Unassociated Document
|
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,
2010.
|
|
|
OR
|
|
[ ]
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
|
|
ACT
OF 1934 FOR THE TRANSITION PERIOD FROM _______________
to _______________ |
|
|
Commission
File Number 0-26584
|
|
BANNER
CORPORATION
|
(Exact
name of registrant as specified in its charter)
|
|
Washington |
91-1691604 |
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification Number)
|
|
|
10
South First Avenue, Walla Walla, Washington 99362
|
(Address of principal executive
offices and zip code)
|
|
Registrant's
telephone number, including area code: (509)
527-3636
|
|
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during
the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to
such
|
filing
requirements for the past 90 days.
|
Yes
[X] |
No
[ ] |
|
Indicate
by check mark whether the registrant has submitted electronically and
posted on its corporate website, if any, every Interactive Data File
required
to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for
such
|
shorter
period that the registrant was required to submit and post such
files).
|
Yes
|
[
] |
No
|
[ ] |
|
|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.
See
the definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange
Act.
|
Large
accelerated filer [ ]
|
Accelerated
filer [X] |
Non-accelerated
filer [ ]
|
Smaller
reporting company [ ]
|
|
|
|
|
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
|
Yes
|
[
] |
No
|
[X] |
|
|
APPLICABLE
ONLY TO CORPORATE ISSUERS
|
|
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
|
|
Title of
class:
Common
Stock, $.01 par value per share
|
|
As of April 30,
2010
23,539,984
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, 2010 and December 31,
2009
|
3
|
|
|
Consolidated
Statements of Operations for the Quarters Ended March 31, 2010 and
2009
|
4
|
|
|
Consolidated
Statements of Comprehensive Income (Loss) for the Quarters Ended March 31,
2010 and 2009
|
5
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity for the Quarters Ended March
31, 2010 and 2009
|
6
|
|
|
Consolidated
Statements of Cash Flows for the Quarters Ended March 31, 2010 and
2009
|
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
|
32
|
|
|
Executive
Overview
|
32
|
|
|
Comparison
of Financial Condition at March 31, 2010 and December 31,
2009
|
36
|
|
|
Comparison
of Results of Operations for the Quarters Ended March 31, 2010 and
2009
|
37
|
|
|
Asset
Quality
|
41
|
|
|
Liquidity
and Capital Resources
|
45
|
|
|
Capital
Requirements
|
46
|
|
|
Item
3 - Quantitative and Qualitative Disclosures About Market
Risk
|
|
|
|
Market
Risk and Asset/Liability Management
|
47
|
|
|
Sensitivity
Analysis
|
47
|
|
|
Item
4 - Controls and Procedures
|
51
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|
|
PART
II - OTHER INFORMATION
|
|
|
|
Item
1 - Legal Proceedings
|
52
|
|
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Item
1A - Risk Factors
|
52
|
|
|
Item
2 - Unregistered Sales of Equity Securities and Use of Proceeds
|
53
|
|
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Item
3 - Defaults upon Senior Securities
|
53
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|
Item
4 – [Removed and Reserved]
|
|
|
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Item
5 - Other Information
|
53
|
|
|
Item
6 - Exhibits
|
54
|
|
|
SIGNATURES
|
56
|
BANNER
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(In thousands, except shares)
March
31, 2010 and December 31, 2009
|
|
March
31
|
|
|
December
31
|
|
ASSETS
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
277,752
|
|
$
|
323,005
|
|
|
|
|
|
|
|
|
|
Securities—trading,
cost $162,997 and $192,853, respectively
|
|
|
138,659
|
|
|
147,151
|
|
Securities—available-for-sale,
cost $95,376 and $95,174, respectively
|
|
|
96,718
|
|
|
95,667
|
|
Securities—held-to-maturity,
fair value $76,390 and $76,489, respectively
|
|
|
73,555
|
|
|
74,834
|
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank (FHLB) stock
|
|
|
37,371
|
|
|
37,371
|
|
Loans
receivable:
|
|
|
|
|
|
|
|
Held
for sale, fair value $4,472 and $4,534, respectively
|
|
|
4,398
|
|
|
4,497
|
|
Held
for portfolio
|
|
|
3,684,459
|
|
|
3,785,624
|
|
Allowance
for loan losses
|
|
|
(95,733
|
)
|
|
(95,269
|
)
|
|
|
|
3,593,124
|
|
|
3,694,852
|
|
|
|
|
|
|
|
|
|
Accrued
interest receivable
|
|
|
18,501
|
|
|
18,998
|
|
Real
estate owned, held for sale, net
|
|
|
95,074
|
|
|
77,743
|
|
Property
and equipment, net
|
|
|
101,541
|
|
|
103,542
|
|
Other
intangibles, net
|
|
|
10,426
|
|
|
11,070
|
|
Deferred
income tax asset, net
|
|
|
14,470
|
|
|
14,811
|
|
Income
taxes receivable, net
|
|
|
18,844
|
|
|
17,436
|
|
Bank-owned
life insurance (BOLI)
|
|
|
55,125
|
|
|
54,596
|
|
Other
assets
|
|
|
50,551
|
|
|
51,145
|
|
|
|
$
|
4,581,711
|
|
$
|
4,722,221
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
Non-interest-bearing
|
|
$
|
549,291
|
|
$
|
582,480
|
|
Interest-bearing
transaction and savings accounts
|
|
|
1,404,301
|
|
|
1,341,145
|
|
Interest-bearing
certificates
|
|
|
1,896,186
|
|
|
1,941,925
|
|
|
|
|
3,849,778
|
|
|
3,865,550
|
|
|
|
|
|
|
|
|
|
Advances
from FHLB at fair value
|
|
|
62,108
|
|
|
189,779
|
|
Other
borrowings
|
|
|
177,244
|
|
|
176,842
|
|
Junior
subordinated debentures at fair value (issued in connection with Trust
Preferred Securities)
|
|
|
48,147
|
|
|
47,694
|
|
Accrued
expenses and other liabilities
|
|
|
24,049
|
|
|
24,020
|
|
Deferred
compensation
|
|
|
13,661
|
|
|
13,208
|
|
|
|
|
4,174,987
|
|
|
4,317,093
|
|
COMMITMENTS
AND CONTINGENCIES (Note 16)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
Preferred
stock - $0.01 par value, 500,000 shares authorized; Series A – liquidation
preference
|
|
|
|
|
|
|
|
$1,000
per share, 124,000 shares issued and outstanding
|
|
|
117,805
|
|
|
117,407
|
|
Common
stock and paid in capital - $0.01 par value per share, 75,000,000 shares
authorized, 21,101,149 shares issued:
22,860,768
shares and 21,299,209 shares outstanding at March 31, 2010 and December
31, 2009, respectively
|
|
|
335,877
|
|
|
331,538
|
|
Retained
earnings (accumulated deficit)
|
|
|
(45,775
|
)
|
|
(42,077
|
)
|
Accumulated
other comprehensive income:
|
|
|
|
|
|
|
|
Unrealized
gain on securities available for sale and/or transferred to held to
maturity
|
|
|
804
|
|
|
249
|
|
Unearned
shares of common stock issued to Employee Stock Ownership Plan (ESOP)
trust at cost:
|
|
|
|
|
|
|
|
240,381
restricted shares outstanding at March 31, 2010 and December 31,
2009
|
|
|
(1,987
|
)
|
|
(1,987
|
)
|
|
|
|
|
|
|
|
|
Carrying
value of shares held in trust for stock related compensation
plans
|
|
|
(8,888
|
)
|
|
(9,045
|
)
|
Liability
for common stock issued to deferred, stock related, compensation
plans
|
|
|
8,888
|
|
|
9,043
|
|
|
|
|
--
|
|
|
(2
|
)
|
|
|
|
406,724
|
|
|
405,128
|
|
|
|
$
|
4,581,711
|
|
$
|
4,722,221
|
|
See
selected notes to consolidated financial statements
BANNER
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except for per share amounts)
For
the Quarters Ended March 31, 2010 and 2009
|
|
|
|
|
Quarters
Ended
|
|
|
|
|
|
|
March
31
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
INTEREST
INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
receivable
|
|
|
|
|
|
|
$
|
52,759
|
|
$
|
56,347
|
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
1,126
|
|
|
1,801
|
|
Other
securities and cash equivalents
|
|
|
|
|
|
|
|
2,085
|
|
|
2,183
|
|
|
|
|
|
|
|
|
|
55,970
|
|
|
60,331
|
|
INTEREST
EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
15,798
|
|
|
23,092
|
|
FHLB
advances
|
|
|
|
|
|
|
|
361
|
|
|
720
|
|
Other
borrowings
|
|
|
|
|
|
|
|
634
|
|
|
227
|
|
Junior
subordinated debentures
|
|
|
|
|
|
|
|
1,027
|
|
|
1,333
|
|
|
|
|
|
|
|
|
|
17,820
|
|
|
25,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income before provision for loan losses
|
|
|
|
|
|
|
|
38,150
|
|
|
34,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR LOAN LOSSES
|
|
|
|
|
|
|
|
14,000
|
|
|
22,000
|
|
Net
interest income
|
|
|
|
|
|
|
|
24,150
|
|
|
12,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
OPERATING INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit
fees and other service charges
|
|
|
|
|
|
|
|
5,169
|
|
|
4,936
|
|
Mortgage
banking operations
|
|
|
|
|
|
|
|
948
|
|
|
2,715
|
|
Loan
servicing fees (expense)
|
|
|
|
|
|
|
|
313
|
|
|
(270
|
)
|
Miscellaneous
|
|
|
|
|
|
|
|
617
|
|
|
520
|
|
|
|
|
|
|
|
|
|
7,047
|
|
|
7,901
|
|
Other-than-temporary
impairment losses
|
|
|
|
|
|
|
|
(1,231
|
)
|
|
--
|
|
Net
change in valuation of financial instruments carried at fair
value
|
|
|
|
|
|
|
|
1,908
|
|
|
(3,253
|
)
|
Total
other operating income
|
|
|
|
|
|
|
|
7,724
|
|
|
4,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary
and employee benefits
|
|
|
|
|
|
|
|
16,559
|
|
|
17,601
|
|
Less
capitalized loan origination costs
|
|
|
|
|
|
|
|
(1,605
|
)
|
|
(2,116
|
)
|
Occupancy
and equipment
|
|
|
|
|
|
|
|
5,604
|
|
|
6,054
|
|
Information/computer
data services
|
|
|
|
|
|
|
|
1,506
|
|
|
1,534
|
|
Payment
and card processing expenses
|
|
|
|
|
|
|
|
1,424
|
|
|
1,453
|
|
Professional
services
|
|
|
|
|
|
|
|
1,287
|
|
|
1,194
|
|
Advertising
and marketing
|
|
|
|
|
|
|
|
1,950
|
|
|
1,832
|
|
Deposit
insurance
|
|
|
|
|
|
|
|
2,132
|
|
|
1,497
|
|
State/municipal
business and use taxes
|
|
|
|
|
|
|
|
480
|
|
|
540
|
|
REO
operations
|
|
|
|
|
|
|
|
3,058
|
|
|
623
|
|
Amortization
of core deposit intangibles
|
|
|
|
|
|
|
|
644
|
|
|
690
|
|
Miscellaneous
|
|
|
|
|
|
|
|
2,376
|
|
|
2,891
|
|
Total
other operating expenses
|
|
|
|
|
|
|
|
35,415
|
|
|
33,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before provision for (benefit from) income taxes
|
|
|
|
|
|
|
|
(3,541
|
)
|
|
(16,186
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR (BENEFIT FROM) INCOME TAXES
|
|
|
|
|
|
|
|
(2,024
|
)
|
|
(6,923
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
|
|
|
|
|
|
(1,517
|
)
|
|
(9,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PREFERRED
STOCK DIVIDEND AND DISCOUNT ACCRETION
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividend
|
|
|
|
|
|
|
|
1,550
|
|
|
1,550
|
|
Preferred
stock discount accretion
|
|
|
|
|
|
|
|
398
|
|
|
373
|
|
NET
INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
|
|
|
|
|
|
|
$
|
(3,465
|
)
|
$
|
(11,186
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
$
|
(0.16
|
)
|
$
|
(0.65
|
)
|
Diluted
|
|
|
|
|
|
|
$
|
(0.16
|
)
|
$
|
(0.65
|
)
|
Cumulative
dividends declared per common share:
|
|
|
|
|
|
|
$
|
0.01
|
|
$
|
0.01
|
|
See
selected notes to consolidated financial statements
BANNER
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
For
the Quarters Ended March 31, 2010 and 2009
|
|
|
|
|
Quarters
Ended
March
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
NET
INCOME (LOSS)
|
|
|
|
|
|
|
$
|
(1,517
|
)
|
$
|
(9,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding gain (loss) during the period, net of deferred
income
tax (benefit) of $306 and $150, respectively
|
|
|
|
|
|
|
|
543
|
|
|
264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of unrealized loss on tax exempt securities transferred from
available-for-sale to held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
14
|
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
|
555
|
|
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME (LOSS)
|
|
|
|
|
|
|
$
|
(962
|
)
|
$
|
(8,985
|
)
|
See
selected notes to consolidated financial statements
BANNER
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands)
For
the Quarters Ended March 31, 2010 and 2009
|
Preferred
Stock
|
|
Common
Stock
and
Paid
in
Capital
|
|
Retained
Earnings
(Accumulated
Deficit)
|
|
Accumulated
Other Comprehensive
Income
|
|
Unearned
Restricted
ESOP Shares
|
|
Carrying
Value, Net of Liability, Of Shares Held in Trust for Stock-Related
Compensation Plans
|
|
Stockholders’
Equity
|
|
Balance,
January 1, 2010
|
$
|
117,407
|
|
$
|
331,538
|
|
$
|
(42,077
|
)
|
$
|
249
|
|
$
|
(1,987
|
)
|
$
|
(2
|
)
|
$
|
405,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) |
|
|
|
|
|
|
|
(1,517 |
) |
|
|
|
|
|
|
|
|
|
|
(1,517 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in valuation of securities—available-for-
sale, net of income tax
|
|
|
|
|
|
|
|
|
|
|
543
|
|
|
|
|
|
|
|
|
543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of unrealized loss on tax exempt
securities transferred from available-for-sale to
held-to-maturity, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of preferred stock discount
|
|
398
|
|
|
|
|
|
(398
|
)
|
|
|
|
|
|
|
|
|
|
|
--
|
|
Accrual of dividends on preferred stock
|
|
|
|
|
|
|
|
(1,550
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,550
|
)
|
Accrual
of dividends on common stock
($.01/share cumulative)
|
|
|
|
|
|
|
|
(233
|
)
|
|
|
|
|
|
|
|
|
|
|
(233
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock for
stockholder reinvestment program, net of
registration expenses
|
|
|
|
|
4,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of compensation related to MRP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of compensation related to stock options
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
March 31, 2010
|
$
|
117,805
|
|
$
|
335,877
|
|
$
|
(45,775
|
)
|
$
|
804
|
|
$
|
(1,987
|
)
|
$
|
--
|
|
$
|
406,724
|
|
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, 2010 and 2009
|
Preferred
Stock
|
|
Common
Stock
and
Paid
in
Capital
|
|
Retained
Earnings
|
|
Accumulated
Other Comprehensive
Income
|
|
Unearned
Restricted
ESOP Shares
|
|
Carrying
Value, Net of Liability, Of Shares Held in Trust for Stock-Related
Compensation Plans
|
|
Stockholders’
Equity
|
|
Balance,
January 1, 2009
|
$
|
115,915
|
|
$
|
316,740
|
|
$
|
2,150
|
|
$
|
572
|
|
$
|
(1,987
|
)
|
$
|
(42
|
)
|
$
|
433,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
|
|
|
|
|
(9,263
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in valuation of securities—available-for-
sale, net of income tax
|
|
|
|
|
|
|
|
|
|
|
264
|
|
|
|
|
|
|
|
|
264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of unrealized loss on tax exempt
securities transferred from available-for-sale to
held-to-maturity, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
registration costs for issuance of
preferred stock
|
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion
of preferred stock discount
|
|
373
|
|
|
|
|
|
(373
|
)
|
|
|
|
|
|
|
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual
of dividends on preferred stock
|
|
|
|
|
|
|
|
(1,550
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,550)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual
of dividends on common stock ($.01/share
cumulative)
|
|
|
|
|
|
|
|
(174
|
)
|
|
|
|
|
|
|
|
|
|
|
(174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock for
stockholder reinvestment program, net of
registration expenses
|
|
|
|
|
1,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of compensation related to MRP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of compensation related to stock
options
|
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
March 31, 2009
|
$
|
116,288
|
|
$
|
318,628
|
|
$
|
(9,210
|
)
|
$
|
850
|
|
$
|
(1,987
|
)
|
$
|
(26
|
)
|
$
|
424,543
|
|
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, 2010 and 2009
|
|
|
|
|
|
|
|
Quarters
Ended
March
31
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMON
STOCK—SHARES ISSUED AND OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock, shares issued, beginning of period
|
|
|
|
|
|
|
|
21,539
|
|
|
17,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
and retirement of common stock
|
|
|
|
|
|
|
|
--
|
|
|
--
|
|
Issuance
of common stock for exercised stock options and/or
employee stock plans
|
|
|
|
|
|
|
|
--
|
|
|
--
|
|
Issuance
of common stock for stockholder reinvestment program
|
|
|
|
|
|
|
|
1,562
|
|
|
493
|
|
Net
number of shares issued during the period
|
|
|
|
|
|
|
|
1,562
|
|
|
493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMON
SHARES ISSUED AND OUTSTANDING, END OF PERIOD
|
|
|
|
|
|
|
|
23,101
|
|
|
17,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
COMMON STOCK—SHARES OUTSTANDING
|
|
|
|
|
|
|
|
22,861
|
|
|
17,405
|
|
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, 2010 and 2009
|
|
|
|
|
|
|
|
Quarters
Ended
March
31
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
|
|
|
|
$
|
(1,517
|
)
|
$
|
(9,263
|
)
|
Adjustments
to reconcile net income (loss) to net cash provided by
operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
|
2,319
|
|
|
2,538
|
|
Deferred
income and expense, net of amortization
|
|
|
|
|
|
|
|
609
|
|
|
(937
|
)
|
Amortization
of core deposit intangibles
|
|
|
|
|
|
|
|
644
|
|
|
690
|
|
Other-than-temporary
impairment losses
|
|
|
|
|
|
|
|
1,231
|
|
|
1,078
|
|
Net
change in valuation of financial instruments carried at fair
value
|
|
|
|
|
|
|
|
(1,908
|
)
|
|
2,175
|
|
Purchases
of securities—trading
|
|
|
|
|
|
|
|
--
|
|
|
(23,785
|
)
|
Principal
repayments and maturities of securities—trading
|
|
|
|
|
|
|
|
9,394
|
|
|
53,965
|
|
Deferred
taxes
|
|
|
|
|
|
|
|
35
|
|
|
(1,171
|
)
|
Equity-based
compensation
|
|
|
|
|
|
|
|
19
|
|
|
49
|
|
Increase
in cash surrender value of bank-owned life insurance
|
|
|
|
|
|
|
|
(529
|
)
|
|
(483
|
)
|
Gain
on sale of loans, excluding capitalized servicing rights
|
|
|
|
|
|
|
|
(692
|
)
|
|
(1,205
|
)
|
Loss
(gain) on disposal of real estate held for sale and property
and
equipment
|
|
|
|
|
|
|
|
708
|
|
|
(70
|
)
|
Provision
for losses on loans and real estate held for sale
|
|
|
|
|
|
|
|
15,067
|
|
|
22,050
|
|
Origination
of loans held for sale
|
|
|
|
|
|
|
|
(67,132
|
)
|
|
(152,985
|
)
|
Proceeds
from sales of loans held for sale
|
|
|
|
|
|
|
|
67,231
|
|
|
149,327
|
|
Net
change in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
|
|
|
|
|
(326
|
)
|
|
(5,216
|
)
|
Other
liabilities
|
|
|
|
|
|
|
|
408
|
|
|
(2,051
|
)
|
Net
cash provided from operating activities
|
|
|
|
|
|
|
|
25,561
|
|
|
34,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of securities available for sale
|
|
|
|
|
|
|
|
(5,022
|
)
|
|
(18,672
|
)
|
Principal
repayments and maturities of securities available for sale
|
|
|
|
|
|
|
|
2,778
|
|
|
5,389
|
|
Proceeds
from sales of securities available for sale
|
|
|
|
|
|
|
|
1,965
|
|
|
--
|
|
Purchases
of securities held to maturity
|
|
|
|
|
|
|
|
--
|
|
|
(7,649
|
)
|
Principal
repayments and maturities of securities held to maturity
|
|
|
|
|
|
|
|
1,269
|
|
|
25
|
|
Principal
repayments of loans, net of originations
|
|
|
|
|
|
|
|
59,807
|
|
|
14,401
|
|
Purchases
of loans and participating interest in loans
|
|
|
|
|
|
|
|
(12
|
)
|
|
--
|
|
Purchases
of property and equipment, net
|
|
|
|
|
|
|
|
(318
|
)
|
|
(2,735
|
)
|
Proceeds
from sale of real estate held for sale, net
|
|
|
|
|
|
|
|
9,078
|
|
|
2,056
|
|
Other
|
|
|
|
|
|
|
|
(40
|
)
|
|
(139
|
)
|
Net
cash provided from (used by) investing activities
|
|
|
|
|
|
|
|
69,505
|
|
|
(7,324
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
in deposits
|
|
|
|
|
|
|
|
(15,772
|
)
|
|
(151,346
|
)
|
Proceeds
from FHLB advances
|
|
|
|
|
|
|
|
--
|
|
|
91,200
|
|
Repayment
of FHLB advances
|
|
|
|
|
|
|
|
(127,502
|
)
|
|
(30,002
|
)
|
Increase
in other borrowings, net
|
|
|
|
|
|
|
|
400
|
|
|
35,964
|
|
Cash
dividends paid
|
|
|
|
|
|
|
|
(1,767
|
)
|
|
(2,293
|
)
|
Cash
proceeds from issuance of stock, net of registration costs
|
|
|
|
|
|
|
|
4,322
|
|
|
1,855
|
|
Net
cash used by financing activities
|
|
|
|
|
|
|
|
(140,319
|
)
|
|
(54,622
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
DECREASE IN CASH AND DUE FROM BANKS
|
|
|
|
|
|
|
|
(45,253
|
)
|
|
(27,240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND DUE FROM BANKS, BEGINNING OF PERIOD
|
|
|
|
|
|
|
|
323,005
|
|
|
102,750
|
|
CASH
AND DUE FROM BANKS, END OF PERIOD
|
|
|
|
|
|
|
$
|
277,752
|
|
$
|
75,510
|
|
(Continued
on next page)
BANNER
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
(In thousands)
For
the Quarters Ended March 31, 2010 and 2009
|
|
|
|
|
|
|
|
Quarters
Ended
March
31
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid in cash
|
|
|
|
|
|
|
$
|
18,868
|
|
$
|
25,600
|
|
Taxes
paid (received) in cash
|
|
|
|
|
|
|
|
(561
|
)
|
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
28,218
|
|
|
19,262
|
|
Net
decrease in accrued dividends payable
|
|
|
|
|
|
|
|
(16
|
)
|
|
(569
|
)
|
Change
in other assets/liabilities
|
|
|
|
|
|
|
|
213
|
|
|
179
|
|
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 Islanders Bank. Banner Bank is a
Washington-chartered commercial bank that conducts business from its main office
in Walla Walla, Washington and, as of March 31, 2010, its 86 branch offices and
seven 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).
In the
opinion of management, the accompanying consolidated statements of financial
condition and related consolidated statements of operations, comprehensive
income (loss), changes in stockholders’ equity and cash flows reflect all
adjustments (which include reclassifications and normal recurring adjustments)
that are necessary for a fair presentation in conformity with U.S. Generally
Accepted Accounting Principles (GAAP). The preparation of the
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect amounts reported in the financial
statements and the disclosure of contingent assets and liabilities as of the
date of the statement of financial condition in the accompanying
notes. 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 the
financial statements. These policies relate to (i) the methodology
for the recognition of interest income, (ii) determination of the provision and
allowance for loan and lease losses, (iii) the valuation of financial assets and
liabilities recorded at fair value, including other-than-temporary impairment
losses (OTTI), (iv) the valuation of intangibles, such as goodwill, core deposit
intangibles and mortgage servicing rights, (v) the valuation of real estate held
for sale and (vi) deferred tax assets and liabilities. These policies
and the judgments, estimates and assumptions are described in greater detail in
Management’s Discussion and Analysis of Financial Condition and Results of
Operations (Critical Accounting Policies) in our Annual Report on Form 10-K for
the year ended December 31, 2009 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, because of the sensitivity of the financial statements
to these critical accounting policies, the use of other judgments, estimates and
assumptions could result in material differences in our results of operations or
financial condition. Further, subsequent changes in economic or
market conditions could have a material impact on these estimates and the
Company’s financial condition and operating results in future
periods.
