
|
159,848
|
|
|
5.5
|
|
After
3 years
|
|
52,760
|
|
|
1.5
|
|
|
50,132
|
|
|
1.3
|
|
|
50,463
|
|
|
1.7
|
|
Total
certificate accounts
|
|
1,909,894
|
|
|
51.7
|
|
|
1,848,230
|
|
|
51.0
|
|
|
1,612,665
|
|
|
55.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
3,693,310
|
|
|
100.0
|
%
|
$
|
3,620,593
|
|
|
100.0
|
%
|
$
|
2,921,148
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of Results of Operations for the Quarters Ended March 31, 2008 and
2007
For the
quarter ended March 31,
2008, we had net income of $3.8 million, or $0.24 per share (diluted),
compared to net income of $7.8 million, or $.62 per share (diluted), for the
quarter ended March 31,
2007. The decrease in net income was primarily caused by a
material increase in our provision for loan losses as well as a significant
decline in our net interest margin, which more than offset the favorable effects
of continued growth of loans and deposits, including growth from acquisitions,
as well as changes in the mix of assets and liabilities. As more
fully explained below, our provision for loan losses was $6.5 million for the
quarter ended March 31, 2008 compared to $1.0 million for the quarter
ended March 31, 2007. The increase in the provision for
loan losses in the current quarter primarily reflects an increase in delinquent
and non-performing construction, land and land development loans for one- to
four-family properties and our concerns that the increasing number of distressed
sellers and lender foreclosures may further disrupt certain housing markets and
adversely affect home prices and the demand for building lots.
Our
operating results also included a significant increase in other operating
income, particularly deposit fees and service changes, as well as substantial
increases in other operating expenses, particularly compensation, occupancy,
information services, payment and card processing, amortization of core deposit
intangibles, and miscellaneous expenses, reflecting the acquisitions, growth in
locations, operations and staff as we continued to expand. Over the
past fifteen months through acquisitions and de novo operations, we have added
26 new branches to improve and expand our franchise. With the
exception of four new offices opened during the first quarter of last year, all
of these locations were added subsequent to March 31, 2007. In
addition to the branches added through acquisition, new or relocated offices
that contributed to the higher level of operating expenses during this quarter
compared to the same period a year ago include: Nampa, Idaho;
Beaverton and Tualatin, Oregon; and Bellingham (2), Oak Harbor, Federal Way,
East Wenatchee, Selah and College Place, Washington. Further, our
operating results for the quarter ended March 31,
2008 include an $823,000 ($527,000 after tax) gain as a result of changes
in the valuation of financial instruments carried at fair value pursuant to the
early adoption of fair value accounting under SFAS No. 159, compared to a $1.2
million ($755,000 after tax) gain for the same quarter in
2007. Excluding the net fair value adjustments, net income from
recurring operations was $3.3 million, or $0.21 per share (diluted), for the
quarter ended March 31,
2008, compared to $7.1 million, or $0.56 per share (diluted), for the quarter
ended March 31, 2007.
Compared
to levels a year ago, total assets increased 28% to $4.572 billion at March 31,
2008, net loans increased 27% to $3.790 billion, deposits grew 26% to $3.693
billion, while borrowings, including junior subordinated debentures, increased
$84 million, or 27%, to $396 million. The average balance of
interest-earning assets was $4.144 billion for the quarter ended March 31, 2008,
an increase of $834 million, or 25%, compared to $3.310 billion for the same
quarter a year earlier.
Net
Interest Income. Net interest income before provision for loan
losses increased to $37.4 million for the quarter ended March 31, 2008, compared
to $32.2 million for the prior year’s comparative quarter, primarily as a result
of the growth in average interest-earning assets noted above and despite the
decrease in the net interest margin as discussed below. The net
interest margin of 3.63% for the current quarter ended March 31, 2008 declined
31 basis points from the prior year’s comparative quarter, primarily as a result
of the effect of rapidly declining short-term interest rates on earning asset
yields, particularly floating- and adjustable-rate loan yields. By
comparison to the same quarter a year ago, this decline was compounded by the
adverse effect of an increase in the level of non-accrual loans and other
non-performing assets. While funding costs also moved significantly
lower, the more immediate impact of lower prime rates on a substantial portion
of our loan portfolio resulted in compression of our net interest margin and
offset a portion of the anticipated benefits from loan and deposit
growth. Reflecting generally lower market interest rates as well as
changes in asset mix and a higher level of non-accrual loans, the yield on
earning assets for the quarter ended March 31, 2008 decreased by 104 basis
points compared to the prior year’s first quarter, while funding costs for the
quarter ended March 31, 2008 decreased by 77 basis points compared to the same
period. Importantly, during the most recent quarter, the Federal
Reserve was aggressively lowering short-term interest rates and, due to the
timing of those changes, the full impact on asset yields was not realized in
that
quarter. As a result, we anticipate further compression of our net
interest margin over the next quarter, despite the fact that funding costs are
expected to continue declining.
Interest
Income. Interest income for the quarter ended March 31, 2008
was $72.0 million, compared to $65.4 million for the same quarter one year
earlier, an increase of $6.5 million, or 10%. The increase in
interest income occurred as a result of an $834 million increase in the average
balance of interest earning assets, partially offset by the 104 basis point
decrease in the average yield on those assets. The yield on average
interest-earning assets decreased to 6.98% for the quarter ended March 31, 2008,
compared to 8.02% for the same period in the prior year. As noted
above, the decrease in the yield on earning assets reflects the significant
changes in Federal Reserve policy actions beginning in September 2007 designed
to lower short-term interest rates. As a result of these policy
actions, bank prime rates which had averaged 8.25% for the quarter ended March
31, 2007, declined by 3.00%, to 5.25%, over a five-month
period. While the prime rate finished the quarter at 5.25%, the
average prime rate for the quarter ended March 31, 2008 was
6.21%. Average loans receivable for the quarter ended March 31, 2008
increased by $846 million, or 28%, to $3.831 billion, compared to $2.985 billion
for the quarter ended March 31, 2007. Interest income on loans for
the quarter increased by $6.2 million, or 10%, to $68.1 million from $61.8
million for the same period in the prior year, reflecting the impact of the
increase in average loan balances offset by a 125 basis point decrease in the
average yield on loans. The decrease in average loan yield reflects
the lower average level of market interest rates in the current year, following
the Federal Reserve’s actions to lower those rates, particularly short-term
interest rates including the prime rate and LIBOR indices which affect the yield
on large portions of our construction, land development, commercial and
agricultural loans. The decrease in average loan yields also reflects
changes in the mix of the loan portfolio and slower turn-over in the
construction and development portfolio which resulted in less recognition of
deferred loan fee income, as well as the adverse effect of increased loan
delinquencies. Additional factors were changes in the average credit
risk profile of new borrowers and competitive pricing pressure which resulted in
lower spreads and yields on new loan originations. The average yield
on loans was 7.15% for the quarter ended March 31, 2008, compared to 8.40% for
the same period in the prior year.
The
combined average balance of mortgage-backed securities, investment securities,
daily interest-bearing deposits and FHLB stock decreased by $12 million for the
quarter ended March 31, 2008, and the interest and dividend income from those
investments increased by $262,000 compared to the quarter ended March 31,
2007. The effect of the lower average balance was offset as the
average yield on the securities portfolio and cash equivalents increased to
4.99% for the quarter ended March 31, 2008, from 4.52% in the prior
year. The increase in the yield of the securities portfolio reflects
the maturity of certain lower yielding assets as well as the addition of certain
higher yielding securities, including approximately $31 million of trust
preferred securities issued by other unrelated bank holding companies and $6
million of FNMA preferred stock. Unfortunately, we anticipate that
the yield on these trust preferred securities and certain other floating rate
securities, all of which are indexed to short-term LIBOR rates, will decline as
those rates have also moved lower in response to the Federal Reserve’s
actions. Also, while insignificant in amount, we received $93,000 in
dividend income on our FHLB of Seattle stock for the quarter ended March 31,
2008, an increase of $57,000 compared to the same quarter in the prior
year. We anticipate that the yield on this asset may increase
modestly in 2008 as the earnings and capital position of the FHLB of Seattle
have improved slightly.