The
Financial Accounting Standards Board’s (FASB) Accounting Standards Codification
(ASC) became effective on July 1, 2009. At that date, the ASC became
the source of authoritative GAAP recognized by the FASB to be applied by
nongovernmental entities, superseding existing FASB, American Institute of
Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF) and
related literature. Rules and interpretive releases of the SEC under
the authority of federal securities laws are also sources of authoritative GAAP
for SEC registrants. All other accounting literature is considered
non-authoritative. The implementation of the ASC affects the way
companies refer to GAAP standards in financial statements and accounting
policies, but it has not had a material effect on the Company’s Consolidated
Financial Statements.
Certain
information and disclosures normally included in financial statements prepared
in accordance with GAAP have been condensed or omitted pursuant to the rules and
regulations of the SEC. Certain reclassifications have been made to
the 2009 Consolidated Financial Statements and/or schedules to conform to the
2010 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, 2009 filed with the
SEC. Interim results are not necessarily indicative of results for a
full year.
Note
2: RECENT DEVELOPMENTS AND SIGNIFICANT EVENTS
Regulatory
Actions: On March 23, 2010, Banner Bank entered
into a Memorandum of Understanding (MOU) with the FDIC and Washington
DFI. The Company also entered into a similar MOU with the Federal
Reserve Bank of San Francisco on March 29, 2010. Under its MOU, Banner Bank is required,
among other things, to develop and implement plans to reduce commercial real
estate concentrations; to improve asset quality and reduce classified assets; to
improve profitability; and to increase Tier 1 leverage capital to equal or
exceed 10% of average assets. In addition, Banner Bank will not be
able to pay cash dividends to Banner Corporation without prior approval from the
FDIC and Washington DFI and the Company and Banner Bank must obtain
prior regulatory approval before adding any new director or senior executive
officer or changing the responsibilities of any current senior executive
officer. Further, the Company may not pay any dividends on common or
preferred stock, pay interest or principal on the balance of its junior
subordinated debentures or repurchase our common stock without the prior written
non-objection of the Federal Reserve Bank. See Item 1A, Risk Factors—“We are required to comply with the
terms of memoranda of understanding issued by the FDIC and DFI and the Federal
Reserve and lack of compliance could result in additional regulatory
actions.”
FDIC
Prepayment: On November 12, 2009, the FDIC adopted a final
rule that required insured depository institutions to prepay an estimate of
their expected quarterly deposit insurance premiums for the fourth quarter of
2009 and for the three years ended December 31, 2010, 2011 and
2012. Insured institutions were required to deposit funds with the
FDIC in the amount of the prepaid assessment on December 30,
2009. The
insured
institutions will not receive interest on the deposited funds. For
purposes of calculating an institution’s prepaid assessment amount, for the
fourth quarter of 2009 and all of 2010, that institution’s assessment rate was
its total base assessment rate in effect on September 30, 2009. That
rate was then increased by three basis points for all of 2011 and
2012. Again, for purposes of calculating the prepaid amount, an
institution’s third quarter 2009 assessment base was assumed to increase
quarterly by an estimated five percent annual growth rate through the end of
2012. Each institution was directed to record the entire amount of
its prepaid assessment as a prepaid expense (asset) as of December 30,
2009. Thereafter, each institution will record an expense (charge to
earnings) for its regular quarterly assessment for the quarter and an offsetting
credit to the prepaid assessment until the asset is exhausted. Once
the asset is exhausted, the institution will record an expense and an accrued
expense payable each quarter for its regular assessment, which would be paid in
arrears to the FDIC at the end of the following quarter. If the
prepaid assessment is not exhausted by June 30, 2013, any remaining amount will
be returned to the institution. For Banner Corporation, the
consolidated balance of the prepaid assessment was $27.5 million at March 31,
2010 and is recorded among “other assets” in the Consolidated Statement of
Financial Condition.
FDIC Special
Assessment: On May 22, 2009, the FDIC adopted a final rule
imposing a five basis point special assessment on each insured depository
institution’s total assets minus Tier 1 capital as of June 30, 2009, with the
maximum amount of the special assessment for any institution not to exceed ten
basis points times the institution’s assessment base for the second quarter 2009
risk-based assessment. The special assessment was collected on
September 30, 2009 at the same time the regular quarterly risk based assessment
for the second quarter of 2009 was collected. For Banner Corporation,
this assessment was $2.1 million, which was recognized in other operating
expenses during the quarter ended June 30, 2009. The FDIC Board may
vote to impose additional special assessments if the FDIC estimates that the
Deposit Insurance Fund reserve ratio will fall to a level that the Board
believes would adversely affect public confidence or to a level that will be
close to or below zero.
FDIC Temporary Liquidity Guarantee
Program: Banner Corporation, Banner Bank and Islanders Bank have
chosen to participate in the FDIC’s Temporary Liquidity Guarantee Program (the
“TLGP”), which applies to all U.S. depository institutions insured by the FDIC
and all United States bank holding companies, unless they have opted
out. Under the TLGP, the FDIC guarantees certain senior unsecured
debt of insured institutions and their holding companies, as well as
non-interest-bearing transaction account deposits. Under the
transaction account guarantee component of the TLGP, all non-interest-bearing
and certain interest-bearing transaction accounts maintained at Banner Bank and
Islanders Bank are insured in full by the FDIC until December 31, 2010,
regardless of the standard maximum deposit insurance amounts. The
Banks are required to pay a fee (annualized) on balances of each covered account
in excess of $250,000 while the extra deposit insurance is in
place. The annualized fee for the transaction account guarantee
program is 10 basis points through December 31, 2009 and will be within a range
from 15 to 25 basis points from January 1 through December 31,
2010. On March 31, 2009, Banner Bank completed an offering of $50
million of qualifying senior bank notes covered by the TLGP at a fixed rate of
2.625% which mature on March 31, 2012. Under the debt guarantee
component of the TLGP, the FDIC will pay the unpaid principal and interest on an
FDIC-guaranteed debt instrument upon the uncured failure of the participating
entity to make a timely payment of principal or interest. Under the
terms of the TLGP, the Bank is not permitted to use the proceeds from the sale
of securities guaranteed under the TLGP to prepay any of its other debt that is
not guaranteed by the FDIC. Banner Bank is required to pay a 1.00%
fee (annualized) on this debt, which will result in a total fee of $1.5 million
over three years. None of the senior notes are redeemable prior to
maturity.
Note
3: ACCOUNTING STANDARDS RECENTLY ADOPTED OR ISSUED
In
December 2009, FASB issued ASU No. 2009-17, Transfers and Servicing (Topic
860)—Accounting for Transfers of Financial Assets. This update
codifies SFAS No. 166,
Accounting for Transfers of Financial Assets—an Amendment of FASB Statement No.
140, which was previously issued by FASB in June 2009 but was not
included in the original codification. ASU 2009-17 eliminates the
concept of a qualifying special-purpose entity, creates more stringent
conditions for reporting a transfer of a portion of a financial asset as a sale,
clarifies other sale-accounting criteria, and changes the initial measurement of
a transferor’s interest in transferred financial assets. This
statement was effective for annual reporting periods beginning after November
15, 2009, and for interim periods therein. This standard will
primarily impact the Company’s accounting and reporting of transfers
representing a portion of a financial asset for which the Company has a
continuing involvement. In order to recognize the transfer of a
portion of a financial asset as a sale, the transferred portion and any portion
that continues to be held by the transferor must represent a participating
interest, and the transfer of the participating interest must meet the
conditions for surrender of control. To qualify as a participating
interest, (i) the portions of a financial asset must represent a proportionate
ownership interest in an entire financial asset, (ii) from the date of transfer,
all cash flows received from the entire financial asset must be divided
proportionately among the participating interest holders in an amount equal to
their share of ownership, (iii) involve no recourse (other than standard
representation and warranties) to, or subordination by, any participating
interest holder, and (iv) no party has the right to pledge or
exchange the entire financial asset. If the participating interest or
surrender of control criteria are not met, the transfer is not accounted for as
a sale and derecognition of the asset is not appropriate. Rather, the
transaction is accounted for as a secured borrowing arrangement. The
impact of certain participations being reported as secured borrowings rather
than derecognizing a portion of a financial asset would increase total assets,
liabilities and their respective interest income and expense. An
increase in total assets also increases regulatory risk-weighted assets and
could negatively impact our capital ratios. The adoption of this ASU
did not have a material impact on the Company’s consolidated financial
statements.
In
December 2009, FASB issued ASU No. 2009-18, Consolidations (Topic
810)—Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities. This update codifies SFAS No. 167, Amendments to FASB Interpretation
No. 46(R), which was previously issued by FASB in June 2009 but was not
included in the original codification. ASU 2009-18 eliminates FASB
Interpretations 46(R) (FIN 46(R)) exceptions to consolidating qualifying
special-purpose entities, contains new criteria for determining the primary
beneficiary, and increases the frequency of required reassessments to determine
whether a company is the primary beneficiary of a variable interest entity
(VIE). The new guidance also contains a new requirement that any term,
transaction, or arrangement that does not have a substantive effect on an
entity’s status as a VIE, a company’s power over a VIE, or a company’s
obligation to absorb losses or its right to receive benefits of an entity
must be
disregarded in applying the previous provisions. The elimination of
the qualifying special-purpose entity concept and its consolidation exceptions
means more entities will be subject to consolidation assessments and
reassessments. This statement requires additional disclosures
regarding an entity’s involvement in a VIE. This statement was
effective for annual reporting periods beginning after November 15, 2009, and
for interim periods therein. The adoption of this guidance did not
have a material impact on the Company's consolidated financial
statements.
In
January 2010, the Board of Governors of the Federal Reserve System issued final
risk-based capital rules related to the adoption of FASB ASC Topic 860-10 and
FASB ASC Topic 810-10. Banking organizations affected by these recent
pronouncements generally will be subject to higher regulatory capital
requirements intended to better align risk-based capital levels with the actual
risks of certain exposures. The adoption of the new risk-based
capital rules in relation to these new pronouncements did not have a material
impact on the Company’s consolidated financial statements.
In
January 2010, FASB issued ASU No. 2010-06, Fair Value Measurements and
Disclosures (Topic 820)—Improving Disclosures about Fair Value
Measurements. ASU No. 2010-06 requires:
·
|
fair
value disclosures by each class of assets and liabilities (generally a
subset within a line item as presented in the statement of financial
position) rather than major
category,
|
·
|
for
items measured at fair value on a recurring basis, the amounts of
significant transfers between Levels 1 and 2, and transfers into and out
of Level 3, and the reasons for those transfers, including separate
discussion related to the transfers into each level apart from transfers
out of each level, and
|
·
|
gross
presentation of the amounts of purchases, sales, issuances, and
settlements in the Level 3 recurring measurement
reconciliation.
|
Additionally,
the ASU clarifies that a description of the valuation techniques(s) and inputs
used to measure fair values is required for both recurring and nonrecurring fair
value measurements. Also, if a valuation technique has changed,
entities should disclose that change and the reason for the
change. Disclosures other than the gross presentation changes in the
Level 3 reconciliation are effective for the first reporting period beginning
after December 15, 2009. The requirement to present the Level 3
activity of purchases, sales, issuances, and settlements on a gross basis will
be effective for fiscal years beginning after December 15, 2010. The
sections of this ASU already adopted did not have a material impact on the
Company’s consolidated financial statements. The further adoption of
the requirement to present the Level 3 reconciliation differently is not
expected to have a material effect on the Company’s consolidated financial
statements.
In
February 2010, FASB issued ASU No. 2010-09, Subsequent Events (Topic
855)—Amendments to Certain Recognition and Disclosure
Requirements. ASU No. 2010-09 establishes separate subsequent
event recognition criteria and disclosure requirements for SEC
filers. SEC filers are defined in this update as entities that are
required to file or to furnish their financial statements with either the SEC or
another appropriate agency, (such as the Federal Deposit Insurance Corporation
or Office of Thrift Supervision) under Section 12(i) of the Securities and Exchange Act of
1934, as amended. Effective with the release date, the
financial statements of SEC filers will no longer disclose either the date
through with subsequent events were reviewed or that subsequent events were
evaluated through the date the financial statements were issued. The
requirement to evaluate subsequent events through the date of issuance is still
in place; only the disclosure is affected. This ASU also removes the
requirement to make those disclosures in financial statements revised for either
a correction of an error or a retrospective application of an accounting
change. The adoption of this ASU did not have a material impact on
the Company’s consolidated financial statements.
Note
4: BUSINESS SEGMENTS
The
Company is managed by legal entity and not by lines of business. Each
of the Banks is a community oriented commercial bank chartered in the State of
Washington. The Banks’ primary business is that of a traditional
banking institution, gathering deposits and originating loans for its 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.
GAAP
establishes 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. We have
determined that the Company’s current business and operations consist of a
single business segment and have presented our financial statements
accordingly.
Note
5: INTEREST-BEARING DEPOSITS AND SECURITIES
The
following table sets forth additional detail regarding our interest-bearing
deposits and securities at the dates indicated (includes securities—trading,
available-for-sale and held-to-maturity, all at carrying value) (in
thousands):
|
March
31
|
|
December
31
|
|
March
31
|
|
|
2010
|
|
2009
|
|
2009
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits included in cash and due from banks
|
$
|
236,629
|
|
$
|
244,641
|
|
$
|
2,699
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
or related securities
|
|
|
|
|
|
|
|
|
|
GNMA
|
|
17,514
|
|
|
18,458
|
|
|
32,139
|
|
FHLMC
|
|
40,106
|
|
|
43,469
|
|
|
59,576
|
|
FNMA
|
|
35,907
|
|
|
37,549
|
|
|
44,548
|
|
Private
issuer
|
|
3,881
|
|
|
6,465
|
|
|
8,836
|
|
Total
mortgage-backed securities
|
|
97,408
|
|
|
105,941
|
|
|
145,099
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Agency obligations
|
|
95,247
|
|
|
94,367
|
|
|
44,446
|
|
Taxable
municipal bonds
|
|
3,243
|
|
|
3,717
|
|
|
4,651
|
|
Corporate
bonds
|
|
43,366
|
|
|
43,267
|
|
|
35,758
|
|
Total
other taxable securities
|
|
141,856
|
|
|
141,351
|
|
|
84,855
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt
municipal bonds
|
|
69,287
|
|
|
70,018
|
|
|
66,170
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities (excludes FHLB stock)
|
|
381
|
|
|
342
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
|
Total
securities
|
|
308,932
|
|
|
317,652
|
|
|
296,327
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
stock
|
|
37,371
|
|
|
37,371
|
|
|
37,371
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
582,932
|
|
$
|
599,664
|
|
$
|
336,397
|
|
Securities—Available-for-Sale: The
amortized cost and estimated fair value of securities available for sale at
March 31, 2010 and December 31, 2009 are summarized as follows (dollars in
thousands):
|
March
31, 2010
|
|
|
Amortized
cost
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Estimated
fair
value
|
|
|
Percent
of
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government and agency obligations
|
$
|
58,680
|
|
$
|
171
|
|
$
|
(96
|
)
|
$
|
58,755
|
|
|
60.7
|
%
|
Mortgage-backed
or related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC
collateralized mortgage obligations
|
|
15,961
|
|
|
607
|
|
|
--
|
|
|
16,568
|
|
|
17.2
|
%
|
GNMA
certificates
|
|
16,652
|
|
|
862
|
|
|
--
|
|
|
17,514
|
|
|
18.1
|
%
|
Other
collateralized mortgage obligations
|
|
4,083
|
|
|
--
|
|
|
(202
|
)
|
|
3,881
|
|
|
4.0
|
%
|
|
$
|
95,376
|
|
$
|
1,640
|
|
$
|
(298
|
)
|
$
|
96,718
|
|
|
100.0
|
%
|
|
December
31, 2009
|
|
|
Amortized
cost
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Estimated
fair
value
|
|
|
Percent
of
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government and agency obligations
|
$
|
53,732
|
|
$
|
22
|
|
$
|
(642
|
)
|
$
|
53,112
|
|
|
55.5
|
%
|
Mortgage-backed
or related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC
collateralized mortgage obligations
|
|
17,410
|
|
|
223
|
|
|
--
|
|
|
17,633
|
|
|
18.4
|
%
|
GNMA
certificates
|
|
17,741
|
|
|
716
|
|
|
--
|
|
|
18,457
|
|
|
19.3
|
%
|
Other
collateralized mortgage obligations
|
|
6,291
|
|
|
174
|
|
|
|
|
|
6,465
|
|
|
6.8
|
%
|
|
$
|
95,174
|
|
$
|
1,135
|
|
$
|
(642
|
)
|
$
|
95,667
|
|
|
100.0
|
%
|
At March
31, 2010 and December 31, 2009, an aging of unrealized losses and fair value of
related securities—available-for-sale were as follows (in
thousands):
|
March
31, 2010
|
|
|
Less
than 12 months
|
|
12
months or more
|
|
Total
|
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
U.S.
Government and agency obligations
|
$
|
28,916
|
|
$
|
(96
|
)
|
$
|
--
|
|
$
|
--
|
|
$
|
28,916
|
|
$
|
(96
|
)
|
Other
collateralized mortgage obligations
|
|
3,881
|
|
|
(202
|
)
|
|
--
|
|
|
--
|
|
|
3,881
|
|
|
(202
|
)
|
|
$
|
32,797
|
|
$
|
(298
|
)
|
$
|
--
|
|
$
|
--
|
|
$
|
32,797
|
|
$
|
(298
|
)
|
|
December
31, 2009
|
|
|
Less
than 12 months
|
|
12
months or more
|
|
Total
|
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
U.S.
Government and agency obligations
|
$
|
48,713
|
|
$
|
(642
|
)
|
$
|
--
|
|
$
|
--
|
|
$
|
48,713
|
|
$
|
(642
|
)
|
|
$
|
48,713
|
|
$
|
(642
|
)
|
$
|
--
|
|
$
|
--
|
|
$
|
48,713
|
|
$
|
(642
|
)
|
Management
does not believe that any individual unrealized loss as of March 31, 2010
represents an other-than-temporary impairment. The decline in fair
market value of these securities is generally due to changes in interest rates
and changes in market-desired spreads subsequent to their
purchase. At March 31, 2010, there were six
securities—available-for-sale with unrealized losses, compared to eight at
December 31, 2009.
Securities--Held to
Maturity: The amortized cost and estimated fair value of
securities held to maturity are summarized as follows (dollars in
thousands):
|
|
March
31, 2010
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
|
|
|
Amortized
|
|
|
unrealized
|
|
|
unrealized
|
|
|
fair
|
|
|
Percent
|
|
|
|
cost
|
|
|
gains
|
|
|
losses
|
|
|
value
|
|
|
of
Total
|
|
Municipal
bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
$
|
2,380
|
|
$
|
151
|
|
$
|
--
|
|
$
|
2,531
|
|
|
3.3
|
%
|
Tax
Exempt
|
|
62,925
|
|
|
3,136
|
|
|
(84
|
)
|
|
65,977
|
|
|
86.4
|
%
|
|
|
65,305
|
|
|
3,287
|
|
|
(84
|
)
|
|
68,508
|
|
|
89.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
bonds
|
|
8,250
|
|
|
8
|
|
|
(376
|
)
|
|
7,882
|
|
|
10.3
|
%
|
|
$
|
73,555
|
|
$
|
3,295
|
|
$
|
(460
|
)
|
$
|
76,390
|
|
|
100.0
|
%
|
|
|
December
31, 2009
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
|
|
|
Amortized
|
|
|
unrealized
|
|
|
unrealized
|
|
|
fair
|
|
|
Percent
|
|
|
|
cost
|
|
|
gains
|
|
|
losses
|
|
|
value
|
|
|
of
Total
|
|
Municipal
bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
$
|
2,683
|
|
$
|
66
|
|
$
|
(30
|
)
|
$
|
2,719
|
|
|
3.6
|
%
|
Tax
Exempt
|
|
63,901
|
|
|
2,731
|
|
|
(72
|
)
|
|
66,560
|
|
|
87.0
|
%
|
|
|
66,584
|
|
|
2,797
|
|
|
(102
|
)
|
|
69,279
|
|
|
90.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
bonds
|
|
8,250
|
|
|
--
|
|
|
(1,040
|
)
|
|
7,210
|
|
|
9.4
|
%
|
|
$
|
74,834
|
|
$
|
2,797
|
|
$
|
(1,142
|
)
|
$
|
76,489
|
|
|
100.0
|
%
|
At March
31, 2010 and December 31, 2009, an aging of unrealized losses and fair value of
related securities—held-to-maturity were as follows (in thousands):
|
March
31, 2010
|
|
|
Less
than 12 months
|
|
12
months or more
|
|
Total
|
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Corporate
bonds
|
$
|
2,883
|
|
$
|
(167
|
)
|
$
|
3,791
|
|
$
|
(209
|
)
|
$
|
6,624
|
|
$
|
(376
|
)
|
Municipal
bonds
|
4,481
|
|
(34
|
)
|
3,548
|
|
(50
|
)
|
8,029
|
|
(84
|
)
|
|
$
|
7,364
|
|
$
|
(201
|
)
|
$
|
7,339
|
|
$
|
(259
|
)
|
$
|
14,653
|
|
$
|
(460
|
)
|
|
December
31, 2009
|
|
|
Less
than 12 months
|
|
12
months or more
|
|
Total
|
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Corporate
bonds
|
$
|
2,556
|
|
$
|
(444
|
)
|
$
|
3,404
|
|
$
|
(596
|
)
|
$
|
5,960
|
|
$
|
(1,040
|
)
|
Municipal
bonds
|
2,920
|
|
(43
|
)
|
10,112
|
|
(59
|
)
|
13,032
|
|
(102
|
)
|
|
$
|
5,476
|
|
$
|
(487
|
)
|
$
|
13,516
|
|
$
|
(655
|
)
|
$
|
18,992
|
|
$
|
(1,142
|
)
|
Management
does not believe that any individual unrealized losses as of March 31, 2010 or
December 31, 2009 represent an other-than-temporary impairment. The
decline in fair market value of these securities is generally due to changes in
interest rates and changes in market-desired spreads subsequent to their
purchase. There were nine and twelve securities held-to-maturity with
unrealized losses at March 31, 2010 and December 31, 2009,
respectively.
The
following table presents, as of March 31, 2010, investment securities which were
pledged to secure borrowings, public deposits or other obligations as permitted
or required by law (in thousands):
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
Federal
Reserve Bank, TT&L deposits
|
$
|
1,651
|
|
$
|
1,715
|
|
State
and local governments public deposits
|
|
84,955
|
|
|
88,353
|
|
Pacific
Coast Bankers’ Bank (PCBB) interest rate swaps
|
|
3,862
|
|
|
4,037
|
|
Retail
repurchase transaction accounts
|
|
137,238
|
|
|
140,723
|
|
Other
|
|
4,356
|
|
|
4,390
|
|
|
|
|
|
|
|
|
Total
pledged securities
|
$
|
232,062
|
|
$
|
239,218
|
|
The
carrying value of investment securities pledged as of March 31, 2010 was $236.6
million.
Note
6: FHLB STOCK
At March
31, 2010, the Company carried on its books $37.4 million in Federal Home Loan
Bank of Seattle (FHLB) stock, which represents our investment in the stock at
its par value. Ownership of this stock allows the Banks access to
funding for liquidity and other borrowing needs. Ownership of FHLB
stock is restricted to FHLB member institutions and can only be purchased and
redeemed at par. Shares are not publicly traded and do not have a
readily determinable fair value. FHLB stock is generally acknowledged
to be a long-term investment. Accordingly, when evaluating for
impairment, the value is determined based on the ultimate recovery of the par
value.
As of
March 31, 2010, the FHLB was classified as "undercapitalized" by its regulator
and therefore did not pay a dividend for the first quarter of 2010 and will not
repurchase capital stock or pay a dividend while it is classified as
undercapitalized. The FHLB reported that it did meet all of its
regulatory capital targets, including its risk-based capital requirement as of
March 31, 2010. The FHLB reported a risk-based capital surplus of
$490.1 million as of March 31, 2010 compared to $531.7 million as of December
31, 2009. The FHLB’s total capital at March 31, 2010 was $1.051
billion compared to $993.7 million at December 31, 2009.
Management
periodically evaluates FHLB stock for other-than-temporary or permanent
impairment. Management’s determination of whether these investments
are impaired is based on its assessment of the ultimate recoverability of cost
rather than by recognizing temporary declines in value. The
determination of whether a decline affects the ultimate recoverability of cost
is influenced by criteria such as (1) the significance of any decline in net
assets of the FHLB as compared to the capital stock amount for the FHLB and the
length of time this situation has persisted, (2) commitments by the FHLB to make
payments required by law or regulation and the level of such payments in
relation to the operating performance of the FHLB, (3) the impact of legislative
and regulatory changes on its member institutions or the FHLB itself, and (4)
the liquidity position of the FHLB.