Interest
Expense. Interest expense for the quarter ended March 31, 2008
was $34.6 million, compared to $33.3 million for the comparable period in 2007,
an increase of $1.3 million, or 4%. The increase in interest expense
reflects an $829 million increase in average interest-bearing liabilities, which
was substantially offset by a 77 basis point decrease in the average cost of all
interest-bearing liabilities to 3.46% for the quarter ended March 31, 2008, from
4.23% for the same period in the prior year. The increase in
interest-bearing balances and higher interest expense reflects a large increase
in average deposits of $811 million, along with an $18 million increase in FHLB
advances. The average balances for junior subordinated debentures and
other borrowings were essentially unchanged (excluding the fair value
adjustments). The effect of lower average market rates for the
quarter on the cost of these funds was partially mitigated by pricing
characteristics noted below, particularly as deposits became a proportionately
larger source of funds.
Deposit
interest expense increased $2.5 million, or 9%, to $30.1 million for the quarter
ended March 31, 2008 compared to $27.6 million for the prior quarter, largely as
a result of the significant deposit growth during the past twelve months
including growth due to our acquisitions, despite a 66 basis point decrease in
the cost of interest-bearing deposits. Reflecting the acquisitions,
branch expansion and other growth initiatives, average deposit balances
increased $811 million, or 29%, to $3.606 billion for the quarter ended March
31, 2008, from $2.796 billion for the quarter ended March 31, 2007, while the
average rate paid on deposit balances decreased 66 basis points to
3.35%. 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 tend to be less severe and to lag changes in market
interest rates. In addition, non-interest-bearing deposits dampen the
effect of changes in market rates on our cost of deposits. This lower
degree of volatility and lag effect for deposit pricing have been evident in the
modest decrease in deposit costs as the Federal Reserve moved aggressively to
significantly lower short-term interest rates by 300 basis points from September
18, 2007 to March 31, 2008. Further, competitive pricing pressure for
interest-bearing deposits has been quite intense in recent quarters, as many
financial institutions until very recently experienced strong loan growth and
related funding needs and more recently as certain large financial institutions
have experienced increased liquidity strains. However, we expect that
the cost of deposits will decline over the near term.
Average
FHLB advances (excluding fair value adjustments) increased to $198 million for
the quarter ended March 31, 2008, compared to $179 million during the same
quarter a year earlier. The average rate paid on FHLB advances for
the quarter ended March 31, 2008 decreased to 3.76%, a decrease of 139 basis
points compared to the same period one year earlier, resulting in a $428,000
decrease in the related interest expense, as we benefited from lower short-term
rates. Junior subordinated debentures which were issued in connection
with trust preferred securities had an average balance of $124 million
(excluding fair value adjustments) and an average cost of 6.71% for the quarter
ended March 31, 2008. Junior subordinated debentures outstanding in
the same quarter in the prior year also had an average balance of $124 million
with a higher average rate of 8.04%. Generally, the junior
subordinated debentures are adjustable-rate instruments with repricing
frequencies of three months. The lower average cost of the junior
subordinated debentures in the current quarter reflects lower short-term market
interest rates, as well as a lower spread on the most recently issued debentures
and the early redemption of a higher costing tranche of
debentures. Effective April 22, 2007, we exercised the early
redemption provision with respect to approximately $26 million of the junior
subordinated debentures
which had
a spread of 3.70% to six-month LIBOR and an average cost of 9.09% during the six
months preceding redemption. We replaced the redeemed debentures with
a new $26 million tranche of junior subordinated debentures issued on July 31,
2007 with an initial rate of 6.74% and a repricing spread of 1.38% to
three-month LIBOR. Other borrowings consist of retail repurchase
agreements with customers and reverse repurchase agreements with investment
banking firms secured by certain investment securities. The average
balance for other borrowings was $90 million for the quarter ended March 31,
2008, essentially unchanged from the same quarter in the prior year, while the
related interest expense decreased by $318,000, to $610,000 from $928,000 for
the respective periods, again reflecting lower market interest
rates. The average balance of customer retail repurchase agreements
increased by $22 million, while the average balance of wholesale borrowings from
brokers decreased approximately $22 million. The average rate paid on
other borrowings was 2.73% for the quarter ended March 31, 2008, compared to
4.18% for the same period in the prior year. Other borrowings
generally have relatively short terms and therefore reprice to current market
levels more quickly than deposits and FHLB advances, which generally lag current
market rates, although, similar to deposits, customer retail repurchase
agreements have a lower degree of volatility than most market
rates.
The
following tables provide additional comparative data on our operating
performance (dollars in thousands):
|
|
|
Quarters
Ended
|
|
Average
Balances
|
|
|
March
31
|
|
(in
thousands)
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated
|
|
Investment
securities and cash equivalents
|
|
|
|
|
|
|
$
|
176,596
|
|
$
|
136,097
|
|
Mortgage-backed
obligations
|
|
|
|
|
|
|
|
98,629
|
|
|
152,462
|
|
FHLB
stock
|
|
|
|
|
|
|
|
37,371
|
|
|
35,844
|
|
Total
average interest-earning securities and cash equivalents
|
|
|
|
|
|
|
|
312,596
|
|
|
324,403
|
|
Loans
receivable
|
|
|
|
|
|
|
|
3,830,992
|
|
|
2,985,248
|
|
Total
average interest-earning assets
|
|
|
|
|
|
|
|
4,143,588
|
|
|
3,309,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning
assets
|
|
|
|
|
|
|
|
359,474
|
|
|
192,422
|
|
Total
average assets
|
|
|
|
|
|
|
$
|
4,503,062
|
|
$
|
3,502,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
$
|
3,606,121
|
|
|
2,795,532
|
|
Advances
from FHLB
|
|
|
|
|
|
|
|
197,886
|
|
|
179,427
|
|
Other
borrowings |
|
|
|
|
|
|
|
89,958
|
|
|
89,993
|
|
Junior
subordinated debentures
|
|
|
|
|
|
|
|
123,716
|
|
|
123,716
|
|
Total
average interest-bearing liabilities
|
|
|
|
|
|
|
|
4,017,681
|
|
|
3,188,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing
liabilities
|
|
|
|
|
|
|
|
42,997
|
|
|
49,020
|
|
Total
average liabilities
|
|
|
|
|
|
|
|
4,060,678
|
|
|
3,237,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
442,384
|
|
|
264,385
|
|
Total
average liabilities and equity
|
|
|
|
|
|
|
$
|
4,503,062
|
|
$
|
3,502,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Yield/Expense (rates are annualized)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Yield:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities and cash equivalents
|
|
|
|
|
|
|
|
6.00
|
%
|
|
5.38
|
%
|
Mortgage-backed
obligations
|
|
|
|
|
|
|
|
4.70
|
%
|
|
4.72
|
%
|
FHLB
stock
|
|
|
|
|
|
|
|
1.00
|
%
|
|
0.41
|
%
|
Total
interest rate yield on securities and cash equivalents
|
|
|
|
|
|
|
|
4.99
|
%
|
|
4.52
|
%
|
Loans
receivable
|
|
|
|
|
|
|
|
7.15
|
%
|
|
8.40
|
%
|
Total
interest rate yield on interest-earning assets
|
|
|
|
|
|
|
|
6.98
|
%
|
|
8.02
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
3.35
|
%
|
|
4.01
|
%
|
Advances
from FHLB
|
|
|
|
|
|
|
|
3.76
|
%
|
|
5.15
|
%
|
Other
borrowings
|
|
|
|
|
|
|
|
2.73
|
%
|
|
4.18
|
%
|
Junior
subordinated debentures
|
|
|
|
|
|
|
|
6.71
|
%
|
|
8.04
|
%
|
Total
interest rate expense on interest-bearing liabilities
|
|
|
|
|
|
|
|
3.46
|
%
|
|
4.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
spread
|
|
|
|
|
|
|
|
3.52
|
%
|
|
3.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin on interest earning assets
|
|
|
|
|
|
|
|
3.63
|
%
|
|
3.94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
Key Financial Ratios (ratios are annualized)
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average assets
|
|
|
|
|
|
|
|
0.34
|
%
|
|
0.90
|
%
|
Return
on average equity
|
|
|
|
|
|
|
|
3.49
|
%
|
|
11.98
|
%
|
Average
equity / average assets
|
|
|
|
|
|
|
|
9.82
|
%
|
|
7.55
|
%
|
Average
interest-earning assets / interest-bearing liabilities
|
|
|
|
|
|
|
|
103.13
|
%
|
|
103.79
|
%
|
Non-interest
income/average assets
|
|
|
|
|
|
|
|
0.73
|
%
|
|
0.73
|
%
|
Non-interest
(other operating) expenses / average assets
|
|
|
|
|
|
|
|
3.01
|
%
|
|
3.02
|
%
|
Efficiency
ratio
[non-interest
(other operating) expenses / revenues]
|
|
|
|
|
|
|
|
74.00
|
%
|
|
67.70
|
%
|
Provision
and Allowance for Loan Losses. During the quarter ended March
31, 2008, the provision for loan losses was $6.5 million compared to $1.0
million from the quarter ended March 31, 2007. As discussed 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 as more fully explained
below.