Based on
the above, the Company has determined there is not an other-than-temporary
impairment of its FHLB stock investment as of March 31, 2010.
Note
7: LOANS RECEIVABLE
We
originate residential mortgage loans for both portfolio investment and sale in
the secondary market. At the time of origination, mortgage loans are
designated as held for sale or held for investment. Loans held for
sale are stated at lower of cost or estimated fair value determined on an
aggregate basis. Net unrealized losses on loans held for sale are
recognized through a valuation allowance by charges to income. We
also originate construction and land, commercial and multifamily real estate,
commercial business, agricultural and consumer loans for portfolio
investment. Loans receivable not designated as held for sale are
recorded at the principal amount outstanding, net of allowance for loan losses,
deferred fees, discounts and premiums. Premiums, discounts and
deferred loan fees are amortized to maturity using the level-yield
methodology.
Interest
is accrued as earned unless management doubts the collectability of the loan or
the unpaid interest. Interest accruals are generally discontinued
when loans become 90 days past due for scheduled interest
payments. All previously accrued but uncollected interest is deducted
from interest income upon transfer to nonaccrual status. Future
collection of interest is included in interest income based upon an assessment
of the likelihood that the loans will be repaid or recovered. A loan
may be put on nonaccrual status sooner than this policy would dictate if, in
management’s judgment, the loan may be uncollectable. Such interest
is then recognized as income only if it is ultimately collected.
Our loans
receivable, including loans held for sale, at March 31, 2010 and 2009 and
December 31, 2009 are summarized as follows (dollars in thousands):
|
March
31
2010
|
|
December
31
2009
|
|
March
31
2009
|
|
|
Amount
|
|
Percent
of
Total
|
|
Amount
|
|
Percent
of
Total
|
|
Amount
|
|
Percent
of
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
(including loans held for sale):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner
occupied
|
$
|
515,542
|
|
|
14.0
|
%
|
$
|
509,464
|
|
|
13.4
|
%
|
$
|
460,569
|
|
|
11.8
|
%
|
Investment
properties
|
|
557,134
|
|
|
15.1
|
|
|
573,495
|
|
|
15.1
|
|
|
575,716
|
|
|
14.7
|
|
Multifamily
real estate
|
|
147,659
|
|
|
4.0
|
|
|
153,497
|
|
|
4.1
|
|
|
149,442
|
|
|
3.8
|
|
Commercial
construction
|
|
83,879
|
|
|
2.3
|
|
|
80,236
|
|
|
2.1
|
|
|
103,643
|
|
|
2.6
|
|
Multifamily
construction
|
|
61,924
|
|
|
1.7
|
|
|
57,422
|
|
|
1.5
|
|
|
46,568
|
|
|
1.2
|
|
One-
to four-family construction
|
|
213,438
|
|
|
5.8
|
|
|
239,135
|
|
|
6.3
|
|
|
365,421
|
|
|
9.3
|
|
Land
and land development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
256,607
|
|
|
7.0
|
|
|
284,331
|
|
|
7.5
|
|
|
406,948
|
|
|
10.4
|
|
Commercial
|
|
48,194
|
|
|
1.3
|
|
|
43,743
|
|
|
1.2
|
|
|
39,180
|
|
|
1.0
|
|
Commercial
business
|
|
616,396
|
|
|
16.7
|
|
|
637,823
|
|
|
16.8
|
|
|
650,123
|
|
|
16.6
|
|
Agricultural
business, including
secured
by farmland
|
|
187,207
|
|
|
5.1
|
|
|
205,307
|
|
|
5.4
|
|
|
197,972
|
|
|
5.1
|
|
One-
to four-family real estate
|
|
697,565
|
|
|
18.9
|
|
|
703,277
|
|
|
18.6
|
|
|
643,705
|
|
|
16.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
109,092
|
|
|
3.0
|
|
|
110,937
|
|
|
2.9
|
|
|
90,834
|
|
|
2.4
|
|
Consumer
secured by one- to four-
family real estate
|
|
194,220
|
|
|
5.1
|
|
|
191,454
|
|
|
5.1
|
|
|
185,426
|
|
|
4.7
|
|
Total
consumer
|
|
303,312
|
|
|
8.1
|
|
|
302,391
|
|
|
8.0
|
|
|
276,260
|
|
|
7.1
|
|
Total
loans outstanding
|
|
3,688,857
|
|
|
100.0
|
%
|
|
3,790,121
|
|
|
100.0
|
%
|
|
3,915,547
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
allowance for loan losses
|
|
(95,733
|
)
|
|
|
|
|
(95,269
|
)
|
|
|
|
|
(79,724
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net loans outstanding at
end of period
|
$
|
3,593,124
|
|
|
|
|
$
|
3,694,852
|
|
|
|
|
$
|
3,835,823
|
|
|
|
|
Loans are
net of unearned, unamortized loan fees or discounts of $11.5 million, $11.2
million and $6.7 million, respectively, at March 31, 2010, December 31, 2009 and
March 31, 2009.
The
geographic concentration of our loans at March 31, 2010 was as follows (dollars
in thousands):
|
|
Washington
|
|
Oregon
|
|
Idaho
|
|
Other
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
$
|
404,284
|
|
$
|
64,585
|
|
$
|
46,673
|
|
$
|
--
|
|
$
|
515,542
|
|
Investment
properties
|
|
|
411,242
|
|
|
102,735
|
|
|
43,157
|
|
|
--
|
|
|
557,134
|
|
Multifamily
real estate
|
|
|
121,362
|
|
|
12,740
|
|
|
13,557
|
|
|
--
|
|
|
147,659
|
|
Commercial
construction
|
|
|
60,732
|
|
|
13,295
|
|
|
9,852
|
|
|
--
|
|
|
83,879
|
|
Multifamily
construction
|
|
|
33,704
|
|
|
28,220
|
|
|
--
|
|
|
--
|
|
|
61,924
|
|
One-
to four-family construction
|
|
|
101,947
|
|
|
100,840
|
|
|
10,651
|
|
|
--
|
|
|
213,438
|
|
Land
and land development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
133,016
|
|
|
95,131
|
|
|
28,460
|
|
|
--
|
|
|
256,607
|
|
Commercial
|
|
|
33,941
|
|
|
11,778
|
|
|
2,475
|
|
|
--
|
|
|
48,194
|
|
Commercial
business
|
|
|
436,556
|
|
|
92,602
|
|
|
69,451
|
|
|
17,787
|
|
|
616,396
|
|
Agricultural business, including
secured
by farmland
|
|
|
95,895
|
|
|
39,320
|
|
|
51,992
|
|
|
--
|
|
|
187,207
|
|
One-
to four-family real estate
|
|
|
464,960
|
|
|
200,573
|
|
|
31,145
|
|
|
887
|
|
|
697,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
78,657
|
|
|
24,318
|
|
|
6,117
|
|
|
--
|
|
|
109,092
|
|
Consumer secured by one- to four-family
real
estate
|
|
|
137,196
|
|
|
42,460
|
|
|
14,564
|
|
|
--
|
|
|
194,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans outstanding
|
|
$
|
2,513,492
|
|
$
|
828,597
|
|
$
|
328,094
|
|
$
|
18,674
|
|
$
|
3,688,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
of total loans
|
|
|
68.1
|
%
|
|
22.5
|
%
|
|
8.9
|
%
|
|
0.5
|
%
|
|
100.0
|
%
|
The
geographic concentration of our land and land development loans at March 31,
2010 was as follows (dollars in thousands):
|
|
Washington
|
|
Oregon
|
|
Idaho
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
and development
|
|
$
|
64,106
|
|
$
|
58,380
|
|
$
|
6,481
|
|
$
|
128,967
|
|
Improved
lots
|
|
|
45,044
|
|
|
29,899
|
|
|
2,218
|
|
|
77,161
|
|
Unimproved
land
|
|
|
23,866
|
|
|
6,852
|
|
|
19,761
|
|
|
50,479
|
|
Commercial
and industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
and development
|
|
|
8,302
|
|
|
--
|
|
|
554
|
|
|
8,856
|
|
Improved
land
|
|
|
9,725
|
|
|
10,054
|
|
|
--
|
|
|
19,779
|
|
Unimproved
land
|
|
|
15,914
|
|
|
1,724
|
|
|
1,921
|
|
|
19,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
land and land development loans outstanding
|
|
$
|
166,957
|
|
$
|
106,909
|
|
$
|
30,935
|
|
$
|
304,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
of total land and land development loans
|
|
|
54.8
|
%
|
|
35.1
|
%
|
|
10.1
|
%
|
|
100.0
|
%
|
As noted
in the tables above, substantially all of our loans are to borrowers in the
states of Washington, Oregon and Idaho. Accordingly, their ultimate
collectability is particularly susceptible to, among other things, changes in
market and economic conditions within these states.
The
amount of impaired loans, including performing troubled debt restructurings
(TDRs), net of any charge-offs recorded as a result of specific impairment
analysis, and the related allocated reserve for loan losses were as follows (in
thousands):
|
March
31, 2010
|
|
December
31, 2009
|
|
|
Loan
amount
|
|
Allocated
reserves
|
|
Loan
amount
|
|
Allocated
reserves
|
|
Impaired
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
|
$
|
195,948
|
|
$
|
18,736
|
|
$
|
213,401
|
|
$
|
18,872
|
|
Accrual,
including TDRs
|
|
45,645
|
|
|
1,769
|
|
|
48,337
|
|
|
3,309
|
|
|
$
|
241,593
|
|
$
|
20,505
|
|
$
|
261,738
|
|
$
|
22,181
|
|
The
Company originates both adjustable- and fixed-rate loans. The
maturity and repricing composition of those loans, less undisbursed amounts and
deferred fees, were as follows (in thousands):
|
March
31
2010
|
|
December
31
2009
|
|
March
31
2009
|
|
Fixed-rate
(term to maturity):
|
|
|
|
Due
in one year or less
|
$
|
187,373
|
|
$
|
162,894
|
|
$
|
201,049
|
|
Due
after one year through three years
|
|
203,602
|
|
|
198,107
|
|
|
200,264
|
|
Due
after three years through five years
|
|
233,299
|
|
|
239,145
|
|
|
214,076
|
|
Due
after five years through ten years
|
|
130,261
|
|
|
142,900
|
|
|
122,625
|
|
Due
after ten years
|
|
548,973
|
|
|
551,375
|
|
|
445,292
|
|
|
|
1,303,508
|
|
|
1,294,421
|
|
|
1,183,306
|
|
Adjustable-rate
(term to rate adjustment):
|
|
|
|
|
|
|
|
|
|
Due
in one year or less
|
|
1,496,376
|
|
|
1,582,046
|
|
|
2,488,166
|
|
Due
after one year through three years
|
|
438,413
|
|
|
417,777
|
|
|
84,071
|
|
Due
after three years through five years
|
|
406,687
|
|
|
447,228
|
|
|
37,477
|
|
Due
after five years through ten years
|
|
42,663
|
|
|
47,287
|
|
|
122,527
|
|
Due
after ten years
|
|
1,210
|
|
|
1,362
|
|
|
--
|
|
|
|
2,385,349
|
|
|
2,495,700
|
|
|
2,732,241
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,688,857
|
|
$
|
3,790,121
|
|
$
|
3,915,547
|
|
The
adjustable-rate loans may have interest rate adjustment limitations and are
generally indexed to various Prime or London Interbank Offered Rates (LIBOR), or
One to Five Year Constant Maturity Treasury Indices or FHLB borrowing
rates. Future market factors may affect the correlation of the
interest rate adjustment with the rates the Banks pay on the short-term deposits
that primarily have been utilized to fund these loans.
Note
8: ALLOWANCE FOR LOAN LOSSES
The
following is a schedule of our allocation of the allowance for loan losses at
the dates indicated (dollars in thousands):
|
March
31
2010
|
|
December
31
2009
|
|
March
31
2009
|
|
|
|
|
|
Specific
or allocated loss allowances:
|
|
|
|
|
|
|
|
|
|
Commercial
real estate
|
$
|
8,279
|
|
$
|
8,278
|
|
$
|
4,972
|
|
Multifamily
real estate
|
|
2,072
|
|
|
90
|
|
|
84
|
|
Construction
and land
|
|
44,078
|
|
|
45,209
|
|
|
46,297
|
|
One-
to four-family real estate
|
|
3,093
|
|
|
2,912
|
|
|
814
|
|
Commercial
business
|
|
24,530
|
|
|
22,054
|
|
|
18,186
|
|
Agricultural
business, including secured by farmland
|
|
949
|
|
|
919
|
|
|
587
|
|
Consumer
|
|
1,898
|
|
|
1,809
|
|
|
1,682
|
|
Total
allocated
|
|
84,899
|
|
|
81,271
|
|
|
72,622
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
allowance for undisbursed commitments
|
|
1,161
|
|
|
1,594
|
|
|
1,358
|
|
Unallocated
|
|
9,673
|
|
|
12,404
|
|
|
5,744
|
|
Total
allowance for loan losses
|
$
|
95,733
|
|
$
|
95,269
|
|
$
|
79,724
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses as a percentage of total loans outstanding
|
|
2.60
|
%
|
|
2.51
|
%
|
|
2.04
|
%
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses as a percentage of non-performing loans
|
|
49
|
%
|
|
45
|
%
|
|
36
|
%
|
An
analysis of the changes in our allowance for loan losses is as follows (dollars
in thousands):
|
|
|
Quarters
Ended
|
|
|
|
|
March
31
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of the period
|
|
|
|
|
|
|
$
|
95,269
|
|
$
|
75,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
|
|
|
|
|
14,000
|
|
|
22,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries
of loans previously charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate
|
|
|
|
|
|
|
|
--
|
|
|
--
|
|
Multifamily
real estate
|
|
|
|
|
|
|
|
--
|
|
|
--
|
|
Construction
and land
|
|
|
|
|
|
|
|
37
|
|
|
52
|
|
One-
to four-family real estate
|
|
|
|
|
|
|
|
350
|
|
|
2
|
|
Commercial
business
|
|
|
|
|
|
|
|
1,290
|
|
|
70
|
|
Agricultural
business, including secured by farmland
|
|
|
|
|
|
|
|
--
|
|
|
--
|
|
Consumer
|
|
|
|
|
|
|
|
59
|
|
|
31
|
|
|
|
|
|
|
|
|
|
1,736
|
|
|
155
|
|
Loans
charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate
|
|
|
|
|
|
|
|
(92
|
)
|
|
--
|
|
Multifamily
real estate
|
|
|
|
|
|
|
|
--
|
|
|
--
|
|
Construction
and land
|
|
|
|
|
|
|
|
(7,724
|
)
|
|
(12,417
|
)
|
One-
to four-family real estate
|
|
|
|
|
|
|
|
(2,115
|
)
|
|
(1,091
|
)
|
Commercial
business
|
|
|
|
|
|
|
|
(4,784
|
)
|
|
(3,794
|
)
|
Agricultural
business, including secured by farmland
|
|
|
|
|
|
|
|
(2
|
)
|
|
--
|
|
Consumer
|
|
|
|
|
|
|
|
(555
|
)
|
|
(326
|
)
|
|
|
|
|
|
|
|
|
(15,272
|
)
|
|
(17,628
|
)
|
Net
(charge-offs) recoveries
|
|
|
|
|
|
|
|
(13,536
|
)
|
|
(17,473
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
end of the period
|
|
|
|
|
|
|
$
|
95,733
|
|
$
|
79,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loan charge-offs to average outstanding loans during the
period
|
|
|
|
|
|
|
|
0.36
|
%
|
|
0.44
|
%
|
Note
9: REAL ESTATE OWNED, NET
The
following table presents the changes in real estate owned (REO), net of
valuation allowance, for the quarters ended March 31, 2010 and 2009 (in
thousands):
|
Quarters
Ended March 31
|
|
|
2010
|
|
2009
|
|
Balance,
beginning of period
|
$
|
77,743
|
|
$
|
21,782
|
|
|
|
|
|
|
|
|
Additions
from loan foreclosures
|
|
28,161
|
|
|
19,175
|
|
Addition
from capitalized costs
|
|
752
|
|
|
1,039
|
|
Dispositions
of REO
|
|
(9,814
|
)
|
|
(3,094
|
)
|
Gain
(loss) on sale of REO
|
|
(701
|
)
|
|
99
|
|
Valuation
adjustments in the period
|
|
(1,067
|
)
|
|
(50
|
)
|
|
|
|
|
|
|
|
Balance,
end of period
|
$
|
95,074
|
|
$
|
38,951
|
|
REO
properties are recorded at the lower of the recorded investment in the loan
(prior to foreclosure) or the fair market value of the property, less expected
selling costs. Valuation allowances on REO balances are based on
updated appraisals of the underlying properties as received during a period or
management’s authorization to reduce the selling price of a property during the
period.
Note
10: OTHER INTANGIBLE ASSETS AND MORTGAGE SERVICING
RIGHTS
Other Intangible
Assets: At March 31, 2010, intangible assets consisted
primarily of core deposit intangibles (CDI), which are amounts recorded in
business combinations or deposit purchase transactions related to the value of
transaction-related deposits and the value of the
customer
relationships associated with the deposits. Historically, intangible
assets also included goodwill. However, in 2008, the Company wrote
off all goodwill against earnings.
We
amortize core deposit intangibles over their estimated useful life and review
them at least annually for events or circumstances that could impact their
recoverability. The core deposit intangible assets shown in the table
below represent the value ascribed to the long-term deposit relationships
acquired in three separate bank acquisitions during 2007. These
intangible assets are being amortized using an accelerated method over estimated
useful lives of eight years. The core deposit intangible assets are
not estimated to have a significant residual value. Other intangible
assets are amortized over their useful lives and are also reviewed for
impairment.
The
following table summarizes the changes in the Company’s core deposit intangibles
and other intangibles for the quarters ended March 31, 2010 and 2009 (in
thousands):
|
|
|
|
|
Core
Deposit Intangibles
|
|
|
Other
|
|
|
Total
|
|
Balance,
December 31, 2009
|
|
|
|
$
|
11,057
|
|
$
|
13
|
|
$
|
11,070
|
|
Additions
through acquisitions
|
|
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Amortization
|
|
|
|
|
(644
|
)
|
|
--
|
|
|
(644
|
)
|
Impairment
write-off
|
|
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Balance,
March 31, 2010
|
|
|
|
$
|
10,413
|
|
$
|
13
|
|
$
|
10,426
|
|
|
|
|
|
|
Core
Deposit Intangibles
|
|
|
Other
|
|
|
Total
|
|
Balance,
December 31, 2008
|
|
|
|
$
|
13,701
|
|
$
|
15
|
|
$
|
13,716
|
|
Adjustments
related to 2008 acquisitions
|
|
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Amortization
|
|
|
|
|
(690
|
)
|
|
--
|
|
|
(690
|
)
|
Impairment
write-off
|
|
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Balance,
March 31, 2009
|
|
|
|
$
|
13,011
|
|
$
|
15
|
|
$
|
13,026
|
|
Estimated
annual amortization expense with respect to existing intangibles as of March 31,
2010 is as follows (in thousands):
|
|
Core
Deposit
|
|
|
|
|
|
|
|
Year Ended
|
|
Intangibles
|
|
|
Other
|
|
|
Total
|
|
December
31, 2010
|
$
|
2,459
|
|
$
|
2
|
|
$
|
2,461
|
|
December
31, 2011
|
|
2,276
|
|
|
2
|
|
|
2,278
|
|
December
31, 2012
|
|
2,092
|
|
|
2
|
|
|
2,094
|
|
December
31, 2013
|
|
1,908
|
|
|
2
|
|
|
1,910
|
|
December
31, 2014
|
|
1,724
|
|
|
2
|
|
|
1,726
|
|
Thereafter
|
|
598
|
|
|
3
|
|
|
601
|
|
|
$
|
11,057
|
|
$
|
13
|
|
$
|
11,070
|
|
Mortgage Servicing
Rights: Mortgage servicing rights are reported in other
assets. Mortgage servicing rights are initially reported at fair value and are
amortized in proportion to, and over the period of, the estimated future net
servicing income of the underlying financial assets. Mortgage
servicing rights are subsequently evaluated for impairment based upon the fair
value of the rights compared to the amortized cost (remaining unamortized
initial fair value). If the fair value is less than the amortized
cost, a valuation allowance is created through an impairment charge to servicing
fee income. However, if the fair value is greater than the amortized
cost, the amount above the amortized cost is not recognized in the carrying
value. Loans serviced for others totaled $684.8 million and $509.5
million at March 31, 2010 and 2009, respectively. Custodial accounts
maintained in connection with this servicing totaled $3.3 million and $5.1 at
March 31, 2010 and 2009, respectively. Mortgage servicing rights as a
percentage of total loans serviced for others was 0.81% and 0.82%, respectively,
for the same time periods.
An
analysis of our mortgage servicing rights for the quarters ended March 31, 2010
and 2009 is presented below (in thousands):
|
|
|
Quarters
Ended
March
31
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of the period
|
|
|
|
|
|
|
$
|
5,703
|
|
$
|
3,554
|
|
Amounts
capitalized
|
|
|
|
|
|
|
|
256
|
|
|
1,510
|
|
Amortization*
|
|
|
|
|
|
|
|
(397
|
)
|
|
(612
|
)
|
Impairment
|
|
|
|
|
|
|
|
--
|
|
|
(300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
end of the period
|
|
|
|
|
|
|
$
|
5,562
|
|
$
|
4,152
|
|
*Amortization
of mortgage servicing rights is recorded as a reduction of loan servicing income
and includes any remaining unamortized balance, which is written off if the loan
repays in full.
Note
11: DEPOSITS AND CUSTOMER REPURCHASE AGREEMENTS
Deposits
consisted of the following at March 31, 2010 and 2009 and December 31, 2009
(dollars in thousands):
|
March
31
2010
|
|
December
31
2009
|
|
March
31
2009
|
|
Deposits:
|
Amount
|
|
Percent
of
Total
|
|
Amount
|
|
Percent
of
Total
|
|
Amount
|
|
Percent
of
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing
accounts
|
$
|
549,291
|
|
|
14.3
|
%
|
$
|
582,480
|
|
|
15.1
|
%
|
$
|
508,593
|
|
|
14.0
|
%
|
Interest-bearing
checking
|
|
366,786
|
|
|
9.5
|
|
|
360,256
|
|
|
9.3
|
|
|
307,741
|
|
|
8.5
|
|
Regular
savings accounts
|
|
577,704
|
|
|
15.0
|
|
|
538,765
|
|
|
13.9
|
|
|
490,239
|
|
|
13.5
|
|
Money
market accounts
|
|
459,811
|
|
|
11.9
|
|
|
442,124
|
|
|
11.4
|
|
|
301,857
|
|
|
8.3
|
|
Total
transaction and saving accounts
|
|
1,953,592
|
|
|
50.7
|
|
|
1,923,625
|
|
|
49.7
|
|
|
1,608,430
|
|
|
44.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
which mature or reprice:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
1 year
|
|
1,597,519
|
|
|
41.5
|
|
|
1,593,575
|
|
|
41.3
|
|
|
1,504,958
|
|
|
41.5
|
|
After
1 year, but within 3 years
|
|
260,729
|
|
|
6.8
|
|
|
311,115
|
|
|
8.0
|
|
|
464,576
|
|
|
12.8
|
|
After
3 years
|
|
37,938
|
|
|
1.0
|
|
|
37,235
|
|
|
1.0
|
|
|
49,540
|
|
|
1.4
|
|
Total
certificate accounts
|
|
1,896,186
|
|
|
49.3
|
|
|
1,941,925
|
|
|
50.3
|
|
|
2,019,074
|
|
|
55.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deposits
|
$
|
3,849,778
|
|
|
100.0
|
%
|
$
|
3,865,550
|
|
|
100.0
|
%
|
$
|
3,627,504
|
|
|
100.0
|
%
|
Included
in total deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
transaction accounts
|
$
|
80,942
|
|
|
2.1
|
%
|
$
|
78,202
|
|
|
2.0
|
%
|
$
|
47,639
|
|
|
1.3
|
%
|
Public
interest-bearing certificates
|
|
82,362
|
|
|
2.1
|
|
|
88,186
|
|
|
2.3
|
|
|
175,418
|
|
|
4.8
|
|
Total
public deposits
|
$
|
163,304
|
|
|
4.2
|
%
|
$
|
166,388
|
|
|
4.3
|
%
|
$
|
223,057
|
|
|
6.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
brokered deposits
|
$
|
150,577
|
|
|
3.9
|
%
|
$
|
165,016
|
|
|
4.3
|
%
|
$
|
249,619
|
|
|
6.9
|
%
|
Geographic
Concentration of Deposits at
March
31, 2010
|
|
Washington
|
|
Oregon
|
|
Idaho
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,952,735
|
|
$
|
623,302
|
|
$
|
273,741
|
|
$
|
3,849,778
|
|
In
addition to deposits, we also offer retail repurchase agreements which are
customer funds that are primarily associated with sweep account arrangements
tied to transaction deposit accounts. While we include these
collateralized borrowings in other borrowings reported in our Consolidated
Statements of Financial Condition, these accounts primarily represent customer
utilization of our cash management services and related deposit
accounts. The following table presents customer repurchase agreement
balances as of March 31, 2010 and 2009 and December 31, 2009 (in
thousands):
|
|
|
|
March
31
2010
|
|
December
31
2009
|
|
March
31
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
Repurchase Agreements
|
|
|
|
|
$
|
126,954
|
|
$
|
124,330
|
|
$
|
131,224
|
|
Note
12: FAIR VALUE ACCOUNTING AND MEASUREMENT
We have
elected to record certain assets and liabilities at fair value. Fair
value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date (that is, not a forced liquidation or distressed
sale). The GAAP standard (ASC 820, Fair Value Measurements)
establishes a consistent framework for measuring fair value and disclosure
requirements about fair value measurements. Among other things, the
standards require us to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. Observable
inputs reflect market data obtained from independent sources, while unobservable
inputs reflect our estimates for market assumptions. These two types
of inputs create the following fair value hierarchy:
·
|
Level 1 –
Quoted prices in active markets for identical instruments. An
active market is a market in which transactions occur with sufficient
frequency and volume to provide pricing information on an ongoing
basis. A quoted price in an active market provides the most
reliable evidence of fair value and shall be used to measure fair value
whenever available.
|
·
|
Level 2 –
Observable inputs other than Level 1 including quoted prices in active
markets for similar instruments, quoted prices in less active markets for
identical or similar instruments, or other observable inputs that can be
corroborated by observable market
data.
|
·
|
Level 3 –
Unobservable inputs supported by little or no market activity for
financial instruments whose value is determined using pricing models,
discounted cash flow methodologies, or similar techniques, as well as
instruments for which the determination of fair value requires significant
management judgment or estimation; also includes observable inputs from
non-binding single dealer quotes not corroborated by observable market
data.
|
The
estimated fair value amounts of financial instruments have been determined by
the Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required to interpret data to
develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts. In addition, reasonable comparability
between financial institutions may not be likely due to the wide range of
permitted valuation techniques and numerous estimates that must be made given
the absence of active secondary markets for many of the financial
instruments. This lack of uniform valuation methodologies also
introduces a greater degree of subjectivity to these estimated fair
values.