The
significantly greater provision for loan losses for the quarter ended March 31,
2008 primarily reflects an increase in delinquent and non-performing
construction, land and land development loans for one- to four-family properties
and our concerns that the increasing number of distressed sellers and lender
foreclosures may further disrupt certain housing markets and adversely affect
home prices and the demand for
building
lots. In particular, the increased provision for loan losses reflects
our concern that higher levels of delinquencies and loan loss provisioning
recently announced by a number of lenders in our markets could lead to
significant discounting of property values in efforts to expedite problem loan
resolutions. There were net charge-offs of $1.9 million for the
quarter ended March 31, 2008, compared to $236,000 for the quarter one year
earlier, and non-performing loans increased to $54 million at March 31, 2008,
compared to $42 million at December 31, 2007 and $13 million at March 31,
2007. Generally, these non-performing loans reflect unique operating
difficulties for the individual borrower rather than weakness in the overall
economy of the Pacific Northwest; however, slower sales for one- to four-family
homes and developed residential building lots is clearly a significant
contributing factor and the greatest increase in delinquencies and
non-performing loans is centered in construction and land development
lending. Although we anticipate sales activity will improve through
the spring and summer, we are increasingly concerned about the possibility of
further deterioration in property values in some locations. As a
result, we chose to increase our reserves through a higher level of provisioning
as the degree of uncertainty with respect to property values has clearly
increased. A comparison of the allowance for loan losses at March 31,
2008 and 2007 shows an increase of $14 million, including $7 million added
through the acquisitions, to $50 million at March 31, 2008, from $36 million at
March 31, 2007. The allowance for loan losses as a percentage of
total loans (loans receivable excluding allowance for losses) increased to 1.31%
at March 31, 2008, compared to 1.21% at March 31, 2007. The allowance
as a percentage of non-performing loans decreased to 93% at March 31, 2008,
compared to 277% a year earlier.
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 collateral for
the loan. As a result, we maintain an allowance for loan losses
consistent in all material respects with the GAAP guidelines outlined in SFAS
No. 5, Accounting
for 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
guidelines in SFAS No. 114, Accounting
by Creditors for Impairment of a Loan, and SFAS No. 118, Accounting
by Creditors for Impairment of a Loan—Income Recognition and
Disclosure.
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 our continuing analysis of the factors underlying the quality
of the loan portfolio. These factors include 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 collectibility 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 quality of the loan portfolio, including
changes in the size and composition of the loan portfolio, delinquency rates,
actual loan loss experience and current economic conditions, 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, 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. As of March 31, 2008, we
had identified $55.9 million of impaired loans as defined by SFAS No. 114 and
had established $5.2 million of loss allowances related to these
loans.
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 loans with specific
allowances. Loss factors are based on our historical loss experience
adjusted for significant factors including the experience of other banking
organizations that, in our judgment, affect the collectibility 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. Beginning with
the quarter ended December 31, 2007, we adjusted our loss factors in accordance
with updated guidance from our regulators. The adjusted factors
resulted in somewhat lower general and specific reserves; however, in the
current economic environment, management’s judgment with respect to the
appropriate level of loss provisioning and allowance has resulted in a
significantly greater amount of unallocated allowance than in prior
periods.
We
believe that the allowance for loan losses as of March 31, 2008 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 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 establishment of
additional reserves based upon their judgment of information available to them
at the time of their examination.
The
following tables provide additional detail on our allowance for loan losses
(dollars in thousands):
|
|
|
Quarters
Ended
|
|
|
|
|
March
31
|
|
Allowance
for Loan Losses:
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Balance,
beginning of the period
|
|
|
|
|
|
|
$
|
45,827
|
|
$
|
35,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
|
|
|
|
|
6,500
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries
of loans previously charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family real estate
|
|
|
|
|
|
|
|
--
|
|
|
337
|
|
Commercial
real estate
|
|
|
|
|
|
|
|
--
|
|
|
--
|
|
Multifamily
real estate
|
|
|
|
|
|
|
|
--
|
|
|
--
|
|
Construction
and land
|
|
|
|
|
|
|
|
--
|
|
|
--
|
|
Commercial
business
|
|
|
|
|
|
|
|
86
|
|
|
35
|
|
Agricultural
business, including secured by farmland
|
|
|
|
|
|
|
|
3
|
|
|
255
|
|
Consumer
|
|
|
|
|
|
|
|
55
|
|
|
37
|
|
|
|
|
|
|
|
|
|
144
|
|
|
664
|
|
Loans
charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family real estate
|
|
|
|
|
|
|
|
(72
|
)
|
|
(413
|
)
|
Commercial
real estate
|
|
|
|
|
|
|
|
--
|
|
|
--
|
|
Multifamily
real estate
|
|
|
|
|
|
|
|
--
|
|
|
--
|
|
Construction
and land
|
|
|
|
|
|
|
|
(968
|
)
|
|
--
|
|
Commercial
business
|
|
|
|
|
|
|
|
(780
|
)
|
|
(404
|
)
|
Agricultural
business, including secured by farmland
|
|
|
|
|
|
|
|
--
|
|
|
(20
|
)
|
Consumer
|
|
|
|
|
|
|
|
(205
|
)
|
|
(63
|
)
|
|
|
|
|
|
|
|
|
(2,025
|
)
|
|
(900
|
)
|
Net
(charge-offs) recoveries
|
|
|
|
|
|
|
|
(1,881
|
)
|
|
(236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
end of the period
|
|
|
|
|
|
|
$
|
50,446
|
|
$
|
36,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs (recoveries) as a percentage of average net
book
value of loans outstanding for the period
|
|
|
|
|
|
|
|
0.05
|
%
|
|
0.01
|
%
|
The
following is a schedule of our allocation of the allowance for loan losses
(dollars in thousands):
|
March
31
|
|
December
31
|
|
March
31
|
|
|
2008
|
|
2007
|
|
2007
|
|
Specific
or allocated loss allowances:
|
|
|
|
|
|
|
|
|
|
One-
to four-family real estate
|
$
|
2,054
|
|
$
|
1,987
|
|
$
|
939
|
|
Commercial
real estate
|
|
4,180
|
|
|
3,771
|
|
|
4,726
|
|
Multifamily
real estate
|
|
587
|
|
|
934
|
|
|
902
|
|
Construction
and land
|
|
11,117
|
|
|
7,569
|
|
|
12,294
|
|
Commercial
business
|
|
17,842
|
|
|
19,026
|
|
|
10,652
|
|
Agricultural
business, including secured by farmland
|
|
1,397
|
|
|
1,419
|
|
|
2,554
|
|
Consumer
|
|
2,807
|
|
|
3,468
|
|
|
945
|
|
Total
allocated
|
|
39,984
|
|
|
38,174
|
|
|
33,012
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
allowance for undisbursed commitments
|
|
599
|
|
|
330
|
|
|
259
|
|
Unallocated
|
|
9,863
|
|
|
7,323
|
|
|
3,028
|
|
Total
allowance for loan losses
|
$
|
50,446
|
|
$
|
45,827
|
|
$
|
36,299
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses as a percentage of total loans outstanding
|
|
|
|
|
|
|
|
|
|
(loans
receivable excluding allowance for loan losses)
|
|
1.31
|
%
|
|
1.20
|
%
|
|
1.21
|
%
|
Allowance
for loan losses as a percentage of non-performing loans
|
|
93
|
%
|
|
108
|
%
|
|
277
|
%
|
Other
Operating Income. Other operating income was $8.2 million for
the quarter ended March 31, 2008, compared to $6.3 million for the quarter ended
March 31, 2007. Excluding fair value adjustments recorded pursuant to
the adoption of SFAS No. 159, recurring other operating income increased 43% to
$7.4 million compared to $5.2 million in the first quarter last year, largely as
a result of increased deposit fees and service charges. Deposit fees
and other service charge income increased by $2.1 million, or 69%, to $5.0
million for the quarter ended March 31, 2008, compared to $3.0 million for the
quarter ended March 31, 2007, largely influenced by the increase in deposit
balances from our acquisitions, yet also reflecting internally generated growth
in customer transaction accounts and increased merchant credit card
services. Changes in certain pricing schedules and interchange fees
also contributed to the increased fee income. Loan servicing fees
were essentially unchanged at $402,000 for the current quarter, compared to
$375,000 for the quarter ended March 31, 2007. Reflecting increased
mortgage banking activity, gain on sale of loans increased by $260,000 to $1.6
million for the quarter ended March 31, 2008, compared to $1.4 million for the
same quarter one year earlier. Loan sales for the quarter ended March
31, 2008 totaled $109.6 million, compared to $83.6 million for the prior year
period. Gain on sale of loans in the current quarter included $77,000
of fees on $8.7 million of loans which were brokered and are not reflected in
the volume of loans sold. By comparison, in the quarter ended March
31, 2007, gain on sale of loans included $187,000 of fees on $21.6 million of
brokered loans. As noted above, for the quarters ended March 31, 2008
and 2007 other income also includes net gains of $823,000 and $1.2 million,
respectively, for the change in valuation of financial instruments now carried
at fair value pursuant to the early adoption of fair value accounting under SFAS
No. 159. This gain primarily resulted from changes in the value of
the junior subordinated debentures that we have issued, caused by a significant
change in the level of credit spreads demanded by buyers of that type of
security as reflected in current market prices for comparable
issues. These gains were partially offset by decreases in the value
of similar securities included in the Banner Bank investment portfolio, as well
as by changes in the fair value of portions of Banner Bank’s FHLB
advances.
Other
Operating Expenses. Other operating expenses increased by $7.6
million, or 29%, to $33.7 million for the quarter ended March 31, 2008, from
$26.1 million for the same quarter in the prior year, largely reflecting the
growth resulting from our branch expansion strategy and the three
acquisitions. However, operating expenses for the quarter ended March
31, 2008 were lower than each of the two preceding quarters as we are beginning
to experience some of the anticipated efficiencies following last year’s
acquisitions. And, while we will be opening two new offices during
the second quarter of 2008, we expect further improvement as we capture
additional efficiencies and as a result of a more moderate pace of branch
expansion going forward. Besides the acquisitions, the increase in
expenses includes operating costs associated with the opening of six new branch
offices over the last year in Nampa, Idaho, Beaverton and Tualatin, Oregon, and
Bellingham (2) and Oak Harbor, Washington, and the relocation and upgrading of
our branch offices in College Place, Federal Way, East Wenatchee and Selah,
Washington. Primarily reflecting the additional branches and bank
acquisitions, salary and employee benefits expense increased by $3.2 million, or
19%, and occupancy costs increased by $1.5 million, or 35%, compared to the same
quarter a year earlier. In addition, compensation was higher as a
result of general wage and salary increases, as well as increased per employee
costs associated with benefit programs and employer-paid
taxes. Further, direct expenses associated with payment and card
processing services increased by $543,000 as a result of growth in these fee
generating activities. The current quarter’s operating expenses also
included $736,000 for amortization of the core deposit intangibles recorded in
connection with the acquisitions of F&M, SJFHC and NCW. We
continue our strong commitment to advertising and marketing expenditures;
however, partially offsetting the growth of other operating expenses, marketing
and advertising costs decreased $439,000, or 24%, to $1.4 million in the quarter
ended March 31, 2008, compared to $1.9 million for the same quarter in the prior
year. Other operating expenses as a percentage of average assets was
3.01% for the quarter ended March 31, 2008, compared to 3.02% for the same
quarter one year earlier, reflecting the impact of the acquisitions, integration
and conversion costs and continuing startup costs associated with branch
growth. Our efficiency ratio, adjusted to exclude fair value
adjustments increased to 75.36% for the quarter ended March 31, 2008 from 69.84%
for the same quarter in the prior year. In addition to increased
operating expenses, the higher efficiency ratio reflects the adverse effect of a
narrower net interest margin on our profitability. Over time, we
expect continued increases in the absolute level of operating expenses as a
result of our expansion plans; however, the pace of increase should slow as we
reduce the number of new branch openings beginning in 2008. Further,
we believe that this investment in our branch network will lead to a lower
relative cost of funds and enhanced revenues over time which, combined with
expected cost savings from the acquisitions, should result in an improved
efficiency ratio and stronger operating results.
Income
Taxes. Income tax expense for the quarter ended March 31, 2008
decreased to $1.5 million, compared to $3.6 million for the comparable period in
2007. Our effective tax rates for the quarters ended March 31, 2008
and 2007 were 28.2% and 31.7%, respectively. The effective tax rates
in both periods reflect the recording of tax credits related to certain
Community Reinvestment Act (CRA) investments as well as certain tax exempt
income. The lower rate in the current quarter is primarily a result
of the much larger provision for loan losses which significantly reduced the
portion of fully taxable earnings relative to tax-exempt income from municipal
securities and bank-owned life insurance, as well as the relative effect of
other tax preference items.
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. 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 assets or
changes in classifications, and develops 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.