Items
Measured at Fair Value on a Recurring Basis:
We record
trading account securities, securities available-for-sale, FHLB debt and junior
subordinated debentures at fair value on a recurring basis.
·
|
The
securities assets primarily consist of U.S. Government Agency obligations,
municipal bonds, corporate bonds, single issue trust preferred securities
(TPS), pooled trust preferred collateralized debit obligation securities
(TRUP CDO), mortgage-backed securities, equity securities and certain
other financial instruments. At March 31, 2010, management used
inputs from each of the three fair value hierarchy levels to value these
assets. The Level 1 measurements are based upon quoted prices
in active markets. The Level 2 measurements are generally based
upon a matrix pricing model from an investment reporting and valuation
service. Matrix pricing is a mathematical technique used
principally to value debt securities without relying exclusively on quoted
prices for the specific securities, but rather by relying on the
securities’ relationship to other benchmark quoted
securities. The Level 3 measurements are based primarily on
unobservable inputs. In developing Level 3 measurements,
management incorporates whatever market data might be available and uses
discounted cash flow models where appropriate. These
calculations include projections of future cash flows, including
appropriate default and loss assumptions, and market based discount
rates.
|
During
the ongoing credit crisis, from 2008 through the current quarter, the lack of
active markets and market participants for certain securities resulted in an
increase in Level 3 measurements. This has been particularly true for
our TRUP CDO securities. As of March 31, 2010, we owned approximately
$33 million in current par value of these securities, exclusive of those
securities we elected to write-off completely. The market for these
securities is inactive, which was evidenced first by a significant widening of
the bid-ask spread in the brokered markets in which TRUP CDOs trade and then by
a significant decrease in the volume of trades relative to historical
levels. The new issue market is also inactive as almost no new TRUP
CDOs have been issued since 2007. There are currently very few market
participants who are willing and/or able to transact for these
securities. Thus, a low market price for a particular bond may only
provide evidence of stress in the credit markets in general rather than being an
indicator of credit problems with a particular issuer.
Given
these conditions in the debt markets and the absence of observable transactions
in the secondary and new issue markets, management determined that for TRUP
CDOs:
o
|
The
few observable transactions and market quotations that were available are
not reliable for purposes of determining fair value at March 31,
2010,
|
o
|
An
income valuation approach technique (present value technique) that
maximizes the use of relevant observable inputs and minimizes the use of
unobservable inputs is equally or more representative of fair value than
the market approach valuation technique used at prior measurement dates,
and
|
o
|
The
Company’s TRUP CDOs are classified exclusively within Level 3 of the fair
value hierarchy because of the significant assumptions required to
determine fair value at the measurement
date.
|
The TRUP
CDO valuations were prepared by an independent third party who used its
proprietary cash flow model recognized as the industry standard for analyzing
all types of collateralized debt obligations. Its approach to
determining fair value involves considering the credit quality of the collateral
using average risk-neutral probability of default values, assumes a level of
defaults based on the probability of default of each underlying trust preferred
security and assumed level of correlation among the assets, and creates an
expected cash flows for each security, discounted at the risk-free rate plus a
liquidity premium.
Where
possible, management reviewed the valuation methodology and assumptions used by
the independent third party providers, determined that with respect to
performing securities the fair value estimates were reasonable and utilized
those estimates in our reported financial statements. However,
beginning with the quarter ended June 30, 2009 and continuing with the quarter
ended March 31, 2010, for two securities for which we currently are not
receiving any cash payments, management elected to override the third party fair
value estimates and to reflect the fair value of these securities at zero,
resulting in an other-than-temporary impairment charge.
At March
31, 2010, we also directly owned approximately $20 million in current par value
of TPS securities issued by three individual financial institutions for which no
market data or independent valuation source is
available. Additionally, we have one TPS security with a par value of
$5 million that is activity traded. Similar to the TRUP CDOs above,
there were too few, if any, issuances of new TPS securities or sales of existing
TPS securities to provide Level 1 or even Level 2 fair value
measurements. Management, therefore, utilized a discounted cash-flow
model to calculate the present value of each security’s expected future cash
flows to determine their respective fair values. Management took into
consideration what little market data was available regarding discount rates,
but concluded that most of the available information represented dated
transactions and/or was not representative of active market
transactions. Since these three TPS securities are also concentrated
in the financial institutions sector, which continues to be under extreme
pricing pressure at March 31, 2010, management applied credit factors to
differentiate these issues based upon its judgment of the risk profile of the
various issuers. These credit factors were then incorporated into the
model at March 31, 2010, and discount rates equal to three-month LIBOR plus 600
to 900 basis points were used to calculate the respective fair values of these
securities. In addition to the three TPS considered Level 3 and one
TPS considered Level 1, on its credit analysis, management determined that
collection of two specific TPS securities was highly unlikely and therefore
elected to write off the balance of these securities as other-than-temporary
impairment charges—one in the third quarter of 2009 and one during the first
quarter of 2010.
·
|
Fair
valuations for FHLB advances are estimated using fair market values
provided by the lender, the FHLB of Seattle. The FHLB of
Seattle prices advances by discounting the future contractual cash flows
for individual advances using its current cost of funds curve to provide
the discount rate. Management considers this to be a Level 2
input method.
|
·
|
The
fair valuations of junior subordinated debentures (TPS debt that the
Company has issued) were valued using discounted cash flows to maturity or
to the next available call date, if based upon the current interest rate
and credit market environment it was considered likely that we would elect
early redemption. The majority, $98 million, of these
debentures carry interest rates that reset quarterly, using the
three-month LIBOR index plus spreads of 1.38% to 3.35%. The
remaining $26 million issue has a current interest rate of 6.56%, which is
fixed through December 2011 and then resets quarterly to equal three-month
LIBOR plus a spread of 1.62%. In valuing the debentures at
March 31, 2010, management evaluated discounted cash flows to maturity and
for the discount rate used the March 31, 2010 three-month LIBOR plus 800
basis points. While the quarterly reset of the index on this
debt would seemingly keep it close to market values, the disparity in the
fixed spreads above the index and the inability to determine realistic
current market spreads, due to lack of new issuances and trades, resulted
in having to rely more heavily on assumptions about what spread would be
appropriate if market transactions were to take place. In
periods prior to third quarter of 2008, the discount rate used was based
on recent issuances or quotes from brokers on the date of valuation for
comparable bank holding companies and was considered to be a Level 2 input
method. However, as noted above in the discussion of TPS and
TRUP CDOs, due to the unprecedented disruption of certain financial
markets, management concluded that there were insufficient transactions or
other indicators to continue to reflect these measurements as Level 2
inputs. Due to this reliance on assumptions and not on directly
observable transactions, management considers this to be a Level 3 input
method.
|
The
following tables present financial assets and liabilities measured at fair value
on a recurring basis as of March 31, 2010 and December 31, 2009 (in
thousands):
|
March
31, 2010
|
|
|
|
|
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities—available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S
government and agency
|
$
|
58,755
|
|
$
|
--
|
|
$
|
58,755
|
|
$
|
--
|
|
Mortgage-backed
securities
|
|
37,963
|
|
|
--
|
|
|
37,963
|
|
|
--
|
|
|
|
96,718
|
|
|
--
|
|
|
96,718
|
|
|
--
|
|
Securities—trading
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S
government and agency
|
|
36,492
|
|
|
--
|
|
|
36,492
|
|
|
--
|
|
Municipal
bonds
|
|
7,224
|
|
|
--
|
|
|
7,224
|
|
|
--
|
|
TPS
and TRUP CDOs
|
|
35,116
|
|
|
5,050
|
|
|
--
|
|
|
30,066
|
|
Mortgage-backed
securities
|
|
59,445
|
|
|
--
|
|
|
59,445
|
|
|
--
|
|
Equity
securities and other
|
|
382
|
|
|
360
|
|
|
22
|
|
|
--
|
|
|
|
138,659
|
|
|
5,410
|
|
|
103,183
|
|
|
30,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
235,377
|
|
$
|
5,410
|
|
$
|
199,901
|
|
$
|
30,066
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances
from FHLB at fair value
|
$
|
62,108
|
|
$
|
--
|
|
$
|
62,108
|
|
$
|
--
|
|
Junior
subordinated debentures net of unamortized deferred issuance costs at fair
value
|
|
48,147
|
|
-
|
--
|
|
|
--
|
|
|
48,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
110,255
|
|
$
|
--
|
|
$
|
62,108
|
|
$
|
48,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
|
|
|
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities—available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S
government and agency
|
$
|
53,112
|
|
$
|
--
|
|
$
|
53,112
|
|
$
|
--
|
|
Mortgage-backed
securities
|
|
42,555
|
|
|
--
|
|
|
42,555
|
|
|
--
|
|
|
|
95,667
|
|
|
--
|
|
|
95,667
|
|
|
--
|
|
Securities—trading
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S
government and agency
|
|
41,255
|
|
|
--
|
|
|
41,255
|
|
|
--
|
|
Municipal
bonds
|
|
7,151
|
|
|
--
|
|
|
7,151
|
|
|
--
|
|
TPS
and TRUP CDOs
|
|
35,017
|
|
|
4,825
|
|
|
--
|
|
|
30,192
|
|
Mortgage-backed
securities
|
|
63,386
|
|
|
--
|
|
|
63,386
|
|
|
--
|
|
Equity
securities and other
|
|
342
|
|
|
328
|
|
|
14
|
|
|
--
|
|
|
|
147,151
|
|
|
5,153
|
|
|
111,806
|
|
|
30,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
242,818
|
|
$
|
5,153
|
|
$
|
207,473
|
|
$
|
30,192
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances
from FHLB at fair value
|
$
|
189,779
|
|
$
|
--
|
|
$
|
189,779
|
|
$
|
--
|
|
Junior
subordinated debentures net of unamortized deferred issuance costs at fair
value
|
|
47,694
|
|
-
|
--
|
|
|
--
|
|
|
47,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
237,473
|
|
$
|
--
|
|
$
|
189,779
|
|
$
|
47,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following tables provides a reconciliation of the assets and liabilities
measured at fair value using significant unobservable inputs (Level 3) on a
recurring basis during the quarter ended March 31, 2010 and 2009 (in
thousands):
|
|
Level
3 Fair Value Inputs
|
|
|
|
|
TPS
and TRUP
CDOs
|
|
Borrowings—
junior
subordinated
debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance at December 31, 2009
|
|
$ |
30,192 |
|
$
|
47,694 |
|
|
|
|
|
|
|
|
|
|
|
Total
gains or losses recognized
|
|
|
|
|
|
|
|
|
Assets
gains (losses), including OTTI |
|
|
(126
|
) |
|
--
|
|
|
Liabilities
(gains) losses |
|
|
--
|
|
|
(453 |
) |
|
Purchases,
issuances and settlements
|
|
|
--
|
|
|
--
|
|
|
Paydowns
and maturities
|
|
|
--
|
|
|
--
|
|
|
Transfers
in and/or out of Level 3
|
|
|
--
|
|
|
--
|
|
|
Ending
balance at March 31, 2010
|
|
$
|
30,066
|
|
$
|
48,147
|
|
|
|
|
|
Level
3 Fair Value Inputs
|
|
|
|
|
|
TPS
and TRUP
CDOs
|
|
|
Borrowings—
junior
subordinated
debentures
|
|
|
|
|
|
|
|
|
|
Beginning
balance at December 31, 2008
|
|
$
|
36,295
|
|
$
|
61,776
|
|
|
|
|
|
|
|
|
|
Total
gains or losses recognized
|
|
|
|
|
|
|
|
Assets
gains (losses)
|
|
|
(10,968
|
)
|
|
--
|
|
Liabilities
(gains) losses
|
|
|
--
|
|
|
(7,957
|
)
|
Purchases,
issuances and settlements
|
|
|
--
|
|
|
--
|
|
Paydowns
and maturities
|
|
|
--
|
|
|
--
|
|
|
Transfers
in and/or out of Level 3
|
|
|
--
|
|
|
--
|
|
|
Ending
balance at March 31, 2009
|
|
$
|
25,327
|
|
$
|
53,813
|
|
The
Company has elected to continue to recognize the interest income and dividends
from the securities reclassified to fair value as a component of interest income
as was done in prior years when they were classified as available for
sale. Interest expense related to the FHLB advances and junior
subordinated debentures continues to be measured based on contractual interest
rates and reported in interest expense. The change in fair market
value of these financial instruments has been recorded as a component of other
operating income.
Items
Measured at Fair Value on a Non-recurring Basis:
The
Company records impaired loans at fair value on a non-recurring
basis. From time to time, non-recurring fair value adjustments to
collateral dependent loans are recorded to reflect partial write-downs based on
an observable market price or current appraised value of collateral, less costs
to sell. As of March 31, 2010, the Company reviewed all of its classified
loans totaling $422 million for potential impairment, and identified $242
million of impaired loans, which consisted of $99 million in residential
construction and related land development loans, and $21 of commercial business
loans. The $174 million fair value of impaired loans reported in the
table below, represents loans with an initial carrying value of $200 million,
net of aggregate charge-offs of $26 million. These valuation inputs are
considered to be Level 3 inputs.
The
Company also records real estate owned (acquired through a lending relationship)
at fair value on a non-recurring basis. All real estate owned
properties are recorded at amounts which are equal to or less than the fair
value of the properties based on independent appraisals (reduced by estimated
selling costs) upon transfer of the loans to real estate owned. From
time to time, non-recurring fair value adjustments to real estate owned are
recorded to reflect partial write downs based on an observable market price or
current appraised value of property. We consider any valuation inputs
related to real estate owned to be Level 3 inputs. The individual
carrying values of these assets are reviewed for impairment at least annually
and any additional impairment charges are expensed to operations. For
the three months ended March 31, 2010, we recognized $1.1 million of additional
impairment charges related to these types of assets, compared to $50,000 for the
same quarter one year earlier.
The
following tables present the fair value measurement of assets and liabilities
measured at fair value on a non-recurring basis and the level within the ASC 820
fair value hierarchy of the fair value measurements for those assets at March
31, 2010 and December 31, 2009 (in thousands):
|
March
31, 2010
|
|
|
Fair
Value
|
|
Quoted
prices in
active
markets for
identical
assets
(Level
1)
|
|
Significant
other observable inputs
(Level
2)
|
|
Significant
unobservable
inputs
(Level
3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
$
|
88,014
|
|
|
--
|
|
|
--
|
|
$
|
88,014
|
|
Other
real estate owned
|
|
95,074
|
|
|
--
|
|
|
--
|
|
|
95,074
|
|
Mortgage
servicing rights
|
|
5,562
|
|
|
--
|
|
|
--
|
|
|
5,562
|
|
|
December
31, 2009
|
|
|
Fair
Value
|
|
Quoted
prices in
active
markets for
identical
assets
(Level
1)
|
|
Significant
other observable inputs
(Level
2)
|
|
Significant
unobservable
inputs
(Level
3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
$
|
111,945
|
|
|
--
|
|
|
--
|
|
$
|
111,945
|
|
Other
real estate owned
|
|
77,743
|
|
|
--
|
|
|
--
|
|
|
77,743
|
|
Mortgage
servicing rights
|
|
5,703
|
|
|
--
|
|
|
--
|
|
|
5,703
|
|
Fair
Values of Financial Instruments:
The
following table presents estimated fair values of the Company’s financial
instruments as of March 31, 2010 and December 31, 2009 whether or not recognized
or recorded in the consolidated balance sheets. The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However,
considerable judgment is necessary to interpret market data in the development
of the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts the Company could realize
in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value amounts. The estimated fair value of financial instruments is
as follows (in thousands):
|
|
|
March
31, 2010
|
|
December
31, 2009
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
value
|
|
|
fair
value
|
|
|
value
|
|
|
fair
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
$
|
277,752
|
|
$
|
277,752
|
|
$
|
323,005
|
|
$
|
323,005
|
|
Securities—trading
|
|
138,659
|
|
|
138,659
|
|
|
147,151
|
|
|
147,151
|
|
Securities—available-for-sale
|
|
96,718
|
|
|
96,718
|
|
|
95,667
|
|
|
95,667
|
|
Securities—held-to-maturity
|
|
73,555
|
|
|
74,307
|
|
|
74,834
|
|
|
76,489
|
|
Loans
receivable held for sale
|
|
4,398
|
|
|
4,472
|
|
|
4,497
|
|
|
4,534
|
|
Loans
receivable
|
|
3,588,726
|
|
|
3,411,326
|
|
|
3,690,355
|
|
|
3,490,419
|
|
FHLB
stock
|
|
37,371
|
|
|
37,371
|
|
|
37,371
|
|
|
37,371
|
|
Bank-owned
life insurance (BOLI)
|
|
55,125
|
|
|
55,125
|
|
|
54,596
|
|
|
54,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand,
NOW and money market accounts
|
|
1,375,888
|
|
|
1,262,714
|
|
|
1,384,860
|
|
|
1,272,322
|
|
Regular
savings
|
|
577,704
|
|
|
531,988
|
|
|
538,765
|
|
|
495,409
|
|
Certificates
of deposit
|
|
1,896,186
|
|
|
1,906,932
|
|
|
1,941,925
|
|
|
1,954,825
|
|
FHLB
advances at fair value
|
|
62,108
|
|
|
62,108
|
|
|
189,779
|
|
|
189,779
|
|
Junior
subordinated debentures at fair value
|
|
48,147
|
|
|
48,147
|
|
|
47,694
|
|
|
47,694
|
|
Other
borrowings
|
|
177,244
|
|
|
177,244
|
|
|
176,842
|
|
|
176,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance-sheet
financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
to originate loans
|
|
362
|
|
|
362
|
|
|
362
|
|
|
362
|
|
Commitments
to sell loans
|
|
(362
|
)
|
|
(362
|
)
|
|
(362
|
)
|
|
(362
|
)
|
Fair
value estimates, methods and assumptions are set forth below for the Company’s
financial and off-balance-sheet instruments:
Cash and Due from
Banks: The carrying amount of these items is a reasonable
estimate of their fair value.
Securities: The
estimated fair values of investment securities and mortgaged-backed securities
are priced using current active market quotes, if available, which are
considered Level 1 measurements. For most of the portfolio, matrix
pricing based on the securities’ relationship to other benchmark quoted prices
is used to establish the fair value. These measurements are
considered Level 2. Due to the increasing credit concerns in the
capital markets and inactivity in the trust preferred markets that have limited
the observability of market spreads for some of the Company’s single issue trust
preferred securities and pooled trust preferred securities (see earlier
discussion above in determining the securities’ fair market value), management
has classified its trust preferred securities as a Level 3 fair value
measure.
Loans
Receivable: Fair values are estimated first by stratifying the
portfolios of loans with similar financial characteristics. Loans are
segregated by type such as multifamily real estate, residential mortgage,
nonresidential mortgage, commercial/agricultural, consumer and
other. Each loan category is further segmented into fixed- and
adjustable-rate interest terms and by performing and non-performing
categories. For performing loans held in portfolio, the fair value is
based on discounted cash flows using as a discount rate the current rate offered
on similar products. The carrying values of variable rate
construction and land development loans and nonresidential real estate loans are
discounted by a liquidity adjustment related to the current market
environment.
The fair
value of performing residential mortgages held for sale is estimated based upon
secondary market sources by type of loan and terms such as fixed or variable
interest rates.
Fair
value for significant non-performing loans is based on recent appraisals or
estimated cash flows discounted using rates commensurate with risk associated
with the estimated cash flows. Assumptions regarding credit risk,
cash flows and discount rates are judgmentally determined using available market
information and specific borrower information.
FHLB Stock: The
fair value is based upon the redemption value of the stock which equates to its
carrying value.
Mortgage Servicing Rights:
Fair values are estimated based on current pricing for sales of servicing
for new loans adjusted up or down based on the serviced loan’s interest rate
versus current loan sales of servicing.
Deposit Liabilities: The
fair value of deposits with no stated maturity, such as savings, checking and
NOW accounts, is estimated by applying decay rate assumptions to segregated
portfolios of similar deposit types to generate cash flows which are then
discounted using short-term market interest rates. The market value
of certificates of deposit is based upon the discounted value of contractual
cash flows. The discount rate is determined using the rates currently
offered on comparable instruments.
FHLB Advances and Other
Borrowings: Fair valuations for our FHLB advances are
estimated using fair market values provided by the lender, the FHLB of
Seattle. The FHLB of Seattle prices advances by discounting the
future contractual cash flows for individual advances using its current cost of
funds curve to provide the discount rate. This is considered to be a
Level 2 input method. Other borrowings are priced using discounted
cash flows to the date of maturity based on using current rates at which such
borrowings can currently be obtained.
Junior Subordinated
Debentures: Due to the increasing credit concerns in the
capital markets and inactivity in the trust preferred markets that have limited
the observability of market spreads (see earlier discussion above in determining
the junior subordinated debentures’ fair market value), junior subordinated
debentures have been classified as a Level 3 fair value
measure. Management believes that the credit risk adjusted spread
utilized is indicative of those that would be used by market
participants.
Commitments: Commitments
to sell loans with notional balances of $31 million and $25 million at March 31,
2010 and December 31, 2009, respectively, have a carrying value of $362,000 at
the end of each period, representing the fair value of such
commitments. Interest rate lock commitments to originate loans held
for sale with notional balances of $31 million and $25 million at March 31, 2010
and December 31, 2009, respectively, have a carrying value of ($362,000) at the
end of each period. The fair value of commitments to sell loans and
of interest rate locks reflect changes in the level of market interest rates
from the date of the commitment or rate lock to the date of our financial
statements. Other commitments to fund loans totaled $752 million and
$777 million at March 31, 2010 and December 31, 2009, respectively, and have no
carrying value at both dates, representing the cost of such
commitments. There were no commitments to purchase or sell securities
at March 31, 2010 or December 31, 2009.
Limitations: The fair value
estimates presented herein are based on pertinent information available to
management as of March 31, 2010 and December 31, 2009. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date and,
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
Fair
value estimates are based on existing on- and off-balance-sheet financial
instruments without attempting to estimate the value of anticipated future
business. The fair value has not been estimated for assets and
liabilities that are not considered financial
instruments. Significant assets and liabilities that are not
financial instruments include the deferred tax assets/liabilities; land,
buildings and equipment; costs in excess of net assets acquired; and real estate
held for sale.
Note
13: INCOME TAXES AND DEFERRED TAXES
The
Company and its wholly-owned subsidiaries file consolidated U.S. federal income
tax returns, as well as state income tax returns in Oregon and
Idaho. The tax years which remain subject to examination by the
taxing authorities are the years ending December 31, 2009, 2008 and
2007.