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 the generally acceptable 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 estimated 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 March 31, 2008, we
had an allowance for loan losses of $50 million, which represented 1.31% of net
loans and 93% of non-performing loans compared to 1.21% and 277%, respectively,
at March 31, 2007.
Non-Performing
Assets: Non-performing assets increased to $62 million, or
1.36% of total assets, at March 31, 2008, compared to $14 million, or 0.39% of
total assets, at March 31, 2007. With the exception of residential
construction and land development loans, non performing loans and assets
generally reflect unique operating difficulties for individual borrowers rather
than weakness in the overall economy of the Pacific
Northwest. However, slower sales and excess inventory in certain
housing markets have been clear contributing factors to the increase in
delinquencies for construction and land development loans, which represent
approximately 82% of our non-performing assets. While we have not
engaged in any sub-prime lending programs and have not been directly impacted by
the asset quality issues emanating from that market segment, we do have
heightened concerns relative to home values, housing markets and construction
lending as a result of the problems associated with sub-prime and other
non-traditional mortgage lending programs, as well as increasing levels of
builder and developer delinquencies and lender foreclosures. As a
result, we are currently exercising extra monitoring vigilance with respect to
our asset quality and for the quarter ended March 31, 2008 we significantly
increased our allowance for loan losses. Aside from residential
construction and land development lending, to date we have not detected any
meaningful deterioration in the performance or quality of any other segments of
our loan portfolio. We believe our level of non-performing loans and
assets, while increased, is manageable, the underlying asset values remain
sufficient to minimize principal losses and our reserves are
satisfactory.
While
nonperforming assets are geographically disbursed, they are concentrated largely
in land and land development loans. The geographic distribution of
nonperforming construction and land development loans and real estate owned
included approximately $22 million, or 42%, in the western Oregon (Salem and
Portland)/southwestern Washington (Vancouver) market area, $16 million, or 30%,
in the Puget Sound region and $12 million, or 24%, in the greater Boise market
area. At March 31, 2008, our largest non-performing loan exposure was
for a land development project totaling $6.2 million secured by 210 acres of
undeveloped land near Boise, Idaho. The second largest non-performing
loan exposure was for a residential land development loan totaling $6.0 million
secured by a project in Portland, Oregon. This project contains 38
fully developed and marketable single family building lots. The third
largest non-performing loan exposure, totaling $4.2 million, was also for a
residential development project and is secured by a finished, 32 lot residential
plat also in the greater Portland market. We only have four
additional non-performing loan exposures which exceed $2 million in size,
ranging from $2.3 million to $3.9 million. The largest is a
residential development project in the southern Puget Sound region which is
secured by six completed single family homes, five partially completed homes and
13 single family lots. The second consists of four finished single
family homes and one land development project containing seven lots located in
Portland, Oregon which is secured by the project. The third is a
single family attached-home residential project in Washington which is secured
by the residential-use land. The fourth is a land development project
in the greater Boise, Idaho market which is secured by undeveloped
land. At March 31, 2008, we had $7.6 million of real estate owned and
other repossessed assets, the most significant component of which was a
residential land development loan totaling $5.2 million secured by a project in
Salem, Oregon. This project contains 80 fully developed and
marketable single family building lots. We acquired title to this
property through foreclosure on January 31, 2008. The second largest
element is a parcel of undeveloped land in Federal Way, Washington with a book
value of $918,000. The remaining balance of our real estate owned
consists of two single family residential homes, one located in Boise, Idaho and
the other in Bend, Oregon and five acres of raw land in Bellingham,
Washington. Management is optimistic about the prospects for disposal
of these properties at prices in line with the current book values.
The
following table sets forth information with respect to our non-performing assets
and restructured loans within the meaning of SFAS No. 15, Accounting
by Debtors and Creditors for Troubled Debt Restructuring, at the dates
indicated (dollars in thousands):
|
March
31
|
|
December
31
|
|
March
31
|
|
|
2008
|
|
2007
|
|
2007
|
|
Non-performing
assets at end of the period:
|
|
|
|
|
|
|
|
|
|
Nonaccrual
Loans:
|
|
|
|
|
|
|
|
|
|
Secured
by real estate:
|
|
|
|
|
|
|
|
|
|
One-
to four-family
|
$
|
2,869
|
|
$
|
3,371
|
|
$
|
1,536
|
|
Commercial
|
|
3,273
|
|
|
1,357
|
|
|
3,329
|
|
Multifamily
|
|
--
|
|
|
1,222
|
|
|
792
|
|
Construction
and land
|
|
44,192
|
|
|
33,432
|
|
|
1,842
|
|
Commercial
business
|
|
3,114
|
|
|
2,250
|
|
|
4,529
|
|
Agricultural
business, including secured by farmland
|
|
386
|
|
|
436
|
|
|
1,031
|
|
Consumer
|
|
40
|
|
|
--
|
|
|
--
|
|
|
|
53,874
|
|
|
42,068
|
|
|
13,059
|
|
Loans
more than 90 days delinquent, still on accrual:
|
|
|
|
|
|
|
|
|
|
Secured
by real estate:
|
|
|
|
|
|
|
|
|
|
One-
to four-family
|
|
488
|
|
|
221
|
|
|
55
|
|
Commercial
|
|
--
|
|
|
--
|
|
|
--
|
|
Multifamily
|
|
--
|
|
|
--
|
|
|
--
|
|
Construction
and land
|
|
--
|
|
|
--
|
|
|
--
|
|
Commercial
business
|
|
--
|
|
|
--
|
|
|
--
|
|
Agricultural
business, including secured by farmland
|
|
--
|
|
|
--
|
|
|
--
|
|
Consumer
|
|
73
|
|
|
94
|
|
|
--
|
|
|
|
561
|
|
|
315
|
|
|
55
|
|
Total
non-performing loans
|
|
54,435
|
|
|
42,383
|
|
|
13,114
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate owned, held for sale, and other repossessed assets,
net
|
|
7,579
|
|
|
1,885
|
|
|
958
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-performing assets at the end of the period
|
$
|
62,014
|
|
$
|
44,268
|
|
$
|
14,072
|
|
Non-performing
loans as a percentage of total loans before allowance for loan losses at
end of the period
|
|
1.42
|
%
|
|
1.11
|
%
|
|
0.44
|
%
|
Non-performing
assets as a percentage of total assets at end of the
period
|
|
1.36
|
%
|
|
0.99
|
%
|
|
0.39
|
%
|
|
|
|
|
|
|
|
|
|
|
Troubled
debt restructuring at end of the period
|
$
|
2,026
|
|
$
|
2,750
|
|
$
|
--
|
|
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 and competition.
Our
primary investing activity is the origination and purchase of
loans. During the quarter ended March 31, 2008, we purchased loans of
$4 million, while loan originations, net of repayments, totaled $31
million. This activity was funded primarily by principal repayments
on loans and securities, sales of loans, and deposit growth. During
the quarter ended March 31, 2008, we sold $110 million of loans. Net
deposit growth was $73 million for the quarter ended March 31,
2008. FHLB advances decreased $12 million (excluding fair value
adjustments) for the quarter ended March 31, 2008 while other borrowings,
including junior subordinated debentures, increased $33 million for the quarter
ended March 31, 2008.
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 quarter ended March 31, 2008, we used our
sources of funds primarily to fund loan commitments, to purchase securities, and
to pay maturing savings certificates and deposit withdrawals. At
March 31, 2008, we had outstanding loan commitments totaling $1.152 billion,
including undisbursed loans in process and unused credit lines totaling $1.095
billion. While reflecting 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 is to increase or decrease short-term borrowings,
including FHLB advances. We maintain credit facilities with the
FHLB-Seattle, which at March 31, 2008 provide for advances that in the aggregate
may equal the lesser of 35% of Banner Bank’s assets or adjusted qualifying
collateral, up to a total possible credit line of $804 million, and the lesser
of 25% of Islanders Bank’s assets up to a total possible credit line of $23
million. Advances under these credit facilities totaled $154 million,
or 3% of our assets at March 31, 2008. We also have in place
borrowing lines with certain correspondent banks which in aggregate total $115
million, none of which was drawn upon as of March 31, 2008.
At March
31, 2008, certificates of deposit amounted to $1.910 billion, or 52% of our
total deposits, including $1.656 billion which were scheduled to mature within
one year. While no assurance can be given as to future periods,
historically, we have been able to retain a significant amount of deposits as
they mature. Management believes it has adequate resources and
funding potential to meet our foreseeable liquidity requirements.
Financial
Instruments with Off-Balance-Sheet Risk
The Banks
have financial instruments with off-balance-sheet risk in the normal course of
business to meet the financing needs of their customers. These
financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
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. As
of March 31,
2008, outstanding commitments for which no liability has been recorded
consist of the following:
|
Contract
or
Notional
Amount
(in
thousands)
|
Financial
instruments whose contract amounts represent credit risk:
|
|
|
Commitments
to extend credit
|
|
|
Real
estate secured for commercial, construction or land
development
|
$
|
363,260
|
Revolving
open-end lines secured by 1-4 family residential
properties
|
|
99,355
|
Credit
card lines
|
|
47,668
|
Other,
primarily business and agricultural loans
|
|
594,245
|
Real
estate secured by one- to four-family residential
properties
|
|
32,150
|
Standby
letters of credit and financial guarantees
|
|
14,916
|
|
|
|
Total
|
$
|
1,151,594
|
|
|
|
Commitments
to sell loans secured by one- to four-family residential
properties
|
$
|
32,150
|
|
|
|
Interest
rate swaps
|
$
|
20,370
|
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 15 to 45 days, the most typical period being 30
days. Typically, pricing for the sale of these loans is locked with
various qualified investors under a best-efforts delivery program at or near the
time the interest rate is locked with the customer. We make every
effort to deliver these loans before their rate locks expire. This
arrangement generally requires us to deliver the loans prior to the expiration
of the rate lock. Delays in funding the loans can require a lock
extension. The cost of a lock extension at times is borne by the
customer and at times by us. These lock extension costs paid by us
are not expected to have a material impact to our operations. This
activity is managed daily. Changes in the value of rate lock
commitments are recorded as other assets and liabilities. See
“Derivative Instruments” under Note 1 of the Notes to the Consolidated Financial
Statement’s in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2007 filed with the SEC.
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 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 March 31, 2008, Banner and the Banks
each exceeded all current regulatory capital requirements. (See Item
1, “Business–Regulation,” and Note 21 of the Notes to the Consolidated Financial
Statements included in Banner Corporation’s Annual Report on
Form 10-K
for the year ended December 31, 2007 for additional information regarding
regulatory capital requirements for Banner and the Banks for the year ended
December 31, 2007.
The
actual regulatory capital ratios calculated for Banner Corporation, Banner Bank
and Islanders Bank as of March 31,
2008, along with the minimum capital amounts and ratios, were as follows
(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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banner
Corporation—consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk-weighted assets
|
$
|
450,419
|
|
|
11.03
|
%
|
$
|
326,556
|
|
|
8.00
|
%
|
|
N/A
|
|
|
N/A
|
|
Tier
1 capital to risk-weighted assets
|
|
399,973
|
|
|
9.80
|
|
|
163,278
|
|
|
4.00
|
|
|
N/A
|
|
|
N/A
|
|
Tier
1 leverage capital to average assets
|
|
399,973
|
|
|
9.15
|
|
|
174,868
|
|
|
4.00
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banner
Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk-weighted assets
|
|
421,110
|
|
|
10.65
|
|
|
316,288
|
|
|
8.00
|
|
$
|
395,360
|
|
|
10.00
|
%
|
Tier
1 capital to risk-weighted assets
|
|
372,061
|
|
|
9.41
|
|
|
158,144
|
|
|
4.00
|
|
|
237,216
|
|
|
6.00
|
|
Tier
1 leverage capital to average assets
|
|
372,061
|
|
|
8.82
|
|
|
168,709
|
|
|
4.00
|
|
|
210,886
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Islanders
Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk-weighted assets
|
|
20,525
|
|
|
15.70
|
|
|
10,460
|
|
|
8.00
|
|
|
13,075
|
|
|
10.00
|
%
|
Tier
1 capital to risk-weighted assets
|
|
19,128
|
|
|
14.63
|
|
|
5,230
|
|
|
4.00
|
|
|
7,845
|
|
|
6.00
|
|
Tier
1 leverage capital to average assets
|
|
19,128
|
|
|
12.49
|
|
|
6,124
|
|
|
4.00
|
|
|
7,655
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM
3 – Quantitative and Qualitative Disclosures About Market Risk
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. Additional interest rate
risk results from mismatched repricing indices and formulae (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
portion of our floating-rate loans, which help us maintain higher loan yields in
periods when market interest rates decline significantly. However, as
of March 31, 2008, we have very few floating-rate loans with interest rates that
were not at levels above their floors and therefore these loans should be
responsive to modest decreases or increases in market rates should they
occur. Further, 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. An additional consideration is the
lagging and somewhat inelastic pricing adjustments for interest rates on certain
deposit products as market interest rates change. These deposit
pricing characteristics are particularly relevant to the administered rates paid
on certain checking, savings and money market accounts and contributed to the
recent narrowing of our net interest margin following the Federal Reserve’s
actions to lower market interest rates beginning in late 2007 and accelerating
in the first quarter of 2008, as asset yields declined while the reduction in
deposit costs lagged. Further, in recent quarters, deposit costs have
not declined as much as other short-term market interest rates as credit
concerns and liquidity issues for certain large financial institutions have
created heightened competitive pricing pressures. As noted earlier in
this report, our net interest margin has also been adversely affected by an
increase in loan delinquencies as well as changes in the portfolio mix as
construction and development lending has slowed.
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 market value analysis, which addresses changes
in estimated net market value of equity arising from changes in the level of
interest rates. The net market 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 equity value to changes in
interest rates and provides an additional measure of interest rate
risk.
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 market value of equity could
vary substantially if different assumptions were used or if actual experience
differs from the assumptions used.
The table
of Interest
Rate Risk Indicators sets forth, as of March 31,
2008, the estimated changes in our net interest income over a one-year
time horizon and the estimated changes in market value of equity based on the
indicated interest rate environments.
Interest
Rate Risk Indicators
|
|
Estimated
Change in
|
|
Change
(in Basis Points) in
Interest
Rates (1)
|
|
Net
Interest Income
Next
12 Months
|
|
|
Net
Market Value
|
|
|
|
(dollars
in thousands)
|
|
+300
|
|
$ |
6,505 |
|
|
|
3.9
|
% |
|
$ |
(35,796 |
) |
|
|
(7.7
|
)% |
+200
|
|
|
3,983 |
|
|
|
2.4 |
|
|
|
(23,574
|
) |
|
|
(5.1
|
) |
+100
|
|
|
1,662 |
|
|
|
1.0 |
|
|
|
(11,810
|
) |
|
|
(2.5
|
) |
0
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
-50
|
|
|
(413
|
) |
|
|
(0.2
|
) |
|
|
1,063 |
|
|
|
0.2 |
|
-100
|
|
|
(1,387
|
) |
|
|
(0.8
|
) |
|
|
(3,233
|
) |
|
|
(0.7
|
) |
-200
|
|
|
(9,929
|
) |
|
|
(5.9
|
) |
|
|
(39,798
|
) |
|
|
(8.6
|
) |
__________
(1) Assumes
an instantaneous and sustained uniform change in market interest rates at all
maturities.