Income
taxes are accounted for using the asset and liability method. Under
this method a deferred tax asset or liability is determined based on the enacted
tax rates which will be in effect when the differences between the financial
statement carrying amounts and tax basis of existing assets and liabilities are
expected to be reported in the Company’s income tax returns. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date.
Effective
January 1, 2007, the Company adopted revised accounting standards for Income
Taxes. The standard, ASC 740, provides guidance related to the
accounting for uncertainty in income taxes. Adoption of this standard
did not have a significant impact on the Company’s financial position or results
of operations. The revisions prescribe a recognition threshold and
measurement process for financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return, and also provide
guidance on the de-recognition of previously recorded benefits and their
classification, as well as the proper recording of interest and penalties,
accounting in interim periods, disclosures and transition. The
Company periodically reviews its income tax positions based on tax laws and
regulations and financial reporting considerations, and records adjustments as
appropriate. This review takes into consideration the status of current taxing
authorities’ examinations of the Company’s tax returns, recent positions taken
by the taxing authorities on similar transactions, if any, and the overall tax
environment.
As of
March 31, 2010 and December 31, 2009, the Company had recorded net deferred
income tax assets of approximately $14.5 million and $14.8 million,
respectively. Our largest deferred tax item is related to the
allowance for loan losses. For federal income tax purposes, only net
loan charge-offs are deductible, not the booked provision for loan
losses. The difference between these two methodologies creates a
deferred tax asset related to the allowance for loan losses ($36.1
million). Two other significant components of our deferred tax asset
relate to the timing of deferred compensation ($6.6 million) and our net
operating loss carryforward ($5.6 million). Our material deferred tax
liabilities relate to fair value adjustments for financial instruments carried
at fair value ($12.5 million), FHLB stock dividends ($6.2 million), timing
differences related to depreciation ($5.4 million), loan origination costs ($4.9
million), and intangible assets ($3.7 million).
The
following table reflects the effect of temporary differences that give rise to
the components of the net deferred tax asset as of March 31, 2010 and December
31, 2009 (in thousands):
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
REO
and loan loss reserves, book vs. tax
|
$
|
36,051
|
|
$
|
35,653
|
|
Deferred
compensation
|
|
6,570
|
|
|
6,470
|
|
Net
operating loss carryforward
|
|
5,586
|
|
|
5,586
|
|
Other
|
|
85
|
|
|
98
|
|
|
|
48,292
|
|
|
47,807
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
FHLB
stock dividends
|
|
6,230
|
|
|
6,230
|
|
Depreciation
|
|
5,396
|
|
|
5,423
|
|
Deferred
loan fees, servicing rights and loan origination costs
|
|
4,895
|
|
|
5,002
|
|
Intangibles
|
|
3,738
|
|
|
3,969
|
|
Financial
instruments accounted for under fair value accounting
|
|
12,491
|
|
|
12,194
|
|
Other
|
|
589
|
|
|
1
|
|
|
|
33,339
|
|
|
32,819
|
|
|
|
14,953
|
|
|
14,988
|
|
Unrealized
loss on securities available for sale
|
|
(483
|
)
|
|
(177
|
)
|
Deferred
tax asset, net
|
$
|
14,470
|
|
$
|
14,811
|
|
Under
GAAP (ASC 740), a valuation allowance is required to be recognized if it is
“more likely than not” that all or a portion of our deferred tax assets will not
be realized. “More likely than not” is defined as greater than a 50%
probability of occurrence. A determination as to the ultimate
realization of the deferred tax assets is dependent upon management’s judgment
and evaluation of both positive and negative evidence, forecasts of future
taxable income, applicable tax planning strategies, and an assessment of current
and future economic and business conditions. Positive evidence
reviewed included long-term earnings history prior to recent economic downturn,
recent improved performance trends, proven ability to forecast earnings and our
projections of future income over the next three years, capital levels and net
operating loss carryback availability. Negative evidence reviewed
included the losses sustained by the Company during the past two years and
continuing into the current quarter.
After
considering both the positive and negative factors, management believes we have
sufficient positive indicators to outweigh the negative factors and therefore
believe that it is more likely than not that we will be able to fully realize
all of our recorded deferred tax assets. Accordingly, we did not
establish a valuation allowance for the deferred tax assets of $48.3 million and
$47.8 million at March 31, 2010 and December 31, 2009, respectively, as
management believes it is more likely than not that the deferred tax assets will
be realized principally through future reversals of existing taxable temporary
differences and based on projections of future taxable income from
operations.
Note
14: CALCULATION OF WEIGHTED AVERAGE SHARES OUTSTANDING FOR EARNINGS
(LOSS) PER SHARE (EPS)
The
following table reconciles basic to diluted weighted shares outstanding used to
calculate earnings per share data dollars and shares (in thousands, except per
share data):
|
|
|
Quarters
Ended
March
31
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
|
|
|
|
$
|
(1,517
|
)
|
$
|
(9,263
|
)
|
Preferred
stock dividend accrual
|
|
|
|
|
|
|
|
1,550
|
|
|
1,550
|
|
Preferred
stock discount accretion
|
|
|
|
|
|
|
|
398
|
|
|
373
|
|
Net
income (loss) available to common shareholders
|
|
|
|
|
|
|
$
|
(3,465
|
)
|
$
|
(11,186
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
|
|
|
|
|
22,132
|
|
|
17,160
|
|
Plus
MRP, common stock option and common stock warrants
considered
outstanding for diluted EPS
|
|
|
|
|
|
|
|
2
|
|
|
2
|
|
Less
dilutive shares not included as they are anti-dilutive for
|
|
|
|
|
|
|
|
|
|
|
|
|
calculations
of loss per share
|
|
|
|
|
|
|
|
(2
|
)
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
22,132
|
|
|
17,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
$
|
(0.16
|
)
|
$
|
(0.65
|
)
|
Diluted
|
|
|
|
|
|
|
$
|
(0.16
|
)
|
$
|
(0.65
|
)
|
Note
15: 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). Authority to grant awards under the 1996 MRP and 1996 and 1998
SOPs has expired and, as of March 31, 2010, there were only 51,595 options
eligible for grants under the 2001 SOP. We did not make any grants
under any of these plans during the three months ended March 31, 2010 or the
twelve months ended December 31, 2009. Stock based compensation costs
related to the MRP and SOPs were $19,000 and $49,000 for the quarters ended
March 31, 2010 and 2009, respectively. At March 31, 2010, there were
options for 495,372 shares outstanding with a weighted average exercise price of
$22.34 per share and a weighted average remaining contractual term of 3.5
years. None of the options had any intrinsic value on that
date. The Company had $69,000 of total unrecognized compensation
costs related to stock options at March 31, 2010 that are expected to be
recognized over the remaining contractual term of the underlying
grants. All compensation expense related to the MRP program was fully
amortized as of March 31, 2010.
Banner Corporation Long-Term
Incentive Plan: In June 2006, the Board of Directors adopted
the Banner Corporation Long-Term Incentive Plan effective July 1,
2006. The Plan is an account-based type of benefit, the value of
which is directly related to changes in the value of Company common stock,
dividends declared on the Company common stock and changes in Banner Bank’s
average earnings rate, and for accounting purposes 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. 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 Banks 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. The accounting standards
require us 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. We
recognized compensation expense of $137,000 and $16,000 for the quarters ended
March 31, 2010 and 2009, respectively, related to the change in the fair value
of SARs and additional vesting during the period.
Note
16: COMMITMENTS AND CONTINGENCIES
Financial
Instruments with Off-Balance-Sheet Risk
We have
financial instruments with off-balance-sheet risk generated in the normal course
of business to meet the financing needs of our customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in our
Consolidated Statements of Financial Condition.
Our
exposure to credit loss in the event of nonperformance by the other party to the
financial instrument from commitments to extend credit and standby letters of
credit is represented by the contractual notional amount of those
instruments. We use the same credit policies in making commitments
and conditional obligations as for on-balance-sheet instruments. As
of March 31, 2010, outstanding commitments for which no liability has been
recorded consisted of the following (in thousands):
|
Contract
or
Notional
Amount
|
Financial
instruments whose contract amounts represent credit risk:
|
|
|
Commitments
to extend credit
|
|
|
Real
estate secured for commercial, construction or land
development
|
$
|
94,521
|
Revolving
open-end lines secured by 1-4 family residential
properties
|
|
120,021
|
Credit
card lines
|
|
68,502
|
Other,
primarily business and agricultural loans
|
|
431,063
|
Real
estate secured by one- to four-family residential
properties
|
|
31,337
|
Standby
letters of credit and financial guarantees
|
|
6,936
|
|
|
|
Total
|
$
|
752,380
|
|
|
|
Commitments
to sell loans secured by one- to four-family residential
properties
|
$
|
31,337
|
|
|
|
Interest
rate swaps notional amount
|
$
|
19,519
|
Commitments
to extend credit are agreements to lend to a customer, as long as there is no
violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Many of the commitments may expire without
being drawn upon; therefore, the total commitment amounts do not necessarily
represent future cash requirements. Each customer’s creditworthiness
is evaluated on a case-by-case basis. The amount of collateral
obtained, if deemed necessary upon extension of credit, is based on management’s
credit evaluation of the customer. Collateral held varies, but may
include accounts receivable, inventory, property, plant and equipment, and
income producing commercial properties.
Standby
letters of credit are conditional commitments issued to guarantee a customer’s
performance or payment to a third party. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers.
Interest
rates on residential one- to four-family mortgage loan applications are
typically rate locked (committed) to customers during the application stage for
periods ranging from 30 to 60 days, the most typical period currently being 45
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 attempt 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. For
additional information, see “Derivative Instruments” under Note 1 of the Notes
to the Consolidated Financial Statements in the Company’s Annual Report on Form
10-K for the year ended December 31, 2009 filed with the SEC.
The
Company has stand-alone derivative instruments in the form of interest rate swap
agreements, which derive their value from underlying interest
rates. These transactions involve both credit and market
risk. The notional amount is the amount on which calculations,
payments and the value of the derivative are based. The notional
amount does not represent direct credit exposure. Direct credit
exposure is limited to the net difference between the calculated amount to be
received and paid. This difference represents the fair value of the
derivative instrument. All of the Company’s interest rate
swap agreements are with the Pacific Coast Bankers’ Bank (PCBB) as the
counterparty. The Company has swapped fixed-rate cash flows that it
receives from its customers for variable-rate cash flows that it receives from
PCBB. The net changes in fair value of the derivatives are recorded
in loans and other liabilities.
The
Company is exposed to credit-related losses in the event of nonperformance by
the counterparty to these agreements. Credit risk of the financial
contract is controlled through the credit approval, limits, and monitoring
procedures and management does not expect the counterparty to fail its
obligations.
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. 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 and changes in our allowance for loan losses and
provision for loan losses that may be impacted by deterioration in the housing
and commercial real estate markets; changes in general economic conditions,
either nationally or in our market areas; changes in the levels of general
interest rates and the relative differences between short and long-term interest
rates, deposit interest rates, our net interest margin and funding sources;
fluctuations in the demand for loans, the number of unsold homes, land and other
properties and fluctuations in real estate values in our market areas; secondary
market conditions for loans and our ability to sell loans in the secondary
market; results of examinations of us by the Board of Governors of the Federal
Reserve System (the Federal Reserve Board) and of our bank subsidiaries by the
Federal Deposit Insurance Corporation (the FDIC), the Washington State
Department of Financial Institutions, Division of Banks (the Washington DFI) or
other regulatory authorities, including our compliance with the Memoranda of
Understanding and the possibility that any such regulatory authority may, among
other things, institute a formal or informal enforcement action against us or
any of the Banks which could require us to increase our reserve for loan losses,
write-down assets, change our regulatory capital position or affect our ability
to borrow funds or maintain or increase deposits, which could adversely affect
our liquidity and earnings; legislative or regulatory changes that adversely
affect our business including changes in regulatory policies and principles, or
the interpretation of regulatory capital or other rules; our ability to attract
and retain deposits; further increases in premiums for deposit insurance; our
ability to control operating costs and expenses; the use of estimates in
determining fair value of certain of our assets, which estimates may prove to be
incorrect or result in significant declines in valuation; staffing fluctuations
in response to product demand or the implementation of corporate strategies that
affect our workforce and potential associated charges; the failure or security
breach of computer systems on which we depend; our ability to retain key members
of our senior management team; costs and effects of litigation, including
settlements and judgments; our ability to implement our business strategies; our
ability to successfully integrate any assets, liabilities, customers, systems,
and management personnel we may acquire into our operations and our ability to
realize related revenue synergies and cost savings within expected time frames
and any goodwill charges related thereto; increased competitive pressures among
financial services companies; changes in consumer spending, borrowing and
savings habits; the availability of resources to address changes in laws, rules,
or regulations or to respond to regulatory actions; our ability to pay dividends
on our common and preferred stock and interest or principal payments on our
junior subordinated debentures; adverse changes in the securities markets;
inability of key third-party providers to perform their obligations to us;
changes in accounting policies and practices, as may be adopted by the financial
institution regulatory agencies or the Financial Accounting Standards Board
including additional guidance and interpretation on accounting issues and
details of the implementation of new accounting methods; war or terrorist
activities; other economic, competitive, governmental, regulatory, and
technological factors affecting our operations, pricing, products and services;
future legislative changes in the United States Department of Treasury
(Treasury) Troubled Asset Relief Program (TARP) Capital Purchase Program; and
other risks detailed from time to time in our filings with the Securities and
Exchange Commission. Any forward-looking statements are based upon
management’s beliefs and assumptions at the time they are made. We do
not undertake and specifically disclaim any obligation to update any
forward-looking statements included in this report or to update the reasons why
actual results could differ from those contained in such statements whether as a
result of new information, future events or otherwise. These risks
could cause our actual results to differ materially from those expressed in any
forward-looking statements by, or on behalf of, us. In light of these
risks, uncertainties and assumptions, the forward-looking statements discussed
in this report might not occur, and you should not put undue reliance on any
forward-looking statements.
As used
throughout this report, the terms “we”, “our”, “us”, or the “Company” refer to
Banner Corporation and its consolidated subsidiaries.
Executive
Overview
We are a
bank holding company incorporated in the State of Washington and own two
subsidiary banks, Banner Bank and Islanders Bank. Banner Bank is a
Washington-chartered commercial bank that conducts business from its main office
in Walla Walla, Washington and, as of March 31, 2010, its 86 branch offices and
seven 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, 2010, we had total consolidated assets of
$4.6 billion, total loans of $3.6 billion, total deposits of $3.8 billion and
total stockholders’ equity of $406.7 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.
Weak
economic conditions and ongoing strains in the financial and housing markets
which accelerated throughout 2008 and generally continued in 2009 and into the
first quarter of 2010 have presented an unusually challenging environment for
banks. For Banner Corporation, this has been particularly evident in
our need to provide for credit losses during these periods at significantly
higher levels than our historical experience
and has
also affected our net interest income and other operating revenues and
expenses. As a result of these factors, for the quarter ended March
31, 2010, we had a net loss of $1.5 million which, after providing for the
preferred stock dividend and related discount accretion, resulted in a net loss
to common shareholders of $3.5 million, or ($0.16) per diluted share, compared
to a net loss to common shareholders of $11.2 million, or ($0.65) per diluted
share, for the quarter ended March 31, 2009. Although there are
indications that economic conditions are improving, this stress in the economy
has been the most significant challenge impacting our recent operating results
and, like most financial institutions, our future operating results will be
significantly affected by the course of recovery from the
recession.
Our
provision for loan losses was $14.0 million for the quarter ended March 31,
2010, compared to $22.0 million recorded for the same period a year
earlier. The significant provision for loan losses in both quarters
reflects material levels of delinquencies, non-performing loans and net
charge-offs, particularly for loans for the construction of one- to four-family
homes and for acquisition and development of land for residential
properties. For most of the past two and a half years, housing
markets remained weak in many of our primary service areas, resulting in
elevated levels of delinquencies and non-performing assets and deterioration in
property values, particularly for residential land and building lots, and the
resultant need to provide for realized and anticipated losses. By
contrast, other non-housing related segments of our loan portfolio, while
showing some signs of stress, have performed as expected with only normal levels
of credit problems given the serious economic slowdown. Since the
second quarter of 2008, the higher than historical provision for loan losses has
been the most significant factor affecting our operating results and, while we
are encouraged by the continuing reduction in our exposure to residential
construction loans and the recent slowdown in the surfacing of new problem
assets, looking forward we anticipate our credit costs will remain elevated for
a number of quarters and will have a continuing adverse effect on our earnings
during 2010. (See Note 8, Allowance for Loan Losses, as well as
“Asset Quality” below.)
Aside
from the level of loan loss provision, our operating results depend primarily on
our net interest income, which is the difference between interest income on
interest-earning assets, consisting of loans and investment securities, and
interest expense on interest-bearing liabilities, composed primarily of customer
deposits and borrowings. Net interest income is primarily a function
of our interest rate spread, which is the difference between the yield earned on
interest-earning assets and the rate paid on interest-bearing liabilities, as
well as a function of the average balances of interest-earning assets and
interest-bearing liabilities. As more fully explained below, our net
interest income before provision for loan losses increased by $3.2 million for
the quarter ended March 31, 2010 to $38.2 million compared to $35.0 million for
the same quarter one year earlier, reflecting improvement in our net interest
spread and net interest margin as asset yields have remained relatively stable
over the past year while our funding costs continued to
decrease. Similar to the second half of 2009, our net interest margin
improved meaningfully in the current quarter as rapidly declining interest
expense on deposits contributed to significantly lower funding
costs. This trend to lower funding costs and the resulting increase
in the net interest margin represents an important improvement in the core
operating fundamentals of the Company, which should provide a solid base to
build upon as the economy begins to recover.
Our net
income also is affected by the level of our other operating income, including
deposit fees and service charges, loan origination and servicing fees, gains and
losses on the sale of loans and securities, non-interest operating expenses and
income tax provisions. In addition, our net income is affected by the
net change in the value of certain financial instruments carried at fair value
(see Note 12, Fair Value Accounting and Measurement) and in certain periods by
other-than-temporary losses on investment securities. For the quarter
ended March 31, 2010, we recorded an aggregate net gain of $677,000 ($433,000
after tax) in fair value adjustments, which was comprised of $1.9 million ($1.2
million after tax) in net fair value gains which were significantly offset by a
$1.2 million ($788,000 after tax) other-than-temporary impairment charge for a
single-issuer trust preferred security that we wrote off. By
comparison, we recorded a net loss of $3.3 million ($2.1 million after tax) in
fair value adjustments for the quarter ended March 31, 2009.
Other
operating income, excluding the fair value adjustments and other-than-temporary
impairment losses, decreased $854,000 to $7.0 million for the quarter ended
March 31, 2010 from $7.9 million for the same period one year earlier, primarily
as a result of decreased gain on the sale of loans from mortgage banking
operations somewhat offset by an increase in loan servicing
fees. Revenues (net interest income before the provision for loan
losses plus other operating income), excluding fair value adjustments and
other-than-temporary impairment losses, increased $2.3 million to $45.2 million
for the quarter ended March 31, 2010, compared to $42.9 million for the quarter
ended March 31, 2009, primarily as a result of the significant decrease in the
cost of deposits over the past twelve months. Other operating
expenses were $35.4 million for the quarter ended March 31, 2010, compared to
the $33.8 million for the quarter ended March 31, 2009. The current
quarter’s expenses reflect significantly increased costs associated with problem
loan collection activities including professional services and charges related
to real estate owned, and increased deposit insurance expense. These
increases were partially offset by reductions in compensation, occupancy, and
miscellaneous expenses.
As noted
above, in the quarter ended March 31, 2010, our net income included a $1.9
million net gain in the valuation of the selected financial assets and
liabilities we record at fair value that was significantly offset by a $1.2
million other-than-temporary impairment loss. These adjustments
resulted in a net reduction of $433,000 (net after tax), or $0.02 per share
(diluted), to the net loss reported for the quarter ended March 31,
2010. By comparison, the $3.3 million fair value charge in the same
quarter one year earlier contributed $2.1 million (net after tax), or ($0.12)
per share (diluted) to the net loss. Excluding the net fair value
adjustments and other-than-temporary impairment loss, the net loss from core
operations was $2.0 million ($3.9 million available to common shareholders) for
the quarter ended March 31, 2010, compared to $7.2 million ($9.1 million
available to common shareholders) for the quarter ended March 31,
2009. Earnings or loss from core operations and other earnings
information excluding the change in valuation of financial instruments carried
at fair value and other-than-temporary impairment loss represent non-GAAP
financial measures. Management has presented these non-GAAP financial
measures in this discussion and analysis because it believes that they provide
useful and comparative information to assess trends in our core
operations. Where applicable, we have also presented comparable
earnings information using GAAP financial measures. The decreased
loss from core operations primarily reflects the decreased loan loss
provisioning and wider net interest margin, partially offset by increased
collection costs on real estate owned and higher FDIC insurance
charges. See “Comparison of Results of Operations for the quarters
ended March 31, 2010 and 2009” for more detailed information about our financial
performance.
We offer
a wide range of loan products to meet the demands of our
customers. 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 two years our
origination of construction and land development loans has declined materially
and the proportion of the portfolio invested in these types of loans has
declined. By contrast, residential mortgage loan originations during
this cycle have remained reasonably stable, primarily reflecting the impact of
exceptionally low interest rates on the demand for loans to refinance existing
debt as well as loans to finance home purchases. Our real estate
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. Reflecting the recessionary environment, in
recent periods demand for these types of commercial business loans has been
weak; however, total outstanding balances have remained relatively
unchanged. We have also increased our emphasis on consumer lending,
although demand for consumer loans also has been modest in recent
quarters. Still, the portion of the loan portfolio invested in
consumer loans has increased and as of March 31, 2010 represented 8% of total
loans. While continuing our commitment to residential lending,
including our mortgage banking activities, we expect commercial lending
(including owner-occupied commercial real estate, commercial business and
agricultural loans) and consumer lending to become increasingly more important
activities for us. By contrast, we anticipate residential
construction and related land development lending, which at March 31, 2010
represented 13% of the loan portfolio, compared to 20% a year earlier, will
continue to be restrained by market conditions for the foreseeable future, as
well as by our efforts to reduce our concentration in this type of
lending. We also expect non-owner-occupied investor commercial real
estate lending, for both construction and longer-term financing, to be curtailed
with balances declining for the foreseeable future as we manage our
concentration in these types of loans.
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 marketing effort and branch expansion, relocations and
renovations has been directed toward attracting additional deposit customer
relationships and balances. The long-term success of our deposit
gathering activities is reflected not only in the growth of deposit balances,
but also in increases in the level of deposit fees, service charges and other
payment processing revenues compared to periods prior to that
expansion. Reflecting a seasonal pattern, deposits declined slightly
in the current quarter but increased by $222 million, to $3.850 billion at March
31, 2010 from $3.628 billion at March 31, 2009 despite our decision to
significantly reduce our exposure to public funds deposits, as the new higher
collateralization requirements under Washington and Oregon state regulations
have made retaining these deposits less desirable than in the
past. In addition, although brokered deposits have never been an
important component of our funding, we also chose to reduce brokered deposits by
$99 million over the same twelve-month period. Further, changes in
the mix of deposits, which reflected the 8% year-over-year growth in
non-interest-bearing accounts and a 28% increase in interest-bearing transaction
and savings accounts, has been an important element in the improved funding
costs of recent quarters.
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 Selected Notes to the
Consolidated Financial Statements contained in Item 1 of this Form
10-Q.
Summary
of Critical Accounting Policies
Our
significant accounting policies are described in Note 1 of the Notes to the
Consolidated Financial Statements for the year ended December 31, 2009 included
in the Form 10-K filed with the SEC on March 16, 2010. Various
elements of our accounting policies, by their nature, are inherently subject to
estimation techniques, valuation assumptions and other subjective
assessments. In particular, management has identified several
accounting policies that, due to the judgments, estimates and assumptions
inherent in those policies, are critical to an understanding of our financial
statements. These policies relate to (i) the methodology for the
recognition of interest income, (ii) determination of the provision and
allowance for loan and lease losses, (iii) the valuation of financial assets and
liabilities recorded at fair value, (iv) the valuation of intangibles such as
goodwill, core deposit intangibles and mortgage servicing rights and (v) the
valuation of real estate held-for-sale. These policies and judgments,
estimates and assumptions are described in greater detail
below. Management believes that the judgments, estimates and
assumptions used in the preparation of the financial statements are appropriate
based on the factual circumstances at the time. However, given the
sensitivity of the financial statements to these critical accounting policies,
the use of other judgments, estimates and assumptions could result in material
differences in our results of operations or financial
condition. Further, subsequent changes in economic or market
conditions could have a material impact on these estimates and our financial
condition and operating results in future periods. There have been no
significant changes in our application of accounting policies since December 31,
2009. For additional information concerning critical accounting
policies, see Notes 1, 8, 9, 24 and 25 of the Notes to the Consolidated
Financial Statements in the 2009 Form 10-K and the following:
Interest
Income: Interest on loans and securities is accrued as earned
unless management doubts the collectability of the asset or the unpaid
interest. Interest accruals on loans are generally discontinued when
loans become 90 days past due, at which time the loans are placed on nonaccrual
status. All previously accrued but uncollected interest is deducted
from interest income upon transfer to nonaccrual status. For any
future payments collected, interest income is recognized only upon management’s
assessment that there is a strong likelihood that the full
amount of
a loan will be repaid or recovered. A loan may be put on nonaccrual
status sooner than this policy would dictate if, in management’s judgment, the
interest may be uncollectable. While less common, similar interest
reversal and nonaccrual treatment is applied to investment securities if their
ultimate collectability becomes questionable.