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 interest
rate increase.
The table
of Interest
Sensitivity Gap presents our interest sensitivity gap between
interest-earning assets and interest-bearing liabilities at March 31,
2008. The 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 March 31, 2008, total interest-bearing assets maturing or
repricing within one year exceeded total interest-earning liabilities maturing
or repricing in the same time period by $79.4 million, representing a one-year
cumulative gap to total assets ratio of 1.74%.
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 March 31, 2008 are within
our internal policy guidelines and management considers that our current level
of interest rate risk is reasonable.
|
|
|
|
Interest Sensitivity Gap as of March
31, 2008 |
|
Within
6 Months
|
|
|
After
6
Months
Within 1Year
|
|
|
After
1 Year
Within 3
years
|
|
|
After
3
Years
Within 5
Years
|
|
|
After
5 Years
Within 10
Years
|
|
|
Over
10 Years
|
|
|
Total |
|
|
|
(dollars
in thousands)
|
|
Interest-earning
assets: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
loans
|
|
$ |
747,431 |
|
|
$ |
17,890 |
|
|
$ |
45,084 |
|
|
$ |
3,063 |
|
|
$ |
188 |
|
|
$ |
304 |
|
|
$ |
813,960 |
|
Fixed-rate
mortgage loans
|
|
|
100,121 |
|
|
|
60,542 |
|
|
|
192,809 |
|
|
|
125,920 |
|
|
|
115,661 |
|
|
|
43,102 |
|
|
|
638,155 |
|
Adjustable-rate
mortgage loans
|
|
|
573,440 |
|
|
|
161,098 |
|
|
|
411,060 |
|
|
|
184,000 |
|
|
|
1,861 |
|
|
|
(5,645
|
) |
|
|
1,325,814 |
|
Fixed-rate
mortgage-backed securities
|
|
|
8,899 |
|
|
|
5,975 |
|
|
|
19,192 |
|
|
|
13,358 |
|
|
|
17,741 |
|
|
|
6,034 |
|
|
|
71,199 |
|
Adjustable-rate
mortgage-backed securities
|
|
|
1,807 |
|
|
|
1,686 |
|
|
|
7,261 |
|
|
|
3,881 |
|
|
|
10,795 |
|
|
|
-- |
|
|
|
25,430 |
|
Fixed-rate
commercial/agricultural loans
|
|
|
46,395 |
|
|
|
34,891 |
|
|
|
100,285 |
|
|
|
38,488 |
|
|
|
16,975 |
|
|
|
98 |
|
|
|
237,132 |
|
Adjustable-rate
commercial/agricultural loans
|
|
|
572,351 |
|
|
|
10,253 |
|
|
|
29,310 |
|
|
|
20,625 |
|
|
|
2,256 |
|
|
|
(2,868
|
) |
|
|
631,927 |
|
Consumer
and other loans
|
|
|
93,184 |
|
|
|
12,212 |
|
|
|
32,042 |
|
|
|
42,437 |
|
|
|
16,823 |
|
|
|
819 |
|
|
|
197,517 |
|
Investment
securities and interest-earning deposits
|
|
|
145,739 |
|
|
|
26,899 |
|
|
|
13,890 |
|
|
|
11,427 |
|
|
|
18,608 |
|
|
|
37,064 |
|
|
|
253,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
rate sensitive assets
|
|
|
2,289,367 |
|
|
|
331,446 |
|
|
|
850,933 |
|
|
|
443,199 |
|
|
|
200,908 |
|
|
|
78,908 |
|
|
|
4,194,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities: (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regular savings and NOW accounts |
|
|
270,120 |
|
|
|
139,852 |
|
|
|
326,322 |
|
|
|
326,322 |
|
|
|
-- |
|
|
|
-- |
|
|
|
1,062,616 |
|
Money market deposit accounts |
|
|
117,299 |
|
|
|
70,380 |
|
|
|
46,920 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
234,599 |
|
Certificates of deposit |
|
|
1,258,426 |
|
|
|
402,546 |
|
|
|
198,085 |
|
|
|
43,988 |
|
|
|
6,848 |
|
|
|
1 |
|
|
|
1,909,894 |
|
FHLB advances |
|
|
40,237 |
|
|
|
10,000 |
|
|
|
78,800 |
|
|
|
25,000 |
|
|
|
-- |
|
|
|
-- |
|
|
|
154,037 |
|
Other borrowings |
|
|
50,000 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
50,000 |
|
Junior
subordinated debentures |
|
|
97,942 |
|
|
|
-- |
|
|
|
-- |
|
|
|
25,774 |
|
|
|
-- |
|
|
|
-- |
|
|
|
123,716 |
|
Retail
repurchase agreements |
|
|
84,604 |
|
|
|
-- |
|
|
|
-- |
|
|
|
428 |
|
|
|
-- |
|
|
|
-- |
|
|
|
85,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rate sensitive liabilities |
|
|
1,918,628 |
|
|
|
622,778 |
|
|
|
650,127 |
|
|
|
421,512 |
|
|
|
6,848 |
|
|
|
1 |
|
|
|
3,619,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess
(deficiency) of interest-sensitive assets over
interest-sensitive liabilities
|
|
$ |
370,739 |
|
|
$ |
(291,332 |
) |
|
$ |
200,806 |
|
|
$ |
21,687 |
|
|
$ |
194,060 |
|
|
$ |
78,907 |
|
|
$ |
574,867 |
|
Cumulative
excess (deficiency) of interest-sensitive assets |
|
$ |
370,739 |
|
|
$ |
79,407 |
|
|
$ |
280,213 |
|
|
$ |
301,900 |
|
|
$ |
495,960 |
|
|
$ |
574,867 |
|
|
$ |
574,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
ratio of interest-earning assets to interest-
bearing liabilities
|
|
|
119.32 |
% |
|
|
103.12 |
% |
|
|
108.78 |
% |
|
|
108.36 |
% |
|
|
113.70 |
% |
|
|
115.88 |
% |
|
|
115.88 |
% |
Interest
sensitivity gap to total assets |
|
|
8.10 |
% |
|
|
(6.37 |
)% |
|
|
4.39 |
% |
|
|
0.47 |
% |
|
|
4.24 |
% |
|
|
1.72 |
% |
|
|
12.56 |
% |
Ratio
of cumulative gap to total assets |
|
|
8.10 |
% |
|
|
1.74 |
% |
|
|
6.12 |
% |
|
|
6.60 |
% |
|
|
10.84 |
% |
|
|
12.56 |
% |
|
|
12.56 |
% |
(footnotes on following
page)
Footnotes
for Table of Interest Sensitivity Gap
(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, NOW, 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 $(620.2) million, or (13.6%) of total assets at March 31,
2008. Interest-bearing liabilities for this table exclude certain
non-interest-bearing deposits which are included in the average balance
calculations in the table contained in Item 2, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Comparison of Results
of Operations for the Quarters Ended March 31, 2008 and 2007” of this
report.
ITEM
4 - 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. 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. Our Chief Executive Officer and Chief Financial Officer
concluded that, as of March 31, 2008, our disclosure controls and procedures
were effective in ensuring that the information required to be disclosed by us
in the reports it files or submits 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.
(b) Changes
in Internal Controls: In the quarter ended March 31, 2008,
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.
PART
II - OTHER INFORMATION
|
Item
1. 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
management believes would have a material adverse effect on our financial
condition or operations.
Item
1A. Risk
Factors
There
have been no material changes in the risk factors previously disclosed in Part
1, Item 1A of our Annual Report on Form 10-K for the year ended December 31,
2007 (File No. 0-26584).
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
During
the quarter ended March 31, 2008, we did not sell any securities that were not
registered under the Securities Act of 1933.
The table
below represents our purchases of equity securities during the quarter covered
by this report.
Period
|
|
Total
Number
of
Shares
Purchased
|
|
Average
Price
Paid
per Share
|
|
Total
Number of
Shares
Purchased
as
Part of Publicly Announced Plan
|
|
Maximum
Number
of Shares
that
May yet be Purchased Under
the
Plan (1)
|
|
Beginning
|
Ending
|
January
1, 2008
|
January
31, 2008
|
|
--
|
|
$
|
--
|
|
--
|
|
|
|
February
1, 2008
|
February
29, 2008
|
|
438,903
|
|
$
|
23.98
|
|
430,800
|
|
|
|
March
1, 2008
|
March
31, 2008
|
|
175,000
|
|
$
|
21.39
|
|
175,000
|
|
|
|
Total
|
|
|
613,903
|
|
$
|
23.24
|
|
605,800
|
|
86,400
|
|
(1)
|
On
July 26, 2007, the Board of Directors authorized the repurchase of up to
750,000 shares of our outstanding common stock over the next twelve
months. As of March 31, 2008, 663,600 shares had been purchased
under this program. During the quarter ended March 31, 2008,
8,103 shares were purchased to facilitate the exercise of vested stock
options.
|
Item
3. Defaults
upon Senior Securities
Not
Applicable.
Item
4. Submission
of Matters to a Vote of Security Holders
None.
Item
5. Other
Information
Not
Applicable.
Item
6. Exhibits
Exhibits
Exhibit
|
Index
of Exhibits
|
|
|
3{a}
|
Articles
of Incorporation of Registrant [incorporated by reference to Exhibit B to
the Proxy Statement for the Annual Meeting of Stockholders dated June 10,
1998].
|
|
|
|
3{b}
|
Bylaws
of Registrant [incorporated by reference to Exhibit 3.2 filed with the
Current Report on Form 8-K dated July 24, 1998 (File No.
0-26584)].
|
|
|
10{a}
|
Employment
Agreement with Gary L. Sirmon, dated as of January 1, 2004 [incorporated
by reference to exhibits filed with the Annual Report on Form 10-K for the
year ended December 31, 2003 (File No. 0-26584)].
|
|
|
10{b}
|
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. 0-26584)].
|
|
|
10{c}
|
Employment
Agreement with Michael K. Larsen [incorporated by reference to exhibits
filed with the Annual Report on Form 10-K for the year ended March 31,
1996 (File No. 0-26584)].
|
|
|
10{d}
|
Executive
Salary Continuation Agreement with Michael K. Larsen [incorporated by
reference to exhibits filed with the Annual Report on Form 10-K for the
year ended March 31, 1996 (File No. 0-26584)].
|
|
|
10{e}
|
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)].
|
|
|
10{f}
|
1996
Management Recognition and Development Plan [incorporated by reference to
Exhibit 99.2 to the Registration Statement on Form S-8 dated August 26,
1996 (File No. 333-10819)].
|
|
|
10{g}
|
Consultant
Agreement with Jesse G. Foster, dated as of December 19, 2003.
[incorporated by reference to exhibits filed with the Annual Report on
Form 10-K for the year ended December 31, 2003 (File No.
0-23584)].
|
|
|
10{h}
|
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. 0-26584)].
|
|
|
10{i}
|
Towne
Bank of Woodinville 1992 Stock Option Plan [incorporated by reference to
exhibits filed with the Registration Statement on Form S-8 dated April 2,
1998 (File No. 333-49193)].
|
|
|
10{j}
|
Whatcom
State Bank 1991 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)].
|
|
|
10{k}
|
Employment
Agreement with Lloyd W. Baker [incorporated by reference to exhibits filed
with the Annual Report on Form 10-K for the year ended December 31, 2001
(File No. 0-26584)].
|
|
|
10{l}
|
Employment
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,
2001 (File No. 0-26584)].
|
|
|
10{m}
|
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. 0-26584)].
|
|
|
10{n}
|
Form
of Supplemental Executive Retirement Program Agreement with Gary Sirmon,
Michael K. Larsen, Lloyd W. Baker, Cynthia D. Purcell and Paul E. Folz
[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].
|
|
|
10{o}
|
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)].
|
|
|
10{p}
|
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)].
|
|
|
10{q}
|
Form
of Employment Contract entered into with Cynthia D. Purcell, Richard B.
Barton, Paul E. Folz, John R. Neill and Douglas M. Bennett [incorporated
by reference to exhibits filed with the Annual Report on Form 10-K for the
year ended December 31, 2003 (File No. 0-26584)].
|
|
|
10{r}
|
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.
0-26584)].
|
|
|
10{s}
|
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.
0-26584)].
|
|
|
10{t}
|
Long-Term
Incentive Plan [incorporated by reference to the exhibits filed with the
Form 8-K on May 6, 2008].
|
|
|
31.1
|
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.
|
|
|
|
|
31.2
|
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.
|
|
|
|
|
32
|
Certificate
of Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
|
|
SIGNATURES
Pursuant
to the requirements 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.
|
|
Banner
Corporation |
|
|
|
|
|
|
|
|
|
May
9, 2008
|
|
/s/ D. Michael
Jones |
|
|
|
D. Michael
Jones |
|
|
|
President and
Chief Executive Officer |
|
|
|
(Principal
Executive Officer) |
|
|
|
|
|
|
|
|
|
May 9,
2008 |
|
/s/ Lloyd W.
Baker |
|
|
|
Lloyd W.
Baker |
|
|
|
Treasurer and
Chief Financial Officer |
|
|
|
(Principal
Financial and Accounting Officer) |
|
Exhibit
Index
31.1
|
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.
|
|
|
31.2
|
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.
|
|
|
32
|
Certificate
of Chief Executive Officer and Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of
2002.
|
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,
D. Michael Jones, certify that:
|
|
|
|
1.
|
I
have reviewed this Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2008 of Banner Corporation;
|
|
|
|
2.
|
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;
|
|
|
|
3.
|
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;
|
|
|
|
4.
|
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)
|
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;
|
|
|
|
|
b)
|
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;
|
|
|
|
|
c)
|
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
|
|
|
|
|
d)
|
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 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)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
|
|
|
b)
|
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.
|
|
|
|
|
|
|
|
|
|
May
9, 2008
|
|
/s/D.
Michael Jones
|
|
|
D.
Michael Jones
|
|
|
Chief
Executive Officer
|
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.
|
I
have reviewed this Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2008 of Banner Corporation;
|
|
|
|
2.
|
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;
|
|
|
|
3.
|
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;
|
|
|
|
4.
|
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)
|
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;
|
|
|
|
|
b)
|
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;
|
|
|
|
|
c)
|
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
|
|
|
|
|
d)
|
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 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)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
|
|
|
b)
|
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.
|
|
|
|
|
|
|
|
|
|
May
9, 2008
|
|
/s/Lloyd
W. Baker
|
|
|
Lloyd
W. Baker
|
|
|
Chief Financial
Officer
|
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, 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 Quarterly Report on Form 10-Q for the quarterly period ended March 31,
2008, 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.
|
May
9, 2008
|
/s/D.
Michael Jones
|
|
D.
Michael Jones
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
May
9, 2008
|
/s/Lloyd
W. Baker
|
|
Lloyd
W. Baker
|
|
Chief
Financial Officer
|