Provision and Allowance for Loan
Losses: (Note 8) The provision for loan losses
reflects the amount required to maintain the allowance for losses at an
appropriate level based upon management’s evaluation of the adequacy of general
and specific loss reserves. We maintain an allowance for loan losses
consistent in all material respects with the GAAP guidelines outlined in ASC
450,
Contingencies. We have established systematic methodologies
for the determination of the adequacy of our allowance for loan
losses. The methodologies are set forth in a formal policy and take
into consideration the need for an overall general valuation allowance as well
as specific allowances that are tied to individual problem loans. We
increase our allowance for loan losses by charging provisions for probable loan
losses against our income and value impaired loans consistent with the
accounting guidelines outlined in ASC 310, Receivables.
The
allowance for losses on loans is maintained at a level sufficient to provide for
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 collectability may not be assured, and
determination of the existence and realizable value of the collateral and
guarantees securing the loans. Realized losses related to specific
assets are applied as a reduction of the carrying value of the assets and
charged immediately against the allowance for loan loss
reserve. Recoveries on previously charged off loans are credited to
the allowance. The reserve is based upon factors and trends
identified by us at the time financial statements are
prepared. Although we use the best information available, future
adjustments to the allowance may be necessary due to economic, operating,
regulatory and other conditions beyond our control. The adequacy of
general and specific reserves is based on our continuing evaluation of the
pertinent factors underlying the 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.
Our
methodology for assessing the appropriateness of the allowance consists of
several key elements, which include specific allowances, an allocated formula
allowance and an unallocated allowance. Losses on specific loans are
provided for when the losses are probable and estimable. General loan
loss reserves are established to provide for inherent loan portfolio risks not
specifically provided for. The level of general reserves is based on
analysis of potential exposures existing in our loan portfolio including
evaluation of historical trends, current market conditions and other relevant
factors identified by us at the time the financial statements are
prepared. The formula allowance is calculated by applying loss
factors to outstanding loans, excluding those loans that are subject to
individual analysis for specific allowances. Loss factors are based
on our historical loss experience adjusted for significant environmental
considerations, including the experience of other banking organizations, that in
our judgment affect the collectability of the portfolio as of the evaluation
date. The unallocated allowance is based upon our evaluation of
various factors that are not directly measured in the determination of the
formula and specific allowances. This methodology may result in
losses or recoveries differing significantly from those provided in the
Consolidated Financial Statements.
While we
believe the estimates and assumptions used in our determination of the adequacy
of the allowance are reasonable, there can be no assurance that such estimates
and assumptions will not be proven incorrect in the future, or that the actual
amount of future provisions will not exceed the amount of past provisions or
that any increased provisions that may be required will not adversely impact our
financial condition and results of operations. In addition, the
determination of the amount of the Banks’ allowance for loan losses is subject
to review by bank regulators as part of the routine examination process, which
may result in the adjustment of reserves based upon their judgment of
information available to them at the time of their examination.
Fair Value Accounting and
Measurement: (Note 12) We use fair value
measurements to record fair value adjustments to certain financial assets and
liabilities and to determine fair value disclosures. We include in
the Notes to the Consolidated Financial Statements information about the extent
to which fair value is used to measure financial assets and liabilities, the
valuation methodologies used and the impact on our results of operations and
financial condition. Additionally, for financial instruments not
recorded at fair value we disclose, where appropriate, our estimate of their
fair value. For more information regarding fair value accounting,
please refer to Note 12 in this Form 10-Q.
Other Intangible
Assets: (Note 10) Other intangible assets
consists primarily of core deposit intangibles (CDI), which are amounts recorded
in business combinations or deposit purchase transactions related to the value
of transaction-related deposits and the value of the customer relationships
associated with the deposits. The major component of our intangible
assets is core deposit intangibles arising from acquisitions. Core
deposit intangibles are being amortized on an accelerated basis over a weighted
average estimated useful life of eight years. These assets are
reviewed at least annually for events or circumstances that could impact their
recoverability. These events could include loss of the underlying
core deposits, increased competition or adverse changes in the
economy. To the extent other identifiable intangible assets are
deemed unrecoverable, impairment losses are recorded in other non-interest
expense to reduce the carrying amount of the assets.
Real Estate
Owned: (Note 9) Property acquired by foreclosure or
receiving a deed in lieu of foreclosure is recorded at the lower of estimated
fair value, less cost to sell, or the carrying value of the defaulted
loan. Development and improvement costs relating to the property are
capitalized. The carrying value of the property is periodically
evaluated by management and, if necessary, allowances are established to reduce
the carrying value to net realizable value. Gains or losses at the
time the property is sold are charged or credited to operations in the period in
which they are realized. The amounts the Banks will ultimately
recover from real estate may differ substantially from the carrying value of the
assets because of market factors beyond the Banks’ control or because of changes
in the Banks’ strategies for recovering the investment.
Comparison
of Financial Condition at March 31, 2010 and December 31, 2009
General. Total
assets decreased $141 million, or 3%, to $4.582 billion at March 31, 2010, from
$4.722 billion at December 31, 2009. Net loans receivable (gross
loans less loans in process, deferred fees and discounts, and allowance for loan
losses) decreased $102 million, or 3%, to $3.593 billion at March 31, 2010, from
$3.695 billion at December 31, 2009. The contraction in net loans was
largely due to decreases of $26 million in one- to four-family construction
loans and $23 million in land and land development loans. We also
experienced decreases of $21 million in commercial business loans, $18 million
in agricultural loans and $10 million in commercial real estate
loans. These changes were partially offset by increases of $8 million
in commercial and multi-family construction loans and $4 million in commercial
land and land development loans. We continue to maintain a
significant, although decreasing, investment in construction and land loans, as
new originations of these types of loans during the past two-and-a-half years
has declined substantially and is expected to remain modest for the foreseeable
future. As a result of the much slower pace of new originations and
continuing payoffs on existing loans, transfers to real estate owned and
charge-offs, loans to finance the construction of one- to four-family
residential real estate, which totaled $213 million at March 31, 2010, have
decreased by $442 million, or 67%, since their peak quarter-end balance of $655
million at June 30, 2007. In addition, land and development loans,
which totaled $305 million at March 31, 2010, have decreased by $197 million, or
39%, compared to their peak quarter-end balances of $502 million at March 31,
2008. Given the current housing and economic environment, we
anticipate that construction and land loan balances will continue to decline for
the foreseeable future, although the pace of decline will be more modest as
originations of new construction loans likely will increase somewhat as
inventories of completed homes have been reduced and the build out of existing
development projects will cautiously resume.
Securities
decreased marginally, to $309 million at March 31, 2010 from $318 million at
December 31, 2009, as repayments and sales exceeded a single $5 million purchase
and net fair value adjustments. During the quarter ended March 31,
2010, net fair value adjustments for trading and available-for-sale securities
increased their carrying values by $1 million, which was net of a $1 million
other-than-temporary impairment charge on a single-issuer trust preferred
security. Effective January 1, 2007, we elected to reclassify many of
our securities to fair value and, although we have not historically engaged in
trading activities, these securities are reported as trading securities for
financial reporting purposes. At March 31, 2010, the fair value of
our trading securities was $24 million less than their amortized
cost. The reduction reflected in the fair value of these securities
compared to their amortized cost primarily was due to a net decrease of $21
million in the value of single-issuer trust preferred securities and
collateralized debt obligations secured by pools of trust preferred securities
issued by bank holding companies and insurance companies as well as a decrease
of $7 million in the value of Fannie Mae and Freddie Mac common and preferred
equity securities, offset by a $4 million gain in all other trading
securities. (See Note 12, Fair Value Accounting and Measurement, in
the Selected Notes to the Consolidated Financial
Statements.) Periodically, we also acquire securities which are
designated as available-for-sale or held-to-maturity. At March 31,
2010, we recorded a increase of $849,000 ($543,000 net of tax) in net fair value
adjustments related to available-for-sale securities, which was included as a
component of other comprehensive income. Generally, securities
designated as held-to-maturity are reported at their amortized cost for
financial reporting purposes.
Real
estate owned acquired through foreclosures increased $17 million, to $95 million
at March 31, 2010, from $78 million at December 31, 2009. The total
balance of real estate owned included $71 million in land or land development
projects, $8 million in commercial real estate and $16 million in single-family
homes at March 31, 2010. During the quarter ended March 31, 2010, we
transferred $28 million of loans into real estate owned, capitalized additional
investments of $752,000 in acquired properties, disposed of approximately $11
million of properties and recognized $1.1 million in charges against earnings
for valuation adjustments related to currently owned properties. (See
“Asset Quality” discussion below.)
Deposits
decreased $16 million, to $3.850 billion at March 31, 2010 from $3.866 billion
at December 31, 2009. Non-interest-bearing deposits decreased by $33
million, or 6%, to $549 million from $582 million, and interest-bearing deposits
increased by $17 million, to $3.300 billion at March 31, 2010 from $3.283
billion at December 31, 2009. In response to the now higher costs of
collateralizing public fund deposits and to reduce the shared risk exposure
under Washington and Oregon State regulations, we encouraged the runoff of an
additional $3 million in public funds during the first quarter of
2010. We anticipate further declines in public fund deposits as we
continue to adjust to these new regulations. We also elected to
reduce brokered deposits by $14 million during the quarter ended March 31, 2010,
as funding from retail deposit growth was more than adequate to meet loan
demand. The decrease in public funds and brokered deposits was offset
by modest growth in retail deposits during the quarter.
FHLB
advances decreased $128 million, to $62 million at March 31, 2010 from $190
million at December 31, 2009, while other borrowings remained relatively
unchanged at $177 million at each of the last two quarter ends. The
decrease in FHLB advances reflects the repayment of temporary increases in
overnight borrowings that were outstanding at December 31, 2009 as a part of our
short-term cash management activities. Other borrowings at March 31,
2010 include $127 million of retail repurchase agreements that are primarily
related to customer cash management accounts. Retail repurchase
agreements increased by $3 million during the quarter ended March 31,
2010. Other borrowings also include $50 million of senior notes
guaranteed by the FDIC under the TLGP, which is unchanged from the amount
reported at December 31, 2009.
Junior
subordinated debentures increased by $453,000 since December 31, 2009,
reflecting only modest fair value adjustments resulting from a minor increase in
the level of three month LIBOR, as changes in credit market conditions during
the quarter had an insignificant impact on the valuation of this type of
security. Changes in the fair value of the junior subordinated
debentures, while not significant in the first quarter of 2010, represent
non-cash valuation adjustments that have no effect on our liquidity or ability
to fund our operations. (See Note 12, Fair Value of Financial
Instruments.)
During
the quarter ended March 31, 2010, we issued 1,561,559 additional shares of
common stock for $4 million at an average net per share price of $2.77 through
our Dividend Reinvestment and Direct Stock Purchase and Sale
Plan. This stock issuance activity was partially offset by the
changes in retained earnings as a result of losses from operations and the
accrual of preferred stock dividends, resulting in a net $2 million increase in
stockholders’ equity. During the quarter ended March 31, 2010, we did
not issue or repurchase any shares of Banner Corporation common stock in
connection with the exercise of vested stock options and grants.
Comparison
of Results of Operations for the Quarters Ended March 31, 2010 and
2009
Reflecting
the economic recession, ongoing strains in the financial and housing markets,
and further deterioration of property values for the quarter ended March 31,
2010, we had a net loss of $1.5 million which, after providing for the preferred
stock dividend of $1.6 million and related discount accretion of $398,000,
resulted in a net loss to common shareholders of $3.5 million, or ($0.16) per
diluted share. This loss compares to a net loss to common
shareholders of $11.2 million, or ($0.65) per diluted share, for the quarter
ended March 31, 2009.
The net
loss for the current quarter continues to reflect an elevated level of loan loss
provisioning compared to our historical experience. However, our net
interest margin did improve compared to the same quarter in the prior year, as
well as the immediately preceding quarter, in response to declining deposit
costs over the last twelve months. As more fully explained below, our
provision for loan losses was $14.0 million for the quarter ended March 31,
2010, compared to $22.0 million for the same quarter in the prior
year. While decreased compared to the prior quarter and the first
quarter of 2009, our provision for losses in the current quarter continues to
reflect high levels of delinquencies, non-performing loans and net charge-offs,
particularly for loans for the construction of one- to four-family homes and for
acquisition and development of land for residential properties.
Our
operating results for the quarter ended March 31, 2010 also reflected an
increase in other operating income that included a $1.9 million (1.2 million
after tax) net gain as a result of changes in the valuation of financial
instruments carried at fair value which was significantly offset by a $1.2
million ($788,000 after tax) other-than-temporary impairment loss. In
the quarter ended March 31, 2009, our fair value adjustments resulted in a net
loss of $3.3 million ($2.1 million after tax) and we did not have any
impairment losses. Excluding these fair value adjustments and the
other-than-temporary impairment loss, other operating income decreased to $7.0
million for the quarter compared to $7.9 million for the same quarter in 2009,
primarily as a result of decreased gain on the sale of loans from mortgage
banking operations. Other operating expenses increased $1.6 million
to $35.4 million for the quarter ended March 31, 2010 from $33.8 million a year
earlier, which is primarily reflective of increased costs related to real estate
owned and deposit insurance and was partially offset by decreased compensation
and occupancy costs.
Compared
to levels a year ago, total assets increased 2% to $4.582 billion at March 31,
2010, net loans decreased 6% to $3.593 billion, and deposits increased 6% to
$3.850 billion, while borrowings, including customer sweep accounts (retail
repurchase agreements) and junior subordinated debentures, decreased $120
million, or 29%, to $287 million. The average balance of
interest-earning assets was $4.290 billion for the quarter ended March 31, 2010,
a decrease of $57 million, or 1%, compared to $4.346 billion one year
earlier.
Net Interest
Income. Net interest income before provision for loan losses
increased by $3.2 million, or 9%, to $38.2 million for the quarter ended March
31, 2010, compared to $35.0 million for the same quarter one year earlier, as a
result of the increase in the net interest margin and despite a modest decrease
in average interest-earning assets. The net interest margin of 3.61%
for the quarter ended March 31, 2010 was 35 basis points higher than the same
quarter in the prior year, largely as a result of the effect of a much lower
cost of deposits. The positive impact to our net interest margin from
lower funding costs was partially offset by the adverse effect of continued high
levels of nonaccrual loans and other non-performing
assets. Nonaccruing loans reduced the margin by 34 basis points in
the quarter ended March 31, 2010 compared to a 38 basis point reduction for the
first quarter in the prior year. In addition, the mix of earning
assets changed to include fewer loans and more securities and interest-bearing
deposits over the past twelve months, as our on-balance-sheet liquidity has
increased. This change in the mix in the current very low interest
rate environment had an adverse effect on earning asset yields; however, this
was more than offset by the significantly lower deposit
costs. Reflecting a large increase in low rate interest-bearing
deposits at the Federal Reserve, as well as further reduction in the yield on
other securities caused by repayments and calls and a modest decrease in loan
yields, the yield on earning assets for the quarter ended March 31, 2010
decreased by 34 basis points compared to the same quarter in prior
year. Importantly, however, funding costs for the same period
decreased by 77 basis points compared to a year earlier and more than offset
this lower asset yield. As a result, the net interest spread expanded
to 3.56% for the quarter compared to 3.13% for the quarter ended March 31,
2009.
Interest
Income. Interest income for the quarter ended March 31, 2010
was $56.0 million, compared to $60.3 million for the same quarter in the prior
year, a decrease of $4.4 million, or 7%. The decrease in interest
income occurred reflecting a 34 basis point decrease in the yield on earning
assets coupled with a $57 million decrease in the average balance of those
assets. The yield on average interest-earning assets decreased to
5.29% for the quarter ended March 31, 2010, compared to 5.63% for the same
quarter one year earlier. The decrease in the yield on earning assets
primarily reflects the large amount of funds we have on deposit with the Federal
Reserve Bank of San Francisco at very low interest rates, as we have chosen to
increase our on-balance-sheet liquidity. Average loans receivable for
the quarter ended March 31, 2010 decreased $217 million, or 5%, to $3.726
billion, compared to $3.943 billion for the same quarter in the prior
year. Interest income on loans decreased by $3.6 million, or 6%, to
$52.8 million for the current quarter from $56.3 million for the quarter ended
March 31, 2009, reflecting the impact of a six basis point decrease in the
average yield on loans, along with the $217 million decrease in average loan
balances. The decrease in average loan
yields
reflects the continuing very low level of market interest rates during the past
year and the maturity or repayment of higher yielding loans. The
average yield on loans was 5.74% for the quarter ended March 31, 2010, compared
to 5.80% for the same quarter one year earlier.
The
combined average balance of mortgage-backed securities, investment securities,
and daily interest-bearing deposits increased by $160 million (excluding the
effect of fair value adjustments) for the quarter ended March 31, 2010, while
the interest and dividend income from those investments decreased by $773,000
compared to the same quarter in the prior year. The effect of the
increased average balance was more than offset as the average yield on the
securities portfolio and cash equivalents decreasing 169 basis points to 2.31%
for the quarter ended March 31, 2010, from 4.00% for the same quarter one year
earlier. As mentioned above, this decrease in the yield on the
securities portfolio is a reflection of the current lower rate environment and a
significant increase in daily interest-bearing deposits.
Interest
Expense. Interest expense for the quarter ended March 31, 2010
was $17.8 million, compared to $25.4 million for the prior quarter one year
earlier, a decrease of $7.6 million, or 30%. The decrease in interest
expense occurred as a result of a 77 basis point decrease in the average cost of
all interest-bearing liabilities to 1.73% for the quarter ended March 31, 2010,
from 2.50% for the same quarter one year earlier, somewhat offset by a $64
million increase in average interest-bearing liabilities. The small
increase in interest-bearing balances reflects net deposit growth during the
year partially offset by an aggregate decrease in outstanding FHLB
advances. The effect of lower average market rates for the quarter on
the cost of these funds was partially mitigated by deposit pricing
characteristics noted below.
Deposit
interest expense decreased $7.3 million, or 32%, to $15.8 million for the
quarter ended March 31, 2010 compared to $23.1 million for the same quarter in
the prior year as a result of an 85 basis point decrease in the cost of
interest-bearing deposits and despite a modest increase in the average balance
of deposits. Average deposit balances increased $108 million, to
$3.801 billion for the quarter ended March 31, 2010, from $3.693 billion for the
quarter ended March 31, 2009, while the average rate paid on deposit balances
decreased to 1.69% in the current quarter from 2.54% for the quarter ended March
31, 2009. 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 aggregate cost of
deposits. This lower degree of volatility and lag effect for deposit
pricing have been evident in the decrease in deposit costs as the Federal
Reserve pursued policies first to aggressively lower short-term interest rates
by 500 basis points from September 18, 2007 to December 31, 2008 and more
recently to maintain the very low level of interest
rates. Furthermore, competitive pricing pressure for interest-bearing
deposits was quite intense for certain periods twelve to eighteen months ago, as
many financial institutions experienced increased liquidity concerns in the
deteriorating economic conditions. However, as market rates have
remained low for an extended period and competitors’ liquidity strains have been
generally mitigated, we have experienced significantly declining deposit costs
during 2009 and continuing into the first quarter of 2010. While we
do not anticipate further reductions in market interest rates, we do expect
additional declines in deposit costs over the near term as account maturities
will present further repricing opportunities and competitive pricing has become
more rational in response to modest loan demand in the current economic
environment. Further, continued changes in our deposit mix,
reflecting growth in lower cost transaction and savings accounts as our branch
network has continued to mature, have also meaningfully contributed to the
decrease in our funding costs.
Average
FHLB advances (excluding the effect of fair value adjustments) decreased to $69
million for the quarter ended March 31, 2010, compared to $134 million for the
same quarter one year earlier. The average rate paid on FHLB advances
for the quarter ended March 31, 2010 decreased slightly by five basis points to
2.13%, compared to the same quarter in the prior year, and augmented the effect
of the $65 million decrease in average FHLB borrowings, resulting in a $359,000
decrease in the related interest expense. The lower average rate for
FHLB advances primarily reflects the maturity of certain fixed-rate
advances. Other borrowings consist of retail repurchase agreements
with customers, secured by certain investment securities, the senior bank notes
issued under the TLGP, as well as overnight federal funds borrowings from the
Federal Reserve Bank of San Francisco and correspondent banks. The
average balance for other borrowings, consisting of $131 million in customer
retail repurchase agreements and $50 million of senior bank notes, was $181
million for the quarter ended March 31, 2010, an increase of $22 million over
the same quarter in the prior year. The related interest expense for
other borrowings increased by $407,000, to $634,000 for the quarter ended March
31, 2010, from $227,000 for the same quarter one year earlier, as an 84 basis
point increase in the average rate paid was augmented by an increase in the
average balance outstanding for the quarter. The average rate paid on
other borrowings was 1.42% for the quarter ended March 31, 2010, compared to
0.58% for the same quarter one year earlier, largely reflecting the higher cost
of the senior bank notes, which were only outstanding for one day in the quarter
ended March 31, 2009. Repurchase agreements and federal funds
borrowings generally have relatively short terms and therefore reprice to
current market levels more quickly than deposits, which generally lag current
market rates. The senior bank notes which were issued on March 31,
2009, have a fixed rate of 2.625% and fixed maturity with a 24 month remaining
term to maturity at March 31, 2012. Junior subordinated debentures
which were issued in connection with trust preferred securities had an average
balance of $124 million (excluding the effect of fair value adjustments) and an
average cost of 3.37% for the quarter ended March 31, 2010. Junior
subordinated debentures outstanding in the same quarter in the prior year had
the same average balance of $124 million (excluding the effect of fair value
adjustments) but with a higher average rate of 4.37%. Generally, the
junior subordinated debentures are adjustable-rate instruments with repricing
frequencies of three months based upon the three-month LIBOR
index. The lower average cost of the junior subordinated debentures
in the current quarter reflects the impact of lower short-term market interest
rates.
The
following tables provide additional comparative data on our operating
performance (dollars in thousands):
|
|
|
Quarters
Ended
|
|
Average
Balances
|
|
|
March
31
|
|
(in
thousands)
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities and cash equivalents
|
|
|
|
|
|
|
$
|
428,842
|
|
$
|
221,035
|
|
Mortgage-backed
obligations
|
|
|
|
|
|
|
|
97,349
|
|
|
145,108
|
|
FHLB
stock
|
|
|
|
|
|
|
|
37,371
|
|
|
37,371
|
|
Total
average interest-earning securities and cash equivalents
|
|
|
|
|
|
|
|
563,562
|
|
|
403,514
|
|
Loans
receivable
|
|
|
|
|
|
|
|
3,726,243
|
|
|
3,942,917
|
|
Total
average interest-earning assets
|
|
|
|
|
|
|
|
4,289,805
|
|
|
4,346,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning
assets (including fair value adjustments on interest-earning
assets)
|
|
|
|
|
|
|
|
258,060
|
|
|
193,188
|
|
Total
average assets
|
|
|
|
|
|
|
$
|
4,547,865
|
|
$
|
4,539,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
$
|
3,800,888
|
|
$
|
3,693,345
|
|
Advances
from FHLB
|
|
|
|
|
|
|
|
68,603
|
|
|
134,022
|
|
Other
borrowings |
|
|
|
|
|
|
|
180,873 |
|
|
159,189 |
|
Junior
subordinated debentures
|
|
|
|
|
|
|
|
123,716
|
|
|
123,716
|
|
Total
average interest-bearing liabilities
|
|
|
|
|
|
|
|
4,174,080
|
|
|
4,110,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing
liabilities (including fair value adjustments on interest-bearing
liabilities)
|
|
|
|
|
|
|
|
(36,459
|
)
|
|
(7,922
|
)
|
Total
average liabilities
|
|
|
|
|
|
|
|
4,137,621
|
|
|
4,102,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
410,244
|
|
|
437,269
|
|
Total
average liabilities and equity
|
|
|
|
|
|
|
$
|
4,547,865
|
|
$
|
4,539,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Yield/Expense (rates are annualized)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Yield:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities and cash equivalents
|
|
|
|
|
|
|
|
1.97
|
%
|
|
4.01
|
%
|
Mortgage-backed
obligations
|
|
|
|
|
|
|
|
4.69
|
%
|
|
5.03
|
%
|
FHLB
stock
|
|
|
|
|
|
|
|
0.00
|
%
|
|
0.00
|
%
|
Total
interest rate yield on securities and cash equivalents
|
|
|
|
|
|
|
|
2.31
|
%
|
|
4.00
|
%
|
Loans
receivable
|
|
|
|
|
|
|
|
5.74
|
%
|
|
5.80
|
%
|
Total
interest rate yield on interest-earning assets
|
|
|
|
|
|
|
|
5.29
|
%
|
|
5.63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
1.69
|
%
|
|
2.54
|
%
|
Advances
from FHLB
|
|
|
|
|
|
|
|
2.13
|
%
|
|
2.18
|
%
|
Other
borrowings
|
|
|
|
|
|
|
|
1.42
|
%
|
|
0.58
|
%
|
Junior
subordinated debentures
|
|
|
|
|
|
|
|
3.37
|
%
|
|
4.37
|
%
|
Total
interest rate expense on interest-bearing liabilities
|
|
|
|
|
|
|
|
1.73
|
%
|
|
2.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
spread
|
|
|
|
|
|
|
|
3.56
|
%
|
|
3.13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin on interest earning assets
|
|
|
|
|
|
|
|
3.61
|
%
|
|
3.26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
Key Financial Ratios (ratios are annualized)
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
(loss) on average assets
|
|
|
|
|
|
|
|
(0.14
|
)%
|
|
(0.83
|
)%
|
Return
(loss) on average equity
|
|
|
|
|
|
|
|
(1.50
|
)%
|
|
(8.59
|
)%
|
Average
equity / average assets
|
|
|
|
|
|
|
|
9.02
|
%
|
|
9.63
|
%
|
Average
interest-earning assets / interest-bearing liabilities
|
|
|
|
|
|
|
|
102.77
|
%
|
|
105.75
|
%
|
Non-interest
(other operating) income/average assets
|
|
|
|
|
|
|
|
0.69
|
%
|
|
0.42
|
%
|
Non-interest
(other operating) expenses / average assets
|
|
|
|
|
|
|
|
3.16
|
%
|
|
3.02
|
%
|
Efficiency
ratio
[non-interest
(other operating) expenses / revenues]
|
|
|
|
|
|
|
|
77.20
|
%
|
|
85.32
|
%
|
Tangible
common stockholders’ equity to tangible assets (1)
|
|
|
|
|
|
|
|
6.09
|
%
|
|
6.56
|
%
|
(1)
|
Tangible
common equity and tangible assets exclude preferred stock, goodwill, core
deposit and other intangibles.
|
Provision and Allowance for Loan
Losses. During the quarter ended March 31, 2010, the provision
for loan losses was $14.0 million, compared to $22.0 million for the quarter
ended March 31, 2009. As discussed in the Summary of Critical
Accounting Policies section above and in Note 1 of the Selected Notes to
Consolidated Financial Statements, the provision and allowance for loan losses
is one of the most critical accounting estimates included in our Consolidated
Financial Statements. Throughout 2009 and continuing into the current
quarter, the provision for loan losses has been the most important factor
contributing to our disappointing operating results. The provision
for loan losses reflects the amount required to maintain the allowance for
losses at an appropriate level based upon management’s evaluation of the
adequacy of general and specific loss reserves, trends in delinquencies and net
charge-offs and current economic conditions. We believe that the
allowance for loan losses as of March 31, 2010 was adequate to absorb the
probable losses inherent in the loan portfolio at that date and that the
estimates and assumptions used in our determination of the adequacy of the
allowance are reasonable.
While the
provision for loan losses in the quarter ended March 31, 2010 declined compared
to the immediately preceding quarter and the same quarter one year ago, it still
remains significantly elevated in relation to previous historical loss
rates. Nonetheless, it is meaningful to note that in the second half
of the prior year and continuing into the current quarter the pace of net
charge-offs and problem loan identification moderated in each successive
quarter. The provision for loan losses for the quarter ended March
31, 2010 continued to primarily reflect material levels of delinquent and
non-performing construction, land and land development loans for one- to
four-family properties and additional declines in property values. It
also reflects our concerns that the significant number of distressed sellers and
lender foreclosures may further disrupt certain housing markets and adversely
affect home prices and the demand for building lots. These concerns
heightened during the second half of 2008 and remained elevated through 2009 and
into the current year as evidence of price declines for certain housing and
related lot and land markets has become more apparent. This has been
particularly the case in certain areas of the Puget Sound and Portland regions
where a significant portion of our construction and development loans are
located, although more recently prices in certain sub-markets have shown signs
of stabilizing. Aside from housing-related construction and
development loans, non-performing loans generally reflect unique operating
difficulties for the individual borrower; however, the weak pace of general
economic activity has also become a significant contributing
factor. We recorded net charge-offs of $14 million for the quarter
ended March 31, 2010, compared to $17 million for the preceding quarter and $22
million for the same quarter in the prior year. Non-performing loans
decreased by $28 million over the last twelve months to $196 million at March
31, 2010, compared to $224 million at March 31, 2009. A comparison of
the allowance for loan losses at March 31, 2010 and 2009 reflects an increase of
$16 million, or 20%, to $96 million at March 31, 2010, from $80 million at March
31, 2009. Similarly, the allowance for loan losses as a percentage of
total loans (loans receivable excluding allowance for losses) increased to 2.60%
at March 31, 2010, compared to 2.04% at March 31, 2009. Likewise the
allowance as a percentage of non-performing loans increased to 49% at March 31,
2010, compared to 36% a year earlier.
As of
March 31, 2010, we had identified $242 million of impaired loans, including $45
million of restructured loans which are currently performing according to their
restructured payment terms. Of those impaired loans, $98 million have
no allowances for credit losses as their estimated collateral value is equal to
or exceeds their carrying costs, which in some cases is net of substantial
write-offs. The remaining $144 million have related allowances for
credit losses totaling $21 million. Impaired loans that have
been individually evaluated for specific reserves totaled $77 million and
accounted for $16 million of the allowances for impaired loans at March 31,
2010. Also, at March 31, 2010, impaired loans with related allowances
for credit losses that are collectively evaluated as homogeneous pools totaled
$67 million and accounted for $5 million of the total allowance related to
impaired loans.
We
believe that the allowance for loan losses as of March 31, 2010 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
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.
Other Operating
Income. Other operating income, which includes changes in the
valuation of financial instruments carried at fair value as well as non-interest
revenues from core operations, was $7.7 million for the quarter ended March 31,
2010, compared to $4.6 million for the same quarter in the prior
year. Excluding the fair value adjustments, other operating income
from core operations decreased by $854,000, or 11%, to $7.0 million for the
quarter ended March 31, 2010 compared to $7.9 million for the same quarter prior
year, primarily as a result of decreased mortgage banking
activity. The pace of mortgage banking activity began moderating in
the final quarter of 2009; however, for much of the prior year it was strong
and, as a result, gain on sale of loans decreased by $1.8 million to $948,000
for the quarter ended March 31, 2010, compared to $2.7 million for the same
quarter in the prior year. Loan sales for the quarter ended March 31,
2010 totaled $67 million, compared to $149 million for the quarter ended March
31, 2009. By contrast, reflecting slower amortization due to early
loan payoffs as well as an increase in the balance of loans serviced for others,
servicing fees increased by $583,000 compared to the same quarter a year
earlier. The weak pace of economic activity adversely affected our
payment processing revenues in both years as activity levels for deposit
customers, cardholders and merchants remained subdued. Despite the
restrained level of customer transaction volumes, income from deposit fees and
other service charges increased modestly by $233,000, or approximately 5%, to
$5.2 million for the quarter ended March 31, 2010, compared to $4.9 million for
the same quarter in the prior year, aided in part by growth in our account
base. For the quarter ended March 31, 2010, we recorded an aggregate
net gain of $677,000 in fair value adjustments, which was comprised of $1.9
million in net fair value gains which were significantly offset by a $1.2
million other-than-temporary impairment charge for a single-issuer trust
preferred security that we wrote off. By comparison, we recorded a
net loss of $3.3 million in fair value adjustments for the quarter ended March
31, 2009. The fair value adjustments in the current quarter
were modest and primarily reflect changes in the value of certain investment
securities, including the other-than-temporary impairment charge. The
fair value adjustments in the quarter ended March 31, 2009 were larger and
included significant reductions in the values of trust preferred securities
which we own, including collateralized debt obligations secured by pools of
trust preferred securities, which were partially offset by reductions in the
values of junior subordinated debentures we have issued. As discussed
more thoroughly in Note 12 of the Selected
Notes to
the Consolidated Financial Statements, the valuation of these financial
instruments has become very difficult and more subjective in recent periods as
current and reliable observable transaction data does not exist.
Other Operating
Expenses. Other operating expenses for the quarter ended March
31, 2010 increased $1.6 million or 5% to $35.4 million compared to $33.8 million
for the quarter ended March 31, 2009. Expenses for the first quarter
of 2010 reflected significantly higher costs associated with problem loan
collection activities including charges related to real estate owned, and
increased deposit insurance expense, generally offset by reductions in
compensation and occupancy costs. As a result, other operating
expenses as a percentage of average assets was 3.16% for the quarter ended March
31, 2010, compared to 3.02% for the same quarter one year
earlier. Expenses related to real estate owned, including losses on
sales and valuation adjustments as well as taxes and maintenance, increased $2.4
million, or 391% to $3.1 million for the quarter ended March 31, 2010, compared
to $623,000 for the same quarter in the prior year. Likewise, the
cost of FDIC insurance increased $635,000, or 42% to $2.1 million for the
quarter ended March 31, 2010 compared to $1.5 million for the quarter ended
March 31, 2009, reflecting increased assessment rates and incremental charges
for certain deposits in excess of $250,000. Advertising and marketing
expenditures increased by $118,000, or 6% to $2.0 million for the quarter ended
March 31, 2010, compared to $1.8 million in the same quarter in the prior year,
primarily as a result of a number of targeted deposit acquisition campaigns and
costs associated with our Great Northwest Home Rush and Peace of Mind
programs. In contrast, salary and employee benefits decreased $1.0
million, or 6% to $16.6 million for the quarter ended March 31, 2010 from $17.6
million for the quarter ended March 31, 2009, reflecting reduced staffing levels
as well as reductions in the level of employer paid retirement
contributions. Likewise, occupancy costs decreased $450,000, or 7% to
$5.6 million for the quarter ended March 31, 2010 compared to $6.1 million in
the same quarter one year ago as we continued to achieve additional operating
efficiencies in this important area. Miscellaneous expense for the
quarter ended March 31, 2010 decreased by $515,000 compared to the same quarter
a year earlier when we recoded a charge of $655,000 for a shared risk assessment
from the Washington Public Deposit Protection Commission related to the failure
of a Washington State chartered commercial bank.
Income Taxes. Our
normal, expected statutory income tax rate is 36.4%, representing a blend of the
statutory federal income tax rate of 35.0% and apportioned effects of the Oregon
and Idaho income tax rates of 6.6% and 7.6%, respectively. Our
effective tax rates for the quarters ended March 31, 2010 and 2009 were 57.2%
and 42.8%, respectively, in each case reflecting a tax benefit rather than a tax
expense. In both years the effective tax rate reflects the recording
of tax credits related to certain Community Reinvestment Act (CRA) investments
combined with the tax benefits of tax exempt income from municipal securities
and bank-owned life insurance policies. The impact of those tax
credits and tax exempt income, combined with a taxable loss in the current year,
results in an effective tax rate that is somewhat higher than the expected
statutory rate.
Asset
Quality
Over the
past two and a half years as housing markets have continued to weaken in many of
our primary service areas, we have experienced significantly increasing
delinquencies and non-performing assets, primarily in our construction and land
development loan portfolios. Beginning in the third quarter of 2008
and continuing into the early months of 2009, home and lot sales activity was
exceptionally slow, causing stress on builders’ and developers’ cash flows and
their ability to service debt, which is reflected in our increased
non-performing asset totals. Further, property values generally
declined during this period, reducing the value of the collateral securing
loans. In addition, other non-housing-related segments of the loan
portfolio are showing some signs of stress and increasing levels of
non-performing loans as the effects of the recessionary economy are becoming
more evident. As a result, for the quarters ended March 31, 2010 and
2009, our provision for loan losses was significantly higher than historical
levels and our normal expectations. This higher level of
delinquencies and non-accruals also had a material adverse effect on operating
income as a result of foregone interest revenues and increased loan collection
costs. Although our future results will depend on the course of
recovery from the economic recession, we are actively engaged with our borrowers
in resolving problem loans. While property values have continued to
decline in most markets, our reserve levels are substantial and, as a result of
our impairment analysis and charge-off actions, reflect current appraisals and
valuation estimates as well as recent regulatory examination
results.
Non-Performing
Assets: Non-performing assets decreased slightly to $294
million, or 6.42% of total assets, at March 31, 2010, from $296 million, or
6.27% of total assets at December 31, 2009. Slow sales and excess
inventory in most housing markets have been the primary cause of the increase in
delinquencies and foreclosures of residential construction and land development
loans, which, including related real estate owned, represented approximately 64%
of our non-performing assets at March 31, 2010. As a result of this
softness in the housing market, property values, particularly values for
residential land and building lots, declined throughout 2009 and in certain
sub-markets continuing in the first quarter of 2010. Reflecting these
value declines, we further increased our allowance for loan losses even though
total loans outstanding declined. While less significant, other
non-housing-related segments of the loan portfolio also experienced increased
non-performing loans as a result of deteriorating economic conditions and we
increased the allocated allowance for those portions of our portfolio as
well. At March 31, 2010, our allowance for loan losses was $95.7
million, or 2.60% of total loans and 49% of non-performing loans, compared to
$95.3 million, or 2.51% of total loans and 45% of non-performing loans at
December 31, 2009. We continue to believe our level of non-performing
loans and assets, which remained relatively unchanged over the current quarter,
is manageable, and we believe that we have sufficient capital and human
resources to manage the collection of our one- to four-family residential
construction and related land loan portfolios and other non-performing assets in
an orderly fashion. However, our operating results will continue to
be adversely impacted until we are able to significantly reduce the level of our
non-performing assets.
While
non-performing assets are geographically disbursed, they are concentrated
largely in land and land development loans. The primary components of
the $294 million in non-performing assets are $196 million in nonaccrual loans,
including $138 million of construction and land development loans, and $95
million in real estate owned (REO) and other repossessed
assets. While we had a modest decrease in our non-accrual loans in
the most recent quarter, it was substantially offset by a corresponding increase
in REO as we continued to work through these problem credits. The
geographic distribution of non-performing construction, land and land
development loans and related real estate owned included approximately $94
million, or 43%, in the Puget Sound region, $80 million, or 36%, in the greater
Portland market area, $23 million,
or 10%,
in the greater Boise market area, with the remaining $24 million, or 11%,
distributed in various eastern Washington, eastern Oregon and northern Idaho
markets.
Loans are
reported as restructured when we grant concessions to a borrower experiencing
financial difficulties that we would not otherwise consider. As
a result of these concessions, restructured loans are impaired as the Bank will
not collect all amounts due, both principal and interest, in accordance with the
terms of the original loan agreement. If any restructured loan becomes
delinquent or other matters call into question the borrower's ability to repay
full interest and principal in accordance with the restructured terms, the
restructured loan(s) would be reclassified as non-accrual.
The
following table sets forth information with respect to our non-performing assets
and restructured loans at the dates indicated (dollars in
thousands):
|
March
31
2010
|
|
December
31
2009
|
|
March
31
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
Loans: (1)
|
|
|
|
|
|
|
|
|
|
Secured
by real estate:
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
6,801
|
|
$
|
7,300
|
|
$
|
15,180
|
|
Multifamily
|
|
373
|
|
|
383
|
|
|
968
|
|
Construction
and land
|
|
138,245
|
|
|
159,264
|
|
|
175,794
|
|
One-
to four-family
|
|
19,777
|
|
|
14,614
|
|
|
21,900
|
|
Commercial
business
|
|
19,353
|
|
|
21,640
|
|
|
7,500
|
|
Agricultural
business, including secured by farmland
|
|
8,013
|
|
|
6,277
|
|
|
2,176
|
|
Consumer
|
|
3,387
|
|
|
3,923
|
|
|
275
|
|
|
|
195,949
|
|
|
213,401
|
|
|
223,793
|
|
Loans
more than 90 days delinquent, still on accrual:
|
|
|
|
|
|
|
|
|
|
Secured
by real estate:
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
--
|
|
|
--
|
|
|
--
|
|
Multifamily
|
|
--
|
|
|
--
|
|
|
--
|
|
Construction
and land
|
|
--
|
|
|
--
|
|
|
--
|
|
One-
to four-family
|
|
--
|
|
|
358
|
|
|
161
|
|
Commercial
business
|
|
--
|
|
|
--
|
|
|
--
|
|
Agricultural
business, including secured by farmland
|
|
--
|
|
|
--
|
|
|
--
|
|
Consumer
|
|
61
|
|
|
91
|
|
|
143
|
|
|
|
61
|
|
|
449
|
|
|
304
|
|
Total
non-performing loans
|
|
196,010
|
|
|
213,850
|
|
|
224,097
|
|
Securities
on nonaccrual at fair value
|
|
3,000
|
|
|
4,232
|
|
|
160
|
|
Real
estate owned and other repossessed assets held for sale,
net
|
|
95,167
|
|
|
77,802
|
|
|
39,109
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-performing assets
|
$
|
294,177
|
|
$
|
295,884
|
|
$
|
263,366
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-performing loans to net loans before allowance for loan
losses
|
|
5.31
|
%
|
|
5.64
|
%
|
|
5.72
|
%
|
Total
non-performing loans to total assets
|
|
4.28
|
%
|
|
4.53
|
%
|
|
4.97
|
%
|
|
|
|
|
|
|
|
|
|
|
Total
non-performing assets to total assets
|
|
6.42
|
%
|
|
6.27
|
%
|
|
5.84
|
%
|
|
|
|
|
|
|
|
|
|
|
Restructured
loans (2)
|
$
|
45,471
|
|
$
|
43,683
|
|
$
|
27,550
|
|
|
|
|
|
|
|
|
|
|
|
Loans
30-89 days past due and on accrual
|
$
|
51,328
|
|
$
|
34,156
|
|
$
|
111,683
|
|
(1) For
the quarter ended March 31, 2010, $3.6 million in interest income would have
been recorded had nonaccrual loans been current, and no interest income on these
loans was included in net income for this period.
(2)
|
These
loans are performing under their restructured
terms.
|
The
following table sets forth the Company’s non-performing assets by geographic
concentration at March 31, 2010 (dollars in thousands):
|
|
Washington
|
|
Oregon
|
|
Idaho
|
|
Other
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
6,106
|
|
$
|
12
|
|
$
|
339
|
|
$
|
344
|
|
$
|
6,801
|
|
Multifamily
|
|
|
373
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
373
|
|
Construction
and land
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family construction
|
|
|
13,529
|
|
|
12,989
|
|
|
5,723
|
|
|
--
|
|
|
32,241
|
|
Multifamily
construction
|
|
|
11,283
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
11,283
|
|
Commercial
construction
|
|
|
1,552
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,552
|
|
Residential
land acquisition & development
|
|
|
29,992
|
|
|
22,063
|
|
|
1,071
|
|
|
--
|
|
|
53,126
|
|
Residential
land improved lots
|
|
|
6,317
|
|
|
8,145
|
|
|
588
|
|
|
--
|
|
|
15,050
|
|
Residential
land unimproved
|
|
|
10,127
|
|
|
348
|
|
|
321
|
|
|
--
|
|
|
10,796
|
|
Commercial
land acquisition & development
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Commercial
land improved
|
|
|
--
|
|
|
10,065
|
|
|
--
|
|
|
--
|
|
|
10,065
|
|
Commercial
land unimproved
|
|
|
4,132
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
4,132
|
|
Total
construction and land
|
|
|
76,932
|
|
|
53,610
|
|
|
7,703
|
|
|
--
|
|
|
138,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family
|
|
|
9,663
|
|
|
9,834
|
|
|
280
|
|
|
--
|
|
|
19,777
|
|
Commercial
business
|
|
|
13,393
|
|
|
361
|
|
|
1,015
|
|
|
4,584
|
|
|
19,353
|
|
Agricultural
business, including secured by farmland
|
|
|
1,775
|
|
|
121
|
|
|
6,117
|
|
|
--
|
|
|
8,013
|
|
Consumer
|
|
|
2,828
|
|
|
96
|
|
|
--
|
|
|
524
|
|
|
3,448
|
|
Total
non-performing loans
|
|
|
111,070
|
|
|
64,034
|
|
|
15,454
|
|
|
5,452
|
|
|
196,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
on nonaccrual
|
|
|
3,000
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate owned (REO) and repossessed assets
|
|
|
45,930
|
|
|
30,566
|
|
|
18,671
|
|
|
--
|
|
|
95,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-performing assets
|
|
$
|
160,000
|
|
$
|
94,600
|
|
$
|
34,125
|
|
$
|
5,452
|
|
$
|
294,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
of non-performing assets
|
|
|
54.4
|
%
|
|
32.2
|
%
|
|
11.6
|
%
|
|
1.8
|
%
|
|
100.0
|
%
|
In
addition to the non-performing loans as of March 31, 2010, we had other
classified loans with an aggregate outstanding balance of $196 million that are
not on nonaccrual status, with respect to which known information concerning
possible credit problems with the borrowers or the cash flows of the properties
securing the respective loans has caused management to be concerned about the
ability of the borrowers to comply with present loan repayment
terms. This may result in the future inclusion of such loans in the
nonaccrual loan category.
Real
estate acquired by us as a result of foreclosure or by deed-in-lieu of
foreclosure is classified as real estate held for sale until it is
sold. When property is acquired, it is recorded at the lower of its
cost (the unpaid principal balance of the related loan plus foreclosure costs)
or net realizable value. Subsequent to acquisition through
foreclosure, the property is carried at the lower of the foreclosed amount or
net realizable value. If a new appraisal and market analysis
determines that the net realizable value has decreased, the carrying value is
written down to the anticipated sales price, less selling and holding costs, by
a charge to operating expense.
The most
significant of our non-performing loan exposures at March 31, 2010 are included
in the following table (dollars in thousands):
Amount
|
|
Percent
of total non-performing loans
|
|
Collateral
securing the indebtedness
|
|
Geographic
location
|
|
$
|
16,458
|
|
|
8.4
|
%
|
|
86
residential lots
Four
completed homes
|
|
Greater
Seattle-Puget Sound
|
|
|
|
|
|
|
|
|
|
|
|
11,283
|
|
|
5.8
|
|
|
163-unit
multi-family complex under construction
|
|
Greater
Seattle-Puget Sound
|
|
|
|
|
|
|
|
|
|
|
|
10,065
|
|
|
5.1
|
|
|
13
acres with three developed commercial lots
|
|
Central
Oregon
|
|
|
|
|
|
|
|
|
|
|
|
8,876
|
|
|
4.5
|
|
|
105
residential lots
|
|
Greater
Seattle-Puget Sound
|
|
|
|
|
|
|
|
|
|
|
|
7,123
|
|
|
3.6
|
|
|
68
completed townhouse lots
|
|
Greater
Portland, OR area
|
|
|
|
|
|
|
|
|
|
|
|
6,069
|
|
|
3.1
|
|
|
Five
parcels of land with plat approval for 51
residential
lots
|
|
Greater
Seattle-Puget Sound
|
|
|
|
|
|
|
|
|
|
|
|
5,682
|
|
|
2.9
|
|
|
37
residential lots
Two
completed homes
|
|
Greater
Portland, OR area
|
|
|
|
|
|
|
|
|
|
|
|
4,728
|
|
|
2.4
|
|
|
89
residential lots
Four
completed new home
|
|
Central
Oregon
|
|
|
|
|
|
|
|
|
|
|
|
4,585
|
|
|
2.3
|
|
|
Accounts
receivable, inventory and equipment
|
|
Helena,
MT
|
|
|
|
|
|
|
|
|
|
|
|
4,248
|
|
|
2.2
|
|
|
Dairy
cows and farm equipment
|
|
Greater
Boise area
|
|
|
|
|
|
|
|
|
|
|
|
4,076
|
|
|
2.1
|
|
|
Seven
acres commercial land
|
|
Greater
Seattle-Puget Sound
|
|
|
|
|
|
|
|
|
|
|
|
3,450
|
|
|
1.8
|
|
|
Three
residential lots
Two
completed homes
|
|
Greater
Spokane, WA
|
|
|
|
|
|
|
|
|
|
|
|
3,392
|
|
|
1.7
|
|
|
13
residential lots
Three
completed homes
3.7
acres of land
|
|
Greater
Portland, OR area
|
|
|
|
|
|
|
|
|
|
|
|
3,329
|
|
|
1.7
|
|
|
Four
residential lots
Five
completed homes
|
|
Greater
Portland, OR area
|
|
|
|
|
|
|
|
|
|
|
|
3,239
|
|
|
1.7
|
|
|
13
completed condominium units
30
completed condominium sites
|
|
Greater
Portland, OR area
|
|
|
|
|
|
|
|
|
|
|
|
3,200
|
|
|
1.6
|
|
|
Promissory
note secured by a 250-unit multi-family
complex
|
|
Houston,
TX
|
|
|
|
|
|
|
|
|
|
|
|
96,207
|
|
|
49.1
|
|
|
Various
collateral; relationships under $3 million
|
|
Various
(mostly in WA, OR, ID)
|
|
|
|
|
|
|
|
|
|
|
$
|
196,010
|
|
|
100.0
|
%
|
|
Total
non-performing loans
|
|
|
At March
31, 2010, we had $95.2 million of real estate owned and other repossessed
assets, the most significant component of which is an unfinished subdivision in
the greater Seattle metropolitan area with 167 platted lots and a book value of
$14.8 million. The second largest holding is a 165-lot townhouse
development in the greater Portland area with a book value of $9.0
million. The third largest holding is a mixed-use three-story
office/retail commercial property in the greater Seattle area with a book value
of $6.8 million. The fourth largest holding is an unfinished
residential subdivision with 35 lots and a book value of $3.5 million in the
Greater Portland area. The table below summarizes
our REO by geographic location and property type as of March 31, 2010 (dollars
in thousands):
Amount
|
|
Percent
of total REO
|
|
|
Geographic
Location
|
|
REO
Description
|
|
|
|
|
|
|
|
|
|
|
$
|
39,149
|
|
|
41.2
|
%
|
|
Greater
Seattle-Puget Sound
|
|
19
completed homes
Six
homes under construction
One
mixed-use three-story retail/commercial property
58
residential lots
One
land development project: 167 SFD lots
22
acres of land
One
agricultural property with a SFD
Three
parcels of land for residential development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,113
|
|
|
34.8
|
%
|
|
Greater
Portland, OR area
|
|
17
completed homes
267
residential lots
177
townhouse lots
One
developed parcel of commercial land
One
underdeveloped parcel of commercial land
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,671
|
|
|
19.6
|
% |
|
Greater
Boise, ID
|
|
Six
completed four-plexes
16
completed homes
156
residential lots
Five
land development projects
16
commercial lots
Two
acres improved residential land
Two
parcels unimproved residential land
32
townhouse lots
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,174
|
|
|
3.3
|
% |
|
Other
Washington locations
|
|
One
completed home
One
home under construction
27
residential lots
Two
mini-storage sites
Five
acres of land
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,060
|
|
|
1.1
|
% |
|
Greater
Spokane, WA area
|
|
Three
completed homes
Land
for 81 residential lots
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
95,167
|
|
|
100.0
|
%
|
|
Total
real estate owned, held for sale
|
|
|
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 of loans, however, during the
quarter ended March 31, 2010 repayments exceeded loan originations, by $73
million. In addition, during the quarter ended March 31, 2010 we sold
$67 million of loans while repayments and sales of securities exceeded purchases
by $10 million. Net deposits decreased $16 million for the quarter
ended March 31, 2010, including a further decrease of $3 million in public funds
in response to changes in the collateralization requirements under the
Washington and Oregon State public deposit protection regulations. In
addition to reducing our collateral requirements, allowing those deposits to run
off also reduced our exposure to future shared-risk assessments under those
regulations. Deposit activity for the quarter ended March 31, 2010
also included a net decrease of $14 million of brokered
deposits. Brokered deposits and public funds are generally more price
sensitive than retail deposits and our use of those deposits varies
significantly based upon our liquidity management strategies at any point in
time. FHLB advances (excluding fair value adjustments) decreased $128
million for the quarter ended March 31, 2010. Other borrowings,
including $50 million of senior bank notes issued under the FDIC Temporary
Liquidity Guarantee Program (TLGP), were nearly unchanged for the quarter ended
March 31, 2010. As a result of all of this activity, although our
overall liquidity remained strong, our net cash position declined by $45 million
during the quarter ended March 31, 2010.
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, 2010, we
used our
sources of funds primarily to fund loan commitments, pay maturing savings
certificates and deposit withdrawals and to reduce FHLB advances. At
March 31, 2010, we had outstanding loan commitments totaling $752 million,
including undisbursed loans in process and unused credit lines totaling $723
million. 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 and FRBSF borrowings. We maintain credit
facilities with the FHLB of Seattle, which at March 31, 2010 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
$1.007 billion, and 25% of Islanders Bank’s assets or adjusted qualifying
collateral, up to a total possible credit line of $43
million. Advances under these credit facilities totaled $61 million,
or 1% of our assets at March 31, 2010. In addition, Banner Bank has
been approved for participation in the Federal Reserve Bank of San Francisco’s
Borrower-In-Custody (BIC) program. Under this program we can borrow
up to 65% of eligible loans not already pledged for other borrowings, which we
currently estimate would provide additional borrowing capacity of $405
million. We utilize this facility on a limited basis, however, we had
no funds borrowed from the Federal Reserve Bank at March 31, 2009 or
2010.
At March
31, 2010, certificates of deposit amounted to $1.896 billion, or 49% of our
total deposits, including $1.598 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 our deposits
as they mature. Management believes it has adequate resources and
funding potential to meet our foreseeable liquidity requirements.
Capital
Requirements
Banner
Corporation is a bank holding company registered with the Federal
Reserve. Bank holding companies are subject to capital adequacy
requirements of the Federal Reserve under the Bank Holding Company Act of 1956,
as amended (BHCA), and the regulations of the Federal Reserve. Banner
Bank and Islanders Bank, as state-chartered, federally insured commercial banks,
are subject to the capital requirements established by the FDIC.
The
capital adequacy requirements are quantitative measures established by
regulation that require Banner Corporation and the Banks to maintain minimum
amounts and ratios of capital. The Federal Reserve requires Banner
Corporation to maintain capital adequacy that generally parallels the FDIC
requirements. The FDIC requires the Banks to maintain minimum ratios
of Tier 1 total capital to risk-weighted assets as well as Tier 1 leverage
capital to average assets. At March 31, 2010, Banner Corporation and
the Banks each exceeded all current regulatory capital
requirements. (See Item 1, “Business–Regulation,” and Note 20 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, 2009 for additional
information regarding regulatory capital requirements for Banner and the Banks
for the year ended December 31, 2009.)
The
actual regulatory capital ratios calculated for Banner Corporation, Banner Bank
and Islanders Bank as of March 31, 2010,
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, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banner
Corporation—consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk-weighted assets
|
$
|
491,175
|
|
|
12.93
|
%
|
$
|
303,984
|
|
|
8.00
|
%
|
|
|
|
|
|
|
Tier
1 capital to risk-weighted assets
|
|
443,082
|
|
|
11.66
|
|
|
151,992
|
|
|
4.00
|
|
|
|
|
|
|
|
Tier
1 leverage capital to average assets
|
|
443,082
|
|
|
9.76
|
|
|
181,592
|
|
|
4.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banner
Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk-weighted assets
|
|
467,903
|
|
|
12.93
|
|
|
289,467
|
|
|
8.00
|
|
$
|
361,834
|
|
|
10.00
|
%
|
Tier
1 capital to risk-weighted assets
|
|
422,075
|
|
|
11.66
|
|
|
144,734
|
|
|
4.00
|
|
|
217,100
|
|
|
6.00
|
|
Tier
1 leverage capital to average assets
|
|
422,075
|
|
|
9.71
|
|
|
173,873
|
|
|
4.00
|
|
|
217,341
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Islanders
Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk-weighted assets
|
|
27,382
|
|
|
13.43
|
|
|
16,313
|
|
|
8.00
|
|
|
20,391
|
|
|
10.00
|
|
Tier
1 capital to risk-weighted assets
|
|
25,346
|
|
|
12.43
|
|
|
8,156
|
|
|
4.00
|
|
|
12,235
|
|
|
6.00
|
|
Tier
1 leverage capital to average assets
|
|
25,346
|
|
|
11.75
|
|
|
8,626
|
|
|
4.00
|
|
|
10,783
|
|
|
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, although our floating-rate assets tend
to be more immediately responsive to changes in market rates than most funding
deposit liabilities. Additional interest rate risk results from
mismatched repricing indices and 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, 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. Further, many of the floating-rate loans with interest rate
floors are in portions of the portfolio currently experiencing higher levels of
delinquencies, which tends to mitigate the beneficial effect of the
floors. As of March 31, 2010, our loans with interest rate floors
totaled approximately $1.7 billion and had a weighted average floor rate of
5.77%. 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 narrowing of our net
interest margin following the Federal Reserve’s actions to lower market interest
rates beginning in late 2007 and accelerating in 2008, as asset yields declined
while the reduction in deposit costs lagged. Further, 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,
particularly in the summer and fall of 2008, created heightened competitive
pricing pressures. Fortunately, these competitive pressures have
decreased over recent quarters and deposit costs have declined sharply over the
same period leading to an improving net interest margin. As
previously noted, our net interest margin has been adversely affected by an
increase in loan delinquencies as well as changes in the portfolio mix as
construction and development lending has slowed. However, changes in
the deposit mix resulting in proportionality more non-interest bearing and
transaction and saving accounts have also contributed to recent improvement in
our interest margin.
The
principal objectives of asset/liability management are: to evaluate
the interest rate risk exposure; to determine the level of risk appropriate
given our operating environment, business plan strategies, performance
objectives, capital and liquidity constraints, and asset and liability
allocation alternatives; and to manage our interest rate risk consistent with
regulatory guidelines and policies approved by the Board of
Directors. Through such management, we seek to reduce the
vulnerability of our earnings and capital position to changes in the level of
interest rates. Our actions in this regard are taken under the
guidance of the Asset/Liability Management Committee, which is comprised of
members of our senior management. The Committee closely monitors our
interest sensitivity exposure, asset and liability allocation decisions,
liquidity and capital positions, and local and national economic conditions and
attempts to structure the loan and investment portfolios and funding sources to
maximize earnings within acceptable risk tolerances.
Sensitivity
Analysis
Our
primary monitoring tool for assessing interest rate risk is asset/liability
simulation modeling, which is designed to capture the dynamics of balance sheet,
interest rate and spread movements and to quantify variations in net interest
income resulting from those movements under different rate
environments. The sensitivity of net interest income to changes in
the modeled interest rate environments provides a measurement of interest rate
risk. We also utilize economic value analysis, which addresses
changes in estimated net economic value of equity arising from changes in the
level of interest rates. The net economic value of equity is
estimated by separately valuing our assets and liabilities under varying
interest rate environments. The extent to which assets gain or lose
value in relation to the gains or losses of liability values under the various
interest rate assumptions determines the sensitivity of net economic value to
changes in interest rates and provides an additional measure of interest rate
risk.
The
interest rate sensitivity analysis performed by us incorporates
beginning-of-the-period rate, balance and maturity data, using various levels of
aggregation of that data, as well as certain assumptions concerning the
maturity, repricing, amortization and prepayment characteristics of loans and
other interest-earning assets and the repricing and withdrawal of deposits and
other interest-bearing liabilities into an asset/liability computer simulation
model. We update and prepare simulation modeling at least quarterly
for review by senior management and the directors. We believe the data and
assumptions are realistic representations of our portfolio and possible outcomes
under the various interest rate scenarios. Nonetheless, the interest
rate sensitivity of our net interest income and net economic value of equity
could vary substantially if different assumptions were used or if actual
experience differs from the assumptions used.
The table
of Interest Rate Risk
Indicators sets forth, as of March 31, 2010, 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
Economic Value
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
+400
|
|
$
|
6,450
|
|
|
3.9
|
%
|
$
|
(183,620
|
)
|
|
(34.3
|
)%
|
|
+300
|
|
|
6,730
|
|
|
4.1
|
|
|
(154,338
|
)
|
|
(28.8
|
)
|
|
+200
|
|
|
6,634
|
|
|
4.1
|
|
|
(113,176
|
)
|
|
(21.1
|
)
|
|
+100
|
|
|
4,165
|
|
|
2.5
|
|
|
(60,259
|
)
|
|
(11.2
|
)
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
-25
|
|
|
(509
|
)
|
|
(0.3
|
)
|
|
10,219
|
|
|
1.9
|
|
|
-50
|
|
|
(632
|
)
|
|
(0.4
|
)
|
|
19,207
|
|
|
3.6
|
|
|
__________
(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 change in
market rates.
The table
of Interest Sensitivity Gap
presents our interest sensitivity gap between interest-earning assets and
interest-bearing liabilities at March 31, 2010. 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, 2010, total
interest-bearing liabilities maturing or repricing within one year exceeded
total interest-earning assets maturing or repricing in the same time period by
$158.6 million, representing a one-year cumulative gap to total assets ratio of
(3.46%).
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, 2010 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,
2010
|
|
Within
6 Months
|
|
|
After 6 Months
Within 1 Year
|
|
|
After
1 Year
Within
3 Years
|
|
|
After 3
Years
Within 5
Years
|
|
|
After 5
Years
Within
10 Years
|
|
|
Over
10 Years
|
|
|
Total |
|
Interest-earning
assets: (1)
|
|
|
|
|
|
|
(dollars
in thousands) |
|
|
|
|
|
|
|
|
|
|
Construction
loans
|
$
|
345,284
|
|
$
|
33,617
|
|
$
|
28,378
|
|
$
|
6,274
|
|
$
|
428
|
|
$
|
789
|
|
$
|
414,770
|
|
Fixed-rate
mortgage loans
|
|
112,178
|
|
|
54,512
|
|
|
221,944
|
|
|
174,068
|
|
|
180,591
|
|
|
193,178
|
|
|
936,471
|
|
Adjustable-rate
mortgage loans
|
|
488,642
|
|
|
132,507
|
|
|
394,766
|
|
|
259,654
|
|
|
19,178
|
|
|
--
|
|
|
1,294,747
|
|
Fixed-rate
mortgage-backed securities
|
|
15,404
|
|
|
12,915
|
|
|
32,260
|
|
|
11,840
|
|
|
5,714
|
|
|
1,348
|
|
|
79,481
|
|
Adjustable-rate
mortgage-backed securities
|
|
5,376
|
|
|
4,084
|
|
|
3,902
|
|
|
615
|
|
|
--
|
|
|
--
|
|
|
13,977
|
|
Fixed-rate
commercial/agricultural loans
|
|
63,237
|
|
|
33,358
|
|
|
74,289
|
|
|
28,195
|
|
|
6,955
|
|
|
762
|
|
|
206,796
|
|
Adjustable-rate
commercial/agricultural loans
|
|
514,666
|
|
|
12,188
|
|
|
43,044
|
|
|
12,546
|
|
|
--
|
|
|
--
|
|
|
582,444
|
|
Consumer
and other loans
|
|
170,196
|
|
|
8,205
|
|
|
37,779
|
|
|
25,042
|
|
|
19,137
|
|
|
3,111
|
|
|
263,470
|
|
Investment
securities and interest-earning deposits
|
|
370,001
|
|
|
12,838
|
|
|
37,457
|
|
|
15,746
|
|
|
33,275
|
|
|
63,304
|
|
|
532,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
rate sensitive assets
|
|
2,084,984
|
|
|
304,224
|
|
|
873,819
|
|
|
533,980
|
|
|
265,278
|
|
|
262,492
|
|
|
4,324,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regular
savings and NOW accounts
|
|
158,773
|
|
|
138,656
|
|
|
323,531
|
|
|
323,531
|
|
|
--
|
|
|
--
|
|
|
944,491
|
|
Money
market deposit accounts
|
|
229,906
|
|
|
137,943
|
|
|
91,962
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
459,811
|
|
Certificates
of deposit
|
|
1,086,930
|
|
|
519,384
|
|
|
251,779
|
|
|
34,802
|
|
|
3,241
|
|
|
50
|
|
|
1,896,186
|
|
FHLB
advances
|
|
15,227
|
|
|
35,800
|
|
|
10,000
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
61,027
|
|
Other
borrowings
|
|
290
|
|
|
--
|
|
|
50,000
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
50,290
|
|
Junior
subordinated debentures
|
|
97,942
|
|
|
--
|
|
|
25,774
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
123,716
|
|
Retail
repurchase agreements
|
|
126,953
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
126,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
rate sensitive liabilities
|
|
1,716,021
|
|
|
831,783
|
|
|
753,046
|
|
|
358,333
|
|
|
3,241
|
|
|
50
|
|
|
3,662,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess
(deficiency) of interest-sensitive assets over |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest-sensitive liabilities
|
$
|
368,963
|
|
$
|
(527,559
|
)
|
$
|
120,773
|
|
$
|
175,647
|
|
$
|
262,037
|
|
$
|
262,442
|
|
$
|
662,303
|
|
Cumulative
excess (deficiency) of interest-sensitive assets
|
$
|
368,963
|
|
$
|
(158,596
|
)
|
$
|
(37,823
|
)
|
$
|
137,824
|
|
$
|
399,861
|
|
$
|
662,303
|
|
$
|
662,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
ratio of interest-earning assets to interest-bearing
liabilities
|
|
121.50
|
%
|
|
93.78
|
%
|
|
98.85
|
%
|
|
103.77
|
%
|
|
110.92
|
%
|
|
118.08
|
%
|
|
118.08
|
%
|
Interest
sensitivity gap to total assets
|
|
8.05
|
%
|
|
(11.51
|
)%
|
|
2.64
|
%
|
|
3.83
|
%
|
|
5.72
|
%
|
|
5.73
|
%
|
|
14.46
|
%
|
Ratio
of cumulative gap to total assets
|
|
8.05
|
%
|
|
(3.46
|
)%
|
|
(0.83
|
)%
|
|
3.01
|
%
|
|
8.73
|
%
|
|
14.46
|
%
|
|
14.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, 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 $(897.6) million, or (19.6%) of total assets at March 31,
2010. 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, 2010 and 2009” 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. Additionally, in designing disclosure controls and
procedures, our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures also
is based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. As a result of
these inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Further, projections of any
evaluation of effectiveness to future periods are subject to risk that controls
may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
(a) Evaluation of Disclosure Controls
and Procedures: An evaluation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) of the Exchange Act) was carried out
under the supervision and with the participation of our Chief Executive Officer,
Chief Financial Officer and several other members of our senior management as of
the end of the period covered by this report. Based on their
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that, as of March 31, 2010, 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 Over
Financial Reporting: In the quarter ended March 31, 2010,
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,
2009 (File No. 0-26584) except as set forth below:
We are required to comply with the
terms of memoranda of understanding issued by the FDIC and DFI and the Federal
Reserve and lack of compliance could result in additional regulatory
actions.
In March
2010, the FDIC and the DFI determined that Banner Bank required additional
supervisory attention and reached an agreement on a Memorandum of Understanding,
or Bank MOU, with Banner Bank. Under the terms of the Bank MOU, Banner Bank,
without the prior written approval, or nonobjection, of the FDIC and/or the DFI,
may not:
·
|
appoint
any new director or senior executive officer or change the
responsibilities of any current senior executive officers;
or
|
·
|
pay
cash dividends to its holding company, Banner
Corporation.
|
Other
material provisions of the MOU require Banner Bank to:
·
|
maintain
Tier 1 Capital of not less than 10.0% of the Bank’s adjusted total assets
pursuant to Part 325 of the FDIC Rules and Regulations by July 21, 2010,
and maintain capital ratios above well capitalized thresholds as defined
under Section 325.103 of the FDIC Rules and
Regulations;
|
·
|
utilize
a comprehensive policy for determining the adequacy of the allowance for
loan loss;
|
·
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formulate
and implement a written profit plan acceptable to the FDIC and the
DFI;
|
·
|
eliminate
from its books all assets classified Loss that have not been previously
collected or charged-off;
|
·
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by
June 30, 2010, reduce all assets classified “Substandard” in the report of
examination to not more than 80.0% of Tier 1 capital plus the allowance
for loan losses;
|
·
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develop
a written plan for reducing adversely classified
assets;
|
·
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develop
a written plan for reducing the aggregate amount of its commercial real
estate concentration; and
|
·
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revise,
adopt and fully implement a written liquidity and funds management
policy.
|
Following
the effective date of the MOU, Banner Bank is required to provide the FDIC and
DFI with progress reports regarding its compliance with the provisions of the
MOU.
In
addition, on March 29, 2010, the Federal Reserve Bank of San Francisco (FRB)
determined that the Company required additional supervisory attention and
entered into a Memorandum of Understanding with the Company (the FRB
MOU). Under the terms of the FRB MOU, the Company, without prior
written approval, or non-objection, of the FRB, may not:
· appoint
any new director or senior executive officer or change the responsibilities of
any current senior executive officers;
· receive
dividends or any other form of payment or distribution representing a reduction
in capital from Banner Bank;
· declare
or pay any dividends, or make any other capital distributions;
· incur,
renew, increase, or guarantee any debt;
· issue any
trust preferred securities; or
· purchase
or redeem any of its stock.
Following
the effective date of the FRB MOU, the Company is required to provide the FRB
with progress reports regarding its compliance with the provisions of the FRB
MOU.
The Bank
MOU and the FRB MOU will remain in effect until stayed, modified, terminated or
suspended by the FDIC and the DFI or FRB, as the case may be. If
either the Company or the Bank was found not in compliance with their respective
MOU, it could be subject to various remedies, including among others, the power
to enjoin “unsafe or unsound” practices, to require affirmative action to
correct any conditions resulting from any violation or practice, to direct an
increase in capital, to restrict growth, to remove officers and/or directors,
and to assess civil monetary penalties. Management of the Company and
the Bank have been taking action and implementing programs to comply with the
requirements of the FRB MOU and the Bank MOU, respectively. Although
compliance will be determined by the FDIC, DFI and FRB, management believes that
the Company and the Bank will comply in all material respects with the
provisions of the MOU. Any of these regulators may determine,
however, in their sole discretion that the issues raised by the FRB MOU or the
Bank MOU have not been addressed satisfactorily, or that any current or past
actions, violations or deficiencies could be the subject of further regulatory
enforcement actions. Such
enforcement
actions could involve penalties or limitations on the Company’s business and
negatively affect its ability to implement its business plan, pay dividends on
its common stock or the value of its common stock, as well as its financial
condition and results of operations.
Item
2. Unregistered Sales
of Equity Securities and Use of Proceeds
During
the quarter ended March 31, 2010, we did not sell any securities that were not
registered under the Securities Act of 1933.
We did
not have any repurchases of our common stock from January 1, 2010 through March
31, 2010.
Item
3. Defaults
upon Senior Securities
Not
Applicable.
Item
4. [Removed
and Reserved]
Item
5. Other
Information
Not
Applicable.
Item
6. Exhibits
Exhibit
|
Index
of Exhibits
|
|
|
3{a}
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Articles
of Incorporation of Registrant.
|
|
|
|
3{b}
|
Certificate
of designation relating to the Company’s Fixed Rate Cumulative Perpetual
Preferred Stock Series A [incorporated by reference to the Registrant’s
Current Report on Form 8-K filed on November 24, 2008 (File No.
000-26584)].
|
|
|
3{c}
|
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)].
|
|
|
4{a}
|
Warrant
to purchase shares of Company’s common stock dated November 21, 2008
[incorporated by reference to the Registrant’s Current Report on Form 8-K
filed on November 24, 2008 (File No. 000-26584)].
|
|
|
4{b}
|
Letter
Agreement (including Securities Purchase Agreement Standard Terms attached
as Exhibit A) dated November 21, 2008 between the Company and the United
States Department of the Treasury [incorporated by reference to the
Registrant’s Current Report on Form 8-K filed on November 24, 2008 (File
No. 000-26584)].
|
|
|
10{a}
|
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{b}
|
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{c}
|
Employment
Agreement with Mark J. Grescovich [incorporated by reference to Exhibit
10.1 filed with the Current Report on Form 8-K dated April 29, 2010 (File
No. 000-265840].
|
|
|
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}
|
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{j}
|
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{k}
|
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{l}
|
Form
of Supplemental Executive Retirement Program Agreement with Gary Sirmon,
Michael K. Larsen, Lloyd W. Baker, Cynthia D. Purcell, Richard B. Barton
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{m}
|
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{n}
|
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{o}
|
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{p}
|
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{q}
|
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{r}
|
Long-Term
Incentive Plan [incorporated by reference to the exhibits filed with the
Form 8-K on May 6, 2008].
|
|
|
10{s}
|
Form
of Compensation Modification Agreement [incorporated by reference to the
Registrant’s Current Report on Form 8-K filed on November 24, 2008 (File
No. 000-26584)].
|
|
|
10{t}
|
2005
Executive Officer and Director Stock Account Deferred Compensation
Plan.
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
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May
7, 2010 |
|
/s/D. Michael
Jones |
|
|
|
D. Michael
Jones |
|
|
|
Chief
Executive Officer |
|
|
|
(Principal
Executive Officer) |
|
|
|
|
|
|
|
|
|
|
|
|
|
May
7, 2010 |
|
/s/Lloyd W.
Baker |
|
|
|
Lloyd W.
Baker |
|
|
|
Treasurer and
Chief Financial Officer |
|
|
|
(Principal
Financial and Accounting Officer) |
|
|
|
|
